Brixmor Property Group Inc

NYSE:BRX

Earnings Call Transcript 2018-Q3

[Operator]

Greetings, and welcome to the Brixmor Property Group Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to turn the conference over to your host for today's call, Stacy Slater. Thank you, you may begin.

[Stacy Slater, Senior Vice President of Investor Relations]

Thank you, Rob, and thank you all for joining Brixmor's third quarter conference call. With me on the call today are Jim Taylor, Chief Executive Officer and President; and Angela Aman, Executive Vice President and Chief Financial Officer; as well as Mark Horgan, Executive Vice President and Chief Investment Officer; and Brian Finnegan, Executive Vice President Leasing, who will be available for Q&A.

Before we begin, let me remind everyone that some of our comments today may contain forward-looking statements that are based on certain assumptions and are subject to inherent risks and uncertainties as described in our SEC filings, and actual future results may differ materially. We assume no obligation to update any forward-looking statements. Also, we will refer today to certain non-GAAP financial measures. Further information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in the earnings release and supplemental disclosure on the Investor Relations portion of our website. [Operator Instructions]

At this time, it's my pleasure to introduce Jim Taylor.

[James Taylor, Chief Executive Officer and President]

Thank you, Stacy, and thank you all for joining our third quarter call. I'm very pleased to report that our team is well ahead of the 2018 plan to deliver value now that we outlined at our Investor Day last December. But importantly, we've not only accelerated the delivery of that value through capital recycling, leasing, reinvestment and balance sheet management, we've also substantially increased the intrinsic value of what we own. Said another way, our progress continues to reduce the appropriate cap rate for Brixmor, while it also sets us up for consistent sustainable growth in 2019 and beyond. Allow me to explain.

Let's start with our investment team where year-to-date, we've closed on $780 million of dispositions, well beyond our original goal. With that progress, we now expect to close nearly $1 billion of dispositions this year at a weighted average cap rate just below 8%. This is an outstanding achievement in several respects. First, we realized these cap rates for assets that have averaged in the bottom quartile of what we own as it relates to 3- and 5-mile population density, average household incomes and most importantly, anchor productivity. Through systematically pruning the bottom of our portfolio and exiting 39 noncore markets, we have significantly improved both the growth prospects and cap rate of our remaining portfolio.

Secondly, we transacted on an asset by asset basis, which we believe drove pricing 5% to 10% higher than what would have been achieved in larger portfolio trades. That effort, which has involved over 50 discrete transactions, captured an additional $50 million to $75 million of value over what might have resulted in portfolio trades. And even more significantly, the nearly $1 billion we expect to close has raised liquidity at NAV or equity valuations at least 40% higher than our average stock price over the past year.

This accelerated disposition activity has enabled us to shift to more of a balanced capital recycling stance for 2019 and beyond. I'm encouraged by identified opportunities for us to cluster further in those retail nodes where we have a dominant presence. Of course, we will also have the ability to acquire more shares under our repurchase program should that prove more advantageous.

Speaking of capital allocation. During the quarter, we repaid over $500 million of secured debt, greatly enhancing our flexibility to accelerate our reinvestment program. Our overall debt plus preferred to EBITDA now stands at 6.5x, which is lower than where half of our shopping center peers stood at the end of 2Q. And importantly, we expect to end this year with no debt maturing until 2021 and more than adequate capital flexibility to fund several years of our value-added plan.

On the reinvestment front, we delivered 8 projects this quarter for a total investment of $54 million at an incremental return of 9%. These projects delivered included the opening of The Shops at Riverhead, one of our first HomeSense locations and Hunter's Creek in Orlando where we opened a new Lucky's Market, transforming a tired under-invested center into the center of its community with a best-in-class specialty grocer.

Allow me to pause on just this quarter's reinvestment progress. Not only did we generate $5 million of incremental income with the delivery of these projects, we've created over $25 million of incremental value before considering any compression in cap rate on the balance of the in-place NOI that naturally occurs when you improve a center.

In the case of Hunter's Creek, we believe our investment drove over 200 basis points of overall cap rate compression. I believe that our opportunity to leverage that kind of value impact of reinvestment truly stands apart within the shopping center sector given our older, well-located portfolio.

This quarter, we added 9 additional projects to our active pipeline comprising $55 million of investment at an incremental return of 10%, bringing our total pipeline underway to over $340 million. Importantly, these new projects impact centers with over $100 million of in-place NOI, so we have tremendous embedded upside from cap rate compression on the centers impacted that goes far beyond our incremental investment.

The projects underway now include our redevelopment of Newtown Shopping Center, which some of you saw in a recent property tour where we are adding great tenants like Harvest, Steak Bar and Turning Point to a center anchored by a very strong regional grocer doing over $900 a foot. From a timing perspective, we've accelerated past our original reinvestment goal set forth at Investor Day as we now expect to deliver over $220 million of accretive reinvestment through the end of next year.

What I think is important to note here is that we are creating tremendous value now in our core business of retail while mitigating leasing and duration risks that occur with ground-up projects or the development of other asset classes. And again, we get additional benefit from the balance of the centers impacted, which, including our shadow pipeline, will be in excess of 35% of our portfolio as they benefit from small shop increases and cap rate compression. Simply put, we're improving the quality of what we own and making money doing so with very modest risk.

Speaking of value creation, let's look at leasing where we signed a sector-leading 2.2 million square feet of new and renewal leases, at cash-on-cash spreads of 13.4%, which included spreads of 39.7% for new deals. For the first 9 months of 2018, we've signed a record 68 new anchor deals. This leasing continues to drive our value-added reinvestments. And as we deliver these new anchor tenants, we're seeing the follow-on growth in our small shop leased occupancy, which grew 110 basis points year-over-year to 85.5%, a record for this company since its IPO in 2013. Please note that our leasing has also driven an overall growth in portfolio average ABR of 8% in the last 2 years as we re-leased space to better tenants at better rents.

Speaking of anchors, subsequent to quarter end on October 14, Sears Holdings filed for Chapter 11 bankruptcy protection. As you will recall, we have been working diligently since joining Brixmor to reduce our Sears exposure by over half through both dispositions and proactively recapturing and re-leasing these spaces. This team has significant experience in re-merchandising and redeveloping former Kmart Sears boxes and since IPO has completed or is finishing over $100 million of such projects, at incremental returns above 9%. Where we haven't seen opportunities for value creation, we've already sold, positioning us to drive very attractive returns on the balance. We've also worked with Sears Kmart on shortening terms and eliminating options on several of our remaining locations so importantly, we can control our fate.

With the filing, we now expect to recapture 9 of our 11 remaining locations. We have leases and/or active LOIs for each of these 9 locations, which are some of the very best of our former Sears Kmart boxes, including Miami Gardens, Naples, Metro Philly and Cincinnati. Our weighted average in-place rent is $5.11 for these boxes, and we expect to achieve new rents that are a multiple of that on the backfill tenants.

As we've said many times before, rent basis truly matters in whether you can make money through disruption. While the timing of the Sears Kmart unwind came a few quarters earlier than we had anticipated, the preemptive hard work of our team has put us in a position to capitalize quickly on this opportunity to meaningfully upgrade our centers. I look forward to reporting to you on the remainder of the Kmart repositions over the coming quarters.

Looking forward, our leasing pipeline continues to be very robust, with over 450 deals representing over $51 million of ABR. And deals executed to date now represent over $44 million of ABR signed but not yet commenced. These executed deals, again, are what drive the 2019 same-store growth expectations that we set forth at our Investor Day. While the earlier-than-anticipated timing of the Sears unwind as well as the projected timing of rent commencements will likely drive us closer to 3% than 4%, I couldn't be more pleased with how these executed deals provide for visible, robust growth through this disruption.

When I joined Brixmor a little over 2 years ago, I introduced myself to the team by sharing a list of my core beliefs, cultural tenets, if you will, that have guided me throughout my career. The first and primary tenet is that great real estate matters but great people matter even more. Over the last 2 years, a unique opportunity to create value at Brixmor has allowed us to assemble one of the best teams in the open-air business.

And this third quarter of 2018 is the quarter where across all facets of our business, the quality of this team has clearly emerged with record-setting leasing, accelerating reinvestment, exceptional capital recycling and prudent balance sheet management. Across the board, what we've achieved not only sets us up for sustainable growth in 2019 and beyond. Each element of our execution has increased the intrinsic value of the well-located assets we own, moving us towards our vision of being the center of the communities we serve. Angela?

[Angela Aman]

Thanks, Jim, and good morning. FFO was $0.42 per share in the third quarter and included a $0.07 loss on debt extinguishment as we've repaid over $500 million of longer-dated high-cost secured debt, significantly increasing our unencumbered asset base and enhancing our financial and operational flexibility as we continue to execute on the business plan laid out at our Investor Day last December.

Same-property NOI growth during the third quarter was 1.2%, driven by a 270 basis point contribution from base rent, which represents a significant acceleration from the 150 basis point contribution in the first half of 2018 despite a year-over-year decline in billed occupancy. At Investor Day, we underscored our expectation that redevelopment would become a positive contributor to same-property growth beginning in the second half of this year, and the acceleration we saw in top line performance during the third quarter speaks to that underlying trend.

Provision for doubtful accounts and net recoveries were both headwinds to same-property NOI growth in the third quarter, consistent with the expectation communicated on last quarter's call. Provision for doubtful accounts was impacted by unusually low bad debt expense in the prior period and unfavorable bankruptcy reserves in the current period, while net recoveries were impacted primarily by favorable real estate tax refund activity in the prior period.

On a year-to-date basis, same-property NOI growth was 1.3%, just above the midpoint of our full year guidance range of 1% to 1.5%, and we have affirmed this range despite the impact of the Sears Kmart and Mattress Firm bankruptcies that were announced in October and could have as much as a 40 basis point impact on annualized base rent in the fourth quarter. As Jim highlighted in his remarks, we have proactively addressed our Sears Kmart exposure over the last 2 years, successfully repositioning or disposing of 11 of the 22 locations that were in the portfolio when we joined.

At the time of the bankruptcy filing, we had 11 locations remaining, representing approximately 60 basis points of annualized base rent. We have already taken back 6 of the 11 locations, representing 80 basis points of GLA and expect that we will take back another 3, representing 40 basis points of GLA by the end of January.

As a result, we currently expect Sears Kmart to detract approximately 40 basis points of same-property base rent growth or 50 basis points of same-property NOI growth during 2019. In addition, we also expect a detraction of up to 20 basis points of base rent growth or 30 basis points of NOI growth related to Mattress Firm, which includes our current expectations for both lease rejections and selected short-term rent concessions. While it is expected that Mattress Firm will pay rejection damages potentially totaling 1 year of rent, these amounts, if received, would most likely be treated as lease termination income and excluded from same-property NOI.

As Jim indicated earlier, despite these significant headwinds from unusually late in the year bankruptcy activity, we remain confident in our ability to achieve 3% same-property NOI growth in 2019. While the Sears Kmart bankruptcy filing will certainly result in more downtime in 2019 than we had originally anticipated, our forward planning and execution has put us in a position to minimize the potential impact from these closures with rent commencements on backfill tenants expected to begin as early as the fourth quarter of 2019. In fact, Greeneville Commons, the first of these 11 locations to be successfully addressed, was added to the active anchor repositioning pipeline this quarter as leases have already been executed with Marshalls, Five Below and Hobby Lobby.

This further demonstrates the effective and efficient manner with which our leasing teams have approached bankruptcy-impacted space over the last 2 years, consistently setting the pace for the industry as it relates to bringing rent back online following retailer disruption as many of you have noted.

We have tightened our 2018 FFO guidance range to reflect our elevated disposition expectation, and we have further adjusted guidance to reflect the $0.07 loss on debt extinguishment recognized during the third quarter. Please note that the revised guidance does not assume additional loss on debt extinguishment in the fourth quarter, although as Jim mentioned earlier, we are currently evaluating the repayment of additional secured debt before year-end.

Last night, we also announced a 1.8% per share dividend increase, demonstrating both our commitment to providing growing income to shareholders and our commitment to prudently funding our growing value accretive reinvestment pipeline. As a result of share repurchase activity in 2018, we expect that total growth distributions in 2019 will be flat to slightly down despite an attractive per share increase to investors, and we will continue to demonstrate one of the lowest FFO payout ratios in the open-air sector.

The rate of change at Brixmor since May of 2016 has been extraordinary. We have sold over 15% of the portfolio we inherited, and we have or will soon have value accretive reinvestment activities underway at 35% of the remaining portfolio. These value accretive investments are not only enhancing the company's short-term and long-term growth rates, but they are fundamentally improving the underlying quality and residual value of the company's unlevered cash flow stream.

At the same time, we have also substantially improved the company's balance sheet by significantly extending duration, expanding our unencumbered asset base and lowering leverage, which currently sits at 6.5x, all while maintaining over $1 billion of available liquidity. As a result, we are well positioned to capitalize on this current period of disruption as we execute on our balanced and self-funded business plan to continue to create meaningful value for shareholders.

And with that, I will turn the call over to the operator for Q&A.

[Operator]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

[Todd Thomas, KeyBanc Capital Markets]

Hi. Thanks. Good morning. Just, first question. In terms of the disposition activity and the much higher pace than expected in 2018, can you just provide some guideposts around what you might be thinking for 2019? And some additional insights around your comments that 2019 would be relatively more balanced from an investment standpoint?

[James Taylor, Chief Executive Officer and President]

As Angela alluded to, we've now sold over 15% of the portfolio, which has enabled us to get after some of the noncore markets and some of the more troubled assets that didn't fit with our strategy going forward. Because we were able to exceed, significantly, the expected volume for 2018, it sets us up in 2019 for much lower level of overall transaction activity, one; and two, to be much more balanced. By that, I mean, what we're selling, we're reinvesting either in additional acquisitions or as I alluded to, share repurchases. And of course, we continue to find great redevelopment opportunities at high single-digit and low double-digit incremental returns, which we think not only create incremental value but as we've said multiple times, significantly improves the intrinsic value of the centers that are impacted. And it's particularly exciting this quarter to see that all coming together. Whether it's in the volume of leasing that we've done, the amount of redevelopment that we're actually delivering now, we're not asking you to wait.

In fact, if you look at the total volume that we expect to deliver over the next 5 quarters of $220 million, it's roughly 2/3 of what we have underway. And again, every quarter, you'll see more projects moved from the shadow pipeline into the active. So it's kind of a great position to be in, to have that be self-funded and to take this disruption that's occurring, whether it's Kmart or Mattress Firm or others, and we do expect others to similarly struggle over the coming year or so. It puts us in a great position to make our assets better. So long-winded answer, I apologize, but I want you to understand how we think about the capital allocation. And importantly, the significant amount of work that Mark and team got done this year in over 50 separate deals, a lot of hard work well ahead of where we expected to be and valuation is much better.

[Todd Thomas, KeyBanc Capital Markets]

Okay. And just the second question just on the Kmart and Sears opportunity. Can you sort of size up what that opportunity looks like? You mentioned that the 9 that you're going to recapture, the in-place rents are $5 or so. Can you just talk about that potential mark-to-market? Maybe how much capital investment it might require to re-tenant those spaces and what you're seeing there?

[James Taylor, Chief Executive Officer and President]

Yeah, I mean, it sets up additional accretive reinvestment. And importantly, we've sold the locations. If you remember several quarters ago, Todd, I said of the 21 or 22 locations that we had, there were some where we didn't see an opportunity to make money. And as I alluded to in our remarks, we've already sold those boxes. So what remains are some of the very best locations that we have, Miami Gardens, Naples, Cincinnati, et cetera. And we're excited about the plans to backfill those. We've got active leases or LOIs on all 9 and I'll let Brian provide some more color.

[Brian Finnegan, Executive Vice President of Leasing]

Yes, thanks, Jim. And Todd, what we've done to date has really set us up for the opportunity, as Jim mentioned. And just to dig in a little further in terms of what we have on these boxes, we've got 85% of the GLA for our remaining boxes either leased, at lease or LOI. That's to grocers, value apparel retailers, best-in-class fitness operators. And some of the retailers that have been thriving in this space and have - still have large open to buys. As Jim mentioned in his remarks, our team has gotten very good at demising these boxes and being able to deliver them quickly and execute on these plans. So from a CapEx perspective, we've been delivering a lot of these boxes over the last few years in terms of these redemises. So we don't expect a material uptick in TIs. We expect the TI piece of this to be in the $30 a square foot range. Obviously, there's some landlord work associated with that in terms of demising the boxes. But in terms of our ability to create value, you look at where these remaining boxes are, Metro Philadelphia, Miami, Cincinnati, central Jersey and the demand that we have already. We feel as though we're in a pretty good position. And the last thing I'd say is of the 6 boxes that we're getting back, we expected to get all them back within the last 12 months. So all this does is really accelerate our plans.

[Todd Thomas, KeyBanc Capital Markets]

Okay. Thank you.

[Brian Finnegan, Executive Vice President of Leasing]

Thanks, Todd.

[Operator]

Our next question is from Christine McElroy with Citi Group. Please proceed with your question.

[Katy McConnell, Citi Group]

Good morning. This is Katy McConnell on for Christine. So just heading into 2019, Sears aside, can you talk about how you're feeling about the level of tenant fallout risk, given other box tenants out there that either have potential for bankruptcy or where the businesses are continuing to suffer or they may be overstored?

[James Taylor, Chief Executive Officer and President]

Thanks, Katy. I think as I've said several times over the last few quarters, as we look forward into '19, we do expect that disruption or that activity to revert to more normal levels. I think what we've seen prior to the Sears and Mattress Firm activity this year has been remarkably low. But that doesn't mean that we're not going to continue, as part of this business, to see that type of disruption. So as we look into '19, we do so with an expectation that there will be additional disruption beyond just Sears and Mattress Firm. But again, it's really an opportunity for us to get our centers better, take these tenants who aren't doing well where we have good, low in-place rents and put in better tenants. And it really, I think, is something unique as an opportunity for us as a company because as we put the capital into these older centers, we're transforming them. And we're creating value even in the space that we're not touching, which is a great opportunity for us to move to that vision of being the center of the community we serve. So when you're talking about a tenant who's not doing growth on sales, not really driving traffic to the center, you've got to ask yourself, "Do you really want that in your center?" And if you expect that tenant to fail, what's then your plan to replace it with a use that's more relevant and more vibrant? And as I've been saying for the last couple of years and as we've been demonstrating every quarter in terms of the volume of leasing that we're doing, there's no shortage of tenant demand for our centers. And we demonstrate that every quarter with leasing volumes that stand at the top of our peer group. So we welcome the additional disruption. We think given all the leasing that we've done, we're set up to outperform through that disruption but also importantly, make what we own better.

[Katy McConnell, Citi Group]

Okay. Great. Thank you.

[James Taylor, Chief Executive Officer and President]

You bet.

[Operator]

Our next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.

[Derek Johnston, Deutsche Bank]

Good morning. It looks like you have about $40 million of ABR that's signed but not yet commenced. Over what period should we expect to see this come online? And when I look in terms of the small shop component of that, is the majority coming in centers that are being redeveloped? Or was it just underutilized or vacant space in existing centers?

[Angela Aman]

Yeah, thanks, Derek. About $30 million of the $44 million should be online by really June 30 of next year with the remainder coming in, in the second half of 2019. Across the board, I would say it's a mix obviously between normal course leasing activity and redevelopment activity. As the amount we have invested in the value-enhancing redevelopment pipeline continues to grow, we would expect that number on a forward-look basis to continue to increase based on a higher contribution going forward from redevelopment.

[James Taylor, Chief Executive Officer and President]

Yeah. And importantly, Derek, that - and I really appreciate the question because when you dig into what we have in our reinvestment pipeline, the small shop occupancy there intentionally lags our portfolio average because as we deliver that new anchor, we're holding some of that space back to lease off the strength of the new anchor. And in fact, once that new anchor is put in, we're seeing increases in those centers of 700 to 900 basis points in small shop occupancy, and importantly, not only occupancy but better tenants, higher-quality tenants as we transform those centers. And that's beginning to be seen in that small shop lease performance that you're seeing, which is up 110 basis points year-over-year. We'll face a little bit of a headwind next quarter as we get some of those Mattress Firm boxes back. But I can guarantee you, we will backfill them very quickly.

[Derek Johnston, Deutsche Bank]

Great. And just switching gears, any notable trends now that more grocers are expanding delivery and curbside pickup options, given that you have a lot of heavily grocery-anchored centers? Can you just comment on traction you might be seeing with omnichannel efforts with any of your retailers?

[James Taylor, Chief Executive Officer and President]

Absolutely. We've been partnering with Kroger and Publix and many of other large grocery tenants as they roll out plans to better serve the customer through multiple channels, which include curbside pickup with very little investment on our part in terms of restriping, resigning the parking lot, providing additional lighting, et cetera, investing capital alongside them in their stores for additional rent. There are many ways that we're capitalizing on this. But importantly, these great well-run grocers are finding ways to continue to evolve and adapt, including better use of technology, which is something that I think you'll see more of over the coming couple of years where not only will customers be able to pick up and order online but apps and other things will allow the experience in the store to be much more efficient. So I think it's - the physical store is an incredible competitive advantage in this low-margin business. And I think the well-run grocers are figuring out how to capitalize on some of these changes to better serve their customers.

[Brian Finnegan, Executive Vice President of Leasing]

Yeah. And I would just add - close to half our Kroger stores now have ClickList. And for us, it's creating additional trips. As Jim mentioned, it's another way to connect with the consumer and it's very little investment. So we have been working with all of our major grocers in this initiatives - within these initiatives that they have.

[Derek Johnston, Deutsche Bank]

Excellent. Thank you.

[Operator]

Our next question is from Karin Ford with MUFG Securities. Please proceed with your question.

[Karin Ford, MUFG Securities]

Hi. Good morning. I think Jim, you said in your opening remarks that dispositions this year are going to be $1 billion and an 8% cap rate. That 8% number seemed a little higher than what we had talked about on previous calls. Just wanted to get your thoughts on whether cap rates have moved? Was it just a different mix that you sold and why that number was a little higher?

[James Taylor, Chief Executive Officer and President]

We're still a little under 8% but as we moved into the balance of the pipeline this year, we're selling some of the tougher assets. It's really a mix issue. We've been pleased that cap rates have held in pretty well, and in fact, a lot of it's being driven by the availability of debt financing where we've seen spreads compressed. So with that, it was really part of what informed our decision, Karin, to accelerate what we were going to get done this year. We saw liquidity there, we saw a strong financing market. If there was one thing I worried about going into 2018, it was whether that liquidity would be there. But in addition to good and attractive debt financing, we're seeing a lot of capital being raised for investments in these community-anchored centers. So we haven't seen a diminution in cap rates. For us, as we've moved into the balance of our execution this year, it's really been more mix.

[Karin Ford, MUFG Securities]

Great. Thanks. My second question is just on the next step in the debt pay-down plan. You mentioned you might repay some more secured debt here before the end of the year. Can you talk about what rate the next tranche is at? And would you also plan to continue to pay down on the term loan side alongside of it like you did this quarter?

[Angela Aman]

Thanks, Karin. We do lay out sort of tranche by tranche what the debt looks like in the supplemental. You'll see that for really all the remaining secured debt it's at a rate at or just a little bit above 6% in terms of the stated interest rate. The GAAP interest rate, I would note, is a little bit below that, probably 5 3/4% or so, but it's pretty consistent across tranches. The extent of how much debt we end up paying off - how much of the secured debt we end up paying off in the fourth quarter will depend a lot on sort of the disposition time - disposition magnitude as well as the timing of disposition activity in the fourth quarter, which is why we haven't sort of embedded that necessarily into the guidance range but certainly continuing to evaluate it. On the term loan, I would expect at this point that the term loan likely gets refinanced in the term loan market.

[Karin Ford, MUFG Securities]

Got it. Thank you.

[Operator]

Our next question is from Wes Golladay with RBC Capital Markets. Please proceed with your question.

[Wes Golladay, RBC Capital Markets]

Hey, good morning to everyone. Going back to dispositions, you mentioned selling some of the tougher assets towards the end of the year. How many, I guess, noncore assets as a percentage of NOI remained in the portfolio?

[James Taylor, Chief Executive Officer and President]

It's pretty low. I can't give you an exact percentage, but we got rid of a lot of the ones that we saw limited growth prospects for that were too far in terms of our other assets, where frankly, as we looked at anchor productivity, had productivity that we thought signaled flat to declining ABR. We still and always will have assets over the coming years that we look at that hold IRR and say, "That's below our cost of capital." And we'll have the flexibility on a more balanced basis, given all the work that we've done this year, to sell those assets at the right point in time. There are some assets that we'll continue to lease and then sell. We're seeing good leasing momentum. And I think that's an important thing to note that when you see the improvement in our statistics as it relates to occupancy, et cetera, that's not being driven by our disposition activity. In fact, what we've disposed of is slightly more occupied year-to-date. And that's quite intentional because we are in an environment where you're not getting value for vacant space. So as stewards of our investors' capital, we're very focused on that. But as a percentage of our overall NOI, it's pretty modest now having sold about 15% of the portfolio.

[Wes Golladay, RBC Capital Markets]

Okay. Now looking at the Sears bankruptcy, I know a lot of landlords have prepared for it. How has the mind-set of the retailers changed? Is this something they've been waiting for? Do you get the sense they may accelerate their open - store opening plans?

[James Taylor, Chief Executive Officer and President]

I don't think it necessarily changes from a retailer mind-set. Look, the retailers that are thriving in this market and we continue to do a lot of business with, whether those are specialty grocers, whether those are operators like Marshalls and Ross who we've signed leases with this quarter, 3 Five Belows that we did this quarter, those retailers continue to have strong open to buys. And if anything, the fact that landlords like us, and we've done a great job of it, have been able to execute on demising these boxes: working with specific prototypes; working with frontage, and all the things it takes to demise a box up for 3 retailers; and have been doing it consistently and delivering to these retailers over the past few years, I think, gives us a leg up in terms of our ability to retrofit them and bring them back online with better operators. So I don't necessarily think it changes their plans from an opening perspective, but they now see in terms of their ability to execute and operate out of these spaces. So I think it's additional opportunity there.

[Wes Golladay, RBC Capital Markets]

All right. That's all for me. Thank you.

[James Taylor, Chief Executive Officer and President]

Thanks.

[Operator]

Our next question is from Jeff Donnelly with Wells Fargo. Please proceed with your question.

[Jeff Donnelly, Wells Fargo]

Hi. Good morning, folks. Jim, I guess, based on Angela's comments, it sounds like the bankruptcies you guys discussed are taking about 80 basis points off your 2019 NOI growth potential and pushing you towards the lower end of that to 3% to 4% NOI growth plan. I guess, the first question is, do you believe NOI for next year could ultimately come in at something in the mid- to high 2% range? Or are you still confident you're kind of within that original range? And maybe as a follow-up, all else equal, do you think the re-leasing of the anchor spots in '19, combined with the redevelopment seeds you've been planting, position the company for NOI growth in 2020 that could theoretically actually top the 3% to 4% range you're anticipating because of the easy comp you're going to have in '19?

[James Taylor, Chief Executive Officer and President]

I do think it positions us for more robust growth in 2020, Jeff. And as it relates to the range, we obviously were conservative as we were setting up '19. That 80 basis points of impact really does move us to the low end of the range, but we still feel confident that we'll achieve that really based in part, as I mentioned in my remarks, on all of the signed but not yet commenced leases that we have. What will be a critical factor next year, Jeff, to that point is the timing of rent commencements. So every day that we beat another timing of rent commencements next year, is worth about $180,000. So it kind of gives you a sense of how much is coming on board as well as, to the latter part of your question, how it sets us up for 2020. And again, we're also seeing and I'm very grateful that we're seeing good small shop follow-on growth where we're impacting these anchors. And that continues with much better tenants, better credit, better rent, local anchors, things that really drive traffic to the center and make it more relevant to the community it serves. So long-winded answer, I apologize, but we still feel confident in the low end of the range and do believe that it sets us up for better growth in '20.

[Jeff Donnelly, Wells Fargo]

And just maybe a follow-up is, there's certainly a lot of dynamics out there that are pushing construction costs, both labor as well as the materials themselves. But rent growth, when you think about asking rents in markets, I think the view and correct me if I'm wrong, is that maybe the asking rent growth has been maybe a little more tepid in the last 12 to 24 months. I'm just curious if you feel like that's maybe setting you up to rethink or change the scope of some of the bigger redevelopment projects you guys have been contemplating, like, in a mall at 163rd or some of these other projects that are hanging out there just because maybe they won't pencil quite the same as you might have hoped?

[James Taylor, Chief Executive Officer and President]

Yeah, it's a great question. Interestingly, Jeff, in our assets in particular, we have huge embedded upside opportunity in rents. Almost regardless of what happens to the ABR trend in a particular market, including North Dade in Miami, including Western Hills outside of Cincinnati, it gives us a real opportunity because basis matters to outperform as we put capital to work. Construction costs have had an impact but that impact has typically been less than 75 basis points on what the expected returns for the projects are. So maybe instead of doing a 10.5%, we're doing a 9.75% type return and we've been seeing some of that. But again, it's really the rent that's driving the equation. The other interesting thing, Jeff, is that in a lot of our markets, we did not see the rental rate inflation that you saw in some of the top 5 markets. And that rental rate inflation significantly outpaced underlying tenant productivity, which I think is putting a lot of pressure on folks who have invested recently at high ABRs in those markets. We're in those markets, too. We have one of the largest portfolios in the Northeast.

We have one of the largest portfolios in California. But we have low rents. And those low rents give us a lot of flexibility here to create value, both incrementally, Jeff, but I think the other point that I just hope I'm getting across here is: that when you replace an old Kmart with a Sprouts and a Marshalls and a TJ, et cetera, you're improving the cap rate not just on the box but you're improving the cap rate on the total center. And that's what's exciting about this period of time for us is that even with rising construction costs and flat to even in some markets, negative ABR, we can create value. And I see that opportunity ahead. It's in our shadow pipeline. We talk about our shadow pipeline, but the one thing you got to know, Jeff, is we're running really hard on getting those leases signed, getting the construction costs out so that we can move that into active. And in fact, we're out-achieving our goals in terms of that rate. So I like how we're positioned. I like how we're positioned on a relative basis. And again, part of it starts with where we started and that fundamental truth that rent basis matters in this business if you're going to make money.

[Jeff Donnelly, Wells Fargo]

Great. Thanks, guys.

[Operator]

Our next question comes from Haendel St. Juste with Mizuho. Please proceed with your question.

[Haendel St. Juste, Mizuho]

Hi. Thank you. Good morning. So Jim, just curious, I guess, how you're thinking about the portfolio's long-term prospects from here from a same-store NOI and earnings growth basis after selling close to $1 billion of assets since your Investor Day last December. I understand that 2019 is a bit of a transition year on an earnings basis, given the volume of dispositions this year and redev still ramping and that the same-store pool still has various puts and takes. So I guess, I'm curious what you think the portfolio can generate on a same-store NOI and FFO growth basis on a more steady state basis once all this - all the noise settles down.

[James Taylor, Chief Executive Officer and President]

I think we're right in line with what we laid out at the Investor Day. And as we go into next year, the ability to deliver that 3% same-store growth is really being driven by all the things that we've been doing, as you kind of alluded to, whether it's the portfolio recycling, putting our capital into work in the reinvestment pipeline. But also Haendel, importantly, all the balance sheet work we've done, which gives us additional flexibility going forward to self-fund that reinvestment and take that, what should be on a run rate basis, 3% to 4% unlevered growth and deliver FFO growth of 5% or better. And so what's been great about this quarter is I think if you dig into any element of what we've laid out, you'll - you can see how they're all pointing us forward towards achieving that goal, and in some instances, bettering that goal. We didn't expect Sears Kmart to happen when it did but we certainly expected it to happen. And we expect other disruption to occur.

And again, I think we're really in a good position, given our low rent basis and track record with these key tenants, to outperform as we go forward. You just - you made me think of one other thing, and that is that what's interesting is we all tend to focus on the shopping center REIT sector and what one REIT is doing versus the other REIT. One of the things you got to appreciate is that we actually don't really compete with each other on the ground much. We own probably 10% to 12% of the open-air shopping centers. And through this period of disruption, the fact that you have a national platform, the fact that you have proven relationships with these tenants, the fact that you can deliver boxes on time and to prototype and to budget really matters as these retailers continue to evaluate new store opening plans. And so platforms such as ours, such as the team that has come together here, I think are positioned to really outperform within the industry as it relates to a business that is going through a lot of disruption.

[Haendel St. Juste, Mizuho]

Appreciate your thoughts there. A follow-up on capital allocation. Looked like you guys haven't been active here for a couple of quarters on the stock buyback front. Just curious where that stands today in your minds with you having opted to buy back some debt and even raising the dividend?

[James Taylor, Chief Executive Officer and President]

Well, we bought back about $50 million this quarter, which I think program to-date is about $90 million of total repurchases, leaving us a little over $300 million to repurchase under the program. It levels today. It looks a lot more attractive than it did last quarter in the $17 range. And so we certainly will look to that. The ability to earn that type of equity yield on buying back our stock is quite attractive to us. Importantly, we've built the flexibility to do that while also bringing down our debt-to-EBITDA, and importantly, funding - prefunding that redev pipeline.

[Haendel St. Juste, Mizuho]

Thank you.

[Operator]

Our next question comes from the line of Scott Frost with State Street Global Advisors. Please proceed with your question.

[Scott Frost, State Street Global Advisors]

Thank you for talking about the debt maturities. Just where do you expect your revolver balance is to be at year-end just for modeling purposes?

[Angela Aman]

Yeah, it's a good question, and it will depend in part on disposition proceeds and as I mentioned earlier, the amount of debt we end up - the amount of secured debt we end up paying down. Consistently, we have managed with either no - nothing drawn on the revolver or very little drawn on the revolver. So I would certainly expect that it's in line with where it was at the end of the third quarter, just over $100 million or below that level at year-end.

[Scott Frost, State Street Global Advisors]

And you said you're going to refi the term loan in the term loan market. I cuff that at that about $350 million or so remaining based on your previous comments. Is that right? And is there a reason - why not come to debt capital markets and issue a senior unsecured?

[Angela Aman]

Yeah, you're right. There's $350 million left on the term loan. What I would say as it relates to the term loan market relative to the unsecured bond market is that for us, it's really not an either/or decision. We're likely to be active in both markets over the next 6 to 12 months.

[Scott Frost, State Street Global Advisors]

So we should expect to see some senior unsecured issuance in debt capital markets in 2019?

[Angela Aman]

Yeah.

[Scott Frost, State Street Global Advisors]

Can you give us a range?

[James Taylor, Chief Executive Officer and President]

Well, I think what's important is that we will approach the market when it appears conducive for us to do so. But importantly, we don't have to. And I think as we manage our capital going forward, that's really the most important guiding principle, that we never put ourselves in the position to have to issue at a particular point in time. With that said, I would expect us to issue in an index-eligible range at some point in 2019.

[Scott Frost, State Street Global Advisors]

Great, thank you very much.

[James Taylor, Chief Executive Officer and President]

You bet.

[Operator]

Our next question comes from the line of Linda Tsai with Barclays. Please proceed with your questions.

[James Taylor, Chief Executive Officer and President]

Hey Linda.

[Linda Tsai, Barclays]

Hi. Over the last 2 quarters, there's been a 300-basis-point spread between leased and billed. For 2019, will the spread increase because of the Sears and Mattress Firm closures? If not and it narrows, how much of the gains can offset dilution from dispositions and refinancing costs from an FFO perspective?

[Brian Finnegan, Executive Vice President of Leasing]

Linda, this is Brian. Just from a lease versus billed standpoint, I think what it indicates first is that we have got a lot of space back but we also have been able to lease it up very quickly. So typically at this time of year, that does tighten a bit. With getting the boxes back here in October from Kmart, it will be a little bit wider and expect that to be wider at the beginning of next year. And typically, that tends to tighten in the third and fourth quarter.

[James Taylor, Chief Executive Officer and President]

Yeah, one point to highlight just from a big picture standpoint, I'll let Angela weigh in, about $44 million of rent signed but not commenced, as Angela mentioned, about $30 million of that will commence by the end of the second quarter next year. So that will be reducing that spread. Hopefully, Brian and team continue to be the most productive team in the business and we're leasing additional space, which takes that leased occupancy higher. We certainly expect that to happen. And then as you mentioned, the take is whatever billed vacancy we get back as a result of Sears Kmart, which Angela, on an occupancy standpoint, is pretty meaningful.

[Angela Aman]

Right. 120 basis points by the end of the first quarter. And as I think about trajectory as it relates to same-property NOI and obviously, the associated FFO impact in 2019, you should expect to see that back-end weighted, again, based on the timing of Sears Kmart and Mattress Firm. I think we talked about situations such as these. We're certainly embedded in that 3% to 4% range we communicated at Investor Day last year. The timing with which those are happening during the year has a more significant impact on 2019 than we might have originally expected. So you should expect to see it back-end weighted, but again, feel confident in that 3% range for next year.

[Linda Tsai, Barclays]

Thanks. And then Mark, you made some comments earlier about how the team's gotten good at demising the boxes and delivering them sooner. Can you just talk a little bit more about what's driving that process?

[Brian Finnegan, Executive Vice President of Leasing]

This is Brian. I think it's back to our experience with these, and really highlighting what Jim mentioned. We have a national platform and we've been able to deliver to prototype. And as our team on the operations side has been developing relationships with the retailers operation teams, we've gotten very good at delivering flexible formats, right? Understanding that they can live within a certain type of frontage, working with loading docks, sometimes on a box like this, you have one loading dock and you got to split those up for a few different tenants. And so as we've done a number of these over the years, like Ann Arbor, Michigan where we put 2 TJX concepts in with Sierra Trading Post and HomeGoods and added an Ulta, we've been able to work with those retailers to deliver to as close to prototype, while working in what is an irregular box. And we think that experience going forward will allow us to deliver - to bring these boxes online a lot faster.

[Linda Tsai, Barclays]

Thanks.

[Operator]

There are no further questions. At this time, I like to turn the call back to Stacy Slater for closing comment.

[Stacy Slater, Senior Vice President of Investor Relations]

Thanks everyone for joining us. We look forward to seeing many of you next week.

[James Taylor, Chief Executive Officer and President]

Thank you.

[Operator]

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.