Retail Properties of America's (RPAI) CEO Steven Grimes on Q2 2016 Results - Earnings Call Transcript

| About: Retail Properties (RPAI)

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

Q2 2016 Earnings Conference Call

August 03, 2016 10:00 AM ET

Executives

Michael Fitzmaurice - Vice President of Finance

Steven Grimes - President and Chief Executive Officer

Heath Fear - Executive Vice President and Chief Financial Officer and Treasurer

Shane Garrison - Executive Vice President, Chief Operating Officer and Chief Investment Officer

Analysts

Christy McElroy - Citigroup

Vincent Chao - Deutsche Bank

R.J. Milligan - Robert W. Baird & Company, Inc.

Jay Carlington - Green Street Advisors

Todd Thomas - KeyBanc Capital Markets Inc.

Michael Mueller - JPMorgan

Floris van Dijkum - Boenning & Scattergood, Inc.

Christopher Lucas - Capital One Securities

George Hoglund - Jefferies & Company , Inc.

Greetings and welcome to Retail Properties of America Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to turn the conference over to your host Mr. Michael Fitzmaurice. Thank you, you may begin.

Michael Fitzmaurice

Thank you, operator and welcome to Retail Properties of America second quarter 2016 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 August 3, 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 can 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 in the 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; and Heath Fear, Executive Vice President, Chief Financial Officer and Treasurer; and Shane Garrison, Executive Vice President, Chief Operating Officer and Chief Investment Officer. After their prepared remarks, we will open up the call to your questions.

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

Steven Grimes

Thank you, Mike and thank you all for joining us today. We continue to remain disciplined with respect to our strategy and I could not be more proud of our team and their commitment to our vision. We are realizing significant advancement towards our goals each quarter and while this quarter had its fair share of movements. I am pleased to announce that our outlook for the year remains relatively unchanged. With this in mind, our commentary today will be sustained.

Our team continues to execute on all elements of our strategy and our portfolio refinement continues to show its strength with current operational performance as well as increasing redevelopment opportunities as we strive to create long-term value for our shareholders. Our quarterly and year-to-date same-store NOI growth were 4.2% and 3.2% respectively. These results are not only a testament to the quality of our portfolio, but also of our continued commitment to enhance the quality and durability of our cash flow.

Retail remains dynamic and by virtue of the Sports Authority bankruptcy. We are once again afforded the opportunity to continue to solidify the dominance of our assets. As we have previously mentioned Sports Authority has been on our watch list and for the past two years we have been reducing our exposure while formulating contingency plans. Heath will update you on the bankruptcy proceedings and the resulting earnings impact while Shane will share the encouraging details of our backfill initiatives.

Because of our [poor sites] are resolved and the resiliency of our portfolio. Despite the Sports Authority of disruption we are maintaining our same-store NOI growth assumptions and we are raising the low-end of our operating FFO guidance by a Penny. We continue to execute on our capital recycling activities. To date we have completed or under contract for approximately $414 million of disposition representing two-thirds of our targeted range of $600 million to $700 million.

We are positioning ourselves well to finish the year meeting our goal of being a net seller and more importantly we continue to expect our 2016 dispositions to be completed within a weighted average cap rate range of 6.5% to 7%. This valuation provides compelling evidence supporting that what we’ve said several times previously. Our non-target market portfolio is high quality and it’s simply non-core to us for geographic reasons.

Despite a highly competitive marketplace our investments team continues to source opportunities in our target markets. Today we have closed on $279 million of acquisitions in the greater DC, Baltimore area as well as the New York, Dallas, Chicago, and Seattle MSAs and we continue to expect our 2016 acquisition to be completed within a weighted average cap rate range of 5.5% to 6%.

We continue to make rapid progress relative to our strategic plan and as further proof I am happy to announce that Seattle is now our number five market based on ABR. This past quarter we took a significant step toward our goal of maximizing value and monetizing Zurich Towers our last remaining office assets.

As a testament to the asset quality along with the focus and talent of our platform during the quarter we executed a lease for approximately 309,000 square feet or 35% of the GLA with Paylocity a publicly traded firm employing 1,300 people that provides cloud based payroll and human capital management software solution.

The new rent represents a 28% comparable releasing spreads, but is excluded from our reported releasing spreads as the leasing statistics we report only include retail properties. Nonetheless this releasing spread validates the quality and location of this Class A office building. As we anticipated the announcement of the Paylocity transaction and our future vision for the building has served to accelerate the leasing momentum.

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

Heath Fear

Thank you, Steve. This morning I will discuss our second quarter results and our outlook for the second half of 2016.

Operating FFO for the second quarter was $0.28 per share, compared to $0.26 per share for the same period in 2015. The quarter-to-date change in operating FFO was driven by lower interest expense of $0.025, higher same-store NOI of $0.015, and higher termination fee income of $0.05. These were partially offset by lower NOI from other investment properties of $0.025 pennies due to our capital recycling activities.

Same-store NOI growth was 4.2% in the second quarter, 320 basis points of which is attributed to higher base percentage and specialty rent fueled by occupancy increases, strong contractual rent increases, and releasing spreads. In addition we had lower expenses net of recovery income and other property income of 75 basis points and a lower bad debt expense of 25 basis points.

It’s important to note that our quarterly same-store results were positively impacted by 110 basis points due to the inclusion of five assets we acquired in the first quarter of 2015. Same-store NOI for these assets collectively grew nearly 26% quarter-over-quarter driven primarily by our leasing progress at Downtown Crown. This is a testament to our acquisition prowess and consistent with our Paylocity of trading today’s yields for more compelling risk adjusted long-term growth. We’re looking forward to including these assets in our full-year 2017 same-store pool.

Our net debt to adjusted EBITDA ratio ended the quarter of 5.9 times and our leverage ratio remained relatively unchanged to approximately 37%. It’s important to note that the temporary increase in our revolver balance and the small uptick in our net debt to adjusted EBITDA ratio as a result of transaction timing.

Turning to guidance and related assumptions, we are tightening the low end of our operating FFO guidance range from $1.03 to $1.07 to $1.04 to $1.07 as a result of $1.15 million of additional unexpected Circuit City bankruptcy proceeds received during the second quarter. $300,000 was recognized as same-store bad debt recovery and $850,000 was recognized as terminations fee income.

Additionally we are maintaining our same-store NOI growth assumption of 2.5% to 3.5% counterbalancing the short-term disruption in Sports Authority with the Circuit City bankruptcy proceeds and portfolio outperformance in the form of a higher renewal retention rate, higher percentage and specialty rent and earlier commencement dates.

As for Sports Authority we began the year with 10 locations. Dick’s Sporting Goods has acquired the right to assume or reject the lease at our Northgate North center in the Seattle MSA by September 11. They are responsible for all rents and total leases assumed or rejected. I believe Dick’s will ultimately assume this lease and satisfy all pre- and post-petition rent obligations.

As for the remaining nine locations, one lease was rejected in the first quarter, three leases were rejected effective of June 30, and five leases were or are expected to be rejected effective July 31. All this activity is reflected in our current guidance.

Finally you will recall that last quarter we reserved against 100% of the receivables inclusive of March sub-rents for nine locations. We have since received all of the March sub-rents for the three leases that were rejected on June 30. As for the March sub-rents for the remaining rejected leases our guidance assumes we received 85% of these rents.

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

Shane Garrison

Thank you, Heath. This morning, I will discuss our operational results and provide an update on our investment and redevelopment activity, in addition to details surrounding our opportunity with Sports Authority bankruptcy. We ended the quarter with a lease rate of 95%, up 50 basis points year-over-year, primarily driven by our 2015 remerchandising plan and small shop leasing efforts.

Regarding our remerchandising initiatives, we have hit a major milestone. To date, we have addressed nearly all of the previous GLA with a vibrant mix of relevant retailers was just 11 months downtime and comparable releasing spreads of approximately 19%. We think this is a great proxy for what we expect with the Sports Authority opportunity, which I will touch on in a moment.

As for our small shop efforts, fundamentals remain strong and we continue to see a robust demand from restaurants, soft goods, health and beauty tenants, and various franchise operators. Our small shop lease rate is 89.8% for the same-store pool and 87.9% for the portfolio and we maintain our belief that stabilize small shop portfolio occupancy is approximately 91% to 92%.

Additionally, we continue to see the friction necessary to push rents and releasing spreads. During the second quarter, we completed 129 leases representing 920,000 square feet with blended comparable cash releasing spreads of 8.1% comprised of a 6.9% spread on renewals and a 16.3% spread on new leases. Overall, our performance was broad based and consistent across geography and asset type.

Before moving on to our transactional update, I would like to comment on our backfill opportunities will Sports Authority. Of the 10 former Sports Authority locations, one is projected to be assumed by Dick’s Sporting Goods, and one is located at our redevelopment project in the Washington D.C. MSA. As it relates to the remaining eight location representing 352,000 square feet, to date, we have signed a lease for 65,000 square feet at our San Antonio location and are in active negotiations on four locations constituting an additional 167,000 square feet.

Specific to the remaining three locations, representing 120,000 square feet, we have robust interest for both long-term and seasonal tenants. As we have discussed in the past against the backdrop of a tight supply environment, we will continue to quickly take advantage of this opportunity to further deliver stabilized cash flow and solidify the merchandising and market positioning of our assets.

Turning to asset sales, to date, we have completed or are under contract for approximately 414 million of dispositions. As Steve stated in his prepared remarks, we continue to expect our 2016 dispositions to be completed within a weighted average cap rate range of 6.5% to 7%. We are pleased with the level of buyer interest that we are seeing in the secondary and tertiary markets for high quality assets and we are still confident in our full-year guidance range of $600 million to $700 million.

From an acquisition standpoint, our platform continues to find compelling opportunities in a very competitive environment. During the quarter, we closed on approximately $126 million of additional acquisitions in our target markets comprised of the previously announced The Shoppes at Union Hill in New York, Eastside in Dallas MSA, and Tacoma South in Seattle. The third quarter is shaping up to be very productive for RPAI on the redevelopment front and we expect this momentum to continue as our focus turns inward to our target markets.

Currently, we are on track to deliver a pad project Heritage Square in Seattle and an expansion at Parkway Towne Crossing in Dallas. At Heritage Square, we redeveloped an existing pad and released its Corner Bakery, achieving a 153% releasing spread with a return on cost of approximately 11.25%. This first to market retailer represents a critical step in enhancing the merchandising mix of the center.

At Parkway, we added 21,000 square feet and leased it to ULTA and Tuesday Morning with the return on cost of approximately 9.75%. In our redevelopment disclosure this quarter, you will also notice that we activated an additional pad development at the shops at Parkway in Dallas, and we have signed a lease with Total Wine with a return on cost of approximately 9.25%.

Some of these three projects is expected to result in roughly 850,000 in incremental NOI with a weighted average return on cost of approximately 9.75%. These are great examples of low risk, repeatable and deal driven value creation opportunities with projected returns in the high single-digit range.

As for our more substantial redevelopment opportunities during the quarter we expect to commence construction at our Reisterstown Road Plaza asset in Baltimore. Here we are demolishing the last remaining enclosed portion of the property and reconfiguring the remaining space together with a facade renovation and the addition of a multi-tenant retail pad building. This project is expected to result an approximately 1.2 million of incremental NOI with a cash on cash return of approximately 10.5%.

Also before the end of the year we expect to add Towson Circle to our active redevelopment section in our supplemental disclosure. Our plan is to increase the density of the site turning the existing configuration into a mixed use development that will include double sided street-level retail with approximately 375 residential units above.

At Investor Day next month, one of our primary goals is for each of you to walk away with a clear and quantifiable understanding regarding the increasing role, redevelopment and densification opportunities will play within our portfolio. I am hopeful you will learn that our portfolio is rich in opportunities and we will detail for you how we intend to continue to unlock value using our stair step and return focused strategy.

Lastly turning to Zurich Towers as Steve noted we are excited about our announcement of a milestone lease with Paylocity. They are an excellent lead tenant and I cannot emphasize enough the importance of this transaction as it relates to our ultimate exit of this last remaining office asset.

And with that, I will turn the call back over to Steve for his closing remarks.

Steven Grimes

Thank you. Heath and Shane for your report. As Shane alluded to earlier I would like to remind all of you that RPAI will be hosting an Investor Day in Tysons Corner Virginia this coming September 21 and 22. Our goal is to present a panoramic and multi-dimensional view of RPAI with specific emphasis on our tremendous progress and even better prospects for the future. Hope to see many of you there.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Christy McElroy with Citigroup. Please proceed with your question.

Christy McElroy

Hi, good morning, guys. Just on Sports Authority you had previously talked about potential 60 basis point impact incremental sort of adverse impact? Can you sort of walk through the primary offset that kept your same-store NOI guidance unchanged. And then Steve I think you also mentioned or Heath that you expect to receive 85% of the March receivables that you previously reserved for in Q1. When should we expect that reversal to flow through same-store NOI and with any of that in Q2?

Heath Fear

Hi, Christy, it’s Heath. So I’ll answer your question in reverse. So the 85%, it was a settlement approval that was approved yesterday. So we think we’ll see those proceeds in two weeks, so we will realize that in the third quarter. And then in the 60 basis points of disruption we told you that assuming we didn’t receive any rent for those six leases after June 30 it would be 60 basis points, so I guess I’ll walk you down.

So first we collected July rent for those locations that brings us down to 50 basis points. One store is being assumed that brings us down to 40 basis points. The March sub-rents for the stores are bringing us down to 30 basis points and we received another 300 K in same-store from Circuit City that brings us down to 20 basis points. And we will resolve the remaining 20 basis points with the portfolio outperformance in the form of percentage rents, early commencements, seasonal leasing, higher renewal rates. So we feel pretty good about our guidance range.

Christy McElroy

Okay great. And then just given the difference in the full-year pool versus the quarterly pool with the performance driven primarily by Downtown Crown and then you know sort of assuming in the back half you know some of that occupancy uplift just the burn off and then you also have that Sports Authority downtime. What are you expecting for the quarterly same-store NOI growth rate in Q3 and Q4?

Steven Grimes

Listen we don’t guide to a quarterly rate but you know based on our midpoint you would expect to see some deceleration based on the Sports Authority disruption. However, I will remind you that we were expecting to see an uplift in the back half of 2016 due to the 2015 [indiscernible] activity. So to some extent the effect of Sports Authority is going to be offset by the fact that we had easier comps in the back half of our 2015.

Christy McElroy

Okay. So just answer a little differently, so if the Downtown Crown and the other acquisition assets for adding a 110 basis points to the 2Q number, what should we expect that impact to be in the back half of the year.

Heath Fear

Those stores won’t be in our year-end pool.

Christy McElroy

Right. Not the year-end pool, but the quarterly numbers so when you report the Q3 number versus the nine-month number.

Heath Fear

Christy, I’ll get back to you on that.

Christy McElroy

Okay. Thank you.

Operator

Our next question comes from Vincent Chao with Deutsche Bank. Please proceed with your question.

Vincent Chao

Yes. Hi, guys. Just curious if Dick’s in the guidance here, if Dick’s does take a store and you said beyond on the hook for prior rents that weren’t paid. Is that factored into the math that you just went through in terms of the Sports Authority impact?

Heath Fear

Yes it. So we’re assuming that we get all pre- and post-petition rent for the Northgate North store.

Vincent Chao

Okay. Great. Thanks. Just maybe moving to the acquisitions that were done in the quarter, I was just curious [indiscernible] fairly full occupancy. I was just curious what the sort of growth profile looks like for those two assets and is that just market rents being below market or how should we think about that same-store NOI growth for those assets when they eventually get put in the pool?

Shane Garrison

Hi, Vin. It’s Shane. Good morning. Yes, more of a mark-to-market opportunity to your point, possibly a little bit of densification down the road as well specifically to in Seattle. So again we’re shooting for kind of 2.5 north CAGR when we underwrite the stuff from an acquisition standpoint and we feel that these assets meet that.

Vincent Chao

Okay. Thanks for that. And then I guess just on an Office Depot in Staples. Can you just provide an update there? I guess Office Depot is closing some stores?

Shane Garrison

Sure. So we were down at the beginning of the year to about 2% of ABR total exposure to the Office sector. We had seven deals I believe that’s coming out for 2016. Three of the seven have vacated, they have all been back filled already and the remaining four in this case have renewed. So for this year our office activity is done and next year I believe we have two expirations. So we continue to deal with more backfill these opportunistically.

Vincent Chao

Okay. Have you gotten the store list yet, the additional 300?

Shane Garrison

We have not. I have not seen.

Vincent Chao

Okay. Thank you.

Operator

Our next question comes from R.J. Milligan with Robert W. Baird. Please proceed with your question.

R.J. Milligan

Hey, good morning, guys. You talked about the eventual exit of the Zurich Towers and I’m curious what the goal for occupancy level and sort of timing for that exit?

Shane Garrison

Hi, good morning. This is Shane again. It’s a great question. With the Paylocity lease at 35% of the existing GLA, I think it’s a great start. But specific to that lease, they have the right to expand to 500,000 feet, so given the quality of the tenant and of the velocity and growth in their business, we certainly think that’s a great indicator of their expansion ability by 2019 call it.

So really when we think about the ultimate resolution of the asset in conjunction with that expansion rate. I think another 200,000 feet or so gets us there just from a market ability standpoint in ultimate resolution and that’s what we’re shooting for currently. If we can get another 200,000 feet and when we do, we will go to market and have more robust conversations around and ultimately put it even here.

R.J. Milligan

And can you talk about what the demand looks like currently for space there? How the talks are going?

Shane Garrison

Sure. So, again the building has great visibility. Certainly the best building in the corridor, again and the adjacency of Woodfield Mall from an amenity standpoint I think sets it apart as well. So the velocity especially since we’ve announced Paylocity in conjunction with our Cosmetic renewal of the common area. We posted some boards during walk-throughs in the property I think that’s helped as well. So I think we’ve walked 400,000 to 500,000 feet through in the last quarter. So activity continues to pick up and the building certainly seems to be in demand.

R.J. Milligan

Okay. My second question is just obviously success on the disposition side, able to find a couple of assets to buy so far year-to-date in some of these core markets where you’ve been hearing the cap rates continue to move lower just curious what you’re seeing in the overall market and what you think your ability is to put capital back out as you sell more assets into these more dense markets in the back half of the year and looking into 2017?

Steven Grimes

So for this year, we certainly think we’re going to maintain the guidance as we have it 425 on the acquisition side. I think the most successful group you’re seeing today in this highly competitive environment have specifically we what we have, which is a very finite focused approach and local knowledge and local relationships.

And we at least from our perspective that is how we are driving success and continue to do so in the acquisitions side. From a cap rate perspective, we still expect to be at 5.5 to 6 at the midpoint. So overall, we are being patient, we’re staying disciplined as far as our underwriting and we’ll look forward to displaying this year’s acquisitions and more densification opportunities in that regard at Investor Day.

R.J. Milligan

Great. Look forward to it. Thanks, guys.

Operator

Our next question comes from Jay Carlington with Green Street Advisors. Please proceed with your question.

Jay Carlington

Hey. Shane, good morning. Just a quick question on the acquisition cap rate, was that previous guidance at 5 and it’s higher or might forgetting that?

Heath Fear

It was 5.5 to 6.

Jay Carlington

Okay. Maybe just switching over to kind of your lifestyle centers there and discretionary nature of some of those tenants, are you seeing any of them being more cautious in their outlook so is there anything on the lease negotiation side or maybe in permanent from a demand perspective that you’re seeing?

Steven Grimes

Specific to lifestyle Jay, I would tell you the only slowdown we’ve seen from a demand standpoint from a category has been really boutique soft goods, other than that demand has been pretty robust. I think you’ve seen all tenants be more selective in the slight selection process, but for the best of the best especially mixed use environment that are unique and have considerable sales history demand is still considerable and that certainly what we see in our portfolio.

Jay Carlington

Okay. And then maybe just looking at our hold that I guess that’s your number two tenant there and bringing those locations have to be the best as part of the [indiscernible] dollars merger?

Steven Grimes

No.

Jay Carlington

Okay. Great. Thanks, guys.

Operator

Our next question comes from Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Todd Thomas

Hi, thanks. Good morning. First question, Heath, apologies if I missed it, but the unsecured debt capital raise and that anything guidance, it seems like you might be contemplating a slightly smaller raise. Can you just provide an update there on what you’re thinking?

Heath Fear

Yes. Those numbers there – it’s just that trying to low flexibility depending on where we land in terms of acquisitions and dispositions at the end of the year. So with the high end of disposition and the low end of acquisitions it really reduces our capital needs for next year.

Todd Thomas

Okay. And then back to Zurich. Is it fair to say that the buyer pool for an asset like this is pretty same I mean, Shane based on what you said you think you need another 200,000 square feet of leases signed. I’m assuming that the building won’t be finance thoughts it’s more than 80% leased or so. Is that the right way to think about it and maybe you could just comment on the eventual buyer pool as you think about this asset?

Shane Garrison

I think the simple answer is it depends, the suburban office market is relatively hot right now and there are certainly a considerable amount of funds out there that could take the building down at $150 million plus or whatever the number ends up being, and they would typically take it without financing and finance it after that fact. So I don’t know I think, but I think given the visibility of the asset quality of the asset, best in market. I do think there’s a decent buyer pool and it certainly liquid in the next 12 to 15 months based on what we see today.

Todd Thomas

Okay. And then heading into next year, any sense for what the impact might look like in 2017 after Zurich vacates in December. I mean how should we think about that?

Heath Fear

It’s $10 million in NOI that’s coming offline and under Paylocity, we are not going to see any rent payment until 2018.

Todd Thomas

Okay.

Steven Grimes

So Todd, it’s probably $0.06 somewhere around there.

Todd Thomas

Right. Got it. And then just last question I was just curious as you kind of think about your target markets here? Maybe you can just give us an update about expanding that target market list from 10 to 15 which you know you’ve talked about in the past and sort of where you’re seeing some of the most compelling opportunities today?

Steven Grimes

Todd, this is Steve. We’re talking about Investor Day and specific to the market that we have I would say that Shane would argue that his transaction team as well as the asset management and leasing teams have enough on their plate with the 10 markets we’ve been focusing in on. That being said we do have markets out there that are of scale that have assets that are very highly producing assets that we continue to evaluate whether we announce markets 11 through 15 at some point. At this point in time we have no plans to announce additional markets, but as we get closer to Investor Day we will reevaluate maybe have a lot more clarity on that going forward.

Shane Garrison

Hey, Todd I want to follow-up on the Zurich question. You had changed that, it was you know $0.06 of dilution but please keep in mind that’s our goal to monetize that asset in 2017 and recycle that capital. So I just want to make sure that you thinking about that as well.

Todd Thomas

Okay. Got it. Thank you.

Operator

Our next question comes from Michael Mueller with JPMorgan. Please proceed with your question.

Michael Mueller

Yes, hi. So Heath I know people brought up Sports Authority and you talked about that from same-store perspective? But can you give us a sense as to how much of NOI dollar that’s in the 2Q run rate come out as we move to Q3 and that that can relate to the reversal relate to you know stores that are you know you’re going to stop collecting rent on et cetera. So can you just size that up for us.

Heath Fear

I am not really trying to understand your question, you are asking me how much rent is coming offline sort of in the back half of…

Michael Mueller

If you look at the Q2 FFO run rate and your NOI? How much NOI was in Q2 that will cease to exist from Sports Authority in Q3 and going forward?

Heath Fear

Right. Just on a full-year basis its total about 90 bps is your total disruption and the back half of that is going to be about 60 bps.

Michael Mueller

So basically you are losing 30 basis points, so if we take your same full-year same-store NOI and multiply times 30 basis points that’s going to be a math that drops off?

Heath Fear

Just trying to get to.

Shane Garrison

I think Mike what Heath was saying earlier is that the potential impact of Sports Authority would be 60 basis points for the back half of the year, but that’s not including some of the backfill opportunities some of the offsets that are in there. So if you are looking at on an absolute basis the 60 basis points, but I simply walked everybody down to say that the impact of the year is very negligible at about 20 basis points total.

Michael Mueller

Okay. And what was the dollar reversal that was booked in the quarter?

Steven Grimes

The reversal is for the - we acquired a ground lease that Ashland and Roosevelt - Sports Authority.

Michael Mueller

Yes, Sports Authority. There was a recovery right.

Steven Grimes

For the March sub-rents.

Michael Mueller

Yes.

Shane Garrison

That wasn’t reversed. That will be reversed this quarter it was announced yesterday that they are going to be pay the 85%, we should receive that in the next couple of weeks.

Steven Grimes

Yes, so the March sub-rents for the three that were rejected in June 30 were realized in this quarter and the March sub-rents 85% of those are going to be realized in the third quarter.

Michael Mueller

Okay. I’ll probably circle up offline on this.

Steven Grimes

Okay. Great.

Operator

Our next question comes from Floris van Dijkum with Boenning & Scattergood. Please proceed with your question.

Floris van Dijkum

Great. Thanks. Good morning, guys.

Heath Fear

Good morning.

Floris van Dijkum

I had a question just on the operating expenses which were down by 700,000 and your recoveries that were up about $1.3 million in the quarter. How much of that is sustainable? It sounds like there are some one-off items potentially that could be affecting those numbers?

Heath Fear

I think it’s a non-recoverable.

Floris van Dijkum

So the non-recoverable – the recovery ratio, how should we think about it I guess is my question is can we assume that those numbers will continue going forward or what should we strip out in terms of – it’s sort of a related question I guess a follow-up to Mike’s question maybe in some ways?

Heath Fear

We will also follow-up with you offline, but I think that’s a sustainable number that you have right now.

Floris van Dijkum

It is. Okay. Great. I had another question in terms of – Heath, as you think about the debt profile and obviously you guys have a pretty strong balance sheet nowadays. How do you think about terming out your debt further and if you were to do another bond deal are you thinking about that in terms of terming out your debt profile for the company further?

Heath Fear

Yes. So if you think about it this year our maturities and our liquidly needs are completely being satisfied by our disposition program in 2025. So next year we have 240 million coming due, so the idea is in the fourth quarter will do a raise, call it, anywhere from seven to 12-year raise, so we’ll push those maturities out.

And then in 2018 all we have do is our term loan which is a floater, so once that comes due we’ll obviously give some more term in out as well. So it’s our goal to increase our duration over time. So we are sitting here at a duration, call it 4.5 years. I think a healthy duration for us considering our maturities and our debt profile somewhere around six or seven years.

Floris van Dijkum

Got it. Okay. And then last question, maybe in terms of and I suspect we’ll probably hear more of this at your Investor Day next month. But as you think about the portfolio restructuring, timing has anything changed. Do you think that’s going to be still around 2018 before you’re fully finished with that or how should investors think about that.

Steven Grimes

Floris, this is Steve. I would say that with respect to the transaction timing specifically. One of the things that we’re keenly focused on as a fact that roughly about 70% of ABR will be in the top 10 markets by the end of the year. Of course, a little over 80% will be in the top 50 MSAs. So from that perspective, when you look at it on an ABR basis, we’re pretty down far along.

That being said, transactionally I think we have been very optimistic about being in that seller of the size this year. We would expect to be a net seller next year as well. And to your point, we will have a lot more clarity on that at the Investor Day. But I would say that 2018 is probably a little bit far out there. I would say our final push we would hope to be would be in 2017.

Floris van Dijkum

Great. Thanks, Steve.

Operator

Our next question comes from Chris Lucas with Capital One Securities. Please proceed with your question.

Christopher Lucas

Yes. Hey, good morning, everyone. Just a couple of detailed questions on Zurich if I could. I guess just making sure, is Zurich scheduled to move out on times. There’s no [indiscernible] there.

Steven Grimes

They are scheduled to move out on time. Currently yes.

Christopher Lucas

Okay. And then just as it relates to sort of the technical issues related to sort of the timing of the takeout or the takedown of leased space and rent commencement and the operating expenses that you guys will be essentially covering after Zurich moves out. I guess if you could maybe walk us through a little bit over that maybe the first like how it works for the takedown of the first piece by Paylocity. In other words you’ve got GAAP rents that starts well before the cash rent, but there are still operating expenses that need to be covered at the building?

Shane Garrison

Sure. So I can just walk you through mechanically, Chris, as a practical matter their first Paylocity first – it’s a tranche takedown, so shares up, lease up at least little over 309,000 square feet call it they step into 44,000 square feet in 2018, call it second quarter of 2018.

And then Q4 of 2018 they take another 66,000 feet, so I’ll call it a 100,000 total in 2018 and then 2019 another 88 and the balance in 2020. Those are actual rent commencement dates. Their occupancy dates are 12 months prior to that in this market as you know it’s basically one-month of free rent leased year signed and that’s basically what happened here.

From a carry standpoint, we will have an onsite building engineer, that’s been with the building for a while. And then from a operating standpoint, we’ve certainly gone through the taxes and have protested those currently aren’t looking at opportunities to reduce expenses right now.

Christopher Lucas

Great. Thank you.

Operator

The next question comes from George Hoglund with Jefferies. Please proceed with your question.

George Hoglund

Hey. Good morning, guys. Just continuing on Zurich, I don’t know if you mentioned this earlier, but what are your current expectations in terms of CapEx requirements to lease it up?

Shane Garrison

George, you want specific to the current leased and common area or just in general?

George Hoglund

I guess both.

Shane Garrison

So we are - I think market right now based on the lease we’ve executed was about $65 a foot from a TI incentive standpoint, so specific to this lease, our commitment here is $20 million give or take and then additional leasing commissions are another $8 million, so lease by itself is $28 million.

From a expenditures standpoint or timing 2016 is, call it $10 million most of which is Q4 at this point and then it burns down from there. So let’s call it $5 million or $6 million run rate in 2017, 2018 with the balance call it $8 million payable at 2019. And again from market perspective as we lease it up, we would expect $65 would be the right number to use.

George Hoglund

Okay. Thanks.

End of Q&A

Operator

[Operator Instructions] There are no further questions. At this time, I’d like to turn the call back to Steven Grimes for closing comments.

Steven Grimes

Well, thank you guys for joining us today. I understand that it is a busy time. We know that you take timeout of your busy schedule to attend our conference call, and I assume some of you are going to be jumping on to the next one, but we are here all day and available for any additional questions that you may have. Have a great day.

Operator

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

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