SITE Centers Corp. (SITC) Q3 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to the DDR Corp. Third Quarter 2017 Earnings Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Brandon Day-Anderson. Please go ahead.

Good morning and thank you for joining us. On today's call, you will hear from President and CEO, David Lukes; Executive Vice President and Chief Operating Officer, Michael Makinen; and Executive Vice President, Chief Financial Officer, and Treasurer, Matthew Ostrower. Please be aware that certain of our statements today may be forward-looking. Although we believe such statements are based upon reasonable assumptions, you should understand these statements are subject to risks and uncertainties and actual results may differ materially from forward-looking statements. Additional information about such risks and uncertainties that could cause actual results to differ may be found in the press release issued today and the documents that we filed with the SEC, including our Form 10-K for the year-ended December 31, 2016. In addition, we will be discussing non-GAAP financial measures on today's call, including FFO, operating FFO, and same-store net operating income. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings press release issued today. This release and our quarterly financial supplement are available on our website at www.ddr.com. For those of you on the phone, who would like to follow along during today's presentation please visit the Event Section of our Investor Relations Page and sign into the earnings call webcast. At this time, it is my pleasure to introduce our President and Chief Executive Officer, David Lukes.

Thank you, Brandon, and welcome to our third quarter 2017 conference call. I would like to start the call by expressing our thoughts and gratitude to our team in Puerto Rico during this difficult time. Many are struggling with the challenging day-to-day circumstances and damage to their homes and belongings. Despite this adversity, our team has accomplished enormous amount in very little time and I'm incredibly grateful to them. We've got quite a bit of content to review with you this morning. First I'll recap our 3Q results, including a review of our transaction activity. Then I will provide an overview of the current state of our assets in Puerto Rico. I'll then hand it over to Mike for more detailed commentary on the operating side. And finally, Matt, who will comment on our financial statements including updated guidance and will close with some comments on our balance sheet progress. To summarize the quarter operating FFO of $0.30 per share was in line with our internal expectations and includes an $8.2 million benefit from the expiration of Sears ground lease at Riverdale Village. The year-over-year decline in operating FFO per share was a product primarily of delusion from de-leveraging and to a lesser extent a decline in NOI from Puerto Rico. While FFO was within our budget, Continental U.S. operating results were better than we originally expected. Specifically same-store NOI for the Continental U.S. portfolio performed ahead of our budget of negative 0.7%, largely because of lower bad debt expense and the impact of real estate tax incentives. The better than expected NOI growth results in an increase in our Continental U.S. guidance which Matt will speak to later. Excluding the impact of Hurricane Maria, our performance in Puerto Rico was in line with our expectations. Our percentage lease rate of 93.4% represents a sequential 40 basis point decline from 2Q was ahead of our prior guidance of 93.2%. Both this metric and occupancy which was roughly flat compared to last quarter benefited from ongoing leasing progress. I'd like to put our current leasing efforts in context with the results of the portfolio review we concluded and discussed on our second quarter call. As a reminder, we had categorized 66% of our NOI coming from properties that we viewed as durable. Much of our leasing completed during the third quarter was within this group of assets. We continue to make steady progress on maintaining the dominance of these assets by replacing vacated tenants at rents slightly above the prior tenants rent, and in most cases, introducing new retailer offerings to our trade area with footprint expansions from discount tenants with strong credit. The second group of properties we outlined last quarter were the ones where we see growth potential, which represents about 25% of our NOI. If these properties that our leasing team is spending considerable time working on and which we will be discussing in more detail over the next few quarters. When a dominant center gains an anchor vacancy it's a real chance for the landlord to make a compelling long-term change to the property, both financially, and with respect to tenant mix. The trigger for our opportunity is a vacant unit but the result is that we have available GLA that's fully entitled. It's important to note that our growth bucket of assets fit within trade areas with superior income demographics in most cases above $90,000 per household. What we found is that the range of vacancies are wide with respect to size between 20 and 40,000 square feet. But the tenant demand is also wide ranging from 10 to 30,000 square feet. In general, the smaller the tenant the higher the per square foot rent and therefore our economic opportunity relies on our ability to facilitate site plan changes that are beneficial to the current tenant demand. This is also why we initially gave our opinion that box vacancies in stable markets will average 12 to 18 months to backfill, a statement we still believe to be accurate. The first spaces to lease tend to be exact backfill, and the longer duration vacancies tend to be box reconfigurations. Our number one job is to match demand with entitled space and we've assembled a great team of development and leasing executives to capture that value. Long-term property help realizes on tenant mix and our national accounts team, headed by Bill Kern have been very active in the last two quarters helping those growing retailers find space in our best assets. Outside of operations, I'm pleased with the progress we've made continuing to sell properties. Specifically, we sold $392 million of assets this quarter, on top of $124 million in the first quarter, and $237 million in the second quarter. The weighted average cap rate for dispositions in the third quarter was once again sub-8%. We also sold an additional $190 million shortly after quarter end, which leaves us just under $400 million in proceeds as DDR share needed to reach our $900 million sales target we put out last quarter. Finally, Matt, will comment more later but dispositions and a variety of capital markets transactions have allowed us to quickly transform our balance sheet. With the closing of our new and expanded line of credit and term loans, we've substantially increased liquidity and completed the maturity extension process leaving us to focus on deleveraging as we continue to sell assets over the coming months. I'd like to now provide some commentary on our Puerto Rico operations and assets. Our priorities there have been first and foremost to account for our employees and to provide for their well being. Second, we've been working to ensure all properties were physically safe and water tight. Third, we work to remove debris and provide generator power, so that we can get stores and common areas open as soon as possible to ensure the people of Puerto Rico have access to basic living supplies. Finally, we've been working with our insurance company to assess damage, arrange for advances on business interruption insurance and begin to make permanent repairs to assets. So where do we stand today? We now have power either through the grid and/or through installations of generators at nine of our 12 assets including four enclosed malls and five outdoor centers. In addition, 24 of our 33 anchors are on grid or generator power and open for business. All this means that as of today, excluding Palma Real, 75% of our leased Puerto Rico GLA is now operating and open for business. It's difficult to provide generator power to individual small stores, so opening of shop spaces at our open-air properties generally depends on the restoration of grid power. Other stores that will remain closed over a longer time period include those who have received water damage including some that are in our closed mall assets. We've completed an initial property damage and business interruption reimbursement estimate of $100 million to $125 million. Roughly one-third of these costs are attributable specifically to Palma Real, which we expect to be repaired and restored. This estimate excludes $30 million of estimated cost associated with repair and damages to anchor spaces that are separately insured by those tenants. It also doesn't take into account the potential changes in pricing due to supply and labor shortages. Finally, we have commenced the process of formally scoping the specific permanent repair work at all properties and to source the contractors and professionals necessary to restore these assets to pre-storm condition. We are focused on getting our properties reopened as quickly as possible and have the resources and the right employees and tenant partners on the island to do so. Our SVP of Property Operations, Joe Lopez, our SVP of Construction, Joe Chura, and our Lead Property Management Executive in Puerto Rico, Xavier Gonzalez, are ultimately responsible for these enormous undertakings. They are among the most diligent, thoughtful, and effective real estate professionals with whom I've ever worked and I thank them for their efforts. We will of course make every effort to provide you with additional information on our Puerto Rico business as we have it. And with that I will hand the call over to Mike Makinen to provide you some additional color on our operations and the leasing environment generally.

Thank you, David. Total same-store NOI growth including Puerto Rico was negative 0.9% in the third quarter fueled by modestly positive growth in the Continental U.S. and negative 6.5% growth in Puerto Rico, when adjusting for hurricane costs and including Hurricane related bad debts. As David mentioned, our lease rate was ahead of our expectation and our commenced rate was roughly flat sequentially primarily due to a combination of steady leasing and store openings partially offset by no move-outs. We're particularly pleased to have the country's first two homes and stores TJX's new home furnishings concept opened at Shoppers World in Framingham, Massachusetts, and in East Hanover, New Jersey. The sequential decline in lease rates was caused by the aforementioned Sears ground lease exploration. We expect our Continental U.S. lease rate to end year in the 93.25% to 93.75% range. This range assumes no significant bankruptcy related store closings ahead of year-end. As we have said for the last two quarters, the leasing environment continues to be characterized by steady demand for space. To that end, we continue to expect that it will be a 12 to 18 month process to achieve rent commencements for new tenants filling anchor spaces made vacant from recent bankruptcies. We now have 24 of the 28 former Sports Authority, hhgregg, and Golfsmith spaces released or in LOI negotiations. Third quarter new leasing volume was 259,000 square feet. We feel good about our activity levels given we have nearly 536,000 square feet of new leases under LOI or in process as of the end of the quarter. Importantly, our small shop leasing focus has continued to generate an increase in activity for this portion of our portfolio. Blended new and renewal leasing spreads of 6.2% were consistent with year-to-date trends, while net effect of rents improved significantly to $15.50 this quarter from $9.50 in the second quarter, primarily a result of better economics from greater small shop leasing and overall renewal activity this quarter. This metric has historically been volatile and is generally affected by CapEx required by anchor leases offset by less capital intensive, higher rent, and land volumes. With that, I'd like to hand the call over to Matt Ostrower who will review our financial and refresh our 2017 guidance.

Thanks Mike. I'd like to start by reviewing the impact of Hurricanes Irma and Maria on our 3Q financial statements. First, we recorded $6.1 million of hurricane casualty and impairment costs on the income statement. Approximately $1 million of this relates to Hurricane Irma primarily debris removal which is within our deductible and thus will not be reimbursed by insurance. The second component of this line item is a $5 million capital costs related to deductible for property and casualty damages from Hurricane Maria in Puerto Rico. This $5 million capital cost is a difference between a $65 million write-off of historical cost basis of property damaged by Hurricane Maria and a $60 million receivable on the balance sheet representing the portion of the book value of damages for which we expect to be reimbursed. As David mentioned, our actual estimates for the cost of repair and damages is likely to be higher than the write-off of historical book value this quarter. Second, loss revenues from Hurricanes Irma and Maria during the third quarter were roughly $2.6 million, approximately $1 million of which is attributable to our deductible on Puerto Rico insurance policies and will not be reimbursed. Separately we recorded an increase in bad debt reserves of $900,000 attributable exclusively to anticipated greater tenant financial difficulties in Puerto Rico. Both the $2.6 million of loss revenues and the $900,000 of Puerto Rico bad debt reserves were excluded from our calculation of same-store net operating income. Third, the company received a business interruption advance payment of $2 million related to third quarter loss revenues shortly after the close of the quarter. Given the timing we were unable to record this revenue on the income statement but expect to do so in the fourth quarter. Going forward, we are working to ensure regular payment of business interruption advances and would hope to record those on the income statement limiting the short-term impact of storm damage to net income and FFO. We carry property, casualty, and business interruption insurance with limits of $330 million including a $6 million deductible. Business interruption insurance generally covers the time it takes to make tenant space habitable plus one year. Our insurance policies carry traditional terms and contingencies that could affect actual insurance reimbursements. Switching gears to the balance sheet, we made significant progress this quarter and over the last six months extending maturities and improving liquidity. With the placement of a $350 million seven-year bond offering as well as the recapping and expansion of our line of credit and term loans, we believe this portion of our balance sheet restructuring is now complete. Our weighted average maturity of 8.3 years when including perpetual preferred securities now ranks as one of the longest in the shopping center REIT Group. We have almost $1 billion of liquidity with full availability under our recap line of credit after accounting for October asset sales as well as a well laddered maturity schedule. Just two quarters ago before we undertook these capital markets transactions, we faced a significant wall of maturities with $1.1 billion of debt or almost 25% of the total maturing in 2017 and 2018 and an additional $1 billion maturing in 2020. Going forward, we will focus primarily on deleveraging. Successful completion of the previously announced $900 million disposition program would result in several additional improvements including a better comprehensive leverage profile, additional extension of our weighted average maturities, and no unsecured maturities until 2021. We repaid our remaining 2018 secured maturities yesterday further increasing and improving the size and quality of our unencumbered asset pool. Finally, we have reduced the reserve for our preferred investment in the Blackstone joint ventures that we reported in the first quarter. This $15.4 million reduction is a product of higher than expected sales prices on several larger assets that closed or are under contract in the third quarter. As we discussed in the first quarter, GAAP accounting rules require us to adjust the security to market on a quarterly basis which means the reserve could increase again if future sales prices fall below expectations. One other Blackstone related item, we reached the sales threshold in our Blackstone III joint venture in the third quarter. As a result, we believe that 52% of all further sales proceeds will now be used to repay our preferred interest in that venture. Subsequent to quarter end, we received a $48.6 million repayment related to the sale of power processing and Whittwood Town Center with total year-to-date preferred repayments now up to $55 million. As we stated last quarter, we view disposition proceeds and Blackstone preferred proceeds as interchangeable in pursuit of our $900 million sales target. I'd like to now turn to some changes to our 2017 guidance. First, we had increased our same-store NOI guidance for the U.S. portfolio to negative 0.5% to positive 0.5% from negative 1% to positive 0.5% previously. This implies that U.S. same-store NOI should now trough in 4Q down modestly from the mid-point of the guidance range. The better guidance is a result of the above budget performance of the U.S. portfolio over the last six months. As Mike mentioned, our expectation for year-end Continental U.S. lease rates remains unchanged. Second, we are withdrawing 2017 guidance for same-store NOI performance in Puerto Rico. As David mentioned, roughly 75% of our lease GLA outside of Palma Real is now open for business including all major anchor spaces. This represents significant progress in a short time period and we're optimistic about continuing to reopen centers and stores over the coming weeks. The pace of this progress will depend in part on restoration of grid power to certain centers which is difficult to predict. In addition, selective spaces in all centers and the vast majority of space in Palma Real will not reopen for some time because of necessary repairs. We expect loss revenues attributable to the hurricane will be covered under our business interruption insurance policies, but the timing of these payments often occurs with a lag which impacts comparability. So to summarize, we believe we will make progress reopening stores in the fourth quarter but we still expect to face a significant revenue decline in the quarter. We hope to offset some of this decline with business interruption insurance advances but some of these payments may ultimately be received and recorded in a later quarter. With that, I'd like to hand the call back to David for a couple of closing comments. David?

Thanks Matt. My takeaway this quarter is steady progress. We have a significantly better balance sheet than we did even a few months ago. Our box leasing continued to be effective, our renewed focus on shop leasing is starting to produce results, and our knowledge of the portfolio we own is deepening. We use the annual budget process to evaluate risk and opportunity which is proving to be accurate and helpful as we focus our efforts. Even in the phase of a hurricane, our culture reacted quickly to focus on immediate solutions. We know where we need to create value for shareholders and our stewardship of this portfolio is going to produce results. And with that, I would like to hand the call back to the operator, so we can take your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Christy McElroy with Citi. Please go ahead.

Good morning everyone. Just following up on the leasing that you've been doing, it sounds like there is more juice in there given what you have under LOI that's not reflected in the lease rates. You talked about this 12 to 18 months time period in terms of commencements, that’s a pretty big window maybe you can give us a sense for sort of along that timeline, how we should be thinking about lease commencements, I know you talked a lot about sort of reconfiguration of space but maybe just so we can kind of wrap our arms around the downtime that we're talking about?

Hey Christy, this is Mike. I think the best way to answer that is going back to the 12 to 18 months window that we've identified. We still feel pretty strong that is the appropriate window for backfilling some of the vacant spaces that came to us via the recent tenant bankruptcies. But generally the way the way that it's working is that in the early phase of getting those back, there's some pretty quick lease-up because you're generally getting tenants who are interested in that precise space and so there's an easy conformance with what their prototype is and what the space that's available happens to be. As time goes on, the thing that ends up taking the majority of the time is working through the configuration of spaces when a tenant needs 25,000 feet and we have 35,000 feet and so what ends up happening is we end up talking to multiple tenants and we have to conform and reconfigure the spaces to make it work. That takes quite a bit of time upfront which is really why things end up going out to as long as an 18 month window but we feel pretty confident right now that we're in a great progression as far as filling spaces and as far as our overall junior box leasing with -- at this moment we have 100% share over 600,000 square feet of leases in progress. So we feel we're making good progress and we also feel that we're pretty much in sync with our expectations and our historical norms in that deal flow.

Hey Christy, just one point of clarification the 12 to 18 months is after we get Sears back right post bankruptcy or post departure. So it's not meant to be a statement from today.

Okay. And then just Mike maybe some insights into what you know about timing in terms of decision making around Tresoros stock closing. And then how are you thinking about your exposure just given all the changes in the movie theater industry right now, how are you thinking about your exposure there?

I'll start with Tresoros and right now we're in conversations with Tresoros. They are certainly in general looking at and working with us favorably in some cases, less favorably in others, but right now that's a work-in-progress and we'll have more to report on that most likely next quarter. As far as movie industry, we've got pretty good relationships with AMC and Regal and in general we're finding that in our centers we happen to have pretty good locations and we feel pretty confident that we're in pretty good shape with regard to the movie industry and the leases in our centers.

Our next question comes from Todd Thomas with KeyBanc Capital. Please go ahead.

Hi thanks. Good morning. So in terms of the disposition cap rates in the quarter which you characterized a sub-8% and also the better than expected pricing on the Blackstone asset sales. Can you just provide a little bit more color on those comments on what you're saying in general and maybe just talk about how demand and pricing for the assets that you're in the market with now is?

Sure, good morning Todd. I wish that the data pool was big enough to be able to tell you something that was a credible number but the reason we kind of say sub-8% is simply because the cap rate on assets we're selling range from the five to the nine, so it really depends on which assets close during that quarter. I would say that for the most part the buyer pool has been fairly steady. Their access to mortgage debt has been fairly steady and the closing process has been consistent with prior years. So we haven't really seen a great change in the transaction markets that's worthy of noting.

And on the Blackstone pieces to comment, I think we have only partial visibility on that process, right, we're not running that whole process. So in a certain sense we had to put an estimate out there at the end of the first quarter and the sales process had just really begun then. So we had limited visibility and the process was early, we obviously are able to fine tune things more as that process continues and as transactions actually happen. So it's less about some massive change in the market overall and more about our increasing visibility on actual values.

Okay. And then just following up on the some of the anchor vacancies, thinking about those going forward to the extent that there are additional vacancies are you anticipating from here that the majority of the incremental boxes you might recapture would be reconfigured versus backfilled assets and how much is the average cost per square foot generally when you have to reconfigure a box?

For the conference we'll put an easy one because it's all over the map. I mean it really depends on a tenant work layer, figuring out what their credit looks like, what kind of square footage they need, I would say that that's the most intense financial analytics we do is when we're splitting up a box because we're trying to figure out how much return we can get and how safe that capital investment is.

As far as the proportion it's a breakout of how many will be split, it really depends on what we get back that's the same answer, every space is different, every tenants prototype is different, so it's really to be determined.

I'll also add that it's not out of the norm in this sector that spaces were purpose built for a prototype and 10 years later prototypes have changed and that's why the cost to build a one-storey open-air strip center box is relatively small relative to other asset classes and so configurations there are a normal part of the process you saw with Mervyns, you’ve seen it with KMart, it’s a normal part of process and so I don't think it's something we find it surprising.

I will just highlight, it's Matt. I'll just highlight that we’re very thoughtful about the economics here right credit is extremely important for spending money it's got to be somebody who we think is going to be there not just for the initial lease term but through several renewals thereafter, so we can actually make money. We're not just shelving people with posters into boxes particularly on these more CapEx intensive areas.

Our next question comes from Rich Hill with Morgan Stanley. Please go ahead.

Hey good morning guys, thanks for taking my call. I want to just chat a little bit about the transaction market in light of your $900 million disposition plan that you've previously announced, it looks like you made some good progress and you made some comments earlier about maybe higher than expected sales prices, so what are you seeing in the U.S. market at this point, house demand for buying properties cap rates stable, they’re tightening, they’re widening, what are you thinking about given that you’re pretty active at this point?

Richard it’s hard to be kind of the spokesperson for what the entire transaction market looks like. I think from our own company's perspective over the last five years DDR has disposed of a substantial amount of assets and so you certainly could make the argument that what we're disposing of now is primarily for the purpose of deleveraging and not because of an outsized risk on the asset which just means that there are other buyers that are finding value, and I think the cap rates that we're getting are very fair. If I had to kind of pull back and characterize it, I would say that there are certain buyers that understand this property type, they’re able to get mortgage debt and they can receive very good returns in kind of property types and submarkets that maybe less desirable from certain institutions. And so the buyer pool tends to be a little bit more, a little bit more private I would say and a little bit less institutional.

Got it. And so I'm sorry if I missed this, did you disclose cap rates on the call it $300 million plus that you sold in the quarter?

We simply said in the script we said there is sub-8% kind of our normal process.

Okay, great. And then just one quick question on the occupancy guidance obviously it increased, is it comparable to the 93% to 93.5% previously I was looking at prior press release and this press release says the U.S. portfolio but the prior press release was bit silent on that, so I'm just curious is that comparable? Or is there some impact relative to Puerto Rico?

You're asking the right question Rich. Just to be totally clear, it's not comparable, we would say we never kind of gave the U.S. occupancy number before. So given the comments I made about Puerto Rico, I think it's very difficult to know where occupancy is going to end up there. So we’re taking that off the table, we're giving you a new number for the U.S. I would tell you based on our internal numbers previously that that occupancy number is unchanged.

Got it, okay. Thank you very much. I will jump in and follow-up separately with any more questions.

Thank you.

Thanks, Rich.

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

Thanks. I'm wondering what should we think about the loss revenue for Puerto Rico in fourth quarter.

I'm sorry what do we think about it?

No, no. What should we be think -- we as analyst turn to budget for the year, what do we think we might lose relative to the number you gave on 3Q?

Yes, I think that's -- there's obviously a problem there right; we're in a situation where I think it's very, very difficult to predict. I think we try to be as transparent as we can about our expectations for our operations and we found ourselves in a position where we just find it extremely difficult to make a forecast there, it's only 12 assets, right it's obviously a significant part of our revenue base but it's only 12 assets. It really will depend Craig on things like those grid power come back on. It's -- so I think we don't really I would tell you we ourselves don't exactly really know that number yet otherwise we would have given you some kind of an estimate. I'm sorry to not be able to clear you about it.

Okay. And then just thinking about your tenant watch list with real focus on big-box and junior anchors relative to year ago, do you think things are the same, better or worse in terms of potential closings in 2018.

Well, yes, so I guess the watch list is a different question than exactly what's going to happen in 2018. We use our watch list obviously to decide on to whom do we want to extend credit, to whom do we want to extend capital on which requires a much longer view than just 2018. What I can comment on is that our watch list is relatively unchanged there's been some ins and outs obviously you see some things come down as a result of the bankruptcies that were declared throughout 2017 and then we've obviously put some more on given some of the news that's come out in our analysis of financial statements for some of the larger companies but the actual exposure number has not changed dramatically in the last 9 to 12 months.

Our next question comes from Alexander Goldfarb with Sandler O'Neill. Please go ahead.

Good morning. Two questions. First maybe a different way of Craig's question down in Puerto Rico what percent of tenants are currently paying, so you obviously Simon gave what their view is from their assets, Kimco gave their view from what they're booking, can you guys just tell us currently what percent of your tenants are paying rent?

Well we really haven't had long enough to know the answer of that question, Alex. We have -- if you think about the time horizon here things happened relatively close to the end of the quarter. We really will know a lot more in another five or six days right which is unfortunate timing as it relates to our providing guidance on this call. What we said was that 75% of the leased GLA is now open for business ex-Palma Real. We would certainly expect those tenants to pay -- to pay their rents, but it's a fluid and uncertain environment, some tenants may not be able to pay their rent, others may say that they have the right to abate, there's just a lot of -- there's a lot of -- there's a lack of clarity on exactly what those cash flows are going to look like, it's another level of uncertainty that we have in predicting these cash flows. So we're telling you really everything that we know at this point in time which is who is open and where we've got power et cetera. The actual revenue prediction I think is quite difficult.

Okay. And then but it's part of that the 75% those tenants are primarily U.S. national or super credit type tenants or is it a mix of or some of the stuff that's closed, is not just small shop but it's also some of the Nationals?

It’s a huge cross section right, I would say that you can’t really -- I wouldn't say there is any real bias to that number, we have -- we said 24 to 33 anchors are now open, obviously anchors tend to be certainly national or certainly higher credit. So you can take some comfort in that but then you can to get up to the 75% of GLA open it's a lot of small shop as well and we do have -- we have a bigger small shop exposure in Puerto Rico than we do in our U.S. portfolio. Alex, one thing I would tell you is just think about also the other moving part here, you're asking about revenues which is obviously a fair focus, the other piece of it is BI, right. So to the degree we don't get rent from some of these tenants, to the degree we can't get more of them open, to the degree power turns off or doesn't turn on in certain areas, we will be collecting BI on that. I think as some of our peers will have said to you it's just very difficult to know exactly when that BI will come in the door. I think we've done a good job arranging to get some of it earlier but that’s still a work-in-progress and we don't know exactly when the payments are going to happen and when we'll be able to record them on the income statement.

Right but once you do get the BI that covers the whole portfolio whether or not the asset is open or closed? Correct.

Yes, it's going to be tenant by tenant, it's going to depend on the individual circumstances but if we are missing our view is that if we're missing revenues because of the hurricane that is a BI claim on our part.

Okay. And then the second question is on the economic rents you said in the quarter they were bit better just because you did more small shop but as we think about you guys cutting up space and duplicate system services HVAC, fire safety, and all that stuff, do you anticipate that most of the rents will be economically positive or there will be a fair amount that end up being sort of neutral but just because of a cost incurred of combining space or dividing space in the redundant systems that even though you may get higher rent, it sort of nets out, what's your view on that?

There are very few situations where you're compelled to make a big investment for a negative value creation. It's just it's just not all that common.

One thing I would like to point out is that the process of cutting up boxes is as common as it gets in the shopping center space. It's an age old practice from the days when Montgomery Ward boxes were received by large landlords and it still continues through to today. So some of these deals are really great and really profitable and some of them are less. So we're always doing things because we think there's a good credit there or because and/or because if there is material increase in the merchandise mix in our center.

The other point I would make as it relates to shop leasing is that when we split up a Junior Box, it’s often with three smaller tenant there's still over 10,000 square feet, so the shop effort and the reconfiguration of anchors are not one and the same. Shop effort applies to all shop space across the portfolio which generally is a very positive financial return.

Our next question comes from Jeff Donnelly with Wells Fargo. Please go ahead.

Good morning guys and Matt thanks for trying to provide some clarity on those situation in Puerto Rico. Are you able to break down your -- I would call pre-storm revenues or NOI in Puerto Rico, I'm just curious if you might have a sense even a rough one how that would breakdown between anchors and then shop space both national and local if it's sort of fair to fair to fair there?

Meanwhile Jeff I can call you back and give you some more color on that, I don't have the exact number ticking about, I will call you back and give you a follow-up on that.

That’s good. And then just building on an earlier question I know there's a lot of this in here but assuming there's no big change in store closings, is it fair to say we could see a bottoming or an inflection in your reported lease rate as we move into early to mid 2018 and I guess maybe building off that as it relates to leasing spreads because the portfolio is maybe running with slightly higher vacancy, is it fair to say you should expect leasing spreads to continue to decelerate perhaps beyond inflection in your lease rate just as you begin to rebuild occupancy in the portfolio?

I think lease rates tend to be one of the most volatile areas of all of the metrics that we have in the leasing realm. But I think in general, we've seen a fairly consistent run of our overall leasing spreads over the last several quarters and I don't really have a sense that that's going to go up or down, sometimes one major deal where you replace a low rent tenant can shift the entire picture, sometimes they can shift in the other direction. So I feel pretty strong that it's really going to be up in the area as far as where it goes. But I don’t see it going down.

I think just its Mike as a follow up, I think it’s an unequivocal yes that we believe our occupancy would rebound if bankruptcy stop, I don't think we see our occupancy or current vacancy rate as structural in any way, it's really going to depend on what happens to the bankruptcy picture which I think is not [indiscernible] at this point.

Jeff, one of the things that I could add on the spread discussion is that, it's important to look at which tenant went bankrupt because of the age of their lease and therefore the likely in place rents. So if you're talking about hhgregg which is a relatively near history lease for this company and for most the likelihood that rents inflated over a five or six year period is not, not very high and therefore you would expect the spread to be not nearly as great because of a built in mark-to-market. At toys or babies, it’s a little different because they're lethal tend to be little bit older, so you can have situations where the rents have a large mark-to-market spread, so a lot of the volatility Mike talking about has less to do with the supply and demand today is much is simply the rent related to the loss rent.

Understood. And actually maybe somewhat related to that, I mean how you guys think about your 2018 expirations, I guess maybe a two-part question, have you seen any change in the percentage of your tenants that are exercising options would normally be doing at this point and I guess how do you think about the rents on expirations and how they compare to where you've been signing deals, is it sort of provide an easier hurdle for you thinking it’s kind of the same as we've seen in past years, how do you think about it?

There’s no question that there's a lot of dialogue about new leasing because that seems to be something that's easy to look at. But you're right and that the real barometer of how property is doing performance wise is do the tenants trigger their options. And I must say one of the benefits of having larger box expirations is that unlike a shop tenant where you're negotiating every single time, we're simply banking on a percentage of renewal probability and as much as we're keeping an eye on it, so far the probability of renewals has not really changed dramatically. Just continue to be decent, the sales growth I think is not all that high for a lot of tenants but their ability to pay the same rent they've been paying for the last five years seems to be the same.

Yes, I think I mean the previous comment of putting their, Jeff, in terms of you look this quarter we saw a nice uptick in renewal activities certainly by the last few quarters at very consistent spreads. So where we sit today it looks fine, would we like a higher spread yes but the spreads are pretty consistent. Where we go in the future I think there's still some uncertainty about that but so far so good.

We have a follow-up question from Christy McElroy with Citi. Please go ahead.

Hey it's Michael Bilerman here for Christy. I'm just curious on Puerto Rico, does this whole thing affect your ability if you wanted to sell an asset try to hive off the portfolio and I'm just thinking about how transfer whether there's any transferability of your insurance at all to potential other buyer or effectively now we should expect these assets to be on your balance sheet for the foreseeable future?

I'll just take the insurance question; it’s our view that transferability of insurance isn’t an issue. David you want to add?

Having said that, I think Michael the reality is you know right now it would be a Brexit to say that they’re active buyers of properties in Puerto Rico since we're still trying to grid power on and tenants open for business, so it's just a little bit too early to tell. I do understand your question very well which is before we said we're open to lots of different types of transactions on Puerto Rico, we executed a couple of them at great prices a few months back. But I would say right now the idea that we would be actively engaged in conversations about transactions is probably very low.

Just think about some of the public market access that some companies have used to hive-off or rings tence more difficult portions of their portfolio arguably this is acting somewhat of a drag in starting the entire company, so I didn't know if that was potentially on the table in terms of some public market split of the company to isolate Puerto Rico so that the rest of the company would be valued and look at more cleanly?

Good question. I think what we've said even in the last few quarters is that this management team is willing to consider anything that would create or protect shareholder value. And there are a lot of types of ideas that could be considered but should always be considered at any quarter. So nothing is off the table and you can rest assure that we're certainly focused like a laser on making decisive actions when something seems credible.

And then just lastly if was there anything or has there been anything precluding your majority shareholder auto from buying stock and I just say that's just in the vein of he was very active, last November buying almost a million shares and then through basically late April to early June buying another 2.4 million shares that's in stock probably $9 or $10 clearly the stock has unfortunately fallen below those levels, I just don’t know if there's been anything between May and today that would have precluded him and his family from accumulating additional shares that arguably what would be much lower prices from their focus his entire position to begin with?

It's a good question Michael, to be perfectly honest I don't know. I think this quarter I paid much more attention to the fact that all of our board members, our board members and I paid very little attention to their personal acquisitions of the stock, it's not a bad question I'm sure we can get back to you on it. But the reality is we're focused on trying to get our properties open and have been a little bit more concerned about operations than anything else.

And I guess would you guys [indiscernible] done a great job at pushing and creating liquidity and also looked at their debt maturity schedule, would you ever entertain buying your own stock at this point at least having a program in place, so that if you can be opportunistic in selling I don't know half an interest of the core asset and generating a lot of proceeds using that to mass fund buying stock instead of deleveraging?

Okay. Well I certainly agree that the existing stock price certainly looks attractive. The reality is that I think our primary stewardship is around risk and right now, the easiest way to keep risk low at this company is through deleveraging and so our capital allocation right now is entirely towards the deleveraging process which of course if we engage in buying stock we would reverse that, at some point it becomes more interesting but I think at this point the primary focus is on our amount of debt.

Well does the sale of Woodworth [ph] which was a pretty low cap rate in the low five entice you to say what we've got a lot of other wood type assets sitting on our portfolio that we wholly own maybe as much as those are long-term assets for us, maybe we should think about trying to tap the market and sell those today to increase liquidity to put you in a better position to be able to buy your stock that was trading at the standard levels.

I think what you're really getting at is speed and up to-date in the whopping eight months that we've been here I think the accomplishments on balance sheet have been pretty fast, we set out a goal as to exactly what we're going to do by when and I would say we're on track to achieve that goal by selling assets that we don't think have the high growth prospects that we think the company deserves to keep.

I would just reiterate I think you're asking the right question that this is a topic that we discussed a lot and we're very focused on trying to create value here right. So everything is absolutely on the table. While we think it's very important to finish our initial program which isn’t going to take that much longer and that much further in terms of capital, where we go from there is a very important question and we're trying to be incredibly kind of creative and decisive about adding some value here and not letting the stock languish.

Our next question comes from Ki Bin Kim with SunTrust. Please go ahead.

Good morning guys. Hi along the same lines, what is your commitment level today towards your dividend especially in light of your depletion pipeline maybe a second round to that and obviously some disruption in Puerto Rico which next year might get worse, just combining all those things with our stocks trading at almost 10% yield isn’t possibly rightsizing the dividend a source of capital for all your needs?

Good morning, Ki Bin. Right now, I don’t really see the access to capital being an issue, we’re selling assets at very good prices, we're getting plenty of bidders and closings are happening without a whole lot of hit. So I think from where we find the capital, the dividend is much, much, much further down the list in terms of what we think is interesting. Our dividend is valuated every quarter by the board and at this point, I certainly don't see anything that would mean that the dividend became more interesting than selling assets.

Okay. And on Puerto Rico, could you help me better understand the longer-term risk and what percent of your tenants actually had their own insurance to help sustain their businesses longer-term and I guess what is the risk that after your business interruption insurance runs off, what kind of demand would there be and given how much or how little the tenants had their own insurance?

I think it's a really important series of questions that unfortunately the landlord has relatively little visibility into. The risks are fairly simple. We have I think if you've toured our properties there you'll recognize that the dominance of their locations is quite high. I mean I was very impressed with a large number of the properties that we had in Puerto Rico. They have great fundamentals, great locations, great anchors, and the primary risk we have right now is that business insurance lasts for a year and after that year you say to yourself how many of the tenants that were previously open for business and paying rent will be previously REIT will be open in the future and paying rent and we just don't know. So far the level of store openings has increased dramatically and I think yesterday we had maybe 20 or 30 emails coming through that were tenant opening up a business again, so the signs are all good but you're talking about a year from now and it has a lot to do I think with how the island responds from a power and infrastructure and population perspective and I just can't even guess.

Our next question comes from Floris van Dijkum with Boenning. Please go ahead.

Great, thanks guys. Just following up on Michael's question, in terms of obviously the share price is telling you guys something and in terms of the pace of the restructuring clearly you guys have made it tremendous strides since you came on board but do you feel like you need to speed up some of that work and does that make you look more favorably upon a potential spend or something like that or you guys going to continue to execute your plan even if it takes another two years?

Well I don't have a whole lot more to add then I think the conversation responded to Michael but you’re right that you always want to step back and say are we moving fast enough. The reality is that the business plan was not another two years. We named a target as to when we would be at a leverage level that we were happy with. We named specifically the group of assets and the size that we would be selling and so far they've been selling and so far they've been selling faster and at lower cap rates than we originally thought. So I think all seems to be moving along, to me that’s a different question than what other types of things can a management team do and to that I'll say the things I said to Michael which is everything is on the table and we're certainly not unwilling to take decisive action when we see an idea that makes sense.

Okay, thanks. And the other question I guess is in terms of making your portfolio more attractive going forward maybe if you can touch upon with -- obviously with the rent spreads we talked about but also maybe talk about your initiatives on the fixed bumps on the portfolio and how are you making progress on that, increasing the fixed bumps?

You're talking about getting more fixed bumps into leases?

Yes, yes and getting higher fixed bumps into leases.

Yes, I don't think that we addressed that directly for something we’re saying, I mean obviously we try to do that where we can but I don't think that's something I would call cornerstone of our strategy at this point.

We're obviously trying to get as favorable lease terms as we can with every tenant we can and we're aggressive as we can be every, every single time and obviously having fixed bumps annual fixed bumps is what we strive for and most of the shop tenants have those, the anchors particularly the nationals generally have a five-year rent step and they generally don't budge from that.

Right. So you're not seeing a real change in that perhaps going forward or you have interest --?

We haven't seen a change to the negative or the positive. I mean it’s really there are certain situations where you're able to receive much higher rent bumps, it tends to be smaller tenants that are more local in general, I mean that's why the higher shop percentage properties tend to have high growth at times in the economy when there's good GDP growth. Our properties with larger anchors tend to be lot more protected on the downside because the fixed bumps have been generally respected by the tenants, when they exercise their options. So I don't really think there's been a great change on that. I think what will give confidence to investors in this space with our product type is quarter-after-quarter-after quarter delivery of incremental steps to the positive and we're more focused on that than something that's striking to come out in one quarter. We're making great progress on leasing, we have a lot of anchors that we have to choose through, we’re getting through a number of them in general they’re rents that economically better than the prior tenants. And so it may not be front page news but it's certainly step by step very positive.

The next question comes from Chris Lucas with CapitalOne. Please go ahead.

Hey good morning guys. Just a couple of small questions. Mike earlier you talked about the toys conversations you had with them, I guess if you could maybe characterize those conversations as more focused on rent reduction on their end or on a change in their footprint, how would you characterize that?

I would say generally the conversations are very early and I think we should probably give you more updates as they become more material.

Okay. And then I guess couple of accounting related issues on the you talked earlier about renewals, the renewal spreads that you guys post, do those include both of those that are at market and those that are fixed renewal rates?

I think so, yes.

Okay. And then as it relates to --

It’s contractual and negotiated.

It's contractual and negotiated, yes?

Correct, yes.

That's into the blended forecast.

Okay. And then as it relates to the reconfiguration costs, do all of the costs essentially end up in the reported GI numbers that are -- that you guys post or some of the cost allocated to base building and not included in those tenant-driven cost?

It's attributable to the lease it's in the TI numbers; we try to be pretty careful about that, Chris.

So it’s all in there, so all costs related to the reconfiguration?

I can’t say with 100% certainty that we’ve never taken anything out but it’s a vast, vast majority if we are fully loading that number.

Okay. That’s all I was looking for. And then lastly David you mentioned about focus on probability of renewals, I guess just kind of what has been the story of tenant retention rate that you guys have been running at?

You mean the historic last eight months or the historic for the company over the years?

Whichever you would like to give me.

It’s a good question, the portfolio of the company in last five years has changed so dramatically with dispositions. We should look back and calculate it what has been on the existing portfolio. I can say just in my career it's generally been in the mid-90s and so the whole industry was based on a pretty high likelihood of renewals usually higher for anchors and a little bit lower for shops and much as we’re concerned about it, we really haven't seen a notable change in that even in the last five, six, seven years.

Okay great, I appreciate it. Thanks.

That would certainly be an indicator that a tenant either a) can support their option rents or b) have other choices to move to where a landlord across the street is willing to put in a lot of capital to build a new store, it's always been part of the business but I don't think we've seen any dramatic change in the last year or two.

Excellent, thank you. Appreciate the time this morning.

Our next question comes from Samir Khanal with Evercore ISI. Please go ahead.

Good morning guys. So just looking at your leasing spreads, I know it’s been pretty stable sort of in the mid-single-digits kind of area but I know it’s kind of decelerated probably for a lot of the folks in the shopping center peer group maybe from the high-single-digits whether it's 8%, 9%, 10%. So as we think about sort of 2018, I know you haven't provided guidance but just trying to figure as we formulate 2018 sort of numbers on same-store. Do you feel pretty confident that you can still kind of maintain that sort of 5% to 6% renewal spreads here?

It feels reasonable that we would be able to maintain that, yes.

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

Thank you all for joining and appreciate the questions. We will talk to you next quarter.