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Retail Properties of America (NYSE:RPAI)

Q3 2012 Earnings Call

November 06, 2012 11:00 am ET

Executives

Sarah Byrnes

Steven P. Grimes - Chief Executive Officer, President, Director and Member of Investment Committee

Angela M. Aman - Chief Financial Officer, Executive Vice President and Treasurer

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

Analysts

Quentin Velleley - Citigroup Inc, Research Division

Todd M. Thomas - KeyBanc Capital Markets Inc., Research Division

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

Vincent Chao - Deutsche Bank AG, Research Division

Jason White - Green Street Advisors, Inc., Research Division

Operator

Greetings, and welcome to the Retail Properties of America Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sarah Byrnes of Retail Properties of America. Thank you, Ms. Byrnes. You may begin.

Sarah Byrnes

Thank you, operator, and welcome to Retail Properties of America Third Quarter 2012 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, estimates, expects, intends, may, plans, projects, seeks, should, will, and variations of such words or similar expressions.

Actual results may differ materially from those described in any forward-looking statements 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 the most recent Form 10-K and Form 10-Q filed with the SEC.

As a reminder, forward-looking statements represent management's estimates as of today, November 6, 2012, 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 such as same-store results, EBITDA, FFO and operating FFO. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers and definitions of these non-GAAP financial measures in our quarterly supplemental package and the Forms 10-K and 10-Q, 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; Shane Garrison, Executive Vice President, Chief Operating Officer and Chief Investment Officer; and Angela Aman, Executive Vice President, Chief Financial Officer and Treasurer. 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 P. Grimes

Thanks, Sarah, and good morning. And thank you all for joining us today. Before we begin our prepared remarks, I wanted to take a moment to extend our thoughts and prayers to our employees, friends, families and business partners that continue to suffer from disruptions sustained by Hurricane Sandy. We hope to see the lives of those affected get back to normal as quickly as possible.

We are very pleased with the third quarter results, which reflect a continuation of the strong operational and financial progress we have made over the last several quarters. Third quarter operating FFO was $0.21 per share and same-store NOI growth was 80 basis points based on another strong quarter of leasing traction.

Same-store occupancy was up 90 basis points year-over-year and cash re-leasing spreads were up nearly 6%, topping last quarter's strong performance on substantially higher volume.

From a macro perspective, the tepid economic recovery we have seen over the last several years appears to be finally gaining some traction with noticeable improvements in retail sales, consumer confidence, unemployment and the housing market. We believe we are well positioned to benefit from these trends as a result of our unique mix of high quality retail properties. Our diversified mix of neighborhood and community centers, power centers, lifestyle centers, provides us with an opportunity to serve the consumer on multiple fronts, and we believe this mix will serve us well in the coming quarters. That said, this management team has been and remains focused on mitigating operational and financial risks in order to ensure our success in any economic climate.

We are proactively reducing exposure to troubled tenants in problem categories. We are making significant strides in divesting of non-core and nonstrategic assets and we are continuing to focus on the responsible and prudent management of the balance sheet. Also, we are taking bold action to enhance the operational power of our platform.

During the quarter, we made considerable progress in reducing our leverage, primarily as a result of the success of our disposition program. While our expectations for total 2012 disposition volume have not changed since our IPO, the mix of properties included in our pipeline has changed significantly. At the time of the IPO, we expected nearly 2/3 of our 2012 disposition plan would represent the contribution of core multi-tenant retail assets to one or more joint venture arrangements, with the remainder being made up primarily of single tenant retail asset sales, including the Mervyns portfolio. At the time, we expected less than 5% of our total transaction volume to represent sales of non-retail assets. However, as a result of the success of our asset management initiatives over the last several quarters, we are pleased to report that we now expect nearly 1/2 of our transaction volume to represent the sales of office and industrial assets, 40% to represent a sale of single tenant retail assets and just over 10% to represent the sales of non-strategic multi-tenant retail assets. We now do not expect any core multi-tenant retail assets to be sold or contributed to joint ventures this year in order to meet our balance sheet objective.

Approximately 2 million square feet of non-core will remain from our original 10 million square feet in 2007, a statistic of which we are particularly proud. We are very pleased to be achieving the simplification of our portfolio mix more quickly than we had anticipated, and we look forward to beginning 2013 with a higher growth portfolio and a more nimble and efficient balance sheet.

I would now like to take a few minutes to discuss the totality of changes that are occurring or have occurred recently in our operational platform. We discussed on last quarter's call that we had canceled the majority of our service agreements with our former sponsor. I am now pleased to report that we have elected to terminate all agreements. Our office move will be complete by the beginning of December, and we could not be more pleased with the receptivity to these announcements by all of our stakeholders, including tenants, investors and employees. The design of our new office space is a physical representation of the culture we are fostering company-wide: open, collaborative and transparent.

But we are doing a lot more from a platform perspective than just internalizing shared services. We have made a commitment as a management team to make retention and attraction of top tier professionals a priority. While we are quite proud of the core team, who have proved resilient over the last several years, we have made our team even stronger as of late with significant additions to our leasing, asset management and capital markets platforms. In order to complete the decentralization of our leasing platform, we hired Jeff Stauffer on the West Coast and Greg Goldberg on the East Coast. Bruce Heitzinger joined our asset management team, and we also hired Dan Flattery to capitalize on redevelopment opportunities within our existing portfolio, which you will be hearing about in the coming quarters.

We have also made some important additions to our capital markets team, including Sarah Byrnes and Michael Fitzmaurice. Sarah is focused on Investor Relations, while Mike is enhancing our internal reporting and business intelligence efforts. We have added significant retail real estate and publicly traded REIT experience throughout the organization over the last 18 months and have been very pleased with the results of those efforts.

We are currently in the process of finalizing our financial and strategic plans for 2013, and look forward to sharing the details with you on next quarter's call.

With that, I would like to turn the call over to Angela Aman, our Chief Financial Officer, to discuss our financial results in more detail.

Angela M. Aman

Thank you, Steve, and good morning. Operating FFO was $49.6 million or $0.21 per share for the third quarter. Including nonoperating items, FFO was $57.2 million or $0.25 per share. Nonoperating items this quarter included gains on marketable securities and charges related to the early extinguishment of debt.

Same store NOI growth in the third quarter was 80 basis points, with same-store occupancy growth of 90 basis points, contractual bump and positive cash re-leasing spreads, which were offset by a change in expense recorded during the third quarter of 2011, which had the effect of increasing same-store NOI in the third quarter of 2011. Excluding the effect of this adjustment, same store NOI growth for the third quarter of 2012 would have been 1.6%. On a year-to-date basis, this change in expense had no impact on the same store NOI growth of 2.3%.

For the last 2 quarters, we have guided to full year same store NOI growth of 0 to 100 basis points, excluding the impact of all planned 2012 disposition. And we are tightening this range to 50 to 100 basis points of growth.

Our full year guidance does imply negative NOI growth in the fourth quarter, primarily as a result of the remerchandising efforts that we are making in a handful of centers, consistent with our discussion from prior calls, as well as the normalization of bad debt expense, which was negligible in the fourth quarter of last year.

While we continue to be very encouraged by our overall tenant health and credit metrics, as well as the collections of previously written-off amounts, we do take a more conservative posture on future bad debt expense and guidance.

In addition, there were $300,000 of lease termination income booked in the fourth quarter of last year, which we don't anticipate recurring in the fourth quarter of 2012.

From the capital market's perspective, the activity this quarter was focused on the continued growth of the unencumbered asset base. During the quarter, we repaid $282 million of mortgage loans, while $133 million related to properties that were sold during the third quarter, most notably the $116 million loan on the former Mervyns portfolio. $149 million related to operating properties that are now fully unencumbered.

Subsequent to quarter end, we repaid an additional $77 million of mortgage loans, addressing all remaining 2012 debt maturities and increasing our unencumbered asset base to $1.5 billion, allowing us to achieve our year-end objective a quarter early.

In addition, during the third quarter, we also repaid $13.9 million of property-specific mezzanine debt with an interest rate of 11%. This loan was scheduled to mature in December of 2013, but as a result of our improved leverage and liquidity position, we were able to prepay this high cost piece of debt in the third quarter of 2012. We are encouraged by the progress we continue to make on growing our unencumbered asset base and refinancing high cost debt, but recognize there is still additional work to be done.

As a reminder, the remaining $125 million of mezzanine debt carries a blended interest rate of 12.8% and opens for prepayment in February of 2013. The early repayment of our mezzanine debt in the first quarter of next year will be a significant contributor to the simplification and improved efficiency of our balance sheet as we move forward.

Our current combined net debt to combined adjusted EBITDA ratio is 7.3x, down significantly from last quarter, and nearly a full turn lower than where we were at the end of 2011. The considerable progress we have made on our overall leverage level is the result of our equity offering in April, as well as the successful execution of our disposition program.

We will remain disciplined net sellers over the next several quarters, as we continue to make progress on our leverage target of 6x to 7x. We remain committed to our long-term objective of becoming an investment grade borrower, and believe the steps we have taken over the last 9 months position us well for making that transition over the next several years.

On October 5, our Class B-1 common shares converted into Class A common shares and became tradable on the New York Stock Exchange. 50% of our pre-equity offering share base is now fully tradable. With respect to the dividend, on September 10, the Board of Directors declared a third quarter distribution of $0.165625 per share, representing an annualized dividend of approximately $0.6625. While dividend policy is a board level decision, we continue to be pleased with our operational and financial performance and view the current dividend as sustainable at this level.

Turning to guidance. We have narrowed our full year operating FFO guidance by $0.01 at the low end of the range to a range of $0.84 to $0.87 per share. As previously mentioned, we are narrowing our same store NOI guidance to 50 to 100 basis points, which excludes all assets we expect to be sold during the year. We are also maintaining our previous full year G&A guidance of $30 million.

With respect to 2013, we are now finalizing our strategic and operational plans, and expect to provide operating FFO and same store NOI guidance early next year. We believe the decisions we have made during 2012 position us well for growth in 2013 and beyond.

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

Shane C. Garrison

Thank you, Angela. I'd like to review our operating and leasing performance for the third quarter and provide some additional details on our disposition program. We are extremely pleased with our leasing efforts over the last several months. Transaction velocity was very strong during the third quarter, with over 1 million square feet of leases signed, a 40% increase over the second quarter.

Comparable cash leasing spreads were up approximately 6%, slightly ahead of our last quarter, with renewal spreads up 5% and new lease spreads up 12.7%. This strong performance was accomplished on a much larger base as comparable transactions were up 180% from the second quarter at 820,000 square feet.

Continued growth in demand from strong credit worthy national retailers has been exacerbated by the ongoing lack of new retail supply. This dynamic is clearly translating into improved negotiating leverage for landlords of high quality retail product, which we believe will continue through 2013. Our leasing pipeline remains robust, with strong demand from both big-box and inline retailers.

Our retail portfolio stands today at 94.7% leased on spaces over 10,000 square feet, a 330 basis point improvement from last year. And as anchor occupancy improves, so does demand from small shop retailers looking to capitalize on the renewed traffic generation of our centers.

Overall consolidated retail portfolio occupancy ended the quarter at 88.4% or 91.1%, including leases signed but not commenced. The 270 basis points spread between our occupancy and percent lease rate represents over 900,000 square feet or $13.1 million in annualized base rent, nearly $5.1 million of which we expect to begin rent commencement by year end.

Before moving on to discuss the asset sales during the quarter, I would like to take a moment to address the impact of Hurricane Sandy. We continue to field many questions specific to the storm, and I'm happy to report that the portion of our portfolio in the storm's path, which is 48 assets constituting some 8.3 million square feet of GLA, incurred very minor damage with little business interruption for our tenants. For the most part, the economic damage is extremely small, limited to minor roof leaks, broken tree limbs and a few signage panels. Additionally, any temporary power outages were largely overcome by the majority of our tenants through generator use. Our property management and operations staff have been diligently working to make sure all tenants are up and operational, prioritizing repairs and making sure that tenants know we are there to help.

Moving on, as Steve indicated, the third quarter was extremely active on the disposition front. During the quarter, we sold 18 properties resulting in gross sales proceeds of $190 million. Most notably, this includes the sale of a 13 asset Mervyns portfolio for $100 million and the sale of the Cost Plus distribution center for $63 million. Remaining asset sales during the quarter included 3 non-strategic retail centers in Dallas for $19 million, and 1 additional Mervyns property for $8 million.

Including earnouts, pad sales and a deed-in-lieu of foreclosure transaction, we have executed $262 million of asset sales to date, which includes 3 single tenant retail properties that were sold in October for $33 million.

In addition, we currently have over $200 million under contract or LOI that we expect to close in the fourth quarter. As a result, we are maintaining our full year disposition guidance of $450 million to $550 million.

As Steve discussed earlier, we are very pleased with the progress we have made this year on streamlining the portfolio and enhancing the balance sheet through this series of compelling, economically-efficient transactions.

While we are still refining our strategic plans for 2013, it is fair to say that additional dispositions of remaining office and industrial assets and single tenant retail assets will be part of our plans for next year. In addition, you should expect to see us begin to better define our optimal geographic footprint and work to reduce exposure to markets in which we don't have critical mass.

As Angela mentioned, we fully expect to remain a net seller in 2013, but are hopeful that we will reach an inflection point from a balance sheet perspective in the second half of the year, at which time we will begin recycling the proceeds from dispositions into external growth opportunities, either acquisitions or redevelopments.

And with that, I'll turn it over to Steve for some final remarks.

Steven P. Grimes

Thank you, Shane, and thank you, Angela for your previous report. We would like to thank all of you again for your time today. We are very pleased to have posted yet another solid quarter and remain confident in meeting our 2012 stated objectives.

At this time, I will turn the call over to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Quentin Velleley with Citi.

Quentin Velleley - Citigroup Inc, Research Division

Just in terms of the $125 million of mezzanine debt that you can repay in February next year at 12.8%, how should we think about how you'd fund that? Is it sort of going to be a combination of cash from asset sales, a little bit of cash on balance sheet and a line? Or should we sort of think about maybe re-encumbering some assets or maybe some -- doing a preferred?

Angela M. Aman

Quentin, it's Angela. It's a good question. I think if you look at the balance sheet today, in particular the usage on the line, one thing to remember is that the dispositions that are coming in the fourth quarter will be almost entirely net proceeds that we'll use to create additional capacity under the line. So we deal with -- for example, the Mervyns portfolio that was sold during the third quarter ended up paying off the debt and resulting in almost no net proceeds. But the full year guidance we had given, the $160 million to $180 million, is coming in the fourth quarter and to some extent, the first quarter and will be all net proceeds. Creating additional capacity under the line. So I certainly think we'll have capacity under the line to be able to take out the mezz comfortably when we get to that point in February. That said, we do continue to evaluate things like the preferred market, which has obviously been very active and very attractive for issuers, and we'll evaluate our options over the next couple of months.

Quentin Velleley - Citigroup Inc, Research Division

Okay. Maybe just switching to occupancy, which is still below 89%. As you said, there's that 270 basis point spread below the leased rate. And your same-store NOI for this year, I think you said it was 50 to 100 basis points. If we remove the retenanting that you're doing at the moment, can you gives a sense for what same-store NOI would be this year? And also what occupancy would be now, I mean, is it still -- is it going to be above 90%?

Shane C. Garrison

Yes, that's a good question, Quentin. I think as far as our year-end target of 90% to 91%, I think the easiest way to think about it right now is we contemplate the $5 million in rent coming online in Q4 and additional asset sales, specifically the 3 Mervyns by the end of the year that are vacant. So that gets us to the very low end of the range, contemplating some attrition or tenant fallout at the 90% by year end from an occupancy standpoint.

Quentin Velleley - Citigroup Inc, Research Division

And then can you give us sort of a sense of what same-store NOI would have been this year if you weren't conducting all the retenanting?

Angela M. Aman

It's a difficult number to break out. I would say when you step back and think about the impact of the remerchandising effort, it really shows up in the mix issue. For example, on a year-to-date basis, while we've picked up 90 basis points in occupancy, the economic impact of that occupancy is much lower as a result of most of the occupancy growth coming from anchor leasing and some of your occupancy loss coming from higher ABR centers, where we're conducting this remerchandising. It's really difficult to segregate out, but obviously it is having a significant impact on the full year number.

Operator

Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

Todd M. Thomas - KeyBanc Capital Markets Inc., Research Division

A question on dispositions. With regard to the asset sales outside of the Mervyns boxes and the non-retail properties, was the decision not to sell as many of those assets this year due to better operational performance or because you're seeing better execution on the sale of the non-retail and single tenant assets and then maybe can you quantify how big this bucket of properties is?

Shane C. Garrison

Yes, I think the decision was, to Steve's comments, based almost exclusively on our ability to recast some of those leases and optimize capitalized value in a more compressed time frame. And additionally, as you know, the market's been extremely compelling to sell into. The remaining assets for the year, we've got over $200 million under contract that we contemplate closing. And in that is Aon, which is a big chunk of it from a non-core standpoint and then one additional non-core, which is about 120,000 feet in Phoenix, a little north of $5 million. Remaining, assuming Aon and that office building closes, will be really 4 buckets. So you've got 2 -- a little over 2 million square feet that Steve referenced, a little north of $24 million in NOI remaining. One being Zurich which is $10.4 million of it or 890,000 feet. The Hewitt campus remaining, which is about 360,000 feet, a little north of $4 million in NOI. One American Express building that we just signed a new lease on, we have 12 years, that should go to market here Q1. And then 9 office and industrial assets that are about 800,000 square feet, you have $8.5 million in NOI, the average remaining lease term on that bucket is about 3 years. And I think the takeaway there is, outside of the remaining lease terms, 70% of those tenants in that pool are S&P A- or better, and that's actually -- those 9 assets are in the market currently. We're going through a bit of a pricing discovery exercise here, so we can understand better if it's compelling enough trade now as they sit with 3 years remaining given the tenant profile or if we should go ahead and run through the lease up exercise.

Todd M. Thomas - KeyBanc Capital Markets Inc., Research Division

Okay. That's helpful. And then regarding the retail properties though that just might not fit geographically or for other strategic purposes. What's that sort of bucket of properties look like, and it sounds like the plan would still be to shed some of those assets through 2013?

Shane C. Garrison

Yes, that's right. We're identifying that through the budget process right now. I think there's 5 states where we have 1 property. I think those are fairly easily to identify, but anything deeper than that, I'd be hesitant to identify, at least until we're through the budgeting process.

Todd M. Thomas - KeyBanc Capital Markets Inc., Research Division

All right. And then just switching over to operations. For spaces below 5,000 square feet, it seems like that's where most of the vacancy or the greatest amount of vacancy remains. What are you seeing for those spaces specifically today and what are you doing to increase occupancy there?

Shane C. Garrison

Yes, I mean, the neighborhood continues to lag quite a bit. Gateway obviously probably cost us 50 basis points in that bucket. Our pipeline is probably 300,000 feet below 10. I don't know what the break out is below 5. But it's been fairly vigorous, I think for us the obvious focus has been on the anchor space that's been some of the low hanging fruit, and I would argue that the below 10,000 doesn't really come online in any compelling way until you had those anchors done from a trial [ph] standpoint anyway. So we've been focused, and I think we'll be even more focused here going forward now that we're pushing 95 leased above 10,000.

Todd M. Thomas - KeyBanc Capital Markets Inc., Research Division

Okay. And then just a quick clarification for Angela. The $1.4 million prepayment penalty that was realized in the quarter, is that, that's in interest expense on the income statement?

Angela M. Aman

Yes $900,000 is an interest expense in the income statement, and there's another, call it $500,000, within interest expense in discontinued operations.

Operator

Our next question comes from the line of Michael Mueller with JPMorgan.

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

A couple of quick questions. Going back to occupancy for the 88.4% quarter-end occupancy, if you eliminate all the churning that's going on with the portfolio, when you think about that number more on a same-store basis. Where do you think leasing alone puts that number by year end, because I know you talked about a 90% to 91% occupancy target, but I think that's impacted by other stuff as well.

Shane C. Garrison

Yes, Mike, I think it's 1/2 and 1/2 literally.

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

Okay. So about close to 100 basis points give or take?

Shane C. Garrison

Yes, I think that's right.

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

Okay. And then, Shane, you were talking about some of the bigger chunks of the non-core asset sales that you expected to close. I'm not sure if you were just listing those, because some of those were, I think, maybe earmarked for fourth quarter, but some are clearly 2013, which ones are -- do you think will hit in the fourth quarter?

Shane C. Garrison

Sure. So inside the north of $200 million under contract today, Mike, non-core office and industrial, there's just 2. That's the vacant office building in Phoenix, which is about $5.5 million and then Aon is in that number. We had previously guided $145 million to $160 million on Aon, and based on contract today, we anticipate being in that range.

Operator

Our next question comes from the line of Vincent Chao with Deutsche Bank.

Vincent Chao - Deutsche Bank AG, Research Division

Just wanted to clarify on the same store NOI guide, just so we have an order of magnitude. Just back of the envelope, looks like the implied fourth quarter might be something like minus 3%. Is that ballpark-ish correct?

Angela M. Aman

That's at the low end of the range.

Vincent Chao - Deutsche Bank AG, Research Division

That would be at the low end of the range?

Angela M. Aman

The low end of the range. Yes, I would say in Q4 within the guidance we've given, probably negative 1% to negative 3%, somewhere in there.

Vincent Chao - Deutsche Bank AG, Research Division

Negative 3%, okay. And then on the rent spreads, that's been coming in a bit better than I think you have previously guided to. I'm just wondering what your thoughts are there and if there's anything in the pipeline of deals that would take the yearly number down more towards the range, or if you're thinking the range is going to be a little bit higher now.

Shane C. Garrison

That was a good question. I think this was the best quarter we've had maybe ever from a comp standpoint just because of the depth and consistency of the comps or of the spreads, 80% of the total leasing volume were comps and of that, 34% of the renewals were double-digit comps. So I think that speaks to certainly the assets in the platform. From a pipeline standpoint, it remains robust. I don't see anything in particular that would drag us down significantly.

Vincent Chao - Deutsche Bank AG, Research Division

Okay. So this quarter's performance on the spreads, there wasn't like a 1 or 2 big deals that really drove -- sound like it was pretty broad-based?

Shane C. Garrison

No, it was a very consistent. We had 96 inline deals in the comps and up 5.5%.

Vincent Chao - Deutsche Bank AG, Research Division

Great. And just Angela, I mean, this is for you. We talked about $125 million term loan, I think there's about $276 million of consolidated debt coming due next year. Do you think, I guess, how much of that would you expect to just repay outright versus try to refinance? And then I know you said that, the net dispositions would also take care of some of the leverage as well.

Angela M. Aman

Yes. So we expect to end the year obviously with more capacity than we're sitting with at the end of the third quarter as a result, as I mentioned, of both the net proceeds from the Q4 disposition. We said on the call obviously that we expect to remain a net seller in 2013, and would expect to unencumber most of the 2013 maturities as a result of that strategic plan which we'll lay out when we provide guidance.

Vincent Chao - Deutsche Bank AG, Research Division

Okay. And is there anything lumpy in that 2013, the $276 million, is there a very large mortgage in there?

Angela M. Aman

No, I think there's one that's, call it, $60 million, but the remainder are closer to our portfolio average which would be somewhere in the $20 million to $30 million range.

Operator

Our next question comes from Jason White with Green Street Advisors.

Jason White - Green Street Advisors, Inc., Research Division

I had a couple questions for you here. Looking at your acquisitions dispositions, have you looked at any acquisitions currently or is it just too much on the disposition plate to do so?

Shane C. Garrison

Yes, we monitor the market just so we're cognizant of -- from a strategic planning standpoint, being aware of where trades are and what expected IRRs are and that sort of thing, but as far as really focusing on a single acquisition opportunity, no, right now we're very focused on the balance sheet and the disposition process.

Angela M. Aman

I think that's right. This looks [ph] from an internal capacity standpoint as the team's concerned and more from just a balance sheet capacity standpoint.

Jason White - Green Street Advisors, Inc., Research Division

Okay. So it's just a -- it's more balance sheet not so much team?

Angela M. Aman

Yes, I think that's fair. I mean we'd set out to improve an overall leverage target and obviously the intention to migrate to investment grade, that's been our #1 priority, and we're remaining disciplined until we feel that we've reached an inflection point in the middle of next year at which not every dollar from the dispositions needs to be deployed to the balance sheet and can begin to be recycled.

Jason White - Green Street Advisors, Inc., Research Division

Okay. That's helpful. And secondly, can you dig in a little bit on Gateway with the new City Creek Center and what you're seeing for the prospect for that asset?

Shane C. Garrison

Yes, I think we're up sequentially 100 bps, maybe a little north of that from a economic standpoint right now. But it's still very much a one step up, one step back process. The merits of the asset haven't changed. I think for us, the light rail system, which comes in, I think, in February will certainly be a pickup, with jazz played right across the street, parking revenue has been fairly consistent, and so that traffic seems to be there. But admittedly, we're still on a honeymoon phase with City Creek and trying to understand what that dynamic really is long term. But from a positioning standpoint, I think it's safe to say that we know what the asset needs to be, and we think we're there. It's just a question of getting the retailers to believe in the format right now, and where we want them to go into the center. So I think initially, we contemplated maybe an 18-month process from the trough, which is probably Q4 this year and I think it's probably 18 to 24 months right now, again depending on which retailers and ultimately what we have to re-itemize [ph] there.

Jason White - Green Street Advisors, Inc., Research Division

Okay. And then lastly, as far as stabilized NOI growth, what do you think if you could kind of hit the button and reset your portfolio to where you would like it to be, say, by the end of next year. What do you think a stabilized growth rate would be for the portfolio?

Angela M. Aman

We think it's 2% to 3%. Obviously, that involves a handful of assumptions including the dispositions of many of the single tenant assets that obviously are lower growth. But we think our core multi-tenant retail portfolio does somewhere between 2% and 3%.

Operator

There are no further questions at this time. I'd like to hand the call back over to Mr. Grimes for closing comments.

Steven P. Grimes

Thank you. Thank you all for the great questions we received today. As I stated earlier, we are very excited about this quarter posting yet another good solid quarter. I look forward to posting results this next quarter, in the January time frame, and hopefully, that will be a good one as well. A particular thanks to our team, we did set out to do a tremendous amount this year. And as I had stated previously, we have or really are in a position to be realizing all of the 2012 objectives that we set out and possibly even exceeding our own expectations. So thank you all again for your time today. Look forward to seeing some of you at NAREIT next week.

Operator

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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