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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings and welcome to the Brixmor Property Group Fourth Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formation presentation. [Operator instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Stacy Slater, you may begin.
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’ll 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.
Thanks, Stacey. Good morning and thank you for joining our 2018 fourth quarter conference call. I'm really pleased to report on how our teams' accomplishments in 2018 were consistent with and even better than the plan we set forth at our Investor Day in December of 17th. Through record setting, anchor leasing and compelling spreads, a value accretive reinvestment pipeline that's a delivering now, growing small shop leasing, our opportunity capital recycling as a bottom quartile of our portfolio and to strengthen balances, we've set the table for accelerating NOI growth of 3% or better in 2019 and beyond.
In a few minutes, Angela will provide some additional color on the fourth quarter, and importantly, the impact of the Kmart bankruptcy that we previewed on last quarter's call. In short, the recapture of the Kmart space created 90 basis points of drag. That coupled with prior headwinds below the ABR line created a tough comp for the quarter. However, even with those drags, we delivered 190 basis points of contribution from the top line and we're able to hold the full year range we had originally provided of 1 to 1.5.
But perhaps most importantly, recapturing those Kmart boxes is eliminated uncertainly for us, allowing us to advance a creative reinvestment plan that will transform those centers very attractive returns. For the year we signed a sector leading 8.5 million square feet of new and renewal leases, achieving average new and renewal rents of $15.72, a comparable spreads of 14%. Our spreads on the 4 million fee of new leases average 34%. Importantly, we created over 45 million of additional rent with better tenants.
Let me dig into that a bit further. First, we achieved record small shop leased occupancy of 85.7% a number that we believe at several hundred basis points of additional growth as we continue to recapture space from weaker anchors and bring in concepts that are relevant to the communities we serve, expect to see this follow on growth continue this year and beyond.
Continuing our trend of growing our market share of new store openings, we signed a record 84 anchor leases for 2.5 million square feet. Incredibly, that record was achieved on a smaller portfolio. Many of these leases triggered accretive reinvestment projects and also quickly address boxes recaptured through bankruptcy. We signed new leases with thriving tenants like Kohl’s, LA Fitness, Sprouts, Aldi, Burlington, Marshall's, At Home, Maya Cinema, El Rancho, Schnucks, 24 Hour Fitness, Ross' Total Line, Five Below, Ulta and many others.
As some of you have noted, our progress here and improving tenant quality has led to one of the lowest at risk tenant percentages in our peer group. Demonstrating the tenant demand to be in our older well located centers, we now have leases in our LOIs on over 80% of the space recaptured through bankruptcy over the last two years at average spreads north of 50%. As some of you have also noted in your research, our track record of capitalizing on bankruptcies compares very favorably. It also underscores a very important point that disruption can present a great opportunity when you have attractive rent basis.
Our overall leasing production has now driven the largest GAAP between build and lease the 350 basis points since IPO. That represents over 46 million of signed but not yet commence rent setting much of our expectations for this year and beyond. Finally and importantly, as many of you have also noted, we've remained discipline with leasing capital in terms, keeping capital relatively flat and average term in line by leveraging tenant demand and are low in place rent.
This strong leasing productivity continued to drive our reinvestment pipeline. This year, we delivered a 131 million of reinvestment at an average incremental return of 9%, creating well over 70 million of incremental value. This quarter, we commenced an additional 54 million of projects bringing our active pipeline to 350 million at a 9% return, and our pipeline continues to grow with over a $1 billion of opportunity identified throughout our portfolio at attractive returns.
We expect to deliver over 161 million of reinvestment in 2019, which is on plan with what we highlighted at our Investor Day. And importantly, our active pipeline will improve centers with over a 100 million of in place NOI, which is I discussed on last quarters' call highlights how our projects not only deliver very attractive incremental returns, they grow the intrinsic value of the centers impacted.
It's important to note that the projects we are gearing up for redevelopment are creating over 100 basis point drag on occupancy, but the projects that have already delivered or delivering now this year offset this investment and continuing future growth. Simply put, the continued execution of our multi-year pipeline moves this relentlessly towards our purpose of owning centers that are the center of the communities we serve.
We also capitalize on attractive market valuations and liquidity to dispose of over 60 assets this year, raising a billion in proceeds at an average cap rate nearly 150 basis points inside our average market implied cap rates. By executing these as one-off transactions, we not only captured an additional 50 to 75 million over what would have been achieved in larger portfolio trades, we also unlocked over 250 million of NAV versus where our shares were trading.
We achieved that on assets that are in the bottom quartile of our portfolio with population densities and incomes that are significantly below our portfolio average. We also exited over 50 cities, allowing us to focus our capital and markets that we believe have strong underlying supply demand fundamentals. We also repaid approximately 800 million in refinance nearly 3 billion of debt, reducing our debt to adjusted EBITDA to 6.2 times or 6.5 times, if you adjust for straight line rents and FAS 141.
We now had no debt maturing until 2021. We built an all weather balance sheet that provide us maximum flexibility to continue our value added plan to hardest the value intrinsic in our portfolio. You also note that we have reached an agreement and principal with SEC regarding the events that we announced in February of 2016 and which lead to the departures of the prior CEO, CFO and COO. We’re pleased to agree to this agreement as well as the settlement of the class actions previously announced, and believe that there will be no additional proceedings relating to these matters brought against this company.
In sum, just a few weeks into this New Year, we are focused and excited for what we expect the year to bring. Our retail partners continued to demonstrate demand to be in our centers. Our leasing and reinvestment efforts continue to drive additional growth in our intrinsic value. And most importantly, our team is energized and ready to deliver continued outperformance. Angela?
Thanks, Jim, and good morning. I’m pleased to report on another quarter of strong execution across our platform as we continue to position the Company for long-term sustainable growth. Four quarter FFO was $0.40 per share, which reflects a charge of $0.02 per share related to the SEC settlement in addition to the previously disclosed $0.06 per share of loss on debt extinguishment. Full year FFO was $1.85 per share, excluding loss on debt extinguishment, the SEC settlement and other items that impact comparability, FFO was $2 per share versus our original guidance range of the $1.95 to $2.04 per share.
Despite having executed on nearly a billion dollars of non-core and nonstrategic asset sales during 2018 far in excess of original expectations as we responded to strengthen in the private market and raised attractively price capital to fund our accretive value enhancing reinvestment project deleverage primarily through the repayment of high cost secured debt and repurchased our stock at attractive valuation.
Same property base trend contributed 190 basis points to same property NOI growth in the fourth quarter, reflecting strong leasing productivity and redevelopment execution over the last 12 to 18 months despite the headwind experienced in the fourth quarter due to the rejection of 6 of our 11 Sears Kmart leases, which detracted 40 basis points of base trend growth and 90 basis points of NOI growth during the quarter.
As Jim discussed, while the six locations we took back in the fourth quarter and the additional three locations we expect to take back in the first quarter of 2019 will detract from growth over the course of the year. We're well underway with remerchandising and redevelopment plans for nearly of all this space and strongly believed that this bankruptcy has unlocked substantial value creation opportunities of these assets.
In total, same property NOI growth during in fourth quarter was negative 0.2% with strong base line performance being offset by net recoveries and provision for doubtful accounts, which detracted 220 basis points from growth in the quarter. Net recoveries were negatively impacted on a year-over-year basis by significant positive real estate tax refund and appeal activity in the fourth quarter of 2017.
While provision for doubtful accounts or bad debt expense was impacted in the current quarter by the Sears Kmart bankruptcy, we also recognized an unusually low level of bad debt expense in the prior periods. Only 40 basis points of total revenue versus our historical run rate of 75 to 100 basis points. You may recall that difficult year-over-year comparisons in bad debt were the primary reason that our original same property NOI guidance for 2018 included a 50 basis point attraction related to bad debt, which is in line with where we ended on a full year basis with the most difficult comparisons in the second half of the year.
These items and their disproportionate impact on our fourth quarter growth rate underscore the inherent volatility and same property NOI growth metrics and serve as an important reminder of why it's critical to have a somewhat longer term view as it relates to the performance of a long-term business. Same property NOI growth for 2018 was 1.1% within our original range of 1% to 1.5% with base rent contributing 210 basis points above the midpoint of our original guidance range of 175 to 225 basis points. The Sears Kmart bankruptcy acted as a 20 basis point drag on full year NOI growth and absent that event same property NOI growth would have been in the upper half of the original range.
Turning to 2019 as Jim highlighted, the coming year will be an opportunity for the investment community to see accelerating results from the work that has been done over the last three years to create a platform position to take full advantage of the opportunity embedded in this portfolio. Our same property NOI growth guidance for 2019 remains 3% at the midpoint of the range with the growing contribution from recently completed repositioning and redevelopment work across the portfolio more than offsetting additional drag in the future redevelopment pipelines that's been incurred as a result of the timing of recent bankruptcy activity.
Our FFO guidance for 2019 is a $1.86 to a $1. 94 per share, in addition to the previously disclosed impact of the continued deceleration in non-cash GAAP rental adjustment and the lease accounting change, this range also reflects strength and same property NOI growth as well as the impact of significant back end weighted disposition activity in 2018. The range also includes the potential impact of future capital recycling activity. We expect that disposition volume will be lower and the use of proceeds from such activity will be more balanced as we head into 2019. The substantial improvements we made with respect to solidifying our balance sheet last year put us in a position to focus capital allocation on our reinvestment pipeline, stock repurchases and/or acquisition activity in the coming year.
As it relates to the same property NOI and earnings trajectory, please note that as a result the Sears Kmart bankruptcy, builder occupancy is expected to trough in the first half of the year. Following the additional rejections expected in the first quarter before reaccelerating in the second half as redevelopment completions also accelerate. We expect the contribution from base rent and the detraction or contribution from net recoveries to follow the occupancy trajectory throughout the year. I would also note that our most challenging bad debt comparison will occur in the second quarter of 2019 as we recognized significant cash payments amounts previously reserved to the bankruptcy activity in the second quarter of 2018.
In summary, we enter 2019 well positioned to execute on the business plan we laid out at our investor day over a year ago. We believe the coming year will demonstrate the growth potential of our asset base, the internal capabilities we have developed with respect to redevelopment execution, the capital allocation philosophy with which we manage investment activity and the strength and stability of our balance sheet.
With that, I'll turn the call over to the operator for Q&A.
Thank you. At this time we will be conducting a question-and-answer session. [Operator instructions] Our first question comes from the line of Todd Thomas with KeyBanc Capital Market. Please proceed with your question.
Last quarter, you mentioned that Sears and some other activity would impact 19 but suggested that it could set up the Company for better growth in 2020 and you have a little more clarity around Sears. You're a few months into lease negotiations for some replacement tenant. So maybe for Brian, can you can about mark-to-market expectation a little bit on some of the backfills for the Kmart specifically and the general timeline for commencements to begin? And then, Jim, can you touch on early thoughts on how this activity might impact 2020 in light of your comments last quarter?
Yes, I will take the first part. As Jim mentioned, we're pleased with the progress that we've made on Kmart so far. We've got roughly 80% of the GLA committed, meaning executed lease at least or final LOI with the range of uses, many of the tenants that Jim mentioned in his opening remarks. This quarter, we announced the deal with Kohl's at our boxes London, Kentucky, which we expect to announce other national tenants later this year and we will start opening those spaces towards the end of the year. That comes on the heels of the box that we announced in Greenville, Kentucky with Marshall's Hobby Lobby and Five Below.
So, we've been excited by the demand, we’re not surprised by it. The teams continuously demonstrated the ability to get ahead of these bankruptcies, so that we’re in a position to quickly address when we get them back and expect to see us continue announced tenants throughout the year. From a retrospective, we're just over 2x the rents in place on the Kmart boxes, incremental returns in line with what we've been seeing historically on our Kmart basis, and we're excited about the opportunity because we still have boxes in places like Miami, Metro, Philadelphia and Cincinnati that we expect to be bringing online year towards the back half of 2019 and then the 2020.
Yes, Todd, excuse me I would just add that the activity does set us up well for 2020 and beyond. And importantly, it eliminates a lot of uncertainty. At this point, we only have two boxes remaining with Kmart. One of which negotiated the elimination of options in Hamilton, New Jersey. We already have a lot of interest in that box. So, what we've been working on over the last two years, what you've implicitly suggested, has been setting up the ability to drive value in these Kmart boxes, and not only importantly are we getting great returns on the boxes, we're also opening up opportunities as we get into these 40-year-old leases and importantly, improving the balance of the center by bringing uses that are relevant to the communities they serve.
So as we talked about last quarter, the timing of the actual bankruptcy was a little bit sooner than what we thought, but we've been working for the last year-and-a-half to set ourselves up to capitalize and what we think is a great intrinsic growth opportunity in addition to a lot of other opportunities throughout the portfolio.
And then Angela, in terms of the 3% midpoint for same-store NOI growth in 19, which is consistent with what you said last quarter. How much additional reserve is there for additional or incremental speculative fallout? And how much visibility or insight do you feel you have about the potential future bankruptcy and move out at this point in the year?
I would first say, we expect continued disruption, right, and I think that reflected. Angela?
Yes, I would just add to that. It's always tricky to pin point the number because of the variety of ways we budget for additional retailer disruptor disruptions. So from a bad debt prospective, we consistently model and guide to about 75 to 100 basis points of total revenue as the bad debt reserve. We came in at the lower end of that range this year. Again despite significant bankruptcy activity during the course of 2018, so we feel like we’re well covered from a bad debt prospective.
From a top line prospective, we budgeted -- as we do a zero-based budget for every phase in the portfolio, we’re taking a thoughtful look at each space and the spaces we make it back because of retailer disruptor disruption. And then, there is additional kind of portfolio reserve employed on top of that. So, it’s a very thoughtful process I think in terms of deriving the 3% midpoint and the overall same property NOI range. But to Jim’s point, I think we feel very comfortable that we have within that range incorporated our expectations for additional retailer disruptor disruption.
Thank you. Our next question comes from the line of Jeremy Metz with BMO Capital Markets. Please proceed with your question.
You guys stop disclosing the impact of redevelopment on your same store NOI. I don't think it had a huge impact in 2018 at the end of the day, but you've obviously talked plenty in recent quarters. Everybody noted remarks about the increasingly development activity given 200 million delivered here in the next 12 months or so. So can you talk about that decision and then maybe help quantify what sort of impact is actually expected to have on your 3% same store expectations for year?
We’d love to. As you think about our business plan and the opportunities that are intrinsic in our portfolio, it really runs the gamut, Jeremy from pad opportunities to end cap reposition to anchor reposition to the facade renovation to larger redevelopments. And importantly, we provide you detail on the significant anchor repositioning all the out parcels and the redevelopment. It seems to be us to be a bit of a distinction without a difference given the breadth of reinvestment opportunities that we have in the portfolio and kind of forces where decisions about timing as to when things are rolling in and out.
So, we thought it was better to basically show you our aggregate capital that's going into the portfolio where it is, what the timing is and what that overall impact is. So, that's really it, it's really just how we think about the business. And the other thing I would highlight for you is. It’s a very clean overall NOI number because it includes basically the entire portfolio, which I think is important. But as we step back again and just thought about this, it's really opportunity that’s intrinsic in the real estate itself. We’re not creating large mixed-use projects. We're not taking centers down completely. We're not changing drastically their use.
This is sort of core business stuff, it's granular. I love it because its lower risk, its higher return and I also like that it's really spread across the portfolio. One thing I’m particularly excited about is that we see the ability to impact nearly half of the assets we have through accretive reinvestment, everything from a pad to again an end cap and anchor repo or a larger facade redevelopment type project. So, we’re showing you that we’re making money on the capital that were putting the work on, and importantly, I think we're also creating a lot of value on the balance of the center that's being impacted here. But again its core to our business and it seemed to us that particular disclosure was somewhat limited, Angela?
Yes, I'd just -- I would agree with that. I would point out that that disclosure was really a legacy disclosure that we inherited and didn't really match up with the way that you've heard Jim and I and Brian and Mark talked about the business overtime. If you think back to our Investor Day last year, we talked about not just readout of what was recently completed and currently in process which is what that disclosure was, but we also talked about the other part of the lifecycle of redevelopment which was the future pipeline and everything that we're teeing up vacancy were incurring in order to prepare for the next wave of redevelopment. None of the future pipeline was shown in that disclosure before.
So I think as we think about and manage the business and try to communicate externally that disclosure really didn't tie that the way we think about it, the points that Jim made as well. And as a reminder, we've always guided to the total number including redevelopment that's what you've always seen, the more detailed same property disclosure from us in the supplemental around. And to the point Jim made, if you look at the reconciliation and the glossary of our supplemental you'll see there are very few exclusions from our same property pull effectively nearly 100% of the portfolio we show you in that number.
Yes and I think that's all fair I mean from a broad level. It just sounds like that. It is going to continue to play a bigger role here near-term in kind of driving that accelerating growth you highlighted in your opening comments. That’s a fair statement.
Yes, absolutely, as part of what excited us when we came on board the Company was, how broad base the opportunity is, but again it's a wide gamut, it's not all expenses.
And then second for me. Just in terms of asset sales, you obviously sold more in 2018 that you had initially expected, so obviously expecting less here in 2019. Wonder if you could maybe comment on how much you currently have on the market today? How much is under contract? And then, if pricing firms up even more, could we see accelerating sales to further clean out that bottom tier in single asset markets and perhaps just warehouse some of that capital for future redevelopment?
We always reserve the right to be opportunistic. It's part of why we don't provide pinpoint guidance on things like transactional activity. So we did provide a range of what we think the impact will be from the capital recycling. In terms of where we expect to be for the year it will be less than where we were in 2018. And I think the important point to note is that we were opportunistic and taking advantage of the liquidity that we found for these assets.
And the second thing I know is that we dealt with a lot of the bottom of the portfolio and that's really important. So, as we look forward, we have a few more assets that we're going to be sellers of, but we've dealt with many of the ones that just weren't consistent with our long term plan and all of that hard work and what I was trying to allude to in my prepared remarks has set us up in '19 and '20 and beyond to be more balanced.
And the other comment I'd make is. I think that any good long term business plan has some degree of capital recycling. So because of all the work that we've done in '18, it sets us up to be balanced in '19 balanced in '20 and so forth. As it relates to some of the remaining single asset markets, please understand that some of those will be growth markets for us. And I'm very pleased that we've exited as many of the cities as we have because it has greatly simplified the portfolio, and frankly, sharpen the focus of the team on the execution of the value added strategy and opportunity that we have.
Our next question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.
You combined leasing spread remain double-digit but when you look at the trend that they tightened over the course of 2018. I wonder what was driving this trend and what you're expecting from leasing spreads in 2019.
Part of that was really driven by the mix in the latter part of the year, we executed some shorter-term renewals to facilitate redevelopment, which had some drag on our that new and renewal strategy for the quarter, but we do expect our spread to renew in renewal leases to be in that mid teens range going forward. I would point you to importantly, what we've been doing on the new lease spreads which for the year average 34%, and also some of Brian's commentary in terms of the embedded Mark to market for example that we see in the Kmart boxes.
So, we're still seeing opportunity. One of the other things that I’m excited about is, we're also driving acceleration in the small shops, right, and that's really important. You’re beginning to see at this quarter and you’re going to see it for the balance. And the reason I highlight that is that we're capitalizing on what we're doing with these larger boxes and anchors as follow-through throughout the portfolio. And frankly, we're setting new record as it relates to small shop rents. So, I expect that combined spreads for next year to be pretty consistent with what it’s been over the last couple of years and I'm excited about how we're leveraging our improving centers.
And then second I'd just say. How active are the groceries in pursuing by online and pickup in stores? And what is the longer-term impact for cross shopping with that increase?
This is Brian. They've been very active and we've been very encouraging of our glossary partners to add this. It’s a very low investment for us almost none. We give a couple parking spaces and it creates several more trips and engagement with the consumer, and obviously more traffic to the center means more sales for the rest of our current partner, our retail partners. We have click, progress click list at roughly half of our locations. We've been doing this with AGB. We’re working with Stop & Shop. So across the spectrum, we’re working with our traditional retail grocers to add this where we can, we’re doing it with Walmart as well. So, we’re going to continue to do this as much as possible.
The people I noticed that are using this service really seemed to be focused on saving time that they are actually willing to pay a little more money to have somebody walk up and down the aisles of glossary. I guess is that also going to limit their willingness to cross shop?
It might allow them to work out at Orange Theory or have a cup of coffee at Panera. And I actually love that the grocers are focused on the customers and customers experience. And early on these discussions to Brian point, we jumped all over this program of adding these pickup lanes to our center. What’s actually interesting is that, there is often times shopping within the store that occurs with the pickup of groceries, and I do also think that the interaction between the grocer and the customer is improved by that level of service, so particularly when you look at how some of the better groceries are executing upon it.
So, we think its net positive and the last thing I would say on this is that. I think strong retailers are going to continue to evolve, adjusted their format, importantly have capital to do that, and we want to be supportive of them and we want to have shopping centers that give them the flexibility to do that, which we're demonstrating effectively now on as we are dividing boxes, adding space, doing other things to try to make sure that we’re getting tenants like our recent downsizing at Burlington, our recent downsizing at Kohl to the format that they want to be in, to the format that they are going to thrive in.
And what’s fun is that we’re doing it off a pretty low rent. So, we're able to do it and money in the process. So our little bit broader than your questions, but the point I’m trying to make is that. I think retells going to continue to evolve and the important thing is a landlord is that you have the flexibility and importantly the rent basis to meet the needs of your tenants and if you look at the market share that we're capturing at the new store openings, I think it shows you that were really doing a very good job on that.
So I'm excited about the change. I don't really see it as a threat. I think you got it be clear about what implications are and certainly in some instances its informing our capital recycling decisions, right part of why that will always be part of our plan. But again I’m kind of excited for these changes are bringing.
Thank you. Our next question comes from Greg McGinniss with Scotiabank. Please proceed with your question.
Angela, there was a lot of work done this year extending debt term, bringing down the blended interest rate. And I'm curious, if there's an ability or desire to proactively address total debt to EBITDA leverage in 2019?
Yes, I think right to your point, we did make a tremendous amount of progress on the balance sheet this year, not just in terms of working down that type of EBITDA number, but like you said extending during, putting us in a position where we have no debt maturities at this point until 2021, expanding the flexibility of the balance sheet, repaying all that secured debt that created a tremendous amount of operational and financial flexibility across the capital stock. So, we’re really pleased with the progress we made in 2018.
I do think we’re sitting at point in time now where while we remain committed to getting down to that six times numbers, a lot of the additional progress you’re going to see is going to come from EBITDA growth. And all of Jim earlier comments about the benefit of all the work we have done over the last couple of year in terms of repositioning and redevelopment work really coming to fruition, is going to be a significant driver of how we make additional progress on that leverage metrics in this point going forward.
And so the second question. With the sign [indiscernible] debt of 350 bps. How much does that translate to on an NOI basis? And what's the expectation on closing that gap?
Well, we have over $46 million of rents that’s been signed and not yet commenced, and that rent is going to be commencing over the next 6 to 8 quarter, and it is a clear driver of what we see our NOI growth to be for this year and next year. Timing this year is going to be critical. I mentioned it on last call, but because of those deals that we signed up every day of rent commencements worth about a couple hundred grand for us on average.
So, it's a good problem to have and I'm glad at this point that we're able to drive the demand in the leasing activity for the spaces that we're taking back the spaces that we’re recapturing proactively, or in the case of Kmart, dealing with the timing issue of that bankruptcy being sooner than we expected, which certainly helped contribute to that gap between building lease, and as Angels said our build number is likely going to continue to drag a little bit in the first part of the year as we take back those Kmart boxes.
But again, when you dig into the leases that were signing the redevelopment that they're setting up, it's really a big component of the visibility that we have on our growth. There's not a lot of speculative assumptions as it relates to where NOI is coming from, we know it, the leases are signed, we have rent commencement date scheduled as I mentioned over the next six to eight quarters. So for us from an execution standpoint, the real focus is going to be on time.
Thank you. Our next question comes from the line of Samir Khanal with Evercore ISI. Please proceed with your question.
I guess getting back to the 350 basis points wide and leased versus occupied. What is the -- I know that that's going to narrow, but what is kind of the normalized spread going forward? I mean is it 250…
Yes, I would say, historically, it's been probably between 150 and 200 basis points. So, you should see over time significant compression in that number.
Okay. And then Brian, I guess for you just taking a step back. Can you generally talk about where your watch list is today versus this time last year, I mean maybe excluding Sears and Kmart? So, where does that watch list stand today?
It's definitely smaller. Obviously, those were tuning as we have been watching for awhile. There are still some users and tenants out there that we're keeping a closer eye on, but the magnitude of last year's bankruptcies are certainly smaller as we look into this year.
And as part of your watch list, do you have any concerns sort of the traditional grocers going forward? What is kind of your thought on that, that segment?
Yes, let me take that initially. The concern or the focus on grocers is always on occupancy costs. And you look at that per square foot sales productivity relative to your rents. And as we said many times, we're benefited by our average occupancy costs that are well below 2%. So even in the instance of a grocer that may not continue it gives you a lot of optionality in terms of backfilling that space with another grocer quite frankly with another use.
Yes and it's interesting, this quarter we announced Hearthstone Corners in Houston, we backfilled with an El Rancho for a traditional grocer that hadn't put a lot of capital into that store in some time. They're coming in. They are much more relevant to the community there. They're probably going to do 30% to 50% more in volume. It's allowed us to really advance our follow on leasing at the center. So as we look out and Jim mentioned capital recycling earlier, if we're looking at areas where our grocers are not investing and where they are and making sure that we're focused on that our anchors continue to invest in their locations.
I guess as a follow-up, Jim. Are you seeing any sort of cap rate expansion on some of these grocer tenants kind of in the secondary markets especially with some advisor becoming a little bit concerned on kind of traditional grocers?
Yes, our cap rate is held pretty firm for what we had actually transacted on. Mark, I don’t know if you’re on, do you want to take that?
Yes, I think you hit the nail in the head, Jim. When we looked at our assets that we traded on a year-over-year basis, so like-for-like similar assets from our markets, we actually saw pretty stable cap rates. We haven't really seen a big impact on cap rate movement for that factor.
Thank you. Our next question comes from Christy McElroy with Citi. Please proceed with your question.
Angela, sorry if I miss this. Do you have an assumption in your guidance for unsecured debt issuance in 2019 later this year and maybe you can talk about sort of any indications of pricing today? And then, what do you plan to do with the swaps that burn off in March?
Thanks Christy. I would say if you look at the guidance walk down we provided, we do have a $0.03 range between $0.07 and $0.10 on align that includes the impact of leverage reduction last year that share repurchase activity from last year and then all other items. So, it would be embedded within that $0.03. What I would say it just a reminder and I mentioned that’s in response to Greg's question earlier, but we don't have any debt maturity at this point until 2021. So really put ourselves in a position where no additional unsecured issuance is necessary.
But obviously, we embedded within the range the ability do something should be opportunistic to do so and continue to advance our goal of extending term and weighted average duration across the balance sheet. In terms of the swaps, as you mentioned, we have $400 million of swaps burning off in March. We would love to -- we will evaluate the market as those burn off and determine what the optimal outcomes is for that and that sort of plays into first question you had about do we term out some of that floating it has to begin with.
So any expectations with respect to both the unsecured debt issuance in the swaps would be embedded within that $0.03 range and that other line in the mark down.
And then just in terms of the recapture Kmarts in Q4 and Q1, how much capital would you expect to sort of go into those boxes in terms of retenanting? And would that be considered sort of the normal leasing CapEx bucket? Or would that be the redevelopment bucket? And then just longer term, as you think about $350 million active pipeline but just in terms of the billion dollar of opportunities going forward that you talked about, would you expect that pipeline to continue to be self funded with free cash flow?
Yes, as we look out, I think year we’re probably running somewhere around $75 million of free cash flow after we fund the dividend, which gives us a great base from which continue to invest in value accretive reinvestment activity across the portfolio. The remainder of what we need to fund that activity will come from primarily disposition activity. But we view that as Jim said earlier, capital recycling is a fundamental part of business, you will see us do some of that activity, no matter what really in any given year to continue to reinvest in the portfolio and generate growth from that point forward.
And then, Christy in terms of the Kmarts, I mean, we've been seeing those on average around, call it, 80 to 90 bucks a foot inclusive of the demising split when we’re putting new facades on working with loading docks and the tenant TIs that are part of that’s. And that’s been very consistent throughout markets. And I think I mentioned on last call, one of the benefits to the platform and continuing to grow share with a lot of the retailers that Jim mentioned is the team getting pretty good at being able to deliver to prototype and what is an irregular box. And it's not the typical ground-up scenario we done a number of these. So, we've been able to keep some cost efficiencies in line and working with our retail partners on the operation side.
Again, I take the numbers that Brian quotes are numbers where we are going to split the box. We've had a few executions where we haven't split the box, but that's a pretty good estimate that $70, to $80, $90 a foot, generally speaking to demise the box. And then where it fits within the pipeline just depends on what we’re doing outside of the box. Are we adding pads? Are we changing the balances of the facade? Are we adding space? That's then tends to move it into one bucket or the other.
Our next question comes from the line of Jeff Donnelly with Wells Fargo. Please proceed with your question.
Maybe just a first question for Angela, I’m just curious, compare to prior years. Can you talk about some of the assumptions in the 2019 budget that you’re making on things like tenant renewal rates, particularly around the at-risk tenants when their leases mature this year? And maybe perhaps the length of downtime you're assuming between leases because I know that bad debt expense does effectively capture all the assumptions you’re making around revenue recognition?
So, my comment earlier around how we budget, what the process really is. The only line item I would say in our budget process that’s more sort of a portfolio metrics is really that bad debt expense at your point. Now, we will capture some of retailer disruption you have, but it's also embedded in ABR line to your question, Jeff. Our budget process is a very granular space by space budget process. So, we’re making very specific assumptions for each tenant in portfolio, not just for the watch list tenants, but across based on feedback we’re getting from tenants about their sales and their productivity and there locations as well.
So that’s certainly as sort of how we budget and then form the process and like I mentioned earlier we than take a portfolio look and sort of right size those. I would say across the board renewals probably look excluding redevelopment assets where we might not be renewing people because we’re completing something bigger or more holistic at the asset. I would say the retention rate look pretty similar to previous year. But again underlying that is specific least by least assumption for every tenant in portfolio.
Understood, and then, I’m just curios the value enhancing projects that were added to the pipeline this quarter, I think you guys that we’re coming around 8% yield. Is that indicative where you expect the yield to be on your Kmart boxes where they'll ultimately pencil out? And maybe a second part of that yield is bit below the 9% to 14% range for the overall enhancing pipeline. Is that just a mix issue? Or is that maybe reflective of a broader trend and rents or capital costs?
It's actually a mix issue. And if we look at the Kmart returns, they can be in the low teens. We had a couple on the digits. It's kind of across the board. And again Jeff depends on how value we’re able to harvest by recapturing that 40 year old lease. And then frankly, are we a longer-term holder of asset or would we drive more value and better IRR simply by backfilling the box and planning liquidity for the center in the markets. But we’re seeing continued strong demand from our core tenants for the space that we’re recapturing. I think that’s most importantly. We are also seeing increases in costs, construction cost in particular, which are having a bit of a drag in terms of returns, but you’re going from 11 to 10 or 9 to an 8, 12 to 11 that’s how to think. It’s not rendering the decision to move forward with the value-added investment are no longer viable.
Thank you. Our next question comes from line of Ki Bin Kim with SunTrust Robinson Humphrey. Please proceed with your question.
So curious about one thing, if I look at that TI per square foot, it's been pretty steady for the past couple years. But if I look at the maintenance CapEx, it's actually grown over the past two years even though portfolio size has shrunken. So just curious about what’s causing that?
One thing to highlight is, you're including I think in that the leasing capital which reflects the fact that even on a smaller portfolio. We've leased more space right. So our productivity continues to be strong, so you need to look at it as we also show you in the disclosure on that net effective basis.
We are spending more in recurring maintenance capital per foot. We were I think around $0.55 or $0.60 a foot, reflecting our effort to bring these assets up to our proudly owned and operated by standard. I would expect that rate of span to begin to moderate as we get through more of the portfolio and address some of the items in deferred maintenance, but importantly that investment that we're making is driving momentum in small shop and it's also driving some of our rents. So we think it's the right thing to do from a stewardship perspective.
And, again, I can't emphasize this enough capital allocation is something that we take very seriously and if we see an asset that requires more capital than it's warranted by the rents and the growth in rents that we can get, we sell it and that drove a huge amount of the decisions in 2018. As we move forward, again our mission as a company is to own the center of the community we serve. We wanted to be relevant. We wanted to be local. We want it to thrive. And to do that, we need to make sure that we're operating them to a certain standard. So some of the pickup in the recurring capital you're seeing there, but again I think it's being more than paid for by the rents.
And in your lease negotiations with tenants, has there been any noticeable change in the level of expense pastors that you're able to push onto tenants?
No, Ki Bin, actually it's come from our side really as we've gone to tenants and talk to them about the increased investments that we're making in our centers and talking about what we're going to do. We're seeing receptiveness on their side to contribute to those investments. So it has come up in our negotiations, but we're proactively doing it because we want to make sure particularly where we're making investments in some centers that have needed as that we're getting reimbursed for those investments.
And as a result of those efforts, Brian's referring to, you will see our recovery percentages continue to improve. And that I think is an area it's an opportunity for us going forward.
Thank you. Our next question comes from the line of Wes Golladay with RBC Capital Market. Please proceed with your question.
Looking at the value enhancement projects for 2019, what do you budgeting for capital expenditures? And do you plan to start into the major developments that are on the shadow pipeline?
Yes, I think in terms of capital expenditures as Jim said, in 2019, I would expect that maintenance CapEx runs probably somewhere in the $0.45 to $0.50 a square foot area, leasing capital as you know, will be entirely dependent on productivity. But given as we talked about the strong tenant demand, we're seeing for a lot of the bankruptcy base. We're still in the process for addressing it'd certainly be a high productivity year from a leasing standpoint.
The value enhancing bucket, we've continued to talk about ramping that bucket of capital spend the $150 million to $200 million range. We were about $170 million in 2018 in total. I think you could be at the higher end of that range is not a touch above as we had into 2019 based on the acceleration of some of the Kmart projects that had potentially already been scheduled for late 2019 or into 2020, but we'll be spending that capital little earlier in the process.
And importantly, we expect to deliver over $150 million this year. So, we're not asking you to wait. We're getting these projects done. We're delivering them on time on budget on return.
In the shadow pipeline, two projects in particular had a residential component potential there. Is there any update to that? And could more properties have residential components?
We've identified over 50 assets that based on market in place rents might make sense to support residential or senior assisted living or some other complimentary uses across the portfolio. But as I said on the last couple of calls, really into 2019, we’re focused on the lower hanging fruit. And we're working very hard to set up some of that additional value extraction that we think presents itself and markets like Miami and Southern and Northern California and throughout the Northeast, but not a lot this year. So, don't expect us talk much about it other than to say we're setting it up and it's coming.
Thank you. Our next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.
This is Shivani on for Derek Johnston. Just on the private market side, we heard some commentary from that there's a greater demand for larger pools than this time last year. You guys had mentioned that there were north of 60 individual disposition transactions last year. I just curious, if you could sort of comment on demand across transaction sizes? And what you're sort of targeting into 2019?
Mark?
Well, sure. Yes, I think you certainly are starting to see some larger deals get done, whoever I do think as we've looked at the market last year and going into the next year, the most critical factor continues to be sized. I think that's pretty consistent across the markets. There are really just a wide range of buyers for assets in that $30 million to $40 million area and below. It's driven by the private REIT of certain traditional funds, the high net worth buyers, and there's been a growing private equity bid for power centers.
In part, it's driven by the attractive financing environment given where we're seeing the 10 year. But you know, really when you start to get above that level I do think you see a drop in buyer demand and I think you see some more price sensitivity. So, we have seen some big assets going to market but they haven't traded. And I think that maybe where we will see some pricing movement and some opportunity even in some of the core property markets. And as we continue to capital recycle, I think that's a pretty important opportunity for us to take advantage of.
And then Brian, if you could just give us an update on sort of leasing sentiment where you’ve seen so far in 2019 versus last year and maybe just remind us of the Payless exposure that’s in the portfolio right now?
Yes, sure. I'll take the first part. First, in terms of demand, we've continued to see strong open device from the retailers and categories that have been thriving in our space for sometimes. Jim mentioned, our anchor activity last year was a record on a much smaller portfolio and those retailers continue to have strong open to bias for '19 and '20, whether that's in the value apparel best-in-class fitness, specialty grocery, health and wellness or home categories. And then in terms of Payless, we've been monitoring the situation there. There's obviously nothing that's been announced. So, we don't have visibility if there will be some type of event or if we will get any spaces back.
What I would point to as the progress that we've made on the Payless spaces that we have taken back, which we've addressed roughly 70% of those through either lease executions, or as part of a redevelopment or outparcel development. The ones that we've executed we've had spreads of over 30% recently with tenants such as Club Pilates and America's best uses that are really driving that small shop growth that Jim mentioned earlier, and the spaces that are part of redevelopment in outparcels, we expect to drive considerable value out of those. So as we look at what we've done with Payless, the momentum that we have in small shops and the depth and breadth of demand that we see in the small shop space, we're pretty confident that should we get some of these spaces back, we'll be able to put better usage and even higher rents.
Yes, the total exposure, Shivani, is about 20 basis points of GLA or 30 basis points of ABR for all of the locations.
Thank you. Our next question comes from the line of Hong Zhang with JP Morgan. Please proceed with your question.
I was wondering under what circumstances, would you return to being, I guess, a significant net seller that you were in 2018. And is it relates to the volume of capital recycling, in your 2017 successor day you laid out a target of $400 million and $600 million of annual capital recycling. Do you expect to be within that range this year or under that?
Thank you for the question. I think it's probably going to be close to that range. Again, we're not going to provide specific guidance, but we are reverting to a more normalized level, which we see a 3% to 5% of the portfolio. And, what drives us to sell more, honestly, having done the hard work last year is going to be the opportunities that we see on the other side, what types of acquisitions, additional reinvestment activity, share repurchases, et cetera. So, we're real pleased to be in the position that we're in now because it allows us to be opportunistic. And frankly, as cap rates move up and down because we're more balanced, we can capitalize on that on the other side.
Thank you. Our next question comes from the lien of Vince Tibone with Green Street Advisors. Please proceed with your question.
Could you provide an update on the former Toys “R” Us spaces? Just curious how backfill demand and net effective rents have trended against your original expectations?
Sure, this is Brian. So of the 10 we took back 8 are committed, meaning either leases executed or at least final LOI. We announced another one this quarter in our Michigan with a regional furniture operator that 54% rent spread. We had said on prior calls that we thought our rent growth expectation on these would be between 20 to 30%. We're trending towards the higher end of that range. And the range of uses is what I've alluded to earlier in the call, we still are seeing demand from best-in-class fitness, home, family, entertainment, value apparel, very similar to who we've been talking about when we're splitting some of the Kmart boxes. So, we've been pleased with demand and like Kmart expect us to continue announced lease signings as we progress throughout the year.
All right, that’s very helpful. Thanks. One last one for me, the anchor build occupancy declined by about 170 basis points compared to the third quarter. Just wondering besides the 6 Kmarts what other closures contributed to this decline?
Sure, we did have the bankruptcy impact that came in from Dallas that happened in the fourth quarter, which we took those spaces back towards the end of the year. We also had some proactive downsizing that we did. One on a development that we had outside of Philadelphia where we're downsizing, a Burlington for Sprouts, another where we're downsizing Kohl's as part of our development in Speedway in the outside of Indianapolis, Indiana. And one project in Naperville or Illinois where we're working with a fitness operator that we're close to finalizing something with, so that was -- that's really what drove in addition to the Kmart bankruptcies.
That’s helpful. And for the Dallas, is that a big issue or just in any way you can quantify just a few occasions or how big of an impact without bankruptcy?
Yes, we had -- I want to say it was close to 10 locations that we had with Dallas overall. It wasn't a big issue to say plus we have demand for those boxes. We’re already at least on a handful of the spaces, so it was someone again that was on our watch list. So, we had been marketing a number of these spaces, expect some of them to start coming online this year and many of them paying rent in 2020.
Thank you. Our next question comes from line of Linda Tsai with Barclays. Please proceed with your question.
Just to follow up on tenant fallout. Angela, you noted that 75 to 100 bps, was budgeted for unknown tenant fall out in 2018 and that came in at the low end. That’s had FFO NOI growth for 2018 came in a little bit below the midpoint at 1.1% versus 1.25%, why was that?
Yes, so the 75 to 100 basis points isn't really for unknown tenant fallout, that's for bad debt expense that provision for doubtful accounts line that you see in the same-property NOI reconciliation, that takes into account things like bankruptcy activity or fallout four outstanding AR balances, but also other AR across the portfolio. Stepping back I think, you know, in terms of where we -- how we had originally budgeted tenant fallout versus what materialize during the year, I think we were even clear back to the Investor Day that something like that Sears Kmart situation, any impact that could have to us was not fully contemplated in the range.
And so, I think what you really saw was a big impact in the fourth quarter like we talked about 90 basis points related to Sears Kmart hitting the fourth quarter, we more than offset that with strong leasing productivity over the course of the year and execution on redevelopment that really helps to make sure that we stay comfortably within that original range we had given.
So tenant fallout of well the 75 to 100 bps for [indiscernible] came at the low end, but then…
But then you had other things offsetting it in the ABR line.
And then I went back awhile back that Kohl's was going to provide space to all tenant locations. Have you seen any of these openers is going to occurred any of your properties?
Linda, this is Brian. It's not occurring in any of our properties. But I think, it speaks to their view to drive to get into the best footprint that they can. As I just mentioned in prior question, we're doing that, we're doing it -- we just announced another one with Burlington where we've downsized and we're bringing another especially grocer in Seminole, Florida in addition to what we've done in Milton. So, we’ve have had discussions with Kohl’s are a great partner of ours in terms of the footprint that they're in, in our centers and there are at the handful of locations where we're talking to them about proactively taking space back because we know the tenant demand and we can execute on ourselves. But we haven't had any throughout the portfolio yet where they've just gone ahead and downsize and backfilled with all the year any of the other tenants that they've been talking to.
Thank you. Our next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.
I just had a quick follow-up one to the few questions regarding the capital recycling. I was just wondering, if you could discuss as you go forward and you're more balanced in terms of dispositions versus and the uses of those proceeds. What do you think would be a cap rate spread? And do you think it would be positive? Or could it start out with being, I guess, negative and then growing as you put more effort into leasing? Or what have you at the various properties?
Well, I think that what we've capital recycled today and the work that we've done represents really the bottom of the portfolio. So, as we move forward, all other things being equal, we would expect to see good performance in cap rates, it's going to be driven by mix. Then on the reinvestment side, it’s going to be driven by the reinvestment yields that we disclose. Certainly, cap rates on acquisitions can be 100, 200 basis points inside of the assets that we might be selling.
Again, our focus on the acquisition side is to make sure that we buy assets that have growth similar our entire portfolio. I mean, you think about our portfolio as an asset, what sets us apart is the below market rents and the ability to put accretive capital to work. So that would imply as we continue to find other assets that are complementary to our portfolio, lower cap rates, people pay for IRR. And then of course share repurchases are an opportunity for us as well.
But again, because of the work that we've done with the capital recycling with the balance sheet, it allows us to be much more flexible going forward and balanced as we make those capital allocation decision.
So just in terms of potential property acquisitions going forward, we might see that the acquisition cap rates could be relatively lower than disposition, but the idea is that long term they would have higher growth in that, that's why they would make sense.
Yes, absolutely. We're not in interested in assets that don't provide a view of how you're going to grow your ROI.
Thank you. This concludes our question-and-answer session. I'll turn the floor back to Ms. Slater for any final comments.
Thanks everyone for joining us. We'll see some of you over the next few weeks.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.