Brixmor Property Group - Earnings Call - Q2 2017

Transcript

Speaker 0

Good morning, and welcome to the Brixmor Property Group, Inc. Second Quarter twenty seventeen Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Ms.

Stacy Slatter. Please go ahead.

Speaker 1

Thank you, operator, and thank you all for joining Brixmor's second quarter call. With me on the call today are Jim Taylor, Chief Executive Officer and President and Steve Gallagher, Senior Vice President and Chief Accounting Officer as well as Mark Horgan, Executive Vice President and Chief Investment Officer and Brian Finnegan, Executive Vice President, Leasing, who will be available for Q and A. Angela Ahman, Executive Vice President and Chief Financial Officer is on maternity leave and will return for our third quarter call. Before we begin, let me remind everyone that some of our comments today may contain forward looking statements that are based on certain assumptions and are subject to inherent risks and uncertainties as described in our SEC filings, and actual future results may differ materially. We assume no obligation to update any forward looking statements.

Also, we will refer today to certain non GAAP financial measures. Further information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in the earnings release and supplemental disclosure on the Investor Relations portion of our website. Given the number of participants on the call, we kindly ask that you limit your questions to one or two per person. If you have additional questions regarding the quarter, please re queue. At this time, it's my pleasure to turn the call over to our CEO, Jim Taylor.

Speaker 2

Thank you, Stacy. Good morning, everyone, and thank you for joining our call. I'm incredibly pleased with and grateful to the Brixmor team for yet another strong quarter of outperformance as we execute on our long term plan. There are a few points I'd like to highlight prior to turning the call over to Steve Gallagher for a more detailed discussion of our results and then to you for your questions. First, we and others continue to demonstrate that disruption in the retail environment can actually be beneficial.

We tip our hat to the recently reported strong results of our good friends at Kimco, Weingarten and Kite, which underscore the broader truth that demand to be in well located open air centers remain strong. In fact, this quarter's analysis by our national accounts team of over 150 tenants across Open Air segments such as grocery, off price, fitness, entertainment, home goods, restaurant, health and beauty and others indicated plans to open up over 12,500 new stores in the next twelve months. And importantly, that count does not include the thousands of new openings planned for regional and local tenants. My point here simply is that amidst this ongoing creative disruption in the retail generally, the Open Air segment is thriving as an accessible, convenient and cost effective alternative for retailers who require a physical presence to acquire and serve their customers. Now having tipped our hat to the strong performance of our peers in the Open Air segment, I must point out that our leasing productivity and cash rollover growth truly stand apart.

I continue to believe we are best positioned amongst our peers for strong growth given the locations of our centers, our people and improved platform and our attractive rent basis during a period in which retailers are increasingly focused on store profitability and occupancy costs. Now let's dig into our results. During the quarter, we executed over 500 leases representing 3,000,000 feet, including 1,900,000 square feet of new and renewal leases at average spreads of nearly 17% and new lease spreads of 36%. When you include options, we've created over 42,000,000 of new incremental ABR over the trailing four quarters. At quarter end, we had $33,000,000 in ABR signed and not yet commenced, which provides us tailwinds into the latter part of this year and into next.

Our new lease ABR of $16.51 is the highest since the IPO. And rest assured, we are not buying rents as seen in our net effective rent disclosure. And our visibility on future rollover growth remains strong. Consider that our new anchor rents this quarter averaged $12.66 which compares very favorably to the $8.25 average in place rents for anchors expiring without options over the next four years. Again, basis truly matters to growth.

We are generating this leasing with better retailers, including new to portfolio tenants such as HomeSense, the new TJ Maxx concept, Bezmo, Lucky's Market and innovative quick service restaurants such as my all time favorites, Duck Donuts and Super Chicks. In fact, we executed 35 new restaurant leases this quarter, and I'm extremely pleased with the productivity of our new outparcel team, which came on board last September and already has 40 deals executed or at least representing over $5,000,000 of net new rent. We also continue to focus on the quality of our intrinsic lease terms, with 94% of our new deals this quarter having rent bumps at an average of 2.2% versus our in place average closer to 1%. Our strong leasing productivity kept overall leased occupancy at 92% despite approximately 70 basis points of bankruptcy move outs. Small shop occupancy increased sequentially to 85% or 80 basis points over the prior year.

And importantly, our receivables aging shows continued health of our small shop tenants. It's important here to note that we do expect a 50 basis point headwind to small shop occupancy in the third quarter as a result of lease rejections from Payless Shoes and Route twenty one. But we continue to see good demand from categories in this size range. As we look ahead, our overall leasing pipeline has over four thirty new and renewal leases for over 2,500,000 square feet, slightly ahead of where we were last quarter and as strong as it's been since we joined. Second, as it relates to our plan, our reinvestment program continues to deliver and expand, adding eight projects at expected yields of 9% and completing four projects at double digit returns this quarter.

And while I'm not going to flip a deck with you this morning, I do encourage you to explore the slide deck we posted last time on our website that illustrates our continued progress in upgrading our centers. We are taking part in a variety of property tours over the next few months, and I ask that you reach out to Stacy for more information. Projects added to our pipeline this quarter included a new Lucky's Market at Hunters Creek Plaza in Orlando and an LA Fitness at High Point in Chicago. Our total in process reinvestment pipeline now sits at 40 projects totaling $258,000,000 at a weighted average expected return of 10%. We also expanded our future redevelopment pipeline, as you'll notice in our supplement, with eight new projects and are confident that we will continue to accelerate the pace at which we move value accretive projects into the active pipeline, given our current leasing and tenant demand.

The third element of our strategic plan, capital recycling, we continue to accelerate our disposition efforts to capitalize on favorable private market valuations and to build liquidity, while also tightening the acquisition's ticket, positioning us to take advantage of opportunities that may evolve from the current landscape. We now expect to be a net seller for 2017. We executed the sale this quarter of three properties and two buildings for $75,000,000 in gross proceeds at an average cap rate of 7%. We also closed on an additional $21,000,000 sale in July at a mid-six percent cap rate and have another seven properties under contract for sale at approximately $115,000,000 most of which is expected to close this quarter. Fourth element of our plan, we continue to strengthen our balance sheet, reducing leverage by $100,000,000 from the first quarter and completing a $500,000,000 bond offering and subsequent to quarter end, a new $300,000,000 seven year term loan, further improving our duration and laddering.

Both these refinancings were ahead of our original timing expectations, but we felt it important to address future maturities opportunistically in this favorable debt market. We continue to enjoy strong support and are grateful for that support from both the fixed income community and the lending community. In fact, over the last fourteen months, we've raised over $5,000,000,000 of unsecured debt and put ourselves in a position where we have maximum flexibility and capacity. That allows us to continue to capitalize on growth opportunities embedded in what we own and control, regardless of inevitable market volatility. Finally,

Speaker 3

a

Speaker 2

few thoughts on guidance for the balance of the year. As we noted last quarter, we expect same property ABR growth to trough this quarter, given the timing of bankruptcy activity before reaccelerating in the fourth quarter. We expect same property NOI to follow a similar trend with the third quarter remaining at or below the low end of our full year guidance range of 2% to 3%. Now importantly, the acceleration we expect in the fourth quarter and into next year is driven by leases that have already been executed, which includes our successful efforts with the recaptured Sports Authority boxes, where we have executed leases on all of those boxes that spreads over 50%. In fact, we've now signed leases and LOIs on nearly 90% of our twenty sixteen bankruptcies at average overall spreads of 27%.

This progress has allowed us to reduce the potential impact of those twenty sixteen bankruptcies this year from 40 basis points to 25 basis points, truly excellent execution by Brian, Mike and the team. We are actively working through our twenty seventeen bankruptcies and now expect their impact this year to be about 60 basis points. Where we end up in the current year same store range will be driven primarily by the timing of rent commencements for those signed leases as well as levels of space proactively recaptured to set up additional value accretive reinvestments. Turning to FFO, we've maintained our range of $2.05 to $2.12 As mentioned previously, we do expect to continue to ramp disposition activity and become a net seller. Where we end in our range will be primarily driven by net disposition activity actually closed in the balance of the year.

We will update the range based on actual closings, but I expect that the capital recycling impact could be a few cents of impact given that we do not currently expect any acquisitions for the balance of the year or any significant acquisitions. Allow me in closing to comment briefly on our most important asset, our people. Great real estate matters, but great people matter even more. Over the last twelve months, we've changed over 80 positions, upgrading talent while not losing a step, a tribute to a truly great team. I'm particularly excited to welcome Bill Brown to lead our redevelopment efforts.

Bill is an experienced and talented professional, having led the redevelopment efforts at Equity One and Kimco previously. Like the addition of Vince Corneau to run our Midwest Division, Bill is a seasoned pro who provides our growing redevelopment efforts experienced leadership. Vince and Bill, along with other new folks such as Andrew Gracie, Steve Gallagher, Dan Sutherland, Dan Costello, Jason White, Tonya Creekmore, Sean McLaughlin and many more demonstrate the ability of Brixmor to continue to attract and retain the very best talent, which is key to our long term sustained outperformance. And perhaps most important of all, we are very, very excited to announce the arrival of our future CEO, Margo Elizabeth, Angela Ahman's daughter who was born on July 20. I suggested the name Brixy, but I have to admit, Margot Elizabeth is a beautiful name for a beautiful baby girl who looks like a movie star.

Margot and mom are doing great and doing their best to avoid the paparazzi. Before I turn the call to Steve for some additional color on our financial results and capital transactions, I ask you each to think about this. If your measure of the quality of the business is its ability to drive cash flow growth through a period of disruption, then we here at Brixmor go well beyond checking the box. Steve? Thanks, Jim, and

Speaker 4

good morning. FFO for the second quarter was $0.53 per share, representing growth of 3.6% excluding non cash GAAP rental adjustments and lease termination fees. This growth was primarily driven by high same property NOI and lower G and A related to the management transition in the 2016. Same property NOI growth was 1.3% in the second quarter consistent with the indication we gave on last quarter's call that this quarter's growth rate would be at or below the low end of our full year guidance range of 2% to 3%. Base rent contributed two sixty basis points to same property growth.

This contribution was primarily offset by net recoveries, which as expected, detracted 100 basis points from same property growth during the quarter. As we have discussed on prior calls, the 2016 benefited from the completion of annual chem and tax reconciliations as well as lower operating costs due to the management transition last year. As mentioned last quarter, our full year expectations for operating cost growth remains under two percent as we focus on improving the look and feel of our shopping centers, while remaining disciplined about every dollar of capital spent. With respect to the balance sheet, during the second quarter, we issued $500,000,000 of seven year unsecured debt at a rate of 3.65 using the proceeds to repay $283,000,000 of secured maturities at a rate of 6.38%. An additional $100,000,000 outstanding on our tranche A term loans as well as amounts outstanding on our revolver.

We completed the quarter with zero drawn on our $1,250,000,000 revolver. Last night, we also announced closing of a $300,000,000 seven year unsecured term loan. The proceeds from the new term loan were used to repay an additional $300,000,000 of tranche A term loan, which matures in 2018. As of today, we have no remaining 27 maturities and only $210,000,000 of remaining twenty eighteen maturities, putting us in a position where we won't have the access to the capital markets until 2019. Our unencumbered asset base now totals approximately 80% of our total NOI and our weighted average maturity on a pro form a basis for the new term loan is five point six years, representing a substantial improvement over the last eighteen months.

As reminder, September, we anticipate prepaying without penalty an additional $97,000,000 of secured debt maturing in 2020 at a rate of 6.3%. As we have mentioned on previous calls associated with this prepayment, we expect to recognize a gain on debt extinguishment of approximately 2,000,000 to $3,000,000 in the third quarter. While we originally expected gain on debt extinguishment to contribute approximately $00 per share to FFO during 2017, early repayments of our tranche A term loan have resulted in losses on debt extinguishment, which we now expect to largely offset the gain expected in the third quarter. And with that, I will turn the call over to the operator for Q and A.

Speaker 0

Thank you. We will now begin the question and answer session. The first question comes from Christy McElroy of Citi. Please go ahead.

Speaker 5

Good morning everyone. You Good discussed an accelerated pace of dispositions. It sounds like you expect you could be end up a net seller for the year. Just to be clear, that $05 of potential dilutive impact that you think you could see is not currently in your guidance, correct? And does that assume that the net disposition proceeds would be allocated to debt pay down?

And maybe you could provide a little bit more color on sort of the average cap rates on your Q2 disposition activity and what you're expecting for the balance of the year? Thanks.

Speaker 2

Thanks, Chris. Yeah, I appreciate the question. We do expect to be a net seller this year. The cap rates that we're seeing, as I mentioned in my prepared remarks, for what we sold in the quarter were about 7%. What we sold after the quarter was in the mid-6s.

And we continue to see pretty strong demand as it relates to investors looking for investments in the Open Air segment. In terms of impact on guidance, again, as I alluded to, our current range can handle a wide range of outcomes. But we do expect, if we're a net seller, use those proceeds to pay off debt, and we'll update our guidance as those transactions actually close.

Speaker 5

Okay. And then just following up on your comments about not buying rents. Your net effective rent numbers are pretty stable, but we've seen we have seen a pickup in TIs from some of your peers, given all the box retenanting. Are you seeing more pressure to increase TIs to maintain the level of spreads that you've been showing? Is that something that we could potentially see pick up in coming quarters as you release more of the bankruptcy space?

Speaker 2

Christy, hey, this is Brian. As you mentioned, as Jim mentioned in our remarks, our TIs are in line with where they've been on a trailing 12 and our net effective rents continue to be strong. I would say that for some uses like entertainment, fitness or when we're demising a box, those TIs can be a little bit higher. But typically, we're also getting higher rents. We're more than happy with the returns that we're getting on those investments.

And I would say, look, competition for space leads to the best outcome in rent and TI. So the more competition that our team is able to draw up for these spaces, which we have been seeing, the better outcomes we'll have. So we feel pretty good about where we're at.

Speaker 0

Thank you.

Speaker 2

Thanks, Christy.

Speaker 0

Our next question comes from Todd Thomas of KeyBanc Capital Markets. In

Speaker 3

terms of the lease rate and economic occupancy, I think you talked about the 50 basis point headwind to small shop leasing in the third quarter from Route twenty one and Payless. Can you just help us understand though where those metrics might bottom in the second half of the year and what's in the model at year end?

Speaker 2

Yes. Mean, again, we do expect it to trough in the third quarter. When you think about the total impact of bankruptcies from 2017 on the year, it's about 60 basis points. Now a lot of that rent was in our first two quarters. So obviously, we're expecting the impact in the latter part of the year as those tenants are now out and out of occupancy as well as no longer rent paying.

And we expect a reacceleration actually in the fourth quarter, given the progress that we've made releasing not only that space, but as I mentioned before, the twenty sixteen bankruptcies. So when you take a step back, Todd, and you think about what the potential impact could have been on this year, it could have been much more significant. Just on the twenty sixteen bankruptcies alone, it could have been more than double what the current impact is. So I'm really pleased with the efforts of the team to get after that getting that space leased. And as I alluded to, and I think this is an important point, we're leasing that space to better tenants.

And one of the things I didn't highlight on the call is that we are replacing some of these anchor boxes, we're seeing great follow through still in our small shop occupancy. So some timing disruption in the latter part of this year without a doubt, but I'm very encouraged in terms of how it's setting us up for future growth.

Speaker 3

All right, great. And then, Jim, you've got Kroger, Publix, Ahold Delhaize, Albertsons, they're all top tenants in the portfolio. And I was just wondering what you think about the changing grocer landscape, how you're thinking about the portfolio going forward given both Lidl's expansion in The U. S. And the Amazon Whole Foods news?

Maybe for Mark, you could comment then if there's been sort of any change in thought process on your end, either investments or in the capital markets or just more broadly around grocery anchored centers?

Speaker 2

Todd, that's a four for one question there. Let me start and just tell you that the grocery segment, as you know, has always been a very competitive segment. And in fact, over the last several years, in addition to it being very competitive, has been struggling with food price deflation. And we'll see where commodity prices go going forward. I think for us as a landlord, we are very fortunate to have great partnerships with very strong survivors such as Kroger and Publix and others.

And we look at the landscape of new competitive entrants. You mentioned two in Lidl and certainly Amazon and Whole Foods, would expect would grow that platform. And don't forget Aldi. I think we've seen some statistics which would suggest that these new entrants into the space represent over 25,000,000 square feet of net new demand. And as you would expect, we have discussions ongoing with all of them as it relates to what their expansion plans are.

That can ultimately have a deflationary impact certainly on some of the existing competitors. But again, I think we're really well positioned given our low occupancy costs with our grocers. If you look across our portfolio, we're well below 2% in terms of average occupancy cost with average sales well above $550 a foot. So we watch it very closely, but we're actually encouraged by what we see as a lot of capital being invested in a physical store, right? I think folks are realizing the importance of that to serve their customer, Mark, and then in terms of its impact on our transactions?

Speaker 6

Yes. So we continue to

Speaker 7

see very deep interest in open air assets with grocery. So we're seeing across many markets, primary and secondary, deep bidding pools and strong values for these grocery anchored assets. We haven't really seen any impact from some of the transactions that you mentioned. And so from our perspective, seeing this great pricing on grocery anchored assets is a nice validation of the assets, but certainly can make it harder to buy as we remain disciplined with our shareholders' capital. And when we see this liquidity, we're going to continue to try to take advantage of it like we have with the sale of Frankfurt and Eustis.

I think we've generated some interesting proceeds from those assets built of grocery anchored

Speaker 2

assets. Thanks, Todd. Our

Speaker 0

next question comes from Nick Yulico of UBS. Please go ahead.

Speaker 2

Hey, Nick.

Speaker 8

Thanks. Hi, everyone. So your anchor repositioning and outparcel development yields dropped 100 basis points from the first quarter. How much of this was due to new expectations in leasing versus project mix?

Speaker 2

It really was driven by project mix almost entirely as we expanded the scope of some of the existing projects and then some of the new projects we went on, we added. Again, 9%, I think, is a phenomenal yield for what we're doing and where these assets are trading at several 100 basis points below that in terms of a cap rate. But it's really just the mix of transactions that we brought into the pipeline this quarter more than anything else. And expect to see us continue as we're moving projects and please take note of what we're moving into the shadow pipeline and then what we've moved from the shadow pipeline into active and of course what we actually deliver, you'll see that we're establishing a really nice velocity of throughput into that value accretive pipeline. And the last thing I'd just say there is a lot of what we're doing, as a few of you have noted in your research, it's smaller, it's more granular.

And the importance of that is that we're able to get it executed in a reasonable timeframe at really nice compelling yield. So it's lower risk, higher yield. And what we're not including in those returns is the follow on benefit that we're seeing from the small shop lease up when we replace that anchor. And as we've talked about in the past, we're seeing that consistently better than 800 basis points of improvement when we replace that anchor. So we're very excited about the Lucky's market that we added in Orlando to the redevelopment this quarter as well as the LA Fitness that we did in Chicago at High Point Center, which was a center with a lot of vacancy.

I have to give Vince and the team in Chicago some props for spotting that opportunity and getting right on it. Certainly appreciate the partnership we have with LA Fitness. So expect us to continue to find opportunities to add value. And as I said when I joined the company, the scope of opportunity across our portfolio of over 500 assets is truly remarkable.

Speaker 8

Okay. And then just one other question is on the overall leasing environment. I mean, of the, I think concerns out there is that when you hear about the retailers looking to go into open air shopping centers, it's we know about the TJ Maxx, Ross, Pick Your Pet concept and Pick A Fitness concept. And it's not clear, what is the extra level of demand besides those types of tenants? So if you can just talk a little bit more about what that pipeline looks like for demand.

Speaker 2

Yes. I hit it a little bit, and I appreciate the question in the intro, where I talked about every quarter, our national accounts team, Nick, does a survey of all the national tenants that they cover, which includes tenants across all the categories I mentioned, from restaurants through fitness, to service, to health and beauty, to grocery, to value, to off price, etcetera. And what we're seeing there is a robust pipeline of store openings over 12,500. And given the nature of our assets, what that actually doesn't include are the local and regional tenants that are such a core part of our small shop tenancy. As I take a step back and think about all these headlines, I think they're missing the point that within the Open Air segment, there is a lot of good, strong, robust demand in addition to innovation that's occurring in many of those categories of tenants, particularly in health and wellness, fitness, restaurants, as well as you're seeing some of the value segments.

And we just talked about grocery. So we like what we see as where this creative disruption is going. We think the weight of innovation, if you will, is actually favoring the Open Air segment because it's lower cost, it's more proximate to where the consumer is and more convenient. So we're actually feeling pretty good about where things stand. Now there are always categories that are kind of out of cycle, and certainly we're doing our best to manage that.

But Brian? Yes. And look, you mentioned innovation, Jim. I would point to, again, TJX with two new concepts like Sierra Trading Post and HomeSense. We look at other home retailers that are expanding.

In the grocery front, you're at you're seeing more online pickup and more specialty concepts that are entering new markets. We continue to see restaurant innovation really across the country. And look, as Jim mentioned, I think as retailers are becoming more prudent with their real estate decisions, it's important for us not only to have good real estate, but a good basis, the redevelopment expertise and the remerchandising expertise. And then finally, just the relationships that our guys have both at the corporate and the regional level to continue to drive these results. So we feel pretty good about where things are and continue to look to reinvest and remerchandise to these uses in our centers.

And Nick, we wouldn't be delivering the results that we're delivering were it not for that demand. All right. Thanks, everyone. You bet.

Speaker 0

Our next question comes from Jeff Donnelly of Wells Fargo. Please go ahead.

Speaker 9

Good morning, folks, and my best to Angela and her family if she's listening. Jim, can you talk about the percentage of your tenants that are occupied but not paying rent compared to the longer term trends? I'm just curious if that's been changing and does that touch some anchor tenants or is that really more of an in line tenant issue?

Speaker 2

I don't think there's really any shift and change. I think what you're referring to is dark but rent paying tenants. And we do that's held relatively stable. And certainly, we have a few Kmart boxes that fit into that category that are teeing up some of the redevelopments that we have down in Naples and over in Miami Gardens. But no, we haven't seen any real change in that and actually have been aggressively getting after some of those earlier.

And you see some of that coming through our early space recapture and some of that following through in terms of our lease term fees. But no real change other than I think our difference today is that we're getting after some of that stuff earlier and more aggressively to set up redevelopment.

Speaker 9

I can follow-up with you on some of that offline. But maybe as a follow-up for Brian, it's often said that one should never let a good crisis go to waste. I'm curious, are you finding retailers trying to take advantage of this environment and maybe lobbying in more, I guess, I'll say, inter lease term inquiries about rent relief or other sorts of concession regardless of whether or not they need it? They're just effectively trying to capitalize on the situation?

Speaker 2

Look, I think the retailers are always going to use the headlines, and they're certainly doing now for better terms and deals. But generally, we continue to be able to drive rents. We continue to be able to get flexibility elsewhere in our shopping centers for both uses and for our ability to redevelop. And those that we're actually expanding and doing business with feel pretty good about their bricks and mortar expansion plan. So yes, we're certainly hearing some things, but net net, I think we're doing fine.

But Jeff, it's also opened up an opportunity for us in certain markets where we've got the great national relationships, we've got great rent basis, and those tenants are seeking more reasonable occupancy cost levels. So for example, in Mobile, Alabama, we're able to do that. In other markets, we're able to actually capitalize on our great national relationships and our low rent basis to add value to our centers.

Speaker 0

Our next question comes from Alexander Goldsbab of Sandler O'Neill. Just

Speaker 10

two questions, Jim. First one is, I don't think that you talked about Ascena, maybe you did, but can you just give us your thoughts on what you expect for store closings, bankruptcies for the back half of the year? And then also just in terms of your tenant conversations, what your expectations are for after the holiday season from another round of bankruptcies, store closings, etcetera?

Speaker 2

Alex, hey, this is Brian. First on Ascena, look, they've been a great partner of ours for a long time. And we are certainly in discussions with them on really all the locations across our portfolio. And I think each individual location is different. There are certain circumstances for every space that we have.

I would say that we feel pretty good about the demand in that size range for the spaces that we do get back from the likes of Five Below. And just this quarter, we backfilled an Ascena space in Springfield, Illinois with Comcast Xfinity at a 35% increase. So those conversations are ongoing, and we feel pretty good about our ability to manage through that. And then looking into next year, we've got obviously our watch list and focused on a few tenants, but I wouldn't say there have been any substantial changes to where that list has been in the past. And we're constantly monitoring that tenant health to get in front of it, Alex.

In fact, we wouldn't have had the results we had this year if we weren't getting in front of it, right? And we weren't anticipating things like Sports Authority, Payless, etcetera. We wouldn't be minimizing that transitory impact.

Speaker 10

Okay. Okay. So your expectation is next year should be pretty stable to this year or you think it's better?

Speaker 2

I think it's going to I think there's probably going to be some continued disruption, no doubt. I don't think obviously, not going to comment on any particular tenants, but none of them would be surprises, let's just say that.

Speaker 10

Okay. And then just second question. On the dispositions, have you noticed any change in lender appetite as you guys are marketing centers? Are you hearing anything from prospective buyers as far as whether it's community banks or other lenders of those centers dialing back their underwriting of those? Or there's been no change on the lenders for the centers that you're selling?

Speaker 7

For the centers that we're transacting on, we really haven't seen that much change. I mean, we really benefit in that market is that some of the centers that we're selling are relatively small deal sizes. So they have deep interest from the local and community banks. We certainly transacted on larger deal sizes and haven't really had much pushback there either. But we're continuing to see a financing market that takes a little bit longer, the financing liquidity is still there.

Okay. Thank you.

Speaker 0

Our next question comes from Vincent Chao of Deutsche Bank. Please go ahead.

Speaker 11

Hi. Good morning, everyone. Hey, just want to go back to the bankruptcy comments for 2017, the 60 basis point hit. I think last quarter you talked about if everything closed, it was like 125 basis point hit. So I guess at this point, is the visibility on that 60 basis points pretty clear?

Or are there still some unknowns out there where closures could be a little bit higher? And also, does that 60 basis contemplate any additional bankruptcies in the back half?

Speaker 2

It does not contemplate any additional bankruptcies. And we did have a bankruptcy after last quarter with Ultra Foods, which is a small grocer in the Midwest. But the other side of that is the big variables are we now know basically what stores are going to be closed, right? And then we've been generating a lot of re leasing on that activity as we attempt to resolve those locations that have closed. So 60 basis points is about where we expect the overall impact for the year to be.

Again, re leasing can be a can help us close that gap further, but that's about where we expect it to be.

Speaker 11

Okay. And then just along those lines, in terms of the same store NOI guidance of 2% to 3%, if you're sort of at or below the 2% range in the third quarter, depending on exactly what you assume, it does seem like there's a fairly wide range implied for the fourth quarter. And I'm just curious, is it realistic to think that the high end or the low end are really going to be hit here? I mean, the low end seems to imply no acceleration and then the high end, something pretty gaudy.

Speaker 2

Well, it is a big range still through the year, but take a step back and think about all the moving pieces that we have, which include the twenty sixteen and twenty seventeen bankruptcies and includes a tremendous amount of leasing activity. And where we end up in that range is going to be influenced by the timing of rent commencements, which Vince can move a month or so, and that has a significant impact. As well as on the other side of that, and I alluded to it in my remarks, but I appreciate question, we continue to recapture space early to set up anchor repositionings or redevelopments. And that, of course, will have a near term impact on us. So we've kept the range wide and it reflects the fact that we do have a lot of moving pieces.

But also importantly, that we do have a lot of leases signed that are going to be giving us tailwind into the fourth quarter and into next year. I mean, recognize that we have $33,000,000 of ABR that's signed, but not yet rent commenced and expect us to continue to add to that tailwind, if you will, as we go into the fourth quarter and into next year.

Speaker 11

Yes. I think that's the reason for the question. It just seems like you do have some visibility on the closure side, and then you obviously know what's signed and relatively when it's going to commence. So it just seems like a pretty wide range, but I got you. Thanks.

Speaker 2

Yes, you bet. You bet. You can come help us with the model. Next?

Speaker 0

Our next question comes from Karen Ford of MUFG Securities. Please go ahead.

Speaker 12

Hi, good morning. Staying on that same store NOI growth theme. Do you think there's a new normal for same store NOI growth in your portfolio given the changing environment as well as the changes in escalators that you highlighted?

Speaker 2

Yes. When we joined and as we've executed upon this new plan, we expect that long term sustainable same store growth rate to be in that mid- to high-two range. I think that we're doing a great job of biasing us towards the higher end of that range. And certainly, as I look at the rollover growth that's implied in our anchors that are expiring over the next four years at $8.25 and where we're signing the leases, I think we have a lot of long term visibility on that mark to market, if you will, in those assets. And then again, we are doing all that we can to take that embedded, which is our cheapest form of growth, that embedded rent growth in those leases.

And as we're signing these leases, we're not just emphasizing rollover growth, we are in fact driving better embedded growth. I'm real pleased with the over 2% embedded rent growth average we had on 94% of the leases that we signed this quarter. And that's really a result of focus and as Brian alluded to, making sure that we're driving competition for the space. And again, we continue to see that. So I think that we stand in good shape to hit our long term targets for several years to come.

Speaker 12

Thanks for that. It's helpful. My second question is on dispositions. Appreciate the disclosure of what you have under contract. Can you just talk about how big the disposition pool could grow to?

How much are you marketing today? And since you can prepay the remaining term loan balance at any time, what factors are determining the size of your disposition pool?

Speaker 2

Well, thank you for the question. I'm not going to provide specific disposition guidance. We haven't done it. I'm not going to do it. The reason I'm not is I want to always maintain maximum flexibility there to make sure that we're doing our job as it relates to maximizing the value of what it is we're selling.

The second point I'd make to you is our assets tend to be smaller in size, but it takes every bit as long to sell a $20,000,000 asset as it does $100,000,000 asset if you're really truly focused on maximizing value. And so expect this pace that you're seeing increasing and what we have under contract to be more characteristic in the quarters for the balance of the year. But beyond that, I really don't want to get too specific. We are using the proceeds of these dispositions to deleverage. As you see, we did this quarter, we reduced our leverage by $100,000,000 and expect us to continue to do that on a net basis.

On the other side of the capital recycling equation, in terms of acquisitions, we are saying no to a lot of things. The pricing still is pretty aggressive. In fact, we had a center sell down the street from our Miami Gardens Center at a sub-five percent cap rate. So again, we think on balance, at least what we see in the market right now, better for us to be net sellers. But as a long term investor, we will, of course, capitalize where we see acquisitions like we did in Ann Arbor earlier in the year at appropriate IRRs.

Speaker 0

Thank you.

Speaker 2

You bet.

Speaker 0

Our next question comes from Floris Van Dijkum of Boenning.

Speaker 13

Quick question for you guys on encouraging on the small shop occupancy increase. What is your target? You're around 85% now, right? Where do you think that's going to stabilize once you guys are done with your redevelopments?

Speaker 2

I think it's a I think we've got several 100 basis points of room to grow there. And as I've alluded to in the past, it's really through anchor repositionings where we see 800 basis points of improvement. It's through and redevelopments. It's through capital recycling as we exit single asset markets. It's such a local business, Floris, that those assets drag our portfolio average by a few 100 basis points in the single asset markets.

And then lastly, is focus. And Brian and Mike and team are doing a great job of not just improving the occupancy, but I think it's reflected in our bad debt numbers, improving the quality of tenants that we're bringing into our centers. So we'll hold on to a space, to put in a tenant that we don't believe in their long term viability. So again, I'm not going to give you a specific number, but we think it's several 100 basis points higher than where it is today. And we expect to get there not in a matter of a couple of quarters, but over a couple of years.

Speaker 13

Okay, great. I guess one other question, and I appreciate that you don't want to give specific guidance on dispositions. But as you look at your debt to EBITDA, do you target that? And so can you maybe can you give a little bit maybe color around your sort of your leverage targets? And maybe that is that part of what's driving the dispositions or is it purely a cost of capital calculation in your view?

Speaker 2

Well, it's more primarily cost of capital and capital allocation decision at the moment. As I've said before, our portfolio has a lot of embedded EBITDA growth and we're demonstrating that in what we have. And we are on a very good glide path to take that, which sits at 6.9% today, down six times in the next year or two. What I think is also important to recognize, as we alluded to in the comments, Floris, is that we've done a really Stacy and Angela have done a tremendous job of extending out our debt and putting ourselves in a position where we don't have to access the debt markets through 2019, which is I think particularly important given there inevitably will be a lot of volatility. And so that capital flexibility is of utmost importance to us.

And I think the team has done a tremendous job there. Just layover what our maturity table was when we started versus where it is today. And I think we've done an outstanding job. And I think it's being recognized by the fixed income community for managing our balance sheet appropriately. Thanks, Jim.

You bet.

Speaker 0

Our next question comes from Wes Golladay of RBC. Please go ahead.

Speaker 14

Hey, good morning, everyone. Can you give us some updates on how the shop tenant is doing for the local shop tenant? We always see in the news that some of the brands, the big chain concepts are not doing well. Just kind of curious how the local tenant is doing?

Speaker 2

Surprisingly well, Brian. Yeah, Wes, if you look at kind of our ratio in terms of small shop deals, we were typically in the past around sixty-forty between national and franchise versus local operators. That's been more fifty-fifty. And the quality of the local operators we're seeing are existing businesses, somebody that has a restaurant or two in a market that wants to expand. We're seeing a number of maybe like local pet stores as well.

But the team in the field has done a great job really across the board looking at strong local concepts. As we continue to invest in our centers, to Jim's point, when we're doing these anchor repositionings, when we're doing redevelopment, we don't just want to fill the centers with brands. While we do have a lot of relationships with national concepts across the country, we want strong local operators in our center, and we feel pretty encouraged about the health of them. Yes. And the two things we look at, Wes, there are obviously the AR aging and the pace at which the rent is being paid, both those indicators remain very strong through the year.

As well as and we do this as part of our budgeting process, we're looking at any amounts in dispute, which is another sort of indicator of tenant health. And those are at also record low levels, where there's a CAM dispute or something like that. So it's something we watch really carefully, and we continue to be very pleasantly surprised about what we're seeing in that local and regional tenancy.

Speaker 14

Okay. And then looking at that 12,500 store openings that you alluded to, how long have you been tracking that number? What's the

Speaker 7

overall trend in that data?

Speaker 2

We've been tracking it since the second quarter I joined. And one of the things that we're holding the national accounts team accountable for is market share penetration with those tenants. And I'd say that it's held pretty steady. We've actually seen a slight growth, particularly Wes, with the addition of Tanya Creekmore and the restaurant and outparcel team. That's something I'm really proud of what Tanya and Eve have done.

I think we had done maybe one or two outparcel deals in the eighteen months prior to our joining. We brought that team on board last September. And as I alluded to in my remarks, we have over 40 deals at least executed or being negotiated with $5,000,000 of rent there. So that activity sort of expands our reach in terms of tenant coverage. And I think that's been a lot of the net adds on that.

Yes. And Wes, I would just add, Jim mentioned it earlier in his opening remarks and back to your initial question about small shops. Those tenant that number of store openings does not include local tenants. So that's just national operators with announced store opening plans. So we actually feel pretty good about the local aspect of that as well.

Okay. Thanks a lot. You bet.

Speaker 0

Our next question comes from Haendel St. Juste of Mizuho. Please go ahead.

Speaker 2

Hey Haendel. Hey, good morning there.

Speaker 9

Most might have been asked, but a couple

Speaker 6

of quick ones for you, Jim. I guess, first, at a high level, I was thinking about the grocer anchor portion of your portfolio. You got a 70%, I think, grocer anchored, 18% of your ABR. I'm just wondering, in light of

Speaker 2

Amazon Whole Foods, how are you

Speaker 6

thinking about those levels going forward? Are you still comfortable with that? Should we see that remain relatively same, net reduced, if you've been selling some assets? Just curious on how you're thinking about that.

Speaker 2

Very comfortable with that exposure. And look, I think it's an industry that will continue to evolve and change, but it's one that will survive. I think net impacts and there will be changes will be in things like store formats, the sizes of certain stores. I think you'll see some operators invest more in terms of the offerings around the perimeter of the store versus what they have in the middle of the store. But I think the Amazon transaction, if anything, in my mind, which I don't think was really covered a lot, it highlighted the importance of a physical platform in that business.

Not just the bricks and mortar, but the business of delivering that assortment of goods and prepared foods and everything to the customer at a reasonable price. And remember, it's a very, very low margin business. And it's always been that way. It's always been very competitive. And I think not just what Amazon's announced with Whole Foods, but also Lidl and Aldi, Kroger and Publix and Sprouts and Lucky's.

We're seeing a lot of strong competition in that field, which on balance, I think benefits us. I don't think we need any more grocery stores in this country, but I do think we need better grocers. And I think that's what you're seeing a lot of these operators doing to stay competitive and healthy.

Speaker 10

Appreciate that. And just curious, have

Speaker 6

you seen any change in grocer cap rates here over the past couple of months? And then any change in demand for planned grocer openings in your redev development pipeline?

Speaker 2

Let me hit the second part of that first. We continue to see good grocer demand. In fact, this quarter, we added the Lucky's specialty grocer in Orlando, which actually replaced an LA Fitness. Cap rates are still pretty racing, Mark. Yeah, for the grocer assets that we've

Speaker 7

been selling, we continue to see strong demand. We see cap rates that frankly continue to be a bit surprising on the ones we would like to buy. So we haven't seen any real change other than people continue to like well located real estate.

Speaker 2

Thank you.

Speaker 0

Our next question comes from Samir Kahal of Evercore ISI. Please go ahead.

Speaker 15

Good morning, guys. Hey, how are you? Of mine have been answered, but I was just curious about whether you or Brian about your thoughts around sort of Bed Bath and Beyond. I mean, it is a top 10 tenant of most of the shopping center REITs and I know that they've sort of talked about sort of publicly about looking to possibly rationalize their store base as they have a sizable sort of number of leases coming due over the next few years. So any color around this would be helpful as you think about sort of growth for the next twelve to thirty six months here.

Speaker 2

Sure, Sameer. This is Brian. Another retailer, which we have a tremendous relationship with, and we are in discussions with them, feel pretty good about where our locations sit in our portfolio. They are continuing to open some new stores. I know there were a lot of headlines around the store closures, but they are expanding the world market business there, AnnNet, is which their new Christmas tree concept they opened in Kennesaw, Georgia, and they're expanding that as well.

And I think to Jim's point earlier, look, as retailers potentially look to reassess where they are in the market. We have an opportunity there in certain markets to be able to offer them real estate and pull them over to get maybe one or two concepts into a center. So we're in discussions with them, not just on the existing portfolio, but where they're looking to potentially reposition as well. So we feel pretty good where we're at with them and continue to be in discussions on those locations. Samir, an important point embedded in what Brian's talking about is they are focused on occupancy costs, as are all tenants.

And we have a great national relationship with them. And it allows us in certain markets to capitalize on the location that we have and importantly, the rent basis to relocate some of their stores. And we're seeing ourselves as a net beneficiary of that.

Speaker 0

This concludes our question and answer session. I would like to turn the conference back over to Stacy Slatter for any closing remarks.

Speaker 1

Thanks, everyone, for joining us today. Have a great summer.

Speaker 0

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.