Good morning, and welcome to the Kimco's Third Quarter 2018 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to David Buschnicki, Senior Vice President. Please go ahead.
Good morning, and thank you for joining Kimco's Q3 2018 earnings call. Joining me on the call are Conor Flynn, our Chief Executive Officer Ross Cooper, President and Chief Investment Officer Glenn Cohen, Kimco's CFO David 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, and it's 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 in the Investor Relations area of our website. With that, I'll turn the call over to Conor.
Thanks, Dave, and good morning, everyone. Today, I'll provide an overview of our Q3 performance and give an update on our leasing and redevelopment progress, 2 critical components of our growth strategy. Ross will then report on our quarterly transaction activity and describe the overall transactional environment. Finally, Glenn will provide details on key metrics and our updated 2018 guidance. Overall, the economy is healthy and consumer confidence is near an 18 year high as we enter the critical holiday season.
Retail sales growth projections for this holiday season from both the National Retail Federation and ICSC are north of 4%, and we anticipate that our transformed portfolio will benefit from increased traffic and purchasing power. Having made the strategic decision to increase our dispositions in 2018, our portfolio is now well positioned to embrace the dynamic change in retail that is unfolding right before our eyes and moving at a faster pace than anyone could have imagined. We are seeing major shifts in consumer preferences and shopping habits impacting every retail category, which has resulted in a form of retail Darwinism. While some legacy retailers have been unable to adapt and compete in the new environment, resulting in reorganization or liquidation, there are many more savvy, well capitalized and experienced retailers who have successfully adapted their business models and are flourishing. We are also seeing many new and creative concepts stepping in and grabbing market share at a rapid clip.
Off price continues to thrive. A recent National Retail Federation survey showed that 89% of consumers shop at discount retailers and their appeal spans across ages and income groups. Retailers like Walmart and Target have gone on the offensive with acquisitions or new store concepts and the results are showing. Target, for example, reported traffic growth of 6.4% in its most recent earnings report, by far the strongest since the company began reporting traffic in 2,008. Comparable sales increased 6.5%, which was Target's best comp in 13 years.
Health and wellness concepts and trends continue to create new demand across categories from new forms of exercise classes to restaurants and to fashion. And this is just the tip of the iceberg, with other new retail concepts and categories continuing to emerge. So while change in the retail sector may be disconcerting to the investor, the fact of the matter is that there are more store openings than closings, and the changes occurring in the shopping capitalized and better prepared to adapt the consumers' changing tastes and needs.
Kimco's vision
and strategy dovetails with this continuous evolution by focusing on placemaking and reinvesting in our best assets to create live, work, play experiences. The key is having the right real estate, an exceptional team and a rock solid balance sheet. The quality of Kimco's real estate is validated on a daily basis as the demand for space in our shopping center portfolio remains strong with new and expanding retailers continuing to seek out great locations. This is also reflected in our key metrics with continued strength in leasing spreads, occupancy and same site NOI. Our new lease spreads of 12.1 percent continue our streak of 19 quarters in a row with spreads over 10%.
Our portfolio occupancy remains strong at 95.8 percent despite the slight impact from the Toys R Us vacates, while our small shop occupancy has reached an all time high of 90.8%. As to Toys R Us, we have executed leases or leases have been assumed on more than 60% of our Toys R Us spaces or 13 of 21 boxes, with LOIs and leases pending on all remaining locations. The demand has been strong with the primary drivers coming from the leaders in off price, furniture, hobby, fitness and entertainment. The recent Sears Holdings bankruptcy should provide Kimco with a long awaited opportunity to reposition our 14 remaining Sears Kmart locations, which are significantly below market. And while these boxes account for only 60 basis points of our total ABR, we have been proactively marketing these locations and are ready to recapture them and start to create value.
As for our major projects, we were thrilled to host our grand opening of Lincoln Square in the Q3, with residents moving into the apartment units and Sprouts Farmers Market opening the lines around the block. The Center City Philadelphia project provides a window into the future of what we expect from our mixed use platform. Other major milestones include the opening of our first phase of Dania Point in Florida that is set for next week and Costco's opening at Mill Station in Owens Mills, Maryland just last week. These Signature Series redevelopments are now all over 90% pre leased and are set to deliver significant growth for the company in 2019 and beyond. In closing, we are pleased with the momentum we are building in both our leasing and redevelopment platforms.
The strength of our portfolio has given us the confidence to raise our FFO and same site NOI guidance for 2018. We believe it is more important than ever to have a motivated team that is laser focused on execution at the local level help drive strong, sustainable growth and create long term shareholder value. And now I'll turn it over to Ross for his transaction update.
Thank you, Conor. We had another very productive quarter on the transaction side, setting us up for a strong year end. In the Q3, we sold 10 shopping centers for $154,000,000 Kim share. An additional sale occurred yesterday in Greenville, South Carolina for $37,000,000 With those closings behind us, we have now sold 49 centers year to date with total KimShare proceeds of approximately $722,000,000 exceeding the bottom end of our range of $700,000,000 to $900,000,000 provided at the beginning of the year. As such, we are raising the low end of the dispositions guidance for a new range of $800,000,000 to $900,000,000 The blended cap rate through the 3rd quarter remains within the target range of 7.5% to 8%, and we anticipate ending the year firmly within said range.
As we previously indicated, given the success of our disposition activity this year, our 2019 disposition plans anticipate only a modest level of asset pruning with proceeds being used primarily to fund redevelopment. As we enter the New Year with our right sized portfolio, the major focus for the company is the internal growth opportunities. In terms of transactions market color, investor demand for shopping centers remains strong across all quality levels and geographic locations. Core institutional asset sales continue to be very competitive with substantial capital raised and dry powder chasing limited opportunities. Cap rates for this product continues to be sticky with transactions in the low fives and high fours in several coastal markets.
Value add investors continue to seek yield and are willing to stretch for assets that meet their criteria and provide upside potential. There has been a tangible increase in investor demand for our assets earmarked for disposition over the course of the year with private equity capital plentiful and debt readily available from traditional lenders as well as non traditional financing sources. We've also been approached by interested parties evaluating larger portfolio opportunities. However, at this stage of our disposition program, we continue to focus on finishing off the remainder of the asset sales on a one off basis. We still believe that is the best way to maximize value.
Glenn will now provide additional detail on our financial performance for the quarter.
Thanks, Ross, and good morning. Our Q3 performance further exemplifies our continued focus on execution of our strategic plan. Leasing continues at a brisk pace. Our Signature Series projects are beginning to come online. Our disposition target is in range and our balance sheet and liquidity position are in solid shape.
For the Q3, NAREIT FFO was $0.34 per diluted share, which includes a $0.03 per share charge from the early extinguishment of our $300,000,000 6.875 percent bonds and a $0.01 per share benefit from transactional income, primarily from gains on land sales. FFO as adjusted, which excludes transactional income and charges and non operating impairments, was $0.36 per diluted share for the 3rd quarter as compared to $0.38 per diluted share for the same quarter last year. The decrease is a direct result of our aggressive disposition program, which resulted in the sale of $922,000,000 of assets during the past 15 months and a corresponding reduction of NOI of approximately $16,000,000 during the quarter. The proceeds from the dispositions were used to fund our development and redevelopment programs, which are beginning to reduce cash flow as well as for debt reduction. Our transformed portfolio with over 80% of our annual base rents coming from assets in our top 20 markets nationwide is producing strong operating metrics.
Our pro rata anchor occupancy was 97.6% at the end of the quarter despite the 40 basis point impact from the Toys R Us boxes that vacated during the quarter, and as Connor mentioned, are being addressed at a speedy pace. Our leases our leasing spreads for new leases remain double digit positive and lease options and renewals produced a 7.9% increase. Same site NOI growth was 2.3% for the 3rd quarter and includes a contribution of 10 basis points from redevelopment projects. Most encouraging was the 3.5% growth in the minimum rent component of our same site NOI, which was offset primarily by higher property expenses net of recoveries due to large real estate tax refund received last year, higher credit loss reserve due to the recent bankruptcy filings of various tenants. For the 9 month period ended September, same site NOI growth was 3%, primarily from minimum rent contributions with no incremental effect from redevelopments.
Same site NOI growth for the quarter and the 9 month period ended September both benefited from more Toys R Us leases being affirmed or assigned than anticipated and the delay in timing of lease rejections by Toys R Us. On the balance sheet front, our consolidated weighted average debt maturity profile is now 10.7 years, one of the longest in the REIT industry with no unsecured debt maturing until May of 2021 and only $120,000,000 of mortgage debt maturing during the same time frame. We have over $2,000,000,000 available on our unsecured revolving credit facility, which provides us significant liquidity for any opportunistic funding refinements. Let me spend a moment on 2018 guidance. Based on our year to date same site NOI results, we are increasing our same site NOI growth
guidance range
for the full year 2018 from 2% to 2.5% to a new range of 2.3% to 2.7%. We are also increasing our full year NAREIT FFO per share guidance range from $1.43 to $1.46 per share to a new range of $1.45 to $1.47 and listing our FFO as adjusted per share guidance range from $1.43 to $1.46 to the new range of $1.44 to $1.46 We will provide 20 19 guidance on our next earnings call. Our team remains confident and energized as we complete 2018 and look forward to realizing the benefits of our efforts in the coming year. And with that, we'd be happy to take your questions.
Before we start the Q and A, I just want to offer a reminder that you may ask a question with an additional follow-up. If you have any further questions, you're welcome to rejoin the queue. Anita, you could take our first caller.
Okay. The first question today comes from Jeremy Metz with BMO Capital Markets. Please go ahead.
Hey, good morning guys. Ross, I was hoping you can give a little more detail about the stuff you sold in the quarter in terms of occupancy and what the mark to market profile look like for those assets. And then you mentioned moving to a more modest level of sales next year. Can you put some rough numbers around what exactly that could mean?
Sure. Yes. In terms of the sales this quarter, the total amount of $154,000,000 was a little bit less than previous quarters, but continued to be primarily geographically located within the Midwest and a couple of other assets outside of the central part
of the
country. Occupancy remained very high on the disposition sites, just around 95% for the quarter. So we are selling fairly stabilized assets. As we get into next year, as we mentioned, it will be a meaningfully less number. We are very confident in the right size portfolio that we have by the end of this year.
So we'll continue to prune assets and fund redevelopment opportunities with that and really focus on the recurring FFO growth for 2019, but it will be a modest number.
So is that kind of $200,000,000 to $300,000,000 Is that kind of a fair ballpark to put it?
I think when you look at our redevelopment spend, which will be sort of in that low to mid-two hundred number, the dispositions are really earmarked for that, so.
Okay, great. And second one for me, just in terms of the bankruptcies here, the 21 Toys boxes, how many of those are pure re tenant boxes, is kind of as is versus where you're going to need to break it up? And then can you also comment on Mattress Firm? You have the 62 leases. So do you know at this point how many are on that near term closing list?
And then the rent is north of $21 $29 in aggregate. It's a little above the portfolio level. So is it fair to assume the rents will come down here as you release those or any sort of range you can frame around that opportunity?
Sure. This is Dave Jamieson. First, let's address the Toys R Us question. In terms of those that have already been awarded at auction or assigned, there were 6 initially. So those there is no downtime in rents.
They're assumed either by retailers or other operators. From there, we've had since before this call, 7 executed, 6 of which have been single tenant backfills, one of which is a box split and then that brings you to 13. Of the remaining, we have 6 that are in negotiation, LOI negotiation, of which 3 of the 6 will be single tenant backfills. So out of that group, you only see 4 that could be potential box splits. And then on the remaining 2, they are currently flagged and are under contract for disposition.
So what we've seen is really single tenant as being the dominant use for these boxes, which is obviously help reduce the overall cost required to reposition the boxes. And then as it relates to Mattress Firm, I'll turn it over to Matt.
Yes. Hi, this is Ray. With regards to Mattress Firm, 8 of our 62 properties were listed as sites to close in the 1st month of the filing. And for now, we don't know of any store closings. We're working with the company.
We might figure a few more might fall out as they might want rent reduction that we don't want to give to them. But it should be a pretty fast case with them assuming by middle of November to have a plan approved to come out of bankruptcy shortly thereafter at 100% plan to the unsecured creditors.
And we're comfortable with the mark to market on those locations. We feel like they're pretty much right at market. So we don't see any rent roll downs. Typically, they like to be right up in front either on a pad or on an end cap. And as our small shop occupancy, as you know, just hit all time highs, there's significant demand for those locations from service tenants, from restaurants, from financials.
So we feel really strongly that those spaces will be recaptured and leased very quickly.
Thanks, Chris.
The next question comes from Christy McElroy with Citi. Please go ahead.
Hi, good morning, everyone. Just with regard to the 14 Sears Kmart boxes, in terms of being ready to recapture them, I know it's early in the process, but just wondering how much progress you are looking to potentially make in the context of the bankruptcy process. And what impact does Bridgehampton being collateral in the dip financing have on your ability to get that back some point?
Yes. Hey, Christy, it's Dave again. So on the Kmart, the 14, so what we know today is that there will be 4 coming back to us. And right now, it actually has to go to auction, one of which is slated for dispo. And then of the remaining 3, we have LOIs in negotiation for the balance of those boxes for single tenant users.
And as a reminder as well, one of those is in one joint venture where we own 15%, while the other is in a venture that we in which we own 49%. So from a cost standpoint, we feel very comfortable there. That said, it still needs to go to auction. Auction date has not yet been set yet. So what we've been doing and what we've messaged clearly over prior quarters is we've constantly prepared for this event and we continue to be out in the market pre leasing these boxes with contingent leases.
So if and when we do get them back, we'll be ready to act. I mean, with regard to Bridgehampton, I mean, typically, when a
debt is in bankruptcy, almost usually all the leases are part of collateral. So they're very selective here in what they did. But if there's a reorganization around the company, which they're trying to do or going concern bid, probably Bridgehams will be part of that and we might not get it back. But if it's a wind down, then it doesn't matter and we'll have an opportunity to get the property back at that time.
Okay. And then, Connor, you talked a bit about the big changes in retail happening at a faster pace than ever. Just from a bigger picture perspective, can you put in context how you're thinking about the necessary CapEx spend in that environment? So you have on one hand the sort of the revenue generating redevelopment and densification opportunities created, but then there's also this elevated pace of re tenanting churn and sort of how you're thinking about that relative to trying to get back to free cash flow positive after dividends?
Yes, sure thing, Christy. When you look at our strategic goals for the long term for Kimco, we were very vocal about what we wanted to do with the portfolio to really transform the geographic locations. We're big believers in the top 20 markets in the U. S. That's where we see population growth.
That's where we see barriers to entry. And that's where we see retailers want to be and they want to concentrate their store base there. So what we found is the demand for the locations in those areas have been really actually stronger than we anticipated. And that's why you're seeing us be, I think, well ahead of what we anticipated for our Toys R Us leasing, because those boxes really are concentrated in our best markets. There will be some tenant churn, as you mentioned.
We've gone through a point where the legacy retailers that have not invested in the store and have not put the customer really as the focal point, those are the boxes that are coming back to us. But the beauty of Kimco is our diversity. When you look at our tenant diversity, we feel like it's unmatched. If you look at the ability of mark to market on those boxes gives us great potential to really generate significant return on investment for our shareholders. And that's what we continue to focus on, whether it's the toys boxes or the Kmart boxes, we look at it as an opportunity.
We look at it as a way that we've got the right portfolio now that we can unlock the value for our shareholders by repositioning the real estate with great quality tenants that are going to drive more traffic. And then you get the halo effect that will really drive the surrounding rents on the spaces that have been living with some of these retailers that have not been driving traffic for an extended period of time. And so that's where the focus has been of the company. We're very excited to turn the page and head into 2019 with the trimmed down portfolio, tightly concentrated in our best metro markets with a big redevelopment pipeline that's just starting about to deliver. As you've seen with Lincoln Square and others, where we've got, I think, the right mix of projects and place making that really makes a difference in today's world because you can't just line up boxes next to each other and think that someone's going to shop it.
You've got to lean in. You've got to create the place. You've got to do more from a landlord perspective.
Sorry, just one quick follow-up on that. It sounded like the toys boxes, a few of them are going to be box splits. I can imagine these Kmart boxes, a bunch of them are going to be box splits. What impact does that have on the timeline to getting free cash flow positive? I think originally you were talking about potentially next year.
I can imagine this CapEx spend continues
to eat into that.
Well, remember, 6 were awarded from the toys, so we actually had no capital outlay there. And the majority of the toys boxes are actually individual tenants taking existing boxes and the costs have actually been pretty modest when you look at the TI and landlord work there. Right now, it's right in that range of $35 to $40 a foot for the toys location. So we feel like we've been careful and cognizant of the CapEx that are going into these boxes. You're right, when you split a box, it takes a little bit longer to get the rent to commence.
But since the lion's share of these boxes have been single tenant users, we feel like we can get those paying tenants open quicker and you've seen that with the compression of the lease to economic occupancy spread. We've put a lot of effort and put more resources behind expediting rent commencement dates, and you're starting to see that happen.
Don't forget, these are also revenue generating. This is revenue generating CapEx. This is not just maintaining same rents. I mean, you have rents on the Sears boxes that are at $5 a foot. So there's a fair amount of revenue generation that's going to come
from it.
Thanks guys.
Next question comes from Craig Schmidt with Bank of America. Please go ahead.
Thank you. Looking for future redevelopment efforts, will you be actually replacing existing anchors given your kind of view on winners and losers in the space?
I think that's always part of the business, Craig. When you look at how to generate the most traffic to your assets, you really want to try and put together the tenants that are going to drive traffic at all points during the day. And so this is a long term business. Typically, our retailers sign long term leases. So we would have loved to been repositioning our real estate over the years with the best in class.
But many times, the real estate is controlled by these long term leases. So as these boxes have been coming back to us, you've seen us get the mark to market opportunity as well as the repositioning opportunity to drive more traffic. And so there's been a lot more repositioning with the off price players. When you look at TJX and all their banners, including their newest concepts that are doing quite well, HomeSense and Sierra Trading Post, Burlington and Ross and then Sprouts Farmers Market and the specialty grocers where we're doing a lot of deals with Sprouts and Trader Joe's and Whole Foods. Those are the types of players that we get really excited about because it compresses the cap rate on the whole asset and it also drives a tremendous amount of traffic.
Okay. And then what is the climate of the smaller space, the small business in terms of taking new space?
Yes. Hi, Craig, it's Dave. The climate for our small shops has been very, very strong. It's when you look at 90.8% on our small shop occupancy, which is by far and away the highest we've ever seen in the company, it's just evidence that you have small businesses that are continuing to look to open locations. The franchise model has been very successful in this last run up.
It gives people an opportunity to focus on the business, less so on specifically trying to define a business, so they can take an existing business and just start performing. You see the urgent care is doing well, the financial is doing well, fast casual, QSR is all very, very active. You can't lose sight of the fact too that Amazon with the Amazon Go rollouts, how that trends, the pace of that, no one knows. But just again, it's further illustrating that there is high, high demand for great quality real estate on the small shop category.
We've been putting a lot of focus, Craig, on services. When you look at the makeup of our small shop tenant base, we always had the hair salons, the nail salons, and now we've really seen a boost to it. You look at the fitness element and the health and wellness and beauty. That has just been a major, major shift terms of demand and we continue to see it expand and we like those uses because we haven't been able to figure out what's the Internet resistant type use like those fitness players that you can't do with that online yet. And just to add
a little also, having transformed the portfolio with all the sales we've done, I mean, it's part of the evidence that it's working. Getting to 90.8% of small shop, just it proves where the properties are. You have properties that are in higher demographic areas, higher household incomes, higher density, higher population, just better markets and they lead to being able to add more small shop space to the centers. Okay. Thank you.
The next question comes from Greg McGinniss with Scotiabank. Please go ahead.
Hey, good morning. I was just curious what percent of taxable income is currently being distributed and how you're thinking about dividend raises considering the level of dispositions this year and the mid-eighty percent AFFO payout goal you've talked about before?
Well, we're comfortable where the dividend level is today. Again, we are focused on continuing to grow our EBITDA and our recurring FFO as we go forward. And each quarter, we go ahead and we analyze and look and discuss with our Board where the dividend level is.
For
now, we're fine and very comfortable where it is, and we'll go quarter by quarter and continue to monitor it.
As we've mentioned before, we have a very large redevelopment pipeline that's now pre funded and pre leased and starting to deliver. And that's really showcasing what we believe is going to really grow the recurring FFO and EBITDA levels in 2019 2020. So that's where we've been investing as we want to create the places that people want to come back to time and time again, which will really help us drive free cash flow.
Right. So how do you think about that discrepancy or sorry, that matching out of the mid-eighty percent AFFO payout goal or increasing the dividend, I guess?
Well, again, it's a balance, and we're going to continue to grow recurring FFO and EBITDA and then talk with our Board and see when it makes sense to continue to grow our dividend.
Just one more. And with disposition funding earmarked for redevelopment next year, should we expect another year of pretty limited acquisitions? I mean is there anything even worth buying at this point?
Yes. I mean there's certainly assets in the market that we like. We continue to be very selective and I would imagine it will be an extremely modest level for next year. As I mentioned in the prepared remarks, I mean the cap rates and the prices for the high quality stuff is still very aggressive at low cap rates. With where our cost of capital is today, it doesn't make sense for us to be acquiring in the open market.
So we'll continue to monitor. We see everything that's out there. We're building long term relationships for acquisition opportunities when our cost of capital does come back. But for now, our priority is clearly the redevelopment spend, where we get significantly better yields than what we would find on the open market.
We have a very deep pipeline of redevelopment projects, and the team is spending a lot of human capital working on getting entitlements for future projects that will take us several years out. We feel pretty comfortable about where we can deploy our capital accretively.
We will always be looking for adjacent parcels, things that could potentially add to our redevelopment potential where it makes sense for value creation opportunities.
All right. Thank you very much.
Next question comes from Rich Hale with Morgan Stanley. Please go ahead.
Hey, good morning guys. Maybe want to spend a little bit more time on the cash flow side of the argument or the debate. So when I'm looking at your consolidated your condensed consolidated statement of income, it looks like your revenue came down quarter over quarter. Is that just due to you printing your portfolio? Or are there other things that we should be considering?
No. It's a direct correlation to the amount of sales. As I mentioned, over the last 15 months, we've sold over $900,000,000 of assets. That's what it relates to.
Got it. And though but then at the same time, it looks like CapEx is up to maybe stable at the same time. Is that just because you put to go back to what was previously discussed, is that just because you're spending more time on development at this point?
We are between the developments, the redevelopments. Again, we've put some money back into the Sports Authority boxes that you're now starting to see come online. If you look at our lease to economic spread, that's actually narrowed by 50 basis points. So again, that's for more than capital that we put in to get those flows started.
Okay. All right. Once we get the 10 Q, I may have some additional questions. But thank you, guys. I appreciate it.
The next question comes from Alexander Goldfarb with Sandler O'Neill. Please go ahead.
Hey, good morning out there. Just two questions. First, Glenn, just with Sears Mattress Firm, Toys being the biggies, as we think about NOI this year versus next, how much NOI is going to be coming out of 2019 as these retailers wind down with an understanding you're going to backfill them, but still probably not till later in the year. And I understand that Sears may be restructured, so maybe some of that NOI doesn't go away. But just can you sort of quantify it, NOI is going to come out of on an annualized basis out of 2019?
And then we can sort of guess at when that may start to get come back online in the latter part?
Well, the short answer is we can't actually do that because we don't really know what's going to happen with Sears Kmart, right? We know that a few of them have been that we expect to get them back, but we don't know what's going to happen with the other 10. And in the case of Mattress Firm, although there is 8 on the block, as Ray mentioned, we don't know what the final balance is going to be there as well. The other point I'd make on the Mattress Firm is on the ones that they reject, because it is a 100% plan, we're going to wind up getting a full year's worth of rent as part of a rejection claim. So the Mattress Firm leases,
I don't really think they're going to have
a major impact on our 2019 NOI. So it's very, very hard to predict what it's going to be. I think the good news
for us is when you
look in total, Sears makes up less than 60 basis points, Mattress Firm makes up less than 80 basis points. And it does look like Mattress Firm is going to come out as a reorg, so many of those sites will stay in place.
Okay. That's helpful. And then the second question is just on Albertsons. Thinking for your next steps, what are you guys thinking as far as your position there? Is it worth it just to I mean, it would seem like you don't really get any credit for it.
So is pursuing a private sale and just being done with it and not having this linger over, does that seem more likely, especially if the retail environment seems to be improving? My understanding is Albertsons had some good sales or good earnings recently? Or is your hope still to try and affect either an IPO or some sort of merger?
No, I think that the IPO route is the way that the company is focused on it. And listen, they went through Illinois about 8 months of this merger with Rite Aid. But during that time period, they improved the operations. They didn't get distracted from that. Sales improved.
They reduced their debt levels. They had about $11,000,000,000 in net debt a year and a half ago. Now they have about $9,500,000,000 in net debt. And they're getting themselves in the right shape for the company with over $1,000,000,000 of free cash flow expected in the coming year that they're going to get themselves markets prevailing and allowing us be in a good position sometime hopefully in 2019 to do something in IPO. But again, markets have a little direction on whether we can do something or not, but they're running the business very well, improving the business, reducing the debt and it's all we can ask them to do for us right now.
Yes. I can add also, Alex, that again, in our 'nineteen numbers, there is nothing in there for Albertsons at all. We're focused on our core business of leasing, development, redevelopment. Albertsons, when it happens, is just going to be an upside for us. So it's not in anyone's numbers.
It's not in any of our debt metrics or anything else that goes along that line.
No, I understand, Glenn, but it's still a source of capital. So are you guys dual tracking it where you're running right now possibly reaching out to private people to sell to if the IPO doesn't occur? I mean, it just seems like it does help you guys delever and get you there where that's more beneficial than maybe maximizing the last dollar.
We're not doing that at this point. We haven't considered it. I think we're we think we're very bullish on where they are going now and there's a lot of upside if they execute the plan. And you don't want to leave too much money on the table. So we're not even thinking about that because we're very bullish on the prospects for next year or so.
Okay. Thank you.
The next question comes from Steve Sakwa with Evercore ISI. Please go ahead.
Thanks. I guess first question really is on the redevelopment development program. As you just sort of look out to the 2019, 2020 and maybe even deals that you're contemplating for 'twenty one, what kind of returns do you think you can achieve? And what sort of maybe cost pressures are you seeing on the construction side? And what sort of risks are there on those yields?
Hey, Steve. Yes, when you look at our pipeline, we actually feel like we're in really good shape because the developments that we have really in the pipeline right now are all pre funded and heavily pre leased and we'll start to really deliver in 2019 2020. So when you look at Grand Parkway Phase 1 and Phase 2, that's going into operations now. When you look at Dania Point, the Phase 1, we're actually going next week for the ribbon cutting, and it's over 90% pre leased and will open and really stabilize in 2019. When you look at Lincoln Square, the retailer is 100% pre leased and we're now really starting to bring on the multifamily section of it.
We just actually signed our 100th apartment lease there. And Mill Station, we just opened Costco. Lowe's is set to open right after that. It's over 90% pre leased. On the redevelopment side, we've got some great projects that are under construction.
Pentagon is topped off. That's our large multifamily tower. We sit right above the metro there in Pentagon City and continue to watch that one take shape. The Boulevard in Staten Island continues to take shape as well as steel is going up. The projects that we have currently under construction really have all GMAX contracts.
So even though prices have been rising, we've locked in our costs and feel very comfortable with our returns. On the future projects, as we mentioned earlier, we are working hard at entitling a number of projects across the portfolio. And then each one we're going to have a decision tree of how we fund it, how we're going to actually create the highest and best returns for our shareholders. And as you've seen in our pipeline, we really identify really where our cost of capital is and how would we best unlock the value for our shareholders. We can sell those entitlements.
We can ground lease those entitlements. We can joint venture those entitlements. And so right now, where our cost of capital is, we're going to look at the portfolio and look at the opportunities we have in the future. And when we get the project shovel ready, then we're going to take the best approach going forward. Where the returns for multifamily have been in that, call it, 6% to 7.5% returns.
And on retail, they've been much higher. And so we're cognizant of where our cost of capital is and the funding requirements. And going forward, we're going to take them on a one off basis and really identify what's the best way to unlock the value.
Sorry. So is there a way for you
to just kind of blend it? So on average, the 2019 2020 deliveries you think will have average returns of what?
In between 7% and 8%,
I think when you look at the blended because of the multifamily projects that we have coming online, that brings it into that 7% to 8% range.
Okay. And I realize you're not giving 2019 guidance, but as you sort of look forward and think about sort of the tenant watch list and a lot of things have happened this year, maybe the timing of like Sears Kmart was unclear if it was this year or maybe next year. As you just sort of look at the watch list today, how does that sort of stack up versus maybe a year ago? And would you sort of consider or think that your reserves would need to be as big next year as they were coming into this year?
The watch list is something obviously we talk about a lot and we continue to see that. Actually it's getting a little bit smaller with these legacy retailers liquidating and going out of business. And so when you look at our exposure, it really is modest compared to what it has been in years past. Sears Kmart, for example, even though we have 14 locations, one of them is actually already subleased to a public retailer. So we don't think we lose any income or have any capital outlay there at all.
We think the 3 of the 4 that are going to auction, there's a chance that a number of those locations might be purchased at auction because of the below market leases. So again, limiting our downtime and our costs on some of those locations. I mean, clearly, there's still some disruption going on in retail, and we're cognizant of that. We don't want to sound overly optimistic. But we look at the portfolio, we look at where we're positioned and we think that the normal run rate going forward of that 100 basis points of bad debt reserve is something that we continue to we'll have going forward as we look at years 2019 2020.
Great. Thanks a lot, Bruce.
The next question comes from Vince Tibone with Green Street Advisors. Please go ahead.
Good morning. For the 7 toys boxes that have already been released, when do you expect those tenants to open and start paying rent? And what was the mark to market on those
spaces? So the mark to market has been pretty much in the mid single digits, low to mid single digits. And in terms of the flows of those, we'd expect to start seeing them coming in the back half of 'nineteen and into 'twenty as well. So again, 6 of the 7 of those are single tenant uses. So those will be pushed forward and start flowing a little bit sooner than the others.
Were those the kind of
spreads you're expecting on these spaces? Or is that was that in line with your expectations maybe a year ago?
Yes. I mean most of the significantly below market leases were ones that were picked up in auction. So when you look at the whole portfolio, the whole mark to market opportunity was higher. And then for those that we had remaining, they were slightly closer to market. So that's about in line with what we were expecting.
Makes sense. Thanks. My next question is for Ross. You mentioned Kimco's approach by interested buyers about potential portfolio deals. Do you still feel that portfolio deals are being discounted by buyers versus the pricing you could achieve by selling individual assets?
I think there's still a modest level of discount, but it's certainly narrowed from where the discount, for portfolios was when there were discussions that we were having at the early part of the year. So I do think that there are large private equity groups that are getting a bit more constructive on retail and looking at opportunities within portfolios. So you may see that as we get into 2019 with some other portfolio owners. But for us, we're at the tail end of this program. So we just have a we're going to finish it off with a one off strategy.
Got it. Thank you. That's all I have.
The next question comes from Derek Johnston with Deutsche Bank. Please go ahead.
Good morning. Could you talk about cap rates that you've seen for different formats? Guys, have you seen any divergence between power centers versus grocery anchored, especially with recent pushes into online grocery, any changes in demand or pricing?
I think for the core major market assets, grocery anchored product is still very much in favor, particularly for the best in class grocers. So a couple of examples in Raleigh, Portland, Northern California, we've seen grocer anchor deals either close or price sub-five percent. I would agree with the premise that as you get a little bit outside of the real major institutional type of assets that buyers are being much more critical of who the grocer is, what their performance is, if their rent is replaceable, Whereas in years past, I believe that having a grocery anchor sort of was an automatic bulletproof type of investment for an investor. So I think there is a bit of a blending now people are just much more focused on who the retailer is, how their performance is, how their rent compares to market and if there's any additional upside. So that's really what we're seeing in the marketplace today.
Thank you. And on TIs and CapEx associated with new leasing activity in 3Q, it did look a bit higher And on TIs and CapEx associated with new leasing activity in 3Q, it did look a bit higher than previous quarters and the volumes looked a little light. Of course, understand this is a volatile statistic Q over Q and a slightly smaller portfolio. But was this related to a specific new lease or is it consistent with breaking up some of the bigger boxes and something that may remain elevated into 2019, if there's any insight there that you can share, please?
Sure. Yes, absolutely. Great question. Yes, and you're spot on. It was driven by a few leases that elevated the cost side.
But what's also more important to look at is on the new rent side. So when you look at the Trailing 4, we're just over $19 in this quarter, we're at over $22 a foot. So there's a significant gain there as well to more than compensate for the slight increase of the additional cost and that's where it was driven by. So strip those out and you're pretty much back into your trailing 4 and the trend we assume would continue.
Excellent. Thank you.
Next question comes from Wes Golladay with RBC. Please go ahead.
Hey, good morning guys. Looking at the Toys R Us, you had 6 toys boxes awarded to others. And I think you mentioned maybe some of the Kmarts may be assumed by others. Can you talk about who those entities might be? Is it retailers with construction teams, landlords, etcetera?
Yes. So on the on those that have been assumed, they were all primarily retailers. So those that would be managing their own, I believe you said construction, so doing their own construction and fit outs, absolutely. And again, on the Kmart, same thing. And use operators, retailers, off price crafts have been popular with the toys.
Those have been big drivers of it, furniture, fitness, etcetera.
Okay. And then
when we look at the redevelopment budget for next year, I believe at a high level, it's around $250,000,000 Is there any part of that budget dedicated to the Sears Kmart redevelopment?
There's a piece of it that we just have as a placeholder. But again, we'll have to wait and see how that plays out.
Okay. Thanks a lot, guys.
Next question comes from Haendel St. Juste with Mizuho. Please go ahead.
Hey, good morning.
Conor, I
guess for you, I know you're not ready to talk about 2019 guidance, but obviously 2019 looking like a bit of a transition year, held back a bit by this year's disposition activities and redev drag and a growing 2018 same store NOI base. You've raised guidance now 2 quarters in a row. I guess I'm more curious what you think the portfolio, the Kimco portfolio can generate on a same store NOI and FFO growth basis on a more steady state basis once all the noise settles down?
Thanks.
Look, our goal long term is to be the best shopping center REIT in the entire sector. And we on on a long term run rate and an FFO growth rate that's in that 4% to 5% or higher. And so when you look at the portfolio and what we're trying to do, that's our long term goal to get there. Now 2019 has some hurdles ahead of us because of the accounting change, because of the dispositions that we did and because of the developments, redevelopments that are continuing to start to ramp and that continue to ramp from 2019 into 2020. So look, our goal is to get there.
We obviously have our work cut out for us in 2019, but we're committed to make it a growth year and that's what we continue to say is that we've repositioned the portfolio to where we see now we can really run a top quality and top flight portfolio going forward.
That's helpful. Thank you. A question, a follow-up on the tenant side. We've seen a number of traditional strip center tenants who are still opening a large number of stores, Ulta, 5 Below, Carter's, starting to go into B and C malls, sometimes on the exterior because it's often cheaper. Curious what you're thinking and seeing on this front and how it impacts your view on tenant retention going forward as the environment for some of these tenants gets more competitive?
Thanks.
It's something that we talk about a lot and watch closely. When you look at the competitive set, we continue to look at malls as a competitor. And when you think about though the opportunity set there that retailers are looking at, the mall is really a 4 headed monster when you look at the anchors that they have. And really, the retailers that we're used to doing business with that you listed off, they're really focused on making sure that they have great visibility to the street, big fields of parking and an exterior entrance. And so when you think about the mall, there's really only probably 1 or maybe 2 boxes that could be repositioned to flip to the exterior and retain that type of visibility in that parking field and that exterior entrance.
And so it has been very limited to date. And now that we've repositioned the portfolio to be concentrated in the top 20 markets, we believe that if a mall gets a box back, the likelihood of them doing an off price retailer or a discounter is probably very limited because they're probably either going to do a luxury and redevelopment or densification for that box. So that's why we continue to look at the portfolio as well positioned for that shadow supply that we've been talking about now for a number of years.
Do you have handy what the retention levels have been historically, say, the last 5 years and maybe how we should think or how you're thinking about that going forward?
The retention levels have increased. I mean, when you look at the amount of options and renewals we're doing, we continue to be pleased with the retention rate, not only in the junior boxes and anchor boxes, but also in the small shop boxes. We continue to beat budget on that assumption. And so we've been watching that closely. And I think it's a reflection of the improved portfolio as well.
Thank you.
It's pretty evident what's happened with the portfolio when you have options or renewals running in high single digits quarter after quarter. Mean, that's really when these tenants have the opportunity to move down the street, go somewhere else if they think they can get a better deal, yet they're signing renewals and options in high single digit numbers without us needing to put any real capital into it.
The next question comes from Michael Mueller with JPMorgan. Please go ahead.
Yes. Hi. Quick question. When you're, I guess, through the Dania Mill Station and Lincoln Square developments, Are we going to see a pipeline of new development opportunities that kind of backfills those?
We're going to continue to look for the Lincoln Squares of the world, but those are real needles in the haystack and the Dania's of the world. So we look at our portfolio and see the huge amount of opportunity on the redevelopment side. And so that's where we're going to focus and continue to look for that organic internal growth that we can add to the pipeline. Dania has multiple phases to it. The second phase obviously is now moving forward.
We've and one thing to also keep in mind on Dania Phase 2 is that the apartments are under construction, which we have as a ground lease. And so it's not listed as an anchor, but it's one that continues to evolve as that project really comes into its own in the first phase of opening next week. So as you see the transformation of the portfolio going forward, I think you're going to see more pentagons, more of those types of redevelopments versus, say, the ground ups.
And that's where the team has been working on these entitlements. It's really been able to gain entitlements where we can further densify the properties.
Got it. Okay. That was it. Thank you.
The next question comes from Chris Lucas with Capital One Securities. Please go ahead.
Hey, good morning everybody. Hey, Glenn, just a quick question on the on where you stand as it relates to the taxable income given the where you expect asset sales to come in and the pricing. Is there any need potentially for special dividend this year given the sizable volume of asset sales?
It's a good question. I mean, we've done a lot of strategic planning to put us in a position where we don't think we will need a special dividend at all. But you'll see the composition of the dividend be very different than what it's been in the past. So in the past, you've had some level of return of capital. Right now, I think there would be no return of capital.
It will be a pretty good mix of ordinary income and capital gains because we have not used the 1031 exchange market to defer the gain. So we have a pretty significant amount of capital gains that is in the taxable income this year.
And then just a quick question, Conor, just on the 14 Sears Kmart boxes, if you were to bucket them between those that could potentially trigger redevelopment versus those that are more likely just simple backfills, could you give us a sense as to what that split is?
There's a number in there that we've been focused on in terms of large scale mixed use redevelopment and it's small. It's probably in the 2 to 3 number of ranges and it's those assets that are in dense urban locations that we've been waiting patiently for. What we found is that there's a number of individual retailers that are now at the table looking to take the whole box and we
could either do that as
a ground lease to limit our capital or we can do it as a reverse build to suit or just a normal TI fit out. So as we've said, we're focusing on the ones that we have visibility on. And actually, the cost on those are in that $30 to $50 a foot range, which is very probably right in our sweet spot when you look at the rents that we're achieving there and the spread. So as we go through the process, we'll continue to be ready with other retailers at the table as we get the boxes back, but that's really the spread of where we see it going forward.
And then just a quick follow-up on Kmart Sears. Is there anything unique or different about their operations in Puerto Rico that we should be thinking about as they go through this process?
I would just tell you that they're some of the highest performers in the entire chain. Their sales are incredible there. And so as a profitable entity or a reorganized entity, those are ones that create a significant amount of EBITDA for them. So that's just something to keep in mind. The other thing I should just mention on Puerto Rico is the whole island has been deemed an opportunity zone, which for us is an interesting development as we look at our portfolio down there as that may change the cap rates on the island.
Great. Thank you. Appreciate it.
The next question comes from Ki Bin Kim with SunTrust. Please go ahead.
Thanks. Going back to your earlier comments about a pretty strong or stable pricing market for asset sales. I know you've been very consistent in your messaging that you don't want to do a lot more in 2019 in terms of dispositions. But what keeps you from doing more? Is it really basically that dilution is painful and the stock market doesn't appreciate it?
I know the market has kind of turned in their mentality about can you do asset sales to you can do it, but just don't do too much. But just curious overall, why not do more asset sales and bring down your leverage, that's a little bit above 7 times to something more in line with your peers?
Yes. I mean, I think we're very confident in the portfolio with where it sits today. We're seeing strong results quarter after quarter in terms of the performance on the existing portfolio. But you are right, we have stated, we are very excited to bring this portfolio back to a recurring FFO growth year in 2019. But more so than that, we just are really confident within the portfolio and think that we have a right sized portfolio that has a strong mix of quality, core grocery anchored centers as well as an opportunity set for redevelopment that we really believe is unmatched.
So we're excited about the future within this portfolio.
I said the only thing I would add is when you look at the net debt to EBITDA, it's going to naturally come down because EBITDA growth from all the investments that we've made in these developments and redevelopments, they're just beginning now to flow. I mean, we have $500,000,000 invested in development projects that are just now beginning to flow. So as all that EBITDA comes on board 2019 and further into 2020, you'll see leverage come down naturally.
Yes, I realize that. And that makes a lot of sense. Second question, this might be a tough one, but when you look at the applied cap rate for your internal portfolio today versus 15 months ago, pre-900,000,000 of asset sales. I know you're not going to give a cap rate for your portfolio on the call, but directionally, how has your view on the applied cap rates changed over that timeframe? And like has it come down 25 basis points or 50?
Yes. I mean, I think when you look at the portfolio we have today compared to 12 months ago, the significant amount of our best assets take up a bigger percentage of our overall value. And we don't think that that's been represented within the stock price yet. But we're hopeful and we're optimistic that all the work that we've done, that we've put into repositioning the portfolio as well as the redevelopment opportunities that we have as they continue to start flowing, we'll see a narrowing of that gap. But from where we sit today, there's still clearly a big discrepancy between the private market cap rates that would be on our portfolio versus where the implied is today.
All right. Thank you.
The next question comes from Linda Tsai with Barclays. Please go ahead.
Hi. I know you've been relying more on data and technology to help retailers understand the attractiveness of your centers. And you've said in the past, you to look at 1, 3, 5 mile rings, but now density is more of a focus and you could look at geospatial data to figure out a true trade area. Are there any insights you could share as to which retailers or service providers help expand a trade area? And then on the flip side, does this data help you understand the impact of competing centers and sales cannibalization?
Yes. It's in terms of those that actually have the draw, it's interesting. When you look at, say, the ethnic grocers, the Asian grocers, they have a significant draw outside your traditional 1, 3 and 5. They can pull from 15 to 20 miles away, which is pretty unique. And so when you see them as an anchor, you keep that into consideration.
As it relates to the utilization of data, we continue to be very proactive in that case and partnering with our retailers to get a better understanding of how they're utilizing it. So collectively, we can have more of a joint partnership to create the best offering to the end customer, which is really both our customer and their customer. And that's what's most important. And with retailers such as Target and others and Walmart, I mean, how they're utilizing it to draw people in on the buy online, pick up in store and making more customer oriented and customer service oriented. It's so critical for the evolution of what retail needs to be going forward.
And so you see the really the winners and those that are seeing some outstanding performance, it's really a result of those efforts. So for us, we see it as a critical part of our business going forward and we'll continue to work with the retailers alike.
Thanks. This concludes our question and answer session. I would now like to turn the conference back over to David Puszczynski for any closing remarks.
Thank you very much for participating in our call today. I'm available to answer any follow-up questions you may have, and I hope you enjoy the rest of your day.
This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.