Retail Properties of America, Inc.
Q1 2017 Earnings Call Transcript

Published: 3 May 2017

[Operator:]

Greetings and welcome to the Retail Properties of America First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. An interactive question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Mr. Michael Fitzmaurice. Thank you. You may begin.

[Michael Fitzmaurice:]

Thank you operator, and welcome to Retail Properties of America first quarter 2017 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 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 anticipate, 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 2017 and will be affected by a variety of risk 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 3, 2017 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 rpai.com. On today’s call, our speakers will be Steve Grimes, President and Chief Executive Officer; and Heath Fear, Executive Vice President, Chief Financial Officer and Treasurer; and Shane Garrison, Executive Vice President, Chief Operating Officer and Chief Investment 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.

[Steven Grimes:]

Thank you, Mike, and thank you all for joining us today. Before we dive into the quarterly results, I want to reflect for a moment on the current narrative surrounding retail real-estate. Throughout the earnings season our peers have done an excellent job defending the long-term viability and relevancy of our space. We wholeheartedly echo these sentiments and rather than reaffirming what we already know to be true, we thought it might be constructive to look beyond the boundaries of retail real-estate for lessons learned. Specifically, I’m reminded of the office sector in the early to mid-1990. The prevailing though at the time was telecommuting would lead to mass de-urbanization and the demise of the office building, it all seemed logical. Why pay office rents when you can have your employees work more productively at home? Why live in a congested, relatively expensive CBD if there is no need to commute? Fast-forward to 2017 and the office building is very much alive and the vast majority of major U.S. MSAs have experienced re-urbanization. In fairness, technology continues to reshape how we use and think about our work spaces, but despite the leaps and bounds we made in the past 20 years, as of the last census in 2014 fewer than 4 million U.S. workers work remotely more than 50% of the time. Why is that? Because we are human beings and study after study has demonstrated that there is no substitute for face-to-face collaboration. As current technology made it possible to conduct business without office space, absolutely, but it’s not about whether we technically need office buildings. People want just the face-to-face interaction. The same holds true for retail real-estate. You can get just about anything you want delivered to your doorsteps, so why go to the store? The simple answer, because people want to. They want to pick up their grocery, take a yoga class, have a meal with their family, and see a movie all in the same place. It’s not just that they want to touch and feel the product. They want to shop in a store. And while customers want brick and mortar, study after study has shown that our retailers actually need it to effectively compete. That’s why online retailers like Amazon are opening stores, because the margins are better and they understand the need for customer experience. The retailers that can most effectively create synergies between their online and bricks and mortar experience are having the most success. The corollaries don’t end with the office sector. The warehouse will be the thing of the past because of the industry’s ability to perfectly match the client demand. Why go to a hotel when you can rent a stranger’s help online? Driverless cars will eliminate the need for parking garage and de-urbanize our city again. Disruption is undeniably fixating and coupled with the images of drone delivery and a cyclical spike in tenant bankruptcies, it’s our time out of the sun. All of us on this call today are attached in some shape or form with discerning whether we are experiencing a normal course end of cycle disruption, or the beginnings of a secular change in our space. We think it’s both. The world is not worth off without hhgregg. The company could no longer compete or bring any unique value to the marketplace and is now extinct. That’s normal disruption in our mind. Heath will spend time quantifying the short-term revenue disruption associated with the current group of bankruptcy, but more importantly, Shane is going to talk about the backfill opportunities. And he will reassure that these closures represent an important step in our continuing goal of solidifying our cash flow and creating more desirable shopping destinations. As for secular change, we know that retail real-estate is enduring, but there will be winners and losers. The U.S. is over retailed with nearly 24 square feet of retail space per capita, and the next closes country is Canada at 16, followed by Australia at 11. Despite negligible new supply, retail square footage needs to decrease. So, how do we survive better yet? How do we slide against the backdrop of this sobering reality? By being a dominant owner in 10 of the most desirable U.S. markets with superior demographics, a track record of population growth and a strong and diverse economic foundation, by concentrating on the right real-estate, by acknowledging that the most durable retailers are focused on the right location and not the sheer number of stores. By embracing the shift in the retail paradigm back in 2013 when we first announced our Target Market Strategy. Shane has said it many times, if we had waited until today to start a transformation, we would never get it done. We are so close and remain committed to completing our repositioning strategy, positioning goals for 2017. As of today we have closed or are under contract or in LOI for approximately $570 million of asset sales, combined, this represents 75% of our targeted retail disposition goal for the year. Our confidence in the high-quality nature of our disposition pool is holding true and we look forward to continued momentum on the transactional fund as we progress through the remainder of the year. While human nature and a winning strategy give us comfort, it’s our incredibly solid fundamentals that make it possible for us to drown optimally focused and execute. Our retail same-store portfolio is over 95% leased. We achieved record-setting blended releasing spreads of 10%, signed leases at an all-time high ABR per square foot of over $27, tenant demand for our centers remain strong. The end of our portfolio transformation is inside and our balance sheet has never more opportunistic. We certainly are implying to the challenges ahead, but these were not unanticipated, and accordingly we continue to believe we can make great things happen. And with that, I’d like to turn the call over to Heath.

[Heath Robert Fear:]

Thank you Steve. This morning I’ll discuss our first quarter results and our outlook for the remainder of 2017. Operating FFO for the first quarter was $0.28 per share, flat over the comparable period in 2016. First quarter 2017 operating FFO benefited from higher same-store NOI of $0.005, and lower interest expense of $0.025, offset by lower NOIs from other investment properties of $0.03 due to our capital recycling activities and the NOI drag from Schaumburg Towers. It’s important to note that our lower interest expense is directly related to the defeasance of the $379 million IW JV loan this past January. As set forth in our supplementals, the resulting impact to our balance sheet is remarkable. As compared to the end of 2016, our blended interest rate is 3.5% versus 4.4%. Our unencumbered NOI sits at 86% versus 66% and we have only 20 asses versus 66 assets encumbered by our mortgage. These improved metrics over a long way toward achieving our goal of a ratings upgrade. In addition, and possibly more importantly, the IW JV defeasance has allowed us to accelerate the disposition of our non-target assets. For the balance of 2017, we expect to use our disposition proceeds to fund our acquisitions, retired debt, redeem our preferred equity and perhaps most importantly, positions us to be very opportunistic in 2018 and beyond. Same-store NOI growth was 2% in the first quarter, primarily driven by higher rental income of 200 basis points from a combination of strong contractual rent increases and releasing spreads, as well as higher net recoveries and other property income of 40 basis points. These items were partially offset by an increase in bad debt expense of 40 basis points, partially related to reserving 100% of the receivables for hhgregg and Gander Mountain. Turning to guidance, we are maintaining our operating FFO guidance of $1 to $1.05. As we communicated in the earnings release last night, we are maintaining our acquisition assumption of $375 million to $475 million and our disposition assumption of $800 million to $900 million, including the sales of Schaumburg Towers. We are maintaining our G&A expense assumption of $42 million to $44 million. We are revising our same-store NOI assumption from 2% to 3% to 1.25% to 2.25% to reflect the known impact of recent tenant bankruptcies. As discussed when we issued our initial guidance, we decline to make any tenant specific bankruptcy assumptions, regarding our watch list tenants due to a variety of uncertainties, including timing our initial filings, liquidation versus reorganization, these assumption versus rejection et cetera, instead we use the bad debt reserve assumption of 50 basis points of savings program use or approximately 70 basis points is full year same-store NOI. So what do we know at this point? We know that hhgregg and Family Christian are liquidating. Camping World who want to bid on Gander Mountain, [indiscernible] concern, but they were all required to seal 17 leases and there is no guarantee that it will include either of our two locations. As for Payless, they didn’t pay April rent, but none of our 16 locations are among the 400 store closures announced by Payless today. I’ll start with the lease by lease analysis, but suffice it to say, the collective negative 2017 impact from these four tenants and one other isolated first quarter bad debt event represents roughly 85 basis points of full year same-store NOI or $2.5 million. While we acknowledge the 2017 bankruptcy as a consequence with respect to the same store NOI growth in the short-term, it’s important to note that the impact is relatively modest with respect to our earnings roughly $0.01, in light of fat that 2017 is likely a trough year in terms of the dilution associated with capital recycling activities, we are convinced that this is the ideal time to endure these bankruptcies and backfill these spaces in a highly occupied and high demand environments which will lay the ground work for 2018 and beyond. In terms of additional risk in 2017, we are concerned of the Payless closure list could go beyond 400 stores and we are becoming increasingly watchful of rue21, Gymboree and Children’s Place. What I can tell you is, that if all of our locations for these tenants are closed, for example, on June 30, with no seal to 2017 back rolls, these closures would attract an additional $1.6 million from our full year 2017 same-store NOI, which equates to approximately 50 basis points. While it’s highly unlikely that these locations will all close by June 30, our bad debt assumption for the balance of 2017 contemplates this incremental risk. It’s important to note that the shape of our 2017 same-store NOI growth assumption is a mirrored opposite of our 2016 same-store NOI growth, such that we anticipate a deceleration in the second and third quarters, followed by a sharp reacceleration in the fourth quarter. And with that, I’ll turn the call over to Shane.

[Shane Garrison:]

Thank you, Health. On the operational transactions front, we have been very busy. Mostly importantly, notwithstanding the negative sentiments surrounding retail, we continue to see the friction necessary to drive rents. Year-to-date we signed 121 new and renewal leases with a blended comparable releasing spread of 10% and an ABR per square foot of over $27, a high watermark for both of these metrics since we began reporting them. And furthermore, the leases we signed during the quarter contain strong annual contractual rent increases of approximately 140 basis points. Our performance for the quarter was broad based and consistent across asset type and geography, yet again demonstrating the strength and quality of our portfolio. Our retail lease rate at the end of the quarter stood at 94.3%, down 70 basis points sequentially while our same-store lease rate was 95.3%, down 30 basis points sequentially, primarily driven by one-off anticipated anchor accelerations in addition to ordinary course seasonal move outs. Of note, our small shop lease rate of 89.5% is up 160 basis point year-over-year. On the transactional front, we are well on our way to completing our disposition goals for 2017 with approximately $570 million already closed or in process. As a result, we remain confident in our ability to execute on our 2017 asset sales of $800 million to $900 million and expect a blended cap rate on dispositions will be in the 6.5% to 7.5% range. Overall, as expected pricing and demand remain dynamic and very sensitive to market positioning, asset type and asset quality. Our continued progress is a testament to our superior market optics, supremely focused investments team and the high-quality nature of our disposition pool. On another significant goal for 2017, we continue to drive value and liquidity with the leasing traction at Schaumburg Towers. To-date, we have released 44% or 397,000 square feet of the available space. And we have an additional 25,000 square feet in lease negotiations. All of which will have leasing comps of 27% or greater. Based on the progress to-date, we remain confident in our ability to monetize the asset in 2017 with proceeds net of CapEx and releasing costs in $80 million $100 million range. Turning to redevelopment, we continue to make progress on our active projects. We’re on track to deliver Reisterstown in the fourth quarter of this year and the project is roughly 90% or in active lease negotiations. Additionally, we are nearly complete with all predevelopment activities at Towson and we’re on track to break ground later this year. Given the high quality and infill nature of this mixed used project, we continue to receive strong interest from entertainment, restaurant, and soft goods merchandising categories. In total, we’re on track to deliver approximately $21 million of development and pad developments at year end at blended double-digit returns. Before turning to the recent wave of tenant bankruptcies, it’s important to revisit our re-tenanting initiatives over the past few years. You will recall that in 2015 we proactively recaptured 15 anchor boxes, representing over 500,000 square feet. To-date, all of that rent has been replaced with the average downtime of less controlled months and comparable releasing spreads that were nearly 20%. In 2016 we had 10 Sports Authority boxes of which one was sold and one was located at our redevelopment projects in Washington D.C. Of the remaining eight, representing 364,000 square feet, all but one of these boxes are leased or in active lease negotiations and we expect these locations to be opened and operating during the second half of 2018. I’ve said it before and it’s worth repeating, this is what we do every day. As for 2017 retailing remains Devonian as evidenced by the roster bankrupt tenants. The good news is that we don’t have exposure to Gordmans, RadioShack, BCBG, MC Sports, Eastern Outfitters, Wet Seal, or The Limited. However, as Heath noted, we do have exposure to hhgregg, Gander Mountain, Family Christian and Payless. Regarding the backfills hhgregg is in full liquidation mode and we expect to get all five of our locations back representing 161,000 square feet, one of which is located at our redevelopment project in Washington D.C. As it relates to the remaining four locations, we are in active negotiations on all of these locations. Merchandising categories include specialty grocers, discounts soft goods and wine and spirits just to name a few. On average the hhgregg leases are below market and provide for what should be our best rental comps on big buck bankruptcy today. As we expect double-digit releasing spreads on single tenant backfills with higher releasing spreads if there is demand for the space. Average downtime is expected to be roughly 12 months. Moving onto Gander Mountain, we have two locations representing 111,000 square feet. Although early, we have very strong interest from several different users, including entertainment, furniture, specialty grocer and fitness. We expect to the replacement tenants to be open and paying rent by mid to late 2018, depending on bankruptcy timing and final rejection of the leases. As for the smaller formats stores, to the extent we get any of these spaces back, we anticipate on average minimal downtime and positive releasing spreads, which follows the theme on bankruptcies over the last three years. While we do expect some short-term negative impact in our lease revenues from these bankruptcies, it is important to remember the overall quality of the portfolio. Today we’re 95% plus leased in the same-store portfolio and we’re not chasing occupancy. In fact, we’re very much in a position to continue to drive rents and merchandising. We expect the best assets to only get better as commodity centers constructed on a now defunct spacing model continue into obsolescence and expect that our retail partners will put increasing focus on those locations providing for the bricks and mortar track sector. Profitability, brand awareness and distribution, all of which align well with our long-term market focused strategy. And with that, I would like to turn the call back over to Steve for his closing remarks.

[Steven Grimes:]

Thank you Shane and Heath for your reports. While recent bankruptcies have cut short-term disruptions in our expected same-store NOI growth assumption for 2017 and have overshadowed retail fundamentals, we continue to be encouraged by our ability to drive leasing spreads and rents in this highly occupied environment, strengthen our cash flows and finalize our asset repositioning efforts by the end of 2018. As we stated at our Investor Day, we expect 2017 to be an inflection point and this recent disruption is manageable with minimal earnings consequence. As a result, we’re maintaining our FFO guidance and we’re maintaining our disposition target and we’ll remain disciplined in our use of capital, keeping all uses on the table. We continue to be encouraged by the fact that we’re in the later stages of our plan, the health of our balance sheet and our tremendous team which is committed to creating long-term sustainable value for our shareholders. And with that, I’d like to turn the call back over to the operator for questions.

[Operator:]

Thank you at this time we’ll be conducting a question-and-answer session [Operator Instructions]. And our first question comes from George Hoglund from Jefferies. Please go ahead.

[George Hoglund:]

Hey, good morning guys. Just wondering if you could give a little bit of color on what you’re expecting from lease termination fees?

[Heath Robert Fear:]

So we don’t guide to lease termination fees right now, George. So typical run rate for lease termination fees, probably call it, $300 million bucks a year. I think so far to-date we’ve collected about 1.6. So again, we don’t guide to it, but the reason the run rate use $3 million.

[George Hoglund:]

Okay, thanks. And then just as far as the store closures, will any of those closures and bankruptcies impact any of the individual asset disposition plans?

[Steven Grimes:]

It’s a good question, George, at this point we don’t think so. We think there’s enough activity there. And the activity combined with the quality of the assets to the extent they are in the disposition plan this year, we think make them look good.

[George Hoglund:]

Okay, and then just a last one for me is, are you seeing any change from lenders in terms of the buyers that are acquiring your assets. Are they facing any increased challenges in terms of getting financing these assets?

[Steven Grimes:]

So George, the liquidity is still pretty good in the space. Obviously the retail headwinds are also appear in the capital market as well. But what we’re seeing arrive is we’re seeing a lot of banks sort of stepping into the void, you can still get CMBS debt at reasonable rates, call it, 4.5% for a 6% leverage deal. So the financing is available. And again, banks have been losing a lot of allocation, because even stepping away from doing construction loans. So there’s a lot of floating rate debt out there available. And so again, it’s not as liquid as it was two years ago in the retail space, but there are certainly financing sources available.

[Heath Robert Fear:]

And George I would just add, from what we’ve seen, from an under contract and close standpoint, we have yet to do a deal that was contingent on financing.

[George Hoglund:]

Okay. Thanks guys.

[Operator:]

Our next question comes from Vincent Chao from Deutsche Bank. Please go ahead.

[Vincent Chao:]

Hey good morning. Just sticking with the bankruptcies here for section I appreciate – I mean, as it appreciates your – the color you gave on all the bankruptcies to-date, as well as some of the on the bubble kind of closures. Just curious, it doesn’t sound like it, but have you increased the reserve for sort of future bankruptcies. And as you’re discussing with the tenants their outlook for the rest of the year, particularly for the weaker tenants in the portfolio. Do you think that the typical seasonality of bankruptcies maybe different this year meaning could we see more later in the year than we typically do?

[Steven Grimes:]

There’s a couple of questions in this. I’ll answer the first. So as far as the continuing bad debt reserve has been, it’s 50 basis points of same-store revenue, which at this point equals 55 basis points of full-year same-store NOI. So we gave a lot sort of list of those four tenants which worst case scenario they all leave by June 30, we don’t think that’s going to happen, we’re just using as an example, that reserve right there more than covers the disruption cost by those four tenants, which were the ones we’re watching closely. So we think at this point of the year, a couple of the fact that we moved our midpoint down, we feel very comfortable at our current range. And then the second question was, do we think that seasonality wise we’ll see more bankruptcies later in the year. I mean I think we’re thinking we’ll see rue probably files...

[Vincent Chao:]

Right.

[Steven Grimes:]

…in the next couple weeks. Whether or not we see some of those other ones, Children’s, Gymboree, my guess these would probably try to get through the end of the year, but you never know.

[Heath Robert Fear:]

Yes, I would agree with that. I think long story short, we think the seasonality or this bankruptcy season hasn’t been extended this year. But from the most part we should be through it.

[Vincent Chao:]

Okay and then as we think about 2018, I mean, just some of the credit report out there suggest that there is more and more distressed retail and maybe a worsening debt maturity profile, I mean do you think 2018 is looking like it will be similar to 2017, worse, better and also as you look at your own exploration schedules and things like that?

[Heath Robert Fear:]

Yes, I think it’s a great question. We talk about the 2018 set up a lot here. I think as a reminder, look we have the big obvious bankruptcies out there I think pending or Sears and Kmart we have zero exposure there. And we have zero department exposure – department store exposure. So I think we’re going to take our medicine here with a few boxes, again we’re going to drive the biggest comps we’ve ever had with hhgregg. For the 2018 set up, it’s interesting. We think broadly that there’s going to be more square footage come back, really driven by the department sector, department store sector. But I think for us specifically, 2018 is the best set up we’ve ever had. We have a much smaller denominator, we’re probably 4 million to 5 million feet smaller by year end, call it, 20 million feet based on the run rate on acquisitions and dispositions. So, we have a small denominator, we’ll have our biggest redevelopment delivery ever for the company in one year. We should put up over 2 million in NOI added to the same-store pool. And then we’ve got some significant comps outside of hhgregg on boxes we’ve taken back over the last quarter or so. So Tysons, for example, most of us has been there, that’s a 2x to 3x comp. Woodinville in Seattle, which we recently took back, that’s a 400% to 500% comp. Crown puts up its last 10% in occupancy at mid-40 rents. And then the hhgregg comps, the first two boxes we got on the table here are 50% plus comps. So, between redevelopment and some of the box closures, and some of the boxes we’ve taken back willingly in addition to the limited bankruptcy exposure we had with some of the bigger box space that should come back next year. We like the set up for 2018 very much.

[Vincent Chao:]

Great. And then just turning to the dispo side, I know 75% of the retail is sort of either closed or close to being closed that sort of lease about 40 million to maybe 140 million for Zurich. Given the leasing progress that you’ve made, given the trends in the market that you’re seeing on the investment markets side. Do you think that’s really the right way to think about Zurich, I mean 40 million seems really low even 100 million maybe a little bit light. So, but just from a backwards math perspective that seems to be the implication?

[Heath Robert Fear:]

Yes, I think we think of Zurich as 80 million or 100 million net of CapEx and I think...

[Vincent Chao:]

Okay, so no change on that?

[Heath Robert Fear:]

No change and I think from a progress standpoint we have another 25,000 feet, as I discussed in my prepared remarks. I mean if you add a 25,000 to the anchor tenant expansion rate or expansion rate, excuse me, through 2019 you are at 60% leased. And we think 60% to 70% is kind of that magical hurdle that makes the asset liquid. The OM is currently being drafted, we’re just waiting to get a little further down the road of construction to have a more meaningful OM from a graphic standpoint. But at this point, I would expect late June, July to get to the assets to market, so very much on track.

[Vincent Chao:]

Okay, great. Thanks guys.

[Operator:]

Our next question comes from Christy McElroy from Citi. Please go ahead.

[Christy McElroy:]

Hi, good morning guys. Just a clarification question on the last one. With the buffer in your same-store NOI growth range for sort of the unknown. Is it the low-end or the mid-point of the same-store range that assumes that scenario of the sort of end of June closures for the additional Payless and rue21?

[Steven Grimes:]

It’s the midpoint, Christy.

[Christy McElroy:]

It’s a midpoint, okay. And then maybe you can talk a little bit about sort of the mix of what you have left to sell in sort of 2018 versus you’ve transacted on or have under agreement 75% of what you plan to sell in 2017. If you can talk about 2018, you just appease the IW JV loans you opened up a bunch more properties. Is it the same quality stuff? Is it a little bit more difficult stuff to sell? Just trying to get a sense for kind of the remaining as we look through the light at the end of the tunnel?

[Steven Grimes:]

Christy this Steven and then I’ll turn it over to Shane, but specifically when we talked about the disposable for both 2017 and 2018, we talked about 55% or so as grocery, anchored-grocery component. And then call it roughly 5% to maybe a little over 5% was the Zurich asset with the remaining being power largely in top MSA assets. And also largely kind of within that cap rate range that we had talked to on a blended basis. I think what you are saying and Shane will talk to more specifically as we see movement on all, but specifically I think you’ve got a couple of deals under contract that are pretty compelling we can speak to.

[Shane Garrison:]

I guess, Christy, back to you original question on 2018, there’ll be our large – our largest Orange County asset should be in 2018 and another – our next largest asset in California used to be 2018, both very compelling. I would expect favorable cap rates there. And then the rest should be just sporadic, again most of it should be grocery. Around this year, just from what we’re seeing, just to go there. We’re at 160 done and I think the cap rate there has been 6.5 to 6.7, somewhere in there, so in largely grocery-anchored. And what we are seeing is neighborhood grocery, as long as there is a sales story, on a sales story being 4.50 plus on the sales side, almost regardless of geography that is a deep bitter pool and it’s a very favorable cap rate, again in the 6s, maybe up to a 7 depending on occupancy costs and other peripheral items or valuation points. And as you go up the strata, next being community, for best-in-class community centers, even tertiary, I think we’ve got 100 contract right now that’s fairly good sized, we call it 50 million that has a grocer that does North of 650 a foot, so you have the grocery sales story there, but you also have the biggest footprint of a community center and that center in particular, you actually have target on a ground lease which is fairly rare and other boxes paying 15 to 18, the asset has always been 99% to 100% leased, so very high-grade best-in-class for tertiary. That asset pegged us 7. And then you go up to the top on power, and power today, the valuation exercise as we all know is completely different than it was even 24 months ago. And that is that the correlation and pricing is almost exclusively tied to the underlying real-estate. So long ago when power was out, we all know it was a credit play, it was a lease duration play. And today, the term credit tenant is an oxymoron in our space. So that has really knocked the bottom out of the power. And when you go out in tertiary power, you have to really understand who shows up and why, and it also has driven and or net CapEx underwriting for re-tenanting. So what we’ve seen on best-in-class tertiary power, the 7.5 to 8.5, depending on the sales story. That being said, not all power is unfortunate, right. I think power right now is a full lot of word, but if you have the right power, we will sell our power center in Miami this year that will certainly trade in the 5. So, again you go back to correlation of the underlying real-estate and I think that’s the best way to think about power and the overall valuation right now.

[Christy McElroy:]

Okay and then just lastly, Heath you talked about the balance sheet, and each of you has made comments about being opportunistic and I know I’ve asked about this before, but just maybe given the continued pressure on the stocks, you could update us on your thoughts about doing buybacks here?

[Steven Grimes:]

Christy, I’ll take that and Heath can chime in. Certainly it’s part of our program, it’s part of our tools, we’ve used it in the past and I think rather pricing us today is even more compelling than it’s ever been. So certainly if we were to trade out some acquisitions for buybacks, we would certainly entertain that. It’s something that we feel as though is meaningful in terms of appropriate capital allocation, but to be mindful of the fact that, it is a little bit difficult to acquire in huge scale, we will do our best to do it opportunistically.

[Christy McElroy:]

Thank you.

[Operator:]

Our next question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.

[Todd Thomas:]

Hi, thanks, good morning. Just first question, just following up on Christy’s question on dispositions. Shane, can you just talk about sort of the buyer pool for these assets, any change to demand, the number of interested parties or sort of strength of sponsorship in general for assets that’s showing up – for these assets that you are marketing for sale?

[Shane Garrison:]

Yes, I think just going back to strata of assets, grocery is, again, as long as the sales story there, Todd it’s brought to trend deep and all very qualified. We have sold to other public REITs, we have sold to funds, we have sold to high net worth individual. Communities, a little different, more of the fund opportunistic side, certainly more of a levered yield play. And to-date, we have sold more to the high net worth and fund side. And then power, we’re actually talking to or have deals under LOI with other REITs, as well as high net worth individuals. So a very broad spectrum and as you go up that strata, the buyer pool gets thinner.

[Todd Thomas:]

Okay. And then, it sounds like you’ve maintained your acquisition guidance for the year. Are you thinking about investments definitely at all here, though, just given the increase in the company’s cost of capital?

[Shane Garrison:]

I think, Steve talked about buybacks. I think that remains to be an – remains an opportunity, especially anywhere near these levels. That being said, we’re balancing the initiative with the target market. So we are being thoughtful year-to-date on, call it, a $150 million closer-end process, we’re about a six cap. I think we continue to look for opportunities to feed the redevelopment densification program as well, that’s a consideration that we weighed very heavily on acquisitions. We have $300 million to $400 million in the pipeline right now. But again, where the stock is trading, that’s certainly compelling as well.

[Todd Thomas:]

Okay. Thank you.

[Operator:]

Our next question is from Chris Lucas from Capital One. Please go head.

[Chris Lucas:]

Yes, good morning, guys. On the – Shane, back to the TSA situation, you mentioned you have eight that were in active negotiations, at least. Can we actually talk about what’s been leased versus what hasn’t been leased? And then also, is there any rent commencement expected in 2017 from the Sports Authorities?

[Shane Garrison:]

Yes, good morning, Chris. So we have, call it, nine in that. We’ve got five leased, and I think, one of – actually two of those should come online towards the end of the year. And the remaining four – three are in LOI, so no expectation there other than getting it signed this year, Chris, and the one remaining box we just continue that conversations, but nothing tangible at this point. From a comp perspective, it’s going to be 5% to 10% comp exercise by the time we’re done on Sports Authority.

[Chris Lucas:]

Okay. And then, Heath, on the hhgregg, I think you – did you get April payment for them – rent for them?

[Heath Robert Fear:]

Yes, we do. We did not get March, but we did get April.

[Chris Lucas:]

Okay. And then just, Shane, actually going back to you just to wrap up for modeling purposes. The disposition cap rate for the quarter, as well the acquisition cap rate, what should we be using for both?

[Shane Garrison:]

Six on the acquisition side – for the quarter 65, 66 on disposal

[Chris Lucas:]

Okay. Great. Thank you. That’s all I have.

[Operator:]

Our next question is from Michael Mueller from JPMorgan. Please go ahead.

[Michael Mueller:]

Yes. Hi, Shane, just a question on cap rates going back when you were talking about power centers, community centers. If you take a market, I know it’s going to be different in every market, in every circumstance. But if we’re generalizing and saying in the same market you have three comparable quality shopping centers, one is the grocery-anchored neighborhood center, one is a community center, one is a power center. When you move from the neighborhood up to the community, how much decreasing the cap – what do you think the cap rate moves up to making that leap and then going from community to power, how much more does it move off would you say?

[Shane Garrison:]

That’s an interesting question. I would say, assuming sales are comparable, right a good story across the Board. It’s probably 50 to 100 basis points gap between grocery and community and between community and power in a – let’s say, we’re in a secondary market, it could be another 50 to 100 basis points.

[Michael Mueller:]

Okay. That’s it. Thank you.

[Operator:]

[Operator Instructions] And if there are no further questions, I’d like to turn the floor back over to management for any closing comments?

[Steven Grimes:]

Great. Thank you all for being with us this morning. We understand that this is a pretty difficult quarter in terms of trying to understand what the real headline versus the real headwind. That being said, we spent, as we always do in our quarterly preparations to make sure that we’re coming across this transparent and accurate as possible. So, obviously, the guidance move on the same store is indicative of that that holding the others, we still feel very, very confident in our ability to execute on the remaining portion of the guidance. That being said, there’s a lot in the transcript. I would encourage you all to look in the transcript, there’s a lot of details there. And certainly, we’re available for any questions that you may have for further follow-up, and we’ll probably see many of you at ICSC or NAREIT in the coming weeks. Thanks, everybody. Have a great morning.

[Operator:]

Thank you. This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.