Greetings, and welcome to the Brixmor Property Group Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stacy Slater.
Thank you. You may begin.
Thank you, operator, and thank you all for Brixmor's 2nd 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 and 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 1 or 2 per person. If you have additional questions regarding the quarter, please re queue. At this time, it's my pleasure to introduce Jim Taylor.
Thank you, Stacy, and good morning, everyone. I'm pleased to report yet another quarter of strong performance on all fronts, in line with what we've achieved the last several quarters and consistent with the plan we laid out at our Investor Day in 2017. As we've discussed on past calls, our performance highlights both the strength of this team and platform as well as the potential embedded in our portfolio of very well for the acceleration of growth in the latter part of 2019, 2020 beyond. But what may be only partly apparent in our reported numbers is the broad based physical transformation occurring at the real estate level that not only drives ROI, but also delivers tremendous growth and intrinsic value. Simply put, each quarter that we execute, our real estate becomes more valuable.
Since this team began together in May of 2016, we've harvested through asset sales over 20% of our original portfolio. We've also completed, commenced or will soon commence value accretive projects on over 30% of our remaining portfolio. Said another way, we've now crossed an important threshold in terms of momentum, and our progress clearly demonstrates that we are a fundamentally different company than we were 3 years ago. Consider, for example, at Web Royal outside of Dallas, where we converted a tired center in a dense submarket with a new ethnic grocer, new facades and signage and drove a doubling of the NOI at that center with continued room for growth as we roll some of the small shop space. Outside of Minneapolis, we're adding a specialty grocer at a vacant end of a neighborhood center, expanding a restaurant that's a local institution, updating facades and driving a 9% incremental return on invested capital.
That return will continue to grow significantly as we set the market in that affluent first string suburb. In Mamaroneck, New York, we backfilled an old A and P box with a CVS and a high end food market, acquired an adjacency and developed an additional 12,000 square feet with fast casual food and boutique fitness, creating a center for that affluent community that's just steps from the Metro North train station. And in Pleasanton, California, we replaced the Fresh and Easy with the Trader Joe's, purchased an old CVS, which we backfilled with the total wine, added a new Starbucks outparcel and remodeled the entire shopping center at a 10% incremental return in this highly desirable Bay Area submarket. We are executing over 80 projects like this across the portfolio, having now delivered $200,000,000 of reinvestment at a 10% incremental return since we began. And the full year benefit of those deliveries is just now beginning to hit our numbers.
We have another $400,000,000 at a 10% return underway, and we have over $1,000,000,000 in our future pipeline that we expect to commence over the next few years. Again, with each of these projects, not only are we driving great ROI, but our cost of capital in terms of the private market valuation of these centers continues to improve. And again, this Q2 of 2019 truly is an acceleration point in terms of the momentum of our portfolio wide transformation. We've also generated great returns and margin improvements through operational enhancements at our centers, including solar projects, LED lighting, low maintenance attractive landscaping and tighter management of local service providers. This effort has resulted in better looking centers, accelerating small shop momentum and a strengthened connection between our centers and the communities they serve.
We've aggressively pruned those centers where we don't see future growth opportunities. From a capital recycling standpoint, we've sold over $1,500,000,000 to date, fixed the balance sheet and have shifted importantly as we've discussed on prior calls to a more balanced level of dispositions and acquisitions. This shift has allowed us to execute on great value added opportunities such as the center we closed on during the quarter, Plymouth Square in Conshohock in Pennsylvania. Plymouth is a 60% occupied retail shopping center across the street from our 100% leased White Marsh asset. We plan to move our North region offices to the back part of that center, saving over $1,200,000 in rent, and we already generated tremendous demand from national tenants to fill the remaining 20% at significantly higher rents.
As you consider all that's happening at the real estate level, it provides much greater depth to the numbers that we are delivering. Consider the growth in our average in place ABR per foot from $12.85 when we started to $14.39 today. That same growth in in place ABR is driving top line growth of nearly 2% this quarter, even with over 200 basis points of drag in build occupancy driven by our ramping redevelopment pipeline. Consider the sector leading 2,200,000 square feet of new and renewal leases signed at cash spreads of 14% this quarter, productivity that continues to lead the sector, but on a portfolio that's been pruned by 20%. Consider the over $51,000,000 of signed but not yet commenced rent, which will continue to deliver over the next several quarters as tenants take occupancy.
Consider our growth in market share with thriving tenants such as TJ, Ross, Burlington, LA Fitness, 5 Below, Ulta and Panera. And importantly, the corresponding reduction in exposure to problem tenants like Sears Kmart, which dropped out of our top 10 and is now less than 10 basis points of our total revenue. Simply put, we have dealt with our Sears exposure. Consider the increase year over year in small shop occupancy despite the ramp in redevelopment and recent bankruptcies and consider the records we continue to set in terms of small shop new lease ABR per square foot, which is at $23 for the trailing 12 months, up 20% from when we first began. Across the board, we're not only getting better tenants, we're achieving better rents and terms.
We're incredibly pleased that our execution has up several years of outperformance in terms of growth with over 400 basis points gap between what we're billing today and what we'll be billing over the next several quarters. But we are even more pleased with the physical transformations at our centers that drive value for our company, our shareholders, our tenants and the communities we serve. We invite you to see firsthand the transformation that is occurring at Brixmor and we'll be hosting several property tours over the coming months. Thanks for your interest in us. And with that, I'll turn the call over to Angela for a more detailed discussion of our results and our self funded capital strategy.
Angela?
Thanks, Jim, and good morning. I'm pleased to expand on another quarter of strong execution as we continue to transform our portfolio, driving growth while also significantly improving the quality of our cash flow stream. FFO in the Q2 was $0.48 per share, reflecting same property NOI growth of 1.8%. Same property NOI growth was driven by strong base rent, which contributed 170 basis points during the quarter despite a year over year decline in build occupancy, primarily as a result of bankruptcy activity, which has been more than offset by strong rent spreads and the continued successful execution of our value enhancing reinvestment pipeline. In addition, net recoveries, percentage rents and ancillary and other income together contributed an additional 80 basis points of growth, which was partially offset as expected and discussed on previous calls by a negative contribution from bad debt due to significant recoveries realized in the Q2 of last year.
Bad debt expense in 2019 has been in line with expectations, totaling approximately 70 basis points of total revenues in the 2nd quarter or 85 basis points year to date versus our long term run rate level of 75 to 100 basis points. We have maintained our 2019 FFO guidance of $1.86 to $1.94 per share and our 2019 same property NOI growth guidance of 2.75 percent to 3.25%. Our guidance has always been predicated on an acceleration in same property NOI growth in the second half of the year based on the timing of rent commencements related to bankruptcy backfills and the stabilization of value enhancing reinvestment projects in the 3rd 4th quarters. As a reminder, the spread between build and leased occupancy stands at a record 400 basis points today, which represents over $51,000,000 of contractually obligated annualized revenue, dollars 31,000,000 of which is slated to come online during the remainder of 2019. In addition, year over year comparisons become easier in the Q4 due to the timing of several 2018 bankruptcies including Sears Kmart.
As a result, we expect same property NOI growth to accelerate through year end. In addition, on a year to date basis, operating costs are down relative to last year due to timing, which has resulted in a positive contribution from net recoveries in the first half of the year, despite a decrease in average billed occupancy. For the full year, we expect net recoveries to be neutral to same property NOI growth, implying a reversion in the second half as spending normalizes. Stepping back from our quarterly results for a moment, I do want to take an opportunity to highlight the disposition of Bay Point Plaza in Tampa St. Pete during the 2nd quarter, as this transaction represents a distillation of our strategy to create and harvest the significant value embedded in our well located and historically under managed asset base.
May recall that Bay Point Plaza was the first redevelopment that the company completed in the Q4 of 2016. We spent approximately $8,000,000 at a 10% incremental return to bring Publix to prototype, remerchandise small shop space, enhance facades, upgrade to LED lighting and improve common area. Based on the strength of our execution, which included the marking to market of both anchor and small shop rents across the center, resulting in limited additional opportunities for our platform to create value at this site, we elected to dispose of the asset, raising over $25,000,000 of very attractively priced capital and creating over $5,000,000 of value in the process. As our focus remains on creating sustainable long term growth, expect capital allocation discipline to remain at the forefront of our efforts. As it relates to the balance sheet, we continue to advance our capital structure objectives in the Q2 by issuing $400,000,000 of 10 year unsecured notes, which were used to repay $200,000,000 of the 2021 term loan and amounts outstanding on our revolving line of credit, further extending our weighted average duration.
We were pleased to have the progress we've made on the balance sheet over the last 3 years acknowledged by Fitch in early July with a positive outlook to our credit rating. And looking forward, we will continue to ensure that our capital structure provides ample capacity and flexibility in order to execute on our self funded business plan. In conclusion, I want to take a moment to highlight that last month we published our inaugural corporate responsibility report, which I hope you all have an opportunity to review. As the report summarizes, corporate responsibility is central to Brixmor's culture and our mission of ensuring that our centers are the center of the communities we serve. Given the transformation occurring across our portfolio, as Jim highlighted, both through capital reinvestment as well as more proactive operating standards, We have an opportunity to make great progress around corporate responsibility and sustainability goals over the next few years, and we look forward to continuing to report on our ongoing performance in these areas.
And with that, I'll turn the call over to the operator for Q and A.
Thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from the line of Karin Ford with MUFG Securities. Please proceed with your question.
Good morning.
Hi, good morning. Jim, at NAREIT, you said that there were some early signs that cap rates might be headed higher shopping centers. Has that materialized or did lower rates end up having a positive impact on pricing?
It's interesting. I'll let Mark comment But certainly, Mark, you want to But certainly, Mark, you want to comment more on where the market is?
Yes. I'd say that the market actually remains pretty consistent with what we've seen and what we've talked about on previous calls. We continue to see significant capital chasing open air retail assets. I'm sure once all the big retail trade portfolio trade that recently occurred. We've seen some tight pricing on grocery.
We do continue to believe that definition of core is a little tighter than it was in the past, But we haven't really seen a significant movement.
Yes. And Karen, I'd just say that I think every investment decision we make as a company is with the view that cap rates will move higher, interest rates will move higher. When we underwrite acquisitions or we underwrite investments in the centers, we always assume a reversion that's higher than where it is today. So my gut is always that cap rates are going to be going up, but we haven't seen it yet in what we've actually transacted.
Great. Thanks. And my second question, similar theme. You mentioned in your prepared remarks that you think your real estate has gotten significantly hard work you've done on asset sales and redevelopments to date? I think, hard work you've done on asset sales and redevelopments to date?
I think it's been significant. I don't want to give an absolute number to it, but it's part of our investment philosophy that the changes that we're making not only are driving great incremental ROI, but we have a view that what we're doing is making the assets much more valuable. So that on a steady state basis, the cap rates will be lower than when we started on those assets. But across the portfolio, I can tell you it's meaningful. As I mentioned, what's important at this point is that we really are accelerating in the execution of our plan.
As I mentioned in my prepared remarks, we've harvested about 20% of our portfolio and we're starting or have executed on another 30% of our original core portfolio. And when you execute projects like we executed, for example, in Minneapolis or in Pleasanton, California or in Mamaroneck, New York, you can expect to see the cap rates on those shopping centers tighten by anywhere from 50 to 125 basis points. So as we get through the portfolio and we harvest these opportunities that I've been excited about since I've joined the company, we really are every day creating more and more value. And honestly, as Angela alluded to in her remarks, we're actually lowering our cost of capital from an implied cap rate standpoint. But we're not prepared at this point to give you an estimate of what that is.
But we do invite you to look at the breadth of the projects that we're executing, the number of assets that we're impacting. We do provide in our supplement a list of all the 60 plus projects that we have underway and we have many more behind that. And again, these are smaller. They're more granular than massive mixed use development projects, but they have huge value benefits, not just in terms of that ROI, but in terms of making the center better.
I think you said that the example that Angela gave in Tampa was a $5,000,000 value creation on a $25,000,000 roughly value asset. Is that pretty indicative of what you think the other projects the value that you've created in the other projects as well?
I think it's a great example. And think about it, we put about $6,000,000 to work. So when you are putting and this is another point that we've made a lot, when you're putting capital to work at incremental, not gross, incremental returns of 10% in a business where the assets are 6% to 7% in cap rates, you are creating a huge spread in terms of value before you consider any compression in cap rates. So it is a significant lever. And the other point I think is important, I'm glad you asked question is we can create the same value with that $400,000,000 of investment that we have underway the ground up development or more complicated development would require 4 to 5 times the level of investment and also impart a lot more risk and also not have the same type of duration that our projects have.
So, you're seeing it come into our numbers now, the $200,000,000 that we've completed. It's part of what gives us a great visibility on ramp in the latter part of this year and into 2020. And we're really excited about it. It's granular. It's hard to talk about specific projects and generate the same level of excitement that larger projects generate.
But the important thing is that we're actually making money, which we're excited about.
Good stuff. Thank you.
You bet.
Our next question comes from the line of Craig Schmidt with Bank of America Merrill Lynch. Please proceed with your question.
Great. Thank you. I was just wondering as investment in e commerce grocers continues to climb, are you viewing various bricks and mortar grocers differently today than you might have a couple of years ago?
I'm going to let Brian comment on this, but let me lead off with we are very focused on those grocers who are thriving today, who are investing in their business, who are driving buy online, pick up in store. And where the grocer isn't, we're taking a more cautious view as to whether or not that's somebody that we want as an anchor in our center going forward.
Yes. And I would just add, Craig, as we've said on prior calls, we have been working with those grocers, as Jim mentioned, that are investing in buy online, pickup in store that are doing more from a delivery standpoint. And it really goes into the total investment that they're making within the store and we have our eye on that both with specialty and traditional grocers. It's something that we're very focused on.
Great. And then just as a follow-up, on the lease to build occupancy, thanks for the breakout of $31,000,000 but how much do you think we'll be hitting in the Q3 versus the Q4?
Angela? Yes. So, Craig, we haven't provided sort of a quarterly breakdown. But I think it's fair to say based on both the timing of bankruptcy backfills and the timing of redevelopment stabilizations we have in both the 3rd and the 4th quarter, that you're going to see some coming in the 3rd quarter then a larger portion of that really hit in the 4th quarter, which does a great job of setting us up for 2020 growth.
Great. Thank you.
Our next question comes from the line of Christy McElroy with Citi. Please proceed with your question.
Just a follow-up on Craig's question. As we head into 2020, would you expect a narrowing of that spread closer to the 170, 180 basis points that the company had been averaging prior to the 2016 Sports Authority bankruptcy? And maybe kind of frame that the answer to that question in sort of the context of your views on potential tenant fallout into next year. And I think you had previously had a 75 to 100 basis point bad debt buffer in the range this year. How are you thinking about that today?
Let me start and say that when you look at our build occupancy number, it reflects a couple of things. It reflects certainly the bankruptcies that we've all experienced in the sector. But I think for us in particular, it also reflects the proactive recapture space for redevelopment and reinvestment. And we're at an important turning point in terms we as those spaces deliver and the tenants take occupancy. So, with that said, I do expect our build occupancy to continue to accelerate and climb, both overall and also within the small shop space as we continue to see momentum, driven in part by the investments that we're making in our centers, and as I alluded to before, the improved operations.
With that said, Brian and team continue to be the most productive group in the industry in terms of leasing. And so while I expect an acceleration in build occupancy, if that spread stays at 400 and we're up a couple of 100 basis points in build occupancy, which we fully expect, I'm not going to be crying a river on that. But I do honestly expect it to tighten, because as we execute that gap should narrow and ultimately approach more of what you've seen historically, which is 150 basis points to 200 basis points.
Yes. Just in terms of the bad debt question, 75 to 100 basis points has been sort of the longer term run rate for this portfolio. We continue to feel very comfortable operating in that range. As I mentioned in my prepared remarks, we're at about 85 basis points year to date. So certainly that's been the right level for 2019 and would expect that it's something comparable as we look forward to 2020.
Thanks for that. And sorry for the multipart question. Just secondly, maybe you could update us on your outlook for how we should be thinking about dispositions for the balance of the year? The volumes have been pretty light thus far relative to 2018. And just maybe in the context of why it's been a little bit slower given what you're seeing in the private markets?
Sure. It's really timing. We do expect asset sales volumes to increase in the latter part of the year. Again, I think as we've been pretty clear on Christy, not to the levels that we saw in 2018, but more in line with what we expect the long term levels of this business plan to be, as we shift to more of a balanced capital recycling stance. We've sold about $100,000,000 year to date, and I expect that number to accelerate in quarters 34.
Obviously, we never give a specific transactional number, but do expect that to pick up.
Thank you.
You bet.
Our next question comes from the line of Alexander Goldfarb with Sandler O'Neill. Please proceed with your question.
Hey, good morning. Just two questions. First, actually, Anshul, maybe I'll start with you the Fitch announcement. Obviously, good to see. Maybe you could just give some thoughts on your expectations for the other rating agencies.
And if there's anything that you guys have to do versus this is just the folks recognizing what you guys have done? And then also just curious, just given your recent bond pricing, how do you think how much where do you think you would have priced had you been sort of BBB flat versus where you're currently rated?
Sure, Alex. Thanks. As it relates to Fitch, as you mentioned, we are very pleased to see some momentum there from a ratings perspective that I do think really acknowledges all of the work that's been done on this balance sheet over the last 3 years. In terms of the other rating agencies, obviously, I won't speak for them or the way they're looking at the credit. But I do think as I look across the research and what we've been hearing from the rating agencies, I think this is really just about continuing to execute on the plan that we've laid out, and continuing to demonstrate progress both on the portfolio transformation that Jim spent, his prepared remarks really highlighting, as well as just
consistency at this point, I think, on the balance sheet.
So I don't think that there that we need to hit. I think it's just continuing to execute. In terms of pricing on the last bond deal, it's really obviously very difficult to say and rates overall have shifted relatively significantly since that time. So I think it would be a little bit difficult to predict. We certainly do feel that over time as we continue to see momentum from the rating agencies and work towards a higher rating, not just positive outlook, that we'll continue to see improvement in our cost of capital
market reflects a higher rating than where we are today and we expect that to continue to improve.
Okay. And then the second question is on the acquisition you guys did, the one in Philly that's adjacent to your existing asset, maybe you could just provide a little bit more color on that given the low occupancy. It sounds like you may be relocating your headquarters or your regional headquarters there, which I guess has some cost saves. But also in light of stock buybacks, your stock is trading at an 8.4% implied, but obviously you felt good enough to acquire this asset. So maybe just how you think about the 2 as external capital uses?
Well, this acquisition is truly value added. As I mentioned, the occupancy overall was about 60%. We're going to take about 20 percent of the occupancy and backfill or vacancy and backfill it with our regional office. As I mentioned, we'll be saving about 1,200,000 of annual rent or G and A. And we already have backfill demand from national tenants to re tenant and reposition that center, which as you mentioned is directly catty corner to our 100% leased White Marsh asset.
And we also see significant upside in the underlying rents. Now this asset was something that we've been targeting for the last 3 years. And really with great work by Chris Reed and our Philadelphia office as well as Mark Horgan, we're able to engage in a discussion with the owner and I think it and execute a transaction. And I think there's something else implicit in this transaction that's important for people to understand why we're considering acquisitions with our common stock. And that is that we are in an environment where our national platform, the visibility that Brian and team give us in terms of tenant demand allows us to understand how we're going to backfill space.
In a market where it's interesting, cap rates are holding pretty firm, but you're not getting a lot of value for vacancy. Just part of why when you look at what we've sold, it's actually more occupied than the balance of our portfolio. It's implicit recognition that the capital that's moving into the shopping center space is yield driven capital, capital that's going to be leveraging where interest rates are. So that opportunity to actually understand going in, what our backfill demand is going to be, how we're going to drive value, takes a center in infill Philadelphia and gives us an opportunity to drive an IRR that's high single digits, low double digits on an unlevered basis. So that's a pretty compelling thing.
Obviously, our stock is also compelling. But I think as I've said many times before, as we shift to a more balanced capital recycling standpoint, we're also going to be somewhat balanced in terms of acquisitions that meet our criteria as well as our common stock.
Okay. Thank you.
You bet.
Our next question comes from the line of Jeremy Metz with BMO. Please proceed with your question.
Hey, just going back to the same store NOI trajectory, you mentioned obviously a few times the big ramp and the importance of the rent commencement timing and that narrowing of that lease to build spread. But you also mentioned the redevelopment benefits. So I'm wondering if you could bifurcate the 2 for us in terms of how much is being driven by that narrowing in that spread versus how much is benefits coming from redevelopment at this point in the back half?
Well, remember that part of that spread is being driven by the redevelopment pipeline itself. I don't have an exact breakdown of how much of that spread is just pure simple leasing versus anchor repositioning or anchor redevelopment. But that redevelopment is contributing pretty meaningfully to that spread. And you're right, the rent commencement timing is incredibly important as we move through the next several quarters and bring that rent online, get the tenants open. We feel good about our pace.
In fact, this quarter, we did better than we thought in terms of rent commencements. But I think an important thing to understand, Jeremy, about this yet to be commenced rent is it's signed, it's coming. And now it's just a question of timing. Is it September 15 or October 1? And we're obviously working hard every day to try to pull that timing up and outperform.
But again, we're not wondering where the growth is coming from. It's been very intentional on our part to set aside space for redevelopment, get at least, to deal proactively with weaker tenants. I'm really pleased with what we've done with our tenant watch list, which has shrunk, as we've reduced exposure to tenants that we don't think are going to be viable. And importantly, on the other side of that, increased our penetration with tenants who are growing and we think are more relevant in the communities we're trying to serve.
Yes, that's fair. And you mentioned the anchor repositioning is going on. You have the 28 of them in the pipeline. How many of these involve changing the actual square footage? Are you doing more meaningful redevelopment versus just more basic re leasing or splitting the space?
I mean, I guess if I look at Rivercrest or Westridge, which you just added to the pipeline in this quarter, those seem more like just some standard releasing activities there. So can you break that bucket down a little bit for us?
Yes. I mean, I think when you look at the anchor repositioning definition sort of how we categorize things as anchor repositioning relative to redevelopment, Really everything that's on the anchor repositioning schedule will be for the most part limited to the box itself. So that might mean demising the box and putting in multiple tenants. You mentioned the case of Rivercrest, where we're replacing, an Ultra Foods with At Home. That's a straight releasing exercise that's profiled for you on the anchor repositioning schedule.
Given that Ultra Foods was a bankruptcy, we try to highlight all that activity. So you can really get a more granular understanding of how the bankruptcy backfill process is working and the strength of tenancy that we're putting in on the other side.
And I think the distinction from a business standpoint is less important and it's important for you as an investor to understand how we're putting the capital to work and the types of incremental returns we're generating. And it's part of the transparency that we're trying to provide in our supplement to show you the full range of value added reinvestment, whether it's anchor repositioning where we're demising the box, we're backfilling with a single use outparcels to larger redevelopments where we're touching more of the center. I will tell you that when we backfill a use that's no longer relevant with a use that is or a set of uses that is, it often opens up additional outparcel opportunities because we free the parking lot. It also allows us to drive better momentum in the small shop leasing. And in fact, in many of those anchor repositionings, we're holding back small shop space to be able to lease off the benefit of the new anchor.
And in fact, I think the drag within that pool is a few hundred basis points on just on small shops. So it's a very intentional effort on our part to show you the full range of value added reinvestment that we're making in our portfolio. Thanks. You bet.
Our next question comes from the line of Todd Thomas with KeyBanc. Please proceed with your question.
Hi, thanks. Good morning. Just circling back to investment activity. So you are a net acquirer this quarter, but it sounds like it was timing related and asset sales may increase in the next quarter or 2. Can you just provide a little bit more color around the current pipeline for both acquisitions and dispositions?
And then maybe remind us of your longer term capital recycling plans that I think you said the full year would ultimately look like and that we should think about going forward?
Well, again, we don't provide specific annual guidance in terms of levels, but I would expect the back half of the year to be a multiple of what we did in the 1st part of the year. I'll let Mark comment a little bit on the types of opportunities that we're seeing on the acquisition side. But we're on pace I think this year to be close to what we think is that long term average that we talked about at Investor Day of $400,000,000 to $500,000,000 Mark?
I guess what I would say about the pipeline is the digital pipeline as Jim just mentioned remains where we think it should be. On the acquisition side, what's important to remember about our acquisition strategy is that we have a very targeted acquisition strategy. We have a list of assets that we'd like to acquire. And I think 2 of the assets we bought last quarter Centennial and Plymouth really are a great example of those assets. We want to target assets where we can take advantage of the Bridgeport platform to drive value and growth.
In both assets that we bought last quarter, we're seeing great momentum already, which is
I think a real testament to Brian's team and what
they're doing on the leasing side of things. So we are very disciplined with respect to acquisitions. We don't just simply respond what's on the market. So we really try to find those assets that can drive value for the company. We're constantly in communication with the owners that we like to transact with and remains competitive out there.
But that target asset is really what we think is our competitive advantage over time.
And Todd, we are trying to be balanced as I've said, which obviously drives both sides, right? The actual number of dispositions will be driven in a small measure by what we see in terms of investment opportunities on the other side.
Okay. And then, Angela, a 2 part question, I guess, on the same store. So you talked about that ramp in same store NOI growth that you're anticipating. You mentioned about $33,000,000 of the $51,000,000 of lease to build ABR commencing in 2019. How much of that would you say is incremental to what's in place today when you take lease roll into consideration?
And then you talked about the tough bad debt comp this quarter that you were up against. Is there anything in the prior year period in either 3Q or 4Q related to bad debt or net recoveries or anything else that we should be thinking about in the model?
Yes. Thanks, Todd.
I mean just to take the last point first, I think in terms of things to be aware of as we look at Q3 and Q4, I mentioned net recoveries has been a positive contributor on a year to date basis and we expect that to revert in the second half of the year just solely based on the timing of operating cost spend as it relates to certain items. So I highlighted that. The other thing I mentioned in my prepared remarks was just the timing of some of the 2018 bankruptcy activity and the fact that the comparison does get easier in the Q4. Outside of that, it's really that trajectory is really going to depend almost entirely on the pace of rent commencements in Q3 and then into Q4. Obviously, the Q3 commencements have a cumulative effect as we roll forward into the Q4.
As it relates to the $31,000,000 of signed but not commenced, that's coming online here through the remainder of 2019. I think if you look at the lease expiration schedule, you're going to see even if you assumed that, you did have significantly a significantly lower retention ratio than we historically have had, A tremendous amount of that is going to be incremental relative to lease expirations and to move out activity. So we do think that this really I think it's sort of evident in the acceleration we're guiding to in the second half of the year that this really is going to be a net benefit above and beyond kind of the normal run rate of
activity. Okay. Thank you.
You bet. Thank you.
Our next question comes from the line of Greg McGinniss with Scotiabank. Please proceed with your question.
Hey, good morning. Brian, I've got a bit of a multipart tenant closure question for you. So first, is the expectation for Dressbarn locations to close December 31? And what kind of demand are you seeing for those spaces? And secondly, what's the implication for those closures on dealing with other brands?
Because it sounds like that, that's beyond is gearing up to utilize a similar closure method with some of its brands. So how are you addressing that risk today?
Yes, I think just let me take the first part with Dressbarn because I do think each circumstance is unique. With Dressbarn, we are expecting to get those spaces back at the end of the year. As we talked with many of you at ICSC Recon, both the demand for those spaces as well as the upside, which we think is 15% to 20% has been strong. We were already at lease on several of those spaces today. So we expect to start seeing a lot of that income coming back in 2020 and be in a position on several of those spaces to be already released.
I think this was a unique this has been a unique situation with Dressbar, and I don't know that there's a read through to other retailers, potentially at least from what we see. I would say overall back to Jim's point, the proactive nature of what our team has done with troubled with really retailers across our portfolio, whether those retailers are have a good balance sheet, but they are closing stores or whether there is balance sheet issues, our team has gotten ahead of it and we've continued to demonstrate that we've gotten ahead of it, so that when we do get these spaces back, we're in a position to lease them very quickly. So I'm confident both our regional team and our national platform to continue to do that.
Okay. Thank you. And then just following up on Craig's Grocers question, looks like Albertsons had 3 box closures in 2Q based on top tenant list. I'm just curious what's going on there, what the plan is for those assets. And in general, what do you see
as the overall risk from traditional
grocery store closures? I mean, you
did mention that it's kind
of a maybe a I think, well, 2 part question.
I think, well, 2 part questions. Related to the Albertsons, those closures were Northeast locations, Acme locations that we knew were not strong performers. We weren't incredibly surprised by those that closed. If you look at our Albertsons portfolio across the country, we've got some very strong stores, particularly in Southern California, with Vons and other Albertsons just south of Downtown LA. In terms of the backfills for those, we already have leases.
We're going to lease on a center in Metro Boston for the entire box with a specialty grocer and a fitness center to split that. We've got a center out in Worcester where we're splitting that box as well and have had pretty good demand on that. I think if you look at traditional grocers across the spectrum, it goes back to Jim's point about investment and really looking at where that investment is in the shopping center and seeing if they're investing and we should be as well. And we see traditional grocers across the country, whether that's Kroger or whether that's Publix, whether that's HEV that are investing in their stores and we feel pretty good about where our fleet sits with that investment overall.
And I'd say we feel very good about the trends we're seeing in their sales or trends in sales per foot. And importantly, Greg, our occupancy costs, which average well below 2%. So when we do in the natural course, and this is the Albertsons recapture is not a marginal change. It's part of what's been happening in this business over decades. What's important is we have a low basis and we have multiple options to backfill that space when we do get it back.
But overall in terms of grocery, we like the viability of grocery. We think it continues to be a vibrant source of traffic and sales in our centers. And to Brian's point, we have partnerships with the best in the business who are investing in their stores and seeing great outcomes from those investments. So I wouldn't agree with the part of your question that would suggest that it's a higher risk category. I just think as with everything, you have to be very focused on how well is the tenant doing.
It could be the best tenant in the business, but if it's not doing well in your center, that's a risk. And I also think one of the other things that's becoming an opportunity for us, frankly, with this national platform is the increased willingness of tenants to relocate and how are we positioned to recapture some of that demand around assets that we have. So you're seeing that in our numbers. You're seeing that in our investment decisions, acquisitions like the one we just did in Conshohocken. So this disruption that's occurring is something that we're greatly benefiting from and driving both value and growth.
Okay, thanks. And just to clarify, Brian, on my first question, you don't see the risk for Christmas Tree Shop similar to Dressbarn?
Not what we can see right now, we don't.
Okay. Thank you very much.
Our next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.
Hi, good morning. Maybe just as a follow-up to a question from earlier, when you think about sources of capital going into the second half and even 2020, How do you expect to balance property dispositions with incremental debt and what would make one more attractive to you than the other?
Yes. I mean, we've been very focused on emphasizing, I think, consistently since we laid out the long term plan that this is going to be a self funded plan. And so really our redevelopment spending the portion of our redevelopment spending that's not already funded with free cash flow will predominantly be funded with disposition activity. Over the longer term as these redevelopment projects come online, obviously EBITDA continues to move higher and there is incremental capacity without increasing leverage to take on additional debt. We're effectively funding these projects with all equity.
That will be a factor down the road. But as we execute at this stage in the plan, like I said, we do have significant free cash flow after the dividend and after normal course CapEx. The portion of redev that won't be funded with that free cash flow will predominantly come from disposition.
Got it. Okay. And then maybe just in terms of the watch list today, I think you somebody briefly mentioned earlier that it does seem smaller, but I guess do you expect the pace of closures over the next few years to be actually lower going forward? Or is it just kind of too hard to tell at this point?
I do think to the first part of your comment there that we have gone through some of the major bankruptcies, particularly for this that impacted this portfolio. There are always tenants and uses that are on the watch list. And as I mentioned earlier, our team has done a nice job of getting ahead of those. But from just a pace perspective, I think some of the larger ones we've been through that.
Okay, thanks.
Our next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.
Hi, good morning. It looks like TIs were a bit high on new leases in the quarter. Just wondering if there was anything one time in that?
Yes. So overall, I appreciate the question. I think the team has done a great job holding the line on costs. They did tick up a bit this quarter. We had 2 theater and 2 fitness deals in the 20 anchor leases that we signed during the quarter, which were the most that we signed in a year, which had somewhat of an impact on it.
I would point you to the net effective rent though. And as we've said on prior calls that even when we do deals with those more capital intensive users, they're also typically paying more rent and our net effective rent is in line with where we've been on a trailing 12.
Yes. And do look at that number because it does reflect that discipline. And you go back several quarters and see we've been remarkably consistent in terms of net effective rent.
Okay. Thank you for that. And I guess as a leasing follow-up. So are you seeing increased in line interest from traditionally mall tenants? Are retailers pivoting to be closer to customers and possibly exiting lower quality malls into the brand new markets?
And if so, could you perhaps share an example or 2?
Yes, it's a great question. We are definitely seeing it because a retailer looks at occupancy costs and the ability to drive sales. And I think particularly in some of these lower quality malls or even some higher quality malls, they're seeing the ability to come to our centers, they're seeing the traffic that's being generated by retailers that are doing well in this environment, whether that's those that we are growing shares with, like Jim mentioned, whether it's Ulta, TJX, Ross, Burlington and the foot traffic and sales that they're generating, you look at an operator like a Bath and Body Works who's got a big off mall program that they are executing right now and we're in a number of discussions with them. You look at concepts like VisionWorks, which now see the ability to not only get out of a mall, but see pad opportunities and visibility and access to the customer that they didn't have previously. So there are certainly tenants that are looking to get into the best situation for themselves from an occupancy cost perspective, but also seeing the tenants that are thriving in the open air space today.
Thank you.
Our next question comes from the line of Haendel St. Juste with Mizuho. Please proceed with your question.
Hey Haendel.
Hey, good morning. Good morning. Jim, I actually wanted to follow-up a bit on the last question here. One of the key things we heard at ICSV was that not only were leasing volumes robust, but that tenants were asking and getting more generous TI packages. Your second quarter TIs are up 39% on a per square foot basis versus last quarter, 13% year over year versus Q2 last year.
The proportion of anchor versus small shop looks fairly consistent this quarter versus those prior quarters. And so I appreciate your comments on the net effective rents and understand that TIs can be a volatile number. But I'm just curious if you think we're in a new norm for elevated TIs and should we expect more of this type of elevated TI figures at least going forward?
No, it really had to do with the mix. We had a record number of anchor deals as Brian alluded to. We also had more fitness and entertainment uses this quarter. So it had much more to do with mix in terms of the per square foot numbers that we recognized in the quarter. And again, we paid for it with the rents.
And you can see that with the net effective rents that we show, which I think is important. I know that not everybody shows that, but I want to make sure you understand the economic decision we're making. And it will probably fall again next quarter. And I expect the level to be relatively consistent with what it's been over the last several quarters is reflected in that net effective rent number. Part of what you have in this and where we are in the business right now is the desire and need on our part to make sure that we're generating competitive demand for the space that we have.
We're not buying the deals. I think the net effective rents show that we're not. And we're maintaining that discipline. In other area that doesn't really show up in the reported numbers, but is also incredibly important are the non face terms of the deal, things like the embedded rent growth where we continue to average over 2%. The average term of the length or the absence of options.
And we're driving that fundamental improvement in the terms of our deals through competition. That's the only way we'd be able to deliver the results we're delivering. So every quarter we're showing you through demand what's happening with our centers. And that we're also showing you because we disclosed that net effective rent number that we're not buying deals.
I appreciate those comments and actually incorporated one of my follow ups in it. We did see that the average lease term for deals signed in this past quarter was up about a year versus this quarter.
And that reflects mix Haendel. It totally reflects mix. I don't know if you remember, but last quarter, we were a much higher percentage of small shop deals. I think we were well over 55% small shop versus anchor. This quarter, it's more of a normal 40% for small shop.
So you see it in the ABR achieved, you see it in the net effective numbers.
Yes, yes. Thank you for that. Second question, just following up on the disposition questions earlier. Is there anything under contract or LOI today? Or are you perhaps waiting first to see what you could potentially acquire before committing to any disposition conversations
or commitment? Yes,
we have assets that are under LOI and contract. Just kind of our normal course that we've been doing for the last 3 years.
But to the other part of your question, we are looking at what we have on the acquisition side in terms of the total volume we expect to dispose of this year. Again, we're going to try to be
a bit more balanced. Okay.
Mark, would you be willing to put some numbers around that or is that something you're not comfortable at this point?
We don't disclose it, but to be confident that we're going to ramp significantly in the next few quarters given it's almost August,
we're going to
have a lot of that under contract.
Well, I had to try. Thank you, guys. Thanks.
Our next question comes from the line of Brian Hawthorne with RBC. Please proceed with your question.
Hi. Just one question for me. So for the redevelopments next year, does Brixmor need to recapture more space? And how should we expect it to compare to this year?
It's a really important question. And I think what's most important about it is the pace of recapture. We had to ramp to deliver the $200,000,000 and to have the $400,000,000 that we have underway in terms of that space recapture. We expect that to moderate and become more steady state in 2020 beyond, so that we're recapturing about at the same pace that we're delivering new space. And you can expect that number to fluctuate some.
But in terms of deliveries, we expect about $150,000,000 to $200,000,000 of annual deliveries of that reinvestment pipeline. And now having it's part of why this is such an important quarter because it's kind of the pivot point as we start becoming more balanced with respect to deliveries and space that we're taking back for redevelopment.
Okay. Thank you.
You bet.
Our next question comes from the line of Jeff Donnelly with Wells Fargo. Please proceed with your question.
Good morning, guys. I think Haendel snagged part of my question. So I don't think I'm going to reattempt to squeeze anymore out of you on that, Jim. But I guess I do have a question for Mark. In his earlier remarks, he had mentioned that I think the definition of core had tightened up a little bit, I'm presuming over the last 1st part of this year.
That implies that there's probably been some cap rate deterioration for some segment of assets out there that maybe lost out, if you will, and is no longer thought of as desirable. I guess my question is, what's been that change? And more importantly, what's caused that shift? I recognize these things can be subtle, but what's caused some types of assets to no longer be thought of in the same vein as they once were?
I wouldn't say that, Jeff, to of your comments, I wouldn't say it's over the last quarter. I think it's more of a long term. Over the last couple of years, you've seen that definition of core change from what you saw maybe 3 or 4 years ago. Part of it is asset size, part of it what people can see with respect to growth out of some assets that they otherwise thought were ultra core 3, 4 years ago. So I think that's a bigger part of it.
Okay. And Jim, I guess, is it possible that cap rates on dispositions in the back half of the year could be better than what we've seen this quarter? Or do you think the trailing 6 to 12 months is a better indicator?
I think it's going to be roughly in line with what we've seen over the last couple of quarters.
Okay. Thanks guys.
You bet.
Our next question comes from the line of Vince Tibone with Green Street Advisors. Please proceed with your question.
Hey, good morning. You mentioned that same store operating expenses are down about 4% due to expense timing. I was just hoping you could provide a little more color behind the exact drivers behind that. The reason I ask is that most of your peers are seeing operating expenses growing in the mid single digit range this year. So I'd just like to understand what Brixmor is doing in our portfolio?
Yes. I mean, I would start by saying overall across the full year, I do think you're going to continue to see us recognize operating expense efficiencies. We've been very focused not just on making sure that, we're spending every dollar of operating costs in the most efficient and effective ways possible, but also in ways where we can recover as much as possible from that spend. So that's been a big focus organizationally not just this year, but over the last couple of years. That said, as I mentioned in my remarks, I do think for the full year you're going to see some modest growth in operating costs and that the down 4% you saw in the first half of the year really was timing of certain repair and maintenance items primarily that can be a little bit lumpy.
And just from a timing perspective ended up falling more in Q3 and Q4 this year.
Got it. That's really helpful. And then just one last one for me. Just can you provide what you expect total CapEx spend including all redevelopment will be this year? And then also what free cash flow after the dividend and total CapEx would shake out in 2019?
Sure. I mean just to kind of add up the different pieces for you. We've always said that we think maintenance CapEx spend should be somewhere in the $0.45 to $0.55 a square foot range. That's going to get you somewhere kind of between $35,000,000 and $40,000,000 for the year. Normal course leasing CapEx has run historically kind of in that $70,000,000 to $80,000,000 range on an annual basis.
Though as the value enhancing pipeline ramps, you are seeing some geography change between just leasing related capital and the value enhancing capital. But that said, I think that's still probably a pretty good number. And then the last piece is that value enhancing bucket. As I think Jim mentioned earlier, our goal has been to spend and deliver an annual run rate of $150,000,000 to $200,000,000 a year. I do think during the course of 2019, we could end up a little bit above the high end of that range, primarily due to the timing of the Sears Kmart bankruptcy and the fact that we were able to accelerate execution on more of those opportunities into the current year.
That's helpful. So if you spend yes, I'm just looking at year to date, it's $165,000,000 in total CapEx. So like could that number end up above $300,000,000 for the year? I mean, I'm just trying to get a sense like is that a fair is that fair to analyze that number? Or do you expect it to kind of dip in the second half at all?
No, I mean, I think you add up the different pieces. I think you'd get actually pretty close to that number, a touch above 300,000,000 I think for the full year when you consider all the different components meaning maintenance, normal course leasing as well as value enhancing, I think you could be a touch above 300,000,000.
And then so just what if
that's the case, how much do you need to sell to maintain leverage at that CapEx level and the dividend spend?
So remember that after normal course leasing CapEx and after maintenance CapEx, we're still generating significant free cash flow. I would call it in 2019 somewhere between $50,000,000 $75,000,000 So in order to fund what probably is $200,000,000 to a little bit more than $200,000,000 in terms of value enhancing spend, we'd be looking to raise approximately $150,000,000 from disposition activity during the course of the year.
Perfect. Thank you so much.
Our next question comes from the line of Michael Mueller with JPMorgan. Please proceed with your question.
Yes. Hi. Just want to go back to the $51,000,000 base rents that signed. How much of that is, I know you may not have a specific number, but in the bucket of redevelopment, anchor repositioning, other as opposed to just normal blocking and tackling
for the rest of the portfolio?
Yes. In total, I think that signed but not commenced bucket, it's somewhere between 40% to 50% would fall between redevelopment and anchor repositioning. So it's a significant amount of that bucket. Remember a lot of the anchor repositionings as I mentioned earlier reflects bankruptcy backfills as well. So, it is a significant portion.
We try to highlight through the anchor repositioning and redevelopment schedules a significant portion of the capital we're putting to work across the portfolio. So between those two buckets, you're ending up, like I said, between 40% to 50% of the time, but not commenced.
Okay. And when you threw the $31,000,000 of rent coming on, are you implying that, once that comes on, the FFO run rate should go up by a dime or so right after that by the end of the year or are you not implying that?
I'm sorry, I'm not quite following your math.
Yes, dollars 31,000,000 of rents, dollars 300,000,000 shares, dollars 0.10 a share. Right. Should that all go to the bottom line or not?
Yes. I mean, I think as you think about sort of the trajectory from an FFO perspective, obviously, the acceleration in same property NOI is beneficial from a longer term run rate perspective on FFO. I think as we mentioned, disposition activity is also going to accelerate in the back half of the year. And so that's something to take into account as well. We were opportunistic earlier this year actually in the Q2 in terms of accessing the capital markets in order to continue to extend duration on the balance sheet.
Rates continue to move lower since that point in time. And I think the FFO range we've laid out for 2019 certainly also leaves us with the optionality of coming back to the capital markets later in the year to continue those efforts of extending duration.
Got it. Okay. That was it. Thank you.
Thanks, Mike.
Our next question comes from the line of Linda Tsai with Barclays. In terms of the rent
commencement starting sooner, you sort of alluded to this. What are some of the levers you can pull or what is within your control to get tenants into spaces faster?
Yes, Linda, hey, this is Brian. I'm really glad you asked the question. I think it goes to the strength of the platform that we have here, whether it's our conforming leases with many of the tenants that we continue to grow share with that's cutting down that time on lease negotiation, whether it's aligning our operating partners on both sides, our construction teams on both sides where we're negotiating work exhibits or we're getting tenants to start spending money ahead of time because they know that we're going to deliver and that we have before. So that cuts down on the time as well. And then the work that our local teams are doing with municipalities in terms of getting ahead of these projects to set the table.
So it's really a complete team effort that we have, but it's something that we've been laser focused on and we are starting to see the results of it.
Thanks for that. And then, could you tell us about any initiatives you have in place from the data analytics side, either internally or with 3rd party providers to maybe help monitor traffic or understand leasing decisions better?
We rely on publicly available data. I need to underscore that to better understand exactly how our centers trade, cell phones that come on and off the property. And that's been quite revelatory in terms of redefining the trade areas served by our shopping centers. We also look at the data within our own portfolio in terms of how certain co tenancies work and what are the patterns that we see across over 4.30 assets in terms of if you have a Kroger that's doing over $600 a foot, how does that particular lineup of co tenancy work? And it leads to some interesting outcomes and conclusions that have been driving part of our leasing decision.
We're also tracking gentrification indices amongst around our assets to look at what's actually happening in the markets in terms of home prices and education levels and other things, which are the same sort of metrics that our tenants are looking at. We actually have an on staff data analytics team that partners with our tenants to better understand how they're making their real estate location decisions so that we can also drive productivity off of some of those conclusions in terms of understanding that data better. And I think we're only scratching the surface. Another area that we've been looking at preliminarily and had some good early success on is, again, anonymous, but captured social media conversations around our centers, which indicate certain psychographics that would be productive for retailers that we want to bring to our shopping centers. So for example, in Newtown, Pennsylvania, we saw an unusually high occurrence of the topic Girls Night Out, which led us to a different merchandising decision with an organic small plate bar friendly concept there at Newtown versus another type of concept and that's proven out to be very successful.
So we're using a number of different tools to continue to get smarter about answering that fundamental question, which is what's needed at the shopping center. And I'm really excited about the progress the team's making. And again, it's all publicly available type information. We're very sensitive to not utilizing personal data.
Thanks for that.
You bet.
Thank you. We have reached the end of the question and answer session. Ms. Slater, I would now like to turn the floor back over to you for closing comments.
Thanks everyone for joining us today. Enjoy the rest of your summers.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.