Q3 2019 Earnings Call
Greetings and welcome to the personal property group third quarter 2019 earnings Conference call. At this time all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being record.
It is now my pleasure to introduce your host Ms. Stacy Slater thinking you may begin. Thank you operator, and thank you all for joining Brooks more third quarter conference call with me on the call today or Jim Taylor, Chief Executive Officer, President and Angela Aman Executive private <unk> Executive Vice President and Chief Financial Officer, as well, Mark where again.
That get a vice president and Chief investment Officer, and Brian Finnegan Executive Vice President and Chief who will be available for human <unk> before we began let me remind everyone that some of our comments today may contain forward looking statements that are based on current assumptions and are subject to inherent risks and uncertainties as described in our FCC filings.
And our actual future results may differ materially we assume no obligation to update any forward looking statements.
So we offer today to certain non-GAAP financial measures further information regarding are you said 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 Africa's depends on the call. We kindly ask that you limit your questions to one or two per person. If you have additional questions regarding the quitter. Please re queue at this time, it's my pleasure to introduce Jim Taylor.
Okay, Stacy and thanks, everyone for joining our call. This quarter Brixmor delivered on time and adds promised our results are truly outstanding top to bottom not just for the headline reported same property NOI at 4.4% worthy out the FFO per share a 49 sags, but for what those numbers that.
From including the unique strength of our business plan that capitalizes on opportunities embedded in what we own and control drives higher rents and stronger margins and provides visibility on several years of growth.
The sector, leading demand from today's relevant tenants to be in our well located shopping centers at those higher rents.
The intrinsic value delivered versus merely promised through reinvestment that drives attractive ROI and moves us towards our purpose of owning centers that are the center of the communities. We serve the strength of the balance sheet internally generated cash flows and self funded strategy that allow us to execute our plan for that.
Next several years without having to access the capital markets and most importantly, the performance and commitment of our best in class leasing operations redevelopment construction accounting finance legal and HR teams that have executed notches, that's corridor, but each and every one since we began a live.
All over three years ago.
Lets dig into the result, our national accounts in regional teams partner this quarter to deliver over 2.3 million feet of new and renewal leases at cash on cash spreads at 13%, including nearly a million feet of new leases at comparable cash spreads of over 30%.
Overall leased occupancy grew 40 basis points sequentially to 91.9% and importantly, we drove a 30 basis point increase and small shop occupancy sequentially.
We commenced over 18 million a new hbr this quarter, bringing down the gap between building leased to 330 basis points from 400 basis points last quarter.
However, while the operations team is doing a phenomenal job getting tenants and rents commenced the leasing teams haven't slowed a bit as these signed but not commence rents continue to get back filled in fact, those signed but not commence rents are once again approaching 50 million a navy our and our current leases in the pie.
Hi, blind to be executed comprise an additional 42 million an AB are these executed leases and leases in our pipeline provide us great visibility on future growth.
Once again this quarter, we maintain discipline with capital as net effective rent held firm and our intrinsic lease terms held steady with average duration of nine years and embedded rent bumps up 2%.
As we discussed in the past those embedded rent bumps are cheapest form of growth and build upon our overall portfolio average.
Our redevelopment and construction teams partner debts corridor to deliver another 68 million of reinvestment projects and an 11% incremental return.
If I may pause on that.
You'd have to deliver over 250 million of ground up development, this quarter, which typically yield 6% to 7% in which involves much higher execution and leasing or ask to create the same amount of value that we created this quarter.
That's why I love, what we're executing upon at Brixmor profitably, making our assets better and more relevant to the communities. They serve as I mentioned last quarter the improvements at the asset level, our palpable not only driving increases in ROI and intrinsic value, they're driving small shop on that and future ROI growth.
Reinvestment projects completed this quarter included the first phase of Mira Mesa, which was delivered a quarter ahead of schedule, where we re merchandised a former calls with the sprouts five below Michaels and Bob mouth.
If you find yourself in San Diego, We'd love for you to see how we transformed the tired powered sater into the center of this very dads community.
Well. It's also very cool is that we're not done creating value at Mira Mesa at this initial phase sets up opportunities for additional feature density from pad sites to potential residential.
We also keep driving the velocity of our reinvestment pipeline, adding 12 projects to be active pipeline. This quarter, we now have $414 million projects underway at an incremental return of 9%.
I'm truly proud of our regional honors identifying and executing upon these opportunities that drive both our ROI and our purpose.
Our investment team continued to capitalize on liquidity for noncore assets completing the sale 13 assets for total proceeds of 151 million, bringing our year to date totaled just under 250 million.
In the quarter, we exited another for single asset markets.
Meaningful part of the benefit you see in our operating numbers is being driven by this clustering of our investments in our core markets. In fact, a powerful statistic regarding the benefit of this focus is that we continue to achieve leasing volumes at the top of our historical range of two to two and a half million fee per quarter with nearly 100.
You are shopping centers as communicated on prior calls we do expect to me more balance in the coming quarters with potential acquisitions identified in a number of our target markets as always we're focused on those opportunities where we can leverage the unique strengths of our leading platform to drive growth an ROI versus.
Simply putting capital to work or chasing statistics, so we will remain disciplined.
Finally, we continue to strengthen our balance sheet opportunistically issuing 350 million of 10 year notes at a record tight spread for us and an effective yield of 3.3%. We now have no debt maturities until 2022, and a very well laddered maturity profile after that.
Simply outstanding execution by our finance team.
In summary, I couldn't be prouder of how the overall team has delivered on our all weather plan to drive sustainable growth and value creation from our portfolio of well located shopping centers. This very same execution, which shows in all facets of our plan, including our rent signed but not commenced the robustness of our forward leasing pipeline.
The growing reinvestment pipeline and are accelerating shot small shop, my MME provide us unparalleled visibility and confidence on continuing to deliver even with the inevitable disruptions that occur in retail from year to year and cycle to cycle.
That I'll turn the call over to Angela for a more detailed discussion of our financial results and outlook Angela.
Thanks, Jim and good morning, I'm pleased to report another strong quarter of execution. That's the success of the portfolio transformation. We began in 2016 becomes fully evident in our financial and operational metric.
I thought though in the third quarter was 49 cents per share, reflecting an acceleration in same property NOI growth to 4.4%.
Same property NOI growth was driven by positive contributions across every line item.
Notably the contribution from base rent was 290 basis points, representing a sequential acceleration of 120 basis point due to strong rent spreads over the last year as well significant rent commencements during the quarter, which increased build occupancy by 110 basis points since Q tail.
In addition to the significant contribution from base rent not recoveries contributed 70 basis points to growth well ancillary and other income and bad debt expense, both contributed 30 basis points and percentage rent contributed 20 basis point.
With the contribution from network, while the contribution from net recoveries is partially a reflection of the timing of Opex spend. It also reflects the capital investments we've made in the portfolio over the last few years, which are driving margin improvement.
We have increased our 2019 same property NOI growth guidance to 3% to 3.25% and our 2019 AFFO guidance to $1.92 at taller 93%.
As we've discussed with you throughout the year, the historically high amount of revenue embedded at least a signed but not yet commenced has meant that the timing of rent commencement date has been both a risk and an opportunity to calendar year growth in 2019.
As I believe this quarter clearly demonstrate we're not only hitting our scheduled rent commencement dates, but we're also finding opportunities to accelerate the date and get tenants open and operating sooner than expected through the combined efforts at the entire platform.
Our results validate the significant opportunity we saw in 2016 to capitalize on or below market rent basis and to transform the portfolio through accretive reinvestment importantly, our result also underscored that enhancements we have made to our operating platform have positioned us to fully capitalize on the opportunity embedded in our well located shopping centers.
As a result, well we're not prepared to provide specific guidance for 2020 I would note that we do expect same property NOI growth at or above 3% next year as the business plan. We have laid out continues to result in strong base rent growth did a robust leasing activity and redevelopment delivery, despite our expectations of ongoing tenant disruption.
As it relates to the balance sheet, we continue to advance our capital structure objectives in the third quarter by issuing $350 million, a 10 year unsecured notes.
The proceeds were used to repay the $300 million that remained outstanding under a 2021 term loan as well as outstanding amount on a revolving credit facility further extending our weighted average duration.
As Jim mentioned, we we now have no debt maturities until 2022 and no amounts outstanding on our 1.25 billion dollar revolver.
Debt to EBITDA is currently at 6.2 time, and we have significant financial flexibility to execute on our business plan.
Last night, we announced a 1.8% dividend increase which demonstrates both our commitment to providing shareholders with a growing income stream as well as our commitment to prudently funding our value enhancing reinvestment pipeline and growing the intrinsic value of the portfolio with this dividend increase we will continue to report one of the lowest FFO payout ratio any open air sector.
And with that I will turn the call over to the operator for Q and <unk>.
Thank you, ladies and gentlemen, we will now be conducting the question and answer session. If he would like to ask a question. Please press star one on your telephone keypad. The confirmation told the indicate that your line is and the question Q you May press star to if he would like to remove your question from the Q for participants you can speak or equipment and may be necessary to pick up your handset the for pricing.
There are keys.
Our first question comes from the line of Christy Mcelroy with Citi. Please proceed with your question.
Hey, good morning, everyone and thank you.
Angela just hoping you can talk a little bit about the mechanics of the trend in straight line rents, which has been higher this year than you originally expected understanding that you booked at when a tenant takes possession of the space and then it becomes cash minimum rents when the tenant starts paying rent. So the question is if we think about the rent commencement that occurred in Q3.
Which had an impact on bill the occupancy, but also same store growth how should we think about that straight line rent number in Q3, which is still at a pretty high level in the context of near term incremental rent commencement, what's and what sort of a good normal run rate for straight line rents going forward.
Yeah. Thanks, Christy I mean, you're right that we have seen additional straight line rent relative to our original expectations the share and to your point. It really has been a function of how large that that spread between leased occupancy and build occupancy has grown to over the course of the air particularly in the third quarter as we had many tenants are in possession of that.
Based on later in the quarter, taking commencing rent and even for the Q4 rent commencement date, if I look at the number we reported in the third quarter I would certainly expect that it does begin to decelerate from this point going forward, but again, it really is going to be a function of that gap between a lease occupancy and.
The occupancy and how many tenants are in possession of the space and duration of tenants in possession of the space before the rent commencement dates as I look forward to next quarter and then into 2020 I would certainly expect that we decelerate on straight line income from here and I would also just in terms of more broadly on non cash on cash rental.
The adjustments.
A reminder, I would say that the Fas 141, or the above and below market rent is going to continue to decelerate as well the step down you're seeing in 2019 relative to 2018 as a little outsized given the fact that we had accelerations of some below market rent amount in 2018 related to bankruptcy activity, but as we laid out.
In our 10-Q, you should expect to see a penny to two pennies a sharp deceleration on a year over year basis going forward from from that line item as well.
Yes on Christy I, just comment that it really does reflect our success in leasing and getting tenants in possession.
And accelerating that timeframe to actual rent commencements. So.
While we do expect it to decelerate, we're going to continue to push on leasing to drive build occupancy.
Okay. That's helpful. Thanks, and then just your revised AFFO guidance implies a range of 46 to 49 cents in Q4.
You are at 49 cents in Q3, I'm guessing there's some calming solution from dispositions that you just completed which are pretty heavy so I guess in addition to the 3% or higher same store growth that you expect in 2020, Angela you alluded to maybe you can kind of help us think about the major moving pieces that impact so in Q.
For but also over the next few quarters, because if I think about the midpoint of that Q4 range. It implies a base of annual SFL what might be.
Yeah. Thanks, Christy I would say I think you've hit on the the major components in terms of Q3 to Q4, the two things really aren't noncash expected noncash deceleration and then as well the impact of both the third quarter capital recycling activity as well as any expectations for fourth quarter capital recycling activity as well as we look out to.
2020, I would say, it's it's effectively the same answer and that we do expect again strength from same property NOI growth you will see some impact from capital recycling activity, which has been backend weighted in 2019, and then any expectations for 2020 capital recycling activity and then again importantly that deceleration from noncash income.
Okay. Thank you.
Thank you. The next question is from Todd Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, Thanks, good morning.
Can you talk about the acquisition pipeline a little bit here I think Jim you touched on briefly you were a little probably in the quarter after sourcing some deals in twoq.
Are you seeing more potential opportunities out there and would you expect 2020 to shape up to be more active year on the acquisition side, and then 2019, absolutely I'll, let mark comment a little bit we are seeing some more opportunities and lot of what we've targeted our assets that aren't necessarily on the market but assets.
We think would further drive our clustering strategy and some of our key target markets. While we have noticed is that pricing remains pretty tight right now and we're going to remain disciplined on the acquisition front, but I do expect that pays to accelerate and for us to be much more balanced in 20.
Yeah with respect to the pipeline, we're seeing some interesting.
Current activity in the market certain private equity sources and pension funds have been bringing opener assets into the market I think in part to reduce their overall retail exposure, which is leading to some interesting.
Individual asset acquisition and portfolio opportunities. So I think we'll see that overtime. The flip side of that coin as we've also seen the increase and an increase of of inbound. Some other private equity sources that are seeking open air retail exposure because the asset class screens.
What cheap relative to other major asset classes. So we're seeing those type of Investor show up on the bid list, which is pretty healthy for the overall market, but I think Jim Jim said that Jim said, it well and we've talked about it in the past couple of quarters. It's about remaining disciplined with capital allocation hearing you shouldn't expect us just to do deals just to do deals already right very disciplined and find deals where.
We can drive value with our platform like I think we well with the recent acquisitions, we did in Q2.
Okay, Great and then Angela one of your peer sold common equity recently is that something you would consider in order to accelerate.
Your deleveraging plan to little bit maybe take leverage down below your your longer term target, maybe cash up for some future acquisitions and or redevelopment opportunities here. How are you talking about that let me start and I'll, let Angela finish.
Look we have brought our balance sheet to a great level and to where we promised over two years ago.
Which gives us adequate funding capacity for several years of what we're doing in addition to the free cash flow regenerating. We think we're cheap at this level.
And so we don't think it makes sense to issue equity here and you know going forward.
At different price levels, perhaps but what I think most important about our plan.
Is that we don't have to access the capital markets and that was very important to us to.
To make sure that we set up at self contained plan that could drive growth drive improvement in ROI, that's not not dependent on external funding sources. Yeah. I you know the only thing I would add to that is that yes. We have said for sometime now that we think that additional de leveraging really is going to come from EBITDA growth and that is a large part of what you saw in the current corridor.
As you know all of that the work we've done in the portfolio over the last few years really does drive on leverage asset growth that is having a significant benefit in terms of our debt to EBITDA I'm not track and you're going to continue to see that overtime as we harvested below market.
Rent basis across the portfolio. So we do feel like you know that the balance sheet isn't a great possession and think that the work. There is effectively done yes, there's still last comment I'd make there is that.
We've got a balance sheet that is matched with the left side of what we're doing and we're not taking much risk on the left side of our balance sheet. Most of our reinvestment activity. It's preleased, it's shorter duration and we're demonstrating that every quarter to angela's point as it comes online just like the 68 million that's corridor with cash flow.
So at a great incremental returns and the way we're finding it is de levering up so.
We feel very good about the trajectory we're on.
Okay. Thank you yeah.
Thank you. The next question is from Jeremy Metz with BMO capital markets. Please proceed with your question.
Hey, good morning.
Angela you mentioned, the 3% or higher same store expectation for next year. Some landlords have been actively working with retailers like bed Bath Thermo Dallas to restructure some deals here and minimize some disruption next year. So I guess Im wondering have you been doing the same and maybe you can just comment more broadly as you sit here today how your.
Thinking about bad debt.
Your next year relative to historical ranges 75 to 100 basis points, which you typically target yeah. I mean is a great question, Jeremy I think as it relates to kind of renegotiations of existing contractual obligations from our tenants, we really haven't been engaging in those conversations I do think we're in a different possession and many other platforms.
Given the fact that the portfolio is below market from a rent perspective. So we have been it's I think we prevent enable to deploy capital accretively and reset rents to market and if we have an opportunity to do that to take back space in order to do that we're willing to entertain that but we havent been willing to entertain cutting what's already at below market rent in order to.
On a lot to facilitate that that negotiation with the retailer I'll, let Brian comment more specifically, yes, I think Angela covered most of the Jeremy I mean, we're in great position you can see it in terms of some of the distressed retail space that we've taken back we've brought those leases to market demands been there to backfill than backfill.
Them fairly quickly so it puts us in a great position in our portfolio.
When retailers do ask and sometimes they certainly do.
Yes, just on your bad debt questions, specifically as it relates to next year. We've always said in our expectations are for a level of bad debt across the portfolio of 75 to 100 basis points. We're trending this year right in the middle at that range and that would certainly be our expectation for next year as well that said as I mentioned in my comment about our.
Our I'm 2020 outlook, we do assume that you see additional tenant disruption in the base rent line as well and that certainly incorporate our expectation.
Yeah that's helpful.
As my follow up here I, just wanted to stick with the same property I know why topic here I'm wondering you know how much you know if you can quantify redevelopment, having an impact or is it 5800 basis points I recognize it's all positive the growth we're trying to get a better center core growth first redevelopment tissue and as we look in the night and then.
Can you walk through the expense side, a little more you've obviously done very well keeping expenses flat here. So wondering how you're kind of achieving that how sustainable that really is are there.
That being moved into redevelopment projects can be capitalized is that helping any color on that would be great. Thanks sure in terms of the redevelopment impacts on the third quarter and you know in embedded in our expectation for full year 2019.
It's been if you just look at read that the larger scale redevelopment projects in particular, it was about a 50 basis point benefit in the third quarter, it's going to be less of a benefit on a full year basis, probably in that order magnitude 20 to 30 basis points until your same property NOI.
Remember that when we close that number and it does include the future redevelopment pipeline. So all of the drag as an example associated with the Kmart bankruptcy is offsetting the growth you're seeing there from a from the end processes recently completed redevelopment projects, but again 50 basis points on the corridor, probably 25 basis points.
On a full year basis in terms of expenses, you know I would say the largest share of what's going on in terms of our ability to manage expenses as bad as I mentioned in my prepared remarks, the investments we've made in the portfolio over the last few years to really bring it up to as Jim talked about on previous calls are privately owned and operated pipe racks more standard and.
Certainly is resulting in certain categories of lower expenses over time as it relates just sometimes utility cost, sometimes repairs and maintenance across the portfolio. We've also been very proactive about how we're managing our operating expense spend and thinking very critically about leakage on a property by property basis and doing the best we can manage.
That against a backdrop of what was.
400 basis points last quarter 330 basis points this quarter at leases signed but not commence and understanding that that occupancy its coming online through the end of of 2020 and as a result, we're going to have opportunity. It's right copper. So it's both of those thanks those are the primary drivers.
Thank you.
Thank you.
Thank you. Our next question comes from Alexander Goldfarb with Sandler O'neil. Please proceed with your question.
Hey, good morning over there.
Two questions first Angela I appreciate the comments to Jeremy that your 3% plus same store for next year does incorporate some element of store closings bad debt et cetera, but just as you guys look at what happened to forever 21, where everyone expected it to be sort of pre packaged it instead.
They did something random how much comfort is in your budget or how much budget is a near 3% to allow for just the vagaries, whether it's a senior bed bath or one of those big tenants doing something unexpected that sort of forever 21 did how much are you budgeting in there.
Yes, let me let me start there as we as we look at our budget, we really do at bottom up Alex and we look at not just potential tenant disruption, but also move outs and other things that would impact revenue in a given year and so I think we've taken a fairly conservative look at what we expect the disruption to be on an ongoing.
Basis looking into 2020, but one thing I'd highlight and that is that we've been thinking about this and the moment we joined.
And that we've been aggressively managing that watch list.
Getting ahead of these problems not just for 20, but 20 122, just as we were getting ahead of them before so.
That doesn't mean that we've contemplated all potential outcomes, but we certainly look at an environment like this and expect that theres going to be continued disruption one of the things that it really attracted me to this opportunity that I thought was unique is I think where any we're in a different position in that even.
In an environment of disruption or declining market hbr because of where we're starting from we have the opportunity to drive growth and look at our lease maturity profile and you can see based on where we're signing leases today relative to where those leases are turning over the next three to four years that we've got a lot.
Runway, even if market rents come back a little bit. So that's that's how we think about it we don't think about adjust for purposes of 2020, we really think about it in terms of how are we managing the portfolio.
Okay and then the second question as you guys raise the dividend just a little under 2%.
Historically your bumps have been much bigger than that and given your operates your bullish comments on next year in same store NOI is is that the two per cent dividend increase is that just because that's the taxable minimum or is that because all of that the rest of the cash flow is going to re.
Investment just trying to think how much signaling you're doing with the dividend increase relative to the growth that you're talking about on the call and all the signed but not yet commenced and Hawaii.
No, we really manage our dividend to taxable income and where we expect that payout to be.
With a view towards our cheapest form of capital is that which we are internally generating so that we are in a position to produce a long term track record of sustainable dividend increases the 1.8% that we've increased the dividend. This year follows what we did last year, but we certainly do expect that to accelerate over time.
And as the income that we're signing delivers and it's a good position to be in.
Thank you.
Thank you. Our next question comes from Shivani sued with Deutsche Bank. Please proceed with your question.
Hi, good morning, understanding that the small small shop vacancy is an important component to growth than at this economic cycle starts to get a little bit longer attitude is there anything different about how you're approaching the underwriting process.
Then the statistic has been sort of the mid 80% area for a few quarters. So how high could we expect to see this gap at some other redevelopment stuck to the bottom line I Love. This question and it actually relates to something that we started doing two and a half years ago, which is.
Actively managing our portfolio of small shop tenancy and moving out those small shops that we thought were weaker.
And admittedly, we took a hit to growth in 2017 in 2018 as a result of more proactive calling of the small shop portfolio, but what resulted as a basis small shop tenants that have much lower levels of delinquency much stronger credit and then as we move forward we absolutely are much.
More focused on our financial strength of these small shop tenants how much capital did they have to put to work what are they doing with.
Their shops et cetera, and I think as we go forward, that's really with the view that we have an all weather business plan that we are late in the cycle and trying to position ourselves outperform because our goal is not to be at 85% small shop occupancy. Our goal is to be much closer to 90, which is something that.
I think this portfolio is capable of supporting with the better leasing and a better anchor tenants that we're bringing in and the repositioning that we're doing the better operating that we're doing these assets and again I mentioned it last quarter.
You are seeing it in our small shop growth statistic, but I really invite you all to get out and see what we're doing at the asset level, because it'll it'll be much more probable for you to see the changes and you'll you'll get how we're.
Improving upon that opportunity.
Thanks, and then and we continue to hear about the expansion of the off price off price Branson concepts and the strength of this retailing concept and you guys think we're beginning to hit a point of concentration in any of the brands or any of the concept that all.
I'm going to let Bryan take this but but one one observation to make is that that that's part of a larger trend of disruption thats occurring visa be full price department stores, and what's happening with those sales, where they're going where that product is going and how those tenants continue to.
Do while many of them think they have a lot more white space in terms of the number of new store openings and we think its.
A great way of serving the community in terms of bringing them true value. Yeah. I was just added in Jim Jim hitting on the head if you look at people want.
Name brands at a discount and these operators continue to deliver value and speaking to the white space excuse me. If you look at it like Ross stores for instance, there not even in the northeast yet to just entered into the Midwest opening their first stores in Ohio. This year, there continues to be white space out there.
Our for TJX, Burlington still on a phenomenal job and the they keep improving the shopping experience within their stores. So as department stores close to Jim's point, they're picking up most of that traffic and we continue to see good demand from them for space and white space out going forward, yes, one.
The other side of this and I think it's also important to mention is just overall portfolio management and we do think about our exposures to individual tenants and where they should be and I think the strength of our platform is the tenant diversification that we do have and the strength of the top 20 or top 40 tenants that we have throughout the portfolio.
Our largest tenant is 3% of revenue and that's intentional and so we we watch very carefully.
What are the concepts that are growing how are they doing from a sales performance standpoint, and then importantly on the other side of that where do we stand relative to our exposure to them.
Thank you. Our next question comes from the line of Samir Khanal with Evercore ISI. Please proceed with your question.
Good morning, Jim Jim or Mark can you talk about the pricing you've seen in the grocery anchored centers, especially as it relates to secondary markets. It sounds like.
The core markets have held firm, but I'm just trying to get some color.
In the secondary markets here.
Yes, I would actually say I think in what you Mike quantify.
As primary markets, you're actually seeing very stable to perhaps some cap rate compression on the grocery anchored side, depending on the strength of the gross or on the secondary side of what you'd call secondary side, we really haven't seen that much change we continue to see demand for.
Our assets in markets that are an off the top 10 markets across the country.
We continue to receive sitting amount of inbound seeking access to those type of assets, we haven't seen a drastic change there at this point it really comes down to like it always has strength of the real estate strength of the grocer How's the how how's the asset then managed overtime. So we haven't really seen that much of a.
Liquidity, Samir still seems bifurcated and that if you have an asset under 50 million you have long better list as you get above 50 million.
That tends to shrink, which we hope will be an opportunity for us going forward in terms of where assets are being price because you have below 50 million, it's clearly ready competitive sale driven and that is small measure by where interest rates are and the availability of financing yeah. That's I think really what's driving a.
The pricing today.
Let me just as a follow up any given the pricing seems to be holding firm even in the secondary markets I mean could you.
Take advantage of that pricing and even be sort of net sellers next year, and obviously theres been a lot of conversations about.
What could come down the line in terms of disruption and grocery right. I mean could you take advantage of that maybe next year, just becoming more net sellers.
You know, we really are focused on being more balanced I think from a balance sheet perspective, and importantly from a portfolio of perspective, we've been in front of those assets that we deem to be noncore or that we think will be dilutive to our long term ROI and growth prospects and we've sold now over a billion a.
Real estate just in the last couple of years, which puts us in a great position to be more balanced and frankly I like that posture because it allows me to be a bit more in different adds to the movement of cap rates, because I'm buying and selling.
And you know I also think it's really important for our long term plan that we continue to find assets like we did and conshohocken, Pennsylvania to which we can apply I think the unique strengths of a national platform, where we have the relationships with tenants the access to capital and frankly.
The track record and experience and repositioning these assets for long term growth, which is a unique set of characteristics against many of the buyers with whom we might be competing who are more leveraged buyers who don't have the national platform.
And don't have the ability to fund significant additional capital to take the center to where it needs to be so you're not going to see US again as I've said in my remarks chasing the bright shiny finished asset we're going to be looking for those assets that really do provide us an opportunity to drive value added type returns.
Okay. Thanks, Tim.
Yeah.
Thank you. The next question comes from Caitlin Burrows with Goldman Sachs. Please proceed with your question.
Hi, Good morning, maybe if we just think about the 2019 same store guidance. The midpoint is now for just about 3%, which is in the 3% to 4% range that you gave at the end of 2017. So I was wondering if you could just talked about how much has played out as planned kind of showing how much visibility you have versus puts and takes that have come up along the way, but kind of.
Got you to the similar place.
I'm really pleased with how the plants come together I think most importantly, we're demonstrating how.
We can be affected and allocating capital to these assets and driving meaningful incremental returns, which is certainly part of it as well as capitalizing on the below market rents and simply just leasing to better tenants.
At better rounds, and I'm incredibly pleased that we delivered on time and as promised in the range that we expect to take.
This portfolio not just for the next several quarters, but for the next several years and I just point to again, we're trying to provide you visibility in that both in terms of our existing in process pipeline, our future pipeline as well as where we're signing rents consistently every day.
Corridor.
And where our rents are rolling which we provide detail on.
And that combination as I alluded to in my remarks.
Growing reinvestment pipeline.
A growing leasing pipeline, both executed leases and leases in process.
As well as the velocity with which we're delivering on the reinvestment pipeline.
Really give us a great deal visibility and put us in a much different position.
You know market conditions, either down or up than if we were sitting on a portfolio of fully rented.
Fully repositioned assets, that's that's where you're playing defense and that's where you might be as was alluded to on an earlier question at a disadvantage in negotiating with a tenant.
I believe there at a rent that's above market. So.
It's it's very affirming to see the plan come together.
And you know on the margins were doing a bit better.
On operating margin than we had anticipated and we're certainly seeing that in the contribution from recoveries, but I would say.
We're just real pleased with how the plan has come together and and what this quarter means in terms of the next several.
Got it okay. Thanks Beth.
Thank you. The next question comes from Greg Mckinnis with Scotia Bank. Please proceed with your question.
Hey, good morning, everyone.
Mark obviously this was a healthy quarter for dispositions sold nearly 2.5% of total gionee and have no second half of the year tends to run heavier than the first half in general for transactions is it fair to think about a similar level of dispositions in Q4 and I'm just curious kind of whats in the pipeline for dispositions today and also if you could disclose the.
The cap rate on the Threeq, you dispositions that'd be appreciated as well thanks.
So a couple a couple of things there I think the cap rates for for Q3 were generally in line with already then selling assets over the past few years. It was slightly higher based on the mix of assets that we transacted on in a.
In Q3, Q4, I would expect to be to be lower than things than Q3, and as Jim said. The goal is to try to match fund acquisitions and dispositions overtime it will be lumpy.
We don't control I don't control exactly when assets will change will trade down so expect to be bit lumpy, but overtime in the long run it should be it should be match funded.
Oh, I'm, sorry, I don't think I've answered all your questions what else did you want to head on.
No that's pretty much that covered the some questions. So thank you.
And Brian on leasing no, obviously, it's tracking along pretty smoothly.
Would you mind given its just a few details on the changes in terms of the anchor and small shop leasing since last quarter.
It's a great question, we continue to see the demand from many of the relevant retailers that we've been doing business with we've been adding to our centers as Jim mentioned the investments that we're making the redevelopment is that are coming online continue to attract best and cross retailers to our assets and so as we look out that pipeline is still.
Very robust.
From a small shop perspective, we've leased 20% more small shop CLA. This year than we did during the same period a year ago and they are on pace to have our best small shop leasing year. Despite the fact that we've had some disruption from pay less Avenue and charming and I think really the stat. This quarter, a 30 basis point increase.
Despite some of that bankruptcy impact, which is 80 basis point year over year, just speaks to the focus of our team and capitalizing on those investments. So we've been really pleased with the pipeline and you'll see us continue to announce new leases with the most relative relevant retailers that are expanding in the strip center space over the next few quarters.
Yes.
Great. Thank you.
Thank you. Our next question comes from Ki bin Kim with Suntrust Robinson Humphrey. Please proceed with your question.
Thanks, I'm just a couple of follow ups.
So when you said acquisitions, then dispersed dispositions will be more balanced.
Sounds like you're implying that it will actually be pretty close to equal to each other that's on right now.
Got pretty pretty clubs there'll be some of those disposition proceeds that go to continuing to fund reinvestment.
But thats, what we mean and you know it may mean that though in one quarter, where net sellers in one quarter or Annette acquirers to Mark's point, it can be lumpy and hard to plan, but expect us over several quarters average out and be more balanced.
I mean, that's a big change from what we've been seeing from bricks more for the past few years. So thanks for that clarification.
And then just bigger picture.
Obviously, the retail shopping center stocks have done while this year, including yourself.
I think allow that has to deal with the fact that headline banker fees for attendance at our focus and the shopping center space has had been light.
So I'm curious what you would think just kind of bigger picture.
It's a health of your attendance on your business and our there's still a storm clouds is just a matter of time and maybe the Kansas kicked down the road and how do those how does that worldview.
Shape like what you talked about being more balanced in terms of acquisitions or dispositions and what does that mean when high when it comes to actually negotiating with tenants for different.
We love the open air business I mean, it is a business. It's a wide funnel in terms of the types of uses that want retail store fronts near where people live and work and it's a it's a product that has a very low cost of occupancy relative to other types of competitive product.
And one that even as we go through all this disruption what I have a ton of conviction and well continue to remain relevant.
We certainly expect some of the less relevant tenants I don't need to provide you a list. All you need to do is reason is well experienced disruption over the next couple of quarters, but I have tremendous confidence not only in our ability to backfill that space, but to backfill it at better rents with better tenants in part because of where we're coming from.
From a rent basis standpoint, when I started I kept saying rent basis matters, no one listen, but it does matter and it's part of why we are driving the performance that we're going to drive not only this quarter, but for the next several quarters in terms of what we think about from an investment standpoint, we think.
We can take the strength of this platform and apply it to certain other shopping centers that have become less relevant butter clustered around ones that we own and why is that important because we're not taking risks as it relates to understanding the market. We're buying the center across the Street I think we know what market rents are and I think we're going to have a vision on.
How to drive ROI and drive acceptable rates of return against a market backdrop that.
Always is cyclical always has disruption and if you don't have a business plan that positions you to outperform in that then you do so at your apparel.
And the last thing I'd tell you is that.
We we see great opportunities on the investment side in this environment to continue to drive growth. So.
When when I hear that the retail shopping center has outperformed.
Year to date and cheese is there any more room to run whatever we're still ridiculously cheap.
We were really cheap at the end of last year. So for those of you who believed in us and believe that we'd execute and deliver thank you.
And I can promise you that we will continue to deliver on that.
Given the visibility that we have.
Okay, maybe a quick win for Angela.
You gave some good color on some of the expense moving pieces.
Hi, just curious as we look into next year.
Come reimbursements that youve gotten for certain capital expenditures do you continue to see that and maybe other expense line items too.
Continuing to benefit more so next year.
I would expect that the contribution from net recoveries ends up being less significant in 2020 than it was our will be in 2019.
Okay. Thank you.
Thank you. Our next question comes from Vince to Bone with Green Street Advisors. Please proceed with your question.
Good morning, I've a question on the dress barn closure process. My understanding is they're able to get out of most of their leases around year end without paying a termination fee is this the case for bricks more as well in your opinion look given the leverage to negotiate this unique arrangement.
Hey, this is Brian .
Look they came to US early this summer as they did many landlords that I think looking at both the demand for the space and the situation and of with the Sina overall, we made the same calculation and mainland was that across the industry and we're getting the spaces back.
At year end, they're paying rent through the end of this year.
In terms of the demand for that space, it's been pretty good so far I mean, we've got 60% of that space either signed or essentially committed.
Meaning it will why or at least so there will be some downtime associated when we get those spaces back at year end, but we signed two of them during the quarter with five below pet supplies plus we've got other demand from five below boutique fitness. So the demand were seeing has been pretty good so far.
No. It makes sense I'm, just curious if I dig a little deeper like why because I mean, there are probably a lot of other retailers that would love to exit leases without paying any fees, but why was dressbarn able to do it was it the threat of bankruptcy of just bankruptcy that entity or was it the risk of the whole parent company going under I'm. Just curious why are the landlord. So accommodative in this case versus.
Oh, probably a lot of other retailers, who have some are requesting you guys say no sure sure. It had to do particularly with the with Dressbarn, It's often anstey on those leases and very unique compared to other retailers without getting into it any further ivig you saw landlords really across the industry come to the same cash.
Collation that we did that there was that the ability to get read through the end of year and have certainty about that made sense based off of the signature on those leases and also then the certainty of getting those spaces back, which where it pretty attractive grants made sense to us.
Well it makes sense boom is it fair to say this will do more of a one off arrangement then something you could see other retailers replicating with landlords yes.
Okay. Thank you all have.
Thank you. Our next question comes from Michael Miller with JP Morgan. Please proceed with your question Hi. Thanks.
It looks like you'd have had some nice progress in terms of shop leasing, but how far down the road do you think we need to look into.
We see that number go into the high Eightys closer to 93 years five years could be inside of that.
I think it's a three year timeframe.
Okay. Okay.
Okay that was it thank you Uh huh.
Thank you. Our next question comes from the line of handles saying just with Mizuho. Please proceed with your question.
Hey, good morning, So just a couple of quick ones here.
Now, let's say in a meaningful value, creating via your redevelopment. The overall yield on the total in process Reinvestments declined 9% from 10% last quarter can you talk a bit more about what's going on there.
Yeah, it's really a mix of what's in that pipeline and really we're talking about.
10 basis points surrounding but what's what's most important handled the look at is what we're delivering the schedule of what we're delivering and.
Well, we're actually reporting every quarter and you can see we're outperforming and.
No I feel good about not only what we have underway, which is largely leased but all of this leasing that we're talking about is setting up the future pipeline as well.
And putting us in a great position to see that 400 million continue to grow.
On the backend won the front end, we continue to deliver so.
And these are great. These are great returns that were able to generate in part because of where we're coming from from a rent basis standpoint.
Got it got it okay. Thanks, Jim.
And a bit of an add on to an earlier question recoveries last quarter. I think you guys implied that recoveries, we met neutral in the second half of this year that neutral to same store NOI. This quarter added 70 basis points I'm curious.
I guess, maybe with that expected in has your view on being that neutral in the second half of this year changed yet as I mentioned there are signs from previous question I do think that net recoveries are going to be a positive contributor on a full year basis I do at this point still expect some reversion in the fourth quarter, but still thinks that the category overall in 2019 same property.
Oh I will be a positive contributor as you look forward to 2020, and whats implied in sort of that at or better than 3% number I gave earlier for 2020 I would expect that it's less of a positive contributor or neutral for 2020.
Got it thanks, Angela and since maybe I don't think there's anyone really behind me in line one of the guest squeeze one half question in here I didn't get exact number mark on the third quarter cap rates you mentioned there generally in line, but can you be more specific what was the exact cap rate. Thanks.
I think we've been pretty consistent in the seven and a half a percent range and thats.
As Mark alluded to we were at the upper end of that range in the quarter.
Thank you.
Yes.
Thank you. Our next question comes from the line of Floris vintage come with Compass point. Please proceed with your question.
Hey, Thanks, guys.
Question on the redevelopment.
Most of the redevelopment opportunities or are pretty small and granular obviously returns had been a been stellar.
But as you think about some of the the larger redevelopment opportunities going forward I note the couple of including Mira Mesa. The project you alluded to Jim.
But also a university mall and superior marketplace.
Could entail residential components, presumably that would.
Increase the cost also probably.
Lower the.
The implied yields on on development, although the total return should be similar I would imagine could you maybe walk us through that and and also as.
How many other sites you see potential.
Multi use.
Opportunities.
You know I've talked about this a little bit on past calls and I appreciate the question because.
Part of what we're doing from a redevelopment standpoint is.
He is making sure that were teeing up those opportunities for additional densification most of which is residential whether its student housing offer many of our university properties or senior housing or market rate multifamily and we believe big picture that we have over.
40 assets that would support residential up sometime and additional density and the approach that we've been taking has been one that's conservative admittedly are getting the entitlements in place and then thinking about the best way for us to maximize the value of those entitlements, while making sure we.
Don't lose control over the site and.
And so.
Expect US you know not in the next couple of quarters, but several quarters out to start talking more about what those opportunities where is that represent and how we're capitalizing on them, but to what's embedded in your question, we have tremendous opportunities at much higher rates of return in our core.
Competency, which as retail and we know that that's our core competency.
So we'll as we move forward and put the higher densities on some of these size expect us to do it in a very balanced and responsible way.
Great maybe one follow up question in terms of the the Sears exposure.
I believe you had 11 stores that.
Closed maybe if you can give us an update I know a couple from forevermore in the in the redevelopment pipeline already maybe give us an update on on the remaining.
Stores that that were in your portfolio floors. Hey, This is Brian we are incredibly pleased with the progress that the team has made in Backfilling. These kmart locations. I think is speaks to want to Jim's earlier points in how we kept getting ahead of this in particular and how the teams gotten ahead of many troubled retailers, where either completed or will be come.
Pleaded with all but two of our Kmart spaces that we took back roughly a year ago.
Completed I am sorry, or under construction on all but two of our spaces by the first quarter of next year.
At two and a half times the rent that we were getting from Kmart and you think about the tenants that were bringing into our portfolio Kohl's TJX Ross old Navy Ulta five below some of the leading retailers that are expanding today and this quarter, we announced another one outside of Philadelphia, So expect us to continue.
To announce these.
We're expecting rent that come back online in the back half of 2020, some red has already commenced but on the ones that we're going to be starting here at the backend of 2019 and early 20, we'll see red start to come online in the back into back half a 20 in early 2021, but really incredibly pleased with the progress our entire team has done because it's not just leasing it's our operate.
Patient team as our redevelopment team in terms of getting these projects and title and being able to execute so.
One of the team's doing a great job.
Can you maybe give us give an update on on the coastal lending exposure you have as well and into yet it's the last one that that we effectively own our Hamilton location will be expiring and you can see that in our redevelopment pipeline that we've already got that spoken for from a lease perspective coastal in brooksville. They.
Still control it right now they have term on the lease and a lot of options of or certainly in dialogue with them.
In terms of what's going on going forward, but they control that space for now that's a very below market rent at at coastal way and I think the important thing here is that as you get into the early part of 2020 will really have de minimis exposure to Sears Kmart going forward.
Great. Thanks, guys, you've got thank you for us.
Thank you. Our final question comes from the line of Greg Mckenna sets Scotia Bank. Please proceed with your question.
Just one more quick one from me Jim You've mentioned that you think the stock is cheap at this level, but based on the appreciation share price this year and starting to target more acquisitions is it fair to assume that buybacks, maybe taking a backseats other forms of capital use.
No I don't I don't think so I mean.
I think what's most important is that where balance and as we think about buybacks. We do think we're we're under valued at this point, but the way we've always approach that Greg is.
What are we what are we funding at where we're not trying to be market timers on the stock price. We were always with a view of continuing to strengthen the balance sheet hitting our objectives, which I'm very proud we have.
Inline with what we talked about over two years ago, and also striking that right balance so great because I think on a marginal basis, you'd still point to repurchase of common stock yet.
This is a long term business and we're seeing the benefit of clustering of these investments with some of these acquisitions.
Those those are really the factors that we consider.
As we think about where the proceeds being generated from asset sales or are deployed.
Okay, great. Thank you do that.
Thank you we have reached the end of our question and answer session. So I'd like to pass the floor back over to Miss later for any additional concluding comments.
Thanks, everyone. We look forward to seeing many of you marry it in a few weeks.
Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.