Good day, ladies and gentlemen, and welcome to the Q2 2019 Kite Realty Group Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. I would now like to introduce your host for today's call, Mr. Bryan McCarthy, Senior Vice President, Marketing and Communications. Mr. McCarthy, you may proceed.
Thank you, and good morning, everyone. Welcome to the Kite Realty Group second quarter earnings call. Some of today's comments contain forward-looking statements that are based on assumptions of future events and are subject to inherent risks and uncertainties. Actual results may differ materially from these statements. For more information about the factors that can adversely affect the company's results, please see our SEC filings, including our most recent 10-K. Today's remarks also include certain non-GAAP financial measures. Please refer to yesterday's earnings press release, available on our website, for a reconciliation of these non-GAAP performance measures to our GAAP financial results.
On the call with me today from Kite Realty Group, our Chairman and Chief Executive Officer, John Kite; President and Chief Operating Officer, Tom McGowan; Executive Vice President and Chief Financial Officer, Heath Fear; Executive Vice President, Portfolio Management, Wade Achenbach; Senior Vice President and Chief Accounting Officer, Dave Buell; and Senior Vice President, Capital Markets and Investor Relations, Jason Colton. I will now turn the call over to John.
Thanks, Bryan. Good morning, everyone. During the past quarter, we continued to execute on our deleveraging and disposition program while maintaining a focus on operational excellence. I'd like to highlight our achievements before discussing operations. During the quarter, we sold eight assets for $244 million, and subsequent to the quarter end, we have sold an additional five assets for $157 million. The proceeds from these sales will be used primarily to pay down debt. Year to date, we've sold 14 non-core assets for combined proceeds of $415 million. We now believe we'll meet the high end of our disposition guidance range of $500 million by the end of 2019. As anticipated, our net debt to EBITDA ratio continues to drop and was 6.4 times at quarter end.
Pro forma for the completed asset sales and debt paydowns subsequent to quarters end, KRG's ND/E ratio is currently at six times. As a reminder, we have no preferred shares outstanding. Since we believe we'll hit the high end of our dispossession range, we anticipate our ND/E ratio will be in the mid to high five times by year-end. In light of the recent macro volatility, it's important to note that our revolver is completely undrawn, and our maturity ladder continues to improve. To put in perspective, our current borrowing capacity under our revolver is more than our aggregate debt maturing through 2025. Moving to operations. In the second quarter, we generated FFO of $36.7 million or $0.43 per share. For the six months ended June 30, FFO was $74.9 million or $0.87 per share.
We grew same property NOI by 1.7% compared to last year, driven primarily by increases in base rent and expense savings. Combined with our first quarter results, we grew same property NOI by 1.8% through June 30th. We grew our ABR to $17.35 per square foot, an all-time high for KRG. We executed 81 new and renewal leases for over 500,000 square feet, a 40% increase as compared to the second quarter 2018. Year to date, we've executed 176 new and renewal leases for over 1.1 million square feet. We continue to make very good progress with our box program, signing another two leases in the second quarter, representing approximately 43,000 square feet. This brings the total big box leases to eight this year and 20 since the beginning of 2018. Not only have we successfully backfilled vacant boxes, but we've upgraded our tenant roster in the process.
We signed tenants such as Old Navy, Sprouts, Skechers, and REI, just to name a few. The 20 box leases we've signed since 2018 include over 525,000 sq ft and have comparable cash spreads of approximately 16%. Return on cost on these leases has been over 15%. In every metric, the Big Box Surge program has been a huge success. As of today, we've opened 20 of the 29 leases, with the remainder anticipated to open in late 2019 and early 2020. As a result of our significant leasing efforts, our retail anchor lease rate stands at 96.6%, a 160 basis point year-over-year increase. Our retail small shop lease rate is 92%, also a 160 basis point year-over-year increase and an all-time high for KRG.
Our total portfolio economic occupancy is currently 92.1%, which is a 300 basis point spread to our lease percentage of 95.1%. The spread equates to over $9 million of NOI that will come online over the next 18 months, with over $6.5 million attributable to the success of the Big Box Surge. We're now projecting 2019 FFO of $1.61-$1.69 per share. I've got to say, this is a first for us. Lowering our FFO range by $0.06 at the midpoint is rarely a sign of outperformance. That's exactly what's happening this quarter. Our disposition program is way ahead of schedule, which is a testament to the quality of the assets, the depth of the market, and the dedication of our investments teams.
Buyer pools have been deep and diverse, financing is readily available, the due diligence process has been smooth, and pricing is right in line with our expectations. I think investors can often view the NAV discounts in our sector as theoretical. Having the benefit of seeing our disposition program unfold in real time in private markets, I can assure all of you, there's nothing theoretical about our significant NAV discount. Given the strong first half of 2019, we're raising the midpoint of our same property NOI growth to 2%, and we're able to increase the same property NOI due to better-than-anticipated occupancy. Our team is staying focused on our 2019 plan, both in dispositions, and more importantly, in operations. We had a great first half of the year and plan to continue the success throughout the year. Thanks, everyone, for joining today. Operator, we're ready for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Christy McElroy with Citi.
Hey, good morning, everyone.
Morning.
Hey. Can you provide the average cap rate on the $415 million of dispositions completed year to date? Given that you've been able to transact more and earlier than expected, is there a possibility that you'd maybe look to do more, and could it exceed the high end of the range? Is there anything under contract today?
Hey, Christy. As regards to cap rate, I think, as you know, we've introduced the plan in the beginning of the year. We really pretty much laid out that we were going to avoid getting into the cap rates, particularly until we're finished with the program. I think as it relates to what we were trying to communicate was the impact on our FFO guidance and the impact, particularly giving what we felt like the annualized impact to 2020 would be, and I think that's what we put out in this particular earnings release. You can triangulate to the 2020 impact. That's important that we do that. As it relates to our expectations relative to the cap rates, they're exactly what we budgeted. Back to what we think the earnings impact will be, that's how we're budgeting that.
In terms of would we do more, I think that we obviously increased the midpoint of our guidance a little bit due to the acceleration. We always told everyone that we were going to have more than $500 million on the market. We do have more than that on the market. As it relates to would we do more, that possibility exists. The one thing we were trying to make clear is that really anything above the net $500 million of disposition number, we're going to view that as offensive capital, not defensive capital. I think if we were to go there, and it's still early because things haven't played out fully, yes, we would go above that number.
If we did, we'd be reinvesting those dollars either in accretive acquisitions that would probably have some sort of potential redevelopment components to them, or our own existing redevelopment pipeline that we have right now. We also mentioned that, depending on where the stock is, we'd have to look at that too, from a capital allocation perspective.
Hey, John, it's Michael Mueller speaking. I can totally appreciate why when you set out a $500 million asset sale target, which obviously is a substantial amount of your portfolio, you didn't want to sort of lead the market with cap rates that would weaken your negotiating power. You've done well over 80% at this point, right? It's in the bank. It's done. I think it would be helpful, especially because FFO impact is in large part driven also what you do with the proceeds and what rates you're assuming on payback, that you provide the trailing or forward cap rates on the $415 million done to date. I don't think it should be a secret.
Well, I appreciate that, Michael, of course. I think we're not far from finishing that initial. I think the one thing that is pretty clear is that these dispositions are well inside our implied cap rate. I think there was one or two notes that speculated what those cap rates were, and they were probably directionally correct, and they're pretty much right in line with where you're seeing these things trade. I do, we will get more concise with that when we get closer to the end. As it relates to if they were materially different, or in other words, if they were much higher than we had originally projected, then our guidance wouldn't be holding true to the impact of 2020, Michael. I get your point.
I'm not trying to be coy, but I want to get through this, and I really don't want it to impact what we're going to do.
Michael, this is Heath. I'll just add on that, I've been through this process before, where we communicated a range. Sometimes when you communicate that range, you end up not making the best real estate decisions. We're really trying to just look at this as making the best real estate decisions in terms of what we're buying. Sometimes you can kind of box yourself. Yes, to your point, we're pretty far through, but we made a promise to ourselves early on that we would remain disciplined and not disclose cap rates until we're done, and that's what we're going to do.
Right. Your implied cap rate represents your entirety of portfolio. Arguably, you're selling likely weaker quality assets. Understanding where you've transacted on 85% of the program would be helpful, but also just trying to understand the spread between what you're selling, what you're losing, and then what you're doing with the money, because that will have as big of an impact on your dilution, than just where you're selling the assets at. Right. The time factor in terms of how you redeploy or how quickly you redeploy also factors that in. At least having some of the averages, doesn't have to be a range, but just some sort of guidance in terms of, hey, we've done 85%, we've done them at an eight cap rate.
We've taken the money, we've repaid debt at 3.5% or 4%, or we're leaving it in cash at 2.5%, just to give us some goalposts to think about.
Yeah. Again, appreciate it. I would say your little ending to that is directionally right online. That's part of what's going on right now is that we have to think about once we exceed, if we exceed that, Michael, then for sure what we do with those proceeds can impact further dilution or not, and we get that. That's why we want to be really cautious around what we say about what we will do beyond that. I think directionally, your statement is pretty accurate.
Yeah. Also add that, listen, we gave math as sort of the guardrail. We told you we're selling up to $500 million. We told you that the primary use of that is to pay down debt. The net impact of that, those activities, we set it forth in our guidance. Again, we think we've given folks enough tools to figure out what this means for us going into 2020.
All right. Thank you.
Thank you.
Thank you. Our next question comes from Todd Thomas with KeyBanc Capital Markets.
Hi, thanks. Good morning. Just a couple questions, I guess, on the dispositions also. I was wondering first, can you talk about what the impact to same store NOI growth in the quarter was from the asset sales that were completed in the second quarter?
Yeah. Todd, listen, some of them contribute, some of them detract. When you sort of like net it all out, you're talking about five to 10 basis points different at this point. Not a material difference on the same store by virtue of selling those assets.
Okay. The assets that were sold subsequent to the end of the quarter, those were still in the same store, for the quarter, and was there any similar impact, I suppose, if you exclude those five assets?
They were in the same store pool. Yes, again, some of them are detractors, some of them are accretive, but those subsequent ones are generally accretive.
Okay. Just one more, I guess, on the disposition. I think I heard in your prepared remarks, John, and in some of the comments, just around 2020 that the 2020 impact is sort of intact from the disposition. A little earlier in the timing, some price uncertainty perhaps. I guess regarding the FFO bridge that you've provided, is it your expectation that 2020 should be intact as a result of the net impact from all of this transaction activity overall?
Yeah, I think our expectation is that if you look at the way we laid out guidance in our press release, that the annualized impact, we moved that a little bit, but yeah, I think that would be intact the way we've laid it out. That's just specific to only that dilution that would be occurring from those asset sales. You've got to make other assumptions, obviously, for what would be happening in 2020. Heath, do you want to add to that?
Yeah, the only change, Todd, is that we raised the bottom of the disposition guidance from $350 to $415, which took it from $0.20 to $0.29 to $0.25 to $0.29 into annualized impact to 2020. There's really no change there.
Okay. That's helpful. Then just moving over to the same store. Heath, can you remind us how much you budgeted for the year in terms of bad debt or unexpected move-outs, and how should we be thinking about throughout the balance of the year, and are there any known move-outs occurring in the third or fourth quarter at this point?
Sure. We started the year with a total of $3.2 million in our bad debt reserve, of $2.5 million in same store, and that translated to about 110 basis points of same store NOI. For the balance of the year, we've got $1.6 million left in our bad reserve. $1.2 million of that is in same store, which is about 60 basis points of same store NOI. We do not have any budgeted distress in the back half of the year.
Okay.
There's no specific tenants that we're looking at that we're modeling for the back half of the year.
Yeah. If you just said it another way, if you look what we've modeled for the full year. It looks like the model was pretty accurate. We've used about half of it. I don't know why we wouldn't assume that the balance would get used, but we'll see. The next quarter is a big quarter, and we'll see what happens.
Okay. All right. That's helpful. Thank you.
Thank you.
Thank you. Our next question comes from Craig Schmidt with Bank of America.
Yes. Good morning. Given the high level of anchor occupancy, I wonder how much left you have to do in terms of big box retenanting.
Sure, Craig. I think we've moved through the majority of the leasing from the original bankruptcies. We have a handful out there that we still need to get done, probably somewhere between six and 10, I guess, that we're working through. Those aren't all relative to bankruptcies. Those are also just some other vacancies. We're starting to get to the point where it's in a much more normal cadence of big box leasing, and really the last two, three years have been so hyperelevated that's why you're seeing the results of us starting to get this leasing done, and then the $9+ million of NOI that'll come online. In general, we're getting more normalized. I don't know, Tom, you want to add anything?
Yeah. Craig, I think that number will actually reduce through the end of the year.
We're clearly working on various deals that take that number down further. We continue to drive the Big Box Surge and expect it to continue through the end of the year.
Okay. Just, are you able to do any pre-leasing on the Dressbarns that'll close at the end of the year?
We made an immediate trip out to Philadelphia and other locations to make sure we jumped on any opportunities that were out there. I think we're seeing tenants being very opportunistic when they see vacant space. We are in a position that we're negotiating three leases right now, two LOIs. It's fair to say we have very good movement on five of the eight. We have till the end of the year to get this sorted out. The expectation is to get as far as we can by year-end.
Great. Thank you.
Thank you.
Thank you. Our next question comes from Collin Mings with Raymond James.
Thank you. Good morning.
Good morning.
Good morning.
First question from me. I just wanted to go back to Christy's question and just the discussion around the use of proceeds going forward. Can you maybe just expand on how you're thinking about redevelopments right now? Over the last few years, we've heard a lot about the 3R program. Again, it doesn't look like there's anything active right now on the redevelopment front, but maybe just talk a little bit more about the future opportunities and how you think about potentially allocating some capital to that front and kind of ramping back up the redevelopment efforts.
Sure. I think you remember, Collin, that we talked about when we got laser-focused in on filling these boxes, obviously, we viewed those as little mini redevelopments in themselves in the sense of capital expenditures and returns, which is why we mentioned that we have been generating around 15% returns on these deals, cash on cash, which is pretty strong. That took a lot of our emphasis and focus. That's where a lot of the spend has gone in the last 18 months. As that begins to play out, and we have been extremely successful there, we will begin to pivot to look at where else we would want to spend that capital. In looking at redevelopment deals, if you look in our supplemental, you'll see that we have some redevelopment deals that we consider future redevelopments, which are more mixed use in nature.
Two of those are in Carmel, Indiana, and Indianapolis, consistently one of the best suburbs in the country, in growth and in income appreciation, and it gets ranked very highly that way. Then we have a third one in Indianapolis at Glendale, which is also mixed use. Those are the three that are in the most current pipeline. We haven't put the numbers in there yet because it's still evolving. I think our thought process there is that we like the mixed-use attributes in these three particular deals. Doesn't mean that that's all we're going to look at, but that's our current, what we're focused on. We want to get the right returns and get them done. Beyond that, it's too early to say.
Beyond that, we always continue to look for these things, and I think a lot's going to have to do with how much capital we have to deploy if we do exceed the goal in terms of asset sales.
Got it. Maybe given the success year to date on the dispositions as well as maybe the willingness to go beyond that $500 million mark, should we think about some of these redevelopments maybe gaining a little bit more traction or getting some more clarity on to what extent you might pursue some of these as we roll into 2020? Just the thinking there as you're looking at capital going forward.
I think it's a combination of the timing. These things take time, particularly mixed-use development deals take quite a bit of timing, and you've got to go back in generally through rezoning processes or variance processes. Two of the three of them, actually all three of them, we'll be looking for some sort of incentive package as it relates to partnering with the municipalities involved. That takes time. That's part of that. Prudent capital allocator. We wanna know that we have the appropriate capital to allocate without impacting our balance sheet. We've obviously worked extremely hard. We're going to succeed in getting our leverage into that mid to high five times. As a reminder, we don't have preferred shares. That'll put us in top five or six in our space as it relates to balance sheets. We're gonna protect that.
That said, we still want to grow. We will find that balance and figure out how to do that.
On that last point, John, you made a point earlier to kind of highlight, if you were to look at acquisitions with kind of future capital, again, keeping in mind your point around where you wanna keep leverage, that there would maybe be a redevelopment tilt in terms of some of the acquisitions you might pursue. Maybe just, obviously, you've been very active in the transaction market this year. Just, are you seeing very many potential acquisitions where if the balance sheet is where you want it to be, that you would be potentially pursuing?
Yeah, we are definitely monitoring the other side of the equation, which is acquisitions. As we mentioned, we're going to have to do a couple 1031s as part of our overall disposition plan. We've been looking to execute on that. As part of that process, we are seeing a lot of things, and I think we've found both some opportunities that we feel like are under-managed or under-opportunistic in some way, that we could change that dynamic. We also have been looking very hard at geography. As you know, part of all of this isn't just about de-leveraging, it's about improving the quality of our portfolio. We spent a lot of time analyzing that, and we've mentioned that we would end up in 15-20 markets eventually, and that's what's going to happen.
Those markets are going to be markets that we think have excellent characteristics as it relates to growth, as it relates to inventory, and frankly, where people want to live, and that's critical to our business. I think it's all of those things, and we definitely think we can find those opportunities and look, our skill set that we have, one of our many skill sets is this ability to see things and assets that others have missed. We've proven it, time and time again with the deals we've done and the returns we've generated. The only thing that's held us back is our balance sheet. We're hitting that square on. I understand people's desire to understand the past as it relates to cap rates, everything else, and we're going to help everybody with that down the road.
These deals are smart deals that we're doing right now. When we're selling these assets well inside our overall company implied cap rate, the redeployment of this capital that we're eventually gonna be able to do is gonna be very, very good for us.
Okay. I appreciate all the detail there, John. Just one quick one for Tom. Just as far as lease negotiations, just curious how much just the trade tensions have entered into leasing discussions with tenants. Is that something that's coming up at the negotiating table right now?
When we make our visits to the retailers, it's one of the hot topics that we discuss. As of right now, it has not entered into it. I do think you're seeing retailers really diversify their buying base, and you're seeing movement to Vietnam and all across that region. I do think long term, all of them feel this will be healthy for the industry to provide a much greater hedge in the event of tariff situations like this. To date, we have not talked about it specifically on lease rates, TI, et cetera.
Okay. Thank you.
Thank you.
Thank you. Again, ladies and gentlemen, if you have a question at this time, please press the star then one key. Our next question comes from Barry Oxford with D.A. Davidson.
Great. Thanks, guys. Just kind of building on the retailers a little bit. John, what are you seeing as far as new concepts coming in to your space? Are they more or less than they were maybe six months ago? Give us a little bit of color there.
Sure, Barry. Well, high level, if you just look at the last quarter, I'd say about 60% of the deals we signed were restaurant, grocery, entertainment, service. That, I would say, is fairly typical in terms of the type of users. Again, one of the benefits of our world and the open air space is it's just extremely flexible space, right? I think we're much more pliable, much more adaptable to use changes. As it relates to specific maybe newer retailers, I think it's what you hear about. I think you're starting to see retailers, when I say retailers, the ones that are reinvesting in their businesses, reinvesting in their physical space, are the ones that are most interested in new thoughts. Ones that have shied away from that over the last several years, are ones that are slowly kind of fading out.
This is a natural, healthy process. I think in terms of guys that we're excited about, we've definitely seen some tenants that historically have, for example, only been mall-based tenants that think that they now can be successful in both venues. Probably can do it in much closer radiuses than they thought they previously could, just because of the different types of consumer. The fact that our cost of occupancy is significantly less. That means maybe they can give up a little bit of sales somewhere else and still be profitable with us. That allows them to get more creative too, with their spaces. Without getting into a lot of specific names, because we want to be careful there, we're definitely seeing more interest today from retailers that we have not done business with than we did a year ago, two years ago, Barry.
I feel really good about that, and we're probably only just beginning to scratch the surface. I want to emphasize, the primary reason for that is the flexibility and locations of our centers. They're just flexible, they're visible, and the cost proposition is pretty reasonable.
Ultimately, it just allows that shopper to generate additional trips because of the ease of ingress, egress. If a mall location were able to secure one, I think a strategy, keeping the A mall, would be to try to do peripheral components, review increased trips. That seems to be a logical strategy where the two types could work together, serve the customer.
Outside of that, entertainment and service also are both growing pretty substantially, I would say.
Are you finding the retailers to be very discriminate about where they're going? Because you guys have some of the newer lifestyle centers, you guys aren't feeling the pressure that maybe an older center would be, so to speak?
Yeah, I think a couple things. Well, one thing, we've always had a younger portfolio than probably the majority of the peer group, if you just look at average age of our shopping centers, which is why we've had lower CapEx per year than most, just based on the age of our portfolio, Barry. Also, I think that you're seeing this ability for us to be much more adaptable, at a much more efficient price. You got to remember throughout all this, people forget, there has been no inventory buildup in our space for 10 years. That's way beyond what people initially thought. Sure, was there overcapacity? Was there over buildup in the previous 10? Definitely. Now that's kind of moderating out, and which is why I like to say, hey, we don't need an incredibly robust retail environment for us to do well.
We need a moderate environment, which is why you see our spreads where they are, you see our NOI growth, and it's coming back. We went through a period of kind of unprecedented change in the anchor space. Now on the other end of it's going to be better, because we're going to be hooked up with better partners that want to spend money on their businesses. Those dying partners that just avoided that was a mistake. I think it's pretty damn clear, you got to pay attention to your physical real estate because it complements your entire distribution channel.
Perfect. Appreciate it, guys.
Thanks.
Thank you. Our next question comes from Chris Lucas with Capital One Securities.
Hey, good morning, guys. Just a couple of quick follow-ups, if I could. Heath, with the proceeds from the quarter for third quarter, you're paying down additional debt. Do you have a sense as to what that debt extinguishment cost will be for third quarter at this point, based on what you've paid down already? Not future, just kind of what's heard.
Yeah. Sort of year-to-date, we've paid $5 million in penalties. As we said in the first quarter, we thought the total program would cost about $12 million-$13 million in prepayment penalties. Basically, what's happening with rates, that's gotten more expensive, call it by $2 million-$3 million. We're fairly confident that's been hedged by the fact that, one, we think we're probably getting better pricing on our dispo program because obviously rates are cheaper, which makes the debt cost cheaper for our buyers. Two, we really think that the due diligence process has been fairly smooth, and I think part of that is, again, because people's debt costs have been steady or actually improving during the diligence process. While, overall our defeasance costs are going to go up by $2 million-$3 million bucks, I think we're seeing it on the selling.
Okay, great. Thanks. On same store NOI, it looks like relative to sort of the loose guidance you provided last quarter, second quarter was a beat. How do you guys think about the cadence in third quarter, fourth quarter, as it relates to sort of ramp from here?
Part of that beat for the second quarter was really the timing of expenses. Those expenses will sort of bleed into the third quarter. We originally described moderating into the second and then accelerating into the third and the fourth. Now I think what we're going to see is it's going to be flattish into the third. Then we'll accelerate severely into the fourth. The trajectory has changed a little bit. Again, a lot of it has to do with the timing of expenses. The good news is that over a third of our leases are fixed CAM. When you don't pay expenses during the quarter, you're actually still collecting the same from the tenants. Again, it's mostly just the timing of expenses.
Okay. You mentioned the need to probably get a 1031 done or two. I guess the question I would have is, how does the timing of that work? In other words, given the program is still underway and you still have potentially more to do, does that allow you more flexibility as it relates to when you need to execute on that? Is that something that could drift into next year, or is that something that you need to get done before the end of the year in order to avoid a special dividend?
Yeah. We've done one 1031 now. Listen, the trick to this whole process is you try to match losses and gains, so you don't have to pay that special dividend. There may be an opportunity where we have one asset, which is a.
Significant gain. We may 1031 that asset, even if we don't, and net at the end of the day, when you look at what's the total gain in this portfolio we're selling, it's around $70 million. The current dividend that we're paying based on the return of capital portion covers it. You may do another 1031 because you're worried about the other side of that transaction. For the most part, again, on a net basis, we're covered for the full year.
Okay, great. Thanks. John, just one for you. You're at 92% on the shop space, which was sort of what I think you described as the high end. Is there a chance that that can move higher at this point, or do you feel pretty comfortable that is pretty much the ceiling for that business?
No, I think it could definitely move higher, and we're going to make it move higher. That's our job. Our job is to lease space. It's the number one thing we do. Our portfolio is only getting better, Chris. By that, sometimes you have addition by subtraction in those things. No, definitely. When we had originally, if you remember, for a long time, we talked about this goal to get to 90%, and we blew by that goal. We have a great team, and I anticipate they'll blow by where we are right now, and that's what we do. I'm not a big believer in this idea that there's permanent vacancy. I think we can lease everything, and we got to go do it. I think, the only thing I would balance that against is, what kind of rent growth we can drive.
One of the things that I think you even noted is that when we look at our lease spreads our GAAP lease spreads are pretty significantly above our cash lease spreads due to the fact that we push hard for annual growth, in our small shop world particularly. That's the balance. You want to balance that. I want to continue to push growth. Okay? Yeah, that's some friction against occupancy, but we have a phenomenal leasing team that gets that and knows when they come in to get a deal approved, that we're going to be paying close attention to that.
Thank you. That's all I had this morning.
Thanks. Appreciate it.
Thank you. Our next question comes from R.J. Milligan with Baird.
Hey, good morning, guys.
Morning, R.J.
Heath, I just want to follow up on the CapEx discussion. How do you expect TI LC CapEx to trend in the back half of 2019 and into 2020?
I think when you look at the progression of our CapEx, if you look in our sup, as you know, we're very descriptive in what it is. I don't think that's very consistent across the universe, but we're pretty descriptive. The last couple of quarters, obviously, have continued to move up, in terms of the new lease CapEx. I think that's pretty clearly associated with the level of big box leasing that we've been doing. Remember, our universe of deals is pretty small per quarter. When you're looking per quarter at the universe, even though you kind of trail it out over the last few quarters, one or two box deals, for example, this quarter, I think we had 21 new deals. Half of the square footage was in three box deals, three or four box deals.
One of them was particularly expensive, but a good return. That can really skew. I'd say we're on the upper end of where that's been, and as we begin to get more stabilized and back to the historical occupancy in the boxes, I would see that likely coming down a little bit. In the scope of what we've always done, we've always said that when you're going to do anchor leasing, and these are turnkey deals with landlord work involved, tenant work involved, commissions, doing a deal around $75 a foot is not very unusual. I think it's pretty stable, and there has been some movement in construction costs. Overall, I'd say it's pretty stable. Tom, you want to-
Yeah, I would say the one location where we saw increased costs was a turnkey deal. It was a situation that was in a state that had the higher tax, that adds up to about 8.5%. Ultimately, on a turnkey, you have much higher costs, and it's similar almost to a grocery store build-out on the one we talked about. I think as a general run rate, we are being extremely steady. Sometimes we'll have very low TI box deals. It's going to move around, but we're comfortable with the pace in the areas that we're in right now.
Okay, that's helpful. I guess, I think in the press release, you guys give pretty good guidance in terms of what the expected dilution would be for the dispositions for 2020, and I guess what I'm trying to get to is an AFFO number for 2020. If you end up selling more than the $500 million, and based on your expectations for TI LC CapEx, how comfortable are you with the resulting payout ratio and the current dividend level?
Yeah, I think we've talked about that. We're very focused on making sure that we understand where our cash flow will be. I think we're right on top of our estimates of what it'll be, and we're pretty clear that this is elevated payouts relative to our historical payouts. Our historical payouts were reasonably low for the last several years, during the period of time we were raising the dividend. I think we're very comfortable with the dividend payout right now, and as we said, it's not in cross purposes with our deleveraging plan, which has been obviously very successful in a fast period of time. I think you may have heard me say earlier, the first step of this was to get our balance sheet to be top-notch, to be in the top tier. By the end of the year, that's happened.
At that point, the next phase of that is growing the business with that awesome balance sheet, and we're going to be able to do that. We're going to figure that out. Paying the dividend is there. We think we can do those things. It's clearly tighter than it was in the past, but we've invested a lot of capital over the last couple of years that we won't have to invest in the next couple of years through this box program. We actually feel pretty good about it. We'll continue to monitor it like we always do. As we pivot into, I'd say 2021, 2022, 2023, we already have pretty good understanding of where we're going to be there, and cash flow begins to grow pretty substantially in those years, and we'll be looking to deploy that into positive returning investments.
Thanks, guys.
Thank you.
Thank you. Our next question comes from Tammy Fique with Wells Fargo Securities.
Hi, good morning. It sounds like the impact on same-store growth here today from the dispositions is fairly minimal. I guess, can you just give us an update on the longer-term growth profile for the company, sort of post-dispositions, and then based upon the tailwinds from outsized anchor leasing recently, how should 2020 kind of compare with that long-term range?
Can you repeat the second part, please?
Sure. I was just saying that based upon the tailwind that you guys have from all the outsized anchor leasing recently, I'm just wondering how 2020 should compare with kind of the longer-term range that you guys are expecting for the company on a same-store NOI growth basis.
Got it. Yeah. I think as Heath just said a second ago, the fourth quarter is when you'll really see the beginning of the impact of the leasing that we've been doing as it relates to the big box leasing particularly. When you go out into 2020, I would assume that will also be continuing throughout 2020 in terms of more strength in NOI growth than we've had in the last two years. I think the tailwind that you mentioned, obviously when you get into 2021, you're comping against what I would think would be a stronger NOI growth in 2020, you begin to have to continue to push that growth. When you look where we've been historically, Tammy, thinking of our business being able to grow in that three-plus % range is how we think about it.
We think about that we want to grow our NOI at three and better, that's how we want to set up our capital investments. That's how we want to look at pushing our rent growth with our tenants. That would be our goal on a longer-term basis, is to get back to where we've historically been. Again, unfortunately, not everybody is giving you the same math on that NOI growth, whereas ours is very clear the way we're calculating it. I think the business can remain pretty healthy in the next couple of years as long as the dynamics stay as they are today. Obviously, we have exogenous risks from recessions and things like that can impact you. On a static basis, yeah, we'd look to improve that through the next couple of years. Heath, you want to add to it?
I think, Tammy, the first part of your question was really looking at what's the impact of this disposition pool on our same store. When we're picking these assets to dispose of, we weren't really focusing on what their same store impact would be into 2019, but rather what their longer-term growth profile would look like. While net, at the end of the day, we sell the pool that we're looking at, it'll be modestly accretive to same store for 2019. On a backward-looking basis, the five-year CAGR on these assets is 1.3%. Again, for us, it was about how can we, addition by subtraction, how do we sort of get rid of some of our slower growers so that we can grow and set ourselves up better for the future.
Got it. Thank you. I guess just maybe that 3% plus growth, I guess, is that taking into consideration kind of future redevelopment opportunities within the portfolio, or is that pure organic growth excluding that?
No, I think it takes it into consideration because if you look at where we are just in contractual rent bumps, Tammy, our contractual rent bumps are probably around 160 basis points or 140 basis points. As Heath said, our fixed CAM has been a good initiative for us. There's some growth in there as well. Those two things don't get you to three. I think you've got to do a few other things, you have to have a few other arrows in your quiver to get to three. Again, this is as we define our very straightforward NOI growth, that doesn't include lease term fees and things like that. I think it's not a layup. We got to go out there and get it done. That's why I said 92% is not whole. Nothing's a layup. We push hard.
This is an organization that has an edge as it relates to going out there and making things happen, and we're fortunate to have a team around us that get that and know that and are excited about it. Not a layup, but I think it's doable.
How quickly do you think in 2020 that you guys we should see your redevelopment program ramp pretty considerably sort of toward the end of this year going into 2020 to support that growth in 2020? Or is this more a 2021 growth rate?
Yeah. I think 2020 is more associated with what we've already done. We're going to get significant growth out of what we've already done in 2020. We're talking past 2020. The redevelopment deals that we have currently in our pipeline that I mentioned earlier, the 3 mixed-use deals, those really, for the most part, wouldn't be generating much in 2020. We're talking past 2020, which is great. We're looking into 2021 and 2022 already as it relates to our business plans and our strategies and objectives that we're going to execute on. It's why this almost fortress-like balance sheet that we're going to have soon is very important to that plan.
Right. Got it. I guess, can you give us your expectation for year-end economic occupancy?
We typically don't guide to year-end occupancy, but just to say it will be higher.
Right.
We said in our comments that there's $9 million of NOI that represents a 270 basis point spread between our leased and our occupied. About half of that comes online by the end of 2019, you'll see that spread start to shrink, and the other half comes on in 2020. Again, you should start seeing a more normalized, 125 to 154 basis point spread between leased and occupied as we head through the back half of 2020. Yeah, I think I'd add, Tammy, that when you look at these spreads between occupied and leased, it's an interesting thing because some companies like to position it as such a great thing that they continually run these really big spreads. I think you have to dig a little deeper than that, what type of vacancy you're talking about.
I think our spread's very, very clearly specific to these box leases. Not all of it, but the majority of it. As he said, as that normalizes, we don't really want that to be at 300 basis points. We want it to be 150, 160, 170. That's what it's historically been, so it's pretty easy to directionally see half of that is from what's happened in the big box world in the last couple of years. Now we're pushing through that, but for any other unknown things out there, that's where we want it to be.
Okay, great. Thanks, guys.
Thank you.
Thank you. Our next question comes from Alexander Goldfarb with Sandler O'Neill.
Hey, morning out there.
Morning out there.
Hey, it's a nice morning. Two questions. First, John, free cash flow, that's been your mantra for the past few years, and just looking at quick math, you guys were generating sort of $40 million-$50 million, and now on the pro forma basis, it would look to go down to zero if you maintain the dividend as is. If we look at the tax composition of the dividend, it looks like a fair amount is return of capital. If you were to cut that amount, that would bring you sort of back to $40 million, $45 million of free cash flow.
As you think about the business and the redevelopment and the value that that inexpensive free cash flow provides, why wouldn't you consider to resize the dividend as part of this pruning portfolio exercise and use that free cash flow for the redevelopment, which you've done historically?
Sure. Appreciate the question. I think as it relates to the cash flow, the 2019 cash flow is the cash flow that I think you're probably referring to, that is close to being break-even. As I mentioned, we begin to grow it again in 2020, 2021, and 2022. I don't project out over the next couple of years that we would be flat. I project out over the next couple of years that cash flow will begin to grow, albeit not where it was two years ago, as you're referring to. Look, I think in the overall scheme of capital allocation, we have to look at everything, and that's why I said we're comfortable where we are today. We've got a lot of different constituencies as it relates to investors and reasons that those investors own the shares.
If it was as simple as there was one constituency, it would make that a different question. I think we pivoted significantly, and now we're going to pivot in the other direction as the business begins to grow when we get through this program, which we're not through yet. All I can say to that, Alex, is that we constantly look at this. We constantly analyze it. We're comfortable where we are today. Beyond today, I don't really project beyond that. That's a board-level conversation, and that's something that we always talk about, and the board is well aware of our plan, well aware of what it looks like over the next couple of years, and everyone is comfortable where we are today.
The second question is, going to tenant store closings, bankruptcies, and all that fun stuff. Out of ICSC earlier this year, there were a number of tenants mentioned, the Stein Marts, Bed Baths, Pier 1s, and the list goes on. Far it doesn't really look like much is materializing. Is your view that these are just names that will, like names before, like the office names and other, Sears, over the past decade. Are these things that you expect just to linger on for the next several years? Or you think that a number of these names that have been in the press and talked about at ICSC will actually materialize and go through restructurings, or what have you, within the next, call it 6-12 months?
Well, it's tough to say, Alex. A lot can happen in short periods of time. As we sit here today, again, under the static assumption of where the economy is, a lot of these weaker tenants can hang on for quite some time. One of the things that people forget about is as a landlord, we don't run those businesses. We're subject to what they're doing in that regard, and as long as the tenant is not in default in their lease, they continue to be in the space. There are certain tenants that you mentioned that we're actively involved in discussions in spaces we want to recapture because we would prefer to have tenants in those spaces that invest in their businesses. That said, it's certainly diminished to some respect. It's certainly slowed down.
Again, you get towards the end of this year, and you get into the beginning of next year, and I'm sure there will be some more restructurings. We're not hanging a banner up in the hallway that says, "Mission accomplished." We got more work to do. There will be more things that happen, and we're prepared for it. There are definitely tenants that, as I said, we've actively worked to significantly reduce exposure to, and I think you know the names. I don't think we need to look to fire arrows at anybody. It's in a better place today, but it is not over.
Okay. Thank you, John.
Thank you.
Thank you again, ladies and gentlemen. If you have a question at this time, please press the star, then one key on your touchtone telephone. Our next question comes from Linda Tsai with Barclays.
Hi. On a cash basis, the re-leasing spreads is 6% recovered from the prior quarter where it was down 3%. I assume some of the weakness last quarter was due to leasing up assets to ready for sale. If so, is it fair to assume that the re-leasing spread will normalize in the upcoming quarters?
Yeah, I think, Linda, it feels more normalized. As you know, we do have some more assets out there that we intend on selling. There may be one or two more of those where we would say we leased some space just to get the NOI as part of a sale. Since we're 85% of the way through that, you can assume the majority of that is behind us. Again, the thing I caution everybody on is based on our size, and in the law of these smaller numbers, something can really skew it. Generally, we would point that out if there was something really skewing it certainly feels a little more as though we're back on that track of more normalcy as it relates to the renewal spreads.
Even in this quarter, interestingly, I think we had seven anchor deals that we renewed this quarter that were non-option. That's kind of unusual. Anchors that didn't have options, and even there, the spreads were, I think, like 8%. That's a good sign for the health of the market, actually.
Thanks. In terms of the heavy anchor leasing you've done, can you just give us some examples of who the new tenants are that have taken over those spaces and whether you re-leased the whole space or split the boxes?
We've actually done very well in terms of avoiding having to split boxes. There have been situations here recently that we've had to do that, and then some of it just ties back to the sheer size of the box. Just some tenants that we've worked with over 2018 and 2019, they're great names category-wise. They're HomeGoods, Sprouts, REI, Burlington, Ross, Old Navy, Total Wine, just to name a few. It's a very diverse group of tenants, and it's a healthy group of tenants, more importantly. Everyone I listed are groups that are aggressively growing and looking at new markets to fuel their growth. We feel like we're in a good position in terms of demand drivers as well as the quality of tenancy coming in.
Thanks. Last one. When you look at the dispositions you've done year to date, what was the average GLA of those assets? Were they larger than the average center size in your portfolio?
I don't have that right in front of me. Linda, I think they were pretty normal size. There were a couple bigger ones. I know overall our average is going down. The size of our average center is going down. I think you can assume they were slightly above. I think our average is around 140,000 square feet. I think they were more like 170,000. That's off the top of my head based on what we sold. That's another element of the plan, is to have these be of a size that we feel like is much more manageable, much more pliable. It's a word I guess I've used like three times today. It's important to us to know that not one particular asset can really hurt you in a significant way.
That said, we still own a couple of really large assets that we love. One of the misnomers on our company is that we get boxed into this Oh, that's a good word, actually. We get boxed into being supposedly a big box company, a power center company. If the average size of our portfolio is going to be 130,000, 140,000 square feet, that's not a power center. That's much more in that community center range that we've always talked about that we want to be in. That's right on plan to where we want to be.
Thanks.
Thank you.
Speakers, I'm showing no further questions in the queue at this time. I'd like to turn the call back over to management for any closing remarks.
All right. Again, I wanted to thank everybody for joining us. Thank you for the interest in the company. We look forward to updating you on the next call and seeing some of you before then. Have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect, and have a wonderful day.