Equity One Inc. (NYSE:EQY) Q2 2016 Earnings Conference Call July 28, 2016 9:00 AM ET
David Lukes - Chief Executive Officer
Tom Caputo - President
Mike Makinen - Chief Operating Officer
Matt Ostrower - Chief Financial Officer
Bill Brown - Executive Vice President of Development
Satnam Singh - Director of Finance
Christy McElroy - Citigroup
Jay Carlington - Green Street Advisors
Ki Bin Kim - SunTrust
Vincent Chao - Deutsche Bank
Jeff Donnelly - Wells Fargo
Craig Schmit - Bank of America
Collin Mings - Raymond James
Chris Lucas - Capital One
Mike Muller - JP Morgan
Good morning and welcome to the Equity One Second Quarter 2016 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to Satnam Singh, Vice President of Finance. Please go ahead.
Thank you, operator. Good morning everyone, and thank you for joining us. With me on today's call are; David Lukes, our Chief Executive Officer; Tom Caputo, our President; Mike Makinen, our Chief Operating Officer; Matt Ostrower, our Chief Financial Officer and Bill Brown, our Executive Vice President of Development.
Before we get started, I would like to remind everyone that some of our statements today may constitute forward-looking statements within the meaning of Private Securities Litigation Reform Act. Forward-looking statements include annualized or projected information, as well as statements referring to expected and anticipated events or results. Actual results may differ materially from our forward-looking statements due to a variety of risks, uncertainties and other factors, which are addressed in our filings with the SEC. Statements made during the call are made as of the date of this call. Facts and circumstances may change subsequent to the date of this call, which may limit the relevance and accuracy of certain information that is discussed.
Please note that on today's call we will be discussing non-GAAP financial measures including FFO and NOI. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earning release and our quarterly financial supplement, which are available on our website at www.equityone.com.
I would now like to turn the call over to our CEO, David Lukes.
Thank you, Satnam, and good morning. Equity One's second quarter results highlight the power of our core operations. We saw compelling growth in property cash flows and we continue to make significant advances in our current and shadow redevelopment pipeline. This operational strength, the key to our long term sustainable growth should provide real comfort to our investors, especially in the light of a few isolated tenant bankruptcies this year.
I would like to take a moment to touch on each key contributed of our results; property performance, the redevelopment pipeline and success in sustainability. First from the property perspective, we reported growth in same store net operating income excluding redevelopments of 4.5% and 6.1% for the larger portfolio including redevelopment. This continues our trend of well above historical average profit expansion.
Like last quarter we're getting a boost from our shop leasing team that is clearly still on fire. The completion and rent commencement of the Barney's redevelopment, and of course our new lease renewal with Giant at our Bethesda, Maryland property. These factors more than offset headwinds from tenant bankruptcies during the quarter. We've seen time and time again, that for high quality assets like ours, the bad news in one property is more than offset by good news at another.
Result from our portfolio can easily be summarized in a few lines, but that dramatically understate the enormous amount of talented labor that our first class leasing and property management teams invest. I truly believe we've got the best leasing and operations team in the industry, and I want remind all of our investors of the human effort that goes into the hundreds of distinct negotiations, transactions and efficiencies that we conveniently tell you about in the form of a single growth rate.
We know we have great opportunity ahead of us for core growth. After all our shop occupancy has already grown by 360 basis points on a year-over-year basis, but we're still not at the historic high watermark. We're also highly focused on advancing our redevelopment efforts which we believe is the key to generating continued FFO and NAV growth into the future. Some of our progress is very visible and some much less so. But I can assure you, that overall, we continue making enormous strides in generating redevelopment value for shareholders.
The most visible form of progress is rent, and the most impactful to our redevelopment pool this past quarter was from Barney's. The store not only looks great, the Barney's has been on record stating that it's performing well above their expectations. While many luxury apparel retailers are rightly reconsidering their bricks and motor plans amid a dynamic operating environment, our new Barney's stores so far great evidence that a focus on the best locations is a very legitimate and rewarding strategy for strong retail operators.
We've also made real progress at Serramonte and Daly City, California where site work continues on the perimeter development parcels, and we've begun the turnover process to tenants such Dave & Buster's within the mall expansion areas as of the project.
Tenant turnover of course is the precursor to rent commitment and we're working diligently to achieve positive cash flow impact by the end of this year and continuing through stabilizations by mid-2018. The project is currently 80% preleased, so we've got a very good handle on the rent commencement schedule and the projected returns. I'm incredibly excited about this project for a variety of reasons.
First it will not only strengthen a mall that doing already very well. Even before we had a chance to fundamentally reposition it, the asset was producing inline tenant sales of $540 as a square foot. We believe that adding Dave & Buster's, the new restaurant to the existing mall, as well as an incredible array of new boxes like Nordstrom Rack, Ross Dress for Less, TJ Maxx, Buy Buy Baby, Cost Plus and Party City on the mall's periphery will re-anchor the assets, lifting tenant sales greatly from where they are today and giving us an opportunity to then redevelop and re-merchandize the mall's interior.
And of course, this is all exciting, because it should generate returns on investment for shareholders that are well in excess of our cost of capital. Just as important is the visible progress at Barney's and Serramonte, is the less visible progress on our current and shadow pipeline projects.
Following council approval of the sector plan in the South of Maryland which includes our Westwood property, we've begun work in earnest with the community on a much more details sketch plan review process. We hope to have further entitlement and leasing progress to report in the coming months.
In the shadow pipeline, several of our projects require the approval of existing anchors with significant term left on their leases. Traditionally, anchors of such assets have quickly rejected attempts by the landlord to improve sustainable design and increase density, fearing the operational and sales growth disruption that tends to accompany such projects.
I'm pleased to report though that many of the anchors we have been communicating with have so far taken the opposite approach. Sharing our excited visions of the economic and strategic benefits of a repositioned and improved center, and working very productively with us and structuring agreement that would allow us commence work. We have nothing specific to announce at this time, but suffice to say that we've been encouraged by the past tenant approval on several significant projects.
Our core same-store NOI growth and the profitability of our numerous development projects should allow us to generate the sort of long-term sustainable returns that we believe are equity investors demand, allowing us to frequently opt out of what feels like an increasingly over heated acquisitions market.
But, our concern about current market prices for properties doesn't mean we're sitting on the side line. Tom Caputo and his team have found and closed this quarter on a $30 million Walmart and HomeGoods anchored center that was a result of our deep relationship and other investments in the area. The site was originally developed as a Bradley's in 1962, which eventually became a Walmart, who to this day, pays base rent of less than a $1 a square foot., While the initial cap rate on this acquisition is low, given the age of the in place leases, complete tenant expiration within the next eight years should allow us to exceed our longer term return requirements.
And the properties location in the wealthy, high barrier Norwalk market puts it in close proximity to the remainder of our Connecticut portfolio. In fact, sitting directly between two of our best assets means we have great clarity on the market rents and tenant demand which certainly helped us in our underwriting.
The market is very tough right now, but we continue to find a flow of one-off opportunities to make strategic and economic sense for our company. All this investing and redevelopment activity will require funding, and I'm happy say that our balance sheet has probably never been in better shape.
We've closed on a private placement of unsecured bond this quarter that effectively addresses the remainder of unsecured debt, maturing between now and the end of 2018. And continue to use our ATM to generate the equity we'll need to keep the balance sheet in its current low leverage condition.
Matt will provide some additional color on our financial picture shortly.
Finally, I'd like touch again on the topic of sustainability. We often refer to the strong long-term same-store NOI growth and large redevelopment opportunities provided by a high quality portfolio has been the key to our sustainable growth. And while this is certainly the case, these result are simply the outcome of an enormous focus on healthy long-term relationships with key constituencies across our business from our tenant who pay rent to the employees who collect account for and sign leases, and certainly the communities who rightfully have a say as to what we do with assets that are located in their midst.
Like some of the redevelopment activity that I described above, these efforts may not be highly visible to our investors, but they are just as critical to our success. To make sure we adequately communicate the importance of this work as well as its substance, I'm proud to highlight our recently published annual sustainability report. This is our seventh corporate responsibility report prepared using GRI, G for guidelines. The report reflects progress throughout our organization and ensuring it's publication is the heavy responsibility of Joe Lopez, our Senior Vice President of Property Management, who passionately rises to the challenge every year.
Our report was posted to our website yesterday under our Sustainability tab, and I encourage you all to take a look at where our corporate culture places its values and what we result we achieved. Thank you very much Joe for all your effort in this incredibly important work.
I'll close by reiterating our main message when we unveiled our 10-year business plan last December. Equity One has the right assets, we have the right people and we have the right investment opportunities to produce meaningful and sustainable growth in shareholder value for years to come.
And with that, I will turn the call over to Mike Makinen for his remarks on our operating performance.
Thank you, David. I'm pleased to report another quarter of great operating results for Equity One. During the quarter we were able to maintain strong occupancy, increase rent in both new and renewed tenant leases and continue robust same-store NOI growth. While we are pleased with our overall operating result, we're most excited about the continued momentum in shop leasing, most notably in Florida where occupancy increased another 80 basis point in just the last 90 days.
Before I turn the detailed operating results, let me address our exposure to Sport Authority. As a reminder, we had a total of four Sport Authority stores in our portfolio. Two in Westbury, New York, one in Broadway Plaza in the Bronx, and one in Plaza Escuela in Walnut Creek, California. During the second quarter, all leases were rejected with the exception of the Westbury Plaza lease, which we also expect to be rejected by the end of July.
Despite the number of landlords with newly vacant boxes to market, the combined quality of our leasing team and our great location meant that we successfully executed leases for spaces at Gallery at Westbury and Broadway Plaza with Bassett Furniture and Bob's Discount Furniture within days of receiving the space.
These leases combined will generate slightly higher rent for us than the old t Sport Authority leases with minimal tenant allowance. As a result, we hope to have both stores opened some time in December or early 2017.
We are continuing to work with multiple prospects for Plaza Escuela and hope to be able to announce a new tenant there in the near future. We're also in advanced LOI negotiations with two perspective replacement tenants at Westbury Plaza.
From an overall quarterly leasing perspective, despite some press headlines to the contrary, we continue to see nearly unprecedented tenant demand, and we successfully executed approximately 516,000 square feet of new leases, renewals and options which remain similar to the pace we've reported for the last two years.
Overall core occupancy for the quarter saw an increase of 10 basis points since the first quarter, settling at 96.3%. Same-site occupancy was also 96.3%, down only 10 basis points since the first quarter in spite of the vacancy triggered by the Plaza Escuela Sports Authority termination.
As I mentioned, shop leasing remains a great strength for Equity One. During the second quarter, we increased consolidated shop occupancy to 90.3%, up 90 basis points over the first quarter and 360 basis points over last year.
Florida has seen the strongest results with ending shop occupancy of 89% of 424 basis points year-over-year increase. Results like these tend to raise the same question every quarter about whether we are approaching structural vacancy, and the answer this quarter is unchanged. Even with shop occupancy now at around 90%, we believe we've got a lot of runway ahead of us as long as the economy remains stable.
The strength of the leasing environment also shows through our leasing spread results. New lease rent spreads for same space leases were 6.4%, a bit below the double digit trend over the last couple of years. But like occupancy, this number is affected by the Sports Authority, which had recently at high rents. If we removes the two previously mentioned executed leases, the same space new lease spread increases to 12.2%, which is much more in line with our recent history. Unlike before, we continue to generate these spread without sacrificing credit quality or merchandise mix.
Negotiated renewals also saw a positive rent spread of 7.3% and tenant exercised options saw a rent spread of 7.4% further demonstrating our tenant's desire to continue operating in our centers.
Anchor leasing momentum also remained strong in our redevelopment properties. During the second quarter, we executed a lease with TJ Maxx at Serramonte Center in Daly City, California, rounding out the lineup of six junior box tenants in the outparcel redevelopment components of the project.
We also executed a lease with Forever 21 Red at Broadway Plaza in the Bronx. That lease along with the previously mentioned Bob Discount Furniture lease, brings occupancy for the project to 92%.
One final item that should be mentioned is that, as we continue to work towards solidifying control of our redevelopment properties, we will be allowing certain lease expirations that would otherwise be simple to renew or refill, to remain longer term vacancies. Specifically, we expect expirations of an Office Depot at Potrero Center in San Francisco, and a Cost Plus World Market store at Piedmont Peachtree in Atlanta to become vacant over the next couple of quarters, as we preserved redevelopment optionality for ourselves at these assets.
While this, along with the Sports Authority vacancy, could cause some volatility in our reported occupancies statistic, we believe it's the right call for shareholder value and the impact is included in our budget.
At this point, I'll turn the call over to our Chief financial Officer, Matt Ostrower.
Thank you, Mike. I'll spend a few minutes putting our results in the context and then make some comments on our balance sheet. Core FFO per diluted share in the second quarter was $0.35, a 3% increase from the second quarter of 2015. This growth was fuelled by 6.1% same-store NOI growth including redevelopment, lower interest expense from the financing of higher interest rate debt, contribution from deliveries in our development and redevelopment pipeline, and ongoing G&A cost controls.
Offsetting these positive factors were one, a higher share count following issuance under our ATM program; two, a $740,000 decline in the amortization of the low market rents due to a large one-time write-off last year and the impact from the signing of the new Giant lease; three, a $1.1 million decline in lease termination fees; and four, a $400,000 declined in management fees following the unwinding of the GRI joint venture.
Bad debt expense most of which is included in the same-store NOI growth I just mentioned declined by the $900,000 year-over-year. This might be surprising given our exposure to the Sports Authority, business in fact the categorization of 2Q rent and certain CAM expenses as post-bankruptcy expenses allowed us to receive payment of most of these items in the second quarter, as well as payment of most of March rents.
Our 2Q total bad debt of $490,000 this quarter was roughly half from Sports Authority and half from the lingering effect of a bankruptcy of a large local tenant in one of our Florida properties. The much larger $1.4 million bad debt expense in 2Q 2015 arose from a range of different sources rather than a single high profiled tenant bankruptcy.
While total bad debt fell on a year-over-year basis, bad debt in the same-store pool excluding redevelopments actually rose from $343,000 in 2Q 2015 to $481,000 in 2Q 2016. We expect the drag from bad debt expense to be replaced by nearly a full quarter of vacancy from our four Sports Authority stores in the third quarter, something I'll touch on when I discuss assumption behind our guidance in a moment.
It's worth spending a moment on the difference between the 4.5% same-store growth we reported excluding redevelopments and 6.1% same-store growth including redevelopments. The higher growth of a larger pool including redevelopments is largely attributable to the 14.4% same-store NOI growth of the redevelopment assets taken in isolation, a much higher growth rate than last quarter. This acceleration is largely the product of a full quarter impact of Barney's in Manhattan as compared to only a month or so in the first quarter.
Other development assets like Boynton Plaza, Lake Mary Centre, and Kirkman Shoppes continued to experience stronger acceleration in NOI, but these are offset by large declines from Medford, Serramonte Center and Point Royale.
I'd now like to walk through some key points on the balance sheet. The headline here is that our debt-to-EBITDA and coverage metrics were all generally stable or improved sequentially, but there is a fair amount of activity behind these results. First, we received, the first $100 million installment of the $200 million private note placement we announced earlier this year. We'll receive the second $100 million installment in third quarter, the proceeds of which will be used to repay the final portion of our outstanding 2017 bonds.
Following these transactions, our next unsecured debt maturity outside of the line of credit itself is our $250 million 2019 term loan.
We continue to focus on reducing our exposure to mortgage debt wherever possible, paying down two loans for approximately $30 million in the quarter. We expect to continue repaying secured loans over the coming 12 months and hope to reduce our mortgage to total debt ratio to below 20%.
On the equity side, we continue to utilize our ATM during the second quarter, issuing $866,000 shares at a weighted average price of almost $29.50. Proceeds from these sales will be used to fund the equity portion of our ongoing robust redevelopment spending.
As we discussed in our Investor Day, we expect to reduce our needs for new equity over time, as EBITDA from completed redevelopment commences.
Looking forward, I'd like to address our unchanged 2016 core FFO per share guidance of $1.36 to $1.40 per share. The key operating assumptions that we provide in reaching this guidance also remained unchanged an important accomplishment in the face of vacancy and bad debt expense arising from the Sport Authority bankruptcy.
There are few specific issues worth highlighting here. First, we expect some deceleration of results through the remainder of the year, as we feel the impact of vacancy at all four Sports Authority locations as well as the box Mike mentioned at Potrero. Strength in the rest of the portfolio should mute, but not eliminate this impact, so we could experience lower same-store NOI growth and potentially a sequential decline in FFO per share and occupancy in the third quarter.
In our last call, I mentioned that the vacancy at our Westbury Plaza store raised the risk of our FFO falling below the mid-point of our guidance, but strength and other factors, especially small shop leasing is compensating for this lost revenue, so we are retaining both our FFO guidance and same store NOI assumption.
Second, while possible that additional acquisitions occur through the rest of the year, the mid-point of our guidance assumes nothing additional beyond the $30 million Norwalk transaction.
With that, I'd like to hand the call over to the operator for questions. Operator?
[Operator Instructions] The first question comes from Christy McElroy of Citigroup. Please go ahead.
Hi, good morning everyone. Just following up on Norwalk, realizing its low, but from a modeling perspective, can you provide the cap rate and, how are you looking at this asset from a 10-year IRR perspective, as you are able to sort of eventually recapture the Walmart?
Good morning, Christy. From a cap rate perspective there is some percentage rent in it, so I think it's safe to say there's a low-single digit cap rate which is consistent with what you've seen us do both in Cambridge as well as few years ago in Bethesda, Maryland. From an IRR perspective, give that fact that the tenant sales are so high, number one. Number two, we have executed LOIs at our properties nearby for large spaces to give us accurate market rents such that's it's fairly easy for us to underwrite a high-single digit IRR over a 10-year hold.
Then just on the ATM having issued during the quarter at $29.40 on average, you show they are now higher than that, how are you thinking about your cost of equity today, further issuance in the second half and then the opportunity that might give you to do additional deals? I know you said no more acquisitions and guidance, but just generally how are you thinking about your cost of capital?
I mean the reality is that the cost of capital is allowing deals to get done and we're constantly in the market looking for properties, but we also have a very specific business plans. We have a portfolio that half of the anchors expire in next 15 years, which means that our company is going to continue to see highly valuable real estate become unencumbered by tenant restrictions over the next decade and half. And finding additional properties that have that business thesis is very important to us. It does allow us to be more aggressive on pricing when we find those types of asset. So, I think you will see it continue to find one-off properties that have the future potential and the kind of reduced risk for down side in near term. We will be aggressive when we find properties we like, like we were in Norwalk and we certainly were in Cambridge, but I don't think you will see us go into a prolific acquisition spree on a spread investing thesis simply because of where our stock is at.
A - Matt Ostrower
And on the ATM, Christie, I think I'd just say that we'll look at our, we'll look at where the stock price is. We're going to be opportunistic about this and the core principle behind the ATM issuance is really matching sources and uses, particularly as it relates to redevelopment. So, at the beginning stages we still have some equity needs.
The next question comes from Jay Carlington of Green Street Advisors. Please go ahead.
Matt, maybe just a follow-up on that. Has [indiscernible] been participating in the ATM to maintain its ownership there?
So far they have not.
Okay how does that get disclosed?
That is a good question. I don't know off the top of my head. I'll come back to you. I'm sure we'll arrange for some.
We would disclose in in our quarterly earnings report.
We can touch base later. Maybe just on Medford, real quick I think you mentioned in the press lease that NOI decreased because of commencement activities there. Is the show stopping rent this quarter, and then can you may be give us an update on status of the redevelopment there may be expected timing on when you think you can start moving forward on that?
Yes sure. I think what mentioned is, was giving information on is at the, shops are paying rent a year ago, and so from the redevelopment perspective we are still kind of lapping a period in time where we used to have rent coming from the property. So, we proactively recaptured that last year. We've been going through an entitlement process. We were successful in rezoning of the property and a number of, what would you call it Bill, you say, there is a number of
Community Zone Board and Planning and Zoning Board approvals and we're currently and the city council is come back and asked us to address some planning concern. So we're working with that with the community and exciting project, great community.
Yes, I would say from a de-risking perspective, we're through a lot of the technical process. We have some variances in place and there is some lingering community issues that we need to work through in the next couple of months, and hopefully we'll have some more information for you shortly.
Okay. And May be just a quick on Barney's there. Was that the majority of the redevelopment contribution in the quarter and then is there a ballpark sales productivity number, you can give us on that store?
It was the majority of the contribution, so obviously a very big number which we pretty much disclosed to you guys given the ABR and the square footage. So, yes, that's the bulk of the contribution this quarter and the reason for the very high growth rate. We -- they will be reporting sales to annually. We've yet to receive anything official from them.
Okay. Thank you.
They should report to sometime early next year, I believe.
The next question comes from Ki Bin Kim of SunTrust. Please go ahead.
Ki Bin Kim
Thank you. Could you just explain upon your comments about seeing unprecedented kind of demand and some of the more willingness you are hearing from tenants and when it comes to redevelopment, and does it patina to the any certain centers like Piedmont or a Potrero?
What I can speak most directly to the activity that we've seen at Serramonte of late as we're in the earlier stages above Piedmont and Potrero. But with Serramonte what we're seeing there from a tenant demand perspective is that, it is viewed as the apex geographically of the market that is intended to be served and the demand there is actually quite easy to view, everybody is latching on to it and we're seeing the majority of the six anchor tenants we mentioned are actually being pulled and relocated from other centers in the area because of the confluence of everything that's going on there.
We're generally seeing a really strong amount of demand on the shop side as well particularly in Florida, and that's a wide range of tenant types, ranging from restaurants to medical to a lot of national franchises.
And Ki Bin on your other question, all of the projects that we presented in December at our Investor Day had ongoing tenant conversations, negotiations and idea sharing on how to unlock valuable both for the retailer and for the landlord. Those conversations continue, we are very excited and anxious to give some details, but at this point we're going to kind of refrain. We simply -- we're starting that most of the conversations with the city and with the tenants are going a little better than I would have expected based on historical precedent earlier in my career doing the same thing.
Ki Bin Kim
Okay, and in terms of small shop occupancy, obviously you guys have had really good success there. Just from a modeling perspective, 360 basis point of increase year-over-year, is that all cash flowing or is threesome more on the come in the second half? And given your visibility for the next six to 12 months, what is a reasonable assumption for where that goes in the next six to 12 month?
Ki Bin, just to be clear, when we say occupancy, I think you'll find this across most of the companies in the industry. When we say occupancy, we're actually talking about lease right, which is different than rent commencement, which is really when you start to see an income statement impact. If you look in the supplemental, we kind of give you the delta between the lease and the physical occupancy, which I think has been hovering around the 100 basis points pretty consistently for some time now. So, the leasing activity that Mike mentioned is really, as it relates to revenue, is kind of on the income right, it's kind of tell us, we've got this pipeline of revenue increase going on for a lease at next six month as these leases times turn into actual physical occupancy and rent commencement.
Your question about overall assumptions, we've been very clear about not giving a specific particularly inline occupancy target. Overall, the portfolio, I don't think you'll see the occupancy number change dramatically, but the inline piece, the shop piece, we continue to see momentum on, we continue to be optimistic about, the truth as we really don't know where peak is there, but we really sitting here today, the one thing we do know is we think it's significantly above where we sit today. So the pace of improvement that you are seeing is something that we're telegraphing to you and trying to be pretty clear we think that's the stainable as long of the economy hangs in there.
Ki Bin Kim
Okay thank you guys.
The next question comes from Craig Schmit of Bank of America. Please go ahead.
Hi I guess I'm staying on the small shop topic. I'm just wondering going forward is it going to be easier to fill the small shop space than the past or harder, I mean I guess is your -- from the scarcity value and harder may be these are less attractive spaces?
A little, good morning Craig, a little bit of both. There are some properties were you just simply can't help but the worst is the last, and it's a little bit difficult. On the other hand, the economy has been improving and supply and demand characteristics have changed such that, last year's dogs are this year's better looking faces. And so, we've seen a lot of positive momentum. But if I were to pull back and Mike and I and Thomas, lock on looking at every shop vacancy that's left, the beauty of company like this is the – there's only 112 properties, and with a shop occupancy of 90% you're talking about not that many spaces of inventory and as we look through them, one of the surprising factors last quarter that we realized was that most of the shop square footage was in properties that we had been working anchor repositioning, not technical redevelopments, but anchor repositioning. You know tearing down a Kmart and putting in higher quality retailer, and Albertsons leaves and the Fresh Market goes in, the Trader Joe's goes in, and those properties tend to be in our better demographics like Connecticut, California, Dade County. And once those anchors got open in the last 12 months, the shops that we're remaining suddenly became much higher in value. So, it leaved half of the shops. I'm seeing if Mike's going to nod his head in agreement or not, but most of the -- at least half of the remaining shops are in properties that I would say are going to be easier to lease than spaces where maybe two years ago.
And will the greater lift be in Florida or going to be in some of these other, with anchor repositioning?
The Florida is at 89% and the rest of the portfolio is that 90% on shop occupancies, so we feel that we have to most anchor or our shop space in Florida. So I would anticipate that Florida would be where we see the greatest momentum.
Okay thank you.
Our next question comes from Vincent Chao of Deutsche Bank. Please go ahead.
Good morning everyone. Just adjusting with the NOI here for a second, just I know they were very small in the quarter, but the two dispositions that happened, they saw that they are very low prices. I was just curious, if you could just kind of talk about what was really wrong with those assets, I mean obviously they are non-core, but anything else going on that would cause them to sell for such a low prices?
They are very small properties with low NOI per square foot for sure, and they are in tertiary markets. And I think that, when you talk about the power of operation team being able to really drive rent, it does depend heavily on demographic and your ability to be practice on your properties and when there are very small properties with low single-digit rent per square foot across the entire asset in tertiary markets, the for ownership of those properties is somewhat low. And for us, frankly was more of the distraction than anything else.
So, I mean I think when you add demographics, low average rents and tertiary markets, you end up with cap rates and values that simply aren't commensurate with the rest of the portfolio.
Okay, so there is nothing specific to those assets, that's fairly reflective of that type of property that you just described?
No it's really, it's really size and Tom can comment more on this. It's size and sub market.
I think you covered it completely.
That's fine. I know it was small, just curious. And then just maybe going to Staples and Office Depot, just curious how those conversations are going now post and merger breakup?
Before I let Mike answer that question, one thing that you should aware of is that when you see our shop occupancy success continue, there will continue to be properties like the small ones that we dispossessed off that over time say to ourselves, we've achieved a very high occupancy and shops in this property might be tertiary, secondary market. There is not very many of them left. But some recycling of the portfolio is going to continue on a one-off basis.
Just a couple of comments on the Office Depot, Staples situation, much like Sports Authority, when we stared to become concerned about the longevity of that particular category and that particular brand. We took a deep dive into all of those locations and we've done exact same thing with the Office Depot and Staples component in the portfolio. We've got 15 in all, 8 Office Depot and 7 Staples, and we've gone through every one of them looked at the trade area characteristic, done a void analysis and we've really assessed our vulnerability, and we've also looked at a mark-to-market where we think we could go and we definitely think that aggregately this group of stores is slightly below market and we feel actually encouraged about a lot of these locations, the majority of locations actually would be nice ones to get back if that were to occur. But we're well ahead of the game on this one and we're very focused on the category.
I guess have the conversations changed at with them at all since the break-up?
Not really. No, I mean we're having lot of conversation with specific one-off store location issues, but for the most part, no there hasn't been any specific change.
Okay. Thank you.
The next question comes from Jeff Donnelly of Wells Fargo. Please go ahead.
Good morning guys. I just want to circle back to Norwalk, I apologize if I missed this in your disclosures. But are you able to share the sales productivity of that store and does Walmart have any options at the end of its lease?
They have no options at the end of their lease, and unfortunately their lease restricts us from discussing this out.
But, obviously they were strong I guess on the percentage rents, but, I just want to clarify, do you have a preference for whether or not you want them to renew in that 2024 time frame, or do you see more value coming from dividing this base?
That is a great topic of discourse within our executive suite. It is going to be curious as you get closer to the eight year mark, even five year out, what we historically have seen, and we're seeing in Piedmont right now where Kroger run out of term in 2019 and 2020. The tenant picks up the phone and starts calling, and that's the opposite situation of course. If you are much longer out and the landlord is calling and asking to do something, so I would expect the conversation with Walmart would start way before their natural expiration and those would be initiated by the tenant. It's going to a mathematical study for us to figure out whether it's a better idea to renew a very, very healthy good credit tenant or whether we can reallocate that square footage to a higher rent. Luckily since this property sits right between two of our others and we have recent LOI comps, we have the current market for that size space or you know junior anchors, and we feel like we can run the analysis pretty simply. So, I don't know the answer is the long-answer. It will be fun to figure it out.
Then I guess switching coasts, Potrero, I know it is not a big office component, but its unique, as is contemplated, it's going to have set of large full floor office space. When do you think about marketing that office space in San Francisco? Just curious on the timing perspective when you kind of start doing that or have you already?
Well the Potrero project is a tough one because, it's one of these real-estate projects that would be a very long term development cycle especially given tenant consents, State of California environmental review, City of San Francisco local community meetings. I would suggest that on entitlement process of loan in the city San Francisco it's multiply years, three to four years.
And the office component of our master plan is only 49,000 square feet. As of right now I think it's the only 49,000 square foot space that's contemplated on the single floor and entire trade area. So it is somewhat unique. I don't see much risk in the office component. It's not that large of a piece and frankly over the entitlement period, it can change. So, I think we're years away from really being concerned about which is why we really have not spent a lot of time, worried or even analyzing the office or multifamily job market, and so forth in San Francisco. We're just -- we're too far away. We have a really great piece of real estate, it can be worth a lot of money over time, but it's really not within this cycle right now.
And just one last question, do you have specific estimate of the anticipated financial impact and maybe duration of that I'll call it managed vacancy you guys referenced at Potrero and [indiscernible]?
We'll have to get back to you on that. I think it depends on…
The economic impact of the two vacancies that we're going to hold in our redevelopment properties.
It depends on how -- what we do from temporary tenant standpoint
Yes I'm not property give out an exact number at this point.
The next question comes from Collin Mings of Raymond James. Go ahead, please.
Hey good morning.
First question from me just on either of your stop and shops, are those being impacted by the Delhaize merger, or just may be any other thoughts as it relates to the your properties, now that some of those divestures have been announced?
No we don't believe that to be the case.
Okay and then I apologize if I missed it, but just on the two Sports Authority location under negotiation, how are you expecting those rents to comparative that what's Sport Authority was paying?
We're expecting them to both be at or slightly above current Sports Authority rent.
Okay, and then going back to Christie's question earlier, just as you think about the acquisition opportunities I know David, you made a few remarks about stills seeing kind of a selective one-off opportunities. Can you maybe just provide a little bit more color on may be things that are doing due diligence on or anything else on that pipeline?
I'm struggling to come up something specific. We're constantly in the market. We have an awfully good team underneath Tom and we're constantly underwriting assets. But we have a very specific profile of what we want to see and we've lost a few we've won a few, but in the end our business plan doesn't require an enormous some out of external growth, simply because if you look at our capital allocation choices, we have a lot more surety in pre-leasing fully entitled redevelopment asset that we own and we can pace out the timing, and so we're more incentive to make that were prudently putting capital to work at high returns. Having said that, every now and then we are finding acquisitions that make sense for our business plan and we'll continue to do so.
Okay thanks David
And next question comes from Chris Lucas of Capital One. Please go ahead.
Yes good morning everybody. Just, I hope a quick question. On the joint ventures that you have, the -- it's a little bit of the portfolio, its' not a huge number, but I guess I was just curious as to how you guys are thinking about those at this point, whether there is opportunities there either to simplify your overall structure and/or add to the portfolio through acquiring your part of interest and/or dissolving some this partnerships? What's the thought process right now with those?
Well we have a recent history of unwindings in joint ventures and buying attractive properties at attractive prices out of those joint ventures. The joint ventures that are left, I don't see that as being a large part of our business plan. The assets that are in those joint venture are little different, little more commodity like then what we have in our core portfolio. So, I don't see them as being of source of deal flow.
And on the expansion and change in those joint ventures, they were put together with a certain cost of capital years ago and the market has changed, and so I just don't see a lot of change in the small amount of JVs we have left.
Great, Thank you.
The next question comes from Mike Muller of JP Morgan. Please go ahead.
Thanks. Matt, just curious, does guidance contemplate any additional ATM usage in the second half of the year?
Yes, I think I said before, it depends in the certain sense. There is lot of different ways you can get tour our number, so we are not saying definitely that we're going to issue equity, but I've been clear that these early stages of the redevelopment process, we do have some equity needs. It's a long way of saying generally, yes.
Generally, little bit. Okay. That was it. Thank you.
This concludes our question and answer session. I would now like to turn the conference back over to David Lukes, for closing remarks.
Thank you all very much for joining us and we will talk to you next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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