Retail Properties of America's (RPAI) CEO Steve Grimes on Q4 2015 Results - Earnings Call Transcript

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Retail Properties of America, Inc. (NYSE:RPAI)

Q4 2015 Results Earnings Conference Call

February 17, 2016 11:00 AM ET

Executives

Michael Fitzmaurice - VP, Finance

Steve Grimes - President and CEO

Heath Fear - EVP, CFO and Treasurer

Shane Garrison - EVP, COO and CIO

Analysts

George Auerbach - Credit Suisse

Christy McElroy - Citi

Vincent Chao - Deutsche Bank

Todd Thomas - KeyBanc

Jay Carlington - Green Street

Chris Lucas - CapitalOne

Lina Rudashevski - JPMorgan

Operator

Greetings and welcome to the Retail Properties of America Fourth Quarter 2015 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.

I would now like to turn the conference over to Michael Fitzmaurice, Vice President of Finance. Thank you. Please go ahead.

Michael Fitzmaurice

Thank you, operator and welcome to Retail Properties of America Fourth Quarter 2015 Earnings Conference Call. In addition to the press release distributed last evening, we have posted a quarterly supplemental package with additional details on our results in the Investor Relations section on our website at www.rpai.com.

On today’s call, management’s prepared remarks and answers to your questions may include statements that constitute forward-looking statements under Federal Securities Laws. These statements are usually identified by the use of words such as anticipates, believes, expects and variations of such words or similar expressions. Actual results may differ materially from those described in any forward-looking statements, including in our guidance for 2016 and will be affected by a variety of risks and factors that are beyond our control, including, without limitation, those set forth in our earnings release issued last night and the risk factors set forth in our most recent Form 10-K, 10-Q and other SEC filings.

As a reminder, forward-looking statements represent management’s estimates as of today February 17, 2016, and we assume no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Additionally, on this conference call, we may refer to certain non-GAAP financial measures. You could find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers and definition of these non-GAAP financial measures in our quarterly supplemental package and our earnings release, which are available on Investor Relations section of our website at www.rpai.com.

On today’s call, our speakers will be Steve Grimes, President and Chief Executive Officer; Heath Fear, Executive Vice President, Chief Financial Officer and Treasurer; and Shane Garrison, Executive Vice President, Chief Operating Officer and Chief Investment Officer. After the prepared remarks, we will open up the call to your questions.

And with that, I will now turn the call over to Steve Grimes.

Steve Grimes

Thank you, Mike and thank you all for joining us today.

Looking back, 2015 was a very successful year for RPAI on several fronts. We significantly outperformed our initial expectations, posting full-year same store NOI growth of 2.9% and operating FFO per share of $1.06. We signed over 2.7 million square feet of space achieving blended comparable re-leasing spreads of nearly 9%, and we addressed approximately 70% of the ABR associated with our 2015 remerchandising plan.

We traded over $0.5 billion worth of assets with an ABR per square foot of $12 and an embedded annual growth profile of approximately 60 basis points for nearly $0.5 billion worth of assets with an ABR per square of $22 and embedded annual rent growth profile of approximately 130 basis points, in addition to numerous mid to long-term densification possibilities. As a result of these efforts, our portfolio ABR per square foot has increased to over $16 and the ABR per square foot on our target markets has increased to over $18.

We issued our first investment grade unsecured bonds and we received commitments to upsize, reprice and extend our term loan and revolver. We maintained our net debt to EBITDA at 5.8 times and increased our unencumbered NOI to 58%. And shortly after year-end and in the results of the multiyear efforts, we achieved final resolution with the disposition of The Gateway asset. By all accounts, this was an exceptional year for RPAI, showcasing our will, determination and execution powers against our strategy to build a focused, best in class portfolio to drive long-term value for our shareholders.

Thus far in 2016, the macro environment has been dominated by fear and volatility. We are experiencing record low oil prices, slowing growth in China, and anemic Japan and Europe, dislocation in the fixed income markets and a strong dollar pricing pressure on exports and tourism. As for the retail real estate industry, there has been an uptick in speculation regarding tenant bankruptcies and the shadow supply fueled in part by lackluster sales performance from Sears and Macy’s in addition to the Sports Authority subordinated debt default.

We understand that the new cycle has a bias towards gloom. However, we still see strong fundamentals in our economy and in our industry, and we take great comfort in the strength of our balance sheet and the quality of our portfolio in this continued low supply retail environment. Job growth remains strong, as we near full employment, housing is performing and consumer confidence remains high. Retail sales are up 3.2% year-over-year excluding autos and gas. We see no catalysts for a spike in long-term rates and we believe the opposite side of the oil trade will begin to bear fruit in the form of increased consumer spending and outsized strength in transport and energy consuming industries as futures contracts burn off. Additionally, continued volatility, the global territory yield and changes in Arvada [ph] are bullish signs for U.S. real estate.

New supply in the shopping center sector remains at near all-time lows and we have not seen a wholesale degradation in tenant balance sheet. While we had a modest amount of tenant bankruptcies in 2015, we believe the store closings to be more indicative of a loss of retailer relevance with retailers that have been struggling for some time than they are predictive of future trends. In fact, we continue to see tenant expansion from a number of large retailers including Dick’s Sporting Goods, Fresh Thyme Farmers Market, DSW, Five Below, TJX, Ulta and Sephora to name a few.

That being said, we do have a tenant watch list and we monitor it very closely. Specifically, we continue to monitor Sports Authority. We believe our portfolio can absorb the disruption expected from Sports Authority, given our diligence today and overall asset quality, in conjunction with the continued lack of new development. We welcome the chance to create even more valuable centers after re-tenanting and we believe the success of our 2015 remerchandising initiatives is proof positive of our ability to do so.

Shane will share details on our progress but it’s very important to note that we have the foresight on Sports Authority financial difficulties and have been proactively taking back its location. In fact, our offensive stance on struggling retailers in categories has been well documented over the last few years. Since our initial listing in early 2012, we have reduced our exposure to the office supplies sector by over 35% and to Sports Authority by over 40%. We anticipate continued progress on this front and we continue to shift our portfolio towards assets with strong demographics situated in infill locations with densification possibility.

Since the announcement of our portfolio refinement strategy in mid-2013, we have experienced a significant shift in our portfolio from power centers to lifestyle mixed-use, primarily as a result of our portfolio recycling effort. At year-end, 26% of our multitenant ABR lifestyle mixed-use, up from 16% and 35% is power, down from 44%.

Heath is going to give you a better appreciation for the state of our balance sheet. Our current low leverage levels tell only part of the story. If there is a material disruption in the financial markets, we believe RPAI is equipped to ride out the storm and emerge exquisitely.

Our 2016 guidance reflects the union between our cautious optimism and our diligent preparedness. We anticipate continued strong operational performance with same store NOI growth of 3% at the midpoint, driven by higher occupancy, re-leasing spreads and contractual rent increases. We expect operating FFO of $1.03 per share at the midpoint, which is down $0.03 from 2015, largely a result of our 2015 and anticipated 2016 transactional activity.

In 2016, we’ll once again be net sellers and you will see the continuation of our efforts to geographically concentrate our portfolio. We have $375 million to $475 million of acquisition and $525 million $625 million of disposition. On the acquisition front, we have approximately $200 million already closed or under contract. And on the disposition front, we have sold two assets for a combined growth sales price of approximately of $93 million, which includes the sale of The Gateway in Salt Lake City, as I noted earlier. Had we not sold the Gateway, based on the expected continued deterioration of NOI, there would have been approximately $0.01 of a drag on 2016 earnings. It’s also important to note that The Gateway asset demanded a disproportionate amount of our internal resources across nearly every business units. And we anticipate substantial indirect accretion as our teams are able to redirect their energies, especially in our western division.

Before I turn the call over to Heath and Shane, I wanted to share with you again our philosophy on our portfolio and repositioning plan. These portions of our portfolio that we have referred to as non-strategic are often assumed to be low quality and located in tertiary markets. For RPAI, non-strategic is simply a geographic designation, meaning the asset is not located in one of our identified 10 target markets. Non-target is a more accurate description and we will message accordingly going forward. Also, given the strength of our disposition market over the last few years, we sold our riskier assets and build the quality of our remaining assets in our non-target portfolio of institutional quality.

By way of example, our non-target multitenant retail portfolio has an ABR per square foot of approximately $14 and generated over 3% same store NOI growth, year-over-year in 2015. Over 40% of his portfolio is located in the top 50 MSAs such as Los Angeles, Tampa Bay and Miami with grocery sales of over $550 per square foot. The remaining portion of this portfolio is outside of the top 50 MSAs but includes institutional quality assets like Eastwood Towne Center located in Lansing, Michigan, near Michigan State University that generates approximately $450 per square foot in inline sales productivity, driven by tenants such as Apple, Sephora and P.F. Chang.

To provide additional transparency around our portfolio quality, we added new discloser to our supplement which can be found on page 12. Here, we show occupancy in ABR detail for each of the target markets and states within our non-target markets bifurcated by the top 50 MSAs and outside of the top 50 MSAs. We are providing this information to help our constituency and a better understanding of our portfolio quality outside of our target market.

And with that, I would like to turn the call over to Heath.

Heath Fear

Thank you, Steve. This morning I’ll discuss our 2015 results and our outlook for 2016.

Same store NOI growth was 2.1% in the fourth quarter, primarily driven by strong contractual rent increases, re-leasing spreads, and improvement in property expenses net of recovery income.

For the full year, same store NOI growth was 2.9%, primarily driven by higher rental income, as a result of contractual rate increases, small shop average occupancy gains, and re-leasing spread.

Operating FFO for the fourth quarter was $0.26 per share compared to $0.27 per share in the same period in 2014. The quarter-to-date change in operating FFO was driven by a decrease in NOI from other investment properties of $0.02 per share, as a result of our capital recycling activities, lower net termination fee income of $0.01 per share, and higher G&A expenses of $0.01 per share partially offset by lower interest expense of $0.02 per share and higher same store NOI of $0.01 per share.

Operating FFO for the year full year was a $1.06 per share compared to $1.09 per share in 2014. The year-over-year change in operating FFO was driven by an increase in G&A expenses of $0.05 per share and lower NOI from other investment properties of $0.04 per share, as a result of our capital recycling activities partially offset by higher same store NOI of $0.04 per share, lower interest expense excluding the impact of early extinguishment of debt of approximately $0.015 per share and net termination fees of about $0.05 per share. It’s important to note that differences between our quarterly and full year operating FFO and our FFO are due to charges associated with the early extinguishment of debt and executive and realignment separation charges

To recap our capital markets activity during 2015, we retired approximately $495 million of mortgage debt with the weighted average interest rate of 5.82%. As a result of these mortgage repayments and the unencumbered 2015 acquisition activity, our unencumbered NOI ratio increased by 14% from 44% to 58% during 2015, significantly enhancing our credit profile and our operational and balance sheet flexibility. Also, subsequent to year-end, we recast and upsized our unsecured credit facility, increasing financial capacity by $200 million, lowering our interest rate by 13 basis points and extending the term by over two years. At last but not least as Steve noted, subsequent to year-end and as a result of the great efforts of our team, we were able to dispose-off The Gateway for gross sales purchase price of $75 million with a lender-directed sale and a full satisfaction of the mortgage debt of $94 million which carried an interest rate of 6.57%. Immediately prior to The Gateway disposition, the lender reduced our loan obligation to $75 million which was assumed by the buyer in connection with the sale.

Looking towards the balance of 2016 and beyond, we take enormous comfort in the strength and flexibility of our balance sheet. Based on our upsized revolver and taking into account our planned capital recycling activities, we have sufficient liquidity to cover our business plan and satisfy all of our debt maturities through 2018. However, as Steve mentioned, our revolver capacity and overall low levers are partially indicative of our ability to thrive over the next several years. For RPAI the angel is in the details and for a moment, let’s assume the world plunges back to the depths of 2009.

In 2016, we have only three mortgages maturing, representing approximately $35 million of debt. In 2017, we have five mortgages maturing of which four balance sheet loans, representing approximately $215 million with a blended maturity date yield of 16% and a blended maturity date LTV under 30%. $135 million of the 2017 debt encumbers Southlake Town Center, arguably our best in most financeable assets. In 2018, we have only the $200 million unsecured term loan coming due but just in case we have two one-year extension options. In 2019, we’ve approximately $435 million of mortgage debt maturing encumbering 55 assets, having a blended maturity date yield of over 23% and a blended maturity LTV of less than 30%.

In all likelihood, we will retire these maturities with proceeds from unsecured debt but if those markets are closed we still have option. Having seen this movie, I am confident that low leverage loans encumbering these type of high quality assets can be refinanced or extended also with the existing lenders in nearly any capital markets environment. With over $700 million in liquidity at year-end and a net debt to adjusted EBITDA ratio of 5.8 times, it’s very easy to imagine the scenario where RPAI not only survives the distressed marketplace but has the ability to take advantage of it.

Now, turning to earnings guidance. We initiated 2016 same store NOI growth guidance at a range of 2.3% to 3.5%. Taking into account the removal from the same store portfolio of two properties, Reisterstown, and anticipated redevelopment assets and Zurich Towers, our last remaining office asset.

Moving forward our same store pool will solely be focused on the performance of our retail operating assets. At the midpoint of our same store guidance range, we expect that rental income will be the primary driver to same store NOI growth, which is anticipated to contribute approximately 300 basis points comprised of contractual rent increases of 100 basis points, average occupancy gains of approximately 130 basis points and renewal re-leasing spreads of approximately 70 basis points. As for the shape of our same store NOI growth, we expect it to accelerate over the course of the year.

2016 operating FFO guidance has been initiated at a range of $1.01 to $1.05 per share. In last night’s release, we provided the reconciliation from our reported 2015 operating FFO of $1.06 per share to our expected guidance range, which is $1.03 at the midpoint. The growth in our same store NOI and the interest savings more than offset the dilution created by our 2015 and 2016 transaction activity. Furthermore, we anticipate $0.04 of dilution attributable to our planned redevelopment activities, lease termination fees and lower non-cash items.

Please note the following additional consideration is with respect to our guidance. First, consistent with our historical practice, our model assumes 50 basis points of bad debt and we do not forecast speculative lease termination fee income. Second, the range of dilution related to our 2016 planned transaction activity reflects potential variability in the timing of transactions and the composition of our disposition and acquisition pools. Third, last quarter we told you that we would like to tap the unsecured debt markets in 2016. Our guidance assumes we issue $250 million of unsecured debt during the first half of the year to repay our $200 million term loan due in 2018. It’s important to note that this issuance is completely opportunistic and if the current market conditions persist, we may elect to stand out. And lastly, G&A expense in 2015 totaled $45.9 million excluding the impacts from executive separation and operating platform realignment charges that totaled $4.7 million.

In 2016, we expect G&A expense to be in the range of $45 million to $47 million inclusive of approximately $1 million in acquisition costs which is basically flat at the midpoint on a year-over-year basis.

And with that, I’ll turn the call over to Shane.

Shane Garrison

Thanks Heath and good morning everyone. Today, I would like to review our operational and transactional performance for 2015 and provide some additional details on our 2016 outlook. First, I want to touch on our overall leasing results. 2015 was another strong year for our leasing asset management teams. Against the backdrop of the favorable supply dynamic in the market, we continue to see accretion necessary to push rent and deliver strong re-leasing spreads.

During the year, we signed 521 new and renewal leases with blended comparable re-leasing spread of 8.7%, representing the highest reported full year spreads since we began reporting this metric. In fact, it’s nearly 400 basis points higher than the average reported spread for the three previous years. Our record leasing comp performance for the year was broad-based and consistent within each multitenant retail asset type we own, whether it’d be lifestyle mixed-use, power or neighborhood community, which is yet another indicator of the depth and improving quality within our portfolio. As a result of our efforts, we ended the year with 94.3% occupancy, up 120 basis points sequentially, primarily driven by our 2015 re-merchandising efforts.

To-date, we have addressed 300,000 square feet or roughly 70% of the previous ABR, as Steve noted earlier. Of the nearly 540,000 square feet, 230,000 was an occupancy in 2015, 120,000 is expected to be in occupancy in 2016 and the remaining square footage which is primarily one box is expected to come on line thereafter. We continue to believe that the expected weighted average downtime for these 540,000 square feet will be about 12 months and that the blended comparable re-leasing spreads will be in the 10% to 15% range.

Further, we continue to drive significant momentum in small shop leasing with small shop occupancy ending the quarter at 86.7%, up 140 basis points sequentially and 80 basis points year-over-year. This progress continues to be fueled by our lifestyle mixed-used portfolio, which generates over $500 per square foot on inline sales productivity. This compelling sales performance is driven by assets including Southlake Town Square, Shops at Legacy in the Dallas MSA, Eastwood Town Center in Lansing, Michigan and Downtown Crown and Merrifield Town Center in the Washington D.C. MSA, both of which were acquired in 2015.

Looking ahead to 2016, our leasing efforts in 2015 have provided us with a strong foundation. At yearend, we had signed leases with 29 tenants, representing 235,000 square feet of space with an ABR per square foot of $19, which will generate approximately $4.5 million in annual revenue when the tenants open for business. We currently expect approximately 85% of this revenue to be in place prior to the end of the second quarter with a balance before year-end.

Before moving onto our transactional update, I would like to elaborate on Steve’s comments regarding the shadow supply that may come into play in the form of tenant closings, specifically Sport Authority.

In recent news, Sports Authority missed an interest payment on its bond, which is concerning to us but not at all a surprise. As we have discussed in the past and as Steve noted earlier, we have been a contrarian in regard to our stance on reducing exposure to tenants with the highest probability of default. Just in the last year, as part of our remerchandising efforts, we took back four Sports Authority locations, which leaves us with 10 remaining locations with the vast majority being located in top 25 MSAs. While we don’t envision getting all these spaces back at once, we remain positioned to upgrade tenancy, mitigate cash flow volatility and drive rents in this tight supply environment.

Overall, we will continue to be proactive on our watch list tenants as well as distressed retail categories such as the office supply sector to ensure we remain on the offensive to continue to solidify the merchandising and market positioning of our assets in their respective trade areas.

Turning to our transactional update, to recap 2015 disposition activity, we ended the year with $516 million of dispositions and recycled $463 million of this capital into retail assets in our target markets including the Washington D.C./Baltimore corridor and the Seattle, Austin, Dallas and Houston MSAs, resulting in the expansion of our footprint in these markets by 1.2 million square feet. All of these assets share similar characteristics including high barriers to entry, robust tenant demand, existing contractual rent increases of approximately 130 basis points and the potential to add density in the future. We are optimistic about our prospects in 2016 and we will continue with our philosophy of trading today’s yield for more compelling risk-adjusted long-term growth.

We believe our year-to-date 2016 announced acquisitions totaling approximately $200 million in the Chicago and New York MSAs in addition to the greater Washington D.C. and Baltimore area represent a great start to the year and will further enhance the quality of our portfolio as we continue to migrate into our identified target markets and build our redevelopment pipeline, targeting starts over the next two to five years.

As Steve noted, for the full year 2016, our acquisition goal is $375 million to $475 million and we expect the year one weighted average cap rate to be in the 5.5% to 6% range. Regarding asset sales, we anticipate that the 2016 disposition volume will be $525 million to $625 million and the weighted average cap rate to be in the 6.5% to 7% range, which is inside where the entire company trades on an implied cap rate today. The timing of both, acquisitions and dispositions is expected to be ratable.

As a further reminder, we expect the disposition pool to be comprised of roughly 70% multitenant retail, based on value with remaining being simple tenant retail. And lastly, while we expect the MSA migration will be less impactful in 2016 relative to 2015, we anticipate exiting approximately five non-target markets and ending 2016 with rightly 70% of our multitenant ABR in our 10 target markets.

With that, I will turn the call back over to Steve.

Steve Grimes

Thank you, Heath and Shane for your reports and your efforts in 2015, and thanks to our incredible team for rising through even greater challenges in 2015 and delivering results well ahead of our own expectation.

I believe we have demonstrated yet again our execution capabilities and our progress against plan to-date is well ahead of expectation. Our pulse in our business has never been stronger, and we look forward to further advancing our long-term strategy in 2016. We take great pride in our solid balance sheet, portfolio quality and best in class platform which we believe have us in the most offensive posture we have ever been.

And with that, I’d like to turn the call over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of George Auerbach with Credit Suisse. Please go ahead with your question.

George Auerbach

I guess for Shane, can you walk through the size of the disposition pipeline today, in particular how much you have on the market today and how much more is teed up to be put onto the market in the next 30 or 60 days?

Shane Garrison

We have the -- the triple net assets are in the market as of this week, so call it $160 million to 180 million in value and I think we’ll have, it looks like about $300 million in the market by mid-March. So triple nets first and then a few big power centers and then onward from there.

George Auerbach

So, is it fair to sort of -- I guess because we’re thinking about when those sales will hit, I think you said they’re ratably through the year, but it sounds like second quarter, third quarter, fourth quarter is probably better from a timing perspective?

Shane Garrison

Yes, I think so. I think that’s fair, right. I would say though that a couple of the power centers are close to $100 million. So, we want to understand in this environment there is certainly secondary, tertiary nature. So, if they don’t clear, we want them front end loaded and we want to go to plan B which luckily we have that optionality. And with the triple net portfolio, we assume it’s readable; we assume it’s very granular, onesie-twosie all year, that’s 35 assets throughout the year.

George Auerbach

And I guess, Shane, just on that point, how did you guys think about the risk of front-end loading the acquisitions this year, and leaving non-target market sales to occur later in the year, just given what we’re seeing in the capital markets?

Shane Garrison

I think it’s a fair question. I wish it was the transaction market was linear; in other words, we could just match fund. But for the product we’re looking for, it sometimes takes six months to a year to actually mine it. And the Merrifield deal specifically, we were working on it at least six months. So, the other two deals, probably three months separately. So again, we’re ahead of it; we’re happy with the product on the disposition side. We have a plan A, it’s largely secondary tertiary like I mentioned. But again, we have the optionality, if the secondary markets feel like it just isn’t there, we can go to plan A. And plan A’s Florida or California or any of the assets that we regard and I think the most of our public peers as well as institutional capital in general regard as high quality. And we absolutely think that liquidity is there. We think core product this year generally still holds firm from a cap rate and interest standpoint, generally it’s not a levered buyer, and we certainly think we can -- overall we can get the plant done, it’s just the question of ultimately what the path is.

George Auerbach

Last one from me, Heath can you just clarify the same store pool this year? It sounds like Zurich and Reisterstown are out, is Capital Center and Towson, did they stay in?

Heath Fear

No, those are out as well.

Operator

Thank you. Our next question comes from the line of Christy McElroy with Citi. Please go ahead with your question.

Christy McElroy

Maybe this is for Heath, just with the establishment of both an ATM and share repurchase program, maybe you can comment on how you’re thinking about share repurchases today, given I think Steve’s comment on where you’re selling assets versus the implied cap rate of the company? What NAV discount would you target executing on share buyback?

Steve Grimes

Christy, this is Steve, good morning, I’ll take that question. As we went through the end of the last year, our ATM was unwinding, so we needed to reinstate that. And in tandem with that, we instituted the share repurchase program. Somewhat in part to George’s earlier questions, we did kind of front end some acquisitions. So, the focus right now is executing on the plan and therefore devoting any sort of capital that we have towards the acquisition. We do have a couple of more on the plate and then obviously as dispositions roll on and through the year we’ll be able to reevaluate whether share repurchases make sense. But we’re very happy that we have that tool in place and it’s something that we will definitely be looking at on an ongoing basis over the course of the year.

Christy McElroy

And then just given how active you’ve been looking at or actively been looking at and executing on the lifestyle and mixed use deals, of the two projects you have under contract, one in New York is 93% occupied and then Chicago one is 88%. If you’re looking at these types of deals, how do you distinguish between assets that weren’t designed or developed in the right way and have low occupancy versus those that maybe just need a better leasing platform, essentially to move the NOI higher?

Shane Garrison

Christy, I’ll take it, it’s Shane. I think it all comes down to existing sales and the two assets that we have in the pipeline, the unnamed assets, if you will, both have very compelling sales; I think the blend is pushing 500. So that is part of the discussion in the diligent side. The other part is we’re pushing 25% to 30% of the portfolio now as mixed-used lifestyle. We have much higher touch points with those retailers. And having those discussions around how they think about certain assets is very helpful as well from a visibility and overall diligence standpoint.

Christy McElroy

And could you provide the cap rates on the deals that you -- on what you have done year-to-date?

Shane Garrison

Year-to-date we’re mid fives.

Christy McElroy

Mid-fives and that includes the two under contract?

Shane Garrison

It does.

Operator

Thank you. And the next question comes from the line of Vincent Chao with Deutsche Bank. Please go ahead with your question.

Vincent Chao

You guys all in your prepared remarks talked about the macro headwinds that we’re facing here today. I am just curious and as you think about the outlook that you provided, particularly on the same store side, I mean, is there any consideration for some of the things that we’ve been seeing here over the last say month and a half or two months that’s caused you change your thinking around the rent spread or occupancy by year end? It looks like your bad debt assumptions stay the same, so that didn’t change. But just curious about some of the other components.

Heath Fear

Looking at the macro headwinds, obviously it’s something we take into consideration. And if you look at your numbers and your constantly revisit, and we spent a lot of time verifying whether we feel comfortable with these leasing spreads, how much of our leasing is speculative et cetera. So, it’s certainly part of the chemistry of what’s happening when we do our guidance. We still have 50 basis points of debt in there which this year I think we used 22 basis points of it. So, we still feel despite the gloom and doom that Steve described, we still see underlying fundamentals are still very strong for the economy. So, our guidance, I think as Steve said, was cautiously optimistic. But yes, to your question, it is something that we think about.

Shane Garrison

And just to add on to Heath’s commentary around Sports Authority or any other specific shadow bankruptcy events, we have not made any specific Sports Authority other than what is known today assumptions. But I will tell you just from a run rate perspective, we run typically about 80% on a renewal rate and I think the model right now is showing high 60s. So, we do have some assumptions in there that I think take into account some headwinds. And I think we’re very comfortable right now with that we know in the range.

Vincent Chao

Go it, that’s helpful. And just sticking with some trouble sense, [ph] I mean can you comment on what you are hearing from hhgregg these days?

Shane Garrison

We have not heard a lot of new. I think they’re trying to figure out what makes sense regionally and have bucketed the company in that regard. But other than that we haven’t heard anything substantive for awhile.

Vincent Chao

Okay. And then turning over to Zurich, can you just talk about what you’re seeing there? Leasing activity I think you’ve mentioned in the past has been pretty good in terms of tours and that kind of thing but just curious what you’re seeing today?

Shane Garrison

Sure. So, still the best asset in the market, best visibility, certainly best real estate, so we think that’s going to be the overriding factor that drives rents and occupancy here. We’ve had several tours of what I will call large block users over 250,000 feet. The market lease expirations lineup well for us relative to Zurich’s exit. So, I think right now based on what we’re looking at, we expect to have something to announce, Vin, in the next quarter.

Operator

Thank you. And our next question comes from the line of Todd Thomas with KeyBanc. Please proceed with your question.

Todd Thomas

Just a follow-up there related to Zurich. I guess the $0.02 per share drag that’s in guidance that you’re expecting that to be related to three developments as well as Zurich. I guess just two questions there, one, how does Zurich play into that assumption? And then second in terms of the three redevelopments that you noted Boulevard at Cap Center and Towson and Reisterstown. And are you able to share any information around timing, costs and expected yields on redevelopment?

Steve Grimes

I’ll let Shane answer the redevelopment piece for Zurich, particularly it’s just one month of rent; it’s included in that $0.02.

Shane Garrison

Okay. And on the development and redevelopment, one, we obviously still have disclosure pending on the supplemental. I would tell you just to go there, the temple is done; we anticipate having that broadcast in Q1 specific to ‘16 and the drag on the three assets you mentioned just order of operation. Reisterstown is first, we will put a shovel in ground midyear, 60,000 feet. We will take out, we will deem all them, the last remaining and closed portion. It’s not a big spend; it’s $7 million to $9 million I believe; return on cost is about 10 that’s no longer than 12 months project. After that, it becomes a little more outsized. Housing is next in the queue. We have signed an agreement with an instructional multifamily owner and developer. We will announce who that is once we’re through the deliverables and the document and diligence, which should be towards probably Q3ish at this point. And we will also at that point talk about total outlay and return on cost. But as a reminder, we are monetizing air rights there, so the equity outlay would not be substantial.

And then Cap Center is the furthest out at this point. One, it’s a very large project as we talked about in the past. Indicative multifamily interest there is up to 1,000 units. So, the hospital, a hotel and several other commercial uses in addition to recasting the retail. It’s a multiphase project. Right now, the next hurdle is the CON or certificate of need for the hospital, which initially was February; it’s now been pushed out to mid-year. So Q2, assuming that’s done in Q2, we will have something to announce as far as phasing and at least projected square footage end uses.

Todd Thomas

Just regarding the 65% renewal ratio that you mentioned, what specifically is driving that assumption and what would a renewal ratio of around 80% due to the model, if you were to sensitize it?

Shane Garrison

It’s hard to say because it would depend on -- it was in line our anchor, obviously. I would tell you some of it is known, right? So, we’ve had -- as an example, we’ve had six original office expirations, office user across the spectrum in 2016; two have not renewed, and they’ve not baked into space but they are already leased. So, yes we will have downtime but they’re already addressed. I think the comps were mid to high single digits. That’s the specific assumption I’m aware of. We’ve also had a couple of downsizes early where the comps were close to 50%. So, again, this is generally what we’re aware of and there is always a bit of conservatism in it as well.

Todd Thomas

And just lastly for Heath on the balance sheet, just looking at the maturity schedule over the next few years, there is still quite a bit of high cost debt outstanding. Any flexibility or any thoughts in being able to get at some of that and get some of the back to lock in today’s low rates? Any sort of view or thought around being able to maneuver around some of the prepayment penalties or getting some of that debt back?

Heath Fear

I think that any maneuvering we do would be in connection with the sale of the assets. So, there is really not an opportunity to look at. My 17 maturities -- or my 19 maturities and say well, can I pay it back and not pay a penalty or the fees in or yield maintenance. So to the extent that there is an asset that’s encumbered and we want to monetize that asset, that’s when you can have an opportunity to get creative and maybe you can assign the debt, maybe you can do substitution or collaterals. So, those are the things that we think about. But again, just basically, being able to repay it early is not something that we’re going to be able to do.

Operator

And our next question comes from the line of Jay Carlington with Green Street. Please go ahead with your question.

Jay Carlington

So, Shane, on the 6.5% to 7% cap rate range you saw in dispositions, did that include Gateway?

Shane Garrison

I think it does, Jay. I can double check, but I believe it does.

Jay Carlington

So, do you have any idea what that looks like ex-Gateway, is that probably a lower range I am guessing?

Shane Garrison

Yes, I would certainly be -- I still don’t think we would get above 7%.

Jay Carlington

And maybe just on the strategic remerchandising, can you guys just walk through the impact, what it was in the fourth quarter for same property NOI and some thoughts on how you’re thinking about the cadence of that as we move throughout the year?

Shane Garrison

It was 60 basis points accretive in the fourth quarter and it was 150 basis points -- I am sorry, dilutive…

Jay Carlington

Dilutive, okay.

Shane Garrison

Dilutive in the fourth quarter and the 150 basis points dilutive year-over-year.

Jay Carlington

And then as we go into ‘16, at what point does that become kind of go from a headwind to tailwind?

Shane Garrison

So, we said that in ‘16 it was 50 basis points of tailwind and also should be about 50 basis points of tailwind to ‘17 as well.

Jay Carlington

And Steve, maybe just a big picture question, just looking at that lifestyle retail mix that you mentioned roughly 25% of your ABR. Where do you think that can go over the next couple of years?

Steve Grimes

That’s a fair question, Jay. As we look to the portfolio and we mine through opportunities that we have within the portfolio, we definitely do very -- play very well in the lifestyle mixed-use and it’s definitely directionally where I think a lot of retailers going. That being said, it can be incredibly, incredibly competitive. So, we’re being very mindful about what it is we’re looking at and ultimately targeting for acquisition. I don’t have a fixed percentage for you. We happen to like the portfolio we have right now, it’s producing very well. But I do think as we move forward into the longer term strategic plan, we see a lot of liability in mixed-use.

Operator

Thank you [Operator Instructions].Our next question comes from the line of Chris Lucas with CapitalOne. Please go ahead with your question.

Chris Lucas

Shane, just a quick question on the disposition cap rate guidance range you gave 6.5% to 7%, is there much differentiation between what your expectations are on an single tenant versus the multi tenant assets?

Shane Garrison

No, that’s a great question. I don’t believe so. I think we assume that the single tenant assets are 6.8ish, which is kind of mid range, so I don’t think there is a dramatic difference.

Chris Lucas

And then Steve, bigger picture question, just in terms of the disposition program, given where the stock is and I know you’re trying to manage through sort of the matching of acquisitions and dispositions. But does it make sense in this environment to try to be more aggressive on the disposition front, and is there anything as it relates to what you are long-term looking at disposing off and the encumbrances there that are prohibiting you from ramping up the disposition program even more this year?

Steve Grimes

That’s a fair question, Chris. We’ve been a net seller last year, we’re expected to be a net seller this year to the tune of about $150 million. I think to go anything outsized form that that refers to what Shane was talking in terms of plan A, plan B in terms of what we can pull-in into the pool, and it really is kind of the risk profile that we’re facing in terms of is there going to be some sort of cap rate expansion let’s say in some of secondary market. That being said, we have de-risked the portfolio in terms of what we feel to-date. Close to 80% of our ABR is in the top 50 MSAs right now. And we kind of view it more as trading assets as opposed to buying and selling because as long as we can maintain that differential between acquisitions and dispositions on a cap rate that we’ve expected somewhere in between 100 to 150 basis points, assuming we’re buying the right growth profile and the assets, we feel that we’re driving long-term shareholder value.

So, we feel that we’re in a position, in an offensive position, we do have kind of cards to deal with in terms of the trading aspect of disposing of assets and looking to buy. But again, we can scale that up pretty much at a moment to notice if we see any one in time that we need to be responsive too.

Chris Lucas

And then, thank you. Last question from me, just as it relates to the disposition environment, any comments about what you’re seeing as it relates to the pool of interested buyers for your disposition assets?

Shane Garrison

This is Shane, Chris. It hasn’t -- it’s early, so I can just tell you really what we witnessed the last couple of quarters of ‘15 which was generally the overall buyer pools were a bit thinner and there was a little more dramatic difference between number one and number two. Vegas, I think I referenced on last call was a perfect example of that where four assets fairly dispread just from a genre standpoint and it actually took three different transactions to monetize the market. Our biggest concern in secondary and tertiary outside of buyer, the equity side is really obviously that’s a levered yield profit buyer. So, I would tell you with the CMBS issues that are obviously in front of us for ‘16 that’s a concern. But we did see what was kind of interesting on some of the assets where global banks actually stepped up with their balance sheet and provided the debt. So, it will be interesting to see what happens in ‘16 in that regard.

Operator

Thank you. And our next question comes from the line of Michael Mueller of JPMorgan. Please proceed with your question.

Lina Rudashevski

Hi, this is actually Lina Rudashevski on for Mike. I was wondering the increase in non-cash rents this quarter, what drove that and do you expect that to reoccur going forward at this level?

Steve Grimes

Hi, this is Steve. That was a reversal of a large a below market lease intangible. It was actually -- we recaptured Sports Authority at Manchester Meadows. So, it was a onetime event.

Operator

Thank you. And this does conclude today’s question-and-answer session. I’d like to turn the floor back to management for closing remarks.

Michael Fitzmaurice

Great. Well, thank you everybody for joining the call today. We know it’s a busy time for all of you. We have a couple of conferences coming up. So, I think we’ll see most of you over the next couple of weeks. So, until then, have a great day. And thanks again for participating.

Operator

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

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