Retail Properties of America, Inc.
Q4 2017 Earnings Call Transcript

Published: 15 Feb 2018

[Operator:]

Greetings, and welcome to the Retail Properties of America Fourth Quarter 2017 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] It is now my pleasure to introduce your host, Mike Fitzmaurice, Senior Vice President of Finance. Thank you. Mr. Fitzmaurice, you may begin.

[Mike Fitzmaurice:]

Thank you, operator, and welcome to Retail Properties of America fourth 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 Web site 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 2018 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, February 14, 2018, 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 definition of these non-GAAP financial measures in our quarterly supplemental package and our earnings release which are available in the Invest Section of our Web site at rpai.com. On today's call our speakers will be, Steve Grimes, President and Chief Executive Officer; Julie Swinehart 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. And with that, I will now turn the call over to Steve Grimes.

[Steve Grimes:]

Thank you, Mike. Before I turn the page on 2017 and discuss our 2018 expectations, I would like to start with how genuinely proud I am of our team's accomplishments this past year. 2017 was an extraordinary year for RPAI on many fronts. We continue to drive rents and upgrade tenancy, highlighted by our full year blended re-leasing spreads of over 10%, a high watermark for us. We started to showcase our development capabilities and portfolio potential with the completion of major construction at our Reisterstown project in Baltimore and our groundbreaking in our mixed-use asset project, Towson Circle, in Washington DC. We continue to strengthen our balance sheet by lowering our net debt to adjusted EBITDA to 5.5 times and increasing our unencumbered NOI ratio to 85%. We were textbook stewards of capital with asset sales totaling $918 million, another high watermark for us, using $430 million of the proceeds for asset acquisitions and stock repurchases while the remainder was used to reduce debt and redeem our preferred equity. And right at year-end, to put icing on the cake, we entered into a contract to sell Schaumburg Towers, our last remaining office asset. By all accounts, this was not just an extraordinary year for RPAI but a historic one. 2017 capped of a five-year effort to transform our portfolio, our balance sheet and our organizational platform, all while preserving value through the process. Our efforts have resulted in a company that can survive and thrive in any environment. We are more local to our business and more concentrated in Class A markets with nearly 85% of our retail AVR in the top 25 MSAs. We have added and retained incredibly talented people within our platform and have build a development pipeline of over $400 million in growing. We have low leverage, high coverage ratios and investment grade ratings from S&P and Moody's. The heavy lifting of our company transformation is complete and we are now at a turning point in RPAI's lifecycle. It's time to make the turn and focus inward on growth opportunities to drive long-term value for our shareholders. We will hold tight to our disciplined capital allocation principles and continue to utilize our currency in an accretive manner. Having said this, I would be remiss in not mentioning the current sentiment around retail. So how are we thinking about the macroeconomic environment heading into 2018, similar to years past, we are cautiously optimistic. Unemployment is low, consumer confidence is high and the new tax reform bill should operate the derivative benefits to retail. Holiday sales were the strongest since 2010 and bricks and mortar were up 4% over last year. It is becoming more and more apparent that high quality bricks and mortar retail, real estate locations represent the best profit margin for retailers. As a contrast to a year ago, early indications are that retailers are more focused on internal improvement such as their in-store experience and utilization of consumer analytics rather than closing locations. And we are very hopeful that they will use some of the new found tax savings to reinvest that into their businesses. In spite of the macroeconomic tailwind, we will continue to experience attrition with retailers that lack relevance. Thus far in 2018, the names and categories that have appeared in the headlines are Toys 'R' Us, Sam's Club, Stein Mart and various department stores, just to name a few. By design we have no direct exposure to Sears, Kmart, JCPenney, Macy's, Sam's, Stein Mart or Bon-Ton. Regarding Toys 'R' Us, we have only 8 locations with average rents per square foot well below market providing us with significant mark to market opportunity. We expect some tenant disruption to occur in this sector in 2018, who we are confident on a relative basis it will be less impactful to RPAI. As we have demonstrated in the past, we will continue to diversify our tenancy. Despite shrinking our retail ABR by 22% over the last five years, we have decreased our top 20 retailer concentration by 940 basis points to 29.2% over the same time period. Further, we will continue to play offense with at-risk categories and focus on leasing to retailers that utilize bricks and mortar as core to their strategy. Combined this focus with a steady economy and a high quality and well located portfolio, we are very well aligned with the new retail paradigm and confident that we can continue to upgrade tenancy and drive rent over the longer term. I would now like to touch on the primary areas of focus for RPAI in 2018. First, we expect to complete the remaining asset sales of approximately $200 million. Second, we expect continued progress on the re-leasing of our vacant anchor locations and continue the lease up of our small shop space. Our goal is to end the year with retail occupancy around 95%. Lastly, we intend to provide more visibility into our redevelopment pipeline. By the end of 2018, we plan on finalizing the scope, timing, cost and returns for this first phase of our Boulevard at Cap Centre mixed use redevelopment and our One Loudoun Downtown mixed use expansion, both located in the Washington DC market. We plan to host a property tour and dinner in the DC market with investors and analysts in September to allow for an up close and personal RPAI branded retail experience. More information on this event will be forthcoming and we hope many of you will be able to join us. Lastly, we were excited to announce this past Monday the appointment of Julie Swinehart as our Chief Financial Officer. At RPAI, our greatest asset is our people. Our talented team is what keeps us the best in retail from every angle and our strength is evident in our ability to continue to deliver successful results. We value our team and are committed to creating exceptional growth opportunities for those who not only lead by examples but mentor, coach and empower others to achieve their goals. Julie has been a tremendous asset to the company since joining our team in June 2008 and we could not be more pleased to announce her promotion. We are confident that the steadfast dedication and unwavering integrity that Julie has displayed during her tenure with the company will serve her well in this next stage of her career as Chief Financial Officer. She has earned the full confidence and support of our executive team and board of directors and we all look forward to her contributions in her new role. And in true Julie fashion, she has never met an opportunity that she hasn’t fully embraced. To that end, I would like to turn the call over to Julie for her first of many CFO updates. Julie?

[Julie Swinehart:]

Thank you, Steve. I am excited for the opportunity and truly thankful for the support of the team here at RPAI. We have accomplished great things together and I am eager to get started and to be a part of our RPAI's next phase as CFO. Turning to our results. Operating FFO for the fourth quarter was $0.25 per share, flat compared to the same period in 2016, driven primarily by $0.04 from lower interest expense. $0.01 from same store NOI growth, and 1.5 cent due to a reduced share count attributable to common stock repurchases, offset by 6.5 cents from lower NOI from other investment properties due to our capital recycling activity. Operating FFO for the full year 2017 was $1.06 per share compared to $1.09 per share in 2016. The year-over-year change in operating FFO was primarily driven by $0.21 from lower NOI from other investment properties as a result of our capital recycling activity, partially offset by $0.12 from lower interest expense, 2.5 cents due to a reduced share count attributable to common stock repurchases, 2.5 cents from same store NOI growth and $0.01 from lower G&A expense. Same store NOI growth accelerated as anticipated to 2.7% during the fourth quarter, primarily driven by higher base rent of 155 basis points from a combination of strong contractual rent increases and re-leasing spreads. In addition, to improvements in both property operating expenses net of recovery income of 55 basis points and bad debt expense of 60 basis points. For the full year same store NOI growth was 2%, primarily driven by higher base rent of 175 basis points, again from a combination of strong contractual rent increases and re-leasing spreads, as well as improvements in property expense net of recovery income of 25 basis points. The pristine condition of our balance sheet positions us to be opportunistic on the investment and development font. Our leverage ratio was 35%. We have less than 10% of our debt coming due through 2020, assuming the exercise of expansion options, and our weighted average interest rate of 3.83%. We will not sit idle though. We will continue to intensely focus on our credit profile as we maintain our low leverage, improve our debt duration, lower our debt cost and enhance our liquidity profile. Now turning to our expectations for 2018, our same store NOI growth assumption is 2% to 3%. We expect that the primary driver of our growth will be generated by base rent with property level management expenses also contributing. These components will be partially offset by higher bad debt expense as we continue to model bad debt as 50 basis points of operating revenues, which equates to roughly 75 basis points of same store NOI. As for the shape of our same store NOI growth, we expected to decelerate from the 2.7% we posted in the fourth quarter of 2017 and then sharply re-accelerate in the second half of 2018. Our deceleration in the first half of 2018 is due to tenant bankruptcies that we experienced in mid-2017 and the reacceleration in the second half of 2018 is driven by the lease up of vacant anchor locations. It goes without saying, our 2018 same store NOI growth assumption of 2% to 3% speaks volumes about the quality and resiliency of our portfolio, given the headwinds of today's retail environment. Our 2018 operating FFO guidance was initiated at $0.98 to $1.02 per share. In last night's release, we provided reconciliation from our reported 2017 operating FFO of $1.06 per share to our expected guidance range which is $1 at the midpoint. Year-over-year at the midpoint, the primary drivers are the $0.14 of dilution from our 2017 and 2018 net investment activity including the impact from 2017 share repurchases and a half penny dilution each from NOI from redevelopment assets, lease termination fees and non-cash items, partially offset by $0.04 from our preferred equity redemption, 3.5 cents of same store NOI growth and $0.02 of interest expense savings. Please note the following three additional considerations with respect to our guidance. First, in terms of our Toys 'R' Us risk, as Steve mentioned earlier, we have eight remaining locations. To date, two of our locations are on the closure list and we expect to collect rent on those spaces through April, assuming that these two locations close when anticipated and in the unlikely event that our remaining six locations would close July 1st, this would attract approximately $1.5 million or 50 basis points from our 2018 same store NOI growth, which will be more than covered by the bad debt assumption I noted earlier. Second, consistent with historical practice, we do not forecast speculative lease termination fee income. And lastly, G&A expense in 2017 totaled $40.7 million which was net of $1.1 million of executive separation benefit from the CFO departure. In 2018, we expect G&A expense to be effectively flat at the midpoint from an operating FFO perspective in the range of $40 million to $43 million. And with that, I will turn the call over to Shane.

[Shane Garrison:]

Thank you, Julie, and congratulations to you. You certainly earned it. After five years of portfolio recycling in which we disposed of approximately 60% of the assets that were owned as of our initial listing, we are now positioned to focus internally on our burgeoning mixed use redevelopment pipeline and platform. In Q4 we closed out the year with our most compelling leasing statistics on record, yet another indicator of our strengthening growth profile from our high quality focused asset base. Through a never ending focus on underlying real estate quality, we are near the top of the space in all indicative quality metrics and feel strongly that our portfolio reflects the new retail reality and benefits from locations that provide what our retail partners are searching for today in a long-term location. Convenience, brand awareness and distribution. In 2018, we believe the quality and relevance of our portfolio will be demonstrated through a year of compelling same store NOI growth and continued entitlement work wherein we will in a position to increase the density and long-term growth profile of our portfolio. Turning to Q4 results. We had an excellent quarter as we continue to meaningfully improve our growth profile, drive occupancy and enhance merchandizing across the portfolio. For the quarter, we signed 126 leases, representing approximately 665,000 square feet with comparable blended re-leasing spreads of 16%, a record high for our RPAI. Of equal importance, these same leases contain contractual, annual rent increases of approximately 180 basis points. Contractual annual rent increases of approximately 180 basis points. Contractual annual rent increases for our retail portfolio now contribute on average 110 basis points to our same store NOI growth profile. At the end of the fourth quarter, our retail lease rates stood at 94.9%, up 220 basis points sequentially. This increase was driven by 120 basis points from signed leasing activity and 130 basis points from the removal of the Boulevard at Capital Centre from our operating statistics, partially offset by a detraction of 30 basis points from capital recycling activity. As Cap Centre is now intentionally largely vacant, the hospital has broken ground and we are in the market for a residential partner for Phase I. We have elected to remove it from portfolio occupancy statistics. At year-end, we had signed leases with 28 tenants that have yet to commence rent, representing 189,000 square feet of space with an ABR per square foot well above our portfolio average at $28, which will generate approximately $5.3 million in annual revenue when the tenants open for business. This is another indication of the pricing power within this portfolio. We currently expect approximately $900,000 to be in place prior to the end of the second quarter, an additional $3.6 million prior to the end of 2018, and the balance in early 2019. This activity provides us with a strong trajectory to reach our same store NOI growth of 2% to 3%. As a result of the backfill progress we have made to date and expectations of a substantive leasing and merchandizing year in 2018, we anticipate having an outsized capital intensive year with leasing related capital. Embedded in our leasing capital spend for 2018, this carryover from deals signed in 2017 which will contribute to our outsized leasing spend for the year. Touching on Toys 'R' Us, as duly noted, we have eight locations in total with average rents of just over $6 per square foot. Two of our eight locations are on the closure list and merchandising categories for the backfill of these spaces include discount soft goods, fitness, home improvement and health and beauty. Both leases are well below market and provide for compelling double digit re-leasing spreads on [single] [ph] tenant backfills with higher re-leasing spreads if there is demand split [the] [ph] space. Average downtime is expected to be roughly 12 months. In regard to asset sales. We ended 2017 with our most significant transactions here ever at $918 million of dispositions with a blended cap rate of approximately 7.7%. For 2018, we have sold or are under contract for an additional $180 million including Schaumburg Towers at a gross purchase price of $87 million, 5 additional multi-tenant retail assets for $83 million and 3 single user assets for $10 million. We expect to close on Schaumburg tower by the end of the first quarter with the remaining asset sales completed during the first half of 2018. We will then officially migrate to an opportunistic disposition methodology. This is an advantageous position to be in given the structural retail issues, market pricing dynamics, cyclical concerns and the expected amount of product coming to market in 2018. On the acquisition front, activity totaled $203 million in 2017. We ended the year by acquiring Plaza del Lago for $48.3 million, a mixed use property that sits in Wilmette, Illinois on Chicago's north shore. The property features 100,000 square feet of class A retail and 15 second story residential units in addition to rights to develop up to 20,000 square feet of mixed use GLA. It also has the distinction of being the oldest shopping center in Illinois and the second oldest in the U.S. The asset is anchored by Jewel and generates more than $600 per square foot in annual sales productivity. The combination of extreme barriers to entry, local affluence and a highly educated customer base, all contribute to the long-term success of this property. This is another prime example of the type of income density driven real estate that we acquire. As it relates to 2018, there are a limited number of properties within Class A markets that are available and meet our strict investment criteria and we are happy to be patient. As a result, our acquisition goal is $50 million to $150 million with a year one blended cap rate in the 5% to 6% range. On the development front, you may have noticed on page 10 of our quarterly supplemental that we have added a targeted stabilization date for our active redevelopment in an effort to provide additional transparency on when we expect occupancy to be stabilized. Of note, we completed construction on our Reisterstown project during the quarter and expect occupancy to stabilize in the fourth quarter of this year. The project is 77% leased and is on-track to hit targeted returns of 10.5% to 11.5% I would also like to provide more details on the increasing role, redevelopment and densification opportunities will play in our long-term growth strategy. One of our primary goals this year is for our investors to have a clear and quantifiable understanding regarding the value embedded in our pipeline, which is currently quantified to be over $400 billion in spend today and growing as we entitle additional projects disclosed in the development section of our supplemental. As we continue to refine the scope at a handful of our projects, I fully expect that our pipeline will grow substantially. By the end of the year, we expect to roll out finite site plans and residential partners for two of our mixed use projects, including One Loudoun Downtown and Boulevard at Capital Centre, both located in our Washington DC market. Our plan with One Loudoun is to begin capitalizing on our expansion opportunities by adding 34,000 square feet of retail in addition to 378 multifamily residential units. Further, we plan to complete the land sale and the rights to develop 30 condo units which is currently under contract for $6.8 million. In regard to the Boulevard at the Capital Centre project, this is a multi-phase redevelopment that could include up to $3 million square feet of GLA and we will announce more finite plan for Phase I as the year progresses and we choose a multi-family partner. These opportunities are significant, tangible and represents the next phases in owning and developing a robust mixed use pipeline. Lastly, our total redevelopment spend is expected to be $30 million to $40 million in 2018, primarily driven by our active Towson Circle project in Baltimore, as well as Cap Centre and One Loudoun. Before I turn the call over to Steve for his closing remarks, I would like to reiterate that over the last five years, we have taken a stair step approach to building a strong asset base for long-term organically focused growth through market intelligence, quality and adjacency. Consistent with our track record of migrating to a growth focused portfolio, we are now committed to continuing the same approach for our redevelopment projects and organic growth. And now I would like to turn the call back over to Steve.

[Steve Grimes:]

Thank you, Julie and Shane for your reports. It goes without saying that with the heavy lifting on transactions behind us, our team is refreshed and ready to focus on the organic growth opportunities within our highly concentrated quality portfolio. 2018 is the year of inward and organic focus which extends to our platform as evidenced by the appointment of the Julie to her new role. As our core is a great culture and talented team which is paramount to attaining the success we have to date. Speaking for our team and board of directors, we are all excited to turn the page and focus on the next chapter for RPAI. And with that, I would like to turn the call back over to the operator for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

[Todd Thomas:]

First question for Steve, maybe Julie. Leverage ticked up a little bit in the quarter, it's back to 5.5 times from 5.1 times last quarter, which you suggested what happened and indicated that you are comfortable with taking it up slightly, particularly as you repurchase share. So two questions. One, what's contemplated in the model for leverage at year-end and, two, what's the appetite like for additional stock buybacks here versus acquisition.

[Steve Grimes:]

Yes. Thanks, Todd. Actually we did mention that it would pick up tail end of last year largely because of the timing of dispositions. With respect to this year, we do expect to end the year at 5.5 times. I think we had noted that in the opening remarks and I think we will have a revolver balance somewhere around $260 million towards the tail end of the year. We do intend to pay down the term loan this year and we are likely going to seek out the opportunity there to improve costs and some term on the line of credit. But at the end of the day we do expect to be roughly at about 5.5% -- or 5.5 times, I am sorry, net debt to EBITDA at the end of the year. With respect to stock buybacks, we have said that and we will continue to operate under the discipline that we will be moving forward with stock buybacks to the extent that it is leverage neutral. You might see in our guidance in terms of what we are selling versus what we are buying. We do have acquisition guidance out there of $100 million. We have not necessarily earmarked that for stock purchases because we do have a couple of things in the hopper that we might be looking to acquire on asset basis, but obviously where the stock is trading today, is even better than where it was when we purchased back last year. It's certainly a meaningful opportunity for us in terms of capital allocation for 2018.

[Todd Thomas:]

Okay. It's helpful. And then just question about the impact to guidance from the sale of Schaumburg Towers. I was under the impression that the reduction in carry cost there was in the $10 million range, it's about $0.03 a share and that there would be reinvestment of proceeds on top of that. Maybe I am missing something but can you just help bridge the gap between that math and the penny and half that’s embedded in guidance.

[Julie Swinehart:]

Sure. Todd, in 2017, Schaumburg Towers was about $0.06 drag on OFFO as compared to 2016. We had anticipated the drag to be $0.07 but in the fourth quarter we received a real estate tax reduction at that location which equated to a penny. As we shared in the reconciliation in our earnings release last night, we do expect the impact from Schaumburg Towers to benefit OFFO in 2018 relative to 2017 by a penny and half. So that’s relative based on that penny pick up in the fourth quarter.

[Todd Thomas:]

So the drag -- so it wasn’t necessarily a $0.06 drag in '17 from Schaumburg, right. That was the impact relative to '16 but what was the drag from carrying Schaumburg Towers taken in 2017.

[Julie Swinehart:]

Right. The $0.06 drag was relative to '16. The absolute would be 2.5 cents

[Operator:]

Our next question comes from the line of Christine McElroy with Citigroup. Please proceed with your question.

[Christine McElroy:]

Just wanted to follow up on Todd's question quickly, on buyback. You mentioned that you would do them only a leverage neutral basis. Does that mean that you would do buybacks if dispositions came in higher? I am just trying to think of the scenario given that it's not in guidance, the scenario where you would be more aggressive in buying back stock. And are there any tax considerations when you are allocating to acquisitions versus buyback.

[Steve Grimes:]

Hey, Christine. Essentially we are not a really tax management year this year given the volume of transactions we are doing is quite low compared to years past. But that being said, we do talk about the $400 million of non-core assets that we are talking about, our non-target asset if you will. That could be a meaningful proceed source for additional buyback. So when we talk about leverage neutral, we are sitting at 55 today, we are going to sit at 55 at the end of the year. We can uptick obviously a bit, just to re-leverage, but we do think a source of capital for buybacks and a good source of that capital could be the dispositions that we had talked about. Those are not contemplated because those are all very performing assets but as Shane noted on the last call, if we want to turn those up and dial those up quickly for disposition, we certainly could do that.

[Christine McElroy:]

Okay. And then Julie, first congratulations to you. And I wanted to follow up on, you mentioned the 50 basis points of bad debt inherent in the 2% to 3% same store NOI growth. It sounds like from a base rent perspective, you built in sort of what you know about in terms of further tenant fall out. Like the Toys 'R' Us closings that you mentioned. But you also talked about another potential 50 basis points of incremental retail. I am just trying to get a sense for how much buffer you have in that 2% to 3% range for what you don’t know about, sort of on top of Toys and others. Just wondering how much unknowns are accounted for in there.

[Julie Swinehart:]

Sure, and thank you, Christie. We continue to revisit our bad debt approach of assuming 50 basis points of revenue each year. Last year, in 2017 it ended up 35 basis points of same store NOI. So we are comfortable with the approach for 2018. We think it contemplates our exposure to Toys. Again the two locations that have announced closures. Those would equate to about 10 basis points of same store NOI. And what we mentioned in the prepared remarks would be that if the other six locations were to go out July 1, our bad debt assumption is still more than covers that. So we are comfortable based on our exposure today. We believe it's appropriate. Also mentioned in the prepared remarks, that Steve and Shane had mentioned, we do have other watch list retailer but we feel that we have limited exposure there.

[Steve Grimes:]

So Christie, historically what we done with that, excuse me, bad debt at the onsite of the year is we marketed 50 basis points that’s kind of a norm for us. And then we threw that up on each quarter. Then we actually bake into it what is known at this time. The two Toys boxes are know in terms of being on the closure list but we don’t necessarily have those specifically identified. They are covered by the 50 basis points that we have currently. So what we said was is that if the other six boxes were to close on July 1 of this year, that could basically erode the 50 basis points. But we don’t think that there is highlight ahead of that happening. But we will, there is a quarter on quarter, our run rate has typically been about 35 basis points. And last year if you think about it was a pretty outsized bankruptcy here. And that’s a proxy for what we could experience in 2018, I think we are pretty well covered.

[Shane Garrison:]

Christie, I would just add operationally from a retention standpoint. This year we assume we are probably 400 basis points lower than we have been on average over the last two or three years. And that's our process, it's really situational and more targeted at the asset level around our watch list. So I think that in conjunction with the bad debt, today we feel pretty comfortable.

[Operator:]

Our next question comes from the line of Michael Mueller with JP Morgan. Please proceed with your question.

[Michael Mueller:]

Shane, you talked about leasing expenditures and I think CapEx trending a little bit higher this year. Was wondering can you put some numbers around that for 2018 relative to 2017.

[Shane Garrison:]

Sure, Mike. I think they go hand in hand in that we have a bit of an overhang as it relates to the time of the lease inducement or the TI payments from '17. We had a pretty robust year and some pretty high grade tenancy. So we have probably a $30 million spend in 1'8 relative to '17 leases. And then I am going to say another $25 million to $30 million based on some spec leasing and some known deals in '18. And on a relative basis it's a fairly outsized year for us.

[Michael Mueller:]

So was that $30 million plus $25 million, so the leasing is 55? Is that what you are saying?

[Shane Garrison:]

Yes. 55 plus, yes.

[Michael Mueller:]

Okay. And what about on the CapEx side. Because your numbers I know had Schaumburg in there for 2017.

[Shane Garrison:]

Yes, on the CapEx side it's fairly flat but I would say we are probably close to $30 million. We have an outsized rough year or a smaller year in other areas, payments and things of that nature. So probably around $30 million.

[Michael Mueller:]

Okay. And then Steve, at the beginning you mentioned ending the year at around 95%. Was that leased implying kind of flattish or was that occupancy, so implying about 100 basis point pickup.

[Steve Grimes:]

That’s occupancy, Michael.

[Operator:]

Our next question comes from the line of Vince Tiboneto with Green Street Advisors. Please proceed with your question.

[Vince Tiboneto:]

Can you guys provide the cap rate on dispositions closing the fourth quarter as well as the cap rate on portfolio asset sales?

[Shane Garrison:]

This is Shane. In my prepared remarks I think I stated we ended about 7.7 I think in the quarter, probably closer to 8. And a lot of that had to do, obviously we tried to run farther and faster as the year progressed and part of that expanded pool, which is largely driven by power centers. That is where we have seen the most expansion in cap rates and that’s what really drove us about the range as we got closer to $1 billion in total. From a comp perspective, I think it is important to note, we were over 96% in the pool which was a little dilutive from an occupancy standpoint but from a stabilized asset value, I think the 7.7 is much more indicative of what truly stabilized assets, secondary and tertiary, are trading at today. And power being 8 plus at this point. I think when we look at the market today, cap rates aside. What we see is investors are truly starting to spend more time looking at the quality of the underlying real estate and what's going to drive value longer term and what the story is. There has to be a sale story. Not a spot sales story about a three, four year trend, year-over-year what's the true sales trend look like. And then accordingly what's your mark to market on the rents. And that has been -- that’s probably the deepest quantitative exercise I have seen in my career over the last year and we expect that trend to continue. And for those assets that don’t have a sales story or don’t have any kind of longer term ability to drive value from a liquidity -- forget pricing, liquidity is going to be very poor at best.

[Vince Tiboneto:]

That’s really helpful commentary. Thank you. Can you -- one more from me, can you comment on the expected same property NOI growth of your lifestyle centers relative to the rest of the portfolio. Are you seeing any kind of divergence in performance between on the lifestyle centers and on the rest of the portfolio.

[Shane Garrison:]

I don’t know if - I would tell you it's been on and off. I don’t know if there is any real pattern. I would tell you certainly from a quality perspective some of our bigger same store generators have been Southlake legacy and some of the mix use products overall. This year we have some re-merchandising going in our Southlake. But longer term, the quality of that portfolio relative is probably an outsized driver. No question.

[Vince Tiboneto:]

But in '18 you are not expecting any materially different than the 2 to 3?

[Shane Garrison:]

I don’t think so. On average I would tell you, the last piece of Loudoun as an example, that’s not in the pool this year. It is 80% occupied and 91% leased. That would put up probably over $1 million of annualized accretion in '19.

[Operator:]

Our next question comes from the line of Vincent Chao from Deutsche Bank. Please proceed with your question.

[Vincent Chao:]

Just want to go back to sort of the capital deployment discussion in terms of buybacks versus acquisitions. I am just curious if you could talk a little bit about some of the strategic advantages of some of the 5 to 6 cap assets that you guys are considering buying versus the share repo at north of 8% implied.

[Steve Grimes:]

Vin, I will take that quickly and then I will turn it over to Shane. But generally speaking, the pool of assets that we are talking about is fairly thin and for that reason because typically what you are seeing trading at some pricing that you saw at the tail end of last year at very low cap rates, didn’t necessarily have the growth profile that we are working, looking to achieve. That being said, growth profile is pretty key and our ability to densify those assets. So the good news is, is being finite to our markets. We are very much focused on the assets we want to own and we can be very patient in terms of our pursuit of those assets. When you compare that and you are sitting in investment committee, this current buybacks, given the reality of buyback today versus an acquisition. Obviously, as you experienced in fourth quarter of last year, buybacks made a lot of sense. So we will continue to wrestle with that throughout 2018 but we will also be very mindful of the fact that we really have an opportunity here to focus organically on the portfolio we own today. We do have a very meaningful lease-up here, this year. So we want to make sure that we are focused on that and we also want to preserve the assets as well with the capital cost. So we have got a lot of things competing for capital this year but all for good reasons and good measure and good value creation. With that, I don’t know Shane, if you have any further commentary?

[Shane Garrison:]

Yes. I would just add one of the considerations will be, Steve talked about we don’t have any tax, real deep tax considerations. Some of the higher quality product, there is certainly some significant gains embedded at anticipated cap rates opportunistically. So that would be a point in consideration. You know should you trade into an asset relative to should you buy back as soon against neutral. So that’s certainly part of the bigger conversation.

[Vincent Chao:]

Got it. Thanks. And then maybe on the other side of the coin. You talked about centers, those have been seeing cap rates go up for a while now and you talked about 8% plus today, I guess for secondary type of power centers I am assuming. One, I am just curious, is there financing available for that kind of asset and then what kind of IRRs are people underwriting to when they are buying at an 8 plus, is that assuming deterioration in NOI from here.

[Shane Garrison:]

Yes. Look, it's a great question. And I just want to qualify that. It's becoming more and more difficult to really put spot cap rates on assets by configuration because of the dynamic I talked about earlier where it depends. Right. It depends on the sales trend, it depends on your basis, it depends on your mark to market opportunity and the true tangible CAGR. And I will give you a perfect example, we sold a $50 million plus power center, 100% occupied, right at year-end to and advisor at a 7 cap. But that’s a secondary asset but the barriers, the topographic and entitlement barriers were significant and we would have been happy to hold that asset but for geography. But that's situational, right. The barriers are there. This long-term sales trend is there. It's not about your current tenants, it's about backfill accretively long-term and just drive long-term value. That is probably more of an anomaly in the power center space which as we all know is really the principal reason it's driving values down. But it's a very tough space for a true comp on today.

[Steve Grimes:]

Vin, this is Steve. You had mentioned financing as well. While we are not really in the financing market, let alone the secured financing market. Obviously, we talk with financial institutions regularly. Just to reiterate, on the past we have not really been beholden to financing on anything that we sold, so we haven't really seen anything punch for that reason. However, we will tell you that the sentiment around retail right now is pretty bearish from the lending community. A lot of fear of secondary and tertiary market as well as the fear of any sort of department store fall out, which again we don’t have a lot or any direct exposure to. So from our perspective we are sitting pretty good. Certainly not in need of any financing at that level but I am not so sure that that’s going to be the case from any of the folks that are out there looking to further advance their power center game in 2018.

[Operator:]

Our next question comes from the line of Floris van Dijkum with Boenning. Please proceed with your question.

[Floris van Dijkum:]

A good question on cap rates, a follow up question. Obviously, you guys were ahead of the game achieved that was a 7.7 on the dispose for last year. On the opportunistic $400 million you sort of identified, presumably these are better assets. What kind of cap rates would you expect to get on those kinds of sales if you would execute them in '18.

[Shane Garrison:]

That’s a great question. It's a pretty diverse strata of assets but to your point, better quality. All highly occupied. I think we are 95 plus. We have got an Orange County asset, for example. We have got a large lifestyle asset in Lancing, outside of Michigan state which does very well. We just opened Apple and few other tenants there. So depending on the asset, I think that asset in Michigan probably trades, I don’t know, high 5s. I think the Orange County assets in the fives. But we also have a few other power centers as an example that probably honestly trade 7.5 to 8. So on the average floors, I would expect the pool is probably 7ish, I would say today.

[Floris van Dijkum:]

And as you look out and we see a lot of your peers are looking to sell some assets as well and there seems to be lot of product on the market. Cap rates have gone up in secondary and tertiary markets. Clearly, rates are going to go up even more as well. What do you see -- when do you foresee cap rates sort of stabilize even for the secondary, tertiary assets or do you think they continue to go up at this point?

[Steve Grimes:]

Again, I think you have to strip away the commoditization of the entire space including power and it's just very situational. I think cap rates are relatively stable for the higher quality product regardless of configuration and even in the secondary markets. But outside of that, again where there is no compelling sales story or you have a large mark to market down in the rents, it's tough to pin a number on it. I mean they continue to slip and they should. I think for us the faster that cycle speeds up from an attrition standpoint and some of the B minus and C assets. Secondary, tertiary or otherwise, clear the market and investors can finally discern between what today looks, is this a mispriced value opportunity or is the asset I am looking at destined for obsolescence. That’s kind of where we are at today. That’s the struggle. And the faster that speeds up. I think Sears bankruptcy and otherwise will help clear some of those assets out but I think when that’s done the sooner the better and investors can make much easier decisions with more clarity. We certainly welcome that cycle to speed up.

[Operator:]

Our next question comes from the line of Chris Lucas with Capital One Securities. Please proceed with your question.

[Chris Lucas:]

I guess just a couple of questions. On the Toys, the six you have remaining. Were there any lease modifications made on those as part of the bankruptcy process.

[Shane Garrison:]

I could say definitively, Chris, there are no lease modifications. At $6 on average, that’s a pretty short conversation.

[Chris Lucas:]

Okay. And then as it relates to triggering essentially, potentially the additional dispositions for the year. What are the things that we should be thinking about as it relates to sort of what might be the triggers that would ramp your disposition volumes this year.

[Steve Grimes:]

Chris this is Steve. I would say it's a combination of fronts. I mean certainly where the stock is trading today, it's something that we need to really think about. Certainly the acquisition pipeline is little bit leaner but if with all this cap rate discussion that we have talk about, there might be an opportunity for us. We certainly could ramp asset dispositions up. You know it's pretty short order in order to accommodate any sort of an acquisition in the markets that we have selected. So I would say that’s really the reason that we are pretty cautious in terms of what we are guiding to in terms of both acquisitions and dispositions because we really do want to be opportunistic but we are very nimble. And to that end, I think that you know as the year progresses and we see some sort of stabilization or opportunity essentially with cap rates, we will take advantage of lighting those additional dispositions up.

[Shane Garrison:]

Yes, and I will just add. Chris, we are in the, could you, should you mode. Certainly I think those assets are liquid. Should you on relative pricing and I think if you are trading in those stock right now, on the average it probably makes sense. The question is, do you get caught in the middle? There is what -- $4 billion in product or something, anecdotally, come to the market. At least that we can put somewhat of a number on and that and the rates dynamic and general retail sentiment, I don’t think bode well for pricing overall but for the best of the best. And generally the best of the best is incoming to market right now. So I think we would like at least a quarter to kind of see how they start to settle out and if the better product continues to hold, I think that would be a more compelling reason for us to take some of this product to market.

[Chris Lucas:]

And then just one quick question follow up. It relates to the disposition pools that you have under contract and sort of maybe baked into guidance. What will you have left on the single tenant retail side at that point if you are able to execute fully.

[Shane Garrison:]

We will have two theaters.

[Operator:]

There are no further questions in the queue. I would like to hand the call back over to Mr. Grimes for closing comments.

[Steve Grimes:]

Great. Well, thank you, everybody. Obviously, we capped the year very very strong, we are very excited about where we ended the year. 2018 as I had mentioned is the year of organic opportunity for us, both in terms of assets, value creation as well as the preservation of our team here. We are all very excited to take a breath, move forward and focus on the organic growth opportunity. And many of us that are in this room here are excited to hit the conference tour coming up here in the next couple of weeks. So I am sure we will see you all soon enough. Until then we are certainly available for any further questions you may have. Thanks, everybody.

[Operator:]

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