Retail Properties of America, Inc.
Q3 2016 Earnings Call Transcript

Published: 2 Nov 2016

[Operator:]

Welcome to Retail Properties of America Third Quarter 2016 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host Mr. Michael Fitzmaurice, Vice President of Capital Markets and Investor Relations. Thank you, you may begin.

[Michael Fitzmaurice:]

Thank you, operator and welcome to Retail Properties of America third quarter 2016 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 Investor Relations section on our website at www.rpai.com. On today’s call, management’s prepared remarks and answers to your questions may include statements that constitute forward-looking statements on our 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, included in our guidance for 2016 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 02, 2016, 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 Investor Relations section of our website at www.rpai.com. On today’s call, our speakers will be Steven Grimes, President and Chief Executive Officer; and Heath Fear, Executive Vice President, Chief Financial Officer and Treasurer; and Shane Garrison, Executive Vice President, Chief Operating Officer and Chief Investment Officer. After their prepared remarks, we will open up the call to your questions. With that, I will now turn the call over to Steven Grimes.

[Steven Grimes:]

Thank you, Mike. Thank you all for joining us today. Before we dive into the quarterly results I would like to provide a brief recap of the Investor Day we hosted this past September in Tysons Corner, Virginia. We were very happy with the robust turn out of investors and analyst that attended in person or via webcast. We had nearly a 50% increase in attendance over our Last Inventor Day in 2013 which evidences the momentum of our brand. Our goal for Investor Day was to answer in no certain terms three very simple questions, what have you done since the last Investor Day in 2013? Where are you going from here? And what are your strategies and tactics? Since 2013 we have significant transformed our portfolio, our balance sheet and our organizational platform. Today our retail portfolio ABR stands at $17.03 which is an approximately 18% improvement, our multitenant multi-three-mile population has grown by nearly 60% to 122,000 and our average household income has improved by 15% to 92,000. We have less leverage, more unsecured NOI, better coverage ratios and investment-grade ratings from S&P and Moody's. We’re more local to our business, more concentrated in our market and we have added and retained incredibly talented people within our platform. As we look ahead, it's only getting better. We have accomplished this through a compelling track record of execution from each and every business unit of the company. Our incredible progress today has position us to complete our strategic plan much sooner than the original 10-year timeframe. We now expect our 10 year plan to be cut in half as we project to have approximately 90% of our ABR in our enter target markets by the end of 2018. We are planning to retire the IW JV loan in early January and we expect to sell 1.5 billion of non-target asset and purchase 850 million of assets within our target market over the course of 2017 and 2018. The net proceeds will be used towards deleveraging and redeeming our preferred equity. At the end of 2018, we expect to be uniquely and acquisitively poised to grow scale in our target markets. As for earnings, we believe the impact of our capital recycling activities will inflect in 2017. It's important for you know that this revised timeline cannot be better yet, will not be at the expense of our core philosophies in our discipline capital allocation. Shane has told all of you we don't buy configuration, we don't by tenancy, we buy good real estate. The retail environment is more dynamic than ever and it's time to discard the checkers and start playing chess. Heath has told you that as a guiding principle we are a low leverage investment-grade and unsecured issuer but it's the lessons we have collectively learned as a management team that will guide our everyday activities. In short, we have never been more focused. The feedback we have received has been positive and supportive. Generally investors and analysts are very pleased that we provided a clear and accelerated roadmap on our capital recycling plan, a better understanding of your same-store NOI growth profile, the value creation potential in our redevelopment opportunities and our long-term thesis on real estate and the balance sheet. There is a strong and collective sense that there is a light at the end of the capital recycling tunnel. So again we thank all of you who attended in person and over the phone and we look forward to sharing more incremental news over the next several quarters. Moving to results I'm pleased to share strong quarterly and year-to-date same-store NOI growth of 4.6% and 3.6% respectively. Our OFFO for the quarter is $0.27 and $0.83 year-to-date. Based on these great results we are raising our 2016 operating FFO guidance range to a $1.06 and a $1.08 per share which is up $1.05 at the midpoint and we are tightening the 2016 same-store NOI assumption range to 3% to 3.5% which is up 25 basis points at the midpoint. These results are clearly turning in the right direction and represents strength and pedigree of our portfolio. We continue to make good progress on disposition and are maintaining our guidance range of 600 million to 700 million as the blended cap rate 6.5% to 7%. Year-to-date we are under contract or close on approximately 500 million of non-target asset which includes $90 million sale of our only asset in Vermont this past quarter. Leveraging our local relationships and world class investments team, we continue to find and harvest attractive acquisition opportunities. To-date we have completed or under contract to acquire 408 million by year-end at a blended cap rate 5.7% which is just about completes our 2016 acquisition goal. We are tightening the range of acquisition guidance to 400 million to 450 million while the midpoint will remain at 425 million. Shane will touch on the details in a moment but during the quarter we entered into an agreement to acquire One Loudoun Downtown, a mixed-use lifestyle center in Ashburn, Virginia which those of you who attended our Investor Day were able to tour inexperience. This asset fits in the wealthiest county in the U.S. and will increase our footprint in the DC Baltimore Corridor to 3.6 million square feet or 14% of our multitenant retail ABR ranking just behind Dallas as our number two market. One more piece of exciting news before I turn the call over to Heath, just last week we welcome Robert Gifford to our Board of Directors. Robert is the Former President and CEO of AIG Global Real Estate and brings extensive experience in investments, capital market and mixed-use development. This is our fourth new board member in just over three years and his appointment represents yet another step we've taken to position RPAI for continued success. And with that I'll turn the call over to Heath.

[Heath Fear:]

Thank you, Steve. I'm extremely pleased with our third quarter results and the remaining outlook for 2016. Operating FFO for third quarter was $0.27 per share flat over the comparable period of 2015. 2016 experienced higher same-store NOI of $0.02 and lower interest expense of $0.02 which is offset by lower NOI from other investment properties of $0.03 three due to our capital recycling activities and lower termination fee income of one penny. Same-store NOI growth is 4.6% in the third-quarter primarily driven by higher based rent income and higher net recoveries. Base rent income contributed approximately 250 basis points due to the combination of strong average occupancy improvement, contractual rent increases and re-leasing spreads. Net recoveries contributed approximately 175 basis points primarily due to non-recoverable expenses and higher covering ratios and to a lesser degree real estate tax reconciliation. Also bad debt expense contributed approximately 30 basis points as a result of March [indiscernible] for sports authority collected during the quarter. Year-to-date same-store NOI growth was 3.6% primarily driven by higher base rent income, higher net recoveries and lower bad debt expense. Base rent income contributed 220 basis points due to a combination of strong contractual rent increases, average occupancy improvement and re-leasing spreads. Net recoveries contributed approximately 90 basis points due primarily to lower non-recoverable expenses and higher recovery ratios and bad debt expense contributed approximately 50 basis point of growth primarily due to unanticipated Circuit City bankruptcy proceeds we collected during the first half of the year. Our net debt to adjusted EBITDA ratio ended the quarter 5.3 times and improvement of over half a turn from 5.9 times at the end of last quarter which is primarily driven by our net disposition activity. As we discussed at our Investor Day, we entered into an agreement with certain additional investors to issue 200 million of senior unsecured notes which are primarily be used to satisfy our 2017 mortgage maturities. We issued 100 million of 10 year notes on September 30 at fixed rate of 4.08% and expect to issue an additional 100 million of 12 year notes on December 28 at fixed rate 4.24% as part of the same agreement. Also, we signed a term sheet for fully syndicated 7-year $200 million term loan price of LIBOR plus 170 basis points. We expect to close this transaction on the fourth quarter and receive funding in January of 2017. These proceeds along with our revolving line of credit will be used to retire by $391 million IW JV loan just after the start of the year as noted by Steve. As of September 30, the [indiscernible] cost early repay this to $390 million loan or 68 million compared to mark to market adjustment of $57 million. We are raising our operating FFO guidance by $0.015 at the midpoint $2.06 to a $1.08 primarily as a result of same-store NOI outperformance lower than anticipated G&A expense and non-cash revenue items including a $1 million reversal of the below market lease intangible related to our acquisition of anchor building and related improvements at what Woodinville asset in the Seattle, MSA. Additionally, we are tightening the low end of our same-store NOI growth assumption to 3% to 3.5% primarily as a result of higher net recoveries and lower-than-expected bad debt expense. It's important to note our operating FFO guidance and same-store NOI assumption has held strong despite the sports authority disruption. The total 2016 negative earnings impact is approximately 3.4 million of which 1.6 million will be realized in the fourth quarter. The total 2016 negative same-store NOI impact is anticipated to be $3 million or 90 basis points of which approximately $1.5 million will be realized in fourth quarter. And now I will turn the call over to Shane.

[Shane Garrison:]

Thank you, Heath, good morning, everyone. We’re extremely pleased with our third-quarter operational performance. Continuing the trend blended comparable leasing spreads were over 8% with spreads a comparable new leases over 16%. Our portfolio leased rate at the end of the quarter stood at 94.7% down 30 basis points sequentially while our economic occupancy was 92.9% down 70 basis point sequentially both primarily driven by the Sports Authority bankruptcy. Of note our portfolio leased rate would've been up 75 basis points sequentially but for the Sports Authority disruption demonstrating the broad-based performance across our portfolio. We also continue to make strides on our in-line occupancy. Small shop leased rate for the quarter was 90.4% for the same-store pool and 88.9% for the portfolio up sequentially 40 and 100 basis points respectively. We maintain our belief that small shop portfolio occupancy will stabilize at 92% in the next 12 to 18 months. Additionally, we continue to drive improvement in our tenant recovery ratios. To-date our year-to-date ratio is 72% up 500 basis point year-over-year due to several factors. Our anchor in-line ratio continues to shift and our in-line ratio on an ABR basis now stands at 44%, up 300 basis points year-over-year. Additional drivers include significant remerchandising activity over last several years in addition to more leasing leverage with a higher quality portfolio. Specific to the Former Sports Authority we continue to make compelling progress on our backfilling efforts. The status of the 10 locations we had at the beginning of this year is as follows. One is located at our pending long-term redevelopment Boulevard of Capital Center and is not in the same-store pool. This clears another encumbrance at the property as we look to finalize our redevelopment plans. Of the remaining nine locations we have three leased including the [indiscernible] and Northgate Northern Seattle and we’re in active negotiations on five of remaining six locations. Generally we continue to expect to have all of the nine same-store locations leased within 12 months of vacating. Turning to our investment activity, we continue to be very active in our pursuit of high-quality assets within our target markets in a competitive investment environment. As Steve noted we are very pleased with our pending acquisition of One Loudoun Downtown in Washington DC for 163 million. At closing One Loudoun will be 467,000 square foot mixed-used center which is comprised of 315,000 square feet of resale space and 152,000 square feet of office space. Current tenant roster includes a strong line of retailers such as Alamo Drafthouse Cinema, great gatherings, matchbox Uncle Julio's and one of four new Barnes & Noble concepts in the country. One Loudoun is driven by location, affluence and strong daytime population trends as well as continued household formation in the county. The property is located within a superzip and one of the most resilient job markets in the U.S. and serves to further establish RPAI as a market leader in the Washington DC Baltimore Corridor. In terms of disposition market we remain confident in our ability to end the full year with total disposition volume of 700 million at cap rates in the 6.5 to 7 range. Year-to-date we've completed 393 million of dispositions and we have approximately 347 million of additional transactions under contract LOI for a total of 740 million of disposition activity of which 32 million is scheduled to close in 2017. On the development front, we also continue to see our redevelopment and expansion opportunities grow as we look inward at our existing portfolio for opportunities. As we've discussed, our goal is to be in a position to add at a minimum one pad quarter to our development pipeline. Not only did we add two projects this quarter we also completed two projects which resulted in roughly 500,000 in incremental NOI with a weighted average return on cost of approximately 10.3%. As for the additions, the first opportunity is that our Pavilion at Kings Grant property in the Charlotte MSA. Here we expect to expand Sports Authority might 32,000 square feet to accommodate for the quarter [ph]. Total incremental return is expected to be approximately 15.5%. The second opportunity is a 4500 square feet pad development at Lakewood Town Center in Seattle, here we signed a restaurant lease and total return is expected to be roughly 8.25%. These projects combined will generate 500,000 incremental NOI, although smaller in smaller in scale they will start to add up and be meaningful value creation tool for RPAI and demonstrate our focused quality and connectivity in our target market portfolio. As for our more substantial redevelopment opportunities during the quarter, we moved Towson Circle located in the Baltimore MSA from the pipeline section to the active redevelopment section within our disclosure and in turn provided cost and return estimates. As some of you saw on the property tour at our Investor Day our adjacent Cinemark theater anchored [ph] entertainment center will act as a booking for the project which will help create an [indiscernible] environment where the customer can live, work, shop and play. Total returns are expected to be in the 8% to 10% range based on the cost of $30 million to $32 million. We expect to break ground in the third quarter of 2017 with projected stabilization Q3 of 2019. Additionally, we have some good news to share regarding our pending redevelopment project Boulevard of Capital Center in Washington DC, MSA. As a reminder, the center was previously approved location for the new Dimensions Healthcare University of Maryland Regional Medical Center, a $540 million teaching hospitals that will contain approximately 205 beds. Subsequent to quarter end, the hospital received a certificate of need from the State of Maryland which is the last regulatory approval needed for the project. The hospital will build its own building on site which is expected to be completed by July of 2020. We will continue to receive significant ranks on the remainder of the property. Over the next 12 months we will be finalizing our plans for the asset and making final determinations as to phasing in the balance of non-retail uses and amenities. As reminder, we estimate the value of the multifamily air [ph] rights to be approximately $63 million and we continue to have significant interest from the full spectrum of commercial uses including office, hospitality and medical. Lastly, it's important to note that during the quarter we removed Reisterstown from our operating statistics and we have commenced construction on that redevelopment. This explains a decrease in the number of properties and volatility you may have noticed in the operating metrics of our DC Baltimore portfolio. And with that, I'll turn the call over back over to Steve for his closing marks.

[Steven Grimes:]

Thank you, Heath and Shane for your reports. It goes without saying that this was an incredibly productive quarter for us and thanks to our talented and committed team. With Investor Day behind us and a solid operational and financial condition going into 2017, and a very clear path to completion, we’re even more motivated than ever to execute on the remainder of our strategic plan. With that, I'd like to turn the call back over to the Operator for questions.

[Operator:]

[Operator Instructions]. Our first question is coming from Jay Carlington of Green Street Advisors. Please proceed with your question.

[Jay Carlington:]

Just looking at the retail occupancy kind of break down there, kind of curious if you could talk about what the differences are on that big anchor occupancy difference between kind of your top 50 non-target and what's in your non-target? It looks like a big spread so I'm just curious why you’re -- maybe the Top 50 MSAs kind of has a lower occupancy rate than what you're seeing in the non-Top 50?

[Steven Grimes:]

Most of that is still an echo effect from the '15 remerchandising. Most of those boxes were in the Top 50 so you will see the lease rate to occupancy continued to compress as the balance of that occupancy and income comes online in '17.

[Jay Carlington:]

So the plan is to kind of lease that up and then sell it? Is that how you are thinking about those?

[Steven Grimes:]

Correct, or at minimum have an LOI or some negotiated deal where we can receive credit for [indiscernible].

[Jay Carlington:]

Okay. Maybe just a quick follow-up on that, when you look at cap rates in those non-target markets are you still expecting a 6.5 to 7 on that 1.8 billion? Or have you given guidance on that?

[Steven Grimes:]

We are and I will tell you why, well I guess the better context would be -- when we looked at starting in '13 from a portfolio recycling standpoint versus today. In other words if we started the process today, I don't think we could do it both from a scale standpoint and just liquidity standpoint in the secondary and territory markets. And what we have really seen is if you go back to '13, the kind of environment or attitude when you were at the table to negotiate on the secondary, tertiary and really the power assets was I don't like your number but there's number I will take the asset at. Today obviously the entire pool is more limited for those assets and much more selective, there has to be a sale story or some compelling story around occupancy. So today I will show up and bid at a number or I won't. There is no kind of rationalization of acquiring those assets, that's been the biggest move we have seen and as far as going forward, how we think about the pool, if you look at what we have sold, we were low 7s in '13, mid-7s in '14 on the disposition pool last year we were compelled to 67 to 68, this year again we will be probably the midpoint of 675 and we intend based on the quality uptick continually through the remainder of the 1.5 billion. 1.8 billion, we think based on what we see today we will stay at 6.5 to 7.

[Operator:]

Our next question is coming from Christy McElroy with Citigroup. Please proceed with your question.

[Katie McConnell:]

This is Katie McConnell on for Christy. [Indiscernible] long-term same store NOI growth estimated at around 3%. Can you just talk about how 2017 growth could be impacted by downtime from box retenanting as well as assets moving out of the pool through dispositions?

[Steven Grimes:]

I think a good way of looking at the same-store growth, there's two pieces here. There's the Sports Authority disruption and also the remaining tailwind from the 2015 merchandising. So when you’re thinking about same-store and 3% land for next year kind of those two elements again the drag from Sports Authority versus the tailwind from the 2015, they should roughly offset.

[Operator:]

Our next question is coming from Todd Thomas of KeyBanc Capital Markets. Please proceed with your question.

[Todd Thomas:]

I just wanted to follow up I guess on the same-store NOI growth. In the quarter is seems like it topped your own expectations and I think you noted it was strong despite the Sports Authority disruption which last quarter you noted you were expecting to negatively impact growth by about 60 basis points in the quarter. Did that materialize? And then what primarily drove the outperformance in base rents in the same-store in this quarter? Is there anything that you can point to specifically?

[Heath Fear:]

First of all, we had a great net recovery number for this quarter. The net recovery as again Shane alluded to, we're just continuing to see improved margins and improved margins are being driven by a ratio of our anchored in-line by the quality of our assets that we are seeing, we’re having more leverage with our tenants and so we’re able to sort of get more CAM [ph] dollars and in addition non-recoverables outperformed for two reasons. One, we’re operating more efficiently but also in our lease negotiations we’re able to sort of take what was once non-recoverable and characterize something that goes to camp pool. So outperformed on net recoveries, also performance in base rent, contractual bumps were good, great re-leasing spread you saw 8%. So there wasn't anything that stood out that necessarily drove the net outperformance. I will tell you that the comp they were based off of in the third quarter of last year is when we really saw the pinnacle of the disruption caused by the 2015 remerchandising activity. So it was an easier comp plus just some solid wins.

[Todd Thomas:]

Okay. And then the $1.6 million impact that you’re expecting from Sports Authority in the fourth quarter, that's the annual number that's expected to be incremental in just the fourth quarter I guess so the $3.4 million of rent loss, that's already in the run rate? Is that how we should think about it?

[Heath Fear:]

Well 3.4 across the entire year, 1.6 which is going to realize in the fourth quarter so the half of the impact is in the fourth quarter. Based on the same-store basis and earnings basis.

[Todd Thomas:]

And just switching over to Zurich, I was wondering if you can talk about how leasing demands trended and maybe give us a bit of an update there on where that asset maybe lease standpoint by year-end if there's been any incremental progress since the last update?

[Steven Grimes:]

Sure, so momentum continues to be great. The signing of [indiscernible] 3000 feet has helped set the bar from market rent perspective and also just reinforce our assertion that this is the best Class A asset in the corridor. So we’re in lease on another 35,000 feet currently with an investment-grade tenant and from a pipeline standpoint based on recent tour feedback we expect to be in the RFP process for 2 to 3 deals at another 125,000 speed. Again what really continues to drive this is when you think about corporate culture and office tenant demand, Class A and amenities around and in the building continue to win the day. We're leasing at rates remarkably higher than buildings literally across the street because of the quality and amenities that we have. And from a rent comp perspective, the comps still continues to hold out bad, right around 30%. So overall, obviously we are very aggressive with the assertion that we would monetize the asset in '17 but with the backdrop of 200,000 feet and incremental leasing to do that, we continue to be well on our way from velocity standpoint.

[Todd Thomas:]

Okay. And then just any indications or how does it work with Paylocity? They have the expansion options they can take more space. Can you just remind us how that works as you're working on lease deals with other tenants?

[Steven Grimes:]

So principally the deals we're doing right now are in the other tower and Paylocity basically has the ability to take full tower -- they are in now or will begin in, in addition to the a few floor adjacent so we’re obviously leasing from just a stack floor plan standpoint, we’re leasing above that.

[Todd Thomas:]

Just one last question for Steve. Bigger picture here, as you reposition the portfolio, the company exposure to lifestyle and mixed-use that’s increased pretty significantly from 16% 26% now just the last three years what you’ve outlined at the Investor Day and in guessing that grows a little bit further in the years ahead as the capital recycling continues. How do you think about the performance of that lifestyle and mixed-use segment in the context of a cyclical slowdown or potentially a recession over the next few years or so at some point and how big do you ultimately want that piece of the portfolio to be?

[Steven Grimes:]

I think Shane went into great detail at our Investor Day and I would encourage most of you who may not have had the benefit of that understanding to go to the presentation and kind of understand the thesis on real estate. By and large there was discussion of a bifurcation between real estate kind of the must shop and the want to shop. I would categorize the mixed-use lifestyle in the want to shop and I think when you look at the dynamic between the millennials right now, they really focused in on what that experience of real estate that Shane talked a lot about. That being said, our lifestyle mixed-use component during the past downturn actually performed very well because that discretionary spend is typically not disrupted in a situation where you have kind of the recession that we've had and perhaps one that we would expect that wouldn’t be as impactful as the one that we had in 2009. So that being said, I would expect that the mixed-use of lifestyle component will continue to grow. As Shane said at Investor Day, if at the end of the day everything that we own is mixed-use has some form of experience or component to it as well as live, work, play, we will have done our job and I think you can expect to see that portion of our portfolio over a longer period of time grow pretty substantially.

[Shane Garrison:]

Todd, I would just add I think lifestyle in the last cycle received kind of a broad-based bad reputation, for the most part deservingly so but the see the point, the [indiscernible] of the world performed admirably in the last downturn and I think it's important for investors to discern really the quality of the mixed-use in lifestyle portfolio or just throw it in a broad-based bucket and for us we're pushing 520 foot in sales in the lifestyle segment and increasing so. I think we've been very pragmatic as to our approach to the underlying quality of the real estate and we expect that to carry today through the next downturn.

[Operator:]

Our next question is coming from Vincent Chao of Deutsche Bank. Please proceed with your question.

[Vincent Chao:]

Just on the tenant recoveries going back there, it sounds like improving leverage tenants. So as the low 70s recovery, is that sort of how we should be thinking about this going forward?

[Steven Grimes:]

I think you should. You may see a little disruption into next year based on some of the sports vacancies but we feel the low 70s is very substantial margin.

[Vincent Chao:]

Okay. And then on the Sports Authority I think Shane I thought I heard you say you thought by the end or over the next 12 months you would expect to have everything sort of released but it sounds like the bulk of the upside will be in 2018. Is that the right way to think about it? And then absent any additional similar level of store closures, that could potentially push '18 [indiscernible] a bit ahead of the run rate?

[Shane Garrison:]

18 is a long way away, but yes generally the full annualized impact would be 18 so I think we continue to see just from a comp perspective I don't know if we touched on it but kind of the best benchmark would be that 15 remerchandising exercise. We started the exercise mid-single digit comps and ended up at 18%, 19% and the principal driver there was we ended up splitting over half of those boxes. From a TSA or former TSA perspective we have nine net boxes ex-camp center. We expect a little higher start just a single user backfill and high single digits and obviously up from there depending on how many boxes we split. So overall great activity and we continue to expect no more than 12 months down.

[Vincent Chao:]

Okay. Just maybe going to the single tenant sales, the [indiscernible] portfolio, I think there's some additional fourth-quarter but has there been any change in the discussions or push back from buyers given some of the troubles that Walgreens is having in closing this deal?

[Steven Grimes:]

I would tell you we’re probably a 100 bips wide where we thought we would end up trading the portfolio. Obviously it's not incrementally big dollars so we're still well inside the 6.5 to 7 total range on the disposition pool. But when Walgreens came out and announced they had to basically monetize other 650 source to make the transaction work, I think that just caused another layer of trepidation in the process and that's why I would say the cap rate expanded. That being said, we’re largely out of the [indiscernible] business. We have monetized all but one of those boxes or have gone under contract at least year-to-date. So the process is behind us and again total range is right where we thought we would be.

[Vincent Chao:]

Maybe just sticking with the broader disposition discussion earlier it sounded like they were hesitant, some shift in the mentality but I guess what's the risk of that, continuing to 2017 potentially impacting your ability to finish up the recycling here by 18 as you’re laying it out now?

[Steven Grimes:]

I think it's all relative to quality and I think it's to our benefit. We have said repeatedly that we sold the riskiest assets first whether it's configuration, geography or tenancy and we will continue to prove that out. I do feel good about 6.5 to 7 on the 750 next year and the pool just from a configuration or quality standpoint, again, over half the poll next year has a growth [ph] and that has been one of the principal driver's from liquidity and pricing standpoint as we continue to step through the portfolio. The difference between a large format power center and a large format power center with a grocery component or in this case a community center is that lease 75 basis points up from there depending the storey. So given the pool in front of us the quality and the configuration in tenancy we continue to expect 6.5 to 7 on the 750 in '17.

[Vincent Chao:]

And then last question, just on the numbers, I thought Heath I heard you say there was a below market lease impact on the full-year guidance. I think the straight line rent line it looked a little higher than we have seen in the second quarter. Is that what you’re referring? Should that go back down?

[Heath Fear:]

Right, the straight line pickup is a lease we've signed [indiscernible] so that’s the straight line pickup. You will see in the amortization of the below market intangibles, you will see that million dollar sit there, what it was we had a lease in Woodinville where we own the ground but we leased the ground to a tenant and tenant owned the improvements and we actually just bought that to the improvement and the lease collapsed so that below market intangible is then accelerated.

[Vincent Chao:]

Okay, but the 2 million straight line should we should view that going forward?

[Heath Fear:]

You got to be careful it's straight line because a couple things, with the velocity of our transaction activity, that number can move around a lot. So again, I would be hesitant to tell you that’s a good number, it's probably a good placeholder I'll tell you but again, be mindful with other transactional activity of those non-cash numbers can move around enormously.

[Operator:]

Our next question is coming from Chris Lucas of Capital One Securities. Please proceed with your question.

[Chris Lucas:]

Just a quick follow-ups. Shane, on the activity you were seeing as Zurich, I guess as you think about marketing the building, do you need lease signing or do you need something closer to commencement before you can market?

[Shane Garrison:]

We just need lease signing. I think we talked Investor Day and you know specifically we have talked about kind of the credit it closed. If you're filling in gap and need financing and for the CapEx side, so we feel we just need leases signed and that continues to be 200,000 incrementally.

[Chris Lucas:]

Okay. And then going back to sort of -- thinking about the disposition pool for next year and looking at the sort of lease to occupancy spread in some of the non-target MSA, assets, is it likely or how will that leased occupancy spread impact your ability to sell those assets i.e., again, is this another one of those things where you’re more likely to sell assets that are seeing that rent commenced or does that matter at all in the process?

[Shane Garrison:]

Situational turns into quality of the asset, generally in the quality spectrum for '17 in that pool as long as we have assigned lease and in some cases for the really high quality stuff even some just signed LOI we can get credit for that space and at worst just give a credit close for the CapEx on the deal.

[Operator:]

[Operator Instructions]. Our next question is coming from Floris van Dijkum of Boenning & Scattergood. Please proceed with your question.

[Floris van Dijkum:]

Can you maybe talk about what you're seeing in market rental growth for the upcoming year? I'm not talking about necessarily your mark to market but are you seeing any dispersion in rental growth maybe by market or maybe by tenant category? In particular I'm thinking about restaurants versus grocery versus apparel? Is there any significant bifurcation going on?

[Shane Garrison:]

I think generally would like to 10 target markets on a relative basis long-term for market rent growth. From a tendency standpoint, we certainly see comps slowdown across the board. I think year-to-date total retail comps are 2, 2.5 even restaurants this year are at 1% or something almost flat. So I think tenant sales in combination with just overall market rent growth have slowed down. For us, it becomes more about where we are at from a mark to market and health ratio standpoint and we still think especially considering the size and quality of the mixed-use portfolio that we will continue to drive compelling comps based on that quality.

[Floris van Dijkum:]

Maybe a follow-up question. In terms of your 750 of potential sales next year, do you expect to see any capital gains on that and if so, will you be looking at potential special dividend? Should that be required, are you looking to do a 10-20 exchange on properties to mitigate some of those issues?

[Shane Garrison:]

So if I go back we talked about in the Investor Day, of the 1.5 billion or so over the next -- over '17 and '18 it's about 400 million to 500 million of taxable gains and it's one of the reasons why we’re taking two years to work through that. So we will work through that through a combination -- we have some historical net operating losses. We do some 1031 activity but we are not planning on doing a special dividend at this time. We just think to the extent we have excess proceeds were to continue to delever and until someone can tell me that if I pay special dividend and [indiscernible] those are just dollars that we're going to have to reraise later in order to continue to grow scale in our markets. So I would not bank on a special dividend.

[Operator:]

Thank you. At this time I would like to turn the floor back over to management for additional or closing comments.

[Steven Grimes:]

Great. Well thank you everybody for joining us today. We know it's a very busy day in conference call world. It's also a very busy day here in Chicago with the Cubs. Soon to win the World Series tonight. So thank you all for your time and attention and any further follow-up questions obviously Heath and Mike and myself are always available. Feel free to contact us directly and we will see many of you at NAREIT. Thanks again and have a great day.

[Operator:]

Ladies and gentlemen thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.