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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Brixmor Property Group Inc. Fourth Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [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 fourth 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 future 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.
Well, thank you, Stacy. Good morning, everyone and thank you for joining our call. I'm extraordinarily pleased to report another great quarter and first full year for this team. With full year same-store growth of 2.6% and FFO per share at $2.09 which includes $0.02 of nonrecurring items. Following my remarks, Angela will provide a deep dive into these results as well as our financial outlook.
However, against the current backdrop of market volatility, I'd like to drill down into how we have and how we will continue to deliver on our balanced and durable plan to drive growth.
Let's start with leasing, where our sector leading production continued to accelerate into year end. For the quarter we executed 2.3 million feet of new and renewable deals, a cash spread of 16% which was our merged productive quarter in the past few years. We also achieved new lease spreads of over 42% and importantly those spreads were not bought, as TIs declined and lease terms firm.
When you look at our productivity over the trailing four quarters, we've created over $42 million of new rent or 4.5% of our total ABR. Our average ABR for our new and renewable deals was $15.11 this quarter which continues to demonstrate our below market in place rents and we set a new record with 28 new anchor leases this quarter driving $7.2 million of new ABR and also set a record in terms of small shop ABR over $22 a foot.
Our intrinsic lease terms improved with only 46% of our leases containing options in a weighted average embedded rent growth of over 2.1% versus the portfolio average closer to 1%. And looking forward importantly, our leasing pipeline remains robust with over 400 leases comprising 2.3 million square feet and $41 million of ABR.
Folks, allow me to pause for a moment on that productivity. Simply put, our proven ability to sign better tenants at better rents and better intrinsic terms, not only stands apart within the open-air sector, it underscores how this platform continues to grow in this environment. We believe strongly that you measure the quality of a real estate investment based on your ability to drive growth, and that all begins with getting better tenants at better rents.
What is it about this environment that allows us to drive this outperformance? I believe that there are three primary factors; first, retailers that are growing store counts are increasingly focused on open-air centers like ours located near where their customers work and live. Our national accounts team which covers over 200 national and regional retailers' estimates net new openings over the coming year of over 13,000 stores. And importantly, we're having tremendous success growing our market share with these tenants as they expand.
For example, we've captured 12% of the new store openings for Kirkland's, 13% for Burlington, 10% for Panera, 8% for Roth, 7% for LA Fitness and 6% for T.J. Maxx. We've also executed first ever deals with this company with Sprouts [ph] where we are now at three deals, Lucky's Market, HomeSense, Dave & Busters, Plasma, [indiscernible], Shake Shack, Yard House, and many, many more.
The second main driver of our outperformance is that while these tenants are looking to grow their store counts, they are more focused than ever on occupancy costs and four-wall profitability. Our proven locations and low average in place rents allows us to effectively compete for the very best tenants while still driving growth. As I've said on many prior calls, our high in place ABR can be a tremendous liability in this environment.
Finally, these growing retailers are planning new stores further and further out and therefore demand greater certainty of execution, which means delivering both the prototype spec and critically through the proposed timing of opening. We enjoy an outstanding track record in trust with these retailers, a track record against which many smaller landlords have difficulty competing. That trust is not only evident in our outstanding market share growth, it's also evident in our position as the largest landlord to some of the very best retailers in the industry.
Overall for the quarter we signed 35 new restaurant leases, 11 new Fitness deals, 9 home deals, 3 upright apparel [ph] and 3 specialty grocers. Some of the specific wins this quarter included the new smaller format Burlington is Arapahoe Crossing in Denver which replaced the bankrupt Gordmans, the LA Fitness [indiscernible] in Houston that replaced the former Sears box and the albeit in St. Louis that backfilled our last Sports Authority box. Each of these new tenants were substantial upgrades that should drive strong follow-on leasing in small shops at the impacted centers, again visibility on growth.
Speaking of bankruptcies which we estimate will drag us this year by over 70 basis points on the NOI line, we continue to have strong results backfilling the recaptured space with rent spreads approaching 30%. Importantly, all centers the Sears has now dropped out of our top 20 tenants as we've reduced our locations from 21 at the beginning of the year to as of today 13 and our total ABR from Sears and Kmart is now below 60 bps.
Our strong leasing productivity at this recaptured space, both space we've recaptured proactively as well as through bankruptcy continues to draw the second element of our business plan, accretive property level reinvestment. During the quarter we added 15 projects to our in process pipeline which now totals $295 million at an average incremental yield of 9%. Importantly, we also delivered $62 million of projects from that pipeline during the quarter at an 11% incremental return ahead of schedule and under budget creating over $40 million of incremental value without adjusting cap rate.
I'm very proud of how the team is delivering value now. Again, we expect further growth at these assets that have been repositioned as we capitalize on the small shop lease up not included in our original return. Our shadow pipeline highlighted in the supplement also continues to grow as we make steady progress towards our target of $150 million to $200 million of annual spend in delivery which we expect to reach at the end of this year. As we discussed at our Investor Day, each of these new projects, such as the Beneva Village in Sarasota, Braes Heights in Houston, or Mamaroneck Center in Westchester moves us towards our purpose of being the center of the communities we serve.
The third element of our planned operations closely aligns with leasing and reinvestment in driving the company forward. The implementation of property standards and scorecards has substantially increased the appearance of our centers and as we've highlighted at Investor Day built significant goodwill with our tenants and our new tenant coordination function has paid dividends in terms of reducing average downtime between lease and occupancy in average of over 15 days.
Finally, we have great success rolling out LED lighting programs at our assets with over $6 million invested this year and returns on cost in the low teens. I'm very pleased with the return driven tenant centric execution of our ops team and look forward to continued growth in this area.
The fourth element of our planned capital recycling is driven by three key tenets. The first is that prudent harvesting is key to delivering sustainable growth. The second is the clustering investments in vibrant retails nodes drive long-term ABR outperformance and the third is the volatility in the public markets can support programmatic recapture NAV discounts on a leverage neutral basis.
With respect to the first tenet we continue to find strong liquidity for assets that don’t fit with our long-term plan, disposing of 15 assets in the quarter for proceeds of $106 million which included three dark or seemed to be dark Kmart boxes. Our average cap rates for in place income at the operating centers were 7.8%. Please note that these assets were in the bottom or the bottom quartile of our portfolio in terms of growth, demography, and importantly, ROI potential. We exited single asset markets like Glasgow Kentucky, Tuscaloosa Alabama, Shelby Michigan, Austin Minnesota, and Newport News Virginia. And our current disposition pipeline remains strong and on track.
As discussed at our Investor Day, we also completed the acquisition of three grocery centers in San Clemente California, Venice Florida, and Upland California, building our critical mass in those attractive submarkets with assets with below-market rents and importantly strong growth potential. Also in coincident with our Investor Day we launched a $400 million share repurchase program. Because of the limited market window in December we only completed $6 million of repurchases, but current valuations and our successful harvest of NAV through asset sales expected to significantly ramp that activity in coming quarters.
The fifth and final element of our balanced business plan focuses on ensuring that we have a strong flexible balance sheet with ample liquidity and flexibility. Because our business plan is funded through internally generated cash flows and opportunistic asset sales, our focus from a balance sheet perspective is on continuing to extend our weighted average debt center and opportunistically accessing the unsecured markets as we also drive EBITDA growth.
We continue to reduce the weighted average cost of leverage and have maximum flexibility to drive value at the asset level. We have reduced debt-to-EBITDA to 6.8 times, have a weighted-average debt tender of over five years now and have nothing drawn on our $1.2 billion revolving credit facility. That is a striking transformation from where this team has started and I expect our balance sheet to continue to strengthen as we execute our plan.
In summary, as our results underscore, we are delivering now on each facet of our plan, capitalizing on the current disruption in this environment to drive our company towards our purpose of being the centers of the communities we serve and importantly delivering sustainable growth and cash flow per share. Angela, who will provide more detail on our historical results will also provide some context in our forward outlook for this year and next on how our plan is delivering.
Angela?
Thanks and good morning. I'd like to provide a deeper dive into the strong fourth quarter and 2017 performance that Jim highlighted in his remarks before touching on our firmed outlook for 2018. FFO was $0.52 per share in the fourth quarter or $2.09 per share for the full year. Excluding noncash cap rental adjustments and lease termination fees, FFO per share growth was 3% during 2017 reflecting strong same property NOI growth offset by net disposition activity.
Same property NOI growth was 3.6% for the quarter or 2.6% for the full-year which was slightly above the midpoint of our original guidance range despite additional drag in 2017 from retailer bankruptcies and the expansion of our redevelopment program. In the fourth quarter of 2017 our top line re-accelerated as anticipated, but we also experienced meaningful contributions from that debt and net recoveries in addition to smaller contributions from ancillary and other income and percentage rents as the enhancements we have made to our platform over the last two years continue to drive tangible results across all line items.
We have affirmed the 2018 same property NOI and FFO guidance we've provided at our investor day in December. During the first half of 2018 occupancy and as a result base rent and net recovery will be impacted by a number of proactive terminations or downsizes which occurred as expected at year-end 2017 and throughout the first quarter of 2018 including Sears, Kmart terminations at Northgate Shopping Center in DeLand Florida, and [indiscernible] in Los Angeles, an Office Depot downsize at Hunter's Creek Plaza in Orlando, an a Dark Anchor [ph] termination at Ventura Downs in Kissimmee Florida. All of these centers are now active Anchor repositioning or redevelopment projects as leases have already been executed with vibrant new users including specialty grocery and fitness.
We have strong visibility on rent commencements across our value enhancing reinvestment pipeline with approximately $10 million of annualized base rents from executed anchor leases at these projects coming online in 2018 weighted to the second half of the year. As a result, our same property NOI growth in the first half of the year is expected to be below our full-year guidance range 1% to 1.5% with re-acceleration in the back half of the year.
As discussed at Investor Day, our guidance incorporates our assumptions for bankruptcy activity which is expected to detract approximately 50 basis points of base rent or 70 basis point of NOIs during 2018. As it relates specifically to the impact of Toys "R" Us, we had 12 locations at December 31, with one location disposed of subsequent to quarter end. Our 11 remaining locations have an in place rent per square foot of only $9.40 which we believe is well below-market.
We expect based on the current status of negotiations to experience approximately 2.5 million dollars of NOI detraction in 2018 as a result of rent adjustments at six locations and a lease rejection at Arborland Center in Ann Arbor Michigan which we acquired in early 2017. In each of the six locations with rent adjustments we've also shortened the remaining lease term and removed future options preserving near-term cash flow while also ensuring that we will control the space over the next one to two years.
In the case of Arborland, I would note that the embedded upside we saw in the Toys "R" Us space with a key component of the long-term growth opportunity we saw on the acquisitions and the rejection of the place accelerates our ability to drive meaningful value creation at this asset. As Jim highlighted, the strength of the balance sheet remains a key priority for us and we are entering 2018 with substantial liquidity and financial flexibility. Our $1.25 billion revolving credit facility is undrawn and we have only $185 million of debt maturities over the next 12 months. We will continue to utilize our significant free cash flow and proceeds from disposition activity to further solidify the balance sheet and value accretive reinvestment projects across the portfolio, repurchase our stock and selectively pursue strategic acquisition opportunity.
And with that, I'll turn the call over to the operator for Q&A.
[Operator Instructions] The first question comes from Jeff Donnelly of Wells Fargo. Please go ahead.
Good morning, folks. Jim, just a question on capital allocation. You laid out at your Analyst Day the argument for monetizing noncore assets to fund redevelopment, your initiative I think you said that should concentrate your portfolio, accelerate growth, you know and reduce risk. The shares are down 20% since then in trade, I think north of a 9 cap rate. Just how do you feel about temporarily at least shelving incremental expenditures on redevelopment and favor more aggressively repurchasing shares at these levels?
Well, you know, Jeff you are right, it's a much more opportunistic level for us to repurchase and we never lose sight that our fundamental product at the end of the day is growing cash flows per share. So with the redevelopment pipeline that tends to be a bit longer lead time and we're still earning very attractive incremental returns that also drives future growth of those assets. And you see it in the projects that we delivered, for example we delivered $60 million this quarter and allowing, creating we think over $40 million of value.
But you also see it in the tremendous leasing productivity that's setting up those redevelopments going forward. So it's difficult to turn the acquisitions ticket on and off at a moment's notice based on where the share price is. With that said, certainly where the share price is today we think is opportunistic and we announced the share repurchase plan at levels much higher than where we are today and expect to see us shift our emphasis towards share repurchases on a relative basis.
As we think about redevelopment certainly as we think about acquisitions, we think one of the best acquisitions today is our stock and so do expect us to ramp it. We're not going to be market timers Jeff and by that I mean while certainly the levels indicate a clear buy from our perspective, we're going to be prudent and responsible in terms of how we fund it sort of like a reverse ATM if you want.
Understood, and just one followup, just a more general comment, the valuations we see in the stock market are implying open air centers in all their forums are having some of a B mall moment if you will, you know is questioning sustainability of income and maybe asset values. Can you talk about where in the property markets you're seeing resilience in rents and pricing and maybe contrast that with the types of assets or markets where you feel there is reason to be concerned? I think people are trying to figure out where assets are placed on that spectrum and get comfort.
You know, we – as Mark highlighted and I'll get him to comment in a minute, we continue to see great liquidity and strong valuations for assets that we do not want to hold and I really want to make that point very clearly that we're achieving these cap rates on assets that are in markets that are secondary in many cases tertiary that are consistent with our long-term plan. And you know I think our execution both what we did in the quarter and what we've done year-to-date really underscores that. We're not talking about this hypothetically Jeff. We're talking about what we're actually closing in the markets on an ongoing basis.
As we alluded to at the Investor Day, we have seen weakness from an asset pricing standpoint for larger assets. In fact, you know the transaction volumes for assets above $50 million as we highlighted at the Investor Day continued to decline somewhat, but for smaller assets such as the ones that we're selling which typically are $10 million, $15 million to $20 million and importantly are also more grocery community anchored type centers with the mix of box and small shop we're seeing great demand. Mark?
Sure, yes Jeff, I mean it's a good question, but I would say over the last couple of months we've closed the sale of about 20 assets so we're continuing to see a very active and liquid market for our assets. I think as you know, I spent a fair amount of time in my previous role in the B-Mall end and that's really different this level of liquidity is quite different and what you saw happen over in and would be more wind and less really different this was level liquidity is quite difficult you saw happening over in B-Mall land.
Jim I think highlighted a lot of what we're seeing in the market, is that really small deal size, really matters when we have smaller deals we see larger equity checks, I'm sorry, larger bid less because of the smaller equity checks. We continue to see a vibrant debt market and frankly when you see these smaller deals are just easy to underwrite so those bid less are just frankly larger than you see for really those much larger deals that are out there today or I think you have seen some cap rate movement due to liquidity.
One of the things that was really interesting about the market currently as I look back to the meeting is I had back at the New York ICSC, the vast majority of the meeting were of new capital seeking to buy retail assets with a focus really on smaller stable power centers. Given the apparent spread between grocers and anchors and power center cap rates, so we're really feeling some capital formation in the open air retail space which again I think is really different than what we saw in the B-Mall space over the last couple of years.
Once of the reasons I think you're seeing capital formation in the power center space and open air retails is because in particular for power centers it looks like cap rates have stabilized in the 7 to 8 range or lower depending on quality. So it looks like buyers are not as concerned today about cap rate movement. From our perspective, what we're seeing as translate into larger bid less for power centers. For example, we sold a power center outside of the [indiscernible] Hall Road we had over 10 terrible offers and we had multiple bidders pushing price there.
As Jim mentioned, obviously this portfolio is primarily grocery anchored and on that side of the equation we continue to see strong demand across markets. It's really clear when you own a strong grocer in both large and small markets you get great pricing for those assets. And that's not really just a few cluster markets, it's really across markets when you own that strong grocery you can get pricing and gets down into the 5s like we achieved in this past quarter.
Thanks guys.
You bet, Jeff.
Your next question comes from Ki Bin Kim of SunTrust. Please go ahead.
Good morning.
Good morning.
Good morning. So that 7.8% cap rate on asset sales, was that on a stabilized basis or just in place, they noticed a lot of them were not full occupancy?
Not it's all in place Ki Bin but excluded from that were the dark and seemed to be dark Kmart boxes which obviously would have skewed it.
And I know it's only been two months since you guys provided 2018 guidance, but any incremental thoughts on how things are shaping up and maybe you could put that into context for the at risk retailers like [indiscernible] Toys“R”Us and the Mattress Firm's new portfolio and maybe tying that into that 50 basis points rent track you expect from BKs [ph] because I mean Toys“R”Us itself is 50 basis points right? And so maybe you could just kind of wrap it all around for us?
Yes, but remember that that 50 basis points though is timing adjusted for the full year and what we're saying today is in line with what we expected in terms of retailer weakness and bankruptcies have been no surprises. And importantly, the spaces that we're addressing here we believe are all substantially below-market. Our average in place rent is Angela highlighted for toys boxes is in the low $9 range which gives us a lot of optionality in terms of what we do with that space when we get it back.
And you know, more generally, we're seeing retailers very, very focused on occupancy cost, which gives us a competitive advantage as we compete to backfill some of that space. You know, Angela?
Yes, no I would echo everything that Jim said, I think things are evolving and continue to evolve generally in line with the expectations we laid out in December. I don’t think anything to date has surprised us. So obviously we continue to actively monitor the environment. I would note on toys, you know it's not quite 50 basis points, it's really for the same-store pool and dark there, it's going to be just a little bit over 20 basis points on the bottom line in terms of NOI.
The number I quoted in my prepared remarks was NOI and included Arbor land which Oracle the impact there can be just a little bit over 20 basis points on the bottom line in terms of an ally on the number I quoted in my prepared remarks and align included Arborland which won't be part of the same-store pool going forward to be impactful a little bit smaller than the number you are referring to.
And I'd say just in terms of tone Ki Bin, We saw a lot of great momentum going into the end of the year and frankly that's continuing as we operate this year. So we're cautiously optimistic in terms of where we end up for the year and believe that we've given guidance that appropriately reflects the current environment.
So for retailers that haven’t announced closures in your portfolio, precisely like a [indiscernible] or Mattress Firm, like how do those retailers figure into your guidance? Do you just conservatively reserve for it and is that part of that 50 for that year?
Well, we take a look at the composite of the portfolio and our launch list in particular and stress test what we think different outcomes might be for the year and that's reflected in our guidance. And as it relates to [indiscernible] you mentioned we had a great relationship with them and that's really important because it gives the visibility in terms of what that retailers likely plans are for a particular location and allows us to get ahead of it where it's likely to come back.
And then you know back door which is what we're doing and what we're outperforming and I think Brian and team have done a great job as demonstrated in our productivity utilized this environment where you're getting space back to not only capture better rent with better tenants but in the process of doing that we're improving the centers in which those tenants operated. So you're seeing this environment be wanting which we're taking our assets and upgrading them, whether it's the simple anchor repo or a redevelopment, or just a simple lease.
Yes and Ki Bin I would just add particularly on the matches from spaces these are some of the most high profile locations that we have in the portfolio and caps, outparcels. So the demand for those locations if and when we do get them back at expiration has actually been pretty strong.
Okay thank you.
You bet.
Your next question is from Christine McElroy of Citigroup. Please go ahead.
Hey, good morning, guys. Just sort of following along on the tenant scene, but more specifically just following the four Kmart stores that closed in Q4, I know you've had multiple ongoing discussions with Sears about recapturing boxes over time. Can you just address sort of your remaining exposure there and provide an update on how you're thinking about the rest of the opportunities with regard to that retailer sort of continue gradual wind down?
Christine, hey. This is Brian. I think it's a great opportunity for us to point out what've done with Sears to date. I mean, Jim mentioned in opening remark since IPO we've taken our locations from 29 to 13, midpoint from number 7 in our tenant list and at number 23. We've reduced our ABR exposure by $6.3 million and more importantly the projects that we've done with Sears to date have generated incremental $8 million in ABR. So, I think the team has done a great job and Sears has been a tremendous partner of ours.
So, as we look out to our remaining exposure we’re in discussions with them on a number of locations. We are looking out at what our redevelopment pipeline looks like from a timing and execution standpoint and we feel really good about the demand for those boxes as well as our ability to execute on them. So, overall they continue to be a good partner and we continue to be in discussions with them going forward.
Yes, and Christine, you know that’s tremendous progress by the team particularly over the last 12 months. And if you look also where we don’t think as we did this quarter on three boxes that we have much of an opportunity to get great incremental returns, but I think we have great opportunity mostly in the balance that we retain.
Okay, thanks for that, and then just following up on just question on transactions, just you know to get a sense for the more immediate pipeline, can you tell us what might be under contract today for further dispositions and acquisitions and also did you say what the average cap rate was on the dispositions that you have completed year-to-date?
No, we haven’t given that yet, but it’s in line with what we saw at the end of last year and we are only giving guidance on transactions that we have actually closed which year-to-date are about $85 million.
So, no sense for what might be under contract today?
Well, I'll tell you that the pipeline Christy remained strong and we’re taking up lot of additional assets for sale as we talked about at the Investor Day and I believe we are executing very well towards our plan.
Okay, thanks a lot, just trying to get a sense for timing. Thanks.
You bet.
The next question comes from Samir Khanal of Evercore ISI. Please go ahead.
Hi, good morning. Angela, you know, I guess looking at expenses they were flat in the quarter but recoveries were up by 200 basis points, can you provide some color around that?
Sure Samir. Thanks for the question. We during the quarter did benefit from some real estate tax refunds and appeal wins that definitely benefited the quarter from our recovery ratio perspective.
Is that kind of complete or should we expect any more of that showed up to happen further roll on in the quarters here?
We always aggressively appeal on the real state tax science and trying to make sure we are managing that expense effectively. I think you know as they move forward into next year we are working on that and are hopeful that we had some upside from additional refunds or __ wins that certainly not something that’s fully embedded in guidance. So, you know we will just recognize those as they are achieved over the course of the next year.
Got it, and then I guess the second question from me is, I know there was that $28 million of insurance settlement it seemed now, I am just trying to understand, I mean should we anticipate any further expenses or trying to figure out at this point whether they are put any further liabilities in our NAV in regards to that?
No, I don’t think at this point there is any need to clear additional liabilities based on what we see in that particular case and settlement.
Okay, great, thank you.
The next question is from Todd Thomas of KeyBanc Capital Markets. Please go ahead.
Hi, thanks good morning. Question may be for Mark, just within the context of the demand for assets that you discussed in the bio pool what’s the latest read on CMBS financing and the availability of capital for the buyers that you are working with, are there any changes at all or the lending spreads or LTVs at all in the lender underwritings at all?
Well certainly we are focused on interest rate movement, but as we've looked at pricing assets and bidding, no we haven’t seen foresee the re-trade us on debt availability or debt pricing, so I think that’s a good sign. And we continue to see robust demand outside the CMBS from local banks and other bank relationships. We have closed with CMBS recently so we continue to see bid better using that product to finance our assets, but haven’t seen any dramatic change yet in the market for debt.
Okay, and then just moving over to leasing a little bit, I think last quarter, you touched on delays that you were seeing in some rent commencements, can you just provide an update there? And may be Angela, I'm just curious if you can quantify how much annualized rent commenced in the fourth quarter and how much of that rent was actually recognized in the quarter that hit the P&L?
Let me address the first part of that point, I think what we were talking about with rent commencements is that tenants are signing deals further and further out, so that downtime costs between the signed lease and the ultimate tenants paying rent is growing, but importantly we're getting those deals signed and it gives us a lot of forward visibility as Angela alluded to in terms of what’s happening later this year and what’s happening in 2019. Angela referred to the $10 million of ramp that we see associated just with leases signed related to the redevelopments.
So, from that standpoint it's giving us better visibility further out as retailers as I alluded to in my remarks are planning stores further and further out. And I think that gives us an interesting basis from which to compete. In terms of what the ramp was in the fourth quarter we can get back to you after the call to get more specific on that, but again, these aren’t delays and rent commencements associated with execution or tenants pushing days out. This is really more about tenants planning further and further out their new store openings.
Okay, got it, all right, thank you.
You bet.
The next question is from Craig Smith of Bank of America. Please go ahead.
Hi, Craig?
Hey, thank you. I was wondering do you had a sense of a target for this small shop leasing by the year-end 2018?
We haven’t given any guidance on occupancy targets, but we are seeing good positive momentum there. And importantly, we are seeing great momentum in the projects anchor reposition and redevelopment projects that we've delivered in line with what we've shown historically in our material increases that are several hundred basis points within a couple of years of delivery.
So, I do expect that metric to continue to improve this year and importantly improve in the right way. And by that Craig, I mean not simply leasing space to drive occupancy, but leasing to better tenants that we think will drive better sales productivity at the centers and make those centers better, make them the center of the community they serve. So, that’s really our focus. So, while we're not giving specific small shop guidance on year, we do expect that to continue to ramp if you will as we were delivering these repose and redevelopments.
Okay, and it looks like the renewals in the space under 10,000 have been running around 11%, can you maintain that in 2018?
Craig, absolutely. We feel like we are in a good position particularly to Jim’s point as we bring in more quality operators. Jim went through the names of the tenants that were adding to the portfolio, we feel like we are in good position to recognize that value and drive us further.
Okay, thank you.
You bet.
The next question is from Michael Miller of JP Morgan. Please go ahead.
Yes, hi.
Hey Mike.
Hello, I apologize as I missed this but Angela term loan that’s coming due in July, I think it is over $200 million, can you talk about the plans to refinance that or what’s going on there?
Sure, it’s about $185 million remaining. We do have a little bit of amortization scheduled over the course of the year in our other secured debt of maturing and for further out, so, about $200 million on total debt maturity is, $185 million on that term loan. You know, I would say, it’s going to be a combination of probably some debt pay downs from asset sales as well as we were obviously watching the capital markets and if there is an opportunistic window to execute we would certainly do that, but I would also remind you that you know we are completely under drawn on our revolving credit facility which is $1.25 billion, so we certainly have multiple ways to address that term loan maturity when it comes due later this year.
Got it, okay, that was it. Thank you.
The next question comes from Brian [indiscernible] of RBC Capital Markets. Please go ahead.
Hi, with regards to the bad debt, can you talk about how the tenants categories have been reserved for have performed relative to expectations?
Sure, yes, I think from a bad debt perspective obviously our run rate during the course of ’17 has been lower than what has been on a historical basis. If you looked at total bad debt as a percentage of total revenues we ran about 40 basis points during 2017 versus a longer term historical run rate including 2016 that was between 75 basis points and call it 100 basis points.
The lower number the share really reflects recoveries, we've had and I have talked about on previous calls over the course of the year. As it relates to announced had been previously reserved for our written-off and so as we’ve monitored the retailer environment and the health of tenants specifically within our portfolio and the aging of receivables as we first are far announced we've aggressively pursued collections and have had wins on that front over the course of the year.
We did say and I think it's important to note at the Investor Day that we do expect a reverse into sort of the historical level as we move into 2018, so we don't expect that 40 basis points to be the number you should expect from a bad debt perspective going forward, but that 2018 should look more like 2016 or 2015 debt in terms of the overall level and I'll call it 75 to 100 basis points which wouldn't necessarily denote any deterioration in the environment. I think it's important to remember, but really would just reflect fewer sort of one time recoveries of specific items that had been reserved for in the past.
Sure, so there within that any certain time tenants or categories you seem kind of outperform or yes perform better than expectations.
I don't know that there are any themes to draw from a tenant category perspective, our processes specific identification really looking at every receivable balance for every specific retailer across the portfolio and so certainly while we've had some wins relative to previously reserved amounts I don't think there are many conclusions to draw from a category perspective.
Okay, thank you.
The next question comes from Vince Tibone of Green Street Advisors. Please go ahead.
Hi, good morning. I just actually put out a little bit more color on the Toys“R”Us lease modifications you mentioned for the stores that were not closing any more color there would be appreciated?
Sure, this is Brian. As Angela mentioned in her remarks, we did provide some short term rent relief on a number of locations basically to get control of these assets as a trade for that we're able to reduce the term, remove any options, any co-tendencies, so that at Angela’s point earlier we maintain cash flow while we market these spaces and the demand so far has been tremendous.
Jim mentioned the upside that we have, those fuels are roughly at 950 we're signing anchor leases a close to $13 a foot and we're very excited particularly about the Orlando land opportunity that we saw when we purchased the asset. So we made these deals to make sure that we could get control of these boxes and we can execute on them in quick order and so that's really the plan going forward on those plus keeping cash flow in place.
Right, were there any modifications on the boxes, the Toys“R”Us boxes are going to stay in the portfolio. That've accepted those leases, are there any modifications to those leases or just the ones that are going to be re-tenanted in the near term?
Yes, I think that if we really just looked at the entire portfolio and again our goal was to Jim’s point, maintain cash flow and get controlled as many of these boxes as we could. In the short term while we were able to market these spaces and put leases in place, so I don't think we it wasn't as much of a pick and choose, as much as it was let's make sure we control as much of this as we can.
Yes, may be that sort of frame at differently. There were no rent reductions for leases that we think are going to assume for the full term and any time or any sample where we gave our rent adjustment. We did shorten the term to either at some point in early ’19 or early 2020.
Okay, that’s helpful. Thank you.
You bet.
And then one just another quick one, have you seen or notice any changes in tenant behavior or appetite for space post the passage of the tax bill any direct impact there you've seeing on ’18?
Not yet, we were at the ICR conference last month and it was striking to me, the difference and tone in retailers that we also saw at New York ICSC in December and just in terms of leaning now into new store openings recognizing what their competitive presence is like today and more of an integrated environment and being willing to commit to the larger term growth and I think a lot of that was really more driven by an appreciation for how to compete in this environment versus the tax changes.
I do think that we heard several retailers talk about the tax benefit as an opportunity to put additional capital into their stores which certainly is a net benefit to us as I expect to get increased sales. But we did not see a lot of people saying that they were going to change their store opening plans based on the tax law changes. It was really more investing in their stores, investing in their human capital and really finding the way to compete in this environment which 12 years ago there was maybe or excuse me 12 months ago there was maybe a bit more concern than what we’re seeing today.
Great, thanks. That’s all I have.
You bet.
The next question comes from Jeremy Metz of BMO Capital Markets. Please go ahead.
Hey guys, going back to the watch list, I was wondering if you can give us an update on Southeastern Grocers, I know it’s not a huge piece of the portfolio but wondering just what kind of proactive discussions you’re maybe having with them given some of the issues they seem to be going through and larger business review that one of your peers highlighted that they seem to be doing right now?
We have had active discussions with them and we are in a pretty good position relative to the productivity of our locations and where we had a few locations that aren’t as productive, we also have guarantees that we think will survive which gives us time to look at those weaker locations and assess what we want to do long-term with them.
So not really a big issue for us but certainly one that we’ve been all over in terms of ongoing dialog with them and making sure that we understand what their forward-plans are with respect to the locations, I can’t really comment location by location but I will tell you that I feel like we’re in pretty good shape.
Okay. So none of that necessary in sort of your 2018 outlook for some of the closings or spaces you expected to get back is that fair?
That’s fair. I mean we do have room in our guidance for some unexpected but again I think what is happening with Southeastern grocers at least where we see it today is fully encompassed in our guidance.
All right, appreciate that. And then in terms of the anchored space rolling here in the next year or two, how many of those are net leases at this point with no remaining options? And then I guess, more broadly, you mentioned doing some shorter term deals with Toys, just absent those are you seeing any increase in tenants looking for shorter renewals on the larger box size?
We’ve held firm on our weighted average tenant, I mean just look at our leasing results you see that we kept our weighted average tenant at 9.2 years, so we drove those that rollover growth which our new leases is 42% and they mixed at pretty balance mix of both anchors and small shops that we did that on and we have held firm both on capital and lease terms.
You can look at our lease expiration schedule within the supplement and that shows you by year what deals we have expiring with and without options. What I would just emphasize to you as we've talked about before we’re trying to get after a lot more than what naturally expires. So the opportunity to capture those toys are boxes we see is a real positive to shorten those lease terms and get after the value inherent with them as we’ve referred to and I'll go beyond thrilled particularly because of where that box sits in the center and how it opens up a lot more redevelopment than we included in our original underwriting.
So you should expect us to continue to get after leases ahead of term proactively so that we can continue upgrading the portfolio, upgrading the tenancy and driving good solid cash flow growth.
Thanks James.
You bet.
The next question is from Nick Yulico of UBS. Please go ahead.
Hey good morning, this is [indiscernible] on for Nick. Regarding the new lease spreads, so regarding the new lease spreads it sounds like they are primarily driven by replacing bankrupt tenants with I believe you said 70% spreads, so should we expect to come down from the 30% level on 2017 if bankruptcies slow?
Look I think the teams done a great job again of recognizing the value in this portfolio and if you look over the years it has been pretty consistent in terms of spreads in the mid 30% range for new leases. So as we look forward, we feel very confident of our ability to bring deals to leases to market.
Now obviously the pool changes on a quarter-by-quarter basis but long-term we're very happy with kind of where our opportunity is and the quality of tenants and our ability to drive rents with those deals. So we feel pretty good about it going forward.
Okay.
Yes and importantly as we think about tenants again I just really want to underscore this point that was in my remarks, we really are looking to make sure that and backfilling that space, we're not simply backfilling the space and making not spreads. We'll take less spreads is to take tenants that we think will drive the long-term growth and relevance of the overall center.
And exceeding our repo pipeline, exceeding our redevelopment pipeline and in a self-funded way and this is really important, with our free cash flows, we’re able to put our capital back to work in our portfolio at these very attractive incremental returns. So that sort of underscores why in this environment, we have a unique ability to grow, right we're not sitting on inflated ABR that is not replaceable today.
But we instead have the chance to not just capitalize on the mark-to-market on a static basis but to do it in a way that drives long-term growth of the underlying center as well.
Right, thanks Jim. And so if you putting that capital we're clear there's a strong focus on the proactive redevelopment and growing that pipeline to the $400 million level but I'm curious about reactive redevelopment and the necessary funding there how that fits into the plans with the Toys and the Steers closer especially with the bankruptcy risk there, is there a built in expectation on these troubled anchors entering the pipeline or would you shelve other potential plans to work through those vacancies?
We want to make great returns on the capital we’re putting to work and I think as we've demonstrated with two or three of the Kmart boxes where we didn't see an opportunity to drive great incremental returns, we sold it. Why? our hold IRR was below our cost of capital. So how we get the states back is less important than what it is we're doing with the states and how we're making those incremental investment decisions to drive long-term value.
And as I was just alluding to with Jeremy, the increased pace of the space recapture is coming right into our sweet spot if you will in terms of how we're going to drive long-term growth, I don't see it ramping up our overall expected level of redevelopment activity which by the end of the year, I think we're going to be at $150 million to $200 million of annual spend in delivery, but it certainly does provide more coal for the furnace on a longer term basis that I'm excited about getting after.
Okay, thank you very much.
You bet.
The next question is from Alexander Goldfarb of Sandler O'Neill. Please go ahead.
Hey it’s Dan Santos on for Alex. Two questions from me, hey the first one is just if you guys could talk about general morale despite the positive results you guys have been posting, the stock is down over 40% over the last 52 weeks, how would you say the overall morale of the team and how are you keeping the team motivated despite the fact that the market doesn't seem to be giving you guys much credit?
Well, I keep telling the team that morale will improve or beatings will continue. No, I mean the truth is that we're executing on the plan and the team is seeing the results of that in terms of the improvements we're driving at the centers and what we're delivering in terms of value and I think if anything the team believes the shares are incredibly cheap and we get awarded shares on an annual basis, we're buyers.
So in that instance, we look at it from a long-term standpoint say this is a pretty good value. So the morale has been I think remarkably strong. It is something that in all seriousness and kidding aside you do worry about in a company, but what I've seen and our ability importantly to continue to attract new talent remains unparalleled. So I feel like we're in a good spot right now.
Okay, that's helpful and then just one quick follow-up on stock buybacks, how much of the gain from asset sales can you shelter via your common dividend to deploy first stock buyback?
Yes, it’s a good question. In terms of the game, we have plan and we talked about over the last year or, so we've been paying out effectively before tax gains or losses on asset sales basically the statutory minimum. This year we did have a small return of capital component of part of the dividend because we ended up in a not lost decision just based on the pool of transactions that closed during 2017.
Going forward, there probably will be a small amount that of gains that could be absorbed within the current dividends amount. But remember I think as you look across the portfolio, certainly as we execute we're going to have some losses, we're going to have some gains. We may be able to 1031 some of the gains, and look to manage the overall tax profile that way, but we are paying out pretty close to the such trying minimum before gains or losses.
Yes, the gains issued for us given the timing of our IPO in 2013 is simply less acute and if you look at the gains and losses on a book basis that we've recognized as we've gone through those programs, you can see that they've been slightly in balance which is not far off from where you see the tax basis at these assets. So will continue to obviously monitor that closely but we I think have more flexibility than do others given the basis from a tax perspective in our assets.
Perfect, thank you.
The next question is from Karin Ford of MUFG Securities. Please go ahead.
Thanks good morning. Just going back to your capital allocation priorities, you said you're putting more emphasis on the buybacks, but with the decline in stock price or acquisitions still in the plan at all this year and I know you've given us kind of a wide range of disposition volumes to think about, are you increasing the volumes you're taking up for sale, given the move in the stock?
We're on track with what we originally planned and from a volume standpoint and you're right it's really difficult in this environment to make a sense of that acquisition given where our stockiest price. So our bias is going to be towards reinvesting in our stock that doesn't mean that we won't make any acquisitions during the year.
We may have some 1031 is or there may be smaller strategic acquisitions that we make such as the adjunct center at San Clemente where the hold IRRs it's pretty darn attractive on a standalone basis and it makes sense but our clear priority as we think about use of proceeds is obviously liquidity, balance sheet but as we think about acquisitions versus our stock it's pretty hard to make sense of an acquisition today.
We've always been disciplined about acquisitions however and I just really want to emphasize that point. We looked at over 300 acquisition opportunities last year in close I'm very confused, so we're very focused on that making sure, we're making that capital allocation decision appropriately in with our stock where it is it in some instances makes our capital allocation decision that much easier.
Thanks for that. My second question I know it's only been two months since the Investor Day but have the retailer trends or the leasing activity in the last few months had any impact on the 3% to 4% same-store NOI growth estimate you put out for 2019?
No, I mean as I alluded to going into the year and then through today we're seeing great momentum and good success with leasing and all elements of our plan.
Thanks very much you.
You bet.
The next question is from Haendel St. Juste of Mizuho. Please go ahead.
Hey, good morning. A couple quick ones here if you would, you guys outlined the disposition cap rates for what you sold year-to-date in 4Q, I was curious if you could share what the cap rates were for the acquisitions in 4Q, the stabilized cap rates and IRR expectations and maybe the occupancy if you have that as well? Thanks.
Well, the IRR expectations were in the high 8 range on those assets. I think the average going in yield was around at 6. And if you remember as we highlighted at the Investor Day, these are assets that are adjacent to next to some of our existing assets and so what we don't include in our underwriting, but what we've actually experienced in acquisitions like San Clemente and Arbor is outperformance relative to what we originally underwrite and so for example in the instance of San Clemente or excuse me, Escondido California we're seeing rents that are 10% to 15% better than what we underwrote.
Similarly we're outperforming in Ann Arbor and based on the early reads that we're seeing from these three assets just deals that we've had in leasing committee in the last couple of weeks we're seeing rents better than what we've unwritten. So we're pleased with how those assets are performing relative to what we underwrote, but also appreciate and all that we made a decision around the acquisition of those assets several months ago and then as we think about sort of the incremental capital allocation decisions today. We're in a different spot, in terms of where our stock is trading.
Certainly, certainly. And then maybe some color if you would maintenance CapEx during 4Q jumped up a bit curious and that's tied to the pickup in asset fields for fourth quarter, how should we think about that line item for ’18 and maybe beyond as you step up some sales here?
Yes, it wasn't really related to disposition activity. It did, you're right accelerate in the fourth quarter, but we ended the year exactly where I think we've guided in the past which is right around $40 million and I think that's effectively the level you should expect in 2018 and going forward.
Yes, it’s really Haendel timing. A lot of those projects got done and completed and were accrued for in the fourth quarter.
Got it, got it. Thank you.
The next question comes from Linda Tsai of Barclays. Please go ahead.
Hi, when you look at your increased piece of dispositions since May 16 in three or four years do you expect the overall size of your portfolio to change or will the comp position just be different?
We did talk about this at the Investor Day in terms of and I refer you back to those slides as we highlighted, but we do expect the portfolio to be more in line with about a 400 assets probably similar AVR and NOI because I think what you'll see us continue to do as we've already done is sell some of these smaller assets, particularly assets in markets that we don't have growth plans in and recycle that capital over time either into our shares or into larger assets as we've demonstrated.
So, I think from a size perspective that's kind of what you can expect to see in three to four years. But one other point I want to make is that we're not getting to a particular point and I don't think this is fully appreciated. We see balanced capital recycling as part of any good long term capital allocation plan. The decision to hold an asset is an investment decision. Part of the strength of this company is that it is a very granular portfolio.
So we can be much more objective as to that hold and sell decision with respect to individual assets because we're not trying to move big supertankers in and out of the harbor and that flexibility I think is part of the strength of the company in terms of achieving our long term goal which is outperformance in cash flow per share. So that's kind of how we think about it.
I'm really pleased with the progress that we've made in the last 12 months executing at the cap rates that we've executed in the markets that we've exited and we've done it one at a time, trust me it's hard execution but we believe that in doing, so we're capturing another 10% to 20% of value versus trying to do it on a portfolio basis.
Thanks for that and then for the retailers coming from the Mall seeking space of your centers though, where the average occupancy cost ratios they're paying at the mall and how much lower is it by being in your centers and has the Delta changed at all over the past couple years given the changes we've seen across the industry?
The occupancy cost was in an open air center, it's typically five to six bucks a foot. When you're in a mall it can be in the 20s, you know just depending on the mall. So our occupancy costs are a quarter to a third of what you would pay in a mall. But when you're in a mall it can be in that twice, just depending on the Mall, so our occupancy costs are a quarter two a third of what you would pay in a mall and that's basically held pretty true.
Thank you.
You bet.
The next question is a follow up from Karin Ford of MUFG Securities. Please go ahead.
Hi thanks. Just a couple of quick ones. First on the disclosure side, the last page of the supplement usually provides some additional guidance items, I didn't see it this quarter, are you going to be providing that going forward?
No, we did move the guidance components that we just disclosed to page three of the supplemental on the results overview, so FFO and same property NOI. We did move the signs and not commenced analysis that have been on that guidance page as well to the net effective rent page, but the components of guidance that we provided at Investor Day namely FFO and same property are what we expect to provide on a go forward basis.
Okay and sorry if I missed this, did you mention what caused the $13 million impairment in the quarter?
Yes, it was really, I mean if you look at it just the pool of dispositions that closed during the quarter primarily there was nothing, there were no big outliers in that number. I would also note though that against that backdrop of $12.7 million and impairment we did recognize during the quarter of $13.9 million of gains moving the other direction. To Jim's earlier point portfolio from a book basis was all mark-to-market at the same point in time and you're likely to see some impairments and some small gains just both sides of the equation as we move forward.
Got it. 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 for joining us today. We’ll see many of you over the next few weeks.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.