Kite Realty Group Trust

NYSE:KRG

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2019 Kite Realty Group Trust Earnings Conference Call. At this time, all participants lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]

Please be advised that today’s conference maybe recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Bryan McCarthy, Senior Vice President, Marketing and Communications. Sir, you may begin.

[Bryan McCarthy, SVP, Marketing & Communications]

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 reconciliation of these non-GAAP 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 and Chief Financial Officer, Heath Fear; Executive Vice President, Portfolio Management, Wade Achenbach; Senior Vice President and Chief Accounting Officer, Dave Buell; and Senior Vice President, Capital Markets and Investor Relations, Jason Colton.

I will now turn the call over to John.

[John Kite, Chairman & CEO]

Thanks, Bryan. Good morning, everyone and thanks for joining us today, we appreciate your time and consideration. For many of our investors and analysts, 2019 is squarely in the rearview mirror. And you're understandably focused on 2020 and beyond. But I believe I owe it to the hard working KRG team to briefly look back on the year.

2019 was a phenomenal year for us. Beginning with a bold promise and ending in flawless execution. We sold 23 non-core assets to 20 different buyers for total gross proceeds of $544 million, approximately two months faster than we anticipated. We also acquired two assets for a combined $59 million including Nora Plaza, a Whole Foods-anchored “diamond in the rough”, which we believe has great potential.

On a net basis, our transactional activity for 2019 produced $485 million in proceeds. We paid-off nearly $400 million of debt, most of it secured, increasing our unencumbered NOI percentage from 66% to 74%. The balance of the proceeds will fund our remaining Big-Box spend and identified redevelopments in 2020. Our net-debt-to-EBITDA has improved from 6.7 times to 5.9 times and our fixed charge ratio improved from 3.3 times to 3.6 times. As a reminder, we have no preferreds. We have a strong investment grade balance sheet and extremely manageable debt maturity schedule.

Project Focus was an exercise of addition by subtraction intended to de-risk and further concentrate our portfolio in our target markets. The non-core assets we sold had an ABR of $14.64 compared to our current ABR of $17.83, an over 20% improvement. By the way, that's an all-time high for KRG and stands in stark contrast to $16.84, where we started 2019. For some context, at our 2004 IPO, our ABR was $10.57.

At the outset of the program, 60% of our ABR came from target markets. Now that number stands at just under 70%. The data supporting the national migration to warmer and cheaper states is undeniable, and the trend will only continue as the tax

burden from the SALT legislation takes its toll on states with a high cost of living and often precarious budget deficits. We see data supporting this thesis nearly daily and, more details can be found in our investor presentation posted on our website later today.

During the course of 2019, many investors asked us if Project Focus would serve to distract the organization. As Tom and Wade can attest, it has the exact opposite effect. During 2019, we executed 302 new and renewal leases for over 2 million square feet, which is a 19% increase over 2018.

As a result of our leasing efforts, our anchored leased rate stands at 97.8%, a 160 basis point year-over-year increase. Small shop leased rate stands at a sector leading 92.5%, a 130 basis points year-over-year increase and yet another all-time high for KRG.

Leasing spreads for 2019 on a comparable GAAP basis were 44.8% for new leases and 7.5% for renewals, and 14.5% on a blended basis. Cash spreads for the year were 35.5% for new leases, 3.3% for renewals, and 9.2% on a blended basis. As compared to our peers, we have the second highest anchor leased rates, the highest small shop leased rate, one of the highest recovery ratios, one of the highest NOI margins, and one of the largest 2019 cash lease spreads.

Our Big-Box Surge program has been a huge success. We leased 22 boxes in 18 months to 17 different tenants including names such as Five Below, Old Navy, REI, Total Wine and Sephora to give you some context, we did a total of two box deals in 2017.

Comparable cash rent spreads were over 21%. The estimated total capital costs associated with these leases is $43 million, and the return on that cost is over 16%. We believe these are exceptional returns, especially on a risk-adjusted basis. We have a total of approximately 280 boxes in our portfolio and only seven of them are currently vacant. Once again, it's clear that demand for our real estate is deep and diverse.

The share price appreciated nearly 40% during 2019, resulting in a total return of approximately 50%. And while this movement in our share price served to reduce our absolute and relative discounts, we still have work to do and plenty of room to run.

Our discount to consensus NAV persists at approximately 21%. Our plan to maintain our momentum and close these valuation gaps is as follows.

We’ll continue to highlight our true NAV and we will return to earnings growth. 2020 is our trough year, and we expect to inflect into 2021. While we view our capital allocation activities through the lens of net asset value, we also acknowledge that the equity markets reward consistent and predictable earnings growth. To that end, Project Focus was not the beginning of a multi-year disposition program. This is not to say, we won't sell assets in the future. Prudence and proper portfolio management dictate otherwise. Rest assured, the proceeds of any sale will be reinvested with the goal of maximizing NAV and minimizing any short-term dilution, improving our long-term growth, and further concentrating our portfolio in our target markets.

We’ll continue to counter the retail apocalypse narrative by providing factual evidence of a growing retail renaissance. For example, the most profitable sale for a retailer is when a consumer buys online and picks-up in the store. The customer has acted as their own cashier and as the last mile delivery driver. And in the vast majority of these cases, the customer will also make additional purchases in the store.

This holiday season saw over a 40% increase in the buy online pick-up in store, or BOPUS method. And some experts believe BOPUS could account for up to 50% of digital traffic. The open-air sector is uniquely positioned to benefit from this trend, as evidenced by the omnichannel success of our hallmark tenants such as Target and Walmart, just to name a couple. Bottom line, margins matter, and physical retail is a core component to success, as evidenced by the scores of digitally native brands that now embrace physical locations.

We will also continue to educate our stakeholders as it relates to the quality of our real estate and the vast changes that have occurred, not only since our IPO, but since our merger within Inland Diversified. We're no longer a Midwest-focused power center company. We're proud of our deep Midwestern roots and values, but the fact remains that power centers comprise less than 20% of our portfolio, and 77% of our ABR comes from the South and the West. In reality, the average size of our shopping centers is approximately 140,000 square feet --well below the size of an average power center.

Our 2020 guidance is a testament to the fact that the headwinds in our business have not fully subsided, but we remain unfazed. Our recent success with the Big Box surge demonstrates our ability to rise to those challenges.

On a year-over-year basis, those boxes will produce nearly 240 basis points of same-store growth, which is over $4.5 million. Unfortunately, this growth is being offset by a handful of actual and potential bankruptcies and store closures, including Dress Barn, Earth Fare, A.C. Moore, Bar Louieand Pier 1. Tocombat the loss, we have signed new leases and are far along in discussions to backfill the spaces with more productive, relative tenants.

Furthermore, we're cautiously optimistic that the majority of 2020 tenant fallout has been revealed. It's important to note one of the collateral benefits of Project Focus is that we have significantly increased the durability of our cash flow by decreasing our exposure to watch list tenants.

At the beginning of 2019, we made a bold promise and we delivered. I'm supremely confident that when we convene a year from now, I'll have the same message to report as it relates to 2020. And now I'd like to turn the call over to Heath to discuss the details of the fourth quarter and our full-year guidance.

[Heath Fear, EVP & CFO]

Thank you, John. And thank you to the entire KRG team for an outstanding 2019. I'll briefly address our strong fourth quarter and full-year results before giving some additional color on our 2020 guidance. During the fourth quarter, we generated FFO as adjusted of $34.7 million or $0.40 per share. For the 12-months ended December 31, FFO as adjusted was $143 million, or $1.66 per share. As a reminder, the sole adjustments for 2019 were limited to the impact of the early extinguishment of debt.

We grew same-property NOI by 3.2% compared to fourth quarter 2018. This uptick is consistent with our prior messaging and reflects the narrowing gap between our leased and occupied rates. For the year, we grew same property NOI by 2.2%, which is at the high-end of the initial same-property NOI guidance we provided a year ago. The main contributors to our 2019 growth were increases in base rent of 150 basis points, an increase in net recoveries of 60 basis points, a slight increase in other income of five basis points, and a slight reduction in bad debt of five basis points.

As for our balance sheet, our $600 million revolver is undrawn, allowing us to satisfy all of our debt maturities through 2025. The strength of our balance sheet affords us incredible optionality at a time of uncertainty. While we’re hopeful that 2020 will come and go without undue volatility, we’re more than prepared to survive any disruption. In fact, we are poised to take advantage of it.

Moving to 2020 guidance, KRG is providing 2020 NAREIT FFO guidance of $1.48 to $1.52 per share, including same-store NOI growth ranging from 1% to 2%. It's important to note that the midpoint of our guidance assumes we receive no additional rent from any tenant that has vacated or filed for bankruptcy, including Dress Barn, Pier 1, Bar Louie, A.C. Moore, Earth Fare and Frank’s Theateres. These named tenants, net of expected backfills, equate to lost NOI of $3.6 million, which is a 190 basis point drag on same-property NOI.

Furthermore, on top of all the known disruption, our guidance assumes an additional $3 million of bad debt expense, which represents 1% of total revenues and 1.4% of company NOI. $2.5 million of that bad debt expense is attributable to our same-property pool, which represents 90 basis points of same-property revenues, and 1.3% of same-property NOI.

I'd like to highlight that our bad debt assumption of $3 million for 2020 is equal to the total bad debt we experienced in 2019, despite the fact that we have 23 less operating assets. While we’re not anticipating outsized tenant disruption in 2020, we feel that the current environment warranted a heightened measure of conservatism.

Our guidance does not assume any material transaction activity. A breakdown of the assumptions surrounding our guidance can be found in our earnings release from last night. And as always, Jason and I are available offline to answer any of your modeling questions. Thank you to everyone for joining the call today. Operator, this concludes our prepared remarks. Please open the line for questions.

[Operator]

Thank you. [Operator Instructions] And our first question comes from Craig Schmidt from Bank of America. Your line is open.

[Craig Schmidt, Bank of America Merrill Lynch]

Thank you. And thank you for some of the details on the guidance, but maybe just visit a little more on same-store NOI. You finished at 2.2% and you ramped up to a 3.2% in fourth quarter and the midpoint for 2020 is 1.5%. It sounds like you’re assuming no re-leasing of any of the vacated space as part of the reason for the drag. Are there any other reasons why you're guiding to that that 70 basis points lower from last year?

[Heath Fear, EVP & CFO]

As I described in my remarks, we have $3.9 million of disruption just from those named tenants, so that was a 190 basis point headwind. As John mentioned in his remarks, yes, we had a really nice ramp-up from the boxes of 235 basis points. But again, that 190 basis points basically took all the wind out of those sails. So listen, it's 70 basis points lighter as you described, but I think we've built in a fair measure of conservatism.

We're going to -- just like last year, we are going to do whatever we can to outperform. Sort of the shape of the growth, you'll see us sort of moderate into the first half. And again, as some of those additional boxes come on line, you'll see our same-store NOI growth continue to grow in the back half of the year. But again, Craig, listen, we hit the high end of the range last year. We're going to do whatever we can to outperform. So yes, it's 70 basis points lighter, but we’re feeling very bullish over here.

[John Kite, Chairman & CEO]

Craig, the only thing I would add is, as Heath just said, this is the very beginning of the year. We happen to get these guys at the end of the year and the beginning of this year closing, a couple of surprises. For example with Earth Fare, Bar Louie -- a couple of these are surprises. So I think based on that and building in the conservatism to the guidance, I mean, if you look -- I hope you picked up on the fact that the $3 million, the absolute amount that we have in bad debt reserve, is the same amount we had in 2019, although we have 20% less properties.

So clearly we're taking a conservative view, but in an election year and everything else we have going on, I think that's prudent. Do we think that that's conservative? Absolutely. But that's the prudent thing to do right now. And I think we've demonstrated vis-à-vis the phenomenal results that we had in 2019 that we’re up to that task, and we will execute on that task just like we always do.

[Craig Schmidt, Bank of America Merrill Lynch]

Okay. And then just, is it possible that you could end the year even higher with same-store NOI, given the success with the Big Box Surge and as you leverage that against the smaller shops?

[John Kite, Chairman & CEO]

I mean, look, I think with the guidance that we gave between 1% to 2% and when you look at the bad debt reserve, yes, I think it's possible, if we -- especially since it feels as though we've set aside kind of a double reserve in the sense that we've taken everyone out and put on a large reserve. So yes, I believe that, that's very possible. But it's early in the year, and let’s stay tuned.

[Craig Schmidt, Bank of America Merrill Lynch]

Okay. Thank you.

[John Kite, Chairman & CEO]

Thank you.

[Operator]

Thank you. Our next question comes from Christine McElroy from Citigroup. Your line is open.

[Christine McElroy, Citigroup]

Hi, good morning guys. Thanks. Just in regard to your future pipeline projects in Indianapolis, how should we think about the timing of project commencement and capital spend over the next two years associated with that? And John, just in that context, your comments about FFO inflecting positively in 2021, is there any downtime associated with these locations that we should be thinking about as we think about that longer-term growth rate?

[John Kite, Chairman & CEO]

Well, as to the -- let's start with the second part of the downtime. I mean, when you look at these projects that are in the supplemental, you've got a situation where you've got no income coming at all from one of them. You've got an extremely small amount of income coming from the second one. So, the first one would be The Corner. There's zero income coming from that. Then Hamilton Crossing, there is a de-minimis amount of income. And then Glendale is a little different because we're doing two things there.We’re backfilling the Macy's Box with Junior anchor retailers. And then we're adding apartments in the parking lot, which obviously has no income associated with that portion.

So I don't think this creates a lot of drag in the sense that the idea is, to the first part of the question, our objective is to minimize the capital spend on these vis-à-vis the partnerships that we're doing because the multifamily components of them would be in partnership. So I think as we said in the call, the majority of what we think we're spending in 2020 is coming from what we've prefunded, Christy.

So I think that we feel like we have that in hand. Quite frankly, they’re moving pretty quickly. One of them is moving pretty quickly, in particular. And so that could be interesting for us to see in terms of the start times. But bottom line is, our objective is, to the extent that these aren't retail, to very much limit what capital we're putting in. But we have definitely attributed for that in 2020. Sorry, I think Tom wants to add a little bit.

[Thomas McGowan, President & COO]

Yes, Christy the only thing I was going to add is all three projects, we’re pursuing economic incentives. So that's why exact timing in terms of starts is a little unclear. But hopefully, we will be at at least one by the end of the year, in terms of starting.

[Christine McElroy, Citigroup]

Okay, got it. Thanks. And then just in regard to leasing CapEx, just looking at the numbers, on a trailing 12-months basis, there's definitely been -- they’ve definitely trended higher, and that's causing some more upward pressure on your AFFO pay out. What’s sort of your expectation for the CapEx in 2020? And how should we be thinking about that?

[John Kite, Chairman & CEO]

Sure. Well, I mean, I think, again, as we’ve said, as you know, and we've said before, based on our size and number of deals done in the particular quarter, that can certainly swing. And in this particular quarter, we had two or three deals out of the 45 deals that were higher than what we would project typically. So, I wouldn't view this as like a consistent run rate. I think it's going to move around. One of the things to make sure is that everyone realizes, we're getting strong returns on this capital, and we're merchandising the properties the way we want to merchandise them.

So I think it's probably more of a gradual move that occurred here, Christy. But even when I look at the quarter that we're in right now, although it's early, the spend is significantly less than what it was in the past quarter. So, we'll continue to update you guys on that. But when you have two or three deals that can move the needle, it's tough to kind of say these are run rates.

[Christine McElroy, Citigroup]

Okay. Thank you.

[Heath Fear, EVP & CFO]

Christy, I’ll just add to that. A reminder also that the box deals are generally more expensive. So, in general, the cost is up just by the sheer volume of the box activity. And if you look back historically, that number was more sort of in the mid-50s than where it sits right now. And so we anticipate as we get these box deals, the remaining few that we have left, done, and as we normalize, that number should drift back down towards that historical average of, call it mid-50s to 60.

[Christine McElroy, Citigroup]

So I guess as a follow-up on that, I mean, would you expect the Pier 1 boxes, the replacements, just given their size, to be less CapEx, just given that you're not breaking up as many -- or you're not breaking out any of those, but it’s just less CapEx associated with those?

[John Kite, Chairman & CEO]

I mean it’s very dependent on what we’re putting in there, Christy, because those -- even if you just look at Pier 1 and Dress Barn, those are both what you’d consider like mini-anchor size, right there between 8,000 and 10,000 square feet. So if we’re putting in a guy that’s going to take the whole space, yes, for sure. We could also break that into two users pretty effectively. So I think it depends on what we’re putting in.

And again, to reconfirm to everybody, when I look at the mass volume of stuff that we’ve done in the last couple of years, the CapEx expenditures, when you look at it on an percentage of NOI in 2019 and 2020, it’s just significantly higher than what we have historically seen and what we will see in 2021, 2022, and 2023 as I look out in our models.

And it just is what it is. We’re getting great returns. We’re increasing the NAV of the properties. So I wouldn’t overthink it, quite frankly. I know people want to focus on this, and I get it. But I think it’s a transition period, and it has to do with the returns that we’re generating and the quality of the tenants that we’re putting in.

[Christine McElroy, Citigroup]

Okay. Thanks for the time.

[Heath Fear, EVP & CFO]

Thank you.

[Operator]

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

[Todd Thomas, KeyBanc Capital Markets]

Hi thanks. Just first, following-up on that discussion a little bit. Can you just talk a little bit more broadly about the leasing opportunities or expectations, rather, to backfill some of those early 2020 move-outs and closures in terms of the timing and the potential mark-to-market? And just maybe discuss what's embedded in the guidance with regards to those spaces?

[John Kite, Chairman & CEO]

Well, as it relates to the first part of the question, I think Tom and I can both touch on it. As far as the demand, there's plenty of demand there. And even if you just carve it into what we're looking at between Pier 1 and Dress Barn, I mean, as it relates to Dress Barn, I think we only have one or two of those that we're not actively negotiating leases or having already signed leases, because I think we've already signed four leases in there of the eight, so -- or on the seven that we have remaining. So that gives you an idea that the demand is there. And as it relates to Pier 1, I mean, quite frankly, they're still in the spaces, and we've got tenants calling us trying to get us to make stuff happen. So that that’s the sweet spot size-wise. Tom, do you want to pick-up on that?

[Thomas McGowan, President & COO]

Yes. And then on the box side, we have seven boxes that remain vacant, and we’re already negotiating on three of them. And the fact that we have 280 boxes and only seven vacancies, negotiating three, I think our history over the last 18 months shows that we're going to be successful on that. And I think as we move to the second half of the year, we'll have far more clarity.

[John Kite, Chairman & CEO]

Yes. And Todd, regarding guidance, I mean, as Heath pointed out, other than what we've already leased, for example, like Dress Barn, we don’t have anything in our numbers relating to those vacancies. So that’s the conservatism that we took in addition to the bad debt reserve on top of that, that we were pointing out earlier.

[Heath Fear, EVP & CFO]

Todd, last little piece of information. So, for the Dress Barn deals that we have, we have five signed, two in negotiation. Spreads of those are on a cash basis, around 10%. So there's a nice mark-to-market opportunity in those boxes for us.

[Todd Thomas, KeyBanc Capital Markets]

Okay, got it. That's helpful. And then, yes, Heath, so some of those I understand, are vacant and you're signing leases actively today. But I think you said the midpoint assumes no additional rent from the six retailers that you mentioned that you don't receive rent. Is that beyond February? Is that right? And then of those six tenants that you mentioned, I guess, what's still open and rent paying at this time?

[Heath Fear, EVP & CFO]

I think the only one that's still open and rent paying, Todd, is Pier 1. And we assumed that we don't get any more rent past February, which I'll tell you, it’s probably a fairly conservative assumption, because even if Pier 1 were to change from reorganization, which it appears it is, to liquidation, it's going to take them three or four months just to conduct going out of business sales.

I will tell you that our four locations are not on the closure list. They're still on the website, which leads us to believe that they will ultimately be part of the reorganization plan. Whether or not Pier 1 is able to pull-off a successful reorganization, we'll see. But again, a little more conservatism there -- we just took the rent -- took February’s rent and then we put zero in the base budget for the rest.

[Todd Thomas, KeyBanc Capital Markets]

Okay. Great, that's helpful. And then just shifting over to sort of the balance sheet and disposition. So Project Focus is complete, and you came in toward the high-end of the leverage range that you laid out, which -- mid-to-high 5 times on a debt-to-EBTIDA basis. So you're right there, 5.9 times. But you did have a desire to perhaps drive leverage slightly lower. And I'm just curious what the updated view around leverage is today?

[Heath Fear, EVP & CFO]

So at the beginning of last year when we gave our guidance, we said that we would be between 6.1x and 5.9x when the dust settled. So we're at 5.9x, so we're pretty pleased that we hit sort of our internal goal with respect to the end of year 2019 guidance.

But to your point, our -- sort of our anchoring leverage point is mid to high 5 times. And sometimes will float above it, and sometimes we’ll float below it. I will say, as I'm looking out to our model, you're going to see that number continue to drift down just as we naturally grow EBITDA, which will get us closer to that mid-5 times where we -- mid to high 5 times where we want to reside on a long-term basis.

[John Kite, Chairman & CEO]

Yes, Todd, I mean I guess the only thing I'd add is we're extremely comfortable with the strength of our balance sheet today. And obviously, debt-to-EBITDA is an important metric. But when you look at our fixed charge coverage, you look at our debt maturity schedule, you look at our cash on hand, I mean, we’re in the best shape we've ever been. So, as it relates to either taking advantage of an opportunity or weathering a future potential storm, we could do both.

So -- and look, as -- we don’t think about this in one-year increments. We think about this in three to five-year increments more likely. And we look really good over that period of time.

And to Heath’s point, are we going to freak out whether it's 5.7x, 5.8x, 5.9x, 6.1x, 5.4x? No. It's in that bandwidth that we can operate in and particularly with the way we've kind of skillfully managed the maturity schedule and our cash position. So, feeling very good about that.

[Heath Fear, EVP & CFO]

I think the one thing I’d add, listen, we worked really hard to get the leverage to where it is, and we are going to do whatever it takes to keep it in that range. This is not an exercise of let’s de-lever and just go ahead and lever back up. So again, it's a -- we think this is a good, comfortable number, and we're going to stick there.

[Todd Thomas, KeyBanc Capital Markets]

Okay. Thank you.

[John Kite, Chairman & CEO]

Thank you.

[Operator]

Thank you. And our next question comes from Floris van Dijkum from Compass Point. Your line is now open.

[Floris van Dijkum, Compass Point]

Great. Thanks for taking my question, guys. John, you touched upon NAV. As I look at consensus cap rates for KRG, they’ve basically risen, it appears, like by about 50 basis points over the past 12 months to the range of 7% to 7.15%. Yet you sold presumably some of your worst assets or your non-core assets over $540 million of that. Can you provide any evidence that cap rates should be lower than where the market ascribes your values right now?

[John Kite, Chairman & CEO]

Yes. It’s a great question. Absolutely, Floris. I mean, I think, look, what I can say is a couple of things. The first part of that, yes, we sold our lower tier assets at approximately an 8% cap. In fact, if you look at 2018 NOI, slightly below an 8% cap. And the remaining assets that we own are of a significantly greater quality, evidenced by tons of data we’ve given you, but not the least of which is a 20% improvement in our average base rent from before when this program began.

So when we go out and look at assets in the market, Floris, for sale, like we have recently, multiple deals that we've looked at, we absolutely could not add anything that is complementary to our portfolio at a cap rate that's higher than 6% right now. In fact, the majority of the deals that we see, that we think are complementary to our portfolio basically trade in the 5%s and low 6% range. A 7 is funny. I mean it’s just not even -- there’s no way.

The only way you could do that is in a situation, like, let's say, even a high 6% where you're buying an asset that has significant CapEx deferral, quite frankly, similar to what we bought with Nora, where it’s a good asset but we've got to spend a lot of money to bring it up to where we want it to be.

So I think it's a very important question, and I think people are missing it tremendously. And obviously, our stock has moved a lot in the last year, but we're not even close to where we think that should be right now. And I think if you talk to any of our peers that are similar in asset quality, they would tell you the same thing, that if you want to buy something you think is complementary that doesn't have a lot of work to do, in other words, CapEx to spend to get higher NOI, being higher than a 6%, I just don't see it.

[Floris van Dijkum, Compass Point]

Great. Thanks, John. That's helpful. So the other question I have for you guys is if I look at your development pipeline and I compare it -- I look at it both on an absolute and relative basis compared to your peers, it seems smaller. Can you maybe give us some background to your thinking on development and redevelopment and why you’ve pursued this approach?

[John Kite, Chairman & CEO]

Sure. In terms of why we’ve kind of taken the approach, a lot of it has to do with the fact that if you look at 2015, 2016, 2017, 2018, we were actively engaged, particularly 2016 through 2018, in a significant amount of redevelopment in the portfolio. So frankly, some of it, we just got to earlier than others.

And then the second part of it is the balance sheet management, that we want to be in a position to manage our capital expenditures. We spent a great deal of capital on the Big Box Surge and still have $16 million yet to spend there, which we view as a de facto redevelopment program in the sense that the returns are higher and have less risk associated with them. I think it's a combination of all of that.

And then also, we’ve talked a lot about -- we're interested in adding value to assets like the three that we mentioned, which would be mixed-use style development. But we're not interested in doing it just for the sake of doing it. And when you look at the returns you generate there, you have to be very careful. So overall, this is definitely part of our strategic plan. And we're -- based on our size, having two or three of them that we're working on at one time is plenty. We don't want to overextend either. So I think it’s a combination of all those things, Floris.

[Floris van Dijkum, Compass Point]

Thanks, John. Appreciate it.

[John Kite, Chairman & CEO]

Thank you.

[Operator]

Thank you. [Operator Instructions] And our next question comes from Barry Oxford from D.A. Davidson. Your line is open.

[Barry Oxford, D.A. Davidson]

Great. Great, John, to build-off of that question, when you're looking at future development sites, which MSAs are you like, look, if I could get some raw land in this MSA, I think that makes sense?

[John Kite, Chairman & CEO]

Sure, Barry. I mean, look, right now, it just happens to be the three that we've highlighted are in our home market.

[Barry Oxford, D.A. Davidson]

Right.

[John Kite, Chairman & CEO]

And they have all -- they all have mixed-use attributes relative -- or associated with them. I mean, I think we've been pretty clear that our target markets would be those markets that we deem to be the warmer, cheaper markets in the south and west where we would be looking to actively engage. We’re not -- as you know, we’re not actively out looking for raw land. And I don’t know, Tom, we haven’t done that in…

[Thomas McGowan, President & COO]

It’s been years.

[John Kite, Chairman & CEO]

We were definitely younger when we were doing that. So I think right now, we made it pretty clear that we've got a certain amount of target markets -- 15 to 20 markets. We're moving in the direction of having the majority of our NOI come from those markets. I think we’re going to do a lot more education with the investor community in the next year about that. But I mean, look, the data is pretty clear when you look at markets like Raleigh and Dallas and Houston and Orlando and -- to name a few. People are moving there in droves. The cost of living is exceptionally lower than the high-tax states, and we just happen to be positioned to take advantage of it.

[Barry Oxford, D.A. Davidson]

Perfect. Thanks for the color guys.

[John Kite, Chairman & CEO]

Thank you.

[Operator]

Thank you. And our next question comes from Chris Lucas from Capital One Securities. Your line is open.

[Christopher Lucas, Capital One Securities]

Good morning guys. Just wanted to get a better sense as to what the spread is right now between leased and commenced and just sort of understand sort of what the tailwind looks like to rent growth this year.

[Heath Fear, EVP & CFO]

Yes. So it’s 230 basis points now. And so what you will see, sort of at the beginning of the year, is you'll see it gap out little bit more as some of those other boxes are getting signed. And then you'll see it start to skinny through the balance of the year as more of those boxes open. So it will still be elevated throughout 2020, but not nearly as elevated as it was towards the back half of this year.

[Christopher Lucas, Capital One Securities]

Okay, great. Thanks, Heath. And then on the A.C. Moores, can you remind me how many sites you had and if there's any progress on backfilling those locations?

[Heath Fear, EVP & CFO]

Yes. There was just one site, and we’re in very deep negotiations for a backfill for that site.

[John Kite, Chairman & CEO]

Yes. I mean, it’s a nice size and a location that we feel like we’re going to be successful.

[Christopher Lucas, Capital One Securities]

Okay. Thanks for that. And then last question for me. Just, John, you keep pushing the envelope in terms of shop occupancy or shop leased rate. Obviously, you'll take a hit with the Dress Barns and then to the degree that there's anything else that comes through. But just big picture, 92.5% is the new high watermark. Is there the ability to push beyond that? Or do you feel like that's kind of where the frictional point is for shop space?

[John Kite, Chairman & CEO]

I don't know. Tom shaking his head. Yes, we can push beyond. Look, we've actually -- as you know, Chris, we've talked about this, and it is an interesting thing to think through, and at what point do you reach some sort of frictional vacancy on just locations? But we are very focused on continuing to push it forward. We will take a couple of hits that -- and as far as our guidance goes, we've been very conservative around what we would lease up. But when it comes to small shops, you can move faster. And frankly, even in that 8,000, 9,000 square foot range like Pier and Dress Barn, we can move faster than you can in a 20,000, 30,000 foot box.

So I'm optimistic that our team will continue to overachieve. And pound-for-pound, Chris, if you look at what we've accomplished, it’s kind of why I wanted to look back a little on what we accomplished in the year because companies that trade at significantly higher multiples and lower cap rates did not achieve what we achieved and have not laid out guidance that they would achieve more than us this year, but yet we trade where we trade. So what we’re going do is continue to kick butt and do what we do. And we take that as a great challenge. So I will never say that we will be happy going backwards.

[Thomas McGowan, President & COO]

Just watch out. We'll see what we can do.

[Heath Fear, EVP & CFO]

I’ll add two things. Listen, Chris, at 92.5% leased, it really gives us an opportunity to drive rents. So that's one of the benefits of being so highly occupied. And the other thing, and Tom is fond of telling his leasing folks, yes, 92.5% is high, but we will not capitulate the other 7.5%. So we'll do our best.

[Christopher Lucas, Capital One Securities]

Great. Thank you. Appreciate it.

[John Kite, Chairman & CEO]

Thank you.

[Operator]

Thank you. And I’m showing no further questions from our phone line. I'd like to turn the conference back over to John Kite for any closing remarks.

[John Kite, Chairman & CEO]

I just wanted to thank everybody for being with us on the call today. Thank you, everyone, for the support, and we look forward to continuing to meet with you going forward. Thank you.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.