Good morning, and welcome to the Kimco second quarter 2018 earnings conference call. 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. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your 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 David Bujnicki. Please go ahead.
Good morning, and thank you for joining Kimco's second quarter 2018 earnings call. Joining me on the call are Conor Flynn, our Chief Executive Officer; Ross Cooper, the President and Chief Investment Officer; Glenn Cohen, Kimco's 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, and 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 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 strong second quarter performance and an update on the great progress we have made on the execution of our 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. Execution continues to be our number one priority as we reposition our portfolio for the long-term growth and value creation. Our team continues to work tirelessly as we seek to improve in all aspects of our business. Our results for the quarter continue to demonstrate that our portfolio quality and value creation initiatives are working. Now for some details.
We are now over halfway through the year. The pace and strong pricing of our dispositions give us confidence that we will meet our full-year disposition range of $7 million-$900 million. The vibrant private market valuations, coupled with widely available debt financing and strong pricing for our Midwest assets, continue to demonstrate the disconnect between public and private pricing. Ross will go into detail on the encouraging pricing, execution, and capital formations we have experienced recently. As we achieve our targeted dispositions for the current year, it positions us to restart our growth as we enter 2019 with a superior portfolio concentrated in coastal markets where we see the best opportunity for growth and redevelopment potential. As I mentioned, our repositioned portfolio is producing solid results.
Leasing volume continues to be near all-time highs for the company as our team is working diligently to create vibrant campus-like settings where our shoppers want to stay for extended periods of time. Our same-site NOI outperformed this quarter due to strong leasing volume, a slowing of new vacancies, and the additional rent collected from our Toys 'R' Us boxes. The Toys 'R' Us liquidation process has been drawn out, which has given us a running start on our re-leasing efforts. These efforts have produced significant interest from major retailers in off-price, furniture, fitness, specialty grocery, and arts and crafts. To recap, we had a total of 22 Toys 'R' Us leases that fall into two categories, OpCo leases and PropCo leases.
15 of our leases are in the OpCo entity of Toys 'R' Us , and we have already resolved seven of those locations with retailers taking the entire Toys 'R' Us box. Our remaining eight locations in OpCo have significant tenant interest, and we are working to convert this demand into leases as quickly as possible. The second category of our Toys 'R' Us boxes are leases in the PropCo entity. We have seven leases in PropCo which have not yet been rejected, and the date of the auction has not yet been set. Rent continues to flow on these assets. We anticipate a Q3 resolution of the PropCo entity and have been proactive in marketing these locations.
Looking ahead to the third quarter, we anticipate that the Toys 'R' Us liquidation will have a maximum impact of 70-80 basis points on our occupancy and same-site NOI as we anticipate recapturing the majority of the boxes that have not yet gone to auction. Notwithstanding the impact, given the strong re-leasing to date and the demand for the remaining Toys 'R' Us boxes, we feel confident in raising our same-site NOI guidance for the year to 2%-2.5%. Overall, we have seen demand match or exceed supply for high-quality locations, with retailers focusing on store growth in the top 20 markets where populations are growing, wages are rising, and employment is increasing.
Our overall strategy has focused on repositioning our portfolio to be tightly concentrated in these top 20 markets, where we believe demand will continue to be strong over the long run and provide unique opportunities for our mixed-use platform. Keep in mind that we are also at a 40-year low for new supply, which we don't see reversing anytime soon as land costs continue to escalate, along with increases in labor and construction costs. We see the economy continuing to grow, demand from our retailers continuing to increase, and the millennial generation coming into its peak spending years. These factors have generated outsized demand for many of our assets, driving our occupancy level on our small shops to the highest level in the company's history at over 90%.
Demand for small shops is being driven by multiple retailers expanding in the restaurant, service, health and wellness, medical, and fitness categories. While our focus continues to be on execution and portfolio improvement, it is worth mentioning the two major events that occurred this year that have boosted the retail outlook for the year and has retailers focusing on investment, both in existing store remodels and the rollout of new stores. First, tax reform has dramatically lowered the effective tax rate for our retailers, which were paying some of the highest corporate tax rates in the country. In numerous meetings with our retail partners, they have consistently touted tax reform as a major factor in their real estate expansion plans.
Second, the Supreme Court ruling in the Wayfair case, allowing state impositions of sales tax on e-commerce, will likely level the playing field for all retailers, regardless of channel. This ruling has effectively closed the loophole that allowed pure e-commerce players to skirt state sales tax and offer the cheapest price possible on a wide assortment of goods. We believe the ruling could potentially accelerate the trend of omni-channel retailing. Turning to our Signature Series developments and redevelopments. They continue to mature and move closer to producing meaningful growth for the company as we approach 2019. As I mentioned, the lack of new supply. Whenever a high-quality project is brought to market by a respected and well-capitalized developer, retailers are ready to jump at the opportunity. Our sites are substantially pre-leased, creating positive leasing momentum for these rare high-quality opportunities, which are poised to deliver on time.
Our Lincoln Square mixed-use project in Center City, Philadelphia, is starting to pre-lease apartments with demand exceeding our budget. The first Sprouts Farmers Market in Philadelphia is set to open at Lincoln Square this August, and Target will soon follow. Our Pentagon Centre mixed-use tower, called The Witmer, is now topped off and will begin pre-leasing apartments in 2019. Dania Phase I is now 93% pre-leased and is set to open later this summer and stabilize in 2019. Our Mill Station development is now 79% pre-leased, with Costco set to open in September. These Signature Series projects are large in scale and will deliver meaningful growth in 2019 and beyond as we unlock the embedded value of our real estate. In closing, we are pleased with the pace of our dispositions and pricing.
We have taken advantage of this public-private disconnect by buying back our shares at a discount on a leverage-neutral basis. We are witnessing solid demand for our available spaces and have made meaningful progress on our Signature Series development and redevelopments that will start to deliver later this year. We continue to focus on what we can control, execute on our strategy to position the portfolio to generate consistent growth, supported by a strong balance sheet that will create long-term shareholder value. Ross?
Thank you, Conor. It has certainly been a busy first half of the year on the transaction side, with our team firing on all cylinders. Second quarter sales volume continued at a significant pace with the sale of 17 shopping centers for $320 million at Kim share, putting us well on our way to hitting on our 2018 disposition goals of $700 million-$900 million. In fact, with $530 million Kim share of sales for the first half of the year, we are two-thirds of the way there, and we continue to execute. Subsequent to quarter end, we sold an additional two shopping centers for a combined $49 million at Kimco share and currently have another $200 million plus at Kimco share, either under contract or with an accepted offer. We maintain our full-year guidance range for both net sales volume and cap rates.
As we communicated previously, in conjunction with the initial disposition targets for the year, it was always our goal to maximize proceeds in the first half of the year to minimize dilution in 2019. As Conor indicated, our team is dedicated to ensuring recurring FFO growth in 2019, and we fully understand how the timing of our 2018 sales impact that goal. Given the timing and pace of our sales volume in 2018, we are comfortable indicating that next year's sales will be meaningfully less than this year. Also, another benefit for expediting our 2018 sales volume is that it continues to strengthen the remaining core portfolio as evidenced by our operating fundamentals.
As we move through the remainder of 2018, given our continued emphasis on owning properties in dynamic growth markets, we remain focused on reducing the asset count in the Midwest, while also selectively pruning flat or low-growth assets from other parts of the country. We sold our last remaining shopping center in Alabama this quarter, removing another non-core state from our ownership map. The blended cap rate through the first half of the year was at the lower end of our expected range, reflecting positively on both the quality of the centers being sold and the investor demand. Through the first half of the year, we continue to be impressed by the level of activity and the profile of those bidding on our properties. Demand for our sites remains strong, with readily available debt capital at continued low interest rates.
With the 10-year settling around 3%, borrowing remains an attractive opportunity to maximize yield on investment for buyers. Highlighted during the recent RECon in Las Vegas and continuing through today, new bidders have emerged, as well as some renewed interest from previously inactive investors. While we have seen more sincere interest from potential portfolio buyers, we continue to see the greatest execution via one-off sales, which we will remain focused on through the back half of the year. There has been no material change in valuations or investor appetite for high-quality core major markets. We have seen continued strong demand for institutional quality assets with recent transaction at five caps or below in South Florida, New Jersey, Atlanta, Southern California, Washington, D.C., and elsewhere. Glenn will now provide additional detail on our financial performance for the quarter.
Thanks, Ross, and good morning. Following our solid first half results, we remain confident and energized that we will meet our objectives for 2018 and position our company for growth in 2019. We are starting to realize the benefits of a high-quality portfolio comprised of a strong and diverse tenant roster located primarily in the top MSAs, where we see the best opportunity for growth. Occupancy is near all-time highs, and new leases signed continue to deliver positive double-digit spreads. Our development projects are progressing and are expected to begin contributing to our growth in 2019 and beyond. Now for some details on our second quarter results.
NAREIT FFO was $0.39 per diluted share for the second quarter 2018, which includes $9.5 million, or $0.02 per share, of net transactional income, comprised primarily of $5.6 million from preferred equity profit participations and $3.6 million from an equity method distribution above our basis. NAREIT FFO per share for the second quarter last year was $0.41 and includes $0.03 per share of net transactional income, mostly from the $23.7 million distribution received from our Albertsons investment. FFO as adjusted or recurring FFO, which excludes transactional income and expense and non-operating impairments, was $155.7 million or $0.37 per share for the second quarter 2018, compared to $160.7 million or $0.38 per share for the second quarter last year and reflects the impact of our successful disposition program. Our operating portfolio continues to improve and deliver positive results.
During the quarter, the operating team executed 369 leases totaling 2 million square feet and an average rent per square foot of just over $18. Our average base rent for the entire portfolio has increased 4.6% over the past year and 5.2% when you exclude our ground leases. Total occupancy is at 96%, up 50 basis points from a year ago, and our anchor occupancy is at 98.1%, up 60 basis points from a year ago. Same-site NOI growth was 3.9% for the second quarter, including 10 basis points from redevelopment. Of particular note is the fact that 80% of the same-site growth came from increased minimum rent and percentage rent. For the six months, same-site NOI growth was 3.2%.
In terms of the second half same-site NOI growth for 2018, as Conor indicated, we will be impacted by the Toys Us liquidation as well as a tough year-over-year comp for the third quarter. Mitigating this impact is the wide spread of 310 basis points that remains between our leased and economic occupancy levels. After factoring in these items and based on our year-to-date performance, we are raising our same-site NOI guidance range from 1.5%-2% to a new range of 2%-2.5% and believe the upper end of the increased range is achievable. Our balance sheet and liquidity position are in excellent shape. We ended the second quarter with over $300 million in cash, zero outstanding on our $2.25 billion revolving credit facility, and no debt maturing for the balance of the year.
We also opportunistically utilized our common share repurchase program to buy back 3.5 million shares at a weighted average price of $14.53 per share, totaling $50.8 million, representing a 10% FFO yield and a 7.7% dividend yield. Year to date, we have repurchased 5.1 million common shares at a weighted average price of $14.73, totaling $75.1 million. Our consolidated net debt to recurring EBITDA remained at 5.7 times, same as the first quarter. When you include the transactional EBITDA, the metric improves to 5.5 times. In addition, as a result of the progress made on the disposition program, we have elected to exercise the make-whole provision and repay early our $300 million 6.875% bond due in October 2019. This bond is our most expensive unsecured debt instrument and will be repaid in late August.
We will incur a charge of approximately $13 million or $0.03 per share in the third quarter that will be included in our NAREIT FFO. With the repayment of this bond, we will have no debt maturing until 2020, and our weighted average debt maturity will be over 11 years. We remain focused on reducing net debt to EBITDA. A key driver will be the EBITDA contribution that will flow once the development projects, with $530 million invested to date, start to come online in late 2018 and into 2019. Based on our first-half performance and expectations for the balance of the year, we are raising the bottom end of our NAREIT FFO per share and FFO as adjusted per share guidance range from $1.42-$1.46 to a new range of $1.43-$1.46.
The NAREIT FFO per share range includes the net transactional income to date and the anticipated early debt prepayment charge of $0.03 in the third quarter that I previously mentioned. With that, we'd be happy to answer your questions.
We're ready to move to the Q&A portion of the call. To make the Q&A more efficient, you may ask a question with an additional follow-up. If you have additional questions, you're more than welcome to rejoin the queue. You may take our first caller.
We will now begin the question-and-answer session. To ask a question, please press star Then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star and then 2. At this time, we'll pause just a moment to assemble, and it looks like we have some questioners already, so we will go ahead. The first question comes from Samir Khanal of Evercore. Please go ahead.
Good morning, guys. Conor, you mentioned the same-store NOI guidance, when you look at your same-store guide, it implies a deceleration of to about 1.3% for the second half. Toys is certainly having an impact of 70 to 80 basis points, which you mentioned. What are sort of the other headwinds that kind of get you to the 1.3% in the second half here?
Well, you're right. I did go into detail about the impact of the toys. We'll have to see how that PropCo auction plays out still. We feel actually very comfortable in the high end of our 2% to 2.5% range. We've seen, as you've seen in our operating fundamentals, that the leasing volume continues to be at near all-time highs. That is the real focus of us, is continuing to look at the back half of the year and continuing to push that.
Yeah, it's Glenn. The other thing I'd offer is that during the third quarter of last year, we received a pretty substantial tax refund of about a million and a half dollars that is not there this year on one of our sites. That just adds to the tougher comp comparison.
Okay. I guess as a follow-up, I know you don't have an estimate or guide for 2019 yet, it feels like with Toys paying rent a bit longer in 2018, the setup going into 2019 doesn't seem to be that great. It'll be more of a headwind. What are the things we need to sort of think about from a tailwind perspective as we formulate our thesis for 2019 here from a same-store perspective?
Well, again, we're not going to give guidance yet. We're only halfway through 2018. There are some positives if you look at it. We have a lease to economic occupancy gap of 310 basis points today. Quite candidly, that gap is probably going to widen a little bit as we start re-leasing some of these Toys boxes. You're going to wind up with more leasing done there and widen that gap a little bit until it starts narrowing when those flows start coming online. Remember, same-site is, in our case, cash base.
Yeah, I would just add that of the 15 OpCo leases that we have control over, almost half of them are already backfilled. We feel really good about the momentum we have going there.
Okay. Thanks, guys.
The next question comes from Craig Schmidt of Bank of America. Go ahead, sir.
I guess just on a follow-up, if you had to speculate, will Toys R Us be a bigger impact in 2018 or 2019?
I would say probably have a little bit more impact potentially in 2019. Again, where we sit today, we still have a lot of rent that's still flowing, right? Really through the first six months of the year, except for four of the boxes, everything has been paid so far. With the seven PropCo leases, those are still paying as well. It's going to come down to the timing of when, from a same-site perspective, when those flows start happening. I think Dave maybe will add here, the prospects on leasing are very strong, and we feel good about being able to get them leased up pretty quickly.
Thanks, Glenn. As we have reiterated on past calls, the demand side for the Toys Us boxes continue to be very strong. As Conor referenced, we have almost half of those resolved in the OpCo entity, we continue to pre-lease the PropCos in the case we do actually recapture some of those boxes, and we've seen excellent activity on those that we've just recaptured this quarter as well. We feel very comfortable with where we stand today in terms of the demand side of this and see it as a positive outcome longer term.
Don't lose sight of the fact of just how diverse our portfolio is. Although the toy thing is clearly a headline item. Again, it makes up, we're talking about 70, 80 basis points of total ABR, where we've already released and have assigned four of the boxes and other leases coming online. Headline issue more than anything else, I think.
Just on the non-same store sales I mean, sorry, non-same store NOI, even if we exclude Puerto Rico, it's down significantly. I just wonder what's in that bucket.
In terms of the same site NOI? That's-
Yes.
Rather the NOI coming from non-same site locations, Craig?
Yeah. The non-same store NOI. Given your footnote, I subtract that out. I'm coming down with a decrease of about 41% within the other ones.
Those are primarily properties that we acquired during last year, Craig. That's pretty much outside of Puerto Rico. That's really what it is driving that.
Okay. Thank you.
The next question comes from Jeremy Metz of BMO Capital Markets. Please go ahead.
Hey, guys. Good morning. As I look at the same store detail on page nine, your recoveries have been trending higher than your actual increase in expenses. Is this simply a reflection of the higher occupancy leading to greater recoveries? Then in terms of the tenant improvement dollars, it looked like this is the highest it's been on a quarterly basis in a few years. Just wondering, are you having to give more today to drive leasing, or is this more reflective of some of the box leasing you're doing and higher overall churn you're replacing? Just some color on those trends would be great.
This is Dave. I'll take the first one and the second. With the first one, we have a year-over-year, the economic occupancy is higher. You're spot on that. That's helped with the recovery income. We'll continue to see that trend on a go-forward basis. As it relates to the TI dollars and the contributions, in general, we haven't seen a change in deal costs. It's not as if that the tenants themselves are demanding more to induce them to come into our centers. It's really driven by the population of the tenancy at any given point in time. When you look at our operating real estate lease summary sheet, on the new lease side, you'll see on this quarter, it's actually around $13.10, while the trailing four quarters was about 15. We're right in line there, actually a little bit less.
On the non-comp side, it is elevated a little bit this quarter, really driven by two specific deals that were value creation deals. If you left those out, we'd be at $21 a foot, which falls below our trailing four quarters. We're still pretty much in line with where we'd expect to be.
Maybe a question for Conor or Ray, if he's on the line here. It looks like Glass, Lewis & Co. recently recommended against the Albertsons Rite Aid deal. I know it's a little early, but assuming the transaction doesn't come to fruition, how do you think about monetizing that investment going forward? As it seems like that seemingly or was going to unlock some needed capital starting in 2019. I guess if it doesn't happen, could we maybe see you needing to ramp dispositions again to fund that gap?
Hi, this is Ray. With respect to the Albertsons and the Rite Aid transaction, for us, at least on the Albertsons side, they are really performing very well. They've had three straight quarters of same store comp growth. For this last quarter, their EBITDA was $44 million above last year's. They're really trending very well. If to the extent that if the Rite Aid shareholders don't approve the transaction, I think we're very well-suited for the company going forward to take other opportunities. You start today a transaction with SuperValu. There's really a lot of consolidation in the grocery business on the wholesale side, I think there's a lot of opportunities going forward for Albertsons. We'll just keep our head down and keep making money on that end and work it out as we go forward.
I think Glenn also wants to talk about the capital part.
From the capital standpoint, again, as I've mentioned several times already, there is nothing in our numbers for 2018 or 2019 as it relates to Albertsons. We remain completely focused on execution around the portfolio, our dispositions, our balance sheet management, our developments, our redevelopments. When and if Albertsons happens, it'll be a positive for us, but there's nothing baked into our numbers for it, and as I mentioned, we have no debt maturities and enormous amounts of liquidity at this standpoint. We are very comfortable with our capital position.
Our disposition plan for 2019 will not be impacted one way or the other. That wouldn't impact our desire or need to ramp up dispo's in 2019.
Okay. Our next question comes from Mr. Brian Hawthorne of RBC. Please go ahead.
Hi. My first question is, conceptually, when you look at the increase in shop occupancy, can you kind of frame it up for us as what's really driven that? Is that from increased leasing or more, is that just from dispositions?
I'd say, this is Dave. The higher quality portfolio is clearly starting to showcase its benefits. The higher occupancy is driven by accelerated lease up of those vacancies. Those vacancies are typically vacant less time as opposed to those sites that we've sold in the past. In addition, our retention rates are higher as well. That's obviously a big contributor to maintaining and increasing your occupancy quarter-over-quarter, year-over-year. That's where we see a massive improvement in terms of our occupancy rates.
Yeah. In fact, the dispositions through the first half of the year average 96% occupancy. The assets that we're selling are actually primarily stabilized.
You really see the boost coming from the growing economy, the small shops are really driven by either local entrepreneurs, franchisees, also we've seen a big boost from medical, from fitness, from health and wellness, from service, and from restaurants. Those areas of the economy are booming, and they continue to really drive the occupancy growth in our small shops.
Okay. The other one, when you look at your watch list, have you seen the shift mix from, in terms of the anchor versus shop split?
I don't think it's changed all that much. The mix has always been a focus on retailers that have gotten themselves in a bit of trouble, whether it's through over-leverage or a distressed business plan. That really hasn't changed the shift or the mix of the watch list.
Okay, thank you.
The next question comes from Alex Goldfarb of Sandler O'Neill. Please go ahead.
Hey, good morning out there. Just a few questions. First, just going back to the Albertsons. On the last call, you guys said that you expected to vote in July and now the vote is in August. Glenn, you've been pretty clear that there's a lot of capital that's going to come out of monetizing Albertsons that's non-dilutive because you're not booking any income against it. It does seem like monetizing Albertsons is critical to you guys deleveraging and getting on your run rate, especially when we look at dividend coverage, which is pretty tight, and the sales this year mean that you're going to have to increase it despite the very tight coverage.
If you could just walk through, it just seemed to Jeremy's question, it wasn't maybe as full as would've liked, but just, if Albertsons doesn't happen, how do you plan to de-lever in a non-dilutive way? Or should we assume that in our modeling, that if this doesn't happen, that there will be dilution? And just a little bit more from Ray on why the vote was pushed from July to August. Sounds like Albertsons doesn't have the votes to win.
Okay, a couple of things. First, as it relates to leverage, there's nothing in our numbers for 2019, and our leverage is going to naturally come down because we have all these developments and redevelopments that are going to start flowing and producing further EBITDA. Now, the reality is, if Albertsons doesn't happen, it does happen and it monetizes, the leverage comes down that much quicker. To your point, we're not booking any income and we would have this inflow of cash. We have not based our forecasts on that happening. We're not really concerned about it. Leverage will naturally come down over time. It accelerates in the event that a monetization happens.
Alex, we feel very comfortable with our capital plan to fund everything we're looking to do in 2019 with the plan we have in place with no Albertsons monetization whatsoever, because the EBITDA will come online, it'll improve the dividend coverage. That's the way we've been running the business. We're focused on running the business, not having an investment that we don't control the monetization of impacting that.
I would just say that Ray, is the read on the vote-
Yeah.
on the change of the vote date?
Yeah, this is Ray. The reason for the timing of being pushed back a couple weeks is just really procedurally. They have to get the approval and the final okay from the SEC of when they file the S-4. They had to negotiate that. Just took a couple of weeks longer than they thought, and they felt that instead of giving 30 days, they gave like 40 odd days for the vote to happen. It was just a decision they made. They really think, middle of July or early August is kind of a rounding error in timing. There was nothing else other than that.
Okay. Just as a second question, everyone's favorite topic, FASB accounting. Glenn, do you guys have an estimate for what the change in internal lease accounting is gonna impact your 2019 numbers?
We do. Our initial estimate based on what we've done, is it'll impact it by about $0.02 to $0.03, somewhere between $8 million and $11 million. That's got to be taken into account as you're doing guidance numbers for 2019.
Okay. Thank you.
The next question comes from Christy McElroy of Citi. Please go ahead.
Hey, good morning, everyone. Just to follow up on the discussion around the second half same-store trajectory, there was a lot of talk about the Toys impact, but just as it relates to the leases that have been executed but yet to commence, I think you had previously talked about $15 million of rent commencing in second half. Can you maybe provide an update on that number? In terms of timing, is that weighted more to Q4 as we think about the same-store trajectory going from Q3, which sounds like there's going to be a more significant deceleration, to Q4, which may be more muted?
Yeah, I would say that the third quarter would be our low point in terms of quarterly same site NOI growth. You'll see it start picking up again in the fourth quarter. Again, we raised our guidance, so we're comfortable at that 2%-2.5% range and that we are comfortable that we will get toward the upper end of that range as well.
Right. Just an update on the $15 million. Is that still generally within the range, or is it higher?
Yeah, Christy, that's still with .
It's still in the range, but it'll be more weighted towards the fourth quarter.
Okay. Perfect. Then, Ross, just how should we think about that accelerated pace of dispositions and what sounds like what you talked about, a decent transaction market conditions in terms of where you expect to fall on the full year range, which remains pretty wide at this point. Recognizing your comments that 2019 volume will fall off, but obviously the difference between an incremental $150 million from here versus $350 million in second half has pretty meaningful implications for how we're thinking about further dilution in 2019. Maybe you could give us a little bit more precision in terms of where you expect to fall in the range.
Sure. It was always the team's goal to push as much of the dispositions into the first half of the year as possible. We're very pleased with that. I think you will see a little bit of a slowdown in Q3 in terms of total volume, certainly compared to Q2. To your point, given where we are and the pace and the execution, we would expect that at a minimum, we'll be at the midpoint and probably towards the upper end of that range by the end of the year.
Okay. That's helpful. Thank you.
Sure.
The next question comes from Vince Tibone of Green Street Advisors. Please go ahead.
Good morning. For the seven Toys boxes that have been resolved, when do you expect those leases to commence? Or how will the time to backfill Toys compare to the time it took to backfill Sports Authority in your mind?
Sure. With the first question as it relates to the seven, we had four that were assigned this last quarter, so there's obviously no doubt rent, they're assumed immediately. That resolves those. As it relates to the, there were two that were leased. We had expected those to start flowing towards the back half of 2018 into 2019, and then we did sell one within the quarter as well. That totals up to your seven. As it relates to the balance, we've always stated it, we expect them all to get resolved within the next 18 to 24 months.
Okay. That's helpful. The four that were assumed, how did that number maybe compare to what you were expecting at the beginning of the liquidation process? I know some are still outstanding or still in the process. I'm just curious how that compared to your expectations.
That resulted better than our original assumption and expectation.
Okay, great. Then one more from me. Can you quantify how much the switch from variable to fixed CAM this year has impacted same store in the first half? I think you've said it was an incremental boost in the first quarter. Is that the same in the second quarter? Is this going to be kind of a headwind slightly in the second half, just given the comps?
It probably helps us 20, 30 basis points at the beginning part of the year. I think it's gonna all balance out when we're all said and done. Again, we remain comfortable with the guidance range that we've put out.
Okay. Thank you. That's all I have.
The next question comes from Michael Mueller of JP Morgan. Please go ahead.
Yeah. Hi, just a quick one here. How much of the 50 basis point same store NOI increase is coming from the, I guess, the slower unwind of Toys?
It's tough.
It's tough to break it out, right?
It's probably not a lot, Mike, to be honest with you. Really what's happening is rent commencements are a key driver for us in the same site growth because, again, we're cash-based. As the rents are really starting to flow and you see that of the 3.8% same site growth for the quarter, 3% of it or 80% of the number is really coming from the minimum rent line. That's more of the driver. The Toys "R" Us has a modest impact at this point. It's more the back half that's in there.
Okay. That was it. Thank you.
The next question comes from Richard Hill of Morgan Stanley. Please go ahead.
Hey, good morning, guys. I just wanted to spend a little bit of time on CapEx and get your opinions on how we're supposed to be thinking about it. It looks like quarter-over-quarter it increased. I recognize that can be pretty noisy. It doesn't look like it's that far off from where it was at the year-end 12/31/2017, but you've also sort of, obviously, had done a good job in reducing the size of your portfolio. I'm curious how we should be thinking about CapEx going forward, and if you're seeing any changes in sort of your mix of CapEx spend between inline and big box, or have your CapEx spend per square foot increasing? Anything that you can give us color on that would be really helpful.
Sure. Similar to what I referenced earlier, is that on our page in terms of new lease deals and the costs associated with those, it's really indicative of what's in the population on a quarter-over-quarter basis. It will vary as a result of that. In this quarter, for example, we executed more anchor leases than prior quarters, so you'll see an elevation in terms of number of deals and GLA executed compared to Q1, which will have an impact on those numbers as well. As I referenced in the non-comp new leases, it is elevated at $36 this quarter, driven by two specific deals. You strip those out and you're back to $21, which is in line with our trailing four. Actually, slightly below that. On a go-forward basis, we continue to see our deal costs remaining pretty much where they've been historically.
I would just add that the demand for the Toys boxes, we've been pleasantly surprised that they're being backfilled by a single user. When you look at the CapEx and the net effect of rents, it does benefit and it accelerates the RCDs, the rent commencement dates, when you have a single user backfilling that box. For the first round of leases that we've done, they've been single users coming into those boxes, which is a nice benefit to see.
Got it. Okay. That's it for me. Thank you, guys.
The next question comes from Ki Bin Kim of SunTrust. Please go ahead.
Hey, thanks. This is Ki Bin. Going back to the lease accounting question. I thought I was under the impression that you guys might change the way you compensate your leasing agents in order to not be really impacted by this ASU 842. It sounds like there was a change?
No, we have modified it somewhat that we'll be able to continue to capitalize some of those costs, there are other costs that are much harder to capitalize. There's a lot of legal costs that we are able to capitalize today that you won't be able to under the lease accounting, and you can't capitalize all of the costs that we have today. In total, again, we're primarily a very internal leasing organization. Again, as I mentioned, I think there's an $8 million-$11 million impact in total for the year.
We did try and get ahead of it and change our compensation plan to address it, there is obviously things that Glenn has pointed out that doesn't capture just the leasing side of it.
Right. If you didn't change the compensation plan, would it have been maybe like $5 million or higher? What's the delta?
Yeah. The impact would've been much higher, probably by another
Just going back to your asset sales, obviously you guys have made some pretty good progress this first half. Can you just give us a sense about the occupancy rates, the ABR, and just the kind of overall quality of what you've sold so far, and the cap rates as well?
Sure. Yeah. The occupancy was averaged out right at 96%, they're primarily stabilized assets. As we've previously mentioned, they're good quality assets. They're outside of markets that we view as long-term growth markets for us and may not have the redevelopment or value-add potential that our coastal portfolio, our portfolio in Texas, and a couple of other select markets have, which is why we've ultimately decided to exit those. The quality is fine. The tenancy is stable, in many cases, good credit. The demand has been there. The bidder pools have been relatively deep, more so than we saw in 2017. ABR is sort of right around or slightly below the average of the remainder of the portfolio. You're seeing a slight uptick based upon the dispositions in the go-forward portfolio. Overall, within the portfolio, there's no real distress remaining.
Even the dispositions that we're selling are well-stabilized, solid assets.
The cap rate was?
Yeah. The cap rate through the first half of the year is still on the low end of that 7.5%-8% range, and we continue to see that at the low- to midpoint of cap rate range going forward.
All right. Thank you.
Again, if you have a question, please press star, then one. The next question comes from Haendel St. Juste of Mizuho. Please go ahead.
Hey, good morning. Glenn, I guess a couple for you. One, I guess you referred to the gap between the leased and occupied space, looks like about 310 basis points, which is very similar to what it was at this point last year. I'm curious how much of the closing of that gap is implied in your outlook for same-site NOI in the back half of the year? How would you describe the overall leasing conversation, the process? Are you finding that the time to occupy is diminishing? I ask especially because last year at this time, again, we were expecting that gap between the physical and the leased tailwind to materialize, but it took a bit longer.
Well, again, the gap has widened primarily because of the Toys Us liquidation. The good news is that we've leased the boxes. The bad news at the moment is that with the rents not flowing for same-site purposes, you have this widening that's occurred. The gap will probably stay this wide during the second half of the year because as we go into the third quarter, you're going to have more leases, more Toys Us boxes that came back to us in the third quarter, and then it's a matter of the lease-up that's going to go with it. The more leasing that actually gets done, the wider that gap is going to be until the cash starts flowing.
Which sets us up for 2019 to be a strong year.
Correct. On your second point, I'm going to turn it over to Dave in terms of the timing on the leases getting done with the tenants.
Yeah. In terms of the Toys, we're continuing to see.
Generally.
Yeah. Generally, I think the timing of the leases has maintained itself historically as what we've seen with Toys boxes, 18-24 months as it relates to the other anchor leases. We continue to see between a lease being executed and opening on the anchor set around 10 months.
Got it. Okay. Glenn, just to follow up on one more, just curious on your appetite for stock buybacks here, given your recent run. The stock's here over 17. You're buying year-to-date with the price below 15. Assuming the stock price holds here, curious how you're thinking about allocating those incremental disposition proceeds beyond your normal redev. Thanks.
The primary focus for us is to continue to improve overall net debt to EBITDA. We were very opportunistic buying the stock back at under $15 a share. As I mentioned, 10% FFO yield, 7% dividend yield. We'll watch where cost to capital is. We also just announced that we're going to pay off our $300 million bond. We're going to use cash to help bring those debt levels down. It's really a watching what cost of capital is and where that stock price is, and then trying to do best capital allocation as we see fit.
We're still trading at a sizable discount to that asset value. It obviously still is a piece of the capital allocation plan that we have, and we have plenty of opportunity to utilize that.
Thank you.
The next question comes from Linda Tsai of Barclays. Please go ahead.
Hi. Of the 100 basis points in credit losses you forecasted for 2019, how much have you used on a year-to-date basis?
We've used probably about half of it so far, the balance of it'll probably get used up as we go through the rest of the Toys Us boxes. We still feel comfortable that where our credit loss levels are for the year are really the appropriate level.
In the centers where Toys Us went dark, did it create any co-tenancy issues in terms of other retailers leaving?
Not really, no.
Then just any update on Puerto Rico? I think Puerto Rico isn't in the same property numbers right now. Is it going to have a beneficial impact when it reenters the pool in 2019?
Well, it's not actually going to reenter the pool in 2019. We removed it so that we can keep focused on the continental U.S. as the same-site pool. If you look at our same-site pool, it's probably the largest or most complete pool of pretty much anyone. There are only 10 assets in total that are not in our same-site pool today. Seven of those are our Puerto Rico assets. In terms of operations, Puerto Rico has performed pretty well. Our occupancy level is back to where it was prior to the hurricane.
The guys and our team have done a tremendous job getting the properties back in shape. We've actually benefited from the fact that we actually had capital and people on the ground to repair those properties quickly, where some of the other retail property owners really just didn't have the access to the capital or really the product to kind of fix their properties up. We've really been able to benefit from some further lease-up.
Thanks.
This concludes our question and answer session. I would like to turn the conference back over to David Bujnicki for any closing remarks.
Thank you 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.