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Edited Transcript of RPAI earnings conference call or presentation 3-May-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Retail Properties of America Inc Earnings Call

Oak Brook May 10, 2017 (Thomson StreetEvents) -- Edited Transcript of Retail Properties of America Inc earnings conference call or presentation Wednesday, May 3, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Heath R. Fear

Retail Properties of America, Inc. - CFO, EVP and Treasurer

* Michael P. Fitzmaurice

Retail Properties of America, Inc. - VP of Capital Markets & IR

* Shane C. Garrison

Retail Properties of America, Inc. - COO, CIO and EVP

* Steven P. Grimes

Retail Properties of America, Inc. - CEO, President and Director

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Conference Call Participants

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* Christine Mary McElroy Tulloch

Citigroup Inc, Research Division - Director

* Christopher Ronald Lucas

Capital One Securities, Inc., Research Division - SVP and Lead Equity Research Analyst

* George Andrew Hoglund

Jefferies LLC, Research Division - Equity Associate

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* Todd Michael Thomas

KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst

* Vincent Chao

Deutsche Bank AG, Research Division - VP

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Presentation

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Operator [1]

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Greetings, and welcome to the Retail Properties of America First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Michael Fitzmaurice. Thank you. You may begin.

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Michael P. Fitzmaurice, Retail Properties of America, Inc. - VP of Capital Markets & IR [2]

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Thank you, operator, and welcome to Retail Properties of America First Quarter 2017 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 anticipates, believe, 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 risks and factors that are beyond our control, including without limitation, those set forth in our earnings release issued last night and the risk factors set forth in 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 May 3, 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 definitions 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.

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Steven P. Grimes, Retail Properties of America, Inc. - CEO, President and Director [3]

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Thank you, Mike, and thank you all for joining us today. Before we dive into the quarterly results, I want to reflect for a moment on the current narrative surrounding retail real estate. Throughout the earnings season, our peers have done an excellent job defending the long-term viability and relevancy of our space. We wholeheartedly echo these sentiments, and rather than reaffirming what we already know to be true, we thought it might be constructive to look beyond the boundaries of retail real estate for lessons learned. Specifically, I'm reminded of the office sector in the early to mid-1990s. The prevailing thought at the time was that telecommuting would lead to mass de-urbanization and the demise of the office building. It all seemed logical. Why pay office rents when you can have your employees work more productively at home? Why live in a congested, relatively expensive CBD if there is no need to commute? Fast-forward to 2017 and the office building is very much alive and the vast majority of major U.S. MSAs have experienced re-urbanization. In fairness, technology continues to reshape how we use and think about our work spaces, but despite the leaps and bounds we made in the past 20 years, as of the last census in 2014, fewer than four million U.S. workers worked remotely more than 50% of the time. Why is that? Because we're human beings and study after study has demonstrated that there is no substitute for face-to-face collaboration.

Has current technology made it possible to conduct business without office space? Absolutely, but it's not about whether we technically NEED office buildings. People WANT the face-to-face interaction. The same holds true for retail real estate. You can get just about anything you want delivered to your doorstep, so why go to the store? The simple answer, because people WANT to. They want to pick up their groceries, take a yoga class, have a meal with their family and see a movie all in the same place. It's not just that they want to touch and feel the product. They want to shop in a store. And while customers want bricks and mortar, study after study has shown that our retailers actually NEED it to effectively compete. That's why online retailers like Amazon are opening stores because the margins are better and they understand the need for customer experience. The retailers that can most effectively create synergies between our online and bricks and mortar experience are having the most success.

The corollaries don't end with the office sector. The warehouse will be the thing of the past because of the industries' ability to perfectly match supply and demand. Why go to a hotel when you can rent a stranger's house online? Driverless cars will eliminate the need for parking garages and de-urbanize our cities... again. Disruption is undeniably fixating, and coupled with the images of drone delivery and a cyclical spike in tenant bankruptcies, it's our time out of the sun.

All of us on this call today are tasked in some shape or form with discerning whether we are experiencing a normal course end of cycle disruption or the beginnings of a secular change in our space. We think it's both. The world is not worse off without hhgregg. The company could no longer compete or bring any unique value to the marketplace and is now extinct. That's "normal" disruption in our minds. Heath will spend time quantifying the short-term revenue disruption associated with the current group of bankruptcies. But more importantly, Shane is going to talk about the backfill opportunities, and he will reassure you that these closures represent an important step in our continuing goal of solidifying our cash flow and creating more desirable shopping destinations.

As for secular change, we know that retail real estate is enduring but there will be winners and losers. The U.S. is over retailed with nearly 24 square feet of retail space per capita. The next closest country is Canada at 16, followed by Australia at 11. Despite negligible new supply, retail square footage needs to decrease. So how do we survive, better yet, how do we thrive against the backdrop of this sobering reality? By being a dominant owner in 10 of the most desirable U.S. markets with a superior demographics, a track record of population growth and a strong and diverse economic foundation. By concentrating on the right real estate. By acknowledging that the most durable retailers are focused on the right locations and not the sheer number of stores. By embracing the shift in the retail paradigm back in 2013 when we first announced our target market strategy. Shane has said it many times, if we had waited until today to start our transformation, we would never get it done. We are so close and remain committed to completing our repositioning strategy by the end of next year.

Nearly 70% of our ABR is in our top target markets and we expect that to grow to 90% by the end of 2018. Despite the turmoil in our sector that has garnered so many headlines this year, we are well on our way to completing our disposition goals for 2017. As of today, we have closed or are under contract or in LOI for approximately $570 million of asset sales. Combined, this represents 75% of our targeted retail disposition goal for the year. Our confidence in the high-quality nature of our disposition pool is holding true and we look forward to continued momentum on the transactional front as we progress through the remainder of the year.

While human nature and a winning strategy give us comfort, it's our incredibly solid fundamentals that make it possible for us to drown out the noise, focus and execute. Our retail same-store portfolio is over 95% leased. We achieved record setting blended releasing spreads of 10%; signed leases at an all-time high ABR per square foot of over $27; tenant demand for our centers remains strong; the end of our portfolio transformation is in sight; and our balance sheet has never been more opportunistic. We certainly aren't blind to the challenges ahead, but these were not unanticipated; and accordingly, we continue to believe we can make great things happen. And with that, I'd like to turn the call over to Heath.

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Heath R. Fear, Retail Properties of America, Inc. - CFO, EVP and Treasurer [4]

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Thank you, Steve. This morning, I'll discuss our first quarter results and our outlook for the remainder of 2017. Operating FFO for the first quarter was $0.28 per share, flat over the comparable period 2016. First quarter 2017 Operating FFO benefited from higher same-store NOI of $0.005 and lower interest expense of $0.025 offset by lower NOI from other investment properties up $0.03 due to our capital recycling activities and NOI drag for Schaumburg Towers. It's important to note that our lower interest expense is directly related to the defeasance of the $379 million IW JV loan this past January. As set forth in our supplemental, the resulting impact to our balance sheet is remarkable. As compared to the end of 2016, our blended interest rate is 3.5% versus 4.4%. Our unencumbered NOI sits at 86% versus 66% and we have only 20 assets versus 66 assets encumbered by a mortgage. These improved metrics will go a long way toward achieving our goal of a ratings upgrade. In addition, and possibly more importantly, the IW JV defeasance has allowed us to accelerate the disposition of our non-target assets. For the balance of 2017, we expect to use our disposition proceeds to fund our acquisitions, retire debt, redeem our preferred equity and perhaps, most importantly, positions us to be very opportunistic in 2018 and beyond.

Same-store NOI growth was 2% in the first quarter, primarily driven by higher rental income of 200 basis points from a combination of strong contractual rent increases and releasing spreads as well as higher net recoveries and other property income of 40 basis points. These items were partially offset by an increase in bad debt expense of 40 basis points, partially related to reserving 100% of the receivables for hhgregg and Gander Mountain.

Turning to guidance. We are maintaining our Operating FFO guidance of $1.00 to $1.05. As we communicated in our earnings release last night, we are maintaining our acquisition assumption of $375 million to $475 million and our disposition assumption of $800 million to $900 million including the sale of Schaumburg Towers. We are maintaining our G&A expense assumption of $42 million to $44 million. We are revising our same-store NOI assumption from 2% to 3%, to 1.25% to 2.25% to reflect the known impact of recent tenant bankruptcies. As discussed when we issued our initial guidance, we decline to make any tenant-specific bankruptcy assumptions regarding our watch list tenants due to a variety of uncertainties including timing of initial filings, liquidation versus reorganization, lease assumption versus rejection, etc. Instead, we used the bad debt reserve assumption of 50 basis points of same-store revenues or approximately 70 basis points of full year same-store NOI.

So what do we know at this point? We know that hhgregg and Family Christian are liquidating. Camping World won a bid on Gander Mountain as a going concern, but they are only required to assume 17 leases and there is no guarantee that it will include either of our two locations. As for Payless, they didn't pay April rent but none of our 16 locations are among the 400 store closures announced by Payless to date. I'll spare you the lease by lease analysis, but suffice it to say, the collective negative 2017 impact from these four tenants and one other isolated first quarter bad debt event represents roughly 85 basis points of full year same-store NOI or $2.5 million.

While we acknowledge the 2017 bankruptcies have consequences with respect to same-store NOI growth in the short term, it's important to note the impact is relatively modest with respect to our earnings, roughly $0.01. In light of the fact that 2017 is likely a trough year in terms of the dilution associated with our capital recycling activities, we are convinced that this is the ideal time to endure these bankruptcies and backfill these spaces in a highly occupied and high demand environments which will lay the groundwork for 2018 and beyond.

In terms of additional risk in 2017, we are concerned that the Payless closure list could grow beyond 400 stores and we are becoming increasingly watchful of Rue 21, Gymboree and Children's Place. What I can tell you is that if all of our locations for these tenants are closed, for example, on June 30th, with no assumed 2017 backfills, these closures would detract an additional $1.6 million from our full year 2017 same-store NOI, which equates to approximately 50 basis points. While it's highly unlikely that these locations will all close by June 30th, our bad debt assumption for the balance of 2017 contemplates this incremental risk. It's important to note that the shape of our 2017 same-store NOI growth assumption is the mirror opposite of our 2016 same-store NOI growth, such that we anticipate a deceleration in the second and third quarters followed by a sharp re-acceleration in the fourth quarter. And with that, I'll turn the call over to Shane.

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Shane C. Garrison, Retail Properties of America, Inc. - COO, CIO and EVP [5]

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Thank you, Heath. On the operational and transactions front, we've been very busy. Most importantly, notwithstanding the negative sentiment surrounding retail, we continue to see the friction necessary to drive rents. Year-to-date, we signed 121 new and renewal leases with a blended comparable releasing spread of 10% and an ABR per square foot of over $27, a high watermark for both of these metrics since we began reporting them. Furthermore, the leases we signed during the quarter contain strong annual contractual rent increases of approximately 140 basis points. Our performance for the quarter was broad-based and consistent across asset type and geography, yet again demonstrating the strength and quality of our portfolio. Our retail leased rate at the end of the quarter stood at 94.3%, down 70 basis points sequentially, while our same-store leased rate was 95.3%, down 30 basis points sequentially, primarily driven by one-off anticipated anchor expirations in addition to ordinary course seasonal move-outs. Of note, our small shop leased rate of 89.5% is up 160 basis points year-over-year.

On the transactional front, we are well on our way to completing our disposition goals for 2017 with approximately $570 million already closed or in process. As a result, we remain confident in our ability to execute on our 2017 asset sales of $800 million to $900 million, and expect the blended cap rate on dispositions will be in the 6.5% to 7.5% range. Overall, as expected, pricing and demand remain dynamic and very sensitive to market positioning, asset type and asset quality. Our continued progress is a testament to our superior market optics, supremely focused investments team and the high quality nature of our disposition pool.

On another significant goal for 2017, we continue to drive value and liquidity with the leasing traction at Schaumburg Towers. To date, we have re-leased 44% or 397,000 square feet of the available space and we have an additional 25,000 square feet in lease negotiations, all of which will have leasing comps of 27% or greater. Based on the progress to date, we remain confident in our ability to monetize the asset in 2017 with proceeds net of CapEx and re-leasing costs in the $80 million to $100 million range.

Turning to redevelopment. We continue to make progress on our active projects. We are on track to deliver Reisterstown in the fourth quarter of this year and the project is roughly 90% leased or in active lease negotiations. Additionally, we are nearly complete with all pre-development activities at Towson and we are on track to break ground later this year. Given the high quality and in-fill nature of this mixed-use project, we continue to receive strong interest from entertainment, restaurant and soft goods merchandising categories. In total, we're on track to deliver approximately $21 million of re-development and pad developments at year-end at blended double-digit returns.

Before turning to the recent wave of tenant bankruptcies, it's important to revisit our re-tenanting initiatives over the past few years. You will recall that in 2015, we proactively recaptured 15 anchor boxes, representing over 500,000 square feet. To date, all of that rent has been replaced with the average downtime of less than 12 months and comparable releasing spreads that were nearly 20%. In 2016, we had 10 Sports Authority boxes, of which one was sold and one was located at our redevelopment project in Washington D.C.

Of the remaining eight representing 364,000 square feet, all but one of these boxes are leased or in active lease negotiations, and we expect these locations to be opened and operating during the second half of 2018. I've said it before and it's worth repeating, this is what we do every day. As for 2017, retailing remains Darwinian as evidenced by the roster of bankrupt tenants. The good news is that we don't have exposure to Gordmans, RadioShack, BCBG, MC Sports, Eastern Outfitters, Wet Seal or The Limited. However, as Heath noted, we do have exposure to hhgregg, Gander Mountain, Family Christian and Payless.

Regarding the backfills, hhgregg is in full liquidation mode and we expect to get all five of our locations back, representing 161,000 square feet, one of which is located at our redevelopment project in Washington D.C. As it relates to the remaining four locations, we are in active negotiations on all of these locations. Merchandising categories include specialty grocers, discount soft goods and wine and spirits, just to name a few. On average, the hhgregg leases are below market and provide for what should be our best rental comps on big-box bankruptcy to date, as we expect double-digit re-leasing spreads on single tenant backfills with higher re-leasing spreads if there is demand to split the space. Average downtime is expected to be roughly 12 months.

Moving on to Gander Mountain. We have two locations representing 111,000 square feet. Although early, we have very strong interest from several different uses including entertainment, furniture, specialty grocer and fitness. We expect the replacement tenant or tenants to be open and paying rent by mid- to late 2018 depending on bankruptcy timing and final rejection of the leases. As for the smaller format stores, to the extent we get any of these spaces back, we anticipate, on average, minimal downtime and positive releasing spreads which follows the theme on bankruptcies over the last three years.

While we do expect some short-term negative impact in our lease revenues from these bankruptcies, it is important to remember the overall quality of the portfolio. Today, we are 95%-plus leased in same-store portfolio and we are not chasing occupancy. In fact, we are very much in a position to continue to drive rents and merchandising. We expect the best assets to only get better as commodity centers constructed on a now defunct spacing model continue into obsolescence and expect that our retail partners will put increasing focus on those locations providing for the bricks and mortar trifecta, profitability, brand awareness and distribution, all of which align well with our long-term market focus strategy. And with that, I would like to turn the call back over to Steve for his closing remarks.

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Steven P. Grimes, Retail Properties of America, Inc. - CEO, President and Director [6]

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Thank you, Shane and Heath for your reports. While recent bankruptcies have caused short-term disruption in our expected same-store NOI growth assumption for 2017, and have overshadowed retail fundamentals, we continue to be encouraged by our ability to drive leasing spreads and rents in this highly occupied environment, strengthen our cash flows and finalize our asset repositioning efforts by the end of 2018. As we stated at our Investor Day, we expect 2017 to be an inflection point and this recent disruption is manageable with minimal earnings consequences. As a result, we are maintaining our OFFO guidance and we are maintaining our disposition target and will remain disciplined in our use of capital, keeping all uses on the table.

We continue to be encouraged by the fact that we are in the later stages of our plan, the health of our balance sheet and our tremendous team which is committed to creating long-term sustainable value for our shareholders. And with that, I'd like to turn the call back over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from George Hoglund from Jefferies.

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George Andrew Hoglund, Jefferies LLC, Research Division - Equity Associate [2]

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Just wondering if you could give a little bit of color on what you're expecting from lease termination fees?

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Heath R. Fear, Retail Properties of America, Inc. - CFO, EVP and Treasurer [3]

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So we don't guide to lease termination fees right now, George. So typical run rate for lease termination fee is probably, call it, $3 million a year. I think so far to date we've collected about $1.6 million. So again, we don't guide to it, but if you're using a run rate, use $3 million.

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George Andrew Hoglund, Jefferies LLC, Research Division - Equity Associate [4]

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And then just as far as the store closures, will any of those closures and bankruptcies impact any of the individual asset disposition plans?

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Shane C. Garrison, Retail Properties of America, Inc. - COO, CIO and EVP [5]

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No, it's a good question George. At this point, we don't think so. We think there's enough activity there, and the activity combined with the quality of the assets to the extent they're in the disposition plan this year, we think make them liquid.

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George Andrew Hoglund, Jefferies LLC, Research Division - Equity Associate [6]

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Okay, and then just the last one for me. Are you seeing any change from lenders in terms of the buyers that are acquiring your assets, are they facing any increased challenges in terms of getting financing these assets?

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Heath R. Fear, Retail Properties of America, Inc. - CFO, EVP and Treasurer [7]

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So George, the liquidity is still pretty good in this space. Obviously, the retail headwinds are also appearing in the capital market as well. But what we're seeing a lot is, we're seeing a lot of banks are stepping into the void. You can still get CMBS debt at reasonable rates, call it, 4.5% for 60% leveraged deal. So the financing is available. And again, banks have been losing a lot of allocation because they've been stepping away from doing construction loans. So there's a lot of floating rate debt out there available. And so again, it's not as liquid as it was two years ago in the retail space, but there's certainly financing sources available.

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Shane C. Garrison, Retail Properties of America, Inc. - COO, CIO and EVP [8]

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And George, I would just add from what we've seen from an under contract and close standpoint, we have yet to do a deal that was contingent on financing.

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Operator [9]

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Our next question comes from Vincent Chao from Deutsche Bank.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [10]

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Just sticking with the bankruptcies here for the section. Appreciate the (inaudible), I mean, appreciate your -- the color you gave on all the bankruptcies to date as well as on the bubble kind of closures. Just curious, it doesn't sound like it but have you increased the reserve for sort of future bankruptcies? And as you're discussing with the tenants, their outlook for the rest of the year, particularly for the weaker tenants in the portfolio, do you think that the typical seasonality of bankruptcies may be different this year? Meaning could we see more later in the year than we typically do?

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Heath R. Fear, Retail Properties of America, Inc. - CFO, EVP and Treasurer [11]

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There's a couple of questions in there, so I'll answer the first. So as far as the continuing bad debt reserve, Vin, it's 50 basis points of same-store revenue which, at this point, equals 55 basis points of full year same-store NOI. So again, we gave an illustrative list of those four tenants, which worst-case scenario, they all leave by June 30th. We don't think that's going to happen. We're just using it as an example. That reserve right there more than covers the disruption caused by those four tenants which are the ones we're watching closely. So we think at this point of the year, coupled with the fact that we moved our midpoint down, we feel very comfortable at our current range. And then the second question was, do we think that seasonality-wise we'll see more bankruptcies later in the year, I mean, I think -- we're thinking we'll see Rue probably file in the next couple of weeks. Whether or not we see some of those other ones, Children's, Gymboree, my guess is, they -- say, probably try to get through the end of the year, but you never know.

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Shane C. Garrison, Retail Properties of America, Inc. - COO, CIO and EVP [12]

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Yes, I would agree with that. I think long story short, we think the seasonality or this bankruptcy season has been extended this year. But for the most part, we should be through it.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [13]

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Okay. And then as we think about 2018, I mean just some of the credit reports out there suggest that there's more and more distressed retail and maybe the worsening debt maturity profile. I mean do you think 2018 is looking like it'll be similar to 2017, worse, better? And also as you look at your own expiration schedule and things like that?

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Shane C. Garrison, Retail Properties of America, Inc. - COO, CIO and EVP [14]

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Yes. I think it's a great question. We talked about the 2018 setup a lot here. I think as a reminder, look, we have the big obvious bankruptcies out there, I think pending are Sears and Kmart, we have zero exposure there, and we have zero department exposure -- department store exposure. So I think we're going to take our medicine here with a few boxes. Again, we're going to drive the biggest comps we've ever had with hhgregg. For the '18 setup, it's interesting. We think broadly, and there's going to be more square footage come back really driven by the department sector -- department store sector. But I think for us specifically, '18 is the best setup we've ever had. We have a much smaller denominator. We're probably 4 million to 5 million feet smaller by year-end, call it, 20 million feet based on the run rate on acquisitions or dispositions. We have a smaller denominator, we'll have our biggest redevelopment delivery ever for the company in one year, we should put up over $2 million in NOI added to the same-store pool. And then we've got some significant comps outside of hhgregg on boxes we've taken back over the last quarter or so. So Tysons, for example, most of us have seen that. Like the 2 to 3x comp. Woodinville in Seattle, which we recently took back, that's a 400% to 500% comp. Crown puts up its last 10% on occupancy at mid-40 rents. And then hhgregg comps, the first two boxes have gone on the table here at 50-plus% comps. So between redevelopment and some of the box closures and some of the boxes we've taken back willingly, in addition to the limited bankruptcy exposure we have with some of the bigger box space which should come back next year, we like this setup for '18 very much.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [15]

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Great. And then just turning to the dispo side, I know 75% of the retail is sort of either closed or close to being closed. That certainly leaves about $40 million to maybe $140 million for Zurich. Given the leasing progress that you've made, given the trends in the market that you're seeing on the investment market side, do you think that's really the right way to think about Zurich? I mean $40 million seems really low. Even $100 million may be a little bit light. So but that just from a backwards math perspective that seems to be the implication.

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Shane C. Garrison, Retail Properties of America, Inc. - COO, CIO and EVP [16]

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Yes. I think we think of Zurich as $80 million to $100 million net of CapEx, I think.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [17]

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Okay, so no change in the range?

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Shane C. Garrison, Retail Properties of America, Inc. - COO, CIO and EVP [18]

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No change, and I think from the progress standpoint, we have another 25,000 feet, as I discussed in my prepared remarks. And if you add the 25,000 to the anchor tenant expansion rate or expansion right, excuse me, through '19, you were at 60% leased. And we think 60% to 70% is kind of that magical hurdle that makes the asset liquid. The OM is currently being drafted. We're just waiting to get a little further down the road of construction to have more meaningful OM from a graphic standpoint. But at this point, I would expect late June, July to get to -- the asset to market. So very much on track.

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Operator [19]

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Our next question comes from Christy McElroy from Citi.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [20]

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Just a clarification question on the last one. With the buffer in your same-store NOI growth range for sort of the unknown, is it the low end or the midpoint of the same-store range that assumes that scenario of the sort of end of June closures for the additional Payless and Rue 21?

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Heath R. Fear, Retail Properties of America, Inc. - CFO, EVP and Treasurer [21]

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It's the midpoint, Christy.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [22]

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It's the midpoint, okay. And then maybe you can talk a little bit about sort of the mix of what you have left to sell in sort of 2018 versus you've transacted on or has under agreement, 75% of what you plan to sell in 2017. If you can talk about 2018, you just defeased the IW JV loan until you opened up a bunch of more properties. Is it the same quality stuff? Is it a little bit more difficult stuff to sell? Just trying to get a sense for kind of the remaining as we look to the light at the end of the tunnel.

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Steven P. Grimes, Retail Properties of America, Inc. - CEO, President and Director [23]

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Christy, this is Steve, and then I'll turn it over to Shane, but specifically, when we talked about the dispo pool for both '17 and '18, we talked about 55% or so as grocery-anchored or grocery component and then, call it, roughly 5 to maybe a little over 5% was the Zurich asset with the remaining being Power largely in the top 50 MSAs, and also largely kind of within that cap rate range that we had talked to on a blended basis. I think what you're seeing, and Shane will talk to you more specifically is, we've seen movement on all. But specifically, I think he's got a couple of deals under contract that are pretty compelling that he can speak to.

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Shane C. Garrison, Retail Properties of America, Inc. - COO, CIO and EVP [24]

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I guess, Christy, back to your original question on '18. It will be our largest Orange County asset should be in '18 and another -- our next largest asset in California should be '18, both very compelling. I would expect favorable cap rates there and then the rest should be just sporadic. Again, most of it should be grocery. Around this year just from what we're seeing, just to go there, we're at 160 done, and I think the cap rate there has been 6.5 to 6.7, somewhere in there, it's been largely grocery-anchored. And what we're seeing is neighborhood grocery, as long as there's a sales story and the sales story being 450-plus on the sales side, almost regardless of geography, that is a deep bidder pool and it's a very favorable cap rate, again 6s, maybe up to 7 depending on occupancy costs and other peripheral items or valuation points. And as you go up the strata, next being community, for best-in-class community centers even tertiary, I think we've got one under contract right now that's fairly good sized and call it $50 million that has a grocer that does north of $650 a foot. So you have the grocery sales story there, but you also have the bigger footprint of a community center. And that center in particular you actually have Target on the ground lease which is fairly rare and other boxes paying 15 to 18. The asset's always been 99% to 100% leased, so very high-grade best-in-class but tertiary. We -- that asset's pegged at 7. And then you go up to the top on Power, and Power today, the valuation exercise, as we all know, is completely different than it was even 24 months ago. And that is that the correlation in pricing is almost exclusively tied to the underlying real estate. So long ago, when Power was out, as we all know it was a credit play. It was a lease duration play, and today, the term credit tenants is an oxymoron in our space. So that has really knocked the bottom out of Power. And when you go out in tertiary Power, you have to really understand who shows up and why and it also has driven inordinate CapEx underwriting for re-tenanting. So what we've seen on best-in-class tertiary Power, 7.5 to 8.5 depending on the sales story. That being said, not all Power is unfortunate. I think Power right now is a 4-letter word. But if you have the right Power, we will sell a Power Center in Miami this year that will certainly trade in the 5s. So again, if you go back to the correlation of the underlying real estate and I think that's the best way to think about Power and the overall valuation right now.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [25]

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Okay, and then just lastly, Heath, you talked about the balance sheet. Each of you have made comments about being opportunistic and I know I've asked about this before. But just maybe give a continued pressure on the stocks, you could maybe update us your thoughts on doing buyback here.

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Steven P. Grimes, Retail Properties of America, Inc. - CEO, President and Director [26]

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Christy, I'll take that and Heath can chime in. Certainly, it's part of our program. It's part of our tools. We've used it in the past, and I think where the pricing is today it is even more compelling than it's ever been. So if we were to trade out some acquisition dollars for buybacks, we would certainly entertain that. It's something that we feel as though is meaningful in terms of appropriate capital allocation. But be mindful of the fact that it is a little bit difficult to acquire in huge scale, we will do our best to do it opportunistically.

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Operator [27]

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

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [28]

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Just first question, just following up on Christy's question on dispositions. Shane, can you just talk about sort of the buyer pool for these assets, any change to demand, the number of interested parties, or sort of strength of sponsorship in general for assets that's showing up for these assets that you're marketing for sale?

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Shane C. Garrison, Retail Properties of America, Inc. - COO, CIO and EVP [29]

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Yes. I think just going back to the strata of assets, grocery is, again, as long as the sales story there, Todd, it's 5 to 10 deep and all are very qualified. We have sold to other public REITs, we've sold to funds. We've sold to high net worth individuals. Community's a little different, more of the fund opportunistic side, certainly more of a levered yield play. And to date, we have sold more to the high net worth and fund side. And then Power, we're actually talking to or have deals under LOI with other REITs as well as high net worth individuals. So a very broad spectrum. And as you go up that strata, the buyer pool gets thinner.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [30]

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Okay. And then it sounds like you've maintained your acquisition guidance for the year. Are you thinking about investments differently at all here, though, just given the increase in the company's cost of capital?

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Shane C. Garrison, Retail Properties of America, Inc. - COO, CIO and EVP [31]

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I think Steve talked about buybacks. I think that remains to be an opportunity especially anywhere near these levels. That being said, we are balancing the initiative with the target market. So we are being thoughtful year-to-date on, call it, $150 million closed or in process. We're about a 6 cap. I think we continue to look for opportunities to feed the redevelopment densification program as well. That's a consideration that we weighed very heavily on acquisitions. We have $300 million to $400 million in the pipeline right now, but again, where the stock's trading, that's certainly compelling as well.

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Operator [32]

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Our next question is from Chris Lucas from Capital One.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - SVP and Lead Equity Research Analyst [33]

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On the -- Shane, back to the TSA situation. You mentioned you have the eight that were in active negotiations or leased. Can we actually talk about what's been leased versus what hasn't been leased? And then also is there any rent commencement expected in 2017 from the Sports Authoritys?

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Shane C. Garrison, Retail Properties of America, Inc. - COO, CIO and EVP [34]

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Yes. Good morning, Chris. So we have, call it, nine net. We've got five leased and I think one of -- actually two of those should come online towards the end of the year. And the remaining four, three are in LOI, so no expectation there other than getting it signed this year, Chris, and the one remaining box, we just continued that conversation but nothing tangible at this point. From a comp perspective, it's going to be 5% to 10% comp exercise by the time we're done on Sports Authority.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - SVP and Lead Equity Research Analyst [35]

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Okay. And then Heath, on the hhgregg, I think you've -- did you get April payment for them -- for the rent from them?

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Heath R. Fear, Retail Properties of America, Inc. - CFO, EVP and Treasurer [36]

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Yes, we did. We did not get March, but we did get April.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - SVP and Lead Equity Research Analyst [37]

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Okay. And then just Shane, actually going back to you, just to wrap up for modeling purposes. The disposition cap rate for the quarter as well as the acquisition cap rate, what should we be using for both?

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Shane C. Garrison, Retail Properties of America, Inc. - COO, CIO and EVP [38]

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Six on the acquisition side. For the quarter,6.5 - 6.6 on dispos.

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Operator [39]

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Our next question is from Michael Mueller from JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [40]

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Shane, just a question on cap rates going back to when you're talking about Power Centers, Community Centers. If you take a market, I know it's going to be different in every market in every circumstance. But if we're generalizing and saying in the same markets you have three comparable quality shopping centers. One's a grocery-anchored Neighborhood Center, one's a Community Center, one's a Power Center. When you move from the Neighborhood up to the community, how much increasing the cap -- what do you think the cap rate moves up to making that leap and then going from community to Power, how much more does it move up, would you say?

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Shane C. Garrison, Retail Properties of America, Inc. - COO, CIO and EVP [41]

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That's an interesting question. I would say assuming sales are comparable, right, it's a good story across the board. It's probably 50 to 100 basis points gap between grocery and community. And between community and Power, let's say we are in a secondary market, it could be another 50 to 100.

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Operator [42]

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(Operator Instructions) And it's a no further question, so I'd like to turn the floor back over to management for any closing comments.

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Steven P. Grimes, Retail Properties of America, Inc. - CEO, President and Director [43]

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Great. Thank you all for being with us this morning. We understand that this was a pretty difficult quarter in terms of trying to understand what's the real headline versus the real headwind. That being said, we spent, as we always do, in our quarterly preparations to make sure that we're coming across as transparent and accurate as possible. So obviously, the guidance move on the same store is indicative of that. But holding the others we still feel very, very confident in our ability to execute on the remaining portion of the guidance. That being said, there's a lot in the transcript. I would encourage you all to look in the transcript. There's a lot of details there, and certainly, we're available for any questions that you may have for further follow-up, and we'll probably see many of you at ICSC or NAREIT, in the upcoming weeks. Thanks, everybody. Have a great morning.

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Operator [44]

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This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.