Kite Realty Group Trust (KRG) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 Kite Realty Group Trust Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to your host, Ashley Underwood, Investor Relations. Ma'am, the floor is yours.

Thank you, and good morning, everyone. Welcome to Kite Realty Group's fourth quarter earnings call.

Much 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 the company are Chief Executive Officer John Kite; Chief Operating Officer Tom McGowan; Chief Financial Officer, Dan Sink.

And now I'd like to turn the call over to John.

Thanks, Ashley. Good morning, everyone.

2017 was another productive year for our team, and we've been diligently executing on our long-term strategic goals and plans. As we laid out in our press release, we generated solid results in the fourth quarter that were in line with our guidance ranges. Our strong leasing efforts drove our small-shop lease percentage past our 90% goal to 90.5% leased at year-end, an increase of 160 basis points over the prior year and 80 basis points over the end of the third quarter. Now that we've hit that 90% goal, we're focused on driving the shops even higher while still generating strong leasing spreads.

The experiential qualities and services provided by these tenants will serve as a solid foundation for our portfolio over the long term. We'll continue to be very selective as we lease additional available small-shop space to ensure the prospective tenants add incremental value to the shopping experience.

In addition to working on our small-shop lease space, we're focused on re-leasing our current vacant junior anchor spaces. We're calling this initiative our 2018 box search. We currently have 3 boxes under lease negotiation and another 4 with active letters of intent being negotiated.

Over the next 12 to 18 months, our team is going to be laser-focused on leasing up the remaining spaces and getting new, quality, exciting tenants open and operating. We had great conversations with tenants at ICSC in New York, and we've been actively conducting portfolio review meetings with select, highly productive competitive retailers. These meetings are focused on our tenants' future growth plans and generating interest to secure locations in our high-quality portfolio. We're treating our 2018 box search as a challenge, and we will succeed.

I want to highlight several noteworthy tenant openings in the fourth quarter as we continue to upgrade the quality of our tenant base and drive additional traffic to our centers. We opened 42 new tenants, totaling 185,000 square feet in the fourth quarter. These openings included anchors O2 Fitness at Holly Springs Towne Center and Hobby Lobby at Parkside Town Commons. We also opened Aldi at Bolton Plaza, Ross at Trussville Promenade and several vibrant small-shop tenants, including Athleta, Talbots, North Italia, T-Mobile, Starbucks and Tempurpedic.

These leasing efforts led to a Kite record 393 new and renewal leases in 2017 for over 2.3 million square feet, which was about 600,000 square feet more than the prior year. When combined with rent bumps built into our existing leases, we increased our average space rent for our retail assets to $16.32, which is an increase of $0.54 or 3.4% over the end of 2016. I'd also like to point out that approximately 55% of our annualized space rent is derived from lease spaces of less than 16,000 square feet, making the majority of the space easily convertible to alternative tenant uses in this challenging retail environment. And 70% of our average base rent is generated from shopping centers with a grocery line. We've highlighted these grocers in a new column that we added to the operating retail portfolio summary in our supplemental. Next quarter, we'll also be adding a column to this summary showing the ICSC classification for each of our properties. Based on the ICSC definitions, only 20% of our ABR comes from property that qualify as power centers.

Our property management initiatives, including our fixed CAM conversion program, continue to pay dividends and help drive our retail recovery ratio further upward to 90.9% in the fourth quarter, 170 basis point increase over the prior year.

In terms of capital recycling, we successfully sold $90 million of noncore assets at a blended 6.8% cap rate over the last 5 quarters and recycled $80 million of the proceeds in the 3-R projects, with projected annual aggregate returns in excess of 10%. These capital allocation efforts are accretive to NAV and drive NOI growth. Some examples of the type of work at these redevelopments include at Burnt Store marketplace, where we entered into a new 20-year lease with Publix and fully renovated the façades on 50,000 square feet of small shops.

At Fishers Station, we negotiated an early termination fee for Marsh Supermarkets prior to its bankruptcy and replacing it with 123,000-square-foot Kroger, which also allowed us to do a comprehensive redevelopment of the center.

At Portofino, we did a multiphase redevelopment by rightsizing Old Navy, adding Nordstrom Rack and replacing Sports Authority and Conn's Appliances with the PGA Superstore and TJ Maxx.

At Rampart Commons, we replaced 3 Gap branded stores with Athleta and 2 highly sought-after Sam Fox restaurants, North Italia and Flower Child, while also extending our leases with Pottery Barn and Williams Sonoma.

And at Bolton Plaza, we replaced underutilized small-shop space with a new Marshalls and Aldi, expanding our GLA and enhancing the tenant mix.

And now I'll turn to guidance. For 2018, FFO as defined by NAREIT, we're guiding to a range of $1.98 to $2.04 per diluted common share. Our earnings press release and supplemental list the major assumptions for our guidance, and they include: same-property NOI growth of 1% to 1.5%, which includes a provision for bad debt expense of 1.2% of cash minimum rent or $3.2 million. We're also assuming proceeds from dispositions of noncore-operating properties of approximately $60 million in the first quarter of 2018. These properties are under contract and are in secondary and tertiary markets, with average household incomes and average base rent well below our portfolio average. The assets are not reflective of the balance of our portfolio, and we anticipate that the blended cap rate to be in the low 8 cap range. The proceeds we'll use to reduce our leverage.

In addition to the estimated bad debt provision I already mentioned, we made assumptions for 2018 relative to the Toys "R" Us bankruptcy. Based on the status of current negotiations with the tenant, we have assumed a $2.1 million cash rent and recovery loss in 2018 from the closure of one store and rent adjustments at 3-Rs. Our guidance also includes the recent loss of an 80,000-square-foot office tenant at our 30 South Marine headquarters building, representing $1.4 million of cash rent. This tenant's lease term recently expired, and we didn't believe their requested renewal rate and tenant improvement allowance was in line with the current office leasing environment.

In closing, we're focused on several initiatives in 2018 and beyond. Further improving our balance sheet, by among other things, driving leverage to our stated goal of low 6x, growing our significant liquidity and free cash flow; disposing of assets in a strategic manner to improve ABR and demographics; continuing to drive small-shop occupancy and successfully executing on our 2018 box search initiative; and expanding and enhancing our communications with the investor analyst communities on the overall quality of our portfolio, including planned tours of our primary market.

Operator, we are now ready for questions.

(Operator Instructions) Our first question comes from Todd Thomas from KeyBanc.

First question. Just for the anchor box leasing initiative. Are those 7 anchors that you mentioned, the vacancies there that you're dealing with, is that the totality of what you have from a junior anchor standpoint? And do you have any rental income in the model in 2018 attributable to leasing up any of those spaces?

Well, first part of the question as it relates to -- I guess what you're saying, is that the only activity we have in those available boxes? And the answer to that would be no. What we're saying is of those available boxes that, most of which has come back to us in the last year, and particularly, heavily in the third and fourth quarter, we're already actively engaged in lease negotiations and LOI negotiations on basically half of what we have to do. But that said, I mean, we're trying to be conservative as it relates to -- we're -- if we're just discussing deals with people, we're not including that there. We're actually saying, we've got leases that are going back and forth, and we've got LOIs that we're also negotiating. So that means, for us, that's generally pretty high penetration. As it relates to the other stuff, I mean -- I was trying to make a point, Todd, that if you look at the activity that we've had and the strength of our portfolio, particularly highlighted by what we've done in the small-shop space, we just happened to be in a situation where, in the last couple of quarters, an unusual amount of boxes have come back to us, and we got to fill them. That's our job, that's what we do and we will do. So overall, we feel pretty good about where we are with that. And as far as the 2018 numbers, we basically -- one of those leases that we've recently signed, that we said was in negotiation, is basically signed. That one has an opportunity to be in 2018. But beyond that, it's more likely that all -- all of that would happen in 2019.

Okay, got it. Okay. So you got back, there's about 14 junior anchors that you're working on in total though. It sounds like that, is that right?

Yes, that's correct, as we sit here today.

Okay. And then, generally, what's been the time line...

Todd, I'm sorry to interrupt you. As it relates to that 14, I mean, that's a lot at one time, frankly. But when you look at it against the backdrop of us having about 350 spaces that are defined as anchors for us, because that's above 10,000 feet, on a relative basis, that's not a lot. That's not a huge issue, it just -- the issue is so much of it came in at a concentrated period of time.

Sure, understood. And what's been sort of the time line or lead time to get a tenant in and paying rent from lease signing? Is that changing at all?

Well, I think -- we've talked about this before, it's longer than people think it is, right? And so the bottom line is, to get -- to actually sign a lease and get a tenant open from that lease signing within 12 months is possible but a great challenge. And generally, for us, it probably averages 15 months because of the -- you still have to permit these things, you have to design and drop, so there's a lot of time involved and just the lease negotiation itself can take 3 months. So generally speaking, 12 months would be quick from the time of lease signing to opening. Tom, do you want to add anything to that?

The only thing I would say, Todd, is we're doing everything we can, particularly in permitting, to do concurrent building permit, site permit processes. So a lot of times, you'll have a situation where a municipality or county will not allow you to open up a second permit once it's underway, once the single one is underway. So we're trying to pool these, which saves a lot of time. So we're trying to do everything we can from the actual lease negotiation to the production of drawings, to the permits to tighten up those dates that John is talking about.

Okay. And then just lastly, switching over to the dispositions, the $60 million of dispositions that are in guidance. Is there any risk to those deals not closing just given the increase in the 10-year yield? Are any of them contingent on financing in any way? And then, have you seen any evidence that the increasing borrowing cost has had an impact on private market pricing at all?

Well, I mean, plus that the deals aren't closed. So I always feel like there's risk until it closes. So I mean, we're telling you that we expect it to happen, that we believe that it will happen, but they're not closed until they're closed. So there's always risks, which is why we do what we do relative to the guidance. But I think that we feel good that they'll close. As it relates to the impact on financing, I mean, again -- I mean, the people are making -- are obviously, very, very hyped about the fact that the 10-year has gone from 235 to 270 to whatever it is right this second. But generally speaking, that's not going to impact the deals that we're talking about.

Our next question comes from Craig Schmidt with Bank of America.

I guess my question focuses on some of the densification projects you're pursuing. I wonder if you are getting reverse inquiries from apartment developers or are you just targeting certain assets that you think suit well? And then finally, what do you look for in an apartment company to partner with?

Craig, for the first part of the question, it's both. We have gotten specific reverse inquiries on some of our assets, and we have also, from the very beginning, kind of laid out plans on certain of our deals that we knew there was a multifamily component. For example, at Parkside, when we were laying that out, we knew that we had a multifamily component and we executed on that deal for, I think, it's 250-, 300-unit range. But then in terms of our existing operating assets, that's in a ground-up development, where it's pretty easy for us to see where it's logical. But what we're seeing more of now is that we have assets that are very well located and has become -- as it's become harder for multifamily developers to find good opportunities from a greenfield perspective, they're very interested as it relates to properties that are already up and operating. So they're -- as we've set out, as we said in the press release when we announced what we're doing at Eddy Street, we have 4 or 5 situations where there's definitely opportunity for us to add multifamily. So it's really a combination of both. And in terms of what we're looking for, we generally look for experienced operators who have access to capital, and we're generally -- sometimes we're participating in these deals, sometimes we're just selling, so it just -- it really depends on the deal. Tom, do you want to add to that?

Yes. The one thing I would add is, we talk a lot about multifamily but I think office is also something that we'll begin to look at in unique situations, especially where you have a piece of property on a corridor that creates good visibility. So we're looking at several of those opportunities as well. But densification is -- that's a huge priority of ours. We've been very successful at Notre Dame as far as on what we accomplished with the first phase of 266 apartments. Now we're moving in to over 400 apartments in the second phase. So that's a sub we'll focus on. We'll get hooked up with the right people and really try to find the best opportunities for the asset.

Our next question comes from Christy McElroy with Citi.

So you talked a lot about the boxes that you're working on. But just maybe in terms of getting a better sense for fallout this year, I know that you talked about the $2.1 million for Toys in terms of the loss rent from the one lease rejection and then the reduced rent on the others. But are you building in -- what sort of other buffer are you building in for potential fallout from Toys specifically? Presumably, that doesn't flow through the bad debt forecast, given that Toys is post -- post addition.

No, I mean, I think, Christy, basically, the bad debt forecast, which is recently substantial at $3.2 million, obviously, that -- in addition to what we're saying is going to happen in Toys. So we feel like, as we know it today, as we sit here today, that, that's appropriate, and it's slightly above what was a pretty severe year in 2017. So I would tell you that we -- that, that's -- the $3.2 million plus the $2.1 million, I mean, you're talking about $5.3 million combined. We feel like that's reasonable as we sit here today. And hopefully, we won't use all of that, and we'll be in a better place as we get towards the end of the year. But right now, that seems to be a prudent kind of thing to lay out.

And as you look at the retail REIT -- the retail lease expirations, there's 18 anchor boxes that are expiring. And of those retail anchor boxes, we have 4 that we know are not going to be renewing, and that would be a couple of Office Depot, OfficeMaxs, and those are already baked into our forecast. So that's about 40,000 square feet. And then we've also got 1, the Landing at Tradition Toys "R" Us is also 1 of those 4 that won't be renewing, and another one is like a 10,000 square-foot tenant that's out near the end of the year. So we've already factored in the tenants that we know who are not going to be renewing within the budget, in and of itself.

Over and above the reserves.

Got it, okay. And then just following up on Todd's question on dispositions. I know you're only -- right now, you're only forecasting dispositions in Q1, but maybe you can give us a sense for, sort of your approach to how you're thinking about any other dispositions this year. And then you mentioned, sort of last year, your dispositions were at 6.8% but now you're talking about low 8s on the Q1 stuff, maybe you could talk about the differences in what you're selling or just has the market moved that much?

Sure. In terms of the first part of the question, this is similar to what I've said, I think over the last couple of quarters, which is, we try to be pretty strategic about what we're doing and particularly how much we're really going out and saying we're going to sell in a programmatic way. One of my personal concerns around overdoing that is that we are -- look, we've got to get fair value for assets, whatever that fair value might be. And we, very clearly said, we were going to be selling some assets this year. Obviously, we're kind of frontloading the ones that we've already been working on. It doesn't mean that we wouldn't sell more assets down the road, Christy, but as I think I've said before, we're not going to be selling assets that we don't believe we're getting fair value. And I think it's a bit of a -- when you put out a huge amount that you need to sell and you kind of -- everyone is tracking that, it might put you in a precarious situation. So I'm clearly saying that we're going to be opportunistic there. If there's a good opportunity for us to accelerate our overall business plan, we would, and we were getting fair value, we would do some more. But if we felt like we were not getting fair value, we would not. So that's how I feel about that. As it relates to cap rates and what we're selling this year versus what we sold over the last 5 quarters, these assets all have individual stories. And frankly, the assets we sold last year weren't as -- they weren't in markets that we would view as tertiary and secondary. That said, obviously, cap rates move around, and last year, there were some of the assets that we sold were smaller properties. These 2 are bigger properties. And so some of those smaller properties are a little more liquid, generally. But I don't -- I think that it's not comparable in terms of the asset sizes and particularly, their locations. But the buyers, for what we have, they love these deals. These deals are where they can get a little more yield. But when you look at the -- how it fits into our portfolio in terms of the things that we're focused on, in terms of growth and density, et cetera, that's the difference.

It's Michael Bilerman here. Yes, I guess, you spent so much time and I know running the business and leasing the boxes, selling assets is important. But I'm curious if you can spend some time just talking strategically about where the company is. And if you think about -- and I recognized all -- while the retail REITs have seen their share prices fall, yours is falling as well and pretty significantly. And I think back to the summer of 2016 when all the news we had about a potential transaction with WPG, and so clearly, you've had, over time, some thoughts about strategically moving the company in different positions. I guess, what are you doing now with the stock that's halved in value over the last 1.5 year in your size and -- I just want to know how you're sort of weighting, sort it out or is there any -- are there other things that you can do to emulate value?

Well, Michael, I think look, frankly, we're obviously -- we're a bit surprised by the reaction on how far the value, how much value disconnection there is particularly today. And you're correct in saying that when you look at this evolution of where we've gone over the last couple of years, this is not where we want to be. I think there's many, many things that are going into this right now and there's, obviously, as it relates to a generalist looking at this space and people that would be putting money to work, there's a fear of elevated interest rates and where that's going. There's a massive fear, in my personal opinion, unwarranted in the retail space. So look, from a strategic perspective, you're right. We have to be focused and I mean, incredibly focused, on fighting through the operating goals that we have, and that's one thing that I think you know we will do and we will execute. But that may not be enough. And as it relates to the NAV discount, it's tremendous and it's frustrating. There's things within that that we control, that we laid out, that we will do. And then beyond the outside forces we'll either recognize that or not. And I think people will begin to see over time that this is a point in time where we are faced with opportunities to back them by the way. Look, the great majority of these boxes that have become available were tenants that were no longer relevant, and it's good to close them out, but we got to go through this process. But as it relates to the strategic side, we've got to be very clear that we have some objectives to meet, and once we meet those objectives, if the stock is not reacting, we have to do things that would make it react. And we're very, very thoughtful around that. So I mean, there's part of this that I can comment on, there's part of it that I can't, because you can't understand or know why the market does what it does. But when you look at where we're trading, on an applied cap rate basis right now, it's well, well beyond logic.

Our next question comes from Jeff Donnelly with Wells Fargo.

John, I'll be following on that. I think the investment community has a difficult time differentiating an A center from a B center, if you will, even within the same market. Whereas malls have, maybe in the middle of an imperfect metric of sales productivity, they're indivisible metric for a grocery anchored centers or power centers. And I think in the universe where there's tens of thousands of these centers in the United States, it's just hard really to kind of understand that difference and you are seeing pricing beginning to separate more. I mean, I'm curious, what metrics do you think we and the investment community should be using to kind of better understand those quality gaps between assets and between companies to sort of help narrow the NAV discount? I'm just trying to think about how you sort of eliminate many NAV discounts for people.

I think that you're right, Jeff, it is tough because you don't just throw out a sales number -- or I mean, there -- the things that I see people doing are generally, they look at demographics, particularly weighted towards population and incomes. They look at ABR, which is -- we all focus on it but it can become a little dangerous. I mean, look at some of the Street retail stuff that's occurred from large ABRs. So I think that's the hard part. We've got -- it's kind of why I mentioned we got to do a much better job of getting people out there and seeing our properties, which you can't see on a piece of paper. I mean -- and even going through our website and looking at the quality of the assets. Over time -- I mean, look, over the last 5 years, we averaged almost 4% same-store NOI growth. We grew our cash flow over the last 5 years in a huge way. We grew our liquidity from less than $100 million to $400 million. We're -- like -- so we're doing things that people could see and track that you wouldn't be able to do without owning quality real estate. But frankly, to actually pick one thing is very difficult to do, even on demographics. I mean, you can have 100,000 people with $100,000 of income but you could be the third best shopping center at that intersection. Open-air shopping centers is a very, very local market, right? And it's just -- it's just hard to do it. So look, I think we wouldn't be able to do what we do over time without owning quality real estate. But I think the onus, frankly, is on all of us, the whole community to get out and see these things. And as you know, you and I talked about this often, that the fact that the narrative is that, literally, these places are ghost towns but when you take it upon yourself to go out and look at them, they aren't ghost towns. They're busy, they're vibrant, they're happening. So look, I think this will be a great year to track that, because we will execute and we will lease up space, and over time, people will realize you couldn't do that if you didn't own good quality real estate.

And then maybe another metric to even consider is there are not many of your peers, I think you really provided, too, is traffic, like -- I mean, coming in and out of centers is something to think about, but...

Jeff, I got to tell you, from our perspective, we are going to invest and really look at how we can do a better job, not only for the investment community but for ourselves and our customers, to really figure out where are our customers coming from -- I mean, shoppers. Where are they coming from, how long are they staying there, what are they buying. The metric data analytics side of our businesses has been ignored, and we're not going to ignore that. So look, I'll take our cue from Amazon and say, we're going to invest and it's going to pay off over the long term.

And just a question on the, I guess, asset pricing. You spoke about ICSC data, I mean, using that to segment your portfolio, there's definitely been something of an IP power center sentiment out there. What do you believe is driving that widening cap rate trend in the sector? I mean, is it debt market? Is it equity market? Is it driving the private equity market? Is it concerned around rent sustainability or occupancy levels or CapEx replacing tenants? I'm just curious how you think it sort of gapped out so much in the last 24 months or so.

Well, look, I think part of that, Jeff, is just that -- there's a lot that's happened in the last 24 months as it relates to these bankruptcies. And the thing about underperforming retailers is they tend to hang on for a really long time. And then when they finally roll over, it's huge news. And for whatever reason, we live in a world today where the media loves to bash physical real estate, and so you combine that with -- okay, there's a lot happened in the last couple -- in the last 5, 6 quarters, people are fearful that there's not enough retailers to backfill these spaces. There is CapEx cost associated with it. But look, in the fourth quarter, we opened what, 43 stores, we closed 30 stores. That is our business. That has always been our business. But for whatever reason, people are very fixated on it today. So I think there's a huge fear trade right now, and they believe that the bigger power site -- the power centers that have multiple, multiple big boxes are more exposed, and maybe they are. But that's why when you look at -- we're very focused on what we own, and when you look at what we own, that's the minority of what we are. The majority of what we own has a grocery component, has service, has restaurants, has entertainment. And I'm just -- we just got to make sure that the investment community knows that, that is working. It takes time in that, and Jeff, I think people just have really underestimated how long it takes. When a retailer controls the bankruptcy process and struggles, that takes time. And then they decide when those stores are going to come back to you, then, you can begin the process of filling them. That's the problem. I mean -- and it takes time. But it will happen and we will execute.

And just maybe one last question, apologize if you already mentioned this. But you attended ICSC in New York, what was your kind of takeaway in terms of your meetings, in terms of the pace may be for store closings or rental lease given maybe not just for yourself but just curious industrywide versus what it was in 2017. Do you kind of feel it's at a similar pace, improving pace, how do you underwrite that?

I mean, look, at ICSC in New York, we mentioned it but it was already a while ago, it was in December. And I think we were -- we came out of that feeling invigorated from a perspective of lots of people looking to do deals. Lots of open to buy, lots of successful physical retailers but clouded by the old guard slowly dying off, okay? So the reality of how we came out of there, we came out of there with a plan, which is what we always do. And now that plan is rolling. I mean, yesterday, we were at ULTA and our portfolio review as an example. So I think we feel like that there are definitely retailers who want to take advantage of the fact that some of these good locations are going to become available. That doesn't mean there won't be no more pain associated with that rollover process. And that's what you're going to see in 2018, in my personal opinion is, it's a transition year. And it's a year when you're bouncing along that bottom of the turnover of these retailers, you feel it. But when we look out to '19 and '20 and beyond and we look at the inventory levels, Jeff, and we look at the demand, and we look at the fact that after 8 years of 2% growth in the GDP, you're going to see hopefully an improvement to that. Median income in the country hasn't grown for like 25 years. It's going to grow if this continues, and yes, that one negative side of it from the markets perspective is rates move with that but NOI growth moves lock stock, right? And so we can grow above that. So I just feel like this is a year where people are really not thinking about the long term, they're just thinking about the short term right now.

But if you just look at New York year-over-year without question, it felt tremendously better. And the categories that were out there, entertainment. is moving along very strong with a lot of different options, fitness is out there, we, of course, always have our valued players, the TJ, Rosses that are doing extremely well. But I think one of the bright spots for us for sure was grocery. We're seeing Sprout starting to attack Florida and a lot of different activity with Whole Foods. So we are seeing a little more diversity in terms of our options and our ability to fill space at different square footage allotments which helps us a lot.

Our next question comes from Carol Kemple with Hilliard Lyons.

Looking out to 2018, how much do you expect your real estate taxes to grow?

Carol, this is Dan. In looking at 2018, it's not -- there's not anything significant. We do a pretty good job of staying on top of those. Obviously, the -- when you look at it from a run rate of the fourth quarter, to the extent we disposed over a couple of assets, you'll have some additional properties coming online. I mean, I think, when you look at where we're at, what they've done relative to the appeals process rates when it's been an option to appeal, and we feel like we can reduce the taxes, we do so. So I think it's pretty steady when you look at the fourth quarter going forward.

Okay. And just given where your share price is right now, how have conversations changed if they have about doing a buyback at this point?

Carol, I think as it relates to that, we've been again, we've been pretty transparent about how we feel about that as it relates to -- as we get closer and today, we're getting closer and closer to being where we want to be on a long-run basis as it relates to our balance sheet, particularly leverage. And I think we're doing some things in the business right now that we feel like, within the next year, we're going to be there. So as long as we feel comfortable that we're on track with that and we wouldn't be looking at increasing our leverage in order to do something, it is clearly in our -- it is clearly something that we're talking about at the board level conversation, and when the time -- if this continues and we get to those execution points that we've mentioned, it's an obvious thing for us to really consider in a serious way. But we've seen people in the past throw that out there and not be committed to it. If we're going to announce that, we want to be committed to that. And so that's evolving. So I would stay tuned.

Our next question comes from Daniel Santos with Sandler O'Neill.

Just one question from me on CapEx. As you guys are re-tenanting boxes, should we expect CapEx to remain elevated? And then sort of more generally speaking, given the increase in bad debt expense and the elevated CapEx, would you say it's more expensive to just run the business generally or this is sort of an anomaly?

No, as it relates to CapEx on boxes, if you look at the fourth quarter, our CapEx was up but it was very specific to 2 deals. And that -- again, when you're our size, a couple of deals can move the needle. But when you look at it over the last 2 years, it's been pretty level. So we would think that, that would stay pretty level. We're going to have -- we have more of them available than we did 2 years ago. So just on an absolute basis, we are underwriting in our capital plan to have more spend there but the returns that we get out of that are very appropriate. So we're good with it. And I'm not -- and can you repeat the second part of your question?

And then just generally speaking, if you guys are planning on spending more on CapEx and bad debt expense, would you say it is more expensive to run your sort of quarterly run rate or is this sort of a moment in time?

I think we view it as a moment in time in the sense that we're trying to be -- look, this is the very beginning of the year. So we're trying to be conservative as it relates to how the year is going to evolve. But from a CapEx perspective, we have a very, very detailed CapEx plan that gets updated literally every day. And it is -- we've covered everything that we need to cover for 2018 and 2019 in that plan. And again, it's one of the benefits of having free cash flow that we have. It's one of the benefits of having $400 million of liquidity and $80 million of debt maturing over the next 2 years. So we're in a very good place as it relates to that. And I think we feel like the business cost, the run rate cost is the same as it's been for a while.

And I think what's important there, too, Daniel, is we have a 5-year model that we run and look at -- the accumulation of cash flow, the spend relative to CapEx and incorporate debt. We sit down as a group, as a management team and look at spend and we sit down with the board and walk through our 5-year plan, that's always incorporated. We also include like a 5-year plan relative to parking lots growth on those particular shopping centers. So all that's been incorporated when we look at our models.

Our next question comes from Collin Mings with Raymond James.

A couple of questions for me. First, just kind of going back to the focus on leverage. Just -- can we put that in context of how you're thinking about incremental redevelopment spending at this point? And then if you can, just maybe put that in context of free cash flow you expect this year.

Collin, I think as it relates to the incremental redevelopment spend, I mean, you can track it and so it's pretty clear what we're going to spend and you can see that we still have the spend going on today, and we, relative to the capital plan, we've allotted for that. And in terms of free cash flow, we continue to generate free cash flow, we're going to -- obviously, we've got a little more spend budgeted in 2018 and 2019 relative to the boxes that we'll be backfilling. But we still are generating significant free cash flow in that. It's going to range over the next 2 years most likely between $30 million and $40 million. And of course, that's after the spend.

Okay, so basically $30 million to $40 million of free cash flow after kind of planned CapEx but before redevelopment, is that fair?

Correct, correct.

Okay, that's helpful. And then just going back to the -- I apologize, I missed this, but just as far as the time line for re-leasing the office space.

We didn't get a time line on re-leasing. We were just -- we were just made the comment that we had a large tenant, 80,000 square feet, which was $1.4 million I think . So it's a real number. And we could have taken a renewal at below -- at what would we felt like was below market, below value and we did not, that's part of our business. And we're actively engaged in conversations on the space, it's one of the few large contiguous blocks in a downtown Class A building which we believe is one of the best located, by far. So we're confident we'll do it, we're not going to -- we're not ready to give a time line but we're actively engaged in conversations.

Okay, and then -- all right. And then just one last one from me, John. You and the management team think about options and kind of that balancing act between getting leverage where you want it as well as kind of still having the FFO growth -- or FFO number. I mean, at what point does is it just get -- makes more sense to just get more aggressive? Again, going back to one of the earlier questions of how you think about additional dispositions beyond the $60 million that you've outlined and maybe just the -- again, getting more aggressive in kind of resetting the slate in terms of kind of an FFO run rate that you guys can build off of in context of having the leverage where you want it going forward?

That's a good question, and we, of course, appreciate the balance that we have as it relates to the desire to not only -- we're not only looking to grow our net asset value, we're looking to grow our earnings. And we realize that 2018 is taking a step back on a portion of that, not the net asset value portion but the earnings portion this year. And look, I think, for better or worse, we treat 100% of the equity in this business as though we always have as our equity. And we are very, very diligent around making sure that we don't get taken advantage of in values. So that's our caution around doing a lot at once. But as I clearly said, it doesn't mean that we wouldn't take advantage of an opportunity to do a smart deal and accelerate that process. So it is a tough balance, to be candid, and we're going to have to see how this evolves over this year. We are in the second month of it. So we're going to have to see how it evolves, but we're -- we want to make sure that the community -- investment community understands that we value this equity, we value their investment and we're trying to protect it as well as grow it. And we're going to do the best we can as it relates to that balance, so I think that's what I can say about that right now.

Our next question comes from Chris Lucas with Capital One Securities.

Just a couple of points of clarification for me, if you could. Is the office asset included in your same-store NOI guidance number? I just want to make sure I understand where that $1.4 million that's in or out?

It is not in the same-store guidance and it's not in the same-store pool since we started providing same-store guidance. And we've got footnotes to describe the assets that are out. So in Footnote 1 of the same-store page, you'll see the 30 South Meridian is listed.

Okay, and then -- Dan, and as it relates to the guidance, maybe just so understand it a little bit better. Can you sort of give me the, if you can, the sort of contributors to sort of the positives and the negatives as it relates to the guidance? In other words, I know that you've got better contractual rent and rent commencements that will add, but you also have tenant fallout, which is the bad debt and nonrenewals and probably, some strategic leasing. I'm just trying to understand sort of the -- how the components run together to get you to that 1% to 1.5%?

Chris, and when you look at the fourth quarter, when we were guiding, just basically saying the economic occupancy was going to decelerate into the fourth quarter and 1.5% is right in the middle of our guidance range for the year. And then you look out to next year, I think the top end being 1.5% when you consider the disruption relative to Toys "R" Us and then when you look out -- after the first and second quarter, once you get into the third and fourth quarter, obviously, your comparative year-over-year -- the boxes that we have that were -- filed for bankruptcy are going to be out at both quarters. So I think you're going to see the first couple of quarters at a slightly lower level, and then as we come out of that, there's some additional leasing and then year-over-year comps that aren't as difficult against. You will see that number grow up. And then as John mentioned, as we get this box leased with this box search initiative, as we grow into '19, we hope that, that the economic occupancy percentage will continue to give us a lift in addition to the rent box that are built into the leases.

Okay, and then to my last question. I know you guys just bumped the dividend 5% in November, but I also noticed in your 1099 that you had approximately 24% of the dividend was return of capital. I don't know if there's a specific issue in 2017 taxable income that drove that sort of return of capital component. But just curious as you guys think forward on your dividend policy, whether you're thinking about trying to -- what drives that? Is it trying to get to a more conservative payout policy so that you're meeting sort of more towards your taxable minimum or is it something that is going to be driven more by the cash flow, underlying cash flow growth or FFO per share growth?

Well, I think historically, Chris, we -- first of all, it's all of the above. When you're looking at where you are and your dividend, I'd say most importantly, for us, it's been to continue to return capital to shareholders within reason of our business plan. And over the last few years -- I mean, if you look back over the last 5 years, we've increased our dividend fairly significantly through free cash flow. And as we looked at the business plan for 2017, taking into consideration everything we knew available to us at that time, it was appropriate to continue to raise the dividend by 5%. And particularly, when you're in a position where you're well covered, we feel like we're well covered there, and when the value -- we talked about it a little earlier in Michael's question, when you have a significant disconnect between the value of your assets and your public price, one of the things that we do control is the cash flow coming out of the business and returning it to shareholders. So over a longer period of time, people will look at the total return, not a stock price in a vacuum. But that's also part of the analysis. But overall, we want to be in a comfortable place that we feel that we can effectively operate our business, pay that dividend, hopefully grow that dividend and -- while we're growing cash flow. So it's kind of a mixture of all that. But again, it's -- you take it on a quarter-by-quarter basis as you analyze that.

(Operator Instructions) Our next question comes from Linda Tsai with Barclays.

In light of some of the anchor movement. Do you have a view of what your anchor occupancy could be at year-end?

Yes, I think when you look at year-end, we have -- our lease percentage is projected to be 94.5% to 95.5%. And we're going to have a spread -- the spread between economic occupied and leased is going to be a little greater as we work through some of these boxes and get them re-leased. And that's probably going to -- right now, it's about a couple of hundred basis points. As we look out to year-end, we're projecting that to be about 280 basis points. So there's going to be definitely some activity from the leasing that will filter into 2019.

Okay. And then your renewal spread was 5% in 4Q and 7% over the trailing 4 quarters. What's your view on renewal rates in '18?

As it relates specifically to the spread, the difference between Q4 and Q3, much of that is driven by the anchor renewals, the non-option -- I'm sorry, the option anchor renewals that are at a fixed kind of lower spread than we would get in a quarter with less. For example, I think in the fourth quarter, we had 16 anchors renew and in the third quarter, we had 9 anchors renew. Actually, if you look back at 2016, the fourth quarter spread was about 5%. So this is not an unusual or kind of run rate issue. But again, I mean, it's quarter-by-quarter, but if you look at it over the long term, we generally have been producing pretty good renewal spreads, and in particular, when you look at GAAP renewal spreads versus our cash spreads, because we are extremely focused on the small-shops side of our business, getting significant rent bumps annually. So looking out in the future, I don't think it feels tremendously different than it has in the last year but it's very subject to a particular quarter and particular anchors. As a matter of fact, I mean, even in the fourth quarter, excluding one anchor renewal would have moved it to 6% from 5%. So it's a sensitive number in that regard.

And then just a final one. Any general color on how TIs are trending and what discussions are like with tenants these days?

TIs, as I think we mentioned a little earlier, TIs have generally been stable and we don't see a tremendous change there. We don't -- that doesn't ebb and flow like it does maybe in multifamily based on incentives. Our business is pretty steady as it relates to the cost to put these tenants in as it relates to what we're willing to give and what they want. Certain tenants costs more than others, and generally, you -- we're all about what our return on that cost is, and we have significant hurdles, internal hurdles as it relates to those returns. And I think you know, Linda, I mean, we go to great -- this isn't just us saying, "Well, it costs $40 and you need to get x return on that $40." This is much deeper than that. This is us looking at NPVs and IRRs, credit quality, yields on that credit quality. We have a pretty intense system around it, so it's why we've done well there. And we don't think that's going to change just because we happen to have a few more boxes this year than we did last year to fill.

I'm showing no further questions. I would now like to hand the call back to Mr. John Kite for any further remarks.

I just want to say thank you to everyone for all their time, and thank you for your interest in the company. And I also want to say we are going to execute on the goals that we laid out, and we look forward to talking to you soon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.