Greetings, and welcome to Retail Properties of America Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Julie Swinehart, Chief Financial Officer.

Thank you, operator, and welcome to the Retail Properties of America’s second quarter 2018 earnings conference call. In addition to the press release distributed last evening, we have posted a quarterly supplemental package with additional details on our results in the Invest Section on our website at 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, expects and variations of such words or similar expressions. Actual results may differ materially from those described in any forward-looking statements, including in our guidance for 2018 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 our most recent Form 10-K, 10-Q and other SEC filings. As a reminder, forward-looking statements represent management’s estimates as of today, August 1, 2018, 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. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers and definition of these non-GAAP financial measures in our quarterly supplemental package and our earnings release which are available in the Invest Section of our website at rpai.com. Joining me on today’s call will be, Steve Grimes, Chief Executive Officer; and Shane Garrison, President and Chief Operating Officer. After our prepared remarks, we will open up the call to your questions. With that, I will now turn the call over to Steve.

Thank you, Julie, and thank you all for joining us today. 2018 continues to be a year of internal focus at RPAI and we are reaping the benefits of our efforts. We are just beyond the midpoint of the year and I’m very proud of all that we have accomplished so far. During the quarter, we completed our portfolio transformation with the sale of Schaumburg Towers on May 31. With our last remaining office complex sold, we are able to maintain complete focus on our high-quality Class A retail portfolio, driving growth re-leasing and capitalizing on our embedded expansion and redevelopment opportunities. Our leasing velocity remained strong and we believe we are on track to reach our goal of ending the year with a lease rate of near 95%. Our results year-to-date have essentially been in line with internal expectation, and as we lighted in our earnings release last night, we have increased operating FFO guidance at the midpoint by a $0.01, as we have narrowed the range to $1 to $1.02 per dilute share. Julie will spend sometime covering the details regarding guidance and related assumptions and Shane will shed additional light on our confidence around expected results for the second-half of the year as we expect rents to commence on several significant tenants. He will also provide an update on our expansion and redevelopment project and will highlight the ways in which we continue to invest in our platform to support this key growth component of RPAI 2.0. In terms of retail sentiment in recent months, we have finally started to see a shift in the town of retail environment stemming from fewer major retailer bankruptcies and continued signs of increasing retail sales. Our leasing teams were very positive coming out of ICSC in May, feeling it was…

Thank you, Steve. This morning, I’ll discuss our second quarter results and our outlook for the remainder of 2018. Operating FFO for the second quarter was $0.25 per diluted share, slightly ahead of internal estimates, compared to $0.27 per diluted share for the same period in 2017. The $0.02 decrease was driven primarily by $0.06 from lower NOI from other investment properties due to our capital recycling activities, partially offset by $0.015 resulting from a reduced share count attributable to 2017 common stock repurchases, $0.01 each from the 2017 preferred equity redemption and lower interest expense net of the impact on earnings from early debt extinguishment and a $0.005 from same-store NOI growth. In addition, there are offsetting $0.01 changes in the quarter from net termination fees and from amortization of above and below market lease intangibles, both resulting from Toys "R" Us leases that we either acquired through auction or were rejected. Same-store NOI growth decelerated modestly as anticipated to 1.1% during the second quarter. Our same-store growth continues to be driven by higher base rent, which contributed 100 basis points and resulted from strong contractual rent increases and re-leasing spreads. Improvements in property operating expenses net of recovery income contributed an additional 20 basis points of growth in the quarter, which, as we noted last quarter, is partially the result of our field office cost management efforts. Bad debt detracted 50 basis points in part due to a tough comparable period in 2017 when we received unanticipated stub rent from H.H. Gregg, but was almost fully offset by growth in both other property income and percentage in specialty rent contributing 40 basis points of growth. Turning to guidance. As Steve mentioned, we are increasing our operating FFO guidance by $0.01 at the midpoint, raising the low-end of the…

Before I go to my prepared marks, I first want to thank you both for your encouragement and acknowledgement, I very, very much appreciate it. And while the last five years have not been easy, repositioning the platform, the portfolio and balance sheet was absolutely the right strategic path. And when I look out on the horizon that all of the opportunities here at RPAI that were really created because of that chosen difficult path. There’s no place I’d rather be. The opportunities in front of us are well armed, and I very much look forward to a bright future here with this team. Thank you, again. Before I get to what I consider the most important update, specifically our expansion in development projects, I’d first like to highlight our operational progress in the quarter. Leasing velocity remained strong across our portfolio, especially considering a markedly smaller denominator when compared to this time last year. In fact, at the beginning of 2018, the company had reduced the overall portfolio by almost 20%, or over 5 million square feet through approximately $1 billion of dispositions in 2017, our last significant year of strategic asset positioning. And while each vacancy is more impactful on a GLA basis, we strongly believe these vacancies represent tremendous value creation opportunities. For the quarter, we signed 128 leases for 689,000 square feet, with comparable blended re-leasing spreads of 5%, bringing our year-to-date volume to 225 leases for 1.3 million square feet and year-to-date blended comparable re-leasing spreads to 5.7%. Although spreads on comparable new leases for the quarter were 4.4% markedly lower than recent quarters, we were unfavorably impacted by one lease, which was signed in the quarter to backfill a former Gander Mountain and moving that lease from the comp results and a new lease…

Thank you, Shane and Julie for your updates. As our year of internal focus continues, we are committed to continuing to create additional value for our shareholders through strong leasing and accretive expansion development. Our high-quality portfolio continues to perform well and our dedicated team remains focused on our goals for 2018 and beyond. We are excited to share more specific details about our expansion plans and 2019 starts in D.C. in September. When you couple our expansion opportunities with what we believe will be significant rent comps on our former Toys locations, no impact from the new lease accounting standards and our liquidity profile, 2019 is sizing up to benefit materially from all of our internal efforts in 2018. Our path to growth in 2019 is becoming even more clear. Thank you to our Board for their ongoing support and guidance, and thank you to our hard working dedicated employees who are core to RPAI 2.0. And with that, I’d like to turn the call back over to the operator for questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Christy McElroy from Citi. Please proceed with your question.

Hi, good morning, everyone. I just wanted to follow-up on the commencement timing and just regarding the same-store NOI range and the 25 basis point downward revision. It’s still a very wide range. So, given that you’re expecting lease trends and timing in the second-half and it sounds like some of that will leak into 2019. Under what scenario would you end the year towards the lower-end of the range versus the higher-end, just thinking about the 1.75% to the 2.75%, because I think, in lowering the bottom end to 1.75%, your sort of message to The Street that it’s a real possibility. So I’m just wanted to get my arms around from a lease commencement standpoint, how we should be thinking about the – what the different scenarios are?

Sure. Thanks, Christy. It certainly didn’t help 2018 for us that Toys didn’t hang on for a couple of more months. We had essentially had the worst-case scenario that we had messaged to actually happened in 2018. But all year, we have message that the first-half same-store growth would be modest and that we do continue to expect the second-half of the year to resemble more a bit of a hockey stick in part due to easier comps stemming from the 2017 bankruptcies, but also in part due to what is now looking like $6.9 million in ABR coming online. Of that annual amount, we expect about 10% of that to not start until 2019. But of the 90% that would start in 2018 is a bit more weighted towards Q4 than it is Q3. So, we’ve seen modest changes to that timing as opposed to last quarter, which is the reason for the change in the range. In terms of what would take us to either end, we felt we were responsible – have responsibility to update the range. And we could hit the low-end, we could hit the high-end. I think, the low-end would be dependent on delayed rent starts if our expectations that we see today slip or certainly, a material unforeseen tenant bankruptcy that moved very quickly. And similarly, at the high-end of the range, if, I think, rent commencement timing is significantly the main factor that could move the needle there.

Okay. And Steve, you mentioned that 2019 is potentially shaping up well, recognizing you don’t want to get guidance at this point. But maybe you can talk about sort of the – it sounds like Toys is more of an impact in 2018 and lease commencement will provide a nice tailwind into 2019. Maybe you can just give a little bit more detail on that, because it sounds like you do have a tailwind into next year?

Yes. Thanks, Christy. Yes I do think so. I think, I’ll remind everybody this has been the year of internal focus. And we also said that this is going to be the trough year on earnings and I think we continue to believe that. That being said, Toys, while it was the worst-case scenario, we do have the advantage of getting in front of that space sooner and Shane will talk a little bit more. As he talked about in the opening remarks, we’ve got some very good backfill opportunities there and very meaningful lease spreads. So that certainly will be a tailwind. And to the extent that we can turn that rent on sooner in 2019 and only helps 2019. In addition, as Julie had mentioned, with the lease up coming in largely Q4 of this year to get the full effect of that next year, I think, will be tremendously helpful for earnings. The fact that the lease accounting standard will have no impact for us. And the fact that we are in a very solid liquidity position moving forward into 2019 with all of our expansion plans, and some of those expansion plans being accelerated in terms of timing. I don’t think, we could be any better position for 2019 than we are right now. So we’re very excited for those prospects. And I think we’ll – the one piece of information, I think, are the many pieces of information, I think, you all might be missing is what we intend to share at our September events, which should provide absolute clarity around the roadmap in 2019 and beyond.

Great. Thank you.

Our next question comes from the line of Todd Thomas from KeyBanc Capital Markets. Please proceed with your question.

Hi, thanks. Good morning. Shane, it sounds like we’re hearing a little about a lot less space that needs to be reconfigured and split with regard to some of the bigger boxes, including the Toys "R" Us space. Is that consistent with what you’re seeing? You mentioned that you have lease assigned or LOIs out, I guess, on all six of those boxes that you can control, that you control today. How many of those are being split versus backfilled with a single user and maybe you can just comment on that, that trend a little bit more broadly?

Sure. Sure, Todd. Outside of very beneficial low-rent base here, high 6s. We also have the benefit of smaller average configurations, so five to seven boxes or, call it, 30,000 feet and only two are above that, one is a combo store currently. So because of that, we’re seeing more single tenant backfills than we have historically with H.H. Gregg and certainly with Sports Authority. But we are looking at two box fills right now opportunistically. We’re just trying to understand long-term from both a merchandising standpoint and cash flow net effect of standpoint what makes small sense. So the good news is, we have options. And with our lower – markedly lower average base rent here, I think, it’s going to be a very compelling story in a very short timeframe.

Okay. And then leasing spreads overall moderated a little bit in the quarter. Any sense when or when will – when we might see those metrics improve, the trends there improve a little bit?

Yes. I think, it’s a good question and we’ve talked about this a lot. It’s obviously not a 90-day business and we’re – sometimes it’s not one year as well. But for the year, we’re still in double digits. From a new space comp standpoint, I fully expect that to pick up from an overall number as we go through the year. I mean, if you look at Toys at 70 to almost the double in rent and that doesn’t take many of those to move the needle, especially on this denominator. So bigger numbers as we go through the quarter, I think, is our expect – through the year is our expectation.

All right. And then just lastly, thinking about 2019, I guess, how far into discussions around the 2019 expirations are you? And – are you expecting any change in the retention ratio at all in the year ahead just based on conversations with retailers whether seen or otherwise?

Yes. I think, this year, we ran – if we run typically at 80%-ish on pure retention, this year, we’re probably at 70, and that’s bankruptcy as well. So a lot of the watch list, call it, pain, if you would, the proactivity involved with this year. I think, next year, it’s a much less proactive year and obviously, the best real estate continues to get better. So I think, that’s much or a big part of that dynamic, but we expect retention to be back up close to the 80% range relative to 70 this year.

Okay. Thank you.

[Operator Instructions] Our next question comes from the line of R.J. Milligan from Robert W. Baird and Company. Please proceed with your question.

Hey, good morning, guys. This is Will Harman on for R.J. My question is just about your appetite for share buybacks. Your stock is currently trading at $12.50, which is within the range where you’re actively buying back stock last year. A lot of capacity left on the current program and your balance sheet is pretty lowly levered. So if you could just talk about that, I’d appreciate it?

Sure. Stock buyback certainly remain an option for us. But when evaluate the best pieces of capital, we took a look at our debt profile, for example, specifically some of our higher-rate interest – higher interest rate mortgages and we will be paying off, call it, $65 million to $70 million of that early, and I think you’ll see that by the end of the third quarter. Allocating capital in that way continues to increase our unencumbered NOI percentage that helps us reduce our interest rate exposure obviously. But I guess, keep in mind, with our leasing opportunities and goals for the year, we expect 2018 to be an outsized year for CapEx with most of that spend modeled in the back-half of 2018. I don’t think you’re seeing it yet in the first-half of 2018 versus first-half of 2017, but I would expect as rent turns on those TI dollars to be allocated there. So along with additional investment in our redevelopments and expansions, liquidity is key to us right now. And again, we expect to share more details around that at our Investor Day next month.

That’s helpful. And then just with your disposition program now complete, how should we be thinking about asset sales going forward? And what level of pruning could we expect beyond this year?

It’s a great question. I don’t know that we have a run rate to triangulate around. I think, we said in the past and we still have the conviction, we’ll just continue to be opportunistic. And as we talk about liquidity needs as it relates to the development pipeline and as we get into that virtuous cycle of delivery, we’ll be opportunistic as we try to maintain balance sheet integrity.

That’s it for us. Thanks guys.

Thanks.

Thank you.

Our next question comes from the line of Vince Tibone from Green Street Advisors. Please proceed with your question.

Good morning. Could you provide some additional color on the bankruptcy option process through Toys leases? What was the thought process of paying up for two leases versus maybe letting another party win an auction and experiencing no cash flow disruption or CapEx with kind of backfilling that space?

Good morning. I think, it’s a great question. So we obviously had to pay, we paid about $1.9 million for two leases, $1.4 million for one of the leases. And I think, when we looked at the retailers, we were bidding against and looked at the long-term merchandising strategy of the assets and the restrictions in those leases. It was a relatively easy decision even at $1.4 million for the larger lease. So, short-term pain for long-term gain was very much thought process here, and we have some active leasing going on around these boxes as well. So long story short, we’re going to drive some rent here and merchandising long-term and hopefully sales as well.

Can you elaborate a little bit more if you can on some of the restrictions that were in the leases and kind of what exactly was the issues there?

Yes. Look, every lease is different, right? But the one – the bigger lease that we paid up for certainly one we want to narrow with the retailer we were dealing with. But the lease restrictions themselves, for example, we had linear restrictions around restaurant uses that had held up several different deals over the years and had – we had kind of a shadow pipeline of would be restaurants that were ready to break-free for significant rent. That would probably be the most substantive example I can give you.

No, that’s really helpful. Thank you. And then one more for me. Just kind of based on your spread expectations with Toys boxes, it seems like you’re expecting $12 to $13 rents, assuming a single tenant backlog. How do these rent expectations compare to the rents obtained on former H.H. Gregg and Sports Authority boxes?

Yes. I would tell you, well, Sports was bigger, right? So I think on average, we’re probably in the 10 range on Sports without looking at a roll up. H.H. Gregg to date was our best comp story. We were at 40% to 50% comps on H.H. Gregg on a blended basis. And again, we think this will be undoubtedly the best story period given the lower base. So if we – I think 70% of the low range and we can get to 100% depending on how many box splits we do. But again, great traction and certainly, expect you have very – actually, we hope this space is accretive when we look at 2019 as a set up, and we really get there two ways. We can do it on a light kind, box-per-box replacement. Given the comps, we basically have to do four deals to replace the rent at par on a seven-box denominator. I think, that’s the easy route. I think, when I look at the pipeline now and in the spirit of the best assets continue to get better, our pipeline on the leasing side right now is about 400,000 to 450,000 feet. If I take the top 90,000 feet of that, the best of the best mixed-use stuff, we’re at an average rent right now in the pipeline of 46.50 square foot. So we have to do basically, I don’t know, 25,000, 30,000 feet of those deals to replace all of the Toys rent. It’s 10 deals or something. So there’s multiple ways to cover this rent into 2019. And hopefully, we can get a double here and do the in line and we think 2019 is shaping up great for those reasons.

Thank you. So one quick clarification. On sport, you said, it was $10 range. Was that the new rent or the former rent on that space?

I think it’s – I’d have to look, Vince.

Okay, no problem. I think it’s…

It was – but generally, it’s much less compelling obviously than H. H. Gregg where this will be.

Got it.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.

Great. Well, thank you, operator, and thank you, everybody, for joining us today. As we have sent out on a couple of occasions some save the dates for our September 20 and 21 event at One Loudoun Downtown in D.C., we’re hopeful to get those invites out soon. Some of you have already registered, so we’re very excited about that. But please look for that in your in boxes. Please make every attempt to join us out in D.C. for this event. I assure you that it will be very, very compelling in terms of the information that we’ll be able to provide to give you more insights into 2019 and beyond. So thanks, again, for your time today. We very much appreciate it.

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