Kite Realty Group Trust

NYSE:KRG

Earnings Call Transcript 2018-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Kite Realty Group Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]

I would now like to turn the conference over to our host for today, Bryan McCarthy, Senior Vice President, Marketing and Communications. You may begin.

[Bryan McCarthy]

Thank you, and good morning, everyone. Welcome to Kite Realty Group’s fourth quarter earnings call. Some of today’s comments contain forward-looking statements that are based on assumptions of future events and are subject to inherent risks and uncertainties. Actual results may differ materially from these statements.

For more information about the factors that can adversely affect the Company’s results, please see our SEC filings, including our most recent 10-K. Today’s remarks also include certain non-GAAP financial measures. Please refer to yesterday’s earnings press release available on our website for a reconciliation of these non-GAAP performance measures to our GAAP financial results.

On the call with me today from Kite Realty Group are Chairman and Chief Executive Officer, John Kite; President and Chief Operating Officer, Tom McGowan; Executive Vice President, Chief Financial Officer, Heath Fear; Executive Vice President, Portfolio Management, Wade Achenbach; and Senior Vice President, Chief Accounting Officer, Dave Buell.

I will now turn the call over to John.

[John Kite, Chairman and Chief Executive Officer]

Good morning, everyone, and thanks a lot, Bryan. Before we get started today, I want to take a minute to welcome Heath to the Kite team. Many of you know Heath from his days at GGP and RPAI. Heath brings a wealth of experience, passion, energy. And even though we’ve only been working together for a few months, I can tell you he’s already made a huge impact on our company. It’s great to have him onboard.

As we announced in our earnings release, we had a strong 2018. We reached a new high in ABR for the company at $16.84 a square foot. We reached a new high for our small shop leased percentage at 91.2%, 150 basis point year-over-year increase. And our anchor lease percentage climbed to 96.1%, 140 basis point sequential increase. We’re now ready to take the company to the next level.

Over the last several months, we’ve conducted a bottoms-up analysis of our entire portfolio. We looked at reams of data on the country’s top 50 markets and have begun efforts to sell between $350 million and $500 million in assets as part of a program designed to improve our portfolio quality, further reduce our leverage and focus our operations. I’ll come back to this shortly.

But first, let’s talk about our 2018 highlights. Our fourth quarter and full year 2018 results were in line with our expectations and reflect solid and consistent performance. We generated FFO of $0.48 per share for the fourth quarter and $2 per share for the full year. Same-store NOI grew by 1.2% in the fourth quarter and 1.4% for the full year, which was at the high end of guidance. Our year-end leased rate on our operating retail portfolio was 94.6%, which is an increase of 110 basis points compared to last quarter.

We outperformed our internal goal for our Big Box Surge program, executing 12 anchor leases this past year for 297,000 square feet. We saw good acceleration at the end of the year with five of these deals being signed in the fourth quarter. As for merchandising, two-thirds of our tenant openings in 2018 were grocery, restaurant, entertainment and service offerings. We completed six redevelopment projects in 2018 on schedule and under budget with a combined incremental return of just under 9%.

Also, we strategically sold $200 million of assets in 2018 with $60 million being sold in the fourth quarter. The proceeds of these sales were primarily used to pay down debt. 2018 was a very strong year from an operational perspective. For the last several years, we’ve continued to upgrade our portfolio and preemptively reduced our exposure to tenants who have struggled to adapt to the changing retail environment. And while we faced our fair share of challenges, we’re able to maintain high occupancy rates while increasing ABR and generating positive same-property NOI and reducing our leverage. 2019 will be about continuing these efforts and elevating us to a new tier.

As I mentioned at the start of the call, over the last several months, we’ve spent hundreds of hours conducting a data-driven analysis of our portfolio. We’ve looked at all major U.S. markets, analyzing population trends, demographic data, average rents and third-party evaluations. And we’ve initially identified 15 to 20 markets that are best positioned in the medium to long-term to allow us to gain scale and generate attractive returns. We’re currently in many of these markets like Raleigh, Dallas, Orlando, Nashville and Charlotte. Over time, we’ll be able to concentrate our geographic footprint. And when the time is right and our cost of capital has improved, we’ll acquire new properties in these preferred markets.

The first step in this process is to sell non-core assets. We have a strong investment-grade balance sheet with ample liquidity and a well-staggered maturity schedule. The capacity on our line of credit alone could satisfy all debt maturities through 2022. While we have a tendency to think about our balance sheet defensively, we want to start thinking about offensively. To do that, we want to lower our leverage even further.

Our long-term net debt-to-EBITDA goal is in the mid to high five times. With that in mind, we intend to press forward and generate between $350 million and $500 million in sales proceeds. We’ve identified a disposition pool and have hit the ground running in 2019. We currently have 11 assets in the market with estimated proceeds of approximately $250 million. Upon successful execution of our planned dispositions, we expect our resulting net debt to EBITDA to be between 5.9 and 6.2 times. Using a conservative EBITDA growth assumption, over the next few years, our net debt to EBITDA glides down to our long-term target of the mid to high five times.

In addition, by selling non-core assets, we expect to produce material improvements in our growth profile, our ABR per foot and our demographics. Last Friday, we hosted an internal town hall and shared the details of this program with our team. The goal was to create a company-wide call to action, and our team is focused and ready to get this done. REIT investors have lots of options. And for KRG to earn a disproportionate share of investor dollars, we need a distinct investment thesis. This starts with our markets.

We believe that retail is a local business, and scale in individual markets matters. While we plan to cluster our portfolio in more desirable markets, that does not mean we will sell every asset we own outside of these identified areas. Though a vast majority of our NOI will come from these preferred markets, there are certain properties in our portfolio like the mixed-use development at Eddy Street Commons at the University of Notre Dame that are great assets in their own right regardless of the market. We will continue to be very intentional about where we retain and acquire properties.

So before we move on to guidance, I want to make something abundantly clear. We are not embarking on a multiyear disposition program. We’re moving swiftly to get these transactions done, and early indications are positive. We’re optimistic that we’ll be successful over the course of the year. For a company our size, a $500 million disposition program is meaningful. But I can’t overemphasize this point. The program is not just a debt-reduction exercise. It’s also about making good long-term real estate decisions.

Running this business requires more than just prudent capital allocation. It also requires real estate acumen. We appreciate the variety of moving pieces in our guidance, including the dilution associated with this disposition program. We’ve provided a transparent FFO walk-down in our earnings release. This walk-down specifically quantifies the year-over-year changes we detailed on our last earnings call, the new items that occurred in the fourth quarter and the 2019 impact of the planned dispositions.

Our 2019 FFO range of $1.66 to $1.76, including the impact of the planned dispositions, relies on same-property NOI assumptions of 1.25% to 2.25%. This growth is primarily comprised of contractual rent increases and net recoveries as some of our anchor leases start to come online in the back half of the year.

Our same-property NOI range incorporates the impacts of all known bankruptcies such as Pay Less, Mattress Firm, Toys and Kmart and assumes a historically consistent bad debt reserve of a 110 basis points of NOI. To give some context, the collective impact from these bankruptcies served to lower the midpoint of our 2019 FFO guidance and our same property NOI assumptions by $0.06 and 200 basis points respectively.

Looking beyond 2019, the spread between our leased and occupied rate for our total retail operating portfolio at the end of 2018 was 220 basis points, which is higher than our typical run rate of 125 basis points to 150 basis points. This disproportionate size spread is primarily related to the 12 boxes we executed in 2018, which collectively represent approximately $6 million of annualized gross rent that begins to come online in late 2019.

The building blocks for outsized future growth are setting up nicely. Coupling that with a best-in-class balance sheet, we like our chances. Thanks to everybody for joining our call today and we look forward to questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Christy McElroy of Citi. Your line is now open.

[Christy McElroy, Citi]

Hey, good morning, everyone. Just in the context of the dilution that you expect from the asset sales, maybe you could give us just a little bit of a better sense for the use of proceeds, you don’t have much debt coming due. You have a small balance on the line of credit. So what’s the assumed debt pay down if you execute on these asset sales?

[Heath Fear]

Hi Christy, this is Heath. So we’ll be paying down a mixture of our fixed-rate debt on our mortgages and also our floating rate debt. So, a lot of the assets that we’re selling actually have mortgages associated with them, so we will be incurring some yield maintenance penalties, if we complete the entire $500 million program, the yield maintenance penalties will be somewhere between $12 million and $13 million, all but $2 million of that penalty is associated with assets we intend to sell. So again, it’s a mixture of floating rate debt and fixed-rate debt.

[Christy McElroy, Citi]

So what’s the weighted average cost of debt that’s baked into that assumption?

[Heath Fear]

I hate to give you that numbers. It’s somewhere between 4% to 5%. It’s really going to depend on the pool, we have a $500 million pool identified right now, but as you know, these pools change, so again, I’m reluctant to give you an exact number, but somewhere between 4% and 5%.

[Christy McElroy, Citi]

Okay, and then just, how are you thinking about the shrinking of the asset and the earnings based on the context of your dividend payout, looking out to 2020, 2021?

[John Kite, Chairman and Chief Executive Officer]

Yes, Christy I think, look – as you know, the dividend is established by our Board, so my comments are relative to that, but historically we’ve had a very conservative payout ratio knowing that, that would give us flexibility, if we were in a position where earnings and cash flow were lower, we wouldn’t have any concern around needing to lower the dividend in a corresponding way.

So where we sit today, based on the liquidity that we have, how we see the fact that the majority of all this CapEx and the shrinking of the asset base as you said is happening in the next kind of year and a half, when we look our past there, we feel very comfortable that we’re fine right now and frankly, it’s really not in cross purposes with our deleveraging, because of our tremendous amount of liquidity that we have. So, we feel like we’re in good shape right now.

[Christy McElroy, Citi]

Okay, great. Thank you.

[John Kite, Chairman and Chief Executive Officer]

Thank you.

[Operator]

Thank you. Our next question comes from Todd Thomas of KeyBanc Capital Markets. Your line is now open.

[Todd Thomas, KeyBanc Capital Markets]

Hi, thanks, good morning. Just with regard to the same-store NOI growth forecast of the 1.25% and 2.25%. It sounds like you have a fair amount of anchor lease commencements that are expected to come online throughout the year suggesting that growth should accelerate throughout the year into the second half, is that the right read and maybe you could provide some color on how we should think about the first quarter and maybe second quarter just in an effort to set expectations around the growth trajectory throughout the year a little bit?

[John Kite, Chairman and Chief Executive Officer]

Yes, I think – Hey, Todd. You’re right in the trajectory that you should assume that it begins to accelerate towards the end of year, but that obviously has a lot of assumptions built into it early in the year and I think as one of the things that we do is we build in a fairly significant bad debt reserve, so that’s a factor in that, but as it relates to the longer-term trajectory, as these boxes begin to take hold, that was kind of my point on the last question is that a lot of this capital and a lot of what we’re doing right now, we’re are going to see the benefit of that really in 2020. So Heath you want to add to that?

[Heath Fear]

Todd, based on the trajectory, just think about the comps. We’ve had Toys income in the beginning of last year that fell off. So basically our trajectory sort of is going to mirror what happened to us in 2018.

[Todd Thomas, KeyBanc Capital Markets]

Okay. And then the comments on the reserve, so that’s helpful, so Pay Less, Mattress Firm, they are all outside of that reserve, that’s already accounted for in other same store assumptions, the reserves on top of that, and I may have missed it, but how much are you reserving in guidance and how does that compare to what you’ve reserved historically, just given that some of the other activities already outside of that.

[John Kite, Chairman and Chief Executive Officer]

Right, its 80 basis points of same-store revenues, which translates into a 110 basis points of same-store NOI. So then that reserve is consistent historically. And to your point, yes, that is in addition to taking into account all the disruption that’s happened today.

[Todd Thomas, KeyBanc Capital Markets]

Got it. And then just with regard to the process that you went through, taking a look at the portfolio in a little bit more detail here. Can you just talk a little bit more about some of the key metrics or variables that you were looking at in that market exercise, and then you mentioned you have $250 million of assets on the market 11 assets, when did marketing begin and are these being marketed primarily on a one-off basis? Are you entertaining any larger portfolio sales or anything like that within this sort of subset?

[John Kite, Chairman and Chief Executive Officer]

Well, starting at the beginning of that, three parter, I’d say that in terms of how we looked at this Todd, backing up going at a higher altitude, we looked at the markets, we looked at specific real estate, we looked at tenants and we looked at where we want to be at the end of that movie, okay. And so in terms of the markets themselves, we dug in and looked at not only our own data that we had on our existing markets, but also outside data through things like the brokerage community, Green Street reports, other analyst reports.

So we really got into it in terms of trying to figure out rankings of those markets. But ultimately, what we focused on is where we could actually operate and penetrate in the sense of markets that we thought had growth whether that’s population growth, that’s income growth, where the disposable income levels, where we looked to tap scores, we looked at where the – what type of centers we would own in those markets, neighborhood centers, community centers, et cetera.

And in the end of the day, we dug down to where we are going to generate IRRs that made sense for us in markets that were attractive, which is why I named some of the markets that I named, because we think in those markets that we will generate IRRs, unleveraged IRRs before CapEx in the sevens and after CapEx maybe in the mid-six range, that we felt like generating those returns in a Nashville or a Charlotte or a Dallas is a much better risk adjusted return than going into a market either at the higher cap rate end, some of the ones we’re disposing up or the much lower cap rate end where we just can’t make those returns work and by the way very few people can actually.

So that’s high level in the sense of where we wanted to land, and as we move through this and start to do more work around actually winning the other markets, then we will be talking to you guys more about what those markets are. And by the way make sure you understand, these are initial, the reason we said 15 to 20 markets, that is where we are initially looking and as time goes by and hopefully our cost of capital improves, that might expand, contract, it’s not – you don’t set that in stone and just say you’re going to be there forever. You’ve got to adjust to a lot of different things when you’re looking at that.

[Todd Thomas, KeyBanc Capital Markets]

Okay, that’s helpful. Thank you.

[John Kite, Chairman and Chief Executive Officer]

Thank you.

[Operator]

Thank you. Our next question comes from Craig Schmidt of Bank of America. Your line is now open.

[Craig Schmidt, Bank of America]

Thank you. Good morning. Looking at your guidance page, it looks like the dilution from dispositions will actually be greater in 2020 than 2019, and I just wondered if you could give us maybe what you’re expecting for cap rates for the dispositions and then how you see the timing of the $350 million to $500 million dispositions playing out.

[John Kite, Chairman and Chief Executive Officer]

Craig, to your first question, yes, I mean, when you look at the walk-down page, you can see that the impact from the dispositions is greater in 2020 due to the – that’s a full year effect assuming that we hit the timeline we’ve suggested. So the answer to that is yes, in a vacuum, obviously there are all – other things will be going on relative to growth that we mentioned in the box is taking hold and the same store NOI, that we would have in 2020, but purely in vacuum, the answer to that, yes, that’s correct.

As it relates to – I think your other question was cap rates, I don’t – today, we’re not going to get into what we think the overall cap rate will be here, because we really don’t want to get boxed into a specific pool, we have a pool of assets, but you’re intending on selling between $350 million and $500 million, you need to be looking at an asset pool that’s greater than that. So that may change, and we might – again, as we’ve said in the past, we also have opportunities out there with potential joint venture programs that would be – maybe in the better scale assets would change this mix a little bit.

So as it relates to the single pool that we’re focused on, that ultimately will probably trade where things like that have traded, that we’ve traded before, like – for example, the stuff we sold last year, but it’s going to ebb and flow and we really don’t want anybody zeroing in on a cap rate, because we’re not going to get boxed into that. And look, the market is the market, and we think we feel great about our timing, by the way, because of the 30-year treasury is hovering three and below and there is less product on the market than there was a year ago.

So I actually think our timing is very good to the opposite of what some others have thought, but anyway, we’ll update you and once we get through this, we’ll probably like we have in the past give you a blended cap rate on the total program.

[Craig Schmidt, Bank of America]

Great, thank you.

[John Kite, Chairman and Chief Executive Officer]

Thank you.

[Operator]

Thank you. Our next question comes from Collin Mings of Raymond James. Your line is now open.

[Collin Mings, Raymond James]

Good morning. Thanks. John, just going back to the prepared remarks, and just can you talk a little bit more about how you’re prioritizing outright sales versus other joint venture opportunities?

[John Kite, Chairman and Chief Executive Officer]

Sure. I mean priority is, obviously we’ve laid out a plan that is focused on the pool that we’ve identified that are – let’s say, the lower growth assets, but you certainly while we’re doing that we’re capable of also looking at opportunities on the other side of that spectrum with the – we have a joint venture partner that we’ve established a relationship with, we have others that we talk to. So I don’t think they’re mutually exclusive, I think we worked kind of in a way that we always do, which is where is the best opportunity, I mean we definitely have a plan of improving the overall portfolio quality.

So that’s more of a focus on the identified dispo pool. That said, we also have assets that might make sense for us to pull some profits out of it vis-a-vis a joint venture and reinvest that money in a multitude of ways. So I’m not really going to say that we’re prioritizing one over the other right now.

[Collin Mings, Raymond James]

Okay. And then just as you think about kind of a meaningful reset in terms of the asset base, how do you think about the G&A load as you kind of roll into 2020, and especially given again some of the incremental dilution that you expect going into next year?

[John Kite, Chairman and Chief Executive Officer]

Sure. Well, fortunately, we’ve always run the operation very efficiently and feel that our G&A has always been very manageable and more on the lower end on a comparable basis, but obviously, as this takes hold, we will continue to look at that. It’s not – this isn’t a sort of a one-and-done situation from the perspective of our whole point of this program is to position the Company to be much stronger and to be in a potential offensive mode at a time where others might be in a defensive mode.

So I don’t know that we’re suggesting that we will be here from a size base forever. I mean this is a obviously a step-back in terms of asset that goes a couple of steps forward in the future. But we’ll be very aware of it and focused on it and in 2020 and 2021, we’ll be looking at that trying to figure out where we’re going to go, but I actually feel very good that we will be positioned to take advantage of some things a year or two down the road.

[Collin Mings, Raymond James]

Okay. And that actually leads me a little bit to my next question, John. Just as far as the asset sales in general, I mean, you’ve made the point a couple of times that it’s not just about debt reduction, and it’s – there’s some other moving pieces here. I’m just curious because again, you communicated to the market for a while that you expected to do some delevering and some asset sales.

But was there anything in particular that kind of caused you or compelled you to get this aggressive at this point again – as again, $350 million to $500 million is a meaningful chunk of asset. Was there anything as you kind of set down and kind of engaged in this process to come up with this target that caused you to really get this aggressive?

[John Kite, Chairman and Chief Executive Officer]

Yes. Look, I think what happened, Collin, and if you go back to last quarter and you look at how we talked about this, and I know some – I know this is a larger program than people thought, I think, from what I’ve read. But when you look at how we discussed it, we certainly never said that we landed on a specific number. And when you begin to analyze your assets bottom-up the way we have, and you force yourself to say, “If I continue to own this asset, I’m buying this asset," that’s the process that we went through.

And it created a situation where once we got going with that and you kind of couple the desire to own a profile of assets that, frankly, are – you want to focus your time on your better-quality assets and less time on assets that don’t have that growth profile or the market may not be a market that you think is going to improve. And it does – by the way, these are things that you look at as a public operator that many private operators don’t look at. So I think as we went through that process, it became clear to us that the timing was good for us to lean into it further.

And yes, it’s going to be dilutive. There’s no question about it. But it’s accretive in the end as it relates to NAV and as it relates to our ability to grow, and you just – that’s what we ended up really focusing on. And when we looked at – and we force ourselves to look at the IRRs that we’re able to generate. You’ve got to take into consideration CapEx in these IRRs, and that’s how these markets popped out very clearly that we think we can be competitive, build scale, get a good IRR in a very good market, okay, and frankly markets that we think are better for us long-term and will generate more cash flow and better IRRs than if we try to buy an asset like this in a gateway market.

So I think what – long story short, we got deeper on it and it made sense. And also, frankly, when you look at companies and you look at their values, at the end of the day, we want to have a best-in-class balance sheet. And we weren’t going to get there selling $100 million in assets, for example, which is a number I’ve heard. We just weren’t going to get there, and this enables us to do it. We have to execute, obviously, but we’re laser-focused on having that balance sheet and having that asset profile that leads to growth.

[Collin Mings, Raymond James]

Okay. I appreciate the color, John. I’ll turn it over. Thank you.

[Operator]

Thank you. Our next question comes from Alexander Goldfarb of Sandler O’Neill. Your line is now open.

[Alexander Goldfarb, Sandler O’Neill]

Hey, good morning out there. John, maybe just sticking with that theme. Can you just – you gave a sense of the dilution impact, should you do the full $350 million to $500 million on an FFO. Can you just sort of walk through what the AFFO impact will be because presumably the – as you mentioned, the assets you’re selling maybe are a bit more CapEx intensive. So maybe the AFFO to FFO delta shrinks. So just want to get a sense, going back to Christy’s first question on dividend coverage, just want to get a sense for where the AFFO will net out.

[John Kite, Chairman and Chief Executive Officer]

Yes. I mean, without giving a specific number, Alex, I mean, I think as it relates to AFFO, yes, you’re correct that, over time, we think that these assets were more capital intensive, and we’re utilizing more dollars per foot than the assets that we will hold and continue to invest in. As I said, I mean, I think the crunch of that is really at 2019. And I think that the – we’ll see as we go because we don’t know the timing of these dispositions. But when it’s all said and done, on an annualized basis, the AFFO we think will still be covering the dividend, would be obviously tighter, much tighter than it had been before, but we’re fine with that because the majority of our CapEx investments in the Box Surge Program, in the 3-R program will have already been spent.

So we’re essentially redirecting dollars for a shorter period of time as we improve the assets. And then as we get into 2020, really 2020 and 2021, you begin to build back that free cash flow. And over – by the time you get to 2022, in our models, we’re back to where we are in a position to reinvest in whatever we choose to reinvest in. So I mean, without giving the specific number, we’ve looked at that very closely, and we are comfortable with that. Heath, do you want to add anything to that?

[Heath Fear]

No. I think that’s a good summary.

[Alexander Goldfarb, Sandler O’Neill]

Okay. And then just a second one. Going back, you mentioned upfront Kite needs to differentiate versus peers, and you mentioned growth rates. Is there something sort of tangible that you can provide folks versus us waiting until 2020 to see that the new portfolio is better than the one currently? Is there a way for you guys to talk about the NOI growth profile of the 15 to 20 markets that you want to keep versus the ones that you’re selling or something that helps us sort of bridge? That way, we don’t – we’re not looking at just down earnings. We’re looking at, hey, we can see quantified that there is tangibly better growth.

[John Kite, Chairman and Chief Executive Officer]

Yes. Absolutely. I mean, I think when you look at the pool of assets that we’ve circled to dispose of that would equate to the $500 million, I mean, the average household income is 30% below where we’ll be upon completion. The ABR per foot is almost 40% below. The NOI growth rate is in the low 1%. So I mean, these assets are stable, but they just don’t have the profile that is going to be what we’re made up of afterwards.

And frankly once we’re able to do that, Alex, whether that be $350 million or $500 million, it will be impactful, and it will – and I think you – when we started talking about the CapEx associated as you said, and people really underestimate that how much CapEx goes into a flat asset, right, so that we can take that money and divert that money to an asset that isn’t growing at low 1%, but hopefully is growing at 3% or better.

That’s a material difference in NOI growth and cash flow growth. So, and we will – as we move through the program and when we get to the finish line, we’ll make that very clear, but we want our average for example, we want our average household income in the whole portfolio to be approaching a $100,000, not $85,000 or $90,000. So – and we want the populations to be higher, and they will be. So I do think that there will be tangible things as we move through this that you’ll be able to sink your teeth into.

[Alexander Goldfarb, Sandler O’Neill]

Okay, thank you.

[John Kite, Chairman and Chief Executive Officer]

Thank you.

[Operator]

Thank you. We do have a follow-up question from Christy McElroy of Citi. Your line is now open.

[Christy McElroy, Citi]

Hey guys, thanks. So how do you – how do you manage the potential tax situation that could arise from the asset sales, is there a potential that you would need to pay out a special dividend or no because of the basis of the assets. And how does the impairments that you took in Q4 sort of factor into that?

[John Kite, Chairman and Chief Executive Officer]

A two part question, so on the tax situation, assuming the total $500 million in disposition, it’s around a $30 million gain based on our estimated purchase prices. That gain is going to be covered by the return of capital portion of our current dividend payments. So there’s not a situation that – very, very highly unlikely that we’ll need to pay a special dividend.

And then on the second question was on the impairments, we realized $30 million in impairments in the fourth quarter, and that was really an outgrowth of this entire process of looking at our assets, identifying a disposition pool. That triggered a short haul period, then we did a probability weighted factor in each one of the assets. And so sort of the first slug of – it came out to be around $30 million in impairments.

Looking forward, should we do the entire $500 million program, we anticipate another between $10 million and $20 million in impairments again, as we get more confidence around particular assets as the probability factor gets higher, we’ll go ahead and look at it and see if it needs an impairment. But we’re kind of estimating another $10 million or $20 million over the course of 2019, if we get the entire program done.

[Christy McElroy, Citi]

Okay. And then you said it’s not just about deleveraging, and I get the desire to pay down debt and get into that five times range. But would you think about buying back stock, if you think that there is a sort of a real arbitrage here between public and private market value?

[John Kite, Chairman and Chief Executive Officer]

Yeah, I think Christy, we always look at that as a potential opportunity. We discussed that quite and frankly, discussed that quite lengthy discussions at the recent Board meeting relative to this program. And I think as we move through the program, and as we execute on this and we see where our stock ultimately trades, that has to be in our thought process that, that could be a place to, depending on what we do, for example, with the joint venture possibilities that we have. If we were able to generate more than these proceeds and we’re talking about today vis-à-vis some sort of JV, which would obviously be – probably be at lower cap rates, meaning more dollars to spread that – that’s a possibility.

So we are not taking that off the table at all, we are saying that our primary goal is to get ourselves in that position of that – mid five times leverage that makes us by the way, we don’t have any preferred. So when you would compare that to the entire REIT – or the strip players, we would be kind of one of the lower levered players including preferred. So at that point, we’ll have to decide what is the highest and best use of that capital.

[Heath Fear]

Christy, this is Heath. It’s also interesting. We often talk about the arbitrage and selling assets in the private market using those dollars to buyback stock, but that arbitrage also works with debt. Giving you an example of these $500 million of assets, we’re trading at 30% discount to our consensus NAV, while The Street is only telling us to grow, and giving us $350 million in value for those assets. If I go ahead and sell those assets in the private market and I take that $500 million, and I apply it to debt, the investors are typically going to give us a dollar for dollar reduction in debt. So we are still taking advantage of the arbitrage, but we’re doing it in the context of debt rather than buying back our stock.

[Christy McElroy, Citi]

Okay, and then just if a third, if I could, just a follow-up from Alex’s question in terms of the sort of the $350 million to $500 million bucket versus the rest of the portfolio, I understand you’re not going to give a cap rate, but can you sort of give us a sense for how you think about the value of those assets, and sort of the spread to the other 85% to 90% of the portfolio? So, is it 150 basis points, 250 basis points, how do you think about that valuation spread?

[John Kite, Chairman and Chief Executive Officer]

Well, I – again, I think Christy, we understand your question. And reading your note I understand that – and the way that you laid it out made sense. Look, I think, obviously, when we look at our entire portfolio and you look, let’s do it this way, if consensus NAV has us a kind of around a 7 cap, you can easily assume that the assets that we’d be selling here would be north of that, right.

So, I think that there is clearly a spread to that, the reason that we don’t want to zero it totally in is that we want that flexibility to determine where we land in that spectrum on these dispositions and also as I said, I don’t want to preclude us from doing something on the JV side, which would significantly lower the cap rate for that little period of time. So I think you’re going to just have to do your own assumption there, and I think your assumption has been reasonable.

[Christy McElroy, Citi]

Okay, thank you so much.

[John Kite, Chairman and Chief Executive Officer]

Thank you.

[Operator]

Thank you. Our next question comes from Linda Tsai of Barclays. Your line is now open.

[Linda Tsai, Barclays]

Hi, how much of a tailwind is 2019, SS NOI benefiting from the dispositions or said differently, what would SS NOI guidance have looked like in 2019 if you didn’t do the dispositions?

[Heath Fear]

If you look out our walkdown page, it was a $1.79 sort of – call at the base case with no dispose, within the midpoint of our FFO range. So, between $1.76 and $1.82 that’s without dispose.

[John Kite, Chairman and Chief Executive Officer]

And the only thing I’d add to that Linda is that if you look back when we did the last walk down in Q3, we kind of walked that down to $1.86, alright. So there is obviously a difference between those two numbers, but if you take into account the bankruptcies that occurred literally in December, January and February and then you – and you add the unknown where we were going to land with Kmart, that’s another $0.06 right there that we pointed out in our – in our transcript. So that kind of gets you right on top of where we were in the Q3 walk down, because we didn’t know about those bankruptcies in December, January and February and we didn’t know where Kmart, whether they were going to reject or accept our lease. So, we basically are right on top of our 3Q walk down when you include that.

[Linda Tsai, Barclays]

Okay. And then the bad debt reserve of 200 bps on SS NOI, I realize this is a whole year out, but I assume this would go down in 2020, and I guess it would be more of a function of higher quality assets and/or a better environment.

[Heath Fear]

Well, it’s also just a function of – I believe historical reserve of 80 basis points of same-store revenue, it’s just going to be less revenue. So I think we’ll probably end up maintaining a very consistent reserve going forward, we’re just going to have a smaller denominator.

[John Kite, Chairman and Chief Executive Officer]

Right, and you may be getting that also, we’d also mentioned that the bankruptcies impacted our same-store NOI by 200 basis points. So those are two separate things going on. One is the reserve that we have intact, which is 110 basis points. The other thing we have going on, which is just us pointing out and of course everybody is affected by this that the bankruptcies impacted that by 200 basis points. So you really have two separate issues there.

[Linda Tsai, Barclays]

Okay, and then the leased anchor boxes that you did in 2018, there were 12. How many anchor boxes do you have left to go?

[John Kite, Chairman and Chief Executive Officer]

Right now we have 12 anchor boxes that are currently vacant. And we’ll make a determination as to whether or not there will be any splits accompanied with that, but that is the inventory that we have and what we’re focused on right now.

[Linda Tsai, Barclays]

And then last question, in terms of the pool of buyers for the 11 assets, who are they, and has the composition changed at all over the last 12 months?

[John Kite, Chairman and Chief Executive Officer]

No, I don’t think the composition has changed, Linda, I think the pool is actually very deep. The credit markets are open, the tenure is below – well below where it was 6 months ago, the 30-year is well below. So the market is there, the credit is there, the buyers really depended on if you look at our – what you mentioned is the ones we currently have on the market. But if you look at the total pool that we’re assuming, I think we’ll run the spectrum between with private buyers that are using leverage, private buyers that are using private equity, institutional funds that have lined up to buy assets like this, 1031 buyers because of the size of these deals, you can 1031 players can operate here. Geez, some of these assets are actually in opportunity zones, so maybe there’s buyers that want that. I think it’s a pretty deep pool, and as I said, I think our timing is right on.

[Linda Tsai, Barclays]

Thanks.

[John Kite, Chairman and Chief Executive Officer]

Thank you.

[Operator]

Thank you. Our next question comes from Chris Lucas of Capital One Securities. Your line is now open.

[Chris Lucas, Capital One Securities]

Hey, good morning guys. Just a couple of quick follow-ups, John. Just – it sounds as you’re thinking about for the protocols that you went through as it relates to sort of figuring out what your disposition pool is going to be, it sounds like format didn’t really matter. You’re agnostic on that whether it was lifestyle or neighborhood or community centers, is that right?

[John Kite, Chairman and Chief Executive Officer]

Well, I think format was a part of the equation, Chris. In other words format, meaning, if we had centers that were very heavy in the sense of boxes, particularly boxes that we weren’t as comfortable with, as it relates to their adaptability, that was a factor. But in the end, I mean, it wasn’t the overriding factor, it was just one of four, five major factors that we looked at.

And so for example, I mean, there’s properties on there that you would consider power centers, there is properties on there that are neighborhood centers. So it is across the spectrum and by the way, it’s also evenly distributed over our portfolios in terms of legacy portfolio or acquired portfolios. So, it was a factor Chris, but not the overriding one.

[Chris Lucas, Capital One Securities]

Okay, and then, just a detailed question on specific to Mattress Firm. In the supplement, I think you’re down two units from the third quarter, rents down slightly. Are all of the issues associated with Mattress Firm sort of incorporated into what we see in the fourth quarter supplement? Or is there other factors, rent relief or store closings that we will see through 2019?

[John Kite, Chairman and Chief Executive Officer]

No, as of right now, all of the – all of that is in there. Now that doesn’t preclude the company from having issues down the road or wanting to come back and try to do something differently. We don’t think that’ll happen, we think that they basically took $3 billion of debt and turned it into $3 billion of equity, so they have – they certainly have runway from a balance sheet perspective. And so we have completely renegotiated our deals with them and feel that we’re done with them. So anything else that would happen would be something that they would want that we probably wouldn’t want to give.

[Chris Lucas, Capital One Securities]

Okay. And then just as it relates to the timing of the dispositions for that you like sort of articulated throughout the call, is there – should we be thinking about this on a sort of equal sort of basis. Or is it back-end loaded. Or how should we be thinking about the disposition?

[Heath Fear]

Chris, if you look at footnote 5 on the walk down, it gives the average weighted sale date of August 31. So we hope we can outperform that and we have lot of stuff in the market now, but we think August is a pretty comfortable date, where we think we can get these things done on an average weighted basis.

[Chris Lucas, Capital One Securities]

Okay, and then just Heath, well, I’ve got you two quick detail questions on the walk down. You did increase the lease accounting rule adjustments from $0.05 to $0.06. Was that conservatism? Or was there something that you saw different than what was previously guided?

[Heath Fear]

No, it was just a matter of – we went through the process of trying to figure out what was capitalizable and what wasn’t. As we get into more details with our auditors, just the number we landed on was $0.06 rather than $0.05. So it wasn’t being conservative, it was just giving more details around the process and as the year unfolded, we said, you know what, this is a $0.06 impact, not a $0.05 impact.

[Chris Lucas, Capital One Securities]

Okay. And then one more along the same lines. On the – in the bucket of fourth quarter and other items, the other item line is $0.04 to $0.06 you had $0.04 of sort of BI and lease termination income in the fourth quarter. What else is in that other items bucket that would get you to the $0.06?

[Heath Fear]

That’s really about it. So the $0.03 was – again this is an option that we included that we got in the fourth quarter, it’s non-recurring. And then on the lease termination income, Chris, we took a fairly conservative approach this year sort of at the midpoint. We’re looking at an assumption of about $700,000 in lease termination income. Our run rate is typically around $2 million to $3 million. So again, with a lot of moving pieces this year we just felt it was prudent for us to take a little more conservative view of lease terms that we actually have in hand.

[Chris Lucas, Capital One Securities]

Okay, thank you. Appreciate it.

[Heath Fear]

Thanks, Chris.

[Operator]

Thank you. [Operator Instructions] We do have a follow-up question from Collin Mings of Raymond James. Your line is now open.

[Collin Mings, Raymond James]

Thanks. Just want to go back to the reduction in free cash flow. Just – should we view the 3R program as effectively being on pause for now? And then maybe just expand upon how redevelopment opportunities kind of factored into the box as far as portfolio going forward.

[John Kite, Chairman and Chief Executive Officer]

Sure, good question. Yes, I mean I think what you should assume on the 3R is that, we started that probably three, four years ago. So a lot of what we started is finishing and obviously, we delivered eight. So yes, we are – I’d say, slightly on pause as we – as I said, as we’re reinvesting the dollars. But it doesn’t mean that we’re not – we’re basically pivoting on that and saying, look we’re on pause now because we are going to end up with a very different portfolio we think a year from now. So – and at that point, then we would reengage in that and as cash flow begins to build, as I said in 2021 and 2022 and 2023, we will be leaning back into that, because we always want to be adding value to the assets.

So, I think the fact that we have the skill set enables us to kind of ebb and flow with that. And as it relates to the pool and what we end up with and what that means for redevelopment, it essentially – I mean, I would look at a property like Rampart Commons in Las Vegas, where that’s an asset that we have radically changed and radically improved from where it was when it was acquired, right.

So some of what we want to do going forward, when we have a better cost of capital is to be acquiring assets in markets that we love that we can do exactly what we did a ramp-up. So I think that’s where we go, Collin, down the road. That’s where we use our development skill. And the NAV that you create, when you do that, when you – especially when you buy it at a risk adjusted IRR that we’ve been talking about, is just tremendous. So we’re fired up about the ability to use that skill on things that we can actually go out and acquire at that point in time.

[Collin Mings, Raymond James]

Okay. Thanks, John.

[John Kite, Chairman and Chief Executive Officer]

Thank you.

[Operator]

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to John Kite for any closing remarks.

[John Kite, Chairman and Chief Executive Officer]

Well, I just want to say thank you to everyone for taking the time with us today and engaging in what we’re going to do. And we’re going to be seeing a lot of you soon over the next month in person and look forward to it. Thanks again.

[Operator]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.