Rithm Property Trust Inc (RPT) 2016 Q4 法說會逐字稿

Greetings, and welcome to the Ramco-Gershenson Properties Trust fourth-quarter year-end 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Dawn Hendershot, Vice President of Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining us for the fourth-quarter and year-end 2016 earnings conference call for Ramco-Gershenson Properties Trust. With me today are Dennis Gershenson, President and Chief Executive Officer; John Hendrickson, Chief Operating Officer; Geoff Bedrosian, Chief Financial Officer; and Cathy Clark, Executive Vice President of Transactions.

At this time management would like me to inform you that certain statements made during this conference call which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Additionally, statements made during the call are made as of the date of this call.

Listeners to any replay should understand that the passage of time by itself will diminish the quality of the statements made. Although we believe that the expectations reflected in any forward-looking statements are based on reasonable assumptions, factors and risks that could cause actual results to differ from expectations are detailed in the quarterly press release. I would now like to turn the call over to Dennis for his opening remarks.

Thank you, Dawn. Ladies and gentlemen, this morning we'll discuss our fourth-quarter and year-end 2016 results. We will also provide details about our 2017 business plan and our vision for delivering long-term shareholder value.

In 2016, a time of significant headwinds for our industry, especially with the bankruptcies and liquidations of several national retailers, we were still able to execute on a number of our stated business objectives. John and Geoff will provide the details for our fourth-quarter and year-end results.

We also used our time in 2016 to refine our long-term business strategy as we continue to position our Company to benefit from the significant changes that are occurring in the shopping center industry. Those elements that will drive our crucial decisions revolve around market selection, shopping center type, merchandise mix, and changing consumer preferences.

We believe that our decisions in these areas will ensure that our business model will be relevant in any future retail environment, especially in light of the expanding channels of distribution as well as changing consumer demographics. Our plans for 2017 and the next 36 months are influenced by three main factors beyond macroeconomic concerns that are having a dramatic impact on the shopping center industry, including; first, the impact of e-commerce and digital communications in an omni-channel environment; second, the ongoing flight of healthy retailers to market dominant, quality real estate, to insulate themselves from risk as they rationalized store count as well as store sizes; and third, the convergence of retail to offer both value and a rewarding experience for the customer.

In other words, we are seeing a fundamental change in consumer habits. Thus, retailers who will succeed going forward must understand and adapt to these changes, and those shopping centers that will thrive tomorrow must not only have market dominant locations, but also must be occupied by those retailers who understand the changing trends and rise to meet them.

All of these factors are driving both our short-term and long-term management and investment strategies so that we will have positioned ourselves to succeed in this evolving retail environment. Specifically, in 2017 we plan to do the following: First, we are expanding our reach into key growth markets beyond our current midwest focus. This will involve selling approximately $250 million of non-core Michigan properties, specifically those centers outside of Oakland County and metropolitan Detroit, and acquiring approximately $250 million of market dominant shopping centers in the 40 largest MSAs.

These acquisitions and dispositions will substantially complete the transformation of our portfolio, driving a healthy increase in net asset value. Important characteristics of those markets which are the subject of our focus include high population, employment and household income growth.

On the asset sales side, the sale of our Michigan shopping centers outside of Oakland County will reduce our rental exposure in Michigan to less than 20% by the end of 2017. Further, by limiting our Michigan presence to Oakland County, we will have concentrated our Michigan assets in the 24th wealthiest county in the nation, and one of only approximately 30 counties, or 1% of all US counties, with a AAA credit rating.

As of this date, we have made significant progress toward executing on this first goal by acquiring two shopping centers with a value of approximately $170 million and selling one center in Flint, Michigan, as well as preparing to close on the sale of a second Michigan asset, which together will generate approximately $28.5 million. We have other Michigan shopping centers in the market, and the proceeds from these sales will be used to fund our acquisitions.

Our second initiative involves deploying our capital and selling non-core assets to concentrate our portfolio on two types of shopping centers. First, large regionally dominant centers which include value-oriented retailers, preferably with a grocery component, restaurants and entertainment uses, as well as a substantial amount of small shop space of at least 60,000 to 100,000 square feet. These centers will also possess the potential for additional value creation through redevelopment, re-tenanting and expansions.

Our second asset focus is on infill urban-oriented centers with high barriers to entry. These centers cater to large daytime and evening populations with significant entertainment and restaurant components that will generate ever increasing net operating income growth. Examples of our expansion into new markets, as well as the pursuit of the two shopping center formats I've just mentioned are reflected in our recent acquisitions of Providence Marketplace in Nashville, Tennessee and two urban-oriented centers, Centennial Shops in Minneapolis, Minnesota, acquired in the fourth quarter of last year, and Webster Place in Lincoln Park, an affluent Chicago neighborhood.

All three of these acquisitions are located in what are considered 18-hour cities. The two urban-oriented infill assets also present the opportunity for potential mixed-use development partnerships.

Our third focus for 2017 and beyond involves maximizing the value of each of our core shopping centers, including our recent acquisitions. Thus, in 2017 we will be stepping up our redevelopment program, including densifying our properties by adding additional retail square footage to a number of our centers and creating a sense of place at several others.

John will provide additional information on these value-add programs. I would now like to turn the call over to John for his remarks.

Thank you, Dennis. Good morning, everyone. I would like to expand on Dennis' remarks by first discussing full-year 2016 operational results and then summarizing our operational outlook and expectations for 2017 and beyond in the context of today's business plan.

In general, our team and our portfolio performed well in 2016, and with the completion of the portfolio upgrades Dennis outlined, we are well positioned for the future during this evolving time in our business. Our portfolio produced same-store NOI growth of 2.8% for the full year of 2016, including the impact of The Sports Authority liquidating its four stores that cost $1.8 million of downtime and bad debt expense in 2016. Had we not had this extraordinary impact, we would have been at the top end of our guidance range with a growth of 3.9%.

Good execution of our leasing and other goals from our portfolio teams helped drive this result. Growth was also helped by the opening of the 15 anchor leases we discussed during 2016, and the nearly $44 million of redevelopment projects that stabilized in 2015 and 2016, which all together contributed $2.6 million of NOI growth during the year. These projects include our repositioning of West Oak Shopping Center that brought Michigan's first Container Store and our second Nordstrom Rack to this Oakland County dominant center, the addition of DSW to Spring Meadows in Ohio, and the introduction of Stein Mart to Town and Country Crossing in St. Louis and also to Winchester Center, another Oakland County asset.

As was the case for 2016, our redevelopment pipeline is an important part of growth for 2017 and 2018. After the 2016 completion, our current pipeline of projects is $70 million, which includes the addition of 230,000 square feet of new retail GLA to the portfolio.

During the quarter we added two projects, the 28,000 square foot expansion of our Nordstrom Rack, REI anchored Troy Marketplace, a further investment in Oakland County, and the addition of a new 44,000 square foot nine-screen theater building to anchor our Main Street at Woodbury Lakes in Minneapolis. The theater operator is one of the best dine-in theater chains in the country, which will bring a unique offering to Woodbury's market in early 2018 and provide an important driver for the property.

This project is the first step of multi-phase enhancements at Woodbury Lakes. This strategic redevelopment and those elsewhere, including at Deerfield Town Center and Front Range Village, are all about making environments that create emotional attachments with the consumer and create long-term value.

While driving value on their own, these redevelopments and anchor upgrades will also help push rents and occupancy at each asset. Our leased occupancy finished the year at 94.4%, with anchor occupancy at 97% and small-shop occupancy at 88.2%. While partially offset by gains elsewhere, the 40 basis points decrease in comparable leased anchor occupancy during the year is primarily attributed to the loss of Sports Authority.

We now have agreements on three of the four locations. At the last location in Fort Collins, Colorado, we are continuing to explore opportunities but remain patient to maximize value within the context of the property's overall master plan.

Small-shop leased occupancy increased by 110 basis points during the year on a comparable basis, and thus within the goal that we laid out at the beginning of the year. In addition to this increased occupancy, we were also able to achieve annual fixed increases during the term in 74% of the shop transactions, which is substantially more than what we achieved previously.

We believe this portfolio over time should have a targeted small-shop occupancy of 91%. So continuing to push shop occupancy at least another 100 basis points while maintaining the quality of the leases will again be a goal in 2017.

For the year we executed 326 transactions totaling 2 million square feet, which was a 14% increase in transactions volume compared to 2015. Our total comparable lease spread was 9.2% for the quarter and 9% for the year, essentially equivalent to 2015's level, while also achieving better embedded growth. This increase in leasing volume and improvement in leasing quality again is the testament to our regional operations teams, who generally achieved their annual goals during 2016, the first full year in our regional set up.

The average rent on all deals executed for the year was $15.67 per square foot, which exceeds our portfolio average by more than 10%. Our portfolio of quality upgrades and these rental increases helped drive our overall rent per square foot by approximately 5% year over year.

Furthermore, the average rent excluding ground leases on all three recent acquisitions is $20.50 per square foot, 80% more than the average of $11.40 for the assets that we have or will sell to fund the acquisition. We therefore expect to post continued improvement in portfolio average base rents in 2017, reflecting our higher-quality portfolio.

Turning to 2017, I remain very encouraged by the operating fundamentals of the portfolio and our prospects for continued future growth. We expect same-center to be 2.5% to 3.5% in 2017. While tenant bankruptcy is a normal part of our business and there certainly are headwinds now in the evolving landscape for several retailers, we still feel the full liquidation of a tenant like Sports Authority is an unusual occurrence and resulted in 2016 having downtime and bad debt of $1.8 million above a typical year.

Nonetheless, reflecting today's uncertainty, our midpoint 2017 forecast assumes the same level of reserve. If the impact of our watch list reserves returns to a normal level, we would expect to achieve the top end of our same-center guidance range, which is within the long-term growth target of 3% to 4% that we have previously outlined.

Furthermore, the benefit of our 2017 anchor leasing, improved small-shop occupancy and the impact of 2017 and 2018 redevelopment stabilizations should prepare us as well for growth in 2018 and beyond. Also, our portfolio upgrades should further enhance growth over the next few years.

Excluding any redevelopment benefits, we believe that the forward five-year average NOI growth for our three acquisitions will be about 4% compared to less than 2% for the properties we are selling to fund the acquisition. Therefore, barring unforeseen occurrences, we believe our portfolio has good midterm growth prospects.

Despite certain retailer concerns, many of our flagship retailers are continuing to grow including T.J. Maxx, Ross, Nordstrom Rack, Ulta, Home Goods, Sephora, Dick's, Rally House and Petco, just to name a few. Also our business is now more than just this type of retailer.

In addition to providing consumers the right mix of value and daily needs retail, as Dennis said, today's and tomorrow's consumer is demanding that bricks-and-mortar retail deliver an experience. This is why we are investing in place-making and continuing to expand our community-first initiative.

It is also why entertainment and food have become an important, although balanced, part of our portfolio. In fact, each of our three recent acquisitions have a dominant entertainment concept as an anchor, and for our current portfolio, food and entertainment represent approximately 15% of our AVR at the end of 2016.

In conclusion, 2016 was a good year despite some headwinds. I'm confident 2017 will be another successful operating year. We are envisioning the future of retail today, and our team and our portfolio are well positioned to create value in a changing environment over the next several years. That concludes my comments. I will now turn the call over to Geoff.

Thanks John, and good morning, everyone. I'm happy to report we had a solid year of financial performance in the face of a difficult retail landscape that included the impact of The Sports Authority bankruptcy. A couple of key accomplishment include reporting nonstrategic asset sales of $122 million, which represents the high end of our guidance for 2016, ending the year within our leverage target range and delivering full-year operating FFO at the high end of our guidance.

As John mentioned earlier, we had solid leasing performance in our portfolio. We would like to thank all of the Ramco team members for working collaboratively to accomplish the Company's objectives in 2016.

Now let's review the numbers. Operating FFO for the fourth quarter was $0.33 per share, down from $0.34 per share in the fourth quarter of 2015. The year-over-year operating FFO was impacted by lower cash NOI of $0.02, the result of capital recycling and lower lease termination fee income of $0.01, offset by higher noncash rent of $0.01 and lower G&A expense of $0.01.

We ended the quarter with net debt to adjusted EBITDA of 6.3 times and a fixed charge coverage ratio of 3.2 times. For the full-year, operating FFO was $1.36 per share, up from $1.34 per share in 2015. The full-year result was at the high end of our guidance range and represented another strong showing by our operating team.

Same-store NOI, including redevelopments, increased 1% during the quarter and was negatively impacted by a one-time accrual adjustment that reduced same-store NOI by 110 basis points. For the full-year, same-store NOI increased 2.8% and was negatively impacted by 110 basis points due to The Sports Authority bankruptcy. Minimum rents were a consistently positive contributor to same-store NOI over the course of 2016, driving 240 basis points of growth in the fourth quarter and full year, which highlights the strength of our leasing team and the quality of our portfolio.

Last night we initiated 2017 operating FFO guidance at a range of $1.34 to $1.38 per share. And we provided a reconciliation from our reported 2016 operating FFO per share to our expected guidance range for 2017.

As Dennis previously outlined, we expect to recycle $250 million of predominantly Michigan assets into our targeted growth markets. The effect of our capital recycling will result in an impact of $0.07 per share, but will be offset by $0.05 of growth from same-store NOI with redevelopment and $0.02 from interest savings.

At the completion of our recycling program in 2017, the Company will have harvested value from over $370 million of investments in a two-year period and redeployed the capital into new opportunities to create long-term value for our shareholders. From a modeling standpoint, we are modeling our dispositions using a midyear convention with two-thirds of our acquisitions occurring in the first half of the year, with the balance in the second half of the year.

Our guidance for same-store NOI growth including redevelopment is 2.5% to 3.5%. The range reflects some potential variability with respect to this year's ultimate disposition pool. We anticipate minimum rent to contribute 250 basis points at the midpoint; expenses, net of recovery income, will contribute 65 basis points of growth at the midpoint, positively impacted by the re-tenanting of our Sports Authority locations.

The full-year 2016 recovery rate highlighted on our same-property disclosure on page 8 of our supplement is a good base for future recovery rates, which we expect to marginally increase in 2017 as we complete the re-tenanting of our vacant Sports Authority boxes. We have also assumed approximately 40 basis points of bad debt expense in our guidance, offsetting same-store NOI growth by 15 basis points.

Our same-store NOI growth for 2017 assumes $48 million of redevelopment projects coming online, generating an average yield of 9% to 10% weighted towards the second half of the year. Combined with projects that were completed in 2016, we expect the impact of development projects to increase NOI by $3.25 million in 2017.

From a capital market standpoint, we expect to opportunistically raise $50 million of unsecured debt during the second half of the year to reduce the balance of our revolving credit facility and extend the duration of our balance sheet. At this point in the cycle we are extremely pleased with the position of our balance sheet, with a weighted average term of seven years and a weighted average interest rate of 3.95%.

Our balance sheet is extremely healthy and provides the flexibility to execute our recycling plan and drive value for our shareholders. We anticipate ending 2017 at a 6.5 to 6.7 times net debt to adjusted EBITDA. Although our leverage will trend slightly higher this year as we execute our capital recycling plan, our intermediate target remains in the low 6 times area.

While we may be foregoing short-term growth with our asset sales in 2017, we believe our higher-quality portfolio and leases coming online in the second half of the year will position the Company for sustainable long-term growth.

I would like to now turn the call over to the operator to open the line for questions.

(Operator Instructions)

Collin Mings, Raymond James.

Good morning, guys.

Good morning

First question for me, going back to the comments about increasing leverage this year. Can Dennis, Geoff, maybe talk a little more about your comfort level increasing leverage at this point in the cycle? And then along those lines, I think you touched on unsecured debt that you're looking to raise this year in the range of $50 million. What type of pricing would you expect on that?

Sure, Collin. I think as it relates to leverage, leverage will be higher at the first half of the year as we've executed a couple of acquisitions that we've funded on the line. Then it will naturally come down as we execute our dispositions.

We feel comfortable with the target range that we've laid out for 2017. I think that's how you should be thinking about leverage, just increasing first half and naturally coming down on asset sales in the second, third and fourth quarter.

As far as the debt raise, like I said we're thinking about $50 million opportunistically be weighted certainly in the last half of the year, probably the fourth quarter just given our thinking right now. Right now we're looking at, quote, somewhere around $160 million to $170 million over the 10 year, so we're thinking about a little more conservatively because we don't know how much volatility is in the market. But at least as of now that's a good benchmark on where our 10-year pricing would be for us.

Okay, that's helpful. Then just following up as far as on the planned dispositions. Last year I believe you achieved a, call it, a blended cap rate on about 7.6% on what you are selling.

Clearly the guidance this year is an increase over that. How much of that is a function of what you're focused on selling this year, the types of properties and location versus just the general uplift as far as cap rates in the market right now?

Collin, it is Dennis. One of the things that we didn't say in the press release or really address in the comments here is that included in our dispositions is, one, enclosed mall in a tertiary market. That is really driving the average cap rates up by about an estimate around 50 basis points. So that excluding that mall we certainly see the rest of the assets selling somewhere in the 7%s.

That said, the majority of these markets, and understand that these are all good assets but they are in smaller markets and they don't reflect where we are taking the Company. Although we feel good about those Michigan assets, the bottom line is that with our focus, as I articulated in my prepared remarks, they just don't fit any longer in where we plan to go. Obviously that also then decreases the impact of Michigan on the overall portfolio.

Okay, that's helpful, Dennis. One more question, I'll turn it over. I want to reconcile, I think in the prepared remarks you guys were talking about, call it, about a 36-month plan as far as transition but I think, Dennis, you also referenced that 10% of the portfolio that you recycling this year should substantially complete the transformation of the portfolio.

I'm just trying to get a better sense of the drag from some of the dilution that's going to happen this year and likely into 2018. Should we expect another round of 5%, 10% of portfolio turning over next year as you think about the pipeline, or is this year going to be the bulk of what you expect on the disposition front?

Well, first of all I apologize if I sent an improper message. When I talked about 36 months, I was really talking about our overall growth plan would encompass a 36-month period. No, the heavy (technical difficulties) ends in 2017 and we expect to initiate growth in 2018 with the objective of having sustainable growth in FFO of anywhere from 4% to 6%.

Okay, appreciate that. I'll turn it over. Thanks, guys.

Todd Thomas, KeyBanc Capital Markets.

Hi, thanks. Good morning. First question. John, I think you touched on this a bit in your remarks, but can you provide an update on the timing on where you are in terms of backfilling the four Sports Authority boxes and two Golfsmith stores? It sounds like there's some pick-up in guidance from re-tenanting these boxes. What's in the model in terms of rent commencements in 2017?

Sure. Of the four boxes we have three deals done, as I mentioned, the fourth one being in Fort Collins. From a commencement standpoint the one that Dick's took down in Florida will actually commence probably in end of March or sometime in April of this year.

The deals that we have for Nagawaukee will commence in the fourth quarter. That's our Wisconsin location where we have the two T.J. Maxx concepts in there. And then Clinton Point location, which we are just about to sign a lease on, will probably not commence until early 2018. That's basically what is in our forecast right now.

Regarding Golfsmith, actually we have two Golfsmith locations. One actually was taken by Golf Galaxy, the location in Troy, Michigan. That actually, there won't be impact, no downtime from that in 2017.

And the other one we're in the process of still working on leasing. Our assumption is that there's downtime for the whole year but hopefully we can make up some of that late in the year.

Okay. Can you talk about your exposure to Gander Mountain, the two boxes you have? It's about 110 basis points of base rent.

I know there are at two of your stronger centers, West Oaks and River City, but any sense what may happen there? Can you just talk about some potential plans or thought to the extent that you get those boxes back?

Sure. So as you mentioned, we have the two locations. It's uncertain what will happen. It's certainly somebody we're watching.

Our belief that the two locations we have, even though we don't have direct sales information or four-wall EBITDA information, but our understanding is that they're two good locations. As you mentioned they're both very strong properties for us.

We have started to work on potential backfills if we need to, and we feel comfortable that will be able to backfill them, even though it would have an impact, obviously, if they do close in 2017 it could impact us, which is why it's a taking longer -- that's why we've taken a longer -- I mean, a bigger reserve in 2017 then we would certainly think would be a typical year. Just one thing to point out, on the Gander we had just down-sized them in our Novi, Michigan location to put in Nordstrom Rack. One puts them in a size that I think they should be much more comfortable with long-term and also is, as you know, we've had quite a change in that merchandising there so it just makes it stronger and stronger

Okay. Then shifting over to acquisitions. You're more than 50% of the way through the 2017 guidance for investments.

What's the pipeline looks like today? What are you seeing in terms of pricing and trends for pricing and competition for these assets that you're targeting?

I'll take that, this is Cathy. I think that relative to the types of assets that were trying to buy we're not seeing a large change in pricing. I think that we'll see the pipeline increase.

There was a fair amount of property that was out last year that did not transact, and from our understanding that's going to come back into the market as sellers get a little bit more realistic on pricing. I think those will be probably in the 6% cap range.

Okay. Then on the dispositions, I guess just last question, Cathy, maybe also Geoff could chime in. How far down the road are you with potential buyers on some of these assets, including the enclosed mall you mentioned? Can you just give us a sense how confident you are on getting these dispositions completed, particularly given the strategy to buy first and temporarily increase leverage here?

Yes. Given what we've seen thus far, I think we're fairly comfortable by the end of the first quarter we'll close a little bit over $28 million. We've already taken offers on another $32 million.

One of those properties had a fair amount of upside. We were pleasantly surprised on a Michigan property we had 10 bidders, five or six were pretty tight on the pricing range.

Then we are in the market with another probably $75 million to $85 million. So I think based on that we're fairly confident we can execute on our plan.

Okay. Thank you.

Craig Schmidt, Bank of America.

Great. Within the existing portfolio will you be looking to sell assets not in the top 40 MSAs that are outside of the State of Michigan?

Hi, Craig. We will obviously as we continue to evolve the portfolio look at some assets that, again, don't fit the criteria of the two focuses that we've got. Those will obviously help fund acquisitions. On the selected basis as we are opportunistic on the acquisitions. There are a few assets, some very good assets, that we will indeed utilize to pay for the acquisitions. But you won't see anything close to even what we sold in 2016 as far as dispositions are concerned.

Okay. Then the $250 million of dispositions this year, how far does that get you through removing the non-core assets from your portfolio?

Well again, to the extent that there will be some assets in the portfolio that fit that, either fit the property definition but may not be in the top 40 MSAs, we'll obviously look at those again to try and match up some acquisitions and dispositions. But over 90% of the portfolio at the present time are in the MSAs that we are focused on.

Great. Thank you.

Vineet Khanna, Capital One Securities.

Thanks for taking my questions. Going back to tenant health for a little bit, I believe you guys have a couple MC Sports, and that's another sporting goods retailer to close. What other struggling retailers do you have exposure to? I know you mentioned Gander, but maybe you could talk about MC Sports and then also your watch list in general.

Sure. On MC Sports, you're right. MC Sports is a regional sports operator, sporting goods retailer who we have two locations totaling about 45,000 square feet. They are apparently are going to be liquidating and we are expecting to get the stores back sometime in April, and are actively working on backfills and in fact we believe we have one of them already potentially backfilled.

Looking at our other locations, there's only a handful of other things outside of the list that you have probably already heard that we are keeping an eye on including a Payless Shoe Source where we only have eight locations totaling 25,000 square feet and also Route 21 where we have 11 locations. Beyond that, that's really -- that's generally, besides a few small shops here and there, we don't have a broad watch list that we're overly concerned about.

Okay, great. Regarding the increased redevelopment plans for this year and beyond, how much of that is entitled and ready to go as opposed to there's some work that still needs to be done?

Our existing pipeline of $70 million are all at this point we're comfortable that from a execution standpoint, both from leasing standpoint and a [titlement] standpoint, and we tend not to try to put anything on the pipeline until it's pretty well at the point that we're comfortable in the execution and have a low risk on execution. I think we feel pretty comfortable with the near-term execution.

Okay. Then just last one for me. The ancillary income initiative that got started about a year ago, maybe you can provide an update on how it trended in 2016 and what the prospects are for 2017?

I mentioned at the beginning of the year that was still a growth opportunity and it still is. For the year we added about -- saw about a 10% growth in that line item. When you talked about the dollar magnitude it's only $100,000 to $200,000 from a growth standpoint.

Over time we certainly think 10% growth over the next few years or something we should be able to achieve at that line item. I would have hoped for more in the first year, but certainly we're going to have our legs under us of execution. So it's certainly going to be a focus in 2017 and beyond

Okay, great. Thanks for the time.

George Hoglund, Jefferies.

Good morning. In terms of the market focus going forward in terms of new markets, looking at Nashville and you've got the one large asset there now. Would the plan be to try to increase the Nashville exposure and focus on building up that market and what other markets would you be looking at?

Hi, George. We certainly, with (technical difficulties) see from our past experience, we would be looking to increase our presence in Nashville, but again it would have to meet the criteria that we've laid out relative to the two types of shopping centers. As far as other markets are concerned, we are indeed looking at a number of other markets. Once again, they have to have those key growth elements relative to population, employment and household income.

Okay, thanks. Then going beyond 2017, I know you said the majority of the heavy lifting will be done. Would you expect to continue to do some one-off asset sales, continue culling your bottom, call it, 5% or 10% of the portfolio?

I think that's absolutely, it's a sensible approach, especially with assets that, let's assume, we have maximized its value, they're now very stable, we don't see too terribly much upside. What's interesting is, in the assets we are selling, and again these are good assets, their growth potential fell somewhere between 1% and 2%.

The three assets that we have acquired have internal growth metrics, between contract increases as well as lease rollovers, we are talking about increases in the 4% range. So as some of our assets fall into the first category with slower growth, they indeed could be candidates for sale. But we would look to match that up with acquisitions where we can add significant value.

Okay. Thank you for the color.

Vincent Chao, Deutsche Bank.

Good morning, everyone. Want to go back over to the same-store guidance here and just make sure I heard everything correctly. I think I heard 40 basis points of bad debt is included. One, is that correct?

I think the Sports Authority was 110 basis point drag in 2016. Is that a similar drag in 2017 after you factor in the commencement timing that you laid out earlier? I will start with that.

Yes, Vin. It's Geoff. How are you doing?

Hey, Geoff.

Yes, it was 40 basis points of bad debt for the fourth pool that we are using for 2017. It's a little bit higher than how the pool performed last year, which was 30 basis points. We are taking a little bit of a conservative view, but just so you have the color around the 40 Bps.

Vin, talking about the impact of Sports Authority. No, the impact for 2017 is more like 20 to 30 basis points still because of the lease-up we are doing. But remember, we are still holding about the same amount of tenant failure reserve in 2017 as we saw in 2016, which we think is a high year of reserves. If we have a normal year for that kind of tenant failures we'll be more -- we believe we'll be at the top end of the range of our guidance for same center.

Okay. Just so we're clear, then. The tenant reserves you're talking about is that 10 basis point increase in bad debt? (Multiple speakers). It doesn't seem tremendously high, or is it something else?

No, it's also we actually carry a reserve for not only bad debt but also unexpected vacancy, actually truly tenant failure. And that total reserve is what we think was, because of Sports Authority, it was $1.8 million high last year versus what we typically would've expected.

Got it, got it. As a percentage of NOI, is that, again, another 40 basis points? I don't have the model in front of me here to do the math.

If you think about overall it's about $3.8 million, so as a percentage it's definitely much higher than the 40 Bps.

Got it, okay. That's fair. And then I think also some of the moving parts here are the asset sales, exactly what sells and when. But just curious if there were no dispositions this year, how would that impact the same-store NOI outlook?

Obviously the same-store pool, our forecast is meant to -- it contemplates the sales property. So it depends on -- if we didn't sell those assets, again there's probably slower growth. It hard to tell. It's not something we [pro forma'd].

Got it, okay. All right. Just one other question, different topic. The new lease spread in quarter was quite high. I'm guessing that some of the TSA releases. Is that correct? And if you net that out, what would the new lease spread look like?

No, actually the transactions we have, those four transactions, aren't -- it's actually the one, it's three small shops and one larger box, a 19,000 square foot box which is driving a lot of that gain. We took an old Asian grocery store and are re-tenanting it and doubling the rent on that. It required more TI typically, but we're sorely getting paid for it.

I don't have a pro forma if we were to take that out. But obviously when you look -- rather than looking quarter to quarter, when you look overall for the year, we're basically in line from a spread standpoint with higher quality leases, as I mentioned in my prepared remarks

Okay. Just one last one from me, just on the Chicago acquisition. I thought I read that there was a Barnes & Noble in there. How you think about that exposure? Is that part of the upside scenario where you get that space back and can re-tenant it, or how much term is left there? Just maybe some thoughts there.

Very insightful. We have approximately a year, 1.5 years left on that lease with no options. It is significantly below market rental rate. So we see very healthy upside in that space, as well as turning some of the other smaller spaces.

Okay. Thanks, guys.

Michael Mueller, JPMorgan.

I guess with respect to the acquisitions and possibly moving into new markets, can you talk a little bit about staffing and how the staffing works in terms of the ability to move into new markets, or will be adding folks at different regions to accommodate that?

Sure, Michael. This is John, I will take that. One nice thing about when you buy, like we did at Providence, when you're buying a property that size is that you can hire on -- have on premises personnel of a high caliber and it actually ends up not -- just being part of the property expense. With that plus the local leasing personnel that we'll have in Nashville, that we'll hire third party, we believe that we have new markets like that covered pretty well.

Also just to remind you, that we split into the two regions that we implemented in 2015 and have already seen some good ability to focus on opportunities there. Having those two regions can be able get a firsthand look at opportunities in new markets and really drive value there.

Okay. So it doesn't seem like you need to step-up substantially?

No, it's really just using on-site personnel. And remember, we are trading out -- we're selling for assets too. So there's no new net increase at this point.

Got it, okay. I apologize if I missed this, but if we're thinking about the year-end consolidated occupancy, and ignoring any impact from mix changes from buying and selling stuff, where do you see occupancy ending the year, more on a same-store basis?

Total occupancy about fairly consistent, I think where we saw end of 2016. Small shop, as I mentioned, from a leased occupancy standpoint we certainly hope to continue to push occupancy there to get to more of a stabilize number.

Okay. Okay, thank you.

Floris van Dijkum, Boenning & Scattergood.

Great, thank you. Good morning, guys. A question on cap rates first. We've heard a number of your peers talk about how they're starting to see cap rate expansion of 50 bps, or in some cases higher, in secondary or tertiary markets. Are you seen some of that and where are the cap rates on your disposal -- or properties that are in the market today relative to maybe where they were a year ago, if you can comment on that?

Yes, this is Cathy. I think in general we've seen that 50 to 150 basis point spread between the A and B properties, a little bit less on the grocery-anchored centers and a little bit more on non-grocery power centers. Deals with upside are definitely getting more traction. So I think you'll continue to see that, and I think that it's just reflective, our sales are reflective of that delta as well.

So that means your, call it 7%, 7.5% expected disposition cap rates incorporate those cap rate increases?

Yes. For instance, our Q1 dispo will be in that range, high 7% range on cap rates.

Great, great. One other question, and maybe this is for John as well. I think somebody else touched upon it a little bit earlier, but it would be really useful maybe to -- if you gave the market a little bit better view of what Ramco will look like in three years time, and in particular in terms of market trying to achieve critical mass in certain markets.

You just entered Nashville, so you one asset there, you have now two assets in Minneapolis, you have one asset in Baltimore, three assets in Atlanta but none of them seem, for a lot of investors, seem like that would provide you with critical mass or any real market presence. How would you think about that and where would you ideally like to be in a couple of years time?

It's hard to predict exactly where we'll end up being, but our view is if you buy the right real estate with -- who are super regionally dominant real estate that it's less important probably to have -- we'd rather have that then four or five smaller assets because we believe that's the future of the business. But if we compare an asset like a Providence with a urban type location like we just bought in Chicago or Minneapolis, we believe that's a nice mix.

That has worked well for us with the Centennial acquisition, we have it paired up now in Minneapolis with Woodbury. I think that's the program. I don't know, but it's hard to predict exactly where the opportunities will be, and to us it's about having the right real estate in the right sub-markets in these rather than more of a quantity of real estate.

If I could just, Floris, if I could just add. John is spot-on with our philosophy, which is if you accept, as we do, that the retailing industry is transforming so the shopping center industry also needs to transform and having bulk in a market does not necessarily mean that you're going to be successful. We will have boots on the ground, as John mentioned earlier, with the Providence acquisition. So it isn't like we're going to have remote management for that asset.

And really it's, once you get to understand the national market, we are, indeed, especially on the east side of Nashville, we are the absolute dominant asset and we are drawing from far more than even 10 miles. Having the dominant asset, having the right tenant mix, bringing in place making and our community-first initiatives will ensure the success of that asset, and we are not going to try and bulk up just for a greater presence sake.

Thanks, Dennis.

(Operator Instructions)

I'm showing no further questions at this time. That does conclude our question-and-answer session. I will now turn it back to Mr. Dennis Gershenson for closing comments.

As always, ladies and gentlemen, thank you very much for your interest and your attention. We put a great deal of thought into the direction of our industry, and we believe that with the acquisitions and dispositions that we are making we are truly building in long term sustainable growth starting in 2018.

We will have completed, for all intents and purposes, our portfolio transformation as of the end of 2017. We will be, as we have with Nashville, more likely than not going into at least one new additional market. I'd like to think that at this juncture we will be viewed as the absolute best of the small-cap shopping center REITs with a tremendous runway for future growth.

We look forward to articulating those in the future. Thank you again.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.