Kite Realty Group Trust (KRG) Q2 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Retail Properties of America Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Nikki Sacks, with ICR. Thank you, Ms. Sacks, you may begin.

Thank you, operator, and welcome to Retail Properties of America's second quarter 2012 earnings conference call. In addition to the press release distributed last evening, we have posted a quarterly supplemental package with additional detail on our results in the Investor Relations section on our website at www.rpai.com. On today's call, management's prepared remarks and answers to your questions may include statements that constitute forward-looking statements under Federal Securities Laws. These statements are usually identified by the use of words such as anticipates, believes, estimates, expects, intends, may, plans, projects, seeks, should, will, and variations of such words or similar expressions. Actual results may differ materially from those described in any forward-looking statements and will be affected by a variety of risks and factors that are beyond our control, including, without limitation, those set forth in our earnings release issued last night and the risk factors set forth in the most recent Form 10-K and Form 10-Qs filed with the SEC. As a reminder, forward-looking statements represent management’s estimates as of today, August 7, 2012, and we assume no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Additionally, on this conference call, we may refer to certain non-GAAP financial measures such as same-store results, EBITDA, FFO and operating FFO. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers and definitions of these non-GAAP financial measures in our quarterly supplemental package or the Forms 10-K and 10-Q, which are available in the Investor Relations section of our website at www.rpai.com. On today's call, our speakers will be Steven Grimes, President and Chief Executive Officer; Shane Garrison, Executive Vice President, Chief Operating Officer and Chief Investment Officer; and Angela Aman, Executive Vice President, Chief Financial Officer and Treasurer. After their prepared remarks, we will open up the call to your questions. With that said, I'll now turn the call over to Mr. Steve Grimes.

Thank you, Nikki, and good morning. Let me also welcome you to Retail Properties of America Second Quarter 2012 Earnings Conference Call. We are extremely pleased with our second quarter results. To recap, we reported operating FFO of $0.23 a share, which represents very solid performance for the company. Year-over-year same-store NOI growth was 4.1% in the quarter, our best quarter since early 2008, driven by 180 basis point year-over-year improvement in economic occupancy and positive comparable cash releasing spreads of approximately 5% on a blended basis. [indiscernible] strong metrics, I'd like to focus my remarks today on the progress we are making on our 3 major corporate initiatives for 2012, the lease up in stabilization of our retail portfolio, further improvements to our balance sheet and additional enhancements to our operating platform. In terms of leasing, the second quarter results reflect the substantial progress we have made over the last several years since stabilizing and releasing our portfolio, which has been accomplished through our continued focus on retail relationship, augmentation of the platform and proactive approach to asset management. Retail occupancy now stands at 88.1% or 91% including leases signed but not yet commenced, representing over 1 million square feet of gross leasable area that we expect to take occupancy and begin rent commencement over the next several quarters. There is no disguising the fact that the recession greatly impacted our portfolio and has taken a tremendous amount of diligence and perseverance to get it back to this point. That said, we have created a stronger, better diversified and higher quality portfolio as a result and we believe this momentum will continue in the coming quarters. Moving to the balance sheet. As we have communicated to you in the past, ongoing improvements in our leverage level and overall risk profile is of top priority for this management team. During the second quarter, we made substantial progress on reducing our leverage, primarily as a result of our April capital raise which generated $267 million in net proceeds, allowing us to further delever through the repayment of some very high cost debt. Given the current macroeconomic uncertainty that exist, we feel strongly that the steps taken over the last several quarters have significantly improved our risk profile and strengthened our financial flexibility, positioning us well for whatever lies ahead. Combining net debt to combine adjusted EBITDA has fallen from 8.3x at year end to 7.6x at June 30. We remain focused on our long-term leverage target of 6x to 7x and we believe we will see meaningful improvement in this metric by year end, primarily as a result of non-core and nonstrategic disposition program. Our disposition goal for the year remains unchanged at $450 million to $550 million and Shane will provide a more detailed update in a moment. Moving to our operating platform. As a result of our ongoing commitment to develop and maintain a fully integrated best in class we believe is a platform, we have continued our reviewed service agreements with the Inland group and its affiliates and have elected to terminate the vast majority of them. Furthermore, we also announced in last night's earnings release that we have signed a lease for new office space and will be leaving the Inland campus when our current lease expires in the fourth quarter of this year. Although Angela will address specific G&A guidance in more detail in a few moments, I will briefly comment on the anticipated costs and savings of these actions. I will bucket these terminations into 3 groups. The first group of terminations should represent cost savings through RPAI and includes all services related to communications and capital markets activities. Over the last 12 to 24 months, we have enhanced our internal capital market and corporate marketing teams and they are now well set and positioned to absorb the additional workload. We paid approximately $500,000 for this first group of services during 2011 and expect that these costs would be eliminated as we move forward. The second group of terminations will require RPAI to either hire additional staff or contract with external third parties directly and includes insurance and risk management services, property tax services and personnel services. The good news on this bucket of services, however, is that we believe the cost we will incur from external third parties and from hiring additional staff will be commensurate with the amounts paid under these previous agreement. We paid approximately $600,000 for these services during 2011, exclusive of pass-through cost and do not expect any material changes in that amount going forward. Our new office lease also falls within this group. Our new gross rent will actually be less than that we are currently paying and build out and relocation costs will generally be covered by the allowances and inducements we received as part of the transaction. The third bucket of services, however, will require an incremental upfront investment, but we firmly believe that moving forward with this internalization initiative is the right thing to do from an overall risk and cost management standpoint and should yield enhanced capabilities. This bucket includes technology services. While there will be an added upfront cost, we believe that our recurring IT cost will be commensurate with what we have paid in the past and that the additional onetime cost will be partially offset by the savings and annual cost on the first group of service terminations that I discussed earlier. Finally, and before I turn the call over to Shane, I wish to mention that some, if not all of you, have seen our press release of Friday, July 27, regarding a file claim questioning the company's recent public offering. Given that the matter is in the early stages and in the hands of the attorneys, we are not in a position to comment on this matter at this time. We stand by our statement of July 27 and we take our obligations to be good stewards of capital very seriously. We believe then and continue to believe now that our recent listing and concurrent offering has positioned RPAI for growth and within the best interest of the company. We are encouraged by RPAI's performance in this transaction and are hopeful that our message is resonating with our shareholders. With that, I would like to turn the call over to Shane Garrison, our Chief Operating Officer, to discuss in more detail our operating result.

Thank you, Steve, and good morning. I'd like to review our operating and leasing performance for the second quarter and update you on our ongoing capital recycling efforts. Same-store NOI growth in the second quarter was 4.1%, driven by our continued progress on occupancy and re-leasing. During the second quarter, we signed 148 new and renewal leases across the consolidated retail portfolio for 707,000 square feet of total activity. Retail portfolio occupancy ended the quarter at 88.1%, up 180 basis points year-over-year and up 10 basis points sequentially. Retail portfolio percent leased end of the quarter at 91%, up 230 basis points year-over-year and 40 basis points sequentially. The 290 basis points spread between our occupancy and percent lease rate represents approximately 1 million square feet or $14.2 million in annualized base rent that we expect to commence over the next several quarters. As we communicated previously, our small shop percent lease rate had taken a step back during the first quarter with a 70 basis point sequential decline. I'm happy to share that during the second quarter, we had a sequential improvement in this metric of 40 basis points, bringing us to 81% leased and we feel optimistic about our ability to continue to improve this number in the coming quarters. Moving on, our leasing pipeline remains robust with over 800,000 square feet identified today, consisting of over 550,000 square feet of anchored transactions and over 250,000 square feet of small shop transactions. Most encouraging, during the second quarter, however, was our progress on releasing spreads and in filling space that have been vacant for more than a year. During the second quarter, including our pro rata share of unconsolidated joint ventures, comparable new leasing spreads including our pro rata share of joint ventures, were up 7.5% and renewal spreads were up 7.5% and renewals spread were up 4.3% for a blended spread of 5%. Much of our leasing during the quarter, however, fell into our non-comparable bucket, which includes leases signed on space, but have been vacant for more than 365 days. For example, during the second quarter, 238,000 square feet in the non-comp bucket was non-comp for this reason and had an average unit downtime of approximately 2.5 years. We believe this is indicative of the progress we are making on some of the most difficult vacancies in the portfolio and is a very positive dynamic. While the tone in the market continues to be very constructive, we are highly cognizant of the overall macroeconomic environment and continue to watch our portfolio closely for any signs of stress. As many of you are aware, last month, SUPERVALU suspended its dividend and announced that they were exploring strategic alternatives. We have 10 SUPERVALU locations across our portfolio, totaling 562,000 square feet of GLA and $7.7 million in annualized-based rent, with a weighted average lease duration of 9.6 years. Our exposure consists of 2 Jewel/Oscos, 1 ACME, 2 Shaw's, 2 Shop 'N Saves, 1 Save-A-Lot, and 2 Shoppers Food Warehouses. From a geographic perspective, our Jewel locations are both in the Chicago metro area and 7 of the remaining 8 locations are in the Northeast. While this is obviously an evolving situation, we feel very good about the quality of our real estate and our ability to address any disruption created in our portfolio as a result of SUPERVALU's strategic process. Next, I would like to spend a moment on our most significant leasing transaction of the year. On June 29, we executed a lease expansion with Aon Corporation for 819,000 square feet, representing approximately 70% of the space Aon leases from us. We were able to maintain the current triple net rental structure, while extending remaining term from 6.9 years to 12.5 years. While there was a cost associated with this lease extension in the form of a market-based tenant inducement, we believe that the costs were justified and these assets are now saleable as evidenced by the multiple reverse inquiries we've received and confidential agreements we have signed with prospective buyers since the announcement. We hope to have an update for you within the next 2 or 3 quarters, but we currently expect the sale of these 2 buildings alone to generate gross proceeds of $145 million to $160 million, allowing us to completely repay the existing $113 million mortgage, which is currently in hyper-amortization and leaving the remaining campus unencumbered. Further, these dispositions will allow us to make meaningful progress on our goal of eliminating non-core portfolio and focusing our efforts on our core competency, the management and leasing of multi-tenant retail assets. As Steve indicated, we are maintaining our full-year disposition guidance of $450 million to $550 million. Our expectation for the timing of dispositions was always back end loaded and we're encouraged with our continued progress on this front. At the time of the last call in early May, we had $110 million under contractor LOI, which increased to $146 million by [indiscernible] June and we are pleased to announce that we now have over $250 million under contract of LOI, all of which is expected to close in the third quarter. Included in this amount is a portion of the form Mervyn’s portfolio. At this point in time, we believe that we are well-positioned for a mid-September close on this part of the portfolio, which will allow us to completely pay off the existing loan and to proceed with a more granular execution on the remaining boxes, which we believe is key to maximizing value in this transaction. We are tightening our guidance on total gross proceeds from the sale of this portfolio to a range of $160 million to $180 million. And with that, I will turn it over to Angela.

Thanks, Shane. Operating FFO was $51 million or $0.23 per share for the second quarter, which was ahead of our expectations, primarily as a result of stronger portfolio performance. Including nonoperating items, FFO was $70.2 million or $0.31 per share. Nonoperating items this quarter included primarily the write off of a mortgage premium related to a loan that was repaid with proceeds from our April equity offering and gains on the sales of marketable securities. From a capital markets perspective, the second quarter began with the completion of our equity offering and listing on the New York Stock Exchange on April 5. As Steve previously mentioned, the April offering reached $267 million in net proceeds, allowing us to retire $150 million of debt and other financial obligations with a weighted average cost of 8.8%. The remaining $117 million was used to repay amounts outstanding on our unsecured credit facility, creating additional financial flexibility for the company going forward. As of March 31, 2012, prior to the offering, our combined net debt to combined adjusted EBITDA ratio was 8.3x. Today, it stands at 7.6x and we're in a much better position to withstand capital markets and macroeconomic volatility than we were just months ago. During the second quarter, we closed on $134 million of mortgage loan financings, secured by 3 properties at a weighted average interest rate of 4.31% and with a weighted average term of 8.7 years. In addition, we repaid $223 million of mortgage loans at a weighted average interest rate of 6.39% unencumbering 9 properties in the process. We started the year with $527 million in total consolidated debt maturity. Approximately $311 million of that amount has either already been addressed or represents regularly scheduled amortization payments. Another $116 million represents the loan on the former Mervyn's portfolio, which we expect to repay in its entirety with proceeds from the sale of a portion of the former Mervyn's portfolio in mid-September. This leaves us with approximately $100 million of remaining loan maturities over the course of 2012, which we intend to repay and unencumber with proceeds from planned disposition. As we have discussed in the past, the migration of the balance sheet to investment grade is a top property for the company. And as a result, the continued growth of our unencumbered asset base is a primary focus. When we closed on our unsecured credit facility in February of this year, our unencumbered asset base totaled $1 billion. Based on our current capital plan for 2012, we expect that our total unencumbered asset base at year end will be approximately $1.5 billion, representing a 50% expansion in February of this year. Subsequent to quarter end, we entered into an interest rate swap transaction to convert the variable rate portion of $300 million of floating rate debt to a fixed-rate of 53.875 basis points, from July 31, 2012, through February 24, 2016, the maturity date of our unsecured term loan. The margin on the unsecured term loan is based on the leverage grid and ranges from 1.75% to 2.5% and the applicable margin at June 30 was 2.5%. As we discussed on last quarter's call, we did reach a resolution with a lender on one of our 2 mature mortgages, which resulted in a deed in lieu of foreclosure transaction on April 10. The underlying asset was a single tenant office property in a secondary market with limited remaining lease term and the conveyance of the property back to the lender resulted in the elimination of the $24 million loan from our balance sheet. We have one remaining asset subject to a mature mortgage, University Square and University Heights Ohio. We stopped making debt service payments on the $26.9 million nonrecourse loan in the second quarter of 2012 and have attempted to negotiate with the lenders since that time. This asset generated negative NOI in the second quarter of $1.8 million, which we disclosed separately in the supplemental to assist with your analysis. With respect to the dividend, on June 8, the Board of Directors declared a second quarter distribution of $0.165625 per share, representing an annualized dividend of approximately $0.6625 per share. While dividend policy is a board level decision, we are pleased with our operating performance year-to-date and do view the current dividend as sustainable at this level. Turning to guidance. We are increasing our expectations for 2012 operating FFO to a range of $0.83 to $0.87 per share, a $0.02 increase at the midpoint of the range. We are maintaining full-year same-store NOI guidance of 0% to positive 1%, which excludes all assets we expect to be sold during the year. As a result of the integration of our IT platform and increased legal expenses, we now believe that G&A could be as high as $30 million for the full year versus previous guidance of $26 million to $27.5 million, with the increase disproportionately affecting the fourth quarter. And with that, I will turn it back to Steve for some closing remarks.

Thank you, Angela and Shane. Again, another notable quarter and we would like to thank the entire RPAI team for their efforts, which allowed us to post solid earnings. While consumer sentiment has seen a slight decline this quarter, our tenant mix, by and large, continues to benefit from the modest recovery in retail. We continue to believe that consumers demand value, which is what we offer. Despite macroeconomic uncertainty, to job growth, to our presidential election, to European woes, we are pleased with our results in executing on our strategic plan and as evidenced by our increased guidance, we continue to believe in our ability to deliver strong results and look forward to updating you next quarter. With that, we will turn the call over.

[Operator Instructions] Our first question comes from the line of Todd Thomas of KeyBanc Capital Markets.

With regard to guidance, I was just wondering what the primary drivers of the increase are that offset the higher G&A that you outlined?

Obviously, the first half came in better than expected during the second quarter and on a year-to-date basis, we had some termination fees that helped as well. Bad debt has been trending lower than we previously expected and we've had savings on interest expense. Obviously, NOI, overall, even exclusive of the bad debt was pretty strong in the first half of the year, so it was a combination of all of those things.

Okay. And then I guess that leaves your yearend occupancy target of 90% to 91%. Is that still intact? And I was wondering how that was this quarter relative to your internal forecast and maybe you could comment on that?

I think the -- Todd, this is Shane. I think we're going to maintain 90% to 91%. We feel very comfortable with that, given where we are from a lease rate standpoint and with our dispositions.

And then with regards to the SUPERVALU stores and the portfolio that you mentioned, it's about 1.7% of base rent. I was just wondering if you could comment on where sales are for those stores on average and what your thoughts are, just generally regarding that exposure?

I think it's manageable. It's 10 boxes generally in the Northeast. Average base rent is a little north of $12 and on a reported basis, average sales are about $4.20. So I think overall we're very comfortable with that exposure.

Okay. And then just lastly, regarding the dispositions. Of the $250 million of sales that are under contract, I was just wondering if you could break out what the portion is between, I guess, sort of the Mervyn's and the non-core office industrial and also the multi-anchored retail. I was just wondering is the Aon office deal, that's not included in that amount?

Sure. I think it's a great question. There's 3 buckets there as you've indicated. The first is non-core office and industrial. We have 2 assets there, about 1.2 million square feet under contract. That's about $68 million and we anticipate those closing in Q3. Next is single tenant retail, there's 17 boxes there, 15 of which are former Mervyn's, the other 2 are, one's a single-tenant asset, single-tenant grocery asset in Ohio, the other is a vacant junior box that's part of a broader redevelopment play here in the Midwest. All told, those are under LOR contract for $139 million and all but $6 million of that should close in Q3 as well. And then lastly, nonstrategic, multi-tenant retail, we call the Dallas portfolio. There's 5 assets there, $55 million in total for 2 different transactions. We contemplate that closing towards the back half of Q3 as well. So we're about $260 million, if my math is correct. If you add in Aon, our previous guidance has been kind of 145 to 160, using 150 gets me to 410 and then the remaining Mervyn's at the midpoint is another $60 million, which takes us to $470 million and we have closed this and that here [indiscernible] here and there through a year for about $18 million. So we're about $490 million as far as visibility right now.

Okay. That's real helpful. And then just one last clarification for Angela. The $10.3 million mortgage premium write off in the quarter, where was that on the consolidated income statement? Is that an offset to interest expense in the quarter?

Yes, that's right.

Our next question comes in the line of Michael Mueller JPMorgan. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Angela, your comments on G&A in the fourth quarter stepping up. How much of that is going to be carrying over into '13, or is it more of just the 2012 onetime impact?

Clearly, a lot of the incremental increase in G&A that we mentioned on the call relative to the previous guidance is effectively onetime in nature. As we pointed out, it's related primarily to the integration of the IT platform as well as additional legal expenses in the back half of the year. We're obviously not prepared to give 2013 G&A guidance at this point, but it is fair to say that the increase from the $26 million to $27.5 million up to the $30 million is effectively primarily onetime in nature. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Okay. Got it. Got it. And then on the bucket of asset sales either the -- no, I guess both if you can, the 250 for Q3 and the full year, what's a blended in-place cap rate on that if you're thinking about just looking at what hit the P&L in Q2, thinking of that as in place? What's the cap rate on that basis for those buckets?

Including the Mervyn's? Well let's talk about the Mervyn's specifically. I think, as we've talked about in the past, Mike, you don't see a lot of that NOI. Michael W. Mueller - JP Morgan Chase & Co, Research Division: It's 3% or 4%, right?

The midpoint 160 to 180, it's effectively a forecap [ph] and the rest of the assets right now look to be in the very low 7 range. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Got it. Okay. Great. And then switching gears thinking about leasing spreads, the leasing spreads in Q2, the renewals as well as the new leasing, it was definitely above where the recent quarter's trends had been. Can you talk about how much of that feels like it's going to be sticky and you're going to be at comparable levels, obviously, that stuff can bounce around but does it feel like the spreads over the next few quarters are going to be consistently higher than where they were in the past few quarters before Q2?

That's a good question. Admittedly, there's going to be a little volatility. I think in Q2, you started to see some of our efforts show through relative to our proactive negotiations with some retailers regarding downsizings. There were a couple of positives, very compelling positive comps there. Additionally, some of the former bankruptcies, Blockbuster for example, were we maintained them in place to keep the lights on with a quick ability to move them out. We had a couple of those that were very compelling positive comps. So there's a little volatility there. I think overall we're very comfortable with our previous guidance for the year, which is we think our rents are generally at or marginally below market and 0 to 2 feels like it's the right number.

Our next question comes from the line of Vincent Chao of Deutsche Bank.

Just a quick follow-up on the SUPERVALU. Just wondering if you're getting any increase now on those spaces given obviously what they're going through?

We have not had any reverse inquiry on this basis.

Okay. And then just on the same-store NOI guidance, obviously, the full-year number is not comparable to what we've seen so far this year -- so far in the first half. Just wondering if you do look at it on a comparable basis to the yearend expected portfolio, what would the year-to-date same-store NOI look like?

Sure. So the year-to-date same-store is running about 3.8%. On a comparable pool basis, to what we expect to own at the end of the year, it would've been about 2.5% and most of that delta is related to the Mervyn's portfolio. So the full-year guidance of 0% to 1% does assume some deceleration in the second half as a result of primarily re-merchandising work that's being done at a handful of properties. On the last call, we talked about 2 centers in particular where we're proactively -- either we terminated or chose not to renew an office-supply user and they back filled that space at positive spreads, but that obviously had some downtime that's hitting the second half. And then, as we also talked about on the last call, there are some continued transition at the Gateway and we believe the third quarter is likely the same store NOI and occupancy trough for that portfolio so it will be more impactful in the second half than it was in the first half. We're also assuming an increase in bad debt expense relative to what we saw in the first half of the year and certainly relative to what we saw in the back half of 2011. We actually had a credit in bad debt for that comparable pool in the fourth quarter of '11. So that is obviously contributing to some of the delta as well.

Okay. And I guess just in terms of the bad debt, on a percentage basis, what are you expecting for the back half as a percent of...

50 to 100 basis points. We've been running below that year-to-date. And I'd just stress that the increase in bad debt assumed in guidance isn't related to anything we're seeing today in terms of tenant health or receivable trends. It's really just to capture sort of the existing macroeconomic uncertainty.

Okay. So nothing specific. That's helpful. And then just last question, just with Best Buy, I was just wondering if you've had any other conversations or an update on what they're trying to do there and then combine that with the recent announcement by Schulze of his intention or desire to take out the entire company?

Given the size of that tenant in our portfolio, 30 boxes, they're currently our #1 tenant on a base rent standpoint. We have ongoing conversations regarding downsizing and re-merchandising, continuously. Specific to the offer yesterday, I think the take away for us is, clearly, we're not enamored with the prospect of little to no transparency if it's taken private. But that being said, I think we're willing to compromise if it provides for a somewhat more finite strategic direction and execution at this point.

Okay. And then I guess from your perspective, outside of the visibility issue with the company being private versus public, is there strategically -- do you think there's a big divergence in how they would be managed? I mean would one accelerate store closures versus the other?

I think that remains to be seen. I think our experience with the other PE held retailers, I would hope they would be a little more nimble and be able to be a little more proactive once taken private.

Okay. And just last question for me, I know you can't really say much in terms of the lawsuit, but is there anything you can talk about in terms of the sort of the next timeline of that, like what happens next?

Vince, this is Steve Grimes. Yes, just to kind of put it in perspective for you. This claim is less than 2 weeks old, so it is very, very early stages. What I can tell you we did do a preliminary review, we did file the press release, which obviously we stand behind those statements. But most specifically the case is in the hands of the attorneys right now and they're looking to see just how to move forward with responding. So there probably will be more color as time goes on, but it's still less than 2 weeks. So not a lot of color we can provide today.

Our next question comes from the line of Cedric Lachance of Green Street Advisors.

Angela, in regards to the same-store performance this quarter, can you give us a little more color as to what drove the 4% number versus your guidance for the year that's closer to 1%?

Sure. The 4% was comprised of 1.2% increase in minimum rent due to occupancy as well as contractual rent bonds. Real estate tax expense came in about 8.5% lower. We're seeing lower tax expense across-the-board, but also had a tax refund at 1 property, or a tax credit in the quarter and then recovery income is obviously trending considerably higher, about 5% due mostly to the occupancy gain we've seen.

In terms of tax expenses, is it because a process you have to try to peal [ph] some of the tax numbers on your properties? Or is it just a function of having enjoyed, I guess, a reduction in tax rates in some areas?

Yes, we'd say it's more of the former than the latter. I think we try to be pretty proactive about managing real estate tax expense. I'll let Shane elaborate.

Yes, that's right. I mean, obviously, different jurisdictions are in different assessment cycles and we're starting to see that come through this year.

In terms of the non-comp leasing, what are you leasing most at this point, is it big boxes, small shops? And in regards to TIs you have to provide, where do you spend the bulk of the TI dollars that you report for the non-comp buckets?

Yes, it's -- the large majority of it is small shop. A couple of things on the non-comp space. 90% of the non-comp was due to time, on average, it's been vacant for about 2.5 years. I think that the base rent of 15, 51 [ph] is fairly compelling when you look at our average, which is 14, 17 [ph] and I think those 2 dynamics combined are very compelling for the company.

In terms of the type of small shop tenants you're finding for these spaces, are you looking more at the mom and pops, or is it still the national retailers that are taking more and more space?

On a national, the soft goods below 5,000 are very active and I think the sit down and the QSRs are very active, cell phones remain active and services especially in certain regions are very active, Dentist and Salons. So I think it's a combination, broad-based, including franchisees.

Our next question comes from the line of Quentin Velleley of Citi.

It's good to see that lease extension on Aon. How much capital did you have to put in to get the lease extension?

$23 million, Quentin. Market for Class A it's 819,000 feet, it's one of the biggest office transactions I think this year in the country. Obviously, significant for us given we have 4.2 million square feet of remaining non-core and this is 820,000 of it. So market here is call it $3 to $5 per foot per year plus a month free rent per year for a deal. And with Aon, outside of the inducement, we're very focused on 3 real variables there to optimize capitalized value. One is we needed to keep them in the 819,000 square feet. Secondly, we were very focused on maintaining the triple net sale-leaseback structure of the lease. We strongly believe that, that opens up the field of potential buyers dramatically. And then last, any credit enhancement in this case, Hewitt was on the lease before the negotiation and at the signing, we managed transition to Aon Corp., which is the publicly held investment grade entity. So all in all, I think it was a good execution, admittedly $23 million is a big number, but we think at the end of the day, it will be compelling when we trade the asset.

And then I might have misheard but I think you said on the 819,000 feet, which have been extended, which is what you're looking to sell at the moment, I think you said $145 million to $160 million, was that what you're aiming for?

Correct. So on the bottom it's 7.5 cap and on top it's about a 6.75 cap.

Okay. And that excludes the 23 million inducement?

Right.

And then can you just give us an update on -- I'm not sure whether or not you've been marketing the cost plus warehouse with the enhanced credit profile. And then also the Rite Aid assets, I know there's been some problems with Rite Aid. I don't know whether the markets that are reappearing for those kind of triple net assets yet.

The cost plus is in the -- one of the assets I noted in the non-core previously is under contract right now that we anticipate trading in Q3, which will obviously peel another 1 million square feet of the 4.2 million out of our non-core bucket. I'm sorry, what was the next question?

Just the triple net, the Rite Aid assets?

Rite Aid, we haven't done anything. I think there's another 2 years of that debt left. It's cross-collateralized, so we don't have a lot of optionality yet to move or bifurcate that.

Right and then just the last question. There was a comment on the re-merchandising, particularly in the office supply space, Office Depot are out looking at closing or downsizing 500 stores. Can you just remind us of your total office-supply exposure and what your view is on how it plays out over time with the office-supply category?

Yes, I mean the office supplies category, obviously 4,000 stores in the U.S. Clearly, more than we need. But Office Depot, we have 22. I think the baseline is about 5.7 and with OfficeMax, it was another 10 for 1.6. We've been pretty successful recently with either downsizing or reducing our exposure there and we continue to focus on that. Office Depot has a 5,000 foot concept that they're trying to roll out right now that we're interested in working with them on.

There are no further questions at this time. I would like to turn the floor back over to Mr. Grimes for any closing remarks.

Great. Thank you. We'd like to thank all of you for your time today. Again, this is a very exciting time for RPAI and we look forward to talking with you next quarter. Thanks again.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.