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Edited Transcript of SITC earnings conference call or presentation 20-Feb-19 10:00pm GMT

Q4 2018 Site Centers Corp Earnings Call

Beachwood Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Site Centers Corp earnings conference call or presentation Wednesday, February 20, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brandon Day-Anderson

SITE Centers Corp. - Head of IR

* David R. Lukes

SITE Centers Corp. - President, CEO & Director

* Matthew L. Ostrower

SITE Centers Corp. - Executive VP, Treasurer & CFO

* Michael A. Makinen

SITE Centers Corp. - Executive VP & COO

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* 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

* Jeffrey John Donnelly

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* Omotayo Tejamude Okusanya

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

* Richard Hill

Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS

* Todd Michael Thomas

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

* Vince Tibone

Green Street Advisors, Inc. - Analyst of Retail

* Wesley Keith Golladay

RBC Capital Markets, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Good afternoon, and welcome to the SITE Centers Reports Fourth Quarter 2018 Operating Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Brandon Day-Anderson, Investor Relations. Please go ahead.

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Brandon Day-Anderson, SITE Centers Corp. - Head of IR [2]

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Good evening, and thank you for joining us. On today's call, you will hear from Chief Executive Officer, David Lukes; Chief Operating Officer, Michael Makinen; and Chief Financial Officer, Matthew Ostrower.

Please be aware that certain of our statements today may constitute forward-looking statements within the meaning of the federal security laws. These forward-looking statements are subject to risk and uncertainties, and actual results may differ materially from our forward-looking statements. Additional information about these risks and uncertainties may be found in our earnings press release issued today and in the documents that we file with the SEC, including our most recent reports on Form 10-K and 10-Q.

In addition, we will be discussing non-GAAP financial measures on today's call, including FFO, Operating FFO and same-store net operating income. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release. This release and our quarterly financial statement are available on our website at www.sitecenters.com. For those of you on the phone who would like to follow along viewing today's presentation, please visit the Events section of our Investor Relations page and sign into the earnings call webcast.

At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [3]

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Thank you, Brandon. Good evening, and thank you for joining our fourth quarter earnings call.

2018 was an eventful and exciting year for SITE Centers as we began our pivot to growth. All of our efforts can be thought of in the context of our 5-year business plan to deliver average annual OFFO and NAV growth of 5%, driven by 3 sources: one, 2.75% annual same-store NOI growth, a large portion of which is from re-leasing the 60 anchor opportunities within our portfolio; two, accretive returns on redevelopment; and three, deploying $75 million annually on opportunistic acquisitions and investments with significant cash flow growth.

Before I describe the progress we've made on each of these growth components, I'd like to discuss the $600 million joint venture we announced in November, which represents an enormous stride in derisking our plan. Specifically, we sold an 80% interest in 10 durable assets into a partnership with 2 Chinese institutional investors. The transaction is material for SITE Centers. It pre-funds our growth plans with approximately $500 million of fresh capital, it allows us to cycle out of lower growth assets and it expands our joint venture program with like-minded partners. And while this deal unquestionably stands on its own, we'll be working to convert the relationship in China that we've spent years building into a sustainable and attractive source of capital to fund our long-term growth.

Returning to the results and our business plan. Fourth quarter OFFO of $0.31 per share and same-store NOI growth of 2.1% were both ahead of plan on lower bad debt and property expenses and higher other income. The strong quarterly result allowed us to achieve full year same-store NOI growth of 2.3%, not far from our 5-year 2.75% goal, a noteworthy accomplishment given it includes partial rent commencements from only 2 of 60 anchor leasing opportunities we identified at our Investor Day.

Mike will comment on leasing in a moment, but I'll summarize by saying that we continue to have strong activity with compelling economics. Our budget for 2019 and beyond assumes additional tenant bankruptcies, but this should not obscure the fact that demand for space in our portfolio of dominant assets in affluent communities remains robust. We've also advanced our redevelopment pipeline, completing the Lee Vista development project in Orlando this quarter and Phase I of West Bay Plaza here in Cleveland with Fresh Thyme and Ulta now open and HomeSense expected to open any day.

The transformation of West Bay came in ahead of schedule and under budget, and we're already working on the underwriting and leasing for Phase II. Our Brandon Boulevard project in Florida is now also well underway as we signed key anchor leases, converting the property from a Kmart-anchored discount center to a grocery-anchored neighborhood center with great leasing demand and strong cash flow growth.

The initial phases of our other projects, many of which we identified at Investor Day, are also moving forward. Commencement of these projects remains dependent on 3 variables: market demand, tenant approvals and entitlements. These 3 legs form the foundation for successful investment, and our work over the past 2 years has satisfied the first 2 legs, leaving entitlements as our main focus going forward. That said, our decision to commence construction will also depend on our cost of capital, reinvestment opportunities and the risk and return of each project.

SITE Centers owns a portfolio that has been handpicked to maximize our exposure to asset densification and repositioning. Many of our projects were featured at our Investor Day conference last fall and are heavily tilted towards simple site master plans that make profitable use of excess land and rearranging buildings for a much more profitable use of valuable real estate in high-income demographics. These plans and the significant success we've had to date in advancing them are generating valuable optionality not reflective in current earnings. And importantly, the NOI dilution from recapturing tenant control areas has already occurred.

Finally, I'm also pleased to announce the commencement of the opportunistic investing portion of our growth plan, which seeks to take advantage of mispricing we're seeing in the market. In that vein, we repurchased $50 million of our stock at a weighted average price of $11.74 per share, a level we believe is extremely compelling versus any measure of underlying value. Our quest for compelling returns also led us to purchase 3 assets during the quarter that we believe generates double-digit unlevered IRRs.

The first transaction in this category is Melbourne Shopping Center, a 70% occupied shopping center anchored by a highly productive Publix in Melbourne, Florida, which we purchased for about $50 per building square foot, about a quarter of replacement cost. We've already executed a 35,000 square-foot anchor lease renewal at a 65% rent spread, well above our underwriting, and we're planning a facade renovation and tenant suite reconfigurations as we drive towards our targeted yield.

This is a simple thesis that we intend to replicate. Buying at a low cost per square foot and making improvements to the buildings on site plan to accommodate current market needs in order to significantly raise rents and occupancy. The current property is averaging only $4 per building square foot in NOI, and yet the immediate trade area supports much stronger economics. Recognizing assets that are underutilized in strong trade areas is a key feature of opportunistic investing, and we plan on using our platform to capture this value in retail real estate.

A second and similar transaction was Sharon Greens, a Kroger-anchored shopping center in affluent community in suburban Atlanta with average household incomes of $150,000 per year, which is now one of the highest in our portfolio. When supply is so constrained in wealthy markets like this, a landlord must respond with a leasing strategy to match the demand. This property has been starved for capital for years, and our simple solution to renovate and reconfigure tenant suites and underutilize land has already shown strong shop leasing demand at rents much higher than our underwriting. We achieved a purchase price well below replacement cost on this asset as well. And with an in-place NOI of only $7 per square foot, the market easily supports our targeted growth given its reliance on straightforward shop leasing, which remains a focus of our company.

Finally, our Market Square acquisition also outside of Atlanta offers an even higher targeted return, given a low acquisition price per building square foot of $83 and a chance to increase occupancy through tenant expansions and new leases. The theme for acquisitions this past quarter is all about low basis and high demand, and all 3 are great case studies for an opportunistic investing program.

They allow us to make money, applying our vision, our leasing, our operating skills, and they offer attractive entry price points. Most importantly, their return profiles are high enough to be competitive with that offered by our own shares. Combining our buyback with these acquisitions, it's safe to say that we're ahead of plan on this portion of our growth strategy, and we're seeing an increasing number of deals where we can leverage our company's resources and operational skill set to create value.

With that, I'll hand the call over to Mike for some commentary on our operations.

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [4]

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Thank you, David. The fourth quarter saw more of the robust leasing activity than we've seen throughout all of 2018 with high volumes despite our now more focused portfolio.

We've signed 26 of the 60 anchor leases identified at Investor Day with another 17 in advanced stages. This compares to 15 executed leases in October. We achieved a blended 31% leasing spread on the deals, which are with 19 distinct brands. A few noteworthy deals this quarter include: Total Wine & More at Centennial Promenade in Colorado, their first store in Denver market; Ulta Beauty at Shoppers World; and leases with T.J. Maxx and HomeSense at Nassau Park Pavilion.

Leasing spreads for the quarter were also solid with new leases up 14% and blended spreads of 6.4%, consistent with trailing 12-month trends, which we believe is the best way to look at our operating metrics, given our now smaller and inherently more volatile portfolio. Net effective rents, an indicator of the overall economics of the leases we're signing, were also in line with our trailing 12-month numbers as we continue to lease space at compelling economics.

We remain laser-focused on driving our shop leasing efforts and remain confident in the 94% shop occupancy goal we articulated as part of our 5-year plan. I say this despite the fact that our shop occupancy fell in the quarter to 89.1% from 90.3% last quarter due largely to the sale of an 80% interest in the more highly occupied DTP JV portfolio as well as the acquisition of the 3 low occupancy opportunistic assets David just described.

Additionally, we had 9 Mattress Firm stores closed as part of their recent bankruptcy. We expect to quickly re-lease these spaces at a double-digit spread, primarily with service and QSR tenants. We're also tracking a few more smaller bankruptcies right now that could further temporarily pressure our shop lease rate in the first half of the year. This potential dip shouldn't obscure the ongoing large volume of shop leases being completed by our team. Overall, tenant demand remains high across our portfolio given the superior quality of our assets in the top quartile of the country's retail landscape.

With that, I'll hand the call over to Matt.

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, Treasurer & CFO [5]

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Thanks, Mike. All the accomplishments that Mike and David highlighted have had a significant impact on our balance sheet and capital position. Most important, positive same-store NOI growth and the use of proceeds from the new joint venture to repay debt generated debt-to-EBITDA ratio of 5.6x, our lowest leverage level in years.

We also have no unsecured debt maturing until 2022 and a weighted average maturity of 6.1 years. We not only use JV proceeds to lower leverage, but to improve both liquidity and our unencumbered pool with a virtual elimination of secured debt from the consolidated balance sheet. In fact, with the repayment of mortgage debt in the fourth quarter, just 2 of our 70 wholly owned assets are now encumbered, providing significant optionality and flexibility. And all that to say nothing about the additional securities provided by lowering our exposure to lower growth assets or securing capital from new JV partners.

Our days of repaying debt with dilutive asset sales may be behind us, but that doesn't mean we won't continue to improve the balance sheet over the coming years. We expect NOI from new leases to become a growing EBITDA tailwind and our preferred capital investments in the Blackstone JV and RVI should provide additional capital to reduce leverage further and fund growth. As such, we now see 6x as a long-term leverage maximum rather than a goal to work towards.

I'd like to now comment on several earnings and accounting matters. First, the refresh 2019 OFFO guidance of $1.13 to $1.18 that we provided at the time of the announcement of the DTP JV in November is unchanged. Same-store NOI guidance is also unchanged at 1% to 2%. As a reminder, consistent with our previous comments from Investor Day about the timing of anchor commencements, we expect our same-store NOI growth to be higher in the second half of the year than in the first half of 2019.

Additionally, our 2019 OFFO guidance includes the impact of several items to consider relative to the $0.31 per share we reported in the fourth quarter. First, Blackstone continues to sell assets, and that as well as selective asset sales in our other JVs will cause a decline in JV fees in 2019 as compared to 2018. Updated guidance now includes the fees from the DTP JV, and we continue to believe that the headwinds from lower JV fees is largely resolved.

A second headwind to 2019 results comes from the full year impact of 2018's asset sales, including the DTP JV, which closed November 30 as well as announced and expected tenant bankruptcies. Specifically, the fourth quarter included approximately $500,000 of combined income from the 9 Mattress Firm and Toys spaces that has since closed. We have assumed additional tenant bankruptcies as part of our 2019 guidance.

And finally, we previously flagged a short-term dilutive impact of the redevelopment of our Van Ness property in San Francisco. The existing theater operator vacated in January, resulting in a $0.02 per share headwind to full year 2019 OFFO. We have an executed lease with CGV Cinemas and expect them to open in January 2020. As David mentioned and consistent with our Investor Day, beyond this impact there is no remaining NOI slated to come offline in order to facilitate our redevelopment program.

Turning to RVI fees, our initial guidance call for them to remain flat in 2019, assuming no additional RVI asset sales. There have, in fact, been a number of the asset sales since the fourth quarter, and we are updating our estimate for fees accordingly, which are $1 million lower at the midpoint. We continue to expect a one-for-one offset between RVI fee declines and lower G&A in 2019, though, this relationship will shift in 2020, and we would expect some headwind for 2020 from ongoing RVI liquidation until the RVI preferred is repaid and redeployed.

On the joint venture front, we received a $7 million Blackstone preferred repayment in the fourth quarter and another $12 million so far in 2019, which brings our total receipt of preferred repayment to $154 million with the remaining balance net of evaluation reserve of $177 million. As a reminder, we established evaluation reserve for these securities in the first quarter of 2017 cutting book value by $76 million to $270 million.

Since then, we have achieved key sales threshold levels in both Blackstone joint ventures, allowing us to receive approximately 50% of net proceeds from asset sales in Blackstone III and 100% in Blackstone IV going forward. We recognized a current 6.5% yield on the preferred securities. So every dollar we get back is the earnings equivalent of an asset sale at a 6.5% cap rate. The Blackstone ventures have just 19 of the 83 original assets remaining as of today, and we mark all Blackstone assets to market each quarter to determine the reserve, resulting in a $7 million decrease in book value in the fourth quarter.

With that, I will hand the call back to David for some closing comments.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [6]

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Thank you, Matt. Before taking questions, I want to take a few moments to discuss 2018, which was a year of many accomplishments for SITE Centers. We sold $1.8 billion of assets. We completed the spin of Retail Value Inc., promising new capital from China and lowered our debt-to-EBITDA from 6.5x at the start of the year to 5.6x at the end of the year, all while pivoting to growth through leasing, significant redevelopment milestones and our first opportunistic investment. I couldn't be prouder of our team and what we've achieved so far. I'm also convinced that our most productive and innovative quarters lie ahead of us as we pursue compelling returns on investment and sector-leading growth.

And with that, operator, we'll take some 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 Alexander Goldfarb with Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [2]

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David, just maybe starting with you. When you guys came in to the company, you articulated getting the company down to a bunch of assets that you thought could best grow, and then you further paired it with a Chinese venture, obviously, accretive capital. Do you feel right now that you have the portfolio you want or do you see the potential for maybe further JVs or asset sales outright from the existing assets as you guys move more into focusing on backfilling the anchors, redevelopment, et cetera?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [3]

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Alex, that's a great question. I think we articulated when we announced the spin-off of RVI that we had -- we had curated to a portfolio that we felt had great growth prospects, but also had a lot of durability. If you remember, we used the word durable quite a bit. Over the course of the next 6 months, it became obvious to us that there are more reinvestment opportunities within kind of the upper half of the portfolio. We became enthusiastic about that. And so, the concept of recycling capital by selling off the more secure durable assets using the capital to recycle into the upper tier is one of kind of the easiest ways for us to grow the company. So I wouldn't call it culling. I wouldn't say that it's kind of a defensive move. It's really more offensive that we would like to recycle that capital into higher use.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [4]

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Okay. So there is a potential for more you think JV-ing?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [5]

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I think there is a potential for selling an asset to recycle it into another acquisition. There is opportunity for joint ventures, should we find stable assets with low growth, and we find potential to make reinvestments at higher growth. So I think, you should expect that we won't be shrinking the company in order to pay down debt any further. We're at a great level right now. We're simply using some of our more stable assets as currency to reinvest elsewhere.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [6]

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Okay. And then, Matt, I have a question on the fees. It sounded like from your comments that as the Blackstone fees wind down, there is an offset with the new Chinese venture. So can you just help? Is it a one-for-one offset? So basically fee income will be flat this year. Or is there a run rate that we should be sort of modeling to given the decline of the Blackstone, but, obviously, the rise of the Chinese JV fees?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, Treasurer & CFO [7]

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Yes. The Chinese fees do offset some, but we will still see a net decline in fees in 2019 that's still a headwind to earnings in 2019. So there is some offset there, but it's not complete.

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Operator [8]

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Our next question comes from Todd Thomas with KeyBanc.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [9]

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David, just first question. Following up there on your comments about the joint venture, and you mentioned in your prepared remarks the importance of that relationship. Is there additional appetite from your partners to do more with SITE Centers? And what kind of appetite do you and your partners have to the extent that you do come across stable assets?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [10]

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That's a very good question. As you can imagine, I've been traveling to China for well over 5 years now and building relationships. One of my closest friends spends a lot of time in Hong Kong and Beijing for our company. I think we've built a reputation as a conservative investor that focuses on dividends. And there is need in many parts of the world for dividend style investing in durable assets. And to the extent that we can build those relationships and use that source of kind of core capital for us to fund opportunistic things for us to do, we would be very, very supportive of trying to extend those business relationships further, whether that's with our existing partners, the 2 partners that came into this joint venture or whether it's others. And as you can imagine, if you do a joint venture of this kind, which is the first for this type of capital, institutional capital coming out of Hong Kong, and the first in our asset class, it gives us an advantage because we're seen as more desirable now. Every quarter that goes by that we deliver on the dividends that we said we would, we become a desirable partner for other types of capital looking for core returns. So in the long answer, yes, we certainly hope that we can build on this relationship, and we're certainly poised for it.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [11]

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And as we think about the $75 million investment target for the year, how should we think about that in the context of assets like you acquired in the fourth quarter versus maybe stable assets where you can leverage that $75 million investment on your end, maybe generate additional fee income and move in that direction?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [12]

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Yes. It's difficult to subdivide the $75 million into different buckets. I mean, as you've already noticed in the fourth quarter, our share price got down to a point that it's very difficult to find any other investment as exciting as our own stock, and we put $50 million to work pretty quickly. There were other assets earlier in the fourth quarter that we thought had very high IRRs that were much more repositioning assets. We haven't found a durable asset that we really like yet, but I wouldn't say that that's off the table. Everything is on the table as long as we think the risk and the rewards are commensurate with the amount of capital that we have.

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Operator [13]

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Our next question comes from Christy McElroy with Citi.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [14]

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Just from where you initially provided the 1% to 2% same-store guidance range at your Investor Day last fall. So you did the DTP deal and your 2018 same-store growth [rates] were revised higher from removing those assets from the pool, but the 2019 rate range was unchanged. And then you've had Mattress Firm and Payless since then. Today, you're still at the 1% to 2%. So my question is, since there have been a few changes, obviously, from the time you provided the drivers at your Investor Day, maybe you could sort of walk us through any changes in those sort of underlying assumptions within that growth range.

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, Treasurer & CFO [15]

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Christy, thanks for the question. It's very fair. I would say we feel good about guidance. The main thing I would say is it's February. And as we've all learned together, the retail environment is just highly uncertain. So I think we, certainly, track a number of retailers. I'm sure you're tracking a number of retailers that move the needle. And I just think it's premature to get ahead of ourselves and start speculating on things going a lot better. So we're just -- I think we're trying to be conservative here. You're right. There's some tailwinds there. We also are expecting some bankruptcies, as I discussed in my prepared remarks, which are clear headwinds as well. So offsetting those 2 and how early we are in the year, it doesn't seem appropriate to be changing our view at this point.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [16]

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Okay. And then, Mike, you had mentioned pressure on occupancy earlier in the year. How should we think about sort of the trajectory of the commenced occupancy rate? And then you've got this wide gap between sort of the leased and the commenced rate. How should we think about that widening or narrowing as we go throughout the year?

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [17]

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Generally, the timing is the factor that's making the back half of the year heavily weighted towards the rent commencement dates. But the time frame between the lease execution and the rent commence tends to be shortening, and we're -- continue to see that as we go forward.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [18]

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David, it's Michael Bilerman speaking. As you think about this joint venture you created, you've talked about it being dividend payer stable assets. But the retail environment, as Matt just talked about, is highly uncertain. So how do those 2 things marry up about over the next couple of years where that environment is probably not going to get any more certain and probably continue to be uncertain? How do those assets perform in that environment leading up to those expectations that you laid out with your venture partner?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [19]

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Yes. It's an excellent question. As you can imagine, for the last several years, in Hong Kong, Beijing, Shanghai, that has been a very, very common conversation. One way to prove the durability of slow-growing shopping centers is to look at a trailing 10-year cash flow and understand through quite a few bankruptcies and a recession in the last 10 years how did these assets perform. And I know that there is a general zeitgeist in the reporting world that somehow retail is all-in-one bucket. But the fact of the matter is that if you're looking for sustainable dividends, many times, large-format retail properties have been able to and I do believe will continue to be able to deliver those. And that's what we form the basis of this joint venture on. These are certainly not highly risky assets. They do have a little bit of occupancy upside, but mostly they are seen as stable properties. Bankruptcies will occur in these joint venture assets just like they will in our core, but the likelihood that they have durable cash flows long term is still pretty high, and I feel very confident about them.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [20]

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Are you guys covering any from a master lease perspective or preferred returns, so that if there is additional bankruptcies or additional things that DDR -- SITE -- it's going to be hard for me to ever change, but that SITE will cover the differential to be able to provide that consistent return to your new venture partners?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [21]

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No. The joint venture is a traditional joint venture. They bought 80% of the equity position. We have traditional financing on it. There is no preferred return. There is no net debt. There is nothing out of the ordinary. I think it's just a couple of very, very sophisticated institutions who spend a lot of time here in the States underwriting the assets, meeting our team, touring every suite. And I think they have a belief as we do that they're stable, long-term investments. And that's, frankly, the type of capital that we would like to be partners with. We want sophisticated partners. These folks did their homework over a long period of time. And I would certainly hope that we've proven together that we've got a pretty good sense of the underwriting, and that we can go and look for new assets to acquire from outside the portfolio.

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Operator [22]

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Our next question comes from Wes Golladay with RBC Capital Markets.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [23]

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For those low-dollar per square foot acquisitions, how much on average do you need to spend to get those up to your standards?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [24]

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Wes, it's a great question. It completely depends on what type of tenant we're planning of putting in there. One of the properties has a lot of medical demand, and that tends to be more expensive than traditional, but the rents are also higher. I think that what you should assume is that when we buy buildings that's $50 to $85 a square foot and rents in properties around us are in the 20s, there is a whole lot of room to reconfigure buildings and spend the capital required.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [25]

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Okay. And then looking at your pipeline, you have the 3 TBD projects. I imagine they all make sense from an economic perspective and you're just waiting on the entitlements for that. Do you expect to get any of those started this year?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [26]

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The entitlements is the reason that there's TBDs in the supplemental. I would simply state that in the context of capital allocation, it's important to note that just because something is an intended development doesn't necessarily mean that the construction is imminent. And as soon as we receive entitlements and we have effectively a shovel-ready project, we have to look at it at that point in time and decide are other sources of investment opportunities better or worse than the development project. So yes, we're waiting on entitlements. And yes, the financials make a lot of sense. But this last quarter, we found some great places to put capital that I think are risk-adjusted much better.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [27]

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Okay. Yes. Sticking with that, can you hold that for a set period of time versus indefinite for the entitlement?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [28]

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It depends on a property. Most municipalities now are doing spot zoning for a specific property where once the zoning is in place it stays in place in perpetuity. But that does not mean that they can't downzone the property in a couple of years if somehow the political climate changes. So there is some risk, but, I think, the risk is years, not months.

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Operator [29]

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Our next question comes from Jeff Donnelly with Wells Fargo.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [30]

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Maybe if I can kind of branch off of maybe Christy's question. I guess related to your assumptions on credit loss, if I recall, I think, Matt, your guidance assumed about 150 basis points of credit loss in 2019. And since we're halfway through the first quarter of the year, where, frankly, the majority of retailer bankruptcies historically occur, I'm just curious do you feel better that that's a conservative estimate? Or have the changes in the retail landscape since you last gave guidance lead you to believe it's effectively sufficient, like you're going to need it all?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, Treasurer & CFO [31]

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Yes, so just one -- thanks for the question, Jeff. Just one clarification. The 150 basis points of bad debt plus bankruptcy adjustment that we made was to our 5-year growth number. So we were saying that over each of those 5 years, we were assuming that amount on average. We did not provide -- deliberately didn't provide a specific reserve number for 2019. The reality is the number is sizable. And yes, I think, we all feel better with each day that goes by. I think you'd be the first one probably to say that the kind of the cycle of bankruptcies happening a specific time of the year seems to have been broken. The way the bankruptcies work out, that cycle seems to have been broken. There's just a lot more uncertainty. So I think we all feel better with each day that passes, but, I think, there's still safe to say quite a bit of uncertainty about 2019.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [32]

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And just on the question on your recovery rate, I think, it's up 100 basis points year-over-year in full year 2018, I think, and also up about 70 basis points in the fourth quarter. Considering the year-over-year decline in small shop occupancy and anchor occupancy, I guess, I would have expected to see some erosion in your expense recovery. I guess, where am I wrong in my thinking there? And then second, as new anchors take occupancy in 2019, do you think that recovery rate can continue to rise?

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [33]

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Yes. Jeff, just one comment on it. If you look at our commence rate on Page 13 of the supplement, the commence rate was actually up year-over-year for the same-store pool, which really drove the recovery uptick. And Matt, on the course of the year?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, Treasurer & CFO [34]

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Yes. I mean, look, I think, we've been saying, we expect things, whether it's the commence to lease rate or whatever, we're expecting things to pick up over the course of the year, particularly in the fourth quarter. So I think, as you know, the operating leverage here is tied to that. As we get more rents commenced, you'll see that ratio pick up.

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Operator [35]

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Our next question comes from Tayo Okusanya with Jefferies.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [36]

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Your 3 drivers of growth, leasing, redevelopment and opportunistic investing. I'm just curious, over a 1 year and over a 3- to 5-year horizon, which of those 3 drivers do you kind of feel will be contributing the most to your earnings over a 1 year period and over a longer term period?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [37]

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It's a great question. Over a 5-year period, it's more difficult to project. But I think that this company, as we laid out at an Investor Day conference in the fall, has 60 box vacancies in a very well located portfolio. And so, over the near term, the majority of the growth is coming from leasing.

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, Treasurer & CFO [38]

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I would just point out off that we -- without revisiting them here, we did provide pretty clear weights in our Investor Day presentation. So you can kind of take a look at kind of what our model says. The reality is, as we found out in the last month or 2, things present themselves in unexpected fashion, whether it's a share buyback or opportunistic acquisition. So I think, we gave you some parameters there at Investor Day for you to use in your model, but I would say, those are subject to change as circumstances change. Leasing will be a very important driver over the next 12 to 18 months. That's the most important right now.

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Operator [39]

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

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

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It's only been 2 quarters, but CapEx as a percentage of NOI has trended higher since the spin. Can you just provide some color about how we should think about the run rate for CapEx spend, including readouts, going forward?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, Treasurer & CFO [41]

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Yes, it's Matt. I would just say you're seeing the product of leasing activity, right. So everything I've been saying about -- what we've been saying about things picking up in the fourth quarter of the year that this is all in preparation for that. You will see a significant amount of CapEx this year. We've laid out where the vacancy is. We've laid out how many anchors we've got. You can kind of do your back of the envelope there. As we get those 60 boxes commenced, assuming the bankruptcy environment stays relatively constant, you won't see increases in CapEx, you should see a significant decrease. But of course, that's subject to what happens in the overall retail environment.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [42]

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The only other thing I would add, Vince, is in the fourth quarter in the back half of the year we had about $4.5 million for our LED lighting program. That's onetime in nature. I don't think -- we don't expect that to recur in '19. So for the maintenance CapEx side, you'll see a downtick there over the course of '19.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [43]

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That's helpful. And then just one quick one. Can you provide a little bit more color on the small shop or potential small shop bankruptcies you're tracking?

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [44]

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The ones we're referencing are really focused on Payless and Gymboree which have a very small impact on the overall portfolio. Payless, for example, there's only 7 stores that are wholly-owned portfolio and Gymboree has 3 stores. So it's a pretty minor effect.

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Operator [45]

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Our next question comes from Rich Hill with Morgan Stanley.

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS [46]

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Just wanted to spend a little bit of time on RVI fee income. It's nontrivial, pretty large. So look, you put up around $7 million of RVI fees this quarter, and I think you're guiding to around $24 million at midpoint. How are we supposed to think about that $24 million of fees on sort of a quarter-by-quarter basis in 2019? Can we sort of think about it $6 million a quarter? Or do you think it's going to be more front-loaded?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [47]

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Rich, it's a great question. It's a big number. The reality is that we don't know and we're not projecting the pace of dispositions from RVI. And so, I think, the best way for you to assume in the modeling is that our G&A slowly goes down in a commensurate fashion with the fee income. 2020, as Matt mentioned in his prepared remarks, is probably the year that has a little bit more headwind as we're waiting to get back our preferred equity that we can then reinvest accretively to make up for that. So in '19, I think it's mostly to do about recognizing the G&A is going to go down in a similar fashion.

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS [48]

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Got it. And then -- yes. Go ahead, Matt.

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, Treasurer & CFO [49]

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Keep in mind as you'll have seen in our Form 10 and the fee agreements we have, the fees get remeasured only twice a year. So the minute we sell an asset like fees go down the next day, right? So keep that in mind as well. You can imagine. We are going to sell assets. We don't know how much. We're not going to forecast how much. We are going to sell assets. You will see fees gradually come down, but there is a 6-month lag to that process.

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS [50]

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Got it. And just to go back to one comment. I think I understood this correctly, but 2020 is sort of the year where your fee income starts to go down, but you're not getting the preferred equity investment. And that's maybe where there is a little bit of a disconnect for a period of time. Is that -- does that -- did I hear that correctly?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, Treasurer & CFO [51]

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Yes. And our ability to kind of keep lowering G&A. There are fixed cost to running this business. We definitely rightsized the organization already. And so, there's a limit to how much we can -- we can continue to reduce expenses throughout the organization just to offset those fees. And you're right. We'll have to wait until liquidation is largely complete in all likelihood for us to get the preferred back to be able to redeploy it and get that accretion. So there will be potentially some kind of a short-term disconnect there.

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS [52]

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Got it. And then one question on the preferred equity investment reserves. It looks like they increased again. Is there any read-throughs as to how we're supposed to think about that? Does it mean -- what does it mean for the valuation of the overall market? What are we supposed to think about that? What are we supposed to consider?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [53]

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I honestly think that what you're seeing is a smaller and smaller pool from the Blackstone joint venture. We're down to, what, about 1/4 of the original size. And therefore, as we do a mark-to-market every quarter, it's a little bit bumpier than it was when the portfolio was larger.

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, Treasurer & CFO [54]

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I would just flag, Rich, also. If you kind of look at the historical adjustments, we took the original reserve, then we actually lowered the reserve by a significant amount in the next quarter as a result of a couple of trades that happened. And we just kind of eroded that bag down to where we started again. So net-net, I think, what you're seeing right now is noise. I would warn you because I think we mark this thing to market, and if transactions on the margin tell us something we didn't know before or if the market actually changes, of course, it's subject to additional increases in that reserve.

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Operator [55]

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Our next question comes from Michael Mueller with JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [56]

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Just looking at the, I guess, the Investor Day presentation of $100 million annual spending, $75 million of annual investments and just thinking about that retained cash flow. I guess, what you have to do on the disposition side or what do you have to do either in terms of JVs to raise new capital to fund that over the next 5 years? Just thinking about what happened with the JV in the fourth quarter in terms of the significant proceeds that were raised from that. So what's the look forward on asset sales, I guess?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, Treasurer & CFO [57]

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Yes, so what we said at the Investor Day was that our plan is largely self-funded because of the preferred that we will be getting back when you combine operating cash flow and the 2 different preferred investments we have. If you assume those come back over the next 5 years, we're largely self-funding. The other flex that we have, obviously, is on the opportunistic investing side. What we said was that, that would largely be coming from some kind of recycling activity. To Alex's question earlier in the call, will we sell more? Yes, we will sell more in order to invest at higher rates of return. That activity will be somewhat dependent on what we can sell and for what prices.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [58]

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Got it. Okay. And that doesn't change at all just given the size of the JV that's done in the fourth quarter?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, Treasurer & CFO [59]

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Well, I mean, look, as David said in the prepared comments, it's a game changer for us, right? I mean, it does really prefund a lot of this. So I think the visibility on being able to invest $75 million a year opportunistically just went up significantly. The visibility on being able to invest into redev definitely went up significantly. It just gives us more cushion. So I guess to your point, we don't really have to sell it. The point I'm trying to make is our business plan originally didn't build in a lot of dispositions that were required. And with the JV having closed, you can imagine that's even less than it was before.

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Operator [60]

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Our next question comes from 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 [61]

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Just 2 quick ones. There's been a lot of talk about the bankruptcy tenants and the like. I guess, I was just kind of curious. With the nonbankrupt tenants that are coming to their lease maturities, are you seeing any change as it relates to sort of your tenant retention rates on those tenants, say, year-over-year or as you look out in '19?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [62]

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Yes. I think it's a great question. I would hate to answer as a proxy for the entire retail market. I think as we're looking at 70 assets that were hand selected to be in very high-income demographic areas, kind of, tight supply constraint, we really haven't seen any change in tenant behavior when they come to a renewal, but also our pool is smaller. And so, statistically to say it went from x percent to y percent is more difficult. In general, the tenants that are in our properties would like to be there because they are profitable. And so, we haven't really seen much of a change in their behavior when they come to an option.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst [63]

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Okay, great. And then I guess, David, while I've got you, on the opportunistic investments that you were able to complete, any sense as to what the competitive landscape was? Who were you competing against? Sort of how competitive were those deals?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [64]

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Yes. Well, I think that's probably the most fascinating part of this period in time, the last couple of quarters. Whether it will continue or not, I don't know. But if you think about it, buildings in very high-income areas, very difficult to entitle new properties. And so there's kind of a low supply. They can get left behind as the world changes. And these 3 assets, in particular, have buildings that are outdated. When you have an owner that's unwilling to keep reinvesting capital to make the buildings fit with current tenant demands, then the tenant demand goes elsewhere and you end up with this cycle where the rents get lower and lower even though the tenant demand gets higher and higher. When these properties hit the market to be sold, the demand was surprisingly low. And it makes one say, why is demand low when you've got opportunity for leased occupancy, you've got great demographics, you've got grocery anchors in 2 of the 3? And the answer is that there is only 2 types of buyers out there that are really aggressive. One is for squeaky, clean assets that everything is done and it's easy to finance at high leverage. And I would say the others are ones where they don't have to do a lot of heavy lifting on CapEx. This one fits in the middle zone, which, I think, we have a lot of expertise on effectively putting our CapEx to work, and we don't need mortgage debt to finance assets that have all of the tenants in their option periods. And so the average lease maturity is less than 5 years. I think that's the reason why. So there was really not a lot of demand, and that's where the dislocation is, and I hope we can find more situations like this.

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Operator [65]

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Our next question comes from Derek Johnston with Deutsche Bank.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [66]

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Especially with a smaller portfolio in affluent MSAs, when you think about the overall tenant mix, are there any areas that worry you more than others either from a relevance or a saturation perspective?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [67]

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In this specific portfolio, it's hard for me to generalize over a small portfolio of only 70 assets. I can say that the tenant demand is strongest for convenience and neighborhood types of tenancies. And so, when we have tenants that demand a very, very large trade area, we're being very careful to put those tenants in assets that have an existing trade area that's that wide. Mike's team spends a lot of time analyzing consumer data and trying to figure out exactly where the trade area is on these existing properties, so that when we put a new tenant in there, we can be successful. If you pull this back to our capital allocation strategy, remember that Investor Day out of 60 boxes that were vacant, we had 15 leased. As of today, we've got 26. So the volume of box leasing is pretty dramatic, which means the CapEx that we're putting into these properties is also quite large. And the result is that we need to be very, very careful to make sure that the tenants we're putting in these properties are going to be successful, and we're using a lot of customer data to make sure that we're making that fit.

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [68]

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The only -- this is Mike. The only other thing I would add to that is the fact that of those 26 leases that were executed, 19 of those were of distinct brands of different uses, which basically supports what David was just saying. In that, that is that we are targeting the right tenants for the market and not just going after the same 3 or 4 tenants that happen to be doing a lot of deals.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [69]

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That's helpful. And just one last one. As you look to penetration of buy online and pick up in store trends that we're all hearing so much about, is there any actual feedback from the ground that you can give? Maybe who is doing a more impactful job or a better job than others? And if you're seeing any impact on traffic?

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [70]

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Yes. This is Mike. I think some of our grocery tenants that are doing order online and pick up at the store are doing a tremendous job at getting a different customer pattern to the store. And it also candidly allows some of those customers to do cross shopping because they don't have to spend as much time in a store. I also find that Best Buy does a great job at creating a blend of online and really has turned into an omnichannel distribution center, more than a traditional retail store. So we're seeing our best tenants are getting very good at it, and we're taking advantage of that and going after those types of tenants as much as we can.

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Operator [71]

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

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [72]

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Thank you, all, very much, and we'll talk to you next quarter.

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Operator [73]

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