Rithm Property Trust Inc.
Q4 2016 Earnings Call Transcript

Published: 22 Feb 2017

[Operator:]

Greetings and welcome to the Ramco-Gershenson Properties Trust Fourth Quarter Year End 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Dawn Hendershot, Vice President of Investor Relations. Thank you. You may begin.

[Dawn Hendershot:]

Good morning and thank you for joining us for the fourth quarter and year end 2016 earnings conference call for Ramco-Gershenson Properties Trust. With me today are Dennis Gershenson, President and Chief Executive Officer; John Hendrickson, Chief Operating Officer; Geoff Bedrosian, Chief Financial Officer and Cathie Clark, Executive Vice President of Transactions. At this time, management would like me to inform you that certain statements made during this conference call, which are not historical maybe deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Additionally statements made during the call are made as of the date of this call. Listeners to any replay should understand that the passage of time by itself will diminish the quality of the statements made. Although we believe that the expectations reflected in any forward-looking statements are based on reasonable assumptions, factors and risks that could cause actual results to differ from expectations are detailed in the quarterly press release. I would now like to turn the call over to Dennis for his opening remarks.

[Dennis Gershenson:]

Thank you, Dawn. Ladies and gentlemen, this morning we'll discuss our fourth quarter and year-end 2016 results. We will also provide details about our 2017 business plan and our vision for delivering long-term shareholder value. In 2016, a time of significant headwinds for our industry, especially with the bankruptcies and liquidations of several national retailers, we were still able to execute on a number of our stated business objectives. John and Geoff will provide the details for our fourth quarter and year-end results. We also used our time in 2016 to rewind our long-term business strategy as we continue to position our company to benefit from the significant changes that were occurring in the shopping center industry. Those elements that will drive our crucial decisions revolve around market selection, shopping center type, merchandize mix and changing consumer preferences. We believe that our decisions in these areas will ensure that our business model will be relevant in any future retail environment, especially in light of the expanding channels of distribution as well as changing consumer demographics. Our plans for 2017 in the next 36 months are influenced by three main factors beyond macroeconomic concerns that are having a dramatic impact on the shopping center industry including; first, the impact of e-commerce and digital communications in an omnichannel environment Second, the ongoing flood of healthy retailers to market-dominant quality real estate, to insulate themselves from risks, as they rationalize store count as well as store sizes. And third, the convergence of retail to offer both value and a rewarding experience for the customer. In other words, we're seeing a fundamental change in consumer habits, thus retailers who will succeed going forward must understand and adapt to these changes. And those shopping centers that will thrive tomorrow must not only have market dominant locations, but also must be occupied by those retailers who understand the changing trends and rise to meet them. All of these factors are driving both our short-term and long-term management and investment strategies, so that we will have positioned ourselves to succeed in this evolving retail environment. Specifically, in 2017, we plan to do the following. First, we are expanding our reach into key growth markets beyond our current Midwest focus. This will involve selling approximately $250 million of non-core Michigan properties. Specifically, those centers outside of Oakland County and Metropolitan Detroit, and acquire approximately $250 million of market dominant shopping centers in the 40 largest MSAs. These acquisitions and dispositions will substantially complete the transformation of our portfolio, driving a healthy increase in net asset value. Important characteristics of those markets, which are the subject of our focus, include high population, employment and household income growth. On the asset sale side, the sale of our Michigan shopping centers outside of Oakland County will reduce our rental exposure in Michigan to less than 20% by the end of 2017. Further, by limiting our Michigan presence Oakland County, we will have concentrated our Michigan assets in the 24th wealthiest county in the nation, and one of only approximately 30 counties or 1% of all U.S. counties with AAA credit rating. As of this date, we have made significant progress toward executing on this first goal by acquiring two shopping centers with a value of approximately $170 million and selling one center in Flint, Michigan, as well as preparing to close on the sale of a second Michigan asset, which together will generate approximately $28.5 million. We have other Michigan shopping centers in the market, and the proceeds from these sales will be used to fund our acquisitions. Our second initiative involves deploying our capital and selling non-core assets, to concentrate our portfolio on two types of shopping centers; first, large regionally dominant centers which include value-oriented retailers, preferably with a grocery component, restaurants and entertainment users, as well as a substantial amount of small shops space of at least 60,000 to 100,000 square feet. These centers will also possess the potential for additional value creation through redevelopment, re-tenanting and expansions. Our second asset focus is on infill urban-oriented centers with high barriers to entry. The centers cater to large daytime and evening populations with significant entertainment and restaurant components that will generate ever-increasing net operating income growth. Examples of our expansion into new markets, as well as the pursuit of the two shopping center formats I just mentioned are reflected in our recent acquisitions of Providence Marketplace in Nashville, Tennessee, and two urban-oriented centers; Centennial Shops in Minneapolis, Minnesota acquired in the fourth quarter of last year, and Webster Place in Lincoln Park, an affluent Chicago neighborhood. All three of these acquisitions are located in what are considered 18 hour cites. The two urban-oriented infill assets, also present the opportunity for potential mixed use development partnership. Our third focus for 2017 and beyond, involves maximizing the value of each of our core shopping centers, including our recent acquisitions. Thus in 2017, we will be stepping up our redevelopment program, including densifying our properties by adding additional retail square footage to a number of our centers and creating a sense of place at several others. John will provide additional information on these value-add programs. I would now like to turn the call over to John for his remarks.

[John Hendrickson:]

Thank you, Dennis. Good morning everyone. I would like to expand on Dennis' remarks by first discussing full year 2016 operational results and then summarizing our operational outlook and expectations for 2017 and beyond in the context of today's business. In general, our team and our portfolio performed well in 2016, and with the completion of the portfolio upgrades Dennis outlined, we are well-positioned for the future during this evolving time in our business. Our portfolio produced same-store NOI growth of 2.8% for the full year 2016, including the impact of the Sports Authority liquidating its four-store that cost 1.8 million of downtime and bad debt expense in 2016. Had we not had this extraordinary impact, we would have been at the top-end of our guidance range, with a growth of 3.9%. Good execution of our leasing and other goals from our portfolio teams helped drive this result. Growth was also helped by the opening of 15 anchor leases we discussed during 2016, and the nearly 44 million of redevelopment projects that stabilized to 2015 and 2016, which altogether contributed 2.6 million NOI growth during the year. These projects include our repositioning of West Oaks shopping center that brought Michigan's first Container Store and our second Nordstrom Rack to this Oakland County dominant center. The addition of DSW to Spring Meadows in Ohio and the introduction of Stein Mart to Town & Country Crossing in St. Louis and also to Winchester Center, another Oakland County asset. As was the case for 2016, our redevelopment pipeline is an important part of growth for 2017 and 2018. After the 2016 completion, our current pipeline of projects is $70 million, which includes the addition of 230,000 square feet of new retail GLA to the portfolio. During the quarter, we added two projects; the 28,000 square foot expansion of our Nordstrom Rack, REI anchor Troy Marketplace, a further investment in Oakland County, and the addition of a new 44,000 square foot 9-screen theatre building to anchor our Main Street at Woodbury Lakes in Minneapolis. The theatre operators wanted a best dine-in theatre chains in the country, which will bring a unique offering to Woodbury's market in early 2018 and provide an important driver for the property. This project is the first step of multi-phase enhancements at Woodbury Lakes. The strategic redevelopment and those elsewhere including at Deerfield Towne Center and Front Range Village are all about making environments that create emotional attachment with the consumer and create long-term value. While driving value on their own, these redevelopments and anchor upgrades will also help push rents and occupancy at each asset. Our lease occupancy finished the year, up 94.4% with anchor occupancy at 97% and small shop occupancy at 88.2%. While partially offset by gains elsewhere, the 40 basis points decrease in comparable lease to anchor occupancy during the year is primarily attributed to the loss of Sports Authority. We now have agreements on three of the four locations. At the last location, in Fort Collins, Colorado, we are continuing to explore opportunities but remain patience to maximize value within the context of the properties overall master plan. Small shop leased occupancy increased by 110 basis points during the year on a comparable basis, and thus within the goal that we laid out at the beginning of the year. In addition to this increased occupancy, we're also able to achieve annual fixed increases during the term and 74% of the shop transaction, which is substantially more than what we achieved previously. We believe this portfolio over time should have a target of small shop occupancy at 91%. So, continuing to push off occupancy, at least another 100 basis points while maintaining the quality of the leases, will again be a goal in 2017. For the year, we executed 326 transactions totaling 2 million square feet, which was a 14% increase in transactions volume compared to 2015. Our total comparable lease spread was 9.2% for the quarter and 9% for the year, essentially equivalent to 2015's levels, while also achieving better embedded growth. This increasing in leasing volume and improvement in leasing quality again is the testament to our regional operations team who generally achieve their annual goals during 2016, the first full year in our regional set up. The average rent on all deals executed for the year was $15.67 per square foot, which exceeds our portfolio average by more than 10%. Our portfolio quality upgrade and these rental increases help drive our overall rents per square foot by approximately 5% year-over-year. Furthermore, the average rent excluding ground leases on all three recent acquisitions is $20.50 per square foot, 80% more than the average of $11.40 for the assets that we have or will sell to fund the acquisition. We therefore expect post continued improvement in portfolio average base rent in 2017 reflecting our higher quality portfolio. Turning to 2017, I remain very encouraged by the operating fundamentals of the portfolio and our prospects for continued future growth. We expect same-center to be 2.5% to 3.5% in 2017. While tenant bankruptcy is a normal part of our business, and there certainly are headwinds to how and they evolve the landscape to several retailers, we still feel the full liquidation of a tenant like Sports Authority is an unusual occurrence and resulted in 2016 having down time and bad debt of $1.8 million above a typical year. Nonetheless, reflecting today's uncertainty, our midpoint 2017 forecasts, assumes the same level of reserve. If the impact of our watchlist reserves returns to a normal level, we would expect to achieve the top-end of our same-center guidance range, which is within the long-term growth target of 3% to 4% that we have previously outlined. Furthermore, the benefit of our 2017 anchor leasing, improved small shop occupancy and the impact of 2017 and 2018 redevelopment stabilizations should prepare us well for growth in 2018 and beyond. Also our portfolio upgrade should further enhance growth over the next few years. Excluding any redevelopment benefits, we believe that the forward five year average NOI growth for our three acquisitions will be about 4% compared to less than 2% for the properties we are selling to fund the acquisition. Therefore, barring unforeseen occurrences, we believe our portfolio has good mid-term growth prospects. Despite certain retailer concerns, many of our flagship retailers are continuing to grow including T.J. Maxx, Ross, Nordstrom Rack, Ulta, Home Goods, Sephora, Dick's, Rally Health and Petco just to name a few. Also our business is now more than just the type of retail. In addition to providing consumers the right-mix of value and daily needs retail, as Dennis said today's and tomorrow's consumer is demanding that bricks and mortar retail deliver an experience. This is why we are investing in place making and continuing to expand our community-first initiative. It is also why entertainment and food have become an important, although balanced part of our portfolio. In fact, each of our three recent acquisitions have a dominant entertainment concept as an anchor, and so our current portfolio, food and entertainment represent approximately 15% of our AVR at the end of 2016. So, in conclusion, 2016 was a good year despite some headwinds. I'm confident 2017 will be another successful operating year. We are envisioning the future of retail today, and our team and our portfolio are well-positioned to create value in the changing environment over the next several years. That concludes my comments. I will now turn the call over the Geoff.

[Geoff Bedrosian:]

Thanks John and good morning everyone. I'm happy to report we had a solid year of financial performance in the face of a difficult retail landscape that included the impact of the Sports Authority bankruptcy. A couple of key accomplishments include reporting non-strategic asset sales of $122 million which represents the high-end of our guidance for 2016, ending the year within our leverage target range and delivering full year operating FFO at the high-end of our guidance. And as John mentioned earlier, we had solid leasing performance in our portfolio. We would like to thank all of the Ramco team members for working collaboratively to accomplish the Company's objectives in 2016. Now let's review the numbers. Operating FFO for the fourth quarter was $0.33 per share, down from $0.34 per share in the fourth quarter of 2015. The year-over-year operating FFO was impacted by lower cash NOI of $0.02, the result of capital recycling and lower lease termination fee income of $0.01, offset by higher non-cash rent of $0.01 and lower G&A expense of $0.01. We ended the quarter with net debt to adjusted EBITDA of 6.3 times and a fixed charge coverage ratio of 3.2 times. For the full year, operating FFO was $1.36 per share, up from $1.34 per share in 2015. The full year result was at the high end of our guidance range and represented another strong showing by our operating team. Same-store NOI including redevelopment increased 1% during the quarter and was negatively impacted by one-time accrual adjustment that reduced same-store NOI by 110 basis points. For the full year, same store NOI increased 2.8% and was negatively impacted by 110 basis points due to the Sports Authority bankruptcy. Minimum rents were a consistently positive contributor to same-store NOI over the course of 2016, driving 240 basis points of growth in the fourth quarter and full year, which highlight the strength of our leasing team and the quality of our portfolio. Last night, we initiated 2017 operating FFO guidance at a range of $1.34 to $1.38 per share, and we provided a reconciliation from our reported 2016 operating FFO per share to our expected guidance range for 2017. As Dennis previously outlined, we expect to recycle $250 million of predominantly Michigan assets into our targeted growth markets. The effect of our capital recycling will result in an impact of $0.07 per share fully offset by $0.05 of growth from same-store NOI with redevelopment and $0.02 from interest savings. At the completion of our recycling program in 2017, the Company will have harvested value from over $370 million of investment in a two-year period. And we deployed the capital into new opportunities to create, long-term value for our shareholders. From a modeling standpoint, we are modeling our dispositions using a mid-year convention with two-thirds of our acquisitions returning in the first half of the year with a balance in the second half of the year. Our guidance for same-store NOI growth including redevelopment is 2.5% to 3.5%. The range reflects some potential variability with respect to this year's ultimate disposition pool. We anticipate minimum rent to contribute 250 basis points at the midpoint, expenses net of recovery income will contribute 65 basis points of growth at the mid-point, positively impacted by the re-tenanting of our Sports Authority locations. The full year 2016 recovery highlighted on our same-property disclosure on Page 8 of our supplement is a good base for future recovery rates, which we expect to marginally, increase in 2017, as we complete the re-tenanting of our vacant Sports Authority boxes. We have also assumed approximately 40 basis points of bad debt expense in our guidance, offsetting same-store NOI growth by 15 basis points. Our same-store NOI growth for 2017 assumes $48 million of redevelopment projects coming online, generating an average yield of 9% to 10%, weighted towards the second half of the year. Combined with projects that were completed in 2016, we expect the impact of the development projects to increase NOI by $3.25 million in 2017. From a capital market standpoint, we expect to opportunistically raise $50 million of unsecured debt during the second half of the year to reduce the balance of our revolving credit facility and extend the duration of our balance sheet. At this point in the cycle, we are extremely pleased with the position of our balance sheet, with the weighted average term of seven years and a weighted average interest rate of 3.95%. Our balance sheet is extremely healthy and provides the flexibility to execute our recycling plan and drive value for our shareholders. We anticipate ending 2017 at a 6.5 to 6.7 times, net debt to adjusted EBITDA. Although our leverage will trend slightly higher this year as we execute our capital recycling plans, our intermediate target remains in the low six times area. While we maybe forgoing short-term growth with our asset sales in 2017, we believe our higher quality portfolio and leases coming online in the second half of the year will position the Company for sustainable long-term growth. I would like to now turn the call over to the operator, to open the line for questions.

[Operator:]

[Operator Instruction] Our first question comes in the line of Collin Mings with Raymond James. Please state your question.

[Collin Mings:]

Hey. Good morning, guys.

[Dennis Gershenson:]

Good morning.

[Collin Mings:]

I guess, the first question from me, just maybe going back to the comment about the increasing leverage this year. Dennis, Geoff maybe you guys talk a little bit more about your comfort level increasing leverage at this point in the cycle? And then, just along those lines, I think you touched on unsecured debt that you're looking to raise this year in the range of $50 million. What type of pricing would you expect on that?

[Geoff Bedrosian:]

Sure, Collin. I think, as it relates to leverage, leverage will be higher at the first half of the year as we've executed a couple of acquisitions that we funded on the line, and then it will naturally come down as we execute our dispositions. So, we feel comfortable with the target range that we've laid out for 2017, and so I think that's how you should be thinking about leverage, just kind of increasing first half and kind of naturally coming down with asset sales in the second, third and fourth quarter. As far as the debt raise, like I said, we're thinking about $50 million opportunistically be weighted certainly in the last half of the year, probably the fourth quarter just given our thinking right now. And right now, we're looking at quotes somewhere around 160 to 170 over the 10-year. So, we're thinking about a little bit more conservatively just because we don't know how much volatility is in the market, but at least as of now that's a good benchmark on where the 10-year pricing would be for us.

[Collin Mings:]

Okay. That's helpful. And then just following up as far as on the planned dispositions, I mean last year I believe you guys achieved in the call, a blended cap rates about 7.6% on what you were selling. Clearly the guidance this year is an increase over that. How much of that is a function of just kind of what you're focused on selling this year the types of properties and location versus just a general uplift as far as cap rates in the market right now?

[Dennis Gershenson:]

Collin, it's Dennis. One of the things that we didn't say in the press release, are really addressing the comments here, is that included in our dispositions is, one enclosed mall in a tertiary market, and that is really driving the average cap rate up by about an estimate around 50 basis points. So, excluding that mall, we certainly see the rest of the asset selling somewhere in the 7s. That said, the majority of these markets – and understand that these are all good assets, but they are in smaller markets that are – and they don't reflect where we're taking the Company. So, although we feel good about those Michigan assets, the bottom line is that with our focus as I articulated in my prepared remarks, they just don't fit any longer in where we plan to go. And, obviously that also then decreases the impact of Michigan on the overall portfolio.

[Collin Mings:]

Okay. And that's helpful, Dennis. And then, one more question and I'll turn it over. I just want to reconcile, I think in the prepared remarks you guys were talking about call it about a 36-month plan as far as kind of transition. But I think, Dennis, you also referenced that kind of the 10% of the portfolio that you're recycling this year substantially complete the transformation of the portfolio. I am just trying to get a better sense of kind of the drag from some of the dilution that's going to happen this year and likely into 2018. Should we expect another round of 5%, 10% of the portfolio, turning over next year as you guys think about the pipeline, or is it kind of this year going to be the bulk of what you expect on the disposition front?

[Dennis Gershenson:]

Well, first of all, I apologize if I sent an improper message. When I talk about 36 months, I was really talking about our overall growth plan would encompass a 36-month period. The heavy lifting relative to dispositions ends in 2017 and we expect to initiate growth in 2018 with the objective of having sustainable growth in FFO of anywhere from 4% to 6%.

[Collin Mings:]

Okay. I appreciate that. I'll turn it over. Thanks guys.

[Operator:]

Thank you. Our next question comes from a line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

[Todd Thomas:]

Thanks. Good morning. My first question, John, I think you touched on this a bit in your remarks, but can you just provide an update on the timing on where you are in terms of back filling the four Sports Authority boxes and the two Golfsmith stores. It sounds like there's some pick up in guidance from re-tenanting these boxes. I guess what's in the model in terms of rent commencements in 2017?

[John Hendrickson:]

Sure. So, we – of the four boxes, we have three deals done as I mentioned, the fourth one being in Fort Collins. So, from a commencement standpoint, the one that Dick's took in down in Florida will actually commence probably in end of March or sometime in April of this year. The deal that we have for Nagawaukee will commence in the fourth quarter, that's our Wisconsin location where we have the two T.J. Maxx concepts in there. And then Clinton Pointe location which we are just about to final lease on will probably not commence until early 2018, so that's basically what's in our forecast right now. Regarding Golfsmith, actually we have two Golfsmith locations; one actually was taken by Golf Galaxy location in Troy, Michigan. So that actually – there won't be any impact – no downtime from that in 2017, and the other one were in the process of – we're working on leasing. So, our assumption is that those downtime for the whole year and hopefully we can make up some of that late in the year.

[Todd Thomas:]

Okay. And then, can you talk about your exposure to Gander Mountain, the two boxes you have, it's about 110 basis points of base rent. I know there are two of your stronger centers, West Oaks and River City. But any sense of what may happen there and can you just talk about some potential plans or thoughts to the extent that you get those boxes back?

[John Hendrickson:]

Sure. So as you mentioned, we have the two locations. It's uncertain what will happen. I mean certainly somebody we're watching. Our belief is at the two locations we have – even though we don't have to direct sales information or four-wall EBITDA information, but our understanding is that they are two good locations, and as you mentioned, they're both very strong properties for us. So we've already started to work on potential backfill if we need to and we feel comfortable that we'll be able to backfill them, even though it would have an impact, obviously if they do close in 2017, it could impact us, which is why taking a longer – that's why we've taken a longer – I mean a bigger reserve in 2017 than we certainly think to be a typical year. And just one thing to point out, on the – again, we just, we had this downside in our Novi, Michigan locations, we put in Nordstrom Rack, so that's just one custom inner size, and I think they should be much more comfortable with long-term and also as you know we've had quite a change in that merchandizing there, so we're just making it stronger and stronger.

[Todd Thomas:]

Okay. And then just shifting over to acquisition, so you're more than 50% of the way through the 2017 guidance for investments? What's the pipeline look like today? What are you seeing in terms of pricing and trends – for pricing and competition for these assets that you're targeting?

[Catherine Clark:]

I'll take that. This is Cathie. So I think that relative to the types of assets that we're trying to buy, we are not seeing large change in pricing. I think that we'll see the pipeline increase, you know there was a fair amount of property that was out last year that did not transact. And from my understanding that's been a comeback into the market as seller get a little bit more realistic on pricing and I think there'll be probably in the fixed cap range.

[Todd Thomas:]

And then on the disposition, I guess just last question Cathie, maybe also Geoff could chime in. How far down the road are you with potential buyers on some of these assets including the enclosed mall you mentioned? Can you just give us a sense how confident you're on getting these dispositions completed particularly given the strategy to buy first and temporarily increase leverage here?

[Catherine Clark:]

Yeah. So, given what we've seen thus far, I think we are fairly comfortable. By the end of the first quarter we'll close a little bit over 28 million. We've already taken offer on another 32 million, one of those properties had a fair amount of upside. We were pleasantly surprised on Michigan property. We had 10 bidders, five or six were pretty tight on pricing range and then we are able to market with another probably 75 million to 85 million. So, I think based on that, we're fairly confident, we can execute on our plans.

[Todd Thomas:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes in the line of Craig Schmidt with Bank of America. Please state your question.

[Craig Schmidt:]

Great. Within the existing portfolio, will you be looking to sell assets not in the top 40 MSAs that are outside of the state of Michigan?

[Dennis Gershenson:]

Hi, Craig. We will obviously as we continue to revolve the portfolio, look at some assets that again don't fit the criteria of the two focuses that we've got, and those will obviously help funds acquisition. So, on a selective basic as we're opportunistic on the acquisitions, so there are a few assets and very good assets that we will indeed utilize to pay for the acquisitions, but you won't see anything close to even what we sold in 2016 as far as dispositions are concerned.

[Craig Schmidt:]

Okay. And then the 250 million of dispositions this year, how far do they get you through removing the non-core assets from your portfolio?

[Dennis Gershenson:]

Well, again, to the extent that there will be some assets in the portfolio that fit that – either fixing this property definition, but may not be in the top 40 MSAs. We'll obviously look at those again to try and match up some acquisitions and dispositions, but over 90% of the portfolio at the present time, are in the MSAs that we're focused on.

[Craig Schmidt:]

Great. Thank You.

[Operator:]

Thank you. Our next question comes in the line of Vineet Khanna with Capital One Securities. Please state your question.

[Vineet Khanna:]

Hi. Thanks for taking my questions. Just going back to tenant help for a little bit, so I believe you guys have a couple of MC Sports and that serve another sporting goods retailer that closed. What other struggling retailers do you guys have exposure to, I know you mentioned Gander, but maybe you can just talk about MC Sports and also your watchlist in general?

[John Hendrickson:]

Sure. So on MC Sports, you're right. MC Sports is a regional sports operator, sporting goods retailer who – we have two locations totally about 45,000 square feet. They are apparently are going to be liquidating and we are expecting to get the stores back sometime in April. And are actively working on backfills and in fact we believe we have already one of them potentially backfilled. Looking at our other locations, I mean there is only a handful of other things outside of the list that you guys have probably aren't heard that we're keeping an eye on, including out Payless ShoeSource where we only have eight locations, totally 25,000 square feet and also rue21 where we have 11 locations. Beyond that, that's a really – I mean that's generally besides a few small shops here or there, we don't have a broad watchlist that were overly concerned about.

[Vineet Khanna:]

Okay, great. And then just regarding the sort of increase redevelopment plans for this year and beyond, how much of that is sort of entitled and ready to go as opposed to, there's work that still needs to be done?

[John Hendrickson:]

Our existing pipeline of 70 million, are all at this point that are comfortable that from our execution standpoint, both from leasing standpoint and entitlement standpoint. And so we tend not to try to put anything on the pipeline until it's pretty well at a point of that we're comfortable on the execution and have a low risk on execution. So, I think we feel pretty comfortable with the near-term execution.

[Vineet Khanna:]

Okay. And then just last one for me, the ancillary income initiative that I guess you guys started about a year ago. Maybe you can provide sort of an update on how it trended in 2016 and what the prospects are for 2017?

[Dennis Gershenson:]

Sure. I did mention at the beginning of the year that was a self-growth opportunity and it still is. For the year, we added about – it's all about a 10% growth in that line item. I want to talk about dollar magnitude, it's only $100,000 to $200,000 from a growth standpoint. I mean over time, we certainly think 10% growth over the next few years is something we should be able to achieve at that line item. I would have hoped for more in the first year, but certainly we're going [indiscernible] lots of executions and certainly going to be a focus in 2017 and beyond.

[Vineet Khanna:]

Okay, great. Thanks for the time.

[Operator:]

Thank you. The next question comes from the line of George Hoglund with Jefferies. Please state your question.

[George Hoglund:]

Hi. Good morning. Just in terms of the market focus going forward in terms of new markets and you're looking at Nashville, and you have the one large asset there now. With the plan be to try to increase the Nashville exposure and you focus on building up that market and kind of what other markets would you be looking at?

[Dennis Gershenson:]

Hi, George. We certainly with the acquisition in Nashville, as you can see from our past experience, we would be looking to increase our presence in Nashville, but again it would have to meet the criteria that we've laid out relative to the two types of shopping centers. As far as other markets are concerned, we are indeed looking at a number of other markets. Once again they have those key growth elements relative to population, employment and household income.

[George Hoglund:]

Okay. Thanks. And then going beyond 2017, I know you said the majority of the heavy lifting will be done. But would you expect to continue to do some sort of one-off asset sales and continue calling your bottom call it 5% or 10% of the portfolio?

[Dennis Gershenson:]

I think, absolutely it's a sensible approach, especially with assets that, let's assume we have maximized its value, they're now very stable. We don't see too terribly much upside which interesting is, in the assets that we're selling and again these are our good assets. Their growth potential fell somewhere between 1% and 2%. The three assets that we have acquired have internal growth metrics between contract increases as well as lease rollovers. We are talking about increases in the 4% range. So, as some of our assets fall into the first category with slower growth, they indeed could be candidates for sale, but we would look to match that up with acquisitions where we can add significant value.

[George Hoglund:]

Okay. Thanks for the color.

[Operator:]

Thank you. Our next question comes in line of Vincent Chao with Deutsche Bank. Please proceed with your question.

[Vincent Chao:]

Hi. Good morning, everyone. Hi, Dennis. I just want to go back to the same-store guidance here and just make sure I heard anything correctly. I think I heard 40 basis points of bad debt is included the one, is that correct? And then, I think the Sports Authority was 110 basis point drag in 2016, is that a similar drag in 2017 after you factor in the commencement timing that you laid out earlier?

[Geoff Bedrosian:]

Hi, Vince, it's Geoff. How you're doing? It was 40 basis points of bad debt for the pool that we're using for 2017. So, that's a little bit higher than what – how the pool performed last year, which was 30 basis points, so we're taking a little bit of a conservative view, but just so you have the color around the 40 bps.

[John Hendrickson:]

And then just talking about the impact of Sports Authority, now the impact of 2017 is more like 20 to 30 basis points still, because of the lease up we're doing. But remember, we're still holding about the same amount of tenant failure reserve in 2017 as we saw in 2016, which we think is a high year and that's a high year of reserves. So, if you – if we don't, if we have normal year for that kind of tenant failures, we're being more – we believe we'll be at the top-end of the range of our guidance for same-center.

[Vincent Chao:]

Just, so we're clear then, the tenant reserves you are talking about, is that 10 basis point increase in bad debt? I mean it doesn't seem tremendously higher or it was just something else?

[John Hendrickson:]

No. It's also, we actually carry that reserve for not only bad debt, but also on expected vacancy actually truly tenant failure and that total reserve is what we think was because of Sports Authority was $1.8 million high last year versus what we typically would have expected.

[Vincent Chao:]

Got it. As a percentage of NOI, that's – is that another 40 basis points, I don't have a mile in front of me how to do the math?

[John Hendrickson:]

It's high. I mean if you think about overall, it's like 3.8 million. So, as a percentage it's definitely much more higher than the 40 bps.

[Vincent Chao:]

Got it. Okay, that's fair. And then, I think also some of the moving parts here are sort of the asset sales, exactly what sales and when, but just curious if there were no dispositions this year, how would that impact the same-store NOI outlook?

[John Hendrickson:]

Well, obviously the same-store pool are forecast as net to – it contemplates the sales of properties. So, it depends on what the – if we didn't sell those assets, so again they are probably slower growth. I know it's hard to tell, it's not something we have performed.

[Vincent Chao:]

Got it. Okay. Alright, and just one other question, just different topic, the new lease spread in the quarter was quite high. You know I'm guessing that's some of the GSA re-leases. Is that correct, and if you net that out, what does the new lease spread look like?

[John Hendrickson:]

No. Actually the transactions we have, those four transactions aren't. It's actually the one, its three small shops and one larger box of 19,000 square foot box which is driving a lot of that gain. We took an old Asian grocery store and are re-tenanting it and doubling the rent on that. So, it required more TI typically, but we're certainly getting paid for it. I don't have a pro-forma, if we were to take that out, but obviously when you look, rather than looking quarter-to-quarter when you look overall for the year, we're basically in line from a spread standpoint, but higher quality leases as I mentioned in my prepared remarks.

[Vincent Chao:]

Okay. And just one last one from me, just on the Chicago acquisition, I thought I read that there was Barnes & Noble in there. I guess how are you thinking about that exposure, is that part of the sort of the upside scenario where you get that space back and can re-tenant it, or I guess how much turn is left there and just maybe some thoughts there?

[Dennis Gershenson:]

Very insightful. We have approximately a year, a year and half left on that least with no options. And it is significantly below market rental rate. So, we see very healthy upside in that space as well as turning some of the other smaller spaces.

[Vincent Chao:]

Okay. Thanks guys.

[Operator:]

Thank you. The next question comes from the line of Michael Mueller with JPMorgan. Please state your question.

[Michael Mueller:]

Hi. I guess with respect to the acquisitions and possibly moving into new markets, can you talk a little bit about I guess staffing and just kind of how the staffing works in terms of you know the ability to move it in new markets or will you be adding folks in different regions to accommodate that?

[John Hendrickson:]

Sure Michael. This is John, I'll take that. But, one nice thing about when you buy like we did at Providence, when you are buying the property that size, is that you can hire on – have on premises personnel of a high caliber and that actually ends up not just being part of the property expense. So, with that plus the local leasing, personnel that we'll have in Nashville that were hired third-party. We believe that we have new markets like that covered pretty well. It also just reminds that we're split into the two regions that we have implemented in 2015 and have already seen some good ability to focus on opportunities there, and having those two regions can be – first-hand look at opportunities in new market and really drive value there.

[Michael Mueller:]

So, it doesn't seem like you need the staff up substantially?

[John Hendrickson:]

No. It's really just using onsite personnel, and remember, we're trading out any – we're selling for assets too, so there is no new net increase at this point.

[Michael Mueller:]

Okay, and then I apologize if I missed this but, if we're thinking about the year-end consolidated occupancy and ignoring any impact from mix changes from buying and selling stuff. I mean where do you see occupancy ending the year more on a same-store basis?

[John Hendrickson:]

For total occupancy, about the fairly consistent, I think where we saw end of 2016, small shop – as I mentioned from a lease occupancy standpoint, we certainly hope to continue to push occupancy there to get to more of a stabilized number.

[Michael Mueller:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes the line of Floris van Dijkum with Boenning & Scattergood. Please state your question.

[Floris van Dijkum:]

Great. Thank you. Good morning guys. A question on cap rates first. We've heard a number of your peers talk about how they are starting see cap rate expansion of 50 bps or in some cases higher in secondary or tertiary markets. Are you seeing some of that and where are the cap rates on your disposal or properties that are in the market today relative to maybe where they were a year ago, if you can comment on that?

[Catherine Clark:]

Yeah, this is Cathie. So, I think in general we've seen that 50 to 100 move, 50 basis points spread between A&D properties a little bit less on the grocery anchored centers and a little bit more on non-grocery power centers. Deals with upsize are definitely getting more traction. So, I think you will continue to see that and I think that's its reflective – our sales are reflective of that delta as well.

[Floris van Dijkum:]

So that means that your – call it 7 and 7.5 expected disposition cap rates was sort of empty though, incorporate those cap rate increases?

[Catherine Clark:]

Yes. I mean if we're – yes, so for instance our Q1 disposed will be in that range, high 7 range on a cap rate.

[Floris van Dijkum:]

Great. One other question and maybe this is for John as well. I think somebody else touched upon it a little bit earlier, but it would be really useful maybe to – if you gave the market a little bit better view of what Ramco will look like in three years' time? In particular, in terms of market, you know achieving, trying to achieve critical math in certain markets, you just entered Nashville, so you have one asset there, you have two assets in Minneapolis, you have one asset in Baltimore, three assets in Atlanta, but none of them are seeing for lot of investors seem like that would provide you with critical mass or any sort of real market presence. How would you think about that and where would you ideally like to be in a couple of years' time?

[John Hendrickson:]

Right. So, it's hard to predict exactly, where we'll end up being, but our view is, if you buy the right real estate with who are super regionally dominant, real estate, that and it's less important probably to have a – we'd rather have that than four or five smaller assets, because we believe that's the future of the business. But if we compare asset like a Providence with a urban type location like we just bought in Chicago or Minneapolis, we believe that's a nice mix. That has worked well for us with the Centennial acquisition that paired up now in Minneapolis with Woodbury, and so I think that's kind of the program. I don't know, but it's hard to predict exactly where the opportunities will be, and it's throughout just about having the right real estate and the right sub markets in these rather than more the quantity of real estate.

[Dennis Gershenson:]

If I could just source, if I could just add, John this spot on with our philosophy, which is if you accept, as we do that you know, the retailing industry is transforming, so the shopping center industry also needs the transform, and having bulk in a market does not necessarily mean that you are going to be successful. We will have boots on the ground as John mentioned earlier with the Providence acquisition, so it isn't like we're going to have remote management for that asset. And really, once you get to understand the Nashville market, we are indeed, especially on the east side of Nashville, we are the absolute dominant asset. And we are drawing from far more than even 10 miles. So, having the dominant asset, having the right tenant mix, bringing in place-making and our Community-First initiatives will ensure the success of that asset and we're not going to try and bulk up just for a greater presence.

[Operator:]

Thank you. [Operator Instructions]. I'm showing now further question at this time. That does conclude our question and answer session. I will now turn it back to Mr. Dennis Gershenson for closing comments.

[Dennis Gershenson:]

As always ladies and gentlemen, thank you very much for your interest and your attention. We put a great deal of thought into the direction of our industry and we believe that with the acquisitions and dispositions that we're making, we are truly building in long-term sustainable growth starting in 2018. We will have completed for all intents and purposes our portfolio transformation. As of the end of 2017, we will be – as we have with Nashville more likely than not going into at least one new additional market. And I'd like to think that, at this juncture, we will be viewed as the absolute best of the small cap shopping center REIT with a tremendous runway for future growth. And we look forward to articulating those in the future. Thank you, again.

[Operator:]

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