Kimco Realty Corp (KIM) 2017 Q2 法說會逐字稿

Good day, and welcome to the Kimco Second Quarter 2017 Earnings Conference Call and Webcast. (Operator Instructions) Please note, that this event is being recorded.

I would now like to turn the conference over to Mr. David Bujnicki, Senior Vice President. Please go ahead.

Good morning and thank you for joining Kimco's Second Quarter 2017 Earnings Call.

With me on the call this morning is Conor Flynn, our Chief Executive Officer; Ross Cooper, President and Chief Investment Officer; Glenn Cohen, CFO; and David 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 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 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'll 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. Ross will 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 death of physical retail is over. The Amazon/Whole Foods transaction, Alibaba's growing grocery concept in China, Walmart's click and collect discount pickup program integrated with Jet.com and Target's flex format success all point to a vibrant, albeit different looking retail real estate world.

In this new world order, omnichannel is the new normal and that is where the retail battles will take place. Those that embrace and master the omnichannel approach by combining technology, social media and physical real estate will thrive. Those that ignore it will do so at their own peril.

Omnichannel is a win-win for the retail sector. For the consumer, it provides convenience, lower prices and optionality. For the retailer, it provides 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 to 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.

While change always presents challenges to our industry, we have proven over many decades to be adept at successfully repurposing and redeveloping our asset base.

Our plan is straightforward and focused: First, keep an eye on the long-term in the face of short-term volatility and seize value creation opportunities when they present themselves; second, execute on our 2020 vision to grow a quality portfolio and create long-term shareholder value; third, maintain a strong balance sheet to finance our plan and weather any storm; fourth, reduce operating costs for our tenants by taking advantage of our size and investing in R&D; fifth, eschew waste as Milton constantly reminds us; and sixth, motivate our team to be the best in the industry, to create and lead a next-generation REIT.

As our second quarter results demonstrate, our approach is working. Our operating metrics evidenced the strength of our transformed portfolio that drives recurring FFO and dividend growth. Our by-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 have leased 4 former Sports Authority boxes. Occupancy increased 20 basis points for the first quarter and the blended spread on new leases and renewals of 10.5% show the embedded growth and demand for our portfolio.

We would not have been able to produce these results if we have not undertaken the strategic dispositions over 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 desires 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 aspect 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 at our Fort Lauderdale Dania Beach project bring phase one pre-leasing to over 75% complete. In addition, steel is going up on our 2 signature mixed-use projects in irreplaceable 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 and are reporting sales volumes that are well above average. We expect this trend to continue as the site matures and more tenants open for business.

In closing, while we are excited and confident about our future, we are not naive about the changes in the retail landscape. We believe the physical store is critical to retailing success, but we also know that formats will change and they will require significant effort to innovate and redevelop assets to meet demand 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 will turn the call over to Ross.

Thanks, Conor.

Our second quarter investment activity as well activities subsequent to quarter-end continue to reinforce the strong demand for well-located shopping centers in the United States. In this quarter, we sold 9 centers and 2 land parcels for a 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 a low 6 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 2 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 remains solid for quality assets, particularly those with a grocery component, even in 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 have increased our dispositions guidance to match our acquisitions estimates of $300 million to $400 million for the year.

Our investment strategy remains focused on the matched 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 utilized $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 outparcel expansion and mixed-use potential.

Together with the flagship Jantzen Beach property, we now have 8 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 solidified 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 investment 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 are seeing the benefits of our transformed portfolio and continue to look to build on the enormous progress we have made. At Kimco, we view quality as a safe and reliable income stream with potential to grow cash flow and ability to adapt with changing times. Our properties match these attribute 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 have 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.

Now, some additional color on our results. NAREIT-defined FFO was $0.41 per share for the second quarter, which includes $23.7 million or $0.05 per share from the equity method 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 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 and nonoperating 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 lost NOI from the Sports Authority bankruptcy, which totaled $4.8 million for this quarter. To-date, we have signed leases for 15 of the vacated TSA boxes, have 8 under LOI negotiations, sold one and have one remaining.

Our performance continues to be impacted positively by the strategic initiatives we implemented in the third quarter last year, 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 all our Canadian assets and further consolidation of previous unconsolidated U.S. 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 yields and NAV creation from these assets.

To-date, we have invested over $420 million in our development pipeline, which is nonearning 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 a total occupancy of 95.5%. New leasing spreads remained strong at 17% and renewal and option exercises 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 than the current 6.9% level.

Net debt-to-EBITDA as adjusted is 6.2x and when you include the earnings from our Albertsons investment, net debt-to-EBITDA is only 5.4x. We finished the quarter with over $1.8 billion of availability in immediate liquidity, fixed charge coverage in the mid-3x range and a weighted average debt maturity profile of 8.7 years, one of the longest in the REIT industry.

We are increasing our NAREIT FFO per share guidance range to $1.53 to $1.57 from the previous level of $1.50 to $1.54, incorporating the net transaction activity to-date. We are 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 are reaffirming our full year 2017 same-site NOI growth range of 2% to 3% and expect our 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're ready to move to the Q&A portion of the call. (Operator Instructions) Myrtle, if you could take the first caller.

(Operator Instructions) The first question comes from Paul Morgan with Canaccord.

Just on the Albertsons monetization that you saw in the quarter, I mean, do you have a little more color to give there in how we might think about it? Obviously, it's not in your core FFO, but how we should think about what that might look like going forward and how you view it as a source of proceeds for other investments?

Paul, it's Glenn. This came as a distribution from the earnings of the investment itself. Again, we can't predict the timing of when the 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 investments 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 NOI 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 they keep their S-1 on file current. And we'll see how it goes, but 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. And then, just on same-store NOI growth, if you look at where you were in second quarter, excluding Sports Authority, and kind of where the first half of the year shaped up, and then your -- compare that to kind of where your full year guidance is, I mean, it looks like to kind of hit the midpoint, you have to have pretty solid growth in the 3s -- in the back half of the year. Is that -- could you give any color to see how we're going to get from here to there? Or maybe the lower end is sort of more realistic based on where the first half shaped up?

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

The next question comes from the line of Craig Schmidt with Bank of America.

Great. I wonder what specifically might have driven the leasing at Dania Pointe in the second quarter.

Yes. This is Dave Jamieson, Craig. In terms of our development team and leasing team down there, we've always been running multiple plans there and really I think it's a testament to the quality of the real estate itself. As Conor mentioned in his opening remarks, high-quality real estate is very much in demand. And there is a tremendous amount of activity of interest from your core off-price retailers and those that are the who's who in the retail categories that are thriving in today's market. And it really was just a testament of our team being able to bring those deals together very, very quickly and execute them all within this quarter. That said, we anticipate them seeing phase one starting to go under construction, really starting this quarter through the back half of this year. And you'll start to see deliveries occur in the second half of '18.

And kind of switching gears. You have 15 Whole Foods. There's a lot of speculation that Whole Foods may use these locations as well as retail as distribution points. What would go into your possible review of making any kind of physical changes to the Whole Foods site to accommodate that in terms of how you get paid?

Craig, I think there's a lot of speculation obviously what the future will hold in terms of the Amazon/Whole Foods merger. And it's really anybody's guess at this point. We like to look at Alibaba's grocery concept in China as a window of what may come, where they integrated both the physical grocery store as well as the omnichannel approach. And so when you layer on top Amazon Pantry to Whole Foods, it really is, I think, a nice marriage in terms of the shoppers that they're trying to target. And it probably lowers the hurdle in terms of people ordering groceries online because they'll know produce is sourced from a Whole Foods, which gives that level of comfort. As you know, it's going to be high-quality.

In terms of the changes to the physical store, it really will depend on what they do either inside or outside the store. And there's a whole bunch of different prototypes that Amazon has been testing, but I think it will be interesting. We'll have to watch and see on what they want to do at the physical Whole Foods store. If there's a change to the parking lot, they'll have to come back to us to make sure that obviously they get our approvals and we may have to restructure leases and gain some NOI that way, but again, it will depend on what their strategy is.

The next question comes from Christine McElroy with Citi.

Just beyond the occupancy impact in same-store NOI, a lot of moving parts there. There's been several retailers to file, but only closed a 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 would show up in the re-leasing spread calculation?

We've been very vocal from 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've 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 so it's hard for retailers 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 onto those leases.

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

Yes. I'm glad you asked that because there has been a lot of press coverage on closures, but very little on openings. And our esteemed research department here has a Rolodex of retailers that we follow that shows over 12,000 stores that are planned to open in the next 1.5 years. And that, I think, goes without saying that gets us very confident that if you've got the right real estate, that's going to be very much in demand. And you see that in our leasing volumes. Retailers today are cautious about where they are 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's significant demand from junior boxes. Just this quarter, TJX announced their newest concept, HomeSense, that they're going to be rolling out, have major expansion plans for that. Lidl is coming into the U.S. 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 now that have consistently outperformed and are the shining stars really in retail today.

The next question comes from Wes Golladay with RBC.

Can we go back to that bad debt expense comment with the rent relief? Can you give us some context of a typical cycle range for that number? Is it 50 to 150 basis points? Or is it 1 -- or 0 -- or 1%? Just some kind of context there.

Sure. So 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, 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 kind of give us the building blocks for that? We had some tenants go bankrupt this year. They're still operating. So it would be more of a headwind for next year, but at the same time, you have this big gap between leased versus occupied that seems to be more back half-loaded. So the net of those 2 will be more of a tailwind or a headwind for next year?

Well, 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. So -- and they're typically small shops so they have a very modest impact, if any at all, in terms of our next year's numbers. So we continue to look at the growing retailers that we're doing business with. I think that will far outweigh the exposure we have to some of the watch list tenants that are closing stores.

The next question comes from Samir Khanal with Evercore ISI.

I guess, along the same lines of growth to '18, I mean, you guys have maintained leasing spreads that have been sort of -- the new leases and the renewals have been in the high single digits. With where you stand net today and the visibility you have, I mean, do you feel that you can maintain that sort of high single-digit spread, especially at a time when sort of CapEx as a percentage of NOI sort of seems to be going up, not only for you guys, but sort of the rest of the industry? So just want to get some color around that.

Yes. With our leasing spreads, we have comfort in our below-market portfolio. It's something that we really thrive on and that's really helped us maintain these high single-digit, double-digit leasing spreads. And we sort of, in the long-term, envision that, that maintaining. 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 that -- where we combined multiple spaces. If you excluded that, our spreads are over 26%. And when you look at our junior box tenants this quarter as well as the smaller shops, junior boxes combined are over 30% and small shops are over 15%, both of which exceed our trailing 4-quarter average. So near-term, we feel good; long-term, we feel great because of the below-market portfolio.

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

Sure. And 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, lifestyle. For us, it really comes down to the real estate and the opportunities to grow that cash flow. To your question on grocery, I mean, there is a Target in there that does sell groceries. It does not restrict us from putting another grocery store in there, which is something that we will definitely consider. In addition to that, there is opportunity to add some mixed-use density. So we look at all of the possibilities for this asset. Acquiring 67 acres in a market like Portland is very unique and rare. So we get questions and we look at the cap rate for this asset, which is aggressive on a going-in basis, but there are many different metrics that we evaluate when we're underwriting a potential acquisition, cap rate being one of them, but we're very focused on the CAGR, compound annual growth rate; the yield on our invested capital in various years throughout the whole period; the mark-to-market spread, which is really critical. And when we look at this asset, you have anchor spaces that are paying, in one case, $0.36 per square foot; in another, $3.44; in another, $6 a square foot. So while that doesn't necessarily help us on our ABR, which is another conversation altogether, we're very confident in the ability to grow the cash flow in this asset long-term. And the redevelopment potential of the asset is really something that we're excited about, both in the near-term and the longer-term.

I would just add that this site checks all the boxes for us in terms of long range redevelopment as well as short-term value creation. And if you look at where we've been most successful at creating significant NAV, it's the Westlakes of the world. If you look at our Pentagon project, those are the exact same type of assets where we have been focused on redeveloping and adding significant value, and Jantzen fits exactly into that mold.

The next question comes from Rich Hill with Morgan Stanley.

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

Yes. If you look at the CapEx spend on some of our new deals, it really is concentrated in a handful of the anchor boxes. And a lot of it is due to the fact that either -- whether it was a former Sports Authority box that had to be split up or that had to be expanded, 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, whether it's to a movie theater or if it's to a grocery concept. I think, longer-range, as you see those Sports Authoritys start to continue to fill up and we really hit more of a stabilization run rate, we'll 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 cost. 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. And if you look back since 2011, 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 the low-cost option, they're going to be with Kimco all day long.

Got it. And so just a follow-up and 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 1, 2, maybe even 3 years, but after that, it should start to stabilize or maybe even come down?

Yes. 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 really finalizing that out shortly.

And just to add, this quarter we did the Cinepolis deal at Kentlands. It was really to kickstart the redevelopment of the Kentlands Market Square there. And what's not picked up in the numbers is obviously, adding an experiential tenant like Cinepolis into the center would drive significant traffic and then help with the incremental lift of all the other shops based around it. So long-term, there is other residual benefits that we start to see through these investments.

The next question comes from Alexander Goldfarb with Sandler O'Neill.

So first question is on the leasing environment, obviously you guys -- it's been pretty strong this year and, despite the bankruptcies, you've improved occupancy which is obviously a good thing. Is your view that we are through all of the tenant credit issues? Or your view is that this is sort of a lull and after we get through the holiday season, we're going to go through sort of a repeat of all the bankruptcies that we had this year, we'll have another crew next year? So what's your view of -- as you head to year-end and the holiday season for next year?

I think we're optimistic. Obviously, you can 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 ride the ship. Omnichannel has been a challenge for some as they have to invest heavily in their e-commerce platform. You have 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 tenants, there is still a few there that we continue to be -- have concern over, but we've been mitigating the exposure there continuously quarter-over-quarter. And that's really the best way for us to monitor that to continue to mitigate the exposure to some of the retailers that have yet to find their footing.

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

I think you're going to see muted 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 -- to the development. There really isn't a whole lot of spec 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. And 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, really, the future development that you'll see for retail.

The next question comes from Haendel Juste (sic) [St. Juste] of Mizuho.

So I understand -- I think about 3/4 of your ABR is tied to centers with a grocer and that about 13% of your ABR is directly attributed to grocers. And so understanding your net positive comments earlier about the Amazon/Whole Foods merger, I'm wondering are those levels you're comfortable with?

We always look at the grocery store as the traffic driver and it's 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 ripe 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's 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. The leasing team has done an excellent job as you continue to see that grow quarter-over-quarter.

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

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

Okay. And then, one point of clarification from an earlier question, I just want to understand the Albertsons distribution a bit more. I thought -- I understood it was going to be a onetime item. It sounds like this could be a recurring dividend of some sort tied to your investment there. I understand you can't speak to the specific timing, but I just want to make sure I'm understanding that characterization. Is that fair?

No. I mean, we received it. We don't know if there'll be future ones or when they would be. But it's based on their operations. So we're not predicting it. Again, if it comes, great; if it doesn't, it's not in our numbers and we're not predicting it to be in our numbers. But they're an operating business.

The next question comes from Vincent Chao of Deutsche Bank.

I just wanted to go back to the CapEx discussion a little bit and just trying to understand -- I know you mentioned some of the things that don't get factored in are some of the ancillary benefits to the CapEx spend to the surrounding center, but also just 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, I mean, do you think that returns are holding steady, going up or going down, over the next 2 to 3 years?

Yes. I think our returns so far have been holding steady. I mean, when you look at the redevelopment sitting lower double-digit returns and our target has always been 8% to 13% on the CapEx spend for deals themselves. Again, with some of these elevated spikes with the TSA boxes, your returns might be slightly lower, but in general, we see them holding steady for the long term.

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

We do, yes. And that's typically a part of a larger redevelopment play as well so you tend to see those show up in our redevelopment pipelines.

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

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

The next question comes from Ki Bin Kim with SunTrust.

Actually, a lot of my questions have been answered already, but a couple of follow-ups. In Albertsons, what triggered the distribution? Was it formulaic or just on the willingness of Albertsons?

Well, it's just basically at the end of the fiscal year, Albertsons had a $1.2 billion in cash on its balance sheet and it discussed what to do with it. And honestly, the first question that was asked of management was if there's distributions made, is it going to affect the business in any way shape or form? And the answer is no because of the liquidity it has. And so it was approved by the board last month.

Okay. All right. And in terms of the CapEx, I know you've talked about it already a lot. But if you look at -- from the leasing that you've done and what's in the pipeline, at least for the foreseeable future, this kind of 30%-ish of rental value for new leases, is that an appropriate run rate? Or is that share coming down or up?

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

Okay. Is there a median dollar per square foot that you can talk about? I'm just trying to get just a very general sense of what it means on an actual dollar basis per square foot?

It really does varies drastically depending on what the previous use was and what you're changing it to. So there really is -- it's been all over the map.

The next question comes from Floris van Dijkum with Boenning.

Quick question on the balance sheet and maybe on dispositions. As you look at the stock price and you notice the discount, does that make you want to increase your dispositions? And I know that you have increased your dispositions guidance slightly for the year, but why not be more aggressive based on where your stock is trading?

Yes. 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 asset. 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 the short-term impact on the stock price and our currency. So we'll continue to evaluate where we are, but we're very satisfied with the portfolio for the most part.

And we did up our disposition guidance.

So maybe, I guess, as a follow-up, in terms of the growth -- and maybe getting back maybe 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?

Yes. 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've really raised the bar on the criteria that we need to hit and the boxes we need to check in order to move forward, and this one really did check all those boxes. So there's not many of them out there, but this was one that we felt was -- would really fit our wheelhouse and we capitalized on it.

You're absolutely correct, so far, the first half of the year we've almost matched dollar for dollar on the dispos/acquisitions. 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 is a very exciting opportunity with redevelopment potential. And we'll continue to execute on the disposition upon that.

The next question comes from Linda Tsai from Barclays.

Glenn, there's an upcoming lease accounting change that seems to impact retailers the most of 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?

The leasing is not really going to impact us very much. We continue to analyze it. When you get into 2019, the decisions around capping of internal costs and the way that that's structured and that's 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 have it pretty well covered.

Okay. And then, Conor, what are your high level thoughts on the Whole Foods acquisition by Amazon? And then, just relatedly, are there any grocers you would highlight as having done a good job of investing in omnichannel?

As I mentioned earlier, I really think the Whole Foods/Amazon combination is one where they see the benefit of physical retail and they could layer in the Amazon Pantry on top of the Whole Foods. So I think what they have seen is the demographics, the overlay from the Amazon Pantry shopper to the Whole Foods shopper is very, very similar and so it gives them the ability to understand their consumer 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 it with the grocery store. And I think that Whole Foods is a high-quality brand. It gives them the ability to use that to their advantage. When people are shopping online, if they're 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.

And then, are there any grocers you'd highlight as having done a good job in investing in omnichannel?

I think Albertsons with the Safeway.com and the 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 omnichannel. You see their click and collect program. And I'm 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's so many benefits to getting someone into the store where they see the merchandise, the likelihood that they're going to add on an additional item, the likelihood that they're going to return the item drops off a cliff. So I could see that being the wave of the future where physical retailers start to wake up and realize the power they have if they're able to generate that type of traffic and offer a discount to get them to come and collect it at the store.

(Operator Instructions) We have a follow-up question from Christine McElroy with Citi.

It's Michael Bilerman with Christy. Conor, I was wondering if you can expand a little bit on Jantzen Beach from the perspective of a competitive bid process, a fully marketed deal. It appeared to be a lot of institutional interest in the asset, yet a REIT, who obviously was trading from a currency perspective and had a pretty low valuation, came out on top and paid the highest price. I guess, how do you think about trying to have leveraged that private capital or institutional capital to help justify private market value of assets when the stocks are trading at big discounts to NAV versus being the highest price and buying it wholly on the balance sheet? And I recognize there's 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. As you know, we've 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. And as I mentioned before, where we've created the most shareholder value is in these larger real estate parcels that are infill locations that have significant barriers to entry with tremendous upside in terms of redevelopment potential. So 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 real 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 zonings so 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 of 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. And 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. And so when you combine all those things, it just felt like it 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 comparing to some of the other bidders there, having an office and 7 other centers really gives us an advantage and able to utilize our economies of scale. So when you're deriving an NOI and capping that value, I mean, most buyers will typically utilize a 4% management fee coming out of their expense line, which, in this sized 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 actually substantially higher than these low going-in cap rates that you would utilize sort of on the surface.

Did you explore using institutional capital as a partner? Or this was -- your view was I want to control this whole thing. It's like buying out your partner and gaining it, you'd rather have full control of these sites. I'm just trying to...

It's always an option. I mean we do have partners that would love to continue to grow with us. We've 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? Because arguably, a public buying at highest price, lowest cap rates is not justifying where your cap rates are. So I don't know if you have any 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 disposition this quarter were in the 5 cap range. I mean, 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 that there is plenty of capital chasing those assets. But in terms of bringing in partners to some of the assets that we own 100%, we really want to control as much of the high-quality real estate that we own as possible.

This concludes our question-and-answer session.

I would like to turn the conference back to Mr. Bujnicki for any closing remarks.

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

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.