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Edited Transcript of RPAI earnings conference call or presentation 13-Feb-19 4:00pm GMT

Q4 2018 Retail Properties of America Inc Earnings Call

Oak Brook Jun 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Retail Properties of America Inc earnings conference call or presentation Wednesday, February 13, 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

* Christopher Ronald Lucas

Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst

* Derek Charles Johnston

Deutsche Bank AG, Research Division - Research Analyst

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* Omotayo Tejamude Okusanya

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Todd Michael Thomas

KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research 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, and welcome to the Retail Properties of America Fourth Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mike Gaiden, Vice President, Investor Relations for Retail Properties of America. Thank you. 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 Fourth Quarter 2018 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, February 13, 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, our earnings release and our 2018 Investor Day presentation, 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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Thanks, Mike. We would like to officially welcome you to the team and your first of many earnings calls. You are doing a great job.

I would like to begin my prepared remarks by highlighting some of the many accomplishments reached by the RPAI team during 2018. We completed our multiyear portfolio transformation during the second quarter. Our repositioning, which more than halved our property count, resulted in the high-quality retail portfolio we own today. Our 105-asset operating portfolio is comprised of approximately 80% neighborhood/community and lifestyle/mixed-use centers and contains a significant amount of embedded growth opportunities. We have over 425,000 square feet of commercial GLA and nearly 1,200 multi-family rental units contained in our announced expansions and redevelopments. All of these projects are located within our top 5 markets, representing approximately 65% of our ABR.

Most significantly, we launched RPAI 2.0, which we detailed at our investor event in September. We will continue to redefine our portfolio and enhance shareholder value with self-sourced opportunities for development growth within our existing base of assets and focused leasing efforts across the operating portfolio. Our efforts over the past 5 years will enable us to keep pace with consumer preferences during a time of rapid change in retail. And with our honed, high-quality portfolio and our embedded expansion and redevelopment opportunities, coupled with our solid balance sheet, we now hold a unique position within the sector of having virtually all of our growth opportunities organic to our existing portfolio.

2018 was a pivotal year for us strategically, and we also proved successful operationally. Bolstered by the strength of our focused and improved footprint, our leasing momentum continued to accelerate, which Shane will detail for you shortly. We completed 512 leases in 2018 for a total of 3.4 million square feet at an annual base rent of $20.58 a foot.

Our execution strength helped us to exceed our 2018 earnings guidance, whereby we ended the year operating FFO per diluted share of $1.03, beating the high end of our full year guidance range of $1.00 to $1.02 by $0.01. Full year same-store NOI came in at 2.2%, in line with midpoint of our 2% to 2.5% same-store NOI growth assumption. Also dovetailing with our guidance assumptions, we completed $201 million of dispositions and $100 million of acquisitions, which included $25 million for One Loudoun Uptown and $75 million of share repurchases at an average price of $11.80 per share. By all means, 2018 was a very successful year for RPAI.

From a tenant risk perspective, we continue to benefit from 0 exposure to Sears and Kmart bankruptcies and hold no risk from potential further distress at JCPenney. We also hold no exposure to Shopko or Charlotte Russe. We witnessed the rapid resolution of the Mattress Firm bankruptcy, which will result in previously unanticipated termination fee income, a geographic shift of those dollars out of expected same-store NOI but contributing to our increased 2019 outlook for earnings.

We continue to invest in our active expansion and redevelopment projects. During the fourth quarter, we stabilized the Reisterstown redevelopment and brought that property back into the operating portfolio. We also kicked off the Plaza del Lago multi-family rental unit project just 1 year after acquiring the asset. During 2019, we anticipate achieving additional milestones at other projects, and we look forward to providing updates along the way. I would encourage all of you to visit Pages 10 through 14 of our supplemental to learn about our significant organic growth opportunities through expansions and redevelopments.

We continue to enhance the strength of our balance sheet by executing on several key capital markets initiatives throughout the year, including upsizing our revolver and extending our unsecured facility with an advantageous rate structure. Our efforts provide us with the resources needed to pursue our expansion and development goals with 2 free hands, as Julie will detail.

Because of our modest 5.5x leverage and sound liquidity position, we hold no need for additional external sources of capital to finance our development plans. However, in an effort to improve duration and maintain ample access to liquidity, we plan to issue $200 million to $300 million of unsecured debt in 2019 as interest rates and spreads continue to be compelling.

We continue to improve our strategic positioning through selective dispositions. We sold another noncore property in December with the disposition of Orange Plaza for $8.5 million, exiting the state of Connecticut. We plan to remain opportunistic on acquisition and disposition activity in 2019 but are not guiding to any specific transaction activity.

We expect a widening dispersion in retailer results in 2019. Merchants with differentiated assortments, compelling customer experiences and well-tuned technology offerings that amplify a combined online and bricks-and-mortar presence will continue to outperform. We also expect mounting challenges for retailers who have not found the best way to incorporate e-commerce into their physical stores. Consumer preferences continue to morph through the connectedness brought by the ongoing growth of digital technology. 2019 looks to be a year of accelerating transition for the retail industry. Those retailers that continue to adapt to the changing expectations of consumers will thrive. Other merchants that fail to make this a mandate will see growing pressures on their results. Our honed portfolio and targeted expansion and redevelopment projects centered on live-work-play address the needs of customers and retailers in the increasingly experiential-driven consumer landscape.

The recent macroeconomic backdrop has further exacerbated the challenges facing some of these retailers. After reaching a new cyclical high in October, consumer confidence posted its largest drop since July 2015 during December on the heels of the federal government shutdown. We have seen signs of softening of sentiment in the reports discussing the acceleration of retail promotional cadence post-holidays and into the new year. Yet the jobs market remains robust with more than 300,000 nonfarm payroll ads in January. Amid these various puts and takes, our real estate-first strategy and industry-leading concentration in super-zips and lifestyle/mixed-use positions us well.

Many macro-related sentiment factors brought substantial pressure to the stock market in December. Confident in both our near- and long-term outlook, we took advantage of that pressure and accelerated our share repurchase activity into the holidays and bought back shares at $11.03 on average in December. Share repurchases continue to be a tool in our toolbox, but please be reminded that RPAI 2.0 has additional funding needs for long-term growth initiatives, and share repurchases, if completed, will be done on a leverage-neutral basis.

With that, I will turn the call over to Julie, who will discuss our financial results and our outlook for 2019. Julie?

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

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Thank you, Steve. This morning, I will discuss our fourth quarter and full year financial results as well as our updated outlook for 2019. I will also detail some of our recent and anticipated capital markets activities.

Operating FFO for the fourth quarter was $0.26 per diluted share, up $0.01 compared to the same period in 2017. The increase stems from $0.01 gains in each of same-store NOI growth, the elimination of preferred stock dividends due to the redemption of our Series A preferred stock in the fourth quarter of 2017 and a reduced share count, which more than offset a $0.02 decline from capital recycling.

Full year 2018 operating FFO per diluted share measured $1.03, down $0.03 from 2017, due to a variety of factors. Gains of $0.06 from a reduced share count, $0.04 from the elimination of preferred dividends, $0.03 from same-store NOI growth, $0.02 from lower interest expense and $0.01 from below-market lease amortization were more than offset by a $0.19 reduction from capital recycling.

Same-store NOI for the quarter increased 2.5% over the same period in 2017, driven primarily by base rent growth of 160 basis points and a decrease in property operating expenses, net of recoveries, of approximately 110 basis points, largely stemming from our property-level management expense reduction efforts, partially offset by modest declines in percentage and specialty rent. The growth in base rent largely resulted from contractual rent increases and re-leasing spreads.

Full year 2018 same-store NOI increased 2.2%, driven primarily by base rent growth of 140 basis points and a decrease in property operating expenses, net of recoveries, of 90 basis points. Our full year same-store NOI growth achieved the midpoint of our previously communicated same-store NOI growth assumption of 2% to 2.5%.

As Steve highlighted, we remained active on our share repurchase program in the fourth quarter, adding to our third quarter volume, and repurchased nearly 3.8 million shares at a weighted average price of $11.57 per share for $43.8 million. For the full year, we repurchased more than 6.3 million shares at an average price of $11.80 per share for a total of $75 million, which leaves $189 million still available under the current board authorization.

Also, during the quarter, we continued to proactively address the right side of the balance sheet by amending our $200 million term loan to reduce our credit spread by 50 basis points. As we previously detailed on our third quarter call, the impact of 2 interest rate swaps that we locked into in September in order to fix our interest expense through the November 2023 term loan maturity more than offset the interest rate saving from this 50 basis point credit spread reduction, producing a net $0.01 drag on operating FFO per share in 2019.

At the end of the quarter, our weighted average interest rate measured 3.98%, up 16 basis points from the third quarter, driven by the change in interest rate on the term loan I just mentioned and a 28 basis point increase in the cost of our LIBOR-based revolver. Our net debt-to-adjusted EBITDAre now stands at 5.5x, availability under our revolver measures $577 million, and we hold no debt maturities in either 2019 or 2020, all of which position our investment-grade balance sheet very well.

Turning to guidance. As we detailed in our release last night, we now expect 2019 operating FFO per diluted share of $1.03 to $1.07 compared to our prior projections of $1.01 to $1.05 that we outlined at our September Investor Day. This $0.02 increase in full year guidance is primarily attributed to our third and fourth quarter share repurchase activity and an increase in expected termination fees resulting from the Mattress Firm bankruptcy, partially offset by a lower same-store NOI growth assumption. Our earnings guidance now assumes 2019 same-store NOI growth of 1.75% to 2.75%. Our 100 basis point revision at the midpoint is due to the resolution of the Mattress Firm bankruptcy, which converts certain amounts from expected same-store NOI to expected incremental termination fees, representing roughly 25 basis points; the nonrenewal of one anchor tenant representing another 15 basis points; and incremental occupancy and rent commencement adjustments make up the balance. Mirroring 2018, we expect the majority of our 2019 same-store NOI growth to occur in the second half of the year based in large part on the pattern of tenant bankruptcies in 2018 and our expectations around backfilling those and other vacant spaces.

In terms of the key drivers of our 2019 same-store NOI growth, base rent is expected to be the primary driver due to strong contractual rent increases and re-leasing spreads. Whereas property operating expense, net of recoveries, contributed meaningfully to our same-store NOI growth in 2018 to the tune of 90 basis points of growth, we are expecting our same-store NOI growth in 2019 to be almost entirely base rent growth-driven.

In last night's release, we provided a reconciliation from our reported 2018 operating FFO of $1.03 per diluted share to our expected guidance range for 2019, which is $1.05 at the midpoint. The primary drivers of this $0.02 increase are same-store NOI growth and increased lease termination fee income as well as the impact from 2018 share repurchase activity, partially muted by expected interest expense and the impact from noncash items.

Being mindful of the $273 million drawn on our revolver at year-end as well as redevelopment and expansion investment levels planned for 2019, we currently anticipate taking advantage of the attractive interest rate environment with an issuance of $200 million to $300 million of unsecured debt, subject to market conditions, targeting midyear funding. We expect proceeds from this issuance to be used to reduce borrowings on our $850 million revolver, which will improve duration and enhance access to liquidity. And we expect to maintain leverage levels in the 5.5 to 6x area.

And finally, many in the industry are discussing the impact on 2019 earnings of the adoption of ASC 842, the new lease accounting guidance. As we outlined previously, we expect the adoption of this new lease accounting standard pertaining to the capitalization of certain leasing costs to bring no impact to our operating FFO. Under our long-standing policy, we capitalize only internal direct leasing costs and external lease commissions that are incremental to a signed lease. The new guidance continues to permit capitalization of these types of costs and, therefore, does not affect us.

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. As we have discussed previously, the divide between great retail-driven real estate and the rest is increasing as retailers with poor balance sheets and limited imagination are now disappearing at a much increased pace, reducing viable retail assets in the U.S. And while it will continue to be bumpy for a while, the best assets will only get better, enabling real estate investors in both hard assets and equities to better choose and invest where the value is more tangible as the current fog over retail clears.

On that note, we continue to benefit from a great platform and a high-quality portfolio, driven by our significant repositioning efforts in prior years. During the fourth quarter, we delivered record leasing volumes as a percentage of GLA, topping our previous record results from the third quarter.

In Q4, we completed nearly 1.1 million square feet of new and renewal leases, representing more than 5% of our GLA. In fact, we have realized sequential increases in both total number of leases and GLAs signed in each of the last 3 quarters.

For the full year, we leased 17% of our total portfolio of GLA, the highest since our 2012 listing, including 756,000 square feet of new leases. We continue to focus on maximizing our long-term stability and merchandising while driving cash flows through a higher annual contractual bump profile and an increasingly diverse rent roll. In 2018, we achieved 186 basis points of contractual annual rent growth on new leases, once again demonstrating this commitment to a thoughtful approach to asset management and leasing.

Specific to overall lease spreads. Leases executed during the fourth quarter blended to a 6.3% spread, in line with the 5% to 6% realized in the prior 3 quarters, with new leases being executed at a significant spread of 34.9%, driven by several anchor leases, including 2 former Toys "R" Us locations at an average spread of approximately 80%. The 3.4 million square feet of total leasing in 2018, executed at $20.58 per square foot, once again demonstrates the pricing power of this portfolio and the abilities of our leasing team.

As a result of this strong execution, occupancy increased significantly during the fourth quarter, up 170 basis points to 93.8%, driven by an anchor occupancy gain of 240 basis points to 95.8%. As we highlighted on last quarter's call, noting the significant spread between leased rate and occupancy, several tenants were expected to take occupancy in the fourth quarter, and we completed several significant deliveries and store openings in Q4, including the Container Store, DICK'S Sporting Goods, multiple Total Wine & More locations, Ulta and others. In addition to the anchor occupancy gains, small shop occupancy also increased during the quarter, and we ended the year up 40 basis points to 89.8%.

On a spread-to-leased basis, our momentum continued as we ended the quarter at 94.8% leased, up 80 basis points from 94% at the end of the third quarter, consistent with our prior goal for 95% at year-end. A 130 basis point improvement sequentially in anchor percent leased to 97% at year-end, reflecting the signing of 2 Toys backfills, drove these gains. Small shop percent leased decreased a nominal 20 basis points in the quarter to 90.4%, driven by the 40 basis point impact from the Mattress Firm bankruptcy.

While we are on the Mattress Firm topic, this tenant has now dropped out of the top 20 tenants summary in our supplemental information package. Previously, Mattress Firm leased 24 locations within our portfolio. As of year-end, we now have 17 stores remaining in the portfolio after 1 naturally expired and 6 others, representing 28,000 square feet or approximately 15 basis points of GLA, were rejected as part of the bankruptcy proceedings. We expect termination fee income from those 6 rejected leases to more than offset the lost NOI from these stores in 2019. However, as a reminder, we do not include termination fees in same-store NOI, so there is a same-store impact, but the overall earnings impact is slightly positive.

As it relates to our expectations for same-store and leasing trends for 2019, we have seen several smaller bankruptcies this year, including Shopko, Gymboree, Things Remembered, Beauty Brands and Charlotte Russe. And while we have been relatively unaffected to date, we remain cautious on our watch list and same-store NOI growth assumption. In addition to our 50 basis points of bad debt embedded in that assumption, we have assumed that a small number of our watch-list tenants do not renew certain locations this year based on our credit surveillance and early discussion around renewals and/or re-merchandising and mark-to-market opportunities on those spaces. This proactive stance continues to be important as it relates to future cash flows and asset relevancy, and we are already in lease at multiple locations. We will provide updates on this and other re-merchandising activity as we progress on these and other initiatives in 2019.

While we hold a pragmatic view on the outlook for retail overall and expect more challenges for certain merchants, we also hold confidence in the strength of our portfolio and ability of our team to address any tenant distress scenarios, as we have done successfully in the last several years.

Turning to an important part of our future here at RPAI. Our redevelopment and expansions continue to progress with several notable projects set for construction this year. First, as noted in our supplemental, Reisterstown Road Plaza stabilized during the quarter, so it is back in the operating portfolio as of year-end. It was completed on time and on budget, and we expect it will generate a return of 10.5% to 11%.

With Reisterstown now complete, we continued to build our development resume and have commenced our redevelopment project at Plaza del Lago here in Chicago, wherein we have demolished the interior of the apartments and will expand from 15 to 18 units. While not a large expenditure at $900,000 to $1 million, the expected value creation is compelling and demonstrates robust multi-family returns at approximately 8% to 11%.

Next, our Circle East project continues to progress in Towson, Maryland, where our team's efforts have focused on the former Hutzler's building. And on the adjacent block, AvalonBay is now 8 stories up on the main building, composing the multi-family residential portion of the project. The street-level retail that AvalonBay will deliver back to us continues to be on track for late this year or early 2020, as planned. We have several dynamic retailers we are in various stages of discussion with and expect to provide leasing updates and merchandising in the back half of the year as this complex project continues toward the lease-up phase.

In Loudoun County, we continue to be extremely focused on all aspects of this increasingly important asset, playing defense and offense with an extended investment and hold period in mind. During the quarter, we closed on our previously announced $25 million acquisition of One Loudoun Uptown, which lies directly adjacent to One Loudoun Downtown and is comprised of approximately 58 acres and is currently entitled for 2.3 million square feet of commercial GLA. This acquisition allows us to be patient while planning for a holistic approach to this quickly growing, high-visibility asset, setting up better integration with One Loudoun Downtown as we are on schedule to begin construction on pads G and H in the coming months with our multi-family partner, KETTLER.

Lastly, regarding Carillon. The hospital is well underway and continues to be on track for a 2021 opening. Directly adjacent on Phase One of our project, we are finalizing design with our multi-family partner and expect to execute our medical office joint venture in Q1 of this year. We continue to work towards a construction start of Q2 or Q3 of this year.

Given our continued conviction around these projects and our execution to date on both finished projects and current construction, we expect a total construction spend of approximately $80 million to $90 million in 2019.

With that, I will 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, for those updates. I am deeply and genuinely proud of the results delivered by the RPAI team in 2018, and the team and I are energized and focused on building on last year's momentum into the year ahead.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Christy McElroy with Citi.

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

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Julie, just following up on the 100 basis point same-store NOI revision. You had talked about the -- sort of the remaining amount, which sounds like it was about 60 basis points, was related to occupancy and rent commencement adjustments. Can you just provide some more color there? And then sorry if I missed this. I think you had previously assumed 100 to 200 basis points of upside in occupancy in your range. What is that assumption now?

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Julie M. Swinehart, Retail Properties of America, Inc. - Executive VP, CFO & Treasurer [3]

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Sure. Thanks, Christy. As you mentioned, the occupancy and the rent commencement timing is the balance. I'll just reiterate just for the purpose of the call that Mattress Firm bankruptcy was the 25 basis points of the 100 and really a complete wash, slightly accretive actually from an earnings perspective. Adding to that, we have the -- we had not expected the anchor to not renew. That was another 15 basis points. I'll let Shane provide some color on the balance there. But before I turn it over to him, I will mention the Investor Day bridge, where we had occupancy of 100 to 200 basis points as components of the same-store NOI growth assumption for 2019. That is looking more like 50 to 90 basis points, so call it 80 basis points down. And the balance of the 100 within there would go into that other category that we had, primarily recoveries based.

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [4]

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Okay. Thanks, Julie. Christy, just additional color on some of the new assumptions since Investor Day. So on that remaining gap, we had -- I guess some color on the anchor itself. It's a 20-year-old lease. I think there's a very compelling mark-to-market there. It's almost 70,000 square feet. It's in a core asset and high barrier, so we have activity on it now. I think the mark-to-market there could be as high as 100%. So hopefully, in the next quarters here, we can give you additional color there.

As it relates to the rest, it's not necessarily one tenant or one space on the watch list or necessarily one rent commencement. I think the good news here is that as we look at our expected activity, as it relates to renewal activity on the anchor side, we are 70-plus percent done with our expected renewal activity on anchors, and we're 60% plus done with our renewal activity on the in-line side. So we have better transparency or more finite picture as it relates to same store on the renewal side. And on the spec activity, I think we're 30-plus percent there. So I think some of the rent commencement, as it's moved or as we moved it in the range, has been around signed leases to the extent we knew we would have to push that out on the deliveries, especially as it relates to fourth quarter. And again, the rest of the activity is largely related to 1 or 2, call it, a restaurant here or there performance spike. We had 2 of those as an example, which was also a recent bankruptcy. Gymboree, we have 3 of those remaining. We assume those are going at some point as well. So I think appropriately cautious, given the continued retail environment, we'll be obviously continuing to have a very proactive stance.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [5]

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Okay. And then just sort of following up on that in terms of cautiousness around the retail environment. And Steve, you talked about sort of mounting challenges for certain retailers in 2019 being sort of a year where that's going to play out. Obviously, there was some buffer in there, in that range, that same-store range that you provided back in September. That buffer was in the lower end. Can you just give us a sense for how much buffer is in there now baked into that guidance range? If we get another bankruptcy or a round of store closures, could there be more risk in that range?

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

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Thanks, Christy. Well, that's -- I think you might be getting back to more to our bad debt assumption, which I'll turn over to Julie here in a moment. But generally speaking, as we start every year, we start with that 50 basis points for the bad debt reserve but fully expect that there could be fallout elsewhere in the P&L if there is a bankruptcy. And as Shane pointed out, there are some bankruptcies or risky tenants that we've kind of modeled in either to not renewing or potentially have to absorb some of that reserve that we have for bad debt. Historically, we -- over the past couple of years, our bad debt have actually exceeded the amount that we had originally proposed at the onset of the year, not terribly so, but to some extent, have exceeded the amount that we had reserved initially. So this year, when we talk about being cautious, we just want to make sure that we are covering what the more recent historical trend has been in terms of how -- our outlook on guidance. Julie can give you some specifics, I think, but that's generally the high-level understanding of how we're approaching bad debt again this year.

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Julie M. Swinehart, Retail Properties of America, Inc. - Executive VP, CFO & Treasurer [7]

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Yes, exactly what you said, Steve. In terms of our approach, consistent as prior years, 50 basis points of revenues, which is about 75 basis points of same-store NOI. So we've been comfortable with that. It's served us well over the years. And if I look back to 2018, the bad debt expense that is in that actual category isn't even 50 basis points over the last several years. But if we factor in Toys bankruptcy fallout and other P&L line items, for example, it was about 100 basis points of same-store NOI. So slightly additional to the 75 estimate but certainly within the same-store guidance range. And the same would be true for 2017. When you go back another year and compare, it's about the same as '18.

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Operator [8]

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Our next question comes from the line of Derek Johnston with Deutsche Bank.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [9]

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Can you give us a little more detail on the timing and economics of some of the redevelopment, for example, at Circle East? So when did that street-level retail come off-line? And with the target stabilization of fourth quarter 2020, is that in regard to the whole redevelopment or just the retail aspect? I'm trying to get a sense of the cadence of NOI and any pre-lease levels.

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [10]

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It's Shane. On, I guess, on a forward basis, as it relates to Towson specifically and the stabilization date, that is specific to the retail itself. I don't know when the last time you've seen this site, but the Hutzler's building, which was the old department store, multilevel in this case, we are largely complete with the exterior and continue some minor work on the interior as we continue to stage for tenant storefronts and more specific tenant design inside.

As it relates to AvalonBay, we are nowhere near that or they're nowhere near that as far as delivering the retail shell back to us, which, again, we anticipate sometime early next year. Nevertheless, as construction does continue to settle down and tenants can see and walk the site and understand the configuration and the dynamics, we have had much more meaningful conversations as it relates to certain spaces and certain lead tenants. So we still expect stabilization, call it, in late '20 or '21. And again, for AvalonBay, I think they're continuing to update their occupancy projections as well.

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Steven P. Grimes, Retail Properties of America, Inc. - CEO & Director [11]

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Derek, I'm sorry, this is Steve. I was going to add to that one. Just generally speaking, I'd just state what's out there. Things haven't changed too much in terms of our outlook for development, but as Shane alluded to in the opening remarks, about $80 million to $90 million in spend this year, a little bit closer to $200 million next year, stabling out roughly around $100 million per year mark. So I would encourage you and others to kind of look at the development spend that we have in our investor deck that actually shows the shape of the spend and then the shape of when the NOI is coming online because I think that is your broader question. And I think we do provide a lot of detail that will be out there in published materials.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [12]

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Okay. And just quickly on the apartment portion. Did -- remind me, did you guys retain any upside in the apartments? Or was the idea with the air rights sales to minimize any exposure to the nonretail aspect?

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [13]

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Yes, I think that's exactly right, and it goes back to where we were at as a company from an exposure to, call it, mixed-use development. That was our first project and, obviously, had a great partner that validates us and the site. So I think the thought process there, Derek, was to monetize the air rights, which is what we did. We have no promoter or anything in that. AvalonBay owns all of the vertical there. And then, as we've gone on, obviously, and become more proficient as it relates to mixed-use, we've obviously stepped further into that with operating partners on the other projects, including Loudoun and Carillon.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [14]

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Great, understood. If I could just have one more fun one. So there's been some headlines recently about Toys "R" Us reemerging as TrueKids. I think there's 70 international stores planned. Just wondering, any thoughts with this with regard to the U.S.? It seems that they will have some type of presence. Has there been any conversations or any details?

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [15]

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It's interesting. I think it's more of a pop-up kind of, call it, seasonal demand model, assuming it's viable and anything. I think you've seen certain retailers in the U.S. -- Walmart comes to mind, specifically -- that has actually expanded the toy area in the store with permanency, right, so they've captured those sales. I think it is tough for a, call it, retailer who is exclusively focused on toys, especially on an annual basis, to actually be profitable long term. But we will see.

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Steven P. Grimes, Retail Properties of America, Inc. - CEO & Director [16]

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Derek, I would add to that. If anybody on this call knows, Shane, he knows unless they're going to pay the rent, they're not getting the space. So I don't anticipate that there's any sort of interest there for us to add insult to injury by moving on with that kind of a tenant. But I do want to go back to your comment on development again and just reiterate some of the things that I think Shane might have had in his prepared remarks, but also what we've been touting outside of these 4 walls, is that the optionality that we have with the developments, I think, is incredibly important for everybody to understand. First of all, with the Towson asset, which is now our Circle East asset, we did actually move forward with the selling of the air rights there. In the case of One Loudoun, it is a true expansion. We want to stay in the game. That is adjacent to a very compelling center that we want to stay very close to in terms of the commercial side of the business and don't necessarily want to give up any of the upside on the resi side as well. In the case of Carillon, Carillon is a big, multiphase development. It has all food groups. We have such optionality in that asset in terms of our ability to either sell air rights or JV that, that is going to be essentially a good source for us in terms of further funding development, further funding growth in the core portfolio. So it's a good thing to understand that we have all 3 food groups in development that we have at our fingertips.

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Operator [17]

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

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [18]

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I -- just the first question. Sorry if I missed this, but last quarter, you mentioned that there was $7.6 million of ABR that was signed, not yet commenced. How much of that started paying rent in the quarter? And where does that stand today?

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Julie M. Swinehart, Retail Properties of America, Inc. - Executive VP, CFO & Treasurer [19]

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Yes. I mean, what came on during the quarter was consistent with what our expectations were, and I think you saw that in our same-store NOI print for Q4. In terms of the spread now, 100 basis points, that's about $3.5 million. And timing, just some color on timing there. About half of it should come online in the first half of '19 and half of it after that. I guess the back-half portion is some of that anchor space that was signed during the quarter. So a little mismatch between ABR and GLA when you're looking at that 100 basis point spread.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [20]

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Okay. And just following up on the same-store NOI revision. So you had a wide range to start. And I understand the Mattress Firm and some of the moving pieces. But what specifically turned out to be a surprise relative to what you're previously forecasting? I guess, what materialized that you weren't anticipating when you first provided guidance?

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Steven P. Grimes, Retail Properties of America, Inc. - CEO & Director [21]

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Todd, I'm going to take that one quickly, and I'll kick it over to Julie and/or Shane. Keep in mind, we came off of Investor Day off of the June quarter. We did not have clarity around Mattress Firm at that point in time. That's one thing. Two things. Obviously, we were lucky enough to get the Toys "R" Us space back earlier than most, so we had some clarity there. But as the year progressed and as the threat of Sears ultimately came to fruition, I would say, generally speaking, bigger box not necessarily can't be leased, but is a longer duration in terms of time of rent commencement. So as Shane has pointed out, a lot of that rent commencement initially was to come on in Q4. It's very easy to bridge a quarter. If you miss a 12-month delivery and it's a 15-month delivery, you could bridge the year. So I wouldn't say that it's any one big surprise other than that one lease that we expected to renew that didn't renew, which was about 15 basis points. But it was more of a cautionary tale on, yes, there is more big box out there. We want to be cautious. We want to make sure we get the right tenant in there, the right spread, the right growth. And I think, in that regard, a more critical eye as the year progressed is ultimately what prevailed in our same-store guidance downward from where it was at investor event.

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Julie M. Swinehart, Retail Properties of America, Inc. - Executive VP, CFO & Treasurer [22]

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And I guess I'll take this opportunity just to remind you that -- remind all that the shape of same-store NOI in 2019 is expected to look very similar to how it looked in 2018. It's another year where we've got -- I guess, last year's second half of '18 was comping off an easier second half of '17. And we're going to be in the same spot this year, so second half of '19 comping off '18. So Toys was out. Several anchor tenancy took occupancy, as we just mentioned, during fourth quarter, not all right at the beginning of fourth quarter of '18. So -- and again, we do anticipate much of our signed anchor ABR to come online in the back half of the year. So just wanted to reiterate that.

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [23]

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And I guess, I'll just throw in here. I think momentum is important, right. So we're coming off 2 quarters in a year of an all-time record, especially when you consider our markedly smaller denominator. And this quarter, the first quarter already feels very dynamic relative to the first quarter last year from a volume perspective and a merchandising perspective.

So yes, it's a temporary setback, but it's retail today. And I think what we have modeled today reflects some conservatism, right, but I think appropriately so, given what we've seen. We have, I think, filtered through a lot of the noise as it relates to some early move-outs and bad debt. And I think, from my seat, I'm hopeful that the 50 basis points of debt at this point is more than enough, given what we've realized so far.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [24]

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Okay, that's helpful. And then you list Michaels as a top tenant. That includes Aaron Brothers, which they've announced they're going to shut those 94 stores midyear. What's the breakout in your portfolio between Michaels stores and Aaron Brothers? How many Aaron Brothers do you have?

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [25]

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We have one.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [26]

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Okay. And then lastly, Shane, so on the renewal leasing that's complete, I think you said 70% of anchors and 60% of in-line is complete. Is that of the 2019 expirations? Or was that something else? And any indications overall on renewal leasing spreads over the next several quarters?

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [27]

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That is 29 (sic) [2019] expirations exclusively. I don't -- I haven't looked at what our renewal spreads look like so far this year. And to the extent, obviously, anchors have a 6- to 9-month early option renewal notice, right, so some of that renewal, you've already seen in Q4 in the numbers.

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Operator [28]

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Our next question comes from the line of Chris Lucas with Capital One Securities.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst [29]

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Just maybe following up on Todd's question there on the renewals. I guess, Shane, on the retention rate, what are you seeing this year? And how does it compare to sort of what you've had over the last couple of years?

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [30]

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It's a great question, a bit nuanced. So the top line, Chris, we ran, I'm going to say, 80.5% or so last year. And we're just at 80% on a pro forma basis this year, albeit, again, with a large percentage of the renewals complete for, call it, February. But the nuance here is that we ran high 80s on the anchor in '18. We are low 80s again projected this year. So you're going to have some square footage impact, less so from an income standpoint. And then on the in-line side, you have, I guess, the upside a bit of the inverse, right. We ran about 70% in '18, and we're projecting, call it, 75-plus percent this year based on what we know today. So top line, the same. A little bit of geography, which is obviously causing some of the noise as well.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst [31]

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So you guys have had a lot of success on backfilling and taking your occupancy up on the anchor side. I guess, maybe if you could talk a little bit about what you're seeing on the shop space demand. And what you're seeing as it relates to sort of what maybe your upside is to the occupancy levels there?

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [32]

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Yes, I think we've talked about it in the past. We're still kind of hanging around 90% to 91% on the leased side. It's relatively stable. I don't think we see any difference as it relates to the typical tenancy, whether it's service, fitness or otherwise. I think the space that we continue to have opportunity as it relates to some occupancy and certainly, call it, a shadow watch list or the watch list is that, call it, 10,000 square foot space. And we're very focused on that because 10,000 to 15,000 feet, I think, is very interesting. If you have a watch list tenant that really wasn't doing much for the center, there is a lot of unique tenancy that you can drive there or split as it relates to, call it, beauty or, call it, organic grocery. And we have several of those deals that we hope to announce this year. So we're very focused, I think, on our forward cash flow. But also, I think, merchandising and long-term relevancy is also paramount, and we try to balance those to the best we can.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst [33]

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And then last question for me, just on the disposition side. You have the one asset that is under contract and then the land rights as well. Anything else that you're looking at potentially either being in the market now or you expect to get under contract at some point here in the first half of the year?

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [34]

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Sure. We -- look, we always have something or try to have something in the market because I think it is our obligation, especially from an opportunistic standpoint, to understand what assets price at today. So we will continue to do that. I think we have, obviously, 20, 25 centers that are still nonstrategic long term. So as we think about balance sheet integrity, optionality and funding our development pipeline as it continues to pick up and as we've spoken to before, we'll continue to look to that bucket as a form of liquidity as needed.

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Operator [35]

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Our next question comes from the line of Vince Tibone with Green Street Advisors.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [36]

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Just following up on that last point. Can you provide a little bit more detail on the funding plan for the roughly $300 million in development spend over the next 2 years? And really, how are you balancing debt issuances and levering up some versus asset sales?

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Julie M. Swinehart, Retail Properties of America, Inc. - Executive VP, CFO & Treasurer [37]

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Yes. And Vince, as Steve mentioned earlier, we'll remind folks of the Investor Day presentation. That has quite a lot of granular detail on the topic in there. Nothing materially has changed since then. We do expect to lever up. We mentioned and continue to see 5 to 6x net debt-to-adjusted EBITDAre. I would say 5.5 to 6x at this point, not going above 6x during the course of the investment ramp. We do have, as we mentioned, $80 million to $90 million in 2019 and significant spend thereafter. We are contemplating in the current year to take out part of the revolver. The revolver is at $273 million as of the end of '18. We're looking at a $200 million to $300 million deal. It could come in the form of term loans. To be specific, in terms of the funding methodology, term loans from our bank group, which has continued to be very supportive of us and our story, or the public debt market through the private placement market. And there's advantages to each of those options. I would like to term out our maturities a bit. We're at 4.7x -- or 4.7 years. And we'd like to extend that a bit, so some of those options are more beneficial there, keeping in mind rates. So we are still at historic lows with interest rates. Spreads have come in a bit just even in the last few weeks. So I would hope to have more in the short-term funding on next quarter's call for you.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [38]

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That's very helpful. What kind of pricing difference do you think you could get on a public market bond versus swap term loan? What's the difference in pricing, you think, between those 2?

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Julie M. Swinehart, Retail Properties of America, Inc. - Executive VP, CFO & Treasurer [39]

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Well, and I think I'll point you to our bridge in last night's release, where we do show, I think it's a $0.01 distance between the high and the low operating FFO, so there is an interest rate component. What we disclosed at our Investor Day Event was $200 million contemplated in those earnings guidance figures at 4.5% to 5.5%. I would still feel comfortable at that range. The term loans would be towards the lower end of that range, and a public debt deal would be at the higher end just based on our current credit rating. So again, more to come next quarter.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [40]

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Great. One last one for me. Can you just provide a little bit more color on the operating expense improvement that took place in 2018? And do you think there are any further opportunities on this front?

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Julie M. Swinehart, Retail Properties of America, Inc. - Executive VP, CFO & Treasurer [41]

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I think as we look to 2019, as I mentioned in my prepared remarks, that's really going to be base rent growth-driven in terms of NOI. We did have the property-level management fee expense reductions. We had closed some field offices towards the end of '17, which benefited us in '18, we had a reduction in force as well. So where that contributed to same-store NOI growth in '18 to a significant amount, I don't see that repeating in '19. I guess, said differently, recoveries are expected to be pretty much in line with 2018. And most of our growth, if not all the growth, will be from base rent, with some slight offsets in the other categories.

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Operator [42]

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

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [43]

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Shane, a couple of years ago, I mean, all people were talking about was bankruptcies. It seemed like last year, the conversation shifted, and it was retailers are doing a lot better and sales are picking up. This year again, it feels like it's more bankruptcy related. You talked a little bit about some names that have filed already. And I'm just curious, I mean, if you're thinking from a big-picture perspective, I guess, how deep is the watch list you're looking at right now? And do you think we're going to see restructures and store closings or liquidations?

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [44]

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That's -- I'll try and -- look, I think bankruptcies will continue. I think the question is at what pace and how significant the GLA is. I think, from my seat, if I had one wish for this space, it would be that more GLA would come off-line sooner, right, so we can start rationalizing down to a square footage that makes sense per capita for the U.S. specifically, which is a nuanced market, as we all know. And I think the sooner that happens, the better off tenants are and, certainly, the better off landlords and investors are because we can all better understand what the assets look like that win and what appropriate pricing is across the spectrum.

But from bankruptcies in '19, Sears aside, because the GLA is so inordinate, I don't know, from my seat that I have any different expectations. I think it's a bit more granular. But there are certain tenants on our watch list that, I think, may have a bankruptcy event. What the great unknown there is, really to your earlier point, is it a liquidation? Or is it some broader restructure? And I think that remains to be seen. But nevertheless, again, I think it's, where are you from a mark-to-market perspective as a landlord? What is obviously your relative quality? And I think, in that regard, we still feel extremely compelled about our portfolio overall. When we look at the last exercise -- relevant exercise as it relates to Toys "R" Us, we signed 2 of those boxes in the fourth quarter, north of 80% blended. Q1 this year, we've already signed another one. We are north of 90% on that one, and we have a couple of others. So we still expect to blend on the Toys "R" Us exercise to, call it, 80%, and our TIs are running 60 to 70, so in check there as well. So again, more and more, I think, the best assets get better, and your relative quality is extremely important.

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Operator [45]

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(Operator Instructions) Our next question comes from the line of Tayo Okusanya with Jefferies.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [46]

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In regards to the same-store NOI guidance, I think I get most of the reductions around Mattress Firm and the one anchor that didn't renew. But there was a statement in the earnings release just around management reducing rent commencement and occupancy projections. I was just kind of hoping you could talk a little bit more about that. And how you guys kind of came up with that decision based on the overall kind of leasing environment?

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Steven P. Grimes, Retail Properties of America, Inc. - CEO & Director [47]

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Tayo, I'll take that one quickly and then kick it over to Shane. But it goes back to what I had said earlier in terms of coming off of investor event, we were coming off of June numbers. A lot had happened in the back half of the year, starting with Mattress Firm and the announcement of Sears. And then obviously, we had some Toys "R" Us boxes that we were dealing with. So going back to the process of fine-tuning any sort of same-store assumption for 2019, you take a hard look at the timing of getting that rent commenced. And as Shane will point out, it's -- you're still going to get the rent. You're still going to get the rent started. It's just the timing of that rent commencement moving from maybe a 12-month downtime to a 15- or 18-month downtime. So that's really kind of the primary driver there. So a lot changed in the back half of the year. I think we took a very appropriate stance coming out the way we did in terms of what we expect for '19 and potentially what could spill for -- into '20. But Shane can give you some specifics there. But I think, generally, we've answered this question throughout the transcript, so there's a lot of information out there to kind of re-read to understand our positioning on this.

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [48]

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Yes, I don't know if I have anything -- new color that we haven't...

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [49]

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Yes, but is it this tenant that's taking the vacancy suddenly now saying, "I need an extra 3 to 6 months before I can take the space?" And what's the reasoning behind that kind of decision? Like, why are they making that decision to suddenly elongate the time? Well, I guess that's what I'm trying to understand.

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [50]

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No, I don't think it's any one tenant or, again, any one situation, right. This is a lot of different variables and a lot of different leases. But some of this, again, is to the extent we have signed leases now, you can better understand any delays in permitting, any delays in construction, which, of course, then you work around some blackout periods in the centers. So there's different variables that are pushing rent commencement dates in certain centers. It isn't any one certain situation.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [51]

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Got you. Okay, that's helpful. And then as we kind of think about 2019 and the stock buyback, again, you guys still have some capacity. How do you kind of think about that relative to the stock being up 20% year-to-date?

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Steven P. Grimes, Retail Properties of America, Inc. - CEO & Director [52]

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So Tayo, in my prepared remarks, I talked about share repurchases being a tool in the toolbox. But I also talked about the capital requirements of RPAI 2.0, which we feel very strongly about, has significant amount of growth components to it. So to Julie's earlier comments and the comments throughout this call, we do intend to maintain leverage between 5.5 to 6x. With buybacks, essentially we won't risk any sort of changing of that leverage mindset to buy back shares, and we do have a funding component of development that has some very good, long-term considerations for us in terms of value growth opportunities. So it's competing dollars right now. Real dollars are competing for development right now. So I would caution people to understand that we are not going to do any sort of buyback activity at the expense of leverage. We could potentially, if the opportunity presents itself, dispose of some assets. But again, those are just tools we have in the toolbox to manage the balance sheet for better growth orientation.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [53]

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Got you. Okay. Then one more, if you could indulge me. The mall names kind of talk a lot about this e-commerce concept now suddenly taking physical space in the mall. We don't hear that much about that on the shopping center side. Could you just talk a little bit about if you guys are kind of seeing anything of that nature on your side of the business?

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Shane C. Garrison, Retail Properties of America, Inc. - President & COO [54]

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I think the lifestyle component has obviously some similar characteristics from the enclosed mall. So we have done, we'll call it, bonobos, our Warby deal. We've done Tesla. Obviously, we have Apple in the portfolio and I think recently, Casper as well. So we do see some of that, again, which, because we have assets, large open-air assets that have a lot of the same attributions, but absolutely not to the extent that the mall companies do.

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Operator [55]

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Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Grimes for any final comments.

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Steven P. Grimes, Retail Properties of America, Inc. - CEO & Director [56]

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Well, thank you, operator. Thank you all for joining us today. It's kind of early in the earnings process. We know you have a lot to get through. We are ready to start the conference circuit again, starting in the latter part of this month and through March, so hopefully we'll see many of you on the road, and have a great day. Thanks again.

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Operator [57]

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