Retail Properties of America, Inc.
Q3 2015 Earnings Call Transcript

Published: 4 Nov 2015

[Operator:]

Greeting and welcome to the Retail Properties of America Third Quarter 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Fitzmaurice, Vice President of Finance. Thank you sir, you may begin.

[Michael Fitzmaurice:]

Thank you, Operator and welcome to Retail Properties of America Third Quarter 2015 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 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 November 4, 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 under Investor Relations section of our website at www.rpai.com. On today’s call, our speakers will be Steve Grimes, President and Chief Executive Officer, Heath Fear, 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.

[Steve Grimes:]

Thank you, Mike and welcome everyone to our third quarter earnings call. Before reviewing our results, I would like to take a moment to welcome Heath Fear to the RPAI team. Heath joined us as CFO in mid-August and in that short period of time he has impressed us with his energy, creativity and most of all his commitment to [Indiscernible]. On behalf of the RPAI team we are looking forward to accomplishing great things together. To that end, I am very pleased to report another quarter of both strong operational performance and steady progress towards our longer term vision. We are gaining momentum on every front, delivering growth in same store NOI, driving operational performance and advancing our portfolio repositioning. Releasing execution has resulted in resulted in occupancy growth stronger average base rents and record high releasing spread. Our remerchandising efforts remain solidly on track and we have closed or announced nearly a $1 billion in transaction activity year-to-date As evidenced by the increase in our earnings guidance, 2015 is shaping up to be a year of outperformance due to the exceptional effort of our team. In 2013 we announced a transformative portfolio repositioning strategy and we will continue to task ourselves with finding ways to execute more quickly and efficiently without comprising our disciplined investment principle. We are confident in our ability to outperform the original timeline. Since the announcement of our strategy in 2013 we have recycled $1.1 billion of non-core, non strategic disposition into 1 billion of target market acquisition. We have added 3.5 million square feet in our target markets and we have exited 20 non strategic market. At the same time, we vastly improved our debt metrics and capital structure flexibility and obtained investment grade ratings from S&P and Moody’s. We traded off our lower growth, secondary and tertiary market assets for $13 per square foot of ABR into higher growth, target market assets for $21 per square of ABR. As a result, 60% of our multi tenant ABR is generated from our target market and 78% is from the top 50 national MSA up from 43% and 68% respectively at the time of our strategy announcement. In short, our plan is working. We are seeing improvement in our ABR, our demographic, our ability to improve upon asset configuration, the quality of our tenancy, our asset diversification and our contractual rent increases. Our portfolio ABR persquare foot has increased 13% to $16 and it now stands at $18 in our target market. Our multitenant retail 3 mile demographic profile consists of weighted average population of 118,000 and weighted average household income of 87,000 which have increased 50% and 10% respectively. Our multitenant retail inline ratio has increased to 30%. [Indiscernible] which is the number one U.S. gross based on market share has recently surpassed best buy as our top tenant in terms of ABR. Our portfolio has made a significant shift towards the life style mixed use which now represents 22% of our multi-tenant retail portfolio up from 16% with inline sales of approximately $500 per square foot. Most importantly, we are beginning to see the effective acquisitions on our growth profile. We expect the long term annual NOI growth for these assets to be in the 3% area before taking into account any re-development opportunity. We remain committed to creating long term value and consistent durable growth for our shareholders as we continue our repositioning plan, working to identify and execute on our redevelopment initiative, improve our small shop occupancy, increased rents and gain efficiencies through the benefit of scale that we continue to gain in our target market. Most importantly, we remain committed to being a preeminent owner of mult-tenant class A retail centers in our target market. I will now turn the call over to Heath.

[Heath Fear:]

Thank you, Steve. Life is full of first. My first earnings call and the wind is [Indiscernible] my back. We have an incredible platform and even more incredible team and investment grade balance sheet and an enviable portfolio of assets. And to top it all of we are reporting solid earnings in the guidance raise. Needless to say, I’m extremely excited to be joining the RPAI family. This morning I will discuss our earnings for the quareter, our balance sheet activity as well as our increased guidance for 2015. Same-store NOI growth was 2% in the third quarter, primarily driven by higher rental income from a combination of strong, contractual rent increases and releasing spreads. Year-to-date same-store was 3.4% primarily driven by occupancy gains, contractual rent increases, releasing spreads and improvement in property expenses, net of recovery income. Putting aside the head wind related to our 2015 remerchandising efforts, our same-store NOI for the quarter and year-to-date was 4.2% and 4.9% respectively. Looking ahead, we expect our 2015 remerchandising activities to have a positive impact on our same-store NOI growth in 2016. Operating FFO for the quarter was $0.27 per share compared to $0.28 per share in the same period in 2014. The quarter to date change in operating FFO was driven by an increase in G&A expense of $0.02 per share and a decrease in total NOI of $0.01 per share as a result of our capital recycling activities. Partially offset by net termination fee income of $0.01 per share and lower interest expense excluding pre payment penalties of $0.01 per share. Including non-operating items FFO was $0.23 per share compared to $0.28 per share in the third quarter of last year. Non-operating items this quarter were largely related to early repayment of debt primarily to effectuate the disposition of two properties resulting in $10.6 million of debt extinguishment cost. On the balance sheet year-to-date we repaid termination [ph] fees -- $482 million of debt with a weighted average interest rate of 5.82% of which $288 million was repaid or termination fees during or subsequent to quarter end. As a result, our net debt to adjusted EBITDA ratio ended the quarter at 5.7 times or 5.9 times excluding termination fees. In terms of liquidity, we have minimal near term capital needs. We have one longer date of maturity of $8 million that we expect to repay in the fourth quarter. We have only $35 million of additional debt maturing in 2016 and $400 million of capacity on our revolving line of credit as of the date it is called. With 2015 almost [Indiscernible] year and better than in the way of maturing debt in 2016 our balance sheet focus will be twofold. First, we intend to further establish ourselves in investment grade borrower in the unsecured debt markets. While we were optimistic that the borrowing markets will continue this hour [ph] we have the luxury of a wait and see approach. Second, we will leverage our deep capital relationships through explore efficient and economic ways to accelerate our repositioning efforts. In that vein you will notice that our supplemental and 10-Q have a new disclosure regarding the gateway. This past quarter the loan encumbering the gateway was transferred to the special service representing a significant step towards advancing the exit strategy of the asset. So what can we expect for the remainder of 2015? As a result of strong performance during the third quarter we were increasing and tightening our guidance on our same store NOI growth to a range of 2.5% to 3%, up 50 basis points at the mid-point than the previous range of 1.75% to 2.75%. The increase is a result of higher other rental income and lower bad debt expense. Accordingly we are increasing operating FFO guidance to a range of $1.04 to $1.06 per share up $0.02 within that point than the previous range of $1.02 to $1.04 per share. The increase in operating FFO guidance reflects our highest same-store NOI growth guidance, the receipt of bankruptcy proceeds during the third and fourth quarters and the updated timing of transaction activity. And with that, I turn the call over to Shane.

[Shane Garrison:]

Thanks, Heath and good morning. Today I will discuss our third quarter operational and transactional results along with some positive leading indicators regarding our long term growth profile. At the end of the third quarter, our total portfolio lease trades stood at 94.8% up 30 basis points sequentially as a result of the progress we have made with our remerchandising efforts. Regarding our 2015 remerchandising activity at the end of Q3, 14 of the 15 anchors have vacated representing 496,000 square feet with the remaining 41,000 square feet expected to vacate in the fourth quarter. To date, we have addressed 300, 000 square feet of which 241,000 has been fine, or 59,000 is in advanced lease negotiation. This represents 56% of the square footage we have waited for remerchandising in 2015 or over 70% of the previous ABR. Economic progress continues as a 125,000 square feet open during the quarter with an additional 105,000 square feet expected to be delivered in the fourth quarter of this year for a total of 230,000 square feet expected to be occupied by year end, an increase of 35,000 from the second quarter. Bag [ph] sales to these locations have been diverse in high quality including Macy’s backstage quite below total line by Baty [ph] and cost [Indiscernible]. We continue to believe that the expected weighted average downtime for this space will be approximately 12 months and the weighted average comparable releasing spreads will be in the 10% to 15% well ahead of our initial expectations. During the quarter, we signed 131 leases representing 666,000 square feet with a 7.3% comparable spread on renewals and 19.6% comparable spread on new leases or a blended releasing spread of 9.4%. Our leasing progress continues in the small shop space where tenant demand is robust with continued interest coming from restaurant, health and beauty tenants and various franchise operators. As of the end of the third quarter, our small shop lease rate of 86.9%, representing 130 basis point increase year-over-year. Our small shop portfolio lease rate was 87.3%, representing a 100 basis point increase year-over-year or 40 basis points sequentially. Given the broad or positive impact of our remerchandising efforts platform enhancements and portfolio shift we continue to believe our small shop occupancy will stabilize at approximately 90%. Using our current average small shop ABR per square foot of $25 this would translate into an incremental $10 million in annualized base rent upon stabilization. To follow up on a point of focus, we continue to reduce our exposure to watch list [ph] and in addition to diversifying our tenancy. As an example we continue to see a decrease in our exposures to the -- by sector which is down 10% based on retail ABR since the end of 2014. Additionally, Sports Authority which represented 1.7% of our retail ABR at the end of 2014 is expected to be approximately 1.3% by the end of 2015. Both our significant moves in just 12 months time. Through our transaction efforts the configuration of the portfolio continues to rapidly shift as well and over 40% of our multi-tenant retail portfolio is now anchored or shadow anchored by Kroger. With average reported sales of over 5.35 per square foot which is poised to increase as a result of our lease and acquisition activity and leasing traction. Just in the last year, we have added niche and higher productivity grocers to the portfolio including Traders Joe, Fresh Thyme, PCC Natural and Harris Teeter. Regarding acquisition activity, year-to-date we have completed or announced $464 million of acquisitions in our target markets representing 1.2 million square feet. We do not anticipate acquiring any additional properties in 2015 at this point. Also, we continue to expect the year one cap rate on acquisitions will be in the low 5% range. During the quarter and subsequent to quarter end, we closed on three smaller acquisitions totaling $33 million square feet, a grocery anchored shopping center in the Seattle MSA and two Trader Joe’s asset adjacent to our existing properties in the Dallas and Houston MSAs. Remainder for the year is the acquisition of an entertainment based centre in the Washington D.C./Baltimore corridor adjacent to our existing asset Tyson Circle Tyson square is anchored by a newly construct 15 screen cinema theatre and also includes several national and regional restaurants that we believe are beneficial to the redevelopment and overall environment as we finalize our redevelopment plan at Tyson Circle. This acquisition underscores the benefits of owning and controlling strong adjacent real estate and provides us with unique integration opportunities long term. In terms of dispositions during the third quarter and subsequent to quarter end, we completed $285 million of dispositions including 8 non strategic multi tenant retail asset and office asset a single user asset and a non strategic development asset. We are also under contract to sell our last remaining Las Vegas asset and an additional development asset for a total of $59 million bringing our year-to-date total to nearly $500 million. We continue to anticipate that full year disposition volume will be $5 million to $550 million and weighted average back rate to be in the low end of the $7 to $7.5 range. As Steve mentioned earlier, we are starting to see the benefits to our gross profile from our leasing and transaction activity. Since the beginning of 2014, over the 1.4 million in square feet of new leases that we have signed approximately 90% of these leases contain rent increases within their initial terms. In fact, the average annual rent increases from these leases are approximately 130 basis points compared to approximately 90 basis points in our multi-tenant retail portfolio today. Further, the properties we have acquired since the announcement of our portfolio of strategy excluding those acquired from our joint ventures had average annual contractual rent increases of approximately 125 basis points, another strong indicator of the type of growth profile you should expect as we continue to transform our portfolio. While we won’t see the full impact of this growth in our same-store NOI until 2017, we are clearly establishing a strong growth profile which should contribute meaningfully to our future operating results. Lastly, I would also like to provide a quick update on our one remaining office asset and sort of towers here in Chicago. As we have demonstrated with prior dispositions the best way to maximize proceeds is to stabilize the occupancy with built and a strong credit profile. With that [ph] we continue to believe we can achieve 10% to 20% releasing spreads. We are actively and aggressively pursuing a variety of exit strategies ranging from sales for a single user to a longer dated multi-tenant releasing effort. Early velocity continues to be strong, market vacancy continues to compress and the large block space discussions continue to pick up pace. As we look ahead to 2016, we intend to continue to match fund our target market acquisitions with the proceeds of our non-core dispositions. Assuming no material change in the current market conditions we are anticipating $700 million to $900 million of total transaction activity in 2016. As we continue to progress up the quality spectrum on the disposition list, we anticipate the cap rate differential to compress between the disposition and acquisitions activity. And with that, I would like to turn the call back over to Steve.

[Steve Grimes:]

Thank you, Shane and Heath for your report. Another strong quarter of results adding more clarity to our current and long term prospect. I would like to take this time to thank our incredible employees for their commitment and dedication. And with that, I would like to turn the call back over to the operator for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Jay Carlington from Green Street Advisors. Please go ahead with your question.

[Jay Carlington:]

Hey good morning guys. What was the fees and the cost associated with the $40 million of debt and the [Indiscernible] poll that you had there?

[Heath Fear:]

It was $10 million. $10.6 million.

[Jay Carlington:]

Okay, can you walk us through the thought process behind paying that $10.6 million for I guess roughly $40 million in debt and selling the properties versus the holding the debt for maturity for another four years?

[Steve Grimes:]

Jay, I’ll take it. It was an operational decision one of the assets the larger allocation in this case was in Las Vegas. Given our strategic goal of leaving Las Vegas this year that was the significant decision the assets traded in the low 6s we think it was a good trade overall. The other asset was less of a geography issue but again non-core and that was on the bordering Texas, so largely strategy driven and build assets we think traded at very compelling cap rates.

[Jay Carlington:]

Okay. And maybe on the re-anchorings there without I guess given 16 guidance they are an ideal of how many drag on the same [Indiscernible] were thinking for next year and how we think about the timing of the re-anchoring tenants coming online and paying rent next year?

[Steve Grimes:]

I'll answer the first part of your question. Jay, this is Steve. So, we think actually there's going to be a tailwind going to next year, so we think based on our activity to-date and what we expect happen in 2016, we think there's about a 50 basis points tailwind on our growth in 2016.

[Jay Carlington:]

Thanks. And that is so by mid 2016 do we expect I guess is that one all the tenants are online or some of that drag into late in 2016?

[Shane Garrison:]

Yes, we think we're about 300,000 square feet back on line in mid 2016, Jay, we call it 350 by year end 2016 and the rest in 2017, early 2018.

[Jay Carlington:]

Okay. Thank you, guys.

[Operator:]

Thank you. Our next question comes from the line of Todd Thomas from KeyBanc Capital Markets. Please go ahead with your question.

[Todd Thomas:]

Hi, thanks. Good morning. First question, following up on the re-anchoring projects, the 50 basis points positive impact in 2016, do you think that the 220 basis point impact that had on the same store growth this quarter, I mean, is that the peak in terms of its impact or is it get widen further in the fourth quarter or maybe early next year in the first quarter. And then how many re-anchoring projects do you anticipate starting in 2016?

[Steve Grimes:]

So, first part of the question, yes, we think its peak at this point.

[Shane Garrison:]

And then mechanically at the portfolio level we don't see anything near what we saw this from a re-anchoring standpoint, Todd. I'm aware of one downsizing that we signed after the year that we've already signed the back with this smaller tenant on the slip with a very compelling comp, so other than that I think it's just a more problematic year and don't see anything on the horizon again that would look like of 2015.

[Todd Thomas:]

Okay. And then, Steve or maybe Shane also, you talked about the contractual rent increases and some of the improvements that the capital recycling had on the portfolios growth, what do you think the overall portfolios blended, annual contractual rent increase looks like today, and where was that at IPO?

[Steve Grimes:]

I think that quickly Todd and Shane can add some color there. I think when you look at blend [ph], we're sitting out with the portfolios about 90 basis points of contractual growth. What Shane has been doing in terms of his focus on property that we've been selling obviously been selling one that have less contractual growth and then obviously buying into our target markets with higher contractual growth that about 30. So that's being said, I think you couple that with the acquisition – excuse me, the leasing activity that we've done since the beginning of 2014 which is also around the 125 or 130 basis points mark, you're seeing a meaningful transition in contractual growth in the portfolio to-date and just about two short years time.

[Shane Garrison:]

How it’s just add Todd on the total portfolio, I think Steve's talking the multi-tenant of the total portfolio was somewhere around 65 basis points of EBITDA deal, it’s probably 80 today with single tenant called 6% ABR today, obviously significant drag there is, is the drug store portfolio that is typically flat for the entire term and ROEs there are no exception. So, assuming we can get the drug store and most of the single tenants monetize next year which still continues to be the plan and continued progress on leasing in portfolio transition as well, I certainly think the company, the portfolio be at 200 basis points next year. And then in 2017 I think we would shot for [Indiscernible] again steady progress, but I think the next big leg up is disposition of the drug store portfolio and then relocation of that capital.

[Todd Thomas:]

Okay. And what the latest with regard to the Rite Aid portfolio, just given the announcement by Walgreens, does that – do you have any implications in your efforts to sell that portfolio?

[Shane Garrison:]

We have not started the process yet, on the announcement I certainly don't think we were soft. It's an interesting conversation given that we are determined to monetize this given our longer term goals here and it's a demonstrable drag on our contractual growth. Question is, when in 2016 and how, right. I think looking at the triple net REITs and looking at the discounts, I don't think it’s a large portfolio transaction at this point. It feels like it's much more granular given the environment today, so that's what we anticipate now, want to kind of asset trace this point. The question is what's the right discount from a Walgreens credit to a Rite Aid credit before it actually takes place, and taking into consideration of course that those risk really from two avenues, right. One ultimately it doesn't – the transaction doesn't take place for two that there is some duplicity in the markets or redundancy and we might have some store closures. So there's a lot of variables up in the here right now, not many of which we have answered but I think we've certainly circle them all and we'll be having conversations internally and externally throughout the end of the year here to try to have a better picture of what that ultimately looks like next year.

[Todd Thomas:]

Okay, great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Christy McElroy from Citi. Please go ahead with your question.

[Kitty McCall:]

Good morning. This is Kitty Mcall on for Christy. Could you provide some more color on the acquisitions during the quarter as far as pricing and for Towson square maybe if you could walk us through your plans for the redevelopment there?

[Steve Grimes:]

Sure. Good morning. So pretty like relatively during the quarter and after 33 million was just the Seattle grocery anchored asset and New Castle and then the two Trader Joe’s locations which are adjacent to or embedded in existing assets we own. I think for the quarter, we are right at five, generally I think for the year we intend to be low fives. So, I don't think that's new, I think that's on powerful we discussed last quarter. Relative to the redevelopment, Towson Square and Towson Circle in this case, we close Towson Square I think in the next week. We certainly like controlling that assets, it an entertainment lifestyle feel to it vertical and has structure parking that I think once well with. Our current plans next door which include 350 to 400 multifamily unit and we sack the retail as well, so we are not finite on the plan there, but we want to control the adjacent real estate and certainly for a growth and just overall volume real estate perspective it made most of them.

[Kitty McCall:]

Okay. Great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Vincent Chao from Deutsche Bank. Please go ahead with your question.

[Vincent Chao:]

Hey, good morning everyone. Just going back to Rite Aid for second, I was just curious if you have to know how your portfolio of Rite Aid sort of performance from a sales per square foot are expected relative to the overall company?

[Steve Grimes:]

That's a good question, Vince. We don't have specific color around sales. We do have other indicatives including their remodel effort and overall 90% of our sourced have been remodel in the last couple of years which we think bodes well from the sales perspective.

[Vincent Chao:]

Got it. Okay. Thanks. And then maybe going back to the same store performance for the quarter and then also the improved outlook, a lot of that it seems like it was attributed to a better rental income, but I guess relative to own expectations what was the –it was less move outs, because it looks like average occupancy was down year on year, so that seems like it would be a negative and then obviously kind of rent spreads are pretty good. Just trying to get a sense of ins and outs here, and I think bad debt was also sort of part of it but I just want to get a sense of what really was driving the better than expected same store performance?

[Shane Garrison:]

It’s really transferred into three, three items, so part of it was in your same store NOI growth, I'm sorry, your same store NOI outperformance, a third of that was in your transaction timing and a third that was in these bankruptcy proceeds which was from Circuit City. And so, inside of the same store NOI growth really two things are going on one, half of it was basically explained by bad debt and some of that again it related to the circuit city proceeds. And the other half of it was really other rental revenue income, so that we had some wins in specialty rents and some wins in percentage rents and so we had some mineral royalties, so we got some unexpected wins in that category that's sort of drove the outperformance.

[Vincent Chao:]

Got it. And on the bad debt performance, so you just for the outlook, is that just I think your bad debt performance year to-date or you also projecting some of that into fourth quarter as well?

[Shane Garrison:]

Well, that's a general rule that we remodel 50 basis points of bad debt. So we don't necessarily expect that bad win into the fourth quarter as well. But again, as part of the bad debt win in this quarter was related to those bankruptcy proceeds.

[Vincent Chao:]

Got it. Okay. And then it sounds like in terms of the FFO guidance there was some additional proceeds expected in the fourth quarter, is that right?

[Steve Grimes:]

Yes. I'll just give you the breakdown – from circuit city the total of $1.6 million and so we're going to see $1 million of it hit in the third quarter and 600,000 that’s going to hit in the fourth quarter and its actually the proceeds we applied via [Indiscernible] model with a ledger and it’s based on a sort of waterfall of priority starting with bad debt and termination fee. So I'm going to give you a little bit granular detail here because it was – when I first looked at it, I got a little confused. So in the third quarter you're going to see of the $1 million you're going to see 230,000 if it hits your bad debt and your same store NOI. You're going to see another 325,000 hits your bad debt in your non same store NOI. And you're going to see another 350,000 in your term fee and you're going to see another 160,000 in your other income, and then in the fourth quarter you're going to see about 80,000 hits your term fee and you're going to see about 480,000 hit your other income. So that's basically the breakdown. If anyone wants any more color and how that breaks down, please feel free to call me after the call.

[Vincent Chao:]

Thanks for that, it’s helpful. And just maybe going back to the comment about the gap in the remerchandising versus the non-remerchandising same store NOI, and I guess the updated guidance still does imply a pretty a big deceleration in the fourth quarter, can you just remind us what's driving that again?

[Shane Garrison:]

So, just to remind you, we obviously – we guided this significant deceleration in the second half of the year. And we said in the last guidance that we thought we see a trough in the third quarter and followed by reacceleration to the fourth quarter. Well, the fourth quarter is very much in line with where our guidance was before, but what happened was we didn't see that trough in the third quarter materialize and that trough didn't materialize for those same reason as I just told you, half of that was bad debt, and half of that was sort of the other rental incomes. So the configuration of the deceleration just been kind of pan out where we thought it was going to.

[Vincent Chao:]

Okay. Thanks for that. And then just one last question on the CMBS side on the gateway, can you just give us some color on how that – how you're able to get that into special service hand given that it’s still performing loan and what the implications are in terms of interest expense you might report going forward and when that might, I mean, is that out of the books now completely or you booking some kind of non-cash interest at the moment?

[Steve Grimes:]

You said it was performing well. I wouldn't say, I wouldn’t say it was performing well.

[Vincent Chao:]

Non-performing loan, I didn't, not well, just performing.

[Steve Grimes:]

The difficulty of things that you have cash transfer to property, right and your rent goes to cash trap [ph] and then it gets to fund the debt service, so there's enough rent there to cover the debt service. But we thinking impairment on the asset and it’s become very obvious that the value of the debt is higher than the value of the asset and so we are – and it’s very difficult to kind of get the loan transferred into special servicing. So, we had a sort of lenience on relationships to get that done. And the great thing for us is that we finally have someone as the decision maker that we can talk to. And that's sort of getting into the special service as a free cursor to get into the final resolution of the assets. So, I don't now – I'm not going to guide you to when I think that's going to happen, although I will tell you that we are much more optimistic now for a speedy resolution than we were before.

[Shane Garrison:]

Then just to comment on net asset, as you know we've been talking about the gateway for years now and change effort in terms of trying to monetize that particular asset. For all [Indiscernible] purposes have not gone unnoticed by the services, so as a result of those efforts coupled with the simple ask to get this moved over to special servicing and the performance of the loan and the eminent non-performance of the loan, I think people are little more focused on this and that was one of the biggest catalyst to getting this over to special servicing.

[Vincent Chao:]

Okay. Thanks a lot.

[Operator:]

Thank you. Our next question comes from the line of Michael Mueller from JPMorgan. Please go ahead with your question.

[Michael Mueller:]

Thanks. And apologize if I miss some of this before. But Shane, I think you said for 2016 you're looking at 700 to 900 million of activity. I want to find out first, was that's each acquisitions and dispositions so you'd have 800 midpoint of dispositions than the model has 800 of acquisitions is that correct or is it half each?

[Shane Garrison:]

Its half each Mike.

[Michael Mueller:]

So it call it 350 to 450 each?

[Shane Garrison:]

Correct, correct.

[Michael Mueller:]

Got it. And then, how many markets do you see yourself being at a year-end 2015 and once you get done with the next 350 to 450, what does that take you down to do you think?

[Shane Garrison:]

For 2016?

[Michael Mueller:]

Yes.

[Shane Garrison:]

It would be 350, call it 150 to 200 is going to be single tenant. So in the low end it gives you 150 million. We have assets that we trade non-core assets that we trade 125 million to 150 million, so I think where I'm going is just depends ultimately where we go from a non-core standpoint after the single tenant.

[Heath Fear:]

Honestly for the tact here has been to sell the riskiest assets. We had 45 markets give or take outside the top 50 at investor day, we are now down to 30. If we plus 20 markets over the last couple of years 15 had been upside the top 50 and I would like to continue that process. We have -- how we’ve thought about it is to maintain obviously the best assets to the end and as we continue to try to transact in very tight markets those assets are arguably called for any one institutional, so it’s become a leverage point, a unique leverage point for us and discussions as we continue to try to find assets in target markets and I think that’s the methodology we’ll stick to. So at least one other market, it’s the simple answer Mike, but it could be many more.

[Michael Mueller:]

Got it. And then you talked about last question, you talked about spreads between acquisitions, dispositions compressing a little bit more. Where do you see 2015 ending and how much more if you can compress like that?

[Shane Garrison:]

I think in 2015 it’s going to be 190 to 200 basis points probably. And I hear one, 2016 it just depends, it depends ultimately on how successful we are on the single tenant side which I think is well below or where we transacted this year and call it at the low, very low 7s. And then if we sell, let’s say we do sell one of the larger assets that’s high grade in a very low -- of 5 gaps it could move significantly so. I’m hesitant to give you a bandwidth but I feel very good that it’s narrower than it was this year.

[Michael Mueller:]

Okay. Great, thank you.

[Operator:]

Thank you. Our next question comes from the line of Chris Lucas from Capital One Securities. Please go ahead with your question.

[Chris Lucas:]

Yes, good morning everyone. Just a couple of follow up questions. On the small shop occupancy improvement on the total portfolios 40 basis points, I guess do you have the same number for the same store portfolio?

[Shane Garrison:]

I don’t have it in front Chris; it’s a good question we can follow up with him.

[Chris Lucas:]

Okay. And then Shane just on the Rite Aid stores. Are all 32 single tenant or are some components of shopping centers that are integral to the asset?

[Shane Garrison:]

It’s a good question. The pool we would monetize consist of 28, the rest, the remainder of the four in this case are actually in centers that we are now looking to monetize.

[Chris Lucas:]

Okay. And then Heath, thanks for the excellent detail on the bankruptcy proceeds. But, I guess just for my own education, on the other income component does that flow through the same store NOI count or is that an excluded number, I know….

[Heath Fear:]

Its’ excluded. It’s excluded.

[Chris Lucas:]

Okay, so there is diminimus amounts in terms of….

[Heath Fear:]

Yes there’s only 230,000 total in same store.

[Chris Lucas:]

Okay. Perfect. That’s all I have. Thanks, appreciate it.

[Operator:]

Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to management for closing remarks.

[Steve Grimes:]

Well, thank you operator. Before we end the call, I’d like to remember an important member of the RPAI family. During Q3, we had a significant loss in the death of our VP of Operations, David Nelson who passed away suddenly and unexpectedly. David was with us for over ten years and he was an exemplary employee and even better human being. He will certainly be missed and his legacy and contributions will not be forgotten. Thank you all for joining us today, look forward to seeing many of you at [Indiscernible].

[Operator:]

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