Pennsylvania Real Estate Investment Trust
Q4 2017 Earnings Call Transcript

Published: 16 Feb 2018

[Operator:]

Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the PREIT Q4 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Heather Crowell. Heather, you may begin.

[Heather Crowell:]

Thank you. Good morning. And thank you all for joining us for PREIT’s fourth quarter 2017 earnings call. During this call, we will make certain forward-looking statements within the meaning of Federal Securities laws. These statements relate to expectations, beliefs, projections, trends and other matters that are not historical facts, and are subject to risks and uncertainties that might affect future events or results. Descriptions of these risks are set forth in the company’s SEC filings. Statements that PREIT makes today might be accurate only as of today, February 15, 2018, and PREIT makes no undertaking to update any such statements. Also, certain non-GAAP measures will be discussed, PREIT has included reconciliations of such measures to the comparable GAAP measures in its earnings release and other documents filed with the SEC. Members of management on the call today are Joe Coradino, PREIT’s Chairman and CEO; and Bob McCadden, our CFO. I’ll now turn the call over to Joe Coradino.

[Joe Coradino:]

Thanks, Heather, and good morning to all. In celebrating the Philadelphia Eagles Super Bowl Victory, Eagles center Jason Kelce eloquently said, hungry dogs run faster. Hearing that it occurred to us this has always been PREIT’s model, hungry dogs run faster. We’ve demonstrated this in a number of ways over the past five years. We were the first to pursue and conclude a large scale low productivity mall disposition program. We’ve been bringing in dining and entertainment to our properties for years. We were the first to aggressively take one replacing department stores. And we think now it’s a good time to point out that as far as we can tell, our Q4 same store NOI results were ahead of the entire mall REIT sector and we put out 2018 expectations in line with hope -- high productivity peers for our wholly-owned portfolio. Our core operations are doing quite well. So for PREIT 2017 was a year running faster, even as we faced headwinds and we believe that the results we share yesterday and our projections for 2018 and beyond prove that we distinguish ourselves as a quality mall RIET having delivered on all elements of our strategy. We delivered on our anchor replacement strategy, leading the industry and leasing nine of 11 vacant stores, setting a stage for future growth and strengthening our foundation. We delivered on our capital plan, strengthening our balance sheet by raising over $450 million, reducing our borrowing costs and securing liquidity to fund our -- to fund our value creating redevelopment program. We delivered strong same store NOI in occupancy growth, along with record new leasing activity in the face of a contracting retail environment. Mall occupancy grew 180 basis points since the last quarter, with same store NOI up 3% for the quarter, both driven by leasing activity that was nearly double our 2016 activity. We also delivered on renewal spreads. In the fourth quarter we improve our renewal spreads at 10.8% for tenants under 10,000 square feet to end the year to solid 5.1%. These results confirm that our strategy to drive the quality was the right approach. Moreover our instincts to pursue certain initiatives ahead of many of our peers were spot on and positions the portfolio well, it is noteworthy that the 17 malls we sold, 25 anchors have closed or set to close and these are generally in markets where further capital investment would not be a prudent decision. As you heard from our peers the industry is in the state of evolution. We believe we have been a step ahead of the sea changes and through our intensive portfolio management strategy have positioned ourselves with an asset base that generates tenant demand where tenants sales are improving and our redevelopment projects are generating strong returns. While vacant boxes are abundant around the country, with adeptly dealt with closings, many of which were pre-planned. On the anchor replacement front as 2007 kicked off -- the 2017 kicked off, PREIT had 11 vacant anchors. During 2017 and January 2018, five of these anchors have been replaced with operating tenants. As we move into 2018, PREIT executed leases for four additional replacements. This leaves two vacancies both with leases pending execution. The results in this -- of this initiative is 17 sought after tenants spanning seven diverse uses, paying rents eight times greater than the space was previously generating. But the story expands beyond these impressive figures. In replacing data department stores, we are transforming our properties, driving new customers and reinventing our platform. Through our portfolio repositioning effort, our exposure to potential additional department store closures has been dramatically reduced. We continue to look to proactively take back stores where prudent. We reduced our Sears store count from 27 to eight, which includes Willow Grove Park subleased to Primark. We have gone from 31 JC Penney stores to 16. We went from 25 Macy’s to 14 and we only have two Bon-Ton stores. Demand for quality spaces robust and we have capitalized on this, having executed 76% more new leasing than in 2016 for a record amount of space in 2017. As a result of our tenant diversification strategy, the tendency takes a new shape than in years past. As we look at the leases we signed in 2017, excluding the future additional department stores we sign, two-thirds of the space we lease was committed to a mix of tenants that are a foundation of the mall of the future. Dining and Entertainment made up 19%, Off-price accounted for 14%, Fitness was 9%, Sporting Goods accounted for 8%, Fast Fashion was 8% and Shoes and Accessories made up 9%. As we move into 2018, we are in a strong position to drive revenue into the future, having executed leases for future openings for 33% more space than we had at this time last year. As you know, many legacy retailers filed for bankruptcy protection last year and one early this year. As the choppy retail orders of 2017 became apparent, we quickly adjusted our operating plan to mitigating the impact of rent relief and early close to an aggressive focus on driving ancillary revenues and expense reductions in an effort to maintain our operating margins and NOI objectives without sacrificing quality. We renegotiated contract to reduce expenses, we reduced staffing as appropriate and we instituted new revenue sources through the introduction of Digital Advertising Boards. In addition to our intense focus on operations and evolving our more mall experience, we executed on our plan to strengthen our balance sheet, which continues to be a top priority. Since detailing our capital plan in January 17, we’ve raised gross proceeds of over $700 million, resulting in net proceeds of over $460 million. Notable accomplishments include the sale of three low productivity malls and a non-core office building. On the financing front, we secured a $250 million term loan tied to Fashion District Philadelphia and early refinancing of Lehigh Valley Mall generating excess proceeds and reducing the interest rate, refinanced Francis Scott Key Mall and issued two new preferred shares series for $292.5 million, a significantly lower coupon rate from our existing preferred shares and the redemption in full of our 8.25% Series A preferred shares. Being nimble is key to success in retail and we are pleased to have raise the liquidity to fully fund our value creating redevelopment projects well in advance of the spending needs. As such, we continue to work through additional non-core land and asset sales. Our redevelopment efforts are also generating outstanding results. At Mall at Prince Georges we’ve delivered on our redevelopment plan. We look forward to the openings of DSW, ULTA Cosmetics and Express later this year along with three first casual eateries, solidifying this DC powerhouse that continues to perform even while under construction. The common area renovation is complete, new leasing is 95% committed and the project will be completed in June. At Woodland Mall in Grand Rapids, Michigan, we are making good progress on the merchandising of the new wing that will redefine Von Maur. For the planned new re-merchandise space we’re 65% committed with a robust pipeline of interested tenants for this 2019 project. In Philadelphia, this is a year we will open up Fashion District. We’ve incorporated our share of NOI in our guidance and look forward to release -- to releasing details including the opening date and tenant roster later this year. We continue to work with third parties to explore the vertical development of this project to incorporate multifamily housing. It’s noteworthy that on our completed projects and those nearing completion such as Capital City, Mall at Prince Georges and Viewmont, we have been delivering these projects under budget, on time and at returns that are accretive to these assets and given the newly curated tendency, our cap rate transformative. Now before I turn the call over to Bob, I wanted to take a minute to update you on governance and sustainability improvements we’ve implemented. Last week, our Board appointed JoAnne Epps as a new Trustee. She brings a unique background and a wealth of experience and look forward to her contribution and fresh perspective as we continue to evolve PREIT. We also continued to evolve our sustainability efforts. In 2017 we added three new solar raise, the two that existed in our portfolio and now offer electrical vehicle charging at stations of four properties. PREIT properties now produce more than 8 million kilowatt hours of electricity from solar panels per year. The environmental benefit accrued through the production of renewable energy at these five properties is equivalent to a reduction in greenhouse gas emissions from more than 1200 passenger vehicles annual. Additionally, as part of our Woodland Mall redevelopment, we recycled more than 20,000 tons of concrete from demolition to be reused as building pads, parking lot base and site grading during the expansion phase of the mall. Now, I’ll turn the call over to Bob to cover our 2018 guidance, quarterly and full year results, and our capital plan. Bob?

[Bob McCadden:]

Thanks, Joe. For 2018 FFO guidance has raise the number of questions. It’s quite simply the result of our move to quality and a simplification of our asset base. Let me take you through a reconciliation of 2017’s actual FFO results to the midpoint of our guidance range for 2018. Let’s start with FFO in 2017 where we reported FFO of $130 million or $1.67 per share. We will experience dilution of $6.8 million or $0.09 a share from dispositions. This includes one of the property we anticipate selling this quarter. On a normalized basis adjusting for this dilution, our starting point for this year is a $1.58 per share. Our 2017 results include a number of items where we expect to lower contribution in 2018. Historical tax credit income will be $1 million lower. Corporate revenues and other income will be lower by $2.5 million as a result of lower sales, land sales gains and other items. 2017 non-store revenue -- same store revenue included $1.7 million of accelerated lease intangible income which is not expected to recur. These items account for $0.07 a share, taking us to a $1.51. Excluding lease termination fees our same store NOI at the midpoint of our guidance range adds $4.5 million of NOI or $0.06. Lower lease termination fees and slightly higher interest expense net of G&A cost savings and lower preferred share dividends results in an approximately $0.03 reduction taking you to a $1.54 per share. The incremental contribution from Fashion District had a slightly higher share count account for the remaining difference to the midpoint of our FFO guidance range of $1.55 per share. The short-term dilution is a natural consequence of our strategic move to quality, by shutting non-core assets and redeploying the capital into our remaining portfolio, we’re building a stronger foundation for future growth. So let’s go on to talk about our capital plan and operating results. We’ve made significant progress on our capital plans since beginning of this year. Last month we and our partner closed for the $250 million five-year term loan for Fashion District. The joint venture initially borrowed $150 million with remaining $100 million available to us via a delayed draw option. We used our share of the proceeds to reduce borrowings under our credit facility. As of today, we have no outstanding amounts under the facility. Having closed on the term loan, we now have immediate available liquidity to fully fund our anchor replacement and redevelopment program. In January, we also expanded our $69 million floating rate mortgage loan on Francis Scott Key at the existing spread and swap the loan to a fixed rate at 5.01%. With the available one-year extension option, the final maturity of this loan is 2023. Earlier this month, our joint venture closed on a three year extension of its mortgage loan on the land parcel across from Fashion District. We’re in documentation to finance the construction loan on Gloucester Premium Outlets with a new loan, which is expected at proceed at or above the current loan balance and we will close that loan by the end of the first quarter. After all these 2018 maturities are addressed, our next significant mortgage maturity won’t occur until 2021. We continue to improve our balance sheet, after giving effect for the first quarter’s financing activity, we have approximately $325 million of total liquidity available to us. At the end of December, our bank leverage ratio was 50.65% and our net debt to EBITDA was approximately eight times. Our cash interest rate was 3.9%, 3.98%. a 4 basis point reduction from year ago, 92.9% of our debt either fixed or swap and debt maturities are well ladder. We’re well-positioned to manage through a period of rising interest rates. We are in various state of completion with other transactions that we anticipate will generate up to $70 million of incremental proceeds during the balance of the year. These include the sale of our remaining non-core office property, various land parcel and other assets. We invested $37 million in our capital program during the fourth quarter and $196 million for all of 2017. At the end of 2017, we had approximately $300 million remaining to spend on our redevelopment and anchor replacement program. We expect to spend about $180 million to $200 million this year and the balance in 2019. Turning to operations, we performed in line with our expectations and are ahead of consensus for the quarter. We reported FFO as adjusted of $0.51 a share and a net loss of $0.05 a share. Same store NOI excluding lease termination at our wholly owned properties increased by 4%. Contribution from anchor replacement, other new tenant openings, higher ancillary income and cost savings more than offset $1.9 million revenue impact from bankruptcies and co-tenancy adjustments. We also absorbed an additional $500,000 of bad debts related to fourth quarter and first quarter 2018 bankruptcies and higher than expected snow removal costs due to incremental weather in December. In contrast, the performance of our wholly owned properties, same store NOI ex lease terms at our joint venture properties declined by 4% in the quarter. Bankruptcies accounted for $300,000 of the decline in joint venture NOI. Overall same store NOI ex lease terminations blended to a 3% growth rate for the quarter. We ended the mall of the year with total mall occupancy of 95.9%, non-anchor occupancy was up 10 basis points compared to last year at 93.8%. Total leased occupancy was 96.6% and non-anchor lease occupancy was 94.9%. As we look forward at our same store properties we signed leases for a total of 600,000 square feet of new tenant that will open in 2018 and 2019 which will contribute approximately $7.3 million in annualized rent at our share. With respect to guidance, we introduced our FFO and net income guidance for 2018, with FFO per share expected to be between a $1.50 and $1.60. GAAP earnings are expected to range from a loss of $0.16 to $0.03. I have already discussed the reconciliation of 2017’s results, but I will walk you through some of the underlying assumptions. 2018 same store NOI growth excluding lease termination is expected to be a positive $1.25 to $2.25 comprised of a positive 1.5% TO 2.5% growth rate at our wholly owned properties and negative 2% to 3% at our joint venture properties. Bankrupt tenants net of replacements are expected to reduce 2018 revenues by an additional $1.3 million on top of the $5.6 million impact we experienced in 2017. Co-tenancy adjustments are expected to be approximately $2 million in 2018 compared to $1.3 million in 2017, reflecting the full-year impact of anchor closing. In the case of bankruptcies and co-tenancy adjustments, the impact will be more significant in the first part of the year and will be mitigated as replacement anchors open in the third and fourth quarters of 2018. We will open anchor replacement tenants at Magnolia, Moorestown and Valley Malls in the second half of the year as set forth in our anchor replacement schedule in the supplemental. We assume lease termination revenues of $1.5 million to $3.5 million compared to $3.2 million in 2017. Capital expenditures including recurring CapEx and tenant allowances are expected to be in the range of $220 million to $240 million. And we anticipate recognizing a gain of approximately $2.5 million from the sale of our joint venture interest in a non-core office property in the first quarter. This will be a non-FFO gain. Finally, our guidance does not assume any other operating asset sales, capital market transactions other than mortgage loan financing in the ordinary course of business. And with that, we will open up for questions.

[Operator:]

[Operator Instructions] And your first question comes from Ki Bin Kim with SunTrust. Ki, your line is open.

[Ki Bin Kim:]

Thank you. Can you first talk about the cadence in same store NOI that we should expect in 2018, given that some of the moving parts that you mentioned?

[Bob McCadden:]

So I think the first will, probably, if you look at it on a quarter-by-quarter basis will be the lowest growth quarter and we will start to see acceleration in the second quarter and through the end of year.

[Ki Bin Kim:]

Okay. And I think just historically you speaking there’s been some, maybe the few assets have been a little bit bullish in certain years, just given some of the moving parts. Maybe you can help, just rapid all around for us and all of equal once you finish your redevelopment projects, including FOP, your guidance for next year is $1.55, what is the longer term FFO potential from Penn REIT after some of these projects are completed?

[Bob McCadden:]

I think a year ago we laid out our capital planning and an outlook for the next couple years for 2020. I think the bankruptcies are probably set us back a little bit from a timing perspective. We still expect to be on target to reach the goals that we set out a year ago.

[Ki Bin Kim:]

Okay. I guess, I was trying to see if as the dollar -- from a $1.55 is the growth potential like $1.85, something more concrete like that?

[Bob McCadden:]

At this point we are not really prepared to give guidance beyond the current year, Ki Bin.

[Ki Bin Kim:]

Okay. And can you just remind me, how your lease modifications work. I believe that you have to have an extended term for those leases to be in the lease spread page in your supplemental, but for the ones that are just pure rent modifications, what does that look like and how does that impact your view on 2018?

[Bob McCadden:]

Well, I think, our guidance, as I mentioned, reflect specific lower revenues from bankrupt tenants where most of the lease modifications are occurring, that’s really baked already into our estimates for the year.

[Ki Bin Kim:]

Okay. Thank you.

[Operator:]

Your next question comes from Christy McElroy with CIti. Christy, your line is open.

[Christy McElroy:]

Hey. Good morning all. Just first on Fashion District and thinking about the $1.5 million to $2.5 million of NOI from that project this year. How should I think about the timing of rent commencement, is that the majority of that in Q4? And then, sort of related to that, how should we be thinking about capitalized interest that will start expensing of those cost lease start expensing everything or is it more gradual, since the project isn’t fully stabilized?

[Joe Coradino:]

As it relates to the income -- hi, Christy, it’s Joe.

[Christy McElroy:]

Hi.

[Joe Coradino:]

As it relates to the income from Fashion District, yeah, that will be the fourth quarter or fourth quarter.

[Christy McElroy:]

Okay.

[Bob McCadden:]

And it relates to capitalized interest that will come in phases as the property comes online, those spaces that come online of the corresponding amount of allocated dollars will swap, capitalizing interest on those spaces. But it will take the cessation of capitalized interest will occur over the period of time.

[Christy McElroy:]

Okay. Got you. And then just thinking about the sources and uses, I heard the $180 million to $200 million of spend on redevelopment. I think I heard you say $70 million of proceeds from sales. I assume the rest of the spending is funded off of the line of credit. Just how should we be thinking about the movement of capital and how you and your leverage profile and how you would end the year from a debt to EBITDA perspective, just given that not a lot is slowing yet from the projects in 2018?

[Bob McCadden:]

Okay. So, as I mentioned, we still have the joint venture has $100 million of undrawn capacity under the FDP term loan, so that will be probably our initial source of funding for Fashion District and the balance will…

[Christy McElroy:]

Yeah.

[Bob McCadden:]

… come from line of credit until the proceeds from the asset sales are realized. On a debt to EBITDA, we are sitting at the end of December of ‘17 is about 8 times, that will peak at about 9.1 times at the end of 2018 and then as the NOI starts coming on from FDP and the other anchor replacements that we expect that to kind of be the peak of our leverage at the end of 2018.

[Christy McElroy:]

Okay. All right. Thank you.

[Operator:]

Your next question comes from Karin Ford with MUFG Securities. Karin, your line is open.

[Karin Ford:]

Hi. Good morning, Just -- thank you for all the color on what’s baked into the guidance from bankruptcy and co-tenancy perspective. Just curious if those numbers include any prospective bankruptcies that haven’t been announced yet or is that or box closures for that measure -- matter or is it just what you know and what’s happened already year-to-date?

[Bob McCadden:]

So the numbers that we -- I cited were related to 2017 bankruptcies. When we build our guidance for the year effectively we baked in to our numbers on a unit by unit basis, where we think the likely outcome will be from existing tenants, so to the extent we anticipate closures or any rent modifications that’s baked into our baseline growth level and if not included in the numbers that I quoted, they are really related to bankruptcy -- bankrupt tenants that have already announced.

[Karin Ford:]

Got it. And are you expecting any box closures in 2018?

[Joe Coradino:]

I think at this point we feel good about the future regarding box closures and we are, as I said, we are -- we really dramatically reduced our Sears count. We have down to two Bon-Tons and any box closures that might occur this year, we think would be proactive, where we went out and decided to take back a particular anchor store where we had a tenant to step in. As we can genuinely look at opportunities to again mitigate exposure to sort of risky anchor shall we call it.

[Karin Ford:]

Got it. Next question is, it look like Valley View Mall moved from being held-for-sale to backend of the operations. Why did that fallout and did you -- have you seen a change in the bed for asset sales?

[Bob McCadden:]

Well, it’s -- as it relates to Valley View. It’s a pretty good asset. I mean, look we sold all 17 malls, we certainly are proficient in doing that. But when we looked at Valley View has rising NOI, we successfully replaced an anchor, and we didn’t want to do a relatively what we saw was a high cap rate deal and we decided to sit back and wait for a little bit of better time and really we have got a non-core office building that we are about to close one in the this quarter and we have got lot of focus obviously in anchor replacements in and in-line leasing. We will sit and wait for better times if you will.

[Karin Ford:]

Got it. And last question, just going back to Christy’s question on leverage. So with -- you headed toward 9 times debt to EBITDA by year-end, any thoughts on reconsidering the JV sale of the core asset or any additional asset sales to bring that number down?

[Bob McCadden:]

Well, we continue to engage in dialogue regarding JV asset sales. At this point nothing has really wet our appetite if you will, because those kinds of deals are deals that pricing is critically important and given the fact that we have secured the capital to fund the redevelopment and while ‘18 is a peak year for us from a leverage debt to EBITDA perspective as the redevelopments come online. And much of that is, already executed deals, where you are under construction and you have firm opening dates, et cetera. So it’s not a kind of risk, if you will, a high level of risk. So, again, we’re -- we will continue to look at JVs, as we look at all opportunities to improve the balance sheet, but it’s not at all costs if you will.

[Karin Ford:]

Thank you very much.

[Operator:]

Your next question comes from Michael Mueller with JPMorgan. Michael, your line is open.

[Michael Mueller:]

Yeah. Hi. Couple of things, first of all, I am curious, I mean, the stock was halted for an hour, hour and a half or so yesterday. I mean, do you have any color on why that happened and why you reported pre-close?

[Joe Coradino:]

We made a mistake and hit the wrong button at the wrong time.

[Michael Mueller:]

Okay.

[Joe Coradino:]

Corrected it quickly and issued our release prior to market close after deliberations with counsel on the New York Stock Exchange. And we think that’s -- it was really a blip and its behind us.

[Michael Mueller:]

Okay. Switching gears now on asset sales. Joe, I think, you mentioned something was going to close -- Joe, I think, you mentioned something was going to close in the first quarter and then you also talked about non-core office, maybe some land. Just can you size up the total dollar amount that you are expecting for 2018 in terms of asset sales? Mike, it’s Bob. We mentioned it’s about $70 million.

[Michael Mueller:]

Okay. So that includes what you were talking about at first, something closing in the first quarter as well?

[Bob McCadden:]

Right. So, that’s the only operating asset that we will be selling in our -- at $70 million number. The rest would be land parcels and other non-income generating assets.

[Michael Mueller:]

Okay. So the only operating assets going to be the office portfolio there or the office building.

[Bob McCadden:]

Correct.

[Michael Mueller:]

Okay. Got it. And is that most of that number, a good chunk of it or think about how much of it?

[Bob McCadden:]

About a third.

[Michael Mueller:]

Okay. And rest land, got it, and then, last question on CapEx and TIs. You mentioned, I apologized if I missed this, but the $220 million, $240 number that obviously has some bigger projects in there. What you think about normal course TI leasing commissions outside of major projects?

[Bob McCadden:]

So you -- between recurring CapEx TIs is probably at $40 million.

[Michael Mueller:]

Got it. Okay. That was it. Thank you.

[Operator:]

Your next question comes from Floris Van Dijkum with Boenning. Floris, your line is open.

[Floris Van Dijkum:]

Great. Thanks. I wanted to -- Joe, I want to make sure I caught this right. You said that on the anchor replacements the nine of 11 that you have five signed up, is that correct, we have you -- we should expect an 8 times rent multiple on those spaces?

[Joe Coradino:]

That is correct, Floris.

[Floris Van Dijkum:]

So what would be the return that you would have gotten on the investments into those boxes?

[Joe Coradino:]

High single digits.

[Floris Van Dijkum:]

High single digits. Great. And the $300 million -- and just a follow up questions on the capital spend, you mentioned $320 million left to spend, that presumably does not include potential Bon-Ton recaptures or any further Sears recaptures, correct?

[Bob McCadden:]

So, yeah, just to correct, the number is $300 million, Floris, if I just wanted to make that clear. And that does not include any capital expenditures for any potential Bon-Tons.

[Floris Van Dijkum:]

Okay. Great. Thanks guys.

[Joe Coradino:]

Yeah. Thanks Floris.

[Operator:]

Your next question comes from Linda Tsai with Barclays. Linda, your line is open.

[Linda Tsai:]

Thanks. It sounds like closures in your unconsolidated properties are weighing on your excess NOI outlook. How long might it take to get the excess NOI growth into the positive range and then what you think is the more of a sustainable/stabilize growth rate for those properties, is it in line with the consolidated?

[Bob McCadden:]

It’s probably going to be a little bit less in the consolidated because of a number of those unconsolidated ventures are power centers which have lower growth trajectory. We are anticipating that most of the bankruptcies that currently plague that part of our portfolio get fill by the end of 2018 and we should start to see return to growth in 2019.

[Linda Tsai:]

And then would you ever consider selling out of your power centers?

[Bob McCadden:]

Yes. We certainly would and we continue to work on that.

[Linda Tsai:]

Thanks.

[Bob McCadden:]

I mean, any non-core assets that we have, I mean, they give you -- there was several questions regarding our FFO guidance and really what’s driving that is, are moving to -- are continuing to move to our core business, right. And moving the quality, simplifying the portfolio and getting out of non-core businesses into sale of the power centers is certainly on our list.

[Operator:]

Your next question comes from Caitlin Burrows with Goldman Sachs. Caitlin, your line is open.

[Caitlin Burrows:]

Hi. Good morning. You talked about liquidity, but maybe as it relates to your dividend, the disclosure shows that the payout ratio on FAD was up to 91% in 2017. I guess, just how do you think about the sustainability of the $0.84 annual dividend at this point and balance that use of cash with other potential leases?

[Bob McCadden:]

So, Caitlin, this is Bob. We are very comfortable with the sustainability of the dividend and our multiyear forecast shows actually increases in our dividend once we complete the current redevelopment and anchor repositioning cycle. So we are not going to give a specific target for potential dividend increase that certainly something our Board looks at quarterly and we are optimistic about where the company headed, so we are not even considering any adjustment downward to the dividend.

[Joe Coradino:]

Yeah. This is Joe. I would just sort of did all that and say that, we are completely comfortable with our dividend. Now again many of the -- much of the work that we are doing is executed leases for construction in progress.

[Caitlin Burrows:]

Okay. And then just on the consolidated portfolio, in particular you gave same store ‘18 guidance of up 2% to 2.5%, but that also includes some of the development openings later this year, but that stabilize in ‘19. I was wondering if you could give any detail on the NOI you expect those development openings to contribute to 2018 kind of what that means for the rest of the portfolio and/or said differently the same store growth excluding the impact of development?

[Bob McCadden:]

Yeah. I mean, I don’t know that we can break that piece out, because the -- it’s basically anchor replacements, not so much the -- I think, we talked about Fashion District as a kind of a pure REIT development. The only other pure REIT development that we have would be the Woodland Mall, which is under construction. So I think we are in a position to be able to kind of break out that piece.

[Caitlin Burrows:]

What about like the Mall at Prince Georges, Capital City and Magnolia, that what you’re referring to?

[Joe Coradino:]

Well, the Mall at Prince Georges is really just a -- is a remerchandising. There was no anchor replacement. They were just adding new retailers to it, the ULTA, the DSW as and for instance H&M, et cetera. And so, I’m not sure we can break those out easily.

[Caitlin Burrows:]

Okay. But there is some NOI build that will start this year, but it all stabilize…

[Joe Coradino:]

Yeah.

[Caitlin Burrows:]

… in 2019 and take it from there?

[Bob McCadden:]

Yeah. And actually I can give you a kind of big picture view. If you look at the revenue contribution that we expect from the whole anchor replacement program, we expect by 2020, this is, when everything is open and fully annualized and this is anchor replacement, as well as this includes the program at Woodland Mall. Incrementally, it’s about $70 million of additional revenue coming out of our current program, again excluding Fashion District.

[Caitlin Burrows:]

Okay. Thanks. That’s helpful.

[Operator:]

[Operator Instructions] Your next question comes from Ki Bin Kim with SunTrust. Ki, your line is open.

[Ki Bin Kim:]

Thanks. What were the 2018 same store NOI guidance of 1.75% be at end point, without the contribution from incremental NOI from the Springfield Town Center project?

[Bob McCadden:]

Yeah. We are not -- Ki Bin we don’t break out individual NOIs from specific properties. But it -- overall it’s the -- the same store growth is $4.5 million or 1.8%.

[Ki Bin Kim:]

Okay. And can you remind us how the Veneto promote would work on Springfield Town Center and when is that eligible?

[Bob McCadden:]

At this point we don’t anticipate making any promote payment to Veneto as it relates to the Springfield Town Center project.

[Ki Bin Kim:]

Okay. And I know you mentioned some CapEx guidance for 2018, but what would FAD guidance be compared to that $1.55 FFO guidance for ‘18?

[Bob McCadden:]

Somewhere in the $1 range.

[Ki Bin Kim:]

Okay. That’s it for me. Thank you.

[Operator:]

Your next question comes from Karin Ford with MUFJ Securities. Karin, your line is open.

[Karin Ford:]

Hi. What is the year-end occupancy assumption that you have baked in your same store guidance?

[Bob McCadden:]

So we have 50 basis point to 100 basis point improvement in non-anchored leasing.

[Karin Ford:]

Okay. Thank you. And then, your adjusted EBITDA to fixed charge coverage ratio came down to about 1.89 times this quarter and you obviously have a little bit of a lag between when EBITDA comes on versus your increasing leverage this year. Are you comfortable that you’re not going to come near to your 1.5 times covenant level?

[Bob McCadden:]

Yeah. We are really nowhere close to breaching any of our covenants. We have sufficient cushion in all of our financial covenants.

[Karin Ford:]

Okay. Thanks.

[Operator:]

There are no further questions at this time. I will now turn the call back over to Joe Coradino for closing remarks.

[Joe Coradino:]

So we continue to view the business through the lens of evolution. The work we did in ‘17 in replacing anchors, bringing in new and diverse tenants is expected to continue in 2018, as we open up a variety of new tenants and continue evolve our approach to enhancing the customer experience. In 2018 we will bring fitness centers, grocers, off-price, dining and entertainment venues to our ever evolving properties. Our team is energized to expand our revenue sources through innovative pop-up experiences, activated customer conveniences and new business development. We will also continue to exploit the underlying value of our locations through the execution of our multiuse densification strategy which we anticipate will be a significant source of growth for our portfolio in the future. So remember hungry dogs run faster. Thank you all and have a great day.

[Operator:]

This concludes today’s conference call and you may now disconnect.