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Site Centers Corp (SITC) Q4 2018 Earnings Conference Call Transcript


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Site Centers Corp   (NYSE: SITC)
Q4 2018 Earnings Conference Call
Feb. 20, 2019 , 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the SITE Centers Reports Fourth Quarter 2018 Operating Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Brandon Day-Anderson, Investor Relations. Please go ahead.

Brandon Day-Anderson -- Head of Investor Relations

Good evening, and thank you for joining us. On today's call, you will hear from Chief Executive Officer, David Lukes; Chief Operating Officer, Michael Makinen; and Chief Financial Officer, Matthew Ostrower.

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 maybe found in our earnings press release issued today and in the documents that we file with the SEC including our most recen t report s on Form 10-K and 10-Q.

In addition, we will be discussing non-GAAP financial measures on today's call including FFO, operating FFO and same-store net operating income. Reconciliation 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 statement 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 into the earnings call webcast.

At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes.

David R. Lukes -- President and Chief Executive Officer

Thank you, Brandon. Good evening, and thank you for joining our fourth quarter earnings call. 2018 was an eventful and exciting year for SITE Centers as we began our pivot to growth. All of our efforts can be thought of in the context of our five-year business plan to deliver average annual OFFO and NAV growth of 5%, driven by three sources; one, 2.75% annual same-store NOI growth, a large portion of which is from releasing the 60 anchor opportunities within our portfolio; two, accretive returns on redevelopment; and three, deploying $75 million annually on opportunistic acquisitions and investments with significant cash flow growth. Before I describe the progress we've made on each of these growth components, I'd like to discuss the $600 million joint venture we announced in November, which represents an enormous drive in derisking our plan. Specifically, we sold an 80% interest in 10 durable assets into a partnership with two Chinese institutional investors. The transaction is material for SITE Centers. It pre-funds our growth plans with approximately $500 million of fresh capital, it allows us to cycle out of lower growth assets, and it expands our joint venture program with like-minded partners. And while this deal unquestionably stands on its own, we'll be working to convert the relationship in China that we spent years building into a sustainable and attractive source of capital to fund our long-term growth.

Returning to the results and our business plan, fourth quarter OFFO of $0.31 per share and same-store NOI growth of 2.1% were both ahead of plan on lower bad debt and property expenses and higher other income. The strong quarterly result allowed us to achieve full year same-store NOI growth of 2.3%, not far from our five-year 2.75% goal, a noteworthy accomplishment given it include partial rent commencements from only two of 60 anchor leasing opportunities we identified at our Investor Day. Mike will comment on leasing in a moment, but I'll summarize by saying that we continue to have strong activity with compelling economics.

Our budget for 2019 and beyond assumes additional tenant bankruptcies, but this should not obscure the fact that demand for space in our portfolio of dominant assets in affluent communities remains robust. We've also advanced our redevelopment pipeline, completing the Lee Vista development project in Orlando this quarter, and Phase I of West Bay Plaza here in Cleveland with Fresh Thyme and Ulta now open and HomeSense expected to open any day. The transformation of West Bay came in ahead of schedule and under budget and we're already working on the underwriting and leasing for Phase II. Our Brandon Boulevard project in Florida is now also well under way as we've signed key anchor leases converting the property from a Kmart-anchored discount center to a grocery-anchored neighborhood center with great leasing demand and strong cash flow growth. The initial phases of our other projects, many of which we identified at Investor Day are also moving forward. Commencement of these projects remains dependent on three variables; market demand, tenant approvals, and entitlements. These three lags form the foundation for successful investment and our work over the past two years has satisfied the first two lags, leaving entitlements as our main focus going forward. That said, our decision to commence construction will also depend on our cost of capital, reinvestment opportunities and the risk and return of each project.

SITE Centers owns a portfolio that has been handpicked to maximize our exposure to asset densification and repositioning. Many of our projects were featured at our Investor Day conference last fall and are heavily tilted toward simple site master plans that make profitable use of excess land and rearranging buildings for a much more profitable use of valuable real estate in high income demographics. These plans and the significant success we've had to date in advancing them are generating valuable optionality not reflective in curren t earnings , and importantly the NOI dilution from recapturing tenant control areas has already occurred.

Finally, I'm also pleased to announce the commencement of the opportunistic investing portion of our growth plan, which seeks to take advantage of mispricing we're seeing in the market. In that vein, we repurchased $50 million of our stock at a weighted average price of $11.74 per share, a level we believe is extremely compelling versus any measure of underlying value. Our quest for compelling returns also led us to purchase three assets during the quarter that we believe generate double-digit unlevered IRRs. The first transaction in this category is Melbourne Shopping Center, a 70% occupied shopping center anchored by a highly productive publics in Melbourne, Florida, which we purchased for about $50 per building square foot, about a quarter of replacement cost. We've already executed a 35,000 square foot anchor lease renewal at a 65% rent spread, well above our underwriting and we're planning of a site renovation and tenant suite reconfigurations as we drive toward our targeted yield. This is a simple thesis that we intend to replicate, buying at a low cost per square foot and making improvements to the buildings on-site plan to accommodate current market needs in order to significantly raise rents and occupancy.

The current property is averaging only $4 per building square foot in NOI, and yet the immediate trade area supports much stronger economics. Recognizing assets that are underutilized in strong trade areas is a key feature of opportunistic investing, and we plan using our platform to capture this value in retail real estate. A second and similar transaction was Sharon Greens, a Kroger-anchored shopping center in affluent community in suburban Atlanta with average household incomes of a $150,000 per year, which is now one of the highest in our portfolio. When supply is so constrained in wealthy markets like this, a landlord must respond with a leasing strategy to match the demand. This property has been starved for capital for years and our simple solution to renovate and reconfigure tenant suites and underutilize land has already shown strong shop leasing demand at rents much higher than our underwriting. We achieved a purchase price well below replacement cost on this asset as well, and with an in-place NOI of only $7 per square foot, the market easily supports our targeted growth given its reliance on straightforward shop leasing, which remains a focus of our company.

Finally, our Market Square acquisition also outside of Atlanta offers an even higher targeted return given a low acquisition price per building square foot of $83, and a chance to increase occupancy through tenant expansions and new leases. The theme for acquisitions this past quarter is all about low basis and high demand, and all three are great case studies for an opportunistic investing program. They allow us to make money applying our vision, our leasing, our operating skills and they offer attractive entry price points, most importantly their return profiles are high enough to be competitive with that offered by our own shares. Combining our buyback with these acquisitions, it's safe to say that we are ahead of plan on this portion of our growth strategy, and we're seeing an increasing number of deals where we can leverage our company's resources and operational skill set to create value.

With that, I'll hand the call over to Mike for some commentary on our operations.

Michael A. Makinen -- Executive Vice President and Chief Operating Officer

Thank you, David. The fourth quarter saw more of the robust leasing activity that we've seen throughout all of 2018 with high volumes despite our now more focused portfolio. We've signed 26 of the 60 anchor leases identified at Investor Day with another 17 in advanced stages. This compares to 15 executed leases in October. We achieved a blended 31% leasing spread on the deals, which are with 19 distinct brands. A few noteworthy deals this quarter include Total Wine & More at Centennial Promenade in Colorado, their first store in Denver market. Ulta Beauty at Shoppers World and leases with T.J.Maxx and HomeSense at Nassau Park Pavilion. Leasing spreads for the quarter were also solid, with new leases up 14% and blended spreads of 6.4% consistent with trailing 12-month trends, which we believe is the best way to look at our operating metrics given our now smaller and inherently more volatile portfolio.

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 as we continue to lease space at compelling economics. We remain laser-focused on driving our shop leasing efforts and remain confident in the 94% shop occupancy goal we articulated as part of our five-year plan. I'd say this despite the fact that our shop occupancy fell in the quarter to 89.1% from 90.3% last quarter, due largely to the sale of an 80% interest in the more highly occupied DTP JV portfolio, as well as the acquisition of the three low occupancy opportunistic assets, David just described. Additionally, we had nine Mattress Firm stores closed as part of the recent bankruptcy. We expect to quickly release these spaces at a double digit spread, primarily with service and QSR tenants. We're also tracking a few more smaller bankruptcies right now that could further temporarily pressure our shop lease rate in the first half of the year. This potential dip shouldn't obscure the ongoing large volume of shop leases being completed by our team. Overall, tenant demand remains high across our portfolio given the superior quality of our assets in the top quartile of the country's retail landscape.

With that, I'll hand the call over to Matt.

Matthew L. Ostrower -- Executive Vice President, Chief Financial Officer and Treasurer

Thanks, Mike. All the accomplishments that Mike and David highlighted have had a significant impact on our balance sheet and capital position. Most important, positive same-store NOI growth and the use of proceeds from the new joint venture to repay debt, generated debt-to-EBITDA ratio of 5.6 times, our lowest leverage level in years. We also have no unsecured debt maturing until 2022, and a weighted average maturity of 6.1 years. We not only use JV proceeds to lower leverage, but to improve both liquidity and our unencumbered pool with a virtual elimination of secured debt from the consolidated balance sheet. In fact, with the repayment of mortgage debt in the fourth quarter just two of our 70 wholly owned assets are now encumbered, providing significant optionality and flexibility. And all that to say nothing about the additional security provided by lowering our exposure to lower growth assets or security capital from new JV partners. Our date of repaying debt with dilutive asset sales maybe behind us, but that doesn't mean we won't continue to improve the balance sheet over the coming years. We expect NOI from new leases to become a growing EBITDA tailwind and our preferred capital investments in the Blackstone JV and RVI should provide additional capital to reduce leverage further and fund growth. As such, we now see 6 times as a long-term leverage maximum rather than a goal to work toward.

I'd like to now comment on several earnings and accounting matters. First, the refresh 2019 OFFO guidance of a $1.13 to a $1.18 that we provided at the time of the announcement of the DTP JV in November is unchanged. Same-store NOI guidance is also unchanged at 1% to 2%. As a reminder, consistent with our previous comments from Investor Day about the timing of anchor commencements, we expect our same-store NOI growth to be higher in the second half of the year than in the first half of 2019. Additionally, our 2019 OFFO guidance includes the impact of several items to consider relative to the $0.31 per share we reported in the fourth quarter. First, Blackstone continues to sell assets and that as well as selective asset sales in our other JVs will cause a decline in JV fees in 2019 as compared to 2018.

Updated guidance now includes the fees from the DTP JV, and we continue to believe that the headwinds from lower JV fees is largely resolved. A second headwind to 2019 results comes from the full year impact of 2018's asset sales, including the DTP JV, which closed November 30th, as well as an expected tenant bankruptcies. Specifically, the fourth quarter included approximately $500,000 of combined income from the nine Mattress Firm and Toys spaces that has since closed. We have assumed additional tenant bankruptcies as part of our 2019 guidance.

And finally, we previously flagged a short-term dilutive impact of the redevelopment of our Van Ness property in San Francisco. The existing theater operator vacate in January resulting in a $0.02 per share headwinds to full year 2019 OFFO. We have an executed lease with CGV Cinemas and expect them to open in January 2020. As David mentioned and consistent with our Investor Day beyond this impact there is no remaining NOI slated to come off-line in order to facilitate our redevelopment program.

Turning to RVI fees, our initial guidance call for them to remain flat in 2019 assuming no additional RVI asset sales. There have in fact been a number of asset sales since the fourth quarter and we are updating our estimate for fees accordingly, which are $1 million lower at the midpoint. We continue to expect a one-for-one offset between RVI fee declines and lower G&A in 2019, though this relationship will shift in 2020 and we would expect some headwind for 2020 from ongoing RVI liquidation until the RVIs preferred is repaid and redeployed.

On the joint venture front, we received a $7 million Blackstone preferred repayment in the fourth quarter and another $12 million so far in 2019, which brings our total receipt of preferred repayment to a $154 million with the remaining balance net of the valuation reserve of a $177 million. As a reminder, we established a valuation reserve for these securities in the first quarter of 2017, cutting book value by $76 million to $270 million. Since then we've achieved key sales threshold levels in both Blackstone joint ventures allowing us to receive approximately 50% of net proceeds from asset sales in Blackstone III and 100% in Blackstone IV going forward. We recognized the current 6.5% yield on the preferred securities. So, every dollar we get back is the earnings equivalent of an asset sale at a 6.5% cap rate. The Blackstone ventures have just 19 of the 83 original assets remaining as of today and we mark all Blackstone assets to market each quarter to determine the reserve resulting in $7 million decrease in book value in the fourth quarter.

With that, I will hand the call back to David for some closing comments.

David R. Lukes -- President and Chief Executive Officer

Thank you, Matt. Before taking questions, I want to take a few moment to discuss 2018, which was a year of many accomplishments for SITE Centers. We sold $1.8 billion of assets. We completed the spin of Retail Value Inc., have promising new capital from China and lowered our debt-to-EBITDA from 6.5 times at the start of the year to 5.6 times at the end of the year, all while pivoting to growth through leasing significant redevelopment milestones and our first opportunistic investments. I couldn't be prouder of our team and what we've achieved so far. I'm also convinced to their most productive and innovative quarters lie ahead of us, as we pursue compelling returns on investment and sector leading growth.

And with that, operator, we will take some questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Alexander Goldfarb with Sandler O'Neill. Please go ahead.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Hey, good evening. David, just maybe starting with you, when you guys came in to the company you articulated getting the company down to a bunch of assets that you thought could best grow, and then you further paired it with the Chinese venture, obviously accretive capital. Do you feel right now that you have the portfolio you want or do you see the potential for maybe further JVs or asset sales outright from the existing assets, as you guys move more into focusing on backfilling the anchors redevelopment et cetera?

David R. Lukes -- President and Chief Executive Officer

Good evening, Alex. And that's a great question. I think we articulated when we announced the spin-off of RVI that we had -- we curated to a portfolio that we felt had great growth prospects but also had a lot of durability. If you remember, we used the word durable quite a bit. Over the course of the next six months it became obvious to us that there are more reinvestment opportunities within kind of the upper half of the portfolio. We became enthusiastic about that, and so the concept of recycling capital by selling off the more secured durable assets using that capital recycle into the upper tier is one of kind of the easiest ways for us to grow the company. So I wouldn't call it culling, I wouldn't say that it's kind of a defensive move, it's really more offensive that we would like to recycle that capital into higher use.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay. So, there is a potential for more you think, JV-ing?

David R. Lukes -- President and Chief Executive Officer

I think there is a potential for selling an asset to recycle it into another acquisition. There is opportunity for joint ventures, should we find stable assets with low growth, and we find potential to make reinvestment's at higher growth. So, I think you should expect that we won't be shrinking the company in order to pay down debt any further, we're at a great level right now. We're simply using some of our more stable asset as currency to reinvest elsewhere.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay. And then, Matt, the question on the fees, it sounded like from your comments that Blackstone fees wind down, there is an asset with the new Chinese venture. So, can you just help, is it a one-for-one offset, so basically fee income will be flat this year, or is there a run rate that we should be sort of modeling to given the decline of the Blackstone, but obviously the rise of the Chinese JV fees?

Matthew L. Ostrower -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. The Chinese fees do offset some, but we will still see a net decline in fees in 2019, that's still a headwind to earnings in 2019. So, there is some offset there, but it's not complete.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay. Thank you.

Operator

Our next question comes from Todd Thomas with KeyBanc. Please go ahead.

Todd Thomas -- KeyBanc -- Analyst

Hi. Thanks. Good afternoon. David, just first question following up there on your comments about the joint venture and you mentioned in your prepared remarks the importance of that relationship, is there additional appetite from your partners to do more with SITE Centers, and what kind of appetite do you and your partners have to the extent that you do come across stable assets?

David R. Lukes -- President and Chief Executive Officer

That's a very good question. As you can imagine, I've been traveling to China for well over five years now and building relationships. One of my closest friends spends a lot of time in Hong Kong and Beijing for our company. I think we've built a reputation as a conservative investor that focuses on dividends. And there is need in many parts of the world for dividend style investing in durable assets, and to the extent that we can build those relationships and use that source of kind of core capital for us to fund opportunistic things for us to do, we would be very, very supportive of trying to extend those business relationships further whether that's with our existing partners, the two partners that came into this joint venture or whether it's others. And as you can imagine, if you do a joint venture of this kind, which is the first for this type of capital -- institutional capital coming out of Hong Kong, and the first in our asset class, it gives us an advantage, because we're seen as more desirable now. Every quarter that goes by that we deliver on the dividends that we said we would, we become a desirable partner for other types of capital looking for core return. So -- and the long answer yes, we certainly hope that we can build on this relationship and we're certainly poised for it.

Todd Thomas -- KeyBanc -- Analyst

And as we think about the $75 million investment target for the year, how should we think about that in the context of assets like you acquired in the fourth quarter versus maybe stable assets where you can leverage that $75 million investment on your end, maybe generate additional fee income and move in that direction?

David R. Lukes -- President and Chief Executive Officer

Yes. It's difficult to subdivide the $75 million into different buckets, I mean as you've already noticed in the fourth quarter, our share price got down to a point that it's very difficult to find any other investment as exciting as our own stock, and we put $50 million to work pretty quickly. There were other assets earlier in the fourth quarter that we thought -- had very high IRRs that were much more repositioning assets. We haven't found a durable asset that we really like yet, but I wouldn't say that that's off the table. Everything is on the table as long as we think the risk and the rewards are commensurate with the amount of capital that we have.

Todd Thomas -- KeyBanc -- Analyst

Okay. Thank you.

Operator

Our next question comes from Christy McElroy with Citi. Please go ahead.

Christy McElroy -- Citi -- Analyst

Hi. Thanks. Good afternoon, guys. Just from where you initially provided the 1% to 2% same-store guidance range at your Investor Day last call. So, you did the DTP deal and your 2018 same-store growth reserve -- higher from removing those assets from the pool, but the 2019 range was unchanged, and then you've had Mattress Firm and Payless since then, but today you're still at the 1% to 2%. So my question is, since there have been a few changes obviously from the time you provided the drivers at your Investor Day, maybe you could sort of walk us through any changes in those sort of underlying assumptions within that growth range?

Matthew L. Ostrower -- Executive Vice President, Chief Financial Officer and Treasurer

Hey, Christy. Thanks for the question. It's very fair. I would say we feel good about guidance. The main thing I would say is it's February, and as we all learned altogether, the retail environment is just highly uncertain. So, I think we certainly track a number of retailers, I'm sure you're tracking a number of retailers that move the needle, and I just think it's premature to get ahead of ourselves and start speculating on things going a lot better. So, we're just -- I think we're trying to be conservative here. You are right, there's some tailwinds there. We also are expecting some bankruptcies as I discussed in my prepared remarks, which are clear headwinds as well. So, offsetting those two it's how really we are -- it doesn't seem appropriate to be changing our view at this point.

Christy McElroy -- Citi -- Analyst

Okay. And then Mike, you had mentioned pressure on occupancy earlier in the year, how should we think about sort of the trajectory of the commenced occupancy rate, and then you've got this wide gap between sort of the leased and the commenced rate, how should we think about that widening or narrowing as we go throughout the year?

Michael A. Makinen -- Executive Vice President and Chief Operating Officer

Generally the timing is the factor that's making the back half of the year heavily weighted toward the rent commencement dates, but the time frame between the lease execution and the rent commence tends to be shortening, and we're continuing to see that as we go forward.

Michael Bilerman -- Citi -- Analyst

Hey, David. It's Michael Bilerman speaking. As you think about this joint venture you created, you've talked about it being dividend payer stable assets, but the retail environment as Matt just talked about is highly uncertain. So, how do those two things marry up over the next couple of years where that environment is probably not going to get any more certain and probably continue to be uncertain. How do those assets perform in that environment leading up to those expectations that you laid out with you venture partner?

David R. Lukes -- President and Chief Executive Officer

Yes. It's an excellent question. You can imagine for the last several years in Hong Kong, Beijing, Shanghai, that has been a very, very common conversation. One way to prove the durability of kind of slow growing shopping centers is to look at a trailing 10-year cash flow. And understand through quite a few bankruptcies and a recession in the last 10 years, how did these assets perform. And I know that there is a general -- as I guide in the reporting world that somehow retail is all-in-one bucket, but the fact of the matter is that if you're looking for sustainable dividends, many times large format retail properties have been able to and I do believe will continue to be able to deliver those, and that's what we form the basis of these joint venture on. These are certainly not highly risky assets. They do have a little bit of occupancy upside, but mostly they're seeing as stable properties, bankruptcies will occur in these joint venture assets just like they will in our core, but the likelihood that they have durable cash flows long-term is still pretty high, and I feel very confident about them.

Michael Bilerman -- Citi -- Analyst

Are you guys covering any from a master lease perspective or preferred returns, so that if there is additional bankruptcies or additional things that -- it's going to be hard for me to ever change, but that site will cover a differential to be able to provide that consistent return to your new venture partners?

David R. Lukes -- President and Chief Executive Officer

No. The joint venture is a traditional joint venture. They bought 80% of the equity position. We have traditional financing on it. There's no preferred return. There's no net debt. There's nothing out of the ordinary, I think it's just a couple of very, very sophisticated institutions. We spent a lot of time here in the states underwriting the assets, meeting our team touring every suite. And I think that they have a belief as we do that they're stable long-term investments. And that's frankly the type of capital that we would like to be partners with. We want sophisticated partners. These folks did their homework over a long period of time. And I would certainly hope that we proven together that we've got a pretty good sense of the underwriting and we can go and look for new assets to acquire from outside the portfolio.

Michael Bilerman -- Citi -- Analyst

All right. That's helpful. Thank you.

Operator

Our next question comes from Wes Golladay with RBC Capital Markets. Please go ahead.

Wes Golladay -- RBC Capital Markets -- Analyst

Hi, guys. For those low dollar per square foot acquisitions, how much on average do you need to spend to get those up to your standards?

David R. Lukes -- President and Chief Executive Officer

Hi. Wes, it's a great question. It completely depends on what type of tenant we're planning to putting in there. One of the properties has a lot of medical demand, and that tends to be more expensive than traditional, but the rents are also higher. I think that, well, you should assume is that when we buy buildings that's $50 to $85 per square foot and rents in properties around us are in the $20s, there is a whole lot of room to reconfigure buildings and spend the capital required.

Wes Golladay -- RBC Capital Markets -- Analyst

Okay. And then looking at your pipeline, you have the three TBD projects, I imagine they all make sense from an economic perspective, and you're just waiting on the entitlements for that, do you expect that any of those started this year?

David R. Lukes -- President and Chief Executive Officer

The entitlements is the reason that there's TBDs in the supplemental. I would simply state that in the context of capital allocation it's important to note that just because something is an intended development doesn't necessarily mean that the construction is imminent, and as soon as we receive entitlements and we have effectively a shovel-ready project, we have to look at it at that point in time and decide our other sources of investment opportunities better or worse than the development project. So, yes, we're waiting on entitlements and yes, the financials make a lot of sense, but this last quarter we found some great places to put capital that I think are risk-adjusted much better.

Wes Golladay -- RBC Capital Markets -- Analyst

Okay. Yes. Sticking with that, can you hold that for a set period of time versus indefinite for the entitlement?

David R. Lukes -- President and Chief Executive Officer

It depends on a property, most municipalities now are doing spot zoning for a specific property where once the zoning is in place, it stays in place in perpetuity, but that does not mean that they can't down zone the property in a couple of years, if somehow the political climate changes, so there is some risk, but I think the risk is years not months.

Wes Golladay -- RBC Capital Markets -- Analyst

Okay. Fantastic. Thanks for taking the questions.

David R. Lukes -- President and Chief Executive Officer

Sure.

Operator

Our next question comes from Jeff Donnelly with Wells Fargo. Please go ahead.

Jeffrey Donnelly -- Wells Fargo -- Analyst

Good evening, guys. Maybe if I could kind of branch off of maybe Christy's question. I guess related to your assumptions on credit loss, if I recall I think Matt, your guidance assumes about a 150 basis points of credit loss in 2019. And since we're half way through the first quarter of the year where frankly the majority of retailer bankruptcies historically occur, I'm just curious, do you feel that -- do you feel better that that's a conservative estimate, or have the changes in the retail landscape since you last gave guidance lead you to believe it's effectively sufficient like you're going to need it all?

Matthew L. Ostrower -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. So, just one -- thanks for the question, Jeff, just one clarification, the 150 basis points of bad debt plus bankruptcy adjustment that we made was to our five-year growth number. So, we were saying that over each of those five years we were assuming that amount on average. We did not provided, deliberately didn't provide a specific reserve number for 2019. The reality is the number is sizable. And yes, I think we all feel better with each day that goes by. I think you would be the first one probably to say that the kind of the cycle of bankruptcies happening in a specific time of year seems to have been broken, the way the bankruptcies workout that cycle seems to have been broken. There's just a lot more uncertainty. So, I think we all feel better with each day that passes, but I think there's still safe to say quite a bit of uncertainty about 2019.

Jeffrey Donnelly -- Wells Fargo -- Analyst

And just other question on your recovery rate, I think it's up 100 basis points year-over-year in full year 2018, and I think also up about 70 basis points in the fourth quarter. Considering the year-over-year decline in small shop occupancy and anchor occupancy, I guess I would have expected to see some erosion in your expense recovery. I guess where am I wrong. Am I thinking there in seconds as new anchors take occupancy in 2019, do you think that recovery rate continue to rise?

David R. Lukes -- President and Chief Executive Officer

Yes. Jeff, just one comment on, if you look at our commence rate on Page 13 of the supplement, the commence rate was actually up year-over-year for same-store pool, which really drove the recovery uptick. And Matt, on the course of the year?

Matthew L. Ostrower -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. I mean, look -- I think we've been saying we expect things whether it's the commence to leased rate or whatever, we're expecting things to pick up over the course of the year particularly in the fourth quarter. So, I think as you know the operating leverage here is tied to that as we get more rents commence you will see that ratio pickup.

Jeffrey Donnelly -- Wells Fargo -- Analyst

Okay. Thanks, guys.

Operator

Our next question comes from Tayo Okusanya with Jefferies. Please go ahead.

Tayo Okusanya -- Jefferies -- Analyst

Yes. Good evening. Your three drivers of growth; leasing, redevelopment, and opportunistic investing, I'm just curious over a one-year and over a three to five-year horizon, which of those three drivers do you kind of feel will be contributing the most to your earnings over a one-year period and over a longer-term period?

David R. Lukes -- President and Chief Executive Officer

Good evening. It's a great question. Over a five-year period it's more difficult to project, but I think that this company as we laid out at an Investor Day conference in the fall have 60 box vacancies in a very well located portfolio, and so over the near term the majority of the growth is coming from leasing.

Matthew L. Ostrower -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. I would just point out also the -- without revisiting them here, we did provide a pretty clear rates in our Investor Day presentation. So, you can kind of take a look at kind of what our model says. The reality is as we found out in the last month or two, things present themselves in an unexpected fashion whether its a share buyback or opportunistic acquisition. So, I think we gave you some parameters there at our Investor Day for you to use in your model, but I would say those are subject to change as circumstances change. Leasing will be a very important driver over the next 12 months to 18 months, that's most important right now.

Tayo Okusanya -- Jefferies -- Analyst

All right. Thank you.

Operator

Our next question comes from Vince Tibone with Green Street Advisors. Please go ahead.

Vince Tibone -- Green Street Advisors -- Analyst

Hey, good afternoon. It's only been two quarters, but CapEx as a percentage of NOI has turned higher since the spend, can you just provide some color about how we should think about the run rate for CapEx spend including readouts going forward?

Matthew L. Ostrower -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. It's Matt. I would just say you're seeing the product of leasing activity, right? So, everything I've been saying about or we've been saying about things picking up in the fourth quarter of the year that this is all in preparation for that, you will see a significant amount of CapEx this year. We laid out where the vacancy is, we've laid out how many anchors we've got. You can kind of do your back of the envelope there. As we get those 60 boxes commenced, assuming the bankruptcy environment stays relatively constant, you won't see increases in CapEx, you should see a significant decrease, but of course that's subject to what happens in the overall retail environment.

David R. Lukes -- President and Chief Executive Officer

The only thing I would add Vince is in the fourth quarter and the back half of the year we had about $4.5 million for our LED lighting program, that's one-time in nature, I don't think we don't expect that to recur in '19. So, for the maintenance CapEx side, you'll see a downtick there over the course of '19.

Vince Tibone -- Green Street Advisors -- Analyst

That's helpful. Thank you. And then just one quick one, can you provide a little bit more color on the small shop or potential small shop bankruptcies you're tracking?

David R. Lukes -- President and Chief Executive Officer

The ones we're referencing were really focused on Payless and Gymboree, which have a very small impact on the overall portfolio, Payless for example, there's only seven stores in our wholly owned portfolio, and Gymboree has three stores, so it's a pretty minor effect.

Vince Tibone -- Green Street Advisors -- Analyst

Okay. Thanks. That's all I have.

Operator

Our next question comes from Rich Hill with Morgan Stanley. Please go ahead.

Rich Hill -- Morgan Stanley -- Analyst

Hey, good afternoon. Just wanted to spend a little bit of time on RVI fee income, it's non-trivial, it's pretty large, so look -- you put up around $7 million of RVI fees this quarter, and I think you're guiding to around $24 million at midpoint. How are we supposed to think about that $24 million of fees on sort of a quarter-by-quarter basis in 2019. Can we sort of think about it, $6 million a quarter, or do you think it's going to be more front-loaded?

David R. Lukes -- President and Chief Executive Officer

Hi. Rich, it's a great question. It's a big number. The reality is that we don't know, and we're not projecting the pace of dispositions from RVI, and so I think the best way for you to assume in the modelling is that our G&A slowly goes down in a commensurate fashion with the fee income. 2020 as Matt mentioned in his prepared remarks is probably the year that has a little bit more headwind as we're waiting to get back our preferred equity that we can then reinvest accretively to make up for that. So in '19, I think it's mostly to do about recognizing the G&A is going to go down in a similar fashion.

Rich Hill -- Morgan Stanley -- Analyst

Yes. Go ahead, Matt.

Matthew L. Ostrower -- Executive Vice President, Chief Financial Officer and Treasurer

Keep in mind if you will see in our Form 10, and the fee agreements we have, the fees get remeasured only twice a year, so the minute we sell an asset -- fees go down the next day, right? So keep that in mind as well, you can imagine we are going to sell assets, we don't know how much, we're not going to forecast how much, we are going to sell assets, you will see fees gradually come down, but there is a six months lag to that process.

Rich Hill -- Morgan Stanley -- Analyst

Got it. And just to go back to one comment, and I think I understood this correctly, but 2020 is sort of the year where your fee income starts to go down, but you're not getting the preferred equity investment, and that's maybe where there's a little bit of a disconnect for a period of time, is that -- did I hear that correctly?

Matthew L. Ostrower -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. And our ability to kind of keep lowering G&A. There are fixed costs of running this business, we definitely rightsize the organization already. And so, there is a limit to how much we can continue to reduce expenses throughout the organization just to offset those fees. And you're right, we'll have to wait until liquidation is largely complete in all likelihood for us to get the preferred back to be able to redeploy it and get the accretion, so there will be potentially some kind of a short-term disconnect there.

Rich Hill -- Morgan Stanley -- Analyst

Got it. And then one question on the preferred equity investment reserves, it looks like they increased again, is there any reproves to how we're suppose to thinking about that, does it mean -- was it mean for the valuation of the overall market, what are we supposed to think about that -- what are we supposed to consider?

David R. Lukes -- President and Chief Executive Officer

I honestly think that what you're seeing is a smaller and smaller pool from the Blackstone joint venture, we're down about fourth of the original size, and therefore as we do a mark-to-market every quarter, it's a little bit bumpier than it was when the portfolio was larger.

Matthew L. Ostrower -- Executive Vice President, Chief Financial Officer and Treasurer

I would just flag, Rich, also if you kind of look at the historical adjustments, we took the original reserve then we actually lowered the reserve by a significant amount in the next quarter as a result of a couple of trades that happened, and we just kind of eroded that back down to where we started again. So net-net, I think what you're seeing right now is noise. I would warn you, because let's say, we market thing to market, and if transactions on the margin tell us something we didn't know before or if the market actually changes, of course it's subject to additional increases in that reserve.

Rich Hill -- Morgan Stanley -- Analyst

Got it. Thank you, guys.

Operator

Our next question comes from Michael Mueller with JP Morgan. Please go ahead.

Michael Mueller -- JPMorgan -- Analyst

Yes. Hi. Just looking at the -- I guess the Investor Day presentation of the $100 million annual spending, $75 million of annual investments, and just thinking about that retained cash flow, I guess what you have to do on the disposition side or what you have to do either in terms of JVs to raise new capital to fund that over the next five years, just thinking about what happened with the JV in the fourth quarter in terms of the significant proceeds that were raised from that, so what's the look forward on asset sales I guess?

David R. Lukes -- President and Chief Executive Officer

Yes. So, what we said at the Investor Day was that, our plan is largely self-funded, because of the preferred that we will be getting back when you combine operating cash flow and the two different preferred investments we have. If you assume those come back over the next five years we're largely self-funding. The other flex that we have obviously is on the opportunistic investing side. What we said was that, that would largely be coming from some kind of recycling activity to Alex's question earlier in the call, well we sell more, yes, we will sell more in order to invest at higher rates of return, that activity will be somewhat dependent on what we can sell and for what prices.

Michael Mueller -- JPMorgan -- Analyst

Got it. Okay. And that doesn't change at all just given the size of the JV that signed in the fourth quarter?

David R. Lukes -- President and Chief Executive Officer

Well. I mean, look as David said in the prepared comments, it's a game changer for us, right? I mean, it does really prefund a lot of this. So, I think the visibility on being able to invest $75 million opportunistically, just went up significantly, the visibility on being able to invest into redebt definitely went up significantly, just given us more cushion. So I guess to your point, we don't really have to sell at what the point I am trying to make is, our business plan originally didn't build in a lot of dispositions that were required and with the JV having closed, you can imagine it's even less than it was before.

Michael Mueller -- JPMorgan -- Analyst

Got it. That was it. Okay. Thank you.

Operator

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

Chris Lucas -- Capital One Securities -- Analyst

Hey, good afternoon, everybody. Just two quick ones, there's been a lot of talk about the bankruptcy tenants and the like, I guess I was just kind of curious with the non-bankrupt tenants that are coming to their lease maturities, are you seeing any change as it relates to sort of your tenant retention rates on those tenants, say, year-over-year, or as you look out in '19?

Matthew L. Ostrower -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. I think it's a great question. I would hate to answer as a proxy for the entire retail market. I think as we're looking at 70 assets that were hand selected to be in very high income demographic areas, kind of tight supply constraint, we really haven't seen any change in tenant behavior when they come to a renewal, but also our pool is smaller. And so, statistically to say it went from X percent to Y percent is more difficult. In general, the tenants that are in our properties would like to be there, because they're profitable. And so, we haven't really seen much of a change in their behavior when they come to an option.

Chris Lucas -- Capital One Securities -- Analyst

Okay. Great. And then, I guess, David, on the opportunistic investments that you are able to complete, any sense as to what the competitive landscape was, who are you competing against sort of how competitive were those deals?

David R. Lukes -- President and Chief Executive Officer

Yes. Well. I think that's probably the most fascinating part of this period in time in the last couple of quarters, whether it will continue or not, I don't know. But if you think about it, buildings in very high income areas, very difficult to entitle new properties, and so there is kind of a low supply. They can get left behind as the world changes and these three assets in particular have buildings that are outdated. When you have an owner that's unwilling to keep reinvesting capital to make the buildings fit with current tenant demand, then the tenant demand goes elsewhere and you end up with this cycle where the rents get lower and lower even though the tenant demand gets higher and higher. When these properties hit the market to be sold, the demand was surprisingly low, and it makes one say, why is demand low when you've got opportunity for leased occupancy, you've got great demographics, you got grocery anchors in two of the three. And the answer is that, there is only two types of buyers out there that are really aggressive. One is for squeaky clean assets that everything is done and it's easy to finance at high leverage, and I would say the others are ones where they don't have to do a lot of heavy lifting on CapEx. This one fits in the middle zone, which I think we have a lot of expertise on effectively putting our CapEx to work and we don't need mortgage debt to finance assets that have all of the tenants in their option periods, and so, the average lease maturity is less than five years. I think that's the reason why. So, there was really not a lot of demand and that's where the dislocation is, and I hope we can find more situations like this.

Chris Lucas -- Capital One Securities -- Analyst

Okay. Great. That's all I had. Thank you.

Operator

Our next question comes from Derek Johnston with Deutsche Bank. Please go ahead.

Derek Johnston -- Deutsche Bank -- Analyst

Hi. Good afternoon, everybody. Especially with a smaller portfolio and affluent MSAs, when you think about the overall tenant mix, are there any areas that worry you more than others either from a relevance or a saturation perspective?

David R. Lukes -- President and Chief Executive Officer

In this specific portfolio, it's hard for me to generalize over a small portfolio of only 70 assets. I can't say that the tenant demand is strongest for convenience in neighborhood types of tenancies. And so, when we have tenants that demand a very, very large trade area, we're being very careful to put those tenants in assets that have an existing trade area that's that wide. Mike's team spends a lot of time analyzing consumer data and trying to figure out exactly where the trade area is on these existing properties. So that when we put a new tenant in there, we can be successful. If you pull this back to our capital allocation strategy, remember at Investors Day, out of 60 boxes that were vacant, we have 15 leased. As of today, we've got 26. So the volume of box leasing is pretty dramatic, which means the CapEx that we're putting into these properties is also quite large. And the result is that we need to be very, very careful to make sure that the tenants we're putting in these properties are going to be successful. And we're using a lot of customer data to make sure that we're making that fit.

Michael A. Makinen -- Executive Vice President and Chief Operating Officer

This is Mike. The only other thing I would add to that is the fact that, of those 26 leases that were executed, 19 of those were of distinct brands of different uses, which basically supports what David was just saying and that is that we are targeting the right tenants for the market and not just going after the same three or four tenants that happen to be doing a lot of deals.

Derek Johnston -- Deutsche Bank -- Analyst

That's helpful. And just one last one. As you look to penetration of buy online, and pick up in store trends that we're all hearing so much about, I mean is there any actual feedback from the ground that you can give, maybe who is doing a more impactful job or a better job than others, and if you are seeing any impact on traffic?

Michael A. Makinen -- Executive Vice President and Chief Operating Officer

Yes. This is Mike. I think some of our grocery tenants that are doing order online and pick up the store are doing a tremendous job at getting a different customer pattern to the store. And it also candidly allows some of those customers to do cross-shopping, because they don't have to spend as much time in a store, also find the BestBuy does a great job at creating a blend of online and really has turned into an omni-channel distribution center more than a traditional retail store. So, we're seeing our best tenants are getting very good at it. And we're taking advantage of that and going after those types of tenants as much as we can.

Derek Johnston -- Deutsche Bank -- Analyst

Thanks a lot, guys.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to David Lukes for any closing remarks.

David R. Lukes -- President and Chief Executive Officer

Thank you all very much and we'll talk to you next quarter.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 51 minutes

Call participants:

Brandon Day-Anderson -- Head of Investor Relations

David R. Lukes -- President and Chief Executive Officer

Michael A. Makinen -- Executive Vice President and Chief Operating Officer

Matthew L. Ostrower -- Executive Vice President, Chief Financial Officer and Treasurer

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Todd Thomas -- KeyBanc -- Analyst

Christy McElroy -- Citi -- Analyst

Michael Bilerman -- Citi -- Analyst

Wes Golladay -- RBC Capital Markets -- Analyst

Jeffrey Donnelly -- Wells Fargo -- Analyst

Tayo Okusanya -- Jefferies -- Analyst

Vince Tibone -- Green Street Advisors -- Analyst

Rich Hill -- Morgan Stanley -- Analyst

Michael Mueller -- JPMorgan -- Analyst

Chris Lucas -- Capital One Securities -- Analyst

Derek Johnston -- Deutsche Bank -- Analyst

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Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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