Rouse Properties' (RSE) CEO Andrew Silberfein on Q2 2014 Results - Earnings Call Transcript

Aug. 4.14 | About: Rouse Properties, (RSE)

Rouse Properties, Inc. (NYSE:RSE)

Q2 2014 Earnings Conference Call

August 4, 2014 05:00 pm ET

Executives

Andrew Silberfein – President & Chief Executive Officer

Benjamin Schall – Chief Operating Officer

John Wain – Chief Financial Officer

Steve Swett – IR, ICR

Analysts

Alex Avery – CIBC

Rich Moore – RBC Capital Markets

Nathan Isbee – Stifel Nicolaus

Todd Thomas – KeyBanc Capital Markets

Paul Morgan – MLV

Craig Schmidt – Bank of America

D.J. Busch – Green Street Advisors

Operator

Greetings and welcome to the Rouse Properties’ Q2 2014 Earnings Conference Call. (Operator instructions.) As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Steve Swett of ICR. Thank you Mr. Swett, you may begin.

Steve Swett

Good afternoon. We would like to thank you for joining us today for Rouse Properties’ Q2 2014 Earnings Conference Call. In addition to the press release distributed today we have filed a Form 10(q) with the SEC and posted a quarterly supplemental package with additional detail on our results in the Investor Relations section on our website at www.rouseproperties.com.

On today’s call Management’s prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements include those related to revenue, operating income, capital expenditures, dividends, leverage, financial guidance, as well as non-GAAP financial measures such as same-store results, FFO, core FFO, NOI and core NOI.

As a reminder, forward-looking statements will present management’s current estimates. Rouse Properties assumes no obligation to update any forward-looking statements in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements contained in the company’s filings with the SEC and the definitions and reconciliations of non-GAAP financial measures contained in the supplemental information package available on the company’s website.

This afternoon’s conference call is hosted by Rouse Properties’ President and Chief Executive Officer Andrew Silberfein, Chief Operating Officer Benjamin Schall, and Chief Financial Officer John Wain. They will make some introductory comments after which we will open up the call to your questions. Now I will turn the call over to Andy.

Andrew Silberfein

Thank you, Steve. Good afternoon and thank you for joining us today on our call. I will begin with an overview of Q2’s operating performance and leasing accomplishments and then update you on our growth initiatives for the balance of the year. I will then turn the call over to Ben who will share with you an update on our capital investment program. John will then review our balance sheet, provide further details on our financial results for the quarter and provide an update to our guidance for 2014.

As I do every quarter I will begin with a summary of our results. Today we reported Q2 2014 core FFO of $0.37 per fully diluted share, representing an increase of 8.8% over Q2 2013. The primary driver of the increase in our core FFO was a 14.7% increase in our core NOI compared to last year, which is a testament to the improving operations within our portfolio as well as our success in growing our asset base with approximately $473 million of acquisitions completed in the last twelve months.

Our same-store core NOI was in line with the expectations we communicated to you on last quarter’s call was an increase of 1.2% as adjusted to exclude the litigation settlement expenses related to legacy claims which predated our formation.

As we have stated on previous calls, the elevated leasing activity we are accomplishing along with the capital projects underway throughout our portfolio will continue to have a short-term drag on the same-store NOI but will lead to substantial long-term value creation. As an example, during Q2 the short-term impact from taking tenants offline at just two of our largest strategic and cosmetic capital projects in NewPark Mall and Mall St. Vincent resulted in a decrease to our core same-store NOI of about $0.5 million.

With that said, our same-store core NOI as adjusted would have increased by about 2.7%. As I said, we remain on track with our same-store core NOI as adjusted target for the year of 3% to 4% and expect to generate accelerating gains in the second half of the year similar to the pattern we experienced last year.

Our leasing consistency continued as well, with over 565,000 sq. ft. leased during the quarter. This represents our ninth straight quarter of in line leasing in excess of 525,000 sq. ft. Our metrics continue to improve with our portfolio 91% leased at the end of the quarter, an increase of 130 basis points year over year excluding the two redevelopments and one special consideration asset.

Permanent tenants now represent 81.3% of our portfolio, up 190 basis points year-over-year. Now, to put this in the proper perspective this means that we have increased our permanent leased percentage by over 720 basis points since our formation two and a half years ago. Our total overall portfolio sales grew by 4% to $309 per sq. ft. on the trailing twelve-month basis from $297 per sq. ft. the prior year.

Now, of this increase about 1.7% represented gains on same-property basis with the remainder coming from the positive impact of our acquisitions. This means that we are producing increased sales both organically as well as from our acquisition program as we continue to upgrade the quality of our entire portfolio.

Our average rents for new and renewal leases on a same-suite basis increased by 12.4% and initial rent increased by 7.7%. This is the ninth straight quarter during which we have captured positive average and initial lease spreads. These aggregate numbers demonstrate better than words the underlying quality of our malls, the strength of our national operating platform and the game-changing nature of our asset level leasing and repositioning plans.

Our retail partners are recognizing the progress we are making in changing the character of our malls, and seeing the benefits on the ground in terms of more vibrant customer activity, higher sales per square foot, and the value our portfolio offers; and they’re coming to us on a relationship basis, looking for multiple stores and to fill their open divides.

While pleased with this progress we believe it does not yet reflect the long-term value creation that we are creating throughout our portfolio. It’s important to remember that we have yet to receive the benefit from most of our leasing accomplishments since a sizable percentage of the square footage has yet to take occupancy.

At the end of Q2 we had about 956,000 sq. ft. of leases signed but not yet opened, or SNO, including 736,000 sq. ft. of floor space currently vacant, representing about $18.9 million in incremental net annual revenue. More importantly, this requires us to forego near-term income as we reconfigure and build out the space for new stores and operations.

Once again we’re talking about incurring short-term drag on our results as we create significant long-term value in the portfolio. This will result in a greater revenue and NOI contribution starting late in Q3 and building as we enter Q4 in terms of same-store NOI increases, which reflects the preferred store-open calendars of both retailers. We experienced this seasonality in openings last year and this year is progressing with a similar pattern.

As we did last quarter let me provide some color on how we anticipate this SNO to come online for the balance of 2014 and next year. We expect about 55% of the square footage representing net annual revenue of approximately $10.5 million to come online in the second half of this year, generally beginning in late Q3 and into Q4. We expect these tenants to contribute net revenue of $2.5 million to $3.0 million in 2014, with the remainder captured in 2015.

In 2015 we expect the remaining 45% of the SNO square footage to open, representing net annual revenue of $3.5 million. We expect to capture about $4.0 million to $4.5 million of this revenue in 2015 with the remainder captured in 2016.

Now clearly the second half of this year will be a busy time in our malls, so let me give you some sense of some of the key tenants scheduled to open. A 35,000 sq. ft. state-of-the-art AMC Theater at Chula Vista in a mall that’s now producing over $400 per sq. ft. with plenty of runway left after the recent completion of our cosmetic capital program; a 52,000 sq. ft. Bon-Ton Department Store at Cache Valley Mall in Logan, Utah, the only department store in the trade area.

Also cosmetic at Southland Center in Taylor, Michigan, which brings the total new leasing we have completed at this center to over 140,000 sq. ft. including a new 50,000 sq. ft. Cinemark Theater we announced a few weeks ago; and a 30,000 sq. ft. Sports Authority at our West Valley Mall in Tracy, California, offering the only national sporting good retailer’s retail in the trade area. In addition we have several other openings scheduled in the near future that Ben will review shortly that are part of our strategic and cosmetic capital initiatives.

The impact of these tenants will be dramatic, substantially improving the character of our malls, enhancing the customer profile, and driving our sales per sq. ft. and rental rates over the long term. We are seeing this elsewhere in the portfolio when we open these large-format, new-to-the-market stores.

For example, with respect to our two Shreveport, Louisiana malls in Q2 we opened a 35,000 sq. ft. flagship Forever 21 at Pierre Bossier Mall. As the only Forever 21 in a two and a half hour drive time this high-demand client was extremely well-received by customers and has had a significant spillover effect on the other retailers at the mall. We expect a similar impact when we open up a 22,000 sq. ft. H&M in November at Mall St. Vincent which will be H&M’s second store in the entire state.

Moving on, we continue to make great progress in our strategic and cosmetic capital improvement programs. We continue to look at a strong pipeline of strategic and cosmetic capital investment opportunities which Ben will discuss in a moment, but I’d like to highlight our focus on the significant value we have and will continue to create in California.

California represents about 20% of our total company NOI and we are seeing great strength in retailer demand and sales in both Northern and Southern California. In fact, we have seen almost 10% gains in sales on a trailing twelve-month basis for these assets collectively. At this point, we have commenced or expect to commence shortly strategic or cosmetic capital investment programs at four of our five assets in California.

In total these projects are anticipated to represent approximately 35% to 40% of our overall capital spend and we are extremely excited about the opportunity to continue to drive meaningful improvements in sales and ultimately NOI at these malls.

Now, turning to acquisitions, during the quarter we acquired Bel Air Mall, a 1.3 million sq. ft. super-regional mall located in Mobile, Alabama, for approximately $132 million. This is a solid asset that is a perfect fit for our portfolio of only [B] middle-market malls and was acquired at an attractive entry price with substantial opportunities to create value over time. This acquisition has been very well-received by retailers and we are quite excited by where we can take this asset in the future.

Since our formation we have acquired over $655 million of malls where we can apply our platform’s operating and leasing strategies to improve the quality, cash flow and value of each property. We continue to see significant pipeline of potential acquisitions, and as one of the best-positioned acquirers of middle market malls with a national platform, experienced management team and solid balance sheet we expect to continue to source and close transactions to grow our portfolio and drive attractive returns.

With that I will turn the call over to Ben.

Benjamin Schall

Thank you, Andy. To date we have completed four strategic projects and five cosmetic projects throughout the portfolio, representing a total cost of $65 million. These projects, along with those currently underway, are part of our total pipeline of $200 million to $225 million of strategic and cosmetic capital that we are in the process of actively deploying throughout the portfolio.

As we have stated before, we expect the direct return on these strategic projects is 9% to 11%. Each of the repositionings to date has been extremely well-received by retailers and our shoppers and are generating the positive multiplier effect both in terms of foot traffic and leasing momentum that we expect to achieve from our capital initiatives.

In Q2 we completed two strategic projects, one at Bayshore Mall in Eureka, California, and one in Lansing Mall in Michigan. At Bayshore Mall we capitalized on strong demand from larger-format users to bring TJ Maxx, Sports Authority, and Alta Cosmetics to the mall as part of a revamped streetscape. All three of these retailers are new to the market and all three are performing significantly above plan. We invested $6 million in capital with a direct return of 11.3% and since commencing this project we’ve leased an additional 60,000 sq. ft. bringing our expected total return including the multiplier effect to north of 20% upon stabilization.

At Lansing Mall we took a former Mervin’s which had been vacant for seven years and replaced it with a state-of-the-art, 50,000 sq. ft. Regal Cinemas, the first national movie operator in the market. We spent $14.3 million on the project which included a new Longhorn Steakhouse with a direct return of 9.8%. Regal opened to great reviews in early July and has reenergized the entire wing of the mall and has produced an additional 50,000 sq. ft. of new leasing at the center. Incorporating this leasing, our expected total return at Lansing Mall is approximately 15% upon stabilization.

Construction is fully underway at our de-malling of Knollwood Mall in Minneapolis and we were extremely excited to announce a couple of weeks ago that Nordstrom Rack will be joining leading retailers such as TJ Maxx, Kohl’s, and Cub Foods at the project. We will be creating a market-leading, institutional quality grocery-anchored power center with this redevelopment and we expect to create substantial overall value by both increasing NOI by approximately $3 million above current levels and lowering the inherent cap rate for a retail asset of this quality and profile.

And at Three Rivers Mall in Kelso, Washington, the first portion of the project is now complete with Sportsman’s Warehouse having opened this past weekend with extremely strong traffic. Sportsman’s occupied an anchor space that had been vacant for eleven years and is now the only large-format outdoor retailer within a two-hour drive. The remainder of the project including a state-of-the-art Regal Cinemas is on track for completion later this year.

And finally, we’re gearing up to start construction at our repositioning of NewPark Mall and our de-malling of Gateway Mall in the coming months and look forward to sharing our progress with you on those projects and others in our near-term pipeline over the coming quarters.

With that I’ll turn the call over to John.

John Wain

Thank you, Ben, and good afternoon, everyone. In my comments today I will first review our Q2 operating results, then address our balance sheet including recent financing transactions and their impact on our capital structure and liquidity; and finally update you on our 2014 guidance for core FFO.

Starting with a review of our Q2 operating results: earlier today, Rouse reported quarterly core funds from operations of $21.4 million or $0.37 per diluted share compared with $17.2 million or $0.34 per diluted share in Q2 2013. This represents an increase of 8.85%. Bear in mind that our $0.37 of Q2 core FFO per share includes $785,000 of litigation settlement expenses related to legacy claims which predated the formation of Rouse as a separate company. If one were to exclude this expense, core FFO would have been a penny higher, or $0.38 per diluted share.

The 8.8% year-over-year increase in quarterly core FFO per diluted share is primarily attributable to a 14.7% increase in total property NOI compared to Q2 2013. This NOI increase includes the benefit from four acquisitions totaling $473 million completed in the last twelve months. This was partially offset by higher general and administrative expense during the quarter and an increase in the share count due to our follow-on equity offering in January of this year.

Year-to-date, for the six months ended June 30, 2014, core funds from operations for the company was $43.8 million or $0.76 per diluted share compared with $35.5 million or $0.71 per diluted share in the same period of 2013. The 8.0% increase in core FFO per diluted share for the six months of this year were driven by a 13.5% increase in core NOI and an 80 basis point decrease in interest expense, partially offset by an increase in general and administrative expense as well as an increase in our share count.

Turning to property operations, excluding the legacy claims and the impact of other nonrecurring items such as lease termination income, same-property core net operating income as adjusted was up 1.2% in Q2 compared to Q2 2013. Year-to-date, same property core net operating income as adjusted was up 0.6%. Looking ahead to the balance of the year, we continue to expect that as our SNO comes online our same-store NOI growth should accelerate quarter-to-quarter as we saw last year. We are maintaining our full-y ear same-property core NOI as adjusted growth rate target of 3% to 4%.

Turning to the balance sheet, our financial flexibility and liquidity remains strong as we continue to benefit from the progress we have made over the past two and a half years in strengthening our balance sheet by extending and smoothening our maturity schedule. We have also been successful at lowering our interest rates and generating excess refinancing proceeds to further support our growth strategies.

In Q2 we assumed a $112.5 million first mortgage loan secured by Bel Air Mall which we acquired in May. The loan carries a fixed interest rate of 5.3% and matures in December, 2015. At mid-year 2014 we had total debt outstanding of approximately $1.49 billion with zero outstanding on our $285 million revolving credit facility. Our current weighted average interest rate is 4.71%, down from 5.49% at our formation; and our weighted average term to maturity is now 4.3 years compared to 2.9 years at our formation.

Subsequent to the end of the quarter in July we closed on a new $70 million first mortgage loan secured by Chula Vista Center. The loan carries a fixed interest rate of 4.18% and matures in 2024. Proceeds from the Chula Vista loan were used in part to repay a $54.6 million mortgage loan secured by Sikes Senter. The Sikes Senter mortgage loan carried an interest rate of 5.2% and had been scheduled to mature in 2017 but was open for prepayment at par.

Subsequently Chula Vista was removed from the collateral pool supporting the 2013 corporate credit facility and was replaced by Sikes Senter with no change in the outstanding balance of our $260 million corporate term loan balance. Net proceeds to the company after these financing activities was at about $14.5 million.

Also subsequent to quarter-end, a receiver was appointed at Steeplegate Mall and as of August 1st the nonrecourse loan matured and now remains outstanding. We are working with a special servicer and receiver and currently anticipate an orderly transfer of title during the second half of 2014. As such we don’t have any loan maturities until December of next year, 2015, when we have two loans maturing. We will update you on our refinancing plans as these maturity dates near.

With regard to our financial flexibility as of today we have approximately $14 million of cash and callable deposits and zero outstanding on our $285 million revolving credit facility. This provides us with sufficient capacity to support our operational and strategic growth objectives.

Turning to our guidance, at this time we are amending and raising our guidance by $0.02 at both the high and low ends to 2014 core FFO of $1.59 to $1.63 per diluted share. Our amended guidance reflects several key assumptions including higher-than-anticipated non-same-store property NOI and higher lease termination income as partially offset by the legacy settlement costs. We project growth of 3% to 4% for full-year same-property core NOI as adjusted, general and administrative expenses of $24.6 million to $24.7 million, and net interest expense of $68.6 million to $68.8 million. Please note that our guidance does not include the effect of any future property acquisitions, dispositions other than Steeplegate, or refinancing.

With regard to our dividend, our Board of Directors has approved a $0.17 per share dividend for Q3 2014. This dividend will be paid on October 31, 2014, to stockholders of record on October 15, 2014. With that I’ll turn the call back to Andy for some concluding remarks.

Andrew Silberfein

Thanks, John. Our Q2 results were in line with our expectations as we continue to improve the metrics of our portfolio and successfully execute our growth initiatives. We increased our guidance for 2014 and as we move into the second half of the year the work we have done over the last twelve to 24 months should produce accelerating internal growth metrics, future improvement in our sales per sq. ft. and strong bottom line growth for shareholders.

With that we’d be happy to answer any questions that you may have. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator instructions.) And our first question is from Alex Avery of CIBC. Please go ahead.

Alex Avery – CIBC

Thank you. I was just hoping you could give us a little bit of insight into your mortgage portfolio. You still have a number of mortgages where you can repay them at par with a penalty. Can you just walk us through I guess which ones we can expect to see refinanced earlier and perhaps what some of the considerations would be around those?

Andrew Silberfein

I think we have six properties that are pre-payable without penalty that are CMBS loans. In terms of particular properties I think certainly there’s a number, where we look to complete those capital investments on those properties we’ll turn around and refinance that. So I think it really dovetails with the capital investment, when is that going to be complete? For the individual properties we don’t disclose that until we commence those projects, so when you see that we start projects at certain properties you can expect that to be refinanced as those results come online.

Alex Avery – CIBC

Okay, so are any expected to be done in the next six or twelve months?

Andrew Silberfein

I would think you should expect us to continue to be active, taking advantage of today’s rates. So we could borrow anywhere between 4.0% to 4.5% on a ten-year basis it’s very, very attractive, and therefore whatever we think we could get done you could expect we’d do it sooner rather than later unless the timing doesn’t work for us because we’re still [vetting] [ph] the projects.

Alex Avery – CIBC

Okay. And then just looking at nice positive leasing spreads and your costs, occupancy costs is at 12.3% of sales – is that the right number or should we look for that to either move up or down as you continue to see sales growth in the portfolio?

Andrew Silberfein

Yeah, I would expect that to come down over time. As we improve the sales of the portfolio, as we improve the quality of the retailers, the merchandising mix and as we have a lot of these large tenants that come online helping to drive sales and traffic to the malls, I would expect that occupancy cost number to come down. We will of course work to capture additional rent growth in what we’re able to compress increases in leases.

Alex Avery – CIBC

Do you have a sense of where you think that may migrate over time?

Andrew Silberfein

You know, we’d like to think that at the end of the day if the property is doing north of $375, $400 a foot that those properties could push rents up into the high 12%s or low 13%s type of number.

Alex Avery – CIBC

Okay, that’s great, thanks guys.

Andrew Silberfein

Thank you.

Operator

Thank you. The next question is from Rich Moore of RBC Capital Markets. Please go ahead.

Rich Moore – RBC Capital Markets

Hey guys, good afternoon. Looking at the redevelopment schedule that you guys have in the supplemental I’m curious when you’re going to start showing us some of the other stuff you’re working on, like Gateway and NewPark and that kind of thing. I mean you have basically the same foray, Andy, that you’ve had for a while and the two, the first two are done. So when do we get a look into the other I guess $130 million or $140 million of projects that you guys have in the pipeline?

Andrew Silberfein

I would expect that for both NewPark and Gateway, that all will be reflected in the supplemental sometime later this year. Our policy generally is not to include it in the supplemental until we’ve started construction in terms of going vertical, so we are doing some predevelopment work in both of those projects but I think in the very near future, Q3, Q4 you’ll see them added to the schedule.

Rich Moore – RBC Capital Markets

Okay, so those will start construction though later this year? Is that right or is that next year’s sort of thing?

Andrew Silberfein

No, we anticipate them starting this year in terms of going vertical. We have certainly started some of the clear-out of tenants and taking tenants offline and that’s certainly some of the drag on our numbers. As we start more projects, you know, even the ramp-up period of time until you start there’s a period of time where you have to move tenants or replace tenants or take them offline. So [inaudible] going vertical that will come later this year on those two projects.

Rich Moore – RBC Capital Markets

Okay, and do you have a rough idea of the size or do you want to hold off telling us how much you’re going to spend on those?

Andrew Silberfein

I think we will make that public in the supplemental.

Rich Moore – RBC Capital Markets

Okay, great. And then percentage rents this quarter were down, certainly from what we expected and from last year. Anything special in that? Is that a sales-related thing or is that something else?

Benjamin Schall

Hi Rich, this is Ben. Percentage rents were down this quarter versus last, part of that’s just based on the timing of when we recorded and reconciled percentage rents in Q1 and Q2 this year versus last year. But we do expect percentage rent to be down on a full-year basis in ’14 versus ’13 and for a couple of reasons. One is we actively look to lock in percentage rent when we can, so if you have a tenant who’d been paying percentage rent and we’re up for negotiating a renewal we try to lock some of that into fixed rent – so we’ve been successful with that in the portfolio.

And we also have a couple of leases with J.C. Penny and Sears where they pay percentage rent over a relatively low base, and we’ve had some you know, some negative sales trends there that have led to some percentage rent decline – but generally consistent with our expectations when we started the year in terms of where percentage rents are going to wind up.

Rich Moore – RBC Capital Markets

Okay, good. And while we’re thinking about that, the doubtful accounts number was kind of low as well, is that going to stay low? Are you guys doing okay on the bankruptcy front I guess and store closing front?

Benjamin Schall

It’s obviously a process that we’re actively managing and actively monitoring our tenant profile, but we feel comfortable with where we stand today.

Andrew Silberfein

Let me just mention for a second about the impact of the bankruptcies that we had on the Q2 results. We had 18 stores or about 47,000 sq. ft. that went offline due to store closings due to bankruptcies, and that represented about $2.3 million in annual rent, and about half of those are due to chain-wide liquidations, and the rest were due to Sbarro. So we have had good traction of releasing them but it’ll likely take us till Q3 to place some of these locations. So the hit to Q2 on the bankruptcy side was about $0.5 million. We signed leases or papering deals for about 75% of the 18 stores that we got back.

Rich Moore – RBC Capital Markets

Okay good, thanks Andy. And then John if I could, G&A was up, why again?

John Wain

Well partly we have just a ramp up of staffing that’s occurred since last year, so part of it is because of that. We also have, we also incurred some just costs in Q2 basically the way things accrue, and what I want to direct you to is the full-year guidance that we’ve provided. So I don’t want to indicate that Q2 is a run rate. Look at the guidance for the full year.

Rich Moore – RBC Capital Markets

Right good, I did see that, yeah, thank you. Okay good. And the litigation, is that done or is that coming to an end?

John Wain

So we actually, at spin we inherited 36 claims. We’ve been steadily working those down and we’re down to one.

Rich Moore – RBC Capital Markets

Okay, good, gotcha. Thank you. And I think that’s it for me, thank you guys.

Andrew Silberfein

Thanks, Rich.

Operator

Thank you. The next question is from Nathan Isbee of Stifel. Please go ahead.

Nathan Isbee – Stifel Nicolaus

Hi, good afternoon. Just focusing on the tenant sales for a second, looking at the 4%, that’s all stores excluding anchors, is that correct?

Andrew Silberfein

Yeah, and I’m pretty sure I know where you’re going, Nate. Basically if you take that 4.0% number, if you look at the same-property portion of that that’s about 1.7% of the 4.0%. The remainder came from the benefit of our acquisitions we completed.

Nathan Isbee – Stifel Nicolaus

You’re a mind reader.

Andrew Silberfein

[laughs] You’re consistent, Nate.

Nathan Isbee – Stifel Nicolaus

[laughs] And then if you just slice that to under 10,000 versus all space how would that look?

Benjamin Schall

Nate, the numbers that Andy quoted actually are under 10 numbers. We’ve obviously seen some of our peers move to also reporting a total sales number. We’re not disclosing it at this time. It is a figure that we’re monitoring and tracking. We expect that we’ll disclose it as we move forward and we particularly expect it to be relevant as more and more of our SNO comes online.

Nathan Isbee – Stifel Nicolaus

Okay, thanks. And then can you just talk a little bit about your acquisition pipeline, if you’re pursuing any specific malls today? And then a little more broadly in terms of how you see the B-mall sales market. There’s a lot of questions given the amount of product that’s on the market and some of the buyers out there, and where you see supply and demand today.

Andrew Silberfein

Sure. You know, we have a solid pipeline of opportunities that we’re looking at with the growing portfolio of B malls for sale. So we’re obviously looking at a fair amount of product and these include one-offs and portfolio [set] transactions. So we continue though, since we have from Day One we continue to be selective. Our focus as you know, it’s a pretty tight band in terms of acquiring dominant, only game in town or closed malls and you know, with spreads between cap rates of today I think still attractive we think it’s a great place to play in. But our band is really looking at in line sales between $300 and $400 a foot. We’re not looking for the properties that are below that.

Nathan Isbee – Stifel Nicolaus

Sure. Okay, thank you.

Andrew Silberfein

Thank you.

Operator

Thank you. The next question is from Todd Thomas of KeyBanc. Please go ahead.

Todd Thomas – KeyBanc Capital Markets

Hi, thanks, good afternoon. Just first question following up on the acquisition line of questioning, I was just curious – any comments on pricing for the product that you’re looking at? And also we heard from another landlord this earnings season that perhaps the pool of buyers was not quite as deep as initially thought and I’m just curious as to how you would characterize the competitive landscape today? Is it increasing, decreasing? Maybe you could elaborate a little bit.

Andrew Silberfein

Certainly over the past year we’ve seen a greater amount of competition. I think you have to look selectively at what area you’re talking about. We obviously see every meaningful transaction that comes to the market. We don’t really talk about specific transactions as a policy but I can certainly tell you that the people who are tending to look at assets below $300 a foot are more private owners who are looking for maybe higher risk with higher upside type numbers. And I think that that is a different pool of buyers than you’ll see in our area, which is really between $300 and $400 a foot. So we don’t see as much competition as maybe you would find in the below $300 or above $400 type neighborhood.

Todd Thomas – KeyBanc Capital Markets

Okay. And then a question for John with regard to the guidance increase, just looking for some additional detail on the $0.02 increase there. I was wondering if you could break out the two pennies between the two buckets that you mentioned. I think you said it was roughly higher non-same-store NOI and also lease term fee income, maybe you could break that out a little bit. And then also with regard to non-same-store NOI coming in a little bit ahead of expectations, is that attributable to one property in particular that you can speak to perhaps?

John Wain

So let me discuss lease termination income first. Year-to-date that is $456,000; for the past couple of years we’ve been running $400,000 to $500,000 full-year. We actually expect that number to be full-year $1 million plus or minus so that was baked into our guidance. Now that number’s going to bounce around a little bit, but keep in mind that these lease terminations for this year are largely related to redevelopment projects where we can bring in new tenants, so we’re actually happy with that. Todd, I forgot the second part of your question – give me that one again.

Todd Thomas – KeyBanc Capital Markets

Yeah, just the higher non-same-store NOI bucket, I guess we can sort of do the math a little bit on what the number looks like then, how that breaks out. But is that attributable to sort of one property or two properties in particular that you can sort of speak to a bit?

John Wain

It’s spread across the acquisitions and I think even one of the redevelopments, we kept some tenants in longer than we had anticipated.

Todd Thomas – KeyBanc Capital Markets

Okay. And then regarding the same-store NOI growth, so unchanged at 3% to 4% for the year. So you are at 60 basis points, 0.6% for the first half and Andy, you alluded to the trajectory being somewhat similar to last year and gave some detail on the SNO coming online. But so last year Q3 was roughly flat and then it really ramped up considerably in Q4, and I’m just curious is that what we should expect to see, that sort of bifurcation between the two quarters in the back half of the year? I’m just trying to get a sense of what we should expect next quarter and what that sort of implies for Q4.

Andrew Silberfein

Yeah, I think if you take our 3% to 4% and you divide it by the last two quarters you’ll figure out what we need to do to get to our numbers. But it should certainly follow a pattern of higher numbers in Q4. A lot of the openings that we have coming online are opening late in Q3, so I would say that similar to last year the preferred opening time for retailers is as back in the year as they can make it.

So we continue to expect that with 85% of our SNO being larger-format stores with entertainment or restaurants those take time to build out and that’s some of the drag that we’ve had. As we create long-term growth in NOI, the shorter-term SNO impact and the capital projects that move out the tenants – that has a shorter-term drag but we’re creating real long-term value.

Todd Thomas – KeyBanc Capital Markets

Okay great, thank you.

Andrew Silberfein

Thanks, Todd.

Operator

Thank you. The next question is from Paul Morgan of MLV. Please go ahead.

Paul Morgan – MLV

Hi, just a couple of questions left. On the tenant side you mentioned Sbarro and some of the liquidations. How should I think about kind of what’s on your watch list right now? Obviously there’s Radio Shack and some other retailers that are kind of teetering a little bit. How do you think about that and have you underwritten any of that as a potential negative to some of the positives in your same-store ramp in the second half of the year?

Benjamin Schall

Paul, Radio Shack is obviously on our watch list. We have 24 stores with them, about 60,000 ft. There could be some short-term drag. Generally Radio Shacks are at about 11% occupancy costs so we’re comfortable there, and for the most part in our malls occupying some pretty valuable space at $30, $40 [locked] space. So there could be some short-term drag like we’ve seen with some of the other bankruptcies, not necessarily long-term net negative. And there’s a wider group that we’re monitoring and obviously we make some allocation for the rest of the year but no one else of particular note.

Paul Morgan – MLV

Okay. And on the, you mentioned the positive spillover effects from adding Forever 21 and what you think will happen when you add H&M. Is that, those spillover effects on some of the larger-format chains, is that specific to kind of fast fashion or apparel chains that are more like some of the smaller shops in the mall? Are you seeing much in the way of positive spillovers on the sales side from adding things like Sports Authority which are typically more of sort of a community center type shop?

Andrew Silberfein

Let me just respond certainly on… When we opened the Forever 21 for example in Pierre Bossier there were lines down the block so that was obviously the first day or two. But we’ve certainly seen since they opened that the pickup is broadly seen, whether it’s other retailers that play off them or are nearby or even the food court tenants. So we’ve seen pretty good spillover we think consistently in terms of driving traffic. When you’re the only Forever 21 within two and a half hours people tend to come to you because you’re the only game in town, and therefore when you come to the mall you’re not only shopping for Forever 21, you’re shopping for your other needs.

And we know the theater, when we add the theaters they tend to bring people in from wider radii with broader hours and different days during the week, so it really broadens the customer profile and frequency and duration of their visit.

Paul Morgan – MLV

Okay, great. And then just the last thing, I mean obviously NewPark is an important part of your redevelopment pipeline, and you’re pretty far along in terms of planning and you’re kind of doing work already there. Obviously we’re going to see more detail later this year but I mean is there any kind of significant moving pieces that could change the investment scope there that you’re working on right now? Could it go much bigger or kind of stay where it is? Is there anything we can think of, of what’s exactly going on as you try and finalize the plans right now?

Benjamin Schall

It’s generally around the edges. We’re still planning a significant new entertainment component anchored by AMC with the only IMAX in the sub-trade area which we’ve highlighted before. And the other significant addition is the restaurant pavilion which will be taking the front side of that mall and opening it up on two levels for restaurants with exterior patios. So the plan is on track and moving forward. We’re finalizing our preconstruction plans and expect to commence shortly.

Paul Morgan – MLV

Okay, so the cost is pretty much nailed down; it’s more just you’re kind of figuring out where your pro forma yields are going to be as you think about what you’re going to put into the sub.

Benjamin Schall

We’re narrowing down our costs as we finalize the preconstruction and finalize design, so yes. And part of that is finalizing our income projections for the space as well. We’ve generally taken a policy consistent with our policy that we include our strategic projects in the supplemental once we go vertical on construction, so that’ll be happening soon and that’s when we’ll provide the full disclosure.

Paul Morgan – MLV

Okay, thanks.

Operator

Thank you. The next question is from Craig Schmidt of Bank of America. Please go ahead.

Craig Schmidt – Bank of America

Thank you. On the initial run spread of 7.7% are you able to break that out for new leases and renewals?

Benjamin Schall

Sure Craig, this is Ben. Our new leases were down this quarter 5.9% - that was primarily related to a subset of the Sbarro leases. Sbarro at a number of our centers was paying above-market rents. As a group and particularly as a group the bankruptcies that we’re addressing today we generally expect the rents to be flat or slightly up from the prior tenants, but this quarter we were impacted by Sbarro as I mentioned. And then on the renewals side, renewals were up 11.2% so that brought us to the line of 7.7% for the quarter on initial lease spreads.

Craig Schmidt – Bank of America

Great. And then I thought maybe if you could spend a little time talking about the [cosmetic] side at Bel Air Mall, some things that you could work on I guess near-term?

Andrew Silberfein

I think it’s really, we look at it as really doing the same thing with Bel Air that we do throughout our portfolio. It’s applying our national platform to improving the metrics of the mall – that’s everything from approving merchandising mix to replacing underperforming stores with better performing stores. It’s likely to involve some sort of cosmetic renovation to the mall where we improve some of the entranceways and some of the features and some of the view lines and some of the outside curb appeal that we want to create at some of these malls to the street.

So I think it’s all those things together. I think the attractiveness is it’s the only mall within 60 miles. It’s the only really mall for 650,000 people in that market. The mall does quite well but it could be so much more and we expect it to be once we apply our platform to improve it, the same way we’re doing throughout our portfolio.

Craig Schmidt – Bank of America

Okay, thank you.

Andrew Silberfein

Thanks.

Operator

Thank you. The next question is from D.J. Bush of Green Street Advisors. Please go ahead.

D.J. Busch – Green Street Advisors

Thank you, just a couple follow-ups on some of the acquisition questions. Andy, would you consider purchasing an unanchored or maybe a one-anchored lifestyle center? Does that fit in your investment criteria if it satisfies the other pieces, such as being the only game in town?

Andrew Silberfein

I would say we would certainly take a look at it. It depends on the upside, it depends on the IRRs we think we can generate. And that’s what it’s all about at the end of the day – generating that IRR or growth in the assets. So I wouldn’t say that we wouldn’t take a look at it. It depends on where it is and what the potential upside is for us.

D.J. Busch – Green Street Advisors

Okay. And then given the tenants that you guys are bringing to the mall – larger concepts, restaurants – it seems like there could be leasing opportunities or synergies the way that the portfolio is going with power centers. Is the plan to still sell [Knoll] following the redevelopment and if so I guess why does it not make sense to own that asset long-term?

Andrew Silberfein

Well, I don’t think first of all that we’ve committed to selling [those] and we are certainly going to take a look at that and see what we want to do with that. But we’re big believers in capital recycling and I think that you should expect going forward that we’d consider asset sales including possibly the two de-malled projects. We’re going to be creating significant value as we really transform these projects into institutional-quality power centers that are supermarket anchored. So we’re substantially increasing the NOI and expect to have significant cap rate compression at the same time.

So given the strength of the sales market and the lack of product you see out there we certainly think it makes sense to examine recycling the value that we’re creating into acquisitions which really would have higher growth profiles and more upside potential.

D.J. Busch – Green Street Advisors

Okay. And then last one for Andy or Ben if I may, I think you mentioned nine straight quarters of leasing increases. Over that same time period it looks like average rents, in-place rents for under 10,000 sq. ft. is flat to maybe slightly up. What am I missing there? Is there a reason that the average base rent hasn’t moved up more over time in line with the releasing spread knowing that there’s a little bit of lag?

Andrew Silberfein

Yeah, I would say first of all you have to be a little careful with the average number because that’ll include acquisitions. So if you buy property with lower average rents it’s going to bring the number down and vice-versa. Ben, you want to add to that?

Benjamin Schall

Part of it is, as is custom our renewal spreads are based on comp tenants and based on… Yeah.

D.J. Busch – Green Street Advisors

Okay, so it’s mostly a mix issue with the new properties.

Benjamin Schall

Yeah, it’s based on a mix issue so it depends on the size of the space. We tend to, we’ve been taking spaces, smaller shop space and putting them together for larger tenants so that becomes a difficult thing to comp. So we try to provide each quarter what we think is a true comp and a true-true indication of where rents are heading in what we disclose.

Andrew Silberfein

And if you think about it this way, a lot of the leasing that we’ve done are harder to lease spaces which tend to be out on the [rings] in the zero, 10- or 20-yard line. And you’re not going to get as high rents for that as you are at the 50- or 40-yard line. So we’ve taken malls that have had a substantial amount of vacancies of which maybe the space wasn’t as good as things that were already online – that’ll have an impact as well.

D.J. Busch – Green Street Advisors

Okay, thank you guys.

Andrew Sliberfein

Thank you.

Operator

Thank you. That is all the time we have for questions today. I would like to turn the floor back over to management for any closing remarks.

Andrew Silberfein

Thank you for joining our call today and we look forward to speaking with you at the end of Q3.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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