Site Centers Corp (SITC) 2018 Q3 法說會逐字稿

Good day, and welcome to the SITE Centers reports third quarter 2018 operating results conference call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Brandon Day-Anderson, Investor Relations. Please go ahead.

Good evening, and thank you for joining us. On today's call, you will hear from Chief Executive Officer, David Lukes; Chief Operating Officer, Michael Makinen; and Chief Financial Officer, Matthew Ostrower. Please be aware that certain of our statements today may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from our forward-looking statements. Additional information about risks and uncertainties that could cause actual results to differ from our forward-looking statements may be found in our earnings press release issued today and in the documents that we file with the SEC, including our most recent reports on Form 10-K and 10-Q.

In addition, we will be discussing non-GAAP financial measures on today's call, including FFO, Operating FFO, same-store net NOI. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release. This release and our quarterly financial supplement are available on our website at www.sitecenters.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 webcast. At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes.

Thank you, Brandon. Good evening, and thank you for joining our third quarter earnings call. I'd like to start by thanking those of you, who attended our recent Investor Day. At that event, we presented a 5-year plan to deliver average annual OFFO and NAV growth of 5%. We expect this growth to originate from 3 sources: First, and by far the most impactful is our plan to generate on average 2.75% annual same-store NOI growth, a large portion of which is from releasing the 60 anchor opportunities within our portfolio.

Second, we expect to generate returns of 8% on redevelopment capital spend over the coming 5 years. And finally, we expect to accretively reinvest on average $75 million annually on acquisitions of properties with significant growth and return upside.

Nearly everything we do as a company can be framed by this three-pronged approach, and we made significant advancements on each during the third quarter. On the operating side, we posted same-store NOI growth of 2.2%, which was ahead of our budget and a product in part of rent commencements from a variety of anchor leases offset by lost NOI from bankruptcies.

Mike will discuss leasing activity in a moment, but I'll summarize by saying that we had a very strong active quarter with compelling economics, the key leading indicator for future NOI growth. Our budget for 2019 and beyond assumes additional tenant bankruptcies, but this should not obscure the fact that demand for space in our portfolio of dominant assets in wealthy communities remain robust.

We also advanced our redevelopment pipeline during the quarter. We delivered the initial phase of the West Bay project in Cleveland earlier than expected and ahead of budget, and we signed leases with key anchors, including Lucky Supermarket, which will be replacing our last remaining Kmart location as part of our Brandon Boulevard redevelopment project.

We continue to make progress on the latter phases of our pipeline as well. Commencement of each of these projects depends on 3 variables: tenant demand, tenant approvals and entitlements. At the Investor Day, we highlighted that these extremely well located assets have significant demand from a number of potential users, including grocers, office tenants, hotels and multifamily. And we have recently recaptured enough space to address the tenant approval piece. What remains then is entitlement, and that's where we're spending time.

We expect to be in front of a large number of municipalities in the next several quarters, and we'll provide updates on our progress as we move through the required entitlement process.

I'm also pleased to announce the first 2 deals in the opportunistic portion of our business plan with the planned purchase of 2 assets from our joint venture program, Melbourne Square and Sharon Greens for a combined $20 million. You should expect our recycling focused acquisition program to involve diversity as it relates to retail format, geography and tenant roster. But all will share certain key characteristics: the ability to achieve an attractive cap rate, significant cash flow growth through the application of our superior redevelopment and leasing expertise and valuable locations protected from near-term supply and enhanced by large global spending power. Our first 2 acquisitions share some additional characteristics. They are both grocery anchored, they have significantly near-term leasing and tactical redevelopment upside, and they demonstrate the quality and the strength of the assets in our JV programs as well as the potential for those programs to provide acquisition opportunities going forward.

We have come a long way in just 18 months, but we remain focused on sourcing opportunities to quickly and meaningfully unlock value, demonstrate the quality of our real estate and improve our capital position. And with that, I'll hand the call over to Mike for some commentary on our operations.

Thank you, David. This quarter was extremely productive from a leasing perspective, with ongoing high leasing volumes. Additionally, we signed 4 more vacant anchor since the Investor Day, including leases with Total Wine and Sierra Trading Post. Notable deals this quarter include Ulta at Buena Park near Los Angeles, which caps off the retenanting of the Toys box there. And CGV Cinemas at Van Ness in downtown San Francisco, where we are conducting what is effectively a gut renovation of an historic property with an exciting high credit operator at a significantly higher rent. These leases are all accompanied by strong mark-to-market with new lease spreads in the third quarter over 20%, renewal spreads over 8% and combined spreads of roughly 9%, right in line with our historical average. Another key measure of economics, net effective rents, was similarly in line with our strong trailing 12-month numbers.

We're clearly getting a lot of space leased and with compelling returns in the process. Many of these new leases represent enhancements to our merchandise mix. This quarter, the highlight was the earlier-than-expected opening of West Bay and its new line up, including Fresh Thyme, HomeSense and Ulta, among others. We've also commenced the comprehensive $8 million LED program I mentioned last quarter. The program will modernize the illumination of parking areas at our centers and generate both energy and operational savings and improve visibility for our tenants and safety for our patrons.

I would encourage you to view Page 7 of our earnings slide for before and after photos of Shoppers World. Finally, on Toys "R" Us, 6 of the 12 original stores in the consolidated site portfolio were acquired. Two by SITE for redevelopment at Perimeter Pointe and Shoppers World. Of the remaining 6 stores, 2 are leased or at lease, and we're negotiating LOIs for the remaining 4 stores. In short, we have identified a tenant or tenants for every single Toys "R" Us box and are in a better position today compared to the bankruptcies from the last several years. It's a credit to our leasing and operations teams as well as the testament to the quality of the real estate in our portfolio. There'll be downtime and drag on same-store NOI in 2019, but we're really encouraged by prospects for these spaces. Overall, tenant demand across our portfolio is steady, and the quality of sites' assets in the top quartile of the country's retail landscape means tenants want to do business with us. With that, I'll hand the call over to Matt.

Thanks, Mike. Our balance sheet remains well positioned, and we continue to expect leverage to fall, as final remaining asset sales are completed and preferred capital in the Blackstone joint venture and from RVI is repaid. Full payment of these 2 securities would cause almost a full turn decline in our reported debt to EBITDA.

Our weighted average maturity of roughly 6 years is in line with last quarter and remains one of the highest in our sector. As David said, while we're focused on growth, we're equally focused on finding ways to unlock and demonstrate value from a capital perspective.

I'd like to now comment on several earnings and accounting matters. First, we introduced 2019 FFO guidance of $1.15 to $1.20 at our Investor Day on October 9, and that guidance as well as the assumptions behind it, remain unchanged. We also disclosed the underlying details and assumptions at that time. In particular, the expectation that decisions and transactions from 2017 and 2018 would impact 2019. As most of you know, Blackstone continues to unwind its joint venture with us, and that as well as selected asset sales in our other JVs will cause a decline in JV fees in 2019. We expect 2019 to the trough year for JV profitability, especially as we consider utilizing JV capital to unlock value and offset our current high cost of equity. A second headwind to 2019 results will come from the full year impact of 2018 asset sales and 2018 bankruptcies. In the third quarter, we had approximately $600,000 of combined income from Toys "R" Us and Mattress Firm spaces that has since closed or that we expect to be rejected. And finally, we have flagged the impact of Van Ness, which is our only redevelopment project whose dilutive impact was not already felt in 2018 NOI. The existing operator will vacate in January, and we expect CGV to open in January of 2020.

As we said at Investor Day, beyond this project, there is no remaining NOI slated to come offline in order to facilitate our redevelopment program. You will note that our 2019 G&A guidance has been lowered by $7 million in order to reflect the reclassification of some expenses from G&A to operating expenses in an attempt to make our income statement more closely reflect industry-wide classification practices. This is a change in geography only, and therefore, has no impact on EBITDA, GAAP net income, FFO, OFFO or same-store NOI. In the third quarter, NOI and G&A were $1.7 million lower as detailed on Slide 10 in our earnings deck.

Staying on the topic of G&A, our guidance holds RVI fees flat for 2019, effectively assuming no RVI asset sales. We do in fact expect that RVI will sell additional properties and that fees will decline as a result. While we expect a 1:1 offset between RVI fee declines and lower G&A in 2019, this relationship will almost certainly shift in 2020, and we would expect some headwind to 2020 FFO from ongoing RVI liquidation until the RVI preferred is repaid and redeployed. On the joint venture front, you will see in our transaction disclosure that we received an additional $22 million repayment of preferred securities associated with the Blackstone JV, which brings our total receipt our preferred repayment to over $130 million with the remaining balance, net of a valuation reserve of $204 million.

As a reminder, we established a valuation reserve for these securities in the first quarter of 2017, cutting book value by $76 million to $270 million. Since then, we have achieved key asset sales threshold levels in the Blackstone 3 joint venture allowing us to receive approximately 50% of equity proceeds from asset sales going forward.

We recognized a current 6.5% yield on the preferred securities, so every dollar we get back is the earnings equivalent of an asset sale at a 6.5% cap rate.

The Blackstone ventures have just 25 of the 83 original assets remaining as of September 30, and we mark all Blackstone assets to market each quarter to determine the reserve, resulting in a $2 million decrease in book value in 3Q, which follows a variety of small upward and downward marks over the last several quarters.

We are making great progress selling assets, reducing our investment in those JVs and lowering site leverage, resulting in a more focused portfolio of assets that are easier to underwrite.

Switching to the consolidated financial statements, we recognize $1.8 million of business interruption income related to RVI Puerto Rico assets in the quarter. This consisted of BI pertaining to periods prior to the spin, but paid to SITE Centers by RVI after the spin.

Finally, please note that $14 million of the total $20 million of impairments we recognized in the periods was related to the RVI assets immediately prior to the spin rather than assets owned by SITE Centers today.

With that I'll hand the call back to David for closing comments.

Thank you, Matt. Our new company brand is a reflection of the fact that our sites are the center of communities. We are enthusiastic about the real estate, about our team and about our internal growth drivers and the opportunities that we know will fuel our external growth. We'll be happy to answer questions and I'll turn the line back to the operator.

(Operator Instructions) Our first question comes from Ki Bin Kim with SunTrust.

So how should we think about the cadence of same-store NOI over the next year? You have a few moving pieces, you have some NOI that you would probably lose from the Toys "R" Us boxes that will go dark, and then you have a lot of leases you've accomplished on your anchor spaces. So just trying to think about how that should run in 2019?

Ki Bin, thanks for your question. I would say that you would -- I would generally call it more back-end loaded, back-half loaded. It's not a huge difference, but there is some kind of favorability in the back half.

And just one quick question on CapEx. It seems like you're still running a little bit higher than your historical trends of CapEx spend of about 30% as a percent of rental value. Is it because the mix was heavier towards smaller spaces this quarter? And how we should think about this into 2019?

So I would think CapEx in the quarter was a little bit lower the way we measure it. We have a smaller portfolio now. So you're going to see that number bounce around quite a lot. As we outlined in the Investor Day, we have a lot of anchor leasing to do, so that's obviously going to raise the CapEx numbers for a time period. But I would say, you should really be looking at kind of trailing 12-month numbers when you evaluate that.

Our next question comes from Christine McElroy from Citi.

Just a follow up on that last question from Ki Bin, just on the CapEx. Matt, I think you said it was going to be higher in 2019, and I point to the 2 anchor boxes, the proactive termination, the 222,000 square feet, you talked about the 260% re-leasing spreads in the presentation. But as you work to retenant larger boxes like that, assuming you're going to have to break up those boxes, right, so that requires a lot of CapEx. So I guess, the 2 questions are, what is that 260% on a net effective basis and how should we think about sort of a clean CapEx run rate for 2019?

Yes, I mean, I would say that generally, so I'm not saying that the CapEx numbers are going up dramatically from here, let me very clear about that, right. We've had a higher level of anchor leasing we've been doing and so those CapEx numbers, I would say, in the past 12 months have been relatively inflated. And I think you can expect we've been saying I think for several quarters now, you can expect as long as we're doing lots of anchor leasing, you're going to see those CapEx numbers stay at the kind of higher level they have been over the last 12 months. I don't think they go up dramatically from here. We have a number of onetime items, right? So we talked about the LED program, that's going to artificially, I would say, inflate the number a little bit in the short term, but I don't think, you're going to see this sustainably much higher trend than where we sit today.

And the examples that David talked a little bit about at Investor Day, about the Kmart shopping center, that is one of the boxes. And David or Mike announced the park so I'm going to speak to that one as well.

Okay. And then just with regard to the RVI fees, the $7.2 million in third quarter, excluding the disposition fees and that's obviously consistent with the guidance that you provided for 2019. I'm wondering how did you get from the original sort of estimation of at least $5 million, why is it -- what sort of raised the fee load from what was originally estimated to be? And then, Matt, also you mentioned in your discussion on G&A, that headwind in 2020 where it wouldn't move in lockstep. Can you maybe provide a little bit color as to why that would be?

Sure. So on your first question, I want to remind you that our guidance was for at least $5 million. So we weren't kind of targeting the $5 million number, that was a number we had absolute visibility on. You pointed out disposition fees. Obviously, those come in as transactions happen, and we do not want to forecast those specifically. We also get leasing commissions for example, which we did not provide specifically in our guidance because those are to some degree transactional in nature as well. And can you remind me of the second part of your question Christy, I'm sorry, I forgot.

Yes, sure. You mentioned in your -- and I guess, it was in an answer to your question, in your prepared remarks about how the G&A decline and RVI fee decline would move in lockstep in 2019, but then there was a headwind in 2020, that would keep that from happening. I'm just wondering why that is?

Yes, look, there is a -- we can cut G&A for a time period. We have cut G&A very significantly already. So we can kind of match those declines over time. But there is a limit. At some point, we can't completely cut all of the G&A that we're losing in terms of RVI fees. We'll definitely be -- as we model that out and we get more clarity on that, we'll be providing that to you as well. There, there will be good things happening in 2020 as well, so I don't want to leave you with the impression that's just a massive negative for the year, but it's something for you to be thinking about as you're doing your modeling as well.

Is there a way we should be thinking about sort of an ongoing like a target G&A, as the RVI management agreement winds down?

Yes, it's a little bit too early for us to give you specific guidance on that, Christy. So like I said, as we go through the year, we'll be giving you more specificity there as we get more clarity on ourselves.

Our next question comes from Todd Thomas with KeyBanc Capital Markets.

Just first question, I think you are expecting softer third quarter in terms of same-store NOI growth and it came in considerably better than the second quarter. What was the impact from continuing to receive rent from Toys "R" Us, and what were some of the other drivers of the beat there versus your expectations?

Todd, I'll hand it over to Matt in a second, but I think I would like to preface by saying that when you slim down a portfolio to less than 80 properties, you need to start expecting that our numbers are lumpy. And we still got a quarter left, we have a recent bankruptcy in the near past that we're working through with Mattress Firm. So there is enough uncertainty that, although we definitely have been ahead of budget, there is some headwinds on the other side too that we're just being cognizant of. So Matt can give you a little more detail, but for right now, we feel pretty comfortable leaving our objective the same by the end of the year.

Yes, I think, to David's point about lumpiness, we did have some favorability from earlier RCDs unexpected, etcetera. And then we had some onetime payments that came through as happens every year and really every quarter. And those numbers help to make the third quarter a stronger number.

Okay. I think I may have missed some of the details on Toys, but are they all empty at this point? Do you have control of all of the boxes and have you received October rent from any of them?

Yes, remember, I mean, Toys is a very interesting case study for this company for the SITE Centers portfolio because there were 12 boxes that are in our wholly owned portfolio, 4 of them were assumed and therefore, they never stopped paying rent. 2 of them, we purposely are holding vacant for redevelopment plans and you can see that in Framingham, up at Shoppers World and down in Perimeter Pointe and then there is 6 that we're leasing. And Mike can give some detail behind the leasing progress, but suffice it to say it's extremely promising.

Right. And of the 6 that we're working on, 1 is fully leased in Buena Park, California and 1 we're at lease, and the remaining 4, we're in active stages of negotiation on LOIs. And it's been very, very active demand for all of them.

Okay. And then just last question here, you've noted that the company has no remaining direct exposure to Sears or Kmart. But I was just curious how you think some of the indirect exposure that your centers have either being located near major malls or near Kmart boxes, where there might be some vacancies arising. What are you seeing potentially there as you think ahead?

It's a very, very prescient question. I mean, I think all of us for years now have been thinking about what happens when this inventory comes back to the market. Since it's no surprise, you can imagine us curating a portfolio down to what we think are dominant assets, we ended up with properties that are buried in very wealthy communities. Rarely, does that include a Sears or a Kmart. They tend to be a little bit more mid market, the majority of what's left is, I think, going to be impacted immediately surrounding mall inventory. And if you recall, one of the things I said earlier, when we look at properties and their future, we tend to think about how much tenant demand is there, how much do tenants control our future, in other words, their lease restrictions, and then lastly, the municipal entitlements. It's different for mall assets. In mall assets, there's reciprocal easement agreements and there's usually a zoning that's specifically written for that mall asset. And so the red tape to get through changes to a mall are definitely more complicated than a traditional one-story strip center, then you layer on top of that, that many of the Sears buildings are 2 stories with multiple loading docks and different column grids and so it's just a different business than repositioning junior boxes in an open-air format. So I would say that we're pretty confident with the SITE Centers portfolio that the impact of this kind of shadow inventory showing up is pretty de minimis.

The only thing I would add, Todd, is -- I saw your report on the topic, which I thought was very helpful. And as you noted in that report, really and you can kind of winnow things down more, but in terms of proximity, there's a very small portion of our portfolio that's really proximate to any locations anyway. So you start thinking fractions of fractions of fractions and it's just -- I don't think it's a huge exposure. And I just wanted to come back, we didn't answer your question directly about Sears -- about Toys "R" Us paying rent. Just to be clear they are all now -- they are all now out. So if we were getting rent on any of those boxes today, it's because somebody assumed the lease.

Our next question comes from Derek Johnston with Deutsche Bank.

I was hoping to get a private market update and specifically for power centers versus grocery-anchored centers as you go through RVI sales?

Derek, it's a useful question. I would say that for the purposes of our company now, we're a pretty small focused company now. And so I think our transactions are not a great proxy for the industry as a whole. If you want to see what's happening on RVI, I would encourage you to read the press releases that come out from RVI and look at the disclosure there as to what is selling and you can kind of figure out the volumes, but for our company, we've sold nothing in the last quarter. And so we can't really give you a whole lot of current information that's macro.

Okay. Well, how about then an update on some type of leasing demand and sentiment, we are heading towards the holiday season. Have you seen any positive movements out of retailers and especially, in light of Amazon's $15 hour per (sic) [per hour] wage increase. Any color there that you could share?

I'm trying to think of color that would be noteworthy to you. But within our portfolio, if you look at the volume of leasing, we've got in this last quarter compared to a couple of years ago, you'll see that the volumes are very high. And the active retailers that are signing leases are very, very active. One of the challenges, of course, is finding contractors and enough labor pools to get to the TIs built out and get these tenants open. So that's always been a challenge in our business, but it's more so when you have a low unemployment rate because the properties are very active. Mike, I don't know if you had anything to add.

The only other thing I would add to that is that, you all need to keep in mind that we carefully prune this portfolio so that we have what we feel is a very high demand set of properties, and that's driving the leasing demand as well.

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

Just two questions here. First, just big picture. Matt or David, you guys had the Investor Day a few weeks ago, you've been pretty consistent on the guidance for the third quarter of at least $0.30, you came in $0.33. Great, 10% beat. But as we look about the guidance for next year, $1.15 to $1.20, RVI is going to continue to sell assets, you're going to lease -- you don't have leasing fees. So presumably, the RVI fee income is going to be better. You've already had sort of impact of bankruptcies and stuff and next year, you will get some benefit of backfilling. So why is $1.15 to $1.20, the right guidance range versus if you take the $0.33 run rate, you're already north of $1.30. So if we look at where The Street was ahead of Investor Day, it was $1.23. So why -- what gets you guys to that guidance range for next year and why wouldn't it be higher just based on what this quarter seems to be a lot of normal moving pieces of your business?

Alex, that's a great question. Let me give a little setup and then I'll hand it off to Matt. The purpose of the Investor Day conference is to explain to people what our long-term vision is, expose how we, as a company, look at real estate, what we think we can do with it, and of course, what the results are. And the results that we proposed were a 5% NAV growth, 5% OFFO growth. And I think a pretty compelling stable 2.75% same-store NOI growth. Buried within those are various assumptions and as you can imagine, it's not a straight line. So I personally feel confident of the longer-term goal, and I think that 1 quarter at a time or 2 quarters at a time is less relevant. If you're trying to match from the 4Q this year through next year, Matt and Conor can help you probably more individually with some modeling questions, but conceptually speaking, it's a company that's still in change.

Right. I mean, I would point out a few things, right. One is RVI, you mentioned RVI fees going up next year, that's really not possible, right, particularly the OFFO fees that we are recognizing because the fees will go down as we sell RVI assets, and as I'm sure you've seen we are selling RVI assets. So that -- those fees will decline, even though we're -- our guidance assumes it's holding flat because we don't want to predict transactions. And then I would point you back to the very same disclosure we provided at Investor Day. We're trying to make this as user-friendly as possible as you do your models. We have a variety of headwinds, right? We continue to unwind the Blackstone JV, you commented on that on a number of occasions in your notes, the fees from that are going to be a headwind next year. We expect JV fees to be troughing next year, but that is a significant headwind. We are refilling anchor boxes, but as I'm sure you're aware tenants continue to declare bankruptcy as we saw with Mattress Firm. So we have Toys now, we have Mattress Firm, that will be a headwind. And then we pointed out a specific $0.02 hit from our 1 remaining dilutive redevelopment, which is Van Ness. So I think, when you add up all that stuff together, it should make it pretty straightforward as to why we might have a lower FFO number next year.

Okay. That's helpful, Matt. And then the second question is just as you guys think about bringing in joint venture partners, for the alternative uses, where you'd be bringing them in, how do you weigh sort of an operating joint venture, an outright sale of that pad to the joint venture partner versus a ground lease to try and retain some long-term ownership in case that the person who ends up undertaking the venture doesn't perform in a way that you want, so that, that way you still have rights to it and you can reclaim that? How do you weigh those 3 different options as you look at bringing in a JV and densifying some of your projects?

Well, certainly, we're going to have to deal with that issue in a year's time because we're going to get into completing entitlements in '19 with properties that have other asset classes. And so you will see us wrestle with that. It's certainly, #1 a financial exercise as to which one has the highest risk adjusted return as you know, some asset classes can pay a lot in the ground lease and some cannot. As far as doing joint ventures, there's a land contribution model, there's a variety of ways that we can figure out how to do it. But I would say, number one is financial and then number two is, you're suggesting there's a kind of a social aspect with your own property. If you're subdividing pieces and then you're creating land value, is there a benefit -- a fringe benefit to the remaining retail to, to have some control over those pieces or are the pieces simply disparate enough that it doesn't have an impact. And so I would agree with you that's an equally important point to consider in addition to the financials and that is the interaction with the other components on the site. So for right now, we simply are trying to build the optionality. We've gone through a variety of projects at Investor Day. We proved that we've already taken the NOI dilution from taking boxes in certain pads and shops offline. And so I think we're sitting with at those properties trough NOI, we're going through entitlements at some point in the next year or two, we will be able to figure out how it's best to monetize, especially in light of what you're saying with our other asset classes. So we'll see, we just right now want to build the optionality and that's what we're focused on.

Our next question comes from Vince Tibone with Green Street Advisors.

Can you help me understand the difference in or what's driving the difference between the total portfolio occupancy on a pro-rata basis? Because it was about -- it was down about 110 basis points year-over-year and the same-store physical occupancy, which is up about 50 basis points like why are they -- can you just help me understand what's driving that disconnect?

Off the top of my head, I would say that is largely a couple of projects in the redevelopment pipeline, specifically West Bay Plaza and The Collection at Brandon Boulevard. But I can come back to you. Let me give you some more detail, I'll come back to you.

Yes, Vince, on Christy's question from earlier, so Kmart, we bought back that lease last quarter and David talked about that at Investor Day, that was a couple of hundred thousand square feet alone on that front.

Okay. That makes sense. And just to clarify, so the 2 Toys boxes that are being held for redevelopment, those are not included in the same-store pool or the same-store figures this quarter then?

Those are being held, it's why they're not in a pool. They're being held specifically for redevelopment.

Got it. And does that have a material impact on just reported figure that those were included in the pool, would that -- I mean, I am just trying to get a sense if that is a 10 basis point impact, like a 50 bps impact, if those were included in the pool?

I think, we'll have to come back with a specific answer.

Okay. No problem. That's helpful. And just one more for me. Is there any more insight you can share on the Mattress Firm bankruptcy, the timing of closure and the impact it will have on SITE's same-store NOI?

Yes, this is Mike. Basically, we've got 24 stores in our wholly owned portfolio right now. 6 of those have been rejected, and we're waiting to see the fate of the rest. But one thing, I will say, it's important to note that a lot of these leases regardless of what happens from a big picture standpoint, a lot of these leases are below market. And for the most part, the spaces tend to be in excellent location within the center. So we feel pretty confident that given our small shop efforts that we've really undertaken lately that this fits nicely into our accelerated small shop program. And we'll see what happens.

Our next question comes from Rich Hill with Morgan Stanley.

I wanted to start off with just a CapEx question, there was some focus of last -- last quarter about some numbers showing CapEx went up, it went down this quarter. But separate from what you're reporting, I'm wondering, are you starting to see any changes in CapEx, given the rising labor costs or rising raw material construction costs or how are you thinking about that?

Rich, it's something that we have been trying to track pretty carefully. We have an estimating department that does a great job of figuring out how much it is to split box or vanilla shell boxes. And to date, there have been cost escalations in the labor portion. But the labor portion of the total GMP contract is not an outsized portion and so we just haven't seen enough inflation in construction cost to make a difference on the overall economic viability of retenanting boxes. I mean, it's been very small. It's not to say that -- if we see raw materials go up, then that might change a little bit, but the reality is that rising labor and rising materials usually affects businesses that have much more expensive build outs. Strip center construction is so cheap that it generally doesn't have as much of an impact.

Helpful. Going back to maybe some of the comments talked about -- talking about retailers, could you comment on maybe not -- I would love you to comment on specific retailers on your watchlist, I doubt, you'll do that. But can you talk to -- can you maybe give general views about how your watchlist is evolving? Is it -- is it broader, is it a fewer number of retailers? How has it changed over the past maybe quarter and year-over-year?

Within the last couple of quarters, I don't think any of us around this table here would say that the names that are on the list are changing a whole lot. What's different, of course, is that our portfolio is a lot smaller as of June. And the smaller portfolio means that we're most likely happier to get the spaces back, than we were unhappy maybe a year ago. So I don't know if we've really seen a whole lot of change in makeup, but we're certainly I think better prepared because the portfolio is smaller and we have a pretty good idea of which spaces we're going to get back. I mean, as an example, Mattress Firm with the numbers that they've come out with, we have looked through the list and you will remember at Investor Day, I presented a project in Edgewater New Jersey, there's a Whole Foods doing more than $50 million in gross sales. And, surprise, surprise, there's a Mattress Firm on that site. So that's an example where we're probably 20% to 25% below market in that space. And there's a number of them in the portfolio that are like that. So Midtown Miami, Perimeter Pointe in Atlanta. So we've got a great portfolio I think to respond to this kind of continued disruption.

And Rich, I'll just point you back to at Investor Day, we kind of showed you some analysis of how we did in recent bankruptcies in this portfolio, right, and so what we said to you and to the investor base repeatedly is that we can't completely control in this portfolio exactly who are tenants are, but what we have control for is what happens when we get the space back. And what those examples showed is that at the low end, we got Toys at a full 20% spread. And some of the others, Sports Authority and Golfsmith were in the 30% to 40% range. So when we get space, we still have some watchlist exposure that hasn't changed dramatically. But when we get space back, we're going to get real spreads on these spaces.

Our next question is a follow-up from Ki Bin Kim with SunTrust.

So as you re-lease some of these anchor boxes at seemingly pretty good spreads, is there an element of lost square footage because there might be some cases where you split up the box and put 2 junior anchors in 1 bigger space. So while the rent per square foot increases, is there a chance that it is of a smaller net square footage?

Ki Bin, can I ask you a question?

Sure.

What's the definition of seemingly?

It means definitely.

It depends on the boxes, the Toys boxes in general. When we lease them to a single tenant, they generally take up the whole space and by generally, I mean, I can't think of any that didn't. When we split a box, there's usually a small portion that's left over, but it's a pretty small number. What I think you're talking about is a different strategy, which is, you convert a box to a line of shops and therefore, the depth can only be 90 feet, not 180, and then that is a different type of business and I think, you know that we also have been aggressive on trying to find those opportunities and I think, 1.5 years ago, we had hoped that there would be more. The reality is there's been so much junior box demand to fill the Toys "R" Us and Sports Authorities that we have done relatively little mothballing of space. And so the total square footage that we're leasing is darn close to the gross square footage the Toys had before.

Just to underscore having done that analysis, right, on the historical analysis, that is not -- I want to be totally clear, change in GLA is not remotely a driver of those spreads.

Okay. And that's the same for the 60% of leases that are addressed for your anchor boxes in the pipeline?

Yes.

Our next question comes from Mike Mueller with JPMorgan.

Can you hear me?

Yes, we can hear you.

Great. I was wondering on the comments that JV fee income should be troughing in 2019, should we read into that, that it's just a statement about the 2 Blackstone JVs going away next year or could it be that you intend on expanding that business as an offset elsewhere, so we see more JVs pop up?

Well, I think what we're saying is that we would hope that it troughs in '19 and hope comes from 2 categories. One is that if we continue to be successful selling RVI assets, which is the business plan of that company and the markets are still open and proving that the cap rates are attractive to sell, we'll be kind of working ourselves out of a job. At the same time, there are lots of capital partners that would like to partner with us. And I think it is likely that we will remain positive on the business of joint ventures. And so I think, you'll just see us recycle different partners throughout an economic cycle and keep our scale big enough that we can find opportunities within those portfolios.

Our next question comes from Chris Lucas with Capital One Securities.

Just a couple of detailed questions. On the RVI fees that are included in the operating FFO, Matt, can you give me a sense as to what is sort of the base asset management fee versus the lease income fee? I'm just trying to understand how big the 2 pieces are relative to each other?

We have not given the disclosure on the individual fees and dollar amounts. Chris, we did in the Form 10, give you the percentages, right, so you can kind of back into that, if you want to. 50 basis points of asset management and generally speaking, 3-or-so percent on property management.

Okay. And then on the G&A presentation change, so when we talk about guidance going from $70 million of G&A to $63 million, I'm assuming that $7 million shifts into operating expenses, just as a clean move, there is no...

Correct.

Okay. And then the last question for me is just on that G&A guidance for next year that, that also fully incorporates whatever lease accounting change impact, there might have been to the company?

Correct.

Our next question is a follow-up from Christine McElroy with Citi.

It's Michael Bilerman here with Christy. So first contracts on adding 2 new people to your board, I think that's great. And then I have a question, a couple of questions. So first is just on a definitional -- between what you consider redevelopment versus what you consider retenanting and so if you look at like Van Ness, you're replacing the box with the cinema. Why would that be a redevelopment versus a retenant? So where does it cross the line from one to the other?

Yes, I mean, look, as you know, I'm sure you've seen looking at all these companies, there are some properties that are kind of in a gray area. Van Ness we are not moving external walls because it is a historical structure. We're doing absolutely everything else you could possibly do to a building without moving the wall. So this is properly -- we are moving floors around. So the project seems so large scale and so impactful that we view that as very much fitting in the spirit of redevelopment, but we've also given you the dollar amount, right, so you can kind of do your math there if you want to.

So it's where substantial capital would be involved even if it's a single box?

It's a reform -- it really is a reformatting, right. I mean if you live -- if you say you must move an external wall to call something a redevelopment, then, I guess, it's not.

In other instances, you would call it gut renovation.

Yes, I mean, it's -- this is the building is changing very, very significantly. It felt very much in spirit of the rules of redev. But we have given you enough disclosure that you can kind of if you want to figure out the impact, you're more than welcome to do that.

And just thinking about RVI in terms of the disclosure you're going to provide as external managers for that entity, I guess, will you be hosting a separate conference call when you report results for them or not?

We will not. We will be press releasing whenever we sell assets and will be filing our quarterly results.

So should we be using this call as RVI as 1 component of your performance and from a fee income perspective as asking questions about that?

Mike, should I take that as a suggestion that you're going to be covering RVI now?

No, I'm just saying RVI, there is income that flows into DDR, right, you had $7 million of fees as income, that came in. You're getting disposition fees. Clearly RVI is a component of your cash flow and earnings stream as that entity evolves but it's not looking like...

I mean, the fact of the matter is that the business plan for RVI is fairly well stated that it is -- its goal is to dispose of properties and arbitrage between what I think is pretty healthy private markets for dispositions. Since the business plan is stated, there's only really 1 aspect left and that is the pace at which those assets are sold and the rate. The pace at which they're sold, you're right, does have a reflection on how many fees or how much we get in fees every quarters. So you certainly could use the RVI press releases as they come out to note how many square feet and what percentage of the assets are going away, but I don't see us as talking about the business plan or projecting our thoughts as to how fast and how soon.

The spirit of this, to be totally clear, is that we're not going to be in the business of making a lot of forward-looking statements on RVI, right? It's not a true operating businesses. It's not about same-store NOI growth and leasing spreads and everything else. You're right technically, some of those numbers could have a very, very small spillover effect on to SITE Centers, but really when it comes to PM fees and asset management fees, those all operate with a lag anyway, so you'll have all the information you need. The only forward-looking statements we think that investors would want us to make about RVI would be to predict the pace of asset sales, and we've been very clear all along that we're just not in the business of making those predictions. It doesn't help the shareholders at all.

Right. And I guess, at some point, there will be an event once the asset sales -- the U.S. asset sales are completed, about what the entity -- what RVI is going to be. Is this going to be a stand-alone Puerto Rico thing, and at that point, you may make the decision to completely split. So even if you accelerate and do all the asset sales at whatever pace you do, there will be -- the next event may be a separation -- a complete separation, so it's going to drag on for a while, is what I'm getting at.

Yes.

Is there anything else I know you -- we've talked a little bit about this, at least $5 million and it came in at $7 million. Shouldn't that number have been very -- I mean, Matt, you just referenced the fact that there's the Form 10. It's pretty set in terms of what those fees are, so I guess, why wouldn't you have known it was going to be $7 million versus at least $5 million -- that extra $2 million?

A big chunk of the delta is lease commission and we did not want to be too -- we wanted to -- the reason we gave at least $5 million and I'm sure if you were sitting in my chair, you would be doing the same thing: We're trying to be conservative in our guidance, right? We want to make sure that any number we put out there, we don't have to do a stupid leasing deal or anything else in order to hit the guidance that you are expecting, right? So we're just trying to be prudent with that number. I think you should absolutely read into "at least", right, we can do better than that number. It doesn't mean we absolutely, positively will, but there is some upside to that, and we've given you a range this time around, but the reality is the huge swing this year is going to be about the pace of asset sales and in reality, that is not predictable to any of us at this point.

And then you have the lag between what you're recording in G&A and the fees you get, which will complicate things further.

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 very much for your time.

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