Weingarten Realty Investors
Q3 2013 Earnings Call Transcript

Published: 1 Nov 2013

[Operator:]

Welcome to the Weingarten Realty's Third Quarter Earnings Conference Call. My name is Hilda, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Ms. Michelle Wiggs. Ms. Wiggs, you may begin.

[Michelle Wiggs:]

Good morning, and welcome to our third quarter 2013 conference call. Joining me today is Drew Alexander, President and CEO; Stanford Alexander, Chairman; Johnny Hendrix, Executive Vice President and COO; Steve Richter, Executive Vice President and CFO; and Joe Shafer, Senior Vice President and CAO. As a reminder, certain statements made during the course of this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on management's current expectations and subject to uncertainty and changes in circumstances. Actual results could differ materially from those projected in such forward-looking statements due to a variety of factors. More information about these factors is contained in the company's SEC filings. Also during this conference call, management may make reference to certain non-GAAP financial measures, such as funds from operations or FFO, both recurring and reported, which we believe help analysts and investors to better understand Weingarten's operating results. Reconciliation to these non-GAAP financial measures is available in our supplemental information package located under the Investor Relations tab of our website. [Operator Instructions] I will now turn the call over to Drew Alexander.

[Andrew M. Alexander:]

Thank you, Michelle, and thanks to all of you for joining us. We are very pleased to report another great quarter. Operations remain extremely strong. Our capital recycling program was very active with both acquisitions and dispositions last quarter, and we continue to improve our balance sheet with a successful bond offering shortly after quarter end, each of these advancing an important strategic objective of the company. The transformation of our portfolio is clearly producing excellent results for the quarter, including stronger-than-expected Same Property NOI growth of 4.7% and rental increases on new leases of 9.4%. Looking forward, we see operations remaining solid through the fourth quarter, but continued strong dispositions and the bond deal will provide downward pressure on FFO. This was a very good quarter. Our capital recycling will remain active for the balance of the year. We are very pleased with our recent acquisition in Austin as we purchased this great property in less than 60 days from identification to close. Generally, acquisitions remain competitive and it's challenging to estimate where we'll have success. So in summary, we feel very good about selling property and less bullish about finding significant additional quality acquisitions which make economic sense. As to new development, we continued to make progress on our Hilltop development in Washington, D.C. and remain on schedule for 2015 opening. We're already 73% leased and confident of reaching or exceeding our pro forma. Leasing activity at our Tomball development in Houston continues as we move closer to stabilization on the initial phase. We continue to look at a variety of opportunities and have a few things in the pipeline. Overall, the development market remains tough with high land prices and the tenants' unwillingness to pay the rents required to make economic sense from those deals. Nevertheless, we will remain fully engaged and are optimistic we'll find some opportunities over time. Of course, the challenges in finding acquisitions and new development also provide strength to our existing assets and demand for the properties that we're looking to sell. I'll now turn it over to Steve for the financials.

[Stephen C. Richter:]

Thanks, Drew, and good morning to everyone. Recurring FFO was $0.51 per diluted share for the quarter, up 10.9% from $0.46 per share in the third quarter of last year. FFO for the third quarter benefited from improved occupancy, which also contributed to a very strong Same Property NOI increase of 4.7%, which was above our plan. Recurring FFO also benefited from the redemption of 75 million of our preferred D shares in the first quarter of 2013 and 200 million of our preferred F shares late in the second quarter, as well as the ongoing refinancing of debt maturities. Offsetting these increases was the dilutive effect of our disposition program in 2012 and 2013. Looking to the fourth quarter, with our significant third quarter dispositions and our expectations for a strong fourth quarter, we expect recurring FFO to be negatively impacted by around $0.02 per share. Additionally, the prefunding of our January 2014 maturities through our $250 million bond deal completed at the beginning of October will also cost us an additional $0.02 per share sequentially. Reported FFO for the third quarter increased by 8.9% to $0.49 per share from $0.45 per share in 2012. Included in the 2013 amount was a noncash impairment of unimproved land parcels totaling about $0.02 per share from pending sales transactions. Turning to the balance sheet. We have completed a successful bond offering right after quarter end. We sold $250 million of 10-year bonds at a yield of 4.5% and a coupon based on a slight discount of 4.45%. This transaction effectively prefunded the majority of our January 2014 debt maturities, which totaled $285 million. With all the volatility and uncertainty in the market place caused by the talk of tapering and the government shutdown and the debt ceiling negotiations, we felt that executing this notes offering was effectively an insurance policy against significant market disruption. You may remember that we also locked the treasury swap rate back in February on $150 million of this issuance, which we closed out upon the completion of the bond deal, resulting in an effective rate of 4.39%. As a result of this transaction, we have completely paid down our $500 million revolver and have about $170 million of cash invested in short-term investments. Our balance sheet remains in great shape. At quarter end, the company's net debt to EBITDA was a strong 6.1x, and debt to total market cap remains low at only 37.8%. We remain committed to keeping leverage below the 40% level. So things are also very good on the financial front. As to how we see the rest of the year, we are raising our guidance for recurring FFO from $1.89 to $1.93 upward to $1.93 to $1.95 per share. We are optimistic that we will be at the upper end of our full year guidance on dispositions. And with the acquisition of the Mueller Center, we have exceeded our revised guidance with about $175 million closed to date, but likely nothing significant to complete in the fourth quarter. Additionally, with stronger-than-expected Same Property NOI growth in the third quarter, we have increased our guidance to 3.5% to 4% for the year. On Page 9 of our supplemental, all guidance metrics that have been updated are highlighted. While I'm on the subject of the supplemental, please note that we have provided additional disclosure on the same-store NOI performance, including commenced occupancy, which is on Page 26. With respect to 2014, our preliminary guidance for recurring FFO is $1.95 to $2.01 per share. Since we have not concluded our annual budget cycle, we will provide more details at our Investor Day in New York City next month. However, we are assuming that in 2014, acquisitions and new development will about equal dispositions, resulting in 2014 being capital-neutral from a balance sheet perspective but dilutive to earnings due to the higher cap rates on dispositions. Johnny?

[Johnny L. Hendrix:]

Thanks, Steve. On the operations side, the portfolio continues to produce solid results. Same Property NOI of 4.7% for the quarter and 4.5% year-to-date, improved occupancy to 94.4%, including shop space that increased to 88.7%. Leasing continues at a healthy pace. Rent growth at 9.4% for new leases. And we continue making great progress on our capital recycling program. I want to address our recycling program first. We sold about $116 million of assets during the quarter, that's 8 shopping centers and 2 vacant pads. Consistent with our strategy, these centers are in small towns and demographically challenged markets. Today, we sold $246 million of property for an average cap rate of 7.7%. That pricing is a little better than we estimated when we developed our business plan. Based on assets we have under contract today, I think it's likely we end the year at the upper end of our guidance range, around $325 million. We still have not seen cap rates move for non-core assets even after the sharp increase in rates we experienced this summer. We continue to see high levels of demand for non-core shopping centers from private REITs, funds and individual investors. Fortunately, we've been able to reinvest $175 million in high-quality shopping centers year-to-date. This includes the 2 assets we purchased post quarter end. We're very excited about the Mueller Regional Center in Austin, Texas. The project is part of the redevelopment of the former municipal airport close to downtown, the state capital and the University of Texas. The entire 700-acre site is being redeveloped as a new community consisting of new single-family and multifamily residential, class A office and medical facilities, including Dell Children's Hospital and the University of Texas Medical Center. Our center was built in 2007 and is anchored by Home Depot, Marshalls, Bed, Bath & Beyond and PetSmart. Core assets like Mueller have also held their pricing since early in the year. Sellers have definitely maintained the leverage as most asset sales of A quality shopping centers are generating multiple offers from highly qualified buyers. Core assets in gateway markets are still selling for cap rates in the 5.25% to 6.25% range. In other metro areas, we're seeing 5.5% to 6.5% cap rates for core properties. While it's difficult to quantify the exact contribution, our recycling program has made to the fantastic operating metrics we generated over the last 7 quarters. We are enjoying stronger Same Property NOI and higher occupancy as a direct result of owning better assets. We're going to talk in more detail about the transformation of our asset base at Investor Day, so I hope you can join us in New York on December 10. In addition to improved quality of our portfolio, the scarcity of new supply in metropolitan markets continue to overshadow what is really a pretty average demand for space. Even markets like Houston where we see stronger retail demand, quality new development is stymied by high land prices driven by multifamily boom. As I've mentioned throughout the year, we're still not seeing the formation of new mom-and-pop businesses; and most of our new leases are coming from national, regional or franchise operators. These tenants want to be in Weingarten properties because our top tenants, supermarkets and discount closing retailers, continue to drive sales and traffic to our centers. Rent growth for new leases continues to accelerate. We produced an increase of 9.4% in the third quarter and 12.6% year-to-date. We do see leverage slowly shifting to the landowner, particularly in urban markets that have more depth of retailer demand. As for leasing velocity, I mentioned earlier, retail demand is good but not great, pretty consistent with the lackluster economic recovery. While we have some mixed numbers, I think the end result is very good. We signed 109 new leases this quarter. This is almost 30% fewer than a year ago. These 109 leases represent about the same square footage as a year ago, but the annual rent for the leases signed this quarter represent close to $6.5 million. That's almost 20% higher than last year. Isolating the shop space, we observed pretty much the same pattern of fewer leases, about the same square footage and more total rent. Regionally, we definitely see a pattern emerging that will impact us in 2014. Our properties in the West, Central and Southeast are close to prerecession occupancy levels, 95% to 96%, and we can see leasing velocity slowing in those areas. Our Mountain and mid-Atlantic regions still have some runway and leasing is holding steady in those markets. As we get closer to full occupancy, we should expect the number of leases we see to decline. Ultimately, I see that as very good, but it definitely is a change from the last couple of years. During the quarter, we were able to increase occupancy to 94.4%. This is a slight improvement from last quarter and 50 basis points more than a year ago. Our shop spaces over 10,000 square feet are almost 98% leased, and our shop space rose to 88.7%. My expectation is we'll see occupancy flatten out over the next few quarters. We're getting tougher on renewals, especially the boxes, so we may experience some fallout that will hurt us short term, but over time provide us with healthier tenants and higher rents. We also expect there will be the usual fallout after the holidays. I want to be clear. We still see occupancy climbing to 95% to 96%, but it could be choppy along the way. Long term, this will drive increased NAV. But short term, there could be some moderation in the trajectory of increases in occupancy and Same Property NOI. We still have about 2.5% of our space leased and not commenced. That's 750,000 square feet. This will be an engine for solid Same Property NOI growth next year. But as leasing slows and occupancy reaches that optimum level, we anticipate the lease to commence spread will eventually settle around 1.75% to 2%. Finally, we're very pleased with the outstanding 4.7% Same Property NOI for the quarter and 4.5% year-to-date. On top of the great numbers we produced in 2012, these are really outstanding numbers. While the first 2 quarters saw significant bad debt variances, the third quarter bad debt was actually about $100,000 worse than last year. Almost 75% of the improvement from a year ago is in base minimum rent. We also had a nice pickup in ancillary income. We have another tough comp for next quarter, and we're anticipating Same Property NOI to be between 2% and 3%, which will result somewhere between 3.5% to 4% for 2013. So in summary, leasing is steady, our recycling program is strong, occupancy continues to climb and we delivered outstanding Same Property NOI for the last 7 quarters. Drew?

[Andrew M. Alexander:]

Thanks, Johnny. 2013 has been a very good year. Considering the economy has not exactly been on fire and there remains a great deal of uncertainty, we've performed extremely well. Again, I speak of transformation. Our portfolio is very different than it was when we initiated the strategic change, and I think the results speak for themselves. Speaking of transformation, I hope all of you can join us at our Investors Day on December 10 in New York City, where you'll get a deeper dive into the portfolio. We will lay out the dramatic improvements that we've made. You'll also hear from additional members of the outstanding management team of real estate professionals. Please mark your calendars if you haven't done so already, December 10. Great people, great properties and a great platform equals great results. I want to thank all of you for joining the call today and for your continued interest in Weingarten. Operator, we'll now be happy to take questions.

[Operator:]

[Operator Instructions] Our first question comes from Ki Bin Kim from SunTrust Robinson.

[Ki Bin Kim:]

I was wondering if you could just comment -- provide a little more color on what the financial impact will be in the fallout of tenants early next year, and if there is any -- if there is a way to categorize the type of tenant?

[Johnny L. Hendrix:]

I'm sorry, the last question is to categorize what?

[Andrew M. Alexander:]

The type of tenant.

[Johnny L. Hendrix:]

Yes, yes. Yes, the things that we're looking at, we don't have any certainty on today. These are leases mostly that we're negotiating. And there's probably going to be several hundred thousand dollars through 2014 that will be as a result of those fallouts. One of them is a supermarket. And one of them -- we're probably definitely certain that Office Depot is going to close in a specific shopping center. Again, we think we'll replace these tenants. But I think it will take a little bit of time and there will be some negative impact on that.

[Ki Bin Kim:]

Okay. And just one last question. I'm not sure if you addressed in your opening remarks, but with regard to your 2014 FFO guidance, what is embedded in terms of what you're going to do on capital deployment net?

[Stephen C. Richter:]

We really haven't provided guidance. We have an Investor Day on December 10 in New York, and we'll provide full details for all of our 2014 guidance there. But I know that there was -- in some of the pre-call notes, there was a lot of question or issues around our 2014 guidance. I think most of that confusion or question is around the dilution from the distribution program. We strongly feel that this is a great time to sell assets and complete the portfolio recycling efforts that we've articulated now for a couple of years. This strategy, I will acknowledge, does result in some short-term pain and a slower FFO growth. But we are confident that over the long term, we will improve NAV for our shareholders. Let me -- I think if you look at 2014 -- and remember, in 2013, we're coming off -- as Johnny mentioned in his prepared remarks, we're coming off a very strong second half of this year. So you'll have the full year effect of a very strong disposition program that rolls into next year. And then in '14, if you just -- one just assumes another $250 million of disposition, that in and of itself is significant. I mean, just to quickly run through some numbers, if you took $250 million and you used a spread which, if I use our 9-month actual on dispositions that Johnny talked about, at 7.75 and our cost of our revolver today is about 1.5, so that's about 625 basis points spread. And if one assumes that we do that ratably through the year, so it's about half the money half the time on $250 million program, so 625 basis points on $125 million is $0.06 to $0.07 a share. So that just gives you kind of the magnitude, if you will, for what that dilution looks like. Also on '14, as Johnny mentioned, we have a little bit of decisions to make on leases as we lease up throughout '14. And again, there may be some short-term loss in NOI, but clearly, we see that as long term. So I mean, bottom line, there's lots of moving pieces, but I did want to go ahead and give that color on '14 guidance.

[Ki Bin Kim:]

Right. Just to clarify, maybe I can ask this in a different way. In 2013, you're expected to be a net seller by about $80 million. In 2014 guidance, is there activity embedded in that guidance or is that a -- is that based upon a static portfolio?

[Andrew M. Alexander:]

As we try to articulate in the call, we expect that 2014 will be capital neutral from a balance sheet perspective. So it will still be dilutive from the standpoint that we'll be selling assets at higher cap rates than what we are buying. We also anticipate investing a little bit in new development, which obviously will not produce NOI initially. So while it's capital-neutral from a balance sheet, it is dilutive to earnings. As mentioned, we'll give precise guidance in New York, but Steve took you through the math just assuming $250 million and it's $0.06 to $0.07 per share.

[Operator:]

Our next question comes from Michael Bilerman from Citi.

[Michael Bilerman:]

I recognize that you're not going to pay down the line of $250 million because you're going to buy some assets, so that would be probably max dilution that you would see. And I think perhaps I recognize it's capital-neutral. But at least the size of potential dispositions, I mean, how much left of the portfolio do you sort of view in this whole non-core dispositions? Is it -- do we have $1 billion left? Is it $500 million? Or are we at the tail end of the last $250 million? And I think that's what we're trying to get our arms around as you may be capital-neutral next year, but is that capital-neutral $500 million, or is it capital-neutral $250 million?

[Andrew M. Alexander:]

We'll get more into it in New York, Michael. But it's much more in the neighborhood of the $250 million than it is either in the numbers that you mentioned.

[Michael Bilerman:]

And do you feel then that you're at the end...

[Andrew M. Alexander:]

We also see -- we also obviously see capital pruning as an ongoing part of our strategy, so as we are selling things that are just at the bottom, we also see, as you get into '15, '16, the spread narrowing. As I mentioned in my remarks -- the spread narrowing between what we're buying and what we are selling. As I mentioned in my remarks, acquisitions are very difficult to find good quality things. And that's where I think we have clarity that we will achieve our disposition goals pretty easily. The acquisition is a much tougher thing. So yes, you're right, we do expect to be capital-neutral. We do hope to be investing in acquisitions, so it wouldn't be the full magnitude of just paying down the revolver. But we're just trying to put it in context of how much it is. And again, we feel more comfortable on the disposition side, acquisitions for a good quality property are very, very competitive.

[Michael Bilerman:]

Right. And then as we think about what happened in the fourth quarter, you have $110 million of sales that are expected and the newer property, $86 million, and that's about it. What were the cap rates on the fourth quarter transaction activity? So as we are thinking about 2014, that obviously plays a part as well.

[Johnny L. Hendrix:]

Hey, Michael. This is Johnny. The cap rate on the fourth quarter stuff, if it does close, and we do anticipate that it will, will be somewhere around 7.5. And the Mueller property that we bought, somewhere around in the low 6s.

[Operator:]

Our next question comes from Jonathan Pong from Robert W. Baird.

[Jonathan Pong:]

Just a quick question, with this pretty aggressive disposition initiative and still competitive marketplace for acquisitions, how are you guys thinking about the 150 million of series of preferreds that you still got out there? Is that a low-hanging fruit that you can take down?

[Andrew M. Alexander:]

This is Drew. It's something that we're certainly thinking about. We don't have any plans and not want to make any announcements this morning. But it is something that's out there that, and as I said before, we'll see how it goes in terms of acquisitions, dispositions, new development opportunity. So we are certainly aware of it. And it's something we're thinking about, but not anything we're planning immediately at this time.

[Jonathan Pong:]

Great. And just a little bit more on the acquisition environment. You've now done 2 of what I would say as more power center-like acquisitions between Mueller and independents, where pricing is probably a little bit more attractive even on a risk-adjusted basis relative to grocery-anchored centers. Would you agree with that thesis? And then maybe when you think about those 2 subclasses of shopping centers going forward, how might each of those components grow within the portfolio?

[Johnny L. Hendrix:]

Jonathan, we're focused primarily on getting quality real estate. We're looking at the income level, the education level, the density. We want to have urban assets for the most part, and we would rather have a supermarket component in the shopping centers. It is not a requirement. So we're looking at it more from a real estate perspective than anything. I think there probably is somewhat of a discount for power center now that's relative to a shopping center that may otherwise have a supermarket component. But kind of hard to compare, one on one side of the town, the other on another. Going forward, I don't think that we're going to be isolated to one or the other. And I would think both of those types of categories would expand in the portfolio, but we're not targeting everything that we have. Today, about 75% of the ABR of the company is in shopping centers that have a supermarket component. I think we'd like to keep it in that range, but certainly, don't have a requirement to that.

[Andrew M. Alexander:]

Also I might add, independents, of course, has a supermarket, Mueller has a supermarket right next to it. So in our minds, we get the benefit of all the traffic in both those properties.

[Operator:]

Our next question comes from Wes Golladay from RBC Capital Markets.

[Wes Golladay:]

With the continued improvement on the shop and anchor front, how far off are the economics for development versus where they were, say, at the start of the year? And I think you mentioned land being one of the headwinds for new development. I was wondering if you had any developments you can do from your existing land banks?

[Andrew M. Alexander:]

We'll, again, get into that and some specific examples in New York. But yes, we are and will continue to make progress on some small phases out of the land bank. It's hard to forecast the exact differences but in the quality locations that we're looking at, with dense population, it's still very challenging. One can go out in the suburban fringe and conceptually do it sometimes. And one can certainly go rural and do it. But that's not what we're focused on. We're focused on good quality locations, and that's where it's really challenging. In Texas, in a lot of places, the apartment guys, the multifamily guys, can really bid up the prices beyond what conventional shopping centers can pay. So we see it coming back. We got a very good platform. We're monitoring it. But I think it will be a while before it's material volume. We are making some progress. And we'll get into this more in New York. And we'll make progress next year on the land held.

[Operator:]

Our next question comes from Brandon Cheatham from SunTrust Robinson.

[Brandon Cheatham:]

Just real quick. Again, on the acquisitions and dispositions for next year, can we anticipate that spreads between those cap rates should remain about what we've seen this year? Is that your anticipation as well?

[Johnny L. Hendrix:]

I think that's probably a pretty good assumption. Our vision is, is that cap rates are pretty close to the same over the next couple of months and even the next year or so. So I don't really see much change in that.

[Brandon Cheatham:]

Okay. And on proceeds from dispositions, you mentioned some of that falling through to development. Do you have any idea kind of what percentage we could assume going forward?

[Andrew M. Alexander:]

This is Drew. No, as I said, it really depends upon the opportunity. And I don't see a tremendous amount of investments in new development in the near term because I don't see the opportunities there. When it -- we really look at it separately in terms of if we're successful in dispositions, great. And we think we can be. But we'll still be disciplined about acquisition and development opportunities. And that's where the earlier question in terms of the preferred coming on the table or things that we'll look at as we get closer to it. So no, I can't really give you a specific number. We'll look at opportunities and do what we think is the best long-term thing to create shareholder value.

[Brandon Cheatham:]

Okay. And on the Mueller acquisition, you guys moved pretty quick there. Is that just based on opportunity came up and you want to get ahead of it?

[Johnny L. Hendrix:]

Brandon, Johnny. I don't know if you know this, but Drew and I both went to the University of Texas, so we're very familiar with it. But no, not really. We had actually looked at this asset about 1.5 years ago. And when it came up again, we had already done a lot of research on it, and we were able to move very quickly. It was somewhere around 36 days from the day that we shook their hand to that time that we closed on the property, and that included the assumption of a life company loan. So pretty good advertisement for us, I think.

[Operator:]

Our next question comes from Jim Sullivan from Cowen Group.

[James W. Sullivan:]

Johnny, in your prepared comments, you talked a little bit about the upside you see in the coming quarters from narrowing that spread between the leased and commenced occupancy. And I'm curious, given how the portfolio is changed with the mix of sales and acquisitions and given where occupancy is heading, I wonder if you can talk a little bit about pricing and rental spreads. And I'm curious, given the -- in short, will spreads continue to widen? But as part of that, I'm curious also what the terms of this lease is? To what extent are you getting in your new leases cash bumps, if you can maybe give us a percentage of the leases that have the cash bumps? And kind of a related question, whether you're getting cash bumps from anchors to a greater extent than you were before. And then also a related question, to what extent, if any, are TI dollars going up or going down as these -- as occupancy rates rise?

[Johnny L. Hendrix:]

Okay. I think there's a lot of questions there. If I missed one, I hope you'll come back to me. Number one, in terms of the spread in occupancy between commenced and signed, I think that we're in areas and markets that have more significant barriers to entry. And that includes some zoning, and having to go get approval for construction and even tenant uses. So it is taking us longer from beginning to end to be able to get a lease from signed to actually occupied. Retailers today, national retailers specifically, are all focused on some pretty specific windows for opening, and I think that kind of slows us down a little bit also. The tenant mix from about 60% national and regional tenants to now, we're 77%, I think probably, it's harder to get folks open. And that's why we think to settle in somewhere between 175 basis points and 200 basis points is probably, probably right. In terms of tenant finished dollars, we -- I don't really see that it's been significantly more or less. It feels like about the same, and when we look at the deals, it's pretty close. In terms of the bumps, I would tell you that we're getting some sort of lease bumps from most of the retailers. So I'd say more than -- certainly in the 70 percent-ish range. National retailers, junior anchors, you usually can get a bump in only 5 years. On a local tenant, I can get a bump every year. So somewhere between that, in the national food stores, you can get a -- I'm sorry, the restaurants, you can generally get a little bit of bump in every 3 years or so. When you look at the supermarkets, not many of them are doing a lot of leases these days. The niche groceries is really where the opportunity is, and that's where the expansion is today. And they're pretty resistant to bumps, but we have been able to get some bumps from those guys on some sort of 5-year terms.

[James W. Sullivan:]

And I'm just curious. In terms of those anchors, do you push for or try to get annual bumps? Or is that just a nonstarter with most of those tenants?

[Johnny L. Hendrix:]

I would tell you, we're -- today, it's different than it was yesterday or it was a year ago. And that is we are being tougher on all of the renewals that we have. And we're looking and making decisions and trying to decide and make a choice whether or not we want to extend this tenant or not and whether or not they pay a rent bump is a big part of that. So we are negotiating hard for rent bumps on every negotiation. Some of them, we are successful and some are not. Some of the larger tenants, Kroger, et cetera, is much, much more difficult.

[James W. Sullivan:]

And then a final question for me. You mentioned restaurants as a tenant category, and I'm very curious philosophically, and Drew, if you want to chime in on this, please do. But over time, restaurants as a category have been kind of fickle category. I think you've had a pretty high level of failure with the -- with those formats. And I'm curious if you have kind of a hard cap on the TI dollars per foot you'll provide to a restaurant tenant.

[Andrew M. Alexander:]

I wouldn't say we have a hard cap, but I would say it's something that we're very sensitive to. Vast majority of the "restaurants" that we have are a much more into basic goods and services, the SUBWAY sandwich shops, et cetera. So we're pretty particular when it comes to the more white-tablecloth restaurants, but there really aren't that many of those in the portfolio.

[Johnny L. Hendrix:]

Yes, and I wanted to add something, too. When we look at restaurants, this is part of a more significant lifestyle change, I think, that we see today versus 10 years ago. So I think there probably is more place for fast food restaurants. People are all busy, they're running. And we certainly have been very successful over the last several years.

[Andrew M. Alexander:]

Yes, you have, in addition to Subway which I mentioned, the Paneras, the Chipotles, the Pei Weis, the Pandas, that we've had good success with. They bring a lot of traffic and they've been pretty financially successful.

[Operator:]

The next question comes from Tammy Fique from Wells Fargo Securities.

[Tamara J. Fique:]

I was just wondering if you could talk a little bit more about the property you bought in Austin, maybe what the upside potential is of that asset and on the IRR on which you underwrote it.

[Johnny L. Hendrix:]

Yes. Tammy, this is Johnny. The trade area is very, very tight. If you look at that trade area between the river and 290, which is almost about 6 miles, there really is no developable land for a retail property. And as we renew tenants, we feel like we should be able to get good increases in them. We really don't have much downside. The Home Depot that is there has good rent bumps in it. So we feel really good about the growth that we have had there for that property. In terms of IRRs, that's not something we talked a lot about. Again, cap rate-wise we're probably looking in the low 6s and probably around at 3% NOI growth on the property over a 10-year period.

[Tamara J. Fique:]

Okay, great. And then I guess just sort of turning back to NOI growth maybe for 2014, which I know you haven't really provided guidance for that. But as we are [indiscernible] thinking for our estimates for 2014, you have a gap between signed and leased that is wider today versus where it was a year ago. It's -- and you have 8% implied rent spreads on your expirations relative to where you've been finding rents recently. Tenant reimbursements are up, expenses aren't seem to be well controlled at this point. You did talk a little bit about fallout that could be a modest drag, looks about 10 basis points. And I guess -- so I guess just as we think about NOI growth next year, is there any reason to think that it should be well below where the 3.5% to 4% that you offer for this year for guidance?

[Johnny L. Hendrix:]

Yes, I think it -- a lot of it depends on the choices that we make as it relates to some of the tenants that we are negotiating with today. I don't think that anybody can expect that the elevated Same Property NOI that we've seen for the last 7 quarters is sustainable as we get toward full occupancy. And I think a number that we've talked about historically is somewhere around 2.75 to 3.25 for a sustainable long-term Same Property NOI number. And I think that's probably a number that you guys could use. I am not giving guidance in that number. But when we look at something that's kind of sustainable, I think that's where we will be. I think at the end of the day, our occupancy will rise slightly but certainly not at the pace that it has in the last 2 years.

[Operator:]

Our next question comes from Jay Carlington from Green Street Advisors.

[Jay Carlington:]

So just looking -- it looks like you bought out one of your investment interest. And I'm guessing that's Bouwinvest, but I'm not sure. So just wondering what was the rationale there, and can you give a little color on what type of building that was?

[Stephen C. Richter:]

This is Steve. That was not Bouwinvest. That day where -- we have now, I guess, one deal with them and looking at 1 or 2 others. But that was one of the Miller deals which was our partner in Denver. We actually settled with them on several issues. We traded some interest in some JVs. And bottom line, we wound up with a -- it's a single tenant lease to the state of Utah that we will turn around and put on the market and already quite frankly on the market to sell. So it was not anything strategic that we want long term, but it was really rolling out of 3 individual properties with that partner.

[Jay Carlington:]

Okay, great. And then maybe just on same-store NOI, you had good expense control this quarter. And I'm just wondering, is there a certain level of NOI that you can generate that will generally translate into maybe operating leverage? Or are there just too many moving pieces to kind of ballpark that?

[Stephen C. Richter:]

In our business, the expense side is pretty much a function of -- or is better tied to inflation from some of our suppliers, our vendors, that maintain our parking lots and so forth. So generally, in a noninflationary environment, there is a little bit more margin there than when you see higher inflation. So I would tell you, in some ways, yes, as long as we're in a low inflationary environment but not totally, if that makes sense.

[Operator:]

The next question comes from Mike Mueller from JPMorgan.

[Michael W. Mueller:]

Drew, you were talking about, I think, the term you used was constantly pruning capital. I'm assuming it just meant consistently selling assets over time. I mean, how do you think about that? Do you think about in any given year, we're going to sell the bottom x percent? Do you think of it as a pool that's big enough where it's going to take years to get through? And then when you think about recycling capital, I mean, do you anticipate if you're selling $1, you're reinvesting $1. Or do think you'll be a net acquirer over time?

[Andrew M. Alexander:]

We'll get into this in a lot more detail in New York. But basically, as we've said, we do think that next year is a pretty big year on the disposition front, and we hope it is on the acquisition front, but then we'll see. And then going forward, we do look at a continually analyzing, and Johnny will go through some of the aspects in New York, of the model that we use to rank and have been using for years to rank the portfolio. We do look at the bottom of that. And I would say depending upon the specific year and how we see market conditions, maybe you're looking to something like 3% of the portfolio on a run-rate basis way out into the future.

[Operator:]

Our next question comes from Chris Lucas from Capital One Securities.

[Christopher R. Lucas:]

Just getting a sense, Johnny, maybe as to how you think about the disposition composition for next year. In other words, I think the real question a lot of us are trying to figure out is what's -- where are you at this point in terms of what was laid out originally in terms of the strategic plan of dispositions? And what is part of your sort of the normal part of the cycle of just calling assets that don't fit, whatever profile you want to give it, that would be part of sort of that regular recurring calling? So any sense as to whether you're at a 100% of sort of that strategic stuff you're trying to get rid of? Or there's some portion that is now coming in that is probably part of the more normalized cycle of dispositions?

[Andrew M. Alexander:]

This is Drew. I think it's impossible to put a specific number on it. But I think some of the reason why the number is bigger, the cap rate is better, is that we're getting in to, if you will, some of both that in terms of the non-core, we're just finding what we think are some good opportunities to sell some things. And we think that makes sense given long-term interest rates probably moving up, et cetera, et cetera, a whole lot of factors. So again, we'll go through the detail of the methodology that we use. But I would say it's a bit of a blend, but it's really hard to put a specific number on it.

[Christopher R. Lucas:]

Okay. And then, Steve, just how much of the portfolio was in the same store at this point?

[Stephen C. Richter:]

Well, actually, on Page 26 of the supplemental, which is a new disclosure, I mean, you can see that there -- for those that don't have it, we -- our NOI from same store is $88 million, which represents about 90%. So I mean, you can -- that additional disclosure can get you there.

[Operator:]

[Operator Instructions] The next question comes from Adam Joseph from West Main Partners.

[Adam Joseph:]

Two questions if I could, please. It seems as though the rental rate increases, especially, let's say, 3 of the last 4 quarters, are trending in the right direction. With the guidance that you put out for '14, can we assume that this is a run rate that you're going to expect moving forward?

[Johnny L. Hendrix:]

Adam, this is Johnny. I think that's a pretty good assumption. I think we are very, very focused. And I think, tactically, we have shifted toward pushing rents stronger. And I think that's probably an expectation that I have and that you guys should expect also.

[Adam Joseph:]

Okay. And my second question, please. There seems to be a bit of the mini-rebirth happening with the growth in the master planned community segment. Based on what you guys have done in Austin, where do you see yourselves moving forward, and what role will you be playing in this segment? Can you give us some details as far as do you guys view this as a real potential growth area that you want to be involved in? Or are these just pockets that we're seeing?

[Andrew M. Alexander:]

I think -- this is Drew. I think it's something that we have been involved in for years, going back to the foundations of the company, in 20 and 30 years ago, that we've been involved in different master planned communities all over Houston and elsewhere. We have great relationships with a number of homebuilders and other folks who do master planned community. That said, there's a lot of other people out there, in a very competitive world. So it's something that we will look at and evaluate, but we are also looking at more urban densely populated things. And there's a bit of a seismic shift going on in terms of what the younger folks want in terms of how much suburban new growth there is. So you have to factor that all in. So I think development will continue to grow. We certainly look at master planned communities. But I wouldn't say that I expect it to be a humongous investment in 2014, but we do pay attention to it over time.

[Operator:]

Thank you. At this moment, I would like to turn the call back over to Mr. Drew Alexander for any final remarks.

[Andrew M. Alexander:]

We appreciate everybody's attention. We hope to see all of you and many more folks in New York on December 10. It will be a wonderful presentation, hope you can make it. And we appreciate your attention in Weingarten and wish you all a great day. Thank you very much.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. We thank you for participating. You may now disconnect.