and welcome to the Brixmor Property Group Second Quarter 2018 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Stacy Slater.
Please go ahead.
Thank you, operator, and thank you all for joining 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 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.
Thanks, Stacey, and good morning, everyone. I'm pleased to report yet another quarter of substantial progress across all facets of the plan that we highlighted at our Investor Day last December. Simply put, we're capitalizing on all fronts to deliver value now. That value begins with leasing, where we continue to leverage strong tenant demand to be in our well located centers. In the quarter, we executed a sector leading 2,100,000 feet of new and renewal leases at a cash on cash spread of 14%, which included 1,000,000 feet of new leases at comparable spreads of 29%.
That sustained productivity, along with a pipeline of over 4.80 leases totaling 3,000,000 feet and over 50,000,000 of ABR, underscores the great visibility we have on our continued forward growth. In fact, the gap between leased and build occupancy of 3 10 basis points is the widest it's been since IPO and truly highlights the over $43,000,000 of contractual ABR signed, but not yet commenced. Our overall occupancy grew 40 basis points sequentially to 92.5%. And importantly, we're starting to see the momentum in our small shop leasing as that increased by 70 basis points sequentially. We've delivered this productivity while remaining disciplined with capital and intrinsic lease terms.
We achieved an average duration of 8 years, held leasing capital steady at 23 per foot for new leases, achieved average embedded rent growth of 2% versus the embedded average of 1% and granted tenant options in only 40% of our new leases versus an historical average closer to 55%. We also continue to capture disproportionate market share of our core tenants' new store openings, while reducing exposure to tenants on our watch list. Please note that Sears is now out of our top 25, and I couldn't be more pleased with our progress on toys. We began the year with 12 locations, 2 of which we sold. Of the remaining 10 locations, we have leases or LOIs on 6 of the boxes at average spreads in excess of 25%.
Given that the remaining boxes have an average in place rent of about $9 a foot, I expect we'll realize similar spreads on the balance. Angela will provide more detail on this current year impact of toys in a minute. Our reinvestment pipeline continues to grow also according to plan. During the quarter, we added another 12 projects for a total investment of 45,000,000 dollars at an expected incremental return of 13%, bringing our total in process pipeline to just over $330,000,000 Moving from our future pipeline to in process this quarter was the first phase of our Wynwood redevelopment that some of you saw on a recent Dallas tour, where we're raising an old office building and constructing an LA fitness in Maya Cinema that we believe will thrive in this underserved submarket just a few miles from downtown Dallas. The first phase will begin the transformation of a tired shopping center into a vibrant hub of this very dense community.
I couldn't be more excited with the job our team is doing here and how it aligns with our purpose as a company to own centers that are the center of the communities they serve. Please also note that we added 4 new projects to our shadow pipeline and completed 4 projects during the quarter, creating over $12,000,000 of incremental value. As I've said before, our velocity of value creation remains very strong. From a strategic perspective, I'd like to highlight a couple of points that I believe are important regarding the quality of our reinvestment pipeline. 1st and foremost, the projects underway are effectively pre leased, which mitigates substantial execution risk.
2nd, the weighted average duration of our projects is less than 24 months, given the granular and simple nature of what we're doing. Thus, there is a shorter timeframe between commencement and delivery, which means the investment being made today will begin cash flowing much sooner. The third point is that today we've completed or haven't put in the pipeline projects that positively impact over 25% of our portfolio. And I expect that that percentage will grow given the nature of our older well located assets. This third point is a critical one as we don't include in our stated incremental returns the full benefit of the lift in small shop occupancy and rents that we realize upon the completion of our reinvestment projects.
This lift is several 100 basis points and part of our sustainable plan for growth. The final point is that this pipeline of reinvestment activity is largely funded by free cash flow and a moderate level of capital recycling. Thus, we are self funded and not relying upon an ATM or the capital markets. And as we put this capital to work at high single and low double digit returns, we benefit from substantial deleveraging. Speaking of capital recycling, I'm also pleased to report that since last quarter end, we've closed another $217,000,000 of dispositions at a weighted average cap rate in the mid-seven range for non core assets, and we currently have another $350,000,000 under contract.
Including what we sold in the Q1 and additional contracts under negotiation, we now expect to complete over $750,000,000 in dispositions this year, significantly exceeding our initial goals. Again, we strive for optimal pricing here by selling assets in individual transactions, which take longer to execute, but we believe achieves pricing that's at least 10%
Pardon me, I'm sorry, the speaker line has disconnected. We will try and get them connected right away. Please continue to hold. Thank you for holding everyone. The speakers have rejoined.
Please continue.
I guess I was on capital recycling, which is appropriate because we're now recycling our call. But the point I was making on capital recycling is that we've been doing these in individual transactions versus portfolio transactions, which we think achieves pricing that's at least 10% higher than would be obtained in a portfolio transaction. It's a lot of effort for Mark and his team, but as stewards for our capital, an excellent outcome. Given the late quarter timing of these sales closings, our ramping redevelopment pipeline and limited trading window, we repurchased only $4,000,000 of common shares in the quarter at a weighted average price of $14.47 We also utilized sales proceeds to repay all remaining 2018 maturities and reduced overall leverage by 139,000,000 dollars At quarter end, we had nothing drawn under our $1,300,000,000 credit facility, providing us several years of ample liquidity. From an operational standpoint, we continue to deliver the enhancements necessary to meet our proudly owned and operated by Brixmor standard.
Importantly, we are also making substantial progress in our sustainability initiatives through investment in solar and water efficiency that are producing double digit returns. I'm very proud of our GRESB Green Star that we've been awarded and other awards that these sustainability initiatives have earned. Great job by Hygge and team. Allow me to close by observing that this outstanding execution across all fronts of our business plan provides us even greater confidence in the NOI range of 3% to 4% for 2019 that we first highlighted at our Investor Day in December. I'm extremely grateful for the efforts of our entire team in delivering these results and driving so much value.
At this point, I'll turn call over to Angela for a more detailed discussion of our results.
Thanks, Jim, and good morning. FFO was $0.51 per share in the Q2 based on same property NOI growth of 1.4%. Base rent contributed 160 basis points to growth despite a year over year decline in average build occupancy of approximately 80 basis points. This net growth highlights the new rent created and the strength and overall magnitude of releasing spreads recognized over the last 12 to 18 months. Provision for doubtful accounts contributed 50 basis points, while ancillary and other revenue contributed 40 basis points.
These positive contributors were primarily offset by net recoveries, which detracted 100 basis points reflecting the year over year decline in average billed occupancy and the impact of Final CAM and tax reconciliations. FFO during the Q2 reflects not only strong same property NOI growth, but also our continued discipline as it relates to G and A spending. And additional savings and interest expense as we further delever the balance sheet and optimize our capital structure. During the quarter, we repaid all remaining 2018 scheduled debt maturities and are now focused on addressing the 2019 term loan maturity and executing on the opportunity embedded in the 2020 and 2021 secondured debt maturities to repay higher cost debt while also fully unencumbering the portfolio. We have affirmed our 2018 FFO and same property NOI growth guidance as we consistently deliver on the plan laid out at our Investor Day last December.
As it relates to same property NOI growth, we continue to expect an acceleration in the contribution from base rent during the second half of the year due to both anchor rent commencements across the portfolio, including our in process redevelopment projects, as well as a moderation in the drag associated with future redevelopment and 2017 2018 bankruptcy activity. That said, I would note that we may face headwinds in the second half from net recoveries due to year over year declines in build occupancy and provision for doubtful accounts due to difficult year over year comparisons, both of which were reflected in our original guidance range. As previously anticipated, the net drag from in process and future redevelopment activity has now reached an inflection point and will be a modest contributor to growth throughout the balance of the year before becoming a more meaningful contributor to growth in 2019 and beyond. During the second half of twenty eighteen, we will have significant anchor rent commencements at in process redevelopment projects such as Speedway Supercenter, Mamara Neck Center and Venturide Down, which highlight the granularity and relatively short timelines of our redevelopment projects as Jim discussed in his remarks. In addition, the impact of 2017 2018 bankruptcy activity will moderate in the second half of the year, even when taking into account the impact of Toys R Us store closures due to both the timing of 2017 bankruptcy activity as well as anticipated rent commencements for backfills of several former HHGregg and Gordmans locations.
To summarize our Toys R Us exposure, we started the process with 12 toys boxes, but have since sold 2. Of the remaining 10, 1 vacated at the end of the first quarter, while 2 vacated at the end of the second quarter. During the Q3, 5 additional locations vacated in early July, while 2 locations remain rent paying today, although we currently assume that these locations will also vacate by the end of Q3. The 7 anticipated 3rd quarter closures will result in a 30 basis point impact to total occupancy or a 50 basis point impact to anchor occupancy in Q3. While we don't yet have perfect clarity on the timing of the final store closures, we currently expect that in total Toys will have a 20 basis point to 30 basis point impact on same property NOI during 2018 resulting in a similar impact in 2019 as well, given that our closures occurred on average mid year.
While delays in Toys R Us store closures were slightly beneficial to our 2nd quarter results, the impact of full year same property NOI relative to our prior expectations has been de minimis, approximately 5 basis points. In terms of FFO guidance, the magnitude, timing and use of proceeds related to our capital recycling program will ultimately dictate where we fall within our expected range. While as Jim mentioned, total disposition volume is now expected to surpass our original expectations, this activity is occurring later in the year, partially mitigating the impact on 2018 FFO. While this will have implications for 2019, the discipline we have exercised in the transaction market has created and will continue to create meaningful value for shareholders. Across all disciplines within the company, we are successfully executing on the balanced business plan we laid out at our Investor Day and we look forward to continuing to highlight our progress for you in the coming quarters as this execution further demonstrates the underappreciated quality of Brixmor's portfolio and platform.
And with that, I'll turn the call over to the operator for Q and A.
The first question comes from Craig Schmidt of Bank of America. Please go ahead.
Good morning. Thank
you. Good morning. Angela, you touched on it, but do you intend to continue the pace of dispositions into 2019 or will you be more focused on growth?
Thanks for the question. I think at the end of the day, Craig, our product is a growing stream of cash flows per share. I've said that from the very beginning. And when we talked at the Investor Day last December, what we laid out was a year that we expected in 2018 of more substantial capital recycling. I'm very pleased by the execution that we're getting.
And as I alluded to in my remarks, we're selling a little bit more even than we had expected at the beginning of the year, given where the executions are. As we look forward though, I expect us to revert to a more normalized level of capital recycling, appreciating that the decision to hold an asset is an investment decision, but importantly also reflecting the fact that this year we've gotten through a lot of the assets that we did not deem long term holds. And so expect that we'll be able to revert to a more normalized level in 'nineteen.
Thank you.
You bet.
The next question is from Christy McElroy of Citi. Please go ahead.
Hi, good morning everyone. Just following up on the capital allocation discussion in the opening remarks, just when thinking about the use of proceeds for the 7 $50,000,000 of dispositions this year, given that you were buying back stock in the 14s previously and your stock is now in the 17s, how are you thinking about buybacks today as a priority for disposition proceeds versus debt pay down? And how does how should we be thinking about the FFO dilution in the second half as a result of the disposition?
Well, let me take the first part of that question, which is from a capital allocation standpoint, we first and foremost always focus on making left side of the balance sheet and matches importantly the risk that we are or are not taking. And I think we've done a very good job of that, very good job of making sure that we have ample liquidity to fund not just what's going on this year, but next year and beyond. We still think at these levels, our stock is a compelling value. So again, going back to what I said to Craig, we do think about the product that we offer investors, which is a growing stream of cash flows per share. And obviously, the ability to recycle non core assets at 7 cap rates into our stock at a much higher cap rate will remain a pretty compelling investment tool for us to leverage going forward.
Yes. In terms of FFO dilution in the back half of the year, I'd note a couple of things. I think first, when you look at the timing of the 2nd quarter disposition activity, as Jim mentioned in his remarks, it was pretty back end weighted. In fact, I think 40% of the $139,000,000 we closed during the Q2 closed within the last 2 weeks of the quarter, which definitely has an implication going forward as well. As we mentioned in the press release, we closed another $75,000,000 give or take very early in Q3.
And then I think as you think about the $350,000,000 we noted we have under contract that could set us up for the Q3 being much more significant than the Q4 in terms of activity. But as we stated, we reaffirmed the totality of the FFO range and I do think it reflects a variety of different outcomes as it relates to the final magnitude of dispositions and the timing of those dispositions and as Jim mentioned, the use of proceeds around that.
Okay. And then Angela just to follow-up on your comments on redevelopment impact. Can you just update us on how we should be thinking about redevelopment in the context of the 3% to 4% 2019 same store forecast. At your December Investor Day, you talked about 50 to 100 basis points of REIT. And I think more recently in NAREIT, you discussed with us a larger impact.
Can you just provide an update on kind of the components there?
No, I think the 50 basis
point to 100 basis point impact as it relates to same property based rent contribution in 2019 is still absolutely the same range. I think our execution around redev has continued to be very strong as we've continued to move projects into the in process pipeline. I did mention on last quarter's call that we're seeing a benefit even in the back half of twenty eighteen from projects that are while not stabilizing until 2019 where we do have big anchor rent commencements during 2018. So all of that's consistent with the expectations we gave at the Investor Day for a 50 basis point to 100 basis point contribution in 2019.
From redevelopment? That's right. Okay. Thank you.
The next question comes from Ki Bin Kim of SunTrust. Please go ahead.
Thanks. Jim, can you talk a little bit about how your conversations with tenants are going and maybe specifically touch on groceries? You're one of the biggest grocery landlords. And is there any change or change in conversation from like Ocado, Kroger News and how different grocers are viewing that?
I think it's great news for Kroger as they get smarter about how to serve their customer. And what's interesting about that news in particular with Kroger is it demonstrates how they're investing in their existing stores and with their restock initiative, making sure that they have products in the store that are relevant to a particular community that store serves. So we are seeing grocers on the more traditional end of the scale, invest more in their existing stores with things like curbside delivery, better inventory, more fresh offerings and prepared offerings, which we're seeing result in more traffic and more sales. So very positive. More broadly with tenants, I think the comment I would make is that we're seeing a much higher level of demand than we expected coming into the year.
We are seeing tenants more willing to relocate and we're capitalizing on that propensity to get to the prototype and size, etcetera. But we're winning a lot of business that we didn't even expect to win at the beginning of the year, Brian.
Yes.
And Ki Bin, it was very reflective of what we saw coming out of ICSE that only continuing with their store opening plans, but coming out with new formats, small market formats, new concepts like TJX's HomeSense that they're ramping up. So the retailers that have been active and thriving in our space continue to innovate and continue to have robust store opening plans and you're seeing
Pardon me, I'm sorry, but the speaker line has disconnected. I will sorry, the speaker line has been reconnected. Please go ahead.
Again, sorry folks, we keep getting disconnected here. Ketan, I think what I was saying was that in addition to seeing increased demand from core tenants for our properties, Importantly, we're capturing larger and larger market share of their net new openings, which we're tracking and part of how we're compensating our national accounts team. So overall, it's a leasing environment that's much more positive even than what we saw 8 to 10 months ago.
So just to touch on that point, when you say it's much more positive than several months ago, what is it that you're looking at? Or is it a series of conversations that you're pointing towards when you say things are much better? Or is it just more on just like pure leasing volume?
Well, I think the leasing volume underscores and quantifiable results, the change in mood, if you will, and the execution by the tenants of their plans for growth. So I do think that the leasing results underscore it and they provide you evidence that in fact what we're talking about we're delivering on. But I do think as tenants look at how to better connect with the customer, the store is incredibly important. You are seeing tenants more willing than ever to relocate, and you see them more focused on investing in their store to get the prototype. Those are all things that really benefit Brixmor in particular because we're competing with low rent base, older locations.
And we're demonstrating that the tenants can do well there and that they have demand to be in our centers. So our tone may be more positive on a relative basis than some. But again, it reflects the older well located nature of our centers that tenants have demand to be in. And again, I would tell you that what we're seeing year to date, particularly Ki Bin, when you dig into the pipeline that Brian and the team have set up with nearly 500 leases with over $50,000,000 of ABR, it speaks to the momentum that we're seeing and again underscores that confidence we have in 'nineteen.
The next question comes from Todd Thomas of KeyBanc Capital Markets.
Hi, good morning guys. This is Drew on for Todd. Just on the sequential small shop occupancy jump, I'm just curious what drove that exactly if you expect to see more of that type of thing in the near future?
Toddy, it's a great question. First, we're seeing demand, whether it's from restaurants, service uses, boutique fitness operators like F45 or Burn Boot Camp that we added, health and wellness operators. So that demand is continuing. I think it's also indicative of the investments that Jim called out in his comments that we're making in our centers as well as the redevelopment pipeline that's ramping up. And then finally, some focus.
We realized some incentives earlier this year around driving shop space. So we still have work to do. We have made progress. But as we look at that future redevelopment pipeline, that trails our portfolio average by 7 80 basis points. And when we bring those projects online, we're seeing around a 600 basis point to 700 basis point pickup.
So as that pipeline continues to ramp up, we bring more of those projects into the active pipeline, we can we expect to continue to see that growth.
And you guys have a sense of where you might end up by year end on the small shop occupancy?
We're not giving specific occupancy guidance, but we expect to see continued progress there.
Okay, great. And then just one more for me. You made the there's been some additions to the organization recently. I'm just curious if you could talk about where you see these additions adding value and what you're trying to accomplish with these additions over the next few years or so?
Well, look, I believe firmly that great real estate matters, but great people matter more. And we are setting ourselves up to be a platform that continues to attract and retain the very best talent. I think what you're alluding to is we've recently added John Hendrickson, whom I used to work with at Federal and was later at Ramco to run our Midwest division. And we are incredibly excited about John coming on board. He brings a wealth of experience, great execution and is going to provide us some very good leadership for the great leasing talent that we've also added in Midwest.
Again, we're investing in this talent because we do see a lot of potential in our Midwest assets. And the leasing team there led by Corinne and Devin, is already generating some great results ahead of John coming on board. So I'm not going to let him take full credit. But yes, I mean, as we came on board, we thought really carefully about what was the great talent that we had and where were areas within the business that we needed to continue to add talent. And we'll always be critically assessing talent because it's such an important part of driving outperformance.
Got it. That's helpful. Thank you, Jim. You bet.
The next question is from Jeremy Metz of BMO Capital Markets. Please go ahead.
Hey, guys. In terms of the dispositions, if we go back to your Investor Day, you laid out, call it, 85 or so single asset markets. So wondering how much of this year sales, if you include the next $300,000,000 or so that you have under contract, how much is coming from that bucket versus just being lower growth assets in core markets you're looking to exit? And then as a follow on maybe for Mark, but can you comment on your hit rate a bit in terms of how much you're putting on the market versus how much is getting to the closing line?
Yes. Let me answer the first part of that real quick. I expect by the end of the year as we get through this, we'll be through probably 30 to 35 of our single asset markets. We've exited nearly 45. So again, we'll be reducing our exposure to those markets where we just have one asset.
And Mark, I'll let you take the second part.
Yes. So I think as we've discussed in the past, it's been our strategy to have more assets on the market than we expect to close. From a hit rate perspective, I'd say it's closer to that 70%, 80% of what we bring out to what we close. But the important part is where we have the ability to be opportunistic on those on accepting those purchase prices and don't have to accept any one off sales as we go through the process.
Appreciate that. And then just one for Angela. You touched on the future maturities briefly in your opening remarks. You have the $600,000,000 term loan coming due in March at a pretty low rate here. So can you just give us some color today on how we should be thinking about plans for that maturity recognizing that they can obviously change if you accelerate more asset sales or pricing shifts materially?
Yes. I mean, I think we're at a point right now where we're continuing to evaluate a range of different outcomes as it relates to both the 2019 low cost maturity, as you mentioned, but also the higher cost secured debt maturities in 2020 2021. You're right that I think as we execute on dispose through the remainder of 2018, a component of those proceeds certainly are going to go to further leverage reduction. We also have a range of different outcomes as it relates to both, I think, the unsecured bond market or the bank market in terms of replacing those maturities. So I think it's too early to say in total when I look across 2019, 2020 2021, exactly the timing or exactly how those are refinanced, but we're continuing to evaluate that and should have more clarity next quarter.
Thanks, guys.
The next question is from Jeff Donnelly of Wells Fargo. Please go ahead.
Good morning, guys. Just curious how you think about the rising labor and materials costs factoring into your current value add pipeline and maybe future underwriting? I'm more curious if that's resulting in you either tabling some projects or scaling back their scope or even maybe getting more conservative on the prospective yield?
It's a really good question, Jeff, because construction costs are up. Fortunately, we're dealing with smaller, simpler projects. So we're not getting into projects that have a huge variable element to the budget, right? And furthermore, we're coming off of really low rents. So what rising costs might mean in a particular project is that instead of getting an 11, we get a 10 or maybe it's a 9.5.
But it's still compelling use of proceeds for us. We haven't had to pull any projects because of the rising construction costs. And again, as I alluded to in my remarks, I think what's really important to understand about our pipeline is not only that the projects are small and granular. When we move them into active, we've got the leases in place and we've priced out through GMAX contracts the cost elements of the job. It doesn't mean that there can't be some variances and things like that going forward.
But before we commit substantial dollars, we know that, that we're making. But your broader point is right. Construction costs are climbing. Labor costs are climbing. But I think we have a lot of room within which to continue to create value.
And maybe the second question, I know a lot of people always ask about tenants at risk. Can you talk about the volume of space at risk either due to, I guess, credit concerns or even just above market rent? I know every portfolio has some portion of space at risk. But I was curious if you track such a measure or could express maybe where that stands today for the portfolio or give us some historical context on that?
Yes. Let me comment on it briefly, and Brian, you can chime in here. But one of the things that really struck me when I came in the company were how few of the assets had rents that were above market. We had a few. We sold many of those.
And obviously, as we focus on our disposition activity, we focused on those assets where we think we have limited growth, limited upside in the rent. Again, every element of our plan is oriented towards that fundamental question of how does it help us grow. And so we do look at assets and tenants in particular where we think they're above market. Or conversely, we do maintain a very tight view of what's on our watch list, which we don't quantify, but is in the mid single digits on a rental basis. And what's on our watch list, Jeff, is not just tenants who have immediate credit concerns, but tenants that we think are losing relevancy, tenants where we're observing declining sales trends or other things that we then focus on.
And Brian and team have done an amazing job of reducing our exposure to the office concepts, of reducing our exposure to other weaker concepts and including what we've done with Sears. So it's a regular ongoing part of the business. But as it relates to sort of the initial part of your question, I would suggest that we compare very favorably as a portfolio relative to market, right? And we continue to demonstrate it every single quarter. That doesn't mean that we're not rolling some flat or rolling some slightly down, But on balance, we're in a really good position.
And Jeff, I would just add the watch list hasn't changed much. And what I can tell you is we continue to see very good demand for these spaces and rents and strong incremental returns.
The next question is from Samir Khanal of Evercore
ISI. Angela, I'm sorry if you touched on this before, but looking at your operating costs, the non real estate related, they were quite they were up quite a bit in the second quarter. I know recoveries are up as well, but what's driving that the 7% year over year increase? This is kind of the non real estate related costs.
Yes. So within operating costs, I think that's where you're seeing the 7% increase in the same property pool on that operating cost line item. Real estate taxes was also up during the quarter as well. On the operating cost line, it's really just timing related. It's the timing of certain repair and maintenance activity.
And on a year to date basis, you're looking at a number that's under 2% in terms of year over year growth. Real estate taxes really had to do with certain successful appeals or refund activity in the 2017 period. Again, on a year to date basis there, you're just a touch over 2%. And we think 2% sort of the right full year projection in terms of growth for both those line items.
Okay, thanks. And then I guess the second one is around your leased versus occupied. I know you touched upon that it's 300 basis points or the widest it's been since the IPO. How should we think about that spread over sort of the next 6 to 18 months? And what's kind of a normalized spread to think about as part of your business?
Yes. I think the normalized spread, if we look back historically, has probably been in the 150 basis point to 200 basis point range. So I think we're significantly in excess of where that spread is on a normalized basis or the spread that kind of reflects frictional vacancy in the portfolio. How that spread will trend over time is a little bit harder to predict, but we certainly expect that you'll see both build occupancy and leased occupancy kind of continue to move higher.
Okay. Thank you.
The next question is from Alexander Goldfarb of Sandler O'Neill. Please go ahead.
Hey, good morning and thank you. Just a few just two questions here. First, Jim and Angela, appreciate that you affirmed the 3% to 4% target for next year on same store and the acceleration this year. But Jim, you spoke about exceeding dispositions. And I realize that you as you think about delivering FFO and especially as companies delivering earnings growth becomes more sort of the MO now that we're through the heavy negative headlines from last year.
How do you think about this $700,000,000 of dispose as sort of sounds like second half weighted impacting your ability to grow FFO next year or are there offsets whether it's additional debt pay down or stock buybacks that offset and allow you guys to actually grow FFO?
Pardon me. I'm sorry. It looks like the speaker line has disconnected once again. We will try and get them connected right away. Please hold.
Okay. Do you want me to re ask or did you hear it?
I didn't hear the whole question, Alex. I think you were asking something about the pace of disposition. Activity.
Basically, in simple terms, you guys said you're going to sell $700,000,000 exceeding what your original outlook was for this year. You reaffirmed your same store expectations for the back half of this year and the $3,000,000 to $4,000,000 for NEX. But as far as growing FFO, Jim, and delivering on sort of your promise to grow cash flows, grow the dividend, how should we think about that $700,000,000 impacting next year? Is it more debt pay downs and stock buybacks that allow you to grow or the redevelopments coming in better that offsets any dilution from the $700,000,000
dollars Well, I think that the increased pace of disposition activity will create some drag going into 2019. How much that will be, will be driven by our capital allocation decisions. As you said, we can pay down some expensive debt. Obviously, we've got the share repurchase program, which we intend to leverage because we think there's tremendous value where the stock is today. And our redevelopments and other things are going very well and give us confidence.
But everything that we're doing, Alex, is an issue of timing and it is setting us up for growth. As I alluded to earlier, we don't see beyond 2018 a scenario where we continue to be net disposers of assets. The real focus, as we talked about last December, was setting this year up to be a transitional year. And whether it's leasing, redevelopment, operations or capital recycling, doing that with the view towards long term growth. But certainly, the volume of this dispositions that we're doing in the latter half of this year will create more drag into next year.
And look, part of that was a very conscious decision on our part to continue executing as we have been executing this capital recycling plan, one asset at a time. And as I alluded to in my remarks, I think we're creating substantial value doing it that way versus just flushing portfolios to try to manage year over year timing.
Right. No, I understand that. But just to follow-up there, last year at the Investor Day, you guys spoke of this year being a trough and I think collectively we all got that. But then there is sort of the view that 2019 would be a growth year. It almost sounds now like with the increased dispositions, we may have to dial back our 2019 growth expectations and it could be a flattish year, which I don't think is what people are expecting.
So can you commit to growth or should we be thinking that next year to be another flat year?
Well, I think that we're growing importantly on the unlevered side of the business, right? And we're delivering that growth. Now what we decide to do with that capital will impact where we end up in 2019 from an FFO perspective. But again, Alex, we are utilizing this year to capital recycle and do the other things that create that drag, some of which may go into 2019, but all of which we expect to get done this year, providing good visibility going forward. The second thing I would say is, I'm more pleased than ever about how we're executing on that plan to deliver that top line growth and how every element of what we're doing is driving that.
So that's the most I can tell you. We're not giving 2019 guidance at this point, Alex. There are a lot of moving pieces in terms of how we allocate those proceeds. I'm not going to comment on whether we're flat or up or down. But what we are highlighting that the timing and the volume of what we're doing this year, and I think anybody who's investing in us for the long term can see is generating true value today.
Okay. Thank you. You bet.
The next question is from Karin Ford of MUFG Securities. Please go ahead.
Great, thanks. Good morning. Just wanted to see if you could give us some color on your plans for the land parcel that you bought in the quarter that's adjacent to an existing center?
We're not really prepared at this point to talk about any concrete plan, but this parcel is immediately adjacent to our Arborland asset in Ann Arbor, Michigan, and we think it's going to open up additional value creation opportunities in addition to the toys box that we now have back at well below market rent on the same end of the property. So stay tuned, but that land, which was a $5,000,000 investment, it's going to unlock a lot more than that in terms of redevelopment potential in that very attractive submarket of Ann Arbor.
Great. Thanks. And my second question is just on expense recoveries. Angela, you touched on it a bit in your remarks. The ratio was down year over year and sequentially, but I know occupancy is moving higher here now.
So any color you can give us on how we should think about that ratio in the second half of the year and into 2019?
Yes, I mean, if you look back, I guess I'd say 2 things. 1, I did point out in my remarks, we expect the second half of this year you're going to be continuing to work through a decline year over year in terms of build occupancy which certainly will have an impact on net recoveries as well. If you think back to the commentary from the Investor Day, what we did say is that changes as we get into 2019 based on the pipeline of already executed anchor rent commencements that we have coming in, in the back half of twenty eighteen and into twenty nineteen. And so in twenty nineteen, you sort of start to see that shift. And as a result, I think net recoveries should be neutral to positive as we move into twenty nineteen, but certainly maybe a headwind in the second half of this year.
Great. Thank you.
The next question is from Vince Tibone of Green Street Advisors. Please go ahead.
Good morning. Good morning. Besides selling in single asset markets, can you discuss how you're selecting individual assets for dispositions? I mean, this quarter's sales seem to be pretty barbell between more stable neighborhood centers and value add type properties with maybe some existing vacancy or upcoming move outs? Can you just discuss a little bit more detail kind of how you're choosing which assets
to hold versus sell now? Yes. I mean, what we focus on is our hold IRR. In other words, based on where the rents and occupancy are today, required to drive the growth in the asset and whether or not there is any growth in the asset, what type of hold IRR results. So that's the common denominator of what we're selling.
Strategically, we are simplifying the portfolio. We are exiting a lot of markets where we only have one asset or not a lot of critical mass. And importantly, as I was alluding to earlier, the thrust of this disposition effort is targeted towards those assets where we think we have rents that are above market, right? And where we think our ability to grow that cash flow in place is limited. To assets like what we did a few quarters ago in rural Georgia where we had an asset that we thought had great spread, but the capital required to deliver those spreads was dilutive.
So it all is factored into that decision as to where we're moving the portfolio strategically from a real estate strategy perspective, while also looking at it at an asset level and saying, you know what, the return on this asset is too low for us to hold. There's a cost to us of holding it and time to exit. So that's the long winded answer.
Thank you. That's helpful. And one quick follow-up. How are private market buyers generally underwriting a vacant anchor box when purchasing a shopping center?
They're not giving you a lot of value for it, Mark.
Yes, I think that's a good point. It really is market by market dependent. And obviously, investors try not to give you a lot of value for the vacant anchors. But one thing I would comment on in the transaction market, what you're seeing reflected in what we have under contract, the increasing volume is really reflective of what Brian and team has been doing in the market today. We are seeing increased tenant demand, increased tenant velocity.
So I think private market investors are trying to take advantage of that today, which is why you're seeing increased capital formation both in the power center side and demand for gross anchored assets. And that's really what I think is driving some of this increased volumes across our portfolio.
Are you seeing new capital formations on the value add side?
Yes. I mean, I would say that on the value add side, that is the most it's really the number one increase in inbound is from value add investors, because I think they're really trying to find assets where they can take advantage of the market that Brian is really describing on the tenant side. Of course, we prefer to hold the real true value out that we have. So you won't see a sell those as Jim kind of described, but that's really absolutely been the number one increase at least in the eyes.
Interesting. Thank you. That's all I have. Thanks, Seth.
The next question is from Wes Golladay of RBC Capital Markets. Please go ahead.
Hey, good morning, everyone. Just want to go to the Toys R Us boxes, the interest you have in them right now. Are those going to be mainly cases we have to split up the boxes and what is the time horizon to get the tenant open?
Wes, this is Brian. As Jim mentioned, we were at lease or about to go to lease on 6 of those boxes today. Of those, only one right now we're looking to split. That could change, but we are finding demand from single users in the fitness, home, value apparel category. And in the split scenarios, those are fairly high rent payers like specialty wine stores.
So the depth of the demand has been actually quite similar to what we saw from Sports Authority where you looked across and saw several different uses to take those boxes. But as it sits today, the majority of the discussions that we're having are for tenants to take the box as one single user.
Okay. And then you did
mention the rent would be higher if you did have to split it, but net net you would want a single tenant user to take the whole space, right?
Not particularly. As you look at our anchor repositionings, we have several where we've done very accretive returns where we can split those boxes with higher end paying uses. So it's really particular to that center and the demand that, that box is driving. And I would say that we expect those boxes to continue to deliver the returns that we have been in our anchor space repositioning pipeline regardless of whether we decide to split or go with single users.
Okay. And then as far as tenant demand, is there anything that stands out maybe where you have multiple bidders coming for maybe a particular geography, a certain size space just for the whole entire portfolio? And then maybe what is a tough space to lease in this environment today?
To answer your first question, we're literally having a food fight for a box that we have in Northern California right now and it's a competition between 2 users to take that. We've been very pleased overall with the demand that we're seeing with the boxes. Obviously, there's a few here. We said 6. We still have some work to do on the remaining 3.
But the expectation is from our team that we'll have these backfilled and rent paying by late 2019 as Angela laid out. So overall, we're pleased with the progress and again, have seen demand on the majority of those boxes. Yes. I would just comment that there are a number of transactions that we've been successful on that we didn't expect to be. So we're finding demand in pockets and in markets that before would have concerned us, which is certainly helping, as Mark alluded to, us get more value for the assets that we're selling.
We're leasing them up before selling them. So the backdrop right now is a pretty constructive one. It's not that it's not competitive that tenants don't have other options, but by and large, we're seeing the preponderance of momentum go our way.
The next question is from Linda Tsai of Barclays. Please go ahead.
Hi, good morning. On toys for the 20 to 30 bps in 2018 and then the similar impact in 2019, is that purely from just toys boxes closing or does that also include any co tenancy from other stores leaving the center?
Yes, I mean that's all inclusive, but it's basically just toys. There's very little other disruption as it related to toys vacating.
Good question.
And then I realize it's probably a little early to talk about 2020, but just given the current pace of redevelopments, the 50 to 100 basis points benefit in 2019, do you think that run rate could continue in 2020?
Yes, absolutely.
And just look at what we're setting up in our pipeline. We provide project by project timing and disclosure and yields. You can get a sense of what I was referring to earlier, which is the really limited duration of investment to cash flow that we benefit from in our pipeline, which reflects the granularity of what it is we're doing and the fact it's pre leased. So we continue to not only deliver projects from the active pipeline, but we're moving projects from the shadow into active. And again, we're adding to the shadow pipeline.
So I'm very pleased with the velocity of that. And importantly, how it's revealing itself to be a very sustainable element of our business plan.
The next question is from Michael Mueller of JPMorgan. Please go ahead.
Yes. Hi. Jim, first question, you made the comment about not being a net seller after 2018. And if your normalized disposition levels are $400,000,000 to 600,000,000 dollars per the Investor Day. What do you see as the all in development, redevelopment spend over the next couple of years?
Pardon me. This is the operator. I'm sorry, but the speakers have I'm sorry for the inconvenience. Hi everybody. Thank you for holding.
The speakers have reconnected.
Okay. I don't know how much of this you heard, but basically the question was, if normalized disposition levels are $400,000,000 to $600,000,000 what do you see as your annualized development, redevelopment investment activity over the next couple of years, just given your prior comments about not being a net seller of assets?
Well, our targeted run rate from a goal perspective is to be at about $150,000,000 to $200,000,000 of annual spend and delivery on the reinvestment side. And then capital recycling, we expect to be more balanced. So in that $400,000,000 range, we will find some acquisitions to make that we think are accretive. That's really the long term plan. Michael, the great part about the business plan itself is that it is granular and it allows us to make the right decisions at the real estate level, as it relates to the hold or the buy decision.
And also as we think about clustering in particular markets, we're not moving big supertankers in and out of the balance sheet, right? So that flexibility and nimbleness, if you will, I think is going to be a real competitive advantage for us going forward. And particularly in an environment where I think what people lose sight of is that the public REITs don't compete against each other at the real estate level. We're typically competing against local private landlords. So our tremendous leasing platform, our redevelopment platform gives us a lot of insight and competitive advantage as we think about leaning back into acquisitions.
Just think about all the pre leasing that we're doing, for example, of the redevelopment pipeline. It's that same flow of knowledge and information that when we do become more balanced, it's going to allow us to find those opportunities that aren't in the markets that everybody else is clamoring to be in and gives us a competitive basis, if you will, to grow cash flow.
Got it. Okay. And second question, I may have missed it, but Angela, did you comment on what the leasing cost, the lease accounting change will impact will be in 2019?
No, not yet, Mike. We expect the impact will probably be between $9,000,000 $10,000,000 so about $0.03 a share.
Okay, great. Thank you.
Thank you.
The next question is from Caitlin Burrows of Goldman Sachs. Please go ahead.
Hi, good morning. Just one quick one to hopefully finish up. On the buyback in the second quarter, I need to jump off, sorry, knock for you guys.
But on the buyback you guys bought. You might be cut off again, Pamela.
Okay. But in the Q2, you guys bought back stock at a lower price than in the Q1, but it was a smaller amount. So I was just wondering if you could tell us any details on what drove the lower volume decision in Q2?
Yes, I mean it was primarily related to the timing of disposition activity. I mentioned earlier that $139,000,000 that closed during the Q2, over 40% closed in the last 2 weeks of the quarter when we were in the blackout window and really couldn't trade. So as we've stated, since we initiated the program back in December of last year at a price that was pretty close to the level we're trading at today. We expect to continue to execute on that program in a very methodical way as we recognize disposition proceeds.
Got it. Okay. Yes, you guys did mention the dispositions before, but now I realize it was due to the timing of getting the proceeds. So okay, thank you. That's
all. Great.
Sure. Thanks, Caitlin.
This concludes our question and answer session. I would like to turn the conference back over to Stacy Slater for closing remarks.
Thanks, everyone, and apologies for any technical difficulties this morning.
Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.