Retail Properties of America, Inc.
Q1 2019 Earnings Call Transcript

Published: 2 May 2019

[Operator:]

Ladies and gentlemen, greetings. And welcome to the Retail Properties of America First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this program is being recorded. It is now my pleasure to introduce your host, Michael Gaiden, VP of Investor Relations. Thank you. You may begin.

[Michael Gaiden:]

Thank you, Operator. And welcome to the Retail Properties of America first quarter 2019 earnings conference call. In addition to the press release distributed last evening we have posted a quarterly supplemental package with additional details on our results in the Invest section on our website at www.rpai.com. On today’s call, management’s prepared remarks and answers to your questions may include statements that constitute forward-looking statements under Federal Securities Laws. These statements are usually identified by the use of words such as anticipates, believes, expects and variations of such words or similar expressions. Actual results may differ materially from those described in any forward-looking statements, including in our guidance for 2019 and will be affected by a variety of risks and factors that are beyond our control, including without limitation, those set forth in our earnings release issued last night and the risk factors set forth in our most recent Form 10-K, 10-Q and other SEC filings. As a reminder, forward-looking statements represent management’s estimates as of today, May 1, 2019, and we assume no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Additionally, on this conference call, we may refer to certain non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers and definitions of these non-GAAP financial measures in our quarterly supplemental package, and our earnings release, which are available in the Invest section of our website at www.rpai.com. On today’s call, our speakers will be Steve Grimes, Chief Executive Officer; Julie Swinehart, Executive Vice President, Chief Financial Officer and Treasurer; and Shane Garrison, President and Chief Operating Officer. After their prepared remarks, we will open up the call to your questions. With that, I will now turn the call over to Steve Grimes.

[Steve Grimes:]

Thanks, Mike, and good morning everyone. Thank you for joining us for today’s call. I am proud to report that the momentum we built in 2018 has continued into the current year as shown by our strong first quarter results. Thanks to the timely start of rents and healthy expense control delivered by our team, first quarter same-store outpaced our internal expectations. Shane will detail how the hard work of our team and the quality of our assets enabled us to exceed the highest lease percentage in our retail portfolio since late 2014. The merits of our transform asset footprint shines through in our 2.7% same-store NOI growth and ongoing expansion and rent per square foot to $19.17. These attractive assets continue to help us find high quality tenants, which include a growing group of digitally native tenants. Our strong portfolio demographics and healthy property types including our significant and growing concentration in lifestyle and mixed use should enable us to increase store count with these and other high growth retailers. We continue to systematically reduce our exposure to watch list tenants and diversify our rent roll. Our top 20 tenant concentration again declined in the first quarter and now measures only 27% of our ABR down 180 basis points from a year ago. We also hold just two tenants that account for 2% or more of our ABR down from 4% at this time last year. The increasing balance in our tenant line up helps drive diversification in our merchandising mix. We view this retailer and product diversification as key to managing risk amid ongoing disruption in the consumer market and while we benefit from the lack of outsized exposure to any one or more product or service categories, we also gain from the everyday relevance stemming from 64% of our portfolio ABR being derived from assets with a grocer component, either anchored or shadow anchored. Also while the quick traffic tie to grocery benefits our footprint are nearly 50% concentration and small shop across our entire portfolio, including approximately 60% in lifestyle mixed-use assets gives an annual rent bumps well in excess of typical grocery leases.. The total from recent Retail sector results reflects our expectations for ongoing dispersion in the sector that we outlined at the start of the year. Consumer confidence has stabilized during the last few months after retrenchment in December and January amended Federal government shutdown and the job-to-market remain solid with unemployment below 4%. Though the Easter calendar shift to April has added incremental headwinds to early 2019 retailer result, gains in the stock market year-to-date should further add a wealth impacted benefits are super zip heavy portfolio. Announced bankruptcies in 2019 also have not surprised us. Bad debt for the first quarter measured lower than expected and declined versus one year ago. Our tenant-by-tenant, space-by-space modeling and regular portfolio reviews have kept us well poised to manage the risk inherent in our tenant lineup. While we expect more disruption in portions of the consumer landscape, we feel well-positioned to manage through any tenant disruption that may come our way. Our portfolio percent leased sits at multiyear highs. Thanks to an ever increasing focus on convenience and experience consumer preferences for live, work, shop, play environments should only grow, especially among generation X and millennials. Our current and near-term expansion projects all of which fit in our top five markets and feature our mixed used components add to visibility on our sustainable growth goals that position us for where retail is heading. Our efforts at One Loudoun Downtown, which we acquired in 2016 further demonstrate this point. Over time we have unlock value by adding a Trader Joe’s selling multi-family units to a national townhome developer and we are about to add 378 multi-family units within two mixed-use blocks on the site. In addition, we have taken great care to foster a dynamic experience for the local community through events and specialty tenants. In October 2018, RPAI launch four corners at One Loudoun, a dynamic gathering space featuring two specially used shipping containers and a unique patio and gathering space. Each container is designed to serve as an incubator space bringing new and experimental concepts every six months to 12 months to not only keep things fresh and to feature an ever changing component to drive traffic to the center, which will also test new concepts for potential long-term deals within permanent base at our center. Four Corners features an iconic lighting and seating area that was developed and installed by Black Dog Salvage, which is featured on the popular DIY Network shows Salvage Dawgs. As a matter of fact, the episode featuring our One Loudoun asset project airs tonight. Four Corners is another example that demonstrates our ability to identify and execute on innovative opportunities that create value, drive traffic and keep the center top of mind with the local community. During the quarter, we sold our single tenant theater in Fresno and purchased North Benson in Seattle, swapping a no growth asset in a non-target market for a multitenant growth oriented center in an area where we continue to build scale. We have no need for additional external capital to fund the growth in our operating portfolio and our current and near-term expansion project. Our capital structure manages the strength of our operating portfolio. To further solidify our already robust liquidity position, we signed an agreement with certain institutional investors in April to issue $100 million in 10-year private placement notes at an interest rate of 4.82%, providing attractively priced long-term capital to support our growth goals. One final note, RPAI has always been committed to improving our environmental initiatives through the on-site implementation of LED lighting, smart irrigation and HVAC system, vehicle charging stations and zero scape landscaping. In 2019, we will further showcase our commitment to ESG programs via rpai.com and on our quarterly investor update by not only outlining our successes in the environmental category, but also showcasing our strength in the social and governance components that make up ESG. With that, I will turn the call over to Julie. Julie?

[Julie Swinehart:]

Thank you, Steve. This morning I will discuss our first quarter results our outlook for the balance of 2019 recent and anticipated future capital markets transactions and a few industry-wide accounting and financial reporting updates. In the first quarter we generated operating FFO attributable to common shareholders of $0.27 per diluted share, up $0.02 from the same period in 2018, $0.01 gains from both same-store NOI growth and a reduced share count drove this increase. Same-store NOI for the quarter rose 2.7% over year ago results, anchored by a base rent growth contribution of 210 basis points. A 20 basis point contribution from a decrease in property operating expenses and real estate taxes, net of tenant recoveries supplemented this topline strength. We also benefited another 10 basis points to 15 basis points from each of higher percentage in specialty rent, increased other lease related income and reduced bad debt. Contractual rent increases served as the primary driver of our year-over-year base rent growth with releasing spreads and occupancy also contributing, helped by the timely start of rents in the first quarter, as Shane will detail. Same-store bad debt of $459,000 in the first quarter decreased 17% over the comparable quarter in 2018 and measured below our internal estimate, contributing to our better-than-expected first quarter same-store NOI results. Based on announced retailer bankruptcies year-to-date, including Gymboree and Payless Shoes, as well as our current tenant surveillance, we remained comfortable with our aggregate 2019 bad debt assumption of 50 basis points of revenue or approximately 75 basis points of NOI. During the quarter, we initiated our efforts to obtain the targeted $200 million to $300 million in unsecured debt previously outlined. Recall that we earlier discussed the optionality provided by various fixed income markets to extend the duration of our term debt. To take advantage of favorable investment grade credit spreads and the flat shape of the yield curve, we entered into a $100 million note purchase agreement in early April with various institutional investors for a 10-year private placement at 4.82%. We plan to use the proceeds from the late June funding of this private placement to repay revolver borrowing and we expect to round out the balance of our term debt goals from other portions of the fixed income market that also currently offer attractive terms. At March 31st, our weighted average interest rate measured 3.97%, nearly unchanged from year end. Our net debt-to-adjusted EBITDAre declined one-tenth of a turn sequentially in the first quarter to 5.4 times, aided by our financial outperformance. As a reminder, we continue to expect leverage to tick higher over the balance of the year, as a result of both outsized leasing CapEx to achieve our occupancy targets and our expansion and redevelopment investment goals. We expect to remain within our targeted 5.5 times to 6 times leverage goal, which continues to position us solidly as investment grade. Availability under our $850 million revolver stood at approximately $550 million as of quarter end. With our liquidity position to be further supplemented by a private placement closing near mid-year and no debt maturities in either 2019 or 2020, our capital structure remains strong. In terms of guidance, we continue to expect 2019 operating FFO attributable to common shareholders of $1.03 per diluted share to $1.07 per diluted share, based in part on an unchanged annual same-store NOI growth assumption of 1.75% to 2.75%. While we are pleased with our solid first quarter results, occupancy declined in the first quarter as anticipated and we expect occupancy to further compress in the second quarter, before rising in the back half of the year. Generally, same-store NOI growth should follow this overall shape in occupancy with gains accelerating in the second half of 2019, especially in the fourth quarter. A number of rent commencement dates slated for late in the third quarter and early in the fourth quarter, particularly for several large anchor tenants, both add visibility to our projected uptick in growth later this year and influence the ultimate timing realized for this expected revenue acceleration. I also want to point out that our first quarter financial statements and related disclosures reflect the adoption of both the new lease accounting standard and the updated NAREIT funds from operations definition, which have changed our presentation of certain elements of our financial disclosures, but bring no impact to our net income, same-store NOI, cash flows, operating FFO or EBITDAre. These provisions also do not significantly impact our debt covenant calculation. First, I will discuss the adoption of ASC 842, the new lease accounting standard. From a lessee’s perspective under the new guidance, we recorded approximately $100 million of right-of-use assets and corresponding lease liabilities in the same amount, which are primarily associated with six long-term ground leases in our portfolio on January 1st. We then reclassified the related existing straight line rent liabilities and the lease intangible liability as a reduction to the right-of-use assets. These right-of-use assets and lease liabilities are expected to gradually reduce to zero over the lives of the related long-term leases. Further, as a lessor, based on this standard, we have consolidated all lease related revenue to one lease income revenue caption that also includes an offset for bad debt, which was historically presented within operating expenses. We continue to provide disclosure on the components of our lease-related income and bad debt in our supplemental on page four and the components of same-store NOI on page five, just as we have done historically. We also adopted the provisions of the 2018 NAREIT FFO White Paper. In connection with the adoption of these guidelines, we elected to exclude all gains on sale and impairments of real estate from FFO. Previously, we adjusted for gains from sales of non-depreciable property as a line item in the reconciliation from FFO to operating FFO. As you can see on page three of the supplemental, we have restated FFO attributable to common shareholders for the comparative period in 2018 to exclude the gain on sale of non-depreciable investment property of $2.2 million. The change does not impact our previously reported operating FFO. Amid these changes in presentation, I would like to remind investors that we remain acutely focused on transparency. We provide a full reconciliation of the elements of revenue for both our GAAP income statement and our same-store NOI calculations in our supplemental. For additional information about the adoption of the lease accounting standard, please refer to the Form 10-Q that we expect to file later today. Finally, I would also like to remind everyone that our definition of same-store NOI has not changed and that we continue to exclude all termination fee income from same-store NOI, including the termination fee income received during the quarter for Mattress Firm. Furthermore, our capitalization and expense policies also remain unchanged. We continue to capitalize only costs directly attributable to signed leases, our longstanding practice, which brings no impact to FFO from the adoption of the new lease accounting standard. With that, I will turn the call over to Shane.

[Shane Garrison:]

Thanks, Julie. Our sustained leasing momentum in the first quarter represents a carry through from the positive trajectory we saw in the second half of 2018 and underscores the quality of our asset base. While we expect continued volatility in the retail sector as cultural and generational preferences quicken the demise of irrelevant operators, our portfolio remains poised to produce regular rent expansion as merchants seek out best-in-class locations that provide for brand awareness, convenience and profitability. Our recently announced signings with Warby Parker, Casper, TravisMathew and UNTUCKit continue to demonstrate the appeal of our footprint to brick-and-mortar and e-commerce native merchants alike. Base rent growth anchored our 2.7% same-store NOI expansion, as Julie outlined. All rent starts modeled for the first quarter commenced on time or early, aiding our topline strength and serving as a testament to our operations team and the ability to work across the organization with municipalities to deliver tenant space as timely as possible. This execution continues to demonstrate the numerous benefits of adjacency and local relevance with scale. The benefits of our broad-based multiyear portfolio repositioning, which concluded in 2018, continue to show through in our results. During the quarter, we delivered 855,000 square feet in leasing GLA, our highest first quarter volume since 2014. As a result of our leasing team’s efforts across our markedly stronger portfolio, retail portfolio percent leased increased 30 basis points sequentially to 95.1%, the highest since Q4 2014. We also continue to focus on future contractual growth as we achieved 150 basis points of contractual annual rent bumps measured on negotiating leases signed in the quarter. As discussed previously, we remain focused on merchandising relevance and durability, while also increasing the credit quality of our tenant profile and diversifying our retailer exposure. As you see on page 17 in our supplemental, our top 20 tenant concentration decreased 80 basis points sequentially to 27% of ABR. This statistic now measures 1,100 basis points lower than the 38% concentration held at the outset of our portfolio transformation. After several anticipated non-renewals, you will also see that Pier 1 fell out our top 20 list, with DICK’S Sporting Goods, a retailer with no net debt added. We signed backfills on two of our former Pier 1 locations with Ulta Beauty and Trader Joe’s in the quarter, further adding to the incremental quality of our tenant roster and our active approach to managing watch list tenants and regular portfolio reviews have enabled us to maintain our bad debt assumptions for the year despite year-to-date announced bankruptcies. Turning to lease spreads. Our leases signed during the first quarter blended to a 5.8% spread dovetailing with a 5% to 6% spread realized during each quarter of 2018. Comparable new leases eased to a 10% spread. Comparable renewal spreads increased to 4.8% in the first quarter, in line with our broader existing mid single-digit trend higher in renewals. We continue to expect volatility in our comparable lease spreads as retail continues to evolve. Occupancy edged 80 basis points lower in the first quarter as expected to 93% with both anchor and small shop occupancy down. However, combined with our strong leasing activity, our lease-to-occupied spread increased 110 basis points to 210 basis points in Q1, the widest since the first quarter of 2013 and highlighting the future revenue growth from our continued leasing efforts. While we expect occupancy to trend lower near-term, key anchor rent commencements scheduled in the back half of the year underpin our expectations for revenue and occupancy gains later in 2019. Notably, our 210 bps leased-to-occupied spread represents 7.7 million in ABR, most of which we expect to commence in Q3 and Q4 this year. Moving to transaction activity. We remain opportunistic in the acquisition and disposition market. In Q1 we completed the sale of the Edwards Multiplex in Fresno, California for $26 million, as previously outlined. Further reducing our exposure to a non-target market and reducing our single-tenant asset count to two. Also, within the quarter, we purchased North Benson, a shadow grocery anchored neighborhood community center in the Seattle market for $25 million, advancing our scale and adjacency and bringing our total GLA to 1.55 million square feet in our number five market. Lastly, turning to our increasingly active development and expansion projects, we continue to deliver on our development plans over the last few months and I expect our pace of progress to accelerate in the coming quarters. Our six well-positioned mixed-use projects stand to benefit from secular consumer and lifestyle preferences, as Steve mentioned earlier. In the quarter, we completed the multi-family renovation of Plaza del Lago and are hosting a community open house and preleasing event on the site today. The $1 million project adds to our redevelopment and multi-family credentials, while also building our cash flows and enhancing the existing strength of this historic mixed-use asset. At Circle East, AvalonBay expects to begin move-ins to their multi-family portion of this mixed-use project in Q1 of 2020, in line with our plans for the asset. As this complex infill project continues toward completion, we have considerable LOI activity and are in advanced negotiations with leading brands that represent today’s merchandising mix, including unique global restaurants and fitness operators, in addition to regional and national operators, that will drive pedestrian traffic and benefit from our Cinemark Theatre anchor on the adjacent block. Moving to One Loudoun, we have scheduled our groundbreaking event in June for pads G and H, which includes 378 multi-family units and approximately 70,000 square feet of commercial GLA. This asset continues to benefit from an already vibrant and relevant retail critical mass, in addition to the continued significant technology investment and expanding workforce in the region from Microsoft, Amazon, Google and others. At Carillon, we recently executed our joint venture with Trammell Crow for the medical office building planned for Phase 1 and remain on target for a Q2 or Q3 groundbreaking on the project. While we have not commenced with the project to-date, early leasing velocity has been significant and we anticipate having 35% to 40% of the retail portion preleased in Q2. At Main Street Promenade in Downtown Naperville, we continue to work through the entitlement process for a mixed-use expansion and continue to expect to break ground later this year. As a reminder, pages nine and 10 of our supplemental provide a significant amount of detail on our active and near-term development projects and our current pipeline of value enhancing expansions. In summary, we remain focused on our two-pronged approach to driving long-term value through ongoing leasing efforts to optimize merchandising and drive rents in our high quality operating portfolio, while creating new revenue streams tied to our six mixed-use active and near-term development projects. With that, I will turn the call back over to Steve.

[Steve Grimes:]

Thank you, Shane and Julie, for your updates. With our strong first quarter results, we hold more visibility on our ability to deliver on our 2019 goals. At the same time, we realized the focus and drive required to meet our objectives. As they have repeatedly proven, our team is keenly focused on delivering in 2019. With that, I’d like to turn the call back over to the operator for questions.

[Operator:]

Thank you, ladies and gentlemen. [Operator Instructions] Our first question comes from the line of Christine McElroy from Citi. You are now live.

[Christine McElroy:]

Hi. Good morning, guys. Sorry, if I missed this, I jumped on a little bit late. Just regarding Pier 1, I know you talked previously about four of the seven leases rolling this year are not expected to renew of the 90 bps of ABR exposure. What do those stores comprise of that ABR and what’s the timing of those closures, and maybe you could comment on how you are thinking about the remaining exposure?

[Julie Swinehart:]

Sure, Christy. Thanks for the question. Yeah. There were seven of our original 16 that were up for renewal this year and we had expected that four would not renew. Three of those proved out to be true in the first quarter. So three are off the table. You see the Pier 1 came off of our top 20 list. So they are down about 70 basis points from the 90 basis points that was there as of year end.

[Christine McElroy:]

Okay. And then remaining exposure sort of through the year, do you expect more to fall off sort of in the coming years?

[Shane Garrison:]

Yeah. I think -- this is Shane. I think, Christy, we expect, anything past this year, we just assume vacates.

[Christine McElroy:]

Yeah.

[Shane Garrison:]

And I think as it remains this year, we are kind of talking on 30-day basis with the remaining four. So we will see what happens, but we continue to be proactive, and I think, you have seen some progress in that regard on a couple of those locations this year already.

[Julie Swinehart:]

And just to add on…

[Christine McElroy:]

Okay.

[Julie Swinehart:]

… in terms of how we estimate bad debt for the year, when those four locations for Pier 1 were not estimated to renew, that does not erode our 50 basis points of revenue assumption. So said differently, if something were different for the three that we do expect to renew this year, that bad debt assumption would cover those three, but it’s not intended to cover all seven. We had already modeled those four to not renew.

[Christine McElroy:]

Got it. Understood. Okay. And then, Shane, in regard to same-store NOI, you talked about the 200 basis points leased-to-occupied spread and then your expectations for commencement in Q3 and Q4, presumably you have space coming off-line too. So I am just trying to figure out the balance of that. Where should we expect that spread in that commence rate to end the year and how does that play into your expectations for the same-store NOI trajectory in the back half?

[Shane Garrison:]

Yeah. I think long story short, the bulk of rent commencements, as we talked about, I think, in prior, certainly, last quarter as Q3, Q4. For some perspective, if you look at just the little less than $8 million bucket itself, a month’s swing either way, Christy, is about a 20-basis-point impact to us. So we are very focused on, obviously, turning on the rent as fast as we can and as effectively as we can and I think our connectivity and focus in 10 markets, and specifically, the relationships we have at the municipal level have helped us immensely in that regard. So it’s basically our ball to drop at this point. I think the heavy lifting on the leasing side is, for the most part done. We only have about a little over 200,000 beat of spec leasing left to do. But again, most of the rent commencement is ours to kind of execute at this point. As it relates to year-end occupancy, I could tell you, I just look at it more on an average occupancy. Our average occupancy year-over-year is up somewhere between 80 basis points and 100 basis points, and I think, again, we are in a position to execute, we just need to finish.

[Christine McElroy:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. You are now live.

[Todd Thomas:]

Hi. Thanks. First question, actually two questions here with regards to the same-store NOI growth in the quarter that, Steve, you mentioned was better than expected and also at the high end of the range that was revised lower last quarter. So first question, the revision last quarter came at a time after the holidays when there seemed to be a little bit of uncertainty, there were some headlines hitting around bankruptcies early in the year. I guess the question is, do you feel a little bit better about how the environment is today? And then for Julie and Shane, you both mentioned that occupancy will be pressured in the second quarter before reaccelerating in the third and fourth. Can you just talk about the magnitude of that decrease based on what you are expecting and maybe put that in the context of the low end of the same-store NOI growth range that was revised lower last quarter?

[Steve Grimes:]

Well, Todd, this is Steve. I will kick it off briefly. So generally speaking, as Shane had mentioned, the momentum on the leasing came to fruition early part of this quarter. So of the beat or the 2.7% same-store that was about 210 basis points was base rent alone and then on top of that, it’s a mix between a little bit of a beat on bad debt, as well as some percent rent a little higher than we had expected. And that’s just the nature of the merchandising mix that we have coming off of the holidays and also through the first quarter. So the beat this quarter, I think, was just us being on task in terms of bringing these rents online. To Shane’s earlier comments about the trajectory of our occupancy, we do expect it to come down a little bit over Q2 and Q3, and then ramp again in Q4. But essentially where we are going to be averaging is about, what do you say, 70 basis points to 80 basis points on average over what we were prior year. The numbers for the tail end of the year that are assumed in kind of the midpoint of the range for guidance is bringing on about $7.7 million of NOI, which is that delta between the leased rate as well from the occupied rate. So as Shane pointed out, we are on task. Things are fairly contractual at this point. We just need to bring them online. But we also caution people too that if it takes a month later to move them in, that’s a 20-basis-point drag and if we get them in a month earlier, that’s a 20-basis-point win. So that’s kind of how we are looking at life. But we are very much on task with delivering toward the tail end of the year roughly around the midpoint of guidance range.

[Shane Garrison:]

And Todd, Julie’s going to, I think, take the rest of the question. But just for some color and back to the first quarter call in the initial guidance. First of all, I do think it feels generally better, and to that point, there wasn’t any 1 big tenant or event that we point to that says this is taking us down dramatically. This was more of a one or two spaces Pier 1 or Gymborees of the world, things like that where we kind of looked at the rent roll had the discussions and said, look, this feels a bit tenuous, situationally, depending on the tenant, but no big blast or big downturn from one tenant like a Toys "R" Us or hhgregg or Sports Authority. So I think a lot of that box activity has worked its way through the system. I think, generally, the space has markedly better diversity in the rent rolls and certainly we do and literally every quarter we have better tenant quality. So again, I think, it’s -- we feel much more conviction around our future cash flows than we have in recent memory and overall velocity and even the tenant retention feels better. We thought we would be kind of 80% on a pro forma basis from a retention standpoint at initial guidance and I would tell you, on the 1F, we have taken it up moderately, maybe 81%. So it’s a little better, obviously, any tenant stickiness helps from a CapEx perspective and certainly from a cash flow perspective. So, overall, feels better and with the velocity the space feels very compelling right now.

[Julie Swinehart:]

And just to add on to what the guys shared, Steve, you hit all the right points there in terms of our outperformance in Q1, really was aggregation of small beats in every category. In terms of occupancy in Q2, there is a box that we referred to on the year end earnings call that we had originally expected to renew that’s not -- that’s in occupancy at March 31st. It moves out the next day, so you will see 70,000 square feet come out there. You will see -- we are expecting our Payless locations where we have 10. That’s another 30,000 square feet out in Q2. Gymboree is just three locations. Those will be out in Q2 very small. And then just a little more granularity on the $7.7 million in ABR coming online, very little of that is expected in Q2. I would say less than 20% of that total is Q2. So, again, very back end weighted, very much weighted toward anchor. So you will see even a little disconnect between the ABR coming online and the GLA. So in Q3 and Q4, the total ABR is probably 80% plus, I am sorry, 70% plus is anchor, but GLA is closer to 85%. So little mismatch again with how much anchor is coming on the back half of the year, and to Shane’s point, one month move in either direction is 20 basis points of same-store. So it’s early in the year, but we are feeling confident in the full year forecast.

[Todd Thomas:]

All right. That’s real helpful. And then just a follow-up for Shane, you mentioned that the rent commencements in the quarter were on time or early. We have heard that now a few times more recently. That’s not what we have been accustomed to for several years. What’s changed to improve the time to complete work permit and sort of get tenants and occupancy, if there’s anything that you are starting to see loosen up a little bit.

[Shane Garrison:]

Yeah. That’s a great question. I think from our lens, the adjacency we have and the scale what we have continues to play out, especially when you are thinking about municipal connectivity in the permit process and visibility into that process. There’s a lot of initiatives, Todd, we have taken -- undertaken to not only have rent commencement and tenancy turn on quicker, but also just operationally that you can do with adjacency and scale. Dallas specifically, we have a maintenance team that is dedicated to Dallas. That maintenance team provides R&M services to our portfolio, because of the adjacency it makes a lot of sense, but also provides demolition services and other things where we can focus on turning tenants on quicker. For the first time in the last couple of quarters, we have actually had tenants move, so we are proactive and literally had the demo permit in hand to start prep and work for the next tenant the next day. So that is something we continue to press and get better at every day. And again, I think, that’s very much a function of a finite market set and a focus within those markets.

[Todd Thomas:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Derek Johnston from Deutsche Bank. You are now live.

[Shivani Sood:]

Hi. Good morning. This is actually Shivani Sood on for Derek. Going quickly to the capital recycling completed in the quarter in North Benson. Can you comment on how deep the pool might be for assets in those sort of Tier 1 markets and just how competitive the bidding process might have been?

[Shane Garrison:]

Sure. Good morning.

[Shivani Sood:]

Good morning.

[Shane Garrison:]

So that was -- we have said from the outset, we are going to be very opportunistic as it relates to both dispositions and certainly acquisitions. The disposition was opportunistic. It’s a non-core asset in a non-core market. And turning to Seattle, which is now our number five market, very tough to source to your point, this was truly an off-market deal. That was an asset that we first had an LOI out on in 2016 and then just happens to be that it came up this year that we were able to transact. The team has done a great job. Again, market focus plays multiple benefits both operationally and when you think about transactions off-market. Our team continues to focus on a number of assets in certain markets that we would like to own long-term. This was one of them. So we were able to get it off-market I think from an overall depth to the market. Seattle continues to be extremely constrained, and other top-tier markets do as well. Personally, I believe the best get better. There’s a lot of transparency, I think, yet to be had around exactly who the best and what the best is, but as the best get better. And there are allocations to retail, I think, the best assets just will not trade and you are already seeing a lot of the great assets do not trade. So long story short, I don’t think the depth of great assets in great markets gets better, I think, it actually becomes more constrained. For those reasons we are certainly happy to add to what we think is a great market long-term.

[Shivani Sood:]

Thanks. And then just touching on the small shop side, can you share some color on you are thinking about growth there and what level that could get to especially as the development pipeline starts to come online over the next few years?

[Shane Garrison:]

Sure. We have been -- we have hung around 90 I think for, I don’t know, year, year and an half, give or take. A lot of the activity we see on the in-line side, the grocery is fairly well occupied at this point. I think when you look at the mixed-use side to your point on the developments and just the mixed-use bucket in general. We continue to see a lot of activity around proactively merchandising and quite honestly, just new tenant activity as you see more digitally native tenants and others come on into the brick-and-mortar space. So we are at 90 today. Again, the overall flow and focus feels better than it ever has. Tenants are much more sophisticated today than they were even last year and I think that bodes well for not only leasing, but getting optimal tenancy merchandising mix and getting rents turned on. So all of that in a nutshell, I think, we could probably get to 92, I think, 92 is a fair number. But we are very focused on the right merchandising mix, not necessarily chasing occupancy at this point. So 90 to 92 we have a little bit of an opportunity, but again we are very focused on the right tenants in that gap.

[Shivani Sood:]

Got it. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Hong Zhang with JP Morgan. You are now live.

[Hong Zhang:]

Yeah. Hi. I was just curious, now that it seems we have hit a lull in the store bankruptcy and closure announcements. How much of that 50-basis-point reserve built into your guidance has already been used?

[Julie Swinehart:]

Sure, Hong. Thanks for the question. In Q1 we had just under 40 basis points of revenues recognized as bad debt, and as Steve mentioned, and we alluded to, that’s below our expectation. So I don’t want to say plenty left for the year, but a little ahead going into the year and I think ahead to potential fallout or likely fallout from Payless and Gymboree, and as mentioned, pretty minimal exposure there. So we feel like it’s adequate and then I think absent a material near-term unforeseen bankruptcy at this point we are comfortable with the current estimate.

[Hong Zhang:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Chris Lucas with Capital One Securities. You are now live.

[Chris Lucas:]

Good morning, everybody. Just a quick one, Shane or Steve, just on the acquisition, I guess, I am just curious how you thought about the acquisition versus buying back your stock, given that it was probably trading north of the 7.5 implied cap rate going over that timeframe. Just give us some context as to how you thought acquisition versus buying your stock back and then what’s the investment thesis for this specific asset in terms of opportunity?

[Steve Grimes:]

Thanks, Chris. I will take the first, and Shane can handle the second. I think, generally speaking, I think, Shane has alluded to this in terms of being opportunistic. We are really looking at any sort of disposition proceeds to first target acquisitions within our target market to the extent that they make sense, get the right growth profile, get the right configurations that we can play with, to drive better value creation, and importantly, get some growth out of those assets. But in particular, I just -- I want to remind everybody, we have purchased back over $311 million worth of shares. We have done a significant amount of effort in the buyback of shares, and as we go into this year, as we went into this year and looking at capital allocation, we have a lot of things competing for capital right now that really are long-term growth oriented plays that we really want to focus in on. So as we look at the business, and Shane alluded to this a bit, we look at it in terms of the operating portfolio and then essentially the expansion portfolio. We are looking at those as being as self-funded as possible. So we first look to assets within each of those core groups to fund the future expansions and/or growth within those particular avenues of growth for us. That’s how we first look at it from investment committee. But then secondarily, we are looking at where the stock is trading, the pricing of the stock and we want to make sure that we are getting the right risk-reward for what we may be buying back versus what we could be buying in the acquisition market. That being said, as Shane had mentioned, it is tight out there in the acquisition market. I don’t see us doing big acquisitions near-term. But the good news is we know what assets we want to own in each of our core markets and we are well-poised to either get first look or at least middle or last look on those assets, and should those opportunities become available, we will certainly look at those in light of where the current stock is trading and make sure that we are making the right decision for the long-term.

[Shane Garrison:]

Yeah. I would just add, Chris, I think, the growing development spend is a priority here, right? So this was a very nuanced, very unique opportunity to trade a single tenant theater in a non-core asset in a non-core market, into what I will call, an extreme core market with extreme barriers. It is my favorite real estate fundamental market in the country right now when you think about the entitlement barriers that are already high and growing, extreme topographic barriers. You have got great growth, high educational attainment and growing and which should all prove out to have very compelling long-term discretionary spending. So I think the asset itself, look, it’s off-market. We were -- we transacted at a 6.5 to 7 cap. I think that’s at least 100 basis points wide of where our price is if it’s a marketed deal and this is an asset that probably has, well, first of all, it has 4 pads included, which may be priced as the pads themselves maybe in high-4s to a 5. From a growth standpoint, on a comparative, we had a theater that was declining. Last four years of sales showed significant declines and you trade it into an asset, in this case, that has a two to three CAGR on a 10-year basis. So long story short, adjacency, scale, compelling growth on a relative basis, all made sense for us when we looked at the trade.

[Chris Lucas:]

Great. Thank you. That’s all I have this morning.

[Steve Grimes:]

Thanks, Chris.

[Operator:]

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I’d like to turn the floor back over to Steven Grimes for closing.

[Steve Grimes:]

Well, thanks everybody for joining us again today. First quarter was very solid for us and we are very, very hopeful that the balance of the year is going to prove as equally as positive. That being said, we will see many of you at ICSC and NAREIT coming up in the next four weeks to five weeks and look forward to seeing you all then. Thanks so much and have a great day.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your line at this time. Thank you for your participation and have a wonderful day.