Pennsylvania Real Estate Investment Trust (PEI) 2017 Q2 法說會逐字稿

Good morning, my name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the PREIT Second Quarter 2017 Earnings Conference Call. (Operator Instructions) Heather Crowell, you may begin your conference.

Thank you. Good morning, and thank you all for joining us for PREIT's second quarter 2017 earnings call. During this call, we will make certain forward-looking statements within the meaning of Federal Securities laws. These statements relate to expectations, beliefs, projections, trends and other matters that are not historical facts, and are subject to risks and uncertainties that might affect future events or results. Descriptions of these risks are set forth in the company's SEC filings. Statements that PREIT makes today might be accurate only as of today, August 9, 2017 and PREIT makes no undertaking to update any such statements. Also, certain non-GAAP measures will be discussed. PREIT has included reconciliations of such measures to the comparable GAAP measures in its earnings release and other documents filed with the SEC. Members of management on the call today are Joe Coradino, PREIT's Chairman and CEO, and Bob McCadden, our CFO. I will now turn the call over to Joe Coradino.

If you've been following the Company for the past 5 years, you know one thing. We tell you we're going to do something, we do it. We are executing on our capital plan and fortifying our balance sheet with $75 million recently committed. With that, we're halfway toward our goal of generating more than $150 million from noncore assets. We are generating outstanding results on the leasing front with a pipeline that is double what we had at this time last year, and nearly all of our anchor spaces are spoken for. Our redevelopments are moving on pace and in many cases are ahead of schedule with 350,000 square feet of anchor space opening prior to holiday this year. And we had a quarter that was within our expectations and we're on track to deliver on our multiyear plan targeting average NOI growth of 6% to 8% from 2018 to 2020. We are not in a catastrophic environment, simply a course correction. Stores are still open, we're leasing records amount of space, we're not paying extraordinary TA to get there, and as expected, this is the trough. It's likely as bad as it's going to be. And because of our proactive approach with anchors, the issues are mostly behind us and provide a springboard in the second half of this year and on into the next year. We are reaffirming our same store NOI guidance and again, our multiyear plan.

So now I'll say good morning. The first half of the year has been wild. However, if you look at the retail environment through the PREIT lens, and this is what is most meaningful to our shareholders, the fact that we have sold 16, soon to be 18, lower productivity malls, redefined this Company, and created a portfolio that's compelling to retailers, a quick review of the facts will put the Company and our value proposition into perspective. We have executed more new leasing in the first half of the year than in all of 2016. Our wholly owned same store portfolio delivered 1.6% NOI growth. We are on target to achieve 100% commitment on our anchor spaces by yearend. Portfolio sales have reached an all-time high of $468 per square foot, $478 per square foot excluding the malls held for sale. NOI weighted sales are up to $495 per square foot when the properties listed for sale are excluded. $500 is well within reach.

Despite all the headlines focused on store closings, non-anchor occupancy at our wholly owned malls was flat compared to last year. Regarding anchors, in the last two years, including all announcements to date, 13 anchors were proactively recaptured or closed, 9 replacements are either open, under construction or executing. 2 are leased and the remaining 2 are at LOI. In reviewing all of the anchor replacement deals at lease or beyond, prior tenants paid $1.90 per square foot on average. New tenants are paying $8.50 per square foot which is inclusive of three department store replacements. When the three department store replacements are excluded, we are generating a 10x multiple on the replacement rents. These projects are generating solid 8% plus returns.

As it relates to inline bankruptcies, in 2017, 11 retailers that have stores with us filed for bankruptcy. Of these, we expect only 22 store closures. 80% of the stores that filed in 2016 are covered or remained open. 72% of the 2017 spaces are covered or remained open. Now this figure is impact significantly by HH Gregg. If you eliminate HH Gregg, who didn't occupy mall space, 84% of the space is covered.

We have over 1 million square feet of space executed for future store openings, more than double what we had at the same time last year, and we'll generate annual gross rents from these tenants, which include anchors and junior majors, of over $16.5 million at our share. Beyond this, our pipeline of deals in active lease negotiations includes over 500,000 square feet and another $12.3 million of revenue along with another 500,000 feet in active LOI negotiations.

So the negativity facing our industry is rooted in store closings, fueling the unfounded conclusion that brick and mortar retail is rapidly declining. The truth is, retail is changing as is what our customers expect out of physical environments. Crafting the right brand mix, which is a key driver of the consumers' decision-making process, is a critical step in evolving the experience.

We have brought in a unique and diverse merchandising mix from Home Goods, TJ Maxx, Burlington, Dave & Buster's, LEGOLAND Discovery Center, H&M, Zara, to Intimissimi and let's not forget Belk's. We're no longer in the business of homogenous properties. Apparel comprises less than 37% of our occupied space with dining and entertainment coming in at 20% and growing. We see continued growth in fitness and wellness categories as we move away from undifferentiated apparel retailers and replace tired anchor stores at half of our properties. Although it's clearly a tough time, we're up for the challenge. Our team is motivated to execute on our vision to achieve sales of $525 a square foot, sector leading NOI growth, and a balance sheet capable of continuing to execute on opportunities. We have the liquidity required to execute on our plan and are excited about where the Company is headed.

Now let's talk about the status of our redevelopment activity. At Fashion Outlets in Philadelphia, the project is taking shape. Stores are under construction, tile is being installed and the glass cube is underway. The velocity of leasing is increasing as we look to conclude 100,000 square feet of additional leases in the next week. At Mall of Prince Georges just outside of D.C., the interior renovation is underway for holiday completion. 86% of the project is committed with more prospects than we can accommodate.

On the anchor replacement front, DICK's Sporting Goods at Capital City, DICK's Sporting Goods, Field & Stream, and Home Goods at Viewmont, and Burlington at Magnolia will be opening this quarter. We signed Belk at Valley Mall to replace BonTon which we proactively recaptured. At Woodland Mall in Grand Rapids, Michigan, as part of our mission to be good stewards of shareholder capital, we were able to reduce the overall project costs by nearly $50 million and maintain a return that is acceptable in a cap rate compressing project. The new scope will allow us to add Von Maur and approximately 30,000 square feet of shops and restaurant space.

Given our presence in high barrier to entry markets, we continue to densify our properties. It's noteworthy that we do have some mixed use component in a number of our properties today and are actively pursuing opportunities to add a variety of new uses at Springfield Town Center where we're in discussion with a major office user. At Exton Square, we have an executed agreement with a national multifamily developer, Plymouth Meeting, where we have hotel opportunities as well as the multifamily overbuild in Philly. Now these are just a few of the densification opportunities in our portfolio.

In light of all this portfolio fortifying, value creating work, our reasonable 13% occupancy costs are nearly 40% of our NOI being generated from 5 properties with sales of $589 per square foot, stability in retailer sales and our continued progress on our multiyear plan, we are unwavering in our belief that the public markets are undervaluing our company. We've delivered solid results, tightened our guidance range, reflecting our confidence in delivering these results in this challenging environment.

Obviously, execution of asset sales could impact results, but clearly improve our balance sheet and portfolio quality. As it relates to our capital plan and self-funding our growth, yesterday we announced three transactions in accordance with our capital plan for approximately $75 million. Improving our liquidity position has been a tremendous focus of ours and will continue to be a key pillar in achieving top tier status. This also serves as another proof point of our credibility. Like I opened with, we tell you we're going to do something, we get it done.

With that, I'll turn it over to Bob.

Thank you, Joe. We continue to make progress in all aspects of our business. Before I review our operating results and discuss earnings guidance, let me start with an update on our capital plan. Yesterday's announcement to sell three properties when completed will increase the total proceeds from our asset disposition program to over $800 million since the beginning of 2013.

We have prudently recycled the capital raise into portfolio and balance sheet improvements. We continue our marketing efforts on Valley View Mall and expect a 2018 closing for this transaction.

On the financing front, we will request the $10 million earnout proceeds under the existing mortgage loan at Viewmont Mall after the replacement anchors open this quarter.

During the second quarter, we brought a number of potential construction lenders through Fashion Outlets to present the property. As Joe mentioned, the project is starting to take shape with tile being laid and tenant spaces being framed out. We expect to move that process forward this quarter and select a bank syndicate that will provide additional capital for the project.

Since the beginning of 2017, we have reduced our outstanding debt by $104 million. At the end of the quarter, we had $183 million of capacity available under our line and $225 million of total liquidity. At the end of June, our bank leverage ratio was 49.1% and our net debt to EBITDA was 7.5x.

Our cash interest rate was 3.8%, a 42-basis point reduction from a year ago. 93% of our debt is either fixed or swapped and 90% of our loans mature after 2018. We invested $61 million in our redevelopment program this quarter. During the second half of the year, we anticipate spending an additional $90 million to $100 million as our construction ramps up.

Let me turn to operations. We performed in line with our expectation for the quarter and ahead of consensus. We reported FFO as adjusted of $0.39 a share which was in line with last year's quarter taking into account the $0.04 of dilution from asset sales. Same-store NOI of $60.2 million was $200,000 above last year. During the quarter, we saw a divergence in performance between our wholly owned and joint venture properties which were disproportionately impacted by bankruptcies and store closings. This was reflected both in terms of occupancy and NOI contribution.

Same store NOI at our wholly owned properties was up 1.6% while it was down 8.4% at our joint venture properties. Non-anchor occupancy at our wholly owned same store malls was flat compared to last year at 90%. Non-anchor occupancy at our joint venture properties fell 560 basis points to 90.3%.

Let me just spend a minute on the bankruptcy impact across the portfolio. For the full year, we are reforecasting a total impact of $5.7 million with $4.7 million of that at our wholly owned properties and $1 million at our joint venture properties. To put this into context, this represents a 2% drag on same store NOI at our wholly owned properties, but a 3% drag on our joint ventures. In our initial guidance, we assumed negative 1% to minus 2.5% same store NOI growth for the joint ventures. Based on current expectations, this is now expected to be between minus 4% and minus 5%. Obviously we're working diligently to mitigate this impact on the portfolio. Notably, where we control the outcome, we have fared better.

Some factors impacting the quarterly results include, for all the properties in the portfolio, top line revenues were impacted by $1.6 million in bankruptcies and $300,000 from lower cotenancy rents. We'll start to see some of the cotenancy impact mitigated as replacement anchors open for business this quarter. We continue to see a strong backlog of executed leases with future opening dates. These tenants, when they open, will contribute over $16.5 million of incremental revenue to our topline.

From a timing perspective, tenants opening this year will generate annualized rents of $9.8 million at our share. Tenants opening next year will generate annualized rents of $6.5 million with the balance opening in 2019. Renewal spreads for non-anchor tenants were 5% for the quarter and 5.3% on a year-to-date basis which was consistent with our expectations for the year. When excluding tenants that have announced significant store closing plans, our spreads would have increased to 7%.

Average rent for small-shop tenants at comparable malls increased by 2% to $58.78 per square foot. Net loss attributable to PREIT common shareholders was $54.7 million or $0.79 a share compared to income of $0.06 per share in the prior year's quarter. The difference is due to impairment charges reported in the second quarter of 2017, dilution from asset sales and a gain on sale of real estate in the 2016 quarter.

Regarding guidance, as Joe mentioned, we are updating our FFO guidance to give effect to employee separation expenses incurred in the second quarter of 2017 and narrowing our guidance range. We are also introducing guidance for FFO as adjusted to give effect to these factors and revising our estimate of GAAP earnings per share to give effect to the asset impairment charges recorded in the second quarter. FFO as adjusted for the year is expected to be between $1.66 and $1.72 which does not include the impact of pending dispositions. With that, we'll open it up for questions.

(Operator Instructions) Ki Bin Kim, SunTrust.

Did you, I may have missed it, but did you update your same store NOI guidance for the year?

In Joe's comments, he remarked that we were reaffirming the same store NOI guidance.

So it sounded like the JV portion got worse. So what's making up the slack to maintain guidance?

I think as we would expect, the normal cyclical uptick for leasing in the second half of the year, we talked about all the square footage that's going to open in the next quarter or so, so we think that's going to drive our performance in the third and primarily fourth quarters.

Okay, so I guess the implied same store NOI growth of 4.5% sort of second half, I guess you're still on target for that?

It actually doesn't imply that. Remember that same store NOI, typically in the fourth quarter, is about 20% higher than it is in the first three quarters just because of seasonal tenants and all the ancillary income that we generate in the fourth quarter. So if you want to do the math, it probably implies 3% growth to get to the lower end of our range and 4% growth to get to the midpoint of our range.

Okay. Second question, could you talk a little bit about how your conversations with tenants are evolving and if there's a big divergence between your tier one, two, or three mall groups?

Well clearly if you're getting at sort of the purchasing power discussion, I mean clearly the stronger the asset, the stronger the discussion. The leverage I would say generally these days probably is slightly in favor of the tenant, but that tends to change as asset quality improves. I think that the other comment is that certainly there is a different dialogue that occurs with a tenant that's filed bankruptcy as opposed to new tenants coming to the portfolio. But I think Ki Bin, the overriding piece of information is that the volume of leasing that we are experiencing, I mean it's quite dramatic given what the market believes the condition of malls are. We are seeing tenants come from Canada and Italy and fast fashions expanding. Entertainment, retail, new retail concepts, fitness, grocers. And so as a result, as we sort of look to the future, our view is that the balance will begin to shift in favor of the landlord again given the significant demand that we're experiencing.

And if I can squeeze one more in, you mentioned that you think 2017 is a trough year. I guess tied to --

No, I meant, the point I was making is that Q2 is the trough.

Okay, so trough of 2017, not that 2017 is a trough year, is that to be clear?

Repeat that please.

I was just going back to your opening remarks saying that you thought we were at the trough of fundamentals or same store NOI, I'm not exactly sure what you were referring to, but I was just curious if you could maybe expand on that.

Yeah, I mean my comment really went to the fact that when we laid out our plan, our multiyear plan going back almost a year ago, this is -- now we certainly weren't clairvoyant and knew about all of the bankruptcies that were going to occur, but we expected this to be sort of the bottom, Q2 to be the bottom. And that was driven by a couple of things, most of which was anchor closings. And remember, a good deal of that was proactive on our part. Taking back Sears stores. And as a result, we experienced a period of downtime while those tenants are being replaced, cotenancy costs, etc. And so when I call this the trough, it's because again, between now and the end of the year, 350,000 feet of anchor tenants moving in and that continues to occur in 2018 and 2019. We had about 13 department stores impacted and all of those are well along in their replacements. So the trough comment really speaks to as they come onboard, certainly you have the financial impact associated with them, which is a positive one as I outlined. But you also have the upside in terms of driving traffic, driving sales, eliminating cotenancy costs, and doing, getting better rents in the former wings that where you had underperforming department stores occupying that space. And so all of that creates a very positive momentum that starts with reoccupying that space. So that's the comment I was making around this being the trough and that we have an upward trajectory from here.

Karin Ford, MUFG Securities.

Are you guys still expecting small-shop occupancy to end the year in the 93% to 94% range? And does your guidance assume any additional bankruptcies or any [Acina] closures?

Hi, Karin, this is Bob. I'll take them one at a time. I think we're still forecasting non-anchor occupancy between 93% and 94%. And with respect to Acina, our guidance does not assume any closings. In our discussions with Acina, we don't have any reason to believe that there would be any store closings expected for the balance of the year.

Okay, great. Thanks for that. And I think you said on the last call that you were expecting to meet with potential joint venture partners sometime during the second quarter. Can you just talk about how the interest is going on that front and where pricing is coming in versus your expectations?

Well first off, they're coming in next week actually. We have several foreign buyers coming in next week. But I think it's also, Karin, you give me an opportunity to sort of expand the answer on that question if you will. First off, we are on track to meet or exceed our noncore property disposition targets, and selling JV interests in our properties isn't essential to that capital plan. Because again, we have other options that we're currently working on. That's not to suggest that we're not continuing to explore these opportunities with institutional investors, and yes, they are due in next week. But we all are clear it's a tough environment to sell interests right now and we're not prepared to give anything away. Pricing discovery and pricing is quite important to us.

Okay, thanks for that color. My last question is on Springfield Town Center. It looks like small-shop occupancy sequentially declined about 70 basis points. Can you just talk about what's going on there and how that continuing lease-up is going?

Well at Springfield Town Center, we're currently around 90% occupied. We did experience a bankruptcy closing which we've already replaced and a restaurant closing which was Woodranch Barbecue. Route 21 was a closing. They are well underway with replacements. Actually, we'll probably announce a very exciting restaurant to replace Woodranch in the not too distant future. And we continue to move it in a positive direction. In the near term, we'll take that 90% to about 92% from an occupancy perspective. And by yearend, that number will be closer to 95%.

Michael Bilerman, Citi.

Just a question, I guess how do you think about, I think in your opening remarks you talked about this unwavering view that the public markets are undervaluing your stock, Joe. And the shares are the worst mall performer this year and were certainly the worst mall performer last year. I respect the significant amount of work that you and the team have done to sell assets and refinance and backfill tenants, but it seems as though the public market is not appreciating that specifically on PREIT relative to the peers, which have also been down, but clearly not as much. So I guess what do you do? What do you turn to other than just saying you have an unwavering view that the public market is at a disconnect? Can you do something more aggressive to narrow that gap?

Well we think, Michael, we think the work that we're doing, I mean when you think about what's happened in the space if you will, there's been a real kind of knee jerk negative reaction a bit overblown to anchor, the anchor closings and the inline closings. We think the fact that we're going to be in a position by yearend to make a statement that our anchor space is 100% leased and to announce a list of exciting new tenants, many of which are new to the markets they'll be going to, we think as we begin to populate some of the spaces in the mall with that million square feet of tenants that we have, that it will continue to, it will make a difference and help to change the mind of the market if you will. I mean it's as simple as I said this is the trough. I believe it is. We think our plan on a going forward basis will generate outsized NOI returns and begin to get the attention of investors. We've had a steady stream of them through here over the past few months and continue to be active in that arena.

Would you consider selling interests in your higher, your best quality malls to I guess raise capital at a significant premium to where your implied cap rate is trading and use that capital to de-lever or do a stock buyback? And is that, you mentioned some joint venture foreign capital partners coming in, is that now on the table as a more serious option? Recognizing the fact that as you sell some of the higher end top of your portfolio, the bottom becomes a bigger part. So I recognize there's some impact to that also other than just raising capital.

So a couple of things. A qualified yes is the answer to your question that we are looking at selling some of our higher quality joint venture interests and some of our higher quality assets. That's something we would consider and actually have retained [Estill] and they've been through a process. And that is what's generating the meetings that I spoke about. Because we recognize clearly one of the things that separates us from a multiple perspective from the higher quality mall REITs is our balance sheet and that's something we're very focused on continuing to improve. We're also looking at other avenues for that including other noncore properties and continuing to sell from the bottom.

Bob, just a follow-up question on the same store NOI. Your sort between first half and second half over the last 15 years has been 48%/52%. Your sort of math of 3% to 4% would indicate a much bigger weight to the second half. Using the traditional 48/52, you'd come out in that 4.5% implied for the second half. So A), just help us narrow that gap. But two, more importantly, you're looking at something that's probably a $10 million, $10 million to $12 million annualized NOI, up in the back half of the year, $5 million to $6 million in the second half, but annualized $10 million to $12 million. That's a big number, and so can you just give some granular details surrounding that significant of a ramp in the back half of the year?

Mike, in my remarks I did mention that the tenants that are going to open this year will generate annualized rents of almost $10 million. So your analysis is correct. I don't know that we're that different in terms of point of view. The other --

That's assuming they all start June 30, right? So that's just to meet the full, or September 30, just to meet that number, everything would have to start as if for the full back half of the year?

No, so if you look at our same store last year, it was roughly NOI in the second half of 2016 was $130 million. So each percentage is $1.3 million. So if you get to 4%, you're talking about that $5 million of incremental NOI. But you also have, it's not just from permanent leases. Obviously with the number of vacancies that we have as a result of bankruptcies, we expect our short-term leasing program to be higher this year than in previous years because of the availability of inventory. We also have seen significant increases in our partnership marketing program over the last year as we've ramped that up. So there's a number of other areas in the business where we can kind of drive revenues. We're likely to be installing a number of digital screens in some of our higher end properties this year which will generate ancillary revenue. So again, we talk about this all the time, it's nickels and dimes, it's a nickel and dime business. And we're focused on looking at every lever that we can pull. And not just from permanent revenues, but also looking at our costs, looking at contracts. Again, we have a list that we keep and discuss every Friday with the management team and we're really on this stuff.

Daniel Busch, Green Street Advisors.

This is DJ. Thank you. Joe, just following up on a couple of Michael's points. You sold 18 assets over the last few years. You've basically completed your noncore program, disposition program. And you're down to about 20 malls and a handful of non-mall properties. So how do you think about portfolio management at this point? You just mentioned that there's maybe some still opportunities to sell lower productivity or noncore assets. But how do you balance selling more assets with trying to keep some sort of scale to leverage your operating and leasing platform?

DJ, we feel pretty good about that actually right now. I mean we could talk about it is certainly a balancing act. I won't gild a lily, it's certainly a balancing act. But we've been able to attract a quality team of people and feel we have the best production team here that we've ever had, make no mistake about it. We've been able to do that and we've been able to continue to deliver on the vision that we've laid out. It's also noteworthy that when FOP comes online, we'll be generating nearly the same NOI that it was generating prior to the initiation of the company's disposition program over 4 years ago. So if you think about it, what we've been sending out the door has been very low NOI assets that among other things have been a drain on the company from a leasing perspective and a sort of retailer, didn't present compelling cases to retailers. So we think with FOP coming online, with all of our redevelopments coming online, our anchor repositionings, that we can manage our way through the scale issue.

You mentioned in your comments you are probably in a stronger position with your retailers at 20 assets today than you were at 35. But is there a number kind of in the back of your head that says, you know what, if we're at 15 malls, we need to at least have that many to either be big enough to matter to the public market or have, be at the table with the national retailers or whatnot?

Well again, I'm not so sure that quantity is the issue. I think quality is the issue. We like the fact that when we look at the portfolio, we believe that we're getting stronger in terms of those discussions with retailers. And I think there are examples out there. We will be one of the first property owners, mall owners in America to bring an Intimissimi into one of our malls. It's an Italian intimate brand company and we're working with two Canadian retailers right now that we think will be one of the first companies in the US to introduce them into our assets. So while volume we believe we're comfortable at, geographic concentration is something that you also can't take out of the puzzle if you will. The fact that we have a concentration in Philly and in D.C. is an important part of sort of the magic sauce that we bring to retailers. We think we have assets that are well located in major markets and the ones that aren't in major markets are very market dominant. And so our dialogue with retailers is getting stronger, not getting weaker.

As it relates to the JV operating performance I guess this quarter, or year to date, I think Bob mentioned that some of that has been due to more bankruptcies at those. I guess I'm just looking at the two specifically, Lehigh Valley is obviously one of your better assets and you have a partner that's a best in class manager and operator of properties. I'm just curious why those have been more impacted relative to the wholly owned properties?

If you look at the JVs broadly, you had a couple of HH Greggs in the power centers, you had a few Old Country Buffets, Sports Authority, and even at Lehigh Valley you had a disproportionate number of specialty retailers close this quarter. Obviously Simon has been working diligently to fill those spaces on a -- we expect they would be filled with temporary tenants by yearend and certainly we're confident over time that they will deliver and fill those tenants with replacements that are paying rents at amount equal to or greater than the tenants they're replacing. But this is a cyclical business and it's going to take them even as a best in class operator to digest the bankruptcies and find the replacements.

Sure. And then I guess lastly, on the changes at the Woodland redevelopment, costs came down quite a bit, but obviously you guys mentioned that the expected returns came down as will. It doesn't sound like the overall scale changed that much, you still have the Von Maur plus 30,000 square feet of restaurants. Can you provide any more specifics on why?

Actually, the scale did increase actually fairly dramatically. We had a number, two sizable outparcels. We also had a row of stores that was adjacent to the mall entrance and we also downsized the mall expansion from about 50,0000 feet to about 30,000 feet. And we also eliminated a medium-box anchor that would have been accessed on mall. So the scale was reduced fairly significantly in terms of getting to that $50 million savings. I would point out though, DJ, that we have to a certain extent, optionality here. And in a good way. Now while we certainly can't get back the 20,000 square feet that we reduced the inline stores, we do have the ability to add in the rest of it at some point. And I think in addition to hey, just the fact that having optionality is a good thing, the other piece of it is, if one thinks about this redevelopment occurring with a new Von Maur by the way which was the most requested store by the customers who shop the mall, with the new Von Maur and some of the new inline, we think we'll actually be able to outperform the original pro forma we laid out by doing it as a phase two. So we just thought at this time, prudent use of capital, I'd rather sit here two years from now saying geez, I should have built more mall space, I've got too many tenants for the space. And just being very prudent about our use of capital we think was the right thing to do.

Floris van Dijkum, Boenning.

Great. Thanks. Quick follow-up question on Michael's point and I guess DJ sort of alluded to that as well, but first maybe if you can talk about the four anchor boxes that are still vacant, they're not yet in the costs. Could you remind us the status and potential costs involved there? I know that one of them you bought back the leasehold interest I believe, and the other one you bought back wholly owned, but if you could just remind people what potentially incremental costs involved in getting those leased and rent paying?

Well first off, yes, we did buy back Morristown. And on the Plymouth transaction, that was not a buyback, but we entered into a long-term lease without expending any upfront capital. So just to sort of lay that out. In terms of the costs, all costs are in the capital plan. Did you get that one? All of our costs are in the capital plan.

They are in there. It's a fully baked number I guess is what you're getting at.

I'm not getting at it, I'm making that statement.

Great. Would you, sort of in line with the question that Michael, rather than selling your best assets, would you consider selling more malls like Wyoming Valley or Valley Mall and really to DJ's point, prune this portfolio to 10 or 15 malls to get all of the capital issues off the table?

Well we are certainly focused on getting as you said it, all the capital issues off the table. We think we've taken a major step in our recent announcement and we will continue to look for ways to do that. And that would include by the way continuing to look at pruning the portfolio from the bottom, looking at potential JVs. Again, price is important, as well as other noncore assets that we have, outparcels, etc., etc. So yes, our approach to that Floris, to be as clear and direct as possible, is no stone unturned.

Great. Last question for me. Bob, maybe if you can touch upon the outlook for NOI margins and expense recoveries now that you are mostly through this noncore asset plan. How much of a pickup should we expect in 2018 and 2019?

Well I don't know that we're in position to provide specific granular assumptions for 2018 and 2019, but certainly as Joe mentioned, I think we view the second quarter as the trough in our business. We have lots of GLA and revenue coming onstream which should obviously serve to kind of boost our margins. Most of the haircuts we took as it relates to rent restructuring for some of the bankrupt tenants, we've moved from net leases to gross leases. So we saw a little bit of a hit in our recoveries and we'll see it for the balance of this year. But as those revised leases expire over the next couple of years, we would look to either convert those leases back to net leases with the existing tenants or be in a position to replace those tenants with performing tenants at that point in time. So I don't know if fundamentally we have a different view of expense recovery rates and margins than we did a year ago, but certainly that will take place and unfold according to plan. But it may be a year or so behind.

(Operator Instructions). Nakita Belle, JPMorgan.

A quick question on can you guys talk a little bit about the longer term growth trajectory of the company? I know your occupancy is pretty low right now and you're doing some redevelopment, so all those things combined hopefully will translate into better performance over the years. And also, how does that tie to your February of 2017 presentation when you put out and you said your 2018 to 2020-year target plan was 6% to 8% growth of NOI, so it's 7% at the midpoint. So how do you tie those two things together?

Well first off, as I mentioned on the call, we see ourselves currently at a trough. Q2 we've been very focused on anchor replacements, both from closings and proactive recoveries. We've reaffirmed our NOI growth target from 18 to 20 of 6% to 8%. We see that as really coming from the anchor replacements taking what are low rent paying sort of tired retailers to exciting, in many cases first to market retailers occupying those boxes, being able to get significantly higher rents from then. And then also their driving additional traffic and sales to the property will allow us to continue to increase our rents within the properties themselves. So again, I think the simple answer to your question, and you also raised the occupancy issue. I think the occupancy issue, again, as we continue to repopulate these properties, these boxes, occupancy also continues to move in an upward cycle. We do plan to end the year with same store inline occupancy between around 94%. Did that answer your question, Nakita?

Yes, that's very helpful. So that also assumes that your same store NOI for 2018 to 2020 stays at 2.75%-3% ex-lease term?

That's correct. That was the assumptions that we had laid out back in February.

So all those are still intact? I know you talked about the changes at Woodland Mall regarding the size and scope of the project. But did you talk about why you took returns down? I think they were slightly down.

Well there was certain infrastructure work that needed to be done as part of that. There were fixed costs if you will, that as you continue to, as you look to downsize it, those fixed costs became a greater portion of total project costs and had a negative impact on the return. But as I mentioned, the optionality exists and as the market recovers, as the property stabilizes in its new form, we think we have the ability, should we choose to execute on it, to outperform what was the original numbers that we laid out.

Maybe one last quick question. I know it may be a little bit too early to look out to 2018, but have you had any conversations with tenants regarding potential bankruptcies? Or maybe those are not the conversations you're having. Some people, companies that are on your list that you think might not make it in 2018 and if the impact would be as impactful as it was in 2017?

We are obviously well out, we try to be well out in front of the condition and health of tenants. And are regularly in conversation with most of our national retailers. And we like to think, as I mentioned earlier, with 5,300 stores closing in this country, the impact on us was 22 stores. That's a pretty good number, less than one per mall. But I think that really is a result of having pruned the portfolio, selling off the lower quality assets from the impact on us both from an anchor closing as well as inline store bankruptcies and closings was mitigated to an extent the costs of that. But as we look to the future, we think we're as well positioned for any future problems that might occur within the sector.

There are no further questions at this time.

Thank you all for being on the call. Remember the comment if we say we're going to do it, we do it. And I hope everybody enjoys the rest of their summer. See you all in September.

Thank you. This concludes today's conference call. You may now disconnect.