Stacy Slater - Senior Vice President of IR James Taylor - Chief Executive Officer and President Angela Aman - Executive Vice President and Chief Financial Officer Mark Horgan - Executive Vice President and Chief Investment Officer Brian Finnegan - Executive Vice President of Leasing.

Craig Smith - Bank of America Christine McElroy - Citi Ki Bin Kim - SunTrust Jordan Sadler - KeyBanc Jeremy Metz - BMO Capital Markets Jeff Donnelly - Wells Fargo Samir Khanal - Evercore Alexander Goldfarb - Sandler O'Neill Karin Ford - MUFG Securities Vince Tibone - Green Street Advisors Wes Golladay - RBC Capital Markets Linda Tsai - Barclays Michael Miller - JP Morgan Caitlin Burrows - Goldman Sachs.

Good morning, and welcome to the Brixmor Property Group Second Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Stacy Slater. Please go ahead..

Thank you, operator. And thank you all for joining Brixmor's second quarter conference call.

With me on the call today are Jim Taylor, Chief Executive Officer and President; and Angela Aman, Executive Vice President and Chief Financial Officer; as well as Mark Horgan, Executive Vice President and Chief Investment Officer; and Brian Finnegan, Executive Vice President, Leasing, who will be available for Q&A.

Before we begin, let me remind everyone that some of our comments today may contain forward-looking statements that are based on certain assumptions and are subject to inherent risks and uncertainties as described in our SEC filings and actual results may differ materially. We assume no obligation to update any forward-looking statements.

Also, we will refer today to certain non-GAAP financial measures. Further information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in the earnings release and supplemental disclosure on the Investor Relations portion of our website.

Given the number of participants on the call, we kindly ask that you limit your questions to one or two per person. If you have additional questions regarding the quarter, please re-queue. At this time, it's my pleasure to introduce Jim Taylor..

Thanks, Stacy. And good morning, everyone. I'm pleased to report yet another quarter of substantial progress across all facets of the plan that we highlighted at our Investor Day last December. Simply put, we're capitalizing on all fronts to deliver value now.

That value begins with leasing where we continue to leverage strong tenant demand to be in our well located centers. In the quarter, we executed a sector leading 2.1 million feet of new and renewal leases that have cap on cash spread of 14% which included 1 million feet of new leases at comparable spreads of 29%.

That sustained productivity, along with the pipeline of over 480 leases totaling 3 million feet and over 50 million of ABR, underscores the great visibility we have on our continued forward growth.

In fact, the gap between lease and build occupancy of 310 basis points is the widest it’s been since IPO and truly highlights over $43 million of contractual ABR signed but not yet commenced. Our overall lease occupancy grew 40 basis points sequentially to 92.5%.

And importantly, we're starting to see the momentum in our small shop leasing as that increased by 70 basis points sequentially. We've delivered this productivity while remaining disciplined with capital and intrinsic lease terms.

We achieved an average duration of eight year, held leasing capital steady at 23 square foot for new leases, achieved average embedded rent growth of 2% versus the embedded average of 1% and granted tenant options in only 40% of our new leases versus an historical average closer to 55%.

We also continue to capture disproportionate market share of our core tenant new store openings, while reducing exposure to tenants on our watch list. Please note that Sears is now out of our top 25. And I couldn't be more pleased with our progress on Toys. We began the year with 12 locations, two of which we sold.

Of the remaining 10 locations, we have leases or LOIs on six of the boxes at average spreads in excess of 25%. Given that the remaining boxes have an average in place rent of about $9 a foot, I expect we will realize similar spreads on the balance. Angela, will provide more detail on this and current year impact of Toys in a minute.

Our reinvestment pipeline continues to grow also according to plan. During the quarter, we added another 12 projects for a total investment of $45 million at an expected incremental return of 13%, bringing our total in process pipeline to just over $330 million.

Moving from our future pipeline to in process this quarter was the first phase of our Wynnewood redevelopment that you some of you saw in the recent Dallas tour, where we're raising an old office building and constructing an L.A. Fitness and Maya Cinema that we believe will thrive in this underserved submarket just a few miles from Downtown Dallas.

The first phase will begin the transformation of a tired shopping center into a vibrant hub of this very advance community. I couldn't be more excited with the job our team is doing here and how it aligns with our purpose as a company to own centers that are at the center of the communities they serve.

Please also note that we added four new projects to our shadow pipeline and completed four projects during the quarter, creating over 12 million of incremental value. As I said before, our velocity of value creation remains very strong.

From a strategic perspective, I'd like to highlight a couple of points that I believe are important regarding the quality of our reinvestment pipeline. First and foremost, the projects underway are effectively pre-leased which mitigates substantial execution risk.

Second, the weighted average duration of our projects is less than 24 months, given the granular and simple nature of what we're doing. Note, there is a shorter time frame between commencement and delivery, which means the investments being made today will begin cash flowing much sooner.

The third point is that today we've completed or have in the pipeline projects that possibly impact over 25% of our portfolio and I expect that, that percentage will grow given the nature of our older well-located assets.

This third point is a critical one as we don't include in our stated incremental returns the full benefit of the list in small shop occupancy and rents that we realized upon the completion of our reinvestment projects. This list is several hundred basis points and part of our sustainable plan for growth.

The final point is that this pipeline of reinvestment activity is largely funded by free cash flow and a moderate level of capital recycling. Thus we are self-funded and not relying upon an ATM or the capital markets. And as we put this capital to work at high single and low double-digit returns, we benefit from substantial de-leveraging.

Speaking of capital recycling, I'm also pleased to report that since last quarter end, we've closed another 217 million of dispositions at a weighted average cap rate in the mid-7 range for non-core assets. And we currently have another 350 million under contract.

Including what we sold in the first quarter and additional contracts under negotiation, we now expect to complete over 750 million in dispositions this year, significantly exceeding our initial goals.

Again, we strive for optimal pricing here by selling assets in individual transactions which take longer to execute, but we believe achieves pricing at, at least 10%. .

Pardon me. I'm sorry. The speaker line has disconnected. We will try and get them connected right away. Please continue to hold. Thank you for holding, everyone. The speakers have rejoined. Please continue. .

I guess I was on capital recycling which is appropriate because we're now recycling our call. But the point I was making on capital recycling is that we've been doing is an individual transactions versus portfolio transactions which we think achieves pricing that's at least 10% higher and would be attained in the portfolio transaction.

It's a lot of effort from Mark and his team put as stewards for our capital and excellent outcome. Given the late quarter timing of these sales closings, our ramping redevelopment pipeline and limited trading window, we repurchased only 4 million of common shares in the quarter at a weighted average price of $14.47.

We also utilized sales proceeds to repay all remaining 2018 maturities and reduce overall leverage by 139 million. At quarter end, we had nothing drawn under our 1.3 billion credit facility providing us several years to ample liquidity.

From an operational standpoint, we continue to deliver the enhancements necessary to meet our proudly owned and operated by Brixmor standard. Importantly, we are also making substantial progress in our sustainability initiatives through investment in solar and water efficiency that are producing double-digit returns.

I'm very proud of our GRESB Green Star that we've been awarded and other awards to sustainability initiatives, great job by Haig and team.

Allow me to close by observing that this outstanding execution across all fronts of our business plan provides us even greater confidence in the NOI range of 3% to 4% for 2019 that we first highlighted at our Investor Day in December. I'm extremely grateful for the efforts of our entire team in delivering these results and driving so much value.

At this point, I'll turn the call over to Angela for a more detailed discussion of our results. .

Thanks, Jim. And good morning. FFO was $0.51 per share in the second quarter based on same-property NOI growth of 1.4%. Base rent contributed 160 basis points to growth despite a year-over-year decline in average build occupancy of approximately 80 basis points.

This net growth highlights the new rent created and the strength and overall magnitude of re-leasing spreads recognized over the last 12 to 18 months. Provision for doubtful accounts contributed 50 basis points, while ancillary and other revenue contributed 40 basis points.

These positive contributors were primarily offset by net recovery, which detracted 100 basis point reflecting a year-over-year decline in average build occupancy and the impact of final CAM and tax reconciliations.

FFO during the second quarter reflects not only strong same-property NOI growth, but also our continued discipline as it relates to G&A spending, an additional savings in interest expense as we further de-lever the balance sheet and optimize our capital structure.

During the quarter, we repaid all remaining 2018 scheduled debt maturities and are now focused on addressing the 2019 term loan maturity and executing on the opportunity embedded in the 2020 and 2021 secured debt maturity to repay higher cost debt while also fully [unencumbering] the portfolio.

We've affirmed our 2018 FFO and same-property NOI growth guidance as we consistently deliver on the plan laid out at our Investor Day last December.

As it relates to same-property NOI growth, we continue to expect an acceleration in the contribution from base rent during the second half of the year, due to both incorrect commencements across the portfolio, including our in process redevelopment projects, as well as a moderation in the drag associated with future redevelopment and 2017 and 2018 bankruptcy activity.

That said, I would note that we may face headwinds in the second half from net recoveries to the year-over-year declines in both occupancy and provision for doubtful accounts due to difficult year-over-year comparisons, both of which are reflected in our original guidance range.

As previously anticipated, the net drag from in process and future redevelopment activity has now reached an inflection point and will be a modest contributor to growth throughout the balance of the year, before becoming a more meaningful contributor to growth in 2019 and beyond.

During the second half of 2018, we will have significant anchor rent commencements and in process redevelopment projects such as Speedway Super Center, Mamaroneck Centre and Ventura Downs, which highlights the granularity and relatively short timelines of our redevelopment projects as Jim discussed in his remarks.

In addition, the impact of 2017 and 2018 bankruptcy activity will moderate in the second half of the year, even when taking into account the impact of Toys"R"Us store closures due to both the timing of 2017 bankruptcy activity as well as anticipated rent commencements for backfills of several former hhgregg and Gordmans locations.

To summarize our Toys"R"Us exposure, we've started the process with 12 Toys boxes that has been sold too. Of the remaining 10, one vacated at the end of the first quarter, while two vacated at the end of the second quarter. During the third quarter, five additional locations vacated in early July while two locations remain rent paying today.

Although we currently assume that these locations will also vacate by the end of the third quarter. The seven anticipated third quarter closures will result in a 30 basis point impact to total occupancy or a 50 basis point impact to anchor occupancy in Q3.

While we don't have further clarity on the timing of the final store closures, we currently expect that in total Toys will have a 20 to 30 basis point impact on same-property NOI during 2018 resulting in a similar impact in 2019 as well, given that our closures occurred on average midyear.

While delays in Toys"R"Us store closures were slightly beneficial to our second quarter results, the impact to full year same-property NOI relative to our prior expectations has been de minimis, approximately 5 basis points.

In terms of FFO guidance, the magnitude, timing and use of proceeds related to our capital recycling program will ultimately dictate where we fall within our expected range.

While as Jim mentioned, total disposition volume is now expected to surpass our original expectations, this activity is occurring later in the year, personally mitigating the impact on 2018 FFO.

While they still have implications for 2019, the discipline we've exercised in the transaction market has created and will continue to create meaningful value for shareholders. Across all disciplines within the company, we are successfully executing on the balanced business plan we laid out at our Investor Day.

And we look forward to continuing to highlight our progress for you in the coming quarters as this execution further demonstrates the underappreciated quality of Brixmor’s portfolio and platform. And with that, I'll turn the call over to the operator for Q&A. .

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Craig Smith of Bank of America. Please go ahead. .

Angela, you've touched on it, but do you intend to continue the pace of dispositions into 2019 or will you be more focused on growth?.

Thanks for the question. I think at the end of the day, Craig, our product is the growing stream of cash flows per share. I’ve said out from the very beginning. And when we talked at the Investor Day last December, what we laid out was the year that we expected in 2018 of more substantial capital recycling.

I'm very pleased by the execution that we're getting. And as I alluded to in my remarks, we're selling a little bit more even than we had expected at the beginning of the year given where the executions are.

As we look forward though, I expect this to revert to more normalized level of capital cycling, appreciating that the decision to holding asset is an investment decision, but importantly also reflecting the fact that this year we’ve gotten through a lot of the assets that we did not see long-term holds.

And so, I expect that we'll be able to revert to more normalized level in ‘19. .

The next question is from Christine McElroy of Citi. Please go ahead. .

Hi. Good morning, everyone.

Just following up on the capital allocation discussion in the opening remarks, just when thinking about the use of proceeds for the 750 million of dispositions this year, given that you're buying back stock in the 14th previously, and your sock is now in the 17th, how are you thinking about buybacks today as a priority for disposition proceeds versus debt pay down? And how does -- how should we be thinking about the FFO dilution in the second half as a result of the disposition?.

Well, let me take the first part of that question, which is, from a capital allocation standpoint, we’re first and foremost always focused on making sure that we have a strong balance sheet with ample liquidity that matches what we're doing on the left side of the balance sheet and matches importantly, the risk that we are not taking.

And I think we've done a very good job of that, very good job of making sure that we have ample liquidity to fund not just what's going on this year but next year and beyond. We still think at these levels our stock is a compelling value.

So again, going back to what I said to Craig, we do think about the product that we offer investors, which is a growing stream of cash flows per share and obviously, the ability to recycle non-core assets at 7 cap rates into our stock at a much higher cap rate where we run a pretty compelling investment tool for us to leverage going forward. .

Yes. In terms of FFO dilution in the back half of the year, I'd note a couple of things. I think first, when you look at the timing of the second quarter disposition activity, as Jim mentioned in his remarks, it was pretty back end weighted.

In fact, I think 40% of the 139 million we closed during the second quarter closed within the last two weeks of the quarter, which definitely has an implication going forward as well. As we mentioned in the press release, we closed another 75 million give or take very early in the third quarter.

And then I think as you think about the 350 million we know that we have under contract, that could set us up for the third quarter being much more significant than the fourth quarter in terms of activity.

But as we've stated, we reaffirmed the totality of the FFO range, and I do think it reflects a variety of different outcomes as it relates to the final magnitude of dispositions and the timing of those dispositions, and as Jim mentioned, the use of proceeds around that..

Okay, and then Angela, just to follow-up on your comment on redevelopment impact.

Can you just update us on how we should be thinking about redevelopment in the context of the 3% to 4% 2019 same-store forecast? At your December day you talked about -- December Investor Day you talked about 50 to 100 basis points of redev impact? And I think more recently and nearly you discussed there’s a larger impact.

Can you just provide an update on kind of the components there?.

No, I think the 50 to 100 basis point impact as it relates to the same-property based rent contribution in 2019 is still absolutely the same range. I think our execution around redev has continued to be very strong, as we've continued to move projects into the end process pipeline.

I did mention on last quarter's call that we're seeing a benefit even in the back half of 2018 from projects that are well not stabilizing until 2019 where we do have big anchor rent commencements during 2018. So all of that’s consistent with the expectations we gave at the Investor Day for a 50 to 100 basis point contribution in 2019. .

From redevelopment?.

That's right. .

Okay. Thank you. .

The next question comes from Ki Bin Kim of SunTrust. Please go ahead..

Thanks.

Jim, can you talk a little bit about how your conversations with tenants are going and maybe specifically touch on groceries, you’re one of the biggest grocery landlord? And is there any change or change in conversation from Ocado, Kroger news and how different groceries are viewing that?.

I think it's great news for Kroger as they get smarter about how to serve their customer.

And what's interesting about that news in particular with Kroger is it demonstrates how they're investing in their existing stores and with their restock initiatives making sure that they add products in the store that are relevant to particular community that store serves.

So we are seeing grocers on the more traditional end of the scale invest more in their existing stores with things like kerbside delivery, better inventory, more fresh offerings and prepared offerings, which we're seeing result in more traffic and more sales. So, very positive.

More broadly with tenants, I think the comment I would make is that we're seeing a much higher level of demand than we expected coming into the year. We are seeing tenants more willing to relocate and we’re capitalizing on that propensity to get the prototype and size, et cetera.

But we're winning a lot of business that we didn't even expect to win at the beginning of the year.

Brian?.

Yes, and Kin Bin it was very reflective of what we saw coming out of ICSC that retailers were not only continuing with their store opening plans, but coming out with new formats, small market formats new concepts like TJX's HomeSense that they are ramping up.

So the retailers that have been active and thriving in our space continue to innovate and continue to have robust store opening plans and you're seeing …..

Pardon me. I'm sorry, but the speaker line has disconnected. I will try and get them reconnected right away. Please continue to hold. I'm sorry. The speaker line has been reconnected. Please go ahead. .

Again, sorry. Sorry, folks. We keep getting disconnected here. Ki Bin I think what I was saying was that in addition to seeing increased demand from core tenants for our properties, importantly, we're capturing larger and larger market share with their net new openings which we're tracking and part of how we're compensating our National Accounts team.

So overall, the leasing environment, that's much more positive even than what we saw eight to 10 months ago. .

So just touch on that point, when you say it’s much more positive than several months ago, what is it that you're looking at or is it a series of conversations that you're pointing towards, when you say things are much better or it’s just more on just like purely from volume?.

Well, I think the leasing volume underscores in quantifiable results, the change in move if you will, and the execution by the tenants with their plans for growth. So, I do think that the leasing results underscore it, and they provide you evidence that in fact what we're talking about we're delivering on.

But I do think as tenants look at how to better connect with the customer, the store is incredibly important. You are seeing tenants more willing than ever to relocate. And you see them more focused on investing in their store to get the prototype.

These are all things that really benefit Brixmor in particular, because we're competing with low rent basis, older location, and we're demonstrating that the tenants can do well there and that they have demand to be in our centers.

So, our tone may be more positive on a relative basis than some, but again, it reflects the older well located nature of our centers, that tenants have demand to be in.

And again, I would tell you that what we're seeing year-to-date, particularly Ki Bin when you dig into the pipeline that Brian and the team have set off of nearly 500 leases with over 50 million of ABR, it speaks to the momentum that we're seeing, and again, underscores that confidence we have in '19. .

The next question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead..

This is Jordan for Todd.

Just on the sequential small shop occupancy jump, I'm just curious what you drove exactly and if you expect to see more of that type of thing in the near future?.

It’s a great question. First, we're seeing demand, and whether it's from restaurants, service uses, boutiques, fitness operators like F45 or Burn Boot Camp that we added health and wellness operators. So that demand is continuing.

I think it's also indicative of the investments that Jim called out in his comments that we're making in our centers, as well as the redevelopment pipeline is ramping up. And then finally, some focus. We realized some incentives earlier this year around driving shop space. So we still have work to do, we have made progress.

But as we look at that future redevelopment pipeline, that trails our portfolio average by 780 basis points. And when we bring those projects online, we're seeing around 600 to 700 basis point pickup.

So as that pipeline continues to ramp up we can bring more of those projects in the asset pipeline which is what we expect to continue to see that growth..

And do you guys have a sense of where you might end up by year end on the small shop occupancy?.

We're not giving specific occupancy guidance but we expect to see continued progress there..

Okay, great. And then just one more from me. You made the -- there has been some additions to the organization recently.

I am just curious if you could talk about, where you see these additions adding value and what you're trying to accomplish with these additions over the next few years or so?.

Well, look, I believe firmly that great real estate matters, but great people matter more. And we are setting ourselves up to be a platform that continues to attract and retain the very best talent.

I think what you're alluding to is we've recently added John Hendrickson, whom I used to work with at Federal and was later at RAMCO to run our Midwest division. And we are incredibly excited about John coming on board. He brings a wealth of experience, great execution.

And he is going to provide us some very good leadership for the great leasing talent that we've also added in Midwest. Again, we're investing in the talent because we do see a lot of potential in our Midwest assets and the leasing team there led by Corrine and Devin is already generating some great results ahead of John coming on board.

So I'm not going to let him take full credit. But yes, I mean as we came on board, we saw fairly carefully about what was the great talent that we had and where were areas within the business that we needed to continue to add talent. And we'll always be critically assessing talent, because it's such an important part of driving outperformance. .

The next question is from Jeremy Metz of BMO Capital Markets. Please go ahead. .

Hey, guys. In terms of the dispositions, if we go back to your Investor Day, you laid out 85 or so single asset markets.

So I’m wondering how much of this year's sales if you include the next 300 million or so that you have under contract, how much is coming from that bucket versus just being lower growth assets in core markets you're looking to exit? And then as a follow on maybe for Mark, can you comment on your hit rates in terms of how much you're putting in the market versus how much you're getting to the closing one?.

Yes. Let me answer the first part of that real quick. I expect by the end of the year as we get through this, will be through probably 30 to 35 of our single asset markets. We've exited nearly 45. So again we'll be reducing our exposure to those markets where we just got have one asset. And Mark, I'll let you to take the second part. .

Yes, so I think as we have discussed in the past. It's been our strategy to have more assets in the market than we expect to close. From hit rate perspective, yes, I'd say it's closer to that 70%, 80% of what we bring out till what we close.

But the important part is where we have the ability to be opportunistic on those -- on accepting those purchase prices and don't have to accept any one-off sales as we go through the process. .

Appreciate that. And then just one for Angela. You've touched on the future maturities briefly in your opening remarks. You have $600 million term loan coming due in March at a pretty low rate here.

So can you just give us some color today on how we should be thinking about plans for that maturity recognizing that they can obviously change the accelerating more asset sales or pricing shifts materially?.

Yes I mean I think we're at a point right now where we're continuing to evaluate a range of different outcomes as it relates to both the 2019 low cost maturity as you mentioned, but also the higher cost secured debt maturities in 2020 and 2021.

And you're right, that I think as we execute on just both through the remainder of 2018, a component of those proceeds certainly are going to go to further leverage reduction. We also have a range of different outcomes as it relates to both I think the unsecured bond market or the bank market in terms of replacing those maturities.

So I think too early to say in total when I look across 2019, '20 and '21 exactly the timing or exactly how those are refinanced, but we're continuing to evaluate that and should have more clarity next quarter. .

The next question is from Jeff Donnelly of Wells Fargo. Please go ahead. .

Good morning, guys.

How you think about the rising labor and materials costs factoring into your current value add pipeline and maybe future underwriting, kind of more curious if that's resulting you either tabling some projects or scaling back to a scope or even maybe getting more conservative on their perspective yield?.

It's really good question Jeff because construction costs are up. Fortunately we're dealing with smaller simpler projects. So we're not getting into projects that have a huge variable element to the budget, right. And furthermore, we're coming off of really low rent.

So what rising costs might mean in a particular project is that instead of getting an 11, we get a 10, or maybe it's a 9.5. But it's still compelling use of proceeds for us. We haven't had to pull any projects because of the rising construction costs.

And again, as I alluded to in my remarks, I think what's really important to understand about our pipeline is not only that the projects are small and granular, when we move them into active, we've got the leases in place, and we’ve priced out through GMAX contracts, the cross-elements of the job.

It doesn't mean that there can’t be some variances and things like that going forward. But before we commit substantial dollars, we know that, that we're making. But your broader point is right, construction costs are climbing, labor costs are climbing, but I think we have a lot of room within which we continue to create value..

Thanks. And may be the second question. I know a lot of people always ask about tenants at risk. And can you talk about the volume of space at risk, either due to I guess credit concerns or even just above market rent? I know every portfolio has some portion of space at risk.

But I was curious if you track such a measure or could express anywhere that stands today for the portfolio or give us some historical context on that?.

Yes, let me let me comment on briefly, Brian, you can chime in here. But one of the things that really struck me when I came into the company were how to use the assets at rents that were above market. We had a few, we sold many of those.

And obviously as we focused on our disposition activity, we focused on those assets where we think we have limited growth, limited upside on the rent. Again, every element of our plan is oriented towards that fundamental question of how does it help us grow.

And so we do look at assets and tenants in particular where we think they're above market or conversely, we do maintain a very tight view of what's on our watch list, which we don't quantify but is in the mid single-digits on a rental basis.

And what’s on our watch little Jeff, is not just tenants who have immediate credit concerns, but tenants that we think are losing relevancy, tenants where we're observing declining sales trends or other things that we then focus on.

And, Brian and team have done an amazing job of reducing our exposure to the office concepts of reducing our exposure to other weaker concepts and including what we've done with Sears. So, it's a regular ongoing part of the business.

But as it relates to sort of the initial part of your question, I would suggest that we compare very favorably as a portfolio relative to market, right. And we continue to demonstrate it every single quarter. That doesn't mean that we're not rolling some flat or rolling some slightly down, but on balance we're in a really good position..

And Jeff I would just add, the watch list hasn't changed much and what I can tell you is we continue to see very good demand for these spaces at rents and strong incremental returns..

The next question is from Samir Khanal of Evercore ISI. Please go ahead..

Yes, hi. Good morning. Angela, I'm sorry if you touched on this before. But looking at your operating costs the non real estate related, they were quite -- they were up quite a bit in the second quarter. I know recoveries are up as well. But what's driving the 7% year-over-year increase? This is kind of a non real estate related cost..

Yes, so within operating costs, I think that's where you're seeing the 7% increase in the same-property pool, on that operating cost line item. Real estate taxes was also up during the quarter as well. On the operating cost line, it's really just timing related. It's the timing of certain repair and maintenance activity.

And on a year-to-date basis, you're looking at a number that’s under 2% in terms of year-over-year growth. Our real estate taxes really have to do with certain successful appeals or refund activity in the 2017 period. Again on a year-to-date basis, they're just to touch over 2%.

And we think 2% is sort of the right full year projection in terms of growth for both of those line items. .

Okay, thanks. And then I guess, the second one is around your leased versus occupied. I know you touched upon that, that it’s 300 basis points or the widest it's been since the IPO.

How should we think about that spread over sort of the next six to 18 months? And what's kind of a normalized spread to think about as part of your business?.

Yes. I think the normalized spread if we look back historically has probably been in the 150 to 200 basis point range. So I think we're significantly in excess of where that spread is on a normalized basis or the spread that kind of reflects frictional vacancy in the portfolio. How that spread will trend overtime? It's a little bit harder to predict.

But we certainly expect that you'll see both build occupancy and leased occupancy kind of continue to move higher. .

The next question is from Alexander Goldfarb of Sandler O'Neill. Please go ahead. .

Just a few -- just two questions here. First Jim and Angela, appreciate that you affirmed the 3% to 4% target for next year on same-store and the acceleration this year. But Jim you spoke about exceeding dispositions.

And I realized that as you think about delivering FFO when especially as company delivering earnings growth becomes more sort of the ammo, now that we're through the heavy negative headlines from last year.

How do you think about this 700 million of dispose as -- sort of it sounds like second half weighted impacting your ability to grow FFO next year where they're offsets whether it's additional debt pay down or stock buybacks that offset and allow you guys to actually grow FFO?.

Pardon me, I'm sorry. It looks like the speaker line has disconnected once again. And we will try and get them connected right away. Please hold. The speaker line has been reconnected. .

Okay.

If you want me to re-ask or did you hear it?.

I didn't hear the whole question, Alex.

I think you were asking something about the pace of disposition activity?.

Basically in simple terms, you guys said you're going to sell 700 million exceeding what your original outlook was for this year. You reaffirmed your same-store expectations for the back half of this year and the 3 to 4 for next.

But as far as growing FFO Jim, and delivering on sort of your promise to grow cash flows grow the dividend, how should we think about that 700 million impacting next year? Is it more debt pay downs and stock buybacks that allows you to grow or is it redevelopments coming in better that offsets any dilution from the 700 million?.

Well I think that increased pace of disposition activity will create some drag going into 2019. How much that will be, will be driven by our capital allocation decisions as you said, we can pay down some expense of debt.

Obviously we've got the share repurchase program which we intend to leverage because we think there is tremendous value where the stock is today. And our redevelopments and other things are going very well and give us confidence. But everything that we're doing Alex, is an issue of timing. And it is setting us up for growth.

As I alluded to earlier, we don't see beyond 2018, a scenario where we continue to be net [exposures] of assets. The real focus, as we talked about last December was setting this year up to be a transitional year and whether it's leasing, redevelopment, operations or capital recycling, doing that with a view towards long-term growth.

But certainly, the volume of dispositions that we're doing in the latter half of this year will create more drag into next year. And what -- part of that was a very conscious decision on our part to continue executing, as we have been executing as capital recycling plan one asset at a time.

And as I alluded to in my remarks, I think we're creating substantial value doing it that way, versus just flushing portfolios to try to manage year-over-year timing..

Right, I understand that. But just to follow-up there, last year at the Investor Day you guys spoke of this year being a trough and I think collectively we all got that.

But then there was sort of the view that '19 would be a growth year, it almost sounds now like with the increased dispositions we may have to dial back our 2019 growth expectations, and it could be a flattish year, which I don't think is what people are expecting.

So, can you commit to growth or should we be thinking that next year to be another flat year?.

Well, I think that we're growing importantly, on the unlevered side of the business, right. And we're delivering that growth. Now what we decide to do with that capital will impact where we end up in 2019 from an FFO perspective.

But again, Alex, we are utilizing this year to capital recycle and do the other things that create that drag, some of which may go into '19, but all of which we expect to get done this year, providing a good visibility going forward.

The second thing I would say is, I'm more pleased than ever about how we're executing on that plan to deliver that top-line growth. And how every element of what we're doing is driving that. So that's the most I can tell you. We're not giving 2019 guidance at this point. Alex, there are a lot of moving pieces in terms of how we allocate those proceeds.

I'm not going to comment on whether we're flat or up or down. But what we are highlighting that the timing and the volume of what we're doing this year, and I think anybody who is investing in us for the long-term can see it’s generating true value today..

The next question is from Karin Ford of MUFG Securities. Please go ahead. .

Just wanted to see if you could give us some color on your plans for the land parcel that you bought in the quarter that's adjacent to an existing center?.

We're not really prepared at this point to talk about any concrete plan. But this parcel is immediately adjacent for our Arborland asset in Ann Arbor, Michigan. And we think it’s going to open up additional value creation opportunities. In addition to the Toys box that we now have back is well below market rent on the same end of the property.

So stay tuned, but that land, which was a $5 million investment is going to unlock a lot more than that in terms of redevelopment potential in that very attractive submarket of Ann Arbor..

Great, thanks. And my second question is just on expense recoveries, Angela, you touched on it a bit in your remarks. The ratio was down year-over-year and sequentially, but I know occupancy is moving higher here now.

So any color you can give us on how we should think about that ratio in the second half of the year and into '19?.

Yes I mean if you look back, I guess I did two things. One, I did point out in my remarks, we expect the second half of this year you're going to be continuing to work through a decline year-over-year in terms of build occupancy which certainly will have an impact on net recoveries as well.

If you think back to the commentary from the Investor Day, what we did say is, is that changes as we get into 2019 based on the pipeline of already executed anchor rent commencements that we have coming in, in the back half of '18 and into '19. And so, in '19 you sort of start to see that shift.

And as a result, I think net recoveries should be neutral to positive as we move into '19, but certainly maybe a headwind in the second half of this year. .

The next question is from Vince Tibone of Green Street Advisors. Please go ahead. .

Good morning. The site filling in single asset markets, can you discuss how you're selecting individual assets for dispositions? I mean this quarter sales seem to be pretty barbell between more stable neighborhood centers and value-add type properties with maybe some existing -- basically from move outs.

Can you just discuss a little bit more details on how you're choosing which assets to hold versus selling out?.

Yes I mean what we’re focused on is our hold IRR. In other words, based on where the rents and occupancy are today, the capital required to drive the growth in the asset and whether or not there is any growth in the asset, what type of hold IRR results. So that's the common denominator of what we're selling.

Strategically, we are simplifying the portfolio. We are exiting a lot of market where we only have one asset or not a lot of critical mass. And importantly as I was alluding to earlier, the thrust at the disposition effort is targeted towards those assets where we think we have rents that are above market, right.

And where we think our ability to grow that cash flow in place is limited. To assets like what we did few quarters ago in Roswell, Georgia where we had an asset that we thought had great spread, but the capital required to deliver those spreads was dilutive.

So it all -- it's factored into that decision as to where we're moving the portfolio strategically from a real estate strategy perspective while also looking at it at an asset level and saying what the return on this asset is too well for us to hold, there is a cost to us “of holding it and time to exit”. So that's the long-winded answer. .

Thank you. That's helpful. And one quick follow-up.

How are private market buyers generally underwriting a vacant anchor box when purchasing a shopping center?.

They're not getting a lot of value for it, Mark?.

Yes. I think that's a good point. It really is market-by-market dependent and obviously as investors try not to give a lot of value for the vacant anchors.

But one thing I would comment on the transaction market, what you're seeing reflected and what we have under contract increasing volume is really reflective of what Brian and team has been doing in the market today. We are seeing increased tenant demand, increased tenant velocity.

So I think private market investors are trying to take advantage of that today which is why you're seeing increased capital formation go from the power center side and demand for growth anchored assets.

And that's really what I think is driving some of the increased volumes across those our portfolio?.

Are you seeing new capital formations on the value add side?.

Yes, I mean I would say that on the value-add side, that is the most -- it's really the number one increase in inbound, it's from value-add investors. I think they're really trying to find assets where they can take advantage of the market that Brian was describing on the tenant side.

Of course we prefer to hold the real true value-add that we have, actually once we’ve sold those and Jim kind of described that that’s really absolutely been the number one increase to us. .

The next question is from Wes Golladay of RBC Capital Markets. Please go ahead. .

Good morning, everyone. Just want to go to the Toys"R"Us boxes, the interest you have in them right now. Are those going to be mainly cases we have to split up the boxes.

And what is the time horizon to get the tenant open?.

Wes, this is Brian. As Jim mentioned, we were at lease or about to go to lease on six of those boxes today. Of those, only one right now we're looking to split. That could change. But we are finding demand from single users in the fitness home value apparel category.

And in the split scenarios, those are fairly high rent payers like specialty wine stores. So the depth of the demand has been actually quite similar to what we saw from sports authority where you looked across and saw several different uses to take those boxes.

But as it sits today, the majority of the discussions that we're having are for tenants to take the box as one single user. .

Okay, and you did mention the rent would be higher if you did have to split it.

But net-net you would want a single tenant use to take those space, right?.

Not particularly, if you look at our anchor repositionings, we had several where we've done very accretive returns where we can split those boxes with higher rent paying uses. So it's really particularly that center and the demand that that box is driving.

And I would say that we expect those boxes to continue to deliver the returns that we have in our anchor space repositioning pipeline, regardless of whether we decide to split or go with single users. .

Okay, and then as far as tenant demand, is there anything that stands out maybe where you have multiple bidders coming for a major particular geography, a certain size, spacious for the whole entire portfolio.

And then maybe what is a tough space to lease in this environment today?.

To answer your first question, we're literally having a food fight for a box that we have in Northern California right now. And it’s a competition between two users to take that. We've been very pleased overall with the demand that we're seeing with the boxes.

Obviously, there is a few here, we said six, we still have some work to do on the remaining three. But the expectation is from our team that we will have these backfilled and rented by late 2019 as Angela laid out. So overall, we're pleased with the progress, and again, I have seen demand on the majority of those boxes. .

Yes, I would just comment that, there are a number of transactions that we've been successful on that we didn't expect to be. So we're finding demand in pockets and in markets that before would have concerned us, which is certainly helping as Mark alluded to get more value for the assets that we're selling. We're leasing them up before selling them.

So the backdrop right now is pretty constructive one. It's not that it's not competitive that tenants don't have other options. But by and large, we're seeing the preponderance, the momentum go our way..

The next question is from Linda Tsai of Barclays. Please go ahead. .

Hi, good morning.

On Toys for the 20 to 30 bps in 2018 and then the similar impact in '19, is that purely from just Toys boxes closing or does that also include any co-tenancy from other stores leaving the center?.

Yes I mean, that's all inclusive. But it’s basically just Toys, there is very little other disruption as it’s related to Toys vacating. .

Good question. .

And then I realized it's probably little early to talk about 2020 but just given the current pace of redevelopments, the 50 to 100 basis points benefit in '19, do you think that run rate could continue in 2020?.

Yes, absolutely. And just look at what we're setting up in our pipeline.

We provide project-by-project timing and disclosure and yields so you can get a sense of what I was referring to earlier which is there’s really limited duration of investment to cash flow that we benefit from in our pipeline, which reflects the granularity of what it is we're doing, and the fact it's pre-leased.

So we continue to not only deliver projects from the active pipeline, but we're moving projects from the shadow into active. And again we're adding to the shadow pipeline. So I'm very pleased with the velocity of that, and importantly how, it's revealing itself to be a very sustainable element of our business plan. .

The next question is from Michael Miller of JPMorgan. Please go ahead. .

Yes, hi. Jim, first question, you made the comment about not being a net seller after 2018.

And if your normalized disposition levels are 400 million to 600 million per the Investor Day, what do you see as the all-in development, redevelopment spend over the next couple of years?.

Pardon me, this is the operator. I'm sorry, but the speakers have disconnected again. Just give us a moment to get them reconnected. I'm sorry for the inconvenience. Pardon me, everybody. Thank you for holding. The speakers have reconnected. .

Okay.

I don't know how much if this you heard, but basically the question was if normalized disposition levels are 400 million to 600 million, what do you see as your annualized development or redevelopment investment activity over the next couple of years just given your prior comments about not being in that seller of assets?.

Well our targeted run rate from a goal perspective is to be at about 150 million to 200 million of annual spend in delivery on the reinvestment side. And then capital recycling we expect to be more balanced. So in that $400 million range, we will find some acquisitions to make that we think are accretive. That's really the long-term plan.

Michael, the great part about the business plan itself is that it is granular and it allows us to make the right decisions at the real estate level as it relates to the hold or the buy decision. Also as we think about clustering in particular markets, we're not leasing big super tankers in and out on the balance sheet, right.

So that flexibility and nimbleness if you will I think is going to be real competitive advantage for us going forward and particularly in an environment where I think what people lose sight off is that the public REITs don't typically compete against each other at the real estate level. We're typically competing against local private landlords.

So our tremendous leasing platform, our redevelopment platform gives us a lot of insight and competitive advantage as we think about leaning back into acquisitions. Just think about all the pre-leasing that we're doing for example at the redevelopment pipeline.

It’s that same flow of knowledge and information that when we do become more balanced, it's going to allow us to find those opportunities that aren't in the markets that everybody else is clamoring to be, and it gives us a competitive basis if you all to grow cash flow..

And second question, I may have missed it.

But Angela, did you comment on what the leasing costs -- the lease accounting change will -- impact will be 2019?.

No, not yet, Mike. We expect the impact will probably be between $9 million and $10 million, so about $0.03 a share. .

The next question is Caitlin Burrows of Goldman Sachs. Please go ahead..

Just one quick one to hopefully finish up, on the buyback in second quarter. I need to jump off, sorry, enough for you guys. But on …. .

We might get cut off again, Caitlin. .

Okay. But in the second quarter, you guys bought back stock at a lower price than in the first quarter, but it was a smaller amount.

So I just wondering if you could tell us any details on what drove so lower volume decision in second quarter?.

Yes, I mean, it was primarily related to the timing of disposition activity. I mentioned earlier that 139 million that closed during the second quarter, over 40% closed in the last two weeks of the quarter when we were in the blackout window and really couldn't trade.

So as we've stated, since we initiated the program back in December of last year, at a price that was pretty close to the level we're trading at today, we expect to continue to execute on that program in a very methodical way as we recognize disposition proceeds..

Got it. Okay. You guys did mention the dispositions before but now I realized it was due to the timing of getting the proceeds. So, okay, thank you. .

This concludes our question-and-answer session. I would like to turn the conference back over to Stacy Slater for closing remarks..

Thanks, everyone, and apologies for any technical difficulties this morning. .

Thank you..

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