Kimco Realty Corporation (KIM) — Q2 2017 Earnings Call Transcript

Good morning and thank you for joining Kimco’s Second Quarter 2017 Earnings Call. With me on the call this morning is Conor Flynn, Chief Executive Officer; Ross Cooper, President and Chief Investment Officer; Glenn Cohen, CFO; and Dave Jamieson, our Chief Operating Officer; as well as other members of our executive team, including Milton and Ray Edwards. As a reminder, statements made during the course of this call may be deemed forward-looking. It is important to note that the Company’s actual results could differ materially from those projected in such forward-looking statements due to a variety of risks, uncertainties and other factors. Please refer to the Company’s SEC filings to address these factors. During this presentation, management may make reference to certain non-GAAP financial measures that we believe help investors better understand Kimco’s operating results. Examples include, but are not limited to, funds from operations and net operating income. Reconciliations of these non-GAAP financial measures are also available on our website. And with that, I'll turn the call over to Conor.

Thanks, Dave, and good morning, everyone. Today I will provide an overview of our strong second quarter performance and share some perspective on the direction of retailing and retail real estate and how Kimco's strategy is designed to thrive in this period of change. We'll also then report on our quarterly transaction activity and describe the overall market environment. Finally, Glenn will provide details on key metrics and our increase to 2017 guidance. I think it is fair to say that the debate surrounding the debt of physical retail is over. The Amazon-Whole Foods transaction, Alibaba's growing grocery concept in China, Walmart's quick-and-collect Pickup Discount program integrated with Jet.com, and Target’s flex format Express, all point to a vibrant, albeit different-looking retail real estate world. In this new world order, omni-channel is the new normal, and that is where the retail battles will take place. Those that embrace and master the omni-channel approach that combines technology, social media, and physical real estate will thrive. Those that ignore it will do so at their own peril. Omni-channel is a win-win for the retail sector. For the consumer, it provides convenience, lower prices, and optionality. For the retailer, it provides the opportunity to reach more customers, generate add-on sales upon pickup, reduce shipping costs, and limit the number of returns. Physical retail has a large role to play in this effort to bring the best shopping experience for the customer, especially as retailers continue to explore different ways to overcome the last-mile challenge. And let's not forget that notwithstanding the changes and challenges that confront retail, off-price, grocery, home improvement, fitness, beauty, and other service retailers continue to thrive in this environment. As our second quarter results demonstrate, our approach is working. Our operating metrics evidence the strength of our transformed portfolio that drives recurring FFO and dividend growth. Our bi-design concentrated portfolio in the top markets is validation that even in uncertain times high-quality retail real estate is still very much in demand. Our leasing volume year-to-date is the highest in our company's storied history, as we work diligently to stay ahead of the changing retail landscape. We executed 26 new anchor spaces this quarter and leased four former Sports Authority boxes. Occupancy increased 20 basis points from the first quarter and the blended spread on new leases and renewals of 10.5% shows the embedded growth in demand for our portfolio. We would not have been able to produce these results if we had not undertaken the strategic dispositions of the past few years to strengthen the Kimco portfolio. Our transformation efforts are paying off as we see significant demand from our diverse tenant base that desire the best locations with the most compelling demographics. While the transformed portfolio continues to see high demand from retailers, it is the advancement of our Signature Series development and redevelopment projects that may be the most exciting aspects of our future growth. Progress continues across the entire Signature Series pipeline as we remain laser-focused on delivering on these building blocks of long-term growth. Just this quarter, we signed over 400,000 square feet of new leases in our development pipeline. This activity produces real visibility into our future growth. Significant anchor executions had the Fort Lauderdale Dania Beach project bring Phase 1 pre-leasing to over 75% complete. In addition, steel is going up on our two signature mixed-use projects in new replaceable locations: Lincoln Square in Center City, Philadelphia, and our Pentagon City project that sits right above the metro station. This quarter, we also cut the grand opening ribbon for Phase 1 of our Grand Parkway development. Grand Parkway is now over 80% leased and should start to generate significant cash flow in the fourth quarter. Phase 2 at Grand Parkway is also under construction and the combined project is running ahead of internal projections. National, regional, and local tenants have opened in our reporting sales volumes that are well above average. We expect this trend to continue as the state matures and more tenants open for business. In closing, while we are excited and confident about our future, we are not naïve about the changes in the retail landscape. We believe that physical stores are critical to retailing success. But we also know that formats will change and that will require a significant effort to innovate and redevelop assets to meet the demands of the future shopper. Kimco is up to the task. Having the right real estate, the right team, and a strong balance sheet is why we believe Kimco is well positioned to deliver growth into the future. And now I'll turn the call over to Ross.

Thanks, Conor. Our second quarter investment activity as well as our activities subsequent to quarter end continued to reinforce the strong demand for well-located shopping centers in the United States. In this quarter, we sold nine centers and two land parcels for gross value of approximately $156 million, of which Kimco’s share was $128 million. We were pleased with the volume of activity and pricing, which was at the lowest fixed blended cap rate with several of these assets selling in the 5% range and under the low end of our stated cap rate range. With these sales, we also completed our exit from two non-core states: Maine and Louisiana. Year-to-date, the gross value of dispositions totaled $269 million, with Kimco’s share at $194 million. Demand remained solid for quality assets, particularly those with the grocery component, even in the secondary markets; buyers range from private institutions, 1031 exchange buyers, pension funds, and REITs, both public and private. Given the robust demand and pricing, we've increased our dispositions guidance to match our acquisition estimates of $300 million to $400 million for the year. Our investment strategy remains focused on the matching funding of capital from dispositions into stronger properties in core markets with greater growth levels. Our Jantzen Beach acquisition is a prime example of this as we utilize $75 million in 1031 exchange proceeds to fund this acquisition. More importantly, we enhanced our ownership position in one of the premier coastal markets of Portland with a 67-acre asset that has several below-market leases and substantial redevelopment opportunities, including out-parcel expansion and mixed-use potential. Together with the flagship Jantzen Beach property, we now have eight centers and a local office providing a strong presence in the Portland market that creates significant operating efficiencies and economies of scale. We're also pleased to announce the recent acquisition of the Whole Foods and Sierra Trading Post parcels at our Del Monte Plaza in Reno, Nevada. With the acquisition, we now solidify our ownership of the only Whole Foods anchored center in the Reno MSA with grocery sales in excess of $1,000 per square foot. Reno has seen an explosion of technological investments highlighted by Google's 1,200-acre purchase of land for a future data center, Tesla's $5 billion Gigafactory, and Apple and Amazon factories. These developments have transformed the area and created a strong demand for both retail and additional residential development in the marketplace. As Conor mentioned in his remarks, we're seeing the benefits of our transformed portfolio and continue to look to build on the enormous progress we've made. At Kimco, we view quality as a safe and reliable income stream with potential to grow cash flow and the ability to adapt with changing times. Our properties match these attributes more today than ever, and we'll continue to upgrade our property base accordingly. Glenn will now fill you in on the financial results.

Thanks, Ross, and good morning. Our second-quarter results present solid evidence that our company, comprised of open-air shopping centers, continues to perform well. The strength of our real estate portfolio continues to shine as we had another strong quarter led by our leasing activity, which produced positive double-digit leasing spreads and an increased occupancy level. We continue to execute on our redevelopment and development projects, which are about to start bearing fruit and remain confident in achieving our objectives for 2017 and beyond. Next, some additional color on our results. NAREIT-defined FFO was $0.41 per share for the second quarter, which includes $23.7 million of $0.05 per share from the equity-invested distribution received from our Albertsons investment, demonstrating our Plus business at work. We also recorded a $9.5 million impairment charge of $0.02 per share related to an accepted offer on an undeveloped land parcel in Canada, which we expect to close by the end of the year. NAREIT FFO per share for the second quarter last year was $0.38 and included $0.01 per share from a preferred equity profit participation. FFO as adjusted, or recurring FFO, which excludes transactional income and expense in non-operating impairments, was $160.7 million or $0.38 per share for the second quarter of 2017 compared to $155.5 million or $0.37 per share for the second quarter last year. Our operating team has been successfully executing on replacing the lost NOI from the Sports Authority bankruptcy, which totaled $4.8 million for this quarter. Today, we've signed leases for 15 of the vacated TSA boxes, have eight under LOI negotiations, sold one, and have one remaining. Our performance continues to be positively impacted by the strategic initiatives we implemented in the third quarter, which has resulted in lower interest and income tax expense of $7.2 million collectively as compared to the same quarter last year. In addition, with the significant simplification of our business model and constant focus on cost containment, G&A expense was reduced by $2.7 million compared to the comparable quarter. Offsetting these positive factors was lower FFO contribution from joint ventures due to the sale of our Canadian asset and further consolidation of previous unconsolidated US assets. In addition, as Conor mentioned, our development projects are one of the key components of our future growth as we expect to achieve superior yield in NAV creation from these assets. To date, we have invested over $420 million in our development pipeline, which is non-earn today and therefore causing a short-term drag on FFO growth. However, beginning in the second half of 2017, we will start generating NOI and FFO from the recently-opened Grand Parkway project, with other development projects expected to come online in the latter half of 2018 and during 2019. The operating portfolio continues to deliver positive results. Anchor occupancy was up 20 basis points from last quarter to 97.5% and small-shop occupancy increased another 10 basis points to 89.7% for total occupancy of 95.5%. New leasing spread remained strong at 17% and renewal and option exercise produced a positive leasing spread of 7.8%. Retail is clearly changing, but leasing spreads at these levels provide further evidence that the physical store continues to be an integral part of the retailer business model. Our same-site NOI growth came in at 30 basis points, including 20 basis points from redevelopment activity. As I mentioned on our previous earnings call, same-site NOI growth for the second quarter of 2017 was expected to be impacted negatively by the Sports Authority bankruptcy when compared to the same quarter last year, which it was by 210 basis points. Year-to-date same-site NOI growth is 1.2% and we expect stronger same-site NOI growth in the second half of the year. On the balance sheet front, we repaid $405 million of mortgage debt during the quarter and unencumbered an additional 19 assets, bringing our total number of unencumbered assets to 382. Additionally, as of April 1, 2017, we began consolidating a joint venture property in Tustin, California, as we now have expanded our control rights within the partnership agreement. As a result, we recorded the property at its fair value and recognized a $61 million gain on changing control, which is excluded from FFO, while consolidating its $206 million mortgage, which is scheduled to mature in November. We expect to refinance this mortgage at similar proceeds with a new 13-year term mortgage at a significantly lower rate in the current 6.9% level. Net debt-to-EBITDA as adjusted is 6.2 times, and when you include the earnings from our Albertsons investment, net debt to EBITDA is only 5.4 times. We finished the quarter with over $1.8 billion of availability in immediate liquidity, fixed charge coverage in the mid 3 times range and a weighted average debt maturity profile of 8.7 years, one of the longest in the REIT industry. We’re increasing our NAREIT FFO per share guidance range to $1.53 to $1.57 from the previous level of $1.52 to $1.54 to incorporate the net transaction activity to date. We're reaffirming our FFO as adjusted per share guidance range of $1.50 to $1.54, which does not include any transactional income or expense. In addition, we're reaffirming our full year 2017 same-site NOI growth range of 2% to 3% and expect the year-end occupancy to be in the range of 95.8% to 96.2%. Now for those of you who are looking ahead to model 2018 FFO, please keep in mind that we will not include any transactional income or expense items in our initial guidance range, similar to the initial guidance provided for 2017. And now we will be happy to answer your questions.

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

Hi, good morning. Regarding the monetization of Albertsons that occurred this quarter, could you provide more details? Although it’s not part of your core FFO, how should we consider its potential as a source of proceeds for future investments?

Hi, Paul. Good morning. It's Glenn. This came as a distribution from the earnings of the investment itself. Again, we can't predict the timing of when future ones will occur, so we're not going to put it in our guidance. But again, it's part of our Plus business. As you know, as the investment has gone along, we haven't had any NOI or FFO from it because of how our investment sits. The cash distribution we received is FFO. We kept it in our headline number. And we'll see how it goes as we go forward. The company itself continues to perform and we continue to watch closely what happens as it relates to their same-site results and keep their performance on track, and we'll see how it goes. So we think in our plan that we will have the ability to monetize it during our 2020 Vision, as we've talked about previously.

Okay, thanks. And then just on same-store NOI growth, if you look at where you were in the second quarter excluding the Sports Authority and kind of where the first half of the year has shaped up and then compare that to kind of where your full year guidance is, it looks like to kind of hit the midpoint you have to have pretty solid growth in this REITs in the back half of the year. Is that something you could give any color to see how we're going to get from here to there? Or do you think maybe the low end is sort of more realistic based on where the first half shaped up?

Yeah. Hey, Paul. If you look at the economic versus physical occupancy, there is a 320 basis point spread there. That's about 100 basis point wide of a typical run rate. So we see that the leasing that's been executed but not yet flowing, it's going to hit the back half of the year. Also, the leasing volume that was done in the first half of the year has been phenomenal, and we do anticipate that run rate to continue. So with those two ingredients, we feel confident about the 2% to 3% range that we've reinforced today.

So the full range is still realistic for the full year?

That's correct.

Great, thank you. I wonder what specifically might have driven the leasing at Dania Pointe in the second quarter. And kind of switching gears. You have 15 Whole Foods. There is a lot of speculation that Whole Foods may use these locations as well as retailers’ distribution points. What would go into your possible review of making any kind of physical changes to the Whole Foods’ site that accommodates that in terms of how you get paid?

Hey, Craig. There’s a lot of speculation about the future of the Amazon-Whole Foods merger, and it’s tough to predict. We look at Alibaba’s grocery model in China as a potential indicator of what could happen, as they have blended physical grocery stores with an omni-channel strategy. When you combine Amazon Pantry with Whole Foods, it creates a strong appeal for the target shopper and likely makes it easier for people to order groceries online, knowing that the produce comes from Whole Foods, which assures high quality. As for changes to the physical stores, it will depend on what they decide to implement inside or outside. Amazon has been testing various prototypes, so it will be interesting to see what they do with the Whole Foods stores. Regarding the parking lot, they will need to return for approvals, and we may need to restructure leases to enhance NOI, but ultimately, it hinges on their strategy.

Just beyond the occupancy impact in same-store NOI, there have been several retailers to file the only inclusive portion of their stores. How should we be thinking about the impact of rent relief potentially putting pressure on same-store growth? And is that something that could show up in the re-leasing spread calculations?

We’ve been very local for the beginning of the year about our bad debt reserve. All of that is really factored into that. And we have been watching closely as a few of the retailers have closed a few stores and are looking to reorganize and come out of bankruptcy, and we feel like we really accounted for that. And so we feel comfortable in terms of our guidance for same-site NOI and continue to see that. Our real estate is really well located with below market leases, and it's hard for retailer to find a better economic deal in these top markets. So typically the rents that they have are very much below market, so they want to hold on to those leases.

Okay. And then just from a demand perspective, in the current environment, do you see any risk to the sort of box mark-to-market projections that you laid out with your 2020 plan? And just given all the preference store closings, can you shed a little bit of light on store opening plans? Any color on that?

Yes, I’m glad you asked that. There has been a lot of press coverage on closures, but very little on openings. Our esteemed research department here has a rollout of actual retailers that we follow that shows over 12,000 stores that are planned to open in the next year and a half. And that I think goes without saying, that gives us very confidence that if you have the right real estate there is going to be very much demand, and you see that in our leasing volumes. Retailers today are cautious about where they’re going to be opening stores, and if they don't like the real estate, they're not going to move forward with any type of economic deal. So, we feel very confident about the real estate we have and why there is significant demand from junior boxes just this quarter. TJX announced their newest concept, HomeSense, that they're going to be rolling out and have major expansion plans for that. Lidl is coming to the U.S., and it has significant expansion plans. So we continue to see that as a big opportunity in addition to the concepts and categories that we've been talking about that are consistently outperformed and are shining stars really in retail today.

Good morning, everyone. Can we go back to that bad debt expense comment? Can you give us some context of a typical cycle range for those numbers? That’s 50 to 150 basis points? Or is it 1 to – or zero to 1%? Just some kind of context there?

Sure. Historically, we've used 50 to 75 basis points. But as we looked at our budgets for 2017 coming into the year and looking at some of the things that were going on, we actually increased that to 75 to 100 basis points. And we've been running kind of toward the low end of that range, in that 75 to 80 basis point range so far, so we feel comfortable with what we've put in our guidance.

Okay. And then looking at next year, can you give us the building blocks for that? We have some tenants go bankrupt this year. They are still operating, so would be more of a headwind for next year. But at the same time, you have this big gap between lease versus occupied that seems to be more back-half loaded. So the net of those two will be more of a tailwind or a headwind for next year?

We think it's definitely going to be a tailwind. I mean, when you look at the names that are still reorganizing and coming out, our store closure list is very, very small. And they are typically small shops. So they have a very modest impact, if any, at all in terms of our next year's number. So we continue to look at the growing retailers that we're doing business with and think that is where the exposure we have to some of the watch-list tenants that are closing stores.

Good morning, guys. I guess, along the same lines of growth to ’18. You guys have maintained leasing spreads that have been sort of the new leases in the renewals that have been in that high single digits. But with where you stand net today and the visibility you have, do you feel that you can maintain that sort of high single-digit spreads especially in a time when capex or the percentage of NOI seems to be going up and not only for you guys but for the rest of the industry? So I just want to get some color on that.

Yeah, with our leasing spreads, we are confident in our below-market portfolio, something that we really thrive on, and that's really helped us maintain these high single-digit, double-digit leasing spreads, and we envision that maintaining in the long term. That said, spreads are lumpy. Spreads are really driven by the population of the leases that are signed in any given quarter. For example, this quarter, we had 75 comp deals that we're spreading in the new leases to account for that 17%. There is one large deal there where we combine multiple spaces, if you exclude that, our spreads were over 26%. And when you look at our junior box tenants this quarter as well as our small shops, junior box is combined over 30% and small shops over 15, both of which exceed our startling four-quarter average. So near term we feel good, and long term we feel great because of the below-market portfolio.

Second question is on the acquisition of the Jantzen Beach. I mean, if you look at this past, it seems like a pure power center there. Are there any future plans to bring in maybe grocery components to this? I'm just trying to figure out where is the sort of the upside growth in this asset.

Sure. When we look at Jantzen, I mean we really view that as a unique asset. While it is, I guess, technically classified as a power center, we’ve been agnostic between power, grocery, and lifestyle. For us, it really comes down to the real estate and the opportunities to grow that cash flow? So your question on grocery, I mean there is a target in there that sells groceries. It did not restrict us from putting another grocery store in there, which is something that we will definitely consider. In addition to that, there is an opportunity to add some other entities.

I would just add that the site checks all the boxes for us in terms of long-range redevelopment, as well as short-term value creation. If you look at where we’ve been more successful, we are creating significant NAV. These are the exact same type of assets where we have been focused on redeveloping and adding significant value.

Maybe just following up on the CapEx comment a little bit. You made a comment at the end of your prepared remarks that was really important about how well you're positioned to be prepared for this changing retail environment. How are you thinking about CapEx? Are you seeing CapEx going up? Where is that CapEx being spent? How should we think about CapEx in 2018 and maybe even 2019 and beyond?

If you look at the CapEx spend on some of our new deals, it really is concentrated in a handful of anchor boxes and a lot of it is due to the fact that where there was a former Sports Authority box that has to be split up or that had to be expanded, but that really triggers a significant amount of investment in the actual real estate. We also have been very focused on adding experiential and entertainment retailers to our shopping centers to really drive traffic and create that type of live, work, play environment, and those typically are a little bit more expensive as you convert boxes to whether it's to a movie theater or a grocery concept. I think longer range, if you see those Sports Authority boxes start to continue filling up and we really had more of a civilization run rate, you will see that CapEx spend start to come down. And the other piece of it that I think is important is retailers are focused on their all-in occupancy costs, and one thing we love to point to is that we take great pride in being a low-cost provider, and that's something that we continue to focus on as we have significant below-market leases but also we've been investing heavily in sustainability as well as reducing our same-site energy consumption. If you look back, since 2011, there has been a cumulative 18.2% reduction. So that's something that continues to be a focus of ours as we see our retailers focus on their all-in occupancy costs, and if we can provide them with low-cost options, they are going to be with Kimco all day long.

Got it. And so just a follow-up to make sure I understand correctly. CapEx is probably more of a one-off thing to reposition the properties. Maybe we'll see some increase over the next one, two, maybe even three years, but after that it should start to stabilize and maybe even come down?

Yeah, I think that's right. It should be even shorter term than that. I mean, if you look at the Sports Authority boxes that we work through, we plan on finalizing that shortly.

And just this quarter we did the Cinépolis deal to Kentlands, which is really to kick start the redevelopment of the Kentlands market square there. So it's not picked up in the numbers, but obviously adding an experiential tenant like Cinépolis into this center will drive significant traffic and then help with the incremental lift of all the other shops that surround it. So long term, there are other residual benefits that we start to see through these investments.

Good morning, everyone. My first question is about the leasing environment. It has obviously been quite strong this year, and despite the bankruptcies, you have managed to improve occupancy. Do you believe we have resolved all tenant credit issues, or do you anticipate that after the holiday season, we might experience another wave of bankruptcies similar to what we saw this year? What is your outlook as we approach the end of the year and the holiday season for the next year?

I think we're optimistic. Obviously, you never really know when things are going to occur for the retailers. If it's a good holiday season, I think a lot of the retailers will continue to run the ship. Omni-channel has been a challenge for some as they have to invest heavily in their e-commerce platform. Yet a lot of retailers now realize that they have to invest heavily in their physical store base as well to stay competitive. So it's a balance there. And when you look at our watch list, there are still a few there that we continue to be concerned over, but we've been mitigating the exposure continuously quarter over quarter, and that's really the best way for us to monitor that and continue to mitigate exposure to some of the retailers that are yet to find their footing.

Okay. And then the follow-up to that is, you mentioned the strength obviously at Dania Pointe and Grand Parkway Phase 2. Are these sort of project-specific wins or do you think that this is sort of an opening that retailers are willing to do broader development and therefore the rents, et cetera, depending on new development, we could see more development in the future?

I think you're going to see needed development for a number of years. I mean, these are projects that all have a special story of why they make sense and why retailers were eager to get into this development. There really has not been a lot of speculative development out there today. Even the select few development projects that we have picked, we do a huge amount of pre-leasing before we start to go vertical. Retailers like to really work with REITs that are well-capitalized that they know they’re going to deliver the project as promised. So all those things really limit future development that you will see from retail.

So I just want to add and think about three-quarters of your AVRs tied to centers with a grocery and about 13% of your AVR is directly attributed to grocers? And so understanding your net positive comments early about the Amazon-Whole Foods merger, I'm wondering are those levels you're comfortable with?

We always look at the grocery store as a traffic driver and something that we've been focused on as we continue to see that the power centers that do not currently have a grocery component are right for adding that type of use to drive more traffic. And you're seeing it with Trader Joe’s, you’re seeing it with Sprouts and other specialty grocers. And now with Aldi and Lidl being very aggressive on their expansion plan, we think there is a lot more room for us to grow that percentage of grocery-anchored centers that we currently have. And so we're focused on that, and the leasing team has done an excellent job as you continue to see that growth quarter-over-quarter.

Okay, and what would be the breakdown of your centers that are pure power centers and power centers with a grocery component?

I don’t have that data on hand, but we can get that to you later.

Okay. And then one point of clarification from an early question. I just want to understand the Albertsons distribution a bit more. I thought this is going to be a one-time item. It sounds like this could be a recurring dividend but some sort of tighter investment there. I understand you can’t speak up specific timing, but just want to make sure I understand that characterization. Is that fair?

No, I mean we see it. We don’t know it will be a future one or when that would be, but it’s based on their operations. So we're not predicting it. Again, if it becomes great, if it doesn’t, it's not in our numbers. And we're not predicting it to be in our numbers, but they are in operating business.

I just wanted to go back to the CapEx discussion a little bit and just try to understand that. You mentioned some of the things that don’t get factored in or some ancillary benefits of the CapEx spend to the surrounding center, but also that some of the experiential and some of the format changes do require a bit more CapEx as you go through the transition period. I guess, if you think about your all-in returns on capital at the company level, do you think that returns are holding steady going up or going down over the next two to three years?

I think our returns have been holding steady. I mean, when you look at the redevelopment sitting low double-digit returns and our targets have been 8% to 13% on the CapEx spends for deals themselves, again, with some of these elevated spreads with the TSA boxes, your returns might be slightly lower, but in general they're holding steady for the long term.

Okay. And for the experiential, are you able to get the same kinds of returns on those investments?

We do, yeah. I mean, those are typically part of the larger redevelopment play as well, so you tend to see those show up in our redevelopment pipelines.

Got it. Thanks. And just one last question just on the 12,000 store openings that you mentioned. I was just curious if you had some history on that. Like, has that number been going up or down over the past few years?

Yeah, we've been tracking it for a number of years, and it seems to remain relatively steady. But again, with new entrants from Europe and others, it tends to ebb and flow, but that’s obviously a big number and we continue to watch. And I feel optimistic that will continue to ebb and flow as new retailers come into the US.

Thanks. Actually, a lot of my questions have been answered already, but a couple of follow-ups on Albertsons. What triggered that distribution? Was it a revenue bump or just on the willingness of Albertsons?

They are just basically at the end of the fiscal year, Albertsons had $1.2 billion in cash on its balance sheet, and so it is starting to figure out what to do with it. The first question that was asked to management was whether the distributions made would affect their business in any way, shape, or form, and the answer was no because liquidity was in place and so was approved by the board last month.

Okay. And regarding the capital expenditures, we've discussed this extensively, but when examining the leasing activities and what's currently in the pipeline, it seems that around 30% of the rental value for new leases is likely. Is that a reasonable estimate? Do you anticipate that this figure will increase or decrease?

It depends on the deal. It varies on what you are doing with these boxes. If you're backfilling the existing box with a dry use, the number is going to be slightly less with the Sports Authority. And we've reiterated a couple of times now that when you combine spaces there, they tend to be slightly elevated, or if it's an experiential use, if you are adding a grocery there, you're going to be spending a little bit more converting that from dry to wet use. So it's really dependent on the type of deal you're working on.

Hey, guys. Thanks for taking my question, a quick question on the balance sheet and maybe on dispositions. As you look at the stock price and you notice the discounts, does that make you want to increase your dispositions? I know that you've increased your dispositions guidance slightly for the year, but why not be more aggressive based on where your stock is trading?

Yeah, I mean we constantly are evaluating our portfolio. We look at it every week, every month to see which assets we believe have long-term upside redevelopment potential, where the marketplace is valuing some assets, and we do have a plan in place to execute on the remainder of this year. We'll start to look at a modest level for 2018. But we think that the transformation that we’ve done over the last few years really puts our portfolio in great shape and we do obviously look at the stock price frequently, but we don’t want to make long-term decisions based upon a short-term impact on a stock price in our currency. So we’ll continue to evaluate where we are, but we’re very satisfied with the portfolio.

And we did raise our disposition guidance.

So maybe as a follow-up in terms of the growth and getting back to Jantzen Beach as well. Obviously, that was a lower cap rate, but there seems to be some inherent growth. Is this sort of the kind of opportunities that you're looking to pursue going forward? And again, you’ve matched your acquisitions and dispositions a little bit so far this year, but can we expect perhaps another big Jantzen Beach type acquisition to hit in the second half of this year.

To answer the first part of your question, absolutely this is the type of asset that we're looking for. It's very difficult to find. I mean, we really raised the bar on the criteria that we need to hit and the boxes need to check in order to move forward, and this one really did check all those boxes. So there are not many of them out there, but this was one that felt we would have to capitalize on. You’re absolutely correct. So far, the first half of the year, we’ve almost matched dollar for dollar on the disclosed acquisition, and we anticipate the same thing for the second half of the year. We are evaluating a couple of opportunities, one in which we think will probably strike in the latter part of the year that also has very exciting redevelopment potential.

Glenn, there has been an upcoming lease accounting change that seems to impact retailers the most as it relates to putting the value of the lease as an asset on the balance sheet. Is there any sort of material impact to your reporting as a landlord?

No, the leasing is not really going to impact us very much. We continue to analyze it. When you get into 2019, these issues around caps of internal costs and the way that structure, that is something we’re continuing to evaluate just the way our peers are, then we’ll have to make decisions about how that gets handled. But at the moment, we think we had it very well covered.

Okay, thanks. And then, Conor, what are your high-level thoughts on the Whole Foods acquisition by Amazon? And relatively, are there grocers you would highlight as having done a good job of investing in omni-channel?

As I mentioned earlier, I really think the Whole Foods-Amazon combination is one where they see the benefit of physical retail and they can layer in the Amazon Pantry on top of Whole Foods. So I think what they've seen is the demographics. The overlay from the Amazon pantry shopper to the Whole Foods shopper is very, very similar. So it gives them the ability to understand their consumers even better. You're going to have to wait and see obviously in terms of what kind of changes they’re going to make to the Whole Foods prototype. But I just see it as a natural fit for them as they continue to want to try and expand into physical retail. They’ve done it with the bookstore. Now they’re doing with the grocery store. And I think that Whole Foods is a high-quality brand that gives them the ability to use that to their advantage. When people are shopping online, if they are not sure where the produce is sourced from, if they know that Whole Foods is the one filling their order, they probably get the benefit of the doubt that it's going to be high-quality produce.

Thanks. And then are there any grocers you'd highlight as having done a good job in investing in omni-channel?

I think Albertsons with the Safeway.com and home delivery has been heavily invested and doing it for a while now. A lot of – Amazon, don’t forget, has been trying to do grocery online for almost 10 years now with somewhat limited success. So we'll continue to watch that. I think Walmart has done a very strong job in terms of investing in the omni-channel, if you see their click-and-collect program. And I am amazed that Walmart is the only one that offers a further discount if you buy it online and pick it up in the store. There are so many benefits to getting someone into the store, where they see the merchandise, there is a likelihood that they're going to add on an additional item, and the likelihood that they are going to return the item drops off a cliff. So I could see that being the way of the future where physical retailers start to wake up and realize the power they have if they are able to generate that type of traffic and offer a discount to get them to come and collect it in the store.

Hey, it's Michael Bilerman for Christy. Conor, I’m wondering if you can expand a little bit on Jantzen Beach from the perspective of competitive bid process, a fully marketed deal. It appears to be a lot of institutional interest in the assets, yet a REIT who obviously was trading with from a currency perspective for the valuation came out on top and paid the highest price. I guess, how do you think about trying to leverage that private capital or institutional capital to help justify private market value of assets when the shops are trading at big discounts to NAV versus being the highest price and buying it wholly on the balance sheet. And I recognize there are some 1031 proceeds, but that could have been done on a different asset if you wanted. So can you just help us navigate the decision-making that you guys had?

Sure. We covered, I think, a little bit of what you asked earlier, but we look at the real estate and just get very excited about the long-term redevelopment opportunities. As I mentioned before, when we've created more shareholder value in these larger real estate parcels that are in-fill locations that have significant barriers to entry with tremendous upside in terms of redevelopment potential. Yes, we look at the going-in cap rate and we look at the compound annual growth rate and see what near-term opportunities exist, but the really exciting part about this asset is it's over 60 acres in Portland, which can you imagine trying to assemble over 60 acres in Portland today? And it's got flexible zoning. It’s actually permitted to do residential on site, and it’s planned to have a light rail station to it in the future. All those things add up to significant upside in the long term that creates shareholder value for us. And so, when we look at real estate, we want to focus not only on the near-term value creation opportunities but the long-term value creation opportunities. Yes, there was a competitive bidding process. Yes, there was a lot of institutional interest in it because, as you know, the best real estate today is still very much in high demand, and we thought that it was a perfect fit. We have an office located in Portland. We don’t have to add any G&A to manage the asset. We have significant redevelopment capabilities on the West Coast. So when you combine all those things, it just felt like here was the perfect fit for us.

Yes, the only thing I would add to that, which Conor pretty much mentioned, but when we look at ourselves compared to some of the other bidders there, having an office in seven other centers really gives us an advantage and allows us to utilize our economies of scale. So when you're deriving an NOI and capping that value, most buyers will typically utilize a 4% management fee coming out of their expense line, which in this size deal is about $400,000 a year. We don’t need to add any staff or open any additional office in order to operate this asset. So when we look at our actual yield on this, it’s substantially higher than these low going-in cap rates that you typically would utilize in larger surfaces.

Did you explore using institutional capital as a partner, or your view is that you want to control this whole thing? Like buying your partner Dania, you’d rather have full control of these sites. I’m just trying to understand…

We do have partners that would love to continue to grow with us. We talked about it internally, and we felt that given our presence in the market and the proceeds from the dispositions we were using, we wanted to control the whole thing. An asset with this type of upside, we’re greedy; we want 100% of it.

Do you think in terms of dispositions that you would earmark any sort of higher-quality assets at low cap rates to sort of justify the private market pricing, as arguably the public is buying at the highest price, lowest cap rate is not justifying where cap rates are. So I don’t know if you have a desire to try to bring in institutional capital to help provide a little bit more color as to the transaction market and values?

We have sold some very high-quality assets. Several of our dispositions this quarter were in the 5 cap range. Maybe we can highlight those more specifically. But we think that the market has sort of shown that for high-quality assets, buyers are willing to pay for it, and there is plenty of capital chasing those assets. But in terms of bringing in partners for some of the assets that we own 100%, we really want to control as much of the high-quality real estate as we can.

Thank you very much, and we appreciate everyone that joined us on our call today. Have a good day.