DDR Corp (NYSE:DDR) Q1 2016 Earnings Conference Call April 29, 2016 10:00 AM ET
Meghan Finneran - Senior Financial Analyst
David Oakes - President & CEO
Paul Freddo - Senior EVP, Leasing and Development
Luke Petherbridge - CFO & Treasurer
Jeremy Metz - UBS
Craig Schmidt - Bank of America Merrill Lynch
Todd Thomas - KeyBanc Capital Markets
Christy McElroy - Citigroup
Ki Bin Kim - SunTrust Robinson Humphrey
Alexander Goldfarb - Sandler O'Neill & Partners
Haendel St. Juste - Mizuho Securities
Paul Morgan - Canaccord Genuity
Jason White - Green Street Advisors
Greg Schweitzer - Deutsche Bank
Michael Mueller - JPMorgan
Rich Moore - RBC Capital Markets
Chris Lucas - Capital One Southcoast
Welcome to the DDR Corp First Quarter 2016 Earnings Call. [Operator Instructions]. I would now like to turn the conference over to Meghan Finneran, Senior Financial Analyst. Please go ahead, ma'am.
Thank you. Good morning and thank you for joining us. On today's call will you hear from President and CEO, David Oakes, CFO and Treasurer, Luke Petherbridge and Senior Executive President of Leasing and Development, Paul Freddo. Please be aware that certain of our statements today may be forward-looking. Although we believe such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties and actual results may differ materially from the forward-looking statements.
Additional information about such risks and uncertainties that could cause actual results to differ may be found in the press release issued yesterday and the documents that we file with the SEC. Including our Form 10-K for the year ended December 31, 2015. In addition, we will be discussing non-GAAP financial measures on today's call, including FFO and operating FFO. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings press release issued yesterday. This release and our quarterly financial supplement are available on our website at www.ddr.com. Last, we will be observing a one-question limit during the Q&A portion of our call, in order to give everyone the opportunity to participate. If you have additional questions, please rejoin the queue.
At this time, it is my pleasure to introduce our President and Chief Executive Officer, David Oakes.
Thank you, Meghan. Good morning and thank you for joining our call. I will start by addressing last night's announcement that Luke Petherbridge will be departing. First, I would like to congratulate Luke on his new role. While I'm clearly disappointed about his departure from DDR, I'm proud that after working closely with Luke for eight years he has taken an exceptional opportunity to work with our Partner Blackstone as CEO of their growing retail platform. Luke helped transform our balance sheet, our portfolio and our culture and I appreciate all that he has done for this firm.
Looking forward, I'm confident that there will be a seamless transition from Luke to his successor in the near term and that our capital markets and transactions teams are well positioned to continue the strong performance that they have achieved over the past few years with a new leader. As we noted frequently in our annual report, our team has never been more focused and the change in leadership serves much more as a healthy challenge and opportunity for our employees than a hindrance. Turning to the quarter, I'm incredibly pleased with our operating results and progress on the portfolio and balance sheet. Notably, our same-store NOI growth of 3.4% is a testament to the heavy lifting that has been achieved through the years and the percentage of NOI in the pool has increased to 92%, the highest figure in recent Company history which highlights the authenticity of the calculation.
While it is difficult to give credit in the public market for upgrading quality of the portfolio through dispositions, our sale of over 500 assets is yielding impressive results. We have spent a disproportionate amount of time finely tuning this portfolio into the highest caliber subset of large format shipping centers with the best credit profile and most promising growth prospects in the sector. As a result and Paul will elaborate further, I'm pleased to report that the wholly-owned portfolio, outside of Puerto Rico and exclusive of major redevelopment activity, grew in excess of 4% in the first quarter, highlighting the growth opportunities associated with this platform. To this end, we feel very comfortable with our previously stated full-year same-store NOI guidance range of 2.5% to 3.5%. While recent bankruptcies do put pressure on this figure, this was incorporated in the low end of guidance range and we continue to project that our portfolio, inclusive of regular bankruptcies, will perform well within this range. Given the operational performance as well as the transactional efforts to date, we have decided to raise our operating FFO guidance range to $1.20 to $1.25 per share.
Next, I would like to update you on transactional progress. As we announced in the first quarter transactional release a few weeks ago, we're well on our way to meeting our originally stated guidance of $600 million to $800 million of dispositions. While the capital and transaction markets have seen some volatility, our buyer pool remains credible, we see minimal financing issues and we continue to move forward with our originally announced volume and dispositions. While the transactions are a work in progress, I look forward to dialogue with shareholders in the coming quarters regarding the progress that we have made in transforming this portfolio. We would expect that as a very long road of significant sales comes to an end in the coming quarters, the investor and analyst communities will take a fresh look at DDR's wholly-owned portfolio or 93% of NOI. Not simply by demographics or supplemental statistics, but by engaging in the primary research associated with determining what the private market would actually pay for this portfolio, while we're confident that this will translate into nominal cap rate compression used in valuations, notably on a relative basis.
We expect that it should also translate into earnings and same-store NOI growth going forward. As a follow-up to the discussion on transactional activity, I would like to briefly discuss our continued focus on the balance sheet. As you can in our first quarter supplemental, we made significant progress over the past year on leverage reduction by reducing debt to EBITDA by 0.3 times. As we stated in our initial guidance release, we're committed to a reduction further from the 6.9 times reported this quarter to a figure in the mid 6 times by year end, as the vast majority of sale proceeds should be used for debt repayment. If the proper multiple is used on our EBITDA stream relative to peers, especially given our non-core rationalization, our leverage profile would be even more attractive than a simple debt to EBITDA calculation would indicate.
There are few final items I would like to address. The first is corporate governance. While we have received our fair share of questions regarding our proxy filing, I want the investment community to know that both myself and our Board are as committed as ever to creating long term shareholder value. Unlike most of the peer group, we continue to be compensated predominantly on relative and absolute shareholder return, not within the FFO growth, allowing to us make long term decisions that do not sacrifice the portfolio or balance sheet.
Additionally, I would like to point out that Tom August, the highly respected and successful former REIT executive is standing for election at the upcoming shareholder meeting. Tom brings a wealth of real estate knowledge and highly coveted public market experience that we believe will help guide us going forward. The final subject I would like to comment on is the perception of our Firm and how we view the profile of this Company going forward. DDR has endured nearly a decade of transition since the financial crisis. This transition is not lost on management. We do not view today's announcement of Luke's departure as a perpetuation of the situation but instead it's more as an opportunistic endeavor for a talented individual. Both management and the Board's goal is to conclude this long transition phase. The portfolio balance sheet growth profile and team here are well positioned for a long tenure to create value over many cycles.
I will now turn the call over to Paul.
Thanks, David. Leasing fundamentals and overall operating performance remained strong during the first quarter, as we produced solid results across the portfolio. Our leased rate increased 10 basis points quarter over quarter to 96.1% at our pro rata share and is up 30 basis points year over year. More importantly, we continue to deliver strong same-store NOI results as we achieved 3.4% growth at our pro rata share and excluding Puerto Rico, 4.2% growth at our pro rata share.
This same-store NOI strength was driven primarily by re-leasing below market anchors, minor redevelopments at prime plus wholly-owned assets. As well as a decrease in operating expenses, the majority of which was driven by a pickup due to prior year snow related expenses. Slightly offsetting same-store NOI growth for the quarter was the impact from Puerto Rico which represented an 80 basis point drag and is included in the 3.4% figure. Overall deal volume remained strong and we executed 301 new deals and renewals for 1.9 million square feet in the quarter. Spreads were again strong, with a pro rata new deal spread of 19.5%, a pro rata renewal spread of 8.7% and a combined spread of 10.7%, representing the highest combined spread in five quarters.
Lease renewals were especially strong in quarter, as evidenced by the 8.7% spread and they also continue to drive same-store NOI growth. For starters, of the 4.4 million square feet of leases with expiration dates in the first quarter, 89% of tenants on a square footage basis renewed their leases, achieving yet another quarter of tenant retention above our historical average of roughly 85%, highlighting the strength of the transformed portfolio. During the quarter, we negotiated a package renewal with Barnes & Noble covering nine locations, achieving a renewal comp of 16.3%.
The Barnes leases were naked with no options as a result of concessions granted early in the recession, whereby we eliminated options and gained near term control, putting us in a position to mark rents to market with little investment. The benefit of this renewal package will have a positive impact on same-store NOI that will be realized throughout the next three years. New deal metrics were also strong in the quarter. For example, at Meridian Crossroads, we recovered a Babies R Us box at the expiration of their ground lease that was paying $3 per square foot. Not only did we reduce our exposure to a troubled credit, we added a strong merchant in Cost Plus at an over four times mark up in rent.
We have 12,000 square feet of residual space in the Babies box to work with and we're in active conversations with other best-in-class national retailers to fill this space. I would also like to take a moment to address leasing progress made in the small shop category. In the first quarter, we executed a total of 88 new deals for 178,000 square feet for space less than 5,000 square feet and year over year, our leased rate for this category within our wholly-owned portfolio is up 170 basis points to 87.7%. Small-shop leasing tends to get marginalized due to breadth of box space within our portfolio. But it will continue to be a key component for driving further same-store NOI growth, as national retailers as well as strong regional operators and local mom-and-pops seek quality shop space. It is also worth noting that we continue to push for and achieve 3% rent bumps on the vast majority of shop deals as a way to lock in future same-store growth.
And finally regarding our first quarter deals, as I mentioned, deal economics are a keen focus of ours and this is supported by our net effective rents for the quarter. Our net effective rents of $15.62 per square foot for new deals and $15.88 for renewals, compare very favorably with our average net effective rents in 2015 of $14.08 for new deals and $14.27 for renewals. I would now like to briefly comment on the topic of redevelopment and development. On the redevelopment front, while we sold For Sale Colorado, our pool of redevelopment projects and our desire to drive NAV growth through our operational expertise is by no means shrinking. We have a significant redevelopment pipeline of major projects, including approximately $250 million currently in process and another $250 million we're currently working through entitlements and pre-leasing on. While we do take a cautious view on CIP as a percentage of the Company and we do perform vigorous underwriting, our desire to grow organically with $100 million to $150 million of redevelopment spend annually is as strong as ever.
With regards to development, we held a grand opening of Lee Vista Promenade on March 24. And at the conclusion of the second quarter, ground-up development of Legacy Land Holdings, excluding future expansions, will officially be complete. Located just north of Orlando International Airport, Lee Vista opened strong and retailers are meeting and exceeding sales projections. More importantly, this marks the completion of the legacy pipeline which has been a drag on FFO and NAV growth for years and has significantly hindered balance sheet progress. As you are aware, a handful of retailers continue to struggle to win consumer dollars and Sports Authority's bankruptcy filing highlighted this competitive battle. Our national accounts team is working very closely with Sports Authority's consultants and we should have more clarity on the direction the bankruptcy will take within the next month or so. We're planning for a worst-case scenario and aggressively marketing the space.
To that end, we did incur a bad debt expense related to Sports Authority of $500,000 in the first quarter. However, that bad debt did not show up in same-store NOI, given our policy of excluding it from that calculation. Additionally, we did not reserve for the majority of March rent from Sports Authority. As our analysis of the amounts that were attributable to the March period after the filing or post-petition accounts receivable, revealed that we will likely have a claim to collect March rent in the event of a liquidation and settlement. If we were to deduct that rent from same-store NOI, the impact would have been a 30-basis-point detriment to our actual 3.4% figure.
Further, please keep in mind that in these situations, retailers can bid on the existing Sports Authority leases and we're keeping a close eye on this activity as well as staying on top of any recapture opportunities that may be worth pursuing. We obviously have the Sports Authority on our watch list and have been monitoring their performance for some time, having signed our last new deal with them in 2010. All 12 wholly-owned locations are in prime plus or prime centers which is indicative of the quality of space where Sports Authority occupies in our portfolio and the positive outlook for re-leasing to best-in-class retailers. I would additionally like to provide an update on Anna's Linens, as many of you have inquired about leasing progress for this space. Of the 11 domestic Anna's we had in our portfolio, all were in prime plus or prime locations. We have executed three deals and are in lease negotiations for an additional two locations with rent comps in the low 20% range.
Within our wholly-owned portfolio, the average rent comp has been 42%. We're seeing demand for this space from national tenants including Ulta, Five Below, Carters, Oshkosh and Skechers, as well as strong regional operators looking to expand. The bottom line is that we have dramatically improved the quality of portfolio and the credit quality of our tenants and we view the possibility of replacing struggling retailers with best-in-class dynamic retailers as a real opportunity. We watch all of our tenants' performances extremely closely and work diligently to stay ahead of the curve in terms of retenanting space. Puerto Rico continues to receive a considerable share of media attention, most of which is directed toward macroeconomic uncertainty and instability. For those who have been on property tours or follow us on Twitter, you are aware that consumer traffic in our centers is resilient and parking lots are near full capacity on a daily basis. In fact, we have added a link to the home page of our website for you to view the traffic at Plaza Del Sol.
Overall sales on the island are stabilizing and Wal-Mart experienced a positive 1% sales increase for 2015. While same-store NOI was down 1.5% for the first quarter, we expect it to turn positive in the back half of the year as H&M opens at Plaza Del Sol and we comp a difficult back half in 2015. We have previously mentioned the new deals with H&M, Dave & Buster's and Outback Steakhouse as examples of retailers understanding the great long term opportunity that opening stores in Puerto Rico provides. And we will continue to execute on the leasing front and weather any headwinds encountered. Before turning the call over to Luke, I would like to comment on RECon which is less than one month away. Our focus continues to be on the consistent qualitative and quantitative improvement of our assets. While the leasing environment continues to be strong, we intend to take full advantage of this opportunity.
As usual, we have a full slate of meetings scheduled and we look forward to seeing our retail Partners and members of the investment community. We will be located at the Bellagio again this year and please keep in mind that our space will be open on Sunday, Monday and Tuesday. We look forward to seeing you all there.
Now I will turn the call over to Luke.
Cheers mate. For the first quarter, operating FFO was $114.2 million or $31 per share which is a 6.6% increase over the prior year. Including non-operating items, FFO for the quarter was $114.5 million, also $0.31 per share. Non-operating items consisted of $314,000 of transaction costs. During the first quarter, we closed on the sale of 16 operating assets and 3 land parcels for $224 million at our share. Included in this was the sale For Sale Colorado, a large style center in Pasadena for $132 million which was the largest single asset transaction in the Company's history and represented what DDR felt was full valued for a complicated in-process multi-use redevelopment project. Inclusive of the first quarter, we continue to project asset sales in the low 7% cap rate for the full year.
We currently have 21 operating assets and 9 land parcels under agreement for over $500 million at our share, the majority of which is expected to close at the end of the second quarter or at the beginning of the third quarter. Given the transactional progress to date, we still expect to meet the high end of our guidance range of $600 million to $800 million of asset sales. Increasing expected net asset sales from $450 million to $550 million weighted in the first half of this year which will complete the final legs of our portfolio evolution. Following these potential sales, DDR should return to a normalized rate of purely opportunistic transactional activity for the second half of 2016. Select proceeds from the first quarter sales were deployed into the acquisition of Palm Valley Pavilions West, a 277,000 square foot tower center located in Phoenix, Arizona for $61 million at a cap rate in the low 6%s.
Palm Valley is DDR's 7th asset in the Phoenix MSA and elevates Phoenix to our fourth largest MSA rank by NOI and positions DDR to truly leverage its scale in that market where we have one of our regional offices. The remainder of the sale proceeds paid down debt, including $240 million of our 9 5/8% seven-year unsecured bonds that were repaid in March upon maturity. The use of proceeds should further reduce leverage and lower our debt to EBITDA by 0.5 to 0.8 of turn by year end, including the repayment of the remaining $137 million of 2016 maturities.
This will leave no need to access capital markets in 2016. Though additional opportunities should allow the Company to meet its acquisition guidance of $250 million, we acknowledge the impact of net disposition activity has on short term earnings and growth. And we feel the associated reduction in debt to EBITDA is the final major de-risking effort needed to maintain an attractive credit metrics over the course of all economic cycles. I would like to address the outlook of our commingled joint venture, the DDR Domestic Retail Fund. We have a 20% interest in the 55 assets held in the fund which was established in 2007 and has a natural expiration in the mid-2017.
Our joint venture Partners continue to review their investment options and this may lead to the marketing and sale of some or all of the assets later in 2016 or early 2017. While the eventual liquidation of the Fund will significantly simplify our joint venture platform, reduce DDR's number of assets below 300 and improve our overall corporate metrics, it will result in the loss of approximately $8 million of annual fee income. We're working with our Partners to maximize their investment, so timing remains somewhat uncertain. But we're projecting a reduction in the fee income at the beginning of the first quarter of 2017. We continue to expect and have budgeted in our guidance modest annual reductions in the $398 million balance of the preferred equity issued to Blackstone joint venture by DDR as opportunistic sales occur to reduce the venture's value and increased it to the highest quality assets.
Nonetheless, we have repeatedly demonstrated our ability to replace what is perceived as an at-risk short term income with NOI from acquisitions or with structured investments with the highest quality joint venture partners. Before turning over the call to questions, I wanted to take a moment to sincerely thank the people who have made my time here at DDR memorable. Over the last four-and-a-half years, DDR has undertaken a remarkable transformation and I'm honored that I was able to be part of that. The organization which you, our investors, own, is in incredible shape thanks to the 577 individuals who continually to strive to achieve a best-in-class results. Very few companies can show the repositioning that DDR can.
We have sold nearly $4 billion of lower quality assets, selectively acquired assets which reflect our strategy, while dramatically improving our risk profile. As David will continually say, we're never done improving and over the coming years, I know the Company will continue to do that. Thank you specifically to the staff. It has been an absolute privilege to work with you. You turn up to work every day to make our assets and organization better and I'm truly appear appreciative of all your hard work as are all our investors. Finally to my good mate David, thank you for the opportunity to be part of this organization. And I'm confident that under your leadership, the path forward is even more exciting and the best days of DDR are ahead of you.
I will now turn the call to the operator for questions.
[Operator Instructions]. Question comes from Jeremy Metz from UBS. Please go ahead.
In terms of the Sports Authority boxes, is there an opportunity to buy out any of those in order to pursue some larger redevelopments? And then to follow up on that, the major redevelopment pipeline jumped up this quarter, I think it nearly doubled and you included a line of other major projects totaling close to $100 million. So can you give us a little more color on that bucket and more broadly what yields you're expecting on that roughly $400 million of major/minor redevelopments?
Jeremy, so let me start with the Sports situation. We feel very good -- there's been a lot of talk over the past couple weeks obviously on what's going on the various portfolios. As you see in our supplement, we have 13 owned of which 12 are wholly owned and as I mentioned in my script, of those 12 every one is in a prime or a prime plus asset. If you further break that down, eight of those wholly-owned Sports Authorities are in our top 50 assets. So we're talking stuff like Shoppers World in Framingham, Midtown Miami, Winter Garden Village, Perimeter Pointe in Atlanta. So as I mentioned, we're watching it very closely.
There is a lot of interested parties out there. It starts with the other sports users, Academy and Dick's, all the typical growing great retailers like T.J. and Ross, Nordstrom Rack, the specialty grocery segment. All looking, all expressing interest, exactly how it shakes out in terms of who bids on designation rights, who controls space which can still happen, what we might elect to control to your point because it creates a great redevelopment opportunity. And again, some of those assets I rattled off to you are stuff that we're clearly looking at for future redevelopments and this will provide great opportunity.
Obviously if someone acquires that lease in the bankruptcy proceeding, they can assume that lease and proceed. But we're watching it very closely, we're very active and we feel great about the prospects for retenanting where we get the space back, redevelopment in certain cases. In terms of what you saw in the sup with the redevelopment and the development, this quarter, we decided to reclassify further expansions of some of our previous development projects. Belgate in Charlotte, Lee Vista in Orlando and Kyle's in the Austin market fit into that category. These are really -- and by the end of the second quarter, these will all be truly operating centers with most of the initial investment brought into CIP or into service, rather.
So we're viewing that adjacent land at those properties, those assets, as true further expansions for redevelopment that will fit into the major category. And as I mentioned last call also, this is something we continue to focus on. We don't want anyone to think we're slowing down on that redevelopment project, if you will, with $250 million active and about another $250 million which fall into the analyzing, going through entitlements, lease-up phase. Returns, clearly in the high singles and with most north of 10% on the redevelopments is our expectation and that's what we're guiding to achieve.
And our next question is from Craig Schmidt from Bank of America. Please go ahead.
This is probably for Paul as well. Paul, I just wondered if you could categorize the store closing environment this year relative to 2015, as well as maybe the appetite for opening new stores in 2016 versus 2015?
If you take the Sports situation which we really view it as it was just a question of when, Craig. It happened a little sooner than I honestly thought, but this is a great time, by the way, to get space back in quality assets and quality locations, given the demand. Some of the other stuff we're seeing is more of I think more of a mall or specialty concept, whether it's PacSun, what's going to happen with Aeropostale and companies like that. I don't see this as a heavier store closing environment than we have.
Kohl's was an exception where for the first time they announced some closings, but they've been in a funk, quite frankly. Not going anywhere, a very solid company with a great balance sheet, great earnings results. But they've got grow sales again and redefine their business, if you will and their merchandise mix and their marketing plan and all of that. But overall, I don't see this as any different from prior years. Sports is an exception, but something we'll work our way through given the quality of those locations.
Demand, on the other hand, to answer the second part of your question, is as strong as it's ever been. We're seeing incredible demand from the guys we always talk about. We've got an incredible pipeline of deals with T.J. Maxx across all of their concepts and I know you're hearing a lot more about Sierra Trading Post, that's another division of T.J. which is going to grow in a big way. There's no shortage of demand from the quality retailers out there and that's what excites us about getting some of this space back.
The next question comes from Todd Thomas from KeyBanc. Please go ahead.
David, in light of Luke's upcoming departure, two questions really. One, can you comment on the status of your employment agreement? I think the entire executive management team is no longer under contract. All employment agreements expired at the end of 2015. So just curious whether new contracts are being drawn up by the Board and if you could comment on the plan to retain talent at DDR? Then just second, given DDR has a longstanding relationship with Blackstone, what should we read into Luke's departure, if anything, in terms of its impact on DDR? Just given that relationship with Blackstone through various partnerships?
Sure. Regarding employment agreements, you're right, they formally expired at year end and we continue to work with the Board to get those renewed for a multi-year period of time and continue to make progress on that. And hope to be able to show you that progress in the relatively near term. I think from a retention standpoint, we've put great team together here. Luke was a very important part of that, but also one of the risks of having a great team is they're in very high demand elsewhere.
And I think you see that in the opportunity that Luke has in front of him and so excited for him. Disappointed for DDR, but do think that there's an extraordinarily strong team in place that is here and committed for a long period of time whatever the exact nature of contracts might be. The relationship with Blackstone has been extremely strong. Over the years, they've been a fantastic Partner, not just to execute on deals with, but also to operate a portfolio with, to invest at the right times and to divest at the right times. Sometimes we've sold together, sometimes they've sold to us.
So there really have been a number of iterations of transactions that have worked out very well I think for both sides. There's nothing a makes a partnership better than when both of us make money on transactions. So I think it's worked very well. We have a lot of great contacts over there. Obviously, Luke will be another extremely close one of those. And so would expect that we could continue to do deals with Blackstone, that we'd continue to operate the existing portfolio very actively to create value for that Partnership.
Obviously as Luke mentioned, we have budgeted some level of paydown in the preferred equity. Some assets are sold out of one of the ventures with Blackstone. I think over time could you see the potential for some reinvestment there, but probably on a net basis see it get smaller and that's certainly how we've budgeted. But think there could always be new opportunities with a Partner as big and smart and involved and opportunistic as Blackstone is. And I think they've had very good experience with us which would encourage them to certainly stay in good touch as either one of us find opportunities.
Our next question is from Christy McElroy from Citi. Please go ahead.
For Palm Valley Pavilions, is there any potential to invest additional capital into that asset? Are there any other acquisitions potentially in the pipeline at this point? And can you comment in regards to the dispositions what cap rates were the Q1 dispositions and the ones under contract?
Sure, Christy. With regards to Palm Valley, this is a good asset. We see some good opportunities to increase rents there and also just change the merchandising. So it's not something we'd see a huge amount of a redevelopment opportunity, but we do think there's a significant amount of NOI growth. We think we've acquired this based on our internal model north of a 7% unlevered IRR. This is the best asset on the west side of Phoenix. It is a draw. It sits right next to one of the best performing Targets. It's the number three performing Best Buy in the market. And it's somewhere historically in Phoenix where we have had a very, very good presence.
We really haven't been strong on the west side. So we thought this was just very complimentary to our portfolio. And I think I made the comment that I can't understate the regional office ability to be able to leverage that. So we think there's a good opportunity there to be able to create additional value through NOI growth. With regard to the first quarter, because Paseo was part of that transaction in our first quarter, cap rate was in the low to mid 5%s, low to mid 5%s, but that was heavily skewed by Paseo. For the full year, we would still expect to be right around about a 7% including the first quarter.
The next question is from Ki Bin Kim from SunTrust. Please go ahead.
Ki Bin Kim
So if you could help me understand your accounting for same-store NOI and how Sports Authority plays into that. Given that you don't put bad debt is not part of [indiscernible] equation. If there isn't money left over to satisfy the landlords as they come out of bank or as the banks or proceedings go through, would your guidance have to come down? Even at this point right now, because they didn't pay the March rent and I'm not sure about April and May. But I would think that your guidance would have to come down if the cash rents are not there.
Ki Bin, as I tried to outline my opening remarks, we feel extremely comfortable with our same-store NOI guidance range. We have spent a heck of a lot of time over the years refining a process to calculate that number in we think is legitimate a way as possible. There are obviously much broader issues around revenue recognition that our deep accounting team and our auditors at PWC focus on and so think that we've got a very robust process there. And so from a first quarter standpoint, we received rent from Sports Authority for January and February. We did not receive rent for March. However, the overwhelming majority of the month was post-bankruptcy petition, where we think our claim there has an extremely high likelihood of being paid.
So forgetting Sports Authority for a second, we have revenue recognition requirements. This is not us taking an aggressive stand. Heck, I'd tell you, the number of gray area situations where I think we try to err on the conservative side is significant. 29 of the 31 days of March we absolutely, at this point, expect to receive rent for and so we have accounted for that rent. If we did take a different status, stance which we don't believe right now is supportable, it would have lowered the same-store NOI by 30 basis points for the quarter. But our revenue recognitions requires that when we think revenue is going to be received, when it has been billed and we believe it will be received, that does need to be booked as revenue.
So that's exactly what we've done. We've been receiving April rent payments from them and would expect that rent payments in this post-petition period or in this period of bankruptcy are very high priority for the bankruptcy estate and so would expect to continue to get those. I think where your comment is completely legitimate and in line with the way we've budgeted and thought about it is, the high likelihood that this company in a large number of these locations, if not all of them, are going away for the second half of this year. So obviously, we wouldn't have rent there with the exception of leases that are purchased by other tenants and so that is incorporated into our mind-set and guidance for quarters three and four of this year.
And then, Ki Bin, I think just taking a step back, not specifically around Sports. When we do budget early in the year and provide guidance, we do obviously look at our watch list tenants. We, I think as a company, have been saying this is an at-risk tenant for over 12 months. When we sit down with Paul and the team, we actually take into account some of that situation. So we're, as David mentioned, there's the high likelihood at the moment that this rent is going away and we still feel comfortable with our guidance range and actually slightly increasing the bottom end.
The next question is from Alexander Goldfarb from Sandler O'Neill. Please go ahead.
So just a question here, you guys mentioned the inland JV fees going away as that venture unwinds at year end. You also mentioned the Blackstone preferreds that will ultimately go away. One of the interesting things about this quarter is you guys finally actually raised guidance. David, I know that you are NAV focused, not FFO, but at the same time, public markets like earnings going up.
So is there a way that you guys can balance how the inland fees go away and the Blackstone preferreds get paid off with an ability to reinvest so that we can get to a DDR that's steadily growing both FFO and NAV? Or should we expect some earnings taking a step back as some of these fees and preferreds get paid off before those proceeds can be reinvested?
Your question is something we think about a lot, both internally and at the Board level and have that discussion. And I think when we think truly long term, we would say a couple things. One, we do believe NAV growth is the variable, most highly correlated with successful companies and successful stocks over time. But would also absolutely say that it is highly likely that FFO growth comes along with that net asset value growth. And so do agree with you that we would expect to have both sides of that, if not exclusively NAV growth at the expense of FFO growth. Certain years, this year specifically, I think you do see an NAV strategy that takes away something from current year FFO per share growth, but I think is still very consistent with long term FFO per share growth. Regarding some of the fee income, we have tried to guide as clearly as possible that the domestic retail fund was a 10-year fund with 10-year debts and we're approaching the end of that 10 years.
So we just want to make sure everyone understands what is likely to happen there. And so would absolutely acknowledge that there is some fee decline there, but we would expect that the growth in the rest of our business should more than make up for that. A little different story with the Blackstone preferred. Where as that is repaid, it does provide additional capital to be reinvested, whether it's specifically in buying assets as we have at times from the venture in the past or whether it's invested elsewhere. Whether that's debt repayment, whether that's acquisitions or whether that's redevelopment activity, we think the drag on earnings from that repayment should be relatively small.
So we sympathize with everyone on the lack of FFO growth in 2016. We don't take that lightly in the slightest. I had some comments in the opening remarks about the end of this period of transition. Which I know for some has been frustratingly long, but I think we're getting to a point where we're at the very end of that. And we do most importantly foresee strong NAV growth and a very low risk profile for this Company, but would also expect that to translate into multi-year FFO per share growth, even if you don't see that in 2016.
The next question is from Haendel St. Juste from Mizuho. Please go ahead.
Haendel St. Juste
And my question is, how much of the remaining $500 million or so that you plan to sell this year is actually under contract versus under agreement? And we understand that you may be marketing an asset or two in Puerto Rico for sale, is that part of the $500 million? Then could you talk about potential pricing and sizing for Puerto Rico sales, maybe add color on a profile of the assets maybe looking to sell? Are we correct to assume that they would be some of your lower tier assets there? Thanks.
Yes, Haendel, so definitely on the Puerto Rico path, we aren't actively marketing any assets down there. We've noted that the transaction market down there remains somewhat stagnant. We haven't seen much trade. However, we've made comments and it's something that we would consider but it's potential to some of the lower quality assets. But at the moment, nothing is actually being marketed for sale. With regards to the $500 million, a significant portion of that is under LOI with a credible buyer, someone that we've been working with on a transaction for quite some time.
So we still feel very good about completion of the vast majority of the $500 million. And we're not saying this is going to take the next six months to close, we do feel this is something that will happen either the end of this quarter or early next quarter. So mid-year transactions to close. So we wouldn't be throwing a $500 million number out there if we didn't feel like it was actually under agreement and we felt like it was something that will close.
After multiple rounds of bidding, two buyers and had advanced to make sure we had certainty of execution there, had advanced contract with one and LOI with the other. And now believe that the one under LOI is the more likely.
The next question is from Paul Morgan from Canaccord. Please go ahead.
So you talked about the midyear dispositions representing the final component of your portfolio evolution. And you've had several years now to track the performance of the different buckets, the prime, prime plus, et cetera. I just wanted to ask whether the characteristics and the performance or the metrics that you demarcated have proven stable? I know assets can move in or out. But broadly, is there anything you could see changing the story there that would maybe make this not the last stage? Or is the same-store results and the rent growth that you've seen in the different buckets consistent with where you expect it and that's what's giving you confidence at the end of the road there?
Yes, Paul, it's a great question and it's one that we ask ourselves since we created this portfolio management group a few years ago. It hasn't just been, let's set the rules for what defines a good asset and what doesn't. It's really let's constantly learn how these assets are performing and how we should think about the different ways to evaluate the quality of an asset, where we have the three basic buckets, quality of the dirt, quality of the tenancy and growth profile over the coming five years. But then how we evaluate the sub categories there and some of that we do take the constancy back from how assets perform, feedback from tenants, sales activity, traffic to reevaluate assets.
But certainly would not expect that it results in a major change in our expected disposition portfolio. I think as we've looked through the whole portfolio, we've identified clearly what made sense to sell. And we've been rapidly moving forward on that and so wouldn't expect that bucket to change much. But we're constantly evaluating how these assets perform relative to our grading system. The tough part is the last three or four years of bull market really haven't been the ideal time to evaluate assets, because the biggest differentiator we've found is how they perform in a bear market rather than in a bull market.
So I think we're certainly learning a lot as we look at the history of how assets performed over the past decade, more so than just the past couple of years because honestly, you could make the case in a bull market that it's a prime minus bucket with more vacancy that fills up because everything of the highest quality is completely full. So we think we're preparing a portfolio, creating a portfolio that performs well over time, but I think the true test of that is going to be in the next downturn. The true test of that is each case study of a Sports Authority or whatever bankruptcy is next, more so than just the strength of performance that everyone has shown over the past three or four years.
The next question is from Jason White from Green Street Advisors. Please go ahead.
First one in terms of the Blackstone joint ventures, is there any chance that those assets might migrate over to the new platform, along with Luke and those fees go away sooner or is that contractually part of DDR's asset management business?
Very much part of DDR's asset management business. We've mentioned the great relationship and contractual relationship with Blackstone. We have always worked with them closely to make sure that those ventures could be very profitable for both of us. And so while we would continue to expect some wind down, some level of asset sales out of those ventures, would not expect just a wholesale movement of those assets to a different sort of venture.
A question from Tayo Okusanya from Jefferies. Please go ahead.
This is George [indiscernible] on for Tayo. Just wondering if you could talk about your watch list and what other retailers should we be looking for that could be closing stores or having issues in the back half of the year?
Yes, George, it's Paul. I mentioned a couple of them earlier with Craig's question. But there's a few, PacSun, Aeropostale are a couple. PacSun is final, the Aeropostale we're expecting. Not anything material on our portfolio at all, but going to be large numbers of closings in mostly malls and some specialty centers.
Hhgregg is a tenant we watch very closely. We've got 18 and we're reducing our exposure as we can with that company. Continue to struggle to find the right merchandise mix and their niche in the electronics, appliance, furniture field. But, on the other hand, they have no debt and we do not see them as near term risk. It's just somebody, as I mentioned, how we've been watching Sports Authority for years and careful about the deals we didn't make with them, if you will, that's how we're looking at a company like hhgregg. Obviously there's a big one out there with the pending merger still of Office Depot and Staples that we watch.
We should have some resolution within the next 30 days whether that happens or not. We've had intense conversations with both companies. We have a strategy whether there is a merger or whether there is not. But either way, whether there is a merger or not, once that's decided, you will see some store closings in that category also. Again, as we continue to improve the quality of our tenant mix and the credit quality of our tenants, we've made over 88 deals in the last two years with companies like T.J. and Nordstrom Rack and Bed, Bath and Beyond and Dick's. This is what we've been doing. We'll continue to do, we're backfilling with best-in-class retailers with great credit quality, great draws to the center and great ability to lease around them. So that's what we'll continue to focus on.
The next question is from Greg Schweitzer from Deutsche Bank. Please go ahead.
I was just wondering if you could spend a bit more time on Puerto Rico, both on the fundamentals. Outside of some of the new retailers that are coming in, what else gives you comfort that those trends on the traffic and the sales side will continue to hold up? And then also on the dispositions side, how do you weigh up the pricing that you could get for some of those lower tier assets in Puerto Rico versus just your all-out exposure to the market and what reducing that exposure would signal?
Let me start with a little bit on what we see going on down in Puerto Rico, Greg. As I mentioned in my prepared remarks, we have seen a leveling off of sales. We're continuing to see that through the first quarter of 2016. That was a 2015 story I was referring to with Wal-Mart by far the largest retailer on the island showing small growth in 2015 which is good news and we'd expect that trend to continue. Now that of course is coming off of lows in 2013 and 2014, but it is the trend.
As I also mentioned, the traffic we're seeing at the centers has not diminished at all from what we were seeing a few years ago. It's a very high level consumer mentality down there and we're seeing great traffic in the center. We've got the benefit of having leverage with tenants down there. We've spent the last five or six years replacing low credit quality local retailers with high quality regional and national U.S. national chains and that's benefited to us. I didn't mention it earlier today, but we've talked in the past about where our bad debt and our AR, our accounts receivable, sits down on the island and it's that at all-time lows which is also a good sign in terms of where things are going.
Tenants continue to make some deals. H&M, Outback and Dave & Buster's, I mentioned, we'll see more of that. Then with a little success, with success as they open, we'll see more retailers see this long term opportunity. This is clearly a down cycle where we're in right now and nobody underestimates that. But there is a long term opportunity for retailers who see such an opportunity.
And on the evaluation of potential sales, completely understand your point the way that you and others have written about it, that does it represent an overhang the size of the exposure down there, on the other side of that we're absolutely not a forced seller. Look, we lived through a time seven-ish years ago when we were a forced seller and we know how unpleasant that could be. And so it really is balancing both of those, making sure we're taking a long term view on both sides. Both the prospects for the assets as well as just the uncertainty of the island, where there is greater headline risk, there is greater political risk, greater tax risk and so we have to acknowledge that.
So I think what's most important for us is how the assets are performing today which Paul and through materials in the supplement we've outlined a lot of details. Secondly, is the expectation of performance of those assets going forward and what we think the value of those assets can be over time. But don't want you to think at all that it is lost on us, that this does represent an overhang. We're told about it on a daily basis, it represents a lot more than 10% of our time in investor meetings.
And so we're certainly cognizant of the fact that it does have an impact on our cost of capital and we take that seriously as we evaluate potential transactions on the island. Although we don't have ideal visibility on private market pricing down there, we're certainly thinking about a lot of ways to maximize value on the island, both near term and long term.
We have a question from Michael Mueller from JPMorgan. Please go ahead.
So you talked about dispositions. A big slug coming up and really wrapping up the program. Just when you look forward over the next couple of years, what do you think is more of a normalized annual pace once you get past this last big tranche?
Yes, I think that's a good way to think about it, because we really are at the end of the bigger portion of asset sales. On a regular basis, when you look at a portfolio of this size, I think you should probably end up with something for sale every year. I think in a few cases, that simply represents a joint venture partner with a wind-down expectation or a time horizon constraint.
In other cases on a wholly-owned basis, I think this constant portfolio management process that we go through really does create some level of sell discipline on an asset that you've maximized its value where it is very good and a buyer acknowledges it's very good. We just don't think that the prospect can get any better than where it sits today. I do think you will see some consistent volume, but I think there you are talking in the $100 million to $200 million range. Where clearly there are reinvestment opportunities on the acquisition side, as well as on the redevelopment side.
So I don't think you get down to zero disposition activity, but I think you're talking about dramatically smaller numbers, lower cap rates and much more clear reinvestment to lead to no dilution from those sales.
The next question is from Rich Moore from RBC Capital Markets. Please go ahead.
David, second thing if I could ask you, you said in the press release that you have a deep finance team. And I'm curious why you have chosen to take the interim CFO position instead of giving to the one of the members of the finance team? And then secondly, along the same lines, the employment contract, employment agreement situation seems pretty irregular to me. It seems to have taken an inordinately long time. I'm curious, in your view, what is holding that up?
Sure. We did reference in the press release and comments the size and quality of the team on the finance, accounting, transactions, capital market side here, we're very fortunate through work over the years to have a great team in place. As indicated with the 8-K that we filed that had a little more detail than the press release. This is a very real time. The situation with Luke's departure and so has been a very short period of time that we've had this information and we run a very long term or certainly try to run a very long term business. And so I think there wasn't the pressure to act immediately. I think there's a much greater focus for us on how all the pieces and all the people fit together into the strongest [indiscernible] charts possible.
So I think we have exceptional resources here. But also open to see what additional skills and talent we could bring in. We've had a great track record over the years of bringing people here to Cleveland to add to this team. I would expect that could you see more of that, not at all at the expense of the current team but just in addition to that. So I think given the short period of time that we've had to figure this out and given the fact that it was only a little over a year ago that I officially had the CFO hat. We just thought for the interim, it would be easy and understandable and straightforward for me to take that title on as we figure out exactly how to redistribute responsibilities around here as well as how to best position ourselves to continue to bring in additional talent.
On the contract side, there's not that much that I can say. There has been very good dialogue between me and Terry Ahern, our Chairman and so I think there's a good understanding on both sides of our long term interest and commitment to this Company. Obviously, I get that it adds a little bit of uncertainty for the market, but I think we're here to tell you as clearly as possible that this team is motivated and committed. I would also tell you that the caliber of this team does create the risk that other companies are going to say, they want to take talent from here and Luke found a fantastic opportunity. It's a credit to him and it's a credit to the strength of the group that we have put together here at DDR and so I think whenever you have a good team, that's always going to be a risk. But I do think you see a strong commitment here, a strong team here and a motivation to continue to create value at DDR over a long period of time.
The next question is from Chris Lucas from Capital One. Please go ahead.
I guess on the -- was I thinking about the changes in the retailer landscape and the bankruptcy trends, I guess I was just wondering if there are things that you guys can do in your lease terms that insulate you? Since it feels like and there's some data that shows us that retailers in general have been tilting more towards liquidation rather than reorganization over the last 10 years. I'm just curious as to whether or not there are things you can do on the lease terms that you can do to increase your control and protect your interests?
Chris, it really starts with making deals with the right people and that's what we're focused on. Obviously we're going to have a lot of leases that are going to be subject to retailers that may go into decline and fail over time. Jumping to your question about control, that's very tough. Bankruptcy courts are going to control and they're going to protect the estate and they're going to look to maximize creditor's positions.
So there's not a whole lot you can build into a lease. It's not going to be acceptable terms for retailers who are solid retailers, by the way. Bankruptcy Court is what it is and the bankruptcy laws are what they are and they're going to protect those interests. So our focus is clearly and has been for the last six years, let's get the right retailers in place. There's always going to be change in -- as time passes, change in who's good, who's not, who's getting better, who's going the wrong way. And it's our job, as great operators to make sure we're focused on the right winning retailers and that we continue to move our portfolio in that direction.
We have a follow-up from Ki Bin Kim from SunTrust.
Ki Bin Kim
Just to go back to that same-store NOI question. Just to be clear, wasn't questioning how you guys did accounting, just wanted to put the factual definition out there. But along the same lines, just curious, if you did include redev NOI which you guys I know you don't, what would that look like? And second, any other retailers in your top 50 list that you're watching besides hhgregg? And congrats, Luke.
Yes, Ki Bin, I didn't mean to take it the wrong way at all on your question. Just wanted to make sure we gave the details there because we have spent a heck of a lot of time just trying to get to a calculation that answers the question how are these assets growing on average. And so that's also where we've gone through the process to outline the difference between major and minor redevelopments. Because we do think when there's significant capital put into centers, that it isn't truly same-store, that you really have changed that or you've paid for that as a return on that incremental capital.
And so the minor redevelopments I think for us as we've clarified these definitions, really fall into the category of releasing. I think if you want to gross up the redevelopment portfolio, you'd call them something more significant than that. But it really is the day to day core releasing activity. There's some capital associated with it, but not massive amounts of capital. And so we really think of that as primarily our leasing efforts. We leave out the major redevelopments which generally would be quite helpful to notional same-store NOI, but obviously because it's a return on considerable capital that was put in, it would push that number 50 basis points or higher. And then I'll give it to Paul.
Just quickly, Ki Bin, on the top 50. One of the things to keep in mind as we continue to push people off of the top 50, is reduced exposure and Sears/Kmart would fit high in that category. We've reduced them steadily to now they're not even a top 50 tenant. Pennys was one that was a top 50. And while we think there's some improvement in Pennys' business, it's not a company we'd be making deals with right now. They're off of the top 50. But I would tell you that in addition, hhgregg, Toys R Us is clearly somebody that's up there.
Again, no concern at all of the near term filing, but a company that has been losing market share for a number of years and so who we'll continue to watch closely and then Pier 1 on a little lesser category. Their business, they've had some wild swings from tough when the recession came out, very solid in 2011, 2012, 2013 and some issues lately. So again, companies like that we watch, we talk to them regularly, we send our national accounts teams to meet with CEOs, CFOs and heads of real estate and it works for us.
This will conclude the Q&A session, as well as today's call. Thank you for attending the presentation. You may now disconnect your lines.
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