Weingarten Realty Investors Management Discusses Q2 2012 Results - Earnings Call Transcript

Aug. 8.12 | About: Weingarten Realty (WRI)

Weingarten Realty Investors (NYSE:WRI)

Q2 2012 Earnings Call

August 08, 2012 11:00 am ET

Executives

Michelle Wiggs

Andrew M. Alexander - Chief Executive Officer, President, Trust Manager, Chairman of Executive Committee and Chairman of Pricing Committee

Stephen C. Richter - Chief Financial Officer and Executive Vice President

Johnny L. Hendrix - Chief Operating Officer and Executive Vice President

Analysts

Craig R. Schmidt - BofA Merrill Lynch, Research Division

Philip J. Martin - Morningstar Inc., Research Division

James W. Sullivan - Cowen and Company, LLC, Research Division

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division

Vincent Chao - Deutsche Bank AG, Research Division

Wes Golladay

Carol L. Kemple - Hilliard Lyons, Research Division

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

Thomas C. Truxillo - BofA Merrill Lynch, Research Division

Cedrik Lachance - Green Street Advisors, Inc., Research Division

Tamara J. Fique - Wells Fargo Securities, LLC, Research Division

Operator

Good morning, and welcome to the Weingarten Realty Second Quarter Earnings Conference. My name is Brandon, and I'll be the operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn it over to Michelle Wiggs. Michelle, you may begin.

Michelle Wiggs

Good morning, and welcome to our second quarter 2012 conference call. Joining me today is Drew Alexander, President and CEO; Stanford Alexander, Chairman; Johnny Hendrix, Executive Vice President and COO; Steve Richter, Executive Vice President and CFO; Robert Smith, Senior Vice President; and Joe Shafer, Senior Vice President and CAO.

As a reminder, certain statements made during the course of this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results could differ materially from those projected in such forward-looking statements due to a variety of factors. More information about these factors is contained in the company's SEC filings. Also, during this conference call, management may make reference to certain non-GAAP financial measures, such as funds from operations, or FFO, as recurring and reported, which we believe help analysts and investors to better understand Weingarten's operating results. Reconciliation to these non-GAAP financial measures is available in our supplemental information package located under the Investor Relations tab of our website. [Operator Instructions] I will now turn the call over to Drew Alexander.

Andrew M. Alexander

Thank you, Michelle, and thanks to all of you for joining our call. First of all, I want to announce the addition of 2 new Trust Managers to our Board, Shelaghmichael Brown and Tom Ryan. You can see their accomplished backgrounds in the press release we issued yesterday. I'd also like to introduce Michelle Wiggs, who will be helping us interface with all of you. Michelle has been with the company 10 years. She is a CPA, who started in our accounting department and for the last 6 years, she's been supporting Johnny in our leasing area and operational analysis and she's looking forward to helping to answer your questions.

Now to our results. During the quarter, we made significant progress in achieving the 3 strategic objectives that we continue to highlight over the past quarters. The objectives are: number 1, to further improve operations and leasing our portfolio back to 95-plus-percent occupancy; number 2, continue improving the quality of our portfolio through recycling of capital by selling non-core properties and acquiring or developing assets in high barrier to entry markets with strong growth prospects; and number 3, improving our financial position by slightly delevering our balance sheet. We made great progress on all 3 initiatives. The profitability of our core portfolio continues to improve. Retail occupancy continued to move upward to 93.7% with a significant increase in small shop leasing, driven by a 30 basis point increase from the first quarter and a 130 basis point increase from the second quarter of 2011. Combined with reasonably strong rental rate increases, this led to another strong quarter of same property NOI growth with a year-to-date increase over the last year of a strong 3.8%. We are confident we will attain our full-year goal of 4% to 5%. As to our capital recycling, we closed on the sale of our wholly owned industrial assets in the latter part of May, generating net proceeds of $363 million. We are on track to dispose of the remaining industrial assets held in joint ventures before the end of the year. During the quarter, we also generated another $46 million from the sale of other assets, primarily shopping centers in our secondary portfolio. Of this $400 million of capital, we redeployed nearly $130 million with the purchase of 2 outstanding shopping centers, one of them subsequent to quarter-end. Both of these new centers are in outstanding locations with significant barriers to entry and great demographics. Our activity in this quarter clearly exemplifies how we're enhancing the quality of our portfolio through our recycling program.

Looking at the numbers. We've generated significantly more cash this quarter than we have chosen to invest. This has enabled us to more than accomplish the last leg of our 3 strategic objectives by significantly reducing our overall leverage. This positions us to purchase additional assets and still maintain overall leverage that puts us among the upper tier of our peer group, a position we intend to maintain.

Turning briefly to our new development efforts. We continue to make good progress on our pipeline of 11 properties. In the last quarter, our strong leasing improved our net percentage lease by over 400 basis points, and we recorded completions of $12.2 million, highlighted by the strong opening of Ross at our Tomball development in the Houston area. We're on track to finish these projects, which represent an investment of almost $200 million at an average ROI of 7%. We continue to pursue new projects in multiple markets and are confident our development expertise will add significant future shareholder value.

We had a really great quarter. And with that, I'd like to turn the call over to Steve to discuss our financial results in more detail.

Stephen C. Richter

Thanks, Drew. Recurring FFO was $0.47 per diluted share for the quarter versus $0.44 last year, an increase of 6.8%. This was a result of reduced interest expense as we refinanced debt maturities and an increase in commenced occupancy, offset by lease cancellation income of $1.2 million in 2011 that did not reoccur in the second quarter. Reported FFO was $0.45 per share compared to $0.28 per share in 2011. During the quarter, we recognized $25 million in noncash impairments, including an impairment of $5 million, which was recorded on wholly owned shopping centers being actively marketed for sale and an additional $7.8 million, which relates to retail properties held in joint ventures. Finally, $12.1 million of impairments were recorded against properties in an industrial JV accounted for under the equity method. Upon the sale of these properties, which are expected to close by year-end, we will recognize a gain of nearly $12 million upon the liquidation of our equity method investment. This accounting is somewhat unusual, so please contact us off-line if you want further details. Since all of these impairments relate to operating properties, they were added back to net income and arriving at reported FFO. Please see Page 43 of the supplemental for a further description of these impairments and how they flow through our financial statements, as they are recorded on multiple line items.

I want to quickly touch on the impact the industrial transaction and our other disposition activity has had on our balance sheet. Our debt to total market cap has decreased from 39.4% on a pro rata basis at the end of last quarter to 36.3% at June 30, with our stock price relatively unchanged. This is even better today with the recent improvement in our share price. Our net debt to EBITDA went down to 6.62x at March 31 to 5.89x at June 30. This is obviously a tremendous improvement, and it positions us among the best in our peer group. While we believe this provides us some drive power for future acquisitions in new development investment, we clearly understand the emphasis the investment community places on low leverage today. Our current strategy is to keep our leverage under 40% going forward.

With respect to 2012 guidance, we are pleased to increase our acquisition target to a range of $200 million to $250 million and also raise the lower end of our recurring FFO guidance from $1.76 to $1.84 per share, thus narrowing our guidance range to $1.78 to $1.84 per share. We remain comfortable with the balance of our prior guidance, which can be found in our supplemental package.

Lastly, I'd like to address overhead. Included in this quarter's results is approximately $2.1 million of severance expense related to the industrial transaction. This expense is included in the line item operating income from discontinued operations and has been added back to arrive at recurring FFO. We do not anticipate any additional industrial severance expense going forward. With respect to G&A expense, we expect the second half to run about $6.5 million per quarter. With that, I'll give it to Johnny.

Johnny L. Hendrix

Thanks, Steve. We did have a solid quarter. Occupancy is up, leasing velocity remains steady, tenant fallout is at a 5-year low, rent growth is up, same Property NOI is good, and finally, we continue to make progress with our recycling program. These advancements in our operating metrics are a continuation of steady improvements over the last 18 months, and we appear to be in a position to continue moving forward through the balance of 2012. Several factors contribute to my optimism, even in spite of an unstable economic environment. First, a retail lineup is primarily focused on providing necessities, services and discount clothing. While other retail sales have slowed, our retailers have found growth opportunities serving budget-constrained consumers, who still must buy necessities and are focused on value offered by many of our retailers like TJX and Ross.

Second, today 76% of our retailers are national or regional operators. Many are publicly held and focused on growth. As long as we continue to see very little new inventory produced, I feel good we will continue filling our existing space. Retailers are showing more flexibility on prototype size and cotenancy as they search for new growth.

Finally, our geographic footprint is positioned to capture a disproportionate share of new job growth. Almost 50% of all the jobs created in the U.S. over the last 12 months have occurred within the states where we operate. This portfolio is well positioned for the future.

As I mentioned earlier, retail occupancy continues to improve. This is the fifth consecutive quarter we've seen an increase. Our retail shop occupancy ended the quarter at 87.8%, the highest in our peer group. This is a clear indication of our superior operating platform and the high quality of our portfolio. Texas and California are leading the way in occupancy, both in excess of 95%.

Drilling a little deeper, Houston is 96% occupied, and South Texas is over 97% leased. One of the significant factors contributing to the steady increase for the entire portfolio is the dramatic reduction in the number of tenants falling out. During the first half of this year, 190 tenant leases terminated. This represents $8.8 million in annualized rent. That's a reduction of 42% from a year ago and over 50% from the depths of 2009. As we review our accounts receivable and watch list, we feel good this positive trend will continue.

Leasing velocity has remained steady, a significant accomplishment as we continue to reduce inventory. We leased 380 retail spaces for $17.2 million last quarter. This includes $7.2 million in new leases and $10 million in renewals. This production is similar to the last several quarters and is made up mostly of tenants focused on value and service. Our fast casual, fast bites category continues to lead small shop production. Retailers such as Starbucks, SUBWAY and Chipotle are healthy and growing.

The second leading group of tenants we are leasing to is our At Your Service category. These are service- and health-focused tenants, for example, Pacific Dental, Weight Watchers and Nationwide Insurance. During the first half of the year, our retail rent growth was better than we had expected at 4.6%. This is made up of a 4.5% increase in renewals and a 4.9% increase in new leases. As we continue to see occupancy tightening, I expect to gain some negotiating leverage. In most cases today, the retailer still maintains an advantage, but we are seeing this beginning to shift.

We reported Same Property NOI for our retail property of 2.9% this quarter. We knew this would be our most difficult quarterly comparison, primarily because of several positive onetime events in 2011, but we actually did better than we had expected. We got some tenants to open early and we had lower than expected bad debt expense, driven in part by the reduced fallout I mentioned earlier.

Looking forward, the bulk of the increases over the second half of the year are coming from leases already executed. We do still need to sign a few new tenants, who can open in the fourth quarter, but the risk to not achieving greater than 4% gains is clearly unanticipated retailer fallout. That's why we're optimistic the company can achieve the 4% to 5% Same Property NOI we've guided to. As Drew mentioned, our recycling program continues to advance. As of the end of the second quarter, we saw $476 million in assets. The bulk of this is the industrial sale but also includes 22 retail assets representing $88 million. I expect us to finish the year within the guidance of $570 million to $680 million set out on Page 44 of the supplemental.

We continue to sell our secondary assets on a one-off basis. This certainly takes longer, but I think this is the best course to maximize our value on these assets. On the acquisitions front, we found some really good shopping centers to reinvest some of our proceeds. As of the end of the quarter, we acquired over $121 million in assets. The average population within 3 miles is over 224,000 people and the average household income is in excess of $104,000 per year. We're really excited about our 8000 Sunset acquisition. The shopping center's anchored by Trader Joe's, Crate & Barrel CB2 concept, Sundance Cinema and Crunch Fitness. It's located in West Hollywood, California and has average household incomes of over $100,000 a year. That's impressive for a population of over 240,000 people in 3 miles.

One of the unique features of the property is a 5-level subterranean garage, which offers over 890 parking spaces. That densely populated urban environment, we see this as another anchor to the project. We do business with many of these tenants already, and we've had success operating urban multilevel shopping centers with projects like our Centre at Post Oak, Village Arcade and River Oaks Shopping Center, so we're pleased to add this one to the collection.

Since the end of the quarter, we've also purchased Roswell Crossing Shopping Center in Roswell, Georgia, it's a suburb of Atlanta. Again high incomes, almost $130,000 per year and 66% college graduates. The center features market leaders, Trader Joe's and PetSmart. We have a couple of additional projects we expect to close during the third quarter, so we're increasing the acquisition guidance to $200 million to $250 million for 2012. We should be around a 6.5% stabilized return on these assets we acquired this year. So wrapping up, we feel we're going in the right direction, occupancy is up, Same Property NOI is solid, rent growth is increasing, our tenant fallout is decreasing and our recycling program is moving ahead. Drew?

Andrew M. Alexander

Thanks, Johnny. We've clearly made significant progress this quarter on the 3 strategic goals outlined earlier. First, occupancy is up, including small shop occupancy. Each 1% of increase in occupancy adds about $0.05 per share of FFO annually, and as pointed out earlier, with the equivalent of 2.7% in occupancy, where the lease is already signed but the rent has not yet commenced. Second, over $130 million of capital was reallocated from secondary properties into high-quality assets. And finally, our balance sheet is quite strong. We expect to finish the remainder of the industrial transaction and we'll continue our focus on the disposition of the balance of our secondary portfolio.

Clearly, there are economic headwinds that create uncertainty about the future, but our company is well positioned to operate in this environment and may even take advantage of opportunities that arise. Meanwhile, this was an outstanding quarter of operating results and we're optimistic that we can continue this performance going forward. I'm very proud of our team and the effort put forth by all of our associates in producing such a strong quarter. I want to thank all of you for joining the call today and your continued interest in Weingarten. Operator, we'd now be happy to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Craig Schmidt from Bank of America.

Craig R. Schmidt - BofA Merrill Lynch, Research Division

Just focusing on the occupancy gain for those spaces smaller than 10,000, I was wondering if you could kind of categorize them, particularly in terms of national tenants versus local? And then the other thing would that -- who were the tenants that were driving some of that occupancy gain?

Johnny L. Hendrix

Craig, roughly 50%, 55% of the retailers that we're releasing to shop space are national and regional tenants. What you have to also remember is that they're basically replacing almost all local tenants, so that's where you've seen the increase in the overall regional and national tenants to 76% of the entire portfolio. Most of the smaller tenants that we are -- local tenants that we're finding were actually moving from 1 center to another. There's not a lot of new formation of these local operators, so we're moving them to what we consider to be the better centers. And when you look at, kind of drilling into the actual tenants, most of what we're doing is service type tenants and dentists, doctors. And then you have nail salons and small operators like that, the food category continues to be very big with fast food and family dining, pizza restaurants, Asian buffets, those sorts of things.

Craig R. Schmidt - BofA Merrill Lynch, Research Division

And going forward, do you think you can still pick up occupancy sequentially in this under-10,000 group?

Johnny L. Hendrix

I believe I can. And certainly, if we're going to meet the same store NOI goal that we've been talking about, we'll need to do that. But yes, I think that we definitely will continue to pick up.

Craig R. Schmidt - BofA Merrill Lynch, Research Division

And in terms of just the local tenants, are -- is access to capital a reason for them of being less active? Or do you see there's something else that's causing that shift away from them?

Johnny L. Hendrix

Craig, for the most part, it seems like there's access to capital for folks who are interested in starting these new businesses, I don't really see that as something that's blocking that. I just think a lot of them are not prepared with the environment that they're looking at. They don't really know where they're going to be in terms of the tax regime and they're nervous. I mean there are still clouds on the horizon in terms of the fiscal cliff at Europe, and there are a lot of reasons not to start a small business today. And I think that's a lot of what we are experiencing.

Operator

From MorningStar, we have Philip Martin on line.

Philip J. Martin - Morningstar Inc., Research Division

Just in terms of tenant demand. On the renewals and tenants looking for space, are you seeing any incremental changes in tenant demand trends over the last 12 months? I mean certainly, we're dealing with a lot of uncertainty in the economy. And again, I'm just interested always in the trends over the last 6 to 12 months, and if there are any incremental changes, given the diversity you see in your portfolio, you're talking with a lot of different types of retailers.

Johnny L. Hendrix

Yes. Philip, we have not seen in the last 12 months a lot of change. I mean if you look at the leasing velocity, it's remained pretty steady from quarter-to-quarter over the last 4 quarters. We certainly moved a lot of the leasing efforts from the boxes, which was mostly the junior department stores, TJ Maxx and Ross, to the shop space over the last several quarters. So from that perspective, that's really the only change I would see. The demand I think is about the same in the shop space. I just don't see a lot of change. Again, most of the people -- many of the people we're dealing with are public companies, and they just haven't moved that fast in terms of how they're going to change their decisions to open new stores.

Philip J. Martin - Morningstar Inc., Research Division

Okay. Obviously with velocity, leasing velocity up and tenant demand up and that's having a positive impact on occupancies, are you having to turn away tenants in retail?

Johnny L. Hendrix

I'll tell you anecdotally, we're experiencing a number of situations where there are more than 1 tenant trying to get a space. We recently had a space become available here in Houston that was a restaurant, and we ended up with 3 separate tenants all very excited to try to be able to get the space. So that certainly does help our leverage in the negotiating position, and that's why I think over time, I think you'll see some of that leverage shift to us.

Philip J. Martin - Morningstar Inc., Research Division

Okay. And my last question just on acquisitions. You spoke of a 6.5% stabilized yield, what's the time it will take to reach that stabilization period? And I'm assuming you're probably looking at some of these acquisitions, doing some value-added work, et cetera, what's the time to reach that stabilized yield? Is it 6 months? Is it 12 months?

Johnny L. Hendrix

Yes. The -- generally speaking, we're looking at a 3-year out on that number. I'll tell you in terms of the current yield on those properties, it's about 6.2%, so it's not a big movement in that third year. But generally, when we look at an acquisition, we're looking at a 3-year out that gives us time to come in and take tenants out, put new tenants in, for whatever capital we have in and things kind of smooth out in that period of time.

Philip J. Martin - Morningstar Inc., Research Division

Okay. That was my next question, where are they entering, so 6.2% to 6.5% over a 3-year timeframe?

Johnny L. Hendrix

Yes.

Operator

From Cowen and Company, we have Jim Sullivan on line.

James W. Sullivan - Cowen and Company, LLC, Research Division

Just a follow-up question on the occupancy rate, I believe at the peak of the last cycle, your occupancy rate peaked at just over 95%. And I just wonder, as you think about the outlook going forward and maybe particularly, given what you've been doing with the portfolio, whether you think that is likely to be the peak in the cycle? Or do you think you might actually be able to achieve a higher number?

Johnny L. Hendrix

I think that it's reasonable today to expect a little bit higher number, with the better asset we have, with a lot of the dispositions that we recycled the assets. And with the lack of new space, I mean, that is an enormous driver and what I think we'll see occupancy do over the next couple of years. The -- to develop a new shopping center could take 2 to 3 years, so there's just not going to be a lot of new space on the horizon. And again, many of these retailers are public companies and they need to grow, so I expect that it could go higher than 95%.

James W. Sullivan - Cowen and Company, LLC, Research Division

Okay. And then a second question, as that occurs, typically your spreads continue to widen out. And again, looking at the performance over the last cycle, I think the spreads peaked, and these are cash spreads, I believe they peaked at 16%. And again, really the same question for that, I mean how do you feel? I know that you don't collect or don't always get sales data from your tenants but clearly, some of your markets are performing exceptionally well. How do you feel about the upside in terms of spreads as you move toward that 95% occupancy rate?

Johnny L. Hendrix

I definitely think they're going to increase. It's -- from where we are today, it's hard to imagine 16%. But I think they'll increase. I would probably go somewhere between where they are there and now, so I think a reasonable number could be 8% to 10%. What you also have to remember is that as 2006, 2007 leases turn, which was really the height of the last cycle, you're going to -- those are going to be tough comp numbers. So -- but overall, I think if you could get somewhere around 10%, I think that it'd probably be a good number.

Andrew M. Alexander

The other -- this is Drew. The other point, I think, you have to factor in is at some point, we will get back to an inflationary environment. We have to as the economy strengthens and interest rates eventually change, the commodities, et cetera. So when you go to price what a new space is likely to cost, 3, 4, 5, however long in the future it is that the economy gets better, I think that will fuel even stronger upward pressure that makes me a little more optimistic to get to that 16% level that we were at before.

James W. Sullivan - Cowen and Company, LLC, Research Division

Okay. And then the final question from me, I think the Mountain region has been -- has lagged somewhat in terms of Same Property NOI growth. And I'm just curious what your comments are and your sense is for the strength in those economies and the likely performance of the portfolio going forward.

Johnny L. Hendrix

That's primarily driven by Phoenix and by Las Vegas. They were disproportionately hit by the Borders' closings. I think if you'll -- if you kind of look at some of the other numbers, their occupancy, the design versus the commenced occupancy, is doing well and I would actually look for them to probably drag the rest of the year. But I think next year that's where you are going to see some of our increase in Same Property NOI growth as we're able to get some of these stores open. Many of these stores we've reopened and I think the properties we have in Phoenix and Las Vegas are very, very dense and have good incomes, and I think will be some of the first to come back. And you're already seeing some bounce back in the Phoenix and market overall.

Operator

From JP Morgan, we have Michael Mueller on line.

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Just a couple of questions. At quarter-end occupancy and not the lease rate posted, it's about 90.6%. I know you give guidance on lease for year-end but where do you see year-end occupancy penciling out?

Johnny L. Hendrix

I think that I'm going to commence another 250,000 square feet of the space that I have signed, so I'm not sure where that puts me, I just -- I remember that number so another 50 basis points.

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Okay. So a little over 91% then?

Johnny L. Hendrix

Yes.

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Got it, okay. And for the Q3 acquisitions -- or for the acquisitions that are under contract that you expected to close in Q3, about how much more do you expect in Q3 tied to the new guidance versus stuff that's likely in Q4?

Johnny L. Hendrix

Right around $84 million for the balance of Q3. And I'll say, I don't know how much more there will be the rest of the year. Right now, the pipeline is, other than these properties, fairly thin. We had expected we would see some tax-driven opportunities but that has yet to happen. And certainly if a property has debt on it, it would be almost impossible to close it between now and the end of the year. So it's possible we'll hit one or two others, but probably not.

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Okay. So $84 million in addition to what's closed already in the third quarter?

Johnny L. Hendrix

Right.

Operator

From Robert W. Baird & Co., we have Paula Poskon on line.

Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division

Could you tell us the purchase price and the going in cap rate on the Roswell acquisition?

Johnny L. Hendrix

I think you could figure it out, I think $31 million is the purchase rough price. And I don't know on a by-property basis that we're going to disclose the cap rates.

Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then turning to development, how is your underwriting of a new development opportunities today different from a year ago? What are you seeing on land prices and what are you assuming on construction costs?

Andrew M. Alexander

Generally speaking, we have seen some rises in construction costs and that's where I was talking before that I think the opportunity to improve rents is great. One of the things that is the benefit of today versus the 2006 is everything the owner appreciates, that every developer is going to have a good set of at least conceptual drawings and get those specifically priced, have all of the entitlements work, et cetera. Land prices vary tremendously across our geographic footprint, but I would say that people who own a good quality land in the densely populated areas that we want to develop and our tenants want to go, are willing to work with you on it from a time perspective, but they're not willing to take any significant discount over what they perceive the market value. And that's why, there have been some additions to our pipeline and we do think our development prowess will add shareholder value. We're being conservative about it but we don't see a super robust expansion of our pipeline. We're selective, the tenants are selective and the landowners, for the good land, aren't parting with it cheaply.

Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division

And then just again on the construction costs, so is there -- are you thinking about it in terms of a 3% price, 5% rise? Do you think about it in those terms or is it...

Andrew M. Alexander

It very much depends on the market but I'd say, it's generally higher than that. It's more in the 10%, 15% neighborhood, and it depends very specifically what market you were looking at, that there are tremendous differences between Florida, Texas, Pacific Northwest, Southern California but it -- construction prices are definitely going up, and in my opinion will continue to go up and go up dramatically, as the economy gets some traction which it, in my opinion, eventually will.

Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division

And then just one final question. What are you seeing in terms of employee turnover out in the field, as clearly you're in some high job growth markets? Are you seeing -- starting to see any pressure on employee costs?

Andrew M. Alexander

I don't think significantly. It's something that we stay on top of. I think retention of good employees is 1 of our key strengths. So we are seeing some pressures especially in some disciplines and we're responsive to that. But generally speaking, we have a pretty good dialogue with all of our associates, so if they don't feel they're fairly treated they have opportunity to discuss that. And we have, I think, very good retention and we do occasionally lose some good folks but it's pretty rare.

Operator

From Deutsche Bank, we have Vincent Chao on line.

Vincent Chao - Deutsche Bank AG, Research Division

Just want to go back to the REIT spread conversation a little bit but maybe near term. Just thinking about the better-than-expected first half spreads and the comments about improving pricing power when the occupancy goes up, should we be thinking about the sort of 4%-ish for the back half?

Johnny L. Hendrix

Vince, I -- it's difficult to say. There -- 1 of the things that -- we didn't change that in the guidance. And one of the reasons we didn't is there just is some amount of uncertainty going forward. And I will tell you we are going to continue to focus on occupancy. So I didn't want to put more pressure on our folks in the field to get more rent. So I think it's likely that it could be in that 4% range going forward, but if I was going to run numbers, I'd probably go, in the 1% to 2%.

Vincent Chao - Deutsche Bank AG, Research Division

Okay. And is that -- that's more just a general caution? I mean is there something in the pipeline of deals that you're working on that would suggest it would drop to that level?

Johnny L. Hendrix

There is nothing in the pipeline that would suggest that reduction.

Vincent Chao - Deutsche Bank AG, Research Division

Okay. And just on the -- I know you're pretty confident hitting the 4% to 5% for the full year, but you did mention that it would require a little bit of additional leasing activity that would commence in the fourth quarter than you have signed today. Just wondering -- assuming that, that didn't come through, where do you think same-store NOI would pencil out at the end of the year, just based on what you've already signed?

Johnny L. Hendrix

In the really high 3s.

Vincent Chao - Deutsche Bank AG, Research Division

High 3s, okay. And this is the last question, just on the held for sale pool that's currently in the balance sheet. Just wondering what level of NOI is coming off of that?

Johnny L. Hendrix

I'm not sure about that. Can we get back to you on that?

Andrew M. Alexander

I think the best way to look at that is we have given the disposition guidance. One of the things that we've always talked about is we are always going to be working on a tremendous amount more of dispositions than we expect to actually sell. We feel with the industrial deal done that we don't have any tremendous pressures. Steve talked about the balance sheet is in fine shape. Johnny talked about we're seeing some acquisition opportunities but not mighty huge numbers. So we don't feel a tremendous amount of pressure to dispose of properties that -- at significantly less than we think were going to work. So what -- we'll certainly update folks as we go through the disposition situation. And cap rates vary tremendously depending upon the properties that we're selling, but an 8.5% number is probably pretty good for broad modeling purposes. So that would get you the approximate NOI of what we think we're going to sell as distinct from what's in the bucket of what we might sell. Does that help your question?

Vincent Chao - Deutsche Bank AG, Research Division

Yes, it's -- to some degree. I'm just sort of trying to get the split-up between sort of discontinued op line versus the recurring -- or the operating income line, but I can follow up afterwards.

Operator

From RBC Capital Markets, we have Wes Golladay on line.

Wes Golladay

Going back to the acquisitions, is it safe to model probably a 5.5% to 6% going in cap rate? Is that for -- I mean looking at the quality of the asset you just bought, I believe it's the highest annual base rent in your portfolio. Is that a good assumption there?

Johnny L. Hendrix

I think that would be a conservative assumption, yes.

Wes Golladay

Okay. And now looking at the 8000 Sunset, do you have a, I guess, visibility on leasing that asset to the high 90s?

Johnny L. Hendrix

Oh, yes. Definitely yes. We've got a little bit of leasing to do, but we're confident with the platform that we have. We're going to get that thing well into the 96%, 97% area.

It will probably -- let me say that the occupancy will probably fall. We have a couple of office leases on the third level, and our expectation in the way we underwrote the property is we would -- that they would leave over the next 1.5 years and that -- then we would replace them.

Wes Golladay

Okay. Do you have any additional opportunity other than lease, where overall you're going to configure the spaces at all? Or...

Johnny L. Hendrix

We have a little bit of reconfiguration to do. I think we have some ability to gain some income out of the garage, too.

Operator

From Hilliard Lyons, we have Carol Kemple on line.

Carol L. Kemple - Hilliard Lyons, Research Division

We've heard from some of your peers that the traditional retailers are struggling a little more and they're staying more of the niche retailers wanting space. And it looks like with your recent acquisitions, you all have been getting properties with Trader Joe's, how are you all seeing that shake out?

Andrew M. Alexander

Well we think Trader Joe's is a fabulous merchant. Many of us around the table have been doing this for years and years and years, 30, 40, 50 years and there is always a tremendous amount of change in the retail world. And I think Trader Joe's is an excellent example of what's going on, that they're a niche grocer that has an extremely wide trade area, offers a tremendous value proposition and pulls from a very wide area, but it's a little different than the conventional supermarket that they don't pull people with quite the frequency. But we think they're wonderful merchants and enjoy doing business with them. Similarly, you have Sprouts, you have Sunflower, you have a lot of these good, strong niche players. And, of course, Whole Foods headquartered not far from us over in Austin, has been a very valuable tenant of ours for 30 years and we do look forward to doing a tremendous amount of business with them. And then the Krogers and the Safeways, along with the Publixes, the HEBs, the Wegmans, the Harris Teeters, there are a lot of good operators out there. And I think we're very good at assessing those good operations and making those good local sharpshooter real estate decisions.

Carol L. Kemple - Hilliard Lyons, Research Division

And will a Trader Joe's and a Kroger go in the same center? Can you get a niche grocer and then a traditional grocer? Will they not go in the same center?

Andrew M. Alexander

I don't think they usually will but they'll often times be very close to each other. And on some unusual circumstances, they have gone in the same center.

Carol L. Kemple - Hilliard Lyons, Research Division

Okay. And then are you all seeing any additional new retail concepts coming into your centers?

Andrew M. Alexander

I mean I think Johnny talked a lot about that, but it is -- there's certainly some changes to concepts. It is interesting the stallworks, haircutters, nail salons and things like that -- cleaners that have been around forever, you certainly see a lot of different quick service restaurants. And something like Five Guys Burger is a reasonably new chain but it's certainly not a new concept, it's just extremely well executed. So that's where I think that there's new iterations of things and new things done better. And I think that's what drives the business more versus brand new, totally new concepts.

Operator

From Stifel, Nicolaus, we have Nathan Isbee on line.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

There's been a lot of commentary from you and a lot of your peers that the lack of new supply plus national retailer demand is helping occupancy rent. Supply isn't increasing but there still is a lot of supply out there, perhaps not the highest quality. As you sit across the table from the retailers, are you seeing any willingness on their part to trade down on quality and move to that third or fourth center in a submarket?

Andrew M. Alexander

Depends on the retailer. There are some, I would say not that many, that do look at a little bit weaker space. They somewhat have to, but most of the strong guys are looking at good centers. And as Johnny mentioned, I think some of how we have increased occupancy, especially with some of the small shops, is taking people away from weaker centers.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

But for -- on the larger boxes, you've not seen anything changed significantly over the last 6 months to 1 year?

Johnny L. Hendrix

Nate, this is Johnny. We're 97% leased on the boxes, so our experience there in the last 6 months is rather limited. But we haven't seen a willingness of retailers to go down. On the contrary, I think there is a demand to increase the quality of their spaces.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then on the store closure set, what do you budget for this year? And where do you stand today relative to budget?

Johnny L. Hendrix

We're right on top of our budget right now. And so the fallout that we've seen, the 190 stores is pretty much right where we had budgeted.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then finally, Drew, on the new Board additions, can you discuss the motivation for it? Was it driven by wanting to size up the Board? Or was there something else more strategic in terms of skill sets, et cetera?

Andrew M. Alexander

I think it is a function of a number of things that having a good, diverse Board with a lot of different backgrounds is good. And while we've had a lot of tenure on our Board, we thought bringing in some new perspectives was good. Shelaghmichael Brown is a banker, spent the vast majority of her banking in the consumer side. So she is in many respects a retailer who understands how consumers think, understands location theory, how to go into a town, work a branch bank network. So I think she brings a lot of retail acumen. Tom Ryan is the CEO of SCI, the large funeral home. So he is, as we say, in a different part of the real estate business. He's an accountant by training and a public company CEO, who I think brings a lot of understanding of real estate markets, public markets, how to deal with investors, analysts as well as being a CPA, former CFO and therefore financial expert. So while we have a good strong Board, we thought adding some fresh perspective was a good thing to do.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

All right. We shouldn't expect any funeral home announcements addition to your portfolio?

Andrew M. Alexander

No. It's not a strategic growth area for us. But...

Operator

From Bank of America, we have Tom Truxillo on line.

Thomas C. Truxillo - BofA Merrill Lynch, Research Division

You guys have obviously done a very good job of delevering the balance sheet, and you paid off the term loan. But you still have a decent amount on the revolver right now and about $240 million or so of medium-term notes coming due over the next couple of years, can you talk a little bit about your financing needs and how you think you can address those? Going forward, do you plan to continue the medium term note market? Or would you look at kind of term out a larger long-term debt deal going forward?

Stephen C. Richter

Tom, this is Steve, I would tell you that we truly believe that we will approach the capital markets and issue some debt here probably before the end of the year. I think if you look at where the revolver is and -- some of it depends -- and the timing especially depends on exactly the progress we make and how the acquisition disposition actually close. As Johnny mentioned, there's a lot going on there and a lot of transactions, so even though they're not tremendously individually large, the timing of that does vary. But we clearly understand where we are with the revolver today, what maturities we have coming next year and I would expect that we will go to the bond market. We do feel like since we have not used or sold an MTN in quite some time, that we do need to come out with probably an index level deal to reintroduce ourselves to some of those bond investors.

Thomas C. Truxillo - BofA Merrill Lynch, Research Division

Okay, great. And then any comments on kind of the split between secured and unsecured debt? If you're going to do an Index-eligible type of deal, do you see the opportunity maybe -- as mortgages roll to reduce your mortgage debt and unencumber additional assets? Or do you kind of like the split you have now?

Stephen C. Richter

No, no. We have always for years had the financial policy that at the corporate level, we only issue unsecured debt. Now we'll tell you during the downturn in '08, '09 when the capital markets quite frankly were closed, at the corporate level, we did do a couple of secured transactions. Again, only because the bond market was closed. But we continue with the policy that we will pay off secured debt with unsecured and issue in that secured market.

Operator

From Green Street Advisors, we have Cedrik Lachance on line.

Cedrik Lachance - Green Street Advisors, Inc., Research Division

As you're looking at the acquisition market over the next several quarters, what is most attractive to you? Is it a grocery anchored center with the Trader Joe's or a well qualified grocery anchor? Or is it a well located power center?

Andrew M. Alexander

I think, Cedrik, it all comes down to the individual center that we're going to make that decision. Happy to look at both, we'll look at everything and we'll use our local expertise, our people out in the field to assess that. And then we'll make what we think is the right risk/reward call. So I mean I think a good power center is fine. I think you have to pay very careful attention to the quality of the tenant lineup and the rents of the boxes, sales the stores do, and furthermore, the dimensions of the boxes that if you have very high rents with some of the weaker tenants in the space with short lease expirations and there's very little frontage and a lot of depth, then I don't think it's so good. So we are certainly going to focus more on supermarket anchored centers because that's generally where you find everything lining up better that you have a very good supermarket doing good sales, a good layout, et cetera. And there are just fewer power centers where everything lines up right, but in those instances where it does, we're very comfortable with both product types.

Cedrik Lachance - Green Street Advisors, Inc., Research Division

Okay. And I've noticed you sold a few pads during the quarter. Are those pads next to existing shopping centers you own?

Andrew M. Alexander

A few pads?

Cedrik Lachance - Green Street Advisors, Inc., Research Division

Yes.

Johnny L. Hendrix

Yes, they all are. We've had an ongoing effort to continue to sell pads or to lease them. And that's generally what we are doing.

Cedrik Lachance - Green Street Advisors, Inc., Research Division

Okay. So in some cases, those were not necessarily -- they were not built out, this one?

Johnny L. Hendrix

No, they were not.

Operator

[Operator Instructions] And from Wells Fargo, we have Tammy Fique on line.

Tamara J. Fique - Wells Fargo Securities, LLC, Research Division

I just have a quick question on the development pipeline during the quarter, it looked like there was a drop-off in expected development yields on the same group of assets. It was only about 10 basis points but given the improving trends that you're seeing in NOI and leasing, the direction of the change is a little bit surprising, is there anything specific that drove that?

Andrew M. Alexander

No. I think it's just working through principally some of the legacy properties, where again I think, we're trending to complete those at about a 7% return, and comfortable that we are at this point creating some shareholder value. Very pleased with the completions that we have this quarter, that number was in the high 6s as I remember, close to 7%, so I think we are creating some value there. And I think that's just -- I have to get back with you off-line on the detail of it but I don't think it's a trend or anything, it was just a little something that changed.

Tamara J. Fique - Wells Fargo Securities, LLC, Research Division

Okay. And then along those same lines, where do you think market cap rates are for properties in the market where you are developing, so what's the spread, do you think?

Andrew M. Alexander

Yes. Again, a tremendous range. In the Washington DC area, I would say, in the middle to low 5%. In quality stuff throughout Florida, might be a little higher than that and in good locations in the middle of the country, say, 6% to 6.5%. And then the West Coast can be easily back down into the 5% and in some cases the low 5%.

Tamara J. Fique - Wells Fargo Securities, LLC, Research Division

Okay. And then, there have been some different views communicated this quarter by your peers in relation to the direction of cap rates in the B quality market. I just wanted to get your perspective on that.

Andrew M. Alexander

We haven't seen a tremendous amount of change. We think we've seen a bit of improvement, and we are of the view that the cap rate compression -- that there will be cap rate compression and that the spread on the Bs will narrow. Again, a lot of that is very much a function of the economy, and when people get some level of comfort that the likelihood of another downturn is very, very low.

Operator

At this point, I would like to turn it back over to Drew for any final remarks.

Andrew M. Alexander

Thank you all very much for participating in the call and your interest in Weingarten. And we'd be happy to follow up with anybody if there are any other questions offline. Again, have a great day and a great rest of the summer. All the best.

Operator

And this concludes today's conference. Thank you for joining. You may now disconnect.

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