Weingarten Realty Investors Management Discusses Q3 2012 Results - Earnings Call Transcript

| About: Weingarten Realty (WRI)

Weingarten Realty Investors (NYSE:WRI)

Q3 2012 Earnings Call

October 31, 2012 11:30 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

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

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

Philip J. Martin - Morningstar Inc., Research Division

Richard C. Moore - RBC Capital Markets, LLC, 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's Third Quarter Earnings Conference Call. My name is Brandon, and I'll be the operator for today's call. [Operator Instructions] Please note that this conference is being recorded. And I will now turn it over to Michelle Wiggs. Michelle, you may begin.

Michelle Wiggs

Good morning, and welcome to our third 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; 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 call, management may make reference to certain non-GAAP financial measures, such as funds from operations or FFO, both 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

Thanks, Michelle. Before we start on the business of the call, all of my colleagues and I want to wish everyone the best dealing with the effects of super storm Sandy. Our hearts go out to those who've been affected, and we wish everyone the best in dealing with this natural disaster.

Over the last several quarters, we've made significant progress in achieving the 3 strategic objectives we have highlighted. The objectives are: number one, further improving operations and leasing our portfolio back to 95-plus percent occupancy; number two, continue improving the quality of our portfolio through recycling of capital by selling noncore properties and acquiring or developing assets in high-barrier entry markets with strong growth prospects; and number three, improving our financial position by slightly delevering our balance sheet.

Number one, operations. Retail occupancy moved up to 93.9% with a continued increase in small shop leasing, driving a 20 basis point increase from the previous quarter and 110 basis points from a year ago. Combined with rental rate increases, this led to another strong quarter of Same Property NOI growth, with an increase over the third quarter of last year of an impressive 4.9%. We remain confident that we will attain our year-over-year goal of 4% to 5% Same Property NOI growth.

Number two, capital recycling. We continue to improve the quality of our portfolio through the recycling of capital. During the quarter, we generated $66 million from the sale of retail properties and $23 million from industrial assets held in joint ventures. Year-to-date, dispositions have totaled $565 million. This quarter, we redeployed $114 million with the purchase of 2 outstanding shopping centers and the opportunistic purchase of our venture partners' interest in another. The 2 new centers are in locations with significant barriers to entry and outstanding demographics. Our activity this quarter and year-to-date clearly exemplifies how we're enhancing the quality of our portfolio through our recycling program.

Third, our financial position. The proceeds from dispositions this year were partially used to delever our balance sheet, thus accomplishing our third strategic objective. It is our intention to maintain a conservative leverage policy of less than 40%. As always, we're focused on balance sheet management, which we continued this quarter with the completion of a $300 million 10-year note offering. This transaction allowed us to completely pay down our revolving credit facility and redeem the remainder of our convertible bonds. While slightly diluted to funds from operations, this additional liquidity allows us to take advantage of any growth opportunities, maintains our strong overall credit metrics and positions us for future debt maturities. One might say great people, great properties and a great platform translates to great progress.

Before I turn it over to Steve, let me briefly update you on the positive results we've made in our new development efforts. We continue to make good progress in our pipeline of 11 properties. Through our strong leasing efforts, we increased occupancy by 100 basis points during the third quarter and by approximately 900 basis points year-to-date. We recorded completions of $7 million during the quarter, resulting in nearly $25 million year-to-date. 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 I'll now turn the call over to Steve.

Stephen C. Richter

Thank you, Drew. Recurring FFO was $0.46 per diluted share for the quarter, down from $0.47 last year. This $0.01 decline results in being a net seller of assets. The reduction was offset by reduced interest expense as we refinanced debt maturities and an increase in operating income from improved occupancy in our existing portfolio.

Contributing to the increase in operating income were bad debt recoveries during the quarter that were at the higher end of the normal range. Reported FFO for the quarter increased to $0.45 per share compared to $0.25 in 2011 due to noncash impairments included last year.

We continue to improve our balance sheet. As Drew mentioned, we returned to the capital markets for the first time since 2009 with the issuance of $300 million 10-year notes. This was a terrific transaction as we priced the notes at 180 basis points over the 10-year treasury for a yield of 3.42%. We ultimately priced the notes at a slight discount for a coupon of 3 3/8%. With these proceeds, we have completely paid down our $500 million revolving credit facility and have called for the redemption of the 3.95% convertible bonds, of which around $50 million remain outstanding. Subsequent to this transaction, we made the decision to call for the redemption of our 6.95% Series E preferred shares. There was about $72.5 million of these shares currently outstanding, and they will be redeemed before year end.

We have successfully delevered our balance sheet. At September 30, our debt to total market cap was 36% compared to over 45% a year ago, and our net debt to EBITDA was 6.02x compared to 6.76x last year. We intend to keep leverage below the 40% level. So at 36% today, we are well positioned to take advantage our future investments.

With respect to guidance, we are, again, this quarter raising the lower end of our 2012 guidance for recurring FFO, from a range of $1.76 to $1.84 per share to a range of $1.80 to $1.84 per share and changing our rental growth assumption from a range of minus 1% to plus 2% to a positive 2% to 4%. You can see these and all of our guidance numbers on Page 44 of the supplemental.

As to 2013, our preliminary guidance for recurring FFO is a range of $1.84 to $1.90 per share. Since we have not concluded our annual budget cycle, we will provide more details next quarter as to the specific assumptions used in this estimate. However, we are assuming that in 2013, acquisitions and dispositions will be about the same resulting in 2013 being capital neutral.

With that, I'd like to turn it over to Johnny.

Johnny L. Hendrix

Thanks, Steve. We had an outstanding quarter. 4.9% Same Property NOI. Our retail occupancy increased for the sixth straight quarter. Shop occupancy increased to 88.3%. Leasing velocity was steady. We acquired 3 shopping centers for $114 million, and we sold $89 million of assets.

I'm thrilled we've been able to produce results like this during a slow economic recovery. Consumers are rightly cautious and looking for value. Operators offering value like our discount ready-to-wear retailers, such as TJX and Ross, continue to post outstanding results. Quick service restaurants, which have been expanding over the last 18 months, are also seeing good sales increases and are hungry for more space.

Nationally, supermarket sales have been mixed and there continues to be margin pressure. Within the Weingarten portfolio, supermarket sales have been more robust, currently averaging over $513 per square foot. Today, over 30% of our NOI comes from Texas. The economy here continues to outpace the rest of the nation. This robust economy makes this feel like the third coast. Texas produced 259,000 jobs over the last 12 months and added 530,000 people to the population. You're going to hear throughout my remarks today that Texas is experiencing great success.

Leasing production remains steady. We signed 152 new leases for $5.3 million in base rent and 204 renewals for $9.8 million in base rent. Renewals for next year are off to a great start. We've already signed over 40% of our renewals for 2013. The majority of our new lease production is coming from national and regional operators with the most active categories being quick service restaurants like Buffalo Wild Wings and Panera Bread. Medical service tenants are also very active: dentists, chiropractors and optometrists. And finally, we're generating a lot of business from health and beauty retailers like Sally Beauty, GNC and Weight Watchers.

Our leasing team is always looking to create efficiencies in the leasing process, from the initial cold call through rent commencement. Our short-form lease is a powerful tool we use a lot with local tenants who are looking to relocate and upgrade to a Weingarten property from a competitor's center. These leases are simple: 8 pages, short-term and tenant friendly. The approval process is streamlined, and we can approve and generate a lease to be signed in hours. Speed is critical when negotiating with local tenants. The typical short-form lease cycle time from beginning to end is 3 days and usually commences within 30 to 60 days.

We signed 54 short-form leases in the third quarter, and we're already generating about $400,000 in annualized rent. A good example of this is a furniture store in Denver we moved from a neighboring center last month. We agreed to terms on September 17, signed a lease 3 days later on September 20, tendered the space on September 21 and the store opened for business on October 5, 20 days from beginning to end.

If you're not familiar with the general timelines of the leasing process, let me tell you, that's fast. This sort of agile dealmaking can only happen with the right platform. We see our platform as a series of processes and procedures utilizing technology interconnected with our culture and our institutional knowledge. Combined, we have created an environment for our people to confidently and quickly make decisions within predetermined guidelines while maintaining oversight and control. This is not isolated to our leasing staff but also extends to every one of our associates interacting with our customers. We see this platform as a competitive advantage as we compete for tenants.

We've commented over the last several quarters about the reduced number of tenants falling out. This trend has continued during the third quarter, and it illustrates the strong composition of our portfolio. The annualized base rent the company lost to fallout during the third quarter is 40% less than a year ago. As many of you know, we track our receivables very closely, looking at weekly reports. Based on those reviews and historical comparisons, I expect we will continue to enjoy this improved fallout movement through at least the end of 2012.

With our continued leasing and the reduced fallout, it's natural our occupancy is improving. At quarter end, retail occupancy was 93.9%. That's 110 basis point improvement from year ago. Shop occupancy improved to 88.3%. This is 160 basis points better than last year. Texas is leading the way with occupancy at close to 96%. Breaking that down a little more, our Houston retail properties are 96.5% leased, and our assets in South Texas are close to 98% leased. California is now over 95% occupied, and Florida is very close to 94%. So all 3 coasts are doing well.

We've made a lot of progress in these 3 significant states that make up about 60% of our NOI. As a result of the company's leasing efforts, our reduced fallout and the rising occupancy, we produced a 4.9% Same Property NOI increase during the quarter. This is an outstanding number and puts us on track to close out 2012 with Same Property NOI within our guidance of 4% to 5%. Year-to-date, the company has increased the Same Property NOI by almost $10 million. Almost 85% of that is directly attributable to increased rents and increasing occupancies.

Over the last 18 months, we've commenced 2.4 million square feet for annualized base rent of $37.2 million. It's been a collaborative effort by the entire company. I would like to thank all of our associates for their efforts.

We've also been busy recycling capital. During the third quarter, we sold over $89 million in assets, including $66 million in retail properties and $23 million in industrial assets. The shopping centers were mostly smaller with many in small towns. Year-to-date, the company has sold about $565 million. This is $154 million of retail properties and the $411 million of industrial assets. We expect to close on the balance of our industrial assets reasonably soon. But for all practical purposes, we're out of that business today. Looking forward, with the industrial sales and the retail sales we have in the pipeline, we expect to finish the year at the upper end of our guidance range of $570 million to $680 million in dispositions.

We talked about the acquisitions of Roswell and Pike Center on the last call. In addition to those projects, we purchased our partner's 80% interest in University Place in Shreveport, Louisiana. This is a unique circumstance and not a shift in our acquisition criteria. We originally developed University Place, which is anchored by Super Target, Bed Bath and Beyond, TJ Maxx and CVS. We bought our partner's interest for a cap rate of 7.7%, which includes a mark-to-market adjustment for debt.

With the acquisitions in the third quarter, we're already at the top end of our guidance range. So far this year, we've acquired $235 million of retail property. We have a few things in the pipeline now, but it would be late December before anything else would close so there won't be much additional FFO impact in 2012.

The new shopping centers we acquired this year have a weighted average household income of $109,000, with college education levels in excess of 61%. Household incomes of the shopping centers we sold were $70,000 with college education levels at 40%. We're making great progress improving the quality of the portfolio and improving long-term value for our shareholders. Again, a great quarter, 4.9% increase in Same Property NOI, occupancy up to 93.9%, shop occupancy up 160 basis points from a year ago, leasing is steady and we're making great progress on our recycling efforts.

Drew?

Andrew M. Alexander

Thanks, Johnny. Our solid results this quarter are a clear reflection of the strengths of this company. Our best-in-class operating platform is staffed by a highly tenured group of professionals that work in the same markets in which they live and have access to all the processes, tools and technology of our corporate office. We continue to improve the strength of our quality portfolio as we shed the lowest tier of our properties and replace them with excellent new assets. And we remain dedicated to maintaining a strong balance sheet and a manageable maturity schedule. We're pleased with the continued progress towards the 3 strategic objectives, and we understand the need to sustain effort on this multi-year endeavor. This was an outstanding quarter, and we expect to continue this performance. At WRI, great people, great properties and a great platform results in great progress.

I thank all of you for joining the call today and for your continued interest in Weingarten. Again, best wishes in dealing with Sandy. Operator, we'd now be happy to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And from Stifel, Nicolaus, we have Nathan Isbee on line.

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

Can you talk a little bit more about the assumptions in the 2013 guidance, I guess specifically on the same-store NOI?

Stephen C. Richter

Nate, this is Steve. We have not yet concluded the overall budget process, and as we've done historically, we'll provide all the details next quarter once all that's complete.

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

Okay. And maybe you can just give us a little bit, for instance, on the $10 million of NOI that you had this year, how much do you have coming online already next year that you know about signed field?

Stephen C. Richter

The $10 million is an annualized number that I think Johnny quoted.

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

No, it was -- that came online in '12. I'm just saying, do you have any visibility in terms of signed leases today that are coming online in '13?

Stephen C. Richter

Nate, I guess I would say that our spread between signed and commenced occupancy today is about 240 basis points, which is shrinking but it's still well above what I would consider to be normal, more like 150 or 120. So we're definitely looking at that. We have not yet come up with any specific numbers that we're prepared to talk about today.

Andrew M. Alexander

And I would say generally, Nate, this is Drew, that as we have said, this year will be wonderful largely because of those commencements and normal is more like to 2 to 2.5 versus the 4 to 5 of where we are. So next year will be more towards number -- more towards normal and not as outstanding as this year is.

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

Okay. And then just quickly on Pike Center which you acquired. It's got the low occupancy. Is this purely a lease up play? Or is there perhaps some other plan in place for that center?

Andrew M. Alexander

The opportunity we feel is to lease it up and hold it for sort of an extended period of time, could be 5, 6, 7 years, could be even 10 or 12 years. And then over a very long period of time, as you know, it's a wonderful location. It will be more redeveloped. But there's certainly no imminent redevelopment plan. It's much more of an interim to longer term hold.

Operator

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

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

Are you hearing -- in leasing negotiations currently, what kinds of concerns, if any, are you hearing? And might that be delaying decision-making around fiscal cliff?

Johnny L. Hendrix

Paula, this is Johnny. I -- we haven't heard a lot of specific discussion around the fiscal cliff. I will tell you, it seems that when we're talking to retailers today, they are more concerned about all of the details with the leases, more concerned that they maintain the maximum amount of flexibility. It does take longer to do leases, but I think that fiscal cliff component probably works in there somewhere in the back office. But when we're out there talking to the leasing people, they're not focused on that as much as they are all of the details of the lease today.

Operator

From Morningstar, we have Philip Martin on line.

Philip J. Martin - Morningstar Inc., Research Division

I wanted to get a sense of tenant retention. When you look at the discussions you're having now with tenants and even going into 2013, do you expect tenant retention to be improving a bit? And are you seeing a difference in tenant retention by market or in terms of turnover by market?

Johnny L. Hendrix

Yes, Philip, this is Johnny. We are, as I've said in the remarks earlier, thrilled with where we are today on tenant retention. We've renewed about 40% of our leases for next year. And as we're talking to people, what we're seeing is, is the tenants who are doing well obviously want to stay and renew. The ones that haven't done well over the last several years pretty much are gone. So I am certainly looking for increased tenant retention over the next 12 to 24 months versus the couple of years behind us. And a lot of that you can see in our fallout numbers where we count a fallout, if the tenant comes to the expiration of their lease and they leave, it's a fallout. So as part of that, we are retaining those tenants longer. And generally, we're seeing increased retail sales. Another piece for us that's kind of interesting is over the last several years, we've increased pretty dramatically the amount of national and regional tenants. And I think we're up to some around 77% versus in the mid- to low-60s a couple of years ago. So I think again, retention we're seeing is very positive.

Philip J. Martin - Morningstar Inc., Research Division

Okay. And again, based on the remarks this morning, it sounds like everything is going as planned, maybe even a bit better than expected. What's not going as well? What's not going as well as you'd like it to? Can you just give us a sense of what's troubling you, I guess?

Andrew M. Alexander

This is Drew. I think everything really in, as good of ashape as could be, under circumstances. We are coming out of a very, very difficult recession, and the economy is not as robust as we would like. So finding new development opportunities, where people are willing to part with very good properties with a population around it that we want and tenants that are willing to pay the rent so that we can make some money, is challenging. Likewise, a lot of people, pension funds, foreign investors, wealthy individuals, et cetera, have begun to understand the tremendous safety recession-resilient aspects of supermarket-anchored tenants and the properties, the other basic goods and services tenants that we have. So the acquisition world is extremely competitive. So I've always been taught that things never line up exactly perfectly all things all the time, and that's were to me, this is a really pretty good environment, all things considered. We're very pleased with the acquisitions that we've accomplished year-to-date using our local resources. I think we're underwriting things very well and finding some opportunities where we can add value. We're not trying to buy across the entire country, we're very focused, and we underwrite things very well. So I'm sure acquisitions will remain very competitive, and I'm confident we'll get our share. But I wish in -- the economy were doing better. But hope is, of course, not a strategy.

Philip J. Martin - Morningstar Inc., Research Division

No. No. I appreciate that. And I guess, would it be that your -- the acquisition market is probably -- I mean, you've done some good acquisitions this year obviously. But is that probably more frustrating because you're going into somebody's better market, it's more competitive? Is that probably the most frustrating part of the business plan?

Andrew M. Alexander

I wouldn't say it's frustrating because it also means the value of the existing portfolio is that much stronger. So again, it's one of those things that -- things tend to balance out. So when we see somebody paying a very aggressive cap rate, that just means that our existing assets are better. So again, I think things are generally good, and there's always something to work on. Even the fact that there's no new space being built helps us lease the existing portfolio. Johnny's talked before about how flexible tenants are especially on things like dimensions and receiving and the other things because they recognize they have to be a little bit more flexible if they want to get into existing spaces. There will come a time where there is more pressure to build more space, and then you'll also see tremendous upward pressure on rents because construction costs for new space are -- require rents well in excess of current rents in most markets. So again, Philip, I appreciate. I mean, part of being in business is you're always dealing with things, you're always dealing with issues. But I think in the broadbrush, things are pretty darn good. They may not be for many metrics as good as they were in 2006, but they're a heck of a lot better than they were in 2009. So again, I think things are pretty good.

Operator

From RBC Capital Markets, we have Rich Moore on line.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

First, on divestments, on things you're selling. At one point, I remember you guys had I think 64 or 65 assets that you had kind of identified at least, and I realize you could have more than that, but those were kind of the target sales group. Where are you in that process? I mean, you've done a great job of getting rid of things. How many more of those are there to go do you think?

Andrew M. Alexander

Johnny's looking through his detailed notes, but let me just say generally, Rich, that I think we're making really good progress. And especially, we feel with the decision to get out of industrial, that it's a multi-year effort, and we recognize that. I said that in the prepared remarks, and we'll continue to work on it. But I know we're making very good progress.

Johnny L. Hendrix

Yes, Rich, we're, I guess, somewhere around between 1/3 and halfway done with selling those assets. I can tell you that the road to these sales has been a long one. They're generally small assets, and we're selling to inexperienced individuals that are going and getting bank loans. So we've had probably 50% closing ratio -- rate of the things we get under contract on some of these lower quality assets. But we're thrilled with the progress that we've made so far, and we're committed to see this thing out. It's going to take a while, but we are committed to finish it.

Andrew M. Alexander

We're down to already, I think, a very manageable level. About 90% of our NOI comes from the target markets that we want to grow. So we're focused on the multi-year effort. But as you and I discussed in the past, we don't feel a need to fire sale things and to just move this out at some deep discounted process. But we will work on it over the next few years.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Sure. I got you guys. And so there's may be 30 or 40 more assets that are potential sales candidate at least in the near term?

Johnny L. Hendrix

Right.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. Good. Then on for a second on the Washington, D.C. market. We hear a lot about how tough the apartment sector is in D.C., for example, or the office sector. I mean, what do you think overall for the retail market? And I realize it's different in those other property types, but what do you think in general for D.C. retail?

Andrew M. Alexander

Good, anchored properties, the kind of things that we want to do, do extremely well there, and we're very pleased. Progressing very nicely at Hilltop, very pleased with the Pike acquisition that we spoke about earlier. Also pleased that some of the tenants are back open and doing business at Pike. It seemed to come through Sandy well and we're pleased with that. So we are diligently working on other acquisitions there, but we find it a very competitive market. We think when we look at the size of the market, the ownership and how diverse things are, that we can work our way into the market. We think it's a logical extension for us as we move up the coast with strong presences in Atlanta and North Carolina, and we think the broad demographics of Washington are great. So we find it a very strong market. It's one -- we frankly targeted it because when the downturn started, we hoped there would be more opportunities there, but it remains a very challenging market. But we've got a lot of expertise there, and we're confident we'll find good acquisitions and development opportunities there.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. Good. And if I could squeeze in just one more real quick one, Steve, the expense recovery ratio dipped in the quarter, and I was curious if it was maybe more bad debt expense that was in operating expense or anything special that caused that to happen.

Stephen C. Richter

Really 2 things, Rich. One is the deferred comp piece that we've had to address several times through the quarters, and that also accounts for why interest income -- I know there was a couple of notes about interest income being up. The deferred comp piece, the offsetting part of that is in or part of it is in operating expenses. That was causing the recovery numbers to go, and then we did have a couple of adjustments that ran through there. I would tell you, don't use probably the quarter as a run rate. I would use year-to-date kind of as the best guide going forward.

Operator

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

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

Drew, you talked about aggressively pursuing new development projects earlier. Can you give us a sense of the magnitude of what you foresee in terms of your development activities in '14 and '15? And can you give us a sense also what it might mean for development activity overall in the market 2, 3 years out?

Andrew M. Alexander

I'll do my best, Cedrik, and it's a very good question. But I think it's a very difficult one to answer with any semblance of certainty. What I know is that we have and will return to our roots of doing development in a very good risk-adjusted way where we won't have entitlement risk and we will very, very much have good pre-leasing, good commitments. The good news is I think the market appreciates that, and I don't think one sees the competitive pressures to get away from that, that one saw in the 2006, '07 period. It's hard for me to imagine the pipeline ramping up any time soon to be a really, really significant number. As you've seen, we're -- we haven't really -- we've added 3 new properties to the pipeline, one of which is the Hilltop project of some size. The other 2, while we're very happy to have them, they're great deals that underline our relationships with both Whole Foods and Kroger, they're pretty small. We continue to work through the legacy assets and as I said before, we're making good progress there. So it's hard for me to foresee a time where things will be such that we have a pipeline of $300 million, $400 million, $500 million, $600 million, $700 million. And I don't see it getting that large, and I know that we will be very sensitive on the risk-adjusted returns that, again, we're avoiding the entitlement risk and we're avoiding any huge amounts of spec space. So while we are aggressively pursuing, I mean that as we are working hard. We're talking to our tenants. We're out there in our field offices, but we also still have a very rigorous investment committee before we invest any significant capital.

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

Good. And just a thing on the development theme, and I think the loan associated with your Sheridan project is now in arbitration. Can you give us a sense of what's happening with the project and with the partnership in particular?

Andrew M. Alexander

The partnership, and I'll let Steve talk a little bit more, he's familiar with some of the details of the loan. The partnership is under a lot of stress as you can imagine. The project is doing better, and we have done some recent leasing there of the existing space that we're very pleased with. It's a very good location, good population density around it, Target open, Costco open doing very well, have a fair amount of land held for development there and are in some negotiations with folks to build some new buildings. Again, I'd be very sensitive to the amount of shop space that we have and spec space that we build. So we are cautiously optimistic that the worst days are behind us there, but it remains under some stress.

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

And in regards to loan?

Stephen C. Richter

The loan itself, as you have referenced, Cedrik, there's -- it's in litigation. There's still -- quite frankly, the latest piece that you saw is only a small fraction of the whole legal strategy. And I don't care to get into all the details of it, but we're basically waiting on, on one more ruling from the court rule that will give us direction going forward.

Operator

[Operator Instructions] From Wells Fargo Securities, we have Tammi Fique on line.

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

Where do you expect the gap between leased and commenced to be at year end?

Johnny L. Hendrix

I think it'll shrink a little bit. If you got 210 basis points, that probably be my guess. Some of it, of course, depends on what I'll lease between now and then, and my leasing people tell me they are working on that diligently today. But I think probably shrinking a little bit to that 210 is probably close.

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

And then into 2013, you're expecting it to get back to a more normalized level by year end, is that correct?

Johnny L. Hendrix

I think that would be accurate, Tammi.

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

Okay. And then you are redeeming the preferred -- the Series E preferred. Are you anticipating issuing another preferred?

Johnny L. Hendrix

At this time, no. We continue to monitor the markets. We will pay that off or redeem that with -- through the revolver. We've also called for the redemption of our convertibles, our 3.95% converts that there are about $50 million outstanding. And actually sitting here today, I'm in a net cash position with the revolver. So we'll continue to monitor acquisitions, disposition activity and look at the capital markets as we go into 2013. But at this time, there's no intent to issue. The spread, quite frankly, our view is that the cost of where our 10-year money is today versus where our preferred, we would issue a preferred, is so wide that we think that the debt market is certainly the place to be today. And we'll continue to monitor that and look at that as we need to approach the capital markets again in 2013.

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

Okay. And then one final question, if I'm looking at this correctly, it looks like the midpoint of implied FFO guidance for the fourth quarter, it sort of implies a sequential drop in FFO at the midpoint sequentially. I just was wondering if that's -- what's causing that? Or is that just due to the $300 million debt issuance?

Johnny L. Hendrix

There is -- certainly, the $300 million notes that we issued is part of the dilutive effect -- or has the dilutive effect on Q4 operations and -- but it's obviously the accumulation of also the disposition activity that we have had and will -- part of that rolls into '13 as well, but it's a combination of a lot of transactions.

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

Okay. And then just actually one more question, expected development spend is down this year. I know you touched a little bit on development, but is there something specific that's driving that? Was there something that you are working on that you decided against?

Andrew M. Alexander

No, it's nothing large. I think it's a combination of a number of things that, again, as I mentioned, we're just being very rigorous as we look at both new sites and also look to expand on the existing properties. So there's nothing specific really big. It's a lot more a number of just smaller things.

Operator

We have no further questions at this time. I will now turn the call back over to Drew for any closing remarks.

Andrew M. Alexander

Well, thank you, all, for joining the call. Again, best of luck in dealing with Sandy and the aftermath of that. Really appreciate everybody's participation. We'll be around later today and look forward to talking with you, and I know we'll see a lot of you at NAREIT coming up. Again, best wishes. Thank you.

Operator

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

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