Kimco Realty Corporation (KIM) Q3 2017 Earnings Report, Transcript and Summary

Good day and welcome to Kimco’s Third Quarter 2017 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. David Bujnicki, Senior Vice President, Investor Relations and Strategy. Please go ahead, sir.

Good morning and thank you for joining Kimco’s Third Quarter 2017 Earnings Call. Joining me on the call are Conor Flynn, Chief Executive Officer; Ross Cooper, President and Chief Investment Officer; Glenn Cohen, CFO; and Dave Jamieson, our Chief Operating Officer, as well as other members of our executive team, including Milton Cooper and Ray Edwards. As a reminder, statements made during the course of this call may be deemed forward-looking. It is important to note that the Company’s actual results could differ materially from those projected in such forward-looking statements due to a variety of risks, uncertainties and other factors. Please refer to the Company’s SEC filings that address such factors. During this presentation, management may make reference to certain non-GAAP financial measures that we believe help investors better understand Kimco’s operating results. Examples include, but are not limited to, funds from operations and net operating income. Reconciliations of these non-GAAP financial measures are also available on our website. Before transitioning the call to Conor, I want to make you aware of an important upcoming change regarding the timing of our future earnings reporting. Beginning with our fourth quarter earnings, which will take place in February of next year, we plan to announce our results in the morning, a few hours ahead of the conference call. We believe that having the benefit of management’s comments taken together with the reported results will provide a more meaningful and comprehensive understanding of the Company’s performance and enables us to mitigate any potential Reg FD risk. With that, I’ll turn the call over to Conor.

Thanks, Dave, and good morning, everyone. Today, I will provide an overview of our strong third quarter performance, update you on our progress for achieving our 2020 Vision strategy, and give additional color on our portfolio including an update on our assets in Puerto Rico. Ross will review our quarterly transaction activity and the general market environment. Finally, Glenn will provide details on key metrics and updates to our 2017 guidance. In terms of key highlights. We singed 343 new leases, renewals and options this quarter, totaling 1.8 million square feet. Occupancy increased 30 basis points sequentially and the blended spread on new leases and renewals was a positive 16%. These results validate our ongoing thesis that open-air centers that focus on grocers, off-price, fitness, everyday goods and services continue to be solid investments and remain the backbone of our strategy to create the optimal portfolio and drive shareholder value. But the retail landscaping is changing should not be a surprise to anyone. The history of retail from small vendors to specialty stores to department stores to big boxes is a history of winners and losers and the fight to win the consumer’s solid. What is surprising today, however, is the speed in which these changes are occurring. Today, it’s about millennials and their taste for experiential retail, services and convenience. They research with their smartphone, which has become the retailer’s front door. Today, it’s also about omnichannel environment which requires retailers and landlords to work together to combine e-commerce, and brick and mortar to attract shoppers and to keep up with their changing tastes. And that is why in this ever-evolving retail landscape our core principles of quality, growth and a strong balance sheet are more important now than ever. Quality locations are where the retailers will always want to be, and the quality of our portfolio continues to improve. Since 2010, we have sold over $6 billion of real estate, recycling the proceeds into higher quality assets and reduce the size of our portfolio from over 900 to 508 assets. The result is a higher quality portfolio concentrated in the best markets in the United States. By focusing on high barrier to entry markets and executing on our unique customer strategy, we have become more efficient and are able to drive greater value-creation. Quality drives growth, which is our second core principle. Creating multiple drivers of NOI growth from leasing, redevelopment and development has been at the heart of our operating strategy. The leasing results this quarter once again demonstrated that when all is said and done, the key to our business is leasing. Our pro rata occupancy now stands at 95.8%, making it one of the highest levels in our sector, and we continue to see opportunities to grow this metric. Leasing is the most direct and important creator of value, whether it comes from filling vacancies, renewing existing tenants, preleasing our redevelopment and development projects or realizing our mark-to-market opportunities. One example of this is our ability to transform and reposition specific assets. Specifically, we signed new leases at strong leasing spread that included the recapture of three former Kmart boxes just this quarter alone. Redevelopment and development continue to be a part of our long-term growth strategy. And this quarter, we achieved several critical milestones that will pave the way for our future success. On the redevelopment side, we have secured all approvals and cleared all contingencies for our Signature Series, Staten Island project, renamed, The Boulevard. A 460,000 center fostering a Towne Square environment, which we believe is emblematic of the future of retail real estate. Construction started recently at the Boulevard, which is already 71% preleased, anchored by a shop rent [ph] grocer, Marshalls [ph] and many other great national and regional and local retailers. The tenant lineup, not only demonstrates the vibrancy of the market but also it significantly reduces the risk associated with major construction. And keep in mind, redevelopments like The Boulevard necessitate the demolition of existing stores and cause short-term impact to same-site NOI. Ultimately, however, the revitalization of irreplaceable assets like The Boulevard will create significant net asset value. Separately, phase 1 of Grand Parkway in Houston is just about complete and the final anchor box in Phase 2 is now leased. The Boulevard and Grand Parkway represent just two examples of our robust pipeline of development and redevelopment opportunities. Our third core principle is to maintain a well-positioned balance sheet that enables us to support our growth initiatives and let our shareholders sleep comfortably at night. Glenn and his team continuously seek opportunities to improve our already solid capital structure and healthy liquidity position. Specifically, they have successfully extended our debt maturity profile, judiciously tapped the preferred equity market, and refinanced existing mortgage debt at favorable terms. Furthermore, as our NOI growth accelerates, we expect our debt metrics will continue to improve. Finally, let me take a moment to update you on our Puerto Rico portfolio. First and foremost, our employees on the island are safe and have performed herculean efforts in helping other team members, some of who have lost homes and in spearheading our cleanup and restoration efforts. In particular, I would like to thank Victor Aguilar [ph] for leading our team in the face of enormous logistical, physical and emotional challenges. Conditions on the island are now improving. Fuel shortages are easing and grid power is gradually being restored. Fortunately, none of our seven assets sustained major structural damage. And comprehensive restoration plans are being implemented at each of our sites. Tenants continue to reopen, and many of our anchor tenants are now open for business. In closing, our leasing volume continues at a record pace. Our occupancy is pushing toward all-time high and continues to validate the quality of our portfolio. Our pipeline of development and redevelopment projects is now starting to deliver. And our balance sheet remains the source of strength. Our team is determined to make our 2020 Vision a reality. I firmly believe that for Kimco, the best is yet to come. And now, I will turn the call over to Ross.

Thank you, Conor. While the acquisition environment remains uber-competitive for infill shopping centers with upside and value-creation potential, we continue to pick our spots recycling the disposition proceeds from non-core properties into irreplaceable, Signature Series assets with the long-term redevelopment opportunities. The third quarter was quite active as we enhanced the quality of our portfolio and strengthened the concentration of assets in our primary markets. During last quarter’s call we announced the Jantzen Beach acquisition in Portland, Oregon, a dominant 67-acre center with substantially below market leases and both near and long-term prospects for value-creation and redevelopment. We continue to mine our assets for growth and expansion opportunities and added adjacent parcels to several assets in the third quarter. We accretively acquired an unowned parcel Jantzen Beach in addition to boxes that are Webster Square asset in Nashua New Hampshire and Gateway Station in Burleson, Texas. Subsequent to the end of Q3, we purchased Whittwood Town Center, a dominant West Coast asset. Whittwood is a 787,000 square foot grocery anchored property located on 54 acres in Whittier, California, a densely populated suburb of Los Angeles. It is anchored by Target, Vons Supermarket, Sears, J.C. Penney, Kohl’s, 24 Hour Fitness and others. Our traction to the site includes irreplaceable real estate and impressive demographics. The substantial upside is what we envision for the future. Collectively, the below market leases of Kohl’s, J.C. Penney’s and Sears have an aggregate mark-to-market spread of 560%. The anchor leases including Target average $3.01 per square foot versus a market rent in excess of $10 per square foot. The $123 million purchase price was funded with 1031 exchange proceeds and $43 million loan assumption of in place debt. With the addition of Whittwood, Kimco now owns 25 assets in Los Angeles, adding to the significant scale we have in this market and further leveraging our Southern California regional offices. In terms of disposition activity, we remain on track, selling five non-core assets for $62 million at a mid-7% cap rate. This brings our sales total for the first nine months of 2017 to 21 shopping centers and three land parcels for a gross price of $331 million. We have another 19 assets, either under contract or with price agreement for a total of approximately $185 million, much of which we expect to close by year-end. The market remains strong for our products, especially those properties with value-add components. This quarter, we sold an asset in Joplin, Missouri with a strong junior anchor line up and one box vacancy to a local buyer. We had seven offers for that center. We also now have price agreement for a power center in the secondary market of North Carolina with 14 offers for that asset. Bidders in the secondary markets have generally consisted of local buyers with private equity backing, private REITs and opportunity funds. Debt is still readily available for reputable sponsors at extremely attractive rates. We remain confident in our ability to execute on our strategy of pruning the non-core asset from the portfolio. And given the current cost of capital, our expectation is that we will sell substantially more than we will acquire in 2018. Glenn will now walk you through the financial results.

Thanks, Ross, and good morning. We are happy to report positive third quarter results from our open-air shopping center portfolio as we continue to execute on all operating fronts. Leasing was strong, leading to increased occupancy, development and redevelopment projects continue to progress, and our balance sheet and liquidity position improved as a result of our capital markets activity. For the third quarter, we reported NAREIT-defined FFO per diluted share of $0.39, which includes $0.03 per share of foreign currency gain on the substantial liquidation of our Canadian investments. Also included is a $0.02 per share charge attributable to the preferred stock redemption, prepayment of bonds, and some land impairments. NAREIT-defined FFO per share for the third quarter last year was $0.18 per diluted share and included transactional expenses totaling $0.20 per share from the early repayment of debt and the deferred tax valuation resulting from the merger of our taxable REIT subsidiary into the REIT. FFO as adjusted which excludes transactional increment expense and non-operating impairments was $161.3 million with $0.38, the same per share level as last year’s third quarter. Our NOI increased $7.4 million compared to the same quarter last year and was offset primarily by lower tax benefit from our TRS merger last year. During the quarter, we moved Phase 1 of our Grand Parkway development project into the operating real estate line as occupancy is approaching 90%. Grand Parkway provided $1.6 million of NOI during the third quarter. It’s important to keep in mind that we have over $360 million invested in development projects which are not earning today, thus impacting our FFO growth in the short-term. These development projects will begin slowing in stages in the latter half of 2018 and into 2019. Our operating portfolio continues to deliver positive results. Same-site NOI growth was 3.1% for the third quarter and includes negative 20 basis points impact from redevelopments. For the nine months, same-site NOI growth was 1.7%. With no incremental contribution from redevelopments as we have started a similar number of new redevelopment projects to those that have been completed. The Boulevard redevelopment project, Conor mentioned, is an example of this. Taking into account our year-to-date same-site NOI performance, we are revising our full year same-site NOI growth assumption to 1.5% to 2% from the previous 2% to 3% range. This is primarily due to the timing of contributions from redevelopment projects, the 320 basis-point spread between leases executed versus rent commencement, and the expected business interruption in the fourth quarter at our seven Puerto Rico assets due to Hurricane Maria. Although our insurance will cover the substantial portion of lost rent [ph] and physical damage, the timing of payment covering business interruption is not expected to be received in the fourth quarter. It was a very active quarter on the balance sheet front. We issues $850 million in unsecured bonds, $500 million at 3.3% and $350 million at 4.45% with a weighted average life of 16.7 years. We completed the $206 million refinancing of the mortgage at our Tustin property with a new 13-year mortgage at a reduced rate of 4.15% versus 6.9% previously and issued $225 million of perpetual preferred stock at a coupon of 5 and 8. [Ph] Proceeds from the bond and preferred offerings we used to redeem $225 million of 6% preferred, $211 million of our 4.3% bonds due in 2018 and to repay the outstanding balance on our revolving credit facility. As a result of these transactions, our weighted average debt maturity now stands at 10.8 years, one of the longest in the REET industry. We have over $2 billion of immediate liquidity with less than $100 million of debt maturing in 2018. Our balance sheet and liquidity position are in excellent shape. Let me spend a moment on 2017 guidance. Based on our nine-month results of NAREIT-defined FFO per diluted share of $1.17 and our FFO as adjusted per diluted share of $1.13, we are narrowing our guidance range for NAREIT-defined FFO to $1.55 to $1.56 per diluted share from the previous range of $1.53 to $1.57 per share. Similarly, we are narrowing our FFO as adjusted per diluted share guidance range to $1.51 to $1.52 from the previous range of $1.50 to $1.54. We are pleased to announce that based on our 2017 performance and expectations for 2018, our Board of Directors has approved an increase in the common stock quarterly cash dividend to $0.28 per share from $0.27, an increase of 3.7%. The increased dividend level represents a conservative and safe dividend payout ratio in the low 70s area and based on the current share price, the dividend yield of 6%. We will provide 2018 guidance on our next earnings call. As a reminder, our initial 2018 NAREIT-defined guidance will not include any transactional income or expenses. Our NAREIT-defined FFO per share range and our FFO as adjusted per share range will be the same at the start of the year and will only differ upon completion of specifically identified transactional events. And with that, we’d be happy to answer your questions.

We are ready to move to the Q&A portion of the call. To make the Q&A more efficient, you may ask a question with one additional follow-up. If you have additional questions, you are welcome to rejoin the queue. Francesca, you can take our first caller.

[Operator Instructions] The first question comes from Craig Schmidt of Bank of America. Please go ahead.

I was wondering, when I look at the total -- the GLA size of both Whittwood and the Jantzen Beach, I just wondered if there is a different way of underwriting these very large centers. Are there different opportunities you see here and what are the risks you consider when you make these purchases?

Yes. No, absolutely. We’re underwriting several opportunities at both properties. And we really believe that the size of these assets gives us the ability to create substantial value. When you look at Jantzen, you have several undeveloped outparcels that are immediate near-term upside opportunities and then you have the below market leases there that give you the opportunity longer term. Both assets we think have very similar attributes and that longer term, we think that there is additional density that can be added. At the Whittwood shopping center, we’ve already started the process with the municipality of master planning the entire asset, and we began that process while we were going to the loan assumption process. So, given the size of the 54 acres in Los Angeles, the surrounding density and the initial positive reception that we’ve had from the city, we think that that’s a very viable strategy. When you look at the anchors that we have at Whittwood, while we do have several large tenants there that will have to be moved around or replaced in time once we have that liquidity and the site, we think that it’s prude in advance to really start that process, the master planning. And when you look at specifically Sears and J.C. Penny, those are opportunities that we think at the appropriate time that we can move forward with a negotiation and recapture of those spaces. So, we think that the size and the below-market leases and the tenants that we’re dealing with, give a lot of upside opportunity.

Okay. And are you seeing the appetite increase from the big box junior anchor category or is it pretty much been where it’s been from the past year?

On the big box demand side, it’s definitely -- it’s probably pretty consistent across the board. It’s really the junior boxes with the off-price that are continuing to really thrive and want to expand the store count aggressively. That’s where we see the most demand.

The next question comes from Christy McElroy of Citi. Please go ahead.

Just in Puerto Rico, what percentage of your rents and recoveries are you not actually collecting today, and when would you expect business interruption proceeds to start to kick in? And then, just bigger picture, what’s your view of the longer term impact of this event on sort of the retailing business in Puerto Rico and thinking about kind of the longer term viability of these centers as well as on the value of commercial property on the island?

So, in terms of the rents, so [indiscernible] from Puerto Rico makes up about 3% of rents. So, it’s about $32 million a year, $8 million for the fourth quarter. Our guess is, you might have 25% of that that might be at risk for collection as we still evaluate what’s happening on the island. As Conor mentioned, tenants are opening, but again, small shop tenants are still evaluating and we’ll have to see how and when that rent starts flowing again. So, we think there is a risk of couple of million dollars there. And that represents roughly a 100 basis points of same-site NOI for the fourth quarter, which would equate to about 25 basis points of same-site impact for the full year. We are still evaluating what’s going to happen. In terms of the proceeds, you have to first put your claim in. Claims would probably start getting paid 60 days after those claims are in. But, we haven’t filed any business interruption claims yet because we are still evaluating it. You need to get the full picture before you start putting the claims in. So, as I mentioned in my opening remarks, I don’t expect that will have claims paid to us really in the fourth quarter, will start recouping the business interruption part of it in 2018.

And then, just your longer term view on Puerto Rico and business there and real estate value?

I think Puerto Rico, longer term, they have a very manageable retail per capita when you look at the island. So, when you look at the rebound of hopefully the island’s recovery, it really will tie back to how quickly they can get the grid back up and running, how quickly they can get services and really power to the entire island. Clearly, everybody has been seeing in the news and we have been working hard in getting our grocery stores and our home improvement anchors open as quickly as possible. But longer term, you are going to have to wait and see in terms of really what kind of impact it has on the population and really how many people move back after the island gets stabilized.

Again, keep in mind who the tenants are in our centers, which is important. It’s really everyday goods and services, it’s discounters, some Home Depots, some Kmarts. It’s really everyday goods and services, which is what really drives the island.

Right. And then, just second question, Ross. You mentioned about selling substantially more in 2018 than you are buying. How do you think about executing on that from a tax efficiency perspective and would proceeds go more toward paying down debt or supplementing sort of free cash flow in funding the redevelopment expense?

Yes. I think it will be a combination of both. We haven’t definitively finalized the exact capital plan, but the expectation is that we would probably look to acquire no more than $200 million next year and then sell certainly in excess of that. So, it will depend on which assets ultimately get solved in the basis for each one, but we are working very closely with our tax group to make sure that we manage that efficiently. But the expectation would certainly be to use that -- to delever as well as fund the rest of the business.

We have full ability to shelter the gains within our whole framework. So, it’s not -- we’re not required necessarily, have to do 1031 exchanges and buy more assets. We can absorb a pretty substantial amount of gains as we go through the year. That would change the composition of what our dividend will look like. You have probably a lot less return of capital and more capital gain component to it, but there is plenty of capacity for us to absorb gains.

The next question comes from Jeremy Metz of BMO. Please go ahead.

In terms of the reduced same-store NOI guidance, lease [ph] economic occupancy gap is one of items that seems to miss expectations here in state [ph] wider than you had anticipated. I am just wondering what your timing expectations are now as we hear today for this narrowing? And as we look at the 3Q number, obviously you seem to get a benefit on the expense side, I assume this is maybe a tax reversal. Was this anticipated when you held the range last quarter?

Yes. I mean, we have some tax refunds that came through that were specific to us that helped drive that. And you also have -- you do have an increase in the NOI line in total from it, so revenue increase as well, so yes. But, when you look forward, again, we do expect as we go into 2018 that that 320 basis-point gap between economy and lease occupancy will start to shrink, and that is part of the driver. We have been doing a lot of leasing but we have also -- they have been matching up. So, we haven’t shrunk that number. That number is growing; it was 200 basis points to spread this time last year, now it’s 320.

The other piece to it, just to keep in mind, is obviously the hurricane had a pretty big impact on our Puerto Rico portfolio, which had a negative impact on our same-site NOI. So that’s something that unforeseen and we continue to try and manage that.

Yes. And then, when you think about also the guidance that 2% to 3% range that we had, if you break it down, redevelopments in the high end of the number and that 3% had 40 basis points in it. So, as we reported, right now redevelopments have had zero impact. We haven’t earned anything from that. So that’s at the high end, down by 40 basis points. You have as I mentioned, 25 basis points reduction from Puerto Rico that was not anticipated. There is about another 15 to 20 basis points that relates to the timing of the rent commencements. And then, on the high end, if you recall, our credit loss was 75 to 100 basis points. So, on the high end at the 3% level, we only had 75 basis points of credit loss in that number, and we are running closer to the 100 basis points. So, if you take a look at those components, you are going to reconcile down to how we got down to 2% for the year.

And just to add on The Boulevard and Staten Island, those entitlements that we secured had a bigger negative impact on pulling down the same-site NOI because we got it earlier than anticipated. So longer term, it’s a big benefit but shorter term, clearly, the same site NOI is reduced a little bit.

And then, switching gears to my second question here. The question for you, Conor, I don’t if Ray is on the line with us, but can you talk about Albertsons a little bit, the recent filings for a sale leaseback, which I think was for about 70 properties and a little over $700 million? What this means in terms of your ability to monetize your position, could we see additional sales leasebacks going forward as the venture looks to take some chips off the table? Any color here would be great.

Sure. Hi. This is Ray. The sale leaseback was announced $720 million, which is supposed to close at the beginning of next week, the intention there is to delever the company. The company is looking at potential other smaller sale leasebacks, some other assets that they have -- some distribution centers that as they merge the company, they are becoming available as way to generate some proceeds, to pay down debt and help by delevering the company to make it more marketable company as we keep [indiscernible] and hope that markets change to have a public offering. So it’s all focused on improving the balance sheet of the Company and so maybe focus on that as we drive the business.

The next question comes from Richard Hill of Morgan Stanley. Please go ahead.

Hey, guys. This is Ronald Kamdem on for Richard Hill. I just had two quick questions. The first is just going back, can you just walk us through what drives the variability in lease compressions? Presumably, our understanding is that the contracts have a fixed start date. So, if you can just maybe just help us understand what instances can drive that variability that would be pretty helpful.

Sure. Yes. This is Dave Jamieson. With anchored tenants and junior anchor boxes as they are going through the permitting process, there are tender dates and where we complete our work and we tender it over to this tenant. There is a permitting window that the tenants go through as well for their right to complete their box. Sometimes depending on the use and depending on what you are doing specifically to that box may add some additional time to that permitting process, which may delay their variability to open and impact the RCD [ph]. That said, it doesn’t necessarily increase the cost on our side of the equation. But, those are some of the variables that set in. Sometimes, for example, you may have to go for a parking variance in which this city then you have work through that entitlement. So, those are couple of the components that can drive an impact the open date itself.

And then, my second question was, just so we understand the impact on Puerto Rico correctly. So, am I thinking about it right that presumably this should be a boost same-site as we are thinking about 2018 when you do get the business interruptions? Thank you.

Yes. Short and sweet, yes. I mean, as soon as the business interruption claims commence, it’s rent that’s collected that we are not collecting now.

Right. Remember, same-site NOI is on a cash basis.

The next question comes from Ki Bin Kim of SunTrust. Please go ahead.

So, on Puerto Rico, the 25% of rent at risk, given that your properties are mostly up and running, at least that’s what it sounds like. [Technical Difficulty] What was the cause of that? Is that tenants just decided to stop paying rent, is it damage, or is it the fact that maybe these smaller tenants, they don’t have their own insurance, which is causing some of this?

Well, you have few things. The larger anchored tenants have generators that are up and running, so that’s how they are able to run their stores. The smaller shops, which is about half the rent that comes from all the tenants at the seven properties, a lot of them don’t have generators, a lot of them are smaller -- small store businesses where quite candidly some of them lost their homes. So, we are still evaluating just how much of that is missing. So, we are trying to be realistic about what we have. We know half of our rents is coming from small shops base. So, we are making an estimate that some portion of that, as much as 50% of that could be potentially at risk during the fourth quarter. Now, again, most of it will be covered by business interruption insurance. But more importantly, we’d like to get the tenants back open and running so that they can provide their goods and services to the communities.

Yes. And just to add some color to that, on the anchor boxes, they are all -- our largest boxes are open and operating. We have two Kmarts that are fully functioning, Sam’s Clubs; we have two Home Depot, we have two Costco [ph] amongst our seven properties. The big guys are opening and they are obviously providing very necessary services during this restoration process. As it relates to the small shops, it does vary site-by-site. Three of our centers which have a substantial majority of those small shops already open and operating, but to Glenn’s point, power itself is intermittent because it’s based on generators and/or if there is some restoration power to the grid, it does vary time-to-time as we know the conditions in Puerto Rico still remain very difficult. So, we will continue to see that improved, but for now, we want to take more cautious approach.

And a quick one here. Business insurance -- interruption insurance, does that cover for one year or is that for duration of the lease?

Well, we have a blanketed policy. So, in total, we have coverage upto $39 million of business interruption. So, in theory, in Puerto Rico, you could lose every single tenant for the entire year and we would be covered.

Okay. And just last question here on your same-store NOI guidance. If I look back at what it was originally and what it is today, for the fourth quarter with adjusted guidance it’s probably about 1% you are saying maybe 50 a 100 basis points came from Puerto Rico. So maybe at the high end 2% but still feels like versus original guidance, which was probably the mid 3s or higher, feels like a pretty material drop off. I know you’ve talked about couple of different items, I might have swung it. But, just curious, what was maybe unexpected change in leasing or timing of occupancy that led to the guidance decrease?

Well, just go back a minute. The estimate that we have for Puerto Rico is that in the fourth quarter, it impacts you by about 100 basis points. Based on our forecast, we still have at the midpoint of our range that the fourth quarter would be 1.75% of same-site NOI growth. If you added Puerto Rico back, you’d be at 2.75. And again, as I mentioned, you do have some impact from the timing of the rent commencement. So, if you put all that back to get it to a more original guidance, you’d be in that 3% range, similar to where we were in the third quarter.

And the other piece of it is the island development, redevelopment that we announced that again, we secure entitlements that we could start the project, which has again a little bit of hit on the same-site NOI in the short term but longer term, it’s a Signature Series asset that we are excited to get going on.

Next question comes from Alexander Goldfarb of Sandler O’ Neill. Please go ahead.

Good morning. Two questions. First, obviously we’ve been in a period of time for depressed cost capital, depressed stock prices. I understand that Whittier was a 1031 exchange, don’t know if your dynamics would have changed, if you were to undertake that underwriting today versus when you originally did. But, as you guys talk about mixed use projects and different external investments, even if you are sourcing it from dispositions, where your stock is trading or now year decline in the stock prices? Does that at all affect how you guys think about the external side or is it independent because as long as you can fund it from dispositions you’re agnostic?

Yeah. The short answer is yes. The cost of capital is definitely -- has an impact on our evaluation of future investment opportunities. When we look at Whittwood and Jantzen, those were deals that were both put under contracts early in the year, March and April. So, obviously, we had hoped that by this point of the year, cost of capital to be different than where it is today. So that being said, we are very excited about those two assets and we did utilize the dispositions to fund those. But on a go forward basis, the expectation is that without a substantial change in that cost of capital, our external investment will be significantly lower.

And then, the second question is just again the classic -- I know, you guys aren’t giving 2018 but still given the questions around same-store NOI, as we think about the next round of store closings, toys [ph] or pick your favorite one. How should we be thinking about 2018 as far as, because the re-leasing spread seems fine. So, it seems more like the risk is on store closings and timing to backfill. So, as you guys think about the same-store NOI construct, how much of it do you think is in that cushion part that would be affected by store closings? Is 100 basis points, is it more than that 150 for next year? What are your initial thoughts as you speak to the tenants today?

First of all, we are still going through our own budget process and we are still evaluating where we think real potential risk is of store closures. We have been running this 75 to 100 basis-point look in terms of credit loss. So that’s in those areas that we are evaluating. But I think overall when we look at the portfolio and where we are at the occupancy level and things that we see online, we do expect that same-site NOI growth will be higher next year than where we are today.

Yes, I think that’s right. I mean, if you look at our portfolio, if you look at really the targets for next year and we do still have a very large spread between physical and economic occupancy. We do anticipate that the credit loss will be similar to this year. So, that is something that we will probably keep consistent next year.

The next question comes from Samir Khanal of Evercore ISI.

Dissimilar to what Jeremy had asked before on the lease which is occupied, but I know we have the rent commencements to the prior -- the Sports Authority box is to be a tailwind to growth next year. But just -- when you look at those rent commencements, I mean, when do the majority of those roll through? I know you had 20 boxes that have been leased up. At this point, are we talking -- is this more of a second half event for next year?

For the one that we leased in the beginning of this year and towards the end of 2016 itself, you will start to see them flowing at the very end of this year and into the beginning part of 2018 as well. And so, from there, it will just gradually build and progress throughout the course of 2018.

And then, I guess, the next question for me is on the acquisition that you did with Whittwood. I know, there is some opportunity to release some of the department store boxes. But, I guess at this point, is this for a short-term event or is it more of a -- when do you expect to get those boxes back, how much term is left on those leases?

Yes. One of the anchor leases is within our 10-year hold that they expire with no further options. The other large anchors o have a little bit of further term anywhere from 16 to 20 years, in total. But I would assume that those tenants would be in place through the end of all their option periods. We have had some success with recapturing Sears, Kmart boxes in advance and they are typically pretty opportunistic about that, if they get economic deal that makes sense. So, our expectation is that by the time we really go through the master plan process and deal with the entitlements with the city that we will be in a position to approach those tenants if they’re active at t he site in order to recapture sooner. So, we think it’s a nice opportunity that gives us the occupancy and the income in the short-term, but when we are ready we’ll approach them and we think there will be some respectability to that on the tenants’ part.

The next question comes from Vincent Chao of Deutsche Bank. Please go ahead.

I just want to go back to Puerto Rico here on the $32 million of NOI annually that’s at risk. Does that include all income including ancillary income and any percentage rents you might be getting and are those two categories also covered by business interruption?

Yes. So, it does include ancillary income; it does not include percentage rent. Percentage rent is just an additive component of that. As it relates to business interruption insurance, it would include that. If you have historic performance that identifies the type of income you would have received otherwise prior to an event, then you have a case in which you can claim business interruption insurance.

Okay. And then, just in terms of the small shop tenants that are struggling little bit more obviously, do you have sense at this point of how many of them might just simply close shop as opposed to trying to reopen? I mean, obviously, if they choose to leave, then obviously, I would assume that there is no business interruption in that case.

It’s still too early to tell. I think that most of the small shops that’s their livelihood and they are racing to try and to keep those stores back open as quickly as possible, and that’s the response we’ve heard from our team on the ground there that everybody is working as hard as possible to get their stores back open.

Okay. And maybe just one last one if I might, just on the Whittwood. Just looking at some disclosures from DDR there, it seems like this is sort of a low four cap going in. Is that more or less correct?

It’s in the low 5s.

Low 5s?.

Yes.

The next question comes from Ryan Olsen [ph] of RBC. Please go ahead.

Just one question now. What the same-store NOI with redevelopments that was lower than -- lower than what the [technical difficulty] developments. When do you expect that to reverse?

We should start to see some benefit during 2018. That’s when -- we will put full guidance together and report on that in February with our call. But, I would expect that you are going to start seeing some benefit in 2018.

And it sounds like earlier first half, second half?

It’s probably more towards the second half and then into 2019.

We will know better once we finish up our budgeting process and we can report to you in February.

Next question comes from Michael Mueller of J.P. Morgan. Please go ahead.

Just wanted to try to get a little more color on the term substantial that you used to talk about asset sales. And I understand that you don’t want to put numbers around, it’s still early, you’re going through budgeting. But, I mean, you are a big company. And can you give us some sort of sense, is substantial, is it a couple of hundred million you are thinking, north of what you could acquire, is it a 1 billion, just how substantial are you thinking this could be for 2018?

Yes. It’s still a little bit up in the air in terms of our definitive strategy. It does go in tandem with our budgeting process. So, we evaluate each asset in the portfolio and look at where the growth is coming from, where the risks are. So, it would be a little premature to give you definitive number. But, as I mentioned, if the expectation is that we will probably be targeting around 200 million of acquisitions, we think that it will be certainly in excess of that. At what magnitude, we’re really not certain yet.

The next question is from Vince Tibone of Green Street. Please go ahead.

Hey, guys. You mentioned you captured a few Kmart boxes this quarter. Can you talk about your philosophy of paying to get boxes back early versus just waiting for the tenant to close? And then, also, is the cost of recapturing that box included in the TIs or landlord work on the re-leasing spread page of your supplemental?

Sure. Just to clarify, the two that we have recaptured this quarter, those are natural lease expirations, no options expiring. So, we didn’t pay anything to get those back. And within both of those, one was in actually in our island projects, so that’s part of major redevelopment; the other one was in Los Angeles where we are currently splitting the box and adding in [indiscernible] as well for our Fairmont site, and then itself on the value creation component of splitting that box is part of our leasing cost number.

Okay, great. Thanks. And then, one more, can you quantify the exact drag on same-site from The Boulevard going forward for the next few quarters? And also, what incremental yield are you expecting to get on that project over your current in-place rent?

So, in terms of the incremental yield for that, we are targeting anywhere from a 6% to 8% incremental yield on that and we are adding 100,000 square feet of retail as well. In terms of the same-site drag, have to report back to you on that one and we’ll make sure to follow up with you.

The next question is from Linda Tsai of Barclays. Please go ahead.

Hi. In terms of the $62.5 million in dispositions, could you just give us more details about the four centers and then the mid 7 cap rate, is that reasonable level you expect going forward?

Yes. It is a combination when we look at our blend of 7.5. It’s probably on average, somewhere in the low to mid 7s as we see the rest of the assets that we have currently under contract. It’s really geographically the diverse. We sold one asset in Georgia, one asset in California. Several have grocery components; others are true power like the one in Joplin, Missouri. So, there really isn’t a trend. It’s just constantly evaluating the portfolio and pruning where we see risk or markets that we don’t anticipate continuing to operate in long term.

Thanks. And then, just on Albertsons, for the 71 stores. Do you have any sense of what the cap rate was for those?

It was somewhere in the mid 6s. It’s a broad spectrum of properties from California to Wyoming and Chicago.

And do you see that as representative of the overall portfolio?

Actually, it’s on the cap rate wise, probably a high cap rate, because they really kept out most of the most valuable properties from the sale leaseback, the middle of the road properties and sale leaseback.

The next question is from Nick Yulico of UBS. Please go ahead.

This is Greg McGinniss on for Nick. Just thinking about closing that occupancy gap you have, the redevelopment redelivering, no Puerto Rico impact, could we potentially be seeing same-store NOI in the 4% range next year?

We are still running through our full budgets, but we’re fairly comfortable that it will be higher than the current year.

And then, with the dispositions, I know you’ve commented a little bit on it but is there any thought as to how much FFO dilution you’re willing to absorb?

Yes, it’s a good question. It’s all part of our budgeting process and our capital planning. But, we will certainly take that into consideration when we finalize the number and put out our guidance in February.

The next question is from Christy McElroy of Citi. Please go ahead.

Hey. It’s Michael Bilerman here with Christy. I was wondering if you can talk about sort of capital allocation in the sense match funding and whether you are going to have a different cadence going forward? And clearly, you have talked about going into contract on Jantzen and Whittwood early in the year. And given that assuming your deposits that you had and the relationship on the seller side, you didn’t feel something you wanted to back away from or get out of. But, at the same time, it’s hurting [ph] your balance sheet, while I know have done a great job of pushing that term and lowering the cost. Your debt to EBITDA has eased up half a turn over the last year. So, would you think about if -- putting your stock price aside, trying to make sure that maybe you fund potential acquisitions early so that you are not in this quandary of having to close on transactions when your cost of capital -- you wouldn’t be doing these deals today, if they were presented to you, given where it is or you would see probably joint venture capital to do them? Can you talk a little bit sort of has this experience changed how you are going to approach external growth from a match funding perspective at the time you enter and go hard on the deal?

Yes. Absolutely, Michael, I think you raised good point that Ross has analyzed pretty deeply in his remarks. I think with our current cost of capital, we see ourselves being really -- the signal is clear that we should be a net seller next year and that’s what we anticipate to do. Because of the loan assumption process on Whittwood, we obviously felt that when we put the project under contract versus where we are today, it was a different situation. Going forward, we do see that we want to make sure that we prioritize our balance sheet, prioritize our net debt EBITDA going forward. And that’s why we will continue to probably sell more and really just focus on adjacent parcels in the next year that will probably lend itself to future redevelopment projects. But going forward, we do see ourselves being a net seller for next year where our current cost of capital sits.

Can you help me understand a little bit, why you wouldn’t have brought in institutional capital into the types of deals? [Technical Difficulty] willing pay these of cap rates for large power centers, especially given Glenn’s comment about next year sales. Glenn said that there was plenty of room to absorb any gains without the need to do 1031 and just absorb it within the common dividend. So, I sort of struggle a little bit that one of the reasons here you’ve been giving for these two big deals as well they were 1031s while you could have pushed more of your common dividend to capital gain [Technical Difficulty] and brought in a large institution to co-invest with you in these assets?

Yes, it’s a good point. I mean, we look at our JV platform as one that we can tap into, when appropriate, and it maybe that time again in the near future. We looked at these assets as ones that again we thought were perfect fit for the quality of and upgrading the portfolio and continue to see that as these assets we think are really gems longer term as they lend themselves to West Lakes, we’ve created a lot of NAV. But going forward to your point, I mean there is that opportunity; we really do respect and admire our JV partners and know that they want to do more with us. So, we do have that card to play and we will look at that going forward?

Would cap rates be different, if you were too get on these assets today, they’ve expanded 50 basis points since March and April?

I really don’t believe so. Especially when you look at Whittwood, I mean the process that is being run by the sellers was one where we have a fantastic relationship with them, given our prior joint venture partnership and it was really a negotiated deal. And we think that it’s one that was well negotiated on our part, clearly made sense for the seller as well but we think it was a good deal for both sides. And I think that had a mass market, a very similar price if not a more aggressive price could have been found in the marketplace.

We haven’t really seen cap rates move at all for the really high-quality assets like Jantzen and Whittwood, it’s a very competitive market for those types of deals with significant value creation opportunities in the best markets and that’s really where we’ve been focusing and picking our spots.

The next question is from Chris Lucas of Capital One Securities. Please go ahead.

Glenn, a quick one for you. You took out more than half of the 6% preferred and there is still remaining. What’s your plans for the remainder of that and why didn’t you fully redeem out that $400 million preferred?

At the right time, we’ll redeem the balance of those 6% preferred. Again, we are trying to balance total look through of consolidated net-debt-to-EBITDA including it with preferreds. And when we went to the market, we went with a very aggressive rate, 5 and 8 [ph] rate was a pretty aggressive. So, we took out what we could get done at that point. I mean, we clearly got to the debt market and replace it at a lower rate but that’s just going to put more pressure on consolidated net-debt-to-EBITDA. So, we will take it out at an opportunistic point.

Okay. I appreciate that. And then, just going back to the prior comments, as it relates to the disposition environment, I guess one question would be, what are the characteristics of the stuff that you are looking to put on the market for sale for next year and how is the market receptivity for those kinds of assets? You talked about high-quality assets still getting a pretty competitive bid but what about more middling or lower quality assets and what should be expecting in terms of the quality of the portfolio of properties that you are looking to dispose of next year?

Yes. As we have continued to call the portfolio, even the tier 2 asset that we look to dispose of are of a higher quality, generally speaking than previously. So, it will be a combination of assets where we continue to see longer term risk in the asset, even if there is stability today, trying to take a longer term approach on our portfolio management and seeing which assets we believe have a longer term opportunity to redevelop or create value or if the highest and best use is a stable retail center, then it may be the time to capitalize on the fact that there still is a viable market to exit these assets. So, the reception to these assets we have been marketing generally has been strong. I mentioned the two examples in Missouri and in North Carolina where we had 7 and 14 bids, respectively. So, I think for higher quality assets, particularly if there is some vacancy or perceived upside to the buyer, there is plenty of capital that’s still excited about investing in that. And then, we will take a look at some of the higher quality assets that are flat longer term and see if it makes sense to monetize today.

Our final question is from Tammi Fique of Wells Fargo Securities. Please go ahead.

Hi. Now that a little time is left, have you had any new discussions with Whole Foods and has Amazon’s involvement changed, their appetite for new stores or the redevelopment of existing stores?

Yes. We have been actively engaged in Whole Foods, obviously prior to the acquisition, we had all noticed I think it stalled a little bit, but they are very much on the expansion, looking for new opportunities to expand. In terms of how they utilize, Amazon will utilize the Whole Foods locations, they still keep things very close with us. So, it’s yet to be seen. I think we all have opinions and there is a number of opportunities in which they could do it in the four walls. But, to our benefit, they are absolutely actively looking to expand in the market.

Okay, great. And then, my follow-up question is, understanding that you are sensitive to leverage level, but with additional asset sales expected next year, where do share repurchases rank versus sort of other uses of that capital.

Well, again, share repurchases put pressure on leverage metric and debt to EBITDA. So first and foremost, we want to bring our leverage levels down to the targets that we planned for before you’d start getting to share repurchases. Don’t forget also, we still have a fairly significant redevelopment pipeline that has pretty significant yields to it, even where the implied price of the stock is today. So, we have uses of capital, but first and foremost is to bring leverage levels to the point where we want that.

I think the share buyback is constantly being discussed and at these levels, we need to make sure that our debt levels don’t come under pressure, but we do see it as something we’ll continue to monitor.

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

Thank you very much and thank you for everybody that joined our call today. Have a good day.