Retail Properties of America's (RPAI) CEO Steve Grimes on Q4 2016 Results - Earnings Call Transcript

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Retail Properties of America, Inc. (NYSE:RPAI) Q4 2016 Earnings Conference Call February 15, 2017 11:00 AM ET

Executives

Mike Fitzmaurice - VP, Capital Markets & IR

Steve Grimes - President & CEO

Heath Fear - EVP, CFO & Treasurer

Shane Garrison - EVP, COO & CIO

Analysts

Christy McElroy - Citigroup

Todd Thomas - KeyBanc Capital Markets

George Hoglund - Jefferies

Michael Mueller - JPMorgan

Chris Lucas - Capital One Southcoast

Operator

Welcome to the Retail Properties of America Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Fitzmaurice, Vice President, Capital Markets and Investor Relations. Thank you, sir. You may begin.

Mike Fitzmaurice

Thank you, operator and welcome to Retail Properties of America fourth quarter 2016 earnings conference call. In addition to the press release distributed last evening, we have posted a quarterly supplemental package with additional details on our results in the Invest section on our website at 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 anticipate, believes, expects and variations of such words or similar expressions. Actual results may differ materially from those described in any forward-looking statements, including in our guidance for 2017 and will be affected by a variety of risk factors that are beyond our control, including, without limitation, those set forth in our earnings release issued last night and the risk factors set forth in our most recent Form 10-K, 10-Q and other SEC filings.

As a reminder, forward-looking statements represent management's estimates as of today, February 15, 2017 and we assume no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Additionally, on this conference call we may refer to certain non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers and definition of these non-GAAP financial measures in our quarterly supplemental package and our earnings release which are available in the Invest section of our website at RPAI.com.

On today's call our speakers will be Steve Grimes, President and Chief Executive Officer; and Heath Fear, Executive Vice President, Chief Financial Officer and Treasurer; and Shane Garrison, Executive Vice President, Chief Operating Officer and Chief Investment Officer. After their prepared remarks, we will open up the call to your questions.

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

Steve Grimes

Thank you, Mike and thank you all for joining us today. Before looking ahead I want to recognize the tremendous efforts and accomplishments of the RPAI team in 2016. Operating FFO per share and same-store NOI growth ended the year at $1.09 and 3.5%, respectively, notwithstanding the velocity of our transactional activity and the earnings disruption caused by the Sports Authority bankruptcy. We traded nearly $550 million of non-target assets for over $400 million of assets in our highly sought after target markets at a cap rate differential of just 100 basis points.

Our target markets now make up nearly 70% of our ABR with an ADR per square foot of $19.21. At our last remaining office asset, Schaumburg Towers, we signed an anchor lease with Paylocity and two additional leases, putting us at 44% leased. We upsized and repriced our revolver originated a $200 million private placement in advance of the rise in treasury yields and retired the mortgage on our crown jewel asset, Southlake Town Square.

We hosted a best-in-class investor day, setting a new standard for transparency by unveiling a very detailed path towards the completion of our strategic plan. 2016 was a tremendous year for us by any and every measure. RPAI is on the offensive and we intend to keep it that way.

Our momentum from 2016 has cascaded into 2017. Since January 1 we have drawn on our $200 million seven-year term loan and we defeased the IW JV loan after the rise in treasuries for a total defeasance payment of $60 million, much lower than we originally anticipated. Taking into account this activity, our unencumbered NOI is 86% and our interest coverage ratio is 4.3 times.

On the transactional front, we acquired Main Street Promenade for $88 million at a cap rate of approximately 6% and to date we have $167 million of dispositions closed or under contract at a blended cap rate within our 2017 expectation of 6.5% to 7.5%. We're quite pleased with the volume of our transactional success so early in 2017. Nevertheless, we cannot ignore the seasonal sentiment regarding retail real estate that often rears its head during and just after the holidays.

E-commerce, shadow supply, retailer bankruptcies and rising interest rates; for the most part, these are familiar themes. The only new variable being a change in the administration. As a management team, we believe our obligation is to separate the headlines from the true headwinds.

So how are we looking at this upcoming year? To borrow a phrase from our fourth quarter 2015 earnings call, we're cautiously optimistic going into 2017.

We still see strong fundamentals in our economy. Unemployment is at its lowest point over the last decade. Consumer confidence and the Small Business Index is stable and relatively high. And retail sales were up 3.2% year over year. Any rise in rates should be accompanied by inflation, thereby allowing us to continue to drive rents in a low retail supply environment. But more importantly, our improved and focused portfolio is positioned to capture rental growth and densification opportunities driven by new retail paradigms.

The tenant bankruptcies in 2016 were indicative of specific retailer obsolescence and not predictive of a chronic trend. Retailers file bankruptcy. It's part of the business and that's why we continue to play offense with at-risk categories and proactively take back space and re-lease it to relevant, more dynamic retailers that are better positioned to drive sales and experience at our highly-regarded assets.

Full-line department stores will continue to close stores, but by design, we have no direct exposure to Sears, Kmart, JCPenney and for that matter, Macy's. Furthermore, given the high quality of our assets, the capabilities of our leasing platform and the minimal five-mile store closure overlap, we feel uniquely positioned to address any resulting shadow supply.

We will once again be net sellers in 2017 and are planning $375 million to $475 million of acquisitions and $800 million to $900 million of dispositions. As I mentioned earlier, we're off to a very strong start on the transactional front. In the wake of the election, we saw a little volatility with levered buyers revisiting their underwriting models to reflect the rise in rates and unlevered buyers taking a wait-and-see approach.

The good news is that we're seeing some of that year-end caution dissipate. Treasuries appear to be range-bound, the CMBS shops are managing risk retention, banks and life insurance companies have healthy real estate allocations and the treasury to cap rate spread is still favorable. Bottom line, we don't see any fundamental obstacles to a productive 2017 outside of our lack of detail with respect to the agenda of the new administration and the collective angst of the real estate veterans, reminding us that the cycle is getting lengthy.

A large measure of our confidence rests on the fact that we have high-quality assets to sell into the marketplace. Except for location, we're happy to own each and every asset that sits outside of our target markets. For this reason, we have no motivation to abandon our core capital allocation principles. We will remain disciplined in our approach to both acquisitions and dispositions and we will leverage our superior market optics to achieve our transactional goals.

Our operational objectives for 2017 will sound familiar to many of you given the visibility that we provided at our investor day. We expect operating FFO of $1.025 per share at the midpoint which is down $0.065 from 2016, largely a result of our 2016 and anticipated 2017 transactional activity, including the anticipated sale of Schaumburg Towers.

We're assuming same-store NOI growth of 2% to 3%. While this midpoint is just below our long term expectation of 3%, this is directly related to a difficult year-over-year comparison, primarily to the lower bad debt expense that we experienced in 2016 due to the recovery of Circuit City bankruptcy proceeds. We will continue to right-size our investment in G&A in order to align with the size of the portfolio, but also remain competitive with respect to attracting and retaining top talent. We expect G&A to be $43 million at the midpoint which is down roughly $600,000 over 2016 after exclusion of acquisition costs.

And with that, I would like to turn the call over to Heath to discuss our financial results and 2017 guidance in detail.

Heath Fear

Thank you, Steve. Operating FFO for the fourth quarter was $0.25 per share compared to $0.26 per share in the same period in 2015, driven primarily by an increase in same-store NOI of $0.01 and lower G&A of $0.01, offset by lower NOI from other investment properties of $0.03 due to our capital recycling activities.

Operating FFO for the full-year was $1.09 per share compared to $1.06 per share in the same period in 2015. The year-over-year change in operating FFO was primarily driven by a decrease in interest expense of $0.07, an increase in same-store NOI of $0.05 and a decrease in G&A of $0.015, partially offset by lower NOI from other investment properties of $0.095 as a result of our capital recycling activities.

Same-store NOI growth decelerated as anticipated to 1.9% during the fourth quarter, resulting in 3.5% growth for the full year. Rental income, including base, percentage and specialty rent, were consistent contributors to same-store NOI over the course of 2016, driving 290 and 245 basis points of same-store NOI growth in both the fourth quarter and full year, respectively.

While net recoveries and other property income detracted approximately 30 basis points from same-store NOI growth in the fourth quarter, these same items contributed approximately 70 basis points for full year 2016. Bad debt expense detracted 70 basis points of same-store NOI growth in the fourth quarter, but was a contributor of 35 basis points for the full year, driven by the recovery of unanticipated Circuit City proceeds.

Throughout the year we received $3.3 million of bankruptcy proceeds from Circuit City, of which $2.4 million was recognized as termination fee income, while the remaining $900,000 was recognized as bad debt recovery within same-store NOI. Also, the quarterly impact of same-store NOI growth from Sports Authority bankruptcy was 150 basis points or $1.3 million, while the full-year impact was 90 basis points or $2.8 million. Similarly, the quarterly earnings impact from Sports Authority was $1.4 million, while the full-year impact was $3.5 million.

For 2016 and the early part of 2017, our capital raising and allocation activities have been intensely focused on maintaining maximum flexibility and setting the stage for the accelerated completion of our strategic plan. On the capital-raising front, we repriced and upsized our revolver, closed and obtained funding on the seven-year $200 million unsecured term loan and priced a $200 million private placement transaction well in advance of the rise in treasuries.

On the allocation front, we extinguished $737 million of mortgage debt with a weighted average interest of 6.52%. This includes the cross collateralized $379 million IW JV loan that was defeased at a cost of $60 million, well below the $83 million that we shared at our investor day. This transaction alone unencumbered 45 assets, 35 of which are located outside of our target markets.

The progress we have made on the balance sheet is nothing short of remarkable and positions us well for the acceleration of our strategic plan. Taking into account our 2016 and early 2017 balance sheet activities, our credit facility leverage ratio is 34%. The average duration of our remaining debt, assuming the exercise of extension options, is approximately six years and our weighted average interest rate is 3.48%.

Through the end of 2019 we have only $89 million of debt maturing, assuming we exercise all available options. Well-positioned is an understatement. Our transactional sources and uses for 2017 are generally consistent with the detail we shared at our investor day. The $850 million in proceeds from our disposition activity at the midpoint, the $200 million in term loan proceeds and the availability under our revolver, have or will be generally applied as follows.

We have paid off the $379 million IW JV loan and the associated $60 million defeasance penalty. We expect to pay off an additional $74 million of mortgage debt, including amortization. We expect to purchase $425 million of acquisitions at the midpoint. We expect to pay off the $200 million 2018 term loan and we expect to redeem our $135 million of 7% preferred equity, $1.3 billion in, $1.3 billion out.

As Steve mentioned, our incredible success in 2016 has had the effect of setting a challenging year-over-year comparison for our 2017 same-store NOI growth. The most encouraging news is at the midpoint of our same-store NOI growth assumption range of 2% to 3% we expect that strong top-line rental income will be the primary driver of our growth, while an increase in bad debt will be a primary detractor.

It's important to note that the increase in bad debt is not reflective of any tenant-specific concern. It reflects the unfavorable comparison of our extremely low 2016 bad debt, as buoyed by the Circuit City proceeds. In addition to the bad debt differential, in 2017 we anticipate 35 basis points of spillover disruption from the Sports Authority bankruptcy and 30 basis points of disruption associated with the Golfsmith bankruptcy at our Tysons corner asset.

Needless to say, our 2017 same-store NOI growth assumption of 2% to 3% speaks volumes about the quality and resiliency of our portfolio. Our 2017 operating FFO guidance of $1 to $1.05 is was very much in line with what we presented at our investor day. In last night's release we provided a reconciliation from our reported 2016 operating FFO of $1.09 per share to our expected guidance range which is $1.025 at the midpoint.

Year over year at the midpoint, the primary driver to the $0.14 of dilution related to our 2016 and 2017 transactional activity; the $0.07 of dilution from Schaumburg Towers, partially offset by $0.135 of interest expense savings; $0.03 of same-store NOI growth; and $0.005 of G&A savings. Furthermore, we anticipate $0.025 of dilution attributable to our planned redevelopment activities, lease termination fees and lower non-cash items.

Please note the following additional considerations with respect to our guidance. First, consistent with our historical practice, our model assumes bad debt of approximately 50 basis points of same-store revenue which translates into 70 basis points of same-store NOI. And we do not forecast speculative lease termination fee income.

Second, the range of dilution related to our 2017 planned transaction activity reflects potential variability in the timing of transactions and the composition of our disposition and acquisition pools. In 2017, we expect G&A to be in the range of $42 million to $44 million.

Please note that effective October of 2016, we elected to early adopt a new business combination accounting guidance which resulted in $725,000 of acquisition costs being capitalized in the fourth quarter of 2016 instead of being expensed in G&A. We expect that our acquisition costs will qualify for capitalization going forward.

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

Shane Garrison

Thank you, Heath and good morning, everyone. Today I will review our operational and transactional performance for 2016 and provide some additional details on our 2017 outlook. Overall, operational performance was excellent in 2016. Despite the Sports Authority headwinds, our retail occupancy rate ended the year at 94.3%, up 170 basis points sequentially. This was primarily driven by positive net absorption as we continue to experience the benefits associated with our 2015 remerchandising activity and notable improvement in demand from small shop tenants.

In fact, over 95% of the new retail leases signed during the fourth quarter were for small shop space, resulting in a small shop lease rate of 91.2% for the same-store pool and 89.9% for the retail portfolio, up sequentially 80 and 100 basis points, respectively. Based on our progress to date, we believe small shop occupancy will stabilize at about 92% by the end of the year which is expected to be primarily driven by organic leasing activity as the disposition pool is projected to generally be occupancy-neutral for 2017.

Against the backdrop of a supply-constrained environment, we continue to establish a stronger growth profile through our leasing and transaction activity. I am often asked what our primary focal point is when signing a new lease, contractual rent increases or re-leasing spreads? The answer is both and they need to be looked at together to really understand and appreciate the continued onus on viable, forward cash flow growth within our leases.

For the year, we signed 540 leases, representing approximately 3.3 million square feet of GLA with comparable blended re-leasing spreads of 7.5%. 60% of these leases contain contractual annual rent increases of approximately 225 basis points, compared to our multitenant portfolio that is now approaching 100 basis points.

Additionally, the properties acquired during 2016 contained contractual annual rent increases of approximately 135 basis points, as well as numerous densification opportunities. All are strong indicatives of the type of growth profile you should expect as we continue to transform our portfolio.

In the fourth quarter, we took another significant step toward our goal of maximizing value and monetizing the newly-branded Schaumburg Towers which was previously known as Zurich Towers. We executed two additional leases totaling approximately 78,000 square feet, with blended 28% re-leasing spreads. Similar to the anchor lease we signed last year, this re-leasing spread validates the quality and location of this Class A office building.

To date, we have re-leased 44% of the available space and remain focused on signing an additional 100,000 to 200,000 square feet to position the asset for an acceptable liquidity event. We continue to have excellent velocity and numerous lease discussions and, as a result, remain confident in our ability to execute on the sale of this asset by the end of 2017. We look forward to quarterly updates throughout the year.

In regard to transactions, we ended 2016 with $543 million of dispositions with a blended cap rate of approximately 6.7%. As Steve touched on, we're off to a strong start with respect to our 2017 disposition goal of $800 million to $900 million. As of today, approximately $167 million of dispositions have already closed or are under contract. In addition, we have approximately $300 million in the market.

While the disposition market is more selective today, our thesis and execution around monetizing the riskiest assets and markets in the early years of our plan was spot on. The benefits of that strategy will continue to become more prevalent in regard to execution, progress and lower overall dilution going forward as there remains depth to the buyer pool for our high-quality product.

As proof, the planned retail disposition pool is well-leased at 94.5%, generates grocer sales of $635 per square foot and has produced, on average, annual retail NOI growth of nearly 3% since 2012. As a result, we remain confident in our ability to execute on our 2017 asset sales and expect the blended cap rate on dispositions will be in the 6.5% to 7.5% range.

Our market knowledge and strong relationships with local owners and brokers continue to result in compelling acquisitions at disciplined risk-adjusted returns in a continued competitive environment. In 2016, acquisition activity totaled $408 million with a blended cap rate of approximately 5.7%.

We started 2017 where we left off in 2016 by acquiring MainStreet Promenade, a mixed-use property that sits in a Super Zip in downtown Naperville, just 30 miles west of Chicago. This property features 103,000 square feet of Class A retail and 79,000 square feet of office space, in addition to an adjacent vacant parcel that is entitled for up to 80,000 square feet of mixed-use GLA. The combination of a dense, affluent and highly-educated customer base all contribute to the long term success of this property.

This is another example of the type of experiential real estate that we acquire. It's where retailers want to be and where customers want to spend their time and money. As it relates to what remains in 2017, we're optimistic about our tangible deal flow and, as Steve noted, our acquisition goal is $375 million to $475 million. Year one blended cap rate is expected to be in the 5.5% to 6% range.

Lastly, as the portfolio geography shrinks and our core market focus becomes greater, our development opportunities continue to grow at a robust pace. In the fourth quarter alone we added over 450,000 square feet of opportunities and will continue to mine for additional prospects in both the existing and newly-acquired assets.

In regard to our more active projects, we're pleased to start the year with a couple of milestone moments. First, in cooperation with our partner, Avalon Bay, we received Architectural Review Board approval for our Towson Circle project in the Baltimore MSA which is an important step in gaining the full zoning approval that we expect to receive in the next few months.

Once we have full approval from the county, we will begin to transform this project into a vibrant mixed-use asset. We anticipate breaking ground in the third quarter of this year and I encourage you to take a look at our latest investor presentation on our website to see the latest renderings of our unique vision for the project.

Also in 2017, in regard to our Boulevard at The Cap Centre redevelopment in Washington, DC MSA, we closed on the transaction with the county in which we received the fee interest and approximately 50 acres of land that was previously subject to a long term ground lease. That, coupled with the certificate of need that was received from the state of Maryland for the hospital in the fourth quarter, effectively puts our long term plan in motion, positioning us to finalize our densification plans over the next 12 months.

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

Steve Grimes

Thanks, Heath and Shane, for your thorough reports and a special thanks to the RPAI team for delivering yet again compelling results. We're excited about entering the final years of our strategic plan and look forward to sharing progress with you throughout 2017. We very much appreciate all of your support and interest in our progress.

With that, I would like to turn the call back to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of Christy McElroy with Citi. Please proceed with your question.

Christy McElroy

Just given some of the dislocation in the markets that you towards the year-end, just to be clear, to what extent have you seen that improve in the first six weeks of the year such that you have that confidence that you will still be able to transact? Maybe you could give us a sense for expectations of timing of dispositions versus acquisitions throughout the year.

Shane Garrison

Morning, Christy; this is Shane. We did see a bit of dislocation at the end of 2016, specifically around the debt environment. As we talked about previously, most of our activity is secondary market in nature. We had one asset that was $60 million to $70 million that fell out largely due to debt reasons that we will push forward probably in 2017.

As far as our conviction in 2017 around $800 million to $900 million, call it $800 million in multitenant, the balance being Schaumburg Towers, we talked about in our prepared remarks the quality of the pool and I think that's what gives us conviction today. What we've seen from a volatility perspective really relates to B and C assets in B and C markets. We generally feel like we have A assets in B markets to trade today.

And from the constitution of the pool, we're 94%, 95% leased. We're $630-plus per square foot in grocery sales which I would argue would be accretive to almost any of our public peers. So it's not a quality issue; it's just a geography issue for us.

I would also add that what we see today as far as what is most marketable and liquid generally has a grocery component and this pool has 55%-plus, maybe 60%, of it has a grocer, either neighborhood or community; 3% to 4% of it on value is also single tenant.

So all that being said, we feel that, yes, there has been some volatility. But given the quality of the portfolio, we expect that to move in the 6.5% to 7% range or 6.5% to 7.5% cap range and feel we can get $800 million to $900 million.

Steve Grimes

Christy, this is Steve; just to add on to the dislocation that you are talking about. Obviously Shane spoke very clearly about the quality of the portfolio that we have to sell in the marketplace and that's something that we have been touting for the past several years. Obviously we sold the riskier assets first.

But Heath and I and a number of us have been having a number of conversations with the lending universe as well; not that we're in the market to borrow, but to understand what the buying universe might be facing. The CMBS market is ripe for originations. They managed the risk retention by syndicating as much as they could the tail end of 2016 and so we're hearing that they are very, very hungry to originate loans in 2017.

Couple that with the banks and the life companies that have pools of monies to lend, we feel as though the lending environment at this current time is pretty robust so that adds to the confidence that we have in executing in 2017.

Heath Fear

Christy, I would add, just to put some numbers around it. Last year the life companies did $80 billion which is $20 billion more than 2015 and I'm hearing from our life company folks that their allocations for real estate are actually more for this year.

In addition, in anticipation of all the disruption around risk retention which really didn't happen because a lot of your major shops are now dealing with risk retention very well, a lot of debt funds have been formed. For example, Prudential has a debt fund called Prudential Real Estate Debt Structures.

Their main purpose was to sort of fill this hole of CMBS and actually the CMBS hole is not created. So we actually have a lot of allocation, a lot of dollars out there in the debt market. So we're very encouraged at this point.

Christy McElroy

Okay, that's helpful. Then, Steve, just the share buybacks in the quarter, very small but they seem to make sense in the context that your balance sheet is in good shape, your stock trades at a meaningful NAV discount and you're projecting pretty meaningful net dispositions in the next 12 months. I know that the two-year plan is to delever with sale proceeds, but to what extent are share buybacks an option instead, if your stock continues to trade at this persistent discount?

Steve Grimes

Share buybacks are a real option for us. Obviously we greased the wheels, so to speak, at the tail end of last year; made sure that the program was functioning or could be functioning as designed and we proved that. Obviously at the beginning of this year we did lever up a little bit as a result of the takedown of the IW JV loan, so we want to get that back in check before we utilize the buyback program. But it certainly is a tool that we would use opportunistically in 2017 and 2018 as we're very much in that seller end of this marketplace.

Operator

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

Todd Thomas

Just a question for Heath. I know that there are a handful of retailers everyone is watching closely and conditions in retail are volatile overall. You had talked about the impact I guess for the Sports Authority and Golfsmith, what those will have on 2017 growth.

Can you just share with us how much is embedded in the range at the low end for future closings and what your expectation is for unannounced store closures in the portfolio throughout the year?

Heath Fear

Yes, Todd, we're not making any specific tenant assumptions in our guidance. As usual, we have 50 basis points of same-store revenues which translates into 70 basis points of same-store NOI, so at this point we're not going to bake in any specific items.

Shane Garrison

Todd, this is Shane. I would just add, on the Argus buildup we look at every asset, every lease, every quarter. And for tenants on the watchlist that come up in 2017 what we typically do - if they are in natural expiration, we typically budget them to not renew. So to the extent there are renewals for tenants, for example, in the office category, that would possibly take the edge off some of the minor bankruptcy filings.

Todd Thomas

Okay. Then following up on Christy's question. We've heard the cap rates have widened by about 50 basis points or so over the last six months, maybe a little more in some instances depending upon market and quality. I think you mentioned the range on dispositions, 6.5% to 7.5%, so about 50 basis points higher than the 6.5% to 7% range that you outlined at the investor day for dispositions.

Does that reflect a slight widening in cap rates over the last few months? Is that the right read? Maybe you can just talk about what you are seeing out there in terms of pricing a little bit more broadly. Then on the acquisition side I guess it was originally I guess a negative 100 basis point spread between the acquisition and disposition yields. Do you expect to be able to maintain that?

Shane Garrison

As we talked about a bit earlier, our midpoint is 25 basis points wider than it was at investor day, to your point and I think that reflects a lot of these secondary market movement largely driven by the cost of debt and speculation around future cost of debt.

That being said, I think there's been broader movement in B and C markets, especially for B and C assets. Again, I think we continue to believe we have A assets in B markets, so we're a little tighter than I think what the market has done broadly.

And more importantly, almost anything with a grocer in it today with sales call it north of 450 is very liquid and trades probably with a 6 handle, maybe a 7 at best. So a lot of that is what we - constitutes our disposition pool in 2017 and that's what continues to give us conviction around it.

Steve Grimes

One thing, Todd, to note on the disposition profile - I'm sorry, I'm not sure that this was answered in the previous question that either you asked or Christy asked. But the timing of dispositions, obviously we're a little bit front-end loaded on the dispositions. In large part because of the scale of the dispositions that we have to do, but also because we want to take advantage of this kind of fresh opportunity that we have in 2017.

Then I think we're, for the most part, kind of back ending, albeit with the exception of the Naperville asset that we just purchased some of the acquisitions. So we're probably looking for the acquisitions to be more of a second half as opposed to the front half of the year which also explains some of the dilution from the transactional timing that Heath mentioned in his opening remarks.

Todd Thomas

Okay, got it. Then just lastly on Zurich Towers or Schaumburg Towers, sorry. Can you just - two things. Can you just talk about how TIs came in for the two deals that you recently signed for the 78,000 square feet relative to expectations? And then the dilution in 2017 from Schaumburg Towers I think was expected to be around $0.06 a share. In guidance now it looks like it's at $0.07 a share. I guess what has changed there?

Shane Garrison

First on the dilution, we're now contemplating holding the asset till, call it, the end of November which is a bit longer than what we initially contemplated. So that's your, call it, added penny on the dilution side.

From a TI perspective, we're actually lower than we were on the Paylocity deal on these two - 10%, 15% I believe - so I think that bodes well. We're holding rent, 15% or so seems to be the market for large block space and we're also focused on driving annual rent bumps in that process.

So on the three spaces today we're 45% leased. The average lease term duration is about 10 years. We obviously have high-credit tenants in place.

We continue to show and be focused on at least one floor or larger space. We have not even gotten into smaller, call it, multitenant floor yet. To the extent we need to throughout the year we will do that, but I'm encouraged by the large blocks of space we continue to show. And we certainly expect to monetize this asset based on the velocity we see today at the end of the year.

Operator

[Operator Instructions]. Our next question comes from the line of George Hoglund with Jefferies. Please proceed with your question.

George Hoglund

Just one question on the acquisitions. I guess for the disposition side you seem pretty confident in being able to execute. Just wondering on the acquisition side what you're seeing out there and how confident are you in finding product that will meet your hurdles? And then also how do you balance the decision between property acquisitions and buying back stock?

Shane Garrison

I'll take the acquisitions and turn it over to Steve around broader capital allocation. We've got $125 million done, if you include the remainder of Loudon to close for the year. We're off and running; we're probably at a 6% cap, all things considered right now.

As far as the pipeline goes, we've got another $300 million or so we're looking at actively. But directly to your point or question, the market is much tighter than it was even in 2016 for the product we looked for. That being said, we will continue to rely on our connectivity at the local market level. That has largely drove our success over the last couple of years and we expect that to continue in 2017.

Steve Grimes

As for the buyback versus the acquisitions, George, obviously we look to see what sort of long term growth opportunities are with the acquisition, densification opportunities. Certainly real value creation that isn't there day one that potentially could be there in year two or three. So that obviously weighs heavily on our decision on whether we buy back shares of current today versus acquisition. All the while looking to make sure that we maintain dominance in the markets that we've targeted.

All of those things weigh into consideration. The investment committee take things very seriously when it comes to the looking - to the spending of money on acquisitions. But I do think that the buyback program is certainly a real option for us opportunistically as we look to sell down more than we're looking to acquire over the next two years.

Heath Fear

George, this is Heath. I will remind you and we said this during our investor day, that we can always delever. Another, obviously, important capital allocation tool is that we've got floating-rate debt that we can take down if we can't find the right acquisition.

Operator

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

Michael Mueller

I apologize if I missed this in the comments, but in looking at the redevelopment pipeline, the three projects listed in the South that have yet to start, what's a rough dollar investment for that bucket, first of all? Then as we look out over the next three to five years, where do you think the average spend on all those redevelopment activities pencils out to, on average?

Shane Garrison

Mike, this is Shane. I'm hesitant to give you a number project-specific on something we don't even have a rough configuration on right now. But I would tell you, just pointing at Cap Centre which is the most significant project right in front of us, that project in scope and density continues to grow.

We have crossed the most important hurdle as far as the hospital receiving the CON and closing on the land swap. The hospital is off to the races, call it, midyear with their plan and infrastructure and plan to go vertical, I believe, towards the end of the year and early 2018.

For us, sitting on 50 acres now with a hospital that is a Level 1 trauma center as well as a teaching hospital, we continue to have significant interest from a lot of peripheral uses, both hospitality and medical office as you would expect. But what has been more surprising to the upside has been the interest on the residential side. Six months ago we thought this site would hold probably 1,000 multifamily units. Today, based on current configuration and demand studies, we're closer to 2,000 units.

We're about 3,000 feet of retail and what is the unknown number is really the final demand around medical office and hospitality. So we continue to pencil that out.

But that is - the hospital alone is $700 million, so this project on our side is significant. What will ultimately depend - from spend on our end is obviously the end-of-the-day demand on multifamily and what the air rights value is net to us.

Merrifield we still expect to start in 2018, but again that is an air rights sale. We think the per-door air rights there, just as an indicative there, are north of $80,000 a door. So our net spend shouldn't be significant on a relative basis. Then, obviously, Tysons is several years out from there.

But that being said, we added 450,000 square feet this quarter to the pipeline at Southlake and Loudon, so we continue to expect - we would like to get to $40 million to $50 million on an annual run rate and we think that the pipeline that we have built bodes well for that going forward.

Operator

[Operator Instructions]. Our next question comes from the line of Chris Lucas with Capital One. Please proceed with your question.

Chris Lucas

Heath, if I could just dig into the same-store guidance a little bit of 2% to 3%. Is that reflective of just your long term core market hold or is that the whole portfolio? What do you do - how do you adjust for the assets you are expecting to sell?

Heath Fear

Again, the 2.5% midpoint guidance, that is toward the year-end pool, so that takes into account our planned dispositions over the course of 2017. And the 2.5% definitely does not reflect what we think is our long term stabilized growth. We said during our investor day that we thought 2.75% to 3.25% was a stabilized number for us.

Again, I would point again that the 2.5%, in light of the incredibly hard comp based on the bad debt, is a very, very good number for us. But again we think 2.75% to 3.25% is an organic stabilized number.

Operator

Mr. Grimes, we have no further questions at this time. I would like to turn the floor back over to you for closing comments.

Steve Grimes

Great, thank you all. We understand that the script was very long, so I would encourage you to get the transcript and certainly dissect it and come up with further questions. We're certainly available for any questions that you may have post call and I know that we will be seeing many of you at Citi or Wells conference coming up in the near term. So thanks again, have a great day. Appreciate your time.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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