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Edited Transcript of WRI earnings conference call or presentation 1-Aug-19 4:00pm GMT

Q2 2019 Weingarten Realty Investors Earnings Call

Houston Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Weingarten Realty Investors earnings conference call or presentation Thursday, August 1, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew M. Alexander

Weingarten Realty Investors - Chairman, President & CEO

* Johnny L. Hendrix

Weingarten Realty Investors - Executive VP & COO

* Michelle Wiggs

Weingarten Realty Investors - VP of IR

* Stephen C. Richter

Weingarten Realty Investors - Executive VP & CFO

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Conference Call Participants

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* Christine Mary McElroy Tulloch

Citigroup Inc, Research Division - Director

* Craig Richard Schmidt

BofA Merrill Lynch, Research Division - Director

* Greg Michael McGinniss

Scotiabank Global Banking and Markets, Research Division - Analyst

* Vince Tibone

Green Street Advisors, Inc. - Analyst of Retail

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Presentation

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Operator [1]

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Good morning, and welcome to the Weingarten Realty Inc. Second Quarter 2019 Earnings Call for August 1, 2019. My name is Brandon, and I'll be your operator for today. (Operator Instructions) Please note this conference is being recorded.

And I will now turn it over to Michelle Wiggs. Michelle, you may begin.

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Michelle Wiggs, Weingarten Realty Investors - VP of IR [2]

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Good morning, and welcome to our second quarter 2019 conference call. Joining me today is Drew Alexander, Johnny Hendrix, Steve Richter, Joe Shafer.

As a reminder, certain statements made during the course of this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results could differ materially from those projected in such forward-looking statements due to a variety of factors. More information about these factors is contained in the company's SEC filings.

Also, during this conference call, management may make reference to certain non-GAAP financial measures such as funds from operations, or FFO, both core and NAREIT, which we believe help analysts and investors to better understand Weingarten's operating results. Reconciliation to these non-GAAP financial measures is available in our supplemental information package located under the Investor Relations tab of our website.

I will now turn the call over to Drew Alexander.

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Andrew M. Alexander, Weingarten Realty Investors - Chairman, President & CEO [3]

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Thank you, Michelle, and thanks to all of you for joining us. I am pleased to announce a great quarter. The continued transformation of our portfolio through strategic acquisitions and dispositions, as well as profitable investments in our redevelopment program, is clearly exhibited by our same property NOI growth of 4.2% for the quarter. The diversification of our tenant base, the quality of our real estate, and the much improved overall strength of our merchant lineup enable us to post solid operating metrics across the board. Coupled with the best-in-class balance sheet, WRI is well-positioned for future growth.

While the acquisition market remains highly competitive, we were able to purchase our second grocery-anchored center in the Phoenix area, and subsequent to quarter end, we closed on a grocery-anchored property in the affluent part of Atlanta, Georgia. We're cautiously optimistic that we will be able to add other quality properties to our portfolio during the balance of the year.

As to dispositions, we sold $133 million of property in the second quarter and an additional $114 million after quarter end. That brings our year-to-date total to $314 million. We strongly believe that selling properties at the bottom of our portfolio at or above our estimate of net asset value is the right thing to do when our stock is priced at a significant discount to NAV. Given our expected 2019 dispositions, it's likely that in addition to the special dividends paid in the last 2 years, we will also pay a special dividend in 2019, further enhancing shareholder returns.

We're very pleased with the sale of Jess Ranch, even though it led to an increase in the disposition guidance. We've discussed, in prior call, the challenges of selling large assets that's even more applicable for power centers and more tertiary markets. Consequently, when we received a very reasonable offer of $89 million, which was above our net asset value, we decided to sell. We believe that was the best long-term decision.

Looking ahead to 2020, given the improvements we've made in the quality of the portfolio from the sales in 2018 and '19, I'd expect dispositions to return to more normalized portfolio management, and I'd estimate around $150 million for 2020.

Moving to our new development activities. In D.C., at Centro Arlington, we started residential pre-leasing, and we expect to begin at West Alex near the end of the year. At Centro, we expect Harris Teeter to open around the end of this year. Both of these projects benefit from a strong supermarket-anchor, their close proximity to Amazon HQ2, and the strong Northern Virginia market. The Driscoll at River Oaks is progressing nicely, construction is currently ahead of plan, and we should have some residential units available in mid-2020.

We have many other redevelopment projects in the pipeline that will provide excellent returns on the invested capital, and we continue to work on those with great focus. A great quarter.

Steve, the financials?

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Stephen C. Richter, Weingarten Realty Investors - Executive VP & CFO [4]

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Thanks, Drew. Our balance sheet remains amongst the strongest in our sector. At quarter end, net debt-to-EBITDA was a strong 5.05x, and debt to total market capitalization was 33.4%, supported by a well laddered maturity schedule that has no significant maturities until 2022. Our great liquidity and strong credit metrics provides significant long-term stability and flexibility to pursue future opportunities.

We had great second quarter results. Core FFO for the quarter was $0.53 per share compared to $0.57 per share for the same quarter of the prior year. The decrease is primarily due to disposition activity, which cost us $0.03 per share when compared to last year and a $0.02 per share of indirect leasing cost we expensed under the new lease accounting standard in 2019, but not in 2018.

These decreases were partially offset by increases in same property NOI, primarily driven by increased base minimum rents, bad debt recoveries and incremental income from our new developments and redevelopments. A reconciliation of net income to core FFO is included in our press release.

As to guidance, we are increasing our disposition guidance to a range of $350 million to $450 million. This results in an increase in net income guidance due to higher gains on sale, and decreases, both NAREIT and core FFO guidance, to a range of $2.05 to $2.11 per share.

Based on the strong results in the first 2 quarters of 2019, we are also increasing our guidance for same property NOI growth to a range of 2.5% to 3.5%. All the details of our guidance are included on Page 10 of our supplemental. Johnny?

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Johnny L. Hendrix, Weingarten Realty Investors - Executive VP & COO [5]

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Thanks, Steve. We have a great portfolio that keeps getting better. About 80% of the average base rent comes from shopping centers with a supermarket. Those supermarkets average a very strong $690 per square foot in sales. The strong results we're reporting today continue to demonstrate the quality of our properties. Occupancy rose to 94.8%, new lease rent growth was over 20%, same property NOI increased 4.2% and we acquired 2 great grocery-anchored shopping centers in the Scottsdale, Arizona and Atlanta, Georgia.

Leasing production remains steady. We have good demand for shop tenants, mostly medical services, fitness, beauty and restaurants. Folks like Orangetheory Fitness, Pacific Dental, Sports Clips and Silver Diner. As for the boxes, we continue to lease to supermarkets, discount clothing and fitness. We signed our first lease with Lidl at High House in Raleigh, North Carolina. We expect they will open in the next 6 months.

We've made great progress leasing the former Toys R Us space. We have commitments to lease all the space they rejected in bankruptcy. We increased the annual rent on those spaces by almost $1 million. Replacement tenants include 2 Ross stores, a Burlington, Five Below, Signature Furniture, and Baptist Health South Florida.

We are also in good shape with Kmart. During the quarter, we sold Prospector's Plaza in Placerville, California, where Kmart closed in May. This leaves us with only one Kmart located at Six Forks Shopping Center in Raleigh, North Carolina. We'd love to get it back, but it's a good store, so most likely, it will be a part of the new Kmart company.

Occupancy rose 50 basis points from last quarter to 94.8%. Most of the improvement is a combination of low fallout and strong leasing. Also contributing to the improvement is the disposition of Oak Grove shopping center in Portland, Oregon, where we had a large vacancy. We sold the property to an end user, and we're very pleased with the outcome.

Importantly, we still have 200 basis point spread between signed and commenced leases. That's 450,000 square feet that should be opening in the next year or so. We expect to commence $6 million in annual rent before year-end. Good fuel for same property NOI for the balance of the year and 2020. As Steve mentioned, we're raising guidance to same property NOI growth to 2.5% to 3.5%. Year-to-date, we're at a strong 3.7%. We benefited from solid leasing and low fallout.

We've also had unusually high bad debt recoveries that should trend downward for the balance of the year. We don't have a lot of exposure to watch list tenants, and at this point, any significant 2019 impact from a bankruptcy is unlikely.

During the second quarter, we purchased Camelback Miller Plaza in Scottsdale, Arizona. This is a great property, anchored by a very strong Sprouts Farmers Market and a high volume T.J. Maxx. Generally, rents are under market at the center, so we see good rent growth in rental rates and an opportunity for densification over time. The property is in the heart of Scottsdale, among multiple high-rise residential towers and close to Scottsdale Fashion Square.

In July, we purchased North Decatur Station in a partnership with Bouwinvest. The overall investment is $53 million, with Weingarten's share at $27 million. This 98,000 square-foot property anchored by Whole Foods is the retail component of a mixed-use development. North Decatur is an affluent community in Atlanta. The 3-mile demographics are strong, with 112,000 people, average household incomes at $97,000 a year and college graduates at 60%. This brings the company's share of acquisitions to date in 2019 to $81 million.

We're working on some other acquisition opportunities and are optimistic that we can acquire other strong properties this year. Drew?

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Andrew M. Alexander, Weingarten Realty Investors - Chairman, President & CEO [6]

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Thanks, Johnny. It's been a good first half of 2019. We've acquired 3 great grocery-anchored centers and our new development projects continue to move successively forward. Same property NOI at 4.2% is quite good, great rental growth, and occupancy increased.

The significant transformation of our portfolio with greatly improved demographics makes it possible to post operating metrics like these and provides our shareholders greater financial stability and enhanced returns through special dividends and better opportunities for future growth.

Great people, great properties and a great platform, equals great results. I thank all of you for joining the call today and for your continued interest in Weingarten.

Operator, we'd be happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And from Scotiabank, we have Greg McGinniss.

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Greg Michael McGinniss, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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Drew, if I'm not mistaken, I think this was the third or fourth increase to disposition guidance in the last 2 years. And you've now set this bogey at around $150 million of dispositions in 2020. Just curious what should give investors confidence that this expectation will stick, and we won't have another more surprise transaction like Jess Ranch?

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Andrew M. Alexander, Weingarten Realty Investors - Chairman, President & CEO [3]

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It's a fair question, and I think it's something that we addressed in our prepared remarks that we believe that the proper capital allocation when we're trading at such a good discount to NAV is to look to take advantage of the disparity between public and private markets. And in the case of Jess Ranch, as I mentioned, it's challenging to sell multiple box more power-oriented center in more of a tertiary supermarket. And we thought it was a very compelling offer, it's above our NAV.

So there's certainly no guarantees, and I think that companies and people reserve the right to change their direction based upon how factors change. And if you look back 3 years ago, retail was in a totally different world than it is today. And I certainly don't know how things can change going forward. What I do know and what I was comfortable saying in the call and I do feel at this time is given what we've sold the last couple of years, we are very comfortable with our portfolio, and that's where we do feel that we are moving to a more normal culling that we'd estimate at this time, and it's early. But we'd estimate this time at around $150 million.

We're also starting to see, as I mentioned some more acquisition opportunities, so looking at being more capital neutral, know we're making good progress on the new developments and we'll have revenue coming online there. So we appreciate that it's something that not everybody on the call likes, but we think it's the right, long-term capital allocation decision. But we feel likewise good about '21 as we do more normal culling and the development pipeline comes online.

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Greg Michael McGinniss, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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All right. And Johnny -- a question for you Johnny. Same-store NOI guidance seems to imply nearly 200 basis point reduction in same-store growth in the back half of the year. I know you mentioned bad debt as one of the reasons growth is expected to shift down. Could you quantify that impact? And then what's the rest of the move related to? Is this just expected occupancy fallout or some other items? Any other…

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Johnny L. Hendrix, Weingarten Realty Investors - Executive VP & COO [5]

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Yes. I'm sorry? I think I stepped on you. But overall, I think we're very proud of the results that we've produced. Bad debt recoveries was a little bit higher than normal in the first half of 2019, and we don't anticipate that continuing. So we're really adjusting for that at the back half of the year. Recovering bad debt doesn't just happen. And it's part of the results of disciplined work that sometimes takes years. It's part of the overall business, and I think we're pretty good at that. For the first half of the year, without bad debt recoveries, we would've been at about 3.3%.

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Greg Michael McGinniss, Scotiabank Global Banking and Markets, Research Division - Analyst [6]

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And then, is the rest of the move expected occupancy move out? Or what's the other piece of that, that drives you down?

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Johnny L. Hendrix, Weingarten Realty Investors - Executive VP & COO [7]

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There will be some occupancy move out. I think looking at around 3 for the year is pretty good.

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Operator [8]

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And from Citi, we have Christy McElroy.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [9]

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Just to follow-up on that. Johnny, you talked about the $6 million of annual rent expected to commence before year-end. It sounds like there's a little bit of a move out component offsetting that. But just sort of what's the cadence of the move-in? So what's that amount of the $6 million that will actually hit in Q3 and Q4? And you said -- and sort of where does that lead the lease to commence spread at year-end factoring all that in?

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Johnny L. Hendrix, Weingarten Realty Investors - Executive VP & COO [10]

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It's pretty even throughout the balance of the year, about half in the third quarter, about half in the fourth quarter. Of course, the exact timing of that is depending on when we can finish construction and get the tenants open. But we feel pretty comfortable that we budgeted pretty accurately for that.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [11]

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Okay. All right. That's helpful. And then, just on the disposition, maybe can you give us an update on your assumptions for use of proceeds inherent in that dilution? Associated with that, will your cash balance shift continue to tick up? What are you earning on cash today? And it seems like you're maybe alluding to a little bit more of a substantial special dividend than you originally thought.

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Andrew M. Alexander, Weingarten Realty Investors - Chairman, President & CEO [12]

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So Christy, it's Drew. I guess it's good afternoon to you. We're still adjusting since we moved our call back an hour from our normal slot. So we do appreciate it's afternoon on the East Coast. So good afternoon to you. So let me take a little bit of that, and then if I miss a piece, Steve can chime in. So I think we're earning 2.25 or thereabouts on cash.

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Stephen C. Richter, Weingarten Realty Investors - Executive VP & CFO [13]

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Right. Correct.

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Andrew M. Alexander, Weingarten Realty Investors - Chairman, President & CEO [14]

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As mentioned, we upped the guidance, and we think that we're likely to have a special dividend in '19. Exactly what it is, is really, really hard to peg from many, many perspectives. As mentioned, we've done some acquisitions, we've got some others working. So when it's possible, we would certainly like to do 1031s and defer the tax gain. But as I've also said before, we don't see tremendously overpaying for properties just to do a 1031.

So while we've closed some things and do have some deals working, the deals that we're working on, in some cases, just started diligence, and it's premature to think that they're certainly going to happen. So a lot of variables there. And when it comes to use of proceeds, I would say a variety of issues are on the table that we are seeing some acquisition opportunities, do have some in the development pipeline to finish.

Looking at a couple of a new, new development opportunities, but really not seeing a whole lot there that is of interest to us, and it's all early, so it wouldn't be much capital anytime soon. Always working on the redevelopment pipeline, both small projects and large. So there could be some capital there. And if the stock were to get to a point we thought it appropriate, we would certainly consider buying back some stock. So I think we're very well-positioned for a number of different opportunities and a number of different things we're working. But it's really hard to put any specifics around a special dividend this early in the year, given some potential acquisitions and 1031s as well as no real estate deal is sold until it's sold.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [15]

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Okay. Yes. It's just helpful in doing the dilution math. But I guess there's still some variability there.

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Andrew M. Alexander, Weingarten Realty Investors - Chairman, President & CEO [16]

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There is a lot, and we're in a good situation, I think, generally, that when we're selling properties we are making money, we have gains. Some of our peers don't always seem to be making money when they're selling property. So I view it as better to make money.

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Operator [17]

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From Bank of America, we have Craig Schmidt.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [18]

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Johnny, on the $690 per square foot productivity to grocers, how many of your grocers are reporting sales?

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Johnny L. Hendrix, Weingarten Realty Investors - Executive VP & COO [19]

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I don't have an exact number, but I would say most to 80%, probably, is somewhere in the range. And we also have pretty strong communications with all of them. So even if they're not officially reporting sales, we have a very good understanding of what their sales are.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [20]

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Great. And then in terms of the heavy investment in e-commerce in the grocery area, are you looking at grocers any differently now than versus, let's say, 2 years ago? I know you mentioned in the call that you've just acquired a center with a little.

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Johnny L. Hendrix, Weingarten Realty Investors - Executive VP & COO [21]

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Yes. I would tell you -- well, we actually leased a space that was vacant to Lidl in a shopping center that we've owned for a couple of years. We purchased -- the 2 shopping centers we purchased since the last call was a Sprouts and a Whole Foods. I would tell you that years ago, we moved toward a consistent -- a bias toward national and regional grocers. And that is really the direction that we continue to head. So it's going to take a supermarket operator with capital to be able to continue to deliver this omnichannel, which we believe is going to be the winning strategy. Today, 75% of our national and regional grocers have some sort of curbside, pickup or delivery. So we think that is absolutely the direction to go from here.

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Operator [22]

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(Operator Instructions) And from Green Street Advisors, we have Vince Tibone.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [23]

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Could you provide some additional color on the densification opportunities you mentioned at Camelback Miller Plaza? And then, yes, could that be a near-term development there, potentially?

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Johnny L. Hendrix, Weingarten Realty Investors - Executive VP & COO [24]

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Vince, I guess, it is good morning to you. Yes, we -- this is -- could be a long-term, could be a short term. We actually purchased the shopping center with kind of in different pieces and could either sell off or build high-rise development on part of the shopping center in the next couple of years. We wouldn't anticipate doing anything before that. We'll have to recapture some of the space. On a long-term basis, though, clearly, we have a great opportunity to be able to reconfigure the shopping center and do multifamily.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [25]

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Got it. Is it entitled for multifamily today? Or that's a process you need to go through.

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Johnny L. Hendrix, Weingarten Realty Investors - Executive VP & COO [26]

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It would be a process that we would need to go through, but the entire area is part of a redevelopment zone by the city. And they are encouraging multifamily development there.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [27]

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Got it. That's really helpful. And then one more for me. It seems like based on the language in the press release, you weren't actively marketing Jess Ranch. I was just curious if you could provide a little color on how the deal came about? And then if you're seeing any kind of noteworthy trends in the transaction markets, particularly for kind of a non-core, higher-yielding shopping centers?

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Andrew M. Alexander, Weingarten Realty Investors - Chairman, President & CEO [28]

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Vince, it's Drew. We did have it on the market, but as many on the call, including you and I, have discussed, and as we said in our prepared remarks, that assets over $50 million and approaching $100 million are not always the most liquid. So while we had been marketing it for a while, the traction level on those kind of things, it's not as fast, as smaller, more dense, et cetera. So it wasn't something that -- we do lots of different scenarios in our business plan and lots of different what if this happens and what if that happens. But it was a nice fortuitous situation that put us at better than our business plan when credible buyer came along and we worked through the issues and got it closed here in the last couple of days.

So we're pleased with it, but it's a combination of -- what's the expression, that luck is preparation and opportunity, and our team responded. We were prepared, but there was some good fortune associated with it as well. Likewise, we think it's a pretty good center. We think they've got a good buy that it's more -- a good -- more stable than they -- than the market might appreciate. But from a public markets’ perspective, it's a good situation for us.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [29]

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Makes sense. Are you able to disclose the cap rate on that individual deal?

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Andrew M. Alexander, Weingarten Realty Investors - Chairman, President & CEO [30]

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We haven't gotten into that, but as folks at -- look, with the 2 deals that we sold post-quarter, it was high-7s cap rate. So it is in the neighborhood that people would expect. So it was fortunate. We're pleased to have it done, but it is -- the market is the market. So as folks will note in the supplemental, our year-to-date sales are under 7%, which is a little better than our business plan and conversations of mid-7s, which I think shows to some better quality, but also is something that will move around quarter-to-quarter. And that's where these 2 deals and more the high-7s we thought were very good deals.

So the middle to low-7s for the year is still a good number, even though we are trending a little bit better than that right now. But it all comes down to the mix of what happens. And especially in a quarter, it can move around.

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Operator [31]

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And no further questions at this time. Drew, we'll turn it back to you for final remarks.

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Andrew M. Alexander, Weingarten Realty Investors - Chairman, President & CEO [32]

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Well, thank you, Brandon. I thank everybody for joining us. We really appreciate the interest in Weingarten. I know there aren't any conferences coming around anytime soon, but we are around if there are other questions. Have a great summer. And appreciate your interest in the company. Thanks so much.

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Operator [33]

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Thank you. And ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.