Good day, and welcome to Kimco's first quarter 2019 earnings conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. David Bujnicki, Senior Vice President, Investor Relations and Strategy. Please go ahead.
Good morning, thank you for joining Kimco's first quarter 2019 earnings call. Joining me on the call are Conor Flynn, our Chief Executive Officer, Ross Cooper, President and Chief Investment Officer, Glenn Cohen, Kimco CFO, Dave Jamieson, our Chief Operating Officer, as well as other members of our executive team that are present and available to answer questions during the call. As a reminder, statements made during the course of this call may be deemed forward-looking, it is important to note that the company's actual results could differ materially from those projected in such forward-looking statements due to a variety of risks, uncertainties, and other factors. Please refer to the company's SEC filings that address such factors. During this presentation, management may make reference to certain non-GAAP financial measures that we believe help investors better understand Kimco's operating results.
Reconciliations of these non-GAAP financial measures can be found on the investor relations website. With that, I'm turning the call over to Conor.
Thanks, Dave, good morning, everyone. Today, I'll briefly discuss the current shopping center environment, how Kimco's strategy is designed to meet today's challenges and create a growth platform going forward. I will then touch on some of our Q1 highlights, describe the remarkable progress we're making on our Signature Series assets. Ross will follow with a review of our Q1 transaction activity, then discuss the current transaction market and our investment outlook. Glenn will close with a discussion of some additional quarterly accomplishments, provide our updated guidance for the year ahead. In the retail real estate space, we anticipate store optimization plans to continue, as underperforming locations will likely not survive the new world order of retail Darwinism. At the same time, however, we see strong demand for new stores, with particular strength in off-price, beauty, fitness, restaurants, medical, and services.
By our count, the number of 2019 openings are over 5,500 more than double the widely reported numbers in the media. We also anticipate that the buy online, pickup in-store phenomenon will grow at a significant rate, placing more value on physical locations that can adapt and drive even more profitability. The ICSC Halo Effect Report is clear evidence of how important physical retail is to e-commerce growth. According to the report, opening a physical store has shown to significantly increase web traffic for the retailer in that market. Conversely, web traffic drops off when retailers close stores. We have positioned ourselves to take advantage of and withstand the vicissitudes of the retail real estate environment. Our assets are concentrated in high-quality markets with high barriers to entry and anchored by profitable high-volume stores.
These are the locations where retailers want to be. Will invest heavily to integrate e-commerce with their physical footprint. In talking to our retailer partners, we have heard consistently that there is no lack of available retail space on the market, that there is a lack of high-quality retail space. Our quality locations, below-market leases, and the diversity of our tenant base give us tremendous flexibility and staying power to navigate the current environment. The new age of retail is evolving rapidly, we are focused on staying ahead of the curve and finding the right real estate to unlock embedded growth. Now to the highlights. We are off to a good start this year, with our portfolio producing stronger-than-anticipated growth. Our first quarter same-site NOI increased 3.7%, and for the first time in over 10 years, our occupancy climbed in Q1 by 20 basis points.
Higher retention and higher leasing volumes drove the outperformance. New deals with Target, Old Navy, Ulta Beauty, Burlington, Ross, Five Below, many others illustrate that our portfolio caters to the successful and growing concepts in the retail world today. Our team executed on our disposition plan in 2017 and 2018 to address the lowest tranche of the portfolio. Since the drag from the portfolio has been removed, our quality and our growth are starting to shine through. Our priority this year is focused on completing and opening the balance of our Signature Series portfolio. We are reaching the final stages of a multi-year investment program that will start to generate significant cash flow to the portfolio. We are on track to deliver $16 million to $18 million of incremental NOI this year that will drive our EBITDA and FFO, increase our free cash flow, strengthen our dividend coverage ratio.
Some highlights from Q1 include the opening of Lowe's at Mill Station, TJ Maxx and Hobby Lobby at Dania Pointe, the commencement of the residential ground lease at Dania Pointe phase two. In addition to this, we are also on schedule to deliver this summer The Witmer, a 440-unit residential tower at our Pentagon Centre, which is across the street from Amazon's planned HQ2 in Arlington, Virginia. As we keep an eye toward the future, we continue to make substantial progress with our mixed-use platform. To date, we have a total of over 4,300 residential units and 550 hotel keys entitled, under construction, or open-to the entitlements, we are creating a multi-year runway of future investment opportunities that we can activate at our discretion. Over the long term, this will change the growth profile and quality of our largest NOI contributors.
Glenn will go into more detail that our balance sheet remains strong, affording us both flexibility to grow and protection to withstand any bumps in the road. In the end, for us, it is all about quality assets and strong leasing, and as Q1 shows, the organic growth of our high-quality portfolio continues to improve. Our team is committed to staying the course and producing solid results. Finally, I would like to thank Joe Grills, outgoing Chairman of the Executive Compensation Committee, and Dick Dooley, outgoing Lead Director and Chairman of the Nominating and Corporate Governance Committee, for their long and devoted service to the board. In addition to their extraordinary leadership, commitment to Kimco, and the many contributions that they have made over the years, these two gentlemen have always conducted themselves in a thoughtful and professional manner characterized by integrity, civility, and honesty.
They have set a high and enduring standard for our board members and leave behind a lasting legacy. Ross?
Thank you, Conor. Good morning. The first quarter of the year went according to plan, with only a modest level of transactions taking place. Following the heavy transformation activity we undertook in 2017 and 2018, we're extremely excited about the current portfolio, and the results for the quarter showcase that the improvement in quality is paying off. We sold 7 assets so far this year, with gross proceeds of approximately $102 million and $85 million at Kimco share. We expect the disposition volume to be similar in the second quarter, with the majority of our transaction activity completed by the middle of the year. We remain confident in our range of net disposition activity of $200 million-$300 million for the year. 2 highlights for the quarter were the sale of our last fee-owned shopping center asset in Missouri and a property in Palm Beach Gardens, Florida.
The Palm Beach Gardens sale is an example of our disciplined approach to capital allocation when evaluating mixed-use redevelopment opportunities. Palm Beach Gardens was a site that was being considered for additional density, and after receiving an offer from an aggressive buyer, we did a deep evaluation of either a self-development scenario, joint venture, or ground lease approach. We concluded that the most accretive and best value creation proposition was an outright sale of the site. The first quarter asset sales produced a blended sub 7% average cap rate on in-place NOI, driven by the sale of our Arboretum Crossing asset, which had a vacant former Toys "R" Us box at the time of closing.
Given the execution in Q1 and expectation for pricing on the remainder of the sales in 2019, we anticipate the blended average cap rates for the full year of sales to be in the 7.25%-7.75% range, an improvement over our prior expectation of 7.5%-8%. On the acquisitions front, last quarter we announced the $31 million sale-leaseback transaction with Albertsons to acquire the unowned grocery anchors at three of our tier 1 West Coast assets. There were no additional acquisitions completed so far this year. While we continue to evaluate opportunities to strategically and accretively enhance the existing portfolio, our main focus is internal growth with the Signature Series development and redevelopment program, which is progressing at a very exciting pace. I will now pass it off to Glenn for a deeper dive into the financial results.
Thanks, Ross. Good morning. Our execution in the first quarter of 2019 has generated increased occupancy, strong same-site NOI growth, and significant progress on our development and redevelopment projects. Before I discuss the details of our first quarter, I want to bring to your attention a change in how we report Nareit FFO. In accordance with the Nareit FFO definition restatement, we have elected to exclude gains and losses from land sales, marketable securities, and preferred equity investment transactions. We will present prior periods to conform to this election. Please keep in mind that these transactional items were previously excluded from FFO as adjusted. Therefore, has no impact on that calculation. For some color on the first quarter results. Nareit FFO was $0.38 per diluted share for the first quarter 2019, the same level as Q1 2018.
The current quarter includes the receipt of a $1 million of insurance proceeds related to our Puerto Rico portfolio that was in excess of the property basis. Last year's first quarter included $4.3 million of gain on forgiveness of debt. Both of these amounts have been excluded from FFO as adjusted. FFO as adjusted, or recurring FFO, was $157.4 million for the first quarter of 2019, as compared to $157.8 million for the same period last year, resulting in $0.37 per diluted share for each quarter. Our first quarter results benefited from lower interest expense of $6.3 million due to the lower debt levels, while G&A expense was higher by $4.1 million, primarily from lower internal leasing and legal capitalization resulting from the adoption of the new lease accounting standard, Topic 842.
We also had a $1 million decrease in NOI, which is remarkable since we lost $20 million of NOI from the $1 billion of dispositions we completed over the past 15 months. Offsetting the NOI reduction from these sales was $7.7 million of organic growth from the same-site pool and $3.5 million incremental contribution from our development projects. There were also higher lease termination fees of $3.8 million and higher straight-line rental income and recapture of below-market rents during the quarter. For the rest of 2019, we don't have any additional lease termination fees in our full-year guidance and expect the GAAP items of straight-line rent and above and below-market rents to revert to more normalized levels. Our transformed operating portfolio continues to produce positive results. Pro rata occupancy increased to 96%, up 20 basis points from year-end, as tenant vacates were lower than anticipated.
Pro rata anchor occupancy is 97.8%, up 40 basis points from year-end, and small shop occupancy is 90.6%, down 50 basis points from year-end due to the seasonal vacates after the holiday season, but up 100 basis points over the year-ago quarter. Through the tremendous effort by our team, pro rata leasing spreads continued their strong performance with first quarter 2019 new leasing spreads increasing 17.4%. Renewals and options also grew by 7.1%, with our combined pro rata leasing spreads up overall by 8.9%. Same-site NOI growth was positive 3.7% for the first quarter of 2019 versus a comp of 2.5% last year, primarily driven by increases in minimum rent, contributing 320 basis points and other revenues up 80 basis points, which includes 40 basis points from the Mattress Firm leases previously rejected.
Offsetting these increases in same-site NOI growth is modestly higher credit loss, negative 10 basis points, and lower operating expense recoveries, negative 20 basis points. Turning to the balance sheet, we finished the first quarter of 2019 with consolidated net debt to recurring EBITDA of 5.7 times, improving from the 6 times level at year-end. On a look-through basis, including pro-rata JV debt and perpetual preferred stock outstanding, the level is 7.2 times, improving from the 7.5 times at year-end. Our liquidity position remains very strong with over $2 billion of immediate liquidity available and only $100 million outstanding on our $2.25 billion revolving credit facility. We have no debt maturities for the balance of 2019 and only minimal debt due in 2020. Our weighted average debt maturity profile now stands at 10.2 years, one of the longest in the REIT industry.
Based on the solid first quarter results, we're reaffirming our NAREIT FFO and FFO as adjusted guidance range of $1.44-$1.48 per diluted share. In addition, we are raising our full-year guidance range for same-site NOI growth from 1.5%-2.5% to a new range of 1.75%-2.5%. With that, we'd be happy to take your questions.
Before we start the Q&A, I just want to offer a reminder that you may ask a question with a follow-up. If you have additional questions, you're more than welcome to rejoin the queue. Anita, you can take our first caller.
Thank you. We'll now begin the question and answer session. To ask a question, please press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw, please press star then two. To reiterate, please limit yourself to one question and one follow-up. The first question today is from Richard Hill with Morgan Stanley. Please go ahead.
Hey, good morning, guys. Really impressive same-site NOI this quarter. One of the things that we had noticed was CapEx looks like it was meaningfully higher than it was in prior quarters and certainly prior to the four prior quarters. I was wondering if you could maybe just give us some guidance about what drove that and how tenants are thinking about CapEx at this point as you have some pretty impressive leasing velocity.
Sure, yeah. Appreciate it. This is David Jamieson. Our CapEx is elevated from prior quarter, it's also important to note that our rents as well have increased as it relates to the increase in cost, as well as our weighted average term of our leases. When we look at this environment today, we are driving higher rents to offset that additional cost. The cost itself is really driven by the elevation of construction costs, hard costs, and labor. That's a trend that we've seen throughout the course of the industry. When you tie it all together, our net effective rent is actually improving. It improved over 5% relative to our total base rent this quarter. The net effect is heading in the right direction as we had hoped. As we go forward, we'd continue to see the same situation occur.
It's something that we always have to be mindful of, that's really what the driver has been. Again, as I tie it all back together, our net effective rent continues to improve quarter-over-quarter.
Got it. Just to be clear, it sounds like most of the CapEx increases are coming from just construction costs and labor costs.
Yeah.
That's a trend we've seen across other property types. I just wanted to make sure that I understood that correctly.
Yep. You got it.
Okay, great. I think that's my question and my one follow-up. Thanks, guys.
The next question comes from Samir Khanal with Evercore. Please go ahead.
Good morning, guys. You did 3.7% in the quarter for same-site, which is certainly strong. The guidance went up by 25 basis points, but you're suggesting sort of a bit of deceleration in the coming quarters. Can you walk us through, I guess, the trajectory of growth over the next few quarters? What are kind of the pluses and minuses we need to think about sort of to get you back to the midpoint of guidance? Thanks.
Sure. Samir, hi, it's Glenn. We're very pleased, obviously, with the first quarter results where they came in, but it is still early in the year, and we want to just take and do a full assessment over the next 90 days as we look at guidance. I can tell you that we actually have stress test our portfolio as we look at tenants that may have impact through the year, tenants that are actually on the watch list.
We feel very comfortable with our current guidance range and are comfortable toward the mid to upper end of that range. A few things to kind of keep an eye on as we go through the quarter and through the rest of the year, really would be the timing of rent commencements and what unexpected tenant fallout could have on same-site and NOI growth. We want to just take it slow, quarter by quarter, and try and produce the numbers that we think will be well appreciated by the street.
I have one more follow-up. It's Dave. I just want to also keep in mind, next quarter, we do have a tough comp coming up. We're on a 3%-8%.
Okay, as a follow-up along your point, Dave, can you give us a sense as to how much of a dip we could see in the second quarter before seeing a re-acceleration kind of in the second half?
Again, it's Glenn. We're watching it closely.
Okay.
You could see somewhere in that 2% range.
Yeah
in the second quarter.
Okay, great. Thanks, guys.
The next question comes from Jeremy Metz with BMO Capital. Please go ahead.
Hey, good morning. Just kind of sticking with that, I was hoping for a little more detail on your expectations for store closings. Conor, you talked about the continuing store optimization that's going on and the expectations that it continues. Wondering what your outlook for the impact is to the portfolio, and how that compares to where we started the year.
Yeah. So far, obviously we're early in the year, but so far so good. I mean, when you look at our transformed portfolio, we get a sense that the retailers that we have had strong performing stores with us, and they're reinvesting in those stores to integrate e-commerce. We haven't really seen the fallout that we've seen in previous years. We continue to look towards the future of what the portfolio's going to look like and the best retailers and how we can backfill with those retailers. When you look at our Toys "R" Us absorption there, we've been very aggressive and have leased all 17 of the 18 boxes that we had, and continue to see strong demand across the board for well-located retail real estate.
When you look out quarter by quarter, we'll continue to monitor the retailers that are trying to reposition themselves for the new world of retail. Luckily, we have the right portfolio where we have a wait list for some of these boxes that we are anticipate recapturing.
All right. Second one for me, just going back to the dispositions. Were those included in your initial same-store pool and your outlook, and therefore did selling some of that, the vacancy, you mentioned the vacant toys box and the reposition going on, I think down in Palm Beach, did that help at all?
Yeah. I mean, the dispositions definitely do have an impact on the same site. We've budgeted for the certain assets, that was all within expectation. Specific to the Palm Beach Gardens site, that really wouldn't have an impact on same site. That was a site that's been held for redevelopment for several years, and our NOI was essentially 0 as we were keeping certain temp tenants in there in anticipation of the redevelopment. Palm Beach Gardens didn't have any real impact on either same site or the cap rate range for this quarter.
Thanks, guys.
The next question comes from Christy McElroy with Citi. Please go ahead.
Hey, guys. Good morning. Just with regard to the small change that you made in same-site. Why not change the FFO range as well? I get that the second half is still somewhat uncertain, which you talked about, the level of conservatism in there. Are there any other sort of offsets in FFO that we should be thinking about?
Not really, Christy. I mean, again, the first quarter had a few things in it that probably won't repeat. As I mentioned in my prepared remarks, we did have an LTA in the first quarter. We don't have any further LTAs in the guidance. We did recapture a couple of leases that had below-market rents in them that were more outsized than normal, and we don't expect those for the balance of the year. For right now, we're going to leave our guidance as is. Again, we did bump the lower end of the same-site guidance.
The dispositions, Christy, are more front-end loaded to the beginning of the year, so that factors into it.
Okay, got it. Just Glenn, following up on the $16 million-$18 million of incremental NOI from redevelopment that you've been talking about. Can you just provide a little bit more color or maybe an update on sort of the timing of that coming online? Can you remind us, is that the annual NOI from those projects, or is that the 2019 impact?
That the $16 million-$18 million is the incremental 2019 impact.
Okay.
Again, as I mentioned, for the first quarter, the incremental amount was about $three and a half million. We're on track to achieve that $16 million-$18 million range.
Okay. Got it.
The total for those properties for the year is expected to be somewhere in the $25 million-$28 million range.
Okay. Thank you.
Next question comes from Greg McGinniss with Scotiabank. Please go ahead.
Hi. Good morning, guys. I'm curious, based on operating results so far this year, if your internal expectations for bankruptcies or uncollectible revenue has evolved since initial guidance? Looking at the watchlist or my watchlist, it's clear that Kimco peers have exposure to some
Let's call them less robust tenants with debt maturities in the 2021, 2023 timeframe. There's still some time to address, but I'm curious how you're handling those retailers as well.
Yeah, it's a good question. I think when we look at our guidance so far this year, there has been less closures or less bankruptcies than we anticipated. That has to do with, again, some of the strength of the locations that we have. For example, when you look at the Sears- Kmart portfolio that we have, they're only rejecting two of the leases with us, which obviously, as a quality spectrum, shows that these are very high-quality locations with below-market leases. We continue to see that the churn or the vacancy rate is slowing in our portfolio. We continue to monitor that going forward as you saw our occupancy tick up in Q1 versus historical normal rates. We'll continue to monitor that closely.
When we look at our risk management tools, we really focus on understanding the at-risk tenants in our portfolio, the mark-to-market of those leases, and really work on really years ahead of time of when those leases may come to fruition and how we can reposition that real estate. You continue to see, I think, our credit scores improve. I think we're the only peer that has the highest investment-grade tenants in our top 10. We continue to improve that. A lot of these legacy retailers are in great locations with below-market leases, which actually is a good thing for us. When you look at the opportunity set going forward, we see that retailers are salivating for these types of locations.
With very little to no new development on the horizon, we think we're in a good position to really capture the who's who of the retailers that are really doing successfully implementing e-commerce into their physical brick and mortar. We think we are in the right path to unlock that value.
Great. Just as a follow-up here, I recognize there's still a lot of pipeline left to deliver, and the expected development investment is going to fall next year and beyond. How are you thinking about the future of Signature Series development and potential multifamily investment over the next few years?
It's a good question. In my prepared remarks, I mentioned about that we have over 4,000 apartment units entitled, we've continued to look on our entitlement path of really ways to create value for our shareholders long term. Where our cost of capital sits today, we have taken the path where the lion's share of what we're doing to unlock value is through a ground lease to apartment developers. That allows us to gain the mixed-use component, which drives traffic and drives sales to our retail, but not necessarily have the capital requirements to fund it. We continue to see that as a nice opportunity going forward in the portfolio.
We do want to finish off our Signature Series assets and continue to look towards the future and see when the next opportunity comes around, where our cost of capital is, and what's the best way to unlock that value. You'll see our entitlement work continue, we will be very selective in terms of what we add to our pipeline going forward.
Thanks for the color.
The next question comes from Alexander Goldfarb with Sandler O'Neill. Please go ahead.
Hey, good morning. Morning out there. Just two questions. First, on your capital plans, just given where we are in the cycle and that Albertsons, the monetization of that seems to be sort of maybe at someday, maybe something will happen. You guys obviously have had a really good run year to date, up 20%. You're not quite at consensus NAV, but you're not far. What about issuing equity, one, to delever? I know you guys don't include preferred, but with preferred, you guys are on the high side. Then two, that way, it starts to at least reduce the leverage question and hopefully, you guys continue to grow, which solves the dividend part of the equation as well. If you could just give thoughts.
Yeah, sure thing, Alex. When you look at our capital plan, we have no need to issue equity at our current levels. We continue to see our discount to NAV be significant. Our capital plan lays out a strategy where we can match funds, really the proceeds from our dispositions to finish off our Signature Series developments and redevelopments. You have to remember, the lion's share of the funding is already completed for most of these projects. We have to be patient a little bit to get the incremental NOI, because that's really what's going to juice our FFO, our EBITDA, and help the dividend coverage towards the end of this year into 2020. We'll continue to look at that and be a good capital allocator going forward. We also have no debt maturing really between now and 2021.
When you look at the levers we have, clearly you mentioned the preferreds. We do have some that are callable at our option, but that's the beauty of preferreds, is they're callable at our option. We'll look at that and see when it's appropriate. We do want to improve the balance sheet long term, but we are in a good position. We think we're well positioned going forward because of our liquidity position and because of our lack of near-term maturities. When we look at the trajectory of the Signature Series NOI and where we see all the metrics going forward, we feel very comfortable to be where we are today and feel confident in the future of the company.
Okay. As far as guidance goes, you've responded to several analysts before. Still, Booz, even if you front-end weight the dispositions, really doesn't impact your guidance, or sorry, impact earnings. Are you guys just being overly cautious?
Just because of what you experienced the past few years in retail? Is something changing in your watch list that's giving you some trepidation that maybe there will be increased store closings or something of that sort?
Alex, it's Glenn. I would just say the same thing. It's early in the year. We put out guidance based on what our budget was. We're happy with the results of the first quarter, we'll take it quarter by quarter and see how things go. Again, we're still dealing and watching things closely with tenants on our watch list, we are very cautiously optimistic about where things are headed.
Thank you.
Thank you.
The next question comes from Craig Schmidt with Bank of America. Please go ahead.
Thank you. I guess I'm focusing on the three sale leaseback transactions. Is that something you want to do more of, and what is the ultimate aim here?
For those three particular assets, we feel very confident that we struck an attractive deal for us at a 6.4% cap rate on West Coast assets where the grocer was doing on average $775 a square foot in sales. We think that there was substantial value creation, particularly when you look at some of the comps on the West Coast in the fives for similar type assets. We'll continue to evaluate those opportunities, both within the Albertsons banners as well as other retailers that are exploring opportunities to sell some of their own real estate. But again, it's going to be very selective. It's going to be strategic, and we want to also ensure that we keep any sort of tenant concentration in mind.
Clearly, as I mentioned in the prepared remarks, the main focus for the spend this year is going to be on the internal growth of the Signature Series. So where the opportunity presents itself, we will certainly pursue and transact, but it's going to be pretty limited.
Keep in mind, Craig, we own the small shops that were shadow anchored by the grocery store. So when you combine the cap rate that we paid for the grocery store, then you combine that with the small shops, we see significant NAV improvements because really, when you look at the grocery anchored comps that are out there today, we feel like we put the site back together and created significant value.
Would I be right in assuming that you would be mainly supermarket focused in this process?
I think we're looking at opportunistic acquisitions within our key markets. When you look at what's out there today, grocery anchored shopping centers are some of the most aggressively priced assets in the market today. Then we look at redevelopment opportunities. I think those are the two key core competencies that we focus on today. It's very tough to make the numbers work when you're trading at a discount to NAV.
Okay, thank you.
The next question comes from Wes Golladay with RBC Capital. Please go ahead.
Hey, good morning, guys. I want to go back to the Mid-Atlantic, what we did late last year. You had highlighted six projects that could start over the next one to three years. This call, you mentioned you may ground lease these projects, will any of them start commencement of construction in the next year or so?
Once we get to the point where we're ready to make a decision, we'll go through our decision tree and see where our cost of capital is. We've always talked about the opportunity set and say, do we self-develop? Do we contribute the land into a joint venture? Do we ground lease, or do we sell an asset? Again, because of the opportunity within the portfolio and the immense entitlements that we've already secured, we feel like we're on the right path to really create a lot of value for our shareholders. Each and every opportunity will be a unique decision because no two sites are alike, and we really have to weigh our cost of capital and where we want to put our capital to work.
It really will depend on the individual sites.
Okay. Looking outside of the tenants you disclose, the top 50 or so, how are the credit trends for the other tenants?
Credit trends continue to improve. When you look at some of the retailers that we have, it's really the best in class of retail today. It's amazing to think how the credit has evolved over the years. It's clear where what's working today is service and convenience. When you look at what we provide to our shopper base, we really take advantage of that. We do think that there is going to be some opportunity for PetSmart to improve their credit. Obviously, you saw that they filed to take Chewy public. It'll all depend on what they do with the proceeds, and how they use that potentially to pay down debt of the parent. We are excited about some of the retailers that have improved their credit quality and continue to want to expand with us.
Okay. Thanks a lot, guys.
The next question comes from Derek Johnston with Deutsche Bank. Please go ahead.
Hi, guys. It comes up every few quarters. Just any updates you can share on your thinking with Albertsons, especially with their recent management change there?
Hi. Good morning. It's Raymond Edwards here. I'm not sure you saw they had their year-end financials reported last year, the company was on track with their goals. They had a couple of major goals for the past year, which they met. One was to have $2.7+ billion of EBITDA. They had about $2.74 billion. They also, through the sale leaseback program, reduced the debt on the balance sheet by over $1 billion. The last part of the program, and it was announced with the earnings call, was the appointment of new CEO to take the company to the next step. I think the company is going in the right direction, doing all the right things. Hey, listen, I think you look at what we've done with Albertsons over the last few years, especially.
A lot of other private equity firms would have taken that sale leaseback money and made it distribution to the equity and hurt the company. We're really focused on improving this company, putting it in the best shape it can be. That way, at the right time, when the equity markets are there, we could achieve the best value for everyone.
Thanks. Then, the entitlements process had come up a little bit. Can you just talk about any changes that you might be seeing there in terms of the process or even the amounts of time to get approvals for larger developments or even for backfill opportunities?
I think entitlements is always unique to the municipality that you're dealing with. I think the nice part about Kimco is that we're long-term holders, and we forge these partnerships with these municipalities knowing that we are going to be here for the long term. Most developers secure entitlements and then flip it the next day. So we take a very different approach with these municipalities, knowing that we are going to be here for the long haul and forge partnerships and making sure that they feel comfortable with our approach. We have seen success recently with a number of our projects, and we'll continue to focus on the portfolio of the future. We feel really that we're just scratching the surface.
We're in the first inning of our entitlement process, and it's always amazing to think that in a short period of time, we've already secured over 4,000 apartment units.
Thanks. That's it for us.
The next question comes from Michael Mueller with JP Morgan. Please go ahead.
Hi. The two questions are, one, can you talk a little bit about resi leasing trends at the recent projects? With shop occupancy over 90%, I think it's 90.6, how much more room do you have to move that up?
On the residential side with Lincoln Square, that's our project in Center City. As you could see in our stuff this quarter, it was up substantially. It went from 38% to 55%. We have 177 units leased as of the end of this last quarter. We're just moving into the high season now, we're expecting to see that trend accelerate, through the spring and summer as new people are moving into the city looking for new jobs and also the university side. We'll expect to see an acceleration through the balance of this year.
Small shops.
Sorry. Yeah. The small shop side. What we saw was our typical seasonal turnover. The turnover here was about 50 basis points down from prior quarter. We had a number of tenants there that extended through holdover through the holiday season and into January. We actually had, I'd say, slightly better than what we had originally assumed as a result of Q1. The small shop side, though, continues to be very, very strong. Health and wellness is very popular. Food and beverage obviously is strong, and we expect to see that through the balance of the year.
Okay. What would you consider to be full in terms of small shop occupancy? Is it 92? Somewhere in there?
Previous, our all-time high was 90%, and we eclipsed that by hitting over 91% last year. Obviously we're trending into new territory here, and we think we can push northwards of those numbers. We'll have to stay tuned and see how hard we can push it. Obviously, we see the upside in the portfolio in the small shop space, but we also have a lot of momentum building on the remaining boxes in the anchor space. It's nice to see that we have a really dominant portfolio that's really starting to trend in the right direction.
Okay, great. Thanks.
The next question comes from Linda Tsai with Barclays. Please go ahead.
Yeah. Hi. What drove the spike in higher above and below market revenues?
Sure. It's Glenn. We had two leases that we recaptured. One was a grocery tenant and one was a JCPenney. One of the boxes is already leased. They come from, again, the 141 analysis that's done when you acquire the assets. Both of these leases were significantly below market, and when we recapture the box, you take the below-market rent into income. The total for those two was around $5 million.
You would expect that to kind of normalize in the upcoming quarters for the remainder of the year?
Correct. When we look in total at our straight line rent and our above and below market rents, those two categories together, on a normalized basis, they're around a total of about $7 million-$8 million a quarter.
Thanks. In terms of the decline, and lower disposition cap rates, do you think that's more a function of the composition of the assets you're selling or a function of improving cap rates across the board for the markets you're selling in?
I think it's a combination of both of those factors, and there's a few other things that I look at when evaluating our disposition program and the success that we've had thus far. I think first and foremost is clearly the improved portfolio. When you look at the quality of even the tier 2 assets that we're selling, they're much improved compared to years past. The subset of assets in the pool is much better. The limited volume that we're doing allows us to be much more opportunistic with the assets that we're selling.
Palm Beach Gardens was an example that I gave in the prepared remarks where that was one that wasn't necessarily expected for Q1 this year, but we took advantage of an opportunity and an offer, and struck with that one. The other one that was mentioned in the transaction release was Arboretum in Austin, which is a good market. It's a solid asset, but it was one where a buyer came along that had a vision for the site that included a redevelopment of the asset that at the price that they offered was well beyond what we felt that we could create in terms of a risk-adjusted return, and ultimately decided that selling it was the best course of action.
I think also when you look at capital formations in retail, we've had limited supply, I think, compared to 2017 and 2018, where more of our peers and ourselves had much bigger volumes of dispositions. The limited amount of supply on the market has helped keep pricing in check. Finally, I would say that interest rates clearly remaining low in our favor have helped our buyers make stronger offers and that debt continues to be readily available for our buyers. I think all those factors have really contributed to our ability to push pricing and have strong execution on the dispo program.
Thanks for that, Conor.
Got it.
Again, if you have a question, please press star then one. The next question comes from Haendel St. Juste with Mizuho. Please go ahead.
Hey, good morning out there. I wanted to follow up on the last question, Linda's question. Understanding that the heavy lifting on the disposition side is behind you, given the stronger pricing demand and lower rates you just outlined, Ross, I'm curious, how likely is it that we could see Kimco be a bit more aggressive in selling assets this year? Perhaps not close to the level of last year, obviously, just curious how the improved demand and pricing environment may play a role into your thinking on dispositions.
Yeah. We're certainly pleased with the demand and the execution. We're very focused on staying within the $200 million-$300 million that we've outlined. We have the capital plan in place that really puts us in a position over the next few years of where we want to be to fund all of our obligations on the development and Signature Series and to continue to focus on balance sheets. While the market may change for the better on the dispositions over the course of the year, we're going to stay on track with what we've outlined.
Yeah. I think the other thing I'd add is, if you look at how the portfolio's really transformed, Conor made the point about how it's really started to shine. We had 2.9% same-site NOI growth last year. We're off to a really strong start this year. The portfolio is producing the things that we would expect it to produce. When we were going through the disposition analysis, we were really looking at where risk was and where we saw downside risk, and that's why we wanted to move out of those markets and those assets. The portfolio is very, very strong today, and it's producing levels that we think are really consistent and long-term growth levers.
Appreciate that. Glenn, while I have you, I wanted to ask, maybe to clarify maybe an accounting question for you. I wanted to clarify how specifically Kimco treats lease termination fees versus the rent that's lost when a tenant leaves. If a tenant leaves and pays the termination fees, that termination fee not counted in same-site NOI, but you keep booking the rent as if the tenant was still there until the end of the lease? For instance, Mattress Firm. If they pay a termination fee in the first quarter of a year, but their lease was scheduled to expire in the fourth quarter of that year, would you continue to book the rent through fourth quarter as a non-cash add back?
Lease termination fees are not in same-site NOI and have never been in same-site NOI. The Mattress Firm was a unique situation where you had a bankruptcy settlement at 100 cents on the dollar, quite candidly, it's a relatively small number. The total number to us was under $900,000. It makes up 10 basis points for the year. No, lease terminations have never been in our numbers.
When a tenant falls out, they're out. We don't have them continuing in the same-site NOI number.
Right.
That's it for me. Thank you.
The next question comes from Vince Tibone with Green Street Advisors. Please go ahead.
Hey, good morning. Just one quick question for me. You mentioned only two of your Kmart leases have been rejected. Do you expect the remaining locations to remain open? What will your exposure to be to Kmart after all anticipated rejections?
Yeah. This is Dave. Right now we actually have two of the leases that are being assumed are dark and paying, and they are significantly below market, and they continue to pay rent on those. Beyond that, all the other ones are open and operating and continue to perform. We're prepared for whatever events may unfold in the future, but as we stand today, that's where it is.
The exposure is about 45 basis points.
Got it. Okay. That means you've lost roughly 15-20 basis points of NOI came offline with the two rejections. Is that fair?
That's on a full year basis.
On a full year basis, yeah.
Correct.
Correct.
Okay. Thank you. That's all I have.
The next question comes from Chris Lucas with Capital One. Please go ahead.
Hey, good morning, everybody. I just want to make sure I understand. On the two rejected leases, you said they were assumed, there's no NOI loss there to the company, correct?
You had separated into two categories. There was two leases that were rejected, they have now since come back to us, in which we have LOIs in process for those two. Of the pool that was assumed, there are two leases that are currently dark and paying.
Okay. Let me just go back. I really didn't want to spend time on this, just let me make sure I understand. Of the stores that you started the year with-
Chris, yeah. We started the year with 13 of them, of which four were on the initial closure list that went for the dark and paying. Two of those were assumed, two were rejected.
Got you.
That's it.
Okay. Thank you, Dave. I guess, just my question really wanted to focus on the same-site NOI guidance. I think, for the initial guidance, you'd provided 100 basis points of reserve was sort of your budget. I guess, just curious as to how much of that 100 basis points was eaten in the first quarter, and probably more broadly, as we think about the rest of the year on same-site NOI, is the bigger factor in terms of the range and where this outcome might be more related to rent commencement towards the back end rather than the bad debt, or lost revenue from tenant fallout. I'm just trying to understand sort of where maybe the disconnect is, in my mind, between kind of where performance is today and where the outcome might be for guidance.
Right. You're correct that our credit loss in our forecast is 100 basis points for the year. For the first quarter, we used about 57 basis points, so we're a little ahead in terms of our budget on credit loss. That's helpful as we go through the year. The guidance range, whether it be the high end or the low end, it's a combination of the things that you mentioned. It's when rents commencement start, because we do same-site NOI on a cash basis. We have this 230 basis point spread between leased and economic occupancy. It's really the timing of when those come online. In our forecast, we expect that around 25% of that spread would come online during the year. Again, rent commencements are important. We budget some level of tenant fallout.
If there's a large amount of additional tenant fallout that's not in there, that would have an impact on it. Those are really the drivers. The credit loss, we still remain very comfortable with.
Okay, great. Thank you.
Next question comes from Ki Bin Kim with SunTrust. Please go ahead.
Thanks. Good morning, out there. Bigger picture, any notable trends in rent relief, how much rent relief you're giving tenants, the number of tenants or some type of preemptive adjustments to leases that you're making versus the past couple of years?
No, there really hasn't been a change in the dynamic of the discussion. It's all driven by supply-demand. Our higher quality portfolio is pushing the demand side for retail tenants wanting to get into the markets and into our centers. We've seen this as an opportunity. I think it's reflective in the rents that we're achieving and the extended terms. That's what we've been seeing. Again, it's always case by case, you have to field it as it comes. There hasn't been any material change in terms of that dialogue.
Okay. Sticking with the same theme, I know it's going to be case by case and asset by asset, but what's the risk that, if I'm a good retailer and I realize I'm the draw to the center and why the center exists, but at the same time, the weaker tenants are getting 35% rent relief in some cases, and I'm paying much more. What's the risk that I come back to you guys and say, "You know what? Why should we be paying much more than some other, more troubled tenants, especially if I'm the draw to the center?
I think you really have to look at the drivers of traffic into our sites. Luckily, where we sit today with our transformed portfolio, the supply and demand is in our favor. There are more high-quality tenants driving traffic that want to be in our locations. The legacy tenants that have not evolved with the new world of retail, those are the ones that we can't wait to recapture and reposition with better credit and better quality tenants. We have very high occupancy. When you look at both our anchors and our small shops, and you look at our mark-to-market opportunities, typically, there aren't relocation opportunities within these high target markets where they can get a better economic deal versus what they're paying today.
Okay, thank you.
This concludes our question and answer session. I would now like to turn the conference back over to David Bujnicki. Please go ahead.
Thank you for participating in our call today. I am available to answer any follow-up questions you may have, and I hope you enjoy the rest of the day.
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