Q3 2019 Earnings Call
On the call today will be Robert Taubman, Calvin centers, Chairman, President and Chief Executive Officer, Simon Leopold Chief Financial Officer.
Reinhart, Vice President Investor Relations.
To them Chief Accounting officer.
Now I'll turn the call over to Ryan for opening remarks.
Thank you operator, welcome everyone to our third quarter conference call.
You know during this conference call will make forward looking statements within the meaning of federal Securities laws.
These statements reflect our current views with respect to future events in financial performance, although actual results may differ materially.
We see yesterdays earnings release in or FCC filings, including our latest 10-K subsequent reports for a discussion of various risks and uncertainties underlying are forward looking statement.
In addition, a replay of this call will be provided through a link on the Investor Relations section of our website.
During this call will also discuss non-GAAP financial measures have defined by a T.C. regulation G.
Reconciliations of these non-GAAP financial measures to comparable GAAP financial measures are included when possible in our earnings release or supplemental information in our historical FTC fine.
non-GAAP measures referenced on this call may include estimates of future EBITDA I know why after tax and Hawaii Pro Rata tour total portfolio in Hawaii, and or Apple So performance of our investment property.
Such forward looking non-GAAP measures may differ significantly from the corresponding GAAP measure net income depreciation and amortization tax expense interest expense indoor other adjustments, some or all of which management has not quantified for the future period.
Following today's prepared remarks, we will open the call for questions. We ask that you limit your questions. If you. If you have more please queue up again.
I'll, let me turn the call over to Bob.
Thanks Ryan.
Good morning, everyone.
Yesterday, we released our third quarter results.
Adjusted FFO per diluted common share was 86 cents inline with our expectations.
And we remain on track to reach our full year Arafat FFO guidance.
Our pro rata share of total portfolio in a wide was up 70 basis points in the quarter.
3.6% year to date.
Comp center NOI growth, excluding lease cancellation income was down 150 basis points.
Forever 20 ones bankruptcy filing and the non payment of September ret, along with continued unfavorable foreign currency exchange rates had a significant impact.
Removing these items third quarter, and Hawaii was flat compared to last year and was up 1.5% year to date.
Average rent per square foot was up 2.3% in the quarter and 1.7% year to date.
I'd answer why weighted basis, it's 3.3% for the quarter and 3.2% year to date.
In the U.S. comps centers average rent per square foot was $62.20 up 90 basis points for the quarter and year to date.
On an ever why weighted basis rent growth in our U.S. centers was 2% for the quarter and 2.5% for the year.
At quarter end, our comparable center occupancy was 93.4% up 10 basis points over last year, and 120 basis points from last quarter.
Well in recent years, we have seen elevated levels of tenant turnover, we've continued to maintain healthy occupancy levels, while improving our merchandise.
This quarter some of our notable additions were blessed CEOC this new expansion and Kenzo at Beverly Center.
Gucci at the guards it helps sale.
Crate and barrel open a 28000 square foot the store at the mall Greenhills Nashville.
With respect to digitally native friends.
Always had opened the two locations they not seven stores, whether Warby Parker also opened the two locations. They have four stores with us Kathy Kasper opened its fits store and Chubb is now has to with us.
At Waterside shops in Naples, Apple reopened it an 8000 square foot store and Louis Vuitton as reopen in a new expanded 4000 square foot store.
At Dolphin Mall, Miami, New balance Reebok, Aireon children's place opened comprising 20000 square feet.
It's city on Shia in Sydney, and Joe in China, We backfill two forever 21 spaces with before.
Nike ATM, Monaco, OPO Bose, Victoria's secret and others.
He said has lifted the sales productivity and in Hawaii at both centers.
Leased space was 95.9% at September Thirtyth up 80 basis points from last quarter and slightly ahead of last year.
A few new and noteworthy leases signed this quarter include.
Nordstrom's rack cannot Adidas outlet, taking a combined 44000 square feet at Great Lakes crossing here in Detroit.
Our house furniture, and pinstripes, a popular bowling concept will occupy over 40000 square feet National Plaza in Tampa.
Digitally native brands like Warby Parker Beta Chuck Chuck These continue to be adding stores.
We're also delighted with our leasing progress related to the expansion of renovation at the mall it greenhill.
The center will have 60 unique to market tenants, including Zara that is set to open it's 37000 square foot flagship store for Nashville next year.
Louie Tom will nearly double their space in a new 4500 square foot store Golden Goose, Gucci, our house ever Reef Morphy, Amazon books, Fabletics and others have signed leases since our April uptake.
We also now have 11 digitally native brands, either open or committed to the center.
Overall, the leasing program is substantially complete and we're very pleased with the level of merchandising, especially the luxury component, which exceeded our expectations.
Turning to sales overall steady sales growth is continue this year on top of very strong sales last year.
Trailing 12 month sales in U.S. comparable centers were $964 per square foot up 13.7% over the prior period.
Including Asia, our trailing 12 months sales were $860 per square foot, an increase of 12% over last year.
And then why weighted sales were $1015 up 12.4%.
In the third quarter sales per square foot were up 12.3% U.S. and were up 11.2%. Overall this is our 13th consecutive quarter of growth.
Although we benefited from Tesla deliveries again this quarter sales growth was solvent Nonetheless, our largest categories of merchandise have performed well all year.
Apparel sales were up for the eighth consecutive quarter on top of an 8.5% increase in the third quarter of last year.
Shoes were up 5% in the quarter and year to date.
Electronics, including Apple continue to see double digit growth.
Growth in luxury across categories also remained strong.
Moving to be Todd Versace, Baldry, Omega brightly San Lorenzo David Yurman, San Salvador, Ferric I'm, an air methods were all up at least 7%.
In apparel Zara, H. NAND Fabletics Little 11, Aerie, Tory Burch, Ralph Lauren and Zumiez posted strong results.
Moving to San Juan.
In August we settled the lawsuit with Hudson Bay Company regarding the Saks location at the mall San Juan.
As you'll recall in September 2017, the SEC source sustained significant damage as a result of hurricane Maria and did not reopened.
We felt strongly our agreements were clear and the tax was required to make the necessary repairs and reopened as expeditiously as possible.
With Saks closed total sales grew nearly 20% compared to pre hurricane levels and leasing along with merchandising continued to improve.
In this context, we agreed to sell the litigation in exchange for sex is paying us $26 million.
We were also able to resolve nearly every co tenancy issue, including with nordstroms.
We're actively working with a number of new tenants to take the sex box that would be additive to the merchandising of the center.
So with that I'll turn the call over to Simon.
Thank you Bobby and good morning, everyone.
I'll begin by reviewing our year over year after FFO variances for the quarter.
Listed on page nine of our supplemental.
FFO per share for the third quarter was 88 cents.
Adjustments this quarter included a promote fee received related to Starfield hanam.
Restructuring charge.
And costs related to shareholder activism, resulting in an AFFO per share of 86 cents.
The net promote fee of $4 million resulted from Blackstone's purchase of the 14.7% interest that was owned by the company's institutional joint venture partner.
And for FFO per share is 80 success this quarter compared to one dollar one of the third quarter of 2018.
We noted several year over year variances in the press release that affected this quarter's results including.
Interest expense unfavorable five cents, primarily due to lower capitalized interest largely the result of the completion of the Beverly renovation project in November of 2018.
Non operating income down two and a half cents due to a land sale gain and dividend income from Simon property group shares that are included in last year's results.
Last that lease cancellation income was also down by two and a half sense.
And uncollectible tenant revenues, which are formerly known as bad debt.
Were unfavorable by two cents, primarily due to the forever 21 bankruptcy filing.
Our other year over year variances included the following.
Minimum rents up four cents, primarily due to higher average rents partially offset by the write off of forever 21 straight line rent receivable.
Net recoveries down two cents were also impacted by forever 21, as well as higher common area of spending.
Gionee was 1.5 cents unfavorable due to some unanticipated nonrecurring legal expenses.
And lastly, our Noncomp centers were unfavorable by a penny.
Now moving to the balance sheet.
We're pleased to refinance and extend both our primary line of credit and one of our unsecured term loans earlier this week.
Our line of credit will maintain a capacity of $1.1 billion.
And our term loan now has the principal balance of $275 million.
The maturity date of our line of credit is now February one 2024 to six month extension options, which is if exercised coincide with our new term loan maturity date of February one 2025.
Both lot loans bear interest within a range based on the company's total leverage ratio.
Today, the line of credit as a rate of LIBOR plus one in three days, resulting in an effective rate, including a facility fee of about 3.4%.
The term loan has a rate of LIBOR, plus 1.55% with LIBOR or continuing to be swapped to a fixed rate of 2.14% through February of 2022, resulting in an effective rate of 3.69% today.
These refinancings slightly lower effective borrowing rates and improve our weighted average debt maturity that to nearly six years.
We're pleased that 15 banks participated the facilities I would like to thank our bank group for their continued support.
I now want to provide an update on the progress of our Asian transactions with Blackstone.
In September we closed on the largest in three joint ventures by completing the sale of half of our interest in Starfield hanam to Blackstone for $300 million.
The sale represents more than half of expected proceeds from the three joint ventures.
The company now onto a 17% interest in the center.
Blackstone owning 32% and shinsegae owning 51%.
We remain on track to close the to China joint ventures around year end.
In addition, there are two refinancings on the China projects that are part of the overall recapitalization of our Asia business.
We completed the refinancing of she on back in April and expect to close the JNJ alone before year end.
Now an update on our 2019 guidance, which as a reminder, can be found on page six of our supplemental along with all our key guidance assumptions.
We are reaffirming our previous AFFO guidance range of $3.64 to $3.74 per share.
The forever 21 bankruptcy filing in late September remains a fluid situation.
As we noted last quarter, we believed our LOE guidance range incorporated adequate reserves for this years after FFO impact.
Based on what has happened and what we know today, we believe our AFFO range remains appropriate.
As it relates to occupancy our current expectation is that nearly all of our 17 locations will remain open and operating.
While we're not changing a AFFO guidance, we are adjusting threeg key guidance measures.
First we have revised our comp center NOI growth guidance, we now expect growth to be flat to 1%.
On our last earnings call, we highlighted the headwinds that foreign exchange rates presented to our NOI growth.
Currency continues to have an adverse impact about 84 basis points of drag on growth for the third quarter.
In addition, tenant bankruptcies, including Forever 21.
Have resulted in elevated frictional vacancy.
Non payments or in some instances lower rent.
We're also updating our interest expense guidance for the year.
Previous range did not include the debt paydown associated with the Starfield Hanam transaction.
Interest rates are also lower than we originally forecast.
Finally, we revised our expected lease cancellation income at share from 12 million to 10 million.
Now I'd like to make a few comments as we look to 2020.
First based on today's best estimates.
We expect forever 20 ones bankruptcy to create a drag on comp center NOI growth next year of 1% to 1.5%.
The resulting AFFO impact we estimate to be eight to 10 cents.
Next well the Blackstone transactions were killed clearly accretive when we announced the deal back in February a good portion of that accretion was related to debt reduction at rates that were materially higher than they are today.
We now believe rates will be at least 100 basis points lower that assumed.
And the net effect will be about three to four cents of F. AFFO next year.
Lastly in 2019, we received about $7.5 million of business interruption proceeds related to the malls San Juan.
Which are included in FFO and AFFO this year.
This will not repeat replicated next year and are not expected to be offset by Anna why growth at the center.
With that I'll hand, the call back over to Bobby.
Thanks Simon.
While the retail landscape continues to evolve.
We have maintained strong occupancy levels, and we are growing sales rent and portfolio NOI.
We're also on track to meet our earnings expectations for the year.
Finally in Asia, we've made substantial progress on both our Blackstone transactions and our new development in answering South Korea.
So with that we'll take your questions as Ryan said, please limit your questions to too.
Christine are you there.
Yes, Sir.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question pressed to bounce.
Our first question comes from the line is Christy Mcelroy some sub.
Hey, guys. Good morning, and thank you I'm just with regard to forever 21, I understand the process is still fluid and I really appreciate all the detail on the 2020 expectations can you talk a little bit about sort of how investors should be reading into that initial.
Closure list that was filed in how we should be thinking about that impact in the context of expected closure inspections rent relief.
Well you know as we said the situation Christy is very fluid and the bankruptcy.
Remains unresolved there there was a new list put out I think yesterday, that's a much shorter list of the closings and there were only two on that list. Originally there were 12 out of the list that were included for US now there are too.
You know, it's it's likely as we said that almost all our locations that will remain open.
But when we have rights to taken back if we have rights to taken back with the rent levels will be what we're reflecting in our in our expectations. Here is based on all those negotiations that are occurring and we think that that the likely outcomes are well within that that rates the reasonable sort of range of outcomes.
For this year it for what we've now said for next year.
So.
We'll see what happens, but it's winding its way through the process.
It is very complicated is our single largest tenant is 4%.
Of our space, it's actually 2.6% roughly <unk> of our SVR. So.
When your largest tenet.
Goes into bankruptcy it does have an impact.
And then just understanding that your releasing spreads continue to be impacted by short term leasing.
But even sort of excluding that impact it seems like there's been a deterioration in your and your rent increases on a permanent leases as well maybe you could give us some insight into that trend and can you remind us does rent relief related to bankrupt tenants flow through with that whats releasing spread numbers.
The last is is the answer to the last question is no they down.
Again, we are still growing our average rents chrissie and that's important to note.
Even through the volatile environment rents are going up.
Spreads are always a complicated staff they do not tell the whole story.
I will say demand for space in our centers broadly remains very strong we have healthy occupancy numbers, we have healthy lease space numbers, and we are able to push rent at our best centers.
We really we manage friend of why we managed for occupancy we managed for the quality of our merchandising and all of that's improving while we are able to move average rents up.
The volatility is creating some some drag on our ability to grow and Hawaii. This year, but over the long haul. We think our centers are getting a lot better spreads really are for us just an output.
Especially at a small portfolio in any quarter. They can be extremely volatile. So I'd point, you really to average rent I pointed occupancy at point of view our merchandising.
And that's really where we're focused.
Okay. Thank you for you guys.
Thanks, Chris.
Our next question comes from the line of Jeremy Metz from BMO capital markets.
Hey, guys as we look at the.
The same store the 30 basis points here today performance guidance assumes you roughly at that same level in the fourth quarter to finish in that flat to 1% range. So what are some of the moving pieces here to get you there and what are you expecting.
From a forever 21 impact is obviously 90 basis points here in the third quarter I think they did actually pay October around.
Correct me if I'm wrong.
Yes, so on the last piece Jeremy they did not pay rent in September and that was a hit in this quarter that was about $1.6 million in the quarter. Santa why there was also a straight line rent write off that we referred to that's not an NOI thats in a AFFO.
But maybe just I'll give you the broad picture on the comps in our guidance for the year and the revision.
We started the year, a 2% which included a very small drag very small by 10 basis points.
Some expected FX rates between the U.S. dollar the the Korean won and the China RMB.
Rates have been throughout the course of the year, we've been highlighting it have been.
Bigger drag than originally expected, it's about 80 basis points through that through the first quarter.
So it sounds sort of through the third quarter. So when you look at that versus about two that gets you a lot closer to about one for the year.
The other piece here is forever 21, but it's also the entire.
The entire volatile environment with bankruptcies, where we and we are seeing an elevated bankruptcy environment. This it looks a lot more like 2017, where we had about 3% bankruptcies that was about half.
It was about half that in 2018, but this is looking a lot more like 17.
Than than 18.
So between Forever 21.
And the expectations for the year on what we saw the third quarter and the overall elevated.
Level of bankruptcies on the year, we've essentially burn through the reserves that we had in place. We said on our second quarter call that we thought that we would be able to accommodate forever 21 within our reserves. What we wouldn't have much left that's in fact, where we are so between FX and what we've seen in terms of.
Elevator bankruptcies and effectively putting back in a three to 5 million dollar.
Cushion for reserves for the fourth quarter that gets you down to about 50 basis points of growth.
For the year and Thats, the midpoint of our guidance right now.
Let me just augment Jeremy on bankruptcies just to put.
Dead on it in 2017 over 3% of our tenants went into bankruptcy in 2018. It was half was about I think was 1.6% in 2019 year to date were 2.4%, we're going to be over 3%. So if you think.
About 17, and you think about 19, they're really running on a similar basis 18 made us feel a little better but I do think that things are settling I mean, we knew forever 21 had issues and clearly there is tenants on watch list, but this 3% level.
It is very elevated and as you look historically.
We are anywhere from 50 basis points to a little over 4%. So anytime you get above 3% you're really in the higher end of the range, especially when you get sustained over now really a three to four year period of time.
Yeah, Thanks, and in terms of the month to month leases and even the shorter leases you've talked about that are dragging some on the leasing spread fraud.
How much does this accounted for.
Today, and as we think about retailers my sense shifting here and we think about incubating new concepts getting some of these digitally native tenants to test a mall space over time should we expect to see a larger proportion of these kind of shorter term deals whether its.
Monthly or even you know 123 years.
I don't think that.
We're clearly seeing some large tenants fast fashion guys.
You know out there, but you know that create I'll say the lower spreads.
But when you think about the digitally native guys. Yes, there has been some of that and a lot of that has turned into long term tenants I mean palatine as a very good example on tuckett Casper they started in our centers with.
Short term deals and they turned into real concepts and they're now expanding as we talked about earlier in the prepared comments.
So we think it's been a good strategy to actually get them in mall and now they're really expanded so.
But they are becoming normal tenants is theyre paying normal rents and they're they're taken space in a whole broad variety of shopping centers, which you heard in my comments earlier. So there is a transition going on from many legacy retailers into the new.
Retailers.
It's beginning to really take shape and take hold.
Thanks, guys.
Our next question comes from the line of Greg Mcdonald's from Deutsche Bank.
Hey, good morning, everyone.
I was hoping to tackle understand a few pieces related to Saxon San Juan. So you mentioned that co tenancy is mostly dealt with there.
Im curious what do you have to maybe give up during co tenancy negotiations negotiations with retailers to settling this disputes.
Especially with regards to Nordstrom and how much do you expect to spend to redevelop and backfill that anchor space.
Well first of all Nordstrom's I mean, they have an operating covenant with significant term on it.
As we said it is resolved the cotenancy issue is resolved and we can't talk specifically about that individual discussion.
With respect to the other tenants there were about a dozen tenants that we dealt with.
That in one way or another the Saks closing impacted.
And.
So I don't think it was material against the.
Against where we were with those tenants specifically.
We do think the Saks resolution.
Allows us to move forward, we realized a gain on the transaction and we do you know you asked.
Is there going to be capital for.
To re tenanted it is possible, but we now have the ability to attract a much more productive tended in their building we are actively showing the space to a number of potential tenants.
And we feel we feel good about our opportunity.
To rebuild that location and and frankly the center as the island rebuilds. The tourism returns, we expect to have strong tourism. This year given what's happened in the Bahamas.
And we expected to continue to grow it it has been a long process. It could continue to be a long process, but we are optimistic about the center and we are very pleased to have the sex resolution behind us.
Great. Thanks, and then.
Second question, just hoping to talk a bit about Stamford town center curious with the market factors, where that kind of led to some of the issues that that mall what was the impetus for finally lifting the property.
Do you foresee similar situation with any or their holdings.
So first of all Stanford is unique situation for us.
We are exploring all possible possible alternatives on the asset I want to remind people. We've said this before that it represents less than 1% of our pro rata analyze and ups and about 1.5% of our comp Center NOI.
We did expect the competitive challenges that are there today.
Again, it was unique they're very very few.
Projects anywhere in the United States being contemplated for major retail right now.
And clearly at <unk> I would say performance has been lagging in the assets compared to the rest portfolio for awhile.
The if we excluded the asset from our comp center NOI growth.
We would have been 50 basis points better this year.
So it is impacting us we're very focused on it and we're looking at all the alternatives.
Hi, Thanks, Bobby.
Our next question comes from the line of Todd Thomas from Keybanc capital markets.
Hi, Thanks first question Simon the assumption that you provided for forever 20 ones impact on comp Center NOI and FFO in 2020, I just want to understand what that consists of in terms of the number of locations.
Just based on the comments around the list to closures that was released yesterday and also what <expletive> what are you assuming.
I understand again that things are our fluid here, but what are you assuming in terms of the timing of of those closures or are the impact there from forever 21.
Well, we don't want to get too deep into what is still a fluid situation, but I can give you. The basic underpinnings of what goes into what went into our thought process, which is that we do believe that nearly all the locations will remain open we do and we've gone space by space and we've looked at occupancy costs. We've looked at what we think makes sense and so.
So inherent in that one and 1% to 1.5% reduction to comp center, NOI and the 8% to 10%, 8% to 10% reduction FFO is a reduction of rent that's going to be different in every one of those locations based on the occupancy costs of the tenant in place.
Okay and Bobby does this situation with Forever 21 does it make you you mentioned that you just opened up a new.
And a new store was Zara Im just curious if this makes you think differently at all about fast fashion.
In general.
Whether whether zara each of them or just the that that business in general.
There are two totally different organizations to companies.
Forever 21, I think it's been widely reported.
A bunch of missteps along the way.
Including their expansions into Europe and Asia.
We've already released to the two locations I mentioned at Citi and she had a city on Gen. Joe in a very very positive way.
And.
Unfortunately.
Some very large stores.
Many mervyns boxes in the like.
And they just couldn't fill the the couldn't execute it could fill the those large spaces and execute properly and I think it's again, it's well documented that this is sort of the unique problem with that.
It's unfortunate.
Every respect.
And they really did in this country creates a fast fashion.
Idea.
And.
They did a terrific job for a long time.
I would say you know just in addition to Zara who've been very cautious in their expansion and taking very few new locations added time here in this country. You know agent and has also expanded very broadly and ancient end is.
Doing very well this year throughout their portfolio throughout our portfolio. So it's I think it is unique circumstance to forever 21.
And it's sort of went off the rails in the last couple of years.
And given the environment that we're in the retail environment.
I think it accentuated itself dramatically.
Okay. Thank you.
Our next question comes from the line is Craig Schmidt from Bank of America.
Thank you.
It appears that luxury sales.
Doing better than than sales overall and I was just wondering are you seeing an increase in luxury retailers appetite to open new stores.
Absolutely correct.
Within the number of brands the number locations do you can hear in our comments about various expansions that occurred whether bullets yaga, whether solve red whether gucci, whether louie time.
These stores are expanding RMS is expanding many other locations.
So.
Luxury is strong right now I mean, all those tenants I mentioned every one of them individually was at least 7% or greater in there in their volume increase.
So it's it's very good.
Very selective about where they go.
It sometimes takes several years of planning to get them to look at a location and move into a location.
We're very pleased with our general luxury representation throughout our portfolio and its growth.
Great and then just maybe.
Long term view on net debt to EBITDA.
Are you seeing you might be by the ended this year in next year and what's your long term goal, where you want to get that.
That ratio too.
Okay, Craig I guess I'd start by saying, let our balance sheet remains solid we noted on the call. We extended our primary line of credit in our larger term load out until until 2025 at favorable terms, we closed the starfield hanam transaction, which gave us some some cash to pay down.
Our line here in the U.S. our coverage ratios are very healthy.
We're about to seven on noninterest expense over two times on fixed charges and we've got a well lowest cost of debt in the sector were slightly both below 4% and now our weighted average debt maturity is nearly six years.
EBITDA is a bit higher than we want it to be where you are in the eight.
We are going to be looking for ways to opportunistically address that obviously growth in EBITDA is a piece of that.
We are very focused and try and get to get back down below eight times.
This has got to be an ongoing monitoring for us is ongoing focus for us and if we can find more opportunistic way like we did with the Blackstone transaction to get that number down where we're going to do that every time.
Okay. Thank you.
Our next question comes from the line of Shibani sewage some Deutsche Bank.
Hi, good morning, apologies for Belaboring, the Forever 21 point I just wanted to clarify one item it sounds like AFFO guidance for this year contemplates that all 17 locations remain open but I thought I am in that you mentioned earlier that they didn't pay September or October when is that correct.
Well, we don't think Theyre all going to remain open we think theres at least one that will close it's not a huge rent pair.
But the way the way the bankruptcy happened they did not pay rent in in September we think in everyone's portfolios that rent then goes effectively into a bucket that will end up as an unsecured claim.
After bankruptcy, we do not expect to recover that in any material way in any timeframe that we can evaluate.
Okay. Thanks, that's it for us.
Our next question comes from the line of Ritchie from Morgan Stanley .
Hey, good morning.
First question for you we've talked a lot about short term leases.
For for several quarters now maybe even a couple of years is there any reason why this should not be transitory and maybe just a reflection of how some retailers are approaching the retail environment.
Well I really do think its transitory.
There were going to cycle right now.
We're merchandising occupancy.
Managing your analyzed all those things are very very important.
And we would like to begin.
To push rents.
Add.
But when you go through a cycle like this especially with bankruptcies in the Backfilling.
That we're doing.
It makes it harder so you need to make judgments everyday and when you have larger tenants that you think are critical to the center in terms of merchandising.
Then you are willing to make some short term deals in order to sustain them in the center.
And.
We are making those decisions, where we need to add.
You know.
As we talked about there were six spaces that were over 30 day, our averaged about 30000 square feet.
They did impact our number.
And we would have been 4% 400 basis points higher.
In our spread absent those tenants so but there is we went through each one of the tenants.
You would say Oh I mean.
We want every one of those tenants.
So, but they are all part of our numbers and we have a small portfolio.
It's you know everything gets accentuated.
And it's a very volatile statistic.
So I think in this environment.
You will see some of it.
Continuing.
Eventually we will get back to.
You know less of it.
Got it thank you and Simon.
Maybe maybe somewhat of an unfair question, but a couple couple of quarters back maybe a year ago are too.
You had some pretty nice statistics about how we should think about growth over the medium term I think you've got away from that long term growth have to the Blackstone JV, but is there any way we should we should sort of think about.
To the new developments and and the pool versus.
Properties I've been in the portfolio for quite some time from gross standpoint.
That's a pretty broad question, but I'll try to take it in chunks I guess.
In 2018, we were able to exceed our guidance measures and outperform largely on the back of the three development projects in Asia, and our development project in Hawaii doing materially better than we had projected at the beginning of the year.
There are a little bit of that was positive.
Outcomes on currency in Asia, but a lot of it the bulk of it was really core better performance than expected and those two assets and we've been saying this year that our ability to outperform again would be outperformance in those assets and you should not expect those to be dramatically different than what we said at the beginning of the or if it is great.
It is and will be closer to where we told you there when we gave guidance.
The assets are performing fine, but they are not outperforming our expectations. This year.
They are really now I would say all all of the development assets really are more part of our core.
And then they should be looked at as the kind of growth you would see an asset that are that are moving towards stabilization. So with that we really have the assets that are in the portfolio now are all kind of in the numbers that you've seen with the exception of the.
The expansion at Green Hills, which opened earlier this year.
Which will help growth in 2020, it will help growth again, we think in 2021 as those tenants continue that we've leased to continue to get open and we'll have a full year in the run rate that's really the only thing.
That I would say should be producing outsized growth compared to the rest of the portfolio next year and into the following year with the exception van Saun, which will open toward the end of 2020 and should provide a boost really in 2021 and 2022 is that asset gets to stabilization.
Got it. Thank you for that can you remind me just real quickly of Green Hills in the same store pool at this point.
It is.
Great. Thank you thanks, guys.
Our next question comes from the line of Caitlin Burrows from Goldman Sachs.
Hi, Good morning, I guess, maybe just one on the remaining two Blackstone joint venture sales is there anything you can share on the process, there and whats, making it take longer than the initial one debt is it just that it's harder to do and the properties are abroad or something else.
Hi, Carolyn we we always knew that these were going to be cereal closing throughout the course of the year, we always knew hinnom would would be first.
So nothing has changed there.
There are number of things related to both the she on Amgen, Joe closings, which we really at the end of the day really our administrative in nature.
To some extent things that we needed as workout with our partners that remember we've got a couple of partners.
And those assets as well so it's really it's nothing specific thats delaying it I wouldn't even say that they are delayed.
Just as we knew that we're going to take some time to happen we knew that we're going to happen later in the year.
Still we still believe that they will there is nothing nothing has changed in terms of our expectation of the probability of closings happening we're still highly highly confident they will and and we expect at least one before year end or by year end and if one goes into next year it won't be long into next year.
Got it Okay, and then maybe just going back to San Juan wondering if you could give us any thoughts on what you're considering for.
Saks box replacement, whether it would be multi tenant or one news and then I don't think that properties in the same store pool. So just what would make it go back in.
On the tenant.
It is any of the above of what you just said it could be one tenant that could be a retailer could be an entertainment tenant.
It could be.
Two to three tenants.
We were talking a whole range of people.
Trying to figure out what we think would be most additive to the merchandising of the of the center.
And in terms of the same store pool, it's not in the same store pool right now.
There are still a significant amount of work that we're doing with the Saks box.
And on the tenant base, we are fairly well leased there I think we're about 90% leased close to it were occupied in the mid eighties, but there's still work to do there. So my expectation I think the expectation to the investment community should be the probably does not go back into the same store pool next year, what we as to what would make it go back into the same store pool.
I think is when we get the occupancy levels. It look more like the portfolio as a whole. So we have a little more work to do to to get it to that point.
Okay. That's all thanks.
Our next question comes from the line of some years panels from Evercore ISI.
Good morning Simon.
One point you had talked about this 20 to 30 million of.
So why there was going to flow through from a redevelopment so.
Leave at that time as Beverly Center, the the Sykes box, it's short hills and I think I think some of the sports authority boxes can you can you update on some of that kind of what you're tracking as we think about 2020.
I can give you a general update I think that the Green Hills.
The Green Hills contribution there.
Taking a little bit longer than we originally expected thats really to do with the leasing environment. The merchandising is great.
Very happy with what's happened there, but we do think that's just taking longer to get folks open and get all of that done to the contribution 20 will be a little bit lower than what we expected. So you'll have closer to full run rate of that in 2021.
Beverly Center.
It's still work in process, but a positive work in process in terms of our ability to bring restaurants and our ability to bring up.
To bring.
Got better better uses throughout the center in luxury and things like that 2019.
Contribution is looking like what we expected it to be there and the and as to the sports authority boxes. Those are pretty much looking like where where we expected to be so I would say when you look at the 20 to 30 by 2020, where we're going to be shy of the 20, but not by a huge amount.
Okay. Thanks for the color on that.
And I guess, Bobby just switching gears.
Despite the distressed we've seen in retail your continue held occupancy or you're expecting occupancy still to be at sort of it.
95%, maybe to expand on that and again as we think about next year.
What is the leasing momentum look like as you're kind of dealing with sort of these 2020 expirations.
Well I look we have solid demand as you've heard in various ways throughout the call.
Solid demand remains in our portfolio, especially in the I'll say the top half of the assets.
You can hear in the leasing program that.
Simon just talked about Greenhills.
I mean, it's a very good example of the dynamic I mean, we tracked at the very best sense, Xyrem restoration hardware crate and barrel.
Expansions that I mentioned from Apple and we'd be adding gucci into the shopping center all the digital natives that we brought in.
You know I mean, it's you're hearing that we're getting all the best brands they are coming our shopping centers.
We did have more bankruptcies in 19 than we expected.
We've made very good progress on the Backfilling.
With a broad group of tenants, but we have a lot of backfill to do I mean the.
At the I think at the end of the second quarter, we had 100 basis points of.
Closures.
We expected due to bankruptcies and we expected to backfill about 60 basis points of it by year end well. Since then we now have a 140 basis points instead of 100, and we're expecting the backfill maybe 90 basis points of that and this does assume that most of the forever 20.
One locations are going to stay open not all but most so.
You know you're you're seeing there is demand.
It is solid.
You can see it are analyzed weighted statistics that.
We were up 2.3%, but we were up 3.3%.
I don't know why weighted basis, so you're saying that we're getting stronger rent in the better assets, but you know we did get hit I'd add forever 21, and we did get hit on currency and.
Otherwise the portfolio is doing well in a very difficult environment.
Okay. Thanks for the color.
Our next question comes from the line of wants to Don Sam Green Tea.
Hi, good morning.
Over 21 operating on a much bigger footprint than most inline retailers I'm. Just curious what is the backfilling strategy for any of the forever 21 spaces. You get back do you think you're going to have to split some of these stores to get a backfill a quicker than maybe a single tenant.
I think in many cases, I think we have six or seven locations out of the 17 locations.
At our 30000 square feet or larger.
And in a number of those locations.
We will likely split it up.
And.
But we're in discussions on a number of them right now I, you know and other ones it'll be a single tenant.
So it just it depends on the location the frontage the.
The options.
And we'll see over the next couple of years, what we end up doing.
But.
Yes, it's a combination of both.
I think we only have.
I think one store up to 50000 feet.
They are they did take a lot of stores I'll say above that even above 70000 square feet, but again those were old mervyns generally and we did not have any mervyn. So we never made one of those deals with.
That makes sense, but it sounds like you when you do if you were split some of these enlai boxes this would be a.
Finally, a multiyear process versus maybe having something come back online in 2020 that is at a fair is that a fair statement.
Well you know were again, it's a fluid situation that's in bankruptcy and were negotiating with them.
And you know to the extent that you know you negotiate a rent relief with them.
Then we want to shorten term we want uncertain.
Rights to take back and various locations so.
We're going to be prudent about the merchandising in these centers.
We're also going to be obviously focused on improving rents wherever we can.
But is.
It is a process that on average will take longer than just.
2020.
And but I think that will be.
Very typical.
This bankruptcy for all of the landlords in our sector.
Thank you that's a that's helpful color one more for me can you provide an update on the Beverly Center redevelopment specifically the food Hall that is not yet open and just how close that overall property and project is to stabilization.
Well the center has very strong momentum we've introduced all these tenants as.
We've strengthened the luxury and we've strengthened the food.
Center has been well received by the customer.
We've talked about it really is the only place and allied to shop from fast fashion up for luxury and everything in between.
The sales have been good.
And they are near the historic levels.
That we ever achieved there.
So as far as the eighth level goes we have we're in very active negotiations.
However, 21 also has their location in that center up in the Ace level.
So we're very active locations with with food with.
Working with entertainment.
What we're trying to do is look at the floor in totality.
And really create.
Hey, destination or an anchor there on the eighth level that will really drive.
Customers in center generically and largely in in what I've, just said non traditional retail.
So that you will have other reasons and other destinations to.
To come into the center.
After the floor.
That makes sense. So there's nothing then eminent in terms of opening the food all are often like to everything so still in the works up there.
It is still in the works and it's not imminent.
But we would.
Hope that we resolved what we're doing their imminently.
Got it makes sense. Thank you.
Our next question comes from the line of Alexander Goldfarb Sandler O'neill.
Hey, good morning out there.
Simon just too just to go back a few points a clarification I think you said that well you did in the earnings release that Forever 21 was three cents and he said they skip September but I was unclear. They say they also skipped October and then if they did is that like another three cents that we should be contemplating or just trying to.
To figure out how to think about the the totality of the forever 21 impact so far no. They paid rent in the third quarter I'm sorry in October .
Okay. Okay. So the three cents is just merely the skip payment.
The three cents is is the skip payment and the write off of the strength straight line rent receivables.
Okay, and then Bobby heading into next year, you said that 2018.
One of the past years with sort of an anomaly, where the bankruptcies went to like one seven versus the prior three this year you expected to be north of three is your expectation that next year is going to be similar like again, it's going to be like I know elevated bankruptcy year or what gives and if not what gives you confidence that.
Things will improve given that this year I think surprised most people.
Well was clearly an elevated environment. This year, we're working through all of that and.
But I think what you heard us say is that in 17 it was over 3%.
In 18, it was half that in 19, it looks like it's going to be over 3% as 2.4% year to date.
So I.
Our sense is that.
As you look as we look at our watch list as we look at the tenants and what their total occupancy costs. They are and how sales are doing.
Category by category tenant by tenant.
Our senses.
This has been a very elevated year and it really has culminated in the forever 21 issue and I as I said earlier I really think there specific to this forever 21 business and a lot of judgments that were made by their leadership so.
I mean, that's what we're dealing with so our sense is that.
It should settle and it should be better in 2020 out of bankruptcy front, we're not going to know until we lived through 2020, we are going to definitely have reserves were going to have significant reserves and I would say even in the context. So all this happened this year.
We're still operating against what we told you in the context to the reserves at the beginning the year. So.
But we are getting hit with forever 21, we are getting hit.
With currency and that's largely the differential and Alex let me just add to that a little bit. So there's no single tenant that we have that can have an impact like forever 21 is having on our portfolio.
The next biggest name out there that people are talking about as a sina.
They seem to be doing better in general we have less exposure to their their underperforming brands to lifelike dressbarn, but just to give you a sense. The abbey our exposure that we have to a scene of versus versus forever 21, it's about half.
And that's kind of the next larger name that people are focused on so.
Forever 21, clearly was meaningful in our portfolio you can't replicate that next year in terms of anyone tenant.
Okay, and then Simon just to clarify at the beginning of the call. I think you said on the FX fraud that was solely related to currency not tourism at your centers correct.
Correct.
Okay. Thank you.
Our next question comes from the line of Michael Miller from JP Morgan.
Yes, Hi, Simon I hear what you're saying about the lease spreads and how the stats may not tell the whole story, but I guess when you strip out the short term leases and you see.
That 3% level that was 8% last quarter and I think it was 10 before that are so I mean is there something that is positive that may not be as obvious from looking at that trend.
Well look at where we really try to make sure everybody understands that spreads are a limited stat and they really are just the stat. There an output of a lot of other decisions that have made the ended the day, Mike you. What we really think you should be doing and everybody should be doing it.
Focus on occupancy levels, which are excellent.
Because on rent growth, which is there.
Focus on the merchandising, which is getting better and to think of it and think about it from that lends. The ended the day spreads are very volatile quarter to quarter. They tell only a story about closures and openings in that quarter.
And they don't they don't tell they don't give you the entire directional kind of look at the story.
So yes. They go up they go down they are volatile quarter to quarter ended the day you should be looking at revenue should be looking at occupancy that's what matters. The most.
Okay that was it thank you.
Thank you.
Our last question comes from the line of lean bed count from Jefferies.
Hi, Thanks for taking my question.
He said a little differently, given the slightly negative releasing spread this quarter and acknowledging a handful of shorter term leases weighed on it.
How are you willing to decision between rate and occupancy as you look out further.
It's a balance Linda it's a balance at the end of the day. The most important thing, particularly in this volatile environment added as a volatile environment. The biggest thing that we're thinking about is an LOI and merchandising.
And.
So even though the spreads that may not looked at great. That's not what we think about when we make these decisions you need to have the best merchandising in your centers to continue to be able to drive the customer to those centers to continue to make it to continue to drive sales at those centers and there will be a connection between sales and merchandising.
At rents going forward, we think theres still is today, we think there will be even more linear going forward. So we're looking at on a why we're looking at merchandising for sure. The ended the day, that's what you need to do to be able to navigate the volatile environment that we have today to get to what we think is a much brighter future for the great real estate in the USA.
Yes, mediocre real estate, you may make different decisions, but in the best real estate right now it's about merchandising and it's about trying to drive Anna why it's not about spreads.
Thanks for that and then how are you feeling about dividend coverage. It seems like increased capex in the pressure on annualized.
Couple of retailers could pressure CFO .
Well dividend coverage for US is it is a focus was our payout ratio right. Now is on Epifix is about 78 I'm sorry on AFFO.
The high Seventys.
Did rise after we had a sale.
Of those seven centers to Starwood back in 2014, we have not grown our way back down into ill call. It a range that we are a little happier with which is below 70, we have increased our dividend 22 times and 24 years, you've never decreased it I will tell you that these are always board decision. The board is very full.
Just on that they're comfortable with the different at these levels, given our liquidity and given our upcoming capital needs.
So as of right now and there's no reason that we think this is going to change and we're comfortable that dividend where it is the board ultimately make those decisions.
Thanks, and then just one last one not to beat a dead horse, but I'm in terms of your 16 to 17 Forever 21 stores. How variable is this population in terms of your willingness to accept rent cuts are closures, suggesting that these spaces could be replaced at comparable or higher rents and then to the extent you do agree to rent cuts.
Would you gain kick out rights or short term leases.
Well I think we have answer those questions largely but you know to say again. It is it took a whole negotiation.
We are you're dealing with forever 21.
Yes, you are dealing space by space this space, but it also matters to them what theyre doing in one location versus another and the overall relationship with the landlord. So it can't be totally one by one.
There is the broader relationship and and so we'll get some things that we like they'll get some things that they like and net net you know.
They will continue to operate and in some cases will have the right to take back the stores and others, we will reduce their term and others, we won't and will will.
Net net.
Our expectation has been articulated here and book ended here in terms of the range of outcome for this year and for next year, but but net net Linda I think you got to focus on what Bobby said, which is yes. This is still a negotiation we're not going to negotiate in public. So we are a little hamstrung and how much detail we can go.
Up to you when the situation is resolved in whatever way. It ultimately is we'll be happy to provide some more detail on what we think that means for the future.
Thanks, a lot.
Thank you.
We don't have any further questions I will now turn the call back to Robert Hoffman.
Thank you Christine and thank you all we look forward to seeing you out Los Angeles and welcome you to come to see Beverly Center.
Bye everybody.
Ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.