Retail Properties of America, Inc.
Q3 2017 Earnings Call Transcript

Published: 1 Nov 2017

[Operator:]

Greetings, and welcome to the Retail Properties of America Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I would now like to turn the conference over to your host Mike Fitzmaurice.

[Mike Fitzmaurice:]

Thank you, operator, and welcome to Retail Properties of America third 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 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 2017 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, November 1, 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:]

Thank you, Mike. First and foremost, I cannot be happier with all that we have accomplished thus far in 2017. We continue to upgrade tenancy and drive rent. We continue to make the right capital allocation decisions, completing share buybacks and further delevering our fortress-like balance. Most importantly with the tremendous progress we have made on our disposition goals in an increasingly challenging market, we will have virtually completed our strategic plan in 4.5 years. All that will remain our few fine tuning items. It times to effectively end the heavy-lifting with our capital recycling plan and place it in the rearview mirror. As we prepare for 2018, we are poised to put our unique focused portfolio and platform in the spotlight where we can become a 100% dedicated to ongoing going organic value creation through mixed-use redevelopment, leasing and remerchandising. It has been almost five years in the making and the entire organization is positioned to prove the value of our real estate first approach as well as our locally focused operating platform. Once we close on the remaining assets that are under contract, or LOI, we will own approximately 110 properties down from over 260 in 2013. Our ABR per square foot will be approaching $19, while our three mile average household income and population will be approximately 103,000 and 134,000 respectively. Our exposure to experiential and or density-driven real estate is approaching 30% of our ABR and growing as we plan to densify several of the properties over the medium-term. Nearly 30% of our asset value will reside in a super-zip location. Our tireless portfolio recycling efforts over the last several years have resulted in a high quality income density driven portfolio that is geographically concentrated with strong embedded rent growth, significant mark to market and numerous densification opportunities. On the balance sheet side, our net debt to adjusted EBITDA stands at 5.1 times. We will be redeeming our 7% $135 million preferred equity in December, removing all preferred equity from our capital stack. Our unencumbered NOI ratio sits at 88% and we have only 15 secured loans remaining allowing us maximum flexibility to operate our assets. Our liquidity profile is robust with nearly $600 million in undrawn debt capacity and less than 20% of debt or approximately $320 million maturing through 2020. Our balance sheet sets the stage for us to be very opportunistic moving forward. Looking ahead, we have never been more focused. We have a vastly improved and concentrated portfolio that is well aligned with the new retail paradigm. We have a very flexible and nimble balance sheet poised for growth opportunities. We have a winning strategy that will continue with evolution as we deliver long-term value for our shareholders. Before I move to my CFO commentary, I'd like to briefly share my thoughts on our open CFO opposition. As most of you know, Heath Fear resigned in September to return to GGP. While Heath is missed, we are very pleased with the depth of talent we have here at RPAI. We have not and will not miss a beat. Given the pristine condition of our balance sheet as well as the depth of Mike Fitzmaurice’s experience in capital markets and investor relations along with the steady hand of our Chief Accounting Officer, Julie Swinehart, it affords us the opportunity to take our time to thoughtfully evaluate the best candidate for the role, which we are likely to fill in 2018. Before I turn to our results, I would like to take a moment to thank our employees in Houston and Florida for their dedication to our company and our tenants in responding to the hurricanes during the third quarter. I'm happy to report that our employees are safe; our properties have seen minimal damage and nearly all of our tenants were open and operating within days of each event. In terms of the impact on our result, we have incurred the related property level deductibles, which totaled $30,000. I will now discuss our third quarter results and outlook for the remainder of 2017. Operating FFO for the third quarter was $0.26 per share compared to $0.27 per share in the same period in 2016. This one penny change was primarily driven by $0.03 from lower interest expense net of prepayment penalties, $0.01 from a decrease in G&A expense, net of the impact of the executive separation and $0.01 due to reduced share count attributable to common stock repurchases offset by lower NOI from other investment properties of $0.06 due to our capital recycling initiatives. Same-store NOI growth was 1% during the third quarter primarily driven by higher rental income of 180 basis points from a combination of strong contractual rent increase and releasing spreads partially offset by tenant recovery income, net of expenses and other property income of 50 basis points and bad debt expense of 30 basis points. We also recognized the impairment charge during this quarter of $46 million related to Schaumburg Towers. I’ll let Shane to share the details on the contemplated sale, but the charge was directly related to the change and estimate of fair value combined with the change and estimated hold period of the asset. Turning to guidance, we are raising our operating FFO guidance by $1.5 at the midpoint to $1.3 to a $1.5 primarily due to lower than anticipated G&A expenses net of the impact from executive separation and reduce share count resulting from stock repurchases. Additionally, we are raising the low end of the our same-store NOI growth assumption resulting in a new range of 1.75% to 2.25% primarily as a result of lower than expected bad debt expense in the third quarter. We expect same-store NOI growth in the fourth quarter to accelerate due primarily to higher revenues as well as outsized bad debt expense in the fourth quarter of 2016. We do not expect any additional material impact from announced bankruptcies in 2017 and are pleased to note that we have negligible direct or indirect exposure to department stores, which continue to dominate the headlines and encounter difficulties. To provide you with some detail regarding tenant bankruptcies and why we do not expect any additional 27 impact, as of the last call only nine of our 32 Payless, Rue 21 and Gymboree leases were rejected, which was factored into our same-store NOI growth assumption last quarter. Three of the locations are at properties that we have sold and I am happy to report the remaining 20 leases have been assumed at this time. As a result, we expect no further disruption from these bankruptcies. However, it's important to note that the midpoint of our current same-store NOI growth assumption, 2%, we are maintaining a bad debt reserve assumption of 50 basis points of same-store revenues for the fourth quarter to cover any unforeseen risks, which equates to approximately 20 basis points or 525,000 of full year same-store NOI. In terms of additional risks in 2017, we do have nine Toys 'R' Us leases representing approximately 50 basis points of ABR. To date they are current in all rent and additional charges. However in the unlikely event, all locations were closed today November 1st. These closures would detract approximately 440,000 in 2017, which will be covered by the bad debt assumption I noted earlier. As we think about our same-store NOI growth in 2018, it's threefold. First, we expect continued progress on releasing vacant anchor locations, which we expect will provide a tailwind in 2018. Second, we have delivered three pad developments and expansions in 2017 totaling an incremental 62,000 square feet, one of which was completed during the quarter. We expect these projects will result in an annualized benefit of 865,000 an incremental NOI with a weighted average return on cost of approximately 10.4%. In addition, we anticipate delivering on the Reisterstown redevelopment during the fourth quarter of 2017, which we expect will result in an annualized benefit of $1.1 million in incremental NOI with a weighted average return on cost of approximately 11%. Lastly, as a result of our share velocity and volume of our disposition progress during 2017, we will be meaningfully smaller company in 2018, which will impact RPAI in two ways. One, we expect to have additional savings in property level management expenses; and two, our ability to move the needle and same-store NOI percentage growth will be magnified given our smaller denominator. And with that, I will now turn the call over to Shane.

[Shane Garrison:]

Thank you, Steve. We continue to execute on our 2017 tactical plan in the face of volatility and a difficult retail environment. I'll cover the operational side first. We continue to drive rent as evidenced by the 8% blended re-leasing spreads we have reported year-to-date. While we had slight deceleration in third quarter, this was a direct result of a couple of strategic leases signed at an asset to improve value upon sale. At the end of the third quarter, our same-store lease rate stood at 94.2%, down 50 basis points sequentially due to the remaining impact of the 2017 tenant bankruptcies. As Steve mentioned, we expect our same-store occupancy and lease rate to accelerate in the fourth quarter due to a couple of our former Sports Authority spaces and one of former hhgregg boxes coming back online as well as additional pipeline activity contemplated by year-end. On the disposition front, to date in 2017 we have 1.1 billion of disposition activity of which 719 million is closed and 333 million is under contract or LOI. We expect to end the year with dispositions between $850 million to $1 billion while the remaining identified activity will close in the first quarter of 2018. Given the increasingly challenging transaction environment and expanded pool, we now expect the cap rates for the targeted $1 billion retail disposition pool to be around the high-end of our initial range of 6.5 to 7.5. Turning to acquisitions, the environment in our target markets continues to be very competitive and sourcing compelling opportunities consistent with our long-term strategic objectives is very challenging. However given the opportunistic use of our stock buyback plan coupled with a healthy pipeline of opportunities sourced through our strong network of brokers and local relationships, we are comfortable maintaining our acquisition range of $375 million to $475 million. During the quarter, we acquired the final phases of One Loudoun Downtown, more importantly we have already made our mark on this asset with the termination of fresh market and Q4 lease execution of a best-in-class small formation organic grocer that will deliver considerable traffic and additional merchandising progress at this significant asset. Additionally, as stated in our press release, we are currently under LOI to sell Schaumburg Towers for approximately $88 million, which contemplates historically deferred maintenance and capital requirements, but it’s gross of tenant related costs to be credited at close and CapEx expect to be incurred by us prior to sale. We are currently in PSA negotiations and the sale will likely close in the first quarter of next year. In spite of all of the progress over the last four years, this is one of our most significant milestones. Consider that as of our initial listing this company had almost 10% of its ABR or roughly 5 million square feet of exposure from single tenant office and industrial buildings. We have retenanted, modified and extended leases all along the way to successfully dispose of these assets. And while that is a significant accomplishment in itself, we have remained steadfast in our approach to leasing, remerchandising and building a portfolio for tomorrow’s retail landscape. Given its history of execution, we remain confident that we will be able to complete the sale of this remaining office building and celebrate a new chapter in RPAI’s success story. As we move towards the completion of our plan, it's important to acknowledge the accomplishments of our team. We have been running as fast as we can for the last 4.5 years. We will have sold over 150 properties, unwound two large JVs and acquired over 30 assets in our target markets. We will have turned over 45% of our portfolio. Total transactions volume in the last 4.5 years has been just under $3 billion. This is no small feat, and I can commend the team for navigating a rapidly changing retail environment, continually executing and sticking with a difficult long dated plan. I firmly believe that if we were to start the portfolio of transformation today, we started 4.5 years ago; we absolutely would not be able to achieve the level of success we have enjoyed today. The secondary and tertiary market fundamentals have changed, cap rates have expanded, buyer pools are smaller and more assets and portfolios are coming to market. Combine this with the fact that we sold the riskiest assets early in the plan; it's the right time to effectively call our plan complete and focused inward. Once we close on the remaining $333 million of assets that there are under contract or LOI, we will have an institutional quality portfolio that will include approximately 25 properties outside of our target markets with an ABR per square foot of over $15.30. These assets are well leased at 94% with long-term NOI growth of approximately 3%. Of note, this portfolio includes assets like Eastwood Towne Center located in Lansing, Michigan, near Michigan State University, that generates nearly $500 per square foot and in line sales productivity driven by tenants such as Apple, Lululemon and Sephora. Another great example is the Commons at Temecula located in California that have leased to high quality relevant national tenants including Nordstrom Rack, Total Wine and Ulta. In consideration of the quality of these few remaining assets and broader market dynamics previously outlined, we are now pivoting from a need based disposition methodology to an opportunistic portfolio management approach wherein future asset sales will be driven by opportunities to deploy capital accretively. And now, I'd like to turn the call back over to Steve.

[Steve Grimes:]

Thank you, Shane. As you have heard, the team here at RPAI has not let its foot off to the accelerator of our strategic initiatives. And as I have said many times before, we are exceeding our own expectations. And again if we succeed on selling all of the disposition activity noted earlier, we will be virtually complete with our strategic initiatives having a highly concentrated portfolio of Class A quality assets largely in our top identified markets. We will have exponentially improved all of the metrics that indicate quality and drive multiple in our sector. Our ABR per square foot is approaching $19 with nearly 50% of our ABR coming from our small shop tenants, which has resulted in significantly stronger re-leasing spreads in contractual rent increases. Also approximate 30% of our ABR will reside in lifestyle and mixed use assets, while roughly 30% of our value will sit in super-zip locations. We very much appreciate your time with us today and we encourage all of you to take some time to really dissect all of our achievements over the last 4.5 years. As I reflect on our transformation, I'm reminded of the transformation attempted or completed within our sector over the last ten years. In my opinion, we stand here today among the elite of our peers despite the challenges facing retail. And we were able to do so because of the team here at RPAI, which is second to none. And with that I would like to turn the call back over to the operator for questions.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from R.J. Milligan with Robert W. Baird. Please state your question.

[R.J. Milligan:]

Hey, good morning guys. Shane, you’ve mentioned that you expect to hit the higher end of the disposition cap rate range. And I'm just curious what's driving that? Is that the increased volume? Have you seen any movement in cap rates? Any color on that would be helpful.

[Shane Garrison:]

Yeah, good morning. I think it's a bit of both. Obviously, the disposition pool in total has expanded quite a bit. I think we initially contemplated about 750, 750 at Investor Day and now absolutely we’re close to 1 billion. So that’s certainly been part of it. I think the other part has been some leakage here in the last quarter or so, I think some of it is that the market very much portrays us as a fore seller. I truly believe that. I also think that there's just been broader leakage around pricing especially as it relates to any bigger format centers. So we're happy. We've done. We've done. Again, what we've completed anyway. I don't think we could do it again and all things considered next year we are happy not to be obligated to be in the market.

[R.J. Milligan:]

Got it. And my second question is on the stock buyback program. How much availability is left on that? Do you plan on re-upping the buyback? And how much more are you comfortable buying back with respect to leverage?

[Steve Grimes:]

Yeah, R.J., it’s Steve. How are you? 115 million is left on the current allotment if you will. And then obviously to the extent that prices or stock prices stay consistent with where they are, we would definitely look to re-up that and probably look to re-up that in the first quarter of next year. You know at these prices, it does look pretty compelling for us to buyback shares. Obviously, we've been in the market over the last few quarters, actually for the whole year, but we're also hopeful the flipside could happen where the stock actually tends to trade a little better. So, we’re happy to have both options available to us.

[R.J. Milligan:]

Thanks, guys.

[Operator:]

Our next question is from Christine McElroy with Citigroup. Please state your question.

[Christine McElroy:]

Hey, good morning guys. Shane just a follow up on R.J.’s question on cap rates realizing that you're not a fore seller next year, but you will still be active. Can you just give us a sense for sort of what you have left to transact on location and quality? And should we expect that similar range for deals in 2018 to 6.5 to 7.5 or even what you're seeing in the market? Should we expect it to be more towards the upper end of that range?

[Shane Garrison:]

Hi, Christy. Good morning. So, right now, we're contemplating finishing the billion one we have under LOI and contract and that includes Schaumburg Towers. At that point, we are done from an obligatory seller standpoint. We will be opportunistic for stocks there as an opportunity or we see some other accretive opportunity. We can certainly go into the remaining 20 to 25 pure non-core for geography reason assets, but we will only do that on an opportunistic basis. From a pricing standpoint, again, I think we'll finish the entire billion one access or I guess is very much at the high end of the range, call it 7.5-ish. And again that's been driven by just continued I think pricing leakage if you will on bigger formats. And it’s for us on the 20 to 25 left. We have two theaters in there in California. We have an Orange County asset as well. We have another California asset. We've got the Whole Foods in Tampa. And for the most part other than Lansing, these are all great assets with 3% growth for the foreseeable future to have a grocery component. So we are happy to own it. I think generally the cap rates on most of the – most of those assets would be inside the high end of our range this year and we are happy to be opportunistic around that pool.

[Christine McElroy:]

Okay, and then Steve you talked about the bad debt reserves that's in guidance. In Q4, right now, I think the midpoint implies somewhere around 3% growth in Q4 for same-store. Is that 50 basis points at the low end of the range or at the mid point. Just trying to get a sense for how much conservatism is still sort of embedded in there?

[Steve Grimes:]

Good morning, Christy. That 50 basis points put us at the midpoint of the range. And so, I think, the 3% that you're talking about maybe a little bit hot, but certainly trending in the right direction.

[Christine McElroy:]

Okay, and then just maybe can you walk us the – the $0.20 - $0.26 this quarter to $0.23 at the mid point in Q4 in FFO. Maybe just walk us how do you get there?

[Steve Grimes:]

I would say the decline from quarter to quarter?

[Christine McElroy:]

Yeah, exactly to sequentially, is it mostly dispositions or…

[Steve Grimes:]

Yeah, it’s primarily dispositions, correct.

[Christine McElroy:]

Okay, all right. Thanks guys.

[Steve Grimes:]

Thank you.

[Operator:]

Our next question is from Vincent Chao with Deutsche Bank. Please state your question.

[Vincent Chao:]

Hi, good morning everyone. Just going back to the CFO search for a bit here, it sounds like that will be a 2018 event, but just given the transformation that’s taking place for the last five years, I mean the balance sheet is in good shape, disposition plans are largely completed at this point. I guess what are you looking for in the next CFO skill set?

[Steve Grimes:]

Hey, Vin, it’s Steve. Thanks for the question. As we look to where RPAI is potentially going and what we’re calling version 2.0 of RPAI, obviously we have a number of redevelopment opportunities which could imply a little bit more complication in the balance sheet maybe not yet, but the idea of venturing in with some of these multifamily developers is a possibility. So I only mention that in terms of a skill set of directionally where we’re going. We definitely are not in a situation where we have to be in the capital markets for any meaningful capital raise and we have our debt maturities well under wraps. So that being said I think it really is more opportunistic in some of the redevelopment value-add opportunities that we have. That's not to say that we don't have that talent in-house, but I think as we look to complete the search both internally and externally, we want to make sure that we've got the right candidate to take RPAI 2.0 to the next level.

[Vincent Chao:]

Got it. Thanks for that. And then just as we get pass the sort of net disposition process heading into 2018, I mean how should we be thinking about the growth outlook organically 2% this year? Rent spreads have been a little bit lighter than some of your peers, but just curious how we should be thinking about the go forward growth algorithm particularly on the opportunities – opportunistic disposition side. So if you are continuing to buy assets, it seems like there could still be some slight dilution from that just given the cap rate spreads, but I am just curious how you’re thinking about that?

[Steve Grimes:]

So, Vin, as we have said that we won’t be completing all of the 1.1 this year as some of it will spill to next year, but all that aside when you look at some of the tailwinds that we have going into 2018, I’d mentioned it in the prepared remarks, we do have some tailwinds from the releasing of the former bankrupt tenants. Obviously that will be taking occupancy next year. In addition to that we have these three pad site developments that will be opportunity for us next year, the 62,000 square feet, it will be coming online and rent paying. And then at Reisterstown, which is our one de mall that we started last year and we’ll be completing this year should be fully online next year. So those are a couple of the tailwinds. I think when you look at any sort of headwinds and you look at any sort of concerns around tenant fee, we will be conservative at the onset of the year in terms of what we might be facing in terms of additional bankruptcies. But as I said in my prepared remarks, we don't have any of the large scale department store exposure and I think that we're in a very manageable situation from whatever bankruptcies we might face next year. So I think the trend is slightly – slightly to the positive for 2018, but it's a little too early to tell given that we're in the process of going through budgets pretty much starting after that call. So we’ll certainly have more information as time moves along in the balance of the year and as we prepare for guidance issuance in 2018.

[Vincent Chao:]

Okay, thanks guys.

[Operator:]

Our next question is from Michael Mueller with JP Morgan. Please state your question.

[Michael Mueller:]

Yeah, hi. Just going back to the – I guess the dispositions a little bit more. We're going to have a lot of people updating a lot of models and throwing a lot of different assumptions in there for capital recycling. And I was just wondering is there anything you can point us to at this point as to what we should be thinking about for a base case for normal course dispositions or probably $100 million to $200 million, we take that redeployed and then to a comparable amount of acquisitions, something along those lines. Can you just give us a little direction in terms of how you're thinking about 2018 and beyond?

[Steve Grimes:]

You know, Mike, I think it's tough because by definition we are happy with the remaining, I will call it non-core for geography reasons, assets. So we know that $175 million is contemplated if you take it from the midpoint today up to $1.1 billion in the first quarter including Schaumburg. After that I am hesitant to give you a run rate. I think it's all going to be around the opportunities on both sides of the ball. If the stock stays anywhere near these levels, we love it and are happy to sell into the market and buyback stock. We have the opportunity – have the balance sheet to do that and we'll continue to execute, but again it's subjective and we're just going to be focused on opportunities.

[Michael Mueller:]

Okay and your cap rate commentary about toward the higher end at around 7.5, is that a blend for the full year including everything that's been done so far or is that more direction for what's about to close?

[Steve Grimes:]

That will be the final on the billion one. So a little bit of a bleed next year it’s the total pool even though we’re hopping over from a calendar perspective that is obviously actually ex-Schaumburg, if you throw Schaumburg in there, it's 60, 70 basis point impact down.

[Michael Mueller:]

Got it, okay. I think that’s it. Thank you.

[Steve Grimes:]

Thank you.

[Operator:]

Our next question is from Vince Tiboneto with Green Street Advisors. Please state your question.

[Vince Tiboneto:]

Hey, guys. Both leased and physical occupancy ticked down on a sequential basis this quarter. I thought last – on the last call, you indicated that occupancy was likely troughing in the second quarter. Is there anything unexpected that happened in terms of move-out or bankruptcy this quarter that turned occupancy down? Or was it a mix issue? Can you provide us a little commentary there?

[Shane Garrison:]

Sure. I think there's a few things going on to be mindful of. Again, our story is a bit nuanced because of the transactions volume. But the entire pool, if you go to the $1.1 billion, or I guess ex Schaumburg, we're at 97% leased. So it's been a fairly dilutive exercise from an overall occupancy standpoint. Additionally our acquisitions have been 87% to 88% occupied. So you kind of pulling on both ends in regards to transactions against occupancy. We did have a few bankruptcies come back. I don't think that was – or anticipated on the in-line side. We had 32 Rue, Gymboree, Payless stores combined. We took nine of those back because we opted to drive rent versus chase occupancy through those bankruptcies, so that's a bit of a short-term ding. But overall, we have a few lease executions, I think, that were delayed in the quarter. It's taking a bit longer to get to the finish line in some cases. I think that's driven by a few dynamics in the market that are very subjective based on the site and the tenant you're backfilling. But generally, municipalities are taking a bit longer. I think there's a bit more volume flow than there has been historically just around commercial and permitting in general. When you think about the tenancy side with obvious margin pressure, we've seen some G&A attrition as it relates to real estate departments to the state. So we feel like that's one of the reasons it's taking a bit longer. And tenants are rightfully so just being more mindful of allocating bricks – from a bricks-and-mortar and locations standpoint. And then lastly, from a landlord standpoint, I think the best way to think about it is yesterday's leases don't really contemplate today's merchandising. So we have to, more often than not, get waiver. So all of that in general, depending on the site, is adding to a bit of added time to the leasing process.

[Vince Tiboneto:]

You know that’s very helpful. Thank you. One more, you mentioned you could potentially get involved in some multifamily redevelopments kind of in the next phase of the company. Does that change your view on monetizing air rights? You previously mentioned that could be a source of capital. Are you still looking to pursue that avenue? Or maybe looking to hold those kind of development rights now for your own kind of future development pipeline?

[Steve Grimes:]

Hey, this is Steve. I am going to turn it over to Shane here in a minute because it’s definitely going to be deal-specific. But as we look to effectively create the plan, post what we're calling 1.0 and moving into 2.0 that we've been talking with the board about, we're evaluating all options for our multi-family. Certainly, it's good to have those options. And as we look to do those, we'll certainly do it to make sure that we're getting the highs and best use out of the retail at the end of the day because that's certainly where we want to be. But we also have some nuances to a particular deal that we need to work through. So Shane, I don't know if you have any color you would like to add but…

[Shane Garrison:]

Yeah, I think just from an indicative value standpoint, none of which is contemplated in current NAV, we've got 3,500 to 4,000 multifamily units from a pipeline standpoint. Some of it's entitled. Some of it is future entitlement. But the point is the quality of the real estate is there. I think about when – or when we think about mixed-use in general and going vertical, we have spent an inordinate amount of time trying to understand the merits of controlling the entire site longer term. That's some of the discussions we're having around 2.0. In the environment, we spend a considerable amount of time and effort to create the retail amenity, and giving up on rents that are 15%, 20% higher than they are a block away is something that we're struggling with. That being said, we'll be opportunistic as we densify these sites going forward. The pipeline is great. We'd love to get into this virtuous cycle where we're delivering $50 million to $100 million a year in development, so that will also be a part of that consideration.

[Vince Tiboneto:]

Thanks. That’s all I have.

[Operator:]

Our next question is from Floris van Dijkum with Boenning and Scattergood. Please state your question.

[Floris van Dijkum:]

Great, thanks guys. I wanted to ask a question on your – if I look at your – the difference between your leased and your occupied or signed – excuse me, in your occupied, there seems to be a bigger gap in your nonmajor markets. Anything specific behind that relative to your target markets?

[Shane Garrison:]

Hi, Floris. Good morning. Some of the bigger box, the TSA space, for example, was noncore. You're seeing a bit of that tailwind or spread still come in. I think that's the majority of it.

[Floris van Dijkum:]

Okay.

[Shane Garrison:]

That being said, portfolio versus same-store, I think, again, because of the nuance to our story and the volume of dispositions, the portfolio occupancy is just a very choppy metric for us. Same-store is much more indicative. On a portfolio side, again, we sold 97%, bought at 87%, 88% occupied. There's bap that's moving it. But also Cap Centre, as we continue to take it down, is really starting to drag on the occupancy metrics. As an example, in the portfolio level, Cap Centre by itself is a 200 basis point drag on in-line. So again, I certainly appreciate the nuance and complications to the story, but I think, for us, same-store is much more indicative of the portfolio today.

[Floris van Dijkum:]

Great. And as follow up question maybe Shane, in terms of the Cap Centre or the boulevards, any sort of new news on that front?

[Shane Garrison:]

I am going out for ground breaking with the hospital, November this month, and so that is taking along nicely. I think, from us, from a Phase I perspective, we are finalizing configuration. And we will shortly be going out to the market, whether it's to participate in a JV or sell air rights for multi-family partners. I would anticipate us doing that in the next couple of months.

[Floris van Dijkum:]

Great. And how big of a potential multifamily are you contemplating?

[Shane Garrison:]

Well, I mean, this is the project that’s 50 plus acres ex the hospital. We have, by right, densities, 5-plus million feet. I don't think we believe we could ever use that amount of FAR. We think the project certainly could bear up to 3 million square feet depending on medical office use around the hospital and other commercial uses, in addition to the retail we contemplate, but multifamily units, Floris, could be 1,000 to 2,000 units, somewhere in there for the total site.

[Floris van Dijkum:]

Great. Thanks, Shane.

[Operator:]

Our next question is from Todd Thomas with KeyBanc Capital Markets. Please state your question.

[Andrew Patrick Smith:]

Hi, good morning guys. This is Drew on for Todd today. Shane you mentioned leasing spreads in your prepared remarks a little bit. I am just curious if you could give us a little bit more color on what may have kept spreads down new spreads a little bit in the quarter, although leasing is pretty solid overall?

[Shane Garrison:]

Sure, good morning, Drew. So, you know, like we have over the last couple of years, this quarter we had a few strategic lease renewals at an asset that we are, I believe, under LOI at this point, really in an effort to extend the average lease maturity for financing for the buyer in this case. So that's dragged down the renewals a bit. I think, ex that, we're probably 8% on renewals or something like that. So it did move it a bit. What's been a bit frustrating for us is the lag on some of the higher comp space. I would expect a lot of that to hit in fourth quarter. So it's going to be a bit choppy, but it should be a fairly significant number from a comp perspective.

[Andrew Patrick Smith:]

Got it. That’s helpful. And then I noticed that the expected yield on Reisterstown came up a little bit at the low end. I am just curious what drove that if you could just tell us a little bit about that?

[Shane Garrison:]

Yeah, I think, there is some operational pickup there. When you de-mall versus the former enclosed mall, there's always some operational savings. I think we were – had an unanticipated pickup in that regard. Rents are about the same. We also have an ongoing tax benefit that wasn't contemplated prior. So all in all, that's what moved the number up.

[Andrew Patrick Smith:]

Got it. And then last one for me, Steve, you have mentioned the new CFO should be coming in some time in 2018. Should we be thinking more early 2018 or not? Maybe just any further color on the timing would be helpful.

[Steve Grimes:]

Yeah, I think the timing, I think we would consider it okay if it was Q2 maybe later in Q1 let’s be honest, I think year-end for a CFO is timing that they probably need to sit in their seat and finish out the year. So having been through this process before, I know that the level of interest is strong, but the timing could be a bit delayed because we're approaching year-end. So Q2 is definitely acceptable, but late Q1 would be ideal.

[Andrew Patrick Smith:]

Makes sense. Thanks guys. I appreciate the time.

[Steve Grimes:]

Thank you.

[Operator:]

Our next question is from George Hoglund with Jefferies. Please state your question.

[George Hoglund:]

Hey good morning guys. Just one question on the increased asset sales and forgive me if I missed this earlier, but does that have any impact on same-store NOI for 4Q? Or.

[Steve Grimes:]

No, no, it doesn't not.

[George Hoglund:]

Okay. And then also, on Schaumburg, since Zurich left, how much CapEx have you put into it?

[Shane Garrison:]

Right around 30 I believe George. Mike would follow-up with you, but it's right around – between $30 million and $35 million.

[George Hoglund:]

Okay, that was it, thanks.

[Operator:]

[Operator Instructions] Out next question is from Chris Lucas with Capital One Securities. Please state your question.

[Chris Lucas:]

Yes, good morning guys. Maybe just a quick follow-up, Shane, on the previous question as it relates to the CapEx spend that you’ll have between now and when the hopefully Schaumburg closes. Does the price adjust for that as you guys continue to build out space? Or how does that work?

[Shane Garrison:]

It's a great question and I'm going to try to limit this to like five minutes because it's a fairly complicated story. So we're at $88 million gross. I think we had said previously $80 million to $100 million net. So starting with $80 million there's different ways to get to a number here. $88 million gross contemplates, from a buyer perspective, the historical deferred CapEx items for the building. In other words, those are obligations the buyer is going to have to undertake. As a reminder, we are in litigation with the former tenant around those very specific items. So I'm hesitant to give you a number, I could just tell you that our claim from litigation standpoint is substantive. Obviously when we get those proceeds and I have no idea when that is, but it doesn't go – show up as a gain at this point, it will show up in other income. So we'll keep you apprised as the quarters and litigation shapes up. Going back to the $88 million purchase price and to your point around CapEx, Chris, so we are netting down from $88 million to basically $60 million. And there's some movement in that number depending on a few things. But the $88 million to $60 million basically contemplates the buyer taking over the TI leasing commissions remaining for the tenants that are signed that have not been paid, in addition to a $5 million or so rent abatement for the current leases. Any movement from that number is really two buckets. One would be taxes we pay in arrears in that county. We have been in four tax process – protests, from a vacancy standpoint, for going on a year. We'll know in the next couple of weeks. But on the high side, that could be a $2 million benefit to us. The other moving variable here is just rent commencement. So I mentioned we have a $5 million credit to the buyer. To the extent tenants move up brand commencements, we will get that back dollar for dollar. So I apologize for the complication, but hopefully it gives some perspective on where the different dollars are coming from as you think about 60 years in that space.

[Chris Lucas:]

Great, thank you. And then just another follow-up. As it relates to sort of thinking about 2018, as acquisitions and dispositions, I guess really the question I have is not so much about volume, but like what is the tolerable dilution that you guys are willing to do i.e., what are you willing to buy at things that fit your formula versus things that you're looking to sell that fit the formula in terms of the amount, the sort of basis point dilution, if you will, between going in and going out cap rates?

[Steve Grimes:]

Chris this is Steve. I would say generally in terms of our tolerance for dilution, we're trying to put that in the rearview mirror, as we had mentioned before. We want to do things on an accretive basis. So that being said, as Shane had mentioned, the 25 assets that remain are certainly assets that we're willing to hold and certainly well-performing assets, especially in what might be even a larger competing environment in terms of the amount of properties that may be coming to market for sale, which could drive cap rates up, which is a reason for us to not want to unwind those assets. So it's a little early to tell, but I would say that our tolerance for any sort of further dilution is pretty much waning at this point because we feel that all the heavy lifting will be done at the completion of the $1.1 billion.

[Chris Lucas:]

Great. I appreciate the time this morning.

[Shane Garrison:]

Thanks very much.

[Operator:]

Ladies and gentlemen we have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

[Steve Grimes:]

Well great. Thank you everybody for joining us today. We now again it's a busy time. We're very excited to be heading out to NAREIT in a couple of weeks. Some of you, I believe, are attending our tour of properties in the Dallas market, so we'd be happy to entertain you there and see some properties that we have. We haven't been to Dallas in a while with you all. So we’re excited about that. And certainly, if you have any further follow-up questions for us, I'm available, Mike is available. We certainly can get back to you. I’m going to update as needed. So thanks very much for your time today.

[Operator:]

This concludes today’s conference. You may disconnect your lines at this time. And thank you for your participation.