Retail Properties of America, Inc.
Q3 2018 Earnings Call Transcript

Published: 31 Oct 2018

[Operator:]

Greetings and welcome to Retail Properties of America Third Quarter 2018 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] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Julie Swinehart, Executive Vice President, Chief Financial Officer and Treasurer.

[Julie Swinehart:]

Thank you, operator, and welcome to the Retail Properties of America’s third quarter 2018 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 2018 and 2019 and will be affected by a variety of risks and factors that are beyond our control, including without limitation, those set forth in our earnings release issued last night, and the risk factors set forth in our most recent Form 10-K, 10-Q and other SEC filings. As a reminder, forward-looking statements represent management’s estimates as of today, October 31, 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, our earnings release an our 2018 Investor Day presentation, which are available in the Invest Section of our website at www.rpai.com. Joining me on today’s call will be, Steve Grimes, Chief Executive Officer; and Shane Garrison, President and Chief Operating Officer. After our prepared remarks, we will open up the call to your questions. With that, I will now turn the call over to Steve.

[Steve Grimes:]

Thank you, Julie, good morning and happy Halloween to everyone. On a day that's all about tricks or treat for the kids, we will keep our prepared remarks relatively short and sweet. We enjoyed hosting our Investor event last month out in D.C. and we're pleased to see many of you there. We really laid the groundwork and launched our new tagline RPAI Real Estate Defined or RPAI Redefine. Sharing details around several new projects including 2019 starts and projects in our longer-term pipeline, and highlighting the strength of our portfolio and fortress like balance sheet. Our accelerated expansion and redevelopment pace over the next few years is primed to be a significant contributor to our long-term growth, as we begin to capitalize on the numerous embedded densification opportunities within our portfolio. Real-estate fundamentals are strong in the United States. And as Cohen & Steers explains, the big stories today are 90 consecutive months of job growth and 18 year low on unemployment and a strengthening economy, giving landlord's greater ability to raise rents. When rents are rising, history shows that REITs can deliver strong returns despite higher interest rate. We have always maintained a real estate first approach growth, and I believe that our track record on this front speaks for itself. The quality of our portfolio continued to attract the type of diverse tenancy that will enhance the value of our properties for years to come. Our strategy focuses on experience and the right merchandise mix for today's ever changing retail landscape. We continue to believe that the generational of barbell and preferences of both the rapidly retiring boomer generation, in many instances, retiring to high-end mixed-use centers and the up-and-coming millennial, who collective spending power could reach 1.4 trillion by 2020, will be the primary driving force towards the live work play, real estate environment for the perceivable future. When they go out, they want a certain experience and here at RPAI, we are acutely focused on ensuring that our high quality assets are the places where they can have everything they're looking for and more. Many of expansion and redevelopment projects are in the D.C. Baltimore area and we are uniquely positioned to capitalize on a continued infrastructure growth and migration to these MSAs. Retailers continue to rebound over the last several quarters, but that does not mean we're out of the woods yet. In the months since we held our investor events, the headlines have been crowded with news from retailers. First, Sears, finally, it felt inevitable that Sears finally declared bankruptcy, and now I feel like the sector can start to gain some clarity, which could come more quickly as Sears moves to our liquidation as some suspect. Many of us recall, the days when the Sears wish book would arrive in the mail and we would race through it to see what new games, toys and clothes we should put on our holiday list. Those days are long gone and kids now text their wish list to their parents including links with prices and product review. Times have certainly changed, but Sears could not keep up the pace. As we have highlighted all year, we have no direct exposure to Sears or Kmart. As Shane will discuss in his prepared remarks, we don't see significant indirect exposure either. We do not expect any disruption within our portfolio which is comprised mostly a misused neighborhood and community centers. And our markets where Sears or Kmart is located, we are confident that our properties are well insulated from this potential competition based on the location and competitive positioning of our assets. In fact, we have used Sears and Kmart as part of the retail shade of supply for years. I would also tell you that supply and demand for retail space in local markets was a key consideration and are now completed portfolio recycling effort. In terms of other headlines, Claire's has emerged from bankruptcy and Mattress Firm recently entered. Only one of our stores is on the initial list of 500 closing for Mattress Firm, so any 2018 exposure is expected to be negligible. We will continue to monitor details as they unfold to assess what impact we should expect for 2019. We have seen this movie before and it may have a different ending this time, but if we end up with some move outs, our season leasing team understands each space and remain proactive as always. For us, there are tenants making headlines. In the past few months, we signed with Lululemon at Downtown Crown in Gaithersburg, Maryland, which came on the heels of Sephora opening there. Elsewhere on our portfolio, we are attracting new fitness uses such as CycleBar, CorePower Yoga and Peloton. In September, Trader Joe's opened up at One Loudoun replacing a fresh market that was in the space when we acquired the asset just two years ago. Trader Joe's is using the One Loudoun store as their prototype for new store opening, and the container store opened at our Tyson's corner assets just a few weeks ago taking the entire former Golfsmith space. Relative to our portfolio size, this quarter was a high watermark releasing as we completed approximately 1 million square feet of deals or over 5% of our GLA Impressive. Turning to the quarter, I'm extremely pleased with the execution on all fronts. Our same-store NOI came in at 3.8% for the quarter brings it up to 2.1% year-to-date, which resulted in us narrowing our full-year guidance assumption to 2% to 2.5%. Operating FFO of $0.26 per diluted share in the quarter brings us up to $0.77 per year-to-date, adding confidence to our full year range of a $1 to $1.02. We were able to allocate capital to share repurchase at attractive pricing that dipped into the high 11. In total, we have completed roughly 50 million in share repurchases plus we are under contract to acquire land at One Loudoun Uptown for 25 million, rounding out to 75 million in acquisition dollars for the year. Shane will touch on a couple of the dispositions expected to close in the next few months and Julie will cover the execution around balance sheet management during the quarter with the early mortgage repayment and hedging activities she completed as interest rates continue to rise. We are very different company than we were at IPO, and I would argue even a year ago when we were finalizing our repositioning effort. We are uniquely positioned to take advantage of the changes in the retail landscape and densification opportunities within our predominantly mixed use and community center portfolio. Our year of internal focus is certainly proving to position after great things in 2019 and beyond. I'm very proud of the RPAI team. They are dedicated, focused and certainly enthusiastic about the opportunities on the near-term horizon. It's great to be RPAI right now. With that, I will turn it over to Julie for a discussion on the financial results from the quarter and our expectations for the balance of 2018. Julie?

[Julie Swinehart:]

Thank you, Steve. This morning I'll discuss our third quarter results and our outlook for the remainder of 2018, and I'll detail some of the proactive steps we’ve recently taken to further strengthen our balance sheet. Operating FFO for the third quarter was $0.26 per diluted share, flat compared to the same period in 2017. When comparing the two periods, the roughly $0.02 detraction from lower total NOI due to capital recycling is fully offset by the decrease in preferred dividends due to the redemption of our Series A preferred stock in the fourth quarter of 2017 and from a reduced share count resulting from share repurchases in the second half of 2017 and to a much lesser degree in the third quarter of 2018. Year-to-date, operating FFO per diluted share was $0.77, down 4% from the comparable period in 2017 due to a variety of factors including, reduced NOI resulting from capital recycling of $0.15, partially offset by increases of $0.05 from a reduced share count, $0.03 due to the decrease in preferred dividends, $0.02 from lower interest expense, net of the impact on earnings from early debt extinguishment and $0.01 from non-cash items. Same-store NOI in the third quarter increased 3.8% over the same period in 2017, driven primarily by both a decrease in property operating expenses, net of recoveries of approximately 210 basis points largely stemming from our property level management expense reduction effort and base rent growth of a 170 basis points. The growth in base rent likely resulted from strong contractual rent increases and releasing spreads, but also benefited from occupancy gains and small shop space, where we ended the quarter at 89.4% occupied and 90.6% leased. Year-to-date, same-store NOI is up 2.1% driven primarily by base rent growth of 138 basis points and a decrease in property operating expenses net of recoveries of 90 basis points. Our very strong same-store NOI growth in the quarter brings our year-to-date figures into the previously communicated guidance assumption range close to the midpoint. As Steve mentioned, we were active on our share repurchase program in the recent months. During the quarter and into early October, we repurchased 4.1 million shares at a weighted average price of $12.12 per share for $49.7 million, which we $214 million still available under the current board authorization. Also during the quarter, we proactively address the right side of the balance sheet whereby we repaid five higher interest rate mortgages early to the tune of $67 million in principal with a weighted average interest rate of just over 6%. That leaves us with only nine mortgages in the portfolio with a weighted average interest rate of 4.65% a 35 basis point improvement. We are more than 90% unsecured both in terms of NOI and property count. In addition, we locked into two forward-starting interest rate swaps that will replace the swaps set to expire next month, which are hedging $200 million of LIBOR-based debt. The rate on the expiring swap is approximately 150 basis points lower than the rate on the new five year swap. We are working with our bank group right now to reprise our $200 million term loan that is due in November 2023. When you couple the expected improved credit spread on that loan, with the new interest rate swap, the all-in interest rate deteriorate by approximately 110 basis points to just over 4%. All else equal the expected change in all in rate on the $200 million loan computes to a $0.01 drag on operating FFO in 2019, which we communicated at our investor event. At the end of the quarter, our weighted average interest rate improved to 3.82% and our net debt to adjusted EBITDAre was 5.1 times, which further represents improvement over last quarter and is an all-time low for us. Availability under our revolver stands at over $640 million. Turning to guidance, as we reported in our release last night, we are maintaining our 2018 operating FFO guidance range of a $1 to a $2 dollar per diluted share. In terms of the assumptions supporting guidance, we narrowed our same-store NOI growth assumption to 2% to 2.5%, maintaining the previous midpoint of 2% in the quarter. As Steve noted between the $49.7 million and share repurchases completed during August, September and October and the $25 million One Loudoun Uptown land acquisition, we expect to end the year at the high end of the previously guided range of $25 million to $75 million. Finally, we left the property dispositions assumption unchanged at approximately $200 million as well as the G&A assumption of $40 million to $42 million. In terms of 2019 operating FFO, we remain comfortable with the $1 to $1.05 range that we communicated at our investor event last month. I want to take a moment to clarify one matter from last quarter, which pertains to the lease termination fees we paid in connection with the choice option to secure the space of two of our location. The $1.9 million termination fee was reported within the operating expenses caption in the condensed consolidated statement of operations or GAAP income statement. So, it is in the three months ended June 30, 2018 figure of $19.4 million and also in the nine months ended figure of $57.2 million. We have added footnote to Pages 2 and 4 of the supplemental clarifying the location of the termination fee extent. Our position regarding the new lease accounting standard and the potential impact on the capitalization of certain leasing cost remains unchanged. When we adapt the new guidance on January 1, 2019, we expect it to have no impact on our financial statements or operating FFO, as it pertains to the accounting for internal and external leasing cost, because our long-standing policy has been to only capitalized internal direct leasing cost and external leased commissions that are incremental to assigned the lease, which are the types of cost that are still permissible for capitalization under the new guidance. Internal and externally leasing cost that are expensed will continue to be recorded primarily within same-store NOI, as property level management cost are components of same-store property operating expenses. And now, I will turn the call over to Shane.

[Shane Garrison:]

Thank you, Julie. The third quarter was a combination of broad-based leasing execution, asset management focus and property management expense control. With the portfolio of continuing to benefit from strong adjacency and market knowledge, and while we posted same-store NOI growth of 3.8%, we also completed nearly 1 million square feet leasing across 142 deals demonstrating our commitments not only driving rents but also increasing occupancy while maintaining our focus on investing and relevant and forward thinking retail partners as we now look into 2019 and beyond. Regarding our growing development of focus and mixed use ownership and execution, our development teams showcase several ongoing and near-term projects last month at our investor event in D.C. And with over 400 million in mixed-use developments starts next year, I fully believe our relentless focus on real-estate first not configuration or tenancy as well as the broadly reposition platform and skill sets combined to provide for a portfolio with unique opportunities to create community focus gathering places and experiences while generating long-term growth for our shareholders. Turning to Q3 operating statistics, I’ll begin with some highlights from the quarter. Again, leasing volume was at 2018 peak of nearly 1 million square feet with total volume representing over 5% of our operating portfolio. For the quarter, spreads were solid at 8% on new comparable leases, containing 220 basis points of annual contractual rent increases and 5.8% on renewals, and we blended the 6.3% for the quarter and 8% on a trailing 12 month basis. One of the more notable deals we signed in the quarter is a co-working office lease in one of our mixed use centers. For those of you who study our lease expiration page within our supplemental, this lease replaces 47,000 square feet of the 81,000 square feet of anchor GLA expiring in 2018 and the spread achieve was 7.4% with a term of 12 years. We are happy to welcome the tenants to our center and feel strongly that additional co-working space is an opportunity for the future, driven by the value we strive to create everyday through our retail amenity at each mixed-use asset. Looking at remaining activity for 2018, we now expect to execute on 1 to 3 former Toys "R" Us locations in Q4, providing more significant comps through the process, which will further position us for growth in 2019 and beyond. Turning to transactions. As noted in our earnings release, we are currently under contract to sell two assets, which are expected to close late in the fourth quarter. The assets are 100% leased and collectively signal our exit from Connecticut and the reduction of our single tenant asset count to just two. As we have stated all year, we will remain opportunistic as it relates to further asset sales, taking into consideration strategic options, long-term values, market visibility and liquidity needs. On the acquisition front, as announced our investor event in September, we are under contract to acquire 50 acres of land adjacent to One Loudoun Downtown and expect to close in the fourth quarter. One Loudoun Uptown represents 32 buildable acres and is currently entitled for approximately 2.4 million square feet of commercial FAR. Controlling this prime piece of dirt will allow us to continue to play both offense and defense next door to what is quickly becoming one of our largest asset as well as the site of our most significant densification project to-date with 378 multifamily units and over 66,000 square feet of commercial GLA expected to begin construction in Q2 of next year. Lastly, turning to same-store. I spoken in the Q2 call regarding our leased to occupied spread at 150 basis points and specifically that it represented 6.9 million in ADR largely expected to commence in Q3 and Q4. Through active tenant coordination, internal accountability and transparency throughout the permitting process, we continue to be on track with those expectations as indicated by our Q3 same-store NOI of 3.8%. Looking forward, we will continue to drive both occupancy and rent and expect former Toys "R" Us spaces provide for both in '19 and '20. As of quarter end, the leased occupied spread is up 290 basis points, which is as high as it has been in the last two years. The spread now represents nearly 7.6 million ABR much of which is expected to start in the remainder of 2018, including the container store that opened a couple weeks ago at our Tysons corner asset replacing former ultimate location. Given our continued leasing success high-quality portfolio and lower relative immediate bankruptcy exposure, we continue to expect a portfolio lease rate of approximately 95% by year end. I'll take a few minutes now to share my thoughts on some of the retailers in the headlines. As Steve stated and as we have said repeatedly, we have no direct exposure to Sears or Kmart. In terms of indirect exposure, we have looked at the overlap analysis, and we surely don't have any area of concern in the portfolio. We continue to believe our assets are generally better positioned, and that some of the former Sears or Kmart are no longer retail site. Similarly, we are staying close to Mattress Firm bankruptcy. I'm happy to report that of the first 500 annouced closures, only one of our locations in Virginia is on the list, and we are having discussions for backfilling space currently. Subtracting the store closure, we now have 23 Mattress Firm locations in the portfolio, which represents a little less than 1% of ABR and like recent relevant bankruptcy filings, we remain engaged and proactive with the tenant and expect to have additional clarity in the coming months. With improving contractual rent functional leases, along with healthy leasing spreads and occupancy upside, our existing portfolio position perform well in terms of growth over the next several years as our redevelopment and expansion efforts accelerate. On that note, we toured a handful of the project and shared a lot of new detail last month at our investor event. We are now disclosing spend timing and expect returns for five additional projects in our core lease supplemental beginning on Page 10, and we have added a site plan for Carillon on Page 13. These projects are focused in the D.C. Baltimore corridor as well as Chicago and represent approximately 400 million of total net investment, 90 million of which will be put to work in 2019. Scott Miller will be leading our Chicago area project, Main Street Promenade in Naperville and the Plaza Del Lago in Wilmette where we commenced our apartment renovation in Q4. Our East Coast development team, including Nick Over and Craig Friedson will continue to run a project in the D.C. Baltimore area including our two largest projects, One Loudoun Downtown pads G and H and Phase One of Carillon. I look forward to providing regular updates on the continued progress and milestones of our rapidly increasing project, as we strive to capitalize on the opportunities we've created over the past six years through our broad-based repositioning efforts. And now, I will turn the call back over to Steve.

[Steve Grimes:]

Thank you, Shane and Julie for your reports. Another solid quarter under our valves and nothing that significant opportunity in front of us, I cannot stress enough that are year of internal focus has solidified in our minds just how different the portfolio of assets and company we have become. It is easy to lose to sight of that fact when you are reporting progress quarter-after-quarter. We were heading our thinking with our real estate first approach, focused on creating a fortress-like balance sheet, and most importantly, ensuring that we have an incredible platform to carry out our initiatives. We’re lean, nimble, liquid, and have robust growth opportunities. It's gratifying that all of our growth is within our existing portfolio and balance sheet to achieve value creation for our shareholders. And with that, I'll turn the call back over to the operator for questions.

[Operator:]

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Christy McElroy, Citi. Please proceed with your question.

[Katy McConnell:]

This is Katy McConnell for Christy. Wondering, if you can provide an update on how you expect the lease six month spread to trend throughout 2019? And with more visibility on leasing progress to-date and the narrower 2018 guidance range, does that provide any more clarity on where you could fall within the wide 2019 range that you've laid out?

[Julie Swinehart:]

Thanks Katy for the question. We did mention in the prepared remarks that our operating FFO guidance for 2019 is unchanged and you are right. We did provide a 200 basis points wide range for the same-store NOI growth assumption in 2019. I'll tell you that that assumption is still valid, but there are still a lot of moving pieces in the fourth quarter in terms of rent starts. So, we will update that assumption and narrow that range on our call in February.

[Operator:]

Our next question comes from Derek Johnston, Deutsche Bank. Please proceed with your question.

[Derek Johnston:]

Can you speak to new leasing volume in the quarter understanding it's a more volatile statistic than most, but it does look like tenant allowances were up a little bit? The lease term Shane mentioned, but -- and I didn’t see the lease spread increasing that much. So we just weren't sure, if this was one lease skewing that statistic or maybe it was in relation to a large anchor signing or some other notable trend?

[Shane Garrison:]

This is Shane. Yes, we had all time leasing for the year at about 1 million square feet. On the new side though to your point, we had a one lease that skewed us probably to tune of our $10 a foot on the whole pool, and that was in the mixed use side, we call it a anchor size, small anchor size large entertainment type concept out of New York that we will put into Loudoun. But that being said, when you look at margin basis right because of the am period, we are pushing 11 years on the average terms in the period. This is still our best margin we have had in the last trailing six quarters. So when you think about the margin and that that put out 220 bps plus in annual contractual bumps, I think it was a great outcome overall, and I think it speaks to our continued pricing power especially in the mixed use segment.

[Derek Johnston:]

Also I was just wondering you know it's clearly impressive share repurchase activity in the quarter at pre-close to current levels. As you look at capital priorities as it relates to redevelopment and repurchases, what almost seems that we are pretty close to that 75 million target. But just wanted to grab your thinking here and just grab some clarity, especially since high quality acquisitions look like they're pretty tough to find. So what are you thinking about repurchases and redevelopments from here?

[Steve Grimes:]

This is Steve. As we talked about in the Investor Day, for 2019 in particular will probably be transaction neutral. So to your point, we will not be really guiding towards any sort of acquisitions for all the reasons that you had mentioned. That being said, obviously, our redevelopment opportunities and our expansions are very right, and we do have 400 million and starts next year with about 90 million of that coming online next year. So, we are committed to that happening. But beyond that, we are certainly not averse to using the tool of the share buyback program. That can easily be funded through an asset sale or two which we feel is an opportunity for us going into '19. So, we are happy to have that tool and the toolbox, we have proven that we are able to use it and willing to use it, and we will use it prudently throughout the duration of the remaining 214 million of allotment as we see fit.

[Derek Johnston:]

And just last one real quick. I think we discussed during the Investor Day or you discussed a 200 million private placement, and I was wondering you know with your low leverage and with rates rising. Is there any desire to accelerate that into 4Q from first half '19? And are you still thinking about that source?

[Julie Swinehart:]

In terms of tapping into the private placement market, it is something that we talked about completing into 2019. We done some things in the quarter to manage interest rate risk in terms of the early mortgage rate payments and locking into the interest rate swaps a little early in terms of the swaps expiring in November. We’re comfortable with the revolver balance as it stand as of the end of the quarter and when I look at the trajectory in terms of anticipated redevelopment spend in 2019, it doesn’t feel like there will be that much of a need too early on. So, it will be mindful of both rates and the balance under revolver. So we’re staying flexible with that at this point.

[Operator:]

Our next question comes from Todd Thomas, KeyBanc Capital Markets. Please proceed with your question.

[Todd Thomas:]

Just circling back to the comments around $6.9 million of ABR that you mentioned last quarter that would come online in the second half. How much of that showed up in the third quarter numbers this quarter?

[Julie Swinehart:]

Todd, we don’t -- I don’t have an exact number on that, but I would tell you that a large part of the 3.8% same-store growth print was based on the fact that much of the rent came on in the third quarter that we expected for third quarter. Looking ahead to the spread now Shane mention 7.6 million in ABR representing the 190 basis points spread between lease and occupied, a good 80% of that is expected to come on in Q4 of 18 with the balance, within the first half of 2019.

[Todd Thomas:]

Okay, that's helpful. And then I was just curious about the -- sorry I missed this, but the increase in the expense reimbursement rate, the expense reimbursement ratio in the quarter. Was there anything impacting that specifically? And how should we think about the run rate into the fourth quarter?

[Julie Swinehart:]

We did continue the benefit this quarter as we have all year long from the cost reduction effort that we made late in 2017 closing certain field offices that we created out of those market. I will tell you though that in addition in the third quarter, we did benefit also from some real estate tax refund, some of that anticipated, some not as well as adjustment coming from few common area maintenance reconciliation that were in our favor. So that led to the same-store recovery percentage of nearly 79% in the quarter. And we’re trending 77%, 78% year-to-date in terms of same-store and that’s probably better proxy for what I see Q4 looking like.

[Operator:]

Our next question comes from Chris Lucas, Capital One Securities. Please proceed with your question.

[Chris Lucas:]

Just a quick follow-up on the question about the capital priorities, I guess let me start with this. You still got I guess two single tenants assets remaining in the portfolio after this one sells. Is there anything that's holding you up from that other than just sort of picking your time to sell? Is there issue or anything like that we should be thinking about?

[Shane Garrison:]

This is Shane. I think on the -- one of the larger one the theater that remains in California. We work on extending that lease, so that would be one remaining item before we would I guess have a better liquidity profile there. The other assets I would know there is nothing hold us up. It's just more opportunistic.

[Chris Lucas:]

And then, I guess just and again, taking a step back then on as because we think about kind going forward '19 and '20 and this was probably a topic that we beat to death at the Investor Day, but just kind of curious as it relates to sort of how much you're willing to let leverage float higher as you're trying to compete -- as you've got sort of competing priorities potential between stock buybacks and your investment and your development, redevelopment program. Just kind wondering, what would be the outside range on that net debt to EBITDA level?

[Steve Grimes:]

This is Steve. We mentioned at Investor Day and I think we will continue to mention for the foreseeable future, 5 to 6 times is our range. We don't see anything inside of the next two years that would kick us above that range given all of our capital activities and plans. And again, we do have a liquidity profile with some of the assets that are in non-target markets for us that we could actually utilize. Obviously, that affects another part of the net debt to EBITDA equation. But for the most part, we expect to stay within that 5 to 6 times and we feel that we are in the clear for that for a good long period of time.

[Operator:]

[Operator Instructions] Our next question comes from RJ Milligan, Robert W. Baird & Company. Please proceed with your question.

[Will Harman:]

This is Will Harman on for RJ. Could you just talk about your expectation for store closures, bankruptcies in '19? And where this gets checkout relative to '17 and '18?

[Shane Garrison:]

Will, this is Shane. I think we have done a fairly admirable job mitigating our rent roll exposure especially in consideration the Company literally half the size it was six years ago. Our top 20 tenants are now I don’t know 25% to 28% or something like that versus mid 30s, when we started the process. But that being said, again if we talked and I certainly talked about no Sears and Kmart, I think relative that sets us with wall. Relative to '17 '18 even '16, I think we expect on this portfolio to be somewhat more muted. We are still going to use our 50 bps bad debt that we typically run with. But based on what we see today, based on conversations with the watch list, including some in bankruptcy, including Mattress Firm, our expectation is, it is lower than it has been this year and the prior year.

[Will Harman:]

So with more muted closures next year, I know you guys have had elevated TIs, LCs, CapEx over the past few years. It looks like you could end up around 80 million this year. Could we see that revert more back to that 50 million to 60 million levels that we saw in '15 or '16? Or would you expect that number to still be elevated in '19 as well?

[Julie Swinehart:]

This is Julie. We are looking ahead to '19 as a heavy leasing year again. And so, I think the levels you are seeing in '18 are looking like they would be there again in '19 largely.

[Operator:]

Our next question comes from Vince Tibone, Green Street Advisors. Please proceed with your question.

[Vince Tibone:]

I have a question on Carillon. Can you -- what do you think is a fair estimate for the market value of the land on that side? I'm just wondering, if you are incorporating any of that land value into the cost and return projections of Phase One in the supplemental?

[Shane Garrison:]

This is Shane. I think at our Investor Day -- and I can pull the deck. But we had said kind of fair value taking into consideration at current entitlements, which are about 3,000 multifamily units about little over 1 million, 1.2 million square feet of commercial FAR, about 100 million, 110 million I believe, but as far as that calculation and how we think about in the JV, we assume what we carry the land that ratably as we contribute to the JV or kick off in the Phase. And then, we use a stepped-up land basis as we contribute each parcel into the JV. So for example on Phase One, there is about a $10 million gain on land at Carillon as we contribute to the JV and start that process.

[Vince Tibone:]

Okay. Just to clarify like the spend that shown in the supplemental like the 194 million or the 215 million. Is there any -- is there like a $20 million allocation to land value in that estimates? That’s what I’m trying to maybe just get a sense of?

[Shane Garrison:]

No, it's net of that land.

[Operator:]

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

[Steve Grimes:]

Well, thank you everybody for your time and attention today. As always, we typically have a conference around the corner. So, I’m sure we'll be seeing many of you in the coming week. Certainly, available for any further questions that you may have, we have a quite a bit of information out there, both in terms of the Investor Day deck that’s been posted to our website as well as the obviously this transcript. So, lots of information and hope to see you all next week with even more robust question. Thanks so much.

[Operator:]

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