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Edited Transcript of RPAI earnings conference call or presentation 30-Oct-19 4:00pm GMT

Q3 2019 Retail Properties of America Inc Earnings Call

Oak Brook Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Retail Properties of America Inc earnings conference call or presentation Wednesday, October 30, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Julie M. Swinehart

Retail Properties of America, Inc. - Executive VP, CFO & Treasurer

* Michael W. Gaiden

Retail Properties of America, Inc. - VP of IR

* Shane C. Garrison

Retail Properties of America, Inc. - President & COO

* Steven P. Grimes

Retail Properties of America, Inc. - CEO & Director

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Conference Call Participants

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* Christine Mary McElroy Tulloch

Citigroup Inc, Research Division - Director & Senior Analyst

* Derek Charles Johnston

Deutsche Bank AG, Research Division - Research Analyst

* Floris Gerbrand Hendrik van Dijkum

Compass Point Research & Trading, LLC, Research Division - Analyst

* Hong Liang Zhang

JP Morgan Chase & Co, Research Division - Analyst

* Vince Tibone

Green Street Advisors, Inc. - Analyst of Retail

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Presentation

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Operator [1]

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Greetings. Welcome to the Retail Properties of America Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to your host, Michael Gaiden, Vice President, Investor Relations. You may begin.

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Michael W. Gaiden, Retail Properties of America, Inc. - VP of IR [2]

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Thank you, operator, and welcome to the Retail Properties of America Third Quarter 2019 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 www.rpai.com.

On today's call, management's prepared remarks and answers to your questions may include statements that constitute forward-looking statements under federal securities laws. These statements are usually identified by the use of words such as anticipates, believes, 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 2019, 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, October 30, 2019, 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 www.rpai.com. On today's call, our speakers will be Steve Grimes, Chief Executive Officer; Julie Swinehart, Executive Vice President, Chief Financial Officer and Treasurer; and Shane Garrison, President and Chief Operating 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 & Director [3]

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Thank you, Mike, and good day, everyone. I'm proud to report that our team continues to extend our streak of above-plan performance as seen in the first half of the year. Our 2 paths to growth for our shareholders have never proven stronger as we will outline for you on this call.

I could not be more pleased with the position of RPAI and our prospects for meaningful growth through our core portfolio performance and within our sights to be supplemented by our expansion efforts at our big 3 redevelopment projects. In Q3, we achieved several all-time records as a publicly-traded company, including record highs in leasing volumes as a percentage of GLA, record retail portfolio percentage leased at 95.5% as well as record low in top 20 tenant concentration as our continued diversification efforts shine through. In summary, our Q3 performance again demonstrated the tangible value our combined high-quality platform and real estate can achieve.

Our accelerated leasing volumes, which have driven a record portfolio lease rate of 95.5% for us, also bode well for our outlook. So too does our trajectory in lease spreads, which jumps (sic) [jumped] to a blended 10.8% in Q3, up from 8.2% in Q2.

We also continue to advance and derisk our expansion and redevelopment projects at Circle East, One Loudoun Downtown and Carillon, as Shane will detail. And we continue to expect rent commencements to begin in late 2020 at Circle East, complementing the base rent-driven growth in our core portfolio.

Our increased operating FFO guidance of $1.05 to $1.07 per diluted share highlights that our team is firing on all cylinders. And we remain focused on executing in the fourth quarter to deliver on our raised 2019 same-store NOI growth assumption of 2.25% to 2.75%, up from 1.75% to 2.75% earlier.

A sound consumer economic backdrop centered on the health in jobs and housing markets continues to aid retail results overall. Our better-than-expected third quarter financial results and lower-than-expected CapEx helped us to maintain net debt to adjusted EBITDAre at 5.5x in the third quarter.

With our balance sheet in fortress-like condition and our abundant liquidity of more than $840 million at September 30, we hold no foreseeable need for external capital, as Julie will outline. Combined with our ongoing operational momentum and expansion opportunities, we remain in the driver's seat on the road to continued growth.

Earlier this week, we issued a press release that announced the launch of our all-new ESG microsite. The new site features a summary of successfully implemented programs related to energy, sustainability, human capital, diversity, corporate governance and other topics that support our focused commitment to ESG. I encourage all of you to visit our new microsite at rpaiesg.com.

Our year-to-date results have firmly validated our thesis on the potential for RPAI 2.0, and we hold much enthusiasm for capitalizing on our positive momentum over the remainder of this year and beyond. Our parallel paths to growth soon to merge in the coming years will be here before we know it. It is truly exciting to see the vision of RPAI 2.0 come together before our eyes as our team delivers day in and day out with an unwavering commitment. The team's enthusiasm is infectious as seen in our results we are sharing with you today.

With that, I will turn the call over to Julie to detail our third quarter financial results.

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Julie M. Swinehart, Retail Properties of America, Inc. - Executive VP, CFO & Treasurer [4]

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Thank you, Steve. Today, I will discuss our third quarter results, our capital positioning and our outlook for the remainder of 2019. From an earnings perspective, in the third quarter, we generated operating FFO of $0.27 per diluted share, up $0.01 sequentially as a result of NOI growth and up $0.01 as compared to Q3 2018, primarily due to a reduced share count.

Year-to-date, we delivered operating FFO of $0.80 per diluted share, $0.03 or 3.9% above the comparable 3 quarters in 2018. A reduced share count benefited this per share metric by $0.02 with earnings growth contributing $0.01, driven by same-store NOI expansion and increased net termination fee income.

Same-store NOI for the third quarter rose 2.3% over Q3 2018. As we previously communicated on our last earnings call, we expected a deceleration in the third quarter from the 2.9% same-store growth pace of the first half of 2019 due to a more difficult Q3 2018 comparable period. While this deceleration occurred, it was lesser in magnitude than we anticipated in part due to small beats across most categories as compared to our internal expectations.

Similar to our first half results, base rent expansion continues to power our same-store growth, adding to the broader visibility on our business and contributing more than 280 basis points of same-store growth in Q3.

Contractual rent increases and occupancy gains powered the vast majority of this base rent growth, with re-leasing spreads also significantly contributing. Increased other lease-related income also helped our Q3 same-store NOI expansion, while expenses net of recoveries and percentage and specialty rent served as the primary offsets as expected. Our year-to-date same-store NOI growth of 2.7% also has been generated primarily by base rent growth, which added approximately 250 basis points, with higher other lease-related income and lower bad debt also contributing.

Regarding bad debt, on last quarter's call, I noted that only 20% of our full year bad debt assumption of 50 basis points of same-store revenue had been used in the first half of 2019. In the third quarter, we used another 40% of this full year bad debt and tenant fallout allocation, a portion of which is visible in the same-store bad debt amount of $690,000 recorded in Q3. That leaves 40% of our full year bad debt assumption available for the fourth quarter if needed. The digestibility of tenant fallout year-to-date reflects both incremental health among merchants broadly as well as our ongoing leasing efforts toward tenant credit quality and diversification in our rent roll.

Turning to our capital structure. The balance sheet remains in great shape with net debt to adjusted EBITDAre at 5.5x, which sits unchanged quarter-over-quarter and positions us in the lower half of our peer group. Liquidity also remains robust with only $24 million drawn on our $850 million revolver and over $17 million of cash on hand. Due to planned spending on our expansion and redevelopment projects, we do expect leverage to tick slightly higher by year-end. We remain committed to balance sheet health and our stated objective of leverage at or below 6x.

As disclosed during second quarter earnings, we raised $270 million in the aggregate on July 17 from a $120 million 5-year term loan and a $150 million 7-year term loan. We swapped these variable rate LIBOR-based loans to fixed, locking in all-in costs of 2.88% for the 5-year term loan and 3.27% for the 7-year term loan based on our current pricing at the lowest point on the leverage grids tied to these borrowings. These swaps took effect on August 15.

With this $270 million placement, our debt capital raises for the year tallied $370 million, placing us well above our initial $200 million to $300 million goal. As a result, we used a portion of these higher-than-expected proceeds at lower-than-expected interest rates to prepay 4 mortgages in the third quarter with an aggregate principal balance of approximately $108 million and a weighted average interest rate of 4.91%.

These prepayments lowered both our secured indebtedness level and our overall weighted average interest rate. And following these prepayments, we now hold just 5 mortgages, our only secured debt, with an aggregate principal balance of approximately $96 million representing less than 6% of our total debt.

Compared to June 30, our weighted average interest rate improved by 16 basis points to an attractive 3.88%, and our weighted average years to maturity increased by approximately 1/3 of a year to 5 years.

Turning to our raised 2019 operating FFO guidance. As detailed in last night's press release, we now expect full year operating FFO per diluted share of $1.05 to $1.07, up another $0.005 at the midpoint from our prior $1.04 to $1.07 range. This guidance raise primarily results from our updated 2019 same-store NOI growth assumption of 2.25% to 2.75%, which represents the upper half of our prior 1.75% to 2.75% range.

We remain encouraged by our year-to-date execution through the third quarter as well as our efforts to turn on rents thus far in the fourth quarter. And while confident in our outlook for the balance of the year and noting that 40% of our full year bad debt allocation remains available for Q4 of 2019, if warranted, we acknowledge that there is still work to be done through year-end. We remain keenly focused as an organization on delivering on our hefty operational agenda over the balance of the year.

And now I will turn the call over to Shane.

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [5]

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Thank you, Julie. In the quarter, we signed 1.1 million square feet in new and renewal leases, achieving a new record in leasing volumes as a percent of our total GLA at more than 5%, besting our prior record set in Q4 2018. This metric, combined with our 46% spread on comparable new leases, which hold a weighted average term of approximately 10.5 years, underscores the pricing power, depth and relevancy of our portfolio in today's retail environment.

Additionally, blended spreads on both new and renewal comparable leases accelerated for the second quarter in a row, rising to nearly 11%, up from 8% in the second quarter and the broader existing baseline of 5% to 6% in the preceding quarters.

In addition to the accretion of these double-digit spreads, our aggregate new lease signings in the quarter also contained annual contractual rent increases of approximately 200 basis points on average, pushing this key statistic for our total portfolio northward and providing incremental visibility on further expanding our overall contractual rent growth profile.

Our leasing efforts have pushed our retail portfolio percentage leased to a new record high for our company as a publicly traded REIT at 95.5%, up 80 basis points sequentially and 150 basis points year-over-year. Our 98.2% anchor leased rate, a multiyear high, drives this overall portfolio statistic. For a further perspective, of the 445 anchor spaces across our 20 million square foot portfolio, we held just 11 anchor boxes open for lease-up at the end of Q3. This not only provides for compelling growth in 2020 but also provides us continued opportunity to focus on longer-term growth through selective merchandising and termination fee income.

At the same time, we continued our first half momentum in starting rents on time during the third quarter. This operating performance helped power our above-plan base rent growth in the third quarter and narrow our leased-to-occupied spread sequentially by 50 basis points to 180 basis points or $7.7 million as of September 30. The $21.44 ABR per square foot of this pool is accretive to our current portfolio ABR of $19.38 and should provide further growth as we deliver these spaces in the coming months.

We continue to push for rent roll diversity and stability, and I am pleased to announce that Ulta Beauty entered our top 20 tenant list at #19 this quarter. This top 20 add typifies the slate of high-quality relevant retailers moving up our tenant roster that continue to diversify and solidify our rent roll. In the aggregate, we have further reduced our top 20 tenant concentration by 200 basis points year-over-year and 20 basis points sequentially to 26.7%, a new record low for us as a publicly traded company.

Our proactive stance to watch-list tenants and merchandising continues to pay dividends. For example, we opened our sixth Trader Joe's at Shoppes at Union Hill in Denville, New Jersey last week, backfilling a Pier 1 location at a very compelling spread. We also recently signed our fourth lululemon location at Main Street Promenade in Downtown Naperville, replacing a J.Crew there at a positive double-digit spread. These upgrades exemplify our team's ongoing effort to drive simultaneous improvements in mix, ABR and credit quality.

Turning to our expansion and redevelopment activity. AvalonBay continues to progress toward first quarter 2020 initial move-ins at the multifamily portion of Circle East, dovetailing with our expectations for delivery of the retail shell in Q1 next year and the expectation of early rent commencements from our retail portion of this mixed-use project in late 2020.

Most importantly, our recent signing of Shake Shack for a prominent corner location on Joppa Road provides excellent leasing momentum and further validation of the project. We also continue conversations with merchants in other categories like home furnishings, digitally native and softgoods and will look to announce these deals in the near term.

In Loudoun, we continued to advance construction at pads G and H, which will feature 378 multifamily residential units over street retail. This expansion project will enhance our existing mixed-use footprint at One Loudoun Downtown, which is currently 96% leased in retail and 100% leased in office. This multifamily development scheduled to open in late spring 2021 also will offer the opportunity to extend the existing successful entertainment-focused component of our current offerings at One Loudoun.

Turning to our last active project, Carillon. We completed the demolition of approximately 290,000 square feet of already vacant GLA at the site during the third quarter. This demolition in turn drove the bulk of the sequential uptick in depreciation and amortization in the third quarter on our income statement, and we expect this line item to normalize at lower levels in the fourth quarter. This mixed-use project, for which the retail portion is 37% pre-leased, sits adjacent to the University of Maryland Capital Region Medical Center now under construction, which is scheduled for opening in spring 2021. Together with our medical office joint venture partner, Trammell Crow, we already have several active discussions with potential tenants interested in our 100,000 square foot medical office building, which will compose 44% of the total mixed-use GLA of Carillon Phase One. And we still expect to start vertical construction on the project in early spring of 2020.

We also provided updated information and timing in our supplemental for expansion projects at Main Street Promenade and Downtown Crown. With this update, we have further clarified our flexible posture toward our pipeline outside of our commenced projects at Circle East, One Loudoun Downtown and Carillon.

In summary, we will continue to evaluate the optimal start time for expansion projects at Main Street Promenade, Downtown Crown and several other locations based on size, time to stabilization, overall risk and cyclical and balance sheet considerations. Currently, we have no set date to commence any projects outside of the current 3 in process.

Going forward, we will look to greenlight these projects when conditions best dictate. In the interim, we enjoy the increased optionality in our development and capital planning brought by this highly flexible approach, and we continue to explore smaller, more immediately accretive pad expansion opportunities to enhance our portfolio and earnings growth.

Thanks to our well-positioned assets, we hold numerous opportunities to continue to entitle expansionary development, and we will look to announce these opportunities in the coming quarters.

Turning to transactions. We remain similarly opportunistic on the acquisition and divestiture front, closing on the sale of land and rights to develop the remaining 12 2-over-2s at One Loudoun Downtown for roughly $3 million in the third quarter and acquiring a single-user parcel occupied by Shake Shack at Southlake for $3 million as well, bringing our total dispositions for the year to approximately $50 million and total acquisitions to just under $30 million.

In summary, Q3 was one of the best quarters we have ever delivered as a publicly traded company, and both our leasing and development teams continue to build the opportunity set for self-sourced growth embedded within our current operating portfolio and project pipeline. When combined with our execution strengths, we are well positioned to build on the impressive results delivered year-to-date, setting the stage for a very productive 2020.

I will now turn the call back over to Steve.

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

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Thank you, Shane and Julie. As you can hear, our continued crisp execution brings us many reasons for confidence in our outlook over the balance of the year. Our straightforward investment proposition anchored on our curated portfolio of 104 growth-oriented operating assets, roughly $350 million in remaining spend over the next 2 to 3 years for our 3 active projects, combined with our strong balance sheet, abundant liquidity and our opportunistic approach to acquisitions and dispositions, provides (sic) [provide] us many reasons to look forward to what lies ahead in 2020 and beyond.

With that, I will now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Christy McElroy of Citi.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director & Senior Analyst [2]

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Just wanted to follow up on, Shane, your comments and get a little bit more of the rationale and the background behind the decision to hold off on the Main Street Promenade and Downtown Crown projects and adjusting the optimal start time. What is that -- how much of that was your decision in terms of -- how much of that was your willingness to put capital to work sort of in the context of your macro view on the retail environment and economic backdrop versus it being a matter of sort of what your cost of capital looks like today? If that makes sense.

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [3]

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It does, Christy. So I think the optionality is key for our platform, right? We've always said we want optionality as to starts and we want to entitle everything we can and maintain an ability to kind of plug-and-play based on how we look at the macro and how we look at the specific drivers at the MSA level. So we pulled these 2 back specifically based on the macro as (sic) [is] just a bit opaque. There seems to be some clouds building on the horizon just at the macroeconomic level, nonretail-specific. So that's purely what this is. We look at $350 million or so of spending over the next 3 years on these projects. Love the projects. Everything is on time, as we discussed in our prepared remarks, but think it's prudent given lack of visibility here, certainly an election year next year as well, to pull back and kind of pick our shots from here, looking at balance sheet integrity as well as demand drivers.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director & Senior Analyst [4]

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Okay. And then just with those clouds building on the horizon, you said it was nonretail-specific, and appreciate the comments you guys made about reducing exposure to your top 20 tenant list. But sort of as you look ahead to 2020 between Dressbarn and others where you may have been working out rent reductions and space recapture outside of the bankruptcy process, could you maybe give us a sense for what the fallout headwind from a tenant perspective could look like next year?

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [5]

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I think that remains to be seen. The watch list hasn't really changed. But look, we're at -- a couple of things for 2020 without guiding but I think as a frame of reference it's important. So we have done since '15, call it, 75 anchor backfills at 15% plus re-leasing spreads with 51 different tenants. And most importantly, those 51 different tenants, there's not one of those tenants that are on the watch list today. And my point is that going forward, we feel because of that work since '15, we have certainly greater cash flow durability and diversity and hopefully growth through those efforts.

And secondly, I would point out that the current demand dynamic has outrun our expectations and I think most in the space. We're at 95.5% leased today. I talked about our anchors. We're north of 98%, 445 locations, only 11 available, and we actually have half of those in LOI or leased today. I could honestly see a path to 99% leased in the anchors right now.

And we also have $8 million of annualized rent to turn on in the next couple of quarters into '20. And then I would say lastly as it relates to our roll in '20, we have -- we're running at 6% of GLA rolling in '20, which is half of our average run rate. So we're opening the year at a much lower roll run rate.

And just to put a bit of a finer point on it, in our top 20 tenants, we have 6.5 million feet there, we only have 65,000 feet rolling in that population. So I think that those points and also the ability to pre-lease because of the demand drivers, we know we have 5 boxes that come back next year. That's what we have a handle on. And 4 of those are watch list tenants that we were proactive with and those are pre-leased. And the fifth box, we think we have leased this quarter.

And my point is, one, to put an exclamation point on what we see on the demand side, but also what is a relatively new dynamic is the ability to pre-lease 2, 3 quarters in advance of boxes we know we'd get back, which is cutting down from a, call it, traditional 12- to 18-month downtime to 6 to 9 months. So even if we take some of those boxes back or when we take some of those boxes back next year, we still conceptually have rent come back online and comp through it. So overall, more rent roll diversity, higher-quality portfolio and platform, and I think certainly significant volume and leasing efforts set us up for a great 2020, and it remains to be seen what the watch list effect will be.

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Operator [6]

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The next question is from Vince Tibone of Green Street Advisors.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [7]

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Could you provide an update on just the total expected development spend for 2020 and any funding plans currently in place for that amount?

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Julie M. Swinehart, Retail Properties of America, Inc. - Executive VP, CFO & Treasurer [8]

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Sure, Vince. So for 2020, we are looking at probably, I'd say, $150 million. So certainly a ramp, the ramp that we've been communicating over the last year or so. And that's associated with, as we're calling them, the big 3 projects.

In terms of funding, we've done a lot of work this year to free up room on our revolver. So we have this $850 million revolver. It was only $24 million drawn at quarter end. So I would expect to tap into that temporarily next year to fund some of this. But just as a reminder, our revolver is our only variable rate instrument so it's our way to continue to take advantage of the very attractive interest rate environment. Right now it's incurring interest at 2.85% and that's been coming down in recent quarters. And if it would continue to go down, it's an even better story for us. So very affordable in that regard and that would be again a temporary use for next year.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [9]

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Could asset sales potentially be on the table for funding or the line of credit the most or another maybe debt placement if interest rates are low the most likely option?

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Julie M. Swinehart, Retail Properties of America, Inc. - Executive VP, CFO & Treasurer [10]

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I think another debt placement would -- I don't want to sit on idle cash, which is not going to earn a whole lot sitting in the bank or in interest-bearing funds and we don't have any debt coming due in 2020. And even if I look ahead to '21, there's $350 million coming due. Even to think to prepay that early, one instrument is at 3.2%, another is just over 4%. So that's not feeling like it makes sense from my standpoint.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [11]

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Do those have prepayment penalties, those maturities in '21?

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Julie M. Swinehart, Retail Properties of America, Inc. - Executive VP, CFO & Treasurer [12]

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Yes. There'd be an element. One's a term loan and it's fixed with interest rate swaps through maturity so you'd have to consider hedge accounting implications as well. But again, the rates are not so high that I would look into prepaying them early, especially with any penalties.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [13]

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Okay. Got it. And then just drilling down a little further, like why are asset sales not part of the plan? It seems like the bid's there. The market's pretty liquid still for all qualities of strip centers so why not sell some of the lower-quality assets or maybe some single or some stable out-parcels even that you can get lower cap rates on? Like why not supplement the debt with asset sales?

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Steven P. Grimes, Retail Properties of America, Inc. - CEO & Director [14]

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Vince, this is Steve. There's multiple aspects of our strategy. I've alluded to it on the call earlier. We have the operating portfolio that essentially should carry the day through this development ramp from an earnings perspective. We want to keep that as pure and complete as possible. And embedded in that is some assets that are noncore to us for geography reasons only but are still very well-performing assets.

We think it prudent, especially given what we have in the horizon for development spend and our funding availability for the development spend, to preserve those disposition proceeds for acquisitions for further growth in our target markets. And if you were to look at the math and what we're able to do in terms of what we're able to sell at even in the future and what we're able to buy at, assuming cap rates move directionally in the same direction for what we're buying and what we're selling, we're in a very good position to preserve that capital to grow in those markets.

From a development perspective again, if we were not in a situation where we weren't essentially self-funded either through a small expansion in the line use or potentially further monetization through JV proceeds or air right sales, it would be a different story. But for right now, to sell income-producing assets to fund or prefund development and sit on idle cash is not prudent from an earnings perspective. And it makes all the sense in the world for us to view these 2 paths separately. And when they converge or when they merge in 2021, it's going to be off the charts. So that's the plan and it seems to be working and it will continue to work, which again bodes well for 2020 and our ramp through 2021 when these 2 things ultimately merge.

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Operator [15]

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The next question is from Derek Johnston of Deutsche Bank.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [16]

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On the new lease spreads which were very healthy, what drove the 46% versus I think it's a mid-20s on average range? TIs were basically kept in check. So what drove it? And how should we think about new lease spreads going forward?

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [17]

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Derek, it's Shane. Look, it was a big anchor quarter. You can feel it in TIs which are a bit elevated. But specifically, we talked about in the beginning of the year where we recaptured a couple of boxes we thought were compelling and we wanted to get to this year and they showed up in this quarter. So we had a 68,000-foot box in the Mid-Atlantic that was mid-single digits and we count north of a 2x on that deal. And then we also had a deal we recaptured in Seattle, which continues to be one of the strongest, if not the strongest, rent growth market we have which was also, call it, 30%, 40% rent comp. So those 2 deals specifically were large in square footage and drove the TI spend as well as the comp.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [18]

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Okay. And then just shifting to leasing trends. So I guess how is retailer interest stacking up in the redeveloped projects in general and versus underwriting?

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [19]

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So Towson would be our first indicator. We talked about Shake Shack, which was a great lead restaurant to sign, I think. It's a great prominent corner. We have 4 or 5 other deals teed up. We are still, call it, mid-40s to 50 net at Towson so we're very comfortable from a pro forma rent standpoint. We did move costs up a bit as we come to the end of raw construction completion as well as a few approved deals through lease committee. But the rents are holding and in some cases outrunning pro forma, which is why we are still very much in the range.

But what we've seen from a demand standpoint continues to be robust on the small shop space, which is basically what Towson is. And we continue to expand with those concepts and genres that we think will carry the day from a long-term demand standpoint, both for space and through merchandising.

Digitally native specifically, we have picked up the cadence there on leasing quite a bit in the last couple of quarters. We now have 15 digitally native deals within the portfolio. We think that sector alone provides for 850 new stores over the next 5 years. In Towson, we expect to have 1 or 2. And with our expansive and expanding mixed-use footprint, we certainly will continue to build our brand with that category. So overall rents are spot on right now. Early demand drivers are considerable and we're very happy with the progress.

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Operator [20]

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The next question is from Hong Zhang of JPMorgan.

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Hong Liang Zhang, JP Morgan Chase & Co, Research Division - Analyst [21]

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I was just wondering how much further do you expect to push commenced occupancy by year-end especially given the large growth that occurred in 3Q.

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [22]

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I would expect based on the -- we don't have a significant amount of deliveries left. I would expect, assuming we don't move the top line, another maybe 25 basis points of compression on the spread by year-end. But I think we assume that we can move the top line as well. So maybe 25 bps compression and on top end, we hold the gap at 180.

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Julie M. Swinehart, Retail Properties of America, Inc. - Executive VP, CFO & Treasurer [23]

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And just to add some color or context around the leased-to-occupied spread. It's about $7.7 million in ABR and it looks like close to half of that would be starting in Q4 in terms of being rent-paying. So a little different than the occupancy question, but the rent-paying portion.

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Operator [24]

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The next question is from Floris van Dijkum of Compass Point.

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Floris Gerbrand Hendrik van Dijkum, Compass Point Research & Trading, LLC, Research Division - Analyst [25]

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A quick follow-up question on something that has been, I guess, talked about a little bit before. But as you look at your cost of capital and your spend, particularly if you look at your $330 million roughly of additional spend you'll have on your 3 big projects, clearly your leverage will tick up a little bit. How do you think about buying back stock relative to other investments going forward?

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

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Floris, it's Steve. Well, we've, I think, been and have proven that we're willing to buy back stock at prices that are pretty compelling. We bought back in the high $11s and I think we probably on a relative basis have bought back more shares than many, if not most, in the space. But as it stands right now in terms of how we look at the leasing momentum that we have and the CapEx required with that as well as the development being very, very additive in terms of what could be earnings growth starting in 2021, the math is really just penciling out for us to earmark any additional dollar of equity or proceeds, if you will, towards either the redevelopment or the leasing efforts that we have on the plate right now. But that's not to be said that if the stock were to hopefully not retract, hopefully we're on a good progression going forward, that we wouldn't consider it again. But at this time, it's pretty much off the table given where we're trading.

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Julie M. Swinehart, Retail Properties of America, Inc. - Executive VP, CFO & Treasurer [27]

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And just as Steve mentioned in his prepared remarks, that $330 million to $350 million or so is over the next 2 to 3 years so it's not coming all at once. And over that same period of time, I would expect EBITDA to continue to grow. So both the numerator and denominator would be moving. And again, we have stayed committed to -- we review leverage projections all the time and stay committed to staying at 6x or below. And 5.5x today feels very, very healthy relative to peers and relative to where we think we ought to be.

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Floris Gerbrand Hendrik van Dijkum, Compass Point Research & Trading, LLC, Research Division - Analyst [28]

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And just a follow-up on the leverage because clearly you -- leverage will tick up over the next, call it, 12 months likely until your investments start to produce income. You'll be monitoring that closely but it should not go above 6x in your view?

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Julie M. Swinehart, Retail Properties of America, Inc. - Executive VP, CFO & Treasurer [29]

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That's correct.

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Operator [30]

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We have reached the end of the question-and-answer session. I will now turn the call back over to Steve Grimes, Chief Executive Officer, for closing remarks.

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Steven P. Grimes, Retail Properties of America, Inc. - CEO & Director [31]

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Thank you, operator, and thank you all for joining us today. I think it's a very, very busy time for all of you. I know there were a couple of calls yesterday, 3 today and another 3 tomorrow, and that's only if you're covering the strips. So appreciate the time you spent with us today. Look forward to seeing many of you in L.A. at NAREIT in just a short couple of weeks. So take care and have a great day. Thanks again.

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Operator [32]

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