Brixmor Property Group Inc

NYSE:BRX

Earnings Call Transcript 2019-Q3

[Operator]

Greetings, and welcome to the Brixmor Property Group Third Quarter 2019 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 introduce your host, Ms. Stacy Slater. Thank you. You may begin.

[Stacy Slater, Senior Vice President, IR]

Thank you, Operator. And thank you all for joining Brixmor 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. Given the number of participants on the call, we kindly ask that you limit your questions to one or two per person. If you have additional questions regarding the quarter, please re-queue.

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

[Jim Taylor, Chief Executive Officer and President]

Thank you, Stacy, and thanks to everyone for joining our call. This quarter Brixmor delivered on-time and as promised. Our results are truly outstanding top to bottom, not just for the headline reported same property NOI of 4.4%, or the FFO per share of $0.49, but for what those numbers of firm, including the unique strength of our business plan that capitalizes on opportunities embedded in what we own and control, drives higher rents and stronger margins and provides visibility on several years of growth.

The sector leading demand from today's relevant tenants to be in our well located shopping centers, as those higher rents. The intrinsic value delivered versus merely promised through reinvestment that drives attractive ROI and moves us towards our purpose of owning centers that are the center of the communities we serve. The strength of a balance sheet internally generated cash flows and self funded strategies that allow us to execute our plan for the next several years without having to access to capital markets. And most importantly, the performance and commitment of our best-in-class leasing, operations, redevelopment, construction, accounting, finance, legal and HR teams that have executed not just this quarter, but each and every one since we began a little over three years ago.

Let's dig into the results. Our national accounts and regional teams partnered this quarter to deliver over 2.3 million feet of new and renewal leases at cash on cash spreads of 13%, including nearly a million feet of new leases of comparable cash spreads of over 30%. Overall leased occupancy grew 40 basis points sequentially to 91.9%. And importantly, we drove a 30 basis point increase in small shop occupancy sequentially.

We commenced over $18 million in new AVR this quarter, bringing down the gap between build and leased to 330 basis points from 400 basis points last quarter. However, while the operations team is doing a phenomenal job getting tenants in and rents commenced, the leasing teams haven't slowed a bit as these signed but not commence rents continue to get backfilled. In fact, those signed but not commenced rents are once again approaching $50 million in AVR, and our current leases in the pipeline to be executed comprised an additional $42 million in AVR. These executed leases and leases in our pipeline provide us great visibility on future growth. Once again this quarter, we maintained disciplined with capital as net effective rents helped firm and our intrinsic lease terms held steady with average duration of nine years and embedded ramp ups of 2%. As we've discussed in the past, those embedded ramp ups are cheapest form of growth and build upon our overall portfolio average.

Our redevelopment and construction teams partnered this quarter to deliver another $68 million of reinvestment projects and an 11% incremental return. If I may pause on that, you'd have to deliver over $250 million of ground up development this quarter, which typically yield 6% to 7%, in which involves much higher execution in leasing rents to create the same amount of value that we created this quarter. That's why I love what we're executing upon at Brixmor, profitably making our assets better and more relevant to the communities they serve. As I mentioned last quarter, the improvements at the asset level are [indiscernible] not only driving increases in ROI and intrinsic value, they're driving small shop momentum in future ROI growth.

Reinvestment projects completed this quarter includes the first phase of Mira Mesa, which was delivered a quarter ahead of schedule where we remerchandise the farmer Kohl’s with the Sprouts, Five Below, Michaels and BevMo. If you find yourself in San Diego, we'd love for you to see how we transform the tired power center into the center of the [indiscernible] community. What's also very cool is that we're not done creating value at Mira Mesa as this initial phase sets up opportunities for additional future density from pad sites to potential residential. We also keep driving the velocity of our reinvestment pipeline adding 12 projects to the active pipeline this quarter. We now have $414 million of projects underway at an incremental return of 9%. I'm truly proud of our regional owners identifying and executing upon these opportunities that drive both our ROI and our purpose. Our investment team continued to capitalize on liquidity for non-core assets, completing the sale of 13 assets for total proceeds of $151 million, bringing our year-to-date total to just under $250 million.

In the quarter, we exited another four single-asset markets. A meaningful part of the benefit you see in our operating numbers is being driven by this clustering of our investments in our core markets. In fact, a powerful statistic regarding the benefit of this focus is that we can continue to achieve leasing volumes at the top of our historical range of $2 million to $2.5 million fee per quarter with nearly 100 fewer shopping centers. As communicated on prior calls, we do expect to meet more balanced in the coming quarters with potential acquisitions identified in a number of our target markets. As always, we are focused on those opportunities where we can leverage the unique strengths of our leading platform to drive growth in ROI, versus simply putting capital tp work or chasing statistics, so we will remain disciplined.

Finally, we continue to strengthen our balance sheet, opportunistically issuing $350 million of tenure notes at a record tight spread for us and an effective yield of 3.3%. We now have no debt maturities until 2022 and a very well laddered maturity profile after that, simply outstanding execution by our finance team.

In summary, I couldn't be prouder of how the overall team has delivered on our all weather plan to drive sustainable growth and value creation from our portfolio of well located shopping centers. This very same execution, which shows in all facets of our plan, including our rents signed but not commenced, the robustness of our forward leasing pipeline, the growing reinvestment pipeline and our accelerating small shop momentum provide us unparalleled visibility and confidence on continuing to deliver even with the inevitable disruptions that occur in retail from year-to-year and cycle-to-cycle.

With that, I'll turn the call over to Angela for a more detailed discussion of our financial results and outlook. Angela?

[Angela Aman]

Thanks, Jim, and good morning, I'm pleased to report another strong quarter of execution as the success of the portfolio transformation we began in 2016 becomes fully evident in our financial and operational metrics. FFO in the third quarter was $0.49 per share reflecting an acceleration in same property NOI growth to 4.4%. Same property NOI growth was driven by positive contributions across every line item. Most notably, the contribution from base rent was 290 basis points, representing a sequential acceleration of 120 basis points to the strong rent spreads over the last year, as well as significant rent commencements during the quarter, which increased build occupancy by 110 basis points since Q2.

In addition to the significant contribution from base rent, net recoveries contributed 70 basis points to growth, while ancillary and other income and bad debt expense, both contributed 30 basis points, and percentage rent contributed 20 basis points. With the contribution from net --while the contribution from net recoveries is partially a reflection of the timing of op expense, it also reflects the capital investments we've made in the portfolio over the last few years, which are driving margin improvement.

We have increased our 2019 same property NOI growth guidance to 3% to 3.25%, and our 2019 FFO guidance to $1.90 to $1.93 per share. As we've discussed with you throughout the year, the historically high amount of revenue embedded in leases signed but not yet commenced has meant that the timing of rent commencement days has been both a risk and an opportunity to calendar your growth in 2019.

As I believe this quarter clearly demonstrates, we're not only hitting our scheduled rent commencement days, but we are also finding opportunities to accelerate those days and get tenants opened and operating sooner than expected through the combined efforts of the entire platform. Our results validate the significant opportunity we saw in 2016 to capitalize on our below market rent basis and to transform the portfolio through accretive reinvestment.

Importantly, our results also underscore that the enhancements we have made to our operating platforms have positioned us to fully capitalize on the opportunity embedded in our well located shopping centers. As a result, while we are not prepared to provide specific guidance for 2020, I would note that we do expect same property NOI growth at or above 3% next year, as the business plan we have laid out continues to result in strong base rent growth through the robust leasing activity and redevelopment delivery despite our expectations of ongoing tenant disruption.

As it relates to the balance sheet, we continue to advance our capital structure objectives in the third quarter by issuing $350 million of 10-year unsecured notes. The proceeds we’re used to repay the $300 million that remained outstanding under our 2021 term loans, as well as outstanding amounts on a revolving credit facility, further extending our weighted average duration.

As Jim mentioned, we now have no debt maturities until 2022 and no amounts outstanding on our $1.25 billion revolver. Adjusted EBITDA is currently at 6.2 times and we have significant financial flexibility to execute on our business plan. Last night we announced a 1.8% dividend increase, which demonstrates both our commitment to providing shareholders with a growing income stream, as well as our commitment to prudently funding our value enhancing reinvestment pipeline and growing the intrinsic value of the portfolio. With this dividend increase, we will continue to report one of the lowest FFO payout ratios in the open air sector.

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

[Operator]

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Christy McElroy with Citi. Please proceed with your question.

[Christy McElroy, Citi]

Hey, good morning, everyone. Thank you. Angela, just hoping you can talk a little bit about the mechanics of the trend in straight-line rents which has been higher this year than you're originally expected, understanding that you booked it when a tenant picks possession of the space and then it becomes cash minimum rents when the tenants aren’t paying rents. So the question is if we think about the rent commencement that occurred in Q3, which had an impact on build occupancy but also same store growth, how should we think about that straight-line rent number in Q3, which is still at a pretty high level in the context of near-term incremental rent commencement? And what sort of a good normal run rate for straight-line rents going forward?

[Angela Aman]

Yeah, thanks, Christy, and you're right that we have seen additional straight-line rent relative to our original expectations this year. And to your point, that really has been a function of how large that spread between leased occupancy and build occupancy has grown to over the course of the year, particularly in the third quarter, as we had many tenants in possession of the space, and later in the quarter taking -- commencing rents, and even for the Q4 rent commencement days.

If I look at the number we've reported in the third quarter, I would certainly expect that it does begin to decelerate from this point going forward, but again it really is going to be a function of that gap between lease occupancy and build occupancy and how many tenants rent possession of the space, and the duration of tenants in possession of the space before the rent commencement days. As I look forward to next quarter and then into 2020, I would certainly expect that we decelerate on straight-line income from here, and I would also, just in terms of more broadly on non-cash rental adjustment. As a reminder, I would say the FAS 141 or the above and below market rent is going to continue to decelerate as well. The step-down you're seeing in 2019 relative to 2018 is a little outsized given that the fact that we had acceleration of some below market rent amounts in 2018 related to bankruptcy activity. But as we layout in our 10-Q, you should expect to see a penny to two pennies a share of deceleration on a year-over-year basis going forward from that line item as well.

[Jim Taylor, Chief Executive Officer and President]

Yeah, and Christy, I just comment that it really does reflect our success in leasing and getting tenants in possession, and accelerating that timeframe to actual rent commencement. So while we do expect that to decelerate, we're going to continue to push on leasing to drive build occupancy.

[Christy McElroy, Citi]

Okay, that's helpful, thanks. And then just your revised FFO guidance implies the range of $0.46 to $0.49 in Q4, you're at $0.49 in Q3, I'm guessing there is some coming dilution from dispositions that you just completed, which are pretty heavy. So, I guess, in addition to the 3% or higher same store growth that you expect in 2020, Angela, that you’re alluded to, maybe you can kind of help us think about the major moving pieces that impact FFO in Q4, but also over the next few quarters, because if I think about the midpoint of that Q4 range, it implies a base of annual FFO of 190.

[Angela Aman]

Yeah. Thanks, Christy. I would say, I think you put on the major components in terms of Q3 to Q4. The two things really are non-cash -- expected non-cash deceleration, and then, as well the impact of both the third quarter capital recycling activity, as well as any expectations for fourth quarter capital recycling activity as well. As we look out to 2020, I would say, it's effectively the same answer. And we do expect, again, strength from same property NOI growth, you will see some impact from capital recycling activity, which has been backend rated in 2019, and then any expectations for 2020 capital recycling activity, and then again, importantly, that deceleration from non-cash income.

[Operator]

Thank you. The next question is from Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

[Todd Thomas, KeyBanc Capital Markets]

Hi, thanks, good morning. Can you talk about the acquisition pipeline a little bit here? I think Jim, you touched on it briefly, you were a little pride in the quarter after sourcing some deals in 2Q. Are you seeing more potential opportunities out there and would you expect 2020 to shape up to be a more active year on the acquisition side than 2019?

[Jim Taylor, Chief Executive Officer and President]

Absolutely, I'll let Mark comment a little bit. We are seeing some more opportunities. And a lot of what we've targeted our assets that aren't necessarily on the market, but assets that we think would further drive our clustering strategy in some of our key target markets. What we have noticed is that pricing remains pretty tight right now, and we're going to remain disciplined on the acquisition front, but I do expect that pace to accelerate for us to be much more balanced in '20.

[Mark Horgan]

Yeah, with respect to the pipeline, we're seeing some interesting current activity in the market. Certain private equity sources and pension funds have been bringing opener assets into the market, I think, in part to reduce their overall retail exposure, which is leading to some interesting individual asset acquisition and portfolio opportunity. So I think we'll see that over time that the flip side of that coin is we've also seen the increase – an increase of inbound time other private equity resources that are seeking up in our resell exposure, because the asset class screens somewhat cheap relative to other major asset classes. So we're seeing those type of investors show up on the bid list, which is pretty healthy for the overall market. But I think, Jim said that well when we talked about it in the past couple of quarters. It's about remaining disciplined with capital allocation here, and shouldn't expect us just to do deals, just to do deals and we are very disciplined and find deals where we can drive value with our platform like I think we will with the recent acquisitions we did in Q2.

[Todd Thomas, KeyBanc Capital Markets]

Okay, great. And then Angela, one of your peers sold common equity recently. Is that something you would consider in order to accelerate your deleveraging plans a little bit, maybe take leverage down below your longer-term target, maybe cash up for some future acquisitions and/or redevelopment opportunities here? How are you thinking about that?

[Jim Taylor, Chief Executive Officer and President]

Let me start, and I'll let Angela finish. What -- we have brought our balance sheet to a great level and to where we promised over two years ago, which gives us adequate funding capacity for several years of what we're doing in addition to the free cash flow over generating. We think we're exceeded at this level. And so we don't think it makes sense to issue equity here. And going forward at different price levels, perhaps, but what I think is most important about our plan is that we don't have to access the capital markets. And that was very important to us to make sure that we set up a self-contained planet that could drive growth, drive improvement in ROI that's not dependent on external funding sources.

[Angela Aman]

Yeah, I -- the only thing I would add to that is that, we have said for some time now that we think that additional deleveraging really is going to come from EBITDA growth, and that is a large part of what you saw in the current quarter. That has -- all of the work we've done in the portfolio over the last few years really does drive on leverage asset growth that is having a significant benefit in terms of our adjusted EBITDA on that drag. And you're going to continue to see that over time as we harvest the below market rent basis across the portfolio. So we do feel like that the balance sheet is in a great position, and think that the work there is effectively done.

[Jim Taylor, Chief Executive Officer and President]

Yeah, this is the last comment I'd make there is that we've got the balance sheet that’s matched with the left side of what we're doing. And we're not taking much risk on the left side of our balance sheet. Most of our reinvestment activity is preleased, it's shorter duration. And we're demonstrating that every quarter to Angela's point as it comes online just like the $68 million this quarter with cash flow, great incremental returns, and the way we're funding it is delevering out. So we feel very good about the trajectory we're on.

[Operator]

Thank you. The next question is from Jeremy Metz with BMO Capital Markets. Please proceed with your question.

[Jeremy Metz, BMO Capital Markets]

Hey, good morning. Angela, you mentioned the 3% or higher same store expectation for next year, some landlords have been actively working with retailers like Bed Bath and models to restructures and deals here and minimizing disruption next year. So I guess I'm wondering have you been doing the same and maybe you can just comment more broadly as you see here today how you're thinking about bad debt for next year relative to their historical range of 75 to 100 basis points, which you typically target?

[Angela Aman]

Yeah, I mean I -- it's a great question, Jeremy. I think is that relates to kind of renegotiations of existing contractual obligations from our tenants. We really haven't been engaging in those conversations. I do think we're in a different position than many other platforms given the fact that the portfolio is below market from a rent perspective. So we have been as I think, we’ve proven then able to deploy capital accretively and reset rents to market. And if we have an opportunity to do that to take backspace in order to do that, we're willing to entertain that, but we haven't been willing to entertain cutting what’s already a below market rent in order to facilitate that negotiation with the retailer. I'll let Brian comment more specifically.

[Brian Finnegan, Executive Vice President, Leasing]

Yeah, I think, Angela covered most of it, Jeremy. I mean we're in a great position. You can see it in terms of some of the distress retail space that we've taken back. We've brought those leases to market commencement there to backfill them, backfill them fairly quickly. So it puts us in a great position in our portfolio when retailers do have, and sometimes they certainly do.

[Angela Aman]

Yeah, and just on your bad debt question, specifically, as it relates to next year, we've always said our expectations are for a level of bad debt across the portfolio of 75 to 100 basis points. We're trending this year right in the middle of that range and that would certainly be our expectation for next year as well. That’s said, as I mentioned in my comment about our 2020 outlook, we do assume that you see additional tenant disruption in the base rent line as well and that certainly incorporated in our expectations.

[Jeremy Metz, BMO Capital Markets]

Yeah, that's helpful. And as my follow up here, I just want to stick with the same property NOI topic here. I'm wondering how much, if you can quantify, redevelopment having an impact here, the 50 or 100 basis points, I recognize it's all positive to growth, trying to get a better sense of core growth versus redevelopment addition as we look into net? And then can you walk through the expense side a little more, you've obviously done very well giving senses flat here, so wondering how you're kind of achieving that, how sustainable that really is? Are there costing moved into redevelopment project being capitalized, is that helping? Any color on that would be great? Thanks.

[Angela Aman]

Sure. In terms of the redevelopment impacts on the third quarter and embedded in our expectation for full year 2019, it's been -- if you just look at the larger scale redevelopment project, in particular, it was about a 50-basis-point benefit in the third quarter. It's going to be less of a benefit on a full-year basis, probably, in the order of magnitude 20 to 30 basis points until your same property NOI. Remember that when we quote that number, it does include the future redevelopment pipeline, so all of the drag is an example associated with the Kmart bankruptcy is offsetting. The growth you're seeing there from the end process and recently completed redevelopment projects. But again, 50 basis points on the quarter, probably 25 basis points on a full-year basis. In terms of expenses, I would say the largest share of what's going on in terms of our ability to manage expenses has been, as I mentioned in my prepared remarks, the investments we've made in the portfolio over the last few years to really bring it up to, as Jim talked about on previous calls, are privately owned and operated by Brixmor standard. And that certainly is resulting in certain categories of lower expenses over time, as it relates to sometimes utility costs, sometimes repairs and maintenance across the portfolio. We've also been very proactive about how we're managing our operating expenses, and thinking very critically about leakage on a property-by-property basis, and doing the best we can to manage that against the backdrop of what was 400 basis points last quarter to 330 basis points this quarter, at least this time, but not commenced, and understanding that occupancy is coming online through the end of 2020. And as a result, we're going to have opportunities to recover. So it's both of those things. Those are the primary drivers.

[Operator]

Thank you. Our next question comes from Alexander Goldfarb with Sandler O'Neill. Please proceed with your question.

[Alexander Goldfarb, Sandler O'Neill]

Two questions, first, Angela, I appreciate the comments to Jeremy that your 3% plus same store for next year does incorporate some elements of store closings, bad debt et cetera. But just as you guys look at what happened to Forever 21, where everyone expected it to be sort of prepackaged, and instead, they did something random, how much comfort is in your budget or how much budget is in your 3% to allow for just the vagaries whether it's a senior Bed Bath, or one of those big cuttings doing something unexpected that sort of Forever 21 did? How much are you budgeting in there?

[Jim Taylor, Chief Executive Officer and President]

Let me start there. As we look at our budget, we really do at bottom up Alex, and we look at not just potential tenant disruption, but also move out another thing that would impact revenue in a given year. And so I think, we've taken a fairly conservative look at what we expect the disruption to be on an ongoing basis looking into 2020. But one thing I'd highlight, and that is that we've been thinking about this since the moment we joined. And that we've been aggressively managing that watch list getting ahead of these problems, not just for '20, but '21, '22, just as we were getting ahead of them before. So that doesn't mean that we've contemplated all potential outcomes, but we certainly look at an environment like this and expect that there's going to be continued disruption. One of the things that it really attracted me to this opportunity that I thought was unique is, I think we're in a different position and that even in an environment of disruption, or declining market AVR, because of where we're starting from, we have the opportunity to drive growth, and look at our lease maturity profile. And you can see based on where we're signing leases today relative to where those leases are turning over the next three to four years that we've got a long runway, even if market rents come back a little bit. So that's how we think about it. We don't think about it just for purposes of 2020, we really think about it in terms of how are we managing the portfolio.

[Alexander Goldfarb, Sandler O'Neill]

Okay. And then the second question is you guys raised the dividend just little under 2%. Historically your bumps have been much bigger than that, and given your bullish comments on next year in same store NOI, is the 2% dividend increase -- is that just because that's the taxable minimum, or is that because all that the rest of the cash flow is going to reinvest? Just trying to think how much signalling you're doing with the dividend increase relative to the growth that you're talking about on the call and all the sign, but not yet commenced NOI?

[Jim Taylor, Chief Executive Officer and President]

We really managed our dividend to taxable income and where we expect that payout to be with the view towards our cheapest form of capital is that which we are internally generating so that we are in a position to produce a long-term track record of sustainable dividend increases. The 1.8% that we’ve increased the dividend this year follows what we did last year, but we certainly do expect that to accelerate over time as the income that we're signing delivers, and it's a good position to be in.

[Operator]

Thank you. Our next question comes from Shivani Sood with Deutsche Bank. Please proceed with your question.

[Shivani Sood, Deutsche Bank]

Hi, good morning. Understanding that the small shop vacancy is an important component to growth, as this economic cycle expects to get a little bit longer in the twos, is there anything different about how you're approaching the underwriting process? And then the statistic has been sort of May 80% carry for up to few quarters, so how high could we see expect to see this gap at some of the redevelopments start [Indiscernible] online?

[Jim Taylor, Chief Executive Officer and President]

I love this question. And it actually relates to something that we started doing 2.5 years ago, which is actively managing our portfolio small shop tenancy and moving out those small shops that we thought were weaker. And admittedly we took ahead to growth in 2017 and 2018, as a result of more proactive calling of the small shop portfolio, but what resulted is the base of the small shop tenants that have much lower levels of delinquency, much stronger credit. And then as we move forward, we absolutely are much more focused on financial strength of these small shop tenants, how much capital do they have to put to work, what are they doing with their shops et cetera. And I think as we go forward, that's really what the view that we have in all weather business plan that we are late in the cycle and trying to position ourselves outperform, because our goal is not to be at 85% small shop occupancy. Our goal is to be much closer to 90, which is something that I think this portfolio is capable of supporting with the better leasing and the better anchored tenants that we're bringing in, and the repositioning that we're doing, the better operating that we're doing in these assets. And again, I mentioned it last quarter, you're seeing it in our small shop growth statistics, but I really invite you all to get out and see what we're doing at the asset level, because it will be much more capable for you to see the changes, and you'll get how we're improving upon that opportunity.

[Shivani Sood, Deutsche Bank]

Thanks. And then we continue to hear about the expansion of the off price brands and concepts and the strength of this retailing concept. Do you guys think we're beginning to hit a point of concentration, I think, of the brand or any of the concepts at all?

[Jim Taylor, Chief Executive Officer and President]

I'm going to let Brian to take this, but one observation to make is that that's part of a larger trend of disruption that's occurring vis-a-vis full price department stores, and what's happening with those sales, where they're going, where that product is going, and how those tenants continue to do well, many of them think they have a lot more white space in terms of the number of new store openings. And we think it's a great way of serving the community in terms of bringing them true value?

[Brian Finnegan, Executive Vice President, Leasing]

Yea, I would just add, Jim hit it on the head. If you look at -- people want main brands at a discount, and these operators continue to deliver value. And speaking of the white space, excuse me, if you look at like Ross Stores, for instance, they're not even in the Northeast yet, they just entered into the Midwest, opening their first stores in Ohio this year. There continues to be white space out there for TJX, Burlington's done a phenomenal job. And they keep improving the shopping experience within their stores. So as department stores close, to Jim's point, they're picking up most of that traffic, and we continue to see good demand from them for space and white space out going forward.

[Jim Taylor, Chief Executive Officer and President]

Yeah, the other side of this, and I think it's also important to mention is just overall portfolio management. And we do think about our exposures to individual tenants, and where they should be. And I think the strength of our platform is the tenant diversification that we do have, and the strength of the top 20 or top 40 tenants that we have throughout the portfolio. Our largest tenant is 3% of revenue, and that's intentional. And so we watch very carefully what are the concepts that are growing, how are they doing from a sales performance standpoint, and then importantly, on the other side of that, where do we stand relative to our exposure to them?

[Operator]

Thank you. Our next question comes from the line of Samir Khanal with Evercore ISI. Please proceed with your question.

[Samir Khanal, Evercore ISI]

Good morning Jim. Jim or Mark, can you talk about the pricing you've seen in the grocery-anchored centers, especially, as it relates to secondary markets? It sounds like the core of markets have held firm, but I'm just trying to get some color in the secondary markets here.

[Jim Taylor, Chief Executive Officer and President]

I would actually say, I think, in what you might quantify as primary markets, we’re actually seeing very stable, perhaps on cap rate compression on the grocery-anchored side depending on the strength of the grocer. On the secondary side of what you would call secondary side, we really haven't seen that much change. We continue to see demand for assets in markets that are not the top 10 markets across the country. We continue to receive ascending amount inbound seeking access to those type of assets. We haven't seen a drastic change to there. When it really comes down to, like it always has, strength of the real estate, strength of the grocer, how the asset been managed over time, so we haven't really seen not much of a change.

[Mark Horgan]

Liquidity, Samir, still seems bifurcated in that. If you have an asset under $50 million, you have long better, if you get above $50 million that tends to shrink, which we hope will be an opportunity for us going forward in terms of where assets are being priced because below $50 million, it's clearly pretty competitive, still driven in this small measure by where interest rates are and the availability of financing. That's, I think, really what's driving a lot of the pricing today.

[Samir Khanal, Evercore ISI]

I mean, just as a follow up, I mean, given that pricing seems to be holding firm even in the secondary markets, I mean, could you take advantage of that pricing, and even being sort of net sellers next year? I mean, obviously, there's been a lot of conversation about what could come down the line in terms of disruption in grocery, right, I mean, could you take advantage of that, maybe next year just becoming bit more net sellers?

[Jim Taylor, Chief Executive Officer and President]

We really are focused on being more balanced. I think, from a balance sheet perspective and importantly, from a portfolio perspective, we've been in front of those assets that we deem to be non-core or that we think will be dilutive to our long-term ROI and growth prospects. And we sold now over $1.8 billion of real estate just in the last couple of years, which puts us in a great position to be more balanced. And frankly I like that posture because it allows me to be a bit more indifferent as to the movement of cap rates, because on buying and selling. And I also think it's really important for our long-term plan that we continue to find assets like we did in Conshohocken, Pennsylvania, to which we can apply, I think, the unique strengths of national platform where we have the relationships with tenants, the access to capital, and frankly, the track record and experience and repositioning these assets for long-term growth, which is a unique set of characteristics against many of the buyers with whom we might be competing or a more leveraged buyers who don't have the national platform, and don't have the ability to fund significant additional capital to take the center where it needs to be. So you're not going to see us again, as I said in my remarks, chasing the bright shining finished assets. We're going to be looking for those assets that really do provide us an opportunity to drive value-added type return.

[Operator]

Thank you. The next question comes from Caitlin Burrows of Goldman Sachs. Please proceed with your question.

[Caitlin Burrows, Goldman Sachs]

Hi, good morning. Maybe if we just think about the 2019 same store guidance, the midpoint is now for just about 3%, which is in the 3% to 4% range that you gave at the end of 2017. So I was wondering if you could just talk about how much has played out as planned kind of showing how much visibility you have versus puts and takes that have come up along the way what kind of gotten you to a similar place?

[Jim Taylor, Chief Executive Officer and President]

Yeah, I'm really pleased with how the plans come together. I think, most importantly, we're demonstrating how we can be affective in allocating capital to these assets and driving meaningful incremental returns, which is certainly part of it, as well as capitalizing on the below market rents, and to simply just leasing the better tenants, better rents. And I'm incredibly pleased that we’ve delivered on time and as promised in the range that we expect to take this portfolio not just for the next several quarters, but for the next several years. And I just point to, again, we're trying to provide you visibility in that both in terms of our existing in process pipeline, our future pipeline, as well as where we're signing rents consistently every quarter and where our rents are rolling, which we provide detail on. And that combination, as I alluded to in my remarks, a growing reinvestment pipeline, a growing leasing pipeline both executed leases and leases in process as well as the velocity with which we're delivering on the reinvestment pipeline really get us a great deal of visibility, and put us in a much different position, market conditions either down or up than if we were sitting on a portfolio of fully rented, fully repositioned assets. That's where you're playing defence. And that's where you might be as was alluded to in an earlier question at a disadvantage in negotiating with the tenant. We might believe there are at a rent that's above market. So it's very affirming to see the plan come together. And on the margins, we're doing a bit better on operating margin than we had anticipated, and we're certainly seeing that in the contribution from recoveries. But I would say we're just real pleased with how the plan has come together, and what this quarter means in terms of the next several.

[Operator]

Thank you. The next question comes from Greg McGinniss with Scotiabank. Please proceed with your question.

[Greg McGinniss, Scotiabank]

Mark, obviously, this was a healthy quarter for dispositions, sold nearly 2.5% of total G&A. And I know second half of the year tends to run heavier than the first half in general for transactions. Is it fair to think about a similar level of dispositions in Q4? And I'm just curious kind of what's in the pipeline for dispositions today. And also, if you could disclose the cap rate on the 3Q dispositions, that would be appreciated as well. Thanks.

[Mark Horgan]

So a couple of things there, the cap rates for Q3 were generally in line with or even selling assets. For the past few years, it was slightly higher based on the mix of assets that we transacted on in Q3. Q4, I would expect to be lower than Q3. And as Jim has said, the goal is to try to match fund acquisitions and dispositions over time. It will be lumpy, you don't control, I don't control exactly when assets will change and will trade down. So expect to be that lumpy, but over time in the long run, it should be match funded. I'm sorry I don't think I've answered all your questions. What else did you want to hit on?

[Greg McGinniss, Scotiabank]

No, that’s pretty much. That covered the some questions. So thank you. And then Brian, on leasing, obviously, it's chugging along pretty smoothly. Would you mind giving us just a few details on the changes in terms of the anchor and small shop leasing since last quarter, new impacts from bankrupt tenants and then kind of expectations as we finish the year?

[Brian Finnegan, Executive Vice President, Leasing]

Sure. It’s a great question. We continue to see the demand from many of the relevant retailers that we've been doing business with, we've been adding to our centers. As Jim mentioned, the investments that we're making, the redevelopments that are coming online continue to attract best-in-class resellers to our assets. And so as we look out, that pipeline is still very robust. From a small shop perspective, we've least 20% more small shop GLA this year than we did during the same period a year ago, and are on pace to have our best small shop leasing year despite the fact that we've had some disruption from Payless, Avenue and Charming. And I think, really the stat this quarter, a 30-basis-point increase despite some of that bankruptcy impact, which is 8-basis-point year-over-year, just speaks to the focus of our team and capitalizing on those investments. So we've been really pleased with the pipeline, and you'll see us continue to announce new leases with the most relevant retailers that are expanding in distributed center space over the next few quarters.

[Operator]

Thank you. Our next question comes from Ki Bin Kim with SunTrust Robinson Humphrey. Please proceed with your question.

[Ki Bin Kim, SunTrust Robinson Humphrey]

Just a couple of follow-ups. So when you said acquisitions and dispositions will be more balanced, it sounds like you're implying that actually be pretty close to equal to each other. Does that sound right?

[Jim Taylor, Chief Executive Officer and President]

Yeah, pretty close. There'll be some of those disposition proceeds that go to continuing to fund reinvestment, but that's what we mean. And it may mean that though in one quarter we’re net sellers, in one quarter, we’re net acquirers, to Mark's point. It can be lumpy and hard to plan. But expect this over several quarters to average out and be more balanced.

[Ki Bin Kim, SunTrust Robinson Humphrey]

I mean, that's a big change from what we've been seeing from bricks more for the past few years, so thanks for that clarification. And then just bigger picture, obviously, the retail shopping center stocks have done well this year, including yourself. I think a lot of that has to do with the fact that headline bankruptcy for tenants that are focused in the shopping center space have been white. So I'm curious what you think just kind of bigger picture is the health of your tenants and your business, and are there still [indiscernible] houses just a matter of time and maybe the kind of kick down the road. And how does that road view shape like what you've talked about being more balanced in terms of acquisitions and dispositions, and what does that mean when it comes to actually negotiating with tenants for different rents?

[Jim Taylor, Chief Executive Officer and President]

We love the open-air business. I mean it is a business that's a wide funnel in terms of the types of usage that want retail store front near where people live and work. And it's a product that has a very low cost of occupancy relative to other types of competitive products. And one that even as we go through all this disruption what I have a ton of conviction in will continue to remain relevant. We certainly expect some of the less relevant tenants. I don’t need to provide you a list, all you need to do is reason is, will experience disruption over the next couple of quarters. But I have tremendous confidence, not only in our ability to backfill that space, but to backfill it at better rents with better tenants in part because of where we're coming from a rent basis standpoint. When I started, I kept saying rent basis matters, no one listen, but it does matter and its part of why we are driving the performance that we're going to drive, not only this quarter, but for the next several quarters. In terms of what we think about from an investment standpoint, we think we can take the strengths of this platform and apply to certain other shopping centers that have become less relevant, but are clustered around ones that we own. And why is that important? Because we're not taking risk as it relates to understanding the market. We're buying the center across the street. I think we know what market rents are, and I think, we're going to have a vision on how to drive ROI and drive acceptable rates of return against the market backdrop that always cyclical, always has disruption. And if you don't have a business plan that positions you to outperform in that, then you do so as your payroll. And the last thing I'd tell you is that we see great opportunities on the investment side in this environment to continue to drive growth. So when I hear that the retail shopping center has outperformed year-to-date and achieved, is there any more room to run whatever, we're still ridiculously achieve. We were really achieved at the end of last year. So for those of you who believed in us and believe that we'd execute and deliver, thank you. And I promise you that we will continue to deliver on that given the visibility that we have.

[Ki Bin Kim, SunTrust Robinson Humphrey]

Okay. And maybe a quick one for Angela, you gave some good color on some of the expense moving pieces. Just curious as we look into next year, the kind of reimbursements that you've gotten for certain capital expenditures. Do you continue to see that and maybe other expense line items to continue to benefit more so next year?

[Angela Aman]

I would expect that the contribution from net recoveries ends up being less significant in 2020 than it was, or will be in 2019.

[Operator]

Thank you. Our next question comes from Vince Tibone with Green Street Advisors. Please proceed with your question.

[Vince Tibone, Green Street Advisors]

Good morning. I have a question on the dressbarn closure process. My understanding is they're able to get out of most of their leases around year-end without paying a termination fee? Is this the case for Brixmor as well, and your opinion, what give them the leverage to negotiate this unique arrangement?

[Brian Finnegan, Executive Vice President, Leasing]

So – hey, this is Brian. Look, they came to us early in the summer as they did to many landlords, and I think, looking at both the demand for the space and the situation kind of with Ascena overall, we made the same calculation as many landlords did across the industry, and we're getting the spaces back. At year-end they’re paying rent through the end of this year. In terms of the demand for that space, it's been pretty good so far. I mean, we've got 60% of that space either signed or essentially committed, meaning an LOI or at least. So there will be some downtime associated when we get those spaces back at year-end, but we signed two of them during the quarter with Five Below, Pet Supplies Plus, we've got other demand from Five Below, Boutique Fitness. So the demand we're seeing has been pretty good so far.

[Vince Tibone, Green Street Advisors]

That makes sense. I'm just curious if I dig a little deeper like, why? Because I mean, there are probably a lot of other retailers that would love to exit leases about paying any fees like why was dressbarn unable to do it? Was it the threat of bankruptcy of just bankrupting that entity or the risk of the whole parent company going under? I'm just curious like why were the landlords accommodated in this case versus about a lot of other retailers who have similar requests and you guys say no?

[Brian Finnegan, Executive Vice President, Leasing]

Sure, sure. It has to do particularly with dressbarn itself and the entity on those leases, and very unique compared to other retailers. Without getting into it any further, I think, you saw landlords really across the industry come for the same calculation that we did that there was the ability to get rents through the end of the year and have certainty about that made sense based off of the signature on those leases.

[Jim Taylor, Chief Executive Officer and President]

And also, Vince, the certainty of getting those faces back, which were as pretty attractive rents made sense to us?

[Vince Tibone, Green Street Advisors]

It makes sense, but was it fair to say this would be more of a one-off arrangement than something you could see other retailers replicating with landlords?

[Jim Taylor, Chief Executive Officer and President]

Yes.

[Operator]

Our next question comes from Michael Mueller with JP Morgan. Please proceed with your question.

[Michael Mueller, JP Morgan]

It looks like you have had some nice progress in terms of shop leasing. But how far down the road, do you think you need to look until we see that number going to the high 80s or closer to 90, is it 3 years, 5 years, could be inside of that?

[Jim Taylor, Chief Executive Officer and President]

I think it's a 3-year timeframe.

[Operator]

Thank you. Our next question comes from the line of Haendel St. Juste with Mizuho. Please proceed with your question.

[Haendel St. Juste, Mizuho]

So just a couple of quick ones here, notwithstanding the meaningful value you’re creating via your redevelopment, the overall yields on the total in process reinvestments declined to 9% from 10% last quarter, can you talk a bit more about what's going on there?

[Jim Taylor, Chief Executive Officer and President]

Yeah, it's really a mix of what's in that pipeline. And really, we're talking about 10 basis points surrounding. But what's most important, Haendel, to look at is, what we're delivering -- the schedule of what we're delivering and what we're actually reporting every quarter. And you can see we're outperforming. And I feel real good about not only what we have underway, which is largely leased. But all of this leasing that we're talking about is setting up the future pipeline as well, and putting us in a great position to see that $400 million continue to grow on the backend while on the frontend we continue to deliver. So – and these are great returns that we're able to generate in part because of where we're coming from a rent basis standpoint.

[Haendel St. Juste, Mizuho]

Got it, okay. Thanks, Jim. And a bit of only add-on to earlier question on recoveries. Last quarter, I think, you guys implied that recoveries be net neutral in the second half of this year, net neutral to same store NOI, this quarter added 70 basis points. I'm curious, I guess, maybe you guys expected and how your view on being net neutral in the second half of this year changed?

[Angela Aman]

Yeah. As I mentioned in response to your previous question, I do think that net recoveries are going to be a positive contributor on a full-year basis. I do at this point still expect some reversions in the fourth quarter, but still think that the category overall on 2019 same property NOI will be a positive contributor. As you look forward to 2020 and what's implied in sort of that at or better than 3% number, I gave earlier for 2020, I would expect that it's less of a positive contributor or neutral for 2020.

[Haendel St. Juste, Mizuho]

Got it. Thanks, Angela. And since, maybe I don't think there is anyone really behind in line. Wanted to get, squeeze one half question in here, I didn't get exact number, Mark, on the third quarter cap rates you mentioned there generally in line, but can you be more specific what was the exact cap rate? Thanks.

[Jim Taylor, Chief Executive Officer and President]

I think we've been pretty consistent in the 7.5% to 8% range. And that's, as Mark alluded to, we were at the upper end of that range in the quarter.

[Operator]

Thank you. Our next question comes from the line of Floris van Dijkum with Compass Point. Please proceed with your question.

[Floris van Dijkum, Compass Point]

Hey, thanks. Guys, question on the redevelopment. Most of the redevelopment opportunities are pretty small and granular, obviously, returns have been stellar. But as you think about some of the larger redevelopment opportunities going forward, I note, couple of them including Mira Mesa, the project you’ve alluded to Jim, but also University Mall and Superior Marketplace could intel residential components. Presumably that would increase the cost, also probably lower the implied yield on development, although total return should be similar, I would imagine. Could you maybe walk us through that? And also as -- how many other sites do you see potential multiuse opportunities?

[Jim Taylor, Chief Executive Officer and President]

I talked about this a little bit on past calls, and I appreciate the question because part of what we're doing from a redevelopment standpoint is making sure that we're teaming up those opportunities for additional densification, most of which is residential whether its student housing, for many of our university properties or senior housing or market raise multifamily. And we believe big picture that we have over 40 assets that would support residential of some type an additional density. And the approach that we've been taking has been one that's conservative admittedly getting the entitlements in place and then thinking about the best way for us to maximize the value of those entitlements while making sure we don’t lose control over the site. And so, expect us not in the next couple of quarters, but several quarters is out to start talking more about what those opportunities represent, and how we're capitalizing on them. But to what's embedded in your question, we have tremendous opportunities at much higher rates of return in our core competency which is retail, and we know that that's our core competency. So as we move forward and put the higher densities on some of these sites, expect us to do in a very balanced and responsible way.

[Floris van Dijkum, Compass Point]

Maybe one follow-up question, in terms of the series exposure that, I believe you had 11 stores that closed. Maybe, if you can give us an update, I know a couple of them -- four of them are in the redevelopment pipeline already. Maybe give us an update on the remaining stores that were in your portfolio?

[Brian Finnegan, Executive Vice President, Leasing]

Floris, hey, this is Brian. We are incredibly pleased with the progress that the team has made in backfilling these Kmart locations. And I think, it speaks to one of Jim's earlier points in how we kept getting ahead of this, in particular, and how the team's gotten ahead of many troubled retailers. We're either completed or will be completed with all but two of our Kmart spaces that we took back roughly a year ago, completed, I'm sorry, or under construction on all but two of our spaces by the first quarter of next year at 2.5 half times, the rent that we were getting from Kmart. And you think about the tenants that we're bringing into our portfolio, Kohl's, TJX, Ross, Old Navy, Ulta, Five Below, some of the leading retailers that are expanding today. And this quarter, we announced another one outside of Philadelphia. So expect us to continue to announce these. We're expecting rent to come back online in the back half of 2020. Some rent has already convinced, but on the ones that we're going to be starting here at the back end of 2019 and early '20, we’ll see rents start to come online in the back half of '20 and early 2021. But really incredibly pleased with the progress our entire team has done, because this is not just leasing, it's our operations team, it's our redevelopment team in terms of getting these projects entitled and being able to execute. So we're doing it -- the team is doing a great job.

[Floris van Dijkum, Compass Point]

Can you maybe give us -- give an update on the coastal lending exposure you have as well?

[Brian Finnegan, Executive Vice President, Leasing]

Yes. It’s the last one that we effectively owned, our Hamilton location will be expiring, and you can see that in our redevelopment pipeline that we've already got that spoken for from a lease perspective. Coastal in Brooksville, they still control it. Right now, they have term on the lease and a lot of options, certainly, in dialogue with them in terms of what’s going on going forward, but they control that space for now.

[Angela Aman]

Yeah, that's a very below market rent at Coastal Way. And I think the important thing here is that as you get into the early part of 2020, what you’ll really have to minimize exposure to Sears-Kmart going forward.

[Operator]

Thank you. Our final question comes from the line of Greg McGinniss with Scotiabank. Please proceed with your question.

[Greg McGinniss, Scotiabank]

Just one more quick one for me. Jim, you've mentioned that you think the stock is cheap at this level. But based on the appreciation share price this year and starting to target more acquisitions, is it fair to assume that buybacks, maybe taking a backseat to other forms of capital use?

[Jim Taylor, Chief Executive Officer and President]

No, I don't think so. I mean, I think what's most important is that we're balanced. And as we think about buybacks, we do think we're undervalued at this point. But the way we've always approached that, Greg is, what are we funding at with? We're not trying to be market-timers on the stock price. We're always with a view of continuing to strengthen the balance sheet, getting our objectives, which I'm very proud we have, in line with what we talked about over two years ago. And also striking that right balance, Greg, because I think on a marginal basis, it's still point to repurchase of common stock. Yes, this is a long-term business, and we're seeing the benefit of clustering of these investments with some of these acquisitions, so those are really the factors that we consider as we think about where the proceeds being generated from asset sales are deploying.

[Operator]

Thank you. We have reached the end of our question-and-answer session. So I'd like to pass the floor back over to Ms. Slater for any additional concluding comments.

[Stacy Slater, Senior Vice President, IR]

Thanks everyone. We look forward to seeing many of you at [indiscernible] in a few weeks.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. Again, we thank you for your participation. And you may disconnect your lines at this time.