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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 day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Federal Realty Investment Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.
I'd now like to introduce your host for today's conference, Ms. Leah Brady. Ma'am, you may begin.
Thank you, good morning. Thank you for joining us today for Federal Realty's fourth quarter 2018 earnings conference call. Joining me on the call are Don Wood, Dan G, Jeff Berkes, Wendy Seher, Dawn Becker and Melissa Solis. They will be available to take your questions at the conclusion of our prepared remarks.
A reminder that certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information, as well as statements referring to expected or anticipated events or results. Although Federal Realty believes that expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty's future operations and it's actual performance may differ materially from the information in our forward-looking statements, and we can give no assurance that these expectations can be attained. The earnings release and supplemental reporting package that we issued yesterday, our Annual Report filed on Form 10-K, and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operations. These documents are available on our website.
We will be hosting an Investor Day on May 9 at Assembly Row in Boston; you should have received the save-the-date, if not, please let me know. Keep your eyes on for an invitation with additional details and registration link in the next few weeks. We look forward to seeing you all there. Given the number of participants on the call, we finally ask that you limit your questions to one or two per person during the Q&A portion of our call. If you have any additional questions, please feel free to jump back in queue.
And with that, I will turn the call over to Don Wood to begin our discussion of our fourth quarter results. Don?
Thanks, Leah and good morning, everyone. We finished our 2018 particularly strong with reported FFO per share in the fourth quarter of $1.57, better than we had expected resulting in a full year 2018 results of $6.23 a share, 6.8% better than last year for the quarter, 5.4% better for the year. Just to have the point out right upfront; this is the ninth year in a row that we have reported FFO increases over the prior year, the only shopping centers read to do so, as the fifteenth year of the past sixteenth that we've done so. We also expect to grow in 2019, please let that sink in in later today's environment.
A lot went right this quarter and subsequently through today, that both benefited the fourth quarter operating results, and more importantly, cash flow in the future. Everything from record leasing activity in the quarter to stabilized residential occupancy in our big developments, the powerful office preleasing at both Assembly Row and CocoWalk, all that is contributing to a business plan that more and more seems right for today's demanding and changing consumer.
So let me get to some specifics; revenues grew 5.1% quarter-over-quarter and 6.8% year-over-year. Earnings growth at comparable properties was 2% for the quarter, 3.1% for the year. The combo portfolio remains 95% leased to 94% occupied, and our operating expenses including G&A but not including real estate taxes grew at less than 1% for the quarter, and less than 3% for the year; that's a pretty complete formula for largely organic growth.
Terms of leasing; we did 107 comparable deals for 574,000 square feet at an average rent of $32.16 a foot, 15% above the $27.96 [ph] that the previous tenant was paying in the last year of their lease. We've never done deals for them at square footage in the quarter before, a record by nearly 10%. For the year, we did 374 comparable deals and 402 total deals for almost 2 million square feet; again, an all-time annual records for us at 12% more rent. So despite this location in the retail real estate business there is plenty of strong retail leasing going on in the dominant quality properties that we know.
A few more words on leasing because I don't want to portray it as all rosy. The big difference we see in today's results compared with a few years back is the increased volatility when you look at a large sample size of leases. They grant bumps [ph] and redeveloped and modernized retail destinations are stronger or even stronger than they've ever been. But there is also a number of roll downs on anchor or junior anchor boxes where there are legitimately acceptable alternatives in the market. Now, well that basic supply and demand dynamic have certainly have been around forever, it feels more pronounced today so that the spread between good deals and not so good deals seems to me to be wider.
We've talked about for quite some time now the importance of a well-diversified income stream to sustainable growing cash flow, and I couldn't be more proud of the progress we've made in this regard. Our core shopping center portfolio is second to none, and we're looking at harder than ever for densification opportunities in terms of broader real estate uses, retail resin [ph] office, following the successes we've had or having at places like the Point in Elsa Gondo [ph], Tower Shops in Florida, Congressional Plaza in Rockville, and many more, you know the list. We broke ground this quarter on our initial development phase at our Kenwood Shopping Center which includes 87 luxury apartments and expanded planning for the development of the balance of the east end of the site.
In the next few months, we're hopeful we'll get investment committee approval to move forward with the redevelopment of the entire western portion of Graham Park Plaza, our long time owned 19-acre shopping center that sits inside the beltway on Route 50 in Fairfax County, Virginia; that plan includes the addition of about 200 apartments and twice making incorporated into a reinvigorated retail shopping destination. And we're getting closer in Darien, Connecticut with negotiation feasibility of a residential over retail mixed used community right at the train station in this New York City suburb. But for a building permit we now have all local and state entitlement to develop 75,000 square feet of new retail space and a 122 rental apartments; diversify and intensify wherever feasible.
The big development news over the past few months involved Assembly Row, [indiscernible] and CocoWalk. After achieving stabilization in 2018 as the big residential component of our second phase at assembly row, and higher rents and at a quicker pace than we had expected. We were anxious to capitalize on this -- that success with the start of our next phase. In addition, the menstruation of assembly as a first class office location solidified by partner's healthcare and the active T-stop in bold enough to add more office products, there too. So we're underway, we're driving files. Two high-rise buildings; one directly at the foot of the Tea-stop with 500 rental apartments above ground floor retail, and the second, a $300000 square foot, Class A Office Building, half of which is pleased to German shoe and apparel maker, Puma, for their North American headquarters. I hope you saw the separate announcement on Puma several weeks back.
Together a $475 million Phase 3 expansion at one of the country's most successful mature development that we're conservatively underwriting to combine 6% yield with full and infrastructure allocation and near 7% on an incremental cash basis. With the commitment of West Elm [ph] to take the final 12,000 square feet adjacent to pinstripes and Pike & Rose, our retail space has all been leased, at least once. As West Elm [ph] and the remaining tenants open throughout 2019 and the residential units remain 95% occupied, the first two phases of Pike & Rose will be fully stabilized, construction on the 212,000 square foot spec office building, and the 600 parking space parking garage in Phase 3 is now fully under construction for tenant occupancy in 2021.
At CocoWalk at Miami, we made very strong progress on both construction and leasing on this 256,000 square foot redevelopment over the past several months with the signing of the 430,000 square foot office lease executed with Regis [ph] for their spaces concept at the project along with an additional 21,000 square feet of new deals, both restaurants and retailers which when combined with existing tenants gets us to well more than 50% release on this important redevelopment. The office demand here in particular is validating our thesis of consumers wanting to be in a monetized [ph] environment close to home. This property is going to be very special when it's completed. No significant development at sunset place over the last few months as we continue to work toward entitlements that would allow greater density, tenants will continue to leave the property as it sits in it's existing condition, and so sunset will be a significant year-over-year earnings drag in 2019.
West Coast construction continues on-schedule and on-budget as we prepare to deliver 700 Santana Road at Splunk later this year. Next step should be the first of two 350,000 square foot office building at Santana West, the 12-acre site that we control across Winchester Boulevard from Santana Row. We expect the investment committee consideration of that project in a couple of months with construction start later this year if we get comfortable with the numbers. Also, Jordan Downs, our 113,000 square foot grocery anchored development in Los Angeles with joint venture partner, Prime Store, is well under construction with it's full anchor program on their lease, 30,000 square feet of sign leases in the fourth quarter alone with Nike and Blank Fitness joining grosser smart and final and value retailer Ross to round out the offerings resulting in more than 75% of the GLA leased at this point. Tension now turns to the small shelf space.
And finally, a quick shout out to Wendy Seher, to Jan Sweetnam and the other 11 Federal Realty executives that were promoted last week coming out of our board meeting including Investor favorite James Model. There was a separate press release that lays out the details. You know there's very little about running this company that is more satisfying to me than being able to develop and grow human capital from within. It's not always possible but we strive to be able to do so. To me, it's indicative of the depth of our team and pays off in spades in terms of the continuity of our business plan and our ability to not miss a beat. And yet, says Dan Guglielmone, G&A will go up a bunch next year. And that's about it for my prepared remarks for the quarter and for the full year of 2018. It was a really good one.
Let me now turn it over to Dan for some additional color and then opened the line to ask your questions.
Thank you, Don and Leah. Hello everyone. We are really pleased with our results for fourth quarter and the full year 2018. With FFO per share growth of 6.8% and 5.4% respectively, versus 4Q and full year of 2017, we'd be consensus for both the quarter and for the year by attending. The numbers in the fourth quarter were driven primarily due to lower net real estate taxes offset by greater net impact from failing tenants than was forecast heading into the fourth quarter as well as higher demo and higher G&A.
Our comparable POI metric came in at 2% for the fourth quarter as a result of these drivers. The average comparable POI growth per quarter for the year was 3.2%. A solid result in light of the challenging environment. With respect to our former same-store metrics, the quarterly average for the same-store with read depth with 3.1% and same-store without real depth at 2.7%. We are officially retiring these metrics having provided them over the course of 2018 during our transition to a more relevant comparable POI figure. With respect to asset sale and other activity during 2018, we raised over $200 million of proceeds in the aggregate as we closed on over 85% of the market rate condos at Assembly Row and Pike & Rose raising roughly $130 million in proceeds, sold Chelsea Comments residential and Atlantic Plaza Shopping Center and our Boston region at a blended mid fives cap rate raising $42 million and closed on our 50-50 JV at the Row Hotel at Assembly, bringing in $38 million of gross proceeds.
On the acquisition side, our discipline was once again evident in 2018 as we aggressively scoured the market for opportunities but to continue to find better risk adjusted capital allocation alternatives in our own portfolio from a redevelopment and development perspective. However, we do have a pipeline of attractive acquisition targets and are optimistic we can bring a couple of them over the finish line in 2019.
Now onto the balance sheet. 2018 was the year where we positioned our capital structure exceptionally well to handle the next wave of value creating development and redevelopment activity for the company. We finished the year with roughly $50 million of excess cash and nothing outstanding on a credit facility. We reduced our overall net debt level by over $100 million. We generated upwards of $90 million of recurring free cash flow after dividends and maintenance capital in 2018. As a result, our net debt to EBITDA at year-end is 5.3 times down point from 5.9 times at year-end 2017. Our fixed charge coverage ratio stands at 4.3 times currently versus 3.9 at 4Q 2017. Our weighted average debt maturity remains at the top of the sector at 10 plus years and the weighted average interest rate on our debt stands at 3.88% with over 90% of it fixed.
As we push forward with the next wave of development and redevelopment of Federal over the coming years, development which has been significantly de-risked through solid pre-leasing splunk with the 100% of the office leased in 97% of the total building at Santana Row delivery set at the end of the year. Puma with 55% of the office space leased and multiple tenants competing for the balances of the office space as block 5B in Assembly Row delivery slated for late 2021 and registers the IWG spaces concept having pre-leased 50% of the new office space at CocoWalk delivery scheduled for late 2020. Our E-rated balance sheet equipped with a diversity of low-cost funding sources leads us extremely well-positioned to execute our multifaceted business plan and drive sector leading growth through 2019 and into 2020, '21 and beyond.
Now, I will turn to 2019 FFO guidance. We are formally providing a range of $6.30 to $6.46 per share. This guidance takes into account the impact of the new lease accounting standard which we estimate at $0.07 to $0.09. While on other items we will be expensing internal leasing and legal costs that were previously capitalized. Please note that on apples to apples basis adjusting for the new accounting standard or FFO growth forecast for 2019 would be roughly 2.5% to 5%. Behind this growth are the underpinnings of a very solid 2019. Occupancy and rental rate gains in our comparable property portfolio will be meaningful. Proactive releasing activity in 2018 will drive growth in 2019 as major tenants like Anthropology in Bethesda, 49ers Fit [ph] and TJ Maxx at Westgate and San Jose, Bob's Furniture at both Lowe's Hardiness and Escondido in Southern California target at Sam's Parkin Shop, NBC among others all contribute more fully over the year. And continued stabilization, our signature, mixed use projects, Assembly Row, Pike $ Rose and Santana Row will all drive meaningful growth to the bottom line in 2019. These items together would drive FFO per share growth into the 6% to 8% range if not for some discreet but somewhat disproportionate headwinds.
The leasing impacts and are non-comparable properties, CocoWalk, Grand Park and Sunset Place will weigh on this year's results. Proactive redevelopment and remerchandising activity at some of our dominant regional assets in order to further consolidate their market leading positions, we'll also have an impact. Assets which include Plaza Elsa Gundo in Los Angeles, Huntington Shopping Center on the Island and congressional here in Metro DC. In addition, a recent initiative to establish the next generation of leaders of Federal will meaningfully increase our G&A in 2019 beyond the lease accounting changes. As a result, our guidance underscores a very constructive 2019 for Federal.
Now to the detailed assumptions behind our guidance, comparable POI growth of about 2% and total POI growth of 4%. A credit reserve which includes bad debt expense, unexpected vacancy in rent relief of roughly 100 basis points, non-comparable redevelopment, i.e. CocoWalk, Grand Park and Sunset will create about sixth sense of drag relative to 2018 as we work through the continued de-leasing impact of these assets. With respect to G&A, we forecast roughly $10 million to $11 million per quarter. This reflects $0.07 to $0.09 impact from the new lease accounting standard taking effect this year and about $0.05 to $0.06 in higher G&A, primarily relating to the promotions in new additions we mentioned On the capital side we project spending on development and redevelopment of $350 million to $400 million. As is our custom, this guidance as soon as no acquisitions or dispositions. And finally, we are projecting another $70 million to $90 million of free cash flow generation after dividends and maintenance capital.
As I close out my comments on guidance, I would like to highlight the Federal diversified business model continues to insistently churn out sector leading FFO growth by a wide margin. When you assess the projected apples to apples FFO growth for 2019, let me have you pause and think about the following statistics. Federal consistently produces outsize bottom line FFO growth relative to our peers, not as adjusted but SEC-endorsed new redefined FFO growth. Over three-year, five-year, ten-year and 15 year-horizons, Federal's FFO growth has outperformed its Bloomberg shopping center peer average by a margin of roughly 8%, 6%, 8% and 7% respectively. That's per annum and that's compounded.
With that, we look forward to seeing many of you in Florida in few weeks and please be on the lookout for the invitations to our investor day, which will be held on Thursday, May 9 at Assembly Row in Boston.
Operator, you can open up the line for questions.
Our first question comes from the line of Jeff Donnelly of Wells Fargo
Good morning guys, and Dan thanks for the call around guidance. The question is the guidance that you provided seems slightly more conservative than earlier commentary you gave in late 2018. Is that small delta the result of the specific change in your outlook you can talk about or is that really just kind of a nonspecific I guess it's a desire to be cautious looking out in 2019?
Yes, I think it's a little bit of a bolt I think that you know when we put things out there we had a placeholder with regards to D&A. In the incremental D&A outside of the lease accounting and so that ended up being a little bit higher and I think just as we work through, you know we -- you know it was a preliminary guide [ph] post you know guidance back in November and as we work through you know a budgeting process which hadn't really yet started until you know mid November 2018 through the end of the year and wasn't finalized until January. I think you know we'll get 60 basis points ¢4 revision on a $6 and ¢40 basis so it's tweaking around the edges. It could give you a little bit more conservatism, yes.
And maybe just a second part on the guidance, can you talk about what your assumptions are on cash spreads on renewals for 2019 just because in 2017 they were up 9% and as in 2018 they're up 4%. I guess I'm wondering if there's a trend there if you guys kind of think you saw the bottom here you know maybe that's not so much a trend other than just a mix of lease maturities that you faced?
Can you repeat the question? I got you Jeff. You know it is -- I don't have much to add to that. It is a mix, it depends on what deals are coming up how it kind of rolls out plays through. There's no doubt, there are pressure on rents and you know I tried to make that point in the -- in the prepared remarks, there -- at least we say, more volatility, you know, great deals are great, not so great deals are not so great and that you know mix between top and bottom is more when it comes down to renewals I mean if I look in -- just look even at the fourth quarter, I can give you a couple of pretty interesting specifics for the years you know CDS deal had a great property that we have in Northern Virginia, that's a big time renewal increase. At the same time, we sit there with an open deal I think recreational Plaza where they had somewhere else to go and we wound up agreeing to reduce rent on that something that wouldn't have happened a few years back. So it really is a bit more volatile I don't know what more to tell you in terms of you know the notion of how those renewals will play out but I can tell you that overall if you'd certainly expect to see continued growing rents from us. I just can't give you the mixes as precisely as maybe you'd like it.
I think you'll see more volatility. I think you saw that this year with regards to some of the rollover you know in the range of 6% one quarter, 22% you know you'll see more of that I think going forward.
Just one last question for you, Don. I'm just curious how you guys think about office leasing decisions that you know dissemble you obviously cut the deal with Puma [ph] you know retail brand instead of looking outside of retailing. I'm just curious because for your retail properties you guys have always talked about putting you know thought behind not just economics but how the tenant contributed to the overall merchandizing and other factors. For offices, is it strictly economics is it credit risk is it -- you know what it does to the daytime population? How do you guys kind of think about that?
Yes, that's a great question Jeff, It really is. There is you know on the waiting of merchandising versus economics certainly in on the retail side as you know we put a lot of you know there's a higher weight on the merchandising side. On the office side is less; it is more economics but not completely. So at the end of the day, you know again when we're doing office, we're only doing office at our places where we created that environment on the street. So to the extent the company has a workforce that aligns better with the merchandising that we've done on the retail side on the street that is clearly beneficial or you know they get a checkup in that type of environment. Credit is certainly the most important thing as we look at it on the office side but you know that merchandising component is clearly the component in the way we put there.
Our next question comes from line of Christy McElroy of Citigroup
Good morning, this is Katie McConnell [ph] on for Kristy. So if you can talk generally a little bit more about the yields you're able to achieve on larger mixed use development projects and how you're underwriting future phases as well and how you think about it in the context of ultimate value creation and what these assets can be worth upon stabilization?
I'd love to deal with that one. I'd love to take that one. Look there is no question I don't think I'm saying anything that everybody doesn't know that construction costs are clearly high end and you know probably will go higher as we go forward and you need premium rents to do that. I can tell you the best thing that we have done in the last decade was to not stop our mixed use development program throughout the last recession. That put us as you know in the place of having the places themselves the street level places created during that period of 2013, 2014, 2015. And so the incremental mix used development stuff that we do at those places Pike & Rose [ph], Assembly rows[ph] and Santana row, are you know are risk mitigated in large measure. I very much believe that mixed use properties are at least the good ones are completely integrated in terms of those uses and have to be viewed as integrated in terms of their Cap rates what they would be sold for what those income streams are valued at? And so when we have a chance to jump on, take assembly. The next big piece for residential and office at a combined 6, on a fully loaded basis and closer to a 7 on a cash on cash basis. There's no doubt in my mind we're creating significant value. And that's in a market where construction costs are about as high as any place that we've seen and given what's happening in and around us with the casino and other things that are taking that construction workforce and employing them. So if you just step back then and say all right, do you view these mixed use properties that we're dealing as sub 5 capital you know assets in total? Absolutely we do. We absolutely look at those things as being 1 plus 1 plus 1 equals 4 in terms of office and ready and retail and accordingly to the extent we can put our capital work 6% or better certainly at assets like that. We think we're getting a sufficient premium to our cost of capital plots as has been demonstrated Santana and in Bethesda [ph] as these things are open and yes they take a long time to get up and yes they take a long time to mature but they are the gift that keeps on giving. So the growth rate of those assets we've experienced to be higher than other stuff. So the IRR's are effectively higher than other stuff. So I hope that answers and I hope that puts in context for you.
Our next question comes from the line of Steven [ph] of Evercore ISI.
Thanks, two questions. I guess Don the follow up on that you know was you think about places like Santana Row in the next days and an office. I mean are you sort of raising the bar at all are you getting a bit more cautious we're getting later in the cycle particularly on the office side as it relates to pre-leasing? Or you know sort of the wiggle room you want on rent? I realize that the apartment side you know is a little bit easier to sort of weather it downturn. So how do you think about the office component this late in the cycle?
Yes, it's a very fair question Steven, and look we absolutely look at this market by market property by property and as we make those decisions and I'll give you a great example. You know when we look across the street at Santana Row when you look at those 13 acres; we had a tenant that we could have signed for the entire 350,000 square feet of space to effectively pre-release that one of those buildings. We decided not to do it. We decided not to do it because of the credit of the tenant, because of the viability of the business plan. Even though the rents were strong. So you know, it's important I think that you know that if we're allocating capital and we're allocating the underwriting if you will, the quality of the tenants that we're getting that while they are completely -- while they're very much de-risked because of the environment we've created the not totally de-risked and so we look really closely at the credit, we look really close at diversity of the tenant base, we look very close as to the prospects of you know their impact on the rest of the shopping center as [indiscernible] asked early on.
In conjunction -- in total, we feel real strongly about Silicon Valley in terms of those opportunities over the next 2 or 3 or 4 years you know beyond that we'll have to see. It is not as vibrant at all in Montgomery County Maryland and that's why we're doing 1 building relatively small size. We know we want office as part of the overall you know mix of the -- mix used Project those will probably be smaller tenants and more diversified in terms of the business. So the market -- the marketplace will dictate it to some extent but we have no problem saying no to a tenant that doesn't you know meet the underwriting standards that are necessary to make the whole thing work.
Okay. And then I guess one for Dan, just on the guidance I guess I understand you've got a lot of balance sheet flexibility but is it fair to assume that you've got, you know some equity raised in the model to fund the $350 to $400 on the development spending in 2019?
Yes, that is not a lot and I think that we position the balance sheet and call it $80 million to $90 million of free cash flow. After dividends I mean it's capital you know we positioned the balance sheet to be able to raise leverage neutral incremental debt of $125 million to $150 million. You know we have some dispositions in the market now. We'll see how we'll look to kind of bring those over the finish line but also we've got, you know capacity on our line of credit and you know we'll be opportunistic with regards to use our ATM program to the extent that it's opportunistic.
The only thing I'd say is that, Stevens, I mean truly look at our history and in terms of how we do you digitally issue equity. It's you know -- we don't love doing the deals and you don't love it, nobody loves it and so everything balanced and the ATM program has been a good program in terms of matching up with development spend pretty nicely. We're in a bad a position as I think you know where we don't have to do that though and so when you sit back and you look at all the alternatives I think instead we had some properties in the market I think we got a $125 or so million worth of dispositions that are in the market now that hopefully get done we expect them to get done. See how that plays out. So it is all about having more hours in the quiver[ph] and being able to pick and choose them opportunistically, carefully and in no way in a big -- in any one of those arrows being over too big a deal.
Our next question comes from the line of Alexander Goldfarb of Sandler O'Neill.
Okay, good morning. Just got two questions here. First Don just going to the office side, you guys have obviously now done some pretty big deals with Puma and partners health and Splunk. Are you guys thinking that maybe as you look at your pipeline going forward that maybe you want to have more office or do you feel that you guys are still leading with retail and offices -- I don't want to say an [indiscernible] but offices with second component just trying to understand because obviously you've had some pretty big wins here.
It's a very good question Alex and please understand, we are a retail company that -- if you just -- the way you build out a large mixed-use project and we have 3 between Santana assembling and Pike & Rose in particular. You have to create a place first. It's -- create that place and we lead as we have and in all 3 with residential overlap, because there's no question having a population that lives there associated with the environment created is a real positive. Now, as those things mature and if you're lucky enough as we have been to have a big piece of the land where there are incremental ways to create value the logical next place to go is with a time population. The thing that we're seeing in the marketplace to me that is just really frankly amazing. It's become almost not optional for a progressive company to have and then who hires younger people or the workforce that it needs to not be in a place with all of the amenities and so we're sitting with this advantage if you will of this many, many year head start if you will of creating places and so now you'll see office that you know that daytime population that fills in and makes the ground out the communities and makes them so strong. I mean I don't know whether Puma would be there without the partners deal and remember partners healthcare we don't own the building. We didn't take the risk we leased [ph] it.
So when we are a conservative company in terms of the way we view value creation at these at better assets, we could probably grow faster. If we did absolutely everything ourselves and you know and move forward in that way. We're careful about it and we only do it ourselves in places where we've really already established and know what the environment is. So think about our office as an integrated part of a decade or 2 decades long. You know place making environment community if you will that you know has to have all components of lifestyle including the office environment.
And then the second question is and maybe my you know with old age maybe I'm forgetting things but I thought previously you guys have spoken about just what the experience of the second phase of Pike & Rose in assembly that the next wave of projects would be sort of smaller in scale but the capital spend for phase 3 of assembly is significantly bigger than either of the other 2 on an individual asset basis. So just sort of curious how you're thinking about it as far as you know the stabilization period the impact it has to earnings? I know you guys are all about growing regardless so just want to understand how this bigger capital spend factors into that and if you expect a longer stabilization period or because it's a lot of offices maybe that's not really as much of a factor because they move in you know sort of quickly.
Yes, first of all, you had nothing to worry about with your age or remembering well. Everything seems totally perfect you know you're doing just fine pal. So let's get that out of the way. In terms of -- and so incremental adjustments that add to existing properties are generally smaller than the original first phase -- that we do in the first 2 phases that we do. We saw in opportunity at an assembly and I really hope you'll join us on May 9 for our Investor Day out there. This marketplace -- that marketplace is on fire. What we were able to do with that building -- the residential building which was big 477 units the time it took to fill that up surprised even to us. It was short and very different than almost every other market and it's that good so the ability to jump on that and there were some reasons both from construction cost perspective which continued to go up there as well as the -- some things that we need to get done with the -- on the residential side in terms of you know units that are cheaper effectively to do on balance it made sense to do that right now and jumping on that it's a big building, it's at the base of the take, that residential building we have very strong thoughts on how well that'll do and then when Puma was you know without us putting a shovel in the ground effectively had that deal done there, that convinced us to move forward there. So we decided to do two at the same time. It was a residential building not pre-leased, effectively we view it is that way given the level of success that we've had over the last 18 months. So it's a bit of an anomaly but it's only an anomaly based on the strength of the market the success that we've had in the first 2 phases.
Our next question comes from Ki Bin Kim with SunTrust.
Thanks, good morning everyone. So if I think about some of the trouble tenants out there and I'm generalizing here you know obviously you've talked about it but we've seen some that always work with these tenants to restructure releases to keep them viable and often cost rationalize and so forth but it's a little bit more one-off. But my question is, if I were working at the real estate department at TJ Maxx or the gems that are expanding our Palatine and any of the kind of expanding very strong retailers and I see other tenants getting a 30% discount on the rent, I would think and come to you and say, "You know what? We're bringing customers into your center. There's a lot more value for us to be there. Why are we not getting a discount?" Now, I will answer my own question and I know it was different by property and quality and all that, but do you see this as a risk and is that increasing?
I'll keep in. I mean there is no doubt. By the way, if you were hired at any retailer’s real estate department and you did not try to take advantage of an oversupply situation in the country, you probably wouldn't be there that long. So there is no question that every retailer has adopted the position of getting the best deal. That's not different than it's ever been. There is no question that in a more oversupplied environment that they play that card higher. Answer now your own question, when there are no other opportunities, you can play it all out but you don't win. On places where there is more opportunities, you do win. And that goes back to my volatility point from earlier on. I see a bigger spread between good deals and not so good deals from that perspective. I don't think there's a company out there that can say that the retail real estate industry is not in a position of change, does not have a overall over supplied phenomenon associated with it. So you have to look at two things; In your specific real estate what leverage do you have to a deal and at what terms. And then secondly, outside of basic shopping center leasing, where else do you have to grow? What other ways do you have to grow? And if you can't answer those two questions, then you've got a growth problem. We don't have that issue. And that's a big deal. So, the last couple of questions have been about all those. Think about this for a second.
We have a 0.5 million square feet of sign off of deal that are going to create over $23 million of NOI over the next couple of years. They're locked. That's a lot of pizza shops and TJ deal, dry cleaners and stuff. That's a pretty good down payment on future growth. And that's because of a vision of the overall importance of place that has been a 20 year or longer on view for us. So what you say it's, of course, it's a risk, it's a risk to the entire industry and you have to look at what you have to negotiate against that. And I think we've done pretty well.
Our next question comes from line of Jeff [ph] of Bank of America, your line is now open.
This is Justin [ph] on for Jeff this morning. First is congrats on a good quarter and solid year. One for Dan, we saw portfolio occupancy tick down a little bit in fourth quarter, both sequentially year-over-year. Can you just drill into what happened in the quarter and then second, just from a guidance perspective, where you sit today, how should we expect occupancy to trend over the next four quarters?
Yes, sure. I mean, occupancy, as we reported, December 31 documents of 2017 versus December 31, 2018, overall occupancy was pretty stable over the course of the entire year from an economic perspective. And so while you saw some point in time to point in time demission, I think that that was part of it. I think in the fourth quarter we were hit with a little bit of some bankruptcies on a smaller level that led us down a little bit over the course of the quarter. That's a bit of the color that we could kind of point to. I would say that with regards to some of our small shop, I mean, which trended down a little bit as well, a lot of that is driven by the de-leasing activity we've got going on at Sunset and Coco. Without those two properties, our small shop would be about 150, 160 basis points higher. So, I think it's a little bit specific to kind of some of the redevelopment that we're doing within our portfolio with regards to some of those trends. But I would expect over the course of 2019 occupancy and lease rates will be fairly stable.
Okay, great. Thanks. And then, Don, sorry if I missed this, but any updates on the Primestor JV? I'm curious that these assets are meeting your internal expectations so far. And if there's anything you've learned there from this venture that you might be able to integrate into the overall core portfolio?
It's very, very good question. And the short answer is, yes. I mean it's been a really good experience all the way through. Jeff's on the phone. Jeff, can you take Primestor on this?
Yes. We've been up and running for about 18 months now with the Primestor folks and we're meeting our projections on what the property produces in the way of NOI and leasing velocity within the portfolio. And if you look at some of -- we had a small bankruptcy at G stage. We were able to backfill those spaces very quickly at better around. So operationally I think everything is going well with the JV. Jordan Downs, as Don mentioned, is our first new investment with them since formation. Everything there is on track or 75% leased with our boxes in place and focused on leasing are a small shop space right now. So that's on track as expected. So I think everything is going well. In terms of are we learning anything that we can apply to our greater portfolio? I don't know, Don. You might want to chime in on that. I'd say probably not, but again, we haven't been in the JV that long and there was a lot of heavy lifting up front of course, when you form a relationship like that. So, I would expect there'll be some nuggets as the years go on that we're able to extract. But Don, what do you think?
Yes, I think the word nugget is right. Remember we did this deal with Arturo and Primestor because they did things like us. I mean, if you go to a number of their properties, [indiscernible] is the one that comes to mind most, you'll see a lot of importance on place. A lot of importance on the mix of tenants and that's kind of what got us together in the first place. So, we are aligned in the way we see things. There'll be nuggets that come out going forward that'll go both ways. I'm sure, but not at this point.
Thank you. Our next question comes from of Vince Tibone of Green Street Advisors.
Good morning. I'd like to drill down a little further on the comparable property NOI growth guidance. I'm just trying to bridge the gap on how to get to the 2%. Because you mentioned occupancies, expected be roughly flat this year. We spread in, contractual rent bumps are, it seems like that would imply something greater than 2%, just hoping you could provide a little clarity there.
Sure, sure. I think that kind of our core portfolio overall, we'll see kind of decent growth along with some of the proactive releasing activity that we had in 2018, kind of really reaping the benefits into 2019, kind of getting us north of 3%. So you're right from that perspective. But there are specific things in the portfolio that will weigh on some of those numbers. One, some of the late year bankruptcies that impacted the fourth quarter. We'll see that carry out through 2019. So that that'll be about a 50 to 60 basis point drag in our forecast for the year in terms of some of those kind of below the radar impact from bankruptcy. And then also I mentioned the redevelopments at [indiscernible] Huntington, Congressional, great pieces of real estate with what we're doing and kind of cash flow over 2019 as we do that, long-term we're creating value and you'll see higher rents and higher property operating income over the long-term there and value creating projects.
So again, similar to our proactive releasing activity, this is more of the same but you know just on a larger scale.
One quick follow up there so just -- is the redevelopment contribution going to be negative then just looking, it look like you only have a, you know a few smaller projects that stabilize in 2018 that would contribute to you know comparable property an ally and if you're rolling in 2019 as well. So you know given that 80 basis point drag, is the overall contribution to next year's growth negative from re-dev?
Well, we look at kind of re-dev and development kind of in the same thing I think that you'll see some balance there. I think you'll see some small contributions from re-dev perspective in terms of what's on page 16 of our 8K. I think you'll see continued contributions from these 2 roll up of assembly from 2018 to 2019 as well as [cross talk] Yes, so I think you'll see yes, based upon you know that redevelopment you know there will be drag from redevelopment during that -- on our comparable number.
Our next question comes from the line of Nick Yulico of Scotiabank.
Dan, just hoping to get you know maybe a few of the items how we should think about for the AFFO adjustments there like you know recurring Cap Ex number how that might trend this year versus last year?
I think we expect you know when we look at kind of you know the going from AFFO TO AFFO, it will be pretty consistent I think with 2018 numbers you know after you know our free cash flow which is really AFFO you know less dividends should be pretty consistent. We're still projecting as I mentioned free cash flow after dividends and maintenance capital to be pretty consistent get us into that you know call that $80 million plus minus range in terms of -- we expect our AFFO payout ratio to be pretty consistent with what we have in 2018.
Okay, helpful and then Don I just want to return to Santana Row and the future office development opportunity there you know I mean all the stats on the market out there show and you know shrinks, new supply you know competitive new supply continues to get leased and there's less of it available so I guess I'm just wondering you know do you have a like it does a company have an internal time frame on you know sort of go or no-go on the office there? Since you know and then whether you know we should think about you know the separate you already have this 320,000 you know office versus the million square feet across the street you know whether there's like separate decision making on that or you could just launch you know everything once if the market receives[ph] you think the market strong enough?
Yes, let me -- it's a great question. You know I mean cycles, right? So as we sit and we look at Santana we very much would like to make a decision the first half of 2019 as to whether we're going forward with the first 350 that is where the building across the street from Santana that seem to be in the West. That is the next thing up. You know we haven't even delivered Splunk yet and it will be delivered by the end of the year and hopefully this year might even go into next year we'll see how that plays out but other than Splunk we've got you know it'll be the go-no-go on the 350. You'll see that the decision soon this year because the market is as strong as it is. It definitely weighs into our considerations we know the -- you know queries we've been getting about office on that site. We know that they're strong; we know we've kind of proven it with Splunk 1, Splunk 2, AvalonBay chose to bring their offices there with us. Our 1st office building has been a complete 100% lease with great rollups there.
So we know we've got an office environment that we've created there that will be successful so you know to the extent that market softens as it surely will at some point over the next 5 or 6 years. We don't want to be in that position then so there is a definitely a desire to get it done and get it going at least part of it in 2019.
Thank you. Our next call comes from the line of Darek [ph] of Deutsche Bank.
Are you seeing an uptick in interest or signing leases or additional leases with online native retailers and are there any examples are you seeing proof of concept regarding long term viability there?
That's a great question in terms of long term viability too early to say but I can tell you that we've had some real good meetings and are doing some pretty good deals with digitally native brands. Coming over whether we're talking about Casper, parachute home or all birds or any of those guys. Now you know all that is good and it's you know demand -- an increasing demand in that type of properties that we have that's clearly a positive. Now whether those brands are you know will be great brands for 10 or 20 or 30 years. Time will tell. We'll have to see. Its why the diversity of the income stream is the most important thing in that decision making process but clearly many -- all would be too strong many of those digitally native brands who just 3 and 4 or 5 years ago said I'll never have a brick and mortar place have gone a reversed course that way. And yes that with the type of properties we own where our natural recipients of that demand.
And just switching gears a bit I know there are no dispose provided in the guidance. But you guys are out there in the market. Any idea of how many assets are currently being marketed and you know the demand profile you're seeing in the private markets and how they're performing and basically are Cap rates coming in at your expectations or what's the delta?
If we're in the market as Don mentioned 2 assets you know we expect them to kind of hope to get into that $125 million range in terms of proceeds and you know it's an ongoing process I think we're -- you know I think that right now with regard to those prophecies you know sales prophecies you know coming in at our expectations we'll see whether or not we get them done but yes, no I think for our assets we're seeing relative stability of demand for them and no surprises so far.
Our next question comes from the line of Collin [ph] of Raymond James.
Thanks good morning everybody. just in the prepared remarks the tone seemed to be pretty upbeat about maybe getting some acquisition opportunities to the finish line this year anything else you can offer us or expand on those comments at all this point and maybe just generically should we think about that -- those opportunities that your presume maybe having redevelopment component based on some of your prior activity is that a fair way at least to think about that?
Let me jump on that for a bit because it's so funny when Dan and I were talking about what to do for you know prepared remarks. You know we want to talk about acquisitions because we do have some things that are close. The bottom line is when we do acquisitions we want to make sure that there's an opportunity to create value. We've never been a volume shop as far as I'm concerned we never will be a volume shop and it's harder to buy today and assume that rents are going up but it's not you know 2006 anymore. So that kind of leads us to say what we do primarily will have some sort of a redevelopment component to it. It's what we do best doesn't mean we're not looking for under market rents. Of course we're looking for under market rents but it's hard to find that. So you know you'll see some acquisition activity from us this year. It'll probably be relatively minor but you know mostly because our best use of capital is in the places that we've already created and we have incremental things to do at them that is the on a risk adjusted basis.
Clearly, the best thing for us to be doing which is why you know you see that development pipeline so full but one of the things we never want to be is the one you know one trick pony and so you know on that, on the acquisition side you'll see the occasional acquisition. It will most likely be part of some strategic plan to either add an adjacency or do something to it to be able to create redevelopment value.
And then just going back to Derek's question on disposition activity. Can you guys just touch on the Atlantic [ph] sale on fourth year?
Sure, we closed on a $27 million grocery anchored center and you know pricing was kind of in the mid-60's, kind of taking that with a blended basis bar you know. Chelsea Commons residential you know we were in the mid 5's on a blended basis on those 2 you know kind of what we view as non-core at the end of the day just kind of -- and so that's the color on that. I mean I think that..
The demos are to light there for us and it came as part of a package I know 10 years ago maybe even more now that includes a number of assets and that was one of the lighter demos. It was a good area. It is a good area North [indiscernible] but it is what it was they were light and so when we looked at you know what we'd be able to do there in the future we said nothing. And had the ability to tax shelter which is what we did and that's what it got sold.
I would like to turn the call over to Ms. Leah Brady for closing remarks.
Thank you for joining us today. We look forward to seeing many of you over the next few weeks so again follow up if you did not receive the Investor Day, save the date thank you.
Ladies and gentlemen thank you for participating in today's conference this concludes today's program. You may disconnect. Everyone have a great day.