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Inland Real Estate Corporation (NYSE:IRC)

Q1 2013 Earnings Call

May 9, 2013 02:00 PM ET

Executives

Dawn Benchelt - IR

Mark Zalatoris - President and CEO

Scott Carr - EVP and CIO

Brett Brown - EVP and CFO

Analyst

Todd Thomas - KeyBanc Capital Markets

Josh Patinkin - BMO Capital Markets

Jeff Donnelly - Wells Fargo

Paul Adornato - BMO Capital Markets

Operator

Good day and welcome to the Inland Real Estate Corporation First Quarter 2013 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions). After today’s' presentation there will be an opportunity to ask questions. (Operator Instructions). Please note, this event is being recorded.

I would now like to turn the conference over to Dawn Benchelt, Director of Investor Relations. Please go ahead.

Dawn Benchelt

Thank you, Emily and thank you for joining us for the Inland Real Estate Corporation's first quarter earnings conference call. The Earnings Release and supplemental financial information package have been filed with the SEC today and posted to our website, www.InlandRealEstate.com. We are hosting a live Webcast of today's call which is also accessible on our website.

Before we begin, please note that today’s discussion contains forward-looking statements, which are management’s intentions, beliefs and current expectations of the future. There are numerous uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. For a discussion of these risk factors, please refer to the documents filed by the company with the SEC, specifically our Annual Report on Form 10-K for the year ended December 31, 2012.

During the presentation, management may reference non-GAAP financial measures that we believe help investors better understand our results. Examples include funds from operations, EBITDA and same-store net operating income. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release and supplemental dated May 9, 2013. Participating on today’s call will be, Mark Zalatoris, Inland’s President and Chief Executive Officer; Chief Financial Officer, Brett Brown and Scott Carr, President of Property Management.

Now, I’ll turn the call over to Mark.

Mark Zalatoris

Thank you, Dawn. Good afternoon everyone, and thank you for joining us. On our call today, I will summarize our first quarter results, review our recent transactions and discuss the progress we have made towards our objectives for 2013. Scott will update you on our portfolio performance and leasing activity and finally Brett will close with the review of our capital markets activity, balance sheet and our guidance.

First quarter was a very strong quarter for the company with record leasing and progress on our initiatives to produce strong internal portfolio metrics improve the quality and growth profile of the portfolio and strengthen our balance sheet.

Let me begin with a quick review our portfolio results, which Scott will provide more detail about later in the call. In the first quarter, we recorded same-store NOI growth 3.2% over the prior year period. At March 31st, the total portfolio was 94.1% leased, the financial occupancy of 91.6%, both of these metrics are 140 basis points higher than one year ago.

Our leasing pace remained robust with more than 600,000 square feet leased in the quarter, representing the highest first quarter leasing total in the company’s history. We are seeing demand across a broad spectrum of retail categories and formats and importantly we are continuing to translate this demand into positive leasing spreads. New lease rates were up 10.9% in the quarter and renewals were up 15%, I would like to take moment to thank all of our employees for their hard work in producing another quarter of strong and operation leasing results for the company.

On the transaction front, we continue to execute on our strategic goal to sell non-core properties with limited upside to improve the growth profile of our company and prudently recycle capital. During the first quarter, we sold two non-core properties for a combined sales price of $6.6 million. In total, we recognized a gain $2.7 million on these dispositions.

Additionally, we have five properties that are currently under contract for sale and we estimate proceeds on the remaining dispositions will be approximately $30 million. We expect all of those dispositions to be closed before yearend and we will provide more details as the sale process is completed.

With regard to acquisitions, we continue to source opportunities to acquire high quality retail centers in our core markets and in other strong markets across the Midwest. In April we acquired Warsaw Commons, an 87,826 square foot shopping center in the city of Warsaw in northern Indiana for $11.4 million, subject to future earn out payments.

The center is 96% leased and is anchored by TJMaxx, PetSmart, Ulta, Shoe Carnival and Dollar Tree. Warsaw Commons is located in the heart of the major trade areas where national retailers including Kohl's, Walmart and Lowe's have clustered to serve a growing community with strong, average household incomes.

Importantly, we can leverage our in-place property management platform given the center's proximity to our orchard crossing shopping center in Fort Wayne, Indiana. We acquired Warsaw Commons through a loan-to-own transaction which allowed us to purchase directly from a developer of a brand new center with a high quality rent roll and extremely attractive yield of 8%.

Warsaw Commons is a great acquisition for us and it highlights our ability to source high quality off market acquisitions through our network of relationships with developers and private owners. We remained disciplined in the execution of our strategy which is to acquire retail properties in market dominant locations with strong demographics that attract quality tenants and also meet our return hurdles.

It’s important to know that we have doubled total assets under management from $1.3 billion in 2004 at the time of our public listing to $2.6 billion at year end 2012. The joint ventures we established with institutional partners have been instrumental in advancing our growth objectives. Those ventures have enabled us to increase assets under management and generate a high margin recurring fee income stream, while we worked to reduce our cost of capital with a long term goal of growing or consolidated portfolio.

Finally we have extended our joint venture agreement with Inland Private Capital Corporation and revised fee structure to provide a higher percentage of recurring management fee income. The venture has lowered its one time acquisition fees and slightly adjusted property management fees. In exchange IRC will be paid a new annual asset management fee on each property acquired by the venture that will be earned throughout the management period. We believe this structure provides more value to the company due to the greater emphasis and long term stable management fee income over one time transaction fees.

With that, let me turn the call over to Scott to review the operational and leasing results in greater detail. Scott?

Scott Carr

Thank you Mark, hello everyone. This afternoon I will provide more detail regarding our operating results and leasing activities in the first quarter within the context of the overall leasing environment. And then I will give a brief update on some of our current redevelopment projects.

We are very pleased with the solid results generated by our portfolio so far this year. For the quarter consolidated same-store NOI rose 3.2% over the same period in 2012, driven by higher income from new leases coming online as well as increased rental rates on renewals.

Same-store NOI growth was in line with our expectations and our target for same-store NOI growth for the full year 2013 remains within the range of 1% to 2%. As we said in our last call, our annual guidance reflects the impact of expected dispositions and 350,000 square feet of space being taken offline in conjunction with planned redevelopment projects. As a reminder we did not remove properties undergoing redevelopment from the same-store pool. So bear that in mind in the coming quarters.

At quarter end, leased occupancy for the total portfolio was 94.1%. Within the total portfolio anchor-leased occupancy was 96.3%, up 80 basis points from one year ago. Non anchor-leased occupancy was 88.5%, up 260 basis points from the first quarter of 2012. These significant gains in leased occupancy are the result of strong leasing activity we achieved during the past year and we expect the positive leasing trends to continue in 2013.

For the first quarter we executed 97 leases from more than 607,000 square feet within the total portfolio. Our robust leasing pace is indicative of the increasing retailer demand which we have reported across our markets over the past year. We are seeing increased leasing activity across a broad range of retail categories for both large spaces and smaller Inland shops.

With a larger shopping center portfolio in the Chicago and Minneapolis St. Paul Metro areas, this is a tremendous opportunity for us. As that our markets have strengthened over the past two years, so has the occupancy and the quality of tenants within the portfolio. The increased demand we are seeing and our ability to accommodate this demand is best exemplified by our growing relationship with new market entrants such as Buy Baby, Ford Mens, HHGregg, Five Below, and most notably Ross Dress for Less, with whom we have now completed nine leases in the Chicago land area.

We are also experiencing renewed demand from the 3000 to 8000 square foot apparel retailers such as Rule 21, Dress Barn, Torrid, Carters and others. For example during this first quarter we signed a new lease with Dress Barn for ,6400 square feet at our Westgate Shopping Center in suburban Cleveland; and we in final lease negotiations with another national apparel retailer for approximately 3000 square feet at that center.

In addition to these national retailers we are seeing healthy activity from franchise operators and mom and pop retailers for users ranging from Spa and Hair Salons, Yogurt stores, Mobile communications, Tutoring and insurance services.

We are also experiencing continued demand in the quick serve fast casual restaurant segment as well as from other nonretail users. With demand across many categories and from tenants of all sizes, we can be increasingly selective in adding the right tenants to enhance the retailing mix and customer experience at each of our properties.

Turning to leasing spreads we are able to achieve continued strong rent spreads in the first quarter. Average base rents increased 10.9% on new leases and 15% on renewals. While we saw positive spreads throughout most of our lease activity there were a few particularly impactful leases signed in this quarter which I would like to highlight.

At Rivertree Court we executed a lease with Pier 1 for more than 10,000 square feet and an annual base rent that is more than double the rent paid by the former tenant Old Country Buffet. At Chatham Ridge we signed a lease with Cosmo Beauty Supply for approximately 6,000 square feet and rent that was 70% higher than the prior tenant. And finally at Mosaic Crossing Old Time Pottery leased 78,000 square feet at a rent that is 40% higher than the amount paid by the former tenant.

For our necessity and value based portfolio we target a stabilized leased occupancy of 94% to 96%. This stability in occupancy gives us flexibility to create opportunities for retailers looking to increase net store accounts, right size store formats and reposition within our markets.

With increased absorption in our markets and lack of new development we are realizing improved pricing power. We believe that we can take advantage of this window to satisfy the retailer driven demand with our ongoing repositioning and redevelopment initiatives.

Currently we have three developments underway and another three expecting to commence in the coming quarters as leasing continues, plans are finalized and approvals received. We plan to invest a total of $21.2 million in six projects for an average return on cost of 15% and expect to deliver over 300,000 square feet of GLA in 2014.

Let me provide you with an update on some of our more high profile projects. At Aurora Commons and Aurora Illinois we declined to renew a lease with Jewel Food Stores and are moving forward with our plan to redevelop the 65,000 square foot building for multiple apparel and discount retailers.

We have executed a lease with the first junior anchor tenant for 25,000 square feet and our in final negotiations with the second to lease approximately 20,000 square feet at the center. In St. Paul Minnesota we are redeveloping a former free standing Bally's Health Club for multi-tenant use.

During the quarter we signed a lease with an established charter school for a portion of the space and we expect to lease the remainder including an existing swimming pool to an established swim school operator.

And finally at Rivertree Court in Vernon Hills, Illinois, the lease that we signed with Pier 1 during the quarter marks the completion of the leasing phase of this project, with new tenants expected to take occupancy in 2013 and 2014.

This multi-year repositioning effort has resulted in stores with Michaels, Old Navy, Gordmans, Torrid, Carter's, Discovery. Office Depot, Ross and Show Carnival complementing our existing Marshall's and Best Buy and has completely transformed Rivertree Court into a market dominant retail center. Since commencing this project we have invested a total of $11 million and we expect to achieve a total return on cost of 15.4%

In summary demand is strong across the spectrum of large and small format retailers. We are leveraging our substantial presence in premiere locations and our markets to capture a healthy percentage of this business. Our entire team is focused on maintaining occupancy, increasing rents reducing expenses and unlocking the value creation potential of our portfolio.

Now I will turn the call over to Brett.

Brett Brown

Thank you Scott and good afternoon everyone. On today’s call I will provide an update on our balance sheet review the financial results for the quarter and finish with our guidance for 2013. Overall it was a relatively quiet quarter on a financing front. In January we closed a new $11.9 million loan secured by Valparaiso Walk in Valparaiso Indiana. The loan carries a fixed rate of 4.12% for a 10 year term.

In addition during the quarter our joint venture was Nesters paid off one month prior to maturity three mortgage loans totaling approximately $20 million. These assets are now unencumbered and the joint venture has no plans to refinance the properties in the near future.

For the remainder of the year excluding Algonquin Commons which I will comment on later in the call, we have only two loans maturing within the total portfolio including one consolidated loan of $14.8 million on the Orchard Crossing Shopping Center in Fort Wayne, Indiana which matures in August in one loan on Ravinia Plaza in Orland Park, Illinois in the portfolio of Nesters in which our share is $5.3 million and matures in October.

During the first quarter and the early part of the second quarter we issues 996,000 shares of common stock through our aftermarket equity program, raising gross proceeds of $10.1 million to fund various activities.

Our total market capitalization is now nearly $2.2 billion with the deck component just 46% of that amount. It was approximately 49% at March 31st, an improvement of 700 basis points from March 31, 2012.

Our interest expense coverage ratio improved to 3.0 times from 2.7 times last year. Our fixed charge coverage was consistent at 2.1 times. Trailing 12 months debt to EBITDA improved to 7.1 times from 8.0 times a year ago.

At March 31st we had $95 million available on the existing line of credit and today we have $115 million available, giving us plenty of room to handle our minimal debt maturities and capital commitments. The size of our unencumbered pool which supports the line of credit is now over $600 million and we plan to increase that when we unencumber more assets as mortgage loans mature.

With the balance sheet strong, our objectives remain consistent; to continue to build liquidity, extend the terms of maturities, improve our debt metrics over time and lower our cost to capital. We continue to strengthen our financial position in order to improve our access to multiple sources of attractively priced capital to fund our growth plans.

Turning to operating results, this morning we reported funds from operations of $0.21 per share, an FFO adjusted of $0.22 per share for the first quarter of 2013. The variance between FFO and FFO adjusted was due to non-cash impairment charges of approximately $600,000 recorded in the first quarter to record our share impairment charge on four outparcels remaining to be sold at Tavena Crossing, an unconsolidated joint venture development property and the others in temporary decline of value of certain investment securities.

On a per share basis, our FFO increased 5% and our FFO adjusted was up 10% compared to the first quarter of 2012. The increase in FFO was driven by a higher total revenue, lower interest expense, and an increase in net operating income from unconsolidated properties.

For the quarter total revenue increased by more than $2 million or 5%, compared to the same quarter the previous year. The increase in revenue is primarily driven by higher tenant recoveries due to increased occupancy and an increase in fee income from our unconsolidated joint ventures.

Fee income totaled $1.6 million in the first quarter, an increase of approximately 54% from the prior year due to increased acquisition fees from our IPCC joint venture and higher asset and property management fee income from our PDGM and IPCC joint ventures.

In January, as Mark stated we restructured our joint venture on IPCC to provide a fee income stream with higher recurring fees and lower transactional fees. The revised fee structure result in a modest reduction in the fees we expect to book in 2013, but the impact was less than one penny per share.

That said over the typical 10 year hold period for assets acquired by the IPCC joint venture, we project the total fee income we receive will increase by approximately 10%. Most importantly we believe that a recurring stable fee income stream is in line with our business as an operating company and should carry a higher valuation.

Turning to expenses for the quarter, total expenses decreased by $1.4 million. The decrease was driven by lowered appreciation and amortization expense from decreased write offs of tenant improvements related to lease terminations and the contribution of consolidated properties to the PDGM joint venture in the previous 12 months.

The decrease was partially offset by higher snow removal costs in the first three months of this year and by depreciation expense recorded on newly acquired investment properties and tenant improvements related to new leases. The nearly 10% increase in property operating expenses was directly related to the more severe winter this year compared to last and fortunately that expense is highly recoverable.

I also want to note that we had a healthy gain of $2.7 million on the sale of two non-core assets during the quarter as we execute our plan to recycle capital out of limited growth, unanchored strip centers, and into assets with higher growth profiles.

Finally with regard to Algonquin Commons as we said on our last call this matter is currently being litigated, therefore we will not be able to comment on this subject and we'll have to refer you to our SEC filings.

And turning to guidance our first quarter was in line with our expectations and consensus estimates and we continue to expect adjusted FFO per common share to range from $0.88 to $0.92, consolidated same store NOI to increase between 1% and 2% and consolidated same store financial occupancy at yearend to range from 89% to 90%. To wrap up, our balance sheet is sound, our leasing activity is robust and our acquisition opportunities look promising. We're excited to continue working our plan throughout the year.

And with that we'll open up the call for questions. Operator?

Question-and-Answer Session

Operator

We will now begin the question and answer session, (Operator Instructions). Our first question will come from Todd Thomas of KeyBanc Capital Markets. Please go ahead.

Todd Thomas - KeyBanc Capital Markets

Just wanted to dig in on acquisitions. I believe there is no mention of the joint venture with PGGM and this being the second quarter on a row without any investments with them. I was just wondering if you can give us an update on the status of that venture.

Scott Carr

This is Scott. We are still pursuing acquisitions for the PGGM venture. A, we renewed last year; the renewed commitment is about $400 million in assets and to date we acquire the Westgate Shopping Center for about $73 million.

We have one property under contract right now, pending closing on loan assumption and pipeline and the works. So, it's still a focus for us and again in those primary markets of Chicago, Minneapolis, Cincinnati, Cleveland, Columbus. So, we are active, just in the process of getting deals closed.

Todd Thomas - KeyBanc Capital Markets

Are you seeing or showing PGGM, less deals at this time? Is there any sense that they are becoming a little more price sensitive or is it due to the quality of product that you are seeing on the product or anything like that?

Scott Carr

No, it's really not an issue of quality. Pricing has obviously become more competitive but we are still very active in showing them opportunities and we have several under review and in pursuit. So it's really not any change in what we are pursuing with them.

Todd Thomas - KeyBanc Capital Markets

Okay and then moving over to the IPCC venture; I was just wondering if you can shed some additional light what the amendments were if you can quantify what the change in the fee structure was related to the acquisitions and property management, asset management.

Brett Brown

Todd this is Brett. We changed the structure to reduce the transactional fee. So the acquisition fee is now approximately half of what it used to be, but we did add in new fee which is that asset management fee so that will be earned over a longer period of time. A typical whole period was around 10 years and so with that we will get higher recurring fee stream and over the life of that whole period, we will actually come out ahead. It will be a greater total fee for us over the long term.

Todd Thomas - KeyBanc Capital Markets

Okay are you able to disclose what the actual fees are for the different components?

Brett Brown

Yes; we have the transaction fee, the acquisition fee is 2.5% on average, where it was 5%. The management fees have changed slightly there. It's broken out between the multi-tenant and the single tenant until the lower fee and the single tenant and then a higher fee on the multi-tenant and that ranges from about 2% on the single tenant and then the multi-tenant is closer to 4%. And then on the asset management fee, that's about 50 basis points then on the total;

Mark Zalatoris

Todd, this is Mark. The asset management fee ranges from about 25 to 45 basis points and then the annual asset value and I just want to kind of clarify the change always; the change that we really believe is in the benefit for us, from the valuation stand point and the ongoing stream, stream of fees, as we really are in this deal for some long term management of the property and asset management fees.

But interestingly enough, we had this dialogue with our partner, they went out and tested the marketplace with the broker dealers that sells the interest and came back with the feedback that they liked this fee structure and they believe it's going to increase the velocity of the sales on the program. So that is actually a benefit for us too because that's going to mean more deals that we can feed into this program if we wish.

So, our target is $100 million worth of acquisitions. Annually, we did over that a little bit over that last year. We're actually have closed down over $50 million for that program so far this year and what we put into the pipeline is that they put out the marketplace, its selling very quickly and actually by comparison the prior year, it seems much faster. So maybe this new fees arrangement is exactly based on the feedback they got, much more desirable in the marketplace. So, its win-win for both parties.

Todd Thomas - KeyBanc Capital Markets

And then just regarding the dispositions, I just wanted to confirm that the $30 million of expected proceeds from assets that are under contract right now, first if that's included in guidance and then I also was wondering what kind of cap rate you think that the sales will take place at on average?

Scott Carr

Todd, it's Scott again. Yes, the dispositions are included in our guidance and in terms of cap rates for the go forward, we’re looking in the range of the properties we’ve sold a year-to-date. The Quarry property was a 76 and Oakland was 86. So we’re targeting in the 8 range for the majority of the assets that are under contract right now and these are generally unanchored strip portfolio and few other choice noncore assets.

Operator

Our next question is from Josh Patinkin of BMO Capital Markets. Please go ahead.

Josh Patinkin - BMO Capital Markets

One question on the leasing spread, would you mind reminding me how you calculate the basis? Is it end of lease cash to newly first period cash?

Brett Brown

Hey Josh, it's Brett. No, it’s actually on an average-to-average.

Josh Patinkin - BMO Capital Markets

Okay, so its GAAP basis.

Brett Brown

Correct.

Josh Patinkin - BMO Capital Markets

And then I know you have been over this but on the 350,000 feet that offline, when did that come offline and when do you expect it to recommence?

Scott Carr

Josh, this is Scott. We had about 65,000 square feet come off during the first quarter toward the end of first quarter and then about 150,000 came offline last year and then the balance of the rest of it just came off recently.

Josh Patinkin - BMO Capital Markets

And I appreciate all the disclosure here. About how much rent are we talking about on the 350,000?

Scott Carr

They don’t have the figure it just everything we’ve calculated on. If you look at what we’ve projected throughout the course of the year in terms of income and occupancy, it reflects the 350,000 coming off and about 300,000 square feet been delivered, so that’s why we’re looking at occupancy remaining relatively stable throughout the year, pickup in income reflecting the increase in leasing that we had in terms of spreads in prior years.

Josh Patinkin - BMO Capital Markets

And so 89% to 90% occupied in the consolidated portfolio in 2013 the expectation, and so 2014 will jump to 92% or so in the consolidated portfolio? Is that about right? And not to guidance on 2014 but 2014 could look like a pretty strong year from your perspective?

Scott Carr

Well obviously the activities we are doing are aimed toward growth but we don’t really provide any projections going out into 2014 yet.

Josh Patinkin - BMO Capital Markets

Okay and then finally on the debt maturities, it seemed Brett like you’re looking at an unsecured model more and more. Would you mind just talking about debt metrics your bearing in mind as you can consider that option?

Brett Brown

Yes obviously Josh. We’re really looking to your mirror what our investment grade peers, what their metrics look like. We have minimal maturities here in ’13 and few more on early 2014. And so we’ll just continue to move on that spectrum as it allows and clearly as we acquire new assets than we would likely not put new financing or new secured financing on that and be able to keep those unencumbered as well.

Josh Patinkin - BMO Capital Markets

So debt to EBITDA range would six to seven times or so?

Brett Brown

Correct yes, in line again with the peers, right.

Operator

Next question is from Jeff Donnelly of Wells Fargo. Please go ahead.

Jeff Donnelly - Wells Fargo

Just maybe another way of asking Josh’s question about the impact space taken offline, is it fair to say that in Q1 of this year you guys have already seen or experienced the peak financial impact from the square footage that’s been taken offline or is there more to come that's in the future quarters of this year?

Scott Carr

I think as we’ve even commented in this script, we do anticipate we will see more space coming offline through disposition and the redevelopment activities and that’s the basis of our guidance.

Jeff Donnelly - Wells Fargo

And I’m just thinking aside from the disposition activities, so for the redevelopment activities, are you able to isolate for us maybe how much more that could be in future quarters compared to what maybe was already in Q1?

Scott Carr

Really, it’s coming off over the course of year and a lot of the timing is dependent on when we start the projects likewise with the dispositions. Some of those may take longer than anticipated or not so.

Jeff Donnelly - Wells Fargo

And maybe the takeaway from you Scott is there is a fairly wide gap in the financial occupancy between total portfolio and the same store portfolio which I think implies certainly that occupancy is stronger in the I guess would call the non-same store side of the business and year-over-year that non-same store side has also grown a little bit faster. I guess my question is, what’s going on in the same store portfolio that financial occupancy is little bit lower and growing robustly. Is that related to maybe some weaker assets that are holding back the overall metrics disproportionately?

Scott Carr

No. I would say it’s quite the opposite. What you’re seeing in the same store occupancy is the impact of all the dynamics we have in place with the redevelopment. As I mentioned we took 350,000 square feet offline, that’s in the consolidated same store portfolio alone.

So we took that space offline, we're delivering about 300,000 over the course of the year which is why we’re remaining flat for this year and will look to deliver what were we developing in 2014 and beyond.

Jeff Donnelly - Wells Fargo

And do you know off hand but how much your same store portfolio represents the percentage of your total assets or NOI?

Scott Carr

I'd hate to guess. Let me get back to you on that one.

Jeff Donnelly - Wells Fargo

And just last question, Brett just considering those plans with cheap investment grade status, do you know where you stand today in terms of the percentage of NOI that is encumbered and are there hurdles you want get to, what’s the point that rating agencies are looking for you to get to?

Brett Brown

Yes. We are very early in the stages. Our NOI, just less than half of it is encumbered right now and so we’ll just continue to move along its spectrum and very difficult to predict the timing on that.

Jeff Donnelly - Wells Fargo

But they don’t have an objective for you for where they'd like you to get to?

Brett Brown

No.

Operator

Our next question is from Paul Adornato of BMO Capital Markets. Please go ahead.

Paul Adornato - BMO Capital Markets

You talked about increasing demand from tenants across the number of different sectors and so I was wondering if you could tell us how you think about merchandizing mix given the increased demand. For instance, how much apparel is too much and how do you think about those types of issues.

Scott Carr

It's Scott. Merchandizing mix is always first and foremost and I think as we’re looking at our centers by the quality we’ve introduced in some of anchor re-tenanting, we’re seeing much more demand for apparel amongst the smaller players. So in terms of the asset ratio I wouldn’t say there is one. What we’re trying to generate is the consistency of shopping. So anything that will generate more visits.

So likewise in the tower center where we can introduce a food component and convert it to a multi-anchor experience that drives more traffic for the center, like we did last year with that in Fresh market to Crystal Point and Whole Foods to Ravinia Plaza, that’s the kind of merchandizing that’s transformational. So, that’s really what we look as we go to attack a shopping center. We want to make sure we’re developing a merchandized mix to generate the most consumer traffic we can.

Paul Adornato - BMO Capital Markets

And looking at the individual spaces, you said there was a good demand at both the large tenant and small shop space sizes. I was wondering if you had an excess of one type of space or another or if you’re comfortable in the context of your redevelopment project with how the portfolio lays out.

Scott Carr

I’ll tell you right now, our anchor space is 96.3% occupied. So that’s a very strong occupancy number. Likewise the leased occupancy in our non-anchor is 88.5%. So it really puts us in a position where we’re trying to generate opportunities which is why you’re seeing more activity on the redevelopment, repositioning end of things.

Our focus today is really targeting underperforming, underpaying tenants and we’re placing them with higher quality market rent paying tenants and that’s really our strategy as we go forward from an asset management standpoint.

Paul Adornato - BMO Capital Markets

And one more as a follow up. After this redevelopment project is done should we expect a pipeline of further projects.

Scott Carr

It’s an ongoing process for us. So, to say I have a bunch we're rolling out, no. But are we continuing looking at this, yes. We defended a bunch of retailer visits with the likes of TJMaxx, Staples, Best Buy, Office Maxx, Office Depot, a full quarters worth of the activity that we’re looking into converting into our 2015, 2016 pipeline. So, we’re building on it continuously.

Operator

This concludes our question and answer session. I’d like to turn the conference back over to Mark Zalatoris for any closing remarks.

Mark Zalatoris

Thank you, operator. And thank you all for joining us today. We look forward to see many of you at the upcoming ICSC and NAREIT conferences this coming May and June and updating you on all our progress when we report second quarter results in august. Have a nice evening.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You many now disconnect.

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