Good day, and welcome to the Kinko's First Quarter 2018 Conference Call and Webcast. All participants will be in a listen only mode. Questions. 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 Q1 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 course of this call. As a reminder, statements made during the course of the call may be deemed forward looking. It is important to note that the company's actual results could differ materially from those projected in such forward looking statements due to a variety of risks, uncertainties and other factors. Please refer to the company's SEC filings that address such factors.
During this presentation, management may make reference to certain non GAAP financial measures that we believe help investors better understand Kimco's operating results. Reconciliations of these non GAAP financial measures can be found in the Investor Relations area of our website. And with that, I'll
turn the call over to Conor. Thanks, Dave, and good morning, everyone. Today, I'll provide a high level overview of our Q1 2018 performance. Ross will then report on our transaction activity for the quarter and share his views on market trends and conditions. Finally, Glenn will provide details and color on key metrics in our 2018 outlook.
2018 is the year of execution for our team here at Kimco. More specifically, we are focused on 4 major initiatives to help position the company for 2019 beyond. 1st, execute on our disposition plan. Our disposition plan is designed to improve the quality of our portfolio, fund our developments and redevelopments and reduce debt. Despite concerns that continue to surround retail real estate, we are enthused about the volume, pace and pricing of our sales.
And while the equity markets continue to wrestle with valuations for retail real estate, the debt markets remain wide open to finance open air shopping centers due to the strong credit tenants that are performing well in the changing environment. While Ross will go into more detail on the dispositions and market conditions generally, think it is worth noting here that even while we are funding projects that provide no current yield and reducing debt at rates lower than the average disposition cap rate, despite this dilutive activity, we are still producing solid results in leasing, earnings growth and balance sheet strength. 2nd, notwithstanding our record setting leasing year in 2017, we expect to further improve upon our leasing volume this year and are off to a strong start. Our leasing volume is almost exactly where we were at this point last year. And for the first time in over 10 years, our sequential occupancy in the Q1 improved and now sits at 96.1%.
Occupancy for our anchor boxes increased slightly to 98.3% and we maintained small shops at 89.6%. This is quite a feat for the Q1, which historically experiences elevated seasonal store closures and bankruptcies and is another indication of the healthy demand for our core markets for high quality open air shopping centers. In terms of our leasing spreads for the quarter, new leasing spreads came in at 15.6% and renewals and options at 7.3% for a combined 8.1%. Our leasing efforts resulted in same site NOI of 2.6%, which is our 32nd consecutive quarter of positive growth. The portfolio continues to dramatically improve as our average base rent is up 19% to $15.69 from $13.18 in just 4 years.
3rd, continue to deliver on our development and redevelopment pipeline to create high quality, high growth assets. Tenants at Graham Parkway Phases 12 are now open and operating and generating above average sales for our best in class retailers. We are pleased to announce that Dania Phase 1 is now anchored by a Lucky's specialty grocer to fill out a great lineup of retailers set to open this summer. Dania Phase 1 is currently 93% pre leased. As we have said on numerous occasions, real estate is about location.
And this area Fort Lauderdale is tracking as one of the fastest growth areas across the United States. Lincoln Square, our mixed use project in Philadelphia Center City is now pre leasing apartments and we are excited to announce that Sprouts Farmers Market will anchor that project by retrofitting the historic train station on the site. Our Signature Series projects are making tremendous progress as we continue to unlock the embedded value of our real estate, allowing them to become major growth contributors for Kimco going forward. 4th, further improve the balance sheet to enable us to reposition our portfolio for the future and provide safety for a steady and reliable dividend. We ended the Q1 with consolidated net debt to recurring EBITDA at 5.7x and only $8,000,000 outstanding on our $2,250,000,000 unsecured line of credit.
While we are proud to be only 1 of a dozen BBB plus or PAA1 rated REITs, We continue to seek opportunities to improve upon this rating. We recognize there are some challenges ahead as we move to execute on these initiatives and are confident that we'll prepare to meet them head on. For example, our 22 Toys R Us locations, which represent 90 basis points of our total annual base rent and 130 basis points of occupancy are already seeing significant demand from our list of growing retailers that are in search of high quality locations. In addition to the thriving categories of off price, health and wellness, specialty grocer, home improvement, furniture, arts and crafts and entertainment, we have started to see new demand coming from co working facilities, hospitality groups and medical facilities. The quality of our centers creates future opportunities to reposition or reinvent them for the highest and best use to drive long term shareholder value.
In conclusion, our team remains both motivated and focused to reach and exceed our goals. Our high quality coastal weighted portfolio combined with the strength of our platform will generate significant long term shareholder value through numerous levers of NOI growth and a stable and safe dividend. And now, I will turn it over to Ross.
Thank you, Conor. We are extremely pleased with our Q1 transaction activity as outlined in the related press release earlier this month. With the sale of 21 shopping centers for $210,000,000 at Kim's share, we continue to execute on our 2018 disposition goals and are well on our way to hitting our target of $800,000,000 at the midpoint. In line with our continued focus on owning a coastal weighted portfolio, a majority of the properties sold were located in the Midwest. The blended cap rate was at the low end of our expected range, reflecting positively on both the quality of the centers being sold and the investor demand.
Through the 1st 4 months of the year, we are impressed by the level of activity and the profile of those bidding on our properties. Demand for our sites is being driven by the combination of cap rates in the mid to high 7 range, coupled with readily available debt capital at continued low interest rates, resulting in compelling returns for the investor. On average, we're receiving 5 to 6 bids per property compared to an average of 3 to 4 in 2017. Indeed, new capital formations have emerged to take advantage of the opportunistic yields that can be achieved. Additionally, we are seeing past buyers who have been sidelined in recent years reemerge after being priced out of the market.
Other buyers include private regional operators with strong track records, partnering with institutional and private equity capital with significant liquidity and a desire to own retail. While supply of centers on the market has ticked up, experience so far this year, the demand has met the supply and we don't envision this dynamic changing. Within our specific portfolio, we have sold to private operators, private equity, 1031 exchange buyers and private REITs. All have been active given the strength and stability of the cash flows we are selling, coupled with debt capital to match at a historically widespread. We currently have another $500,000,000 plus under contract or with an accepted offer and maintain our full year guidance range for both net sales volume and cap rates.
We continue to see within core major markets, there's no shortage of demand for institutional quality assets with prices continuing to achieve historically low cap rates. Given our anticipated spend on the development and redevelopment program, coupled with our focus on improving debt metrics, we maintain our disciplined strategy of passing on new acquisition opportunities in the short term. Bottom line, however, is that retail real estate is in demand. Glenn will now provide additional color and insight on our financial performance for this quarter.
Thanks, Russ, and good morning. 2018 is off to a strong start as evidenced by the level of leasing activity, same site NOI growth and the execution of our disposition plan. In addition, solid progress has been made on our development and redevelopment projects, which will further fuel our growth in 2019 and beyond. Now for some color on the Q1 results. NAREIT FFO was $0.39 per diluted share for the Q1 2018 as compared to $0.37 per diluted share for the Q1 last year.
The current quarter includes $7,000,000 of transactional income comprised primarily of $4,200,000 of forgiveness of debt, dollars 4,700,000 of profit participations from the disposition of certain preferred equity investments as well as $1,500,000 of unrealized losses related to our marketable security portfolio. The latter charge results from the adoption of new FASB guidance on financial instruments requiring unrealized gains and losses from marketable securities to be included in the income statement instead of the equity section of the balance sheet. Also during the Q1, we reclassified personnel costs directly related to property management and property operations from G and A to the operating and maintenance account in the income statement. We believe this change provides better comparability to our peers and all periods have been adjusted to reflect the change, which has no impact on reported net income FFO or FFO as adjusted. In terms of FFO as adjusted or recurring FFO, which excludes non operating impairments and transactional income and expense, Q1 2018 came in at $157,800,000 compared to $155,800,000 last year or $0.37 per diluted share in each quarter.
2018 Q1 results include increased consolidated NOI contribution of $6,600,000 resulting from higher minimum rent and recovery rates attributable to greater occupancy from a year ago. Offsetting this increase was higher financing costs primarily attributable to the larger level of preferred stock outstanding as compared to a year ago. As Connor mentioned earlier, the operating portfolio delivered solid growth, positive leasing spreads and same site NOI growth. Same site NOI growth excluding redevelopments was 2.6% for the Q1 2018 compared to a comp of 2.1% last year. This was substantially driven by minimum rent increases contributing 2.40 basis points, improved payment tax recoveries, adding 60 basis points and offset by lower percentage rent of 30 basis points and higher credit loss of 10 basis points.
Our first quarter same site results well outperformed the 1.25% level we initially guided to. This is attributable to several positive factors, including a lower level of vacates than budgeted, no leases rejected from the Toys R Us bankruptcy during Q1 and the timing related to certain dispositions. As a result, we are raising the low end of our full year same site NOI guidance range from 1.25 percent to 2% to 1.5% to 2%. On the balance sheet front, we paid off $173,000,000 of non recourse mortgage debt during the quarter, ending the period with liquidity in excess of 2,400,000,000 dollars We have minimal debt maturities through 2020 and our weighted average debt maturity profile stands at 10.7 years, one of the longest in the REIT industry. During the Q1, we repurchased 1,600,000 shares at an average price of $15.17 totaling $24,300,000 under the company's common share repurchase program.
And as previously announced, the underwriters exercised their overallotment option in January 2018 on our Series M 5.25 percent preferred originally issued in December 2017, providing us additional proceeds of $33,400,000 Consolidated net debt to recurring EBITDA improved to 5.7 times from the 5.9 times level at year end and 6 times a year ago. On a look through basis, including our pro rata share of JVs and preferred stock outstanding, net debt to recurring EBITDA was 7.2x. Our objectives are to reduce consolidated net debt to recurring EBITDA to 5.5 times and on a look through basis to 6.5 times by 2020. A key driver of this will be the EBITDA contribution expected to come from our Signature Series development projects, which are at varying stages of completion with $465,000,000 invested to date. We are extremely pleased with the construction and leasing progress made during the Q1.
Grand Parkway Phase 2, Dania Phase 1, Lincoln Square and Mill Station remain on track to begin cash flowing in the latter part of 2018 and be significant contributors to 2019 growth. Regarding guidance, we are reaffirming our NAREIT FFO per share and FFO as adjusted per share guidance range of $1.42 to 1.4 $6 The key to our success is continued execution. We remain confident we will deliver. And with that, we'd be happy to answer your questions.
We're ready to move to the Q and A portion of the call. To make it more efficient, we ask that we may ask you may ask a question with one additional follow-up. If you have additional questions, you're more than welcome to rejoin the queue. Natalia, you could take our first caller.
We will now begin the question and answer
Natalia?
Hey, Jeremy, are you there?
Hello. Yes. Can you guys hear me? Yes.
We can hear you.
Yes, Yes, thanks. Good morning, guys. So in terms of the toys, you have the 22 boxes here. I think last call you were talking about kind of seeing where that process shook out. It didn't necessarily sound like you were assuming all went dark this year.
So just given the outcome here, I was wondering if you could talk about how much room this leaves you in terms of your bad debt and closing reserves for additional closures from this point? And then also if you can talk about what the mark to market is today on those boxes?
Sure. It's Glenn. Hi, Jeremy. In terms of where our bad debt reserves are, we remain comfortable that our 100 basis points of credit loss that we have budgeted for in our guidance is enough to support 2018 as it relates to Toys R Us. Again, keep in mind where we are.
They have paid rent in full for all sites through April so far. There are 4 sites, I believe, that have been rejected and those stores are closed. And we haven't gotten rejection notices on the balance of them. Now we've budgeted that many of them will close in the second half of the year, but we remain very comfortable where we are that our guidance incorporates that closure.
And then Jeremy, this is Dave Jamieson. Just as
it relates to the mark to market, we're seeing this as the mid double digits in terms of a positive comp for a spread amongst the 22. And just to clarify on the closures, we budgeted most of them to go vacant in Q2. And in terms of the level of activity that we've been seeing on all these boxes, it's significant. We have leases out for several already, LOI is working on the balance of the location. So as Connor mentioned in his script, we feel very optimistic about the opportunities here.
Appreciate that color. And then Connor, just one for you in terms of the buyback. You did a modest amount here in the Q1. The stock has clearly been under pressure. So I'm assuming it remains an attractive capital allocation option today as well.
But you still have a lot of development spend earmarked for the year. So with that in mind, should we expect buybacks to remain rather minor at least in the near term given your current spending needs?
Well, you're right. We do think it's a compelling option for us where we sit today. We're getting further along with our dispositions and that's really what we've earmarked to match fund our redevelopments and developments. We've seen nice as Ross covered in his remarks, we've seen nice execution there and continue to see more sales closing weekly. So as we look forward, we get more comfortable with the $525,000,000 that we've earmarked for redevelopment and development this year.
And then look at our cost of capital, look at where our shares are trading and continue to think that buying back of the shares is a compelling option for us.
Thanks, guys.
Our next question comes from Ki Bin Kim with SunTrust. Thanks.
Good morning, everyone. Going back to the dissolution topic, it looks like you've made a lot of progress already early in the year. And I know dilution is painful and you don't have much debt maturing, what are the factors that are kind of stopping you from doing maybe more later in the year or next year?
Well, I think that we're constantly evaluating our portfolio. We as Conor mentioned, the $525,000,000 is 1st and foremost a priority in terms of spend for the redevelopments and the developments. We do want to continue to delever where we can, notwithstanding the fact that there's not a whole lot that matures in the near term. But we're going to continue to execute on the plan. We have a lot in the market today.
Not everything will close. We have other deals that are awaiting some lease up or options to be exercised before they'll be introduced to the market. So we do expect there'll be some new assets that are not on the market currently, that will be brought to the market in the latter part of the year, some of which may trickle over to the beginning of next year. But we're very focused on completing our dispositions for this year and then determining where we sit at the latter part of this year as we look into 2019.
Okay. And maybe a question for Glenn. If I remember correctly, your lease spread definition accounts for spaces that are have that to have been vacant for under a year. Is that correct? And if you have any additional color on if you made that definition more inclusive of maybe 2 years or longer, how would your lease spreads look like?
We have not changed the definition of our lease spreads, and it's been 16 months for like ever. So no change. So it wouldn't change.
Basically, yes, 4 quarters.
Right. It's encompassing 4 full quarters.
But if you made that definition a little bit longer for spaces that might be 2 years or so, would that make any kind of material difference on your lease spreads?
Not necessarily. I mean, the thing with lease spreads is that I think we've communicated in the past as well. It is lumpy. It's about the population that's under renewal or is being signed in any given quarter. So you always have to keep that into consideration.
But when you look at
the historic trend and where
we see going forward, we're pretty much right on track.
I think it's customary practice from what we've seen of our peers to utilize the 4 quarters to 12 months.
Our next question comes from Christy McElroy with Citi.
Hi, good morning everyone. Just going back to same store NOI growth, just it sounds like the higher Q1 number versus what you're expecting was occupancy driven. Maybe with the toys closures and everything happening in terms of commencement versus the vacancies that you're expecting. Maybe you can kind of walk us through the same store trajectory for the rest of 2018. And then with the toys boxes kind of vacating mid year and recognizing that it's in your 2018 guidance, but how should we be thinking about sort of that growth rate heading into 2019 given that toys has a much greater impact on next year?
Right. So at least in terms of the current projection, again, we raised the lower end of our guidance from 1.25% to 1.5% with a full range of 1.5% to 2%. We still remain comfortable at the high end of that range even with the impact of Toys R Us. Again, it's going to be impacted on the latter part of the year. And if you look at really even the Q1, the key driver, which is very encouraging to all of us, the key driver was minimum rent increases.
I mean the bulk of the increase, 2 40 basis points, is coming from minimum rents coming online. A lot of the lease up and the leasing we've done over the last year is now starting to flow, right? Cash same side NOI cash base for us the way we're doing it. So you're getting starting to get all the flows from many of these TSA boxes and other boxes that we're making that are coming on. Now we still have an economic occupancy versus leased occupancy gap of 2 60 basis points.
It's narrowed only 10 basis points. As the toys boxes start to vacate, that gap could widen again, but there's a lot of opportunity there for that gap to narrow over time. So we again, we remain very comfortable where we are with 2018. The impact on 2019, it's a little early to tell you. We really need a little bit more time to see what's really going to happen with all these toys boxes.
Again, we don't have rejection notices on the rest of them yet. Some of our boxes were in the PropCo, which also filed for bankruptcy recently. But they're trying to sell a lot of those leases. So I mean, it's possible some of these leases get bought by someone else and new tenants just continues on with no gap. So it's too early to really tell how much is going to happen in 2019.
We'll get there.
Okay. And then, just, Ross, you had talked about in terms of buyer demand, more bidders out there, financing markets wide open. One of your peers this morning, which is primarily selling assets on the West Coast and buying, talked about fewer bidders out there and financing less available. Do you think that that's geographic in terms of the differential and what you're seeing based on what you're selling versus other areas of the country or by asset type, what do you think the differential is there?
Yes. I don't think it's geographic because we are selling assets nationally even though the majority have been in the central region this quarter. When we look at the assets that we're selling, I mean, we really position them to be put on the market at a point in time where we think that they're extremely attractive to investors. We just closed yesterday actually on a large power center in Springfield, Missouri that was north of $50,000,000 and we had a substantial amount of bidders beyond the 5 to 6 that I mentioned on average. So I think for the right product in the right market with good credit tenants that's financeable.
We've seen a lot of interest in those assets. So that clearly with the number of assets we have, some are more attractive than others, but we're executing on a large percentage of those that we're marketing and we don't see that trend slowing down.
All right. Thanks for the color.
Sure.
Our next question comes from Rich Hill with Morgan Stanley.
Hey, good morning guys. I wanted to just dig into G and A a little bit. I recognize that you sold assets over quarter over quarter and look like you have some pretty good velocity there. But it looks like maybe G and A came down $10,000,000 1Q 2018 versus 4Q 2017. Bigger number than maybe what we were expecting.
Anything to that or any way we should think about that?
Sure, Rich. It's Glenn. As I mentioned in my prepared remarks, we reclassified personnel costs specifically related to property management and operations from G and A into the O and M lines. And if you look at the change in the guidance, the G and A guidance, it's about $32,000,000 less from where we first put it out after we do this reclass. So G and A is a little bit lower, but the bulk of it really is a reclass from G and A to O and F, about $8,000,000 And you'll see that consistently.
Also, as I mentioned, all of the periods previously have been adjusted. So you have an apples to apples mix.
Got it. That's helpful. And then just one thing coming back to the same store NOI guide. Obviously, a really impressive 2.6% this quarter. Am I thinking about this correctly that if you look at the midpoint for your revised guide of 1.75% then that implies that you're going to be about less than 1.5 for the rest of the year?
And is that really just reflective of sort of maybe some timing in Toys R Us and while 1Q was a little bit better, the rest of the quarters might face some headwinds as you do get those stores back? Or how should we think about the velocity of that same store NOI for the rest of the year?
Well, as I mentioned earlier, we are comfortable towards the upper end of our guidance range. We remain there. We want to play that a little bit. Again, it's very hard to really forecast the total impact on 2018 for Toys R Us because we just don't know how many we're going to get back. So midpoint of the guidance overall would get you to 175,000,000.
But as I mentioned, we still remain comfortable at the higher end of our current guidance range.
Got it. Thank you for the clarity. I appreciate it.
Our next question comes from Nicky Iulico with UBS.
Thanks. I guess just on Albertsons, how should we think about if Albertsons, the Rite Aid merger doesn't go through, how does that affect your thinking in terms of the need for more asset sales to help fund development and redevelopment in 2019?
It really doesn't impact us. I mean, the models that we are using internally have not modeled anything in for Albertsons. So if and when, and we hope it's when it happens, that's just going to be upside for us and provide us enormous amounts of optionality in terms of where our cost of capital is at that point to figure out the best way to deploy the capital that is earning 0 today.
Okay. And just one other question going back to the guidance, recognizing this the bump at the low end to same store NOI wasn't a huge change. How come there was no benefit though to FFO guidance?
Again, it's early it's really early in the year. We just put out our guidance in February. We want to again still see how Toys R Us plays out, and we think we're better off leaving our guidance where it is for another quarter, and then we'll see where we are at the end of the second
quarter.
Our next question comes from Craig Schmidt with Bank of America.
Thank you. I've just wondered of the assets sold and those under contract, what percent of the dispositions will be from the Midwest?
Yes. We'll continue to see a majority of the dispositions coming from the Midwest. We'll continue to prune assets out of our other regions throughout the country, central part of the country and ensuring that the coast become a more prevalent part of the portfolio. So we actually have an asset that should that's set to close tomorrow, a power center in Chicago. I mentioned that the deal closed yesterday in Missouri.
So we do continue to make progress on exiting the central region over the course of the year.
Great. And then maybe this is for Dave. On average, how long will the time be between, let's say, a rejected toys being leased and when it's actually occupying and paying rent?
Sure. Yes, Craig. Yes, as each of these boxes vary in size and location, depending on what you look to do with the box, the timing itself can vary. So you can look at anywhere from 8 to 10 months sometimes. It could be slightly sooner.
It could be slightly longer. So again, it's really hard to peg a specific timing. It's really a matter of what you do with it. Do you backfill with a single tenant? Do you choose to split the box and get higher rents?
Or does it create a new opportunity for a repositioning or redevelopment that otherwise wasn't possible unless
you got the
toys back? Great. Thanks.
Our next question comes from Samir Khanal with Evercore ISI.
Hi, good morning guys. I guess your same store NOI growth in the quarter was certainly much higher than I think most people expected. I know there was a jump in the recovery ratio and that was a benefit. Can you provide a little bit more color around that?
Sure. So we've been on a program over the last year and a half to convert more tenants to fixed CAM versus just waiting on pro rata. And I think that's actually starting to take hold and have some positive impact on the recoveries.
So as we kind of model going forward, is that kind of more of a 1Q related item? Because you went from sort of 77% to 80%. So I'm
what's your ratio there? I would say it's probably more weighted towards the first half of the year. Again, as you think about what happens during the Q1, right? So the amount of landscaping that you're doing, the amount of roofing, the amount of patching in parking lots that you're doing, those are more items that are happening in your second, third, 4th quarters when the weather is a little bit better. So we do benefit a little bit in the beginning part of the year from that fixed CAM analysis.
But I think overall, we still feel that our recoveries will
be
stronger than they have been in the past. And we also have higher occupancy. Don't forget, we also have higher occupancy, so the recovery rate is higher from having occupancy up 80 basis points.
Right. Okay. And I guess as a follow-up, can you maybe talk a little bit about your watch list today versus maybe 6 months ago? I mean, you've certainly highlighted sort of all the positives. But as I kind of think about growth in the second half of twenty eighteen and even in twenty nineteen, I mean, what are the categories that could create noise or sort of be sort of derail growth, let's say, in 2019?
I mean, there's only the pets category PetSmart, PetGo come up. I mean, what are the other categories that you're concerned about?
Yes. I think that when you look at our watch list tenants, I mean the categories really haven't changed all that much. And when you look at some of the retailers that have run into a bit of trouble, it's really sometimes debt related because they're over leveraged and they're running into that. So when we look at our sector, we continue to think that one of the biggest benefits of owning Kimco shares is the wide diversity we have from a tenant base. And we continue to see the benefits of that as Sports Authority and toys are really yes, we're getting boxes back, but it gives us that ability to mark to market those boxes.
The mark to market opportunity within our portfolio is significant. And just on the anchor boxes alone, we're 66% below market. And when we sit at over 98% occupied in our anchor boxes, those are opportunities we love to get back. And we're really seeing the benefit of this transformation of the portfolio that we've been doing over a number of years. And so this is the first time we've actually seen occupancy uptick in the Q1 in 10 plus years.
So all the hard work that we've been doing is starting to pay off. And so we do see that there is going to be opportunity to continue to have mark to market opportunities within the portfolio in the future.
Okay. Thanks guys.
Our next question comes from Brian Houtorn with RBC Capital Markets.
Hi. My first question, so for the 260 basis points of that spread of leased versus the occupied occupancy, how much is shop versus anchor tenants? And then how much will of that space will be occupied by year
end? We're going to have to get back to you on the breakout of that 2 60 basis point spread. The majority of it, I would say, is probably anchor based, but the split, I'll have to get details for you.
Okay. And then on Daniel Point, it looks like the cost went up by about $21,000,000 Is this due to the addition of Lucky's market and what type of return will you see on the incremental investment?
It is key to the Lucky's grocery store that we've added to the lineup there. We're excited to have a grocery anchor now to really benefit and round out the last anchor box in that asset. We also added the pro rata share of off-site improvements for the site into the cost and are actually returns have gone up since we've added Lucky's to the pro form a. So we're enthused about having them be the last acre box.
Okay. Thank you.
Our next question comes from Alexander Goldfarb with Sandler O'Neill.
Good morning out there. Just 2 for me. First, on the Albertsons, saw that they passed the they got past the Hard Scott period that expired. What are the next hurdles that they need to go through on the merger as far as timing? And is there anything that's come up that you think would delay anything?
This is Ray. The next step for the merger is for the S-four, which was filed about 2 weeks ago, and it's a 30 day common period by the SEC. Once that is completed and the financials are updated because Rite Aid and Albertsons reported new earnings since they filed it, they will file that with a proxy probably early to mid June with a vote we expect in July. We have no reason to think that it's not on schedule at this point.
Okay. And then the second is just going if we look at the 2020 leverage targets the year that you have outlined, if we then look at the dividend, it still remains basically a full payout in 2019 even with the developments coming on. So how are you guys thinking about as far as future capital plans, asset sales as well as trying to improve the dividend coverage?
Well, I think that the actually the dividend coverage continues to improve through 2019 and through 2020 as EBITDA comes on more and more EBITDA does come online. Now again, although we haven't baked in any Albertsons transaction, to the extent that there is a monetization, those are further proceeds that would go towards some level of debt reduction or depending on where cost of capital is investment in assets that yield as well, which will either lower debt and increased EBITDA. So I think you're going to see our AFFO payout ratio continue to improve once these projects will start coming online. Okay. Thank you.
Our next question comes from Jeff Donnelly with Wells Fargo.
Thanks, Glenn. Actually, maybe just building on Alex's question about the dividend. Are you able
to walk through maybe more specifically to the puts and takes to AFFO that could bolster that payout ratio in your favor for the common dividend? It just seems like you are making progress, but there's a little bit of a ways to go to get to your target. And I guess maybe what consideration do you guys give to exploring a change to the common dividend to something that's more sustainable as a way to fund your redevelopments in lieu of or instead of dispositions?
Well, we remain very comfortable that the dividend is clearly sustainable. Again, everyone does AFFO a little bit differently. When you look at the CapEx, a lot of this CapEx that we're investing in, a good portion of it is revenue generating. So it takes time to finish it up and get it flowing. But we remain very comfortable that coverage is there, look at our liquidity position.
We have really no debt maturing. And we're pretty optimistic about our projects that are when you go and visit these projects, whether it be at Pentagon, Lincoln, Dania, all of these projects, they're getting close to completion and will start flowing. It's clear to us, they will start flowing latter part of 2018 and into 2019. And that's just going to further improve our coverage because as we continue to execute on the dispositions, that is our funding mechanism for the development and redevelopment costs that we have. So we're not putting more pressure on the dividend.
And just maybe one follow-up. I know it might be difficult to do on the fly, but back when you guys had rolled out the 2020 vision, you had a walk through of NOI growth to get to your sort of, I think it was about 4.5% to 6% growth that was based on 4 factors: organic growth, leasing creation, redevelopment and ground up development. I'm just curious if you had to revisit that plan today given how the landscape has changed, I guess how do you think the composition of those contributing segments might shift? Do you think they would be as equal as they would be before? Or do you see that some have taken greater or lesser prominence?
Yes. The one building block that has obviously changed significantly is the net acquisition. We have obviously been a net seller this year and will continue to be a net seller this year. And because of where our cost of capital sits today, we think that's the right capital allocation strategy is to sell lower growing assets and reinvest it in our redevelopments and developments that are going to continue to improve the portfolio quality and improve the growth of the portfolio. And so that's the one piece of that that's changed since obviously the wins against retail REITs have moved against us there.
Thanks guys.
Our next question comes from Vincent Chong with Deutsche Bank.
Hey, good morning, everyone. Just going back to the comments on the private market side, a lot of the debt commentary is similar to what we've heard for a little while from you guys, but the number of bids being up was encouraging. I was just curious if you had any sense of why now in 2018 there's more capital forming and what's really driving the increase in the number of bidders
here? I think it's the compelling yields. While interest rates have ticked up modestly over the last few months, the spread between the cap rate and the debt that can be achieved is still extremely wide. So it's a compelling return. The 7.5% to 8% cap that we're selling at are cap rates that have gotten to a point where groups that couldn't buy high quality assets at that pricing are now excited about coming back into the marketplace.
So we've executed on transactions with groups that we've sold to in 2014 2015 that were pretty quiet over the last couple of years until now.
It might also be tied to some of the retailer commentary that came out recently. If you go back and look at what Gap CEO said about the thriving Old Navy brand and how many new stores they plan to open with that banner because of the traffic and the sales that are generating there. Kohl's CEO came out recently and said how important Open Air shopping centers are to their brand and why they think their positioning in Open Air shopping centers because of the traffic. TJX and others have come out and said they want to be very aggressive on store opening plans because they see the traffic generating in shopping centers. So I think the commentary may have something to do with that.
They see the value of Open Air shopping centers and really the investment opportunity that sits there.
Got you. Thank you. And then just in terms of the toys boxes, in terms of the assets you're looking to sell over the balance of the year, are any of them assets with toys in them? And just curious if that's if the announcement has shifted the thinking on those sales or if buyers are how that's changing buyer interest in those types of assets?
Yes, there are certainly a few assets that are on our disposition pipeline with toys or babies. Those, as I mentioned earlier, are a few of the examples where we're working on leasing to backfill that that may push an asset that was originally slated or thought to be put in the market early in the year to the latter part of the year. So we're being very prudent about backfilling those, making sure that we provide activity at a minimum letters of intent or leases for those spaces so that we make sure that we are able to obtain value before we go and sell those assets. So it may delay us slightly, but based upon the activity levels that we have on those boxes, it shouldn't deter us from selling assets into the latter part
of the year.
Okay. But no interest in selling them vacant at this point? No. Okay. Thanks.
Our next question comes from Hong Zhang with JPMorgan.
Hey, guys. As it relates to your net disposition guidance, should we consider any assumptions of acquisitions throughout the year or is that how should we consider that?
Yes, we have no current plans to acquire assets throughout the course of this year. We're not currently working on any acquisitions, nothing in the pipeline. So, the plan is to continue to sell, make sure that we fund all of our obligations and needs for this year on the redevelopment developments and delever. So with where cap rates are for the types of high quality assets that we would look to acquire, if our cost of capital were different, it just it doesn't make sense for us at this current time. So we'll continue to be disciplined and execute on the dispose and see where we sit going into 2019.
Perfect. Thank you.
Our next question comes from Linda Tsai with Barclays.
Hi. In terms of properties being marketed for sale, today's release noted $150,000,000 on the market, but on the 1Q transaction activity released earlier this month, it was $330,000,000 What changed?
Yes. A
handful of those assets that were previously on the market have shifted into the accepted or under contract and then a few assets including the one that we just mentioned that closed yesterday has now moved into the closed section. So as we've made progress, the numbers have shifted around a bit.
Okay, thanks. And then for Pentagon, Dine and Boulevard, how are you thinking about the merchandising for these larger scale type developments? What are some of the trends to focus on?
Well, Pentagon is a mixed use project where we're adding a residential tower above the existing retail site. We think it's going to significantly drop the cap rate on that asset. We have been extremely pleased with really the market rents in that surrounding area of the projects that have recently delivered. So we're cautiously optimistic as Pentagon comes online in 2019 that we're really well positioned to have that be a signature asset for the company going forward. On Dania, we really think that now with adding Lucky's Grocery, we really rounded out the perfect mix of what we think the future of retail real estate really looks like.
It's a blend of grocery, specialty grocery, especially to drive more traffic. Then you've got fitness, health and wellness. You've got really the off price user who loves to drive traffic with the treasure hunt. So it's really a nice blend as well as some restaurants as well. So that's really the merchandising mix that we think drives traffic at all points during the
day and repeat customers that
love to come back. Anything on Boulevard is making great progress, too. When you look at, again, the merchandising mix there, we've got a very strong grocer that's already executed. We've got a movie theater that's going to be the entertainment piece of it. We've got a health and wellness and fitness component that again we like to think is a complementary use.
We've got an off price user that's going to drive that treasure hunter. We've got a beauty concept that signed up. And we've got a restaurant row that we think is really going to be vibrant Main Street for that project. So we're well ahead in terms of our pre leasing there. I think that in terms of the City of New York, that asset is going to be another signature project for Kimco.
This concludes our question and answer session. I would like to turn the conference back over to David Bozemiki for any closing remarks.
Thank you for participating in our call today. I'm available to answer any follow-up questions you may have. I hope you enjoy the rest of the day.