Q4 2019 Earnings Call
Greetings and welcome to the retail properties of America fourth quarter 2019 earnings Conference call.
This time all participants are in listen only mode. A question answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
This conference is being recorded.
I would now like to turn the conference over to your host Mr., Michael Gaiden, Vice President of Investor Relations for retail properties of America. Thank you you may begin.
Thank you operator, and welcome to the retail properties of America fourth quarter 2019 earnings Conference call.
In addition to the press release distributed last evening, we have posted a quarterly supplemental package with additional details on our results in the that's section on our website at Www Dot RP AI Dot com.
Today's call management's prepared remarks and interest for your questions May include statements that constitute forward looking statements under federal Securities laws.
These statements are usually identified by the use of words, such as anticipates believes expects and variations of such words or similar expressions.
Actual results may differ materially from those described in any forward looking statements, including in our guidance for 2020 and will be affected by a variety of risks and factors that are beyond our control, including without limitation those set forth in our earnings release issued last night and the risk factors set forth in our most recent form 10-K 10-Q.
And other FCC filings.
As a reminder, forward looking statements represent management's estimate as of today February 19th 2020, and we assume no obligation to update publicly any forward looking statements whether it was as result of new information future events or otherwise. Additionally on this conference call, we may refer to certain non-GAAP financial measure.
Sure you can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers definitions of these non-GAAP financial measures in our quarterly supplemental package and our earnings releases for both the third and fourth quarters of 2019, which are available in the Investor section of our website at Www Dot our.
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Today's call our speakers will be Steve Grimes, Chief Executive officer to be Swinehart, Executive Vice President Chief Financial Officer, and Treasurer, and Shane garrison, President and Chief operating Officer.
After their prepared remarks, we will open up the call to your questions with that I will now I'll turn the call over to Steve Grimes.
Thank you, Mike and good morning, everyone I'm pleased to report that our team again delivered accelerated performance in the fourth quarter building on our momentum realized through the first three quarters of the year.
Its continued momentum enabled us to post 2019 operating AFFO per diluted share of a dollar eight above our previous outward revise guidance of a dollar five to a dollar seven.
Our multiyear focus on market scale Energy agency. In addition to long term merchandising and cash flow durability also helped us to achieve full year 2019 same store NOI growth of 2.7% near the upper end of our higher revised assumption of 2.25% to 2.75%.
Today, our rent roll is more diversified than ever before and we continue to create long term value through a patient a balanced approach.
In the fourth quarter, we again drove inordinate leasing volume tenant deliveries and improved overall credit quality of our tenant base.
Enabled us to achieve record results in a wide array of leasing and occupancy stat as well as an AB our per square foot and Q4.
At 98.8% leased for our anchors and 96.2% leased overall, we are invigorated by the potential brought by the positioning of our core portfolio.
Shane will provide additional detail on all of our leasing success in his prepared remarks.
We also continued to deliver progress on our big three expansion projects exactly one laden downtown and Caroline which will add a growing source of cash flow in coming years to amplify the base rent driven growth of our core portfolio.
And our newly added near term preleased projects underscore incremental opportunities for high visibility low risk growth available and our existing operating asset footprint.
Our initial 2020 same store NOI growth guidance of <unk>, 0.25% to 1.25% reflects a pragmatic approach to the early 2020 outlook for incremental tenant fallout across the sector versus a year ago.
And our initial 2020 operating FFO per diluted share guidance have a dollar for it to a dollar rate reflects a commensurate level a consideration against this backdrop as well as our expectation for non repetition of certain noncash items that aided our results in 2019 and other factors that Julie will detail.
Early 2020 tenant move outs and Mondays bankruptcy filing from tier one present near term opportunities for us to address our record high leasing and occupancy position at the end of 2019 as well as our long standing record of upgrading both rent and tenancy when presented the opportunity bode well for our prospects.
Further we believe that the combination of our highly Jason operating footprint and sustained strength in our consumer backdrop anchored on robust jobs and housing markets, which should aid the retail sector overall positions us well to achieve long term growth.
Our better than expected fourth quarter financial results helped us to report net debt to adjusted EBIT Yari at 5.4 times to end the year down from 5.5 times in the third quarter.
With leverage near the low end of the peer group and liquidity of more than 840 million at year end, we remain in a solid position of holding no need for additional external capital to fund our growth.
In combination with another 40 basis points sequential decline in our top 20 tenant concentration to 26.3% a record low in our history and the addition of two preleased smaller scale projects. We continue to advance our aims to deliver study improved cash flow growth.
Alongside these economic goals, we continue to advance our U.S.G. efforts as well as an example of our broad scale sustainability efforts I'm pleased to report that we have signed power purchase agreements to deliver energy from renewable resources, such as wind and solar to 12 27 of our Texas assets that are located in deregulated power journey.
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These contracts account for more than one quarter of the asset and our total portfolio and will commence in July of this year.
While addressing an important environmental concern our investment in renewable energy resources also should hold growing resonates with our tenants in shoppers alike. I look forward to reporting on additional progress on these important corporate responsibility initiatives during the coming quarters in in the release of our upcoming proxy filing encourage each of you to monitor our yet.
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I expect our team to again demonstrate the strength of our high graded RPH 2.0 platform in 2020 and 2021, the ongoing lease up at our Circle East project. In addition to deliveries expected that both Caroline and Loudon should add incremental cash flows to the base rent driven expansion in our core portfolio.
We approach both our near term and long term opportunity sets with much enthusiasm.
And expect to deliver study progress on these goals in the year ahead.
With that I will turn the call over to Julie to further detail our financial results and outlook.
Thank you Steve This morning, I will review, our fourth quarter and full year financial result, our capital structure positioning and our 2020 guidance in the fourth quarter, we generated operating FFO of 27 cents per diluted share flat sequentially and up one cents or 3.8% compared to Q4 2018 due to our.
Q4, 2019 same store NOI growth.
For the full year 2019, we delivered operating FFO, but dollar eight per diluted share five cents or 4.9% higher than full year 2018, our share repurchase activity in 2018 accounts for nearly three cents of the five but same store NOI expansion was the strongest contributor at four cents and higher net.
Termination fee income added another sun the.
The combination of lower non same store NOI due to net property dispositions during 2018 and 2019 higher net interest expense.
And lower noncash item served as partial offsets.
Same store NOI for the fourth quarter grew 2.7% or $2.1 million compared to Q4 2018 similar to our results through the third quarter of 2019 base rent continued to propel our same store I know I expansion contributing 310 basis points.
During the quarter contractual rent increases and releasing spreads remained the main drivers of this base rent expansion complemented by occupancy growth. It's our track record of Ontime tenant deliveries continued.
Lower property operating expenses net of recoveries, resulting from higher recoveries associated with increased same store occupancy and higher other lease related income also contributed to this year over year same store NOI growth in the quarter higher bad debt and lower percentage and specialty rent served as partial detractors.
For the full year 2019, same store NOI increased 2.7% or $8.4 million compared to full year 2018 base rent contributed 260 basis points anchored by contractual rent increases and further aided by positive re leasing spreads and occupancy gain.
Higher other lease related income and a decrease in operating expenses net of recoveries also contributed with partial offsets from lower percentage and specialty rent as well as higher bad debt.
Turning to the balance sheet, we did not engage in any significant capital markets activity in the fourth quarter, having already exceeded our initial 2019 debt fund raising goals earlier in the year.
As previously reported during 2019, we raised a total of $370 million, an unsecured debt capital surpassing our initial goal of 200 $300 million.
We raised 100 million in a 10 year private placement, which funded in June and 270 million in term loans composed of a 120 million dollar five year term loan and a $150 million seven year loan both of which closed in July.
We subsequently swapped the LIBOR based variable rate portions of these term loans to fixed and used to these aggregate funds withheld the weighted average maturity of 7.2 years and a weighted average interest rate of 3.56%.
To repay other indebtedness, including pre payment of $108 million, an aggregate mortgage principle with a weighted average interest rate of 4.91% and a net reduction of $255 million on our revolver balance year over year.
All in our 2019 capital markets efforts contributed to reducing our overall weighted average interest rate by 10 basis points year over year to 3.88%, while holding our overall weighted average maturity constant at 4.7 years.
As Steve alluded to earlier, we continued to benefit from our healthy investment grade balance sheet EUR 5.4 times net debt to adjusted EBITDA Ari at yearend 2019 sits 110th of a turn lower than at yearend 2018, and places us among the least levered and our peer group.
And our $832 million of availability under our revolver at December 30, Onest provides for abundant liquidity to invest in both our core operating portfolio and Rx and our expansions and redevelopments with no need for incremental external capital.
Turning to 2020 guidance.
Our record high percent leased occupancy and portfolio Hbr per square foot stats as well as our continued quarterly reduction in our top 20 tenant exposure position us well to build on the continuing base rent driven expansion in same store NOI from our operating portfolio in 2020, a year in which we expect accelerating.
Investment in our three active expansion and redevelopment projects.
At the same time, our out performance in 2019 across a number of key areas, including our delivery of same store NOI growth very near the high end of our February 2019 assumption range of 1.75% to 2.75% and operating FFO per diluted share above the high end of our upwardly revised.
Dollar five to dollar seven range that in October make for a tough comparison in 2020.
In terms of 2020 same store NOI growth.
Just as we experienced in 2019, we expect our growth to be fueled by base rent.
That's the Tailwinds, we generated in 2019, a year in which we delivered year over year increases of 180 basis points in both same store percent leased and occupancy as well as a 210 basis point increase in Hbr per square foot have more than absorbs certain headwinds facing us in 2020.
In addition to the tough same store NOI growth comp of 2.7% from 2019, our same store NOI growth guidance range of 0.25% to 1.25% is negatively impacted by our bad debt assumption.
And our expectations for tenant move outs in 2020, including those that have occurred already.
First our increased bad debt assumption up 110 basis points of revenue for 2020 equivalent to approximately 160 basis points of anti why well pragmatic also represents a year over year headwind and our outlook compared to our 50 basis points of revenue assumed at 20 Nineteens outside.
Had we not made this change in our bad debt assumption, our 2020 same store NOI growth guidance range would've been nearly 90 basis points higher.
As disclosed in last nights earnings release, our bad debt assumption for 2020 includes both 65 basis point allocation for bad debt, an unknown tenant fallout for the year ahead as well as a specific 45 basis point allocation for pier, one which filed for chapter 11 bankruptcy on Monday.
Lastly, we have 12 active leases with pier, one which decreases to nine by September 1st after three of them expire.
Second while our year end portfolio operating statistics reflect incredibly hard work of our team throughout 2019, and the strength of our focus platform several tenant move outs. Shortly after year end, including all five of our Dressbarn locations. One of our two forever 21 locations one of our pier one locations and if so.
Inefficient fitness tenant at our Fordham asset are also reflected as additional detractors from growth in our 2020 same store NOI guidance. The impact on 2020 same store NOI from these eight locations is 100 basis points.
However, Shane will discuss our already strong progress on Backfills for these and other tenants during his prepared remarks.
Our 0.25% to 1.25% same store NOI growth guidance is expected to provide one have sent to two cents of AFFO per diluted share growth in 2020 as highlighted in the reconciliation we provided in last nights release.
The other expected contributor to AFFO growth. This year is reduced interest expense, which we expect will contribute between one have sent in one and a half sense of growth.
Our operating FFO guidance of a dollar for dollar eight per diluted share also illustrates our plans to evaluate capital markets activity Opportunistically, while we hold no 2020 debt maturities, we are exploring multiple options and the capital markets to address our 2021 and 2022 maturities we seek to take advantage of the present combination.
Of low short term interest rates in a flat yield curve balancing that with our lack of need for external capital to fund growth. We are motivated to exploit this advantageous backdrop and it provided flexibility in our interest expense projections. This year as a result.
I also want to remind investors that currently our revolver served as the only variable rate interest instrument in our capital structure underscoring the utility of this funding mechanism for our expansions and redevelopment amid the current low interest rate environment.
In terms of expected operating FFO growth detractors for 2020, the three primary components are noncash and other.
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First regarding noncash items.
In both 2018 and 2019, we outperformed in this area because of a handful of tenant move outs in each year that resulted in us recording significant below market lease and tangible income upon move out.
Specifically in 2019, six tenant move outs generated $2.6 million or more than one cent per diluted share of noncash income.
Our 2020 guidance reflects our expectations for noncash income from known and anticipated tenant move outs, but the total expected is less than the amounts recognized in 2019.
Further our 2020 outlook reflects assumed DNA expenses, a $41 million to $43 million up an incremental 1.5 million at the midpoint as compared to the $40.5 million recognized in 2019, which fell near the low end of our 2019 guidance assumption of $40 million to $43 million. This incremental outlay reflects our.
Ongoing commitment to investing in our high quality platform where appropriate.
Regarding anticipated net transactional activity. In addition to the one half cent detraction from net sales in 2019 or 2020 operating FFO outlook incorporates additional opportunistic net disposition activity I met our record operating portfolio performance and the current environment of strong institutional bids for open air retail asset.
As highlighted in the release earlier this month, we closed on the sale of a $14 million noncore power center assets and acquired the fee interest at our existing Fullerton Metro center assets for $55 million.
And now I will turn the call over to Shane.
Thank you Julie our record fourth quarter results continue to demonstrate the strength of our high quality portfolio and platform.
During the fourth quarter, we executed 168000 square feet of comparable new leases at a blended 14.1% spread and an additional 388000 square feet of renewals at a 4.2% calm.
In aggregate for the quarter, we completed 132, new and renewal leases for 773000 square feet, achieving a blended re leasing spread of 6.9% wall sequentially, driving our leased rate and occupancy to 96.5% and 95.5% respectively on us.
Same store basis. Additionally, we also achieved average annual contractual rent increases on new leases of approximately 160 basis points continuing to focus on our forward growth profile for the full year, we leased approximately 3.3 million square feet, representing 16% of our total portfolio Geos.
Hi, just shy of our leasing record of 17% set in 2018.
And in 2019, we achieved blended releasing spreads of 8.1% while also signing our new leases with average annual contractual rent growth of roughly 180 basis points.
During the quarter, our continued proactive leasing velocity and our ability to consistently deliver significant geo lay on time helped us to drive quarterly record highs for the company across a number of key metrics, including same store portfolio occupancy of 95.5% up 190 basis points sequentially and up.
180 basis points year over year same store portfolio percent leased up 96.5% up 110 basis points sequentially and up 180 basis points year over year.
Same store anchor occupancy of 97.9% up 200 basis points sequentially and up 230 basis points year over year.
Same store anchor percent leased of 99.2% up 110 basis points sequentially and up 240 basis points year over year.
For further perspective on the statistic we ended the year with just eight anchor boxes available for lease across our portfolio.
We also continued to deliver gains in our small shop portfolio, which forms roughly half of our hbr with average rents per square foot of 20 974.
In the fourth quarter, we achieved same store inline occupancy of 90.6% up 150 basis points sequentially and up 50 basis points year over year as well as same store percent leased of 91.3% up 120 basis, when sequentially and 70 basis points year over year.
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Our ongoing progress with our small shop tenants he adds visibility to our broader goals of study contractual base increase in rents accretive recoveries engaging merchandising within our centers and continued diversification of our revenue base.
We delivered 34, commencements totaling approximately 250000 square feet in the quarter continuing our on time rents start cadence seen earlier in the year.
These deliveries helped us to narrow our lease to occupied spread by 80 basis points sequentially to 100 basis points as a result, our signed but not commence spread decreased by 4 million to 3.7 million at year end.
We also sustained our broader effort to increase the credit quality of our tenant roster, reducing our top 20 tenant concentration by 40 basis points sequentially and 150 basis points year over year, 26.3% Oh baby are.
And given the moderating volume of our lease role in the coming year, which measured 7.2% of our portfolio Hbr at year end compared to 10.3% at year end 2018.
We will continue to proactively push for higher credit quality tenants, while working to further diversify our rent roll.
With our portfolio now frictional vacancy at most assets, we novel, even more leveraged to push for credit quality merchandising mix and economic terms in our leasing efforts.
This position continues to produce tangible results in regard to opportunistic merchandising and further efforts to reduce overall downtime as we negotiate through continued volatility in the retail space.
As an example on the merchandising front, we partnered with Macy's Southlake town square to open the first location under the new market at Macy's concept, which is a blend of national and local brands. In addition to active community gathering space. We will continue to cure rate our high quality portfolio with those concepts that pro.
By per patron and community engagement, while creating an interesting and diverse shopping experience.
As you we noted in 2020, we again have some disruption on the anchor side with approximately 14 anticipated anchor boxes vacating, including two AC more locations in total these boxes represent approximately 262000 square feet.
However, through continued watchlist management and ongoing portfolio reviews, we have already pre leased four of these locations will for the current tenant vacated.
And have another four in L. why oren lease negotiation once again, demonstrating our goal of minimizing downtime through active tenant engagement.
Turning to development. We also made significant progress at our big three expansion and redevelopment projects during Q4.
Circle East subsequent to quarter end, we signed Ethan Allen and an additional 6000 square feet on the adjacent corner to shake Shack.
These two tenants occupying adjacent corners set the table for future merchandising and experience.
In regard to timing, we've extended the stabilization date as outlined in the supplemental by six months and costs are now off approximately 10% to 15%.
These increased costs reflect both the delayed timing and carry costs. In addition to currently realized tenant buildout costs.
As leasing has picked up and we now have several ela wise in over 10% of the project at least we have a better feel for remaining costs and these updated numbers and timing reflect both.
While the project stabilization has been extended we intend to remain patient and thoughtful around merchandising and long term sales growth and expect on average two to three deals per quarter going forward.
At Loudon, we're through GMP aren't advance construction on the garages and foundation work for pads Gnh frame construction is anticipated to begin this spring based on this progress. We currently expect delivery of the first multifamily units and the second or third quarter of 2021 for block Gi and Q4.
2021 deliveries for block H.
Our 98.2% retail leased rate and 100% office lease rate at one long downtown and the continued outsized wave of technology investment in Northern Virginia continue to backstop our confidence in this mixed use expansion.
Turning to our largest project a carillon, we continued grading and other early stage work ahead of groundbreaking set for this spring.
After achieving 37% leased on the retail portion of this mixed use project earlier in 2019, we continue to make market progress on the leasing activity with another 12000 square feet, a restaurant space under lease negotiation and approximately 80% of the medical office building under LOI negotiations.
In Q4, we continue to explore partnering with an opportunities on investor for this project and are now and advanced negotiations for up to 50% over the road swap required capital for phases, one and two.
We look to have meaningful updates on this project by the next call as it relates to leasing costs and any additional equity partners.
As previously outlined we continue to look for opportunities to create value through more immediately accretive redevelopment and Pat expansions.
Underscoring the multiple opportunities for growth within our existing assets, which include both long cycle expansions and redevelopments as well as short cycle investments.
We have added two projects to our near term pipeline.
Redevelopment at the shops at quarter field, and a pad expansion at Southlake, our project at quarter field enabled by the recent move out of a struggling shoppers food warehouse demonstrates our efforts to upgrade tendency and asset quality when opportunity permits.
At year end, we had pre leased 62% of the 58000 square feet with L.A. fitness.
Subsequent to year end, we completed a lease with all the for the remainder of this reconfigured building.
Additionally, we have commenced demolition and prep work at the site and expect to deliver the space by early 2021.
Our second addition to the schedule the pad development in South Lake is 100% pre leased to a national wireless carrier and serves as another example of our methodical approach to additional incremental low risk cash flows to our already successful operating assets.
We expect to outline additional short cycle low risk accretive projects in the coming quarters.
In addition to these projects I also want to point out our enhanced disclosure on nine entitled projects in the supplemental composing 4 million square feet and commercial Geo a in more than 2600 multifamily units these expansion and redevelopment opportunities and visibility to our long term runway for growth.
Turning to acquisitions and dispositions, we continue to enhance our portfolio with opportunistic transaction activity early in 2020.
In February we monetize King Phillips crossing a 106000 square foot power Center and Seekonk, Massachusetts for 13.9 million. We also acquired the underlying ground lease at our existing Fullerton Metro Center asset in Los Angeles, San Jose for 55 million, providing for compelling relative value and.
Addition to future liquidity.
We plan to continue to Opportunistically market select noncore assets in an effort to maximize value through highly occupied assets sales, while balancing earnings accretion and leverage as development spend increases throughout the year.
Lastly, while acknowledging the need to address contemplated vacancies after year end or from the watchlist tenants and Nonrenewals mentioned earlier.
I want to relay that my confidence has never been higher and the ability of our platform to productively least these spaces with more durable cash flows and to merchandise and navigate the ever changing consumer landscape after achieving a number of record milestones in 2018 and 29 team.
I look forward to what our team will achieve in 2020 with that I will turn the call back over to Steve.
Thank you Shannon Julie.
As you have just heard our 2019 outperformance, including our record setting lease occupancy and Hbr statistics at year end and our sector, leading capital position bring us much confidence in our outlook for 2020 and beyond none of this would be achievable without having the high quality portfolio and platform, we do I would like to thank our ARPU.
Hi team and our board of directors for stepping it up yet again in 2019 to position us well for 2020 with that I would like to turn the call back over to the operator for questions.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question Ken.
You mean fresh start to if he'd like to remove your question from the Kim participants using speaker equipment. It may be necessary to pick up your handset before pressing the star Keith.
Our first question comes from the line have Christy Mcelroy with Citi. Please proceed with your question.
Hi, Good morning. Thank you chain I wanted to follow up on circle East maybe you could provide some more specifics for us on what drove you know what exactly drove the higher cost the lower yield for later timing and and just can you give us confidence that there's not a read through here in terms of how we should think about the rest associated.
With the costs and yield expectations for your other larger projects one of my dad and Caroline.
Sure. Good morning, Christy. Thanks for the question I think you know what's important here is a bit of context around how we got here.
The team is very optimistic as it relates to 20 and I think quite frankly, we should be we spent six years getting here billions and transactions complete change in field office platform.
A proven ability to trade in those assets really are providing for this future value as we think about the mixed use portfolio.
And the retail emeritus, we feel will drive the vertical value long term.
And we've been very patient we've been iterative we've completed eight bed expansions.
30 million in double digit returns again pragmatic stair step to first had which is 2 million or last development redevelopment was 10 million.
In three years ago, we had no significant mixed use air rights or see IP today, we have almost 4 million a was large majority in future income for multifamily.
And north of 10% Medical office. So I appreciate the focus on Talison I don't think there's any read through to the others and we'll talk through that.
But most importantly.
We continue to progress as it relates to future entitlements as well right. We have 4 million square feet 2600 multifamily units.
Off the C. IP page will continue to provide additional disclosures there.
As it relates to Tausome specifically.
We've obviously updated to reflect or additional.
Expectations. There we are two two quarters later and some of that additional cost is driven by that additional carry.
But additional incremental costs here.
Are really two or three spots.
Juan we have a slight change in scale color incrementally in over 2000 square feet as we get closer to the retail shell delivery from Avalonbay, we have a much more finite picture of the leasable area.
Additionally, we have increased the scope of our landscaping and pedestrian improvements to really focus on the interaction and viability of pedestrian traffic across the two blocks.
And then lastly, we've seen an increase specific to some tenant build out costs or below cost over show in addition to store fronts.
Some of that as market driven in some of those configuration driven on the configuration side. We have several leasing plans as you would imagine for a project like this most of them contemplated a larger format call. It pseudo anchored 12 to 15000 feet. We now plan to have much smaller average.
I'll, let you to 2500 square feet across a project do you have additional storefronts you also have additional demising costs. So.
There isn't any one large items there are several changes here as being closer to finishing up the project and additional carry also added so we still love that project. We are still at call. It two to 250 basis points of accretion over where we feel it would trade on a stabilized basis, just going to take a little longer but we have.
Excellent volume as it relates to tenants, we won which are largely local and regional from here, but with five to 10 stores. Each it takes a much larger effort for those tenants at dawn negotiate at least an open source. So we will remain patient with long term focus being on the merchandising mix and sale.
As viability.
Okay. Thanks for that and then it sounds from your until his opening remarks that does vacancies that you've already experienced in Q1 or sort of offsetting the commencement that you saw in Q4, and that's why that momentum that you saw in Q4, it doesn't translate more into an occupancy tailwind in early.
2020, <unk> is that am I understanding that correctly.
I think that's fair in general you know, we have a higher rate of yard in a smaller denominator. So you continue to feel that effect to the extent, we have high hbr volatility for them I mentioned on the last call. Fordham alone is 1.2 1.5 million of disruption because it's right at the beginning of the year, we have a lease for the space.
We intend to deliver that by year end I'm very happy with the progress as it relates to merchandise in comps et cetera, but that is that is downtime. So that as a great example of pre leasing, but some disruption in here.
So given the range and appreciate the greater conservatism can you maybe give us give us some parameters around how we should think about the trajectory of the growth rate through the year.
Yeah, Christy I think that trajectory will largely follow occupancy as we've tended to see although you know bad debt, especially with the amount. We're estimating for the current year has proven to be less consistent quarter to quarter. As we saw in 2019 for example, but our 2020 same store NOI growth is so.
We'll expected to be driven heavily by base rent. So you know we talk a lot about our 200 basis points roughly from pumps and spreads we still expect to see that and we expect tailwinds from the spaces that we delivered on time throughout 2019 to offset some of those headwinds that we talked about some of the January move outs and other tenant non renewals that we're expecting later.
In the air So again, we're encouraged by the progress on Backfills and many of the non renewals at that chain had already highlighted in terms of detractors. We tried to quantify a the big pieces again quantifying the January move out impact of 100 basis points bad that tried to be really Chris with.
The fact that our experience has run more than the historical 50 basis points of revenue assumption and we saw that in Q4 of 19. For example, so you know we're dealing with a lot of things part of it is it's a tough comp which is great for 2019 freight 2.7% is as high as we've been and probably three years.
And even with that though we look at bad debt and reset, saying 65 basis points. When you include the impact of bankruptcies, which is.
Harder to see because it doesn't always run through the bad debt number right. It's the lack of rental income and recovery. So our transparency effort here is to to share that it's been 65 basis points. So we're starting the year there along with our expectations for pier, one which is another 45 basis points and that assumption.
Soon that we get no more rent after today. So there there could be some some benefit in that number as well.
Okay. Thank you.
Thank you. Our next question comes from the line of Todd Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, Thanks, following up on Circle East chain, you you mentioned that some of the increase in the costs. There were due to higher tenant build out cost somewhere market driven some driven by configuration are you seeing any of those cost pressures.
Elsewhere across the portfolio either either in redevelopment or in the in the operating portfolio.
Well I think I didn't even at the same scope if nothing else change we continue to see construction cost pressure in general as it relates to.
Ground up you know, we just went through GMP on the multifamily a carillon, we obviously just put a bow on loud and before we went vertical in the garage is and the worn inordinate cost. We have seen lately has been concrete a we're up I don't know somewhere around 10%.
And concrete alone that being said, obviously before you go to GMP you have a much higher contingencies to cover items like that so loud and as an example in spite of increases.
We didn't move the range because that GMP, we tightened it and in some value engineering and we're often running so I think its situational Todd, but even if he ran in place on scope, yes, we continue to see inordinate construction costs.
Across the portfolio, especially as it relates to rent growth.
Right and then I'm thinking about Caroline and loud and how how would you compare the risk profile of those projects relative to circle East.
Sure. So certain look circle leases is a very unique asset for those of us or are in those on the phone that have seen it right. It's more urban you load from the bottom.
You also have a parking deck adjacent off she leaves behind the asset that can be utilized and in the middle Love. If you had an asset where we started below grade and are now 13 stories above grade. So long story short a lot of construction disruption through the period.
And it was tougher I think for tenants given the feedback to get their arms around the parking configuration, the interaction with them all behind us.
As well as loading and just the court or itself and now that we have.
Most of that construction Don the apartments are on pre leasing it is somewhat stabilized again landscaping start shortly I think those are just much easier conversations because the configuration is much more tangible if you look at loudon.
The lions share of that 378 multifamily units and I'll call. It 70000 feet of commercial.
Next to a center that is almost 100% lease and arguably the best Center in Martin County, 450000 feet give or take and everything going on out there that is just a markedly different.
Scenario, where you have a.
Black hole of an asset that is just pulling for a significant radius and now we're going to turn on multifamily and a county the has a moratorium on multifamily. So we have the benefit of a phenomenal retail amenity and barriers to entry there and.
We're very excited to turn on on that multifamily there. So night and day again 2002 Loudon, both from a configuration standpoint, an adjacency standpoint, and really what the rental stream is coming from from an asset class.
Carillon Ironically is the farthest behind from a construction standpoint.
Is also our largest project, but continues to really outrun our expectations around pre leasing and even market rents and admittedly.
You know the hospital is.
Hospital as an anchor a regional level to trauma center. In this case is not a known anchor at right that as that is a unique.
Aspect or amenity to this site. In addition to the transit orientation. This site as well as for 95 adjacency.
Has really come together to drive a lot of incremental momentum here you know I talked about in my prepared remarks that we have 80% now the MLP under Ela why.
And we'll probably close to 100% based on velocity this quarter.
We look to hopefully get that through leasing them next quarter, but certainly into so we are staring at the prospect of being highly to fully leased before we even start foundations on the medical office building. The rents are above where we thought they would be from a performance standpoint, and then turning to retail again, we have not started.
We're still in demo there on the site but.
Almost 40% pre leased to a first and second floor AMC. We're now staring at almost 50% assuming we get this lease dawn for 12000 feet for a restaurant that I think will completely change.
The perception.
Of the asset as well as expand the draw and hopefully if we get that done we will be we will have several other deals that we anticipate that come with that execution. So we're through Jim on the cost side, we're through GMP a at multifamily. We're now just trying to finish up the GNP process on.
Yeah, I'm obion retail so I expect cost to be up minimally again, we'll tighten up some of the contingency cost there in that process and a little additional.
The.
But all things considered.
Carillon continues to be above our expectations from velocity in rent standpoint from here. So all different projects, all and different points and all work differently as we've talked about before but there there's definitely no correlation or read through because of the differences and and multifamily MLB.
We.
As it relates to Thomson just completely different projects.
Okay. Thank you.
Thank you. Our next question comes from the line of London side with Jefferies. Please proceed with your question.
Hi.
On the third quarter call you discussed 150 million for development spend in 2020.
That number still good and how will you funded.
Yeah. Thanks, Linda the number is still good I would say, it's looking like a 150 million or even a little above that we mentioned in our prepared remarks and I think you can also glean from the lots of Cobrand last nights release that we do expect that we may be a net seller. This here. So you know to what extent.
Is not yet clear as well right now were a net acquirer with whats close so far I think you know we could be a net seller I would say up to maybe $50 million or so so that would be a portion of the funding and then chain mentioned again that we're working with this potential partner opportunities zone partner, which would also.
Provide a source of funds beyond that you know I'm very happy that the revolver is largely undrawn at yearend a it is our most affordable form of that today its its incurring interest at about 2.7% and.
And we've got capacity up to 850 million. There. So we're very very well positioned in terms of funding for this year.
Thanks, and then I realize your leverage is healthy now at 5.4 times, but do you have plans to Delever further over the course, the you're given some modest I know I coming on line from pre does.
We've talked at length about a ceiling of six times than I do still expect that we will not pierce that six times ceiling in terms of going lower during the year I I wouldn't expect that at this point.
Your next year will be the call it $150 million plus years with investment and redevelopment and while we expect to start to see some of the NOI coming on next year I towards the back half of the year late in the year, it's really in the years beyond that that changes to leverage further further improvements to leverage from where we sit today would be.
More on the table at that point.
Thanks.
Thank you. Our next question comes from line of Vince to bony with Green Street Advisors. Please proceed with your question.
Hey, good morning are you willing to share the cap rate on the floor 10 Metro Center acquisition and also just broader discuss the rationale for that investment given where your cost of capital is today.
Hi, this is shaping up thanks for the question, So Fullerton, obviously noncore asset, California Orange County.
That had a underlying ground lease or a portion at least that had a shorter terms. So when we looked at.
The asset as far as not only liquidity, but value in place with that relatively short underlying ground lease.
Versus taking it out at 55 million and lifting some of the restrictions as well on from a leasing standpoint.
We think we created you know at closing somewhere around seven to 10 million and value.
And then this year, we intend to increase some of the signage, which will also be leasing driven and do a few other things and intend to sell the asset probably and 20 122. So the cap rate not very compelling I think is somewhere around a three when you think about just straight cap rate, but overall with the liquidity.
Profile.
As well as the accretion given the income rents or removal of we feel was a very compelling.
Got it okay that makes parts there just wanted to get a little more clarity on the ground lease portion and how all the components work. There is there any potential to do did entitlements there to help the potential sale value for the buyer or this is really more of a straight through retail play.
I don't think given the non it's a good question I don't think than the given the noncore nature of the asset and how long the in this case multifamily entitlements would take.
Our compelling to us, but we do think it provides for additional incremental value given its stray fee for the next fire. So we'll see how much additional value that concept will create on sale.
Got it makes sense and I know you just one quick ones for Julie.
Just what are you budgeting from a free cash flow perspective, after dividend, but before redevelopment spend I'm just trying to get a sense of how much of this.
External growth can be funded through internal cash flow.
Yes, good question Vince.
For 2020, I'm going to look at our our T.I. and routine or maintenance Capex expectations 2019, those were around $80 million if.
Not accounting for some of the Predevelopment costs that we that we share on the page in the supplemental I would expect similar amounts for 2020, or so free cash flow or AFFO payout ratio is just not quite a 104% in 2019, I think will we couldn't could end 2020 in a similar spot so not a meaningful contributor the redevelopment and.
2020.
Got it thank you.
Thank you. Our next question comes from the line of Lawrence Vandyken with Compass point. Please proceed with your question.
Great. Thanks, Thanks for taking my question, guys and and golf I should say Saar Julie.
No problem.
The question I had was I you know again, you talked about a little bit earlier about 300 million of unfunded.
Cost for your three big projects over the next caller 18 months.
But if I look a little bit beyond that I look at the additional entitlements, both particularly care along and at a loud and how much more capital do you think you you will deploy at those assets.
You know floor force I'll start this off I think that.
We will continue on entitlement front.
But it depends there's a few things moving one obviously, we want credit as we get closer to stabilization on these assets that is key to as it relates to further spend carillon, we've talked about in the prepared remarks, and otherwise that we went out in late last year for and opportunities own partner.
Which again can be for up to 50% of the required equity four phases, one and two so to the extent that's a successful endeavor that would move us farther and faster given the leasing velocity of Caroline on phase two and would certainly provide some cushion as we think about loudon or.
Anything else in the pipeline. So one when you credit and two we need some some more transparency and closure around current efforts on to solidify the capital stack on Caroline.
Florist I'd like to answer that question as well. This is Steve from a strategic perspective, I just want to reiterate a lot of what Shane has sat here already the three or the big three that we have embarked upon at this point in time have been purposeful they've been assets that are within our portfolio that have very purposeful expansion opportunities.
To them.
In the case of house and he talked about that deal at knives him. It was a great play to sell the air rights to Avalonbay for us to get the retail shell back to us and obviously do that on an accretive basis Loudon as he had mentioned very purposeful asset adjacent to a virtually 100% occupied asset and it's got the moratorium on the multi.
Family of which we have all the rights there and then in the case, a Caroline very purposeful with that with the hospital and that what that can bring in terms of more mixed used components, whether it be MLB hospitality as well as the resi in the retail again very purposeful, but from a strategic perspective as we.
We began to deliver this space and we're not seeing the credit.
In the stock price or the multiple.
We of course will have to take a look and see whether these are accretive from a long term value perspective to keep within our portfolio. So I would encourage everybody to understand that we're very purposeful here 2021 at the end of 2021 is the beginning of a measurement period for us on whether we are able to deliver on these projects.
Deliver so accretive late to the extent that we are full steam ahead to the extent that we're not we will rethink so I want to make sure everybody is very clear on that from an all time strategic perspective.
That's a that's really helpful. Steve.
Maybe can you.
You know give us some some of your thinking in terms of the potential 50% partner of at catalog in terms of an opportunity zone investor.
How would that be structured and would that include them partnering all the retail space or is that just for the non retail or how are you thinking about that.
Well floors.
Outside of a ton of specificity here, we're still negotiating and then diligence and document formation, but.
The concept is basically 50% of the required equity or up to.
And as a full mixing bowl so they would participate in every asset class. Obviously, the retail is a bit of a tougher return in phase one because you are doing the theater and some other amenitized retail to really drive value throughout future phases, and we think it's fair that if we do bring in a new partner they participate across the stack on us.
Cost of risk profile, so it would be of up to 50% across all asset classes and both phases, one and two.
Great. Thanks.
Thank you. Our next question comes from line of Shivani said with Deutsche Bank. Please proceed with your question.
Good morning.
But the big three projects are really the focus for now last quarter you guys mentioned the decision to hold off on main street prominent in downtown Crown I'm, just due to the building of non retail specific clouds on so curious if the additional fall out in recent weeks.
Thats changed how you're thinking about the scalar scope of those projects.
Hi, good morning, Nothing's really changed with those projects in regard to scale.
For use in this case I think that.
Given the commentary.
This morning, and further spend on the re merchant ongoing remerchandising efforts in the stabilized portfolio.
They remain sort of at the ready and we'll continue to monitor that as we measure our progress against the big three.
Got it and then Julie you had mentioned the move out it is a significant fitness tenant in the quarter can you give us some more color there just given its been an area of strength recently in terms of fitness.
I'm, sorry, I the the tenant move outs that happened in January in terms of tenant names.
No just on the situation involving the fitness tenant whether it was specific to.
To a specific Brad maybe or the location should we expect anything more.
From there.
Oh, it's it's a tenant where we have one other and the portfolio very very different locations and I think it was specific to the location and I know a chain Scott.
Solid solidly it on backfill there.
Okay. So much.
Thank you. Our next question comes from the line of Michael Miller with Jpmorgan. Please proceed with your question.
Yes, Hi, I'm truly I was wondering can you give us a sense as to when you expect the I guess occupancy is 95.2% to lease rates 96 too.
When do you see those rates Troughing in 2020, where do you see ending the year.
I think for men from an average perspective for the year and.
Not looking at where we finished 2019, but average for 2020, we should be slightly up over 2019 from a same store perspective, I think you see that probably the sharpest drop in January although you know we need to let pier one play out a little more fully to see if there's an impact there, but not all it I don't expect a lot of volatility throughout the year I.
Thank God the increase comes back half or maybe fourth quarter.
Okay, and how significant is the one Q drop.
I'm not going to guide to specific occupancy you know that the eight tenants that I mentioned in terms of January alone. That's about 110000 square feet to call. It 50 basis points 60 basis points in January alone just from those tenants and it makes that a few others in the first quarter, but I think Mike while we had.
Maybe I would just that again, given the pre leasing efforts.
We might even have by the end of March maybe 100, bip drop on occupancy, but I would expect about half that correlation to the leased rate given the the proactive leasing progress.
Got it okay. That's helpful.
That was I think you okay. Thank you.
Thank you ladies and gentlemen. This concludes our question answer session I'll turn the floor back to Mr. grams for any final comments.
Very well, thank you everybody and thanks for your time today, I know again as usual very busy quarter and lots of information that's out there, especially year end. So I would encourage all of you as usual to review the transcript we will see many of you over the coming weeks said a couple of conferences and in the meantime, if you have any questions for any of US Please feel free to.
Each out thanks and have a great day.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.