Retail Properties of America, Inc.
Q4 2014 Earnings Call Transcript

Published: 18 Feb 2015

[Operator:]

Greetings and welcome to the Retail Properties of America, Fourth Quarter 2014 Earnings 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] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mike Fitzmaurice, VP of Finance. Thank you sir, you may begin.

[Michael Fitzmaurice:]

Thank you operator and welcome to the Retail Properties of America fourth quarter 2014 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 Web site 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 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, included in our guidance for 2015, 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 18, 2015, and we assume no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Additionally on this conference call, we may refer to certain non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers and definitions of these non-GAAP financial measures in our quarterly supplemental package and our earnings release, which are available in the Investor Relations section of our Web site at www.rpai.com. On today’s call, our speakers will be Steve Grimes, President and Chief Executive Officer; and Angela Aman, Executive Vice President, Chief Financial Officer and Treasurer; and Shane Garrison, Executive Vice President, Chief Operating Officer and Chief Investment Officer. After the prepared remarks, we will open up the call to your questions. And with that, I will now turn the call over to Steve Grimes.

[Steven Grimes:]

Thanks, Mike, and thank you all for joining us today. 2014 represented a year of tremendous progress for RPAI, as we executed on our operational, financial and transactional objective, making meaningful progress on our strategic plan, while continuing to enhance our financial capacity and flexibility. Operationally we outperformed our original expectations with full year same store NOI increasing 3.3%. Leasing momentum has remained strong, with nearly 4 million square feet of leases signed during 2014, resulting in a year end lease rate of 95.6%. We experienced another year of record low supply growth in our sector and minimal retailer disruption, which has continued to enhance the competitive positioning of retail landlords. Given the strong fundamental outlook for our business today, we are committed to pursuing strategic remerchandising opportunities to upgrade our tenant fee, reduce our exposure to struggling retailers in categories and reinforce the dominance of our shopping centers. Like many of the strategic and financial decisions we have made over the last few years, our operational plans in 2015 are designed to position RPAI for long term value creation for our shareholders. From an investment activity standpoint, during 2014 we closed on $324 million of non-core and non-strategic dispositions and $290 million of strategic acquisitions in our target market. As we move into 2015, we are off to a very strong start, with approximately $375 million of acquisitions already closed or under contract. Our market centric approach is generating notable efficiencies in leasing and property management but the most significant benefit of our strategy to date have been realized by our transactions team. The mandate to focus senior time and attention on just a handful of markets has resulted in greater institutional market knowledge, stronger relationships with local owners and brokers and greater tangible deal flow. Our hit ratio for deals that make it through our rigorous investment process remains low, as we continue our disciplined approach to capital allocation, but our expanding pipeline of near term and long term potential acquisitions reinforces our conviction and our ability to create value through the repositioning of our portfolio. While we continue to expect that we will be a net seller during 2015, we now expect to be much closer to net neutral than originally anticipated with the acquisition guidance currently at $400 million to $450 million, up from $350 million as of our last conference call. The vast majority of our year-to-date acquisition activity has been in the Washington D.C. MSA where we have announced the acquisition or anticipated acquisitions of four assets, which will result in the expansion of our footprint in the D.C. Baltimore market to 3 million square feet. In early January, we announced a 163 million acquisition of retail portion of Downtown Crown, Class A mixed use project located in Gaithersburg, Maryland. The property is located within super-zip, representing an affluent and well educated demographic with strong in place density, which will be further enhanced by the planned development of more than 2200 residential units in the Crown community. While we would categorize this as a lifestyle asset, it also benefits from a strong grocery anchor [indiscernible] Cedar, driving day time traffic and daily visits to the site. Downtown Crown is a new development and as a result was 78% leased at acquisition. We believe the remaining vacancy represents some of the most desirable space in the project, which will allow us to leverage our extensive background in managing premier lifestyle centers in order to complete and optimize the tenant mix at this very dynamic asset. In mid January we announced the closing of two additional multi-tenant retail acquisitions in Washington DC MSA, Fort Evans Plaza II and Merrifield Town Center for a combined purchase price of a $122 million. Additionally in last night's release, we announced the anticipated acquisitions of three multi-tenant retail assets for a combined purchase price of $89 million. These assets include Tysons Corner, a community center in Washington DC MSA, Peter Park Town Center, a community center in the Austin MSA and one additional grocery anchored neighborhood shopping center located in the Seattle MSA. These acquisitions are expected to close in the first half of 2015, subject to the satisfaction of customary closing conditions. At the same time we continue to identify opportunities within our existing portfolio to meaningfully increase density and extract value through the redevelopment of in-fill locations in our target markets. In addition to Boulevard at Cap Center in Prince George's County, Maryland, we are now commencing predevelopment activities at Towson Circle in Baltimore. Towson is a unique asset adjacent to GGP's Towson Town Center Mall. Today it is anchored by Barnes & Noble, Pier 1 Imports and Trader Joe's, all in below grade space. As a result of the significant demand for retail, residential and hotel square footage in this market, we believe we have an opportunity to replace today’s configuration with a high-rise tower that will include up to 400 residential units, a hotel component and street level retail that will be significantly more visible and accessible than what is in place today. We look forward to sharing additional details on these two exciting projects with you as we move through 2015. Before turning the call over to Angela, I would like to take just a moment to discuss our G&A expectations for 2015. Since our IPO we have been and will continue to be conservative in our approach towards balancing performance and compensation. Following the competition of both executive employee market compensation studies and after three very successful years of delivering results for our shareholders, we are rightsizing our investment in G&A in order to remain competitive with respect to attracting and retaining soft talent. Therefore we have guided to a range of $40 million to $42 million in G&A expense in 2015, driven primarily by higher compensation expense. Our investment in our people is an important component of solidifying our long-term positioning and will help to further align our infrastructure with our long-term short-term objectives. We are reaping the benefit of this investment in our people through solid operational and financial performance, and we continue to be keenly aware of and committed to building a best in class shopping center REIT. And with that I will turn the call over to Angela to discuss our financial results and 2015 guidance in detail.

[Angela Aman:]

Thanks, Steve and good morning. Operating FFO was $0.27 per share for the fourth quarter, down from $0.30 per share in the fourth quarter of 2013. FFO was $0.26 per share in the fourth quarter, also down from $0.30 per share in the fourth quarter of 2013. The year-over-year decreases in operating FFO and FFO were driven by lower lease termination fee income and higher general and administrative expenses, which were partially offset by lower recurring interest expense. The $0.01 difference between operating FFO and FFO in the current quarter was due to charges associated with the early extinguishment of debt. For the full year, operating FFO was $1.09 per share, up from $1.05 per share in 2013, driven by lower recurring interest expense and higher NOI, including non-cash items, which were partially offset by lower lease termination and joint venture fee income and higher G&A. Including non-operating items, FFO was $1.08 for the full year, down from a $1.14 per share in 2013 While non-operating items in total resulted in a minor variance between FFO and operating FFO in 2014, the variance between the two metrics was larger in 2013, primarily as a result of a $26.3 million gain on the extinguishment of debt, which was included in FFO but not operating FFO during 2013. Same-store NOI increased 1.3% during the fourth quarter or 3.3% for the full year. As expected, rental income was a consistently positive contributor to same-store NOI over the course of 2014, driving 260 basis points of same-store NOI growth in both the fourth quarter and for the full year. Operating expenses net of recovery income contributed approximately 50 basis points of same-store NOI growth in 2014, although these items detracted approximately 140 basis points from same-store NOI growth in the fourth quarter as a result of particularly difficult year-over-year comparisons. Last night we initiated 2015 same-store NOI growth guidance at a range of 0% to 2%, taking into account the removal of the gateway in Towson Circle, a pending redevelopment asset from the same-store portfolio for 2015. The width of the same-store guidance range reflects some potential variability, with respect to this year's ultimate disposition pool as well as the range in the number and timing of anchor locations we will strategically bring merchandize during the course of the year. We currently expect that as many as 15 anchor locations in the same-store portfolio will be vacated during 2015, representing approximately 530,000 square feet, with a weighted average ABR per square foot of approximately $11.50. While we expect that the downtime associated with these activities will have a 150 to 200 basis point impact on same-store NOI growth this year, we believe they will also significantly enhance the long-term stability of the tenant base and reduce future volatility, by mitigating exposure to certain watch list tenants and categories. At the midpoint of our same-store guidance range, we expect our rental income will contribute approximately 140 basis points to same-store NOI growth, and operating expenses net of recovery income will contribute approximately 30 basis points to same-store NOI growth. The positive contribution from rental income, despite the impact of the remerchandising activity we have discussed is a result of contractual rent increases, re-leasing spread and significant improvement in small shop leasing across the portfolio since 2013. Offsetting these items is an expected increase in bad debt expense as a result of an especially low bad debt experience within the perspective 2015 same-store portfolio during 2014. From a timing perspective, we expect the NOI growth to be strongest in the first quarter and to decelerate as we move through the year as remerchandising activity commences. 2015 operating FFO guidance has been initiated at a range of $0.97 to $1.01 per share. Full year disposition guidance has been maintained at $500 million, while acquisition guidance has been increased to a range of $400 million to $450 million. In last night's release we provided a reconciliation from our reported 2014 operating FFO of $1.09 per share to our expected guidance range. This reconciliation demonstrates $0.04 dilution from investment activity, approximately $0.03 of which related to the annualization of the 2014 investment activity, as a result of the backend weighted nature of 2014 disposition, while the remaining $0.01 related to the expected 2015 investment activity. Other items of note when considering the guidance range for 2015 include our forecasted G&A range, which Steve discussed and the impact of the gateway for two pending redevelopment assets, Boulevard at The Capital Center and Towson Circle and one of our pending development asset Bellevue. While these assets are not part of our 2015 same-store portfolio, we expect combined NOI for these four assets to be approximately $4 million or $0.02 per share lower in 2015 than 2014. In addition, consistent with our pass practice, we do not forecast speculative lease termination fee income as part of our guidance. Total lease termination fee income in 2014 was $2.7 million or $0.01 per share. Lastly non-cash items, including straight line rental income and the amortization of above and below market lease intangibles, net of straight line ground rent expense are expected to be approximately $4 million lower in 2015 than 2014 or $0.02 per share. From a capital markets standpoint, we expect to opportunistically raise $250 million of unsecured debt capital during the first half of the year to repay secured debt and extend the duration of the balance sheet. Anticipated secured debt repayments for 2015 include approximately $377 million of natural mortgage maturities at a weighted average interest rate of 5.4% and approximately $109 million of longer dated mortgage maturities, including the debt associated with one investment property held for sale at December 31st at a weighted average interest rate of 7%. As a result of these mortgage payments and the unencumbered acquisition activity we have already announced, we expect the size of unencumbered asset base to increase by approximately $700 million during 2015, significantly enhancing our credit profile and our operational and balance sheet flexibility. With our net debt to adjusted EBITDA ratio at 5.8 times, just below our long term target, we are well positioned to take advantage of external and internal growth initiatives in the form of acquisitions, remerchandising and redevelopment opportunities. With that, I’ll turn the call over to Shane.

[Shane Garrison:]

Thank you, Angela and good morning everyone. Against the backdrop of a steadily improving economy and the ongoing lack of new class-A retail supply, we continue to drive occupancy and rent growth across the portfolio. During 2014, we signed over 700 leases representing nearly 4 million square feet of space, resulting in a yearend occupancy rate of 94.4%, a 60 basis point increase year-over-year. Including leases signed but not yet commenced, our leased rate was 95.6%, up 90 basis points year-over-year. With our overall anchor leased rate now at 98.5%, our occupancy growth is being primarily driven by small shop leasing across the portfolio as evidenced by the fact that nearly 90% of the new leases signed during the fourth quarter were for small shop space, which resulted in a yearend small shop leased rate of 87.3%, up 150 basis points year-over-year. In addition, we have made significant strides in leasing some of the most persistent vacancies in our portfolio, as demonstrated by the fact that the new leases signed during the quarter had a weighted average downtime of over three years. It’s worth noting that our significant acquisition and disposition activity during 2014 had a negligible impact on our occupancy statistics as we continue to focus on proactive asset management and leasing initiatives in order to maximize the occupancy of disposition candidates, and as a result the value upon sale. As both Steve and Angela have discussed, the focus of our leasing and asset management teams during 2015 will be on strategic remerchandising opportunities where we can upgrade our tenancy and reduce our exposure to struggling retailers and categories. As a result, we expect to repurpose as many as 15 anchor locations during the course of the year, including four office supply stores and four sports authority locations. While the downtime associated with these remerchandising initiatives will be a headwind in 2015, we strongly believe that this is the right environment in which to create inventory for healthier, more vibrant retailers who can continue to solidify the positioning of our assets in their respective trade areas. With our current leased rate on anchors larger than 25,000 square feet over 99%, now is the time to take proactive steps to minimize cash flow volatility over the course of the real estate cycle. Across the pool of anchor locations we are discussing, we expect that the blended releasing spread will be in the mid-single digit range and that average downtime will be approximately 12 months. In terms of investment activity, we ended 2014 with $324 million of dispositions, in line with our previous guidance. During the fourth quarter we sold $154 million of non-strategic assets, including seven multi-tenant retail assets, six single tenant retail assets and one industrial asset. In addition, subsequent to year end, we sold one additional office asset for $17 million. Early indications from our 2015 disposition marketing efforts have been very favorable as the desire for yield as only intensified as a result of interest rate volatility. We continue to expect that the blended cap rate on dispositions will be in the low to mid-7 range, reflecting the continued improvement in the quality of the disposition pool. We have assumed that dispositions will occur ratably in the second, third and fourth quarters. Acquisition activity in 2014 totaled $290 million. During the fourth quarter we completed two acquisitions in the Seattle MSA, including one multi-tenant retail center for $15 million and a multi-tenant retail parcel at one of our existing assets for $6 million. As Steve touched on, we are off to a very strong start with respect to our 2015 acquisition goal of $400 million to $450 million, with approximately $375 million of acquisitions already closed or under contract. We expect the year one cap rate on acquisitions will be in the low 5% range, reflecting the ongoing leasing and stabilization of Downtown Crown, the largest of the announced 2015 acquisitions. In total, the acquisitions we have announced to date represent high quality, strategic assets with compelling demographics and strong long term growth potential. We are extraordinarily pleased with the substantial progress we have already made on our ambitious long term portfolio repositioning plan. Since the first quarter of 2013, and including the nearly $375 million of acquisitions announced or under contract, as well as our expected 2015 dispositions, we are happy to highlight the following progress

[Steven Grimes:]

Thank you, Shane and Angela for your comprehensive report on how 2014 shaped up and our planned activities for 2015. We couldn't be more proud of our performance in 2014, and are excited about the opportunities facing us in 2015 to advance the [indiscernible] in our strategic vision for the Company. As Shane pointed out to date, we have some compelling statistics against our strategic plan, increasing our target market concentration and decreasing our exposure to non-retail and single-tenant retail assets, and expect that we will have turned a significant portion of our portfolio by the end of 2015, exiting approximately 30% of our non-target market. And to reiterate what I said before, we are committed to investing in our platform and are witnessing the reward of this investment through strong operational results and measurable advances against our strategic plan. We expect 2015 to be equally gratifying along the strategic plan front, continuing to create long term value for our shareholders. And with that I would like to turn the call over to the operator for question.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Todd Thomas with KeyBanc. Please proceed with your question.

[Unidentified Analyst:]

This is [indiscernible] for Todd with Jordon Sadler as well. Shane, $500 million for the disposition target this year, that's a relatively large amount. I just want to know what gives you confidence at this point in the year that you will be able to dispose such a large amount. Are you marketing a portfolio or do you expect to be one-offs? Some color there.

[Shane Garrison:]

Sure. Well, the environment remains strong. I think there is certainly a big -- a significant bucket of unallocated capital. The $500 million is 20 to 25 assets. Generally its power and community, secondary, tertiary again, albeit a bit higher quality in '14. The pool is, call it 94% to 95% leased. So institutional quality. I think that when we look at the demos, its 68% to 70%, an approximation [ph] [indiscernible] on the income side which would tell you it's generally tertiary, but we think the market has held up well. We certainly think early returns show that that product will move again in a very compelling way from a pricing standpoint. From a geography standpoint, just to give you some additional color outside of what the assets actually look like, we think we will leave somewhere around eight additional MSAs through the process this year, the most significant being Los Vegas. We will leave -- exit additional four states through the process, those being Montana, Kansas, Oklahoma and Nevada obviously. To your question about portfolio versus granular process, I do think it will be a more granular process. That being said, there are some obvious sub-portfolios, the most significant would be Las Vegas. We have four assets in Las Vegas, very high quality, institutional, public or private I think Las Vegas in itself certainly is open to buy for many public and private investors. It wasn't necessarily the case even a year ago. So I think that will be -- that's certainly north of a $100 million portfolio. I think that makes sense to take out from a portfolio perspective but we think that’s certainly the right thing to do. Vegas has been an interesting conversation internally. That's a portfolio that this year would have put up 8% to 9% same-store, but given the interest and given the unallocated capital discussion and overall opinions on the MSA to-date which are certainly renewed, we think this is the right time to monetize Las Vegas overall. So pretty confident -- or very confident actually on the $500 million and certainly think it will be more granular within the portfolio base.

[Unidentified Analyst:]

And then Angela, you touched on this but I was just wondering what your expectations for bad debt reserves were in '15 compared to '14. I know it's depressed in '14. So maybe just kind of historically?

[Angela Aman:]

Yes, to give you a little color on just the same-store pool, and obviously it's a bit of a moving target, given that we expect the same-store pool for 2015 to be not insignificantly different from the pool we had in 2014. So if you look at the same-store disclosure in our supplemental, you can see that bad debt ran at about 22 basis points of total same-store revenues for 2014, but versus 37 basis points in 2013. So we did get a pickup or a positive contribution from bad debt expense in 2014. But if you roll forward to what the 2015 pool looks like, that pool only had about 9 basis points of bad debt expense as a percentage of total same-store revenues for that pool. So you're up against a pretty significant headwind just from that perspective as you roll forward to 2015. So 9 basis points last year. We tend to model somewhere between 35 and 50 basis points of bad debt expense on sort of a recurring basis and that creates a headwind of call it 50 to 60 basis points in terms of same-store growth in '15.

[Jordon Sadler:]

Hey Angela this is Jordon Sadler with a follow-up on that. Just sort of bridging from there, and looking at sort of the overall 2015 guidance, I guess it definitely surprised us and the street to the downside, and your bridge versus '14 is helpful, but a couple of items. One, on the transaction activity and two, on the interest expense drag or contribution; is the expectation from a timing perspective -- it seems pretty obvious that dispositions will follow acquisitions. So it's going to be all about the negative ARB [ph] on the cap rate there? So any insight you could lend on sort of how negative this spread will be there? And then what the impact is that you're baking in from an interest expense perspective when you factor in sort of refinancing opportunity versus the unsecured deal?

[Angela Aman:]

Sure. Let's just start with on the transaction side. I think Shane gave some of this color in his prepared remarks, but we do expect on the $500 million you're in the low to mid-7% cap rate range, and again that's lower than the cap rate on dispositions in 2014, just as that pool continues to strengthen and become higher quality as we have moved a lot of the really secondary and tertiary assets over the last few years. On the acquisition side, you're looking at a cap rate on a blended basis for the $400 million to $450 million somewhere in the low 5% range, but what we tried to lay out in our prepared remarks was that that really looks like the ongoing and leasing -- leasing and stabilization of Downtown Crown in particular, which was a new development asset. It's more lowly occupied as a result but we really believe that we can optimize the merchandise mix for finishing the leasing exercise on that asset over the next year. So you should expect to see that the cap rate spread between the two buckets compresses significantly looking forward to 2016. On the reconciliation we provided in the supplemental or in the earnings release last night I would just highlight, we're only looking at $0.01 really in 2015 related to the 2015 investment activity, the other $0.03 related to what we communicated throughout the course of 2014 as it related to the 2014 investment activity. So hopefully that clears up some things on the transaction side. On the interest expense side, we did say we're looking at a $250 million unsecured capital raise within the first half of the year, and expect -- obviously the treasury market has been pretty volatile and we've been watching where other deals for somewhat similar credit profiles have priced recently. I think we're expecting fully to do a 10 year deal as an inaugural entrant into the market. You should expect us to be sort of in -- based on where comps have recently treated -- I would say treasuries plus high 100s, low 200s range, somewhere in there. I think from an interest expense, a year-over-year perspective, we didn’t call it out in the reconciliation as a drag, nor do we believe it is on a year-over-year basis. We had a relatively light mortgage maturity payoff year last year. It was about $180 million, just over a 6% interest rate and we paid those off on a weighted average basis, sort of July or August. So you get some pickup from that. You get some pickup from the $486 million I mentioned of mortgage maturities that have been paid off in 2015, also sort of assuming, and there is clarity in the supplemental and timing, but on a weighted average basis also ends up being sort of early in the second half of the year and that’s at about 575 interest rate. So there is pickup from that as well. One of the other things I think to note or to remember though is that we did assume debt associated with the MS transaction in early June of 2014. So that sort of offsets the mortgage payment activity we had in 2014 as well. And then you’ve got the annualization of interest expense from the private placement transaction we did at June 30, 2014 and then obviously the refinancing activity we’re doing or the unsecured capital rates we'll do in the first half of this year. So we think that interest expense overall or recurring interest expense ends up being pretty neutral on a year-over-year basis.

[Operator:]

Our next question comes from Jay Carlington with Green Street Advisors. Please proceed with your question.

[Jay Carlington:]

Can you guys walk me through how the re-anchorings kind of came about? Is that something the retailer decided to close stores or is that something where you guys are kind of negotiating early terminations? Just trying to get a sense of how proactive this is versus maybe kind of leases expiring?

[Steven Grimes:]

I would say, assuming we do the full 15, and that’s why we have kind of the 0 to 100 spread, we're not exactly sure. I think the lion's share of it takes place, but we’re not exactly sure the full 15. But I think it’s fair to categorize it as basically half and half, right. I think there are some natural explorations there that obviously retailers have decided to leave those locations. Sports Authority, I think specifically three of the four are in Texas and it is a Texas competitive issue, specifically for Sports Authority. I think when they look at the broader landscape and head-to-head, it’s Dickinson Academy. They obviously do not carry firearms. So that’s a significant disadvantage in Texas. And also the just the competition above and below, whether its boutiques specializing in golf or soccer, whatever lacrosse in this case or at the top, where its target Wal-Mart, continued competitive pressures from Costco et cetera. So I think they’re caught in the middle and I think Texas is showing that currently. So three of those we'll take back there at expiration, and there are a couple of few other locations we'll take back at expirations. The others are situations where I think we could have done a flat renewal or taken a step back, and there are a few where we may or may not have -- depending on our success some form of lease termination, but we have not modeled that currently. Those are ongoing discussions. I would tell you we have activity on 10 of the 15 right now to the point where at least -- or LOI, we’ve actually signed two leases already. We’ve talked about mid-single digit comps. The only lease we signed for a full space user has certainly been probably the lowest hanging fruit we've backfilled in office use and the comp is north of 130%. So I feel pretty good about mid-single digits with single users. But it’s also about the backfill and the merchandising and trying to position the assets for the longer term in addition to the cash flow. So we’ve backfilled with or at least looking at the leasing and LOI activity. It’ll certain be entertainment, grocery, organic in this case, arts and crafts. There will probably be one or two party concepts in there, discount sought goods will definitely be in there. That continues to be a robust category. Discounts hard goods specific to home will be in there and probably some health and wellness as well. So it's kind of a broad spectrum. I think across the board it makes sense from a merchandising standpoint and certainly makes sense from a reduction to the watch list, whether we’re talking about Sports Authority or office in general. I think we certainly contemplate that the office consolidation takes place. When we look at our top 20 today, that consolidation would push our total OpEx exposure, call it up top 5% or 6% to 2.5% to 2.6% of rent. I think by the end of the year when we look at this remerchandising exercise in tandem with the disposition pool, offices below 2% for us and when we look at Sports Authority specifically, Sports Authority is close to probably 1% of rent at the end of the year through the same exercise. So we’re very focused on not only re-merchandised but the overall portfolio and I think this is a unique opportunity today. We're 99% in the anchors. I don’t necessarily see that opportunity again in the near future. So we’re going to take advantage of it.

[Jay Carlington:]

Okay so maybe as a follow-up to that, what kind of associated CapEx cost is associated with this and taking into consideration the leasing CapEx as well, what is that mid-single digit leasing spread look like on a net basis when all that's take into consideration?

[Steven Grimes:]

It's a fair question. I think blended we assume that these are all 10 year deals right. I think that it's probably a $25 to $30 exercise. That assumes it's generally single users. Obviously it goes up from there but also that rents do as well. The more you cut the box, the rent should move as well. So it's hard to say at this point but I think 25 to 30 Jay, is the right number.

[Jay Carlington:]

That's a per square foot basis that you're referring to?

[Steven Grimes:]

Correct.

[Jay Carlington:]

And maybe my last question, just -- I guess you said maybe half of this is contemplated this year. Is this something that we're looking at dragging into '16 as well?

[Steven Grimes:]

Well, I think we assume the average downtime is 12 months, but when you say dragging, are you talking about getting access to this space and…

[Jay Carlington:]

Well, more or less, just the headwind from the remerchandising. I guess you have 150 to 200 basis points this year. Are we looking at another 100 - 150 in '16 as well?

[Steven Grimes:]

No, I don't think that's a fair categorization. Obviously it will depend on how fast we can fill the gap between downtime and turning on the rents. We are at the mercy of some opening cycles, depending on which retailers you backfill, but I don't think that's the expectation right now. I think most of the paying should be this year.

[Operator:]

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

[Vincent Chao:]

I just wanted to follow up on that line of questioning in terms of the 2016 outlook. Just curious on the remaining Office Depot and Staples and maybe Barnes & Noble, and so the Best Buys, what does the expirations look like in '16 and maybe '17 for those sort of troubled retailers?

[Steven Grimes:]

Yes, Best Buy I think we've got two or three expiring down in '16. I would tell you of the watch list categories and tenants that we have, Best Buy is not one that keeps us awake at night at this point. Barnes, I think we've got two or three next year. I would tell you Barnes is probably some of, if not the highest grade real estate we have and I think we would do very well from a backfill and comp standpoint there. And the office -- I think there's three or four again next year and then it's very staggered through there. '17 there is two, and the remainder or after that. So pretty staggered from this standpoint and that's why we referenced that given where we're at from a lease stand point and the anchors, I just don't see the kind of opportunity we have this year coming again anytime soon.

[Vincent Chao:]

Okay, and then just on Rite Aid, the mortgage there expires I think later this year. Once that's defused or paid off I guess, just curious what the opportunity to maybe unload that [indiscernible] is and what's the remaining lease duration on that?

[Steven Grimes:]

So, the average remaining lease term still north of 10, generally the pool is in New York State. You're right, it does come off. The debt is unencumbered by the end of the year. I think its fourth quarter. We have held that for a while. I would tell you two years ago that portfolio trades in the mid-8s and the Company has done quite well and continue to do quite well whether you talk about operationally or just balance sheet and the cap rate continues to compress. We have made the decision to hold -- I think we could have paid the debt off. We thought about it at one point but that will most likely be a '16 execution to your point, but certainly the cap rates have come in dramatically.

[Vincent Chao:]

Okay, so 8.5ish two years ago, do you think that's more or like -- is it closer to a 7 at this point, or you think it is a little….-- ?

[Steven Grimes:]

Yes, I think it depends who shows up, right? I think that assumes that all the renter market, I think it's probably a 7 to 7.5, execution somewhere in there today.

[Vincent Chao:]

Okay, great and just if you could give us just an update on the Gateway. Obviously it's going to continue to be headwind here in 2015. I think it was $0.02 to FFO from the Gateway and also Towson, but just curious if you could provide an update on what's going on with Gateway?

[Angela Aman:]

Yes, just on the reconciliation, the $0.02 is Gateway, Towson as well as Boulevard at the Capital Center which was removed from the same store pool last year, as well as one of our development assets in Nashville and Bellevue. So it's four assets combined. But Shane, can you give the update?

[Shane Garrison:]

Sure, the overall is that there's not really an update. We're 79% I think leased today. We continue to focus on occupancy versus rents, and again I don't see anything -- any catalyst to change that kind of outlook near term. So we continue to kind of run in place from an occupancy standpoint.

[Vincent Chao:]

Okay, great, thanks and then just one last question from me. Angela I think you said that earlier that interest expense will be sort of a net wash for the year in terms of all the puts and takes, but just curious, I think you mentioned a $109 million of debt potentially to be retired that was longer dated. Are the mortgages that are coming due in '15, are you planning to repay those at expiration, and I think there was a $0.08 prepayment penalty. Is that all tied to that $109 million?

[Angela Aman:]

Yes, that's correct, it is. Well, some portion of the $109 million. When we have chosen to take prepayment penalties in order to unencumber assets early, it's almost exclusively been with respect to making sure that we maximize execution on the disposition pool. And so when we choose to take those prepayment penalties, we're looking at those within the context of the transactions we're talking about and what that would do from an overall cap rate perspective relative to the risk we might take by holding that asset through maturity and choosing to monetize it at that point in time in the future. So I think if you sort of blend those prepayment penalties, and the $18 million I think you referenced does include some non-cash items as well, the write-off of loan fees and some things like that, closer to $17 million on a pure prepayment penalty basis. At this point in time many of those wouldn't occur till later in the year. And so the prepayment penalty is then going to depend a lot on where treasuries are. It's very much a moving target. But that $17 million, we should sort of blend that into the disposition pool we've talked for the year, we'd still be within the same cap rate range we gave you of 7% to 7.5% or low to mid-7%, even if you factor that in to the overall transaction value we'll receive.

[Operator:]

Our next question comes from [indiscernible] with JPMorgan. Please proceed with your question.

[Unidentified Analyst:]

For G&A, expenses of $40 million to $42 million, more of the normalized run rate going forward or is there anything that's one-time with regards to the compensation expense?

[Steven Grimes:]

This is Steve Grimes. It's a fair question. I put in my opening remarks kind of the nature of what the spike in G&A expense was for us. So I want reiterate those details there, but by and large we've completed a three year plan with respect to resetting compensation or I should say setting compensation at what I would say is the median point of market value for execs as well as the entire the company. That being said, it in large part performance based. So to the extent that you were to see improved performance even throughout 2015, you could likely see some increase in G&A expense as it relates to compensation expense going forward. Additionally there are components of compensation expense in 2015 and could continue into 2016 that relate to some incremental hires. As we deploy some additional dollars towards our redevelopment opportunities you're going to see a little bit of an increase in compensation related to those strategic hires. That will be hopefully be normalized on a go forward basis as we migrate even further into our 10 to 15 market strategic plan.

[Unidentified Analyst:]

And then can you discuss your outlook for small shop occupancy in particular for 2015?

[Shane Garrison:]

Sure. We obviously had some great success, especially at the back half of the year. I think we continue to move the mark a little bit. About two years ago I think we were 85, 86, then 87 and I think on the last call we said it's kind of high 80s to 88, and your expectation is 88-ish toward the end of the year. That being said from just the total occupancy in longer-term standpoint, given this velocity, given the space we're leasing, most of its been down three years. I don't think outside of realistic expectations that we could get to 90 at some point.

[Operator:]

Our next question comes from Chris Lucas with CapitalOne Securities. Please proceed with your question.

[Chris Lucas:]

Just a follow-up actually on the G&A question. Steve is there acquisition costs related -- embedded in that $40 million to $42 million and if so, what's the range for that?

[Angela Aman:]

Hey Chris, it's Angela. We did incur about $1.9 million of acquisition cost in the fourth quarter related largely to the 2015 acquisition activities or acquisitions we announced in early January. So the number prospectively for 2015, within that $40 million to $42 million there is $1 million to $2 million I would say of additional acquisition cost baked into that number.

[Chris Lucas:]

And then going back again on the question that’s related to the anchors that are vacating. I guess I'm trying to understand on what the level of confidence that you will actually get those -- all 15 of those back versus what we've seen. I'm sure you have seen where retailers have surprised in terms of their extensions. Are these all -- what's your confidence level on the '15?

[Shane Garrison:]

I would say we're at -- I'm highly confident at 13 and the other two are also back weighted. So they would be less impactful but certainly 13 and the two are optional but are also higher rent.

[Angela Aman:]

And that's like the minimum of that range. The remerchandising impact range was 150 we feel pretty certain there will be at least a 150 basis points of same-store impact. It could be as much as 200 basis points.

[Chris Lucas:]

And then just going back on the dispositions pool, you've got office building those are left in the portfolio. Are any of those on the docket for 2015?

[Shane Garrison:]

Four of those we will move this year. We will have the one remaining asset here in Chicago and it's not a big number on the overall 500, Chris. It's probably 15 million to 20 million of the total number.

[Operator:]

Thank you. At this I would like to turn the call back over to Mr. Grimes for closing comments.

[Steven Grimes:]

Okay. Well thank you everybody for your time today. I hope you appreciate as we do the transparency that we've provided in the numbers in terms of our 2014 performance and the outlook for 2015. Some of you we will see over the coming weeks as Angela and I hit the road to go through a few conferences and some Investor Meetings. So until such time, if you have any questions, we're certainly here and available to answer them. Thank you all for your time today.

[Operator:]

Thank you. This does conclude today’s teleconference. You may disconnect your line at this time and have a great day.