Site Centers Corp (SITC) 2017 Q3 法說會逐字稿

Good morning, and welcome to the DDR Corp. Third Quarter 2017 Earnings Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Brandon Day-Anderson. Please go ahead.

Good morning, and thank you for joining us. On today's call, you will hear from President and CEO, David Lukes; Executive Vice President and Chief Operating Officer, Michael Makinen; and Executive Vice President, Chief Financial Officer and Treasurer, Matthew Ostrower. Please be aware that certain of our statements today may be forward-looking. Although we believe such statements are based upon reasonable assumptions, you should understand these statements are subject to risks and uncertainties, and actual results may differ materially from forward-looking statements. Additional information about such risks and uncertainties that could cause actual results to differ may be found in the press release issued today and the documents that we file with the SEC, including our Form 10-K for the year ended December 31, 2016.

In addition, we will be discussing non-GAAP financial measures on today's call, including FFO, operating FFO and same-store net operating income. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings press release issued today. This release and our quarterly financial supplement are available on our website at www.ddr.com. For those of you on the phone, who would like to follow along viewing today's presentation, please visit the Events section of our Investor Relations page and sign into the earnings call webcast.

At this time, it is my pleasure to introduce our President and Chief Executive Officer, David Lukes.

Thank you, Brandon, and welcome to our Third Quarter 2017 Conference Call. I'd like to start the call by expressing our thoughts and gratitude to our team in Puerto Rico during this difficult time. Many are struggling with challenging day-to-day circumstances and damage to their homes and belongings. Despite this adversity, our team has accomplished an enormous amount in very little time and I'm incredibly grateful to them. We've got quite a bit of content to review with you this morning. First, I'll recap our 3Q results, including a review of our transaction activity. Then I'll provide an overview of the current state of our assets in Puerto Rico. I'll then hand it over to Mike for more detailed commentary on the operating side. And finally, Matt, who will comment on our financial statements, including updated guidance and we'll close with some comments on our balance sheet progress.

To summarize the quarter, operating FFO of $0.30 per share was in line with our internal expectations and includes an $8.2 million benefit from the expiration of a Sears ground lease at Riverdale village. The year-over-year decline in operating FFO per share was a product primarily of dilution from deleveraging and to a lesser extent, a decline in NOI from Puerto Rico. While FFO was within our budget, Continental U.S. operating results were better than we originally expected. Specifically, same-store NOI for the Continental U.S. portfolio performed ahead of our budget of negative 0.7%, largely because of lower bad debt expense and the impact of real estate tax incentives. The better-than-expected NOI growth resulted in increase in our Continental U.S. guidance, which Matt will speak to later.

Excluding the impact of hurricane Maria, our performance in Puerto Rico was in line with our expectations. Our percentage lease rate of 93.4% represents a sequential 40 basis point decline from 2Q, was ahead of our prior guidance of 93.2%. Both this metric and occupancy, which was roughly flat compared to last quarter, benefited from ongoing leasing progress. I'd like to put our current leasing efforts in context with the results of the portfolio review we concluded and discussed on our second quarter call. As a reminder, we had categorized 66% of our NOI coming from properties that we viewed as durable. Much of our leasing completed during the third quarter was within this group of assets. We continue to make steady progress on maintaining the dominance of these assets by replacing vacated tenants at rents slightly above the prior tenant's rent and in most cases, introducing new retailer offerings to our trade area with footprint expansions from discount tenants with strong credit.

The second group of properties we outlined last quarter were the ones where we see growth potential, which represents about 25% of our NOI. It's these properties that our leasing team is spending considerable time working on, and which we will be discussing in more detail over the next few quarters. When a dominant center gains an anchor vacancy, it's a real chance for the landlord to make a compelling long-term change to the property, both financially and with respect to tenant mix. The trigger for our opportunity is a vacant unit, but the result is that we have available GLA that's fully entitled. It's important to note that our growth bucket of assets sit within trade areas with superior income demographics, in most cases, above $90,000 per household. What we found is that the range of vacancies are wide with respect to size, between 20,000 and 40,000 square feet, but the tenant demand is also wide, ranging from 10,000 square feet to 30,000 square feet. In general, the smaller the tenant, the higher the per square foot rent and, therefore, our economic opportunity relies on our ability to facilitate site plan changes that are beneficial to the current tenant demand. This is also why we initially gave our opinion that box vacancies in stable markets will average 12 to 18 months to backfill, a statement we still believe to be accurate.

The first spaces to lease tend to be exact backfills and the longer duration vacancies tend to be box reconfigurations. Our #1 job is to match demand with entitled space and we've assembled a great team of development and leasing executives to capture that value. Long-term property health relies on tenant mix and our national accounts team headed by Bill Kern, have been very active in the last 2 quarters, helping those growing retailers find space in our best assets.

Outside of operations, I'm pleased with the progress we've made continuing to sell properties. Specifically, we sold $392 million of assets this quarter on top of $124 million in the first quarter and $237 million in the second quarter. The weighted average cap rate for dispositions in the third quarter was once again sub-8%. We also sold an additional $190 million shortly after quarter-end, which leaves us just under $400 million in proceeds at DDR share needed to reach our $900 million sales target we put out last quarter. Finally, Matt will comment more later, but dispositions and a variety of capital markets transactions have allowed us to quickly transform our balance sheet. With the closing of our new and expanded line of credit and term loans, we've substantially increased liquidity and completed the maturity extension process, leaving us to focus on deleveraging as we continue to sell assets over the coming months.

I'd like to now provide some commentary on our Puerto Rico operations and assets. Our priorities there have been first and foremost, to account for our employees and to provide for their well-being. Second, we've been working to ensure all properties were physically safe and watertight. Third, we work to remove debris and provide generator power so that we can get stores and common areas open as soon as possible to ensure that people of Puerto Rico have access to basic living supplies.

Finally, we've been working with our insurance company to assess damage, arrange for advances on business interruption insurance and begin to make permanent repairs to assets. So where do we stand today? We now have power. Either through the grid and/or through installations of generators at 9 of our 12 assets, including 4 enclosed malls and 5 outdoor centers. In addition, 24 of our 33 anchors are on grid or generator power and open for business. All this means that as of today, excluding Palma Real, 75% off our leased Puerto Rico GLA is now operating and open for business. It's difficult to provide generator power to individual small stores, so opening of shop spaces at our open-air properties generally depends on the restoration of grid power. Other stores that will remain closed over a longer time period include those who have received water damage, including some that are in our enclosed mall assets.

We've completed an initial property damage and business interruption reimbursement estimate of $100 million to $125 million. Roughly 1/3 of these costs are attributable specifically to Palma Real, which we expect to be repaired and restored. This estimate excludes $30 million of estimated cost associated with repairing damages to anchor spaces that are separately insured by those tenants. It also doesn't take into account the potential changes in pricing due to supply and labor shortages.

Finally, we have commenced the process of formally scoping the specific permanent repair work at all properties, and have sourced the contractors and professionals necessary to restore these assets to pre-storm condition. We are focused on getting our properties reopened as quickly as possible and have the resources and the right employees and tenant partners on the island to do so. Our SVP of property operations, Joe Lopez; our SVP of construction, Joe Chura, and our lead property management executive in Puerto Rico, Xavier Gonzalez, are ultimately responsible for these enormous undertakings. They are among the most diligent, thoughtful and effective real estate professionals with whom I've ever worked and I thank them for their efforts.

We will, of course, make every effort to provide you additional information on our Puerto Rico business as we have it. And with that, I'll hand the call over to Mike Makinen to provide you some additional color on our operations and the leasing environment generally.

Thank you, David. Total same-store NOI growth, including Puerto Rico was negative 0.9% in the third quarter, fueled by modestly positive growth in the continental U.S., and negative 6.5% growth in Puerto Rico, when adjusting for hurricane cost and including hurricane-related bad debt. As David mentioned, our lease rate was ahead of our expectations and our commenced rate was roughly flat sequentially, primarily due to a combination of steady leasing and store openings, partially offset by no move outs. We're particularly pleased to have the country's first 2 HomeSense stores, TJX's new home furnishings concept, opened at Shopper's World in Framingham, Massachusetts and in East Hanover, New Jersey. The sequential decline in lease rate was caused by the aforementioned Sears ground lease expiration. We expect our continental U.S. lease rate to end the year in the 93.25% to 93.75% range. This range assumes no significant bankruptcy related store closings ahead of year-end.

As we have said for the last 2 quarters, the leasing environment continues to be characterized by steady demand for space. To that end, we continue to expect that it will be a 12-month to 18-month process to achieve rent commencements for new tenants filling anchor spaces made vacant from recent bankruptcies. We now have 24 of the 28 former Sports Authority, hhgregg and Golfsmith spaces released or in LOI negotiations. Third quarter new leasing volume was 259,000 square feet. We feel good about our activity levels given we have nearly 536,000 square feet of new leases under LOI or in process as of the end of the quarter. Importantly, our small shop leasing focus has continued to generate an increase in activity for this portion of our portfolio. Blended new and renewal leasing spreads of 6.2% were consistent with year-to-date trends while net effective rents improved significantly to $15.50 this quarter from $9.50 in the second quarter, primarily a result of better economics from greater small shop leasing and overall renewal activity this quarter.

This metric has historically been volatile and is generally affected by CapEx required by anchor leases offset by less capital-intensive, high rent Inland volumes. With that, I'd like to hand the call over to Matt Ostrower, who will review our financials and refresh our 2017 guidance.

Thanks, Mike. I'd like to start by reviewing the impact of hurricanes Irma and Maria on our 3Q financial statements. First, we recorded $6.1 millions of hurricane casualty and impairment costs on the income statement. Approximately $1 million of this relates to hurricane Irma, primarily debris removal, which is within our deductible and thus will not be reimbursed by insurance.

The second component of this line item is a $5 million capital cost related to the deductible for property and casualty damages from Hurricane Maria in Puerto Rico. This $5 million capital cost is a difference between a $65 million write-off of historical cost basis of property damaged by Hurricane Maria and a $60 million receivable on the balance sheet representing the portion of the book value of damages, for which we expect to be reimbursed.

As David mentioned, our actual estimates for the cost of repairing damages is likely to be higher than the write-off of historical book value this quarter. Second, lost revenues from hurricanes Irma and Maria during the third quarter were roughly $2.6 million, approximately $1 million of which is attributable to our deductible on Puerto Rico insurance policies and will not be reimbursed. Separately, we recorded an increase in bad debt reserves of $900,000, attributable exclusively to anticipated greater tenant financial difficulties in Puerto Rico. Both the $2.6 million of lost revenues and the $900,000 of Puerto Rico bad debt reserves were excluded from our calculation of same-store net operating income.

Third, the company received the business interruption advance payment of $2 million related to third quarter loss revenues shortly after the close of the quarter. Given the timing, we were unable to record this revenue on the income statement, but expect to do so in the fourth quarter. Going forward, we are working to ensure regular payment of business interruption advances and would hope to record those on the income statement limiting the short-term impact of storm damage to net income and FFO.

We carry property, casualty and business interruption insurance with limits of $330 million, including a $6 million deductible. Business interruption insurance generally covers the time it takes to make tenant spaces habitable plus 1 year. Our insurance policies carry traditional terms and contingencies that could affect actual insurance reimbursement. Switching gears to the balance sheet, we made significant progress this quarter and over the last 6 months extending maturities and improving liquidity. With the placement of a $350 million, 7-year bond offering, as well as the recasting and expansion of our line of credit and term loans, we believe this portion of our balance sheet restructuring is now complete. Our weighted average maturity of 8.3 years, when including perpetual preferred securities, now ranks as one of the longest in the shopping center REIT group. We have almost $1 billion of liquidity with full availability on our recast line of credit after accounting for October asset sales, as well as a well-laddered maturity schedule. Just 2 quarters ago, before we undertook these capital markets transactions, we faced a significant wall of maturities with $1.1 billion of debt or almost 25% of the total maturing in 2017 and 2018 and an additional $1 billion maturing in 2020. Going forward, we will focus primarily on de-leveraging. Successful completion of the previously announced $900 million disposition program would result in several additional improvements, including a better comprehensive leverage profile, additional extension of our weighted average maturities and no unsecured maturities until 2021. We repaid our remaining 2018 secured maturities yesterday, further increasing and improving the size and quality of our unencumbered asset pool. Finally, we have reduced the reserve for our preferred investment in the Blackstone joint ventures that we reported in the first quarter. This $15.4 million reduction is a product of higher-than-expected sales prices on several larger assets that closed or are under contract in the third quarter. As we discussed in the first quarter, GAAP accounting rules require us to adjust the security to market on a quarterly basis, which means the reserve could increase again if future sales prices fall below expectations. One other Blackstone related item. We reached the sales threshold in our Blackstone 3-joint venture in the third quarter. As a result, we believe that 52% of all further sales proceeds will now be used to repay our preferred interest in that venture. Subsequent to quarter-end, we received a $48.6 million repayment related to the sale of Kyle Crossing and Whittwood Town Center with total year-to-date preferred repayments now up to $55 million. As we stated last quarter, we view disposition proceeds and Blackstone preferred proceeds as interchangeable in pursuit of our $900 million sales target.

I'd like to now turn to some changes to our 2017 guidance. First, we've increased our same-store NOI guidance for the U.S. portfolio to negative 0.5% to positive 0.5% from negative 1% to positive 0.5% previously. This implies that U.S. same-store NOI should now trough in 4Q, down modestly from the midpoint of the guidance range.

The better guidance is a result of the above budget performance of the U.S. portfolio over the last 6 months. As Mike mentioned, our expectation for year-end Continental U.S. leased rate remains unchanged. Second, we are withdrawing 2017 guidance for same-store NOI performance in Puerto Rico. As David mentioned, roughly 75% of our lease GLA outside of Palma Real is now open for business, including all major anchor spaces. This represents significant progress in a short time period and we are optimistic about continuing to reopen centers and stores over the coming weeks.

The pace of this progress will depend in part on restoration of grid power to certain centers, which is difficult to predict. In addition, selective spaces in all centers and the vast majority of space in Palma Real will not reopen for some time because of necessary repairs. We expect lost revenues attributable to the hurricane will be covered under our business interruption insurance policies, but the timing of these payments often occurs with a lag, which impacts comparability. So to summarize, we believe we will make progress reopening stores in the fourth quarter, but we still expect to face a significant revenue decline in the quarter. We hope to offset some of this decline with business interruption insurance advances, but some of these payments may ultimately be received and recorded in a later quarter.

With that, I'd like to hand the call back to David for a couple of closing comments. David?

Thanks, Matt. My takeaway this quarter is steady progress. We have a significantly better balance sheet than we did even a few months ago. Our Box leasing continues to be effective. Our renewed focus on shop leasing is starting to produce results and our knowledge of the portfolio we own is a deepening. We use the annual budget process to evaluate risk and opportunity, which is proving to be accurate and helpful as we focus our efforts. Even in the face of a hurricane, our culture reacted quickly to focus on immediate solutions. We know where we need to create value for shareholders and our stewardship of this portfolio is going to produce results. And with that, I'd like to hand the call back to the operator, so we can take your questions.

(Operator Instructions) Our first question comes from Christy McElroy with Citi.

Just following up on the leasing that you've been doing, it sounds like there's more juice in there given what you have under LOI, that's not reflected in the leased rate. You talked about this 12- to 18-month time period in terms of commencement, that's a pretty big window. Maybe you can give us a sense for sort of along that timeline, how we should be thinking about lease commencements? I know you talked a lot about sort of reconfiguration of space, but maybe we -- just so we can wrap our arms around the downtime that we're talking about?

Christy, this is Mike. I think the best way to answer that is going back to the 12- to 18-month window that we've identified. We still feel pretty strongly that, that is the appropriate window for backfilling some of the vacant spaces that came to us via the recent tenant bankruptcies. But generally, the way that it's working is that in the early phase of getting those back, there's some pretty quick lease up, because you're generally getting tenants who are interested in that precise space, and so there's an easy conformance with what their prototype is and what the space that's available happens to be. As time goes on, the thing that ends up taking the majority of the time is working through the configuration of spaces when a tenant needs 25,000 feet and we have 35,000 feet, and so what ends up happening is we end up talking to multiple tenants and we have to conform and reconfigure the spaces to make it work. That takes quite a bit of time upfront, which is really why things end up going out to as long as an 18-month window. But we feel pretty confident right now that we're in a great progression as far as filling spaces and as far as our overall Junior Box leasing with -- at this moment, we have, at 100% share, over 600,000 square feet of leases in progress. So we feel we're making good progress and we also feel that we're pretty much in sync with our expectations and our historical norms in that deal flow.

Christy, just one point of clarification, the 12 to 18 months is after we get the store back, right, post-bankruptcy or post-departure, so it's not meant to be a statement from today.

Okay. And then just, Mike, maybe some insights into what you know about timing in terms of decision-making around Toys"R"Us store closings and then how are you thinking about your exposure, just given all the changes in the movie theater industry right now, how are you thinking about your exposure there?

I'll start with Toys"R"Us, and right now, we're in conversations with Toys"R"Us. They're certainly, in general, looking at and working with us favorably in some cases, less favorably in others, but right now that's a work in progress and we'll have more to report on that, most likely next quarter. As far as the movie industry, we've got pretty good relationships with AMC and Regal and in general, we're finding that in our centers, we happen to have pretty good locations and we feel pretty confident that we're in pretty good shape with regard to the movie industry and the leases in our centers.

Our next question comes from Todd Thomas with KeyBanc capital.

In terms of the disposition cap rates in the quarter, which you characterize as sub-8% and also the better-than-expected pricing on the Blackstone asset sales, can you just provide a little bit more color around those comments and what you're seeing in general, and maybe just talk about how demand and pricing for the assets that you're in the market with now is?

Todd, I wish that the data pool was big enough to be able to tell you something that was a credible number, but the reason we kind of say sub-8% is simply because the cap rate on assets we're selling range from the 5s to the 9s. So it really depends on which assets close during that quarter. I would say that for the most part, the buyer pool has been fairly steady. Their access to mortgage debt has been fairly steady and the closing process has been consistent with prior years. So we haven't really seen a great change in the transaction markets that is worthy of noting.

And on the Blackstone piece, just a comment. I think -- we have only partial visibility on that process, right, we're not running that whole process. So in a certain sense, we had to put an estimate out there at the end of the first quarter. And the sales process had just really begun then, so we had limited visibility and the process was early. We obviously are able to fine tune things more as that process continues and as transactions actually happen. So it's less about some massive change in the market overall and more about our increasing visibly on actual values.

Okay. And then just following up on the -- some of the anchor vacancies. Thinking about those going forward, to the extent that there are additional vacancies, are you anticipating from here that the majority of the incremental boxes you might recapture would be reconfigured versus backfilled as is and how much is the average cost per square foot generally when you have to reconfigure a box?

Well, the cost per square foot's an easy one, because it's all over the map. I mean, it really depends on a tenant work letter, figuring out what their credit looks like, what kind of square footage they need. I would say that, that's the most intense financial analytics we do is when we're splitting up a box, because we're trying to figure out how much return we can get and how safe that capital investment is.

As far as the proportion of breakout of how many would be splits, it really depends on what we get back. That's the same answer, every space is different, every tenant's prototype is different. So that's really to be determined.

And I'll also add that it's not out of the norm in this sector that spaces were purpose built for a prototype and 10 years later, prototypes have changed and that's why the cost to build a one-story, open-air stip center box is relatively small, relative to other asset classes. And so configurations are a normal part of the process. You saw with you have seen with Mervyns you see it with Kmarts a normal part of process, and so I don't think it's something we find surprising.

And I will just highlight, it's Matt. I'd just highlight that we are very thoughtful about the economics here, right. Credit is extremely important for spending money it's got to be somebody who we think is going to be there, not just for the initial lease term, but through several renewals thereafter, so we can actually make money. We're not just shoving people with pulses into boxes, particularly on these more CapEx-intensive areas.

Our next question comes from Rich Hill with Morgan Stanley.

I want to just chat a little bit about the transaction market in light of your $900 million disposition plan that you previously announced. It looks like you made some good progress. And then you made some comments earlier about maybe higher-than-expected sales prices. So what are you seeing in the U.S. market at this point? How is demand for buying properties, is cap rates stable, they're tightening, they're widening. What you're thinking about given that you're pretty active at this point?

Richard, it's hard to be kind of a spokesperson for what the entire transaction market looks like. I think from our own company's perspective, over the last 5 years or so, DDR has disposed of a substantial amount of assets. And so you make the argument that what we're disposing of now is primarily for the purpose of de-leveraging and not because of outsized risk on the asset, which just means that there are other buyer that are finding value and I think the cap rate that were getting are very fair. If I had pullback in characterize it I would say that there are certain buyers that understand it's property type, they're able to get mortgage debt and they can receive very good returns in kind of property types and submarkets that maybe less desirable from certain institutions. And so the buyer pool tends to be little bit more private, I would say, and a little bit less institutional.

Got it. And so and I'm sorry if I missed this, did you disclose cap rates on the, call it, $300 million plus that you sold in the quarter?

We simply said -- in the script, we said that their sub-8% is kind of our normal process.

Okay great. And then just one quick question on the occupancy guidance. Obviously it increased. Is it comparable to the 93 to 93.5 previously I was looking at the prior press release and this press release says the U.S. portfolio, but the prior press release was silent on that. So I'm just curious is that comparable or is there some impact relative to Puerto Rico?

Yes. You're asking the right question, Rich, just to be totally clear, it's not comparable. We would say, we never kind of a gave the U.S. occupancy number before. So given the comments I made about Puerto Rico, I think it's very difficult to know where occupancy is going to end up there. So we're taking all the table. We're giving the new number for the U.S., I will tell you based on our internal numbers previously, that occupancy number is unchanged.

Our next question comes from Craig Schmidt with Bank of America.

I'm wondering what we think about the lost revenue for Puerto Rico in fourth quarter?

I'm sorry, what do we think about it?

No, no. What should we think -- we as analysts trying to budget for the year, what do we think we might lose relative to the number you gave on 3Q?

Yes. I think, that's -- there's obviously a problem there, right? We're in a situation where I think it's very, very difficult to predict. I think we try to be as transparent as we can about our expectations for our operations and we've done ourselves in a position where we just find it extremely difficult to make a forecast there. It's only 12 assets, right? It's obviously significant part of our revenue base, but it's only 12 assets. It really will depend, Craig, on things like does grid power come back on. It's -- so it's -- I think we don't really, I would tell you we ourselves don't feel like we really know that number yet. Otherwise, we'd have given you some kind of an estimate. I'm sorry to not be able to be clear about it.

Okay. And then, just thinking about your tenant watch list with the real focus on Big Box and Junior Anchors, relative to year ago, do you think things are the same, better or worse in terms of potential closings in '18?

Well, yes, so I guess, the watch list is a different question than exactly what's going to happen in '18. We use our watch list obviously to decide on to whom do we want to extend credit, to whom do we want to spend capital on, which requires a much longer view just '18. What I can comment on is that our watch list is relatively unchanged. There's been some in's and out's obviously, you see some things come down as a result of the bankruptcies that we declared throughout 2017. And then we've obviously put some more on, given some of the news that's come out and our analysis of the financial statements for some of the larger companies. But the actual exposure number has not changed dramatically in the last 9 to 12 months.

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

Two questions. First, maybe a different way of ask -- of Craig's question. Down in Puerto Rico, what percent of tenants are currently paying. So obviously, Simon gave what their view is. From their assets, Kimco gave their view from what they're booking. Can you guys just tell us currently what percent of your tenants are paying rent?

Well, we really haven't had long enough to know the answer to that question, Alex. If you think about the time horizon here, things happen relatively close to the end of the quarter. We really will know a lot more in another 5 or 6 days, right, which is unfortunate timing as it relates to our providing guidance on this call. What we said was that 75% of the leased GLA is now open for business ex Palma Real. We would certainly expect those tenants to pay their rent. But it's a fluid and uncertain environment. Some tenants may not be able to pay their rent, others may say that they have the right to abate. There's just a lot of -- there's a lack of clarity on exactly what those cash flows are going to look like. It's another level of uncertainty that we have in predicting these cash flows. So we're telling you really everything that we know at this point in time, which is, who's open and where we got power, et cetera. The actual revenue prediction, I think, is quite difficult.

Okay and then, but as part of that, the 75% of those tenants are primarily U.S. national or super credit-type tenants? Or is it a mix of -- or some of the stuff that's closed is not just small-shop, but it's also some of nationals?

It's a huge cross section, right? I would say that you can't really -- I wouldn't say there's any real bias to that number. We have, we said 24 of the 33 anchors are now open, obviously anchors tend to be certainly national or certainly higher credit. So you can take some comfort in that. But then you can -- to get up to the 75% of GLA open, it's a lot of small shops as well and we do have -- we have a bigger small-shop exposure in Puerto Rico than we do in our U.S. portfolio. Alex, one thing I would tell you is just think about also the other moving part here, you're asking about revenues, which is, obviously, a fair focus, the other piece of this is BI, right? So to the degree we don't get rent from some of these tenants, to the degree we can't get more of them open, to the degree power turns off or doesn't turn on in certain areas, we will be collecting BI on that. I think as some of our peers would have said to you, it's just very difficult to know exactly when that BI will come in the door. I think we've done a good job arranging to get some of it earlier. But that's still a work in progress and we don't know exactly when the payments are going to happen and when we'll be able to record them on the income statement.

Right. But once you do get the BI, that covers the whole portfolio whether or not the asset is open or closed, correct?

That's -- yes. It's going to be tenant by tenant, it's going to depend on the individual circumstances. But if we're missing -- our view is that if we are missing revenues because of the hurricane, that is a BI claim on our part.

Okay and then the second question is, on the economic rents, you said in the quarter, they were a bit better just because you did more small shop. But as we think about you guys cutting up space in duplicate systems: services, HVAC, fire, safety and all that stuff. Do you anticipate that most of the rents will be economically positive or there will be a fair amount that end up being sort of neutral, but just because of the cost incurred of combining space or dividing space in the redundant systems, that even though you may get higher rent, it sort of nets out. What's your view on that?

There are very few situations where you're compelled to make a big investment for a negative value creation. It's just not all that common.

One thing I'd just like to point out is that the process of cutting up boxes is as common as it gets in the shopping center space. It's an age old practice from the days when Montgomery Ward boxes were received by large landlords and it continues through today. So some of these deals are really great and really profitable and some of them are less so. We're always doing things because we think there's a good credit there or because -- and/or because it's a material increase in the merchandise mix in our center.

The other point I would make as it relates to shop leasing is that when we split up a junior box, it's often with 3 smaller tenants, there's still over 10,000 square feet. So the shop effort and the reconfiguration of anchors are not one and the same. The shop effort applies to all shop space across the portfolio, which generally is a very positive financial return.

Our next question comes from Jeff Donnelly with Wells Fargo.

Matt, thanks for trying to provide some clarity on the situation in Puerto Rico. Are you able to break down your, I guess I'll call it, pre-storm revenues or NOI in Puerto Rico? I'm just curious if you might have a sense, even a rough one, how that would break down between anchors and then shop space, both national and local, if it's sort of 1/3, 1/3, 1/3 or what have you.

Jeff, I can call you back and give you some more color on that. I don't have the exact number to hand out. I'll call you back and give you a follow up on that.

That's useful. And then just building on an earlier question. I know there's a lot of if's in here, but assuming there's no big change in store closings, is it fair to say we can see a bottoming or an inflection in your reported lease rate as we move into early to mid-2018? And I guess, maybe building off that, is it as it relates to leasing spreads, because the portfolios may be running with slightly higher vacancy. Is it fair to say we should expect leasing spreads to continue to decelerate perhaps beyond an inflection in your leased rate just as you're beginning to rebuild occupancy in the portfolio?

I think leased rates tend to be one of the most volatile areas of all of the metrics that we have in the leasing realm. But I think in general, we've seen a fairly consistent realm of our overall leasing spreads over the last several quarters and I don't really have a sense that, that's going to go up or down. Sometimes one major deal where you replace a low-rent paying tenant can shift the entire picture. Sometimes it can shift in the other direction. So I feel pretty strong that it's really going to be up in the air as far as where it goes. But I don't see it going down.

I think just -- to Mike's point, just to follow up. I think it's an unequivocal yes that we believe our occupancy would rebound if bankruptcy stopped. I don't think we see our occupancy or our current vacancy rate as structural in any way. It's really going to depend on what happens to the bankruptcy picture, which I think is muddy as heck at this point.

Jeff, one of the things that I can add on the spread discussion is that it's important to look at which tenant went bankrupt, because of the age of their lease and therefore the likely in-place rent. So if you're talking about an hhgregg, which is a relatively near-history lease for this company, and for most, the likelihood that rent inflated over a 5- or 6-year period is not very high and therefore, you would expect the spreads to be not nearly as great because of a built-in mark-to-market. A toys or a babies is a little different because their leaseholds tend to be a little bit older. So you can have situations where the rents have a large mark-to-market spread. So a lot of the volatility Mike's talking about has less to do with the supply and demand today as much as simply the rent related to the last rent.

Understood. And then, actually, maybe somewhat related to that, I mean, how you guys think about your 2018 expirations. I guess, maybe a 2-part question. Have you seen any change in the percentage of your tenants that are exercising options would normally be doing at this point? And, I guess, how do you think about the rents on expirations and how they compare to where you've been signing deals. Does it provide an easier hurdle for you, do you think it's kind of the same as we've seen in past years? How you think about it?

Well, there's no question that there's a lot of dialogue about new leasing, because that seems to be something that's easy to look at. But you're right in that the real barometer of how a property is doing, performance wise is, do the tenants trigger their options. And I must say one of the benefits of having larger box expirations is that unlike a shop tenant where you're negotiating every single time, we're simply banking on percentage of renewal probability and as much as we're keeping an eye on it, so far the probability of renewals has not really changed dramatically. It continues to be decent. The sales growth, I think you need to be decent, is not all that high for a lot of tenants, but their ability to pay the same rent they've been paying for the last 5 years seems to be the same.

Yes. I think -- I mean, the proof is in the pudding there, Jeff, in terms of if you look at this quarter, we saw a nice uptick in renewal activity, certainly above the last few quarters at very consistent spreads. So where we sit today, it looks fine. Would we like a higher spread? Yes. But the spreads are pretty consistent. But where we go in the future, I think there's still some uncertainty about that. But so far, so good.

We have a follow up question from Christy McElroy with Citi.

It's Michael Bilerman here with Christy. I'm just curious on Puerto Rico. Does this whole thing affect your ability if you wanted to sell an asset, try to hive off the portfolio and I'm just thinking about how transfer -- whether there's any transferability of your insurance at all to potential other buyer or effectively now we should expect these assets to be on your balance sheet for the foreseeable future?

I'll just take the insurance question. It's our view that transferability of insurance isn't an issue. David, you want to talk about it?

Having said that, I think, Michael, the reality is, right now, it would be aggressive to say that there are active buyers of properties in Puerto Rico since we're still trying to get grid power on and tenants open for business. So it's just little bit too early to tell. I do understand your question very well, which is before we said we're open to lots of different types of transactions on Puerto Rico, we executed a couple of them at great prices a few months back. But I would say right now, the idea that we would be actively engaged in conversations about transactions is probably pretty low.

I think about some of the public market exits that some companies have used to hive off or to ring fence more difficult portions of their portfolio. Arguably, this is acting somewhat of a drag and infecting the entire company. So I didn't know if that was potentially on the table in terms of some public market split of the company to isolate Puerto Rico, so that the rest of the company could be valued and looked at more cleanly.

Good question. I think what we've said, even in the last few quarters, is that this management team is willing to consider anything that would create or protect shareholder value and there are a lot of types of ideas that could be considered, but should always be considered in any quarter. So nothing's off the table and you can rest assure that we're certainly focused like a laser on making decisive actions when something seems credible.

And then just lastly, if -- was there anything or has there been anything precluding your majority shareholder, Otto, from buying stock? I say that just in the vein of he was very active last November I think buying almost 1 million shares. And then through basically late April to early June, buying another 2.4 million shares, that's when the stock was probably $9 or $10. Clearly, the stock has unfortunately fallen below those levels. I just don't know if there's been anything between May and today that would have precluded him and his family from accumulating additional shares at arguably what would be much lower prices from where he's built his entire position to begin with.

It's a good question, Michael. To be perfectly honest, I don't know. I think this quarter, I paid much more attention to the fact that all of our board members and I've paid very little attention to their personal acquisitions in the stock. It's not a bad question, I'm sure we can get back to you on it. But the reality is, we're focused on trying to get our properties open and have been a little bit more concerned about operations than anything else.

I guess, would you guys, and I recognize Matt's done a great job at pushing and creating liquidity and also lengthening the debt maturity schedule. Would you ever entertain buying your own stock at this point and at least having a program in place so that if you can be opportunistic in selling, I don't know, 1/2 an interest of the core asset and generating a lot of proceeds using that to match fund, buying stock instead of deleveraging?

Well, I certainly agree that the existing stock price certainly looks attractive. The reality is, that I think our primary stewardship is around risk and right now, the easiest way to keep risk low at this company is through deleveraging. And so our capital allocation right now is entirely towards the deleveraging process, which, of course, if we engage in buying stock, would reverse that. At some point, it becomes more interesting, but I think at this point, the primary focus is on our amount of debt.

Well, does the sale of Whittwood, which was a pretty low cap rate in the low 5s, entice you to say, you know what, we've got a lot of other Whittwood-type assets sitting on our portfolio that we wholly-own. Maybe as much as those are long-term assets for us, maybe we should think about trying to cap the market and sell those today to increase liquidity to put you in a better position to be able to buy your stock when it's trading at the standard levels?

I think what you're really getting at is speed. Up-to-date, in the whopping 8 months that we've been here, I think the accomplishments on balance sheet have been pretty fast. We set out a goal as to exactly what we're going to do by when and I would say we're on track to achieve that goal by selling assets that we don't think have the high-growth prospect that we think the company deserves to keep.

I would just reiterate, I think you're asking the right question that this is a topic that we discuss a lot and we're very focused on trying to create value here, right? So everything is absolutely on the table. We think it's very important to finish our initial program, which isn't going to take that much longer and that much further in terms of capital. Where we go from there is a very important question and we're trying to be incredibly kind of creative and decisive about adding some value here and not letting the stock languish.

Our next question comes from Ki Bin Kim with SunTrust.

Along the same lines, what is your commitment level today towards your dividend, especially in light of your disposition pipeline, maybe a second-round to that and obviously, some disruption in Puerto Rico, which next year might get worse. Just combining all those things, what your stock's trading at, almost 10% yield. Isn't possibly right sizing the dividend a -- the source of capital for all your needs?

Ki Bin, right now, I don't really see the access to capital being an issue. We're selling assets at very good prices. We're getting plenty of bidders and closings are happening without a whole lot of hitch. So I think where we find the capital, the dividend is much, much, much further down the list in terms of what we think is interesting. Our dividend is evaluated every quarter by the Board and at this point, I certainly don't see anything that would mean that the dividend became more interesting than selling assets.

Okay. And on Puerto Rico, could you help me better understand the longer-term risk? And what percent of your tenants actually had their own insurance to help them actually sustain their businesses longer term? And, I guess, what is the risk after your business interruption insurance runs off, what kind of demand would there be and given how much or how little the tenants had their own insurance?

I think that it's a really important series of questions that unfortunately the landlord has relatively little visibility into. The risks are fairly simple. We have -- I think if you've toured our properties there, you'll recognize that the dominance of their locations is quite high. I mean, I was very impressed with a large number of the properties that we had in Puerto Rico. They have great fundamentals, great locations, great anchors. And the primary risk we have right now is that business insurance lasts for a year and after that year, you say to yourself, how many of the tenants that were previously open for business and paying rent will be open in the future and paying rent and we just don't know. So far, the level of store openings has increased dramatically. I mean, yesterday, we had maybe 20 or 30 e-mails coming through that were tenants opening up for business again. So the signs are all good, but you're talking about a year from now and it has a lot to do, I think, with how the island responds from a power and infrastructure and population perspective, and I just can't even gather.

Our next question comes from Floris van Dijkum with Boenning.

Great. Just following up on Michael's question. In terms of -- obviously, the share price is telling you guys something and in terms of the pace of the restructuring, clearly, you guys have made tremendous strides since you came on board. But do you feel like you need to speed up some of that -- the work, and does that make you look more favorably upon a potential spin or something like that, or are you guys going to continue to execute your plan even if it take another 2 years?

Well, I don't have a whole lot more to add than I think the conversation responded to Michael. But you're right that you always want to step back and say, are we moving fast enough? The reality is that the business plan was not another 2 years. We named a target as to when we would be at a leverage level that we were happy with. We named specifically the group of assets and the size that we would be selling, and so far, they have been selling faster and at lower cap rates than we originally thought. So, I think, all seems to be moving along. To me, that's a different question than what are the types of things can a management team do and to that, I'll say the same thing I said to Michael, which is, everything is on the table and we're certainly not unwilling to take decisive action when we see an idea that makes sense.

Okay. And the other question, I guess, is in terms of making your portfolio more attractive going forward, maybe if you can touch upon, obviously, with the rent spreads we talked about, but also maybe talk about your initiative on the fixed bumps in the portfolio and how are you making progress on that, increasing the fixed bumps?

You talking about getting more fixed bumps into leases?

Yes, yes, and getting higher fixed bumps into leases.

Yes, I don't think that we address that directly. Of course, I don't think we're saying -- I mean, obviously, we try to do that where we can, but I don't think that's something I would call a cornerstone of our strategy at this point.

We're obviously trying to get as favorable lease terms as we can with every tenant we can. And we're aggressive as we can be every single time. And obviously, having fixed bumps -- annual fixed bumps is what we strive for. And most of the shop tenants have those, the anchors, particularly the nationals generally have a 5-year rent step and they generally don't budge from that.

Right, and you're not -- so you're not seeing a real change in that, perhaps, going forward or you just haven't specified.

We haven't seen a change to the negative or the positive. I mean it's really, there are certain situations where you're able to receive much higher rent bumps. It tends to be smaller tenants that are more local in general. I mean, that's why the higher shop percentage properties tend to have high growth at times in the economy when there's good GDP growth. Our properties with larger anchors tend to be a little more protected on the downside because the fixed bumps have been generally respected by the tenants when they exercise their options. So I don't really think there's been a great change on that. I think what will give confidence to investors in this space with our product type is quarter after quarter after quarter delivery of incremental steps to the positive and we're more focused on that than something that's striking to come out in 1 quarter. We're making great progress on leasing. We have a lot of anchors that we had to chew through. We're getting through a number of them. In general, they're rents that are economically better than the prior tenant, and so it may not be front-page news, but it's certainly step-by-step very positive.

The next question comes from Chris Lucas with Capital One.

Just a couple of small questions. Mike, on your -- earlier, you were talking about the Toys"R"Us conversations you've had with them. I guess, if you could, if you would maybe characterize those conversations as more focused on rent reduction on their end or on a change in their footprint. How would you characterize that?

I would say, generally, the conversations are very early and I think we should probably give you more updates as they become more material.

Okay. And then, I guess, couple of accounting related issues. On the -- you talked earlier about renewals. The renewal spreads that you guys post, do those include both those that are at market and those that are fixed renewal rates?

I think so, yes.

Okay. And then as it relates to sort of...

You're talking about contractual and negotiated?

You're talking about contractual and negotiated, yes?

Correct. Yes.

It is a blend of those, yes.

Okay. And then as it relates to the reconfiguration costs, do all of the costs essentially end up in the reported TI numbers that are -- that you guys post or are some of the costs allocated to base building and not included in those tenant agreement costs?

It's attributable to the lease, it's in the TI numbers. We try to be pretty careful about that, Chris.

So it's all in there, so all costs related to a reconfiguration.

I can't say with a 100% certainty that we've never taken anything out. But I'd say the vast, vast majority of these, we are fully loading that number.

Okay. That's all I was looking for. And then lastly, David, you'd mentioned about focus on the probabilty of renewals, I guess just kind of what has been the historic tenant retention rate that you guys have been running at?

You mean the historic last 8 months or the historic for the company over the years?

Whichever you'd like to give me.

It's a good question. The portfolio of this company in the last 5 years has changed so dramatically with dispositions. We should look back and calculate what has been on the existing portfolio. I can say just in my career, it's generally been in the mid-'90s, and so the whole industry was based on a pretty high likelihood of renewals, usually higher for anchors and a little bit lower for shops. And as much as we are concerned about it, we really haven't seen a notable change in that, even in the last 5, 6, 7 years. That would certainly be an indicator that tenants either: a, can't afford their option rent or b, have other choices to move to where a landlord across the street is willing to put in a lot of capital to build him a new store. It's always been part of the business, but I don't think we've seen any dramatic change in the last year or 2.

Our next question comes from Samir Khanal with Evercore ISI.

So just looking at your leasing spreads, I know it's been pretty stable, sort of in the mid-single digits kind of area, but I know it's kind of decelerated probably for a lot of the folks in the shopping center peer group maybe from the high single digits, whether it's 8%, 9%, 10%. So if you think about sort of '18, I know you haven't provided guidance, but just trying to -- as we formulate '18 sort of numbers on same store, do you feel pretty confident that you can still kind of maintain that sort of 5% to 6% renewal spreads here?

It feels reasonable that we'd be able to maintain that, yes.

This concludes our question and answer session. I would like to turn the conference back over to David Lukes for any closing remarks.

Thank you, all, for joining and I appreciate the questions. We'll talk to you next quarter.

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