Tanger Inc (SKT) 2017 Q2 法說會逐字稿

Good morning.

This is Cyndi Holt, Vice President of Investor Relations, and I would like to welcome you to the Tanger Factory Outlet Centers Second Quarter 2017 Conference Call.

Yesterday, we issued our earnings release as well as our supplemental information package and our investor presentation.

This information is available on our Investor Relations web page, investors.tangeroutlets.com.

Please note that during this conference call, some of management's comments will be forward-looking statements that are subject to numerous risks and uncertainties, and actual results could differ materially from those projected.

We direct you to our filings with the Securities and Exchange Commission for a detailed discussion of these risks and uncertainties.

During the call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G, including funds from operations or FFO, adjusted funds from operations or AFFO, same-center net operating income, portfolio net operating income.

Reconciliations of these non-GAAP measures to the most directly comparable GAAP financial measures are included in our earnings release and in our supplemental information.

This call is being rebroadcast for a period of time in the future.

As such, it is important to note that management's comments include time-sensitive information that may only be accurate as of today's date, August 2, 2016.

(Operator Instructions) On the call today will be Steven Tanger, Chief Executive Officer; Jim Williams, Senior Vice President and Chief Financial Officer; and Tom McDonough, President and Chief Operating Officer.

I will now turn the call over to Steven Tanger.

Please go ahead, Steve.

Thank you, Cyndi, and good morning, everyone.

Over the last 6 years, Tanger has delivered 11 new outlet centers, expanded 7 of our properties, acquired 7 outlet centers and bought out our partners in 3 joint ventures, while also recycling $312 million of capital from the sale of 9 noncore assets.

We have also thoughtfully managed our portfolio.

In fact, the sale of our -- sale of the least productive asset in our portfolio in May 2017 was the 26th asset sale in our company's history.

This has resulted in net growth of our footprint by 31% and reduce the average age of our fleet from 24 to 17 years old.

In 2016, our portfolio net operating income cumulative growth rate since 2010 was 82%.

Not reflecting this tremendous value creation, the last time our shares were trading in the $26 range was almost 6 years ago in September of 2011.

If you follow the popular media, you may think that disconnect is because the future will be one where nothing is bought in stores and where Amazon will be the only surviving retailer.

We believe that scenario is not accurate.

While we are not immune to retail headwinds, we believe we are well positioned to face them.

Our one key reason is our fortress balance sheet.

It has seen us through numerous economic, retail -- real estate and retail cycles.

Today, it is in better shape than ever with low leverage, plenty of liquidity, limited floating rate debt exposure, a large unencumbered asset pool and dual investment grade rates.

We are pleased to have extended our streak to 55 consecutive quarters of consolidated portfolios, same center net operating income growth and ended the second quarter with our consolidated portfolio 96.1% occupied.

Outlets remain an important and profitable channel of distribution for our tenant partners.

We believe the popularity of outlets with consumers and retailers and the strength of our core portfolio position us to weather the current headwinds in the retail environment as we have in similar parts of the cycle for the past 36 years and emerge stronger when the cycle turns positive.

Before I discuss our operating performance and our outlook for the balance of 2017, I'll turn the call over to Jim who will take you through our financial results and a brief overview of our recent financing activities.

Then Tom will update you on our development activities and the leasing environment.

Go ahead, Jim.

Thank you, Steve.

Second quarter 2017 AFFO was $0.59 per share in line with consensus estimates.

Portfolio NOI, which includes NOI for noncomparable centers, increased 10.2% throughout the consolidated portfolio during the first half of 2017 and 9.5% during the second quarter.

Over the last 5 years, our portfolio NOI has grown by 46% cumulatively.

Excluding the fixed remerchandising centers discussed in our earnings release, consolidated portfolio same-center net operating income increased 2.3% on a year-to-date basis and 2.2% during the second quarter of 2017.

Including the centers, same-center NOI increased to 0.8% on a year-to-date basis and 0.7% during the second quarter of 2017.

Lease termination fees which are excluded from same-center and portfolio NOI totaled approximately $2.6 million in the first half of 2017 compared to $2 million for the same period of 2016.

Following last year's timely conversion of $525 million of floating rate debt to fixed interest rates, we have continued to successfully execute liability management strategies in 2017.

We completed a $300 million 10-year bond offering on July 3, 2017.

The pricing and execution of this offering illustrated the fixed income community's confidence in our business.

Demand for the paper was so great that it ultimately priced at a spread of 170 basis points which was 20 basis points inside the underwriter's initial price indication and represented a 5 basis point negative new issued concession.

Today, we use the $295.9 million of net proceeds from this 3.875% offering to redeem $300 million of 6.125% bond debt that was due June 1, 2020.

We utilize borrowings under our unsecured lines of credit to fund the balance of the $334.1 million required to fund the redemption which included a $34.1 million make-whole premium.

During the third quarter, the make-whole premium would be an adjustment to [May] FFO and therefore excluded from AFFO.

These transactions result in a $6 million increase in our annual cash flow and $0.06 per share to AFFO on an annualized basis.

The positive AFFO impact to the second half of 2017 will be about $0.15 per share, which includes interest savings on the rate differential beginning today offset by the double interest effect of having both bonds outstanding for the last 30 days and the interest expense effect of having -- I'm sorry, and the interest expense on the incremental loan borrowings used to fund the redemption.

As of June 30, 2017, approximately 91% of the square footage in our consolidated portfolio was not encumbered by mortgages and only $101 million was outstanding under our unsecured lines of credit at quarter end, leaving 81% unused capacity or approximately $419 million.

We maintained a strong interest coverage ratio during the second quarter of 4.3x and a net debt to EBITDA ratio of about 6x.

Our floating rate exposure represented only 13% of total debt or 5% of total enterprise value.

After given effect to the bond offering and redemption, the average turn of maturity for our outstanding debt was 6.7 years, the weighted average interest rate on our outstanding debt was 3.31% and we have no significant maturities until April of 2021.

Our conviction that our shares are undervalued are so strong that we recently put a 2-year $125 million share buyback plan in place.

Using asset sale proceeds, we repurchased 1.5 million of our common shares during the quarter at a weighted average price of $26.25 per share for total consideration of $39.3 million.

That leaves $85.7 million remaining under our $125 million share price authorization.

In April, we raised our dividend by 5.4% on annualized basis.

This was the 24th consecutive year we have increased our dividend or every year since becoming a public company in May of 1993.

Our current annualized dividends of $1.37 per share is more than double our 2006 dividend which was $0.68 per share on a split adjusted basis.

Over the last 3 years, our dividend has grown at a 30% compounded annual growth rate.

On August 15, 2017, we'll pay our 97th consecutive quarterly dividend of $0.3425 per share to holders of record on July 31, 2017.

We expect our AFFO to exceed our dividend by more than $100 million in 2017 with an expected AFFO payout ratio with a mid-50% range.

Our dividend is well covered.

To maintain our strong and flexible leverage profile, we prefer to use internally generated cash to fund any further purchases under our share repurchase program.

The redemption make-whole premium and the completion of the 2 projects that will open later this year are creative investments and will consume our remaining cash flow for the balance of the year.

Currently, we also expect our 2018 FFO to exceed our dividend by more than $100 million.

With no new center openings planned for next year and annual capital expenditures and lease up cost expected to return to a normal level of approximately $25 million to $30 million, we should have ample internally generated cash that we use to increase our common share dividend, naturally de-lever the balance sheet, reinvest in and refresh our properties and/or repurchase additional shares as market conditions warrant.

Our conservative mindset have served Tanger well throughout 36 years of economic peaks and valleys.

Maintaining a fortress balance sheet and investment grade credit is our way of life.

Financial store [chip] is the hallmark of Tanger Outlets and we do not intend to change.

I will now turn the call over to Tom.

Thank you, Jim.

The expansion of our Lancaster, Pennsylvania Center is nearing completion.

The new space will open in less than a month, increasing the size of the center by 123,000 square feet or 53% and adding over 20 new brand name and designer outlet stores.

Our Lancaster Center is already highly productive with stellar tenants such as Coach, Nike, Movado and Talbots.

With the addition of upscale brand name and designer tenants opening in this expansion including North Face, Michael Kors, Under Armour, H&M, Columbia and a new state-of-the-art Polo Ralph Lauren store, the newly expanded Lancaster Center promises to be even more productive.

We anticipate that the expansion will be about 90% lease when it opens on September 1. Also of note the announcement that the other outlet center in the market is going to foreclosure auction on September 12 has enhanced demand for stakes in our center.

If you plan to be in the area for the Labor Day holiday, please stop by and check out our newly expanded center.

The second development project we planned to open in 2017 is our new 352,000 square foot center in Fort Worth, Texas adjacent to Texas Motor Speedway and within the Champions Circle mixed-use development.

By many accounts, Dallas Fort Worth is one of the top 4 or 5 retail markets in the country.

We will be delivering a center that will include many point of differentiation and highly sought after retailers like Restoration Hardware, Nike and Polo Ralph Lauren to name a few.

We have already begun turning over space to tenants for their build up and expect to be about 90% leased at grand opening, which is scheduled for October 27.

As of quarter end, $85.3 million remained to be funded to complete these 2 wholly owned projects which are expected to generate a weighted average stabilized yield of approximately 9.3%.

As we all know, 2017 has been a challenging year for retailers, characterized by multiple bankruptcies and store closing announcement.

Recent research published by Fung Global Retail listed 2017 closure announcements totaling 4,381 stores by 29 retailers.

However, let me put that in perspective.

Most of the retailers on this list are not in any Tanger Centers.

In fact, while we don't mention individual tenants, based on our discussions with the tenants on this list, we expect only a total of 24 store closures in the Tanger portfolio, 20 of which have already closed.

Teavana is the latest to announce closing and we have no Teavana locations in our Tanger portfolio.

We also have no Sears, Kmart, J.C. Penney, hhgregg or GameStop stores.

Our tenants tell us that outlets are their most profitable distribution channel.

And so it follows that the demand for space in our centers remained strong.

Demand for outlet space is coming from existing retailers interested in opening new stores or upsizing their existing stores as well as retailers that are newer to outlet distribution.

The seasoned group of active tenants includes retailers like Old Navy, Michael Kors, Polo Ralph Lauren, Skechers, Levis, Columbia, Kate Spade, Vineyard Vines and Bath & Body Works.

One such active tenant, a popular designer accessory retailer, is working with us to open 6 new stores by year-end 2017.

The newer active tenant group includes HomeGoods, T.J. Maxx, and Yves Delorme in the home category; Tory Burch, Lululemon, Francesca's, Marshalls, Dockers, Torrid and ASICS in the apparel and footwear categories; Alex and Ani, Pandora, Alexis Bittar, Brighton and Shinola in the accessories category; and Bare + BEAUTY in the health and beauty category.

I will now turn the call back over to Steve.

Thanks, Tom.

As I mentioned earlier, our consolidated portfolio was 96.1% occupied as of June 30, 2017.

Historically, we have maintained both high occupancy and the dynamic wind up of the most sought after brand name retailers.

We own a portfolio of high quality outlet centers.

Our consolidated portfolios occupancy cost ratio is lower than any other retail channel, meaning our stores are more profitable.

Said another way, at the rents that our tenants are paying there is more cushion for the store to remain profitable should top line growth slow.

Historically, this has resulted in fewer outlet stores vacating when a retailer announces store closings.

Most recently one of our tenants announced the closing of 125 full price stores none of which were in our portfolio.

There are many other examples to illustrate this thesis.

In fact, at our recent meetings with tenants, the mood was cautiously optimistic, professional and many discussing new stores.

At times in the cycle when underperforming brands have shuttered stores, we have capitalized on those opportunities to enhance the tenant mix by filling the space with fresh new brands that our shoppers tell us they want in our centers.

While these desirable high volume retailers have a lower relative occupancy cost that may impact retenanting spreads in the short term, remerchandising vacant space with high volume retailers has been a successful long-term strategy for Tanger for more than 36 years.

Enhancing the tenant mix in this way has historically increased shopper traffic, driven demand from additional new tenants and increased future renewable spreads and overall tenant sales productivity.

With these objectives, we have planned major remerchandising projects ongoing at 6 of our centers.

We expect to complete this work by year-end at our centers in Howell, Michigan; Hilton Head, South Carolina; Jeffersonville, Ohio; Myrtle Beach, South Carolina; and Ocean City, Maryland; and by the end of 2018 in Tilton, New Hampshire.

Our projected unlevered yield is about 7% on our planned $24.3 million capital investment.

We are not currently forecasting any additional major remerchandising activity in 2018.

Eight of the new leases executed to date at these centers to retenant a 150,000 square feet with high volume retailers required the consolidation of 24 storefronts with an average size of 6,200 square feet to these large new format stores with an average size of approximately 18,700 square feet.

Excluding these large format spaces, blended rental rate increased 11.7% on 265 leases renewed or retenanted throughout the consolidated portfolio during the first 6 months of 2017 totaling 1,187,000 square feet.

Retenanted space accounted for 186,000 square feet of the space and resulted in an average base rental rate increase of 18.4%.

Lease renewals accounted for the remaining 1,001,000 square feet of executed leases and resulted in an average increase in base rental rates of 10.4%.

Given current market conditions, we have deliberately chosen to shorten the term to 12 months for 29 leases totaling approximately a 113,000 square feet or about 11% of the renewals we have executed.

Excluding these short-term leases, average base rental rates for renewals increased 12.7%.

Renewal spreads at the 6 centers we are remerchandising was more than 200 basis points higher than the renewal spreads for the balance of our consolidated portfolio.

Regarding lease modifications, we are at the point in the cycle where landlords must carefully balance occupancy and rent.

Generally speaking, we expect our tenant partners to honor the terms of our contract and revisit the terms of the agreement at expiration.

During the first 6 months of 2017, we recaptured approximately 142,000 square feet within our consolidated portfolio related to bankruptcies and brand-wide restructurings by retailers, including 80,000 square feet during the second quarter.

During 2016, we recaptured 19,000 square feet during the first half of the year and 105,000 square feet overall.

To date, we have executed leases or leases in process for about 70% of the space recaptured since 2016.

Based on what we know today, we expect to recapture an additional 15,000 square feet in the second half of 2017 and expect year-end occupancy to be approximately 96% for the consolidated portfolio.

Average tenant sales productivity within our consolidated portfolio was $383 per square foot for the trailing 12 months ended June 30, 2017, or $403 per square foot in an NOI adjusted basis.

Same-center tenant sales performance for the 3 months ended June 30 was up 1.1% for the overall portfolio and up 1.2% for the consolidated portfolio compared to the 3 months ended June 30, 2016.

Same-center tenant sales performance for the trailing 12 months ended June 30, 2017, was down 1.2% on the overall portfolio and down 2.2% on the consolidated portfolio compared to the 12 months ended June 30, 2016.

There are a number of factors impacting tenant sales.

In the past 12 months, 3 new centers have rolled into the consolidated portfolio average tenant sales metric including Foxwoods in Memphis during the first quarter of 2017 and Grand Rapids in the fourth quarter of '16.

Initially, new centers do not typically exceed our portfolio average, but in the first several years have the potential for strong tenant sales growth.

Westgate is a good example, having started out below our portfolio on average in the first quarter of 2014 and has grown its current productivity, which ranks in our top 10 centers.

Another factor negatively impacting apparel sales is the prevalent price deflation as underperforming retailers continue to deeply discount product that is not resonating with the consumer.

We are not at risk of having large department store boxes go dark or having to put a tremendous amount of CapEx into retenanting these spaces because we have no department stores.

Our properties generally have standard bay depths, so we are more easily reconfigured by moving the demising malls that divide suites to make them larger or smaller as needed.

Our industry is not overbuilt.

Factory outlets only represent about 1% of total retail square footage, about 70 million square feet, compared to over 7.5 billion square feet of other retail.

New supply is limited in the outlet industry.

Only 3 new centers opened last year, 2 of which were Tanger outlet centers.

Only 4 centers are planned to open this year including our Fort Worth, Texas center that will open this fall.

Next year, we expect only 2 new centers to open.

We acknowledge that these are challenging times for many retailers.

However, with the lowest average tenant occupancy cost among mall REITs at just 9.9% for our consolidated portfolio, we have been successful at raising rents while maintaining a very profitable distribution channel for our tenant partners.

Over the last 10 years, we have invested over $300 million into renovating our portfolio and upgrading our tenant mix with sought after brand name and designer retailers.

Regarding our outlook for the balance of the year, we have revised our guidance primarily to reflect the sale of the Westbrook Center, share repurchases during the quarter and our recent financing activity.

Currently, we expect full year 2017 net income per year to be between $0.70 and $0.75 per share and FFO to be between $2.04 and $2.09 per share.

We are maintaining our previous guidance for AFFO per share of $2.40 to $2.45 and our assumption for the same-center net operating income of 1.5% to 3% excluding the 6 outlet centers undergoing remerchandising efforts or between 1.5% and 2% including these centers.

Last quarter, we revised our AFFO on same-center net operating income mainly to reflect the impact of incremental unexpected store closings and delayed store openings.

We also widened our range from 100 basis points to 150 basis points for same-center NOI growth to reflect the volatility and variability of the current market environment.

As mentioned earlier, we got back an additional 80,000 square feet during the second quarter related to bankruptcy filings and brand-wide restructurings, most of which was incorporated into our previous guidance.

Based upon what we know today, assuming no additional bankruptcy filings and assuming the deals we have reached with tenants currently in bankruptcy are ultimately approved by the bankruptcy courts, we believe we'll be in this range.

We are encouraged by what we are hearing from our tenants that they want to open new stores.

Where in the range we end up will depend on how quickly we can fill vacancies, the level of sales our tenants achieve in the third and fourth quarter and whether there are additional tenants filing for bankruptcy.

Our key guidance assumptions including lease termination fees totaling $2.7 million for the full year, average G&A expense between $11.2 million and $11.7 million per quarter, 94.7 million weighted average diluted common shares for 2017 net income per share and 99.7 million shares for AFFO and FFO per share.

As Jim reported, the potential for repurchasing additional shares through the balance of the year will be contingent upon market conditions and on maintaining a flexible leverage profile in our investment grade credit ratings.

Our forecast does not include the impact of any additional financing activity, the sale of any out-parcels, additional properties or joint venture interest or the acquisition of any properties or joint venture partner interest.

To conclude, our business model is unique from the rest of our peer group.

Despite bankruptcies and store closing announcements by a number of underperforming retailers, outlets continue to provide the brand value and experience that consumers want and remain one of the most profitable channels of distributions for our retailers.

We believe that our fortress balance sheet, the strength of our core portfolio and our longstanding retailer relationships leave us well positioned to weather the challenges of today's retail environment and prosper when the cycle turns positive.

And now I'd be happy to answer any of your questions.

(Operator Instructions) Your first question comes from the line of Caitlin Burrows with Goldman Sachs.

I was wondering, you referenced the 29 deals that you guys did that were just 12 months renewals and part of that had to do with just the current status of the retail environment.

So could you just give more details on kind of how those came up?

Was it your suggestion or going to the retailer and wanting to do that?

Or did they want that and kind of how did that happen?

I think it was a mutual decision.

I mean, it's -- vacancies are a cancer on any retail shopping center.

It's our desire to keep space occupied and it's also our desire to control space when the market changes and becomes more robust, which we think it will at some point in the future.

We're also finding that the outlets continue to be a very profitable distribution channel for our tenants.

Most of our tenants have been in this property for 5, 10 and 15 years and their stores are fully depreciated.

So it's a win-win for both of us in view of market conditions where there’s some question as to what their long-term plans are to keep the space open on a 12-month basis and see how the market sorts itself out.

Okay.

And then also just on the, I guess, leasing spreads in the quarter, you guys gave a lot of detail on that.

Can you give any more on kind of what you're seeing at some of your higher quality properties versus the lower and if there is a wide discrepancy or not in terms of pricing power?

We've given you the sales productivity for the entire portfolio and on a weighted NOI basis.

I think you can assume that the detail we've given you is sufficient detail for you to draw whatever conclusions you might need to draw.

And it's also a logical conclusion that we are investing in all of our properties to try to increase the productivity of all of our properties in the long-term cash flow.

We're not doing anything for the short term.

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

Thinking about the H&M stores in your portfolio, I believe you have around 14 in your centers and the H&M center at National Harbor has a significant presence and was expanded on top of that.

Finally, I also see you're adding an H&M to Howell.

I’m -- the question is I'm just wondering what impact of these H&M stores have on your centers?

Are the sales productivity above the center average?

And what do they have impact on traffic or other impacts on the property?

It's hard to tell the impact of any one particular tenant, Craig, as you well know.

H&M is a very popular global retailer today with a well-known brand name and a huge following of customers.

We are delighted to have them as a tenant partner.

When we add them to the center, traffic increases, sales overall for the property increased.

So we're also going to have more H&M stores as we work with them on their expansion.

Your next question comes from the line of Todd Thomas with KeyBanc Capital Market.

Just first question on guidance.

The adjusted FFO guidance range you provide was you maintained at $2.40 to $2.45.

And you mentioned that the dilution from the sale, Westbrook was offset by the stock buybacks and everything else seems to have been maintained.

So I'm just curious if there's an offset to the $0.015 benefit from the lower interest expense you expect to recognize in -- throughout the course of the rest of '17?

Todd, there's a range for a reason.

We've given the range based on what we know today and we certainly expect to perform within that range.

We're going to continue to monitor how fast we're able to refill the space and we'll revisit the range as we do at the end of every quarter.

Our range also assumes no further bankruptcies are announced and the deals that we have reached with tenants currently and bankruptcy are approved by the bankruptcy courts.

So there's a lot of -- there’s a reason, there’s a range and we're comfortable we'll end the year inside the range.

Okay.

And then just back to your comments that we're at a point in the cycle where landlords must balance occupancy and rents, I guess how long do you expect to see that persist and what does that mean for leasing spreads in the back half of the year?

I don't have a crystal ball.

I don't think anybody knows how long this market’s going to be at this point in the cycle and when it's going to turn.

But we don't really give guidance on any rent spreads.

Our spreads are reflected in the same-center growth assumptions that we provided.

Typically, we renew about 80% to 85% of our space.

So I think we're -- I can't really give you more guidance than that.

Okay.

Were the short-term renewals, was that one deal -- was that a deal negotiated with one retailer?

Or was that spread across multiple retailers?

It's multiple retailers.

Your next question comes from the line of Samir Khanal with Evercore.

You kept the guidance unchanged at 0.5% to 2% but it looks like you're tracking closings at a higher level than that at this point.

It's 140,000 square feet, it looks like you might get back another 15,000 square feet in the second half.

So I guess just from sort of factors and assumptions you're baking into the low end of guidance here at 0.5%, I mean how much further store closings is baked into that at this point?

Well, we've already released about 70% of the space that we've gotten back in the last 18 months.

So that's pretty good performance.

We're only expecting a small number of leases space to vacate in the balance of the year and we're having ongoing discussions with tenants to fill that space.

We have guided -- we're currently at 96.1% and we've got it at the end of the year that we're going to remain about 96%.

So we're comfortable that we'll be able to fill that space and certainly the cadence are filling it.

The cadence of vacancies will not exceed our ability to fill the space.

Okay.

And then I guess my last question would be on Atlantic City.

I just was looking at the occupancy there, it dropped a little bit.

I just wanted to see if you could provide some color on that?

I'm sure it's very few if any, maybe a small tenant or 2 close, but we're also talking to several very exciting tenants about expanding in Atlantic City and adding to our group in Atlantic City.

It's basically 3 tenants that closed.

Your next question comes from the line of Michael Mueller with JPMorgan.

Couple of questions.

Steve, there are no new development, no new outlets opening in 2018.

Is that more of a function of the blocking-tackling you want to spend in the balance for this year kind of finishing up remerchandisings in the portfolio or is it little bit more of a function of you just couldn't get it done in this sort of market?

Well, it's not that we can't get it done.

I mean, we certainly have the financing and the skill to build a shopping center as we've done over the past 36 years.

We have very strict consistent underwriting criteria, one of which is we will not start construction until we're 60% pre-released.

We had a new development announced in the Detroit area which we dropped in the first quarter and took the write-off because we couldn't get the tenant commitments to sign leases to get to the 60% to break ground.

And we decided based on current market conditions rather than chasing a deal and continuing to pour money into it and then having a very large write-off, we decided to terminate the land agreement and move forward and focus our human resources on filling the space that we've gotten back and remerchandising our existing centers.

But we do and we are actively working on our shadow pipeline of several different locations which we've shown in several tenants, but we're not going to build into a market where there's this much uncertainty.

But as we were in 2008 and 2009 and 2010 where we didn't deliver a single property based on market conditions, and you may remember those conditions, we have the greatest growth spur from 2010 to 2016 that our companies ever had.

So we're prepared when the market and the cycle turns more positive which we think it will, but right now it would not be prudent for us and we never will build on speculation.

And just a quick confirmation on something, Jim.

I think I missed this.

Did you say to $25 million to $30 million CapEx, that level is going to return in 2018?

That's right.

Okay, that was it.

And last thing just any -- is Ascena a fairly good tenant from a GLA standpoint, I think it's around 6% or 7%.

Anything that you can share about what's going on within your portfolio with them just given their announcement from couple of months ago?

We have a lot of respect and have known the management of Ascena for the better part of 35 years.

They were one of our first tenants.

They have a balance sheet with a lot of cash.

So I don't think that there are a bankruptcy risk at this point.

We are in discussions with them, we have a large portfolio but they have given every indication that they will honor their leases.

And when there is an actionable event, we are in discussions with them and all things are on the table on both sides.

So we have a longstanding professional relationship and personal relationship with them.

We don't expect that they will terminate a lease before the end of its natural expiration.

Have you gotten any sort of indication where there is a sizable portion of those leases upon expiration won't be renewed?

Well, that would be speculating, but the answer is…

I guess not (inaudible).

Less than a handful in the next 2 years if you wanted me to give you a guess.

That's just based on our initial conversations.

But that will be more weighted to 2018 than this year.

Your next question comes from the line of Floris van Dijkum with Boenning.

I just wanted you to maybe give some more color on your outlook for the cash re-leasing spreads.

They've come down from I think 5.6% in the first quarter to below 1% in the second quarter.

And how is that related -- is that related to the sales performance or do you think there are some one-off events that are really driving that going forward?

Well, first of all, we don't really give guidance on rent spreads.

And it's not any one particular event.

Every -- it's on a case-by-case basis.

We look at the -- we review every asset every quarter and make capital allocations decision including leasing decisions.

So I'm not prepared to give you future guidance on the spreads.

Let me ask you another question if I may.

You had mentioned investing in -- potentially investing in some of your bottom centers.

You're continuing to invest because you're looking at it from the long term.

Do you guys weigh your investment in the bottom call 15 centers more carefully and does your return hurdle rides for those centers compare to the top 10% of your portfolio or how do you think about that?

Well, the remerchandise centers, the 6 centers are in the bottom half of our portfolio.

We've been able in those centers to attract high volume key retailers and to be able to accumulate the space for them.

So we are comfortable that the -- let me put it in perspective.

The remerchandising investment totals $24.7 million and it's in an accretive return of little over 7%.

So these are carefully weighed investment decisions both for the long-term health and viability of the assets and appropriate capital allocation disciplines.

So I guess and somewhat, yes, you do weigh it, but the concern I guess some people have is that those center -- the cap rates for those lower tier centers is higher than the 7%.

So is that accretive to your overall -- to the overall value of the center I guess is more the question I was trying to have you answer?

I don't think you can compare a 7% return on a $25 million investment spread over 6 shopping centers and draw a conclusion that are particular center value is 7%.

I mean, we look at it long term.

These centers are not on the market for sale.

My experience is that if you do nothing with these centers, the vacancy continues to grow and the value of the center drops off a cliff.

We've been concluding and doing -- we've been concluding remerchandising for 35 years.

This is not the first cycle we've been through.

It's probably the fifth or sixth.

And if I had more time, I'd be happy to name them and give you examples.

But we are already starting to see the renewals at the 6 centers we're remerchandising, are averaging more than 200 basis points higher than in the rest of the portfolio.

So we're already seeing more shopping center returns than just one single investment.

These are long-term investments.

We're not merchant builders.

We intend to own these assets and to continue to improve these assets and to provide the shoppers in those trade areas with the most up-to-date brand names in the marketplace which is what we're doing.

Your next question comes from the line of Caitlin Burrows with Goldman Sachs.

I just had one follow-up question on the remerchandise centers.

I was previously under the impression that there were 7 of them, so I was just wondering if now there were indeed only 6 or if one finished.

We sold the Westbrook property which was the seventh.

And then just lastly on them.

For the 5 that are expected to be done this year and the one for 2018, the one that's going to be done, the New Hampshire one in 2018, was that always expected to take a little bit longer?

Yes.

Your next question comes from the line of Christine McElroy with Citi.

Just a follow up on the remerchandising, just in terms of the projects expected to be completed by year-end and in 2018.

In regards to the 7% return, over what timeframe is that return likely to be achieved?

So I'm just trying to figure out is that 7% related just to the remerchandise stores, for the store fronts that are being consolidated or does that include the sort of the renewal overtime, the upside in the renewals overtime that you spoke of?

It's not a long-term return.

I mean, we took the incremental NOI from the tenants we're adding and divide it by the investment.

So it's almost an immediate return when the new tenants open.

It does not take into account the speculative impact of higher renewals for other tenants or filling additional vacancies.

It's just from what we know.

So by that I would imagine -- so it stands to me like if you are consolidating store fronts and you're creating larger stores, that would imply a lower rent per square foot on those stores.

I guess that's not the case, it's actually higher in the aggregate when you're churning the (inaudible).

Well, keep in mind some of the aggregation of space included vacant space.

Right.

Okay, okay.

What impact if you had…

If you want, we're happy to discuss that with you offline.

So I'm guessing there is a lot of vacant space that was vacant for a long period of time as opposed to just closed in preparation for the remerchandising?

Again, we're happy to discuss.

If you want to give us a call after afterwards, we're happy to walk you through it.

Great.

And then just what impact on your sales per square foot would you expect as a result of the remerchandising of these 6 centers?

We haven't given any guidance, future guidance on that.

Your final question comes from the line of David West with Davenport & Company.

Perhaps a clarification.

A competitor announced they're opening a center in the Fort Worth area that the shops at Clear Fork.

It wasn't clear whether this is a full service conventional shopping center or an outlet center.

I just wondered if you could comment about its positioning relative to your Fort Worth property that you're opening in October.

It's not going to be an outlet center.

We will be the -- to our knowledge, the only outlet center in Fort Worth.

There are 2 other outlet centers; one is closer to the Dallas market, I guess both are closer to the Dallas market.

But we will be the one servicing Fort Worth.

Well, if there are no more questions, I want to thank everybody for continuing to support us and staying on the call.

And I wish everybody a great summer.

And come visit us in Lancaster, Pennsylvania and Fort Worth when we open up.

Talk to you in another 90 days.

Good bye.

Thank you.

This does conclude today's conference call.

You may now disconnect.