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Taubman Centers Inc  (NYSE:TCO)
Q3 2018 Earnings Conference Call
Oct. 30, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for holding, and welcome to the Taubman Centers Third Quarter 2018 Earnings Call. The call will begin with prepared remarks and then we will open the line to questions. On the call today will be Robert Taubman, Taubman Centers' Chairman, President and Chief Executive Officer; Simon Leopold, Chief Financial Officer; and Ryan Hurren, Director, Investor Relations.

Now, I will turn the call over to Ryan for opening remarks.

Ryan T. Hurren -- Director, Investor Relations

Thanks, operator. Welcome to our third quarter conference call. As you know, during this conference call, we'll make forward-looking statements within the meaning of federal securities laws. These statements reflect our current views with respect to future events and financial performance, although actual results may differ materially. Please see yesterday's earnings release, and our SEC filings, including our latest 10-K and subsequent reports, for a discussion of various risks and uncertainties underlying our forward-looking statements. In addition, a replay of this call will be provided through a link on the Investors section of our website.

During this call, we'll also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included, when possible, in our earnings release, our supplemental information, and our historical SEC filings. Non-GAAP measures referenced on this call may include estimates of future EBITDA, NOI, after-tax NOI and/or FFO performance of our investment properties. Such forward-looking non-GAAP measures may differ significantly from the corresponding GAAP measures, net income due to depreciation and amortization, tax expense and/or interest expense, some or all of which management has not quantified for the future period.

Following today's prepared remarks, we'll open the call up for questions. We ask that you limit them to two. If you have more, you can please queue up again.

Now let me turn the call over to Bobby.

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Thanks, Ryan, and good morning, everyone. Yesterday, we released strong third quarter results. We had FFO of $1.05 per share, up more than 36% over last year, and adjusted FFO of $1.01, up nearly 22%. Excluding lease cancellation income, our comparable center NOI growth was 9.2%. It was the best quarterly growth rate we've had in more than six years. Once again, our newest comp centers, International Market Place in Hawaii, CityOn.Xi'an in China, and Starfield Hanam in South Korea produced very impressive growth. This quarter, they contributed more than half of our comp center NOI growth. The rest of our comp centers benefited from greater net recoveries, primarily due to lower expenses, a result of our cost saving initiatives and lower bad debt expense, reflection of the strengthening retail environment. Most importantly, the comp centers benefited from higher average rents. Average rent per square foot in all comp centers was $57.06, up 4.8% in the quarter. In our U.S. comp centers, average rent per square foot was $61.63, up 3.6%. On an NOI-weighted basis, average rent per square foot in our U.S. comp centers was $79.19, up 5%.

Our trailing 12-month releasing spread was 3.7% at September 30. On an NOI-weighted basis, our releasing spread was 7.1%. At quarter-end, our comparable center occupancy was 92.9%, up 70 basis points from last quarter, but down 1.4% from last year, primarily due to lower temporary occupancy. Permanent occupancy is actually 70 basis points above last year and we continue to expect year-end occupancy to be at 95%. A portion of the increase is related to the former Saks space at Short Hills. In early October, Indigo, the cultural department store from Canada, opened their first US location on the lower level of former Saks building.

Next month, Crate & Barrel relocate from elsewhere in the mall to the second level of the former Saks. Boll & Branch, Canada Goose, and Indochino also opened at Short Hills during the quarter. Other notable store openings included (inaudible) at Cherry Creek, altered Steak 'n Shake Shack at Country Club Plaza, Lolli and Pops at Twelve Oaks, and at Green Hills, Apple reopened with an expanded store that doubles their size.

Lease space was 95.6% on September 30, down 1% year-over-year, but up 70 basis points from last quarter. A few of the new lease signings this quarter included Bonobos at City Creek Center, and will be the only Bonobos in the State of Utah. UNTUCKit at Country Club Plaza, exclusive to the Kansas City Market, Peloton in International Plaza in Tampa, another exclusive to the market. Peloton and UNTUCKit also signed at the mall at Green Hills along with David Yurman. At Cherry Creek, North Face will be yet another store relocating from a street location into the shopping center. At International Market Place, drive-bar and Short Fire, a hot local restaurant we signed. And lastly, there were signings with Kendra Scott at both University Town Center and Twelve Oaks.

Turning to sales. Overall, the encouraging trends that we've been seeing throughout the year continued. Sales per square foot were up 5.8% in the quarter, marking our ninth consecutive quarter with positive sales growth. Trailing 12-month mall tenant sales in comparable centers was $800 per square foot, an increase of 6.4%. Notably, both Starfield Hanam and International Market Place are now included in this number, having two full years of sales history. Last quarter reported trailing 12-month sales were $807 per square foot, excluding these two centers. That implies our sales productivity is already nearly on par with our portfolio average, a tremendous achievement for assets with only a two-year operating history. On an NOI-weighted basis, sales per square foot were $914, up 6.3%. In our U.S. portfolio, sales per square foot at U.S. comp centers were up 5% in the quarter; on a trailing 12-month basis, they were up 5.9%. Sales per square foot are now $848, another record for our company and the US publicly traded regional mall industry. Broad-based sales growth continued in the quarter as almost every merchandise category posted increases. Apparel sales were up 8.5%, marking the third consecutive quarter of positive growth. Forever 21, UNIQLO, Urban Outfitters, Zara, Justice, American Eagle, PacSun, Levi's and J.Crew were some of the best performers during the back-to-school season. Also, discretionary categories including luxury, electronics, women's shoes, and jewelry were all up double-digit, an indication of strong consumer confidence.

In Asia, our centers continue to deliver superb growth. Comp center sales were up more than 14% in the quarter and are up 19% year-to-date. Last week, Starfield Hanam was recognized by ICSC with the 2018 Gold Award for best new ground-up development in the Asia Pacific region, a remarkable accomplishment. The center is now eligible for the ICSC's global award for best design and development, which will be awarded during ICSC RECon in Las Vegas in May.

In Puerto Rico, the Mall of San Juan has continued its strong post-hurricane ramp up. Year-to-date, sales per square foot are up nearly 30%. We estimate traffic to the center is up 20% year-over-year. An overall reduction of retail real estate in the island appears to have altered shopping patterns and has brought new resident customers to the center. We're also delighted to report the Nordstrom's will be reopening on November 9, ahead of the holiday season. This should add significant momentum to the center. It's been fascinating to see the substantial growth in shoppers and sales with both department stores closed. This certainly hasn't been the industry's historic model.

This Friday, we'll be in LA for Beverly Center's grand reveal. At its completion, it would be the most comprehensive redevelopment we've ever done or hope we'll ever do. We have literally reimagined every aspect of the center. When we conceived at this project, which began in April 2016, we had several significant goals: contemporizing the interior and exterior, opening the center up to its surrounding neighborhood, creating an improved arrival, parking and departure experience, dramatically upgrading the center's collection of food offerings, and elevating what was already an outstanding collection of retail. Fast forward 30 months later, and I believe we've checked every box, all with the intention of making Beverly Center, which was a top 50 asset but facing significant challenges, into one of the top ten assets in the country. Today, the exterior has a new white metal facade that allows natural light into the parking garage. We've added a new programmable exterior LED lighting system that allows the center to mark special occasions in full color like Breast Cancer Awareness Month, Pride and other community events. The LEDs can be seen from afar and give us the ability to brand the center in much the way the colored lights have branded the Empire State Building in New York. Inside, there are new and expanded floor openings and a 25,000 square foot Skylight that allows sunlight to reach all floors of the center and improve sidelines between levels. Shoppers now says they're almost outside while maintaining the advantages of our climate-controlled environment. Access and parking of the center, always a criticism of shoppers, has been dramatically improved. A new state-of-the-art smart parking system now guides visitors through the 3,000 space parking garage. We've also substantially improved the center's arrival and departure experience including the new valet of West Third Street which provides quick access to the street level retail and restaurants.

We are particularly pleased with the upgraded food at the center. New sit-down, full-service restaurants, including FARMHOUSE, Los Angeles; Yardbird Southern Table & Bar and Calamari and in 2019 will add a concept by seasoned hospitality and another restaurant, which will be announced shortly. Fast-casual offerings at the street level include Eggslut, Marugame Udon, Pitchoun Bakery and Cafe, and Tocaya Organica. Inside, we have also added Easy's by Jeremy Fall. The center's fashion profile has been enhanced across every price point as we've added, relocated and/or expanded a long list of retailers creating an impressive collection of luxury, contemporary and fast fashion brands. APM Monaco, Balenciaga, G-Star RAW, Hayden Girls, IF&Co., Longchamp, MCM, Polo Ralph Lauren, The Celect, and a new 25,000 square foot flagship Zara, the largest in LA, have all been added to the center. Apple, AX Armani Exchange, Foot Locker, Michael Kors, Traffic Los Angeles, Versace, and Wolford have all expanded. And in 2020, the Webster, a multi-brand luxury concept out of Miami will be the new flagship sitting prominently at the corner of Beverly and San Vicente Boulevard.

We are the only location in LA that allows the customers shop high, medium, and low. The millennial customer wants to buy a shirt at Zara and shoes at Gucci and that is why the expansion of the luxury combined with the key mid-price stores like Zara is so critical to the future success of Beverly. Together, it brings a unique destination and shopping experience that cannot be replicated anywhere in LA. The tenant and shopper communities have absolutely embraced the center. And even before the renovation is complete, we've seen material improvements in customer traffic and sales. Sales per square foot were up double digits this quarter and remain on track to reach historic peak levels this year. We expect that substantial growth to continue. We're on budget and expect to meet our financial goals. We've absolutely executed on our vision and we're very proud of what we've accomplished thus far with the reimagination of Beverly Center. We welcome you to visit the next time you're in Los Angeles and we'll be having an investor presentation in mid-January.

I'll now turn the call over to Simon.

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

Thank you, Bobby, and good morning, everybody. Let me first review the year-over-year FFO variances for the quarter, they're listed on Page 9 of our Supp. FFO per share for the quarter was $1.05. After adjusting for the changes in the fair market value of our Simon Property Group common shares and costs related to shareholder activism, AFFO per share was $1.01. This represented an increase of $0.18 over the third quarter of last year. The majority of this increase can be attributed to improved operational performance of our assets. Minimum rents were up $0.035 due to average rent per square foot growth both domestically and in Asia. Net recoveries were up $0.065 due to lower expenses at our centers which were result of our proactive cost savings initiatives. Lease cancellation income was up $0.03, other operating expenses were $0.04 favorable, primarily due to lower bad debt, pre-development expenses and other managed savings.

Our non-comp centers, Beverly Center, Mall of San Juan, and CityOn.Zhengzhou were up $0.06, as all three centers posted better year-over-year results. Separately, our corporate expense variance has included interest expense which was unfavorable by $0.06 primarily due to higher rate. And G&A expenses which were $0.01 favorable as we've continued to seek ways to reduce corporate costs. Since the conclusion of our latest development cycle, which also coincided with disruption in the retail environment, we've been very focused on operating efficiency and margin improvement.

Putting these cost savings initiatives into context, in 2010, our G&A expense was $30 million which peaked in 2013 at $50 million as we build out our platform in Asia. Since then, we've worked hard to reduce our expenses and we now expect to finish the year with G&A of $35 million to $37 million, including the platform in Asia which is down $13 million to $15 million since 2013 as the midpoint, a nearly 30% decrease.

Fluctuations in year-over-year currency rates did not have an impact on our NOI results this quarter. Year-to-date, the favorable impact to our comp center NOI growth has been 50 basis points from FX. And the impact on FX fluctuations on FFO is negligible as the NOI benefit is largely offset by negative impacts to corporate expenses in Asia.

Moving to the balance sheet, during the quarter, we completed the previously discussed refinancing of International Market Place in Hawaii. The new loan is $250 million and bears interest at LIBOR plus 2.15%, it is a three-year term with two one-year extension options. During the quarter, we also sold a 150,000 of the Simon Property Group shares we acquired in our 2014 sale of Arizona Mills and other land. The average sale price was a little over $184 per share, proceeds of approximately $28 million were used to pay down our lines of credit. So at quarter-end, we owned about 440,000 shares. Last week, we sold another 150,000 shares at an average price of about $181 per share, proceeds of approximately $27 million were again used to pay down our line. It's never been our intent to hold the shares as an investment. We acquired them as a way to tax efficiently execute the Arizona Mills transaction. They are a source of liquidity and we'll sell them when appropriate. Please consider this as you refine your future earnings estimates, as the dividends we receive are recognized as non-operating income and changes to the market value flow through FFO.

In an effort to manage our floating rate debt exposure, last week, we entered into forward starting swap agreement that will fix the LIBOR rate on our $250 million term loan to a rate of 3.02% beginning March 1, 2019, through the line's maturity date of March 2023. Currently, the LIBOR rate on the $250 million term loan is swapped to 1.64% through February 2019, resulting in an effective rate of 2.89% to 3.54%. Beginning in March 2019, the effective rate on the loan will be 4.27% to 4.92% depending on our total leverage ratio. As a reminder, our goal is to limit our floating rate debt exposure to 20% or less of our total indebtedness.

Now I'm going to give you an update on our guidance, which as a reminder can be found on Page 6 of our supplemental along with our other key guidance assumptions. With another strong quarter of results, we're again increasing our NOI growth guidance for the full-year 2018. We now expect that comp center NOI growth will be between 3.5% and 4.5%, up 50 basis points from our previous range. Given our year-to-date growth of at -- 5.8%, this range assumes deceleration in the fourth quarter, which is what we typically see. In the U.S., comps are tougher in the fourth quarter, particularly at IMC, which has been a strong contributor to our growth this year.

In Asia, two major holidays, Korean Thanksgiving, and the Chinese Moon Festival, which is a winter holiday, occurred in Q3 this year, whereas last year, they were in Q4. Retail sales are significant for both holidays, so the change in timing has created some quarterly shifting. Both holidays will be in the third quarter again next year.

Average rent, about half of which is typically received in the fourth quarter, is expected to be down slightly in the quarter. I want to remind everybody that our quarterly NOI growth rate is highly sensitive to small year-over-year variances. What might look like a sizable swing in NOI growth in terms of the percentage growth rate is not necessarily that much in terms of total dollars. To put it in context, and as an example, if you look at 3.5% to 4.5% NOI growth on a roughly $700 million base, that's $24 million to $32 million or call it $6 million to $8 million a quarter. So $1 million to $2 million swing in either way actually have a big impact on our quarterly NOI growth rate, but in the context of our company, it's not a lot of dollars. In addition to the NOI guidance raise, we also narrowed our AFFO guidance and raised it at the midpoint. We now expect that AFFO per share will be between $3.76 and $3.84 per share.

Aside from NOI, the other key guidance assumptions listed on Page 6 of the supplemental were unchanged. Please also note that our 2018 guidance excludes any assumption for future costs associated with shareholder activism or fluctuation of the fair value of the SPG common shares we still own.

In addition to our 2018 guidance update, we've introduced certain guidance measures for 2019. First, interest expense. In reviewing analyst estimates for the year, we've noted there is significant variation in this line item. For several years, interest expense has been a challenging item in the model and large part due to the company's sizable development and redevelopment pipeline, the associated spending and the mechanics of capitalized interest. In addition, LIBOR has risen, and we expect it will continue to rise next year. In recognition of the many moving parts, and in an effort to provide greater clarity on the company's earnings expectations, we decided to guide on this item as we've done in previous years when necessary. For 2019, our share of consolidated and unconsolidated interest expense is expected to be $221 million to $227 million compared to our current 2018 guidance range of $189 million to $192 million.

At 100%, consolidated and unconsolidated interest expense is expected to be $297 million to $303 million compared to our current 2018 guidance range of $265 million to $268 million. The significant increase in interest expense is due to a combination of higher interest rates, less capitalized interest and greater borrowing. Higher LIBOR rates are expected to account for the largest part of the increase. Our lines of credit as well as our line -- our loan on the Mall at Green Hills and International Market Place are floating based on LIBOR. In addition, we currently have swaps on our $250 million term loan and $225 million of our line of credit balance. Those swaps expire at the end of February 2019. Presently, the swaps provide for a LIBOR rate of 1.64% on the $250 million term loan, and 1.65% on the $225 million of our line of credit balance. As I mentioned a moment ago, last week, we entered into forward starting swap agreement that will fix the LIBOR rate on the $250 million term loan to a rate of 3.02%, so that's an increase of 138 basis points, beginning March 1, 2019. Our forward interest expense guidance assumes an average LIBOR rate of 3% in 2019. One-month LIBOR to-date is about 2.25%.

Less capitalized interest is expected to account for a bit more than a quarter of the difference. In 2018, capitalized interest at our share is expected to be about $15 million, next year it is expected to be close to $5 million, so that's about $10 million lower. We also provided guidance on the expected impact of the new lease accounting standard, beginning in 2019, the bulk of the internal lease and personnel costs, a portion of which are being capitalized today will be expensed. We expect that the additional leasing costs incurred in connection with this accounting change will be $5 million to $7 million. These costs will be recognized in the other operating expense. As is our practice, we will release full guidance on our year-end earnings call.

Since 2015, we've talked about significant NOI growth target, a good portion of which are expected to come as a result of the sizable amount of capital we've allocated to development and redevelopment. In February, we stated that between the full-year 2015 and full-year 2020, we were targeting approximately $150 million of NOI growth at our share. There were three components to this target, $70 million to $75 million was expected from our foremost recent ground-up development, those are International Market Place in Hawaii, CityOn.Xian and CityOn.Zhengzhou in China, and Starfield Hanam in South Korea. Another $20 million to $30 million was expected from the redevelopment of Green Hills Beverly Center, the Saks Box at Short Hills and three Sports Authority space. And about $50 million of growth was expected from our core assets, which are essentially all the assets not named above. So if you add up all the ranges, you end up at $140 million at the low-end and $155 million at the high-end. We expect to give you more details on our progress in February, but I want to briefly touch on each of the individual buckets.

In terms of the core, our target of $50 million of growth assumed about a 3.5% annual growth rate on a base of about $400 million -- $480 million. The 3.5% assumption felt reasonable and conservative at the time, as it was significantly both below the 4.7% annual growth rate the centers achieved from 2011 through 2015. However, as we know the U.S. retail environment has softened considerably following our statement, the core grew meaningfully less than 3.5% in 2017, our guidance for 2018 assumes core growth at meaningfully less than 3.5% as well. In order to achieve our target of $50 million, the core will need to grow by 4% annually in 2019 and in 2020. The U.S. retail environment has certainly improved since then, and we're very encouraged by the sales and rent growth we produced this year, and we haven't finished our detailed budgeting process for next year. But as we sit today, it appears that achieving 4% growth in the core bucket in 2019 will be a challenge.

In terms of the redevelopments, you heard Bobby talk about what we've done in Beverly Center and the progress we've made on the Short Hills Saks Box, so we continue to feel good about getting to the midpoint of our $20 million to $30 million range there. The largest piece of the redevelopment bucket, the expansion of The Mall at Green Hills won't be completed until 2019 however, so the majority of the contribution will not come until 2020 and some into 2021.

As for the four newest developments, the largest in the three buckets, we appear to be on track. They contributed $35 million of NOI in 2017, and growth this year has been very impressive. In fact, they are on pace to do better than the ratable annual growth of about $12 million to $13 million we discussed last February.

So we still need to see more growth over the next two years to get to the $70 million and $75 million we talked about and that's far from certain, but we've made substantial progress.

With that, I'll turn it back to Bob.

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Thanks, Simon. As everyone knows, the retail environment was extremely challenged in 2016 and 2017. Retailers and landlords are still recovering and that recovery is very uneven. Many centers will not survive. We've said many times, we believe the top 300 assets will account for more than 90% of the value of the sector, and the top 100 assets will account for more than half the value. That implies the majority of more than 1,000 large centers will at best struggle. In this context, we feel very well positioned and there are a lot of data points that give us optimism. The narrative has certainly shifted. Digitally native retail tenants are migrating to brick and mortar real estate and raising capital to do so and are forming a new tenant pool. Luxury retailers are doing exceptionally well, and sales in our portfolio are growing in nearly all categories, and as I said earlier, importantly in apparel.

As we've anticipated, the highest quality assets are managing the transition best, and will gain market share over time, we believe these results suggest this. We're coming out of the development cycle, then unfortunately met this huge disruption in retail. At the same time, interest rates are rising and interest expense is creating a headwind to earnings this year, and will again next year. While this is a reality, it's important to keep in mind that our assets are growing. Sales are up, rents are up, tenant health is improving, and NOI is increasing. All but a few of our centers are either new or have had significant reinvestment within the last decade. The capital we've spent on development and redevelopment is helping us grow and it will help us even more going forward. The industry transition will take time, but we believe our portfolio will outperform.

So with that, we'll now take your questions. As Ryan mentioned, we kindly ask that you limit them to two. Shelly, are you there?

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Rich Hill from Morgan Stanley. Your line is now open.

Richard Hill -- Morgan Stanley, Research Division -- Analyst

Hi, good morning guys. Want to just talked about year-to-date operating expenses for a second. It looked like it was down $8 million year-over-year. Can you just remind us what you've done operational side and maybe what the big drivers of that pretty impressive expense reduction is?

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

Yes, Richard, it's Simon. We -- in the beginning of last year, but really more toward the end of last year, really in the fourth quarter, we took a look at every aspect of our cost base, that's within our corporate headquarters, that's within the centers as well. And part of our ability to cut costs was related to some significant investments we've made in technology and in software, which really allowed us to automate a lot of the back-office processes that's traditionally been done in a more of a manual way. And so the cost-cutting effort really was, I would say, half and half corporate, and half at the center level, and facilitated by technology, it's allowed us to bring our G&A run rate from a high of 12 to 13 a quarter, down to more like 9 a quarter at this stage, and there's still a little bit more to do, but we think we've really brought the company to a stage of pretty close to optimal efficiency with those investments and with the measures we've taken.

Robert S. Taubman -- Chairman, President and Chief Executive Officer

And Rich, the only thing I would add is, again, it was the end of the development cycle, and whenever we've been at the end of the development cycle, we've been able to cut back in the areas that -- where we were using people in the development construction areas to grow. So, it's sort of a natural ending as we have in the past.

Richard Hill -- Morgan Stanley, Research Division -- Analyst

Got it, got it. And then just maybe one thing on the retail environment, and tying it back to modeling, it looks like bad debt expense was negative $466,000. Can you just talk about who is -- on your, well, maybe you can't specifically talk about who is on your watch list, but maybe give us some thoughts on the watch list and how we should think about that bad debt expense going forward?

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

Yes, in terms of bad debts, sort of quarter-over-quarter, the bad debt expense was actually negative, because we had a credit balance and then that can occur sometimes when a delinquent tenant either pays you or more often that lease is modified and the balance is written-off. You're always reserving a portion of your receivables balance, that's an offset to bad debt expense, there's really nothing meaningful and looking at the bad debt quarter-over-quarter, it's not -- it's sort of couple of tenant and it's really normal course. In terms of the watch list, I'd say the watch list is significantly different than it was in late '16 and into '17. There are a lot fewer names on the list as a whole, some larger tenants do remain, but the number of tenants is certainly down, the pace of closure is slowing, and is dramatically less than last year. I will -- we've been pleased with our ability to backfill what we got back in terms of vacancies and we're much more back to sort of a normalized environment. So there's less names, there's still names on it. Some of them have some significant amount of space in our centers, but it's much more like a normalized environment than what we saw in '16 and '17.

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Also on the bankruptcy side, we basically back to an almost a normal year. We're about 1.5% year-to-date and I think the only major bankruptcy was Brookstone in the quarter, which had -- I think we had about, I'm trying to remember -- nine locations for 28,000 square feet, but that was only 30 basis points of our space, it's part of the 1.5% that I mentioned, so that -- it's very much settled down, I mean compared to 2016 and '17, it really is a different world right now.

Richard Hill -- Morgan Stanley, Research Division -- Analyst

Got it. Great. Thanks guys.

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

Thank you, Rich.

Operator

Your next question comes from the line of Christine McElroy from Citi. Your line is now open.

Christine Mary McElroy Tulloch -- Citigroup Inc, Research Division -- Analyst

Hi, good morning, everyone. Just, Simon, as we think about the expectation for a flat same-store growth rate in Q4 and then just kind of looking ahead into 2019, can you maybe quantify the drag that you expect from the Asia holiday timing, and are there any other factors that we should be thinking about in terms of one-time impacts in Q4? I'm kind of trying to put in context, your comments about 2019, and how 4% will definitely be a challenge and sort of how we should be thinking about that forward run rate?

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

Well, the only significant one-time item in 4Q this year is $0.03 to $0.04 of promo expense for the Beverly Grand Reveal as we're calling it, that's the meaningful one-time expense in the quarter. I will say that Hawaii, which has been a very significant contributor to our NOI growth in the first three quarters of this year, is less so in the fourth quarter of this year, because in '17, you saw a very significant occupancy ramp happening in really the first three quarters of '17, we were pretty close to full occupancy there in the fourth quarter of '17. So the comp there is just a little bit different. The holidays in Asia, moving from the fourth quarter of last year to the third quarter of this year, we think that's meaningful, it's not a huge impact, but it's certainly a couple of million dollars we would think -- of impact as well. And Asia was also ramping up next year and has really gotten to a point where in the fourth quarter it's sort of again a tougher comp. I think those are sort of the one-time items as I state them.

Christine Mary McElroy Tulloch -- Citigroup Inc, Research Division -- Analyst

So, the promo expense runs through same-store NOI?

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

No, it does not.

Christine Mary McElroy Tulloch -- Citigroup Inc, Research Division -- Analyst

It does not. Okay. And then just with regard to CapEx, I know it's sort of in line with your -- what your expectations were for the full year, but maybe you can talk a little bit about what drove the uptick in mall tenant allowances in Q3 in terms of the sort of mix of leasing that you're doing and what's commencing with that may be related to the Short Hills stuff, and how we should be thinking about sort of TAs into Q4 and 2019?

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

Well, in general, our tenant allowances are more significant for luxury tenants, for large format tenants like fast fashion and for food. Those are areas where you're generally think bigger allowances, and we're doing more deals like that, which is I think very good news for the positioning of our assets, but the tenant allowance dollars also reflect that. Regardless of the tenant allowance, few retailers are being very selective about where they're going to go, and they're coming to our Class A assets, which is a good news. We're expected this year, as a result of what we're talking about here, tenant allowances to be higher, we're probably going to have them be in the $40 million area this year, we do expect that number to be elevated again in 2019. We think significant amount of it is one-time in nature, we don't expect that to continue in perpetuity. But if we have an opportunity to bring in great retailers that will drive traffic and productivity and help us gain market share, it's smart to do it. Almost all these decisions are elective and they're often in our best centers like Short Hills and the like. So we look at this is playing offense, not defense, and positioning our assets with the best retailers to be able to dominate the markets that we're in going forward.

Christine Mary McElroy Tulloch -- Citigroup Inc, Research Division -- Analyst

Thank you.

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Thanks, Christy.

Operator

Your next question comes from the line of Greg McGinnis from Deutsche Bank. Your line is now open.

Greg McGinnis -- Deutsche Bank -- Analyst

Hey, good morning. I appreciate the comments on the tenant watch list earlier. I'm just curious how you think this change in the watch list may impact lease cancellation income next year versus this year?

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

We do think it will, and we talked about a little bit in the prepared comments. But we -- through the end of the third quarter of this year, we had $16.4 million of lease cancel income. That's a big number. One of the biggest we've had, I think the only time we had more than that was coming out of the great recession. And that's on top of about 12 million that we had last year. Based on everything that we're seeing right now in terms of conversations with tenants, in terms of the overall leasing environment, we see that number being meaningfully lower next year. I can't give you an exact number. I can tell you that traditionally, we're in more in the 5 to 7 area. I believe our number probably would be a bit higher than that next year, but it's too soon for me to tell. But it's fair to say that next year, we are likely to budget a meaningfully lower number on lease cancellations.

Greg McGinnis -- Deutsche Bank -- Analyst

Thanks, I appreciate the clarity there. And then on the Mall of San Juan, has the full year NOI contribution expectation changed there at all? I'm also curious if or when that asset's no longer eligible for BI insurance and if there is any update on the Saks litigation?

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

Maybe I'll take the first part and then Bob you can take the litigation piece. The FFO range that we gave at the beginning of the year incorporated a range of possibilities for what was going to happen in San Juan. We had $10 million budgeted for the asset and that was coming through a combination of NOI at the asset and the receipt of business interruption insurance. Negotiating the business interruption insurance proceeds is a process. It's an even more complicated process in San Juan be given that it's a relatively new asset with less operating history. So we're having those conversations. The conversations are proceeding well, but they are taking a bit longer than we expected, beginning of the year. Our guidance today, so updated for this on this call, assumes about $5 million -- in the area of $5 million of NOI for San Juan this year, that's the NOI portion of that and we are not necessarily budgeting the business interruption proceeds to come in this year. It's still uncertain as to the timing there. If it did come in this year, a portion of it or all of it, then we would likely be higher in our FFO range for the year.

Robert S. Taubman -- Chairman, President and Chief Executive Officer

So on the Saks question, they are required to rebuild and reopen as quickly as possible. There is litigation ongoing and they haven't begun their reconstruction yet. And we're really not in a position to give you much more comment than that given the litigation. I did mention earlier, the Nordstrom's is opening very soon, November 9, and the center is doing really terrific now post hurricane and as my comment wasn't casual that it's doing that with two department stores closed. So we are delighted to see Nordstrom's opening.

Greg McGinnis -- Deutsche Bank -- Analyst

All right, great, thank you very much.

Operator

Your next question comes from the line of Alexander Goldfarb from Sandler O'Neill. You line is now open.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Good morning, good morning out there. Simon, just following up from the prior questions. Looking at 2019, you guys talked about lower lease terms, you talked about the refinancing headwind, so just sort of wondering what else is negative in there as far as -- is it some of the short-term leasing that is going to impact NOI, because it sounds, on the positive, if you don't get the 5 million of BI this year, you'll get it next year. So it does sound like there's some benefits in 2019 that may help numbers the other way. So what are some of the key wildcards that are affecting next year and it sounds more like it's on the NOI side?

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

Well, we're not giving guidance on next year yet, Alex. So I want to be careful in the way that we answer that question. But you take it altogether, what we are seeing next year from interest expense potentially being somewhere around $33 million to $34 million higher. And the lease cancel likely being much lower. And the amount there -- you get in the change just from the lease accounting there. You're looking at what could be $0.50 of headwinds next year, it could be $0.60 of headwind by the time we get to the budget. So there is nothing specific that I want to leave you with in terms of what will be a drag on next year. I think what I really want you to walk away from this conversation is -- thinking is, that is a lot of NOI to generate in a single year. And we are generating real NOI growth, we feel good about where we are. But that's still a lot of NOI growth to generate particularly as some of our assets which have been meaningfully growing and we expect will continue to grow are seasoning. The -- what we're seeing right now from the four redevelopments that we talked about, we're seeing, we think could be $15 million, could be $17 million of NOI growth in those four in '18 over '17 which is more than the 12 to 13 that we were talked about as radical. That's very significant growth and they are the largest growers in our portfolio. So will they continue to grow at those levels? I'm not saying they won't. But that's certainly -- that's pretty lofty and ahead of where we projected. So it's just a lot of NOI at the end to say. There's nothing specific that I would point to that is inhibiting our ability to continue to grow and grow well next year.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay, and then, Bobby, I don't think I heard you mention this, the second Korea project. But if you could provide an update, I think last time you spoke, that was something that you were contemplating announcing by year-end.

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Well, I mean we are under construction as we told you. We are absolutely, we've agreed on terms with a very highly regarded blue chip institutional investor, documentation is under way on it, it's not done until it's done. There's a lot of interest in the project, both from capital sources as well as retailers. And as we talked about, when we announced we're going forward, Shinsegae who is our 51% partner in the project, about half of that space is going to be leased in Shinsegae brand, nothing's changed there. Everybody is really very excited about the project especially in the context of how well Hanam continues to do. So I don't really have any update, we do anticipate some time around year-end that we should be able to make an announcement about our capital partner.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay, that was the part I was looking for. Okay, thank you.

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Thanks, Alex.

Operator

Your next question comes from line of Jeremy Metz from BMO Capital Markets. Your line is now open.

Jeremy Metz -- BMO Capital Markets -- Analyst

Hey, good morning guys. Bobby, can you give a little more color on what you're seeing on the leasing side, you mentioned in your opening remarks tenant sales have been up consistently over the past two years. You're feeling better about the watch list. So hoping you can talk about the leasing velocity that's out there. What's the sort of current environment of tenants asking for rent relief? And then in terms of the increase in apparel sales, has this really surprised you to see this kind of recovery and is it giving you more confidence today when you're having those lease discussions with apparel tenants?

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Well, there's no question that good sales make everybody happy. And after a bunch of years of flat sales in apparel, flat to down sales in apparel, to see the kind of growth that we've seen now over the last several quarters is very exciting and way overdue. And we talked about, how broad-based it is, geographically, by category, luxury, middle as well as more popular price tenants. So there really is -- look, the economy is in good shape, people are employed, there's a lot of consumer confidence out there and the good assets are getting good traffic and you're hearing that in all of our comments. So we have good tenant demand, we're very pleased with our leasing efforts, the deal volume is up, our occupancies are at strong levels. We talked about finishing the year about 95%, that's very, very good occupancy. Our average rent growth, we're delighted with, and all the increasing of our footprint with digitally native brands, I think you're hearing all these Bonobos'es, (inaudible) UNTUCKit, all these guys, it's all positive, the tenant pool which clearly shrunk in the '16, '17 period is now starting to grow again, with all these very interesting tenants. And where do they want to be? They want to be in the best assets, and that's what we have, we have good assets. So we're very, very, very pleased I think with the leasing environment starting to really turn back and you hear it in all kinds of data points, the debt -- bad debt down, bankruptcies are down, all these things are data points that speak to the same question. And in Asia, we have more demand than we can handle, and we have tremendous -- with the shorter term leases that are very leveraged to sales, we're going to be moving a lot of tenants in and out of those assets and finding the strongest tenants we can't. So generally, leasing environment is significantly better than it was over the last couple of years.

Jeremy Metz -- BMO Capital Markets -- Analyst

And I know it can be volatile, but based on that, it sounds like that would imply some potential reacceleration here of the spreads on an overall basis, as we get into next year. Is that fair?

Robert S. Taubman -- Chairman, President and Chief Executive Officer

We would hope so, there's -- it's not like there's not pushback from our tenants, but we would certainly hope to see lease spreads start to rise again as we look into 2019 and beyond.

Jeremy Metz -- BMO Capital Markets -- Analyst

Okay, and second question from me, just in terms of the guidance on the interest costs for 2019. Any more color you can give on the cadence of how that should ramp next year and when the biggest chunks of that should hit, it's in fact, it will be kind of chunky or maybe it should be more fairly ratable?

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

Yes, it will definitely ramp over the course of the year. The largest component of the increase year-over-year is higher LIBOR. So as the Fed raises the Fed funds rate and LIBOR kicks in, that will have a meaningful effect on the year. Capitalized interest burning off is a smaller piece of the overall pie, but most of that Green Hills has the biggest piece of that, that will be done in June. So that will also start to hit more later in the year. So I think if you think about the numbers we just gave you, think about that going up pretty radically quarter-over-quarter, but more back-end weighted for sure.

Jeremy Metz -- BMO Capital Markets -- Analyst

Appreciate it. Thanks.

Operator

Your next question comes from the line of Caitlin Burrows from Goldman Sachs. Your line is now open.

Caitlin Burrows -- Goldman Sachs Group Inc., Research Division -- Analyst

Hi, good morning. I was wondering if you could comment on, I know you guys only previously had three Sears boxes and the one in Fairfax, Virginia is going to be closing. If you have, if it's too soon to tell or kind of what your outlook is for that location, and the other two that you have?

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Bob, and sure Caitlin. We do have three boxes, we have the one you mentioned, it's owned by Sears at Fair Oaks, that's a 210,000 square foot store, and about 15 acres. They have one lease that they have put in place with a 60,000 square foot Dave & Buster's, Sears has announced that they're going to be closing there, which probably will occur sometime after the first of the year. We have Twelve Oaks here in Detroit, Michigan, at Novi, Michigan, it's 228,000 square foot store on 18 acres, it's owned by Sears, it's security for various of the loans that are outstanding. We have an awful lot of things that we could do with the site. We would like to get it back. But we have not been able to do so, and they continue to operate in the store, and it seems to be a very productive store for them. Sunvalley, which is in Concord, California outside San Francisco, 240,000 square foot store on 22 acres, we're told it's one of their best, most productive stores in their chain. And I guess is they're going to continue to operate it until they don't operate stores anymore. So that's the update, there is a -- there will be a lot of interest in the sites, and we'll have to see what happens.

Caitlin Burrows -- Goldman Sachs Group Inc., Research Division -- Analyst

Got it, OK. And then maybe just as a second on dividend policy going forward. Do you expect, I know you're not giving 2019 guidance now, but that -- when we do get closer to knowing 2019, that the dividend will grow in line with FFO or do you see any reason to make that growth lower to have a lower payout ratio?

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

So payout ratio, I think at the end of this quarter was about 65% in that area, which is elevated compared to our historical norms. And we were at the lowest point, I think we were in the low 50s when we had those Starwood assets, after we sold the Starwood assets, we went up to something in the neighborhood of 70% growth, coming down a bit. We don't think there's a problem with the payout ratio, but obviously we would like it to come down and we expect that it will as it grows. We've been growing our dividend at about 5% on an annual basis. We've grown our dividend almost every year since we've been a public company and we intend, we expect, and we will grow it again next year. As to -- how that happens specifically and how that tracks to any one year of FFO, it's really a Board decision, nothing I can comment on. So we will have that conversation with our Board.

Caitlin Burrows -- Goldman Sachs Group Inc., Research Division -- Analyst

Okay. Thank you.

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

Thanks, Cate.

Operator

And your next question comes from line of Todd Thomas from KeyBanc Capital Markets. Your line is now open.

Todd Michael Thomas -- KeyBanc Capital Markets Inc., Research Division -- Analyst

Hi, thanks, good morning. Just following up on the leasing environment a little bit, it sounds like things have improved. You mentioned tenants are still pushing back. Are you still signing some shorter term lease deals at reduced rents or is that not happening despite the pushback? And then, is there any indication what the fate of those tenants that had signed some of those shorter two-year leases will be, has there been an improvement in the business for them or do you expect them to vacate when their -- when that term expires?

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Well, we've made our decisions on shorter term leases selectively by center and by merchant. It very much based on the location and everything else. I would say that we will continue to make those kinds of selective decisions where appropriate. But I would say that the number of those kinds of decisions are decreasing, and as tenant demand and the tenant pool continues to grow, you will see more pricing power in essence shift back in a historic sense to where it was before the big downturn. So the answer is, yes, there is some of that continuing, but it's very much -- it's much more modest and we do expect that some of the tenants that -- that we did the short-term deals with earlier will in fact renew at higher levels, and some will get pushed out in the context of higher paying tenants with merchandise selling better coming into the centers.

Todd Michael Thomas -- KeyBanc Capital Markets Inc., Research Division -- Analyst

Okay. And then given the sales growth that you've experienced across the portfolio over the last two years or so here, I'm just curious what we should be looking for in terms of average rent in the fourth quarter and if you can maybe touch on that, as we think about 2019?

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

Todd, at this point, we're budgeting slightly lower average rent in the fourth quarter of this year than we got from last year, that's not really a comment or related to the strength of the industry as much as it is the sort of natural role of tenants who are paying significant average rent, rolling that rent into minimum rent. The percentage rent forecast we have for this quarter is reflective of a better environment. That said, if the environment continues to strengthen, there is some upside potential in that number, a very small number. It's important to remind you, a very small number, any kind of percentage rent and an even smaller number of the tenants pay meaningful percentage rent. So the likelihood, it's always hard to project because you have to look very specifically at specific tenants and specific assets. So the projection we have in there right now is slightly down. I want to say it's about a half a million bucks, it's not meaningful, in the scheme of things, but there is we think upside in that number if we continue to see strength in sales.

Todd Michael Thomas -- KeyBanc Capital Markets Inc., Research Division -- Analyst

Okay. Thank you.

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

Thanks, Todd.

Operator

Your next question comes from line of Derek Johnston from Deutsche Bank. Your line is now open.

Shivani Sood -- Deutsche Bank -- Analyst

Hi, this is Shivani Sood on for Derek Johnston. Maybe you were talking about digitally native retailers earlier and your progress with them. Can you just speak to any changes you've had to make in our leasing progress as a result of working with them and maybe any differences in underwriting the leases?

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Well, there is an expectation. But there is so much demand for these tenants. There is an expectation on their part for support in tenant allowances or lease terms or things like that. Depending on the location and depending on the center and the specific merchant, you may or may make that kind of decision. But when you have a location like Cherry Creek or you have a location like as City Creek Center in Kansas City or Millennia or when you we have a great location, there's really only one spot they want to be in when they come to Denver, or when they go to Kansas City, or when they go to Orlando. So you do have more pricing power. And then the question is, how soon do you want to make the deal as eventually the UNTUCKit of world is going to come to the best location and do you want this year, or you want now or you want them in two years. So you sort of come to the right balance in the negotiation that makes sense for you in the context of what other merchandise and tenants you have in the shopping center at that moment.

Shivani Sood -- Deutsche Bank -- Analyst

Great, thanks for that, and then going back to the earlier discussed NOI bridge and there is certainly progress being made on NOI growth, especially from the new development properties. And we would expect that to reduce leverage over the longer run, but can you give us some color on the long-term leverage target, especially in light of the 2019 guidance for higher interest expense?

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

Sure. We target a debt to EBITDA ratio of somewhere between 6 times and 8 times. We are above that right now. Our coverage ratios are healthy. We're about 3 times on interest expense for Q4 on fixed charges. We've got one of the lower cost of debt at, I think it's 3.9%, long, very long way with our debt maturity of 6 years, on fixed only we're 3.94% and 7 -- almost 7.5 years in terms of debt maturity. So we feel good about the profile. Our debt-to-EBITDA ratio, we look at it on a forward basis, we're in -- we think we're in the mid-8s right now. We think that number could potentially tick up a little bit through the end of the -- really the end of this year and into next year. But we think it will naturally decrease over the next few years as we get the EBITDA coming online from the developments and redevelopments and hopefully growth in the core. So we assume we're going to get back within our target range from that natural growth. We don't have right now in the plan of capital raising to reduce leverage and we're hopeful that 2020 will be a year where you will start to see these ratios come down -- start to come down significantly back into our target range. Now I will say one other thing to think about is floating rate exposure. We like to have floating rate to be 20%, really less than 20% of our total indebtedness. It's about 18% right now, we put a swap on as we talked about before to hedge some of that floating rate exposure next year. We will have to do some more of that in order to keep below that 20% number and that is in our plans and in our guidance for next year.

Shivani Sood -- Deutsche Bank -- Analyst

Great, thank you.

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Omotayo Okusanya from Jefferies. Your line is now open.

Omotayo Okusanya -- Jefferies -- Analyst

Yes, good morning. Congrats on a great quarter. I just wanted to ask a little bit more around the same-store NOI, again, I think explanation, you kind of gave for 4Q is helpful. But in 3Q, in particular the 9.2%, is there a way you could help breakout how much of that average was because of the holidays moving into 3Q from Asia? How much of it was kind of more OpEx savings? I'm just trying to figure out what a good type of run rate same-store NOI growth could be when I kind of take out some of the new noise that you will experience in 3Q and 4Q?

Robert S. Taubman -- Chairman, President and Chief Executive Officer

So in the third quarter, I think the number -- that 9.2% corresponds to about $16 (ph) million of NOI growth. I'll tell you a little more than half of that came from Hawaii and Asia. And so some of that is related to those holidays, exactly how much, it's very hard to tell you, it's probably a couple of million bucks of it. But it's probably not a massive piece of that. But that's where a lot of our growth is coming from these days in the comp center growth. So those assets are growing really rapidly, Asia was always intended to grow really rapidly and we've been exceeding our expectations there. Hawaii had a lot of ramp this year, we do expect that ramp to continue, but probably not at the same pace going into next year. In terms of for the fourth quarter, if you just extrapolate from our annual guidance through our results year-to-date, we are budgeting flat-ish NOI in the fourth quarter. That's not atypical, in fact it is typical, that's what we saw last year. There's a number of reasons for it, part of it is timing of CAM revenue recognition, which is really, we've taken radically over the year versus expenses, which are more back-end weighted. Part of it also is that over the last couple of years, temporary tenant revenue and average rent, which are both big pieces of the fourth quarter are projected to be down in the fourth quarter, not majorly, but they are. And the fourth quarter results are our largest quarter's, so moving the needle is generally part of it. So that's kind of what you see going on there. I also mentioned before but it's worth mentioning again, there was a big occupancy ramp in Hawaii over the course of 2017, that ramp was largely complete by the fourth quarter of '17. So it's just a tougher comp for Hawaii in terms of fourth quarter this year.

Omotayo Okusanya -- Jefferies -- Analyst

Got you. That's helpful. And then secondly, any thoughts around Prop 13 hitting the ballot in 2020 in California?

Robert S. Taubman -- Chairman, President and Chief Executive Officer

No, I mean, it's been there a long time and it's an impediment to value I think. But it's been something that property owners have dealt with for many, many years. And frankly, I don't think anything is going to change.

Omotayo Okusanya -- Jefferies -- Analyst

Got you. So I was wondering just kind of too early to call whether you think something actually happen this time?

Robert S. Taubman -- Chairman, President and Chief Executive Officer

I hope to be proven wrong.

Omotayo Okusanya -- Jefferies -- Analyst

All right, sounds good, Bobby, thank you.

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Thanks, Tayo.

Operator

Your next question comes from the line of Mike Mueller from JPMorgan. Your line is now open.

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Mike?

Operator

Mike Mueller, your line is now open.

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Shelly, why don't we move on?

Operator

And your last question comes from line Sandy from Mizuho Securities. Your line is now open.

Haendel Emmanuel St. Juste -- Mizuho Securities -- Analyst

Hey it's Haendel St. Juste, how are you guys?

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Haendel, hi.

Haendel Emmanuel St. Juste -- Mizuho Securities -- Analyst

So a couple of questions and I apologize I might have missed this, I joined a little late, but just curious what you're hearing from tenants these days in terms of early lease buyout offers and what's your appetite on these offers for early buyouts today? Are you open for business? And I know you're not ready to discuss '19 guidance, but hard to see a pickup in lease term fees into next year. So curious how that dynamic is playing into your thoughts into next year as well?

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Sure Haendel, we've got $16.4 million of lease cancel income through the third quarter of this year. We are not budgeting any more for the year and that's really based on the conversations we're having right now with tenants. We don't see any of these conversations progressing to a point where they'll be resolved in the fourth quarter. We absolutely expect lease cancellation income to be a part of our business going forward. It always has been. In a more sort of typical environment, you would see lease cancel be $6 million, $7 million something like that. Eventually, we expect there'll be a return to that although I don't know that we will see that next year. We do see that number coming down next year in a meaningful way from the 16.4 that we have seen this year. I will say a lot of the lease cancel activity that we've seen, we think ultimately will strengthen our centers. Most of -- a lot of times when tenants want to leave, they're not doing that well. So we help to replace them and we expect to replace them with better tenants. So we don't want to look at this as negative, but we do think that the pace of that will abate next year, but certainly, it will be a meaningful part of our business as that always does.

Haendel Emmanuel St. Juste -- Mizuho Securities -- Analyst

Got it, thank you for that. A follow-up on the balance sheet. I think, I heard you mentioned earlier. Your cost of debt here is pretty low. But I think one of the reasons why it's pretty low as you -- have fair amount of variable rate exposure somewhere in the high teens, close to 20%. So curious how you're thinking about that exposure into obviously rising rates here? Any thoughts or plans to fix a portion of that in the coming year and potentially what the cost or expectation on that front is?

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

Right now, we're at 18.5% of give or take percent of floating rate debt as it relates to total debt. We try to manage that number. So, it's below 20%. We put a forward starting swap on last week, that will help manage some of the exposure next year. It's not enough yet, we expect to do some more so that we're below 20% and that is in our interest expense guidance. I will say that the floating rate debt, it is actually floating right now with LIBOR right now about 2.25%, our floating rate exposure is not actually -- it doesn't reduce our overall cost of debt with this spread. It's actually pretty close and next year will be -- we think will be pretty close to the total cost. It's not really bringing that number down all that much as it compares to our fixed rate debt, which is right now, so as an example, fixed only as 3.94% and our total cost of debt is 3.9%. So they're kind of right on top of each other now, and in fact next year, it might go a little bit in the opposite direction.

Haendel Emmanuel St. Juste -- Mizuho Securities -- Analyst

Right, the trend is, well, the trend is what it is. The last one from me, just curious on the Zhengzhou, might have missed comments on the asset earlier, but just curious how that particular asset in China is faring versus some of your other Asia assets. Any color on year-to-date performance, sales et cetera? And then is the plan still for that asset to be added to the same-store pool, I believe is it the first quarter next year?

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

It's in the sales number now as of this quarter, it will be in the comp center pool for the full year, next year.

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Yes, we're delighted with the way Zhengzhou has opened and it is very much on track with what we had laid out as our financial objectives and the asset looks great. It's 100% leased. It's well merchandised and we have a bunch of tenants who would like to be in there. So I mean it's -- we are very pleased with Zhengzhou.

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

And Asia in general.

Haendel Emmanuel St. Juste -- Mizuho Securities -- Analyst

Okay, thank you.

Operator

There are no further questions at this time --

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Shelly, anything else?

Operator

No, no further questions. So I'll turn the call back over to Bobby.

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Well, thank you very much everyone for joining us and we look forward to talking to you and seeing you at NAREIT in San Francisco. Good bye everybody, thank you.

Operator

This concludes today's conference call. You may now disconnect.

Duration:  73:16 minutes

Call participants:

Ryan T. Hurren -- Director, Investor Relations

Robert S. Taubman -- Chairman, President and Chief Executive Officer

Simon J. Leopold -- Executive Vice President and Chief Financial Officer

Richard Hill -- Morgan Stanley, Research Division -- Analyst

Christine Mary McElroy Tulloch -- Citigroup Inc, Research Division -- Analyst

Greg McGinnis -- Deutsche Bank -- Analyst

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Jeremy Metz -- BMO Capital Markets -- Analyst

Caitlin Burrows -- Goldman Sachs Group Inc., Research Division -- Analyst

Todd Michael Thomas -- KeyBanc Capital Markets Inc., Research Division -- Analyst

Shivani Sood -- Deutsche Bank -- Analyst

Omotayo Okusanya -- Jefferies -- Analyst

Haendel Emmanuel St. Juste -- Mizuho Securities -- Analyst

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