Kimco Realty Corporation (KIM) — Q2 2015 Earnings Call Transcript

Good morning and thank you all for joining Kimco's second quarter 2015 earnings call. With me on the call this morning are Milton Cooper, our Executive Chairman; Dave Henry, Chief Executive Officer; Conor Flynn, President and Chief Operating Officer; and Glenn Cohen, CFO. There are also other executives who will be available to address questions at the conclusion of our prepared remarks. As a reminder, statements made during the course of this call may be deemed forward-looking and it's 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. Reconciliation of these non-GAAP financial measures are available on our website. We have one housekeeping item to address. Kimco is hosting an Investor Day on December 10 of this year in New York City. We recently sent out invitations for this event and if you did not receive it, please contact my office and we'll make sure to get this to you. We've also provided more details on this event, with the opportunity to RSVP on our Investor Relations website. And with that, I'll turn the call over to Dave Henry.

Good morning, and thank you for joining our call today. We are very pleased to report strong second quarter financial and operating results. As usual, Glenn and Conor will discuss the specific details, while Milton will provide some general thoughts. Overall, both our earnings and property fundamentals looked terrific, as we continue to upgrade our portfolio and sell lower tier retail assets. Combined with limited new supply and healthy growth of both national discounters and service-oriented retailers, our operating metrics are strong and bode well for future earnings growth. It is particularly encouraging to note another strong quarter of US same-site NOI growth at 3.7%. Despite modest retail sales figures, national retailers continue their expansion plans, which in turn is fueling higher occupancies, redevelopment projects and some limited ground-up development in certain markets. Effective rents are moving up sharply and property values continue to increase. In fact, the only disappointing current trend is the rising disconnect between private market evaluations and the implied cap rates property values of REITs in general. Retail properties of all quality types and in almost all markets are experiencing strong demand with cap rates continuing to drift down. Wherever possible, Kimco is continuing to take advantage of the robust sales market by selling our remaining second tier assets and redeploying the capital into redeveloping our larger properties and acquiring the equity interest of our institutional partners. In the latter case, we have the advantage of having managed the assets for many years and have in most cases, a long-term presence in these markets. With respect to our overall strategy, we have now sold our remaining retail assets in Mexico and we've begun to sell certain Canadian properties, as we take steps to reduce our leverage levels which temporarily rose in the first quarter with our purchase of Blackstone's joint venture interest in the former UBS joint venture portfolio. We expect to continue selectively selling Canadian assets including our remaining Canadian preferred equity investments to help us achieve our year-end debt target without issuing new equity. Glenn will cover this in more detail during his presentation. Also with respect to Canada, property prices remain high despite the negative impact of energy prices on the economy, particularly in Alberta. Our partners in Canada are also making excellent progress replacing the nine Target Canadian stores in our portfolio. Five of the nine Target leases have been purchased by Lowe's, and Metro Grocery Store is taking part of a fixed store. There is substantial interest from other retailers in our remaining phases including Marshalls, Bed, Bath & Beyond, H&M, and Sport Chek. And I remind everybody that we have US Target's guarantee on all nine of the leases. Switching back to the US, I believe most participants on the call today have noted the recent public IPO filing of Safeway, Albertsons. We are confident that the future monetization of our 9.8% investment will provide an additional source of capital to fund developments, redevelopments, acquisitions, and reduce debt. During the quarter, as reported, we also sold approximately 80% of our Supervalu stock at a large deal. Our Plus business continues to truly be a strong plus for us. Overall, we feel very positive about the underlying fundamentals about open-air retail properties and the markets we are focusing on. The eCommerce impact on essential goods and services has been modest and most national retailers have emphasized the benefits of brick-and-mortar store locations as an essential part of their integrated omnichannel strategy and very necessary for brand exposure. The proof really is in the numbers. As occupancy, rents, leasing spreads and renewals are all strong across our sector. Now I'd like to turn to Glenn, Conor, and Milton for their thoughts.

Thanks, Dave, and good morning. Our second quarter results were strong with solid execution at the property operating level and additional contributions from our Plus business. As we reported last night, headline FFO per share, which represents the official NAREIT definition, was $0.44 for the second quarter, a 29.4% increase from the $0.34 over the last quarter. Our strong performance is attributable to NOI increase of $8 million or $0.02 per share from the shopping center portfolio and higher transactional income primarily from the $32.4 million marketable security gain on the cost of sale of our Supervalu investment. For the six months, headline FFO per share is $0.81, up from the $0.68 per share level for the comparable period last year, a 19.1% increase. FFO was adjusted, or recurring FFO which excludes non-operating impairments and transactional income and expense was $0.37 for the second quarter, up from $0.35 last year, a 5.7% increase. It's worth noting that this level of growth was achieved even with the impact of $900 million of US assets sold, over $400 million of assets sold in Mexico, Latin America, and Canada, and a negative impact from currency fluctuations. This transformational activity had a diluted impact of $0.06 per share. However, it was more than offset with acquisitions of over $2 billion of high-quality shopping centers and many from our joint venture programs and reduced debt cost from opportunistic refinancing. For the six months, FFO adjusted per share is $0.73, up from $0.69 for the comparable period last year, a 5.8% increase. Portfolio operating metrics of occupancy, leasing spreads, and same-site NOI growth continue to deliver strong levels. Our US pro rata occupancy stands at 95.7%, up 70 basis points from a year ago. US leasing spreads continue to increase with new leases up 26% and renewals and options up 8.7% for combined positive leasing spreads of 11.9%. The closely watched metric of US same-site NOI growth was 3.7% for the second quarter, driven primarily by minimum rent increases and better credit loss results. Included in the US same-site NOI growth is 50 basis points from new developments. For the six months, US same-site NOI growth is 3.4% with 40 basis points coming from redevelopments. We are maintaining our US same-site NOI guidance range of 3% to 3.5% for the full year 2015. Combined same-site NOI growth, including Canada, was 3.4% for the second quarter and 3.2% for the six months, excluding the negative 110 basis point currency impact. We continue to make progress on our balance sheet metrics with consolidated net debt to current EBITDA dropping to 6.3 times from the 6.6 times level at the end of the first quarter. We have raised our full year disposition guidance range to $800 million to $1.1 billion representing an increase of $250 million to $350 million, which will provide the necessary capital to bring our net debt to recurring EBITDA to six times by year-end without the need for any common equity issuance. Based on our strong first half results and expectations for the second half of the year, we are raising our headline FFO per share guidance range to $1.52 to $1.56 from the previous per share range of $1.50 to $1.55. The headline guidance range includes an additional $1 million to $6 million net transactional income generated during the remainder of the year. We are also increasing our FFO as adjusted per share guidance range to $1.43 to $1.46 from the previous per share guidance range of $1.42 to $1.45. Again, these increased per share guidance levels do not anticipate the need for any common equity issuance, and with that, I'll turn it over to Conor.

Thanks, Glenn, and good morning, everyone. Today I'll start by recapping our major metrics followed by our progress on our acquisitions and dispositions and finish with updates on our strategic development and redevelopment pipeline. Overall, we continue to see the fundamentals of our business improve in this favorable supply and demand environment. Our retailers in open-air centers, which include off-price soft goods, specialty grocers, fitness and wellness concepts, and fast casual restaurants, continue with their aggressive expansion plans. Regardless of the interest rate noise that's creating a disconnect between public and private pricing, we are laser-focused on execution. These core initiatives include the blocking and tackling of leasing, continuous efforts to improve operations with an eye towards sustainability, and finishing off our disposition by taking advantage of the healthy demand for hard assets with a strong yield. Turning to our major metrics, the US portfolio maintained occupancy at 95.7% even with the disposition of over 1.2 million square feet of fully occupied space. Due to the disposition, the small shop occupancy took a slight dip to 88%, a 20 basis point decrease in the prior quarter. But we remain confident about the overall improvement in the small shop leasing environment and the ability to grow occupancy throughout the rest of the year. Anchor absorption made up the difference as it increased to 98.4% by executing new deals with Wal-Mart, Fresh Thyme Farmers Market, Total Wine, and Planet Fitness to help keep the overall US occupancy flat over the prior quarter. Our combined spreads for the second quarter were almost 12%, a strong indicator that pricing power exists in our key markets, where we see demand outpacing supply. Same-site NOI continues to trend over 3% in the US and the lease-up with small shop vacancies, redevelopments, and strong re-leasing spreads will continue to produce solid results. A retailer watch list continues to be of focus, as we have seen a few dark clouds on the horizon, with the recent bankruptcy filings of RadioShack, Anna's Linens, and A&P. All three combined make up less than 1% of our AVR. Our diverse tenant base allows us to think strategically about the long-term goals of our assets; that our core performing retailers have great underlying real estate value. The average base rent of the portfolio is up 6.1% year-over-year. Our new leases are being signed at an average of over $19, significantly above our current average base rent, showcasing the embedded value to the mark-to-market opportunity we have at Kimco. We continue to execute on our transformation and simplification strategy. With the previously announced closing of the KIF II transaction at Montgomery Square in Fort Worth. Both of these transactions further the consolidation of our joint venture properties and give us buying opportunities in a challenging acquisition environment that also acquires seven adjacent parcels to our Tier 1 portfolio, as we look to expand our footprint, where we see the opportunity for future redevelopment. The acquisitions market remains ultra-competitive and a few recent transactions showcase that cap rates continue to fall especially for high-quality open-air centers in dense markets. While we continue to mine for opportunities, we believe the best use of our capital continues to be redevelopment and strategic development. The disposition market continues to remain healthy with cap rates continuing to compress across quality and markets. In the second quarter, we sold 13 properties totaling 1.3 million square feet and all were 100% occupied, generating $92 million in KIM share proceeds. Buyers of these assets include public institutions, private REITs, and local private buyers. Currently, we have 28 assets under contract for $170 million, 15 accepted offers totaling $136 million, and another 18 assets in the market that will complete our transformation by year-end and produce another $500 million of gross proceeds. With respect to our redevelopment and development programs, whether it's cooling our existing portfolio, looking for value-add opportunities, assembling adjacent parcels to create future phases, or building a new site from the ground up, our team is working overtime to analyze the highest and best use of the real estate. This modus operandi to evaluating real estate investment opportunities is what we call strategic development. That said, steady progress continues to be made on our redevelopment and development pipelines. This quarter, we completed 11 redevelopments with a gross cost of $34 million. The blended incremental ROI on these projects is 15.5%. The projects were completed under budget and above our revenue expectations. Representing an increase in ROI of 120 basis points over pro forma. At the same time, seven projects were promoted to the active status included in the category of promotions. Our Forest Avenue in Staten Island, where we will be redeveloping a former national wholesale liquidators to make way for a new LA Fitness. And at our Downtown Farmington Center in Farmington, Michigan, we'll be redeveloping a former Office Depot in Tuesday morning for a new Fresh Thyme Farmers Market, continuing our effort to add a grocery component to our centers EO redevelopment. Notable completions this quarter include the transformation of two K-marts in Florida, where we added Whole Foods, TJX, and Ross among other great retailers. The redevelopment pipeline targets the highest and best use for each asset, with a focus on upgrading the quality of the tenant mix, adding a grocery component, and adding density via mixed-use to complement the existing retail. The continued expansion of specialty and traditional grocery concepts in our core markets, in addition to the emergence of several new off-price or outlet concepts, bodes well for our redevelopment and strategic development initiatives. These new demand forces are allowing us to unlock below-market rents with higher producing retailers that will benefit the net asset value of the portfolio. Currently, the redevelopment pipeline has a gross value of just over $1.1 billion for a total of $268 million in active redevelopment, another $756 million in design, entitlement, and $97 million in under review. For the quarter, redevelopment adds 50 basis points to our same-site NOI. We continue to look for development opportunities that are within our core markets, complement our long-term Tier 1 portfolio, and provide compelling returns. Despite high retailer demand, sourcing new projects that will be accretive remains challenging due to rising land costs associated with the boom in multifamily development. That said, retailer demand for our select developments has been strong and we continue to work towards securing a vibrant tenant mix that will create a live, work, play atmosphere that we seek to create on all of our Tier 1 assets. Our four development projects remain on track and will start to deliver in the second half of 2016. In closing, at the midpoint of the year, we are pleased with our progress on our strategic initiatives but understand that the execution throughout the second half of the year is key to achieving our goals. So we've empowered our operations team to make strides to become the best-in-class operator of open-air shopping centers, and it is nice to see our efforts being recognized. Commercial Property Executive magazine named Kimco the number two most effective property manager and Newsday named Kimco one of the top three greenest REITs in the entire REIT universe and number one in all of retail. These accomplishments could not have been achieved without the passion and effort of our deep bench of talented individuals that are pushing Kimco to become the next-generation REIT, and with that, I'll turn it over to Milton for his final comments.

Thanks, Conor. I would once again like to congratulate our team, which is second to none on an excellent quarter. In particular, I would like to thank Ray Edwards, who continues to spearhead our Plus business activities and was instrumental in the Albertsons investment. Ray is just one example of our deep bench strength. And as I've said before, we've great people, great assets, and a great future. On another topic, the recent bankruptcy filing of A&P, as it relates to our portfolio, got me thinking about the often-cited premise that high rents are a proxy for value and quality. Now with respect to our A&P sites, four leases with below-market rents are being cited as generating a profit for A&P, while two other stores with above-market rents will be closing. Now this admittedly is a small sample, but I think it is telling. A rent that is at or below market is much more sustainable over the long-term as the embedded value represents an upside for both the landlord and the tenant. These win-win scenarios for the owner and the retailer are what creates long-term value. As such, I believe that low market rents and sometimes, we're talking about ground rent, should be recorded at lower cap rates. Conversely, while higher rents may be an indicator of a quality asset, they may also reflect more risk, if the rents aren't sustainable over the long run. When underwriting potential acquisitions, determining replacement rents for some high-paying tenants is critical to the overall valuation of that site. In short, one size does not fit all. And now, we'll be happy to take any questions.

We're ready to move to the question-and-answer portion of the call. We have a very deep queue. So we request that you respect the limited one question, with an appropriate follow-up, to allow all of our callers to have an opportunity to speak with management. If you have additional questions, you're welcome to rejoin the queue. Chad, you may take the first caller.

I know that Kimco is working on becoming a more urban portfolio, but outside of continuing to concentrate the portfolio around the top metro markets, what are some of the steps you're taking to become a more urban portfolio?

I think the number of different steps we're taking, we're really divesting of the assets that are falling outside of our core urban markets. We're also looking to acquire adjacent parcels to our assets that are within the core urban areas, and we're looking to develop within those core markets. So combining acquisitions with development and redevelopment and dispositions, we really are trying to transform the portfolio to become a more urban portfolio.

And what are you seeing in terms of spreads of either NOI gain or leasing spreads in terms of the urban properties versus maybe some of the properties in the second tier cities?

It really is a case-by-case analysis. You've got to look at the ones that we continue to try and redevelop, even if they're in second markets because those will actually return very nice returns. But we're seeing the embedded growth, whether it's same-site NOI or the leasing spreads on the mark-to-markets within the core urban markets, definitely are growing at a higher pace. We've seen that the urban markets have higher embedded growth and more demand from our retailers, and that's a real reason why we're focusing on that chapter.

Conor, just following up on your comments around development. As you look at your portfolio and are considering more sort of larger scale projects, whether identification of existing assets or new development. And you also talked about the large redevelopment pipeline sort of a shadow pipeline looking out. How do you think about sort of the annual pace of realizing some of those opportunities. So I think you're in-process pipeline is only about 2% to 3% of your growth asset value currently. Do you have a desire to grow that over time?

It's a good question, I think breaking it down into two different buckets. Redevelopment is one that I would love to do more of; we're trying to focus on how we can expand that $1.1 billion pipeline by adding more projects. Clearly, we're doing a good job in terms of expanding that and also delivering on it. We saw at this quarter, we did more than last quarter and we continue to try and scale that. On the development side, we're being very selective about what we try to pick up for developments. It really has to be within our key markets. We're trying to develop these long-term Tier 1 assets because they have high growth embedded in them. And it's very difficult to find ones that check all those boxes. So we want to try and be measured in terms of what we take on in development. But we're also making sure that we try and look for those opportunities because right now, where cap rates are headed. We don't see a lot of opportunity to create a tremendous amount of value from the acquisition market. So we're looking from our own portfolio, we're looking at acquiring adjacent parcels that may lend themselves to larger redevelopments over time and we're also looking at the development side of it. So I'd like to see us grow on all fronts. That being said, we don't have a target in place. It's really that we're trying to look at every opportunity and make sure it's the right one for Kimco.

And are there any investments that you need to make sort of internally staffing-wise. You already set up for sort of growing that redevelopment pipeline?

We have already made those investments. We are already staffed up in terms of the development and redevelopment side of the business. We knew very early on that this was going to be a growing pipeline and made sure that within the regions, we staffed accordingly because we were very active in terms of trying to identify this early on and make sure that we get out ahead of it before the development pipeline gets even larger.

You took out the equity rates from guidance and replaced it with more asset sales, which makes a lot of sense given the way your stock is trading. How do you think about the earnings growth trajectory of the company in the near term, given the back-end loading of dispositions? Do you think Kimco can be a sort of mid-single-digit FFO grower next year or do you see 2016 as being maybe a bit more low growth given the dispositions?

Hi, it's Glenn. We started off this year thinking that this was going to really be our bridge year and we're performing pretty well, where you're going to see pretty decent growth come from it. You're right, we're back-ending some of the sales. But the growth next year should still be, I would say comparable to where we're this year.

Thanks, Glenn that's helpful. I guess, as a follow-up should we read into next year's disposition volume given the comments on the call about how healthy the transaction markets are? Do you think next year we could see a similar level of dispositions or is this year sort of the bulk, as we think about the next 18 months?

No, I don't think you're going to see the same level. I mean, we're talking about total dispositions at our share somewhere between $800 million and a $1 billion for this year. I don't think it will be anywhere near that next year. Certainly, we're finishing up what we've done in the US. You will still see us do some level of dispositions. I think we've, as a company have been very clear about really looking at every asset and where we see risk in that asset or a market moving away. We've been trying to be aggressive about selling those assets and really focusing on that Tier 1 portfolio.

So you guys made an interesting comment about the rent and how that is critical to underwriting deals. I'm just curious, and maybe this is more for our anchor spaces, but for what percent of your tenants do you have occupancy cost data? And how does that look like and are there any retailers on your list that might screen as maybe too high of an occupancy cost where it might be at risk going forward?

It's a good question; I think occupancy cost is one that we watch closely, where we have the sales data available. It's one that is difficult to track when we don't have the sales data, obviously. So unfortunately our portfolio doesn't have a tremendous amount of sales data. But where we do, we feel very comfortable with where the occupancy cost sits relative to the industry standard. So we think that we actually have some significant embedded mark-to-market opportunities, not only from the existing operator but also just from the open market. So we try to look at and track occupancy cost where we have the sales data and we also look at the market rent replacement value, just in the open market as well.

So maybe just to follow-up on that. So any retailers in your top 20, top 40 list that you think, not in trouble today, but maybe is heading towards that direction next year?

I think in our sector, we're in the sweet spot right now in terms of the occupancy cost because many of the retailers in our Rolodex are actually producing pretty solid same-store sales and you'll see that continue I think through this next cycle. So we don't see any other dark clouds on the horizon other than the few watch-list tenants that we've been watching for a long time.

Looks like you've been trending at about 3.5% on same-store NOI growth year-to-date, which is at the higher end of the range. But you kept the guidance unchanged and I'm just trying to understand if you're just being conservative due to some of the recent store closings or is it just the fact that you're also facing some tough comps. I know, last year in the second half, you were sort of in the 4.5% range. So can you just provide some color around this?

Sure. Our guidance at this point is more towards the upper end of our range, where we've been. But again, you have to look at some of the bankruptcies that have occurred. So we have to be a little cautious from that standpoint. But when our guidance is towards the upper end of the range, we don't have enough clarity to sit there and try and raise it at this point.

And the leasing velocity continues to be strong. I think that even though you see that our small shop occupancy decreased this quarter. It was really driven by the dispositions, and we actually had more small shop leasing volume in the second quarter than we did in the first quarter. So we feel pretty optimistic that the fundamentals are there.

Quick question on your percentage of anchor space versus small shop space. You historically have been heavier on the anchor side, I think more than roughly three-quarters of your spaces are anchor space. I'm curious if that's by design or if that's just what's kind of become of the portfolio over time and how you think about that going forward?

It is something that we actually tout as a differentiator for us because we have 77% of our income coming from our anchors. It's one that we think we can manage effectively because of the investment grade credit ratings that they receive. And we are very conscious of watching how they expand or contract. We have national relationships that we can very much take into effect when we're looking for new projects or new developments. And we think the risk involved with the national anchors is a little bit less than the small shop. So we like the way our portfolio is designed. We continue to develop assets that have a good mix in anchor tenants as well as some restaurants and some small shop tenants, and you'll see that as we continue to try and push the grocery initiative. We'll start to become a much more grocery-anchored portfolio as we're already over 70% grocery-anchored.

Okay, so you look at that anchor space being, having a point of going forward. Is it harder kind of ex-redev to push same-store NOI given that small shops turn faster, so in an up market, you can obviously roll those leases quicker and much market faster than you can anchors, is that kind of trade-off?

I think that's a fair statement. I think the smaller shops definitely have more turnover, more mark-to-market opportunities. Being said, we saw on the last downturn that the small shops were the ones that got hit the hardest. So we feel like we're trying to position ourselves for the ultimate cycle. We're feeling pretty confident that where our leases are maturing, where the rents are, we feel like we have significant mark-to-market opportunities in both small shop and anchor leases.

First, nice job on getting the Jericho parcel. Question for you on Canada and harvesting the Albertsons stake. As you guys obviously love to do that, presumably you have this nice gain in Albertsons. Do you think that you can do both simultaneously from an efficiency standpoint or because of structuring things, you'd have to favor one versus the other in terms of timing?

Well let's take both sequentially. In Canada, it's going to be some time before we sell a number of assets up there. We have a number of joint ventures, and just like in the US, we've identified a Tier 1 and a Tier 2 group of assets there. The Tier 2 assets are much easier to put on the market because you generally have consensus with your operating partner. On the Tier 1 asset, it's more of a discussion and it will take more time to do because we're near the tail end of this year. So what we even start today, some of that's going to fall into next year. So I guess, when we look at Canada in harvesting some of those assets in order to provide capital to pay down debt, it's going to be spread over the next couple of years as it is. When you look at Albertsons, even if the IPO is successful, there will be a lockout period, and Ray can go into that a little bit. So that's more of a longer-term harvesting in our mind.

Yes, I mean, on Albertsons, if the IPO does happen in the fall as we hope, there will be at minimum 180-day lockout to sell any of the shares in the company. I mean for us, the duality with the Albertsons transaction was when we closed the deal in February, nobody thought it would be seven months going out there as an IPO. So we're way ahead of the curve in our ability to monetize the investment whether because we're moving up the IPO timing.

Just sticking with some of the Albertsons side discussion here. Just on the rest of the Supervalu stake, just curious what the plan is there?

We'll probably try to monetize it over the balance of the year, which is obviously our plan.

You've got two headwinds for retailers up there. One is the energy downturn, which has impacted employment; it's impacted the whole commodity pricing sector and has impacted Canada and led to softening in many respects in terms of consumer confidence, consumer sales, and so forth. Secondly, many retailers get their inventory of goods from the US and the strong US Dollar and the quite substantial movement in that US Dollar has really hurt retailer margins in many cases. Particularly, fashion, and that has impacted retail sales, retail margins, and retail profitability. So you've got a few more bankruptcies and liquidations of retailers in Canada right now than we're seeing in the US. So the fundamentals are definitely a little softer in Canada, but we're coming off of 15 years where Canada in many respects was stronger than the US in terms of portfolio occupancy and rents. It was a very solid performer for us. So it was softened lately, and the Target bankruptcy doesn't help, but there has been some pretty good demand for the space. And you're going to see more of it now that these leases have been rejected. It opens up more discussion between landlords and users. As an example, many of these Target leases had food restrictions in them. So the ability for the Wal-Marts of the world and the grocery stores in Canada to bid for the leases, there just wasn't that much demand. So it's not a coincidence that Canadian Tires and Lowe's were the two big purchasers of the Target Canada leases because they didn't have to deal with the food issue.

Just talking about the cost business. I mean you've gone through Supervalu and Albertsons, but how are you thinking about the forward-looking side of things? I mean there are lots of retailers kind of looking hard at doing something with their real estate, and are you out there proactively approaching retailers or if we look at any kind of future deals, would they be more, you know where you step into club deals like you've done before?

Well it all depends. I mean, a club deal for Albertsons, when you're buying an operating company, you really want to bring in other people who have expertise that we might not have. On that deal, we were the experts on the real estate evaluation and helped to do that. But we needed, in that case, the financial partners to help us with the capital structure of the whole concern and bringing the right operator in. But we have done deals and we do look at opportunities to do deals directly with retailers. We've done small deals in the past, we did a deal with Winn-Dixie about a year and a half ago. We got a great little shopping center in Marathon and development, a couple of years. So we look at reaching out to retailers. We have great relationships with them and most of them know that we've been in this business. I've been here for 15 years, but Milton's been doing it for 50 years that we're someone that they can talk to and help them figure out what they can do with their real estate and help monetize it. And really some things are win-win; we're not out there gorging these retailers because ultimately we want them to be around because we want them to be tenants in our shopping centers. And so very good relations for them to work with us.

We do want to keep the Plus business, a Plus business, and we're committed to making the best modest bets, and we love these one-off opportunities that Ray mentioned, but when Sims went into bankruptcy, we bought one of their better assets out of that. So we like the smaller opportunities to truly be a plus for us, and one of the keys to growing this Plus business over the years is to increase the number of relationships we have, not only with retailers which we already have, but with the private equity and the opportunity funds and hedge funds, which have their own ways to originate opportunities here. So we want to be the first call from a private equity firm that's tied up a retailer that owns a lot of its own real estate.

I know you talked about Canada generally, but did you mention how much of the 2015 increased disposition volume is tied to Canada? And then, Dave I think you talked about making substantial progress over the next 18 months or so with Canada sales. Can you put some rough numbers around that?

I mean the increase in the disposition guidance is about $200 million of it; the proceeds will come from Canadian sales. So that's part of it, and then as we look at further dispositions, that will come into 2016, another $200 million.

Most of our partners do know that we would like to monetize the lower-tier assets as the first step, and in some cases, we're willing to sell to them some upper-tier assets. As an example, you've seen us sell three properties to our partner RioCan, which had different plans for those properties than we did over time. So we were, in the first instance, we were actually able to trade, the interest that they have in a very nice property in Dallas, Fort Worth, where we had done an original joint venture with them. So we were effectively able to buy out their interest in Texas, while they bought our interest in three assets in Canada. So there may be more opportunities to do things like that.

Question on demand, kind of a two-part question. First of all, I think Conor you mentioned recently doing a Planet Fitness deal, and as you probably know, they have their IPO queued up here and they're talking about a very significant level of expansion. I wonder if you could share with us how their box might differ from an LA Fitness or 24 Hour Fitness box and what your appetite is to do more deals with them? I think you mentioned the category, there's a growth segment. And then secondly, with regard to small shop occupancy, you've talked before about kind of your clicks to bricks initiative. One of you could just give us an update on any progress or kind of notable deals you've done there that give you grounds for optimism?

Sure, on Planet Fitness they have been aggressive actually over the past, I would call it 2 years to 3 years. So their expansion plans continue. Their pricing point is lower than LA Fitness. So it's a certain demographic; they're the perfect user. They do bring traffic, and we've seen actually from a co-tenancy side of it. A lot of our retailers who were at first against the health club have actually come around, and Sprouts for example is one that actually likes the gym to come into the shopping center because it's the whole health-conscious type customer that they're looking to go after. So you're starting to see that the health clubs become more of an integral part of that live, work, play environment that we're trying to create. And I think Planet Fitness has done a good job in terms of expansion and what they're looking to do going forward. That being said, they're in that size where we have so much demand right now. We're at 98.4% in our spaces over 10,000 square feet. And Planet Fitness will be bidding against a lot of these guys that are looking to come in for that same size box. I see that as being a headwind for their expansion plans, but they do run a great operation and we have a number of deals with them and a number of other deals in the pipeline. And then on the Clicks to Bricks question, this is something we've been tracking now for probably close to 5 years, and it's a program we've been targeting pure online retailers to come into the physical shopping center world. The transformation of that eCommerce to the bricks-and-mortar space has been slow, but you're seeing it start to speed up now. Some of the pure online retailers are now opening physical stores. It hasn't necessarily been in the open-air shopping center sector. It's been more in the high street retail core owners as they're looking to jump into the Soho's of the world to showcase their brand and to have a space to show off their goods. That being said, there are rumors of Amazon developing a store that we're watching closely in California that actually has a drive-thru attached to it. So if that comes to fruition, it may open a whole slew of new operators to come into our shopping center that would create even more demand sources for us. So we're watching it closely; we're encouraging some of the modern top online players to come in our shopping centers, but it has been material of late.

Conor, I missed a little bit of your initial presentation; I got cut off. But did you mention if your small shop leasing target is still 90% for next year? Is that still what you're headed towards?

That's correct.

Okay and in getting to that, is it really just a matter of demand by demand for new store openings and how hard you guys work, or is it also partly getting some of these redevelopments done, maybe adding some anchors to some centers that kind of thing to push you to that kind of target?

I think it's a combination of both. I think our leasing team is really focused on the small shops because we all know that, that's really what we have left to push in terms of our same-store NOI growth. So we have changed some incentives around to make sure that, before we might have been more heavily weighted in incentives towards leasing bigger boxes, we're now shifting that towards the smaller shops. And we're also looking at our redevelopments; when we take down portions of shopping centers, typically it's the junior anchors that are stepping up and paying the rents to get into the space. So they are, it's a combination of both, and yes, we're still doing close to 150 small shop deals a quarter. We don't see that slowing down; it's about a 50-50 split between regional and national small shop tenants; the mom-and-pop tenants and it's a lot of service-based users that we think are sticky, the ones that will stay in our shopping centers for the long haul, and that's where we see significant annual increases coming as well from the small shops.

Question on the JVs. Obviously you've done a lot of efforts in your last year or two simplifying the platforms. Three big JVs last year, it looks like Prudential, Care and RioCan, which maybe you're starting to address here in Canada already. But the question is, what's the status of your conversations with those partners? It looks like the Pru JV had a lot of debt maturities in 2016, wondering if that could be a catalyst to buying in some of that JV?

Yes, Prudential has made it pretty clear that they're not interested in disposing of their interest in most of the properties we have together with them. They have a lot of money to put to work; they're not interested in monetizing at this point in time, and in fact, they've been very cooperative in terms of paying off debt on some of the properties that we have together because they'd like to put out more money, so some of the properties are scheduled to become unencumbered. That said, they've also agreed to our concept where we truly have secondary assets in tertiary markets that those should be put on the market, and they've cooperated with us in selling those to third parties. But in terms of buying out their interest in certain properties, it's probably not going to happen in the near future. RioCan, we have talked about, and I think you'll see that joint venture be reduced over time as we begin to identify certain assets that we both think should be sold, as well as certain assets where they have plans to convert more to a mixed-use or redevelop, and those might be opportunities for us to reduce the size of our joint venture. That said, they've been a wonderful partner all the way long. In terms of Care, we've had some discussions, but at this point, they're inconclusive, and as you probably know, New York Common is going through a change of leadership on the real estate side, so it will be a while before they really settle out on their long-term strategy I believe.

But they've also been very cooperative and agreeable about selling assets that we don't fit in that Tier 1 category.

Appreciated the color, a follow-up, if I may? On redevelopments, I think Conor you mentioned earlier the pipeline today is $1.1 billion. I'm curious as to how big the correct opportunity, the redevelopment opportunity within your current portfolio is today, ballpark? How large you'd be comfortable growing the redevelopment pipeline, either in total dollars or as a percentage of JV?

Well, $1.1 billion is a gross value that includes the JV properties. So we've gone pretty deep in each and every asset to see what we can do in terms of unlocking value. Our redevelopment definition is very simple. It's changing the square footage, changing the footprint of the asset. So adding density is one that where we're laser-focused on trying to add more to the pipeline. We continue to try and see what we can add to it, but it really is typically based off of opportunities that come as we go through the year. So with lease maturities, if tenants for example are going after size options, all of a sudden that triggers a redevelopment opportunity that we didn't necessarily think was actionable. So one just recently happened, and we're adding it to the redevelopment pipeline in addition to potentially looking for more of a mixed-use approach to it, as well as looking at other opportunities that we have yet to really add to the redevelopment pipeline. So that's how we look at it.

Kind of a follow-up on the last question. Conor, you did talk about the ways of growing the redevelopment program beyond the $1.1 billion, and I guess given the success you've had so far, I was just wondering if one of the ways you can grow that is to literally just change how you're thinking about the underwriting given, again, the success you've had so far?

Well it's a good point; rents are definitely moving up. So the returns that come along with those higher rents definitely justify more projects, and we're looking at that. In addition to adding potentially some mixed-use opportunities that we have yet to add. So we're trying to dive through the portfolio and also looking at new acquisitions that have redevelopment potential. So some of the ones we've been looking at, I think now have to have redevelopment component for us to really get excited about. So you're right on that, as we look at returns, we might start to look at other opportunities as rents have moved up, and now it starts to make more sense.

Great, thanks. Just quickly on the sales in Canada and the Albertsons stake over time. Is there any way to shield or manage through the taxable gains in those investments? Or do you just sort of pay the taxes and move on, and that's it?

Well, actually, we do have some room in terms of handling. In Canada, there are two components to the tax. There is a Canadian tax that has to get paid on the gains. So you do have an actual cash tax that occurs in Canada, and then there's the remaining piece that will flow back into our US entity. So it's all the matter of how we shield that. Now we have done a lot of analysis about doing cost segregation studies and other things like that, repair regs analysis that give us a lot more depreciation expense from a tax standpoint to help manage it. In addition, we have been doing a lot more 1031 exchanges on the assets that we sold in the US. So although, we've been reporting a lot of gains in the US from a taxable standpoint, they're actually being deferred. So we have a pretty sizable bucket to be able to deal with the gains that will come.

This concludes our question-and-answer session. I would like to turn the conference back over to David Bujnicki for any closing remarks. Thanks, Chad, and to everybody that participated in our call today. As a reminder, additional information for the company can be found in our supplemental that is posted on our website. Have a good day.