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Edited Transcript of SITC earnings conference call or presentation 29-Jul-19 1:00pm GMT

Q2 2019 Site Centers Corp Earnings Call

Beachwood Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Site Centers Corp earnings conference call or presentation Monday, July 29, 2019 at 1:00:00pm 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, CFO & Treasurer

* 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

* Caitlin Burrows

Goldman Sachs Group Inc., Research Division - Research 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

* Craig Richard Schmidt

BofA Merrill Lynch, Research Division - Director

* Jonathan Michael Petersen

Jefferies LLC, Research Division - Equity Analyst

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* 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

* Richard Hill

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

* Samir Upadhyay Khanal

Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst

* Shivani A. Sood

Deutsche Bank AG, Research Division - Research Associate

* 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 morning, and welcome to the SITE Centers reports second quarter 2019 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, Investor Relations. Please go ahead.

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

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Good morning, and thank 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 risks and uncertainties, and actual results may differ materially from our forward-looking statements. Additional information about these risks and uncertainties may be found in the earnings press release issued today and in the documents 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 NOI. Reconciliations 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 supplement are available on our website at www.sitecenters.com.

For those of you on the phone who would like to follow along during 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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Good morning, and thank you for joining our second quarter earnings call. I am extremely pleased with our performance over the last 3 months, which was measurably above our expectations, due largely to better-than-expected property NOI and lower-than-expected tenant bankruptcies. The combination of these factors is leading us to increase our same-store NOI growth and OFFO guidance.

I'd like to comment on how our quarterly results tie into the 3 major components of our 5-year business plan: leasing, acquisitions and redevelopment, and then I'll hand the call over to Mike to discuss our operations in greater detail. Matt will conclude with some comments on the balance sheet, quarterly results and our guidance increase.

First, same-store NOI growth, which is easily the largest component of our growth plan, was 5.7% in the second quarter compared to our expectation of a deceleration from the first quarter. Our leasing team continues to make great progress retenanting our 60 anchor opportunities, with 45 now leased or in advanced negotiations.

The recent slowdown in tenant bankruptcies means all this work has begun to positively impact our economic occupancy, generating strong NOI growth from the average 36% spreads we expect to achieve on these spaces. The work we did over the last 2 years curating the SITE Centers portfolio means we own real estate in the highest-quality submarkets in the country positioned to take advantage of today's tenant demand.

We also continue to advance our investment program. As a reminder, our 5-year plan calls for $75 million of annual investments funded via capital recycling. We achieved our 2019 goal through the share buyback program and acquisition of 3 joint venture assets, all funded with proceeds from the closing of the first China Dividend Trust Portfolio in November of 2018. We are working on additional acquisitions that could close later this year that would allow us to exceed the $75 million annual goal, funded largely from the sale of our Vista Village assets in San Diego in the first quarter.

Our approach to acquisitions is the same as it has been in the dispositions and spin process, bottoms up rather than top down. We are solving for cash flow growth and returns driven by convenience and value-oriented properties rather than simply seeking out certain formats or geographies.

Finally, we're making progress on our redevelopment plans, which represents the third component of our 5-year growth strategy. Work continues on 4 active projects, including West Bay's Phase 2, which we added to our supplement this quarter, and we are advancing the entitlement process of our pipeline of larger scale projects in Atlanta, D.C. and Boston.

We've made the most progress to date on Duvall Village, one of several projects featured at our October Investor Day. Located in Prince George's County, our zoning text amendment was recently passed which allows for the conversion of this property to new residential and retail uses.

During the entitlement process, we received an offer for the land that would allow us to receive all of our expected development profits immediately rather than over the course of a multiyear redevelopment. So we've opted to sell the property for approximately $10 million, which represents a 3% cap rate on in-place NOI, providing capital we can reinvest in the remainder of the pipeline at a significantly positive spread. We don't expect quick payoffs on all of our projects, but I do see Duvall as a case study in balancing redevelopment risk and reward.

Before closing, I would like to also acknowledge the hard work done by our whole operations team as well as our Senior Vice President of Operations, Joe Lopez, on the publication of our fifth annual sustainability report as well as our recognition as a Silver Green Lease Leader by the Institute for Market Transformation and the U.S. Department of Energy's Better Building Alliance. These are just 2 of the examples of the daily work that this company does to ensure sustainable growth through healthy relationships with our key employee, investor and community constituencies.

In summary, SITE closed the second quarter in an extremely strong position. We have a focused portfolio positioned to benefit from occupancy uplift, solid tenant demand and a balance sheet that provides us flexibility to invest opportunistically. We've made great progress on our 5-year plan to generate 5% average annual earnings and NAV growth as well as a 2.75% same-store NOI growth.

And with that, I'll hand the call over to Mike Makinen to discuss our operating results.

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

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Thank you, David. I'm very pleased with our reported 5.7% same-store NOI growth in the quarter, which was well ahead of plan due to fewer-than-expected tenant bankruptcies; a higher-than-expected recovery rate, due partly to expense timing; earlier-than-expected rent commencements; and receipt of a $1.3 million settlement from the Mattress Firm bankruptcy. Our same-store NOI would have been 4% without these payments.

The second quarter saw more of the robust leasing activity that we've seen over the last 24 months despite our now more focused portfolio. We have signed leases for 33 of the 60 anchor vacancies identified at Investor Day with another 12 spaces at lease or in NOI. This compares to 15 executed leases just 9 months ago. These 45 deals represent a blended 36% leasing spread with 34 different brands. Importantly, we continue to expect anchor openings to accelerate with 6 openings in the second quarter and an additional 10 openings through year-end, mainly in the fourth quarter.

All of this leasing activity has generated a 90 basis point increase in our pro rata portfolio lease rate to 93.9%. Importantly, our lease-to-commence spread, which is the best indicator of low-risk and better future growth now stands at 390 basis points, a 30 basis point increase over last quarter. This large spread provides us confidence in our ability to achieve our 5-year 2.75% same-store NOI growth target even with a 1.5% annual NOI reserve for tenant bankruptcies.

Leasing spreads for the quarter were solid with trailing 12-month spreads in line with our historical average on elevated volumes. As I mentioned last quarter, we expect our smaller portfolio to translate into more volatility and quarterly metrics, so I encourage you to look at our leasing results on a trailing 12-month basis. 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, suggesting still compelling tenant economics.

We remain confident in our ability to continue driving shop leasing and to achieve the 94% shop goal we articulated as part of our 5-year plan. Our shop leasing activity this quarter was as high as we've seen in some time and these deals have more attractive economics. Despite all the activity, our shop lease percentage dropped this quarter because of the Payless liquidation in which we recaptured 13 stores. These locations, along with other high-quality available space, remain a source of future growth.

All of these operational progress is the product of enormous effort by many often unsung heroes, especially in our leasing department. This quarter, though, I'd like to also specifically call out the efforts of our construction management team who are behind the complex work required for store openings often in very compressed time periods. They've delivered 36 spaces ahead of schedule this year with an expected positive impact to our budget of almost $600,000. I congratulate and thank our Head of Construction, Joe Chura, and his team for their outstanding and tireless work.

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

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

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Thanks, Mike. I'll first comment on our balance sheet and then I'll touch on some earnings matters, and I'll close with some comments on guidance.

First on the balance sheet, our position remains strong with pro rata debt to EBITDA in the quarter at 5.7x compared to 6.4x in 2Q '18. Beyond improved leverage, our maturities are also in great shape, with a weighted average consolidated term of 5.7 years.

We also announced this past Friday the recast of our line of credit facility and term loan, extending the facility's maturity, improving liquidity and measurably lowering our borrowing cost as a result. I would like to thank our bank partners for their ongoing support of our business.

As David mentioned, we expect to deploy capital during the year, but the impact of this spending on leverage levels will be mitigated by 3 factors. First, the ongoing ramp in our EBITDA primarily from growth in same-store NOI; second, the ongoing repayment of our $170 million Blackstone preferred as that JV continues to liquidate. There were no Blackstone dispositions in the second quarter but we did get more clarity on prices for dispositions expected to close later this year, which has caused us to marginally increase our valuation reserve on the remaining preferred.

Our current $78 million reserve compares to the $76 million we initially established in 2017, though there have been several upward and downward revisions since then because we marked the preferred mark-to-market on a quarterly basis. We have received a total $155 million of preferred repayments since inception of these securities, with the remaining net value of $170 million.

A third source is additional JV asset sales. We had limited activity this quarter, but expect additional dispositions will occur over the next year. And a final source of deleveraging is the $234 million of total capital we eventually expect to receive through the ultimate liquidation of RVI and the related repayment of our receivable and preferred investment. All this means we continue to see 6x debt to EBITDA as a long-term leverage maximum.

I'd like to now turn to some earnings-related items. First, while bankruptcies has had a much smaller impact so far in 2019 than we anticipated, something which is helping fuel our guidance increase, we did recognize $340,000 of revenues in the second quarter from Charming Charlie and Payless that has since closed or announced that they will close and will therefore not recur in the third quarter.

We also expect to lose approximately $400,000 of revenues from Dress Barn in the fourth quarter. There will be significantly less capital and downtime associated with these non-anchor closures and we are excited about the backfill and mark-to-market opportunities, though they will still act as a drag on 2020 growth. Second, this quarter included a $400,000 positive revenue impact from an outsized bad debt reserve reversal that is onetime in nature.

And finally, as Mike mentioned, we received a $1.3 million settlement from the Mattress Firm bankruptcy resolution. This was included in other income. While this is obviously a large onetime item in the second quarter, the payment is equivalent of 1 year's worth of rent and recoveries for this tenant, so the annual impact is a push.

I'll turn now to our change in guidance. Given the greater clarity we have at this point in the year as well as significant outperformance in the first 2 quarters, we are increasing our OFFO and same-store NOI growth estimates. Specifically, we have increased our OFFO guidance by $0.04 or 3.9% at the midpoint, which we believe represents measurable OFFO growth on a spin-adjusted basis. We've also increased same-store NOI growth by 110 basis points at the new 2.75% midpoint to reflect the better-than-expected economic occupancy throughout the year stemming from fewer tenant bankruptcies.

Given the timing of anchor rent commencements, known tenant closures and bankruptcies and a tougher comp in 3Q, we now expect same-store NOI growth to trough in the third quarter below 2%. Specific quarter-over-quarter headwinds include, as Mike mentioned, $750,000 of quarterly revenues from bankrupt tenants in the second quarter that won't recur, expense timing and a decline in other income.

Finally, we adjusted guidance for fee income and G&A in 2019 with JV fees modestly higher due to higher property NOI and RVI fees lower due to completed asset sales. Based on asset sales completed to date, we expect RVI fee income, excluding disposition fees, to equal approximately $5.1 million in 3Q and 4Q 2019 before stepping down again in 1Q 2020 as RVI continues to sell assets.

G&A was lowered to $60 million as we continue to manage expenses. But as previously mentioned, lower RVI fees will act as a significant headwind to 2020 OFFO. JV fees will also likely decline from 2019 as our partners look to harvest capital.

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. In conclusion, the last 6 months provide increasing evidence of this organization's ability to pivot to growth. We are now demonstrably ahead of schedule in executing on the operational, opportunistic investing and redevelopment goals that underlie our plan to produce average 5% OFFO and NAV growth over the next 5 years.

Operator, we're now ready to take 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 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 [2]

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David, first question. Just thinking about the quarter here, you commented that you're ahead of plan and on track for the 5-year plan. But as we think about this year's performance in this quarter in particular, much of which was related to operations, I'm curious why you aren't tracking ahead of plan for the 5-year plan or if that's not the right read.

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

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Todd, I think it's probably just too distant in the future to speculate on a change on the 5-year plan. And just bear in mind, there's 2 important factors. One is that we've taken what we think it's a very realistic bankruptcy reserve through the remainder of the 5-year program. In some quarters, we'll outperform, in other quarters we might underperform. These past 2 quarters, I think there's been fewer bankruptcies than we would've imagined. So I think in aggregate, we're still on plan. The second piece of the puzzle, I think you have to remember is that our operations and our NOI is trending very positively. But keep in mind that the fee burn-off from RVI over time also has an impact the other way.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [4]

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Okay. And then sort of a 2-part question on dispositions and the related fee income there. So the pace of dispositions seems to have slowed a little bit in the quarter. Is that intentional on your partner's behalf with interest rates down, maybe demand being a little bit better off year-to-date than expected? And then the second part related to the JV fees. So you had previously commented the fees would likely trough, I believe, in early 2020. And I think you were suggesting they would decline but maybe there was an opportunity to form some other strategic partnership or an opportunity to backfill the fee income there. Can you update us on your current thoughts there?

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

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On the slowdown, Todd, are you asking about Blackstone specifically or are you saying just JVs generally?

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [6]

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JVs generally, but maybe you could touch on Blackstone's positioning as well.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [7]

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Todd, on the Blackstone portfolio and several others, we don't really control the pace of dispositions, so it's really squarely outside of our purview. The RVI portfolio that we also received fees on, it's been noted that, that company's assets are all for sale. The timing of those sales has more to do with the exercise of anchor options that affect the value of the property more than it does the desire of RVI to sell assets. So we're a little bit beholden to the timing of when transactions take place.

For joint ventures in general, it is a business that is compelling for us. We do have a certain amount of scale, it allows us to see a lot of deal flow. And I would say that strategically, as joint ventures naturally mature and go away, then we'll be working to replace those over time.

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Operator [8]

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Our next question comes from Caitlin Burrows with Goldman Sachs.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [9]

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I was wondering if you could comment regarding the lease-versus-occupied spread, it has been increasing which supports your leasing strategy. So just wondering when you consider your watch list and future outlook for occupancy, how comfortable are you that this will end up a tailwind to higher occupancy versus having to compensate for additional upcoming potential closures?

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

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Caitlin, I mean, I think at this point, we've seen such dramatic demand from the anchor business. I mean the piece about Mike's prepared remarks that I think you really got to take to heart is that we've signed 45 leases and LOIs out of 60, and that's a 36% leasing spread, which is enormous historically. And even more impressive, it was 34 different brands. So I think you're seeing a tremendous amount of demand on the box side, which has surprised many, including ourselves. And it's a healthy business right now. So the watch list tenants remain there and I do think that industry will continue to have bankruptcies and store move-outs. But I think if you have the right real estate in the right sub markets and the right cotenancy, the demand is going to be there to fill it up. And this portfolio, for one, certainly has a lot of built-in mark-to-market.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [11]

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Got it. And then maybe just on the redevelopment side. Could you go through, for the 2 projects that are planned to open in 2019, Nassau Park and Brandon Boulevard, kind of the percent lease that you've got into on those? And maybe the difference between the 2 projects, maybe it's the scope that one will just take, it seems like, 1 quarter to stabilize and the other will take about 1 year?

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

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Yes. Nassau Park Pavilion was a redevelopment of a Kohl's box in Princeton, New Jersey. It's 100% leased and it's effectively a reconfiguration of square footage that we recaptured. And that's why you're seeing the stabilization happen so fast. It's just that the tenant's ramp-up and open it all happens within a 1 quarter duration. The collection of Brandon Boulevard is a Kmart recapture that we were able to receive back about 1.5 year ago. It was the last Sears-Kmart that this company owned. And the occupancy rate at this point is trending what, Mike?

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [13]

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About 75%, 80%.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [14]

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75%, 80%. And the LOIs and the activity we have on the remainder of the space, I think we've got a pretty prudent guideline for when that final stabilization occurs.

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Operator [15]

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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 [16]

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Matt, I think some follow-ups on the same-store NOI discussion. You talked about the Mattress Firm payment and the bed debt reversal in Q2. I'm just trying to figure out inherent in the same-store NOI guidance increase, how much of that revision was these items? So how much of that had you previously anticipated in the guidance range versus how much of it was driven by your expectation for better core growth? And I'm not sure how much of the better sort of recovery rate in second quarter was timing.

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [17]

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Yes. I think Christy, we did not budget Mattress Firm. That's a transactional item which is just not something we're willing to kind of forecast per se. So I would see that one as certainly outside of budget. And that debt reversal is really about the pace of bankruptcies that we've had. As David and Mike both mentioned in their preferred remarks, and me as well, bankruptcies have just been significantly lower than we expected.

So the guidance is really about, yes, we got some money back from Mattress Firm as a contributor. We're also seeing rents commence more quickly, to Mike's response -- Mike's comments about our construction team getting spaces open. We had little bit of a benefit in operating expense timing this quarter that will be reversed next quarter. And then bankruptcies generally at this point of the year, we were kind of looking forward and it's -- we get more clarity -- as we've mentioned, we get more clarity now about what's going to impact the rest of the year. And so that's part of the upward guidance as well.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [18]

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Okay. So if I look at the pace of base rent growth in the first half of about 1.4% to 1.5%, how should that look in the back half of the year? Is it more commencement take, but then offset by sort of the further impact of closings that you mentioned?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [19]

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Yes. I would put revenues together, right? So you're you saw -- you're right about the 1.5-ish percent increase from that. We also got another 40 or so basis points from ancillary, all the stuff is connected. The third quarter, I think you're going to see a slower pace of revenue growth. A, because of a tough comp; and b, because if you look at our -- what we said about the timing of anchor commencements, they're really going to happen more in the fourth quarter than in the third quarter. So the growth will pick up more in the fourth quarter.

I think our view is -- what we've been saying all along is you're going to see the robust revenue growth happen starting at the end of this year and then going forward. In the meantime, we've managed to pick things up and improve margins and squeeze profitability out of the same-store portfolio, which we're perfectly happy with.

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Operator [20]

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Our next question comes from Samir Khanal with Evercore ISI.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [21]

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Mike or David, when I look at your net effective rents and then when you look at the new and renewals, they've held up pretty well on the net effective side. But then when I looked at new leases, they were down a little bit even from a trailing sort of 12-month basis here. I'm just trying to figure out what's kind of going on there.

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [22]

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Samir, just -- this is Mike. Just wanted to kind of emphasize the size of this portfolio is always going to, going forward, have some bumpiness to it on a quarter-by-quarter basis. And when you look at this portfolio and as an example, if you have one anchor space of 40,000 feet or so that has relatively modest bump and require some CapEx, it can actually cause a quarterly number to fluctuate. When you look at this aggregately across the rolling 12-month basis, it really does kind of temper things. And if you look at last quarter, for example, you had a very high leasing spread related to prior rents. And CapEx in this quarter, we have a smaller portfolio and there's some bumpiness.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [23]

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Okay. And then, I guess, my next question for you Mike is can you currently talk about sort of how leasing discussions are going with potential tenants? Clearly, there's a lot of noise out there. I mean there's bankruptcies, closures. But have you seen any sort of changes in sort of conversations over the last 6 months, 3 months? Are there any changes in sort of economic asks or noneconomic asks coming from tenants?

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [24]

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No. The answer to that is no. I mean when you look at the myriad of tenants that we're doing new deals with, the conversations are really not terribly different than they were over the last 5 years. With the existing tenants talking about renewals, tenants -- we've been doing this for many, many years, and tenants are always working to try to get the best deal. And when you have really good real estate, you can see that we continue to see increases. And I would say there's not a dramatic change in the tone of the conversations.

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Operator [25]

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Our next 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 [26]

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Two questions. First, just a general retailer question. You guys and others have commented that the pace of bad debt -- or sorry, bankruptcy store closings is a lot less than expected. So is your view that a lot of these headlines that we see of tenants announcing various plans to close, are those -- is it essentially all bluffing? Or is it that they're trying to close, but the economic reality means they don't want to pay lease term? Or is it that these tenants, for the most part, have been able to revamp their merchandise plan or revamp the part of the business that was ailing them in which case, they're able to last longer? So said a different way, is it just that the tenants are proving to be more durable than we all expected? Or is this a matter of that it's just taking a long time for these tenants to work through and if they don't go under this year, they'll be going under next year, if you will?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [27]

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It's a really good question. I think that, that subject has come up a lot particularly over the last quarter or 2. And for us, it's hard because you want to talk industry in general since there's so many newspaper articles about retail disruption. And it's accurate. There has been a lot of disruption in retail. But for a company of our size and we own less than 70 wholly owned assets, it's difficult to be a proxy for the overall retail industry. And so I think maybe what we are seeing is that if you own really good real estate, even if a tenant is changing they're store fleet, they're probably not going to change the ones that are making money. And the 4-wall EBITDA that comes out of boxes and shops that are within our 70 wholly owned assets I think are strong enough that they have proven to be very, very durable.

The flip side to that question -- you're asking about existing tenants. The flip side is the demand for space. And I keep coming back to what Mike said during his remarks, of 45 anchor deals that we've done or are working on, there are 34 different brands. So there's a tremendous depth of demand for space in our portfolio and it puts pressure on existing retailers to renew at rents that are market.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [28]

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Okay. And then the second question is for Matt. Matt, you mentioned for next year, for 2020, there's going to be a decline in RVI and the JV fees that provides a bit of a headwind. Can you just sort of put some color or some brackets around like magnitude, sort of a range of millions of dollars, that we should be thinking about that's going to come out of next year as RVI continues to wind down and it sounds like you'll wind down some of the JVs?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [29]

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Yes. So we're not providing specific forecast yet, in part because we don't really know. One thing I will remind you of the lion's share of this really is coming from RVI. I'll come back to your JV comment. But on RVI, we originally laid out, somewhat arbitrarily, a 3-or-so-year liquidation plan. 2020 would mark the third year following what we -- following the spin itself. So -- and that's not because we have some visibility on exactly what's going to happen and when. But we're trying to take, I think, a prudent approach. So you could assume, I think, most importantly, very significant reduction in fees from RVI over the course of next year. And that, I think, is the lion's share of the headwind that we're talking about.

By the same token, the JVs, as David mentioned, we don't really control the Blackstone JVs, but they are, I think, motivated to sell those assets relatively quickly, so we expect some headwinds there. And then our other JVs, the retail landscape is changing. And JV partners are always being active and thoughtful about what they own, and some of what they've bought 5 or 10 years ago may not makes sense today. So I would expect some headwinds there as well. So we're not going to quantify anything at this point, but I do think it's something that you should consider as you're looking forward into your next 12 months.

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Operator [30]

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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 [31]

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Given that you are active in the sales market and maybe not directly with SITE Centers but RVI and the quality of your assets, I was wondering if you could just maybe give us an update on how you think the sales market is trending for the assets that you're looking at, recognizing that RVI isn't exactly what SITE Center owns.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [32]

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Yes. Rich, I'm going to stay away from commenting on RVI's asset sale process. I will say that the CMBS market is alive and well, and that is the key indicator for asset sales particularly in secondary markets. So I think as long as the rates and the door is open for decent financing, I think the transactions market is pretty alive.

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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 [33]

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Got it. And I'm sorry I wasn't specifically asking you to talk about RVIs, maybe giving some color on what you thought about cap rates. But it sounds like you think cap rates are stable to maybe even a little bit tighter given how open the CMBS market is. Is that a fair characterization?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [34]

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Yes. I think that's a -- it's a fair generalization. I think I can talk more on the acquisition side as we've looked to deploy capital and you think about what is most enticing to us, it's durable cash flows with growth. And that sometimes is different than cap rate, right? A lot of this comes to CapEx and the mark-to-market on in-place. So I would say as opposed to cap rates being stable or coming in, I think it's the durable IRRs effectively underwritten are very, very valuable to a lot of different investors. And so we're seeing and witnessing a lot of competition for growth assets.

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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 [35]

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Got it. That's helpful. Talking about the durability of cash flows. Just one follow-up question. You've obviously been pretty successful having partnerships from Asia. Can you maybe talk about just that demand that you're seeing from durable cash flows from foreign investors?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [36]

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Yes. I think that nothing has really changed from when we closed on our $600 million joint venture with the Chinese institution. There is a demand for U.S. dollar-denominated dividends. And to the extent that you can find durable assets that may have a smaller growth than a domestic fund might want, I think that the foreign capital is seeking yield. And I think our asset class can deliver that yield. So we are active and continuing to have more dialogue in that front.

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Operator [37]

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Our next question comes from Shivani Sood with Scotiabank (sic) [Deutsche Bank].

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Shivani A. Sood, Deutsche Bank AG, Research Division - Research Associate [38]

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This is actually Shivani Sood from Deutsche Bank. Just following up the earlier question on the private markets. Have you guys seen any change to the competitor pool in terms of the bidding process for the assets that you are looking for, just given that you're sourcing from more of a new strategic perspective versus some of the institutional capital out there that might be looking for a more of buying hold asset?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [39]

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Shivani, I don't really have any characterization on the buyer pool. It feels like every asset we look at, there's some players that are consistent and there's some new ones. I think there's an awful lot of capital, I think, available for durable assets and so you're seeing public and private together competing.

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Shivani A. Sood, Deutsche Bank AG, Research Division - Research Associate [40]

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Great. And then as a follow-up, you guys have really been at the forefront in terms of leveraging customer and geographic data to gain an edge on the leasing and tenant negotiations. Can you give us an update on your efforts there and how that might have facilitated the faster-than-anticipated re-leasing of the anchor boxes?

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [41]

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Thanks for that question, this is Mike. We're developing an internal team. We're continuing to grow our analysis tools. And we've seen tremendous value as we're looking at potential tenant mix strategies, acquisition strategies. And we're seeing that as something that we're going to be in the front lines developing over the next several years.

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

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Shivani, there have been a couple of specific examples that are intriguing. We had an asset side in the Atlanta market. And there was a tenant we were trying to persuade to join our lineup. And there were some questions as to whether their customer was going to be available and on the property. And the data that we've assembled and Mike's team has been able to work with effectively prove that their customer profile was coming to the property with some frequency. And we really have never had that data before. But in the last year, it really has given landlords a big benefit to be able to market to some of the mom-and-pop tenants that don't have a big department and prove to them that their customers is on the property. So it's been great on the leasing side. I think at this point, we're also using a lot of this data to help us with our acquisitions.

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Operator [43]

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Our next question is from Ki Bin Kim with SunTrust.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [44]

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Good quarter. I just want to ask a couple of questions on leasing economics. The CapEx usage this quarter was about 40% as a percent of rental value. I'm just curious about the type of tenants you're bringing in, the credit or just the longevity. It's actually the 45 out of the 60 boxes that you signed. Can you just provide some color on the quality of tenants you're bringing in?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [45]

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Ki Bin, I'll address your -- the 40% number first, then I'll hand it over to Mike to talk about mix. But just be aware that, that net effective rent number is a fully loaded number, right? Everything that we're doing, the lease spreads, like for all of our peers, there are some sample issues there in terms of which leases are in and out depending on duration and the space, et cetera. This is a fully loaded number and so it's simply -- a change in that CapEx number is about a change in activity, right? It's not about a change in underlying economics per se. And with that, I'm going to hand it over to Mike.

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [46]

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Yes. Ki Bin, as far as quality of tenants, I think it's important just to simply give you some of the tenants that we've looked at, signed leases with and have LOIs with over the last several months and this is strictly anchors. But I'm just going to rattle off a few. We've done deals with Floor & Decor, DSW, Ross, T.J.Maxx, HomeSense, Best Buy, Sprouts, Planet Fitness, Five Below, Ulta, Total Wine, Burlington and the list goes on. This is a great pool of tenants with phenomenal credit who are basically looking to be in the best locations. And we've pretty much proven that this portfolio is offering that.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [47]

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Okay. And if I look at the leasing economics over the past 1.5 year, I know that you guys fully load that number. But looking at it just from a trend perspective, it has been trending higher. And I get it. I don't want to miss the forest from the trees, so it's all positive reasons. But just from a holistic standpoint, should we expect the CapEx usage for SITE to increase -- the actual CapEx usage to increase over the next year because the signed leases are -- on a signed basis, the CapEx usage is based on kind of real-time usage of that CapEx. So should we expect an elevated usage level?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [48]

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Ki Bin, let me give you one comment and then I'll hand it back to Matt. But I think you have to always bear in mind that when we have transparency with our fully loaded numbers in a portfolio that's less than 70 wholly owned assets, you're going to see volatility based on the pool. And the fact of the matter is this portfolio was curated with an excessive amount of anchor opportunities. As we lease those, the pool of space that we're leasing is dramatically larger than a long-term run would be. Once the occupancy stabilizes, then I think you can see that change. But bear in mind, when you're looking at trailing 12 or you're looking on kind of industry averages, just keep in mind the size of our portfolio and the fact that there's an awful lot of leasing taking place.

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

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And I'll just follow up. So just to be clear, on net effective rents, I don't see a change in trend there. So net effective rents have been flat to even marginally up. And that's something that we've seen for years now. In terms of spending dollars, the absolute dollars, we have just said that we have signed on the order of -- about signed 45 anchor leases. So if CapEx did not go up under those circumstances, you should question our disclosure, right? So I think we've been very transparent that there'll be a lot of anchor leasing volume this year with rent commencements that are really the payoff for the spending.

The rent commencements will begin at the end of this year, but you've seen that number ramp. We are not showing an increase in CapEx on that basis. We do expect an elevated level of CapEx compared to, say, 5 or 6 years ago because in our forecast we are assuming 150 basis points per year of bankruptcy loss, right? So we expect bankruptcies to remain elevated and therefore CapEx will remain elevated. That being said, we don't expect that kind of a ramp in CapEx to happen again. I would actually say, over the course of the next 12 to 24 months, you should see some moderation in that spending. But it all depends, Ki Bin, as you know, it just depends on what happens with anchors and the bankruptcies.

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Operator [50]

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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 [51]

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Looking at the Dress Barn, it looks like you know well in advance that tenant may be leaving. How does this help you in the leasing and how quickly can you turn that space? And just in general, how is demand for the space?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [52]

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We don't really know what is going to happen with Dress Barn. I would say that -- on Matt's prepared remarks he mentioned it and we're simply taking the worst-case scenario from a budgeting perspective. If I shift to the opportunity side, I think Mike and his leasing team, particular to this retailer who happen to have older leases, the mark-to-market is exciting for us. And so I think they have been soft-marketing those spaces in the event that we get them back, but really don't know anything other than the market does.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [53]

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Okay. In that situation where your soft marketing it and you did have a contingent lease and you signed it the day after they filed, how soon can you get them in the space?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [54]

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I don't think it's any different than the previous bankruptcies you've seen, that the larger spaces are 18 to 24 months and the smaller spaces are a little bit faster. What it really depends on is how many of them are leased at the same size and how many of them are split up into more profitable shops. And I honestly don't know the answer to that until we get the space back and get more serious.

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Operator [55]

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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 [56]

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I just have a follow-up on Dress Barn as well. If you could just talk a little bit about how the closure process was negotiated? Specifically, how they were -- Dress Barn was able to get out of their leases in the fourth quarter without filing for bankruptcy within the parent. Any color there would be helpful.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [57]

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The only color I can give you is our decisions. We have not signed anything with Dress Barn. And at this point, we're simply collecting rent as per their lease agreements.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [58]

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Got it. Okay. So nothing formally has been executed then. And this -- so just what does your budget exactly call for, just no rent starting in the fourth quarter?

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

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December, yes -- or sorry, October. We're taking them out in October. But that is a conservative and somewhat arbitrary decision. It could be -- negotiations are ongoing. We're not going to comment on those specifics other than to say we haven't committed to anything and it could be better or worse than that. Or it shouldn't be worse than that, it could be better than that. We'll have to see.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [60]

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Got it. And then just one more. Similar to the [follow-on] question. But do you expect having to split up a lot of the Dress Barn locations to get demand or better leasing economics? Or do you think the single tenant user will be kind of the most common backfill there?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [61]

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The most common backfill will be to have a single user. But there's going to certainly be some spaces that will need to be split.

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Operator [62]

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Our next question is a follow-up from Christy McElroy with Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [63]

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It's Mike Bilerman here for Christy. David, you talked a little bit about the Duvall project that we shouldn't expect these quick payoffs in terms of the redevelopment because in most cases you'd likely go forward with the redevelopment. I just want to understand if you sort of look through it, I know you've done a deep dive on every asset, has sort of the [redevelopment] at Duvall and being able to monetize it change any of your thinking as you look across the portfolio for more of those opportunities either to sell or to embark by yourself?

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

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Yes. It's a great question, Mike, and I will admit that even my own temperament has changed over the last couple of years. I wouldn't say it's because redevelopments are more risky, it's simply that there are other uses for capital which are more accretive at less risk. It's as simple as that. Duvall was a nice, simple, clean project that had zoning amendments that allowed us to perform a mixed-use plan. But when we measured our own profitability of that plan, it made more sense to sell it to someone.

And I have a feeling that, that will continue. There's simply a lot of risk in a redevelopment project. It takes a lot of time. And if we can find acquisition assets or our own stock or our preferred shares that have a really good return and good underlying assets, the risk reward simply tilts in the favor of investing in something other than development.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [65]

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And then next question on guidance. Matt, you sort of went through some of the onetime impacts, the fees and other things that came about in this quarter. Most of the guidance increase, predominantly all, was simply the beat. It doesn't appear as though what you guys have described is measurably better, materially better in terms of performance, is impacting second half. The second half run rate from an FFO perspective is about $0.28 a share. You did $0.31, so it's actually a deceleration. Why isn't any of the benefits that you guys are talking about actually boosting more near-term results in terms of second half FFO?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [66]

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Thanks, Mike. Yes, so I can't disagree with the logic of what you said in terms of we're raising it by the outperformance versus consensus. I think what we try to do is give guidance based on what we have visibility for. We had some onetime items that are not going to repeat. So that -- I think by definition that tells you it could see less revenues next quarter in aggregate than you saw this quarter. It Mattress Firm doesn't happen again and we don't think it's going to happen again, you could see a tick down. I would also highlight, we did have some benefit on some expense timing. Just as it happens from time to time, we had some expenses slip into the third quarter from the second quarter. So that will happen.

And then there are things -- and we're not just trying to be kind of overly conservative, but there are things that can affect our numbers, right? We're opening a lot of anchors in the second half of this year. There are big spaces. If they slip by as much as 2 or 3 weeks, that and this smaller company size, that can actually impact our numbers. So I think we're taking a relatively prudent approach to this. We're not trying to be overly conservative. If things go all well, then yes, we could see numbers go higher, I suppose, but this is kind of what we see as a base case sitting here today.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [67]

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I'm just trying to triangulate a little bit about some of your commentary around how robust everything is from a leasing same-store. And if it's not really impacting the second half in terms of a run rate relative to consensus or even to your own numbers, right, because the beat was predominantly just rolled into full year, what really has changed, right? If you're not really getting the go-forward benefit of a beat, the beat is really confined to the single quarter then or you're being overly conservative. I'm just trying to piece it together, right, because I hear such strong language in terms of the outperformance but it doesn't seem to be flowing through in the back half in a meaningful way.

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [68]

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I wouldn't say we use of strong language. I think we did outperform our own estimates and our operations have gone certainly better than we expected in large part because of lower-than-expected bankruptcies. That part will absolutely continue. You can rest assure that we have lowered our so-called bankruptcy reserve overall for the year. So I think that should give the investors some comfort. But to the degree there were some onetime items that don't recur, it's hard for me to pretend that those were simply some kind of a fundamental recurring beat.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [69]

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No. I was just going off of materially stronger-than-expected operations measurably above our expectations, [all of that are going to be]...

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [70]

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But Michael, let's just keep in mind, there's a difference between FFO guidance and same-store NOI, right? FFO is a larger number. It is affected by certain transactional items, et cetera, right, onetime items, more so than same-store is. We did materially increase our same-store guidance. So we've got that kind of in the bag. I think that's something that should be reassuring to investors. And it does represent stronger outperformance. If its anchor spaces continue to open earlier than we expected or even as expected, you could see some upside there as well. I think we're just trying to be prudent about the various moving parts involved in the rest of the year.

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Operator [71]

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Our next question comes from Craig Schmidt with Bank of America.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [72]

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I'm just wondering, have you been talking with Pier 1 or Bed Bath & Beyond and are they talking about potentially closing stores?

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [73]

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First of all, we generally won't comment on specific tenants, but a couple of things to keep in mind. We do maintain a conservative outlook with 150 basis point reserve for potential tenant bankruptcies. So we're mindful of things that are happening out there. And again, as I said earlier, there's nothing new to tenants attempting to modify rents when renewals are due. And as you can see, we continue to show growth in our portfolio.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [74]

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Okay. Great. And I noticed that the small shop occupancy ticked down, would you expect that to pick up by the end of the year? Or what's causing that?

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [75]

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Barring further smaller shop vacancies, I would expect that to pick up or -- bankruptcies, our continued momentum on shop leasing is really, really strong.

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [76]

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In the prepared remarks, Craig, we mentioned that the entire downtick was due to Payless, right? So we can't control those bankruptcies. What we can control is leasing volume, and that is going well and continues to show upward momentum.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [77]

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Yes. I guess the stronger consumer seems to have been helping maybe not less the national small shops. And I thought maybe that you would see an increased appetite for the third pizza parlor or nail salon shop or something.

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Operator [78]

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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 [79]

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Just a couple of quick ones. On the 10 anchor boxes that are expected to open by the end of the year, is there any chance that you actually pull forward any more than the 10?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [80]

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It's probably, Chris, less likely. Anchors have certain periods of time which they want to open. And so normally, you're scheduling something for a 4Q open or a 2Q open. It would be very rare for us to pull in some from next year into this year. I think what will be more common is if we're able to get folks open sooner. That's the -- if you're looking for an upside scenario, in the last quarter we overachieved on opening sooner than planned, and if that continues then you would see an improvement in the fourth quarter. But I don't see the number of boxes increasing dramatically.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst [81]

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Okay. And just a question about the anchor leasing activity velocity. On the 60 boxes you guys have been talking about from first quarter to second quarter, it feels like there's like a net increase of one leased deal, which is obviously well below the pace you guys have been executing on before. So you closed for and you -- but the net number of conversations you were having and closed went from 44 to 45 based on second quarter versus first quarter earnings calls. Is that the seasonal issue? What is the issue there?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [82]

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I think you're just looking at a small portfolio in a 90-day period, honestly.

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [83]

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Yes. And Chris, keep in mind, if you recall, a number of these boxes were holding back redevelopment. So the pool of kind of leasable space hasn't changed, which almost fully encompasses that 45 boxes where we have activity today.

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [84]

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I think we feel pretty good about pace. There's nothing -- there's no slowdown, there's nothing weird going on. It's just it's a little bit too much of a micro view, I think.

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Operator [85]

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Our next question comes from Jon Petersen with Jefferies.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [86]

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Great. I'm just kind of curious if you could give us more of your thoughts on redeploying some disposition proceeds, acquisitions versus share repurchases. And maybe specifically as you underwrite IRRs on property acquisitions, kind of what the hurdles are relative to repurchasing your stock.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [87]

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Sure, John, it's a great question. We certainly have all of our options on the table at any given point. Right now, we sold an asset in Southern California last quarter. And we have those proceeds that we're looking to deploy. So we've been somewhat active at trying to find a good replacement. And as you can imagine, we're trying to balance the IRR with the risk. The 3 assets we brought out of our joint venture business in the fourth quarter were purchased at a 7% cap. And as of today, I believe they're about 25% higher in NOI than they were 6 months ago. So that type of asset does allow a lot of growth. And I think the IRR on a risk adjusted basis is much higher than our stock.

On the other hand, sometimes our stock gets to the point that it's pretty attractive as well. And we've shown that we would execute on that. So we've got a lot of levers to growth. And to your point, I think we simply are looking at the different options at the time that we have the capital.

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Operator [88]

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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 [89]

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Most things have been answered. But I was wondering, just on the remaining 15 boxes that you need to lease still. Should we expect anything materially different in terms of economics relative to what you got out on the first 45?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [90]

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I don't think so, Michael, other than the fact -- remember that a lot of those boxes that are between 45 and 60 are in properties that we're holding them back for redevelopment, like in Atlanta and in Boston. And so it could be that those get demolished and turned into some other type of redevelopment or it could be that they're split and we're using that square footage elsewhere. So if they were to be leased without tearing them down, then I don't think you'd see any anything different in the economics.

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Operator [91]

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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 [92]

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Thank you all very much, and we look forward to talking to you next quarter.

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Operator [93]

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