Q2 2019 Earnings Call
Ladies and gentlemen, and welcome to the Q2 2019 Kite Realty Group Trust earnings Conference call. At this time, all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone I would now like to introduce your host for today's call Mr., Brian Mccarthy Senior Vice President marketing and Communications Mr. Mccarthy you May proceed.
Thank you and good morning, everyone welcome to the Kite Realty group second quarter earnings call.
Some of today's comments contain forward looking statements that are based on assumptions or future.
And are subject to inherent risks and uncertainties.
Actual results may differ materially from these statements.
For more information about the factors that can adversely affect the companys results.
Please see our filings, including our most recent 10-K.
Today's remarks also include certain non-GAAP financial measures. Please refer to yesterday's earnings press release available on our website.
A reconciliation of these non-GAAP performance measures to our GAAP financial results.
On the call with me today Kite Realty Corp, her chairman and Chief Executive Officer, John Correct.
President and Chief operating Officer Tom.
Executive Vice President and Chief Financial Officer.
Executive Vice President portfolio management Wade Pocketbook.
Senior Vice President and Chief Accounting Officer, Dave fuel.
And senior Vice President capital markets and Investor Relations Jason.
I will now turn the call over to John .
Thanks, Brian Good morning, everyone.
During the past quarter, we continued to execute on our de leveraging and disposition program.
While maintaining a focus on operational excellence.
I like to highlight our achievements before discussing operations.
During the quarter, we sold eight assets for $244 million and subsequent to the quarter a quarter end, we have sold an additional five assets for 157 million.
The proceeds from these sales will be used primarily to pay down debt year to date, we sold 14 noncore assets for combined proceeds of $415 million.
We now believe will meet the high end of our disposition guidance range of $500 million by the end of 2019.
As anticipated our net debt to EBITDA ratio continues to drop.
It was 6.4 times at quarter end.
Pro forma for the completed asset sales and debt pay downs subsequent to quarter's end cares Gi care G's net debt to EBITDA ratio is currently at six times.
As a reminder, we have no preferred shares outstanding.
Since we believe will hit the high end of our disposition range, we anticipate our NVE ratio will be in the mid to high five times by year end.
In light of the recent macro volatility it's important to note that our revolver is completely undrawn and our maturity ladder continues to improve.
To put in perspective, our current borrowing capacity under our revolver is more than our aggregate debt maturing through 2025.
Moving to operations.
And the second quarter, we generated FFO of 36.7 million or 43 cents per share.
For the six months ended June 30, FFO was $74.9 million or 87 cents per share.
We grew same property NOI by 1.7% compared to last year, driven primarily by increases in base rent and expense savings.
Combined with our first quarter results. We grew same property NOI by 1.8% through June Thirtyth.
We grew our hbr to $17.35 per square foot, an all time high for KRG.
We executed 81, new and renewal leases for over 500000 square feet, a 40% increase as compared to the second quarter 2018.
Year to date, we've executed 176, new and renewal leases for over 1.1 million square feet.
We continue to make very good progress with our box program.
Signing another two leases in the second quarter, representing approximately 43000 square feet.
This brings the total big box leases to eight this year.
And 20 since the beginning of 2018.
Not only have we successfully backfill vacant boxes, but we've upgraded our tenant roster in the process.
We signed tenants such as old Navy Sprouts, Skechers and Ari I just to name a few.
The 20 box leases Weve signed since 2018 include over 525000 square feet and have comparable cash spreads of approximately 16%.
Return on cost on these leases has been over 15%.
In every metric the big box search program has been a huge success.
As of today, we've opened nine of the 20, new leases with the remainder anticipated to open in late 2019 in early 2020.
As a result of our significant leasing efforts, our retail anchor lease rate stands at 96.6%.
The 160 basis points year over year increase.
Our retail small small shop lease rate is 92% also a 160 basis point year over year increase and an all time high for Georg.
Our total portfolio economic occupancy is currently 92.1%, which is a 300 basis points spread to our lease percentage of 95.1%.
The spread equates to over $9 million event on why that will come online over the next 18 months with over six and a half million attributable to the success of the big box surge.
Turning to guidance, we're now projecting 2019 FFO of $1.61 to $1.69 per share.
I've got to say this is a first for us lowering our FFO range by six cents at the midpoint is rarely a sign of outperformance.
Thats exactly whats happening this quarter.
Our disposition program is way ahead of schedule, which is a testament to the quality of the assets the depth of the market and the dedication of our investments teams.
Buyer pools have been deepened diverse financing is readily available the due diligence process has been smooth.
And pricing is right in line with our expectations.
I think investors can often view the navy discounts in our sector is theoretically.
Having the benefit of seeing our disposition program unfold in real time and private markets.
I can assure all of you there is nothing theoretical about our significant any of the discount.
Given the strong first half of 2019, we are raising the midpoint of our same property NOI growth to 2%.
We're able to increase the same property NOI due to better than anticipated occupancy.
Our team is staying focused on our 2019 plan both in dispositions.
And more importantly in operations.
We had a great first half of the year and plate plan to continue the success throughout the year.
Thanks, everyone for joining today, operator, we're ready for questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then one key on your Touchtone telephone. If your question has been answered or you wish to move yourself from the queue. Please press the pound key.
Our first question comes from Christy Mcelroy with Citi.
Hey, good morning, everyone.
Okay, Hey can you provide the average cap rate on the 415 million of dispositions completed year to date and given that you've been able to transact more an earlier than expected.
Is there a possibility that you'd maybe look to do more and could exceed the high end of the range and is there anything under contract today.
Hey, Christine so as it regards to cap rate I think as you know we will.
Introduced the plan at the beginning of the year, we we really.
Pretty much laid out that we were going to avoid getting into it. So the cap rates is particularly until we're finished with the program.
I think as it relates to what we were trying to communicate was the impact on.
Our FFO guidance and the impact, particularly.
Giving what we felt like the annualized impact to 2020 would be and I think thats.
What we put out in this particular earnings release, you can triangulate to the 2020 impact so thats important that we do that.
As it relates to.
Our expectations relative to the cap rates they are exactly what we budgeted so.
Back to what we think the earnings impact will be that that's how we're budgeting that.
In terms of you know.
Would we do more.
I think that.
We obviously increased the midpoint of our guidance a little bit due to the acceleration.
We always told everyone that we have more we were going to have more than half a million EUR 500 million on the market. We do have more than that on the market. So as it relates to would we do more that possibility exists, but the one thing we are trying to make clear is that.
We really anything above the net $500 million of disposition number we're going to view that as offensive capital.
Not not defensive capital. So I think if we were to go there and it's still early because.
I haven't played out.
Fully then yes, we would we would go above that number but if we did we'd be reinvesting those dollars either in.
Accretive acquisitions that would probably some sort of a potential redevelopment components to them or our own existing redevelopment pipeline that we have right now.
And then we also mentioned that depending on where the stock is we'd have to look at that too from a capital allocation.
John This is Michael.
Let's look at Bilerman speaking I can totally appreciate why when you set out at $500 million asset sale target, which obviously is a substantial amount of your.
Portfolio, you didn't want to sort of lead the market with cap rates that would weaken your negotiating power.
You've done well over 80% at this point right. It's in the bank it's done.
Yes, I think it would be helpful, especially because.
After that FFO impact it is in large part driven also what you do with the proceeds and what rates you're assuming on payback.
That you provide the trailing or forward cap rates on the 415 million done to date I don't think it should be a secret.
I appreciate that Michael Kors, and I think what what I think we're not far from finishing that initial.
I think the one thing that.
It was pretty clear is that these dispositions are well inside.
Our implied cap rate and I think there was one or two notes and speculated.
What those cap rates were and they were probably directionally correct and they're they're going to they are pretty much right in line with where you are seeing these new sprayed and I do we will get more concise with that when we get closer to the end.
But as it relates to if they were materially different or other in other words, if they were much higher than we would have originally projected than our guidance wouldn't be holding true to the impact to 2020, Michael So.
I mean, I get I get your point I'm, not trying to be coy, but I want to get through this and I really don't want it to.
Impact what we're going to do Michael as you thought of that.
I've been through this process before.
We communicated a range and sometimes when you communicate that range you end up not making the best real estate decisions. We're really trying to look at this is making the best real estate decision terms or buying sometimes you can kind of box yourself. So yes to your point, we're pretty far through.
But we made a minute promised ourselves early on that we would bring discipline to not disclose cap rates until we're done so thats from a revenue.
Right, but your implied cap rate represents your entirety portfolio, arguably you're selling likely weaker quality assets. So.
Understanding where youve transaction on 85% of the program would be helpful. But also just trying to understand the spread between what you're selling what you're losing and then what you're doing with the money because that will have as big of an impact on your dilution.
Then just where you're selling the assets that right and then the timing factor in terms of how you redeploy or how quickly redeploy also factor said and so at least having some of the average it doesn't have to be a range, but just some sort of guidance in terms of hey, we've done 85%. We documented eight cap rate we've taken the money, we've repaid debt at three and a half or 4% or leaving it in cash at two and a half.
Just to give us some.
Goalpost think about.
Yes, again I appreciate it I mean, I would say with your little ending to that is Directionally right online I mean, so I mean, that's part of what's going on right. Now is that we have to think about.
Once we exceed if we exceed that Michael and for sure what we do with those proceeds.
Can impact further dilution or not.
And we get that and so thats why we want to be really.
Cautious around what we say about what we will do beyond that but I think directionally Youre your statement is.
Is pretty accurate.
And also as a lesson that we gave.
Math is sort of the guard rails. So we told you were selling up to 500 million. We told you that the primary use of the.
That.
Net impact of that those activities, we set forth in our guidance so.
So again, we think we've given.
Folks enough tools to figure out what this means for us going into 2020.
All right. Thank you.
Thank you.
Thank you. Our next question comes from Todd Thomas with Keybanc capital markets.
Hi, Thanks, good morning.
Just a couple of questions I guess on on the dispositions also I was wondering first can can you.
Talk about what the impact to same store NOI growth in the quarter was from from the asset sales that were completed in the second quarter.
So Todd listen some of them contribute some of them to track. So when you sort of a net net it all out you are talking about five to 10 basis points difference at this point, so not not a material difference on the same store by virtue of our.
Selling those assets.
Okay and the assets that were sold subsequent to the end of the quarter those were still in the same store.
For the quarter and was there any.
Similar impact I suppose if you exclude those five assets.
They were in the same store pool.
Yes, again some of them are detractors some of them are accretive but those subsequent ones are generally accretive.
Okay.
And then just one more I guess on the disposition. So I think I heard in your prepared remarks, John and and some of the comments just around 2020 that.
The 2020 impact is sort of impact from the disposition so little earlier in the timing some price uncertainty perhaps but.
I guess regarding the FFO bridge that you've provided.
Is it your expectation that that 2020 should be intact. As a result of the net impact from from all of this transaction activity overall.
Yes, I think our expectation is that if you look at the way we laid out guidance.
In our press release.
That the annualized impact, we move that a little bit, but yet I think that would be intact. The way we've laid it out.
And that's just specific to only that dilution that would be occurring from those asset sales.
And then you'd have to you've got to make other assumptions, obviously for what would be happening in 2020.
Steve you want to add to that yes, the only change.
Tons that we raise the.
The bottom of the disposition guidance to from from a 3.4 from team, which took it from 20 to 29 cents to 25 to 29 cents in two.
Let's go back to 2020, so there's really no change there.
Okay. That's helpful and then just moving over to.
To the same store.
Heath can you can you remind us how much you budgeted for the year in terms of bad debt or unexpected move outs and.
How should we be thinking about throughout the balance of the year and are there any known.
Move outs occurring in the third or fourth quarter at this point.
Sure. So we started the year totaled $3.2 million, our bad debt reserve.
2.5 million the same store and that translates to about a 110 basis points of same store NOI.
For the balance of the year, we've got 1.6 million left in our in our beverages or reserve.
1.2 million isn't same store, which is about 60 basis points of same store NOI.
And we do not have any budgeted.
The stress in the in the back half of the year.
Okay.
No specific tenants at that we're looking at that were that were modeling in the back half of the year. Yes. So if you just send said another way if you look what weve modeled for the full year I mean.
It looks like the model was pretty accurate I mean, we've used about half of it.
So I don't know why we wouldn't assume that the balance would get used but we'll see.
The next quarter's a big quarter, and we'll see what happens.
Okay. All right that's helpful. Thank you.
Thank you.
Thank you. Our next question comes from Craig Schmidt with Bank of America.
Yes, good morning.
The given the high level of anchor occupancy I wonder how much left you have to do.
In terms of big box Retenanting.
Sure Craig I mean I think.
We've moved through the majority of the leasing from the original bankruptcies.
We have a handful out there that we still need to get done probably.
Somewhere between six and 10, I guess that were working through.
But those aren't all relative to bankruptcies as are also just some other vacancy so we're starting to get it to the point, where where it's in a much normal much more normal cadence of.
Big box leasing and really the last two three years have been so hyper elevated that.
That's why you're seeing the results of starting to get this leasing done and then the nine plus million dollars of and why that will come online. So.
In general there is we're getting more normalized.
But.
I don't know Tom you want to add these again, Craig I think that number.
Will actually reduce through the end of the year.
Clearly the work on various deals that take that now that number down further.
So we continue to drive the big box surgeon.
Expected to continue through the end of the year.
Okay and then just.
Are you able to do any pre leasing on the dressbarn.
Close at the end of the year.
We have when we made an immediate trip out to Philadelphia and other locations to make sure. We jumped on any opportunities that were out there I think we're seeing tenants being very opportunistic when they see vacant space. So we are in a position that were negotiating three leases right now to otherwise. So it's fair to say we have very good movement on five of the eight.
And we have until the end of the year to get this sorted out so the expectation is that good as far as we can by year end.
Great. Thank you.
Thank you.
Thank you. Our next question comes from Collin Mings with Raymond James.
Thank you good morning.
Great.
First question for me I, just want to go back to Christys question and just the discussion around the use of proceeds going forward can you maybe just expand on how you're thinking about redevelopment is right now I mean over the last few years, we've heard a lot about the three our program.
I think it doesn't look like there's anything active right now on the redevelopment front, but maybe just talk a little bit more about the future opportunities and how you think about that.
Potentially allocate some capital to that front and kind of ramping backup redevelopment efforts.
Sure I think you remember call that we talked about.
When we got laser focused in on filling these boxes, obviously, we view those as little mini redevelopments in themselves in the sense.
Capital expenditures and returns.
Which is why we mentioned that.
We have been generating.
Around 15% returns on these deals cash on cash which is pretty strong.
So that took a lot of our emphasis and focus.
And that's where a lot of the spend has gone in the last 18 months so as that begins to.
Play out and we believe we are we have been extremely successful there we will begin to pivot to look at where else we would want to spend that capital.
So is it.
In looking at redevelopment deals we have.
If you look in our supplemental you'll see that we have some redevelopment deals that we consider future redevelopments.
Which are more mixed use in nature two of those are in Carmel, Indiana Indianapolis one of the.
Consistently one of the best suburbs in the country in growth and in.
Income appreciation and just you know.
It gets rank very highly that way so.
And then we have a third one in Indianapolis at Glendale, which is also mixed use so.
Those those are the three that are in the most current pipeline, we haven't put the numbers in there yet because we're still it's still evolving.
I think our thought process there is that.
We like the mixed use attributes in these three particular deals doesn't mean that that's all we're going to look at but that's our current what we're focused on and we want to get the right returns and.
And get them done.
Beyond that.
Well, it's too early to say I mean beyond that will we will always continue to look for these things and I think a lot is going to have to do with how much capital we have to deploy if we do exceed.
The.
The goal in terms of asset sales.
Got it so maybe given the success year to date on the dispositions as well as maybe the willingness to go.
Beyond that $500 million Mark should we think about some of these redevelopment, maybe getting a little bit more traction or getting some more clarity on.
To what extent you might pursue some of these as we roll into 2020 or I mean, just just the thinking there as you are looking at capital.
Going forward.
I think it's a combination of of the timing of those.
These these things take time, particularly mixed use development deals take quite a bit of timing and you've got to go back and through generally through rezoning processes are various processes.
Two of the three of them.
Actually all three of them will be looking for some sort of incentive package as it relates to.
Partnering with.
The municipalities involved so that takes time, so thats part of that but also being a.
Prudent capital Allocator, we want to be we want to know that we have the appropriate capital allocation without impacting our balance sheet. I mean, we've obviously worked extremely hard.
We're going to succeed in getting our leverage into that mid to high five times, which will be.
And as a reminder, we don't have preferred shares so that will put us in top five or six in our space as it relates to balance sheets.
And we're going to protect that that said, we still want to grow so.
We will find that balance and figure out how to do that.
And then on that last point, John you made a point earlier to kind of highlight if you were to look at acquisitions with kind of future capital again, keeping in mind your point around where do you want to keep leverage that there would maybe be a redevelopment tilt in terms of some of the reading some of the acquisitions you might pursue maybe just obviously youve been very active in the transaction market. This year. Just are you seeing very many potential acquisitions, where the balance sheet.
Is where you want it to be that you'd be potentially pursuing.
Yes, we are definitely.
Monitoring the other side of the equation, which is acquisitions and as we mentioned we are going to have to do a couple tenthirty ones as part of our overall disposition plan. So we'll we'll we'll we've been looking to execute on that.
And as part of that process, we are seeing a lot of things and we have.
I think we found both some opportunities that we feel like our under managed or.
Under opportunistic in some way that we could change that dynamic and then we also have been looking very hard at geography, and as you know part of all this isn't just about de leveraging its about improving the quality of our portfolio. We spent a lot of time analyzing that and Weve mentioned that we would end up in 15% to 20 markets eventually and that's what's going to happen in those markets are going to be markets that we think.
Excellent characteristics as it relates to growth as it relates to inventory.
And frankly, where people want to live and that's critical to our business. So I think it's all those things and we will we will definitely think we can find those opportunities and.
Look our skill set.
That we have one of one of our many skillsets is this ability to see things in assets that others have missed.
And we've proven it.
Time, and time again with the deals Weve done in returns we have generated the only thing Thats held us back is our balance sheet.
And we're hitting that square on.
And I understand People's desire to understand the past as it relates to.
Cap rates everything else and we're going to help everybody with that down the road, but.
These deals are smart deals that we're doing right now and when we are selling these assets.
You know.
Well inside our overall company implied cap rate the redeployment of this capital that were eventually going to be able to do is going to be very very good for us.
Okay I appreciate all the detail there John just one quick one for Tom just as far as lease negotiations just curious how much just the trade tensions have entered into leasing discussions with tenants is that something that's coming up at the negotiating table right now.
When when we make our visits to the retailers. It's one of the hot topics that we discussed so as of right now it has not entered into it.
I do think you're seeing retailers really diversify their buying base and you're seeing movement of Vietnam, and and all across that region. So I do think long term all of them feel this will be healthy for the industry.
To provide a much greater heads in the event of terror situations like this but to date, we have not talked about specifically on them on lease rates et cetera.
Okay. Thank you.
Thank you.
Thank you again, ladies and gentlemen, if you have a question at this time. Please press. The Star then one key our next question comes from Barry, Oxford with D.A. Davidson.
Great. Thanks, guys, just kind of building on the we can't lose a little bit and tell what are you seeing as far as new concepts coming in.
To your.
Space.
Are they more or less than they were maybe six months ago.
Give us a little bit of color there sure Barry.
Well hi level I mean, if you just look at the last quarter.
I'd say about 60% of the deals we signed.
We're restaurant grocery entertainment service, so that I would say is fairly typical in terms of the type of users.
And again, one of the benefits of our world and the open our open air space.
It's just extremely flexible space right. So.
I think we are much more pliable much more adaptable to use changes.
As it relates to specific.
Maybe newer retailers I think is what you hear about I mean, I think you're starting to see retailers really expand there when I say retailers the ones that are reinvesting in their in their business is reinvesting in there.
Physical space.
Are the ones that are most interested in new thoughts.
And ones that have have shied away from that over the last several lenses that are slowly kind of.
Fading out and so this is a natural healthy process.
I think in terms of guys that were excited about I mean, we've definitely seen some tenants that historically have for example, only been mall based tenants that think that they now can be successful in both venues.
And now and probably can do it in much closer.
Radiuses than they thought they previously Kurt just because of the different types of consumer.
The fact that our.
Cost of occupancy is significantly less so that that means maybe they can give up a little bit of sales somewhere else and still be profitable with us and that and that allows them to get more creative to with their space. So.
Without getting into a lot of specific names because we want to be careful there.
We're definitely seeing more interest today from retailers that we have not done business with than we did.
A year ago, two years ago, very so I feel really good about that and we're probably only just beginning to scratch the surface, but I want to emphasize the primary reason for that is the flexibility and locations of our of our centers.
They are just flexible there visible.
And the cost proposition is pretty reasonable and ultimately it just allows that shopper.
To generate additional troops because of the ease of ingress egress and.
Mall location were able to secure one I think a status strategy keeping the a mall would be to try to.
Peripheral components, you increase troops and that seems to be a logical strategy or two the two types of work together.
Served to Tesla.
Okay.
Outside of that I mean entertainment and service also are both growing pretty substantially I would say.
Our duty finding the retailers to be very discriminate about where they're going it's still very competitive, but because you guys have some of the newer lifestyle centers you guys aren't feeling the pressure that may be an older center would be so to speak.
Yes, I think I think couple of things well one thing we've always had a younger portfolio than probably the majority of the peer group. If you just look at average age of our shopping centers, which is why we've had lower capex per year than most.
Just based on the age of our portfolio very but but also I think yes, I mean, I think that you are seeing this ability for us to be much more adaptable.
At a much more efficient pricing.
You got to remember throughout all this people forget I mean, there has been no inventory build up in our space for 10 years.
Thats way beyond what people initially thought.
And sure was there overcapacity was there over build up in the previous 10 definitely but now thats kind of moderating out and which is why I like to say, hey, we don't need an incredibly robust.
Retail environment for us to do well, we need to moderate environment, which is why you see our spreads.
Were they R&D CRM NOI growth and it's coming back and we went through a period of.
Kind of unprecedented.
Change in the anchor space and now on the other end of it it's going to be better because we're going to be hooked up with better partners to want to spend money on their businesses and those dying partners that just.
Boy did that.
That was a mistake.
And I think it's pretty damn clear he's got to pay attention to your physical real estate because it complements.
The entire distribution channel.
Perfect appreciate it guys.
Thanks.
Thank you. Our next question comes from Chris Lucas with capital one Securities.
Hey, good morning, guys.
Just a couple of quick follow ups, if I could.
Keith on the.
With the proceeds from the quarter for third quarter.
You're paying down additional debt do you have a sense as to what that.
Debt extinguishment costs will be for third quarter at this point based on what you've paid down already.
Petros kind of whatsoever.
Yes, so sort of year to date.
We paid 5 million of penalties and as we said in the first quarter. We thought the total program costs about $12 million to $13 million in prepayment penalties.
Basically what's happened with rates, that's got more expensive cost by $2 million to $3 million, but we're fairly confident that.
Thats been hedged by the fact that one would think probably getting better pricing on our digital program does obviously rates are cheaper, which makes up the debt cost cheaper for our buyers.
And two we really think that the due diligence process has been fairly smooth and I think part of that is again because people's debt costs have been have been steadier actually improving during the diligence process. So while overall, our defeasance costs are going to go up by two to 3 million Bucks I think we're seeing it on the on the seller.
Okay, Great and then on same store NOI looks like relative to sort of loose guidance. We provided last quarter second quarter was that the cadence of third quarter fourth quarter as it relates to sort of.
Ramp from here.
Yes part of the beat for the second quarter was really the timing of expenses and those expenses will sort of bleed into the third quarter. So we originally described.
Moderating into the second and accelerating into the third and the fourth so now I think we're going to see is we are going to be flattish into the third and then we'll accelerate severely into the fourth so the trajectory has changed a little bit again lot of has to do with the timing of expenses.
The good news is that over a third of our leases are fixed cam. So when you when you don't pay expenses during the quarter you are actually still collecting the same from attendance. So again, it's mostly just the.
The timing of expenses.
Okay and then.
You mentioned the need to probably be at a 10 $31 or two I guess the question I would have is.
How does the timing of that work in other words.
Given the program is still underway.
Definitely more to do not allow you more flexibility as it relates to when we execute on that.
Drift into next year or is that something needs to get done before the end of the year definitely sort of special dividend.
Yes, we've done 110, 31, now and you look at the the trick to this whole process as you try to match losses and gains lead on some kind of special dividend there may be an opportunity, where we have one asset which is.
Significant gave roommate 10, 31 that asset, but even if we don't.
And net net at the end of the day when you look at what's the total gain in this portfolio, we're selling it's around $70 million.
The current dividend that were paying based on the return of capital portion covers. It. So you may do another 10 31, because you worried about the other side of that transaction, but for the most part again on a net basis, we're covered for the full year.
Okay, great. Thanks, and then John just one for you.
Youre at 92% on the shop space, which was sort of what you've described is the high end is there a chance that that.
Move higher at this point or do you feel pretty comfortable that that is pretty much the ceiling for that for that.
Business No I think.
It definitely move higher and we were we want to we are going to make it move higher that's our job and our job is to lease space. It's the number one thing we do.
Our portfolio is only getting better Chris.
So by that sometimes you have some traction. Our addition by subtraction and those things.
So I think you, but no definitely I mean, when we when we had originally if you remember for a long time, we talked about this goal to get to 90% we blew by that goal.
And we have a great team and I anticipate they'll blow by where we are right now and that's what we do so.
I'm not a big believer in this idea that theres permanent permanent vacancy I think we can lease everything and we got to go do it.
And I think you know the only thing I would balance that against is what kind of rent growth. We can we can drive.
One of the things you note.
That I think you even notice is that our when we look at our lease spreads.
Our our GAAP lease spreads are pretty pretty significantly above our cash lease spreads.
Due to the fact that we push hard for annual growth.
In our small shop world, particularly so that's the balance you want to balance that.
I want to continue to push growth. Okay. So, yes, thats some friction against occupancy, but we have great. We have another phenomenal leasing team to get that and knows when they come in to get a deal to prove that we are going to be paying close attention to that.
Thank you our filling out this morning.
Thanks appreciate it.
Thank you. Our next question comes from RJ Milligan with Baird.
Hey, good morning, guys I just wanted to follow up on on the Capex discussion, how do you expect TLC capex to trend in the back half of 19 into 2020.
Well I think when you look at what the progression of our.
Of our Capex and if you look at ourselves as you know, we're we're very descriptive of what it is.
And I don't think thats very consistent across the universe, but we're pretty descriptive. So the last couple of quarters. Obviously have continued to move up from in terms of the new lease capex.
I think thats pretty clearly associated with the level of big box leasing that we've been doing.
And remember our universe of deals is pretty small per quarter, and so when you're looking per quarter, the universe, and even though you kind of trail it out over the last few quarters.
One or two box deals can for example, this quarter I think we had.
21, new deals half of the square footage was in three box deals three or four bucks deals so and.
One of them was particularly expensive.
But a good return so that can really skew. So I'd say, we're on the upper end of where thats been and as we begin to get more.
Stabilized and back to the historical occupancy in the boxes.
I would see that likely coming down a little bit but in the scope of what we've always done. We've always said that when you are going to do anchor leasing.
And these are turnkey deals.
With landlord work involves tenant work involved commissions.
Doing a deal around 75 Bucks a foot is not very unusual.
So I think it's pretty stable and hasn't there has been some movement in construction costs.
But overall I'd say, it's pretty stable Tom you want to yeah, I would say the one location, where we saw increased costs was a turnkey deal.
It was a situation.
Those on a state that has a higher tax so that that adds up to about eight and a half or so.
But ultimately on turnkey.
You have a much higher costs and it's somewhere all sort of grocery store build out on the loan we talked about.
I think as a general run rate, we are being extremely studies, sometimes we'll have very low ti.
Box deals.
So it's going to it's going to move around but we're comfortable with the pace and the areas that we're in right now.
Okay. That's helpful. I guess I think in the press release, you guys give pretty good guidance in terms of what the expected dilution would be for the.
Dispositions for 2020, and I guess, what I'm trying to get you as an FFO number for 2020, if you end up selling more than the 500 million and based on your expectations for Ti.
We'll see Capex, how comfortable are you with the resulting payout ratio and the current dividend level.
Yes, I mean, I think we've talked about that and I, we're very focused on making sure that we understand where our cash flow will be and I think were right on top of our estimates of what it will be and we were pretty clear that.
This is elevated payout relative to our historical payouts, but our our historical payouts were reasonably low for the last several years.
During the period of time, we were raising the dividend and so I think we're very comfortable with the dividend payout right now and as we said, it's not and cross purposes with our plan to our deleveraging plan, which has been obviously very successful in a fast period of time.
And I think you may have heard me say earlier I mean.
Wow.
The first step of this was to get our balance sheet to be top notch to be in the top tier.
By the end of the year that that's happened so at that point with the next phase of that is growing the business with that Austin balance sheet, and we're going to be able to do that we're going to figure that out.
And paying the dividend is there we think we can do those things.
It's clearly tighter than it was in the past, but we've invested a lot of capital over the last couple of years that we won't have to invest.
In the next couple of years through this box program. So we actually feel pretty good about it we'll continue to monitor it like we always do.
But as we pivot into I'd say 2021, 2022 2023, we already have.
Pretty pretty good understanding of where we are going to be there and cash flow begins to grow pretty substantially in those years and and we'll be looking to deploy that into positive returning investments.
Thanks, guys. Thank you.
Thank you. Our next question comes from Tammi Fique with Wells Fargo Securities.
Hi, good morning, it sounds like the impact on same store growth year to date from the disposition is fairly minimal I guess can you just give us an update on the longer term growth top profile for the company sort of post dispositions and then.
Based upon the Tailwinds from outside anchor leasing recently, how should 2020 kind of compare with that long term range.
Can you repeat the second part please.
Sure I was just saying that based upon the tailwind that you guys.
Well the outsize speaker leasing recently I'm, just wondering how 2022 compare with kind of the longer term range.
You guys are expecting for the company on a same store Michael.
Got it yes, so I think as you've just said a second ago the.
The fourth quarter is when you will really see.
The beginning of the impact of the leasing that we've been doing as it relates to the big box leasing, particularly.
And when you go out into 2020 I would assume that we'll also be continuing throughout 2020 in terms of more strength in N.Y. growth than we've had in the last two years.
You know and I think the tailwind that you mentioned, obviously when you get into 2021, you're comping against.
What I would think would be a stronger and wide growth in 2020. So you begin to have to have to continue to push that growth, but I mean look.
When you look where we've been historically Tammy I mean thinking of our business.
Being able to grow in that three plus percent range is how we think about it I mean, we think about that we want to grow our NOI.
At three in better and Thats, how we want to set up our.
Our capital investments, that's how we want to look at pushing our rent growth with our with our tenants. So that would be our goal and a longer term basis. This is to get back to where we've historically been.
And again, I mean not everybody.
Unfortunately, not everybody is giving you the same math on that and NOI growth, whereas ours is very very clear what the way we're calculating it but I think the business can remain pretty healthy in the next couple of years.
As long as the dynamics stay as they are today, obviously, we have outside we have exactness risks from recessions and things like that that can impact you, but on a static basis, yes, we'd look to improve that for the next couple of years Heath you want to add to it yes, I think Kevin the first part of your question is we're looking at what's what's the impact of this disposition pool on our same store when we're picking these assets to dispose of.
We weren't really focusing on what their same sort of equity into 19, but rather what their longer term growth profile look like so well. That's the end of the day, we sell to pull that we're looking at it will be modestly accretive to same store for 19.
On a backward looking basis, the five year CAGR. These assets is 1.3%. So again for US. It was about how can we you know addition by subtraction, how do we sort of get rid of some of our slower grower. So that we can grow set ourselves up better for the future.
Got it. Thank you and then I guess, just maybe that 3% plus growth I guess is that taking into consideration kind of future redevelopment opportunities within the portfolio or is that like pure organic growth excluding that.
No I think it takes that into consideration because if you look at where we are just in contractual rent bumps.
Tammy our contractual rent bumps are probably around 160 basis points or 140 basis points.
As Ken as he said our fixed cam.
Has been has been a good initiative for US there is some growth in there as well.
So, but those two things don't gets you to three so I think you have to you got to do a few other things in Europe .
Yes, I have a few other arrows in your quiver to get to three.
And again this is though this is as we define.
Our very straightforward and high growth.
That doesn't include lease term fees and.
Things like that so.
I think it's not a lay up I mean, we got to go out there and get it done Thats why I said.
92% is not full nothing's a layup we push hard. This is an organization that has an edge as it relates to going out there and making things happen.
We're fortunate to have a team around us that get that and know that and are excited about it so but not a lay up but I think it's doable.
So so how quickly do you think in 2020 that you guys will.
We can see here, we sell them.
Program ramp pretty considerably.
Sort of towards the end of this year going into 2020 to support that growth in 2020 or is this more 2021.
Okay great.
Yes, I'd say 2020 is more associated with what we've already done.
We're going to get significant growth out of what we've already done in 2000 2020. So we're talking past 2020, the redevelopment deals that we have currently in our pipeline that I mentioned earlier, the three mixed use deals.
Those are really for the most part wouldn't be generating much in 2020.
So we're talking past 2020, which is great I mean, we're looking into 2021 and 2022 already as it relates to our business plans and our strategies and objectives that were going to execute on and it's why this.
Almost fortress like balance sheet that we are going to have soon is very important to that plan.
Got it.
And then I guess, just can you give us your expectation for year end economic occupancy.
We typically don't guide.
Year end occupancy so just to say it will be higher.
[laughter].
Yes, we said about yes, we said in our in our comments that there is $9 million NOI that represents.
270 basis point spread between our leased and occupied.
About half of that comes online by the end of 19, so you'll see that spreads start to shrink and the other half comes on in 2020. So again it should it should be so you should start seeing a more normalized 125 to 154 basis point spread between leased and occupied.
As we head through the back half of 2020.
Yes, I think I think I'd add Tammy that.
Yeah, when you look at these.
Spreads between occupied and leased.
It's an interesting thing because some companies like to like to position it as such a great thing that they continually run these really big spreads but.
I think you have to dig a little deeper than that.
What type of vacancy you're talking about was what.
I think our spreads very very clearly.
Specific to these box leases not all of it but the majority of it and so as he said as that normalizes. We we don't really want that to be a 300 basis points. We want it to be 150, 160, 270, and that's what it's historically been so it's pretty easy to Directionally see half of that is from what's happened in the big box World in the last couple of years.
And now we're pushing through that but for any other unknown things out there.
And Thats, where we wanted to be.
Okay, great. Thanks, guys.
Thank you.
Thank you.
Our next question comes from Alexander Goldfarb with Sandler O'neill.
Hey, good morning out there.
Morning out there.
Hey.
It is it's a nice morning.
So two questions first John free cash flow that's been your mantra for the past few years and just looking at quick math, you guys were generating sort of $40 million to $50 million and now on the pro forma basis. It would look to go down to zero. If you maintain the dividend as is but if we look at the tax.
Composition the dividend it looks like a fair amount is return of capital and if you were to cut that amount that would bring you sort of back to 40 45 million of free cash flow. So as you think about the business and the redevelopment and the value that that inexpensive free cash flow provides.
Why wouldn't why wouldn't you consider to re sized the dividend as part of this pruning portfolio exercise needs that free cash flow for the redevelopment, which you've done historically.
Sure.
I appreciate the question I think as it relates to the cash flow.
So the 2019 cash flow is the cash flow that I think you must you're probably referring to.
At that is close to being breakeven and then as I mentioned, we begin to grow again in 2000, 2021 and 22. So I don't project out over the next couple of years that we would be flat I mean, I project out over the next couple of years that cash flow will begin to grow, albeit not where it was.
Two years ago, as you're referring to so look I think in the overall scheme of capital allocation, we have to look at everything and Thats why I said, we're comfortable where we are today.
We've got a lot of different constituencies as it relates to investors and reason that those investors own the shares.
Those if it was as simple as there was one constituency would make that.
Make that a different question. So I think we have to just.
We pivoted significantly.
And now we're going to pivot in the other direction as the because as the business begins to grow when we get through this program, which we're not through yet.
So all I can say to that Alex is that we constantly look at this we constantly analyze it we're comfortable where we are today.
But beyond today I don't really project beyond that that's a board level conversation and that's something that we always talk about and the board is well aware of our of our plan well aware of what it looks like over the next couple of years and everyone is comfortable where we are today.
Okay and then the second question is.
Going to.
Tenant.
Store closings bankruptcies, and all that fun stuff.
Adam I see I see and then earlier this year. There were number tenants mentioned you have a skymark bed bath tier ones.
The list goes on.
So far it doesn't really look like much is materializing. So is your view that these are just names that will like names before like the office names and other serious with me over the past decade are these things that you expect just to linger on for the next several years or you think that a number of these names that have been in the press and talked about it I CSC will actually materialize and then go through restructurings or what have you yeah within the within the next call. It six to 12 months.
Well tough its tough to say Alex lot can happen and short periods of time as we sit here today and again under the under the static assumption of where the economy is.
It's not a lot of these weaker tenants can hang on for quite some time and one of the things that people forget about is as a landlord.
We don't we don't really we don't run those businesses. So.
We're subject to what they're doing in that regard and as long as the tenant is not in default in their lease they continue to be in the space.
There are certain tenants that you mentioned that we're actively involved in discussions and trying to where it in spaces, we want to recapture.
Because we would like we would prefer to have tenants in those spaces that invest in their businesses that said, it's certainly.
To me or to some.
Respected certainly.
It's slowed down but again were were you get towards the end of this year and get into the beginning of next year and I'm sure there will be some more restructurings.
We're not hanging a banner up in the hallway that says mission accomplished we've got more work to do there will be more things that happen and we're prepared for it.
You know there are definitely tenants that.
We have.
I said, we've actively worked to significantly reduce exposure to.
And I think you know the names I don't think we need to.
Look to.
Fire arrows at anybody but.
It's worth it's in a better place today, but is not over.
Okay, well. Thank you John Thank you.
Thank you again, ladies and gentlemen, if you have a question at this time. Please press. The Star then one keen on your Touchtone telephone.
Our next question comes from Linda Tsai with Barclays.
Hi on a cash basis, the releasing spreads of 6% core recovered from the prior quarter, where it was down 3%.
I assume some of the weakness last quarter was due to leasing up assets to ready for sale.
So is it fair to assume that the releasing spread will normalize in the upcoming quarters.
Yes, I think I think Linda it is definitely it feels more normalized but as you know we do have some more assets out there that we intent on selling.
So there may be a one or two more of those where we would say we did we leased some space just to get the NOI as part of a sale, but since we're you know.
85% of the way through that you can assume the majority of that is behind us.
But again the thing I caution everybody on is based on our size.
Then the law of these smaller numbers something can really skew. It. So generally we would point that out if there was something really skewing it but it certainly feels a little more as though we're back on on that track of of the norm more normalcy as it relates to the renewal spreads and but even in this quarter.
Interestingly we had.
We had seven anchor deals that we renewed this quarter that were non option that's kind of unusual.
Anchors that didnt have options and even there the spreads were I think like 8% so.
That's a good sign for for for the health of the market actually.
Thanks, and then in the.
In terms of the heavy anchor leasing you've done can you just give us. Some examples of some of the new tenants are theyve taken over those spaces.
And whether you release, the whole space or split the boxes.
We've we've actually done very well in terms of avoiding having the split boxes. There have been situations here recently that we've had to do that.
Some of those just ties back to the sheer size of the box, but just some tenants that we've we've worked with over 18 and 19 I mean, they're they're great names category wise or home goods Sprouts, Ari Burlington Ross old Navy.
Total line.
Just to name a few so it's a very diverse group of tenants and as a healthy.
More importantly.
Everyone I've listed our ER groups that are aggressively growing and looking at new markets.
To to fuel their growth. So we feel like we're in a good position in terms of demand drivers as well as the quality of tenancy coming up.
Thanks, and then last one.
When you look at the dispositions you've done year to date, what was the average Chile of those assets, where they are larger than the average center size and your portfolio.
I don't have that right in front of me.
Linda I don't think I think there were pretty normal side, there were a couple of bigger ones.
But I know overall, our average is going down the size of our average centers going down. So I think I think you can assume they were slightly above I think our average is around 140000 square feet. So I think they were more like 170000, that's off the top of my head based on what we sold so that was another.
It's another element of of the of the plan is to is to have these beam.
I have a size that we feel like as much more manageable much more pliable sort of I guess I've use like three times today.
And it just it's important to us to know that we can not one particular asset can be of us.
Can really hurt you in a significant way now that said, we still own a couple of really large asset that we love.
One of the Misnomers on our company is that we get we get boxed into this well that's a good word actually we get boxed into being supposedly.
Big Box company, a power Center company, but if the average size of our portfolio is going to be 130, 140000 square feet. That's not a power center at much more in that community Center range that we've always talked about that we want to be in.
So that's.
Right on plan, where we want to be.
Thanks.
Thank you.
Thank you Im showing no further questions in the queue at this time I would like to turn the call back over to management for any closing remarks.
All right.
Again I wanted to thank everybody for joining us. Thank you for the interest in the company and we look forward to updating you on the next call and seeing some of you before then.
Have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may all disconnect and have a wonderful day.