Good day, ladies and gentlemen, and welcome to the Q1 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 touch-tone telephone. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Bryan McCarthy, Senior Vice President of Marketing and Communications. You may begin.
Thank you. Good morning, everyone. Welcome to Kite Realty Group's first 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 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, Chief Financial Officer, Heath Fear; Executive Vice President, Portfolio Management, Wade Achenbach; Senior Vice President, Chief Accounting Officer, Dave Buell; and our newest member of the team, 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 disposition plan while maintaining our focus on operational excellence. A brief summary before we touch on some of the highlights for the first quarter. We generated FFO of $38.2 million, or $0.44 per share. We grew same-property NOI by 1.8% compared to last year, driven primarily by increases in base rent and net recoveries. We grew our ABR to $17.16 per square foot, which is an all-time high for KRG. We executed 95 new and renewal leases for over 640,000 square feet. A 30% increase in leasing volume as compared to last quarter, and a 50% increase as compared to the first quarter of 2018. We made very good progress with our box program, signing six leases in the first quarter, representing approximately 200,000 square feet.
This compares to two in 2017 and 12 for 2018. This is a testament to the volume of tenant demand, the quality of our assets, and the productivity of our leasing team. As a result of the success of our big box search program, our retail anchor lease rate stands at 96.7%, a 50-basis-point increase sequentially. Our retail small shop lease rate is 91.6%, a 40-basis-point sequential increase, and an all-time high for KRG. Our total portfolio economic occupancy is currently 92%, which is a 300-basis-point spread to our lease percentage. The spread equates to approximately $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 program. It's important to note that we anticipated some disruption in our spreads as a result of our desire to drive occupancy in our disposition pool.
In addition, we proactively restructured deals with two of our watchlist tenants. Excluding these combined impacts, blended re-leasing spreads were 17.6% on a GAAP basis and 12.4% on a cash basis. Please note that the impact of the restructured deals is factored into our guidance. Moving on to transactions. During the quarter, we sold one asset for $13.5 million, and subsequent to the quarter end, we sold an additional four assets for $121 million. The proceeds from these sales were used to primarily pay down debt. Additionally, we have another $189 million of assets under contract, one of which was put under contract late yesterday. That's two $324 million of asset sales completed or under contract. We feel very good about our ability to meet our 2019 disposition guidance range. As anticipated, our Net Debt to EBITDA ratio temporarily ticked up this quarter.
Pro forma for the completed asset sales and debt paydowns subsequent to quarter end, KRG's Net Debt to EBITDA is currently 6.6 times. As previously guided, we expect our NDE ratio to be below six times, assuming we hit the high end of the disposition range. I also wanted to point out some updates to our supplement. We've made it cleaner while providing all the relative information. We've also highlighted some of the geography and balance sheet changes associated with the new lease accounting standards. In addition, we now classify assets into four regions, matching those of the U.S. Census Bureau, with the South being our largest region with nearly 60% of our ABR. We trust you'll find these changes helpful.
Regarding guidance, we are reconfirming both the 2019 FFO guidance range of $1.66-$1.76 per share and the underlying assumptions. Our team is staying focused on our 2019 plan, both in dispositions and most importantly in operations. We had a great first quarter and plan to continue this success through the rest of the year. Thanks for joining the call. Operator, we're ready for questions.
Ladies and gentlemen, at this time, if you have a question, please press the Star then the 1 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. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question is from Christy McElroy from Citi. Your line is now open.
Hi, good morning, everyone.
Good morning.
Just wanted to follow up on the spreads, the releasing spreads in the quarter, maybe some color on the negative renewal spreads in Q1. Understanding, it's lumpy from quarter to quarter, but with the trailing 12-month averaging around 3%, sort of how should we expect that to trend? Just wondering if the Q1 activity's related to any specific tenant.
Sure, Christy. Well, first of all, as I tried to say in the prepared remarks, this quarter in particular, in the sense that we're positioning a lot of these dispo properties to get ready to sell and trying to maximize value on the dispo properties. We had a few instances of renewing some anchor leases that we probably otherwise wouldn't have done on long-term hold assets. That was a pretty big part of it. In terms of that going forward, there will be some lumpiness to some of these spreads going forward, in terms of the ones that are in the dispo pool, because we're trying to maximize the value, and these are more decisions that are made in that regard. Also, as we mentioned, a couple of tenants that we restructured leases with.
We also did that, and that kind of reflects actually both some of those are ongoing in assets that we're holding, but were very specific to the couple tenants that we did that with. Basically, half of those were also in the dispo pool. If you were summarizing, it's mostly focused on disposition assets, color as it relates to where we sit today. The first month of the second quarter was more back on track. I do want people to understand that some of this will be lumpy and particularly based on the size of our pool. I don't really think it's indicative of what we're doing in the overall portfolio. There were these instances and based on the square footages, when you're doing these anchor deals, that's pretty impactful. Heath, do you want to add to that?
I think you've captured it well.
Okay. All right. Great.
just with the garage piece spot, maybe you could provide an update on the Pan Am Plaza project plans for ultimate capital outlay, ownership interest, potential monetization, and will you still be the master developer of this site ultimately?
I think first of all, as it relates to the garage, all along, our intention was to control this whole site to maximize the value of the land. We were able to acquire the land several years ago at an extreme below market price due to the fact that the garage was in a separate ownership parcel. We always knew that in order to maximize value, we would need to do that, and we did that. That was always kind of our intention. Overall, big picture, this is a complicated, large project that continues to move forward in the sense of us pursuing the project. again, always trying to maximize the total value of our investment. It's too early to say what all the dynamics of that will be as it relates to ownership percentages, et cetera.
I think in terms of the master developer, that clearly is our intention, to be the master developer of this project. to continue to push this project forward for all of its associated approvals and incentive packages, et cetera. a little early to get further than that, but this was always part of our plan, and it frankly makes the entire parcel much more valuable.
Christy, it's also worth noting that the Pan Am Plaza project was in our original guidance. in terms of our net debt EBITDA goals, that was contemplated.
Okay. Thank you.
Thank you.
Thank you. Our next question is from Todd Thomas from KeyBanc. Your line is now open.
Hi. Thanks. Good morning. John, you talked about the 300 basis point spread between the leased and occupancy rate and you previously talked about same-store NOI growth kind of ramping, sort of the magnitude of that ramp, and in that context, maybe how that compares to what we should expect in the second quarter with any sort of closures or potential move-outs that have occurred.
Yeah, Todd, I think you faded out a little bit. I think you were saying, what do we expect the year to be, the remainder of the year in same-store NOI and the ramp up. I think as we've been talking about the back half of the year is where we anticipate that we would see the increases more third and fourth quarter. I think, second quarter could continue to be a little bit on the lower end, particularly as it relates to comparables, with Toys 'R' Us, et cetera. I think it continues on the path that we have budgeted, which is more of a third and fourth quarter ramp-up. But again, we're also leaving room for any unanticipated fallout. Heath, you want to? Yeah, no.
The first quarter, we actually did a little bit better than we modeled, Todd, because we didn't model any Payless rent. They continued to pay rent. We didn't model any rent from one of the Frank's locations, and they continued to pay us some recoveries and some percentage rent. You may have noticed that our expenses were a little lighter in the first quarter. We anticipate again, that we'll sort of moderate into the second quarter and then ramping up into the third and fourth quarter.
Okay. In terms of occupancy, small shop increased in the quarter. Will we continue to see small shop occupancy rise into the second quarter, or are you expecting occupancy to dip a little bit next quarter before ramping up later in the year?
No, I think our goal is to continue to push the small shop lease percentage. If you remember, not long ago, we were trying to reach 90%. We continue to push that. It continues to be an environment where our shops are attractive to retailers. If you look at the balance, the mixture, we feel pretty good about it. That said, small shops are very much run in line with where the overall economic environment is, and that's been strong. If that continues, we will continue to push that hard. It's an important part of the mixture and especially the merchandising mix for us. Yeah, I think the answer is we don't anticipate any major moves backwards or forwards. We anticipate more incremental moves. When you get up to 92%, basically, you're pushing pretty full occupancy.
We also always like to have some options available at our properties for interesting new tenants. There's a balance there.
Okay, great. All right. Thank you.
Thank you.
Thank you. Our next question is from Craig Schmidt from Bank of America. Your line is now open.
Thank you. Given the pace of dispositions to date, is there any potential that you might raise the target?
Craig, I think what we're doing is we're trying to have enough properties in the market to hit our goals. It's really going to be dependent upon the pricing that we're receiving. We want to be in a position to only accept what we believe are fair value prices. We're always going to have a little more than the goal in the market to kind of test that. Again, I think it's possible that we would do that, but our real goal is to hit the top end of that range.
If we were to go over that, either through other non-core sales or potentially joint venture activity, that capital, as we've said before, would more likely be used in an offensive way, rather than just straight deleveraging, because we think that if we can hit the top end of the dispo range, that we get that leverage in that high 5x, and then natural EBITDA growth will get it down even below that. We'll be in a very good position to try to do things more offensively if we were in that position.
If the dispositions are more front-end loaded, might that raise some of the drag impact on your guidance?
Yeah. It's kind of the thought situation, Craig, that if we outperform our disposition plan, we will underperform our FFO. As of right now, we are still modeling August as our average disposition date, listen, to the extent we can get these things done faster than that, we will. Will it be more dilutive in 2019? Yes, year-over-year, it'll be less dilutive. We're happy to have it done as quickly as possible.
Great. The last thing, on the small shop increases, are those more regional, national, or local tenants?
Tom, you want to?
Yeah. These tenants would mostly be more local tenants, what we really like about the tenant base is it's very diverse, Craig, just in terms of the type of uses, whether that be medical, fitness, just various services. We've seen a nice mix, for the most part, mostly local.
I think Craig Schmidt, also, a lot of those are local in the sense of ownership. Some of them are national franchise deals. You see us doing a lot of the national franchise deals, which the owner of the franchise is usually a local player that has multiple locations. You can see the names that would be national names, but owned locally and then supported with a marketing budget. That's a nice thing too. I think the balance, when you look at the tenants that we've opened, more specifically, when you look at all of our openings in the quarter, basically 70% of our openings were restaurant, entertainment, grocery, and service. We continue to be very experiential in our openings, and necessity based. That's what's most important to us.
Great. Thank you.
Thank you.
Thank you. As a reminder, ladies and gentlemen, if you have a question, please press the star, then the number one key on your touchtone telephone. Our next question is from RJ Milligan from Baird. Your line is now open.
Hey, good morning, guys.
Morning.
I was curious if you could give a little bit of color on the buyers of the assets that you guys have already sold or have under contract.
Sure. It's pretty diverse, RJ, which is positive. Of the five deals that we've sold, I'd say a couple of them would be institutional-type buyers. I'd say a couple of them were kind of more local with institutional backing, and then also 1031. I know that's a question that a lot of people have is what is the depth of this? We were definitely surprised by the number of real offers, the depth of that, and our ability to have that leverage in the sense of pricing. I think that's been a positive, assuming that the overall conditions remain the same. I would think that that'll continue and maybe even accelerate as we move through the year and people deploy capital.
Maybe you could talk about what those buyers are looking for when they're looking at buying those assets. Is it that they see value add opportunities? Is it that they're looking for stability versus you guys looking for growth? What seems to be the driver of that buying purchase?
Yeah, I think it's all the above. I think we had a couple of buyers who are very interested in just stability and knowing that their yield is fairly well locked in. We had a situation where one, more of a local player, is thinking more long-term, in the sense of some value add play. I think that's the nice thing, is you've got people with different objectives seeking these properties, that again, generally drives up price. Whereas we believe, for us, that these particular properties, while they may be stable and produce stable results, are not gonna grow the way we wanna grow our NOI, are probably gonna take more capital per square foot than some of our other properties. In terms of the demography, don't really match what we're looking to do.
As an example, I think the ABR in the five that we sold was below $14. The NOI growth was definitely below where our objectives are. It's what we thought it would be in that regard.
Okay, that's helpful. I guess one last one for Heath. If you hit the top end of the disposition guidance, you said that pro forma, you're gonna be below six times debt to EBITDA, and I'm just curious, and this sort of lends itself to Craig's question, if you are a little bit more opportunistic in terms of dispositions, what's the long-term leverage level that you'd like to run the balance sheet at over the next several years? Is it?
Absolutely
six, just under six, or is it closer to five and a half? What's the target?
Yeah. As an anchoring principle, somewhere between five and a half and high fives. Based on what you're doing, your development activity or your disposition or acquisition activity, you'll float above and below it. Sort of mid to high fives, I think, is an area we'd be comfortable on a long-term basis.
Great. That's helpful. Thanks, guys.
Thank you.
Thank you. At this time, I am showing no further questions. I would like to turn the call back over to John Kite, Chairman and CEO, for closing remarks.
Okay, well, thank you everyone for joining us, and we look forward to seeing everyone soon.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.