Good morning, and welcome to the SITE Centers Reports Second Quarter 2019 Operating Results Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Brandon Day, Investor Relations. Please go ahead.
Good morning and thank you for joining us. On today's call, you will hear from Chief Executive Officer, David Luke Chief Operating Officer, Michael Makinen and Chief Financial Officer, Matthew Ostrohrer. Please be aware that certain of our statements today may constitute forward looking statements within the meaning of the federal securities laws. These forward looking statements are subject to risks and uncertainties and actual results may differ materially from our forward looking statements. Additional information about these risks and uncertainties may be found in our earnings press release issued today and in the documents we file with the SEC, including our most recent reports on Form 10 ks and 10 Q.
In addition, we will be discussing non GAAP financial measures on today's call, including FFO, operating FFO and same store NOI. Reconciliations of these non GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release. This release and our quarterly financial supplement are available on our website at www.sitecenters.com. For those of you on the phone who would like to follow along viewing today's presentation, please visit the Events section of our Investor Relations page and sign in to the earnings call webcast. At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes.
Good morning and thank you for joining our Q2 earnings call. I am extremely pleased with our performance over the last 3 months, which was measurably above our expectations due largely to better than expected property NOI and lower than expected tenant bankruptcies. The combination of these factors is leading us to increase our same store NOI growth and OFFO guidance. I'd like to comment on how our quarterly results tie into the 3 major components of our 5 year business plan leasing, acquisitions and redevelopment. And then I'll hand the call over to Mike to discuss our operations in greater detail.
Matt will conclude with some comments on the balance sheet, quarterly results and our guidance increase. 1st, same store NOI growth, which is easily the largest component of our growth plan was 5.7% in the 2nd quarter compared to our expectation of a deceleration from the Q1. Our leasing team continues to make great progress re tenanting our 60 anchor opportunities with 45 now leased or in advanced negotiations. The recent slowdown in tenant bankruptcies means all this work has begun to positively impact our economic occupancy, generating strong NOI growth from the average 36% spreads we expect to achieve on these spaces. The work we did over the last 2 years curating the SITE Centers portfolio means we own real estate in the highest quality submarkets in the country positioned to take advantage of today's tenant demand.
We also continue to advance our investment program. As a reminder, our 5 year plan calls for $75,000,000 of annual investments funded via capital recycling. We achieved our 2019 goal through the share buyback program and acquisition of 3 joint venture assets, all funded with proceeds from the closing of the First China Dividend Trust portfolio in November of 2018. We are working on additional acquisitions that could close later this year that would allow us to exceed the $75,000,000 annual goal, funded largely from the sale of our Vista Village assets in San Diego in the Q1. Our approach acquisitions is the same as it has been in the dispositions and spin process, bottoms up rather than top down.
We are solving for cash flow growth and returns driven by convenience and value oriented properties rather than simply seeking out certain formats or geographies. Finally, we're making progress on our redevelopment plans, which represents the 3rd component of our 5 year growth strategy. Work continues on 4 active projects, including West Bay Phase 2, which we added to our supplement this quarter. And we are advancing the entitlement process of our pipeline of larger scale projects in Atlanta, D. C.
And Boston. We've made the most progress to date on Duval Village, one of several projects featured at our October Investor Day. Located in Prince George's County, a zoning tax amendment was recently passed, which allows for the conversion of this property to new residential and retail uses. During the entitlement process, we received an offer for the land that would allow us to receive all of our expected development profits immediately rather than over the course of a multiyear redevelopment. So we've opted to sell the property for approximately $10,000,000 which represents a 3% cap rate on in place NOI, providing capital we can reinvest in the remainder of the pipeline at a significantly positive spread.
We don't expect quick payoffs on all of our projects, but I do see Duval as a case study in balancing redevelopment risk and reward. Before closing, I would also like to acknowledge the hard work done by our whole operations team as well as our Senior Vice President of Operations, Joe Lopez, on the publication of our 5th Annual Sustainability Report as well as our recognition as a silver green lease leader by the Institute For Market Transformation and the U. S. Department of Energy's Better Building Alliance. These are just 2 of the examples of the daily work that this company does to ensure sustainable growth through healthy relationships with our key employee, investor and community constituencies.
In summary, site closed the 2nd quarter in an extremely strong position. We have a focused portfolio positioned to benefit from occupancy uplift, solid tenant demand and a balance sheet that provides us flexibility to invest opportunistically. We've made great progress on our 5 year plan to generate 5 percent average annual earnings and NAV growth as well as a 2.75% same store NOI growth. And with that, I'll hand the call over to Mike Makinen to discuss our operating results.
Thank you, David. I'm very pleased with our reported 5.7% same store NOI growth in the quarter, which was well ahead of plan due to fewer than expected tenant bankruptcies, a higher than expected recovery rate due partly to expense timing, earlier than expected rent commencements and receipt of a $1,300,000 settlement from the Mattress Firm bankruptcy. Our same store NOI would have been 4% without this payment. The 2nd quarter saw more of the robust leasing activity that we've seen over the last 24 months despite our now more focused portfolio. We have signed leases for 33 of the 60 anchor vacancies identified at Investor Day with another 12 spaces at lease or in LOI.
This compares to 15 executed leases just 9 months ago. These 45 deals represent a blended 36 percent leasing spread with 34 different brands. Importantly, we continue to expect anchor openings to accelerate with 6 openings in the Q2 and an additional 10 openings through year end, mainly in Q4. All of this leasing activity has generated a 90 basis point increase in our pro rata portfolio leased rate to 93.9%. Importantly, our lease to commence spread, which is the best indicator of low risk, embedded future growth now stands at 3.90 basis points, a 30 basis point increase over last quarter.
This large spread provides us confidence in our ability to achieve our 5 year 2.75 percent same store NOI growth target even with a 1.5% annual NOI reserve for tenant bankruptcies. Leasing spreads for the quarter were solid with trailing 12 month spreads in line with our historical average on elevated volumes. As I mentioned last quarter, we expect our smaller portfolio to translate into more volatility in quarterly metrics. So I encourage you to look at our leasing results on a trailing 12 month basis. Net effective rents, an indicator of the overall economics of the leases we're signing, were also in line with our trailing 12 month numbers, suggesting still compelling tenant economics.
We remain confident in our ability to continue driving shop leasing and to achieve the 94% shop goal we articulated as part of our 5 year plan. Our shop leasing activity this quarter was as high as we've seen in some time and these deals have more attractive economics. Despite all the activity, our shop lease percentage dropped this quarter because of the Payless liquidation in which we recaptured 13 stores. These locations along with other high quality available space remain a source of future growth. All of this operational progress is the product of enormous effort by many often unsung heroes, especially in our leasing department.
This quarter though, I'd like to also specifically call out the efforts of our construction management team, who are behind the complex work required for store openings, often in very compressed time periods. They've delivered 36 spaces ahead of schedule this year with an expected positive impact to our budget of almost $600,000 I congratulate and thank our Head of Construction, Joe Chura and his team for their outstanding tireless work. With that, I'll hand the call over to Matt.
Thanks, Mike. I'll first comment on our balance sheet, then I'll touch on some earnings matters and I'll close with some comments on guidance. First, on the balance sheet, our position remains strong with pro rata debt to EBITDA in the quarter at 5.7 times compared to 6.4 times in 2Q 2018. Beyond improved leverage, our maturities are also in great shape with a weighted average consolidated term of 5.7 years. We also announced this past Friday the recast of our line of credit facility and term loan extending the facility's maturity, improving liquidity and measurably lowering our borrowing costs as a result.
I would like to thank our bank partners for their ongoing support of our business. As David mentioned, we expect to deploy capital during the year, but the impact of this spending on leverage levels will be mitigated by 3 factors. First, the ongoing ramp in our EBITDA primarily from growth in same store NOI. 2nd, the ongoing repayment of our $170,000,000 Blackstone preferred as that JV continues to liquidate. There were no Blackstone dispositions in the Q2, but we did get more clarity on prices for dispositions expected to close later this year, which has caused us to marginally increase our valuation reserve on the remaining preferred.
Our current $78,000,000 reserve compares to the $76,000,000 we initially established in 2017, though there have been several upward and downward revisions since then because we mark the preferred to market on a quarterly basis. We have received a total $155,000,000 of preferred repayments since inception of these securities with the remaining net value of $170,000,000 A third source is additional JV asset sales. We had limited activity this quarter, but expect additional dispositions will occur over the next year. And a final source of deleveraging is the $234,000,000 of total capital we eventually expect to receive through the ultimate liquidation of RVI and the related repayment of our receivable and preferred investment. All this means we continue to see 6 times debt to EBITDA as a long term leverage maximum.
I'd like to now turn to some earnings related items. 1st, while bankruptcies have had a much smaller impact so far in 2019 the Q2. That have since closed or announced that they will close and will therefore not recur in the Q3. We also expect to lose approximately $400,000 of revenues from Dress Barn in the Q4. There will be significantly less capital and downtime associated with these non anchor closures and we are excited about the backfill and mark to market opportunities though they will still act as a drag on 2020 growth.
2nd, this quarter included a $400,000 positive revenue impact from an outsized bad debt reserve reversal that is one time in nature. And finally, as Mike mentioned, we received a $1,300,000 from the Mattress Firm bankruptcy resolution. This was included in other income. While this is obviously a large one time item in the second quarter, the payment is the equivalent of 1 year's worth of rent and recoveries for this tenant. So the annual impact is a push.
I'll turn now to our change in guidance. Given the greater clarity we have at this point in the year, as well as significant outperformance in the 1st two quarters, we are increasing our OFFO and same store NOI growth estimates. Specifically, we have increased our OFFO guidance by 0.04 spin adjusted basis. We've also increased same store NOI growth by 110 basis points at the new 2.75% midpoint to reflect the better than expected economic occupancy throughout the year stemming from fewer tenant bankruptcies. Given the timing of anchor rent commencements, known tenant closures and bankruptcies and a tougher comp in 3Q, we now expect same store NOI growth to trough in the 3rd quarter below 2%.
Specific quarter over quarter headwinds include, as Mike mentioned, dollars 750,000 of quarterly revenues from bankrupt tenants in the 2nd quarter that won't recur, expense timing and a decline in other income. Finally, we adjusted guidance for fee income and G and A in 2019 with JV fees modestly higher due to higher property NOI and RVI fees lower due to completed asset sales. Based on asset sales completed to date, we expect RVI fee income excluding disposition fees to equal approximately $5,100,000 in 3Q and 4Q 2019 before stepping down again in 1Q 2020 as RBI continues to sell assets. G and A was lowered to $60,000,000 as we continue to manage expenses, but as previously mentioned lower RBI fees will act as a significant headwind to 2020 OFFO. JV fees will also likely decline from 2019 as our partners look to harvest capital.
With that, I will hand the call back to David for some closing comments.
Thank you, Matt. In conclusion, the last 6 months provide increasing evidence of this organization's ability to pivot to growth. We are now demonstrably ahead of schedule in executing on the operational opportunistic investing and redevelopment goals that underlie our plan to produce average 5% OFFO and NAV growth over the next 5 years. Operator, we're now ready to take questions.
Thank you. We will now begin the question and answer session. Our first question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.
Hi, thanks. Good morning. David, first question, just thinking about the quarter here, you commented that you're ahead of plan and on track for the 5 year plan. But as we think about this year's performance in this quarter in particular, much of which was related to operations, I'm curious why you aren't tracking ahead of plan for the 5 year plan or if that's not the right read?
Hi, Todd. Good morning. I think it's probably just too distant in the future to speculate on a change in a 5 year plan. And just bear in mind, there's 2 important factors. One is that we've taken what we think is a very realistic bankruptcy reserve through the remainder of the 5 year program.
In some quarters, we'll outperform and other quarters, we might underperform. This past two quarters, I think there's been fewer bankruptcies than we would have imagined. So I think in aggregate, we're still on plan. The second piece of the puzzle, I think you have to remember is that our operations and our NOI is trending very positively. But keep in mind that the fee burn off from RVI over time also has an impact the other way.
Okay. And then sort of a 2 part question on dispositions and the related fee income there. So the pace of dispositions seems to have slowed a little bit in the quarter. Is that intentional on your partner's behalf with interest rates down, maybe demand being a little bit better off year to date than expected? And then the second part related to the JV fees.
So you had previously commented the fees would likely trough, I believe, in early 2020. And I think you were suggesting they would decline, but maybe there was an opportunity to form some other strategic partnership or an opportunity to backfill the fee income there. Can you update us on your current thoughts there?
On the slowdown, Todd, are you asking about Blackstone specifically or you're saying just JVs generally?
JVs generally, but maybe you could touch on Blackstone's positioning as well.
Todd, on the Blackstone portfolio and several others, we don't really control the pace of dispositions. So it's really squarely outside of our purview. The RVI portfolio that we also receive fees on, it's been noted that that company's assets are all for sale. The timing of those sales has more to do with the exercise of anchor options that affect the value of the property more than it does the desire of RBI to sell assets. So we're a little bit beholden to the timing of when transactions take place.
For joint ventures in general, it is a business that is compelling for us. We do have a certain amount of scale. It allows us to see a lot of deal flow. And I would say that strategically as joint ventures naturally mature and go away, then we'll be working to replace those over time.
Okay. Thank you.
Our next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.
Hi. Good morning, guys. I was wondering if you could comment regarding the lease versus occupied spread. It has been increasing, which supports your leasing strategy. So I was just wondering when you consider your watch list and future outlook for occupancy, how comfortable are you that this will end up a tailwind to higher occupancy versus having to compensate for additional upcoming potential closures?
Good morning, Caitlin. I mean, I think at this point, we've seen such dramatic demand from the anchor business. I mean, the piece about Mike's prepared marks that I think you really got to take to heart is that we've signed 45 leases and LOIs out of 60. And that's a 36% leasing spread, which is enormous historically and even more impressive, it was 34 different brands. So I think you're seeing a tremendous amount of demand on the box side, which has surprised many, including ourselves.
And it's a healthy business right now. So the watch list tenants remain there. And I do think that the industry will continue to have bankruptcies and store move outs. But I think if you have the right real estate and the right submarkets and the right co tenancy that the demand is going to be there to fill it up And this portfolio for 1 certainly has a lot of built in mark to market.
Got it. And then maybe just on the redevelopment side. Could you go through for the 2 projects that are planned to open in 2019, Nassau Park and Brandon Boulevard, kind of the percent lease that you've gotten to on those and maybe the difference between the two projects? Maybe it's just scope, that one will just take, it seems like, 1 quarter to stabilize and the other will take about a year?
Yes. Nassau Park Pavilion was a redevelopment of a Kohl's box in Princeton, New Jersey. It's 100% leased and it's effectively a reconfiguration of square footage that we recaptured. And that's why you're seeing the stabilization happen so fast. It's just as the tenants ramp up and open, it all happens within a 1 quarter duration.
The collection of Brandon Boulevard is a Kmart recapture that we were able to receive back about a year and a half ago. It was the last Sears Kmart that this company owned. And the occupancy rate at this point is trending what Mike? About 75%. 75%, 80%.
And the LOIs and the activity we have on the remainder of the space, I think we've got a pretty prudent guideline for when that final stabilization occurs.
Got it. Okay. Thank you.
Our next question comes from Christy McElroy with Citi. Please go ahead.
Hey, good morning guys. Matt, just some follow ups on the same store NOI discussion. You talked about the mattress firm payment and the bad debt reversal in Q2. Just trying to figure out inherent in the same store NOI guidance increase, how much of that revision was these items? So how much of that had you previously anticipated in the guidance range versus how much of it was driven by your expectation for better core growth?
And I'm not sure how much of the better recovery rate in Q2 was timing?
Yes. Thanks, Christy. We did not budget Mattress Firm. That's a transactional certainly outside of budget. And bad debt reversal is really about the pace of bankruptcies that we've had.
As David and Mike both mentioned in their prepared remarks and me as well, bankruptcies have just been significantly lower than we expected. So the guidance is really about, yes, we got some money back from Mattress Firm as a contributor. We're also seeing rents commence more quickly to Mike's response, such as Mike's comments about our construction team getting spaces open. We had a little bit of a benefit in operating expense timing this quarter that will be reversed next quarter. And then bankruptcies generally at this point of the year, we were kind of looking forward and it's we get more clarity as we've mentioned, we get more clarity now about what's going to impact the rest of the year.
And so that's part of the upward guidance as well.
Okay. So if I look at the piece of base rent growth in the first half of about 1.4% to 1.5%, how should that look in the back half of the year as more commencements hit, but then offset by sort of the further impact of closings that you mentioned?
Yes. So I would put revenues together, right? So you saw you're right about the 1.5 ish percent increase from that. We also got another 40 or so basis points from ancillary. All this stuff is connected.
The Q3, I think you're going to see a slower pace of revenue growth, A, because of a tough comp and B, because if you look at our what we said about the timing of anchor commencement, they're really going to happen more in Q4 than in Q3. So the growth will pick up more in the Q4. I think our view is what we've been saying all along is you're going to see the robust revenue growth happen starting at the end of this year and then going forward. In the meantime, we've managed to pick things up and improve margins and squeeze profitability out of the same store portfolio, which we're perfectly happy with.
Okay. Thanks a lot.
Thank you.
Our next question comes from Samir Khanal with Evercore ISI.
Mike or David, when I look at your net effective rents, I know when you look at the new end renewals, I mean, they've held up pretty well on the net effective side. But then when I looked at new leases, they were down a little bit even from a trailing sort of 12 months basis here. I'm just trying to figure out what's kind of going on there.
Hi, Sameer. This is Mike. Just wanted to kind of emphasize the size of this portfolio is always going to going forward have some bumpiness to it on a quarter by quarter basis. And when you look at this portfolio and as an example, if you have one anchor space of 40,000 feet or so that has a relatively modest bump and require some CapEx, it can actually cause a quarterly number to fluctuate. When you look at this aggregately across the rolling 12 month basis, it really does kind of temper things.
And if you look at last quarter, for example, we had a very high leasing spread related to prior rents and CapEx in this quarter, we have a smaller portfolio and there's some bumpiness.
Okay, thanks. And then I guess my next question for you Mike is, can you generally talk about sort of how leasing discussions are going with potential tenants? Clearly, there's a lot of noise out there. I mean, there's bankruptcies, closures, but have you seen any sort of changes in sort of conversations over the last 6 months, maybe 3 months? Are there any changes in sort of economic asks or non economic ask coming from tenants?
No. The answer to that is no. I mean, when you look at the Marriott of tenants that we're doing new deals with, the conversations are really not terribly different than they were over the last 5 years. With existing tenants talking about renewals, tenants we've been doing this for many, many years and tenants are always working to try to get the best deal. And when you have really good real estate, you can see that we continue to see increases.
And I would say there's not a dramatic change in the tone of the Please
go ahead.
Hey, good
morning. Good morning over there. Hi, Please go ahead.
Hey, good morning. Good morning over there. Two questions. First, just a general retailer question. You guys and others have commented that the pace of bad debt or sorry, bankruptcy store closings is a lot less than expected.
So is your view that a lot of these headlines that we see of tenants announcing various plans to close, Are those is it essentially all bluffing? Or is it that they're trying to close, but the economic reality means they don't want to pay lease term? Or is it that these tenants, for the most part, have been able to revamp their merchandise plan or revamp the part of the business that was ailing them, which case they're able to last longer. So said a different way, is this just that the tenants are proven to be more durable than we all expected? Or is this a matter of that it's just taking a long time for these tenants to work through?
And if they don't go under this year, they'll be going under next year, if you will?
Good morning, Alex. It's a really good question. I think that, that subject has come up a lot, particularly over the last quarter or 2. And for us, it's hard because you want to talk industry in general since there's so many newspaper articles about retail disruption and it's accurate. There has been a lot of disruption in retail.
But for a company of our size where we own less than 70 wholly owned assets, it's difficult to be a proxy for the overall retail industry. And so I think maybe what we are seeing is that if you own really good real estate, even if a tenant is changing their store fleet, they're probably not going to change the ones that are making money. And the 4 wall EBITDA that comes out of boxes and shops that are within our 70 wholly owned assets, I think are strong enough that they have proven to be very, very durable. The flip side of that question, you're asking about existing tenants. The flip side is the demand for space.
And I keep coming back to what Mike said during his remarks of 45 anchor deals that we've done or are working on, there are 34 different brands. So there's a tremendous depth of demand for space in our portfolio and it puts pressure on existing retailers to renew at rents their market.
Okay. And then the second question is for Matt. Matt, you mentioned for next year for 2020, there's going to be a decline in RVI and the JV fees that provides a bit of a headwind. Can you just sort of put some color or some brackets around like magnitude sort of a range of 1,000,000 of dollars that we should be thinking about that's going to come out of next year as RVI continues to wind down and it sounds like you wind down some of the JVs?
Thanks, Alex. Yes. So we're not providing specific forecast yet in part because we don't really know. One thing I would remind you of the lion's share of this really is coming from RVI. I'll come back to your JV comment.
But on RVI, we originally laid out somewhat arbitrarily a 3 or so year liquidation plan. 2020 would mark the 3rd year following what we following the spin itself. So and that's not because we have some visibility on exactly what's going to happen and when, but we're trying to take I think a prudent approach. So you could assume I think most importantly very significant reduction in fees from RVI over the course of next year. And that I think is the lion's share of the headwind that we're talking about.
By the same token, the JVs, as David mentioned, we don't really control the Blackstone JVs, but they are I think motivated to sell those assets relatively quickly. So we expect some headwinds there. And then our other JVs, the retail landscape is changing and JV partners are always being active and thoughtful about what they own and some of what they bought 5 or 10 years ago may not make sense today. So I expect some headwinds there as well. So I'm not going to quantify anything at this point, but I do think it's something that you should consider as you're looking forward into your next 12 months.
Thank you.
Our next question comes from Rich Hill with Morgan Stanley. Please go ahead.
Hey, good morning guys. Thanks for all the color on maybe some of the fundamentals that you're seeing in your business. Given that you are active in the sale market, maybe not directly with site centers, but RVI and the quality of your assets, I was wondering if you could just maybe give an update on how you think the sales market is trending for the assets that you're looking at recognizing that RVI isn't exactly what SiteCenter owns?
Yes. Rich, I'm going to and good morning. I'm going to stay away from commenting on RVI's asset sale process. I will say that the CMBS market is alive and well. And that is the key indicator for asset sales, particularly in secondary markets.
So I think as long as the rates and the door is open for decent financing, I think the transactions market is pretty alive.
Got it. And sorry, I wasn't specifically asking you to talk about RVI. I was just maybe giving some color on what you thought about cap rates. But it sounds like you think cap rates are stable to maybe even a little bit tighter given how open the CMBS market is? Is that a fair characterization?
Yes. I think that's a it's a fair generalization. I think I can talk more on the acquisition side as we look to deploy capital and you think about what is most growth. And that sometimes is different than cap rate, right? A lot of this comes to CapEx and the mark to market on in place.
So I would say as opposed to cap rates being stable or coming in, I think it's that durable IRRs effectively underwritten are very, very valuable to a lot of different investors. And so we're seeing and witnessing a lot of competition for growth assets.
Got it. That's helpful. Talking about the durability of cash flows, just one follow-up question. You've obviously been pretty successful having partnerships from Asia. Can you maybe talk about just that demand that you're seeing from durable cash flows from foreign investors?
Yes. I think that nothing's really changed from when we closed on our $600,000,000 joint venture with the Chinese institution. There is a demand for U. S. Dollar denominated dividends.
And to the extent that you can find durable assets that may have a smaller growth than a domestic fund might want. I think that the foreign capital is seeking yield. And I think our asset class can deliver that yield. So we are active in continuing to have more dialogue in that front.
Okay, great guys. Thank you.
Our next question comes from Shivani Sood with Scotiabank. Please go ahead.
Hello. This is actually Shivani Sood from Deutsche Bank. Just following up on the earlier question on the private markets. Have you guys seen any change to the competitor pool in terms of the bidding process for the assets that you are looking for, just given that you're sourcing from more of a nuanced strategic perspective versus some of the institutional capital out there that might be looking for more of a buy and hold asset?
Good morning, Shivani. I don't really have any characterization on the buyer pool. It feels like every asset we look at there's some players that are consistent and there's some new ones. I think there's an awful lot of capital I think available for durable assets. And so you're seeing public and private together competing.
Great. And then as a follow-up, you guys have really been at the forefront in terms of leveraging customer and geographic data to gain an edge on the leasing and tenant negotiations. Can you give us an update on your efforts there and how that might have facilitated the faster than anticipated re leasing of the anchor boxes?
Thanks for that question. This is Mike. We're developing an internal team. We're continuing to grow our analysis tools and we've seen tremendous value as we're looking at potential tenant mix strategies, acquisition strategies and we're seeing that as something that we're going to be the front lines of developing over the next several years. Shivani, there have been
a couple of specific examples that are intriguing. We had an asset in the Atlanta market and there was a tenant we were trying to persuade to join our lineup and there were some questions as to whether their customer was going to be available and on the property. And the data that we've assembled and Mike's team has been able to work with effectively prove that their customer profile was coming to the property with some frequency. And we really have never had that data before, but in the last year, it really has given landlords a big benefit to be able to market to some of the mom and pop tenants that don't have a big department and prove to them that their customer is on the property. So it's been great on the leasing side.
I think at this point we're also using a lot of this data to help us with our acquisitions.
That's great color. Thank you.
Our next question is from Ki Bin Kim with SunTrust. Please go ahead. Hey, good morning guys. Good quarter. So I wanted to ask
a couple of questions on leasing economics. The CapEx usage this quarter was about 40% as a percent of rental value. I'm just curious about the type of tenants you're bringing in, the credit or just the longevity, especially the 45, the 60 boxes that you signed. Can you just provide some color on the quality of tenants you're bringing in?
Ki Bin, I'll address your the 40% number first and then I'll hand it over to Mike to talk about mix. But just be aware that that net effective rent number is a fully loaded number, right. Everything that we're doing, the lease spreads like for all of our peers, there's some sample issues there in terms of which leases are in and out depending on duration and the space, etcetera. This is a fully loaded number and so it's simply a change in that CapEx number is about a change in activity, right. It's not about change in underlying economics per se.
And with that, why don't you go over to Mike? Yes.
Ki Bin, as far as the quality of tenants, I think it's important just to simply give you some of the tenants that we've looked at, signed leases with and have LOIs with over the last several months. And this is strictly anchors, but I'm just going to rattle off a few. We've done deals with Florida Core, DSW, Ross, TJ Maxx, HomeSense, Best Buy, Sprouts, Planet Fitness, 5 Below, Ulta, Total Wine, Burlington and the list goes on. This is a great pool of tenants with phenomenal credit who are basically looking to be in the best locations and we've pretty much proven that this portfolio is offering that.
Okay. And if I look at the leasing economics over the past year and a half, I know you guys fully load that number, but looking at it just from a trend perspective, it has been trending higher. And I get it, I don't want to miss the 4th century, so it's all positive reasons. But just from a holistic standpoint, should we expect the CapEx usage for site to increase, the actual CapEx usage to increase over the next year? Because the signed leases are on a signed basis, the CapEx usage is based on kind of real time usage of that CapEx.
So should we expect us an elevated usage level?
Ki Bin, let me give you one comment and then I'll hand it back to Matt. But I think you have to always bear in mind that when we have transparency with our fully loaded numbers and a portfolio that's less than 70 wholly owned assets, you're going to see volatility based on the pool. And the fact of the matter is this portfolio was curated with an excessive amount of anchor opportunities. As we lease those, the pool of space that we're leasing is dramatically larger than a long term run would be. Once the occupancy stabilizes, then I think you can see that change.
But bear in mind, when you're looking at trailing 12, or you're looking on kind of industry averages, just keep in mind the size of our portfolio and the fact that there's an awful lot of leasing taking place.
And I'll just follow-up. So just to be clear on net effective rents, I don't see a change in trend there. So net effective rents have been flat to even marginally up. And that's something that we've seen for years now. In terms of spending dollars, the absolute dollars, we have just said that we have signed on the order or we're about to sign 45 anchor leases.
So if CapEx did not go up under those circumstances, you should question our disclosure, right? So I think we've been very transparent that there'll be a lot of anchor leasing volume this year with rent commencements that are really the payoff for the spending. The rent commencements begin at the end of this year, but you've seen that number ramp. We are not showing an increase in CapEx on that basis. We do expect an elevated level of CapEx compared to say 5 or 6 years ago because in our forecast we are assuming 150 basis points per year of bankruptcy loss, right.
So we expect bankruptcies to remain elevated and therefore CapEx will remain elevated. That being said, we don't expect that kind of ramp in CapEx to happen again. I would actually say over the course of the next 12 to 24 months, you should see some moderation in that spending, but it all depends Ki Bin. As you know, it just depends on what happens with anchors and the bankruptcies.
All right. Thank you.
Our next question comes from Wes Golladay with RBC Capital Markets. Please go ahead.
Hey, good morning guys. Looking at the dress barn, it looks like you know well in advance that tenant may be leaving. How does this help you in the leasing? And how quickly can you turn that space? And just in general, how is demand for the space?
Hi. Good morning, Wes. We don't really know what is going to happen with Dressbarn. I would say that in Matt's prepared remarks, he mentioned that we're simply taking the worst case scenario from a budgeting perspective. If I shift to the opportunity side, I think Mike and his leasing team, particular to this retailer who happen to have older leases, the mark to market is exciting for us.
And so I think they have been soft marketing those spaces in the event that we get them back, but we really don't know anything other than the market does.
Okay. In that situation where you're soft marketing it and you did have a contingent lease and you signed it the day after they filed, how soon can you get them in the space?
I don't think it's any different than the previous bankruptcies. You've seen that the larger spaces are 18 to 24 months and the smaller spaces are a little bit faster. What it really depends on is how many of them are leased at the same size and how many of them are split up into more profitable shops. And I honestly don't know the answer to that until we get the space back and get more serious.
Okay. Thank you.
Our next question comes from Vince Tibone with Green Street Advisors. Please go ahead.
Hey, good morning. I actually have a follow-up on Dressbarn as well.
If you could just talk a
little bit about how the closure process was negotiated and specifically how they were out Dressbarn was able to get out of their leases in the 4th quarter without filing for bankruptcy within the parent. Any color there would be helpful.
Hey, good morning, Vince. The only color I can give you is our decisions. We have not signed anything with Dressbarn. And at this point, we're simply collecting rent as per their lease agreements.
Got it. Okay. So nothing formally has been executed then. And so just what is your budget as Gasly call for just no rent starting in the Q4?
December, yes. Got it. Sorry for October. I'm taking them out in October. But that is a conservative and somewhat arbitrary decision.
The negotiations are ongoing. We're not going to comment on those specifics, but other than to say we haven't committed to anything and it could be better or worse than that or it shouldn't be worse than that, it could be better than that, we'll have to see.
Got it. And then just one more on similar to the following question, but do you expect having to split up a lot of the Dressbarn locations to get demand to better leasing economics or you think the single tenant user will be kind of
the most common backfill there? The most common backfill will be to have a single user, but there's going to certainly be some spaces that will need to be split.
Okay, got it. Thank you. That's all I have.
Our next question is a follow-up from Christy McElroy with Citi. Please go ahead.
Hey, it's Michael Bilerman here with Christy. David, you talked a little bit about the Duval project that we shouldn't expect these quick payoffs in terms of the redevelopment because in most cases you'll likely go forward with the redevelopment. I just wanted to understand as you look through it, I know you've done a deep dive on every asset, has the resi component at Duval and being able to monetize that change any of your thinking as you look across the portfolio for more of those opportunities either to sell or to embark by yourself?
Yes, it's a great question, Mike. And I will admit that even my own temperament has changed over the last couple of years. I wouldn't say it's because redevelopments are more risky. It's simply that there are other uses of for capital, which are more accretive at less risk. It's as simple as that.
Duval was a nice simple clean project that had zoning amendments that allowed us to perform a mixed use plan. But when we measured our own profitability plan, it made more sense to sell it to someone. And I have a feeling that that will continue. There's simply a lot of risk in a redevelopment project. It takes a lot of time.
And if we can find acquisition assets or our own stock or our preferred shares that have a really good return and good underlying assets, the risk reward simply tilts in the favor of investing in something other than development.
And then this question on guidance. Matt, you sort of went through some of the one time impacts, the fees and other things that came about in this quarter. Most of the guidance increase, predominantly all, was simply the beat. It doesn't appear as though what you guys have described as measurably beat better, materially better in terms of performance is impacting second half. The second half run rate from an FFO perspective is about $0.28 a share.
You did $0.31 so it's actually a deceleration. Why isn't any of the benefits that you guys are talking about actually boosting more near term results in terms of second half FFO?
Thanks, Mike. Yes, so I can't disagree with the logic of what you said in terms of we're raising it by the outperformance versus consensus. I think what we try to do is give guidance based on what we have visibility for. We have some one time items that are not going to repeat. So that I think by definition that tells you could see less revenues next quarter in aggregate than you saw this quarter.
If mattress rooms doesn't happen again and we don't think it's going to happen again, you could see a tick down. I would also highlight we did have some benefit on expense timing, just that just happens from time to time. We had some expenses slip into 3rd quarter from the Q2. So that will happen. And then there are things and we're not just trying to be kind of overly conservative, but there are things that can affect our numbers, right?
We're opening a lot of anchors in the second half of this year. They're big spaces. If they slip by as much as 2 or 3 weeks that in this smaller company size, that can actually impact our numbers. So I think we're taking a relatively prudent approach to this. We're not trying to be overly conservative.
If things go all go well, then yes, we could see numbers go higher, I suppose. But this is kind of what we see as a base case sitting here today.
I'm just trying to triangulate a little bit about some of your commentary around how robust everything is from a leasing, the same store. And if it's not really impacting the second half in terms of a run rate relative to consensus or even to your own numbers, right, because the beat was predominantly just rolled into full year. What really has changed, right? If you're really not getting the go forward benefit of a beat, the beat is really confined to the single quarter then
or you're being overly conservative.
I'm just trying to piece it together, right, because I hear such strong language in terms of the outperformance, but it doesn't seem to be flowing through in the back half in a real meaningful way.
I wouldn't say we use such strong language. I think we did outperform our own estimates and our operations have gone certainly better than we expected in large part because of lower than expected bankruptcies. That part will absolutely continue. You can rest assured that we have lowered our so called bankruptcy reserve overall for the year. So I think that should give investors some comfort.
But to the degree there were some one time items that don't recur, it's hard for me to pretend that those were simply some kind of a fundamental recurring beat.
Right. Now I was just going off of materially stronger than expected operations measurably above our expectations.
But Michael, let's just keep in mind, there's a difference between FFO guidance and same store NOI, right? FFO is a larger number. It is affected by certain transactional items, etcetera, right, one time items more so than same store is. We did materially increase our same store guidance. So we've got that kind of in the bag.
I think that's something that should be reassuring to investors and it does represent stronger outperformance. If anchor spaces continue to open earlier than we expected or even as expected, you could see some upside there as well. I think we're just trying to be prudent about the various moving parts involved in the rest of the year.
Okay. Thank you.
Our next question comes from Craig Schmidt with Bank of America. Please go ahead.
Great. Thank you. I was just wondering, have you been talking with Pier 1 or Bed Bath and Beyond? And are they talking about potentially closing stores?
First of all, we generally won't comment on specific tenants, but a couple of things to keep in mind. We do maintain a conservative outlook with 150 basis point reserve for potential tenant bankruptcies. So we're mindful of things that are happening out there. And again, as I said earlier, there's nothing new to tenants attempting to modify rents when renewals are due. And as you can see, we continue to show growth in our portfolio.
Okay, great. And then I noticed that the small shop occupancy ticked down. Would you expect that to pick up by the end of the year? Or what's causing that?
Barring further small shop vacancies, I would expect that to pick up. Bankruptcies, our continued momentum on shop leasing is really, really strong.
In the prepared remarks, Craig, we mentioned that the entire is going well and
continues to show upward momentum.
Okay. And then is going well and continues to show upward momentum.
Yes. I guess the stronger consumer seems to have been helping maybe less the national small shops. And I thought maybe that you would see increased appetite for the 3rd Pizza Parlor or a nail salon shop or something. But thanks for the information.
Our next question comes from Chris Lucas with Capital One Securities. Please go ahead.
Hey, good morning everybody. Just a couple of quick ones. On the 10 anchor boxes that are expected to open by the end of the year, is there any chance that you actually pull forward any more than the 10?
It's probably Chris less likely. Anchors have certain periods of time which they want to open. And so normally you're scheduling something for a 4Q open or a 2Q open. It would be very rare for us to pull in some from next year into this year. I think what will be more common is if we're able to get folks open sooner.
That's the if you're looking for an upside scenario, in the last quarter, we overachieved on opening sooner than planned. And if that continues, then you would an improvement in the Q4. But I don't see the number of boxes increasing dramatically.
Okay. Thanks. And then just a question about the anchor leasing activity velocity. On the 60 boxes you guys have been talking about, from Q1 to Q2, it feels like there's like a net increase of one lease deal, which is obviously well below the pace you guys have been executing on before. So you closed 4 and you but the net number of conversations you were having in close went from 44 to 45 based on second quarter versus Q1 earnings calls.
Is that a seasonal issue? What is the issue there?
I think you're just looking at a small portfolio in a 90 day period honestly.
Chris, keep in mind, if you recall, a number of these boxes were holding back redevelopment. So the pool of kind of leasable space hasn't changed, which almost fully encompasses that 45 boxes where we have activity today.
I think we feel pretty good about pace. There's nothing there's no slowdown. There's nothing weird going on. It's just it's a little bit too much of a micro view, I think.
Okay. I appreciate that. Thank you.
Our next question comes from Jon Petersen with Jefferies. Please go ahead.
Great. Thanks. I'm just kind of curious if you
could give us more of your thoughts on redeploying some disposition proceeds, acquisitions versus share repurchases and maybe specifically as you underwrite IRRs on property acquisitions, kind of what the hurdles are relative to repurchasing your stock?
Sure, John. It's a great question. We certainly have all of our options on the table at any given point. Right now, we sold an asset in Southern California last quarter and we have those proceeds that we're looking to deploy. So we've been somewhat active out trying to find a good replacement.
And as you can imagine, we're trying to balance the IRR with the risk. Three assets we bought out of our joint venture business in the Q4 were purchased at a 7 cap. And as of today, I believe they're about 25% higher in NOI than they were 6 months ago. So that type of asset does allow a lot of growth. And I think the IRR on a risk adjusted basis is much higher than our stock.
On the other hand, sometimes our stock gets to the point that it's pretty attractive as well and we've shown that we would execute on that. So we've got a lot of levers to growth. And to your point, I think we simply are looking at the different options at the time that we have the capital.
Okay. All right. That's all for me. Thanks.
Our next question comes from Michael Mueller with JPMorgan. Please go ahead.
Yes. Hi. Most things have been answered. But I was wondering just on the remaining 15 boxes that you need to lease still, should we expect anything materially different in terms of economics relative to what you got on the first 45?
I don't think so, Michael, other than the fact to remember that a lot of those boxes that are between 4560 are in properties that we're holding them back for redevelopment like in Atlanta and in Boston. And so it could be that those get demolished and turned into some other type of redevelopment or it could be that they're split and we're using that square footage elsewhere. So if they were to be leased without tearing them down, then I don't think you see anything different in the economics.
Got it. Okay. That was it. Thank you. This concludes our question and answer session.
I would like to turn the conference back over to David Lukes for any closing remarks.
Thank you all very much and we look forward to talking to you next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.