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Cedar Realty Trust, Inc. (NYSE:CDR)

Q3 2013 Results Earnings Call

November 7, 2013 5:00 PM ET

Executives

Brad Cohen - Investor Relations

Bruce Schanzer - President and CEO

Phil Mays - Chief Financial Officer

Brenda Walker - Chief Operating Officer

Nancy Mozzachio - Head, Leasing

Mike Winters - Head, Acquisitions and Dispositions

Charles Burkert - Head, Construction and Development

Stuart Widowski - General Counsel

Analysts

Nate Isbee - Stifel

Todd Thomas - Keybanc Capital

Josh Patinkin - BMO Capital Markets

Craig Kucera - Wunderlich Securities

Operator

Greetings. And welcome to the Cedar Realty Trust Third Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Cohen, Investor Relations. Thank you, Mr. Cohen. You may begin.

Brad Cohen

Thank you, Operator. Good afternoon. At this time, management would like me to inform you that certain statements made during the call, which are not historical facts maybe deemed forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended by the Private Securities Litigation Reform Act of 1995.

Although the company believes that the expectations reflecting any forward-looking statements are based upon reasonable assumptions, they are subject to various risks and uncertainties. The company can provide no assurance that expectations will be achieved and that actual results may or will differ.

Many other facts and risks that could cause actual results to differ materially from expectations are detailed in the company’s press release, which was put out this afternoon and from time-to-time in the company’s filings with the Securities and Exchange Commission. The company undertakes no obligation to revise or update any forward-looking statements reflected under any circumstances after the date of the company’s release.

It is now my privilege to turn the call over to Mr. Bruce Schanzer, Chief Executive Officer and President. Bruce?

Bruce Schanzer

Thank you, Brad. And thank you everyone for joining us on our third quarter 2013 earnings call. As always, I’m joined on this call by the Senior Executives of Cedar, namely Phil Mays, our CFO; Brenda Walker, our COO; Nancy Mozzachio, our Head of Leasing; Mike Winters, our Head of Acquisitions and Dispositions; Charles Burkert, our Head of Construction and Development; and Stuart Widowski, our General Counsel. The balance of team Cedar is dialed into this call.

I would like to sincerely thank my colleagues for their efforts in helping us achieve the strong results Phil, Nancy and I will be discussing with you.

To begin, I have some exciting news. In the next week or so we anticipate closing on our first acquisition since my arrival here, a Fairfield County, Connecticut grocery-anchored shopping center. There are a number of things that make this acquisition a milestone event.

First, it improves our average asset quality in terms of average base rents, projected growth and demographics and it further intensifies our D.C. to Boston footprint. Second, it improves our portfolio diversification by state and by grocery anchor. Third, it is unencumbered and therefore allows us to avoid increasing leverage. And last, we can fund the approximately $34.5 million purchase price with the proceeds of bottom quartile asset sales we are currently pursuing.

We believe that this acquisition is consistent with the quality standard of the properties we hope to acquire in the future, while furthering our capital recycling objectives and meeting our return requirements.

I would add that the seller in this transaction, one of the premiere developers and owners of shopping centers in the Northeast, elected to take Cedar [OP] units for approximately 5% of the purchase price, which we take as a vote of confidence from a highly sophisticated owner and operator. When we close we will provide more information on the transaction.

This earnings call marks the second anniversary of the introduction of the newly renamed and repositioned Cedar Realty Trust. As you will recall, two years ago we introduced a near-term strategic plan to divest all of our non-core assets with the proceeds used to reduce leverage.

By virtue of these dispositions, the company is now primarily focused on grocery-anchored shopping centers between Washington D.C. and Boston. The central measurement of this endeavor was to reduce leverage on a debt-to-EBITDA basis below eight times by this earnings call.

As you will see from our earnings release, we have in fact achieved just that with our leverage at 7.8 times at the end of the quarter. The nice thing about this achievement is that with a number of divestiture transactions yet to close, there is room to further reduce leverage as we put the finishing touches on this successfully executed plan.

In addition to delivering on our near-term portfolio repositioning plan, we have similarly begun to execute on the capital recycling plan we laid out a few quarters ago. We are currently exploring the sale of certain lower quartile shopping centers. These properties have weaker demographics and lower growth than the center we are acquiring.

Accordingly, in acquiring a prime Fairfield County, Connecticut Center while divesting bottom quartile centers in terms of growth and demographics, we are moving the asset quality needle twice, first, with the addition of a high quality center and second, with the subtraction of a number of lower quality centers.

Another gratifying accomplishment I would like to share with you is that we have completed our second dark anchor replacement with the execution of a lease with Walmart Neighborhood Market. This paves the way for the redevelopment at our Kempsville Crossing shopping center in Virginia Beach.

Notably, there is meaningful small shop space that we have carefully managed to keep on relatively short-term leases in anticipation of this Walmart deal. We expect to realize a double-digit unlevered IRR on the roughly $3 million capital investment associated with anchor retenanting and redevelopment, as we leverage the appeal of this very high quality anchor by growing small shop rents and occupancy.

Continuing on the topic of leasing, we had another robust quarter of leasing, as we continued to benefit from the opportunity presented by having roughly one-third of our leases rolling in the next three years at below market rents.

We signed 54 new and renewal leases for 227,000 square feet at an average base rent of $14.29 per square foot of which all the two were comparable. The 52 comparable new and renewal leases were done at a roughly 11% increase on a cash basis with very limited tenant improvement expense.

We ended the quarter 92.8% leased portfolio wide, notably on a same center basis we are now over 94% leased with same center NOI growth of 2.3%. Nancy will expand on our leasing accomplishments in her comments.

In taking stock of what we have accomplished since introducing the new Cedar and rolling out our near-term strategic plan, we have done what we said we would do. What is particularly rewarding for us is that in executing our near-term strategic plan of rationalizing our portfolio, we didn't simply solve for a single leverage statistic.

Let me be specific, we have grown our quarterly run rate FFO per share by nearly 20%. We have reduced our overhead by roughly 20% and have dramatically taken headcount down by nearly 40%.

We have grown both portfolio and small shop occupancy and we have meaningfully improved our portfolio quality, we have streamlined and simplified our corporate disclosure with among other things a vastly improved supplemental.

We have revamped our balance sheet through the transition to an unsecured corporate facility. We have driven down our cost of capital through our debt and preferred refinancings. Last and most significantly, we have transformed this company into a high performing, highly analytical and collaborative organization.

In shifting from defense to offense, one thing that will persist is that we will continue to do what we say we will do. As we have described previously, the central elements of our long-term plan include making the most of the re-leasing opportunity we have in front of us over the coming years.

Investing back into our portfolio through carefully-underwritten redevelopments, continuing to execute on our capital recycling strategy and maintaining a laser like focus on balance sheet strength and flexibility, I can assure you, all of this will be done methodically, analytically and with a sense of duty towards our shareholders.

With that, I give you Nancy who will expand on this quarter's leasing results and provide further context around the leasing upside opportunity we see in the coming few years. Nancy?

Nancy Mozzachio

Thanks, Bruce. Our healthy third quarter leasing results are a direct consequence of the measures we have taken to become streamlined geographically and focused primarily on grocery anchored centers.

Our leasing strategy has evolved in a similarly disciplined manner. The central elements of our strategy include leveraging our local market, boots on the ground expertise regarding the markets in which we operate, utilizing a well-constructed process that combines thorough financial analysis, collaboration between various departments with prompt decision making, focus on anchor upgrades in connection with redevelopment and retenanting projects and communicating early and often with existing tenants prior to lease expiration to drive successful results.

In the third quarter we leased approximately 37,000 square feet of vacant space with an average first year rent of $20.23 per square foot. Renewal activity was strong for the quarter as over 190,000 square feet of renewals were signed at cash spreads of 7.3%, signifying over 30 quarters of positive spreads.

Further, during the quarter we secured a lease with Ulta, a large national cosmetics retailer at our Colonial Commons center in Harrisburg, Pennsylvania. Ulta will occupy space in the center next to Old Navy. Both tenants will open in the spring of 2014 once we complete the redevelopment of that section of the center where there was previously a vacant movie theatre.

The redevelopment of Colonial Commons and resulting high quality leases is a perfect example of Cedar's focus on investing back into our centers at attractive rates of return since at this center we are investing approximately $3.5 million and achieving a solid double-digit unlevered IRR.

Moreover, we have signed another dark anchor replacement that we expect will enhance future portfolio productivity. Specifically, a new grocery lease was executed with Walmart Neighborhood Market to replace a dark Farm Fresh store at our Kempsville Crossing Center in Virginia Beach. The store is expected to open during the third quarter of 2014.

A key element of the dark anchor replacement strategy is maintaining small shop leasing flexibility until such time the new anchor is announced. In this Virginia Beach asset, we carefully controlled occupancy, while negotiating the grocery lease and are now poised to recognize substantial new lease rent gain by replacing older, lesser credit quality tenants with new superior credit small shop tenants and retenanting and our parcel.

Negotiations on a third dark grocery placement are underway. We hope to announce the completion of that lease in the coming quarters. It too should allow us to recognize substantial net rent gains in a manner similar to our Virginia Beach project.

I would now like to take a moment to expand on Bruce's comments concerning upcoming lease rollovers that will provide us meaningful opportunities. With over 3 million square feet expiring within the next three years, we see this as a meaningful opportunity for rent growth throughout the portfolio, particularly as tenant profitability improves and supply constraints in our markets continue for the foreseeable future.

This is a situation we have been strategizing about for well over a year. We are very well-positioned to maximize the benefits to Cedar by leveraging our deep knowledge of the markets we operate in, coupled with substantial analysis of each renewal situation.

In conclusion, I would note that our third quarter leasing results are a continuation of the positive leasing trends at Cedar that are primarily driven by three factors. First, our new corporate direction has brought greater focus and structure to the leasing team and has better-integrated leasing initiatives within our development pipeline.

Second, the macroeconomic environment within our markets combines economic expansion with modest supply growth. This offers us a remarkably favorable operating environment.

Last, the opportunity to release over a third of our square footage in the coming years considering the company's specific improvements we have made and the remarkably positive market backdrop, makes me optimistic regarding the trajectory of our leasing efforts in the coming quarters and years.

With that, I give you, Phil.

Phil Mays

Thanks Nancy and good evening, everyone. On this call, I will highlight our operating results and provide an update on our balance sheet and guidance. Starting first with operating results.

Operating FFO was $0.13 per diluted share for the quarter compared to $0.11 for the same period last year. This represents $0.02 per share increase, or 18% growth in operating FFO. This increase in operating FFO was driven approximately half by property NOI growth and half by reduction in interest expense and preferred dividends. In the prior year, we did receive some earnings from the RioCan JV but as you may recall, this JV was ultimately unwound in a manner that was FFO-neutral.

Moving to property results. Same-property NOI increased 2.3%, excluding redevelopment and excluding the favorable impact of re-tenanting the dark anchor at Oakland Commons. Including the impact of re-tenanting Oakland Commons, same-property NOI increased 3.2%. As a reminder, we report same-property NOI on a cash basis and as discussed on the last call, the new Walmart Neighborhood Market at Oakland Commons began paying cash rent in July of this year.

With respect to our balance sheet, we ended the quarter with net debt-to-EBITDA at 7.8 times, thus making good on our promise to take leverage from over nine times two years ago to under eight times by this quarter. Now to work through the second dark anchor replacement announced today, along with the temporary debt funding of the Connecticut property acquisition, this number may bump up and down a little over the next few quarters.

However, we still have a few dispositions to complete from our original de-leveraging plan and as Bruce noted, we are also exploring the sale of certain additional properties. Once completed, the proceeds from these dispositions will more than maintain the progress we have made on the leverage front.

Before leaving the balance sheet, let me add a brief note about liquidity. We ended the quarter with over $100 million available on our line of credit. More importantly, even after completing the Connecticut property acquisition and closing dispositions currently under contract, we will still have about $100 million available in our line of credit.

And lastly, turning to guidance. With our solid property results and more clarity regarding the timing of dispositions, we are raising and narrowing our full-year 2013 operating FFO guidance range to $0.50 to $0.51 per diluted share from the previous range of $0.47 to $0.49 per diluted share. Notably the acquisition of the Fairfield County, Connecticut property and the downtime associated with our second dark anchor replacement combined will not have a significant impact on FFO for the fourth quarter.

And with that, I'll open the call to questions.

Questions-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Nate Isbee with Stifel. Please proceed with your question.

Nate Isbee - Stifel

Hi. Just focusing on this acquisition in Fairfield County, can you talk broadly in terms of the growth opportunities in that asset and perhaps the age of the asset?

Bruce Schanzer

(Inaudible) detail and may read but just broadly it's an asset with a fair amount of growth in it. Certainly based on our underwriting, growth well in excess of the growth we've seen in many of our assets certainly on average and it's a relatively new asset.

Nate Isbee - Stifel

Okay. And then I mean, can you just talk a little bit about your cost of capital and how you made this work?

Bruce Schanzer

It’s a great question, Nate. Again the way we think about acquisitions from that perspective and obviously, we think about acquisitions from a whole bunch of perspectives but in terms of that particular perspective, we think -- we evaluate the return using generically either a 10-year unlevered IRR analysis or if there's some peculiarities to an asset we might refine the hold period so that it works with the lease rolls.

In this case, we looked at it on a 10-year basis. And the combination of the going in cap rate which wasn't particularly bad, for an asset of this quality, coupled with the growth rate delivers to us an unlevered IRR well in excess of our cost of capital. And so again, this deal works on that basis.

Nate Isbee - Stifel

Okay. And is there anything behind it that's somewhat visible?

Bruce Schanzer

I'm not sure if I understand the question.

Nate Isbee - Stifel

Well, what's your pipeline looking for, looking…

Bruce Schanzer

Absolutely. Again yes, I'm pretty reluctant to get into too much detail on that. We do have other deals that we're either in negotiations on or that we're pursuing. However, our base plan subject to unforeseen opportunities is to really do -- to pursue growth on an asset-by-asset basis one at a time.

And so again, we do have a pipeline of opportunities. But we're going to pursue them methodically and carefully with a lot of very thorough due diligence. And so I can't tell you that there's another deal immediately on the heels of this one, but there are other deals that we're actively pursuing and negotiating right now.

Nate Isbee - Stifel

How did you source this one?

Bruce Schanzer

Yes, we have Mike Winters, our head of acquisitions, has a vast network in our markets. It's one of our strategic advantages and this was a relationship that he had for a very long time. And it was an opportunity that he's been aware of for a while and we were able to take advantage of it.

Nate Isbee - Stifel

All right. Thanks. Then Nancy, you talked about the opportunity in the near term, 3 million square feet rolling. Can you give us a bit of a sense of what you think the mark-to-market on those 3 million square feet are?

Nancy Mozzachio

Well, I think it's important to understand that, let's take the coming year, 2014 essentially slightly over 900,000 square feet. I'd say 40% of that is without the benefit of having an embedded option. So it gives us an opportunity to really force rents.

If you take a look at our expiring small shop average rents for 2014, it's roughly $15.40 per square foot. And just this past quarter, we were able to accomplish average base rents of $20.23 per square foot, essentially all small shop commitments. So it just gives you a little sense of what we could potentially expect.

Nate Isbee - Stifel

Sure. And so, of those 3 million, how many would you say have tenant options attached to them?

Nancy Mozzachio

Again year-by-year in 2014, 60% of those leases essentially have options associated with them. As you get into 2015, it’s slightly less than that. It's probably just under 30%. And maybe just, excuse me -- just over 16% in 2016…

Nate Isbee - Stifel

Okay.

Nancy Mozzachio

Without (inaudible).

Nate Isbee - Stifel

All right, thanks. And then on this new Walmart Neighborhood Market deal, what type of capital is Cedar spending on that?

Bruce Schanzer

I think I'd mentioned it. I think it was in my comments, about $3 million.

Nate Isbee - Stifel

Okay. Thank you. Sorry.

Bruce Schanzer

No problem. Nate, just to expand on one point that Nancy had made, even with the rolling leases that have renewal options, many of them still have contractual embedded rent bumps that are pretty substantial.

Nate Isbee - Stifel

Okay. Thanks.

Operator

Thank you. Our next question comes from the line of Todd Thomas with Keybanc Capital. Please proceed with your question.

Todd Thomas - Keybanc Capital

Hi, good afternoon.

Bruce Schanzer

Hi, Todd.

Todd Thomas - Keybanc Capital

Hi. First question, regarding the redevelopments you mentioned Kempsville and Colonial Commons, I was just wondering, as you look through the portfolio if you could talk about maybe how deep the pipeline of projects like these are that you think you have over the next couple of years? Maybe if you could sort of quantify as you spend some time going through the portfolio over the last couple years now. How much redevelopment and re-tenanting there is in the portfolio where you might have opportunities to yield these high single-digit or double-digit returns like these projects?

Bruce Schanzer

Well let me break up that answer into a few different buckets. I think that we've guided folks generally to an average annual spend of $20 million to call it $30 million a year and that's made up of projects of the size that we described on this call. One is about $3 million, the other is about $3.5 million. Smaller deals as well as deals that are significantly larger.

We're actively pursuing a whole slew of opportunities between redevelopment opportunities that are outgrowth of dark anchor replacements as well as redevelopment opportunities that are outgrowths of existing tenants who want to expand and things of that nature. So I would guide you to the annual spend.

I'll call it $20 million but I can't tell you that we necessarily have deals that specifically look like these ones, but rather deals that fall within a continuum of anywhere between $2 million to deals that potentially could be well in excess of $20 million.

Todd Thomas - Keybanc Capital

Okay. Got it. And then, at Kempsville, are you able to share with us what the rent spread looks like for the Walmart relative to the Farm Fresh at $11.17 a square foot?

Nancy Mozzachio

Yes, we can't share that at this moment in time.

Todd Thomas - Keybanc Capital

Okay. And then I was just wondering if you could give us an update, looking at Page 22 in the supplement, the real estate held for sale and conveyance. I was just wondering if you could give us an update on some of the remaining divestitures in that schedule?

Bruce Schanzer

Okay. So -- this is Bruce. I think that what I would say is the following -- of the -- just going down the page, the first two assets, you have one last Ohio asset. The one last Ohio Discount Drug Mart asset which is the Gahanna asset and then McCormick Place which is also an Ohio asset, both of those are assets that are being given back to the lender. And we anticipate those getting done before the end of the year, again subject to our special servicer having a change of heart which happens periodically.

Just jumping down to one of the last assets, the Roosevelt II asset is also a give-back to the lender and we're confident that that will be done before the end of the year. In terms of the four other assets on the page, I have Harbor Square, Dunmore, Maxatawny and Oakhurst.

Dunmore and Oakhurst are under contract and again, we're reasonably confident that it'll close in the coming weeks. Harbor Square, which is formerly the Shore Mall, is being actively marketed.

We received a healthy number of bids this week and just based on the level of interest, are reasonably confident we should have it under contract by the end of the year. I would say I'm similarly confident that we won't have it closed by the end of the year, but we're reasonably confident that it'll be under contract.

Oakhurst Plaza -- I’m sorry, pardon me, Maxatawny Marketplace, which is the last asset on the list is a development project that was completed and it made sense for us to finish leasing it up in order to maximize the proceeds to us. So that's realistically going to be an asset that gets sold at some point next year once we complete the lease-up.

In terms of the land at the bottom of the page, the Harbor Square land will go with Harbor Square and the four land parcels in Pennsylvania are very, very small assets that will be divested if and when we're able to find buyers for them.

Todd Thomas - Keybanc Capital

Okay. Great. That was real helpful. And just one last one, then, on Harbor Square, the former Shore Mall. Are you pleased with the reception so far and also your decision to de-mall and sort of redevelop that asset?

Bruce Schanzer

I'm glad you asked that question. The answer is thrilled. This couldn't have worked out better. Again, from a strategic perspective it was a difficult decision to take this asset off market and then to put in the capital to redevelop it, to de-mall it, in order to bring it back to market.

But it does appear to be a decision. Just again, we've got the bids in the last day or so. So it's still very, very preliminary, but at least based on the bids we've received and the level of interest. It does look like it's been well received and we're optimistic again subject to a dramatic change in circumstances that this is an asset that I should proceed to hopefully a successful outcome for us.

Todd Thomas

Okay. Great. Thank you.

Operator

Thank you. Ladies and gentlemen, our next question comes from the line of Josh Patinkin with BMO Capital Markets. Please proceed with your question.

Josh Patinkin - BMO Capital Markets

Hi. Good afternoon, everybody. My first question is on the lease roll in 2014 and 2015, and apologies if I missed this in the prepared remarks. But is there a geographic concentration or is that pretty spread across the portfolio?

Nancy Mozzachio

I think it's well distributed throughout the portfolio. I can't see that there's any one particular region that would be impacted by an excessive amount of rollovers in ’14, ‘15.

Josh Patinkin - BMO Capital Markets

Okay. And it looks like your cash run spreads have increased over the last few quarters to come up to 10% in the most recent quarter. Is that a fair number moving forward into 2014 and 2015, just based on the options that you were talking about earlier with, Nate?

Nancy Mozzachio

I think so. I think a fair range is probably between the 8% to 10% mark. I think it's a fair number.

Josh Patinkin - BMO Capital Markets

Okay. And then, Bruce, on capital allocation, you've done a lot of work to improve the quality of the portfolio over time. Can you give us a sense of where it is today, how much NOI is driven by Upland Squares of the world, this new asset in Fairfield County and maybe perhaps as a percentage of portfolio NOI?

Bruce Schanzer

So, it's funny you should bring that up, Josh. Obviously, we're preparing for the NAREIT meetings and one of the things that we decided to share with folks and this will be posted on our website. But I'm happy to share it with you now is how we think about our portfolio. And we've been doing this since, Phil and I started here, which is looking at our portfolio statistically across a number of different statistical measures and breaking up the asset into a quartile.

And so, we think about our portfolio on a quartile basis and obviously different statistics cause an asset to be in a different quartile. So you could have an asset that's in the first quartile for being very dense. Being a very dense market, yet it might have low household incomes and might be in a lower quartile for household incomes. So it's not necessarily that any one asset falls in the top quartile for every statistical consideration.

That said, what we then do is use qualitative measures to determine what is the appropriate quartile for every asset. So, for example, Upland, which you brought up, is a top quartile asset for Cedar and our top quartile assets who are -- I guess I would say the top half of our portfolio. Also the first and second quartile represents about 75% of the gross asset value of our portfolio. So the top quartile probably represents, call it north of 40% of the value of our portfolio and Upland is in that bucket.

Josh Patinkin - BMO Capital Markets

Okay. And in terms of asset dispositions, how much would you say falls into that bucket?

Bruce Schanzer

None. So, I mean, we're really following -- when we talk about capital recycling, we're really not looking to reinvent the wheel. We're really looking to target the bottom quartile assets for divestiture and rotate that capital into assets that would sit in the top quartile of our portfolio.

Josh Patinkin - BMO Capital Markets

Okay. All right. Thanks very much.

Bruce Schanzer

You're welcome.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Craig Kucera with Wunderlich Securities. Please proceed with your question.

Craig Kucera - Wunderlich Securities

Yes. Hi. Good afternoon. I had a question. As you've gone down your plan over the last several years of de-levering the company, you started out at nine times, net debt to EBITDA. Now you're sub-8. Sort of looking at the dispositions you have and assuming those go away, are you more or less pro forma for those all being sold where you want to be as far as from a leverage perspective?

Bruce Schanzer

That's a great question, Craig. Let me answer that in two ways. Yes, we are where we want to be right now in the sense that we had targeted getting below eight times as of this call and we're pleased that we're there. Again, with the assets from this near-term strategic plan yet to be divested, we're comfortable that we're going to continue to drive down leverage pro forma for those asset sales.

From there, our plan is again to continue to drive down our leverage and our hope is to consistently de-lever over time. We're not going to look to do anything precipitous, but we don't see a real benefit to our company in running the company on a highly levered basis. And so our preference and our overall strategy as it relates to our capital structure is to continue to reduce leverage.

Craig Kucera - Wunderlich Securities

Got it. But you're not sort of -- I understand you have the target over the last several years, but you're certainly not saying, okay, we're at seven, eight now. Now, we want to go to -- and our goal is six. You're just managing it prudently, correct?

Bruce Schanzer

Exactly. We do not have some type of a precipitous plan to do some massive equity raise in order to just pay down our line or something like that. Our plan is again, as part of a systematic and disciplined plan that includes a whole slew of measures that are intended to improve this company. We'll be doing things that cause leverage to go down.

Craig Kucera - Wunderlich Securities

Great. And I appreciated the color on the leasing as it rolls over the next three years and the amount that don't have embedded options. But kind of what is your expectation for those that do have options as far as renewals and how does that sort of fit in line with historic norms?

Brenda Walker

I think we would expect that it would be somewhere in the mid-single-digit range. Say, you'd call it 5% to 8% would be fair.

Craig Kucera - Wunderlich Securities

That do not renew, you're saying?

Bruce Schanzer

We thought you were asking about the cash renewal spread, sorry.

Brenda Walker

Right, right.

Craig Kucera - Wunderlich Securities

Okay.

Brenda Walker

You're talking about that percentage that just would not actually renew. Typically, I'd say, historically, we've been in the 80%. Let's call it 85% to 88% range for retaining tenants. So, expect a 12% to 15% non-renewal.

Craig Kucera - Wunderlich Securities

Right. That seems about right kind of with norms. Okay. Great. Appreciate the color.

Bruce Schanzer

Thanks, Craig.

Operator

Thank you. Our next question comes from the line of Nate Isbee with Stifel. Please proceed with your question. Nate, your line is live for question.

Bruce Schanzer

Operator, it sounds like Nate is not available.

Nate Isbee - Stifel

I had it on mute. Sorry about that.

Bruce Schanzer

No problem, Nate.

Nate Isbee - Stifel

A few quick questions. Nancy, as you look ahead to 2014 with the 900,000 square feet, maybe can you give us a little bit of sense of what your occupancy expectations are in terms of lease-up of some of the vacancy as well, as we look ahead to 2014?

Nancy Mozzachio

I'd say to be conservative we’d probably expect to see it grow by 100 basis points. We look today with what we have to be occupied, even, moving forward in the fourth quarter of 2013 probably about 50 basis points just there and then growing conservatively again maybe another 50 to 75 basis points, as we get into 2014.

Nate Isbee - Stifel

All right. Thanks. And then Mike, maybe you can give us a little bit of sense of where pricing has gone in some of your core markets, especially maybe in some of the Pennsylvania markets that where you guys have some critical mass?

Mike Winters

Yes. Absolutely. Quality product is going at lower cap rates. It continues to compress and we expect that to continue in the near future.

Nate Isbee - Stifel

So if you were to put some numbers behind core product in a Lancaster and a Harrisburg, what would we expect to see today?

Mike Winters

It would be -- it really varies on the anchor. It's a tough question. But yes, you own 6 caps on quality product even in those markets.

Nate Isbee - Stifel

All right. Thanks.

Operator

Thank you. I'd like to turn the floor back over to Mr. Schanzer for closing comments.

Bruce Schanzer

Thank you for joining us this evening. We will see you all next week at the NAREIT Conference.

Operator

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

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