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Kite Realty Group Trust (KRG 4.17%)
Q4Â 2019 Earnings Call
Feb 19, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter 2019 Kite Realty Group Trust Earnings Conference Call. At this time, all participants lines are in a listen-only mode. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Mr. Bryan McCarthy, Senior Vice President, Marketing and Communications. Sir, you may begin.
Bryan McCarthy -- SVP, Marketing and Communications
Thank you and good morning, everyone. Welcome to Kite Realty Group's fourth quarter earnings call. Some of today's comments contain forward-looking statements that are based on assumptions of future events and are subject to inherent risks and uncertainties. Actual results may differ materially from these statements. For more information about the factors that can adversely affect the company's results, please see our SEC filings, including our most recent 10-K. Today's remarks also include certain non-GAAP financial measures, please refer to yesterday's earnings press release available on our website for a reconciliation of these non-GAAP measures to our GAAP financial results.
On the call with me today from Kite Realty Group are Chairman and Chief Executive Officer, John Kite; President and Chief Operating Officer, Tom McGowan; Executive Vice President and Chief Financial Officer, Heath Fear; Executive Vice President, Portfolio Management, Wade Achenbach; Senior Vice President and Chief Accounting Officer, Dave Buell; and Senior Vice President, Capital Markets and Investor Relations, Jason Colton.
I will now turn the call over to John.
John A. Kite -- Chairman and CEO
Thanks, Brian. Good morning, everyone. And thanks for joining us today. We appreciate your time and consideration. For many of our investors and analysts, 2019 is squarely in the rearview mirror and you're understandably focused on 2020 and beyond. But I believe I owe it to the hard working KRG team to briefly look back on the year. 2019 was a phenomenal year for us. Beginning with a bold promise and ending in flawless execution.
We sold 23 non-core assets to 20 different buyers for total gross proceeds of $544 million, approximately 2 months faster than we anticipated. We also acquired two assets for a combined $59 million, including Nora Plaza, a Whole Foods anchored diamond in the rough, which we believe has great potential.
On a net basis, our transactional activity for 2019 produced $485 million in proceeds. We paid off nearly $400 million of debt, most of is secured, increasing our unencumbered NOI percentage from 66% to 74%. The balance of the proceeds will fund our remaining Big Box spend and identified redevelopments in 2020.
Our net debt-to-EBITDA has improved from 6.7 times to 5.9 times, and our fixed charge ratio improved from 3.3 times to 3.6 times. As a reminder, we have no preferreds. We have a strong investment grade balance sheet and extremely manageable debt maturity schedule.
Project Focus, was an exercise of addition by subtraction, intended to derisk and further concentrate our portfolio in our target markets. The non-core assets we sold had an ABR of $14.64, compared to our current ABR of $17.83, over 20% improvement. By the way, that's an all-time high for KRG and stands in stark contrast to $16.84 where we started 2019. For some context, at our 2004 IPO, our ABR was $10.57.
At the outset of the program, 60% of our ABR came from target markets. Now, that number stands at just under 70%. The data supporting the national migration to warmer and cheaper states is undeniable and the trend will only continue as the tax burden from the SALT legislation takes its toll on states with a high cost of living and often precarious budget deficits. We see data supporting this thesis nearly daily and more details can be found in our investor presentation posted on our website later today.
During the course of 2019, many investors asked us if Project Focus would serve to distract the organization. As Tom and Wade can attest, it had the exact opposite effect. During 2019, we executed 302 new and renewal leases for over 2 million square feet, which is a 19% increase over 2018. As a result of our leasing efforts, our anchored lease rate stands at 97.8%, 160 basis point year-over-year increase. Small shop lease rate stands at a sector-leading 92.5%, 130 basis point year-over-year increase and yet another all-time high for KRG.
Leasing spreads for 2019 on a comparable GAAP basis were 44.8% for new leases and 7.5% for renewals and 14.5% on a blended basis. Cash spreads for the year were 35.5% for new leases 3.3% for renewals and 9.2% on a blended basis. As compared to our peers, we have the second highest anchored lease rates, the highest small shop lease rate, one of the highest recovery ratios, one of the highest NOI margins and one of the largest 2019 cash lease spreads.
Our Big Box Surge program has been a huge success. We leased 22 boxes in 18 months to 17 different tenants, including names such as Five Below, Old Navy, RAI, Total Wine and Sephora. To give you some context, we did a total of two box deals in 2017. Comparable cash rent spreads were over 21% the estimated total capital cost associated with these leases is $43 million and the return on that cost is over 16%. We believe these are exceptional returns, especially on a risk-adjusted basis.
We have a total of approximately 280 boxes in our portfolio and only seven of them are currently vacant. Once again, it's clear that demand for our real estate is deep and diverse. The share price appreciated nearly 40% during 2019, resulting in a total return of approximately 50%. And while this movement in our share price serve to reduce our absolute and relative discounts, we still have work to do and plenty of room to run. Our discounts to consensus NAV persists at approximately 21%.
Our plan to maintain our momentum and close these valuation gaps is as follows. We'll continue to highlight our true NAV and we will return to earnings growth. 2020 is our trough year and we expect to inflect into 2021. While we view our capital allocation activities through the lens of net asset value, we also acknowledge that the equity markets reward consistent and predictable earnings growth. To that end, Project Focus was not the beginning of a multi-year disposition program. This is not to say we won't sell assets in the future, prudence and proper portfolio management dictate otherwise. Rest assured, the proceeds of any sale will be reinvested with the goal of maximizing NAV and minimizing any short-term dilution and improving our long-term growth and further concentrating our portfolio in our target markets.
We'll continue to counter the retail apocalypse narrative by providing factual evidence of a growing retail renaissance. For example, the most profitable sale for a retailer is when a consumer buys online and picks up in the store. The customer has acted as their own cashier and as the last mile delivery driver. And in the vast majority of these cases, the customer will also make additional purchases in the store. This holiday saw over a 40% increase in the buy online, pick-up in store or BOPIS method. And some experts believe BOPIS could account for up to 50% of digital traffic. The open-air sector is uniquely positioned to benefit from this trend, as evidenced by the omnichannel success of our hallmark tenants such as Target and Walmart, just to name a couple.
Bottom line, margins matter and physical retail is a core component to success, as evidenced by the scores of digitally native brands that now embrace physical locations. We will also continue to educate our stakeholders as it relates to the quality of our real estate and the vast changes that have occurred not only since our IPO, but since our merger with Inland Diversified. We're no longer a Midwest focused power center company. We're proud of our deep Midwestern roots and values, but the fact remains that power centers comprise less than 20% of our portfolio and 70% of our ABR comes from the south and the west
In reality, the average size of our shopping centers is approximately 140,000 square feet, well below the size of an average power center. Our 2020 guidance is a testament to the fact that the headwinds in our business have not fully subsided, but we remain unfazed. Our recent success with the Big Box Surge demonstrates our ability to rise to those challenges.
On a year-over-year basis, those boxes will produce nearly 240 basis points of same-store growth, which is over $4.5 million. But fortunately, this growth is being offset by a handful of actual and potential bankruptcy used in store closures, including Dress Barn, Earth Fare, A.C. Moore, Bar Louie, and Pier 1.
To combat the loss, we have signed new leases and are far along in discussions to backfill the spaces with more productive relative tenants. Furthermore, we're cautiously optimistic that the majority of the 2020 tenant fallout has been revealed. It's important to note that one of the collateral benefits of Project Focus is that we have significantly increased the durability of our cash flow by decreasing our exposure to watchlist tenants.
At the beginning of 2019, we made a bold promise and we delivered. I'm supremely confident that when we convene a year from now, I'll have the same message to report as it relates to 2020. And now, I'd like to turn the call over to Heath, to discuss the details of the fourth quarter and our full year guidance.
Thomas K. Mcgowan -- President and COO
Thank you, John, and thank you to the entire KRG team for an outstanding 2019. I'll briefly address our strong fourth quarter and full-year results before giving some additional color on our 2020 guidance. During the fourth quarter, we generated FFO as adjusted of $34.7 million or $0.40 per share. For the 12 months ended December 31, FFO as adjusted was $143 million or $1.66 per share. As a reminder, the sole adjustments for 2019 were limited to the impact of the early extinguishment of debt.
We grew same property NOI by 3.2% compared to fourth quarter 2018. This uptick is consistent with our prior messaging and reflects the narrowing gap between our leased and occupied rates. For the year, we grew same property NOI by 2.2%, which is at the high end of the initial same property NOI guidance we provided a year ago. The main contributors to our 2019 growth were increases in base rent of 150 basis points, and increase in net recoveries of 60 basis points, a slight increase in other income of 5 basis points and a slight reduction in bad debt of 5 basis points.
As for our balance sheet, our $600 million revolver is undrawn, allowing us to satisfy all of our debt maturities through 2025. The strength of our balance sheet affords us incredible optionality at a time of uncertainty. While we are hopeful that 2020 will come and go without undue volatility, we are more than prepared to survive any disruption. In fact, we are poised to take advantage of it.
Moving to 2020 guidance. KRG is providing 2020 NAREIT FFO guidance of $1.48 to $1.52 per share, including same-store NOI growth ranging from 1% to 2%. It's important to note that the midpoint of our guidance assumes we received no additional rent from any tenant that was vacated or filed for bankruptcy, including Dress Barn, Pier 1, Bar Louie, A.C. Moore, Earth Fare, and Frank's Theater. These names tenants net of expected backfills equate to lost NOI of $3.6 million, which is a 190 basis point drag on same property NOI. Furthermore, on top of all the known disruption, our guidance assumes an additional $3 million in bad debt expense, which represents 1% of total revenues and 1.4% of company NOI. $2.5 million of that bad debt expense is attributable to our same property pool, which represents 90 basis points of same property revenues and 1.3% of same-property NOI.
I'd like to highlight that our bad debt assumption of $3 million for 2020 is equal to the total bad debt we experienced in 2019, despite the fact that we have 23 less operating assets. While we are not anticipating outsized tenant disruption in 2020, we feel that the current environment warranted a hyped measure of conservatism.
Our guidance does not assume any material transaction activity. A breakdown of the assumption surrounding our guidance can be found in our earnings release from last night. And as always, Jason and I are available offline to answer any of your modeling questions.
Thank you to everyone for joining the call today. Operator, this concludes our prepared remarks. Please open the line for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] And our first question comes from Craig Schmidt from Bank of America. Your line is open.
Craig Schmidt -- Bank of America Merrill Lynch -- Analyst
Thank you. And thank you for some of the details on the guidance. But maybe just visit a little more on same-store NOI. You finished at 2.2 and you ramped up to a 3.2 in fourth quarter. And the midpoint for 2020 is 1.5. It sounds like you're assuming no releasing of any of the vacated space as part of the reason for the drag. Are there any other reasons why you're guiding to that 70 basis points lower from last year?
Heath Fear -- Executive VP, Chief Financial Officer
Yes, as I described in my remarks, we had some $3.9 million of disruption just from those new tenants. So, that was 190 basis point headwind. As John mentioned in his remarks, yes, we had a really nice ramp up from the boxes of 235 basis points. But, again, that 190 basis points, basically took all the wind out of the sale. So, listen, it's 70 basis points lighter, as you described. But I think we've built in a fair measure of conservatism. We are going to like, just like last year, we're going to do whatever we can to outperform. Sort of, the shape of the growth, you'll see a moderate into the first half. And again as some of those additional boxes come online, you'll see our same-store NOI growth continue to grow in the back half of the year. But again, Craig, listen, we hit the high end of the range last year, we're going to do whatever we can to outperform.
So, yes, it's 70 basis points lighter, but we are feeling very bullish over here.
John A. Kite -- Chairman and CEO
Craig, the only thing I would add is, as Heath just said, this is a very beginning of the year. We happen to get these guys at the end of the year, in the beginning of this year, closing couple of surprises, for example, with Earth Fare, Bar Louie. Yes, so a couple of these are surprises. So, I think based on that and building in the conservatism to the guidance, I mean if you look, I hope you picked up on the fact that the $3 million, the absolute amount that we have in bad debt reserve is the same amount we had in '19, although we have 20% less properties. So, clearly, we're taking a conservative view. But in an election year and everything else we have going on, I think that's prudent. Do we think that that's, that's conservative? Absolutely. But that's the prudent thing to do right now and I think we've demonstrated vis-a-vis the phenomenal results that we had in 2019, that we're up to that task and we will execute on that task, just like we always do.
Craig Schmidt -- Bank of America Merrill Lynch -- Analyst
Okay. And then just, is it possible that you could end the year even higher with same-store NOI, given the success with the Big Box Surge and as you leverage that against the smaller shops?
John A. Kite -- Chairman and CEO
I mean, look, I think the guidance that we gave between 1% to 2%, and when you look at the bad debt reserve, yes, I think it's possible. If we split -- especially since it feels as though we've set aside, kind of, a double reserve in the sense that we've taken everyone out and put on a large reserve. So, yes, I believe that that's very possible, but it's early in the year. Let's stay tuned.
Craig Schmidt -- Bank of America Merrill Lynch -- Analyst
Okay, thank you.
John A. Kite -- Chairman and CEO
Thank you.
Operator
Thank you. Our next question comes from Christy McElroy from Citigroup. Your line is open.
Christine McElroy -- Citigroup -- Analyst
Hey, good morning guys. Thanks. Just in regard to your future pipeline products in Indianapolis, how should we think about the timing of project commencement and capital spend over the next few years associated with that.? And, John, just in that context, your comments about FFO inflecting positively in 2021, is there any downtime associated with these locations that we should be thinking about as we think about that longer-term growth rate?
John A. Kite -- Chairman and CEO
Well, let's start with the second part of the downtime. I mean, when you look at these projects that are in the supplemental, you've got a situation where you've got no income coming at all from one of them. You got extremely small amount of income coming from the second one. So, the first one would be the corner, there, zero income coming from that. The Hamilton Crossing, there is a de minimis amount of income. And then Glendale is a little different because we're doing two things there; we're backfilling the Macy's Box with Junior Anchor retailers and then we're adding apartments in the parking lot, which obviously has no income associated with that portion.
So, I don't think this creates a lot of drag in that sense. The idea is -- to the first part of the question, our objective is to minimize the capital spend on these, vis-a-vis, the partnerships that we're doing, because the multifamily components of them would be in partnership. So, I think, as we said in the call, the majority of what we think we're spending in 2020 is coming from what we've pre-funded, Christy.
So, I think that we feel like we have that in hand. Quite frankly, there, they're moving pretty quickly. One of them is moving pretty quickly in particular, and so that could be interesting for us to see in terms of the start times. But bottom line is, our objective is, to the extent that these aren't retail, they're very much limit what capital we're putting in. But then, we have definitely attributed for that in 2020.
Tom wants to add a little bit.
Thomas K. Mcgowan -- President and COO
Yes. Christy, the only thing I was going to add is, all three projects, we're pursuing economic incentives. So, that's why, exact timing in terms of starts is a little unclear, but hopefully we will be at least one by the end of the year in terms of starting.
Christine McElroy -- Citigroup -- Analyst
Okay, got it. Thanks. And then, just in regards to leasing capex, just looking at the numbers on a trailing 12 month basis, there's definitely been -- it definitely trended higher and that's causing some more upward pressure on your AFFO payout. What's sort of your expectation for capex in 2020 and how should we be thinking about that?
Heath Fear -- Executive VP, Chief Financial Officer
Sure. Well, I mean, I think, again, as we've said, as you know and we said before, based on our size and number of deals done in a particular quarter, that can certainly swing. And in this particular quarter, we had two or three deals out of the 45 deals that were higher than what we would project typically. So, I wouldn't view this as like a consistent run rate. I think it's going to move around. One of the things to make sure that everyone realize is, we're getting strong returns on this capital and we're merchandising the properties the way we want to merchandise them. So, I think it's probably more of a gradual move that's occurred here, Christy. But even when I look at the quarter that we're in right now, although it's early, the spend is significantly less than what it was in the past quarter.
So, we'll continue to update you guys on that. But when you have two or three deals that can move the needle, it's tough to kind of say these are run rates.
Dave Buell -- SVP, Chief Accounting Officer
Christy, I'll just add that, a reminder also that the box deals are generally more expensive. So, in general, the cost is up just by the sheer volume of the box activity. And if you look back historically, that number was more sort of in the mid '50s than where it sits right now. And so we anticipate, as we get these box deals, the remaining few that we have left, done, and as we normalize, that that number should drift back down toward that historical average of, call it, mid '50s to 60.
Christine McElroy -- Citigroup -- Analyst
So, I guess just a follow-up on that, I mean, would you expect the Pier 1 boxes, the replacements, just given their size, to be less capex? Just given that you're not breaking up as many or you're not breaking up any of those, but it's just less capex associated with those?
John A. Kite -- Chairman and CEO
I mean, it's very dependent on who we're putting in there Christy, because those -- even if you just look at Pier 1 and Dress Barn, those are both what you would consider like many-many -- many anchor sized, right?
Christine McElroy -- Citigroup -- Analyst
Right. Yes.
John A. Kite -- Chairman and CEO
They're between 8,000 and 10,000 square feet. So, if we're putting in a guy that going to take whole space, yes, for sure. We could also break that into two users pretty effectively. So, I think it depends on what we're putting in. And again, I -- to reconfirm everybody, when I look at the mass volume of stuff that we've done in the last couple of years, the capex expenditures, when you look at on a percentage of NOI in 2019 and 2020, it's just significantly higher than what we have historically seen and what we will see in '21, '22 and '23, as I look out in our models. And it just, it is what it is. We're getting great returns, we're increasing the NAV of the properties.
So, I wouldn't overthink it, quite frankly. I know people want to focus on this and I get it, but I think it's a transition period and it has to do with the returns that we're generating and the quality of the tenants that we're putting in.
Christine McElroy -- Citigroup -- Analyst
Okay. Thanks for the time.
John A. Kite -- Chairman and CEO
Thank you.
Operator
Thank you. Our next question comes from Todd Thomas from KeyBanc Capital Markets. Your line is open.
Todd Thomas -- KeyBanc Capital Markets -- Analyst
Hi, thanks. Just first, following up on that discussion a little bit. Can you just talk a little bit more broadly about the leasing opportunities or expectations rather to backfill some of those early 2020 move-outs and closures in terms of the timing and the potential mark-to-market? And, just maybe discuss what's embedded in the guidance with regards to those spaces?
Heath Fear -- Executive VP, Chief Financial Officer
Well, at least the first part of the question, I think Tom and I can both touch on it. As far as the demand, there is plenty of demand there, and even if you just carve it into what we're looking at between Pier 1 and Dress Barn. I mean, as it relates to Dress Barn, I think we only have one or two of those that we're not actively negotiating leases or haven't already signed leases. And I think we've already signed four leases in there of the eight -- or the seven that we have remaining. So, that gives you an idea that the demand is there.
And as it relates to Pier 1, I mean, quite frankly they're still in the spaces and we've got tenants calling us trying to get us to make stuff happen. So, that's a sweet spot size wise. Tom, you want to pick up on that?
Thomas K. Mcgowan -- President and COO
Yes, and then on the box side, we have some of the boxes that remain vacant and we're already negotiating on three of them. And the fact that we have 280 boxes and only seven vacancy, negotiating three, I think our history over the last 18 months shows that we're going to be successful on that. And I think as we move to the second half of the year, we'll have far more better numbers [Phonetic].
John A. Kite -- Chairman and CEO
Yes. And, Todd, regarding guidance, I mean, as Heath pointed out, other than what we've already leased, for example, like dress Barn, we don't have anything in our numbers relating to those vacancies. So, that's the conservatism that we took in addition to the bad debt reserve on top of that that we were pointing out earlier.
Dave Buell -- SVP, Chief Accounting Officer
Last little piece of information. So, for the Dress Barn deals that we have, we have five signed, two in negotiation, spreads of those are on a cash basis around 10%. So, there is a nice mark-to-market opportunity in those boxes.
Todd Thomas -- KeyBanc Capital Markets -- Analyst
Okay, got it. That's helpful. And then, yes, Heath, so, some of those I understand are vacant and you're signing leases actively today. But I think you said the midpoint assumes no additional rent from the six retailers that you mentioned that you don't receive rent. Is that beyond February, is that right? And then, of those six tenants that you mentioned, I guess, what's still open and rent paying at this time?
Heath Fear -- Executive VP, Chief Financial Officer
I think the only one still open and rent paying, Todd, is Pier 1. And we assumed that we don't get any more rent past February, which I'll tell you is probably fairly conservative assumption, because even if Pier 1 were to change from a reorganization, which it appears it is, to a liquidation, it's going to take them 3 or 4 months just to conduct going out of business sales. I will tell you that our four locations are not in the closure list, they're still on the website, which leads us to believe that they will ultimately be part of the reorganization plan. Whether or not Pier 1 is able to pull off a successful reorganization, we'll see.
I mean, again, a little more conservatism in that, but we just took February's rent and then we put zero in the base budget for the rest.
Todd Thomas -- KeyBanc Capital Markets -- Analyst
Okay, great. That's helpful. And then just shifting over to sort of the balance sheet and dispositions. So, Project Focus is complete. You came in toward the high end of the leverage range that you laid out, which is mid to high 5s on a debt-to-EBITDA basis. So, you're right there 5.9 times. But you did have a desire to perhaps drive leverage slightly lower. And I'm just curious what the updated view around leverage is today?
Heath Fear -- Executive VP, Chief Financial Officer
So, at the beginning of last year when we gave our guidance, we said that we would be between 6.1 and 5.9 when the dust settled. So, we're at 5.9, so we're pretty pleased that we hit sort of our internal goal with respect to the end of year 2019 guidance. But to your point, our -- sort of our anchoring leverage point is mid to high-5s, and sometimes we'll float above it and sometimes we'll flow below it. I will say, as I'm looking out to our mode, you're going to see that number continue to drift down just as we naturally grow EBITDA, which will get us closer to that mid 5s, where we'd -- mid to high-5s, where we want to want to reside on a long-term basis.
John A. Kite -- Chairman and CEO
Yes, Todd. I mean, I guess the only thing I'd add is, we're extremely comfortable with the strength of our balance sheet today. And obviously, debt-to-EBITDA is an important metric, but when you look at our fixed charge coverage, you look at our debt maturity schedule, if you look at our cash on hand, I mean, we're in the best shape we've ever been.
So, as it relates to either taking advantage of an opportunity or weathering the future potential storm, we can do both. So -- and look, as we -- we don't think about this in one-year increments, we think about this in 3 to 5-year increments more likely. And we look really good over that period of time. And to Heath's point, are we going to freak out whether it's 5.7, 5. 8, 5.9, 6.1, 5.4? No. It's in that bandwidth that we can operate in and particularly with the way we've kind of skillfully managed the maturity schedule and our cash position. So, feeling very good about that.
Dave Buell -- SVP, Chief Accounting Officer
I think the one thing I'd add, listen, we worked really hard to get the leverage to where it is and we are going to do whatever it takes to keep it in that range. This is not an exercise, let's de-lever and just go ahead and lever back up. So, again, it's -- we think this is a good comfortable number and we're going to stick there.
Todd Thomas -- KeyBanc Capital Markets -- Analyst
Okay, thank you.
John A. Kite -- Chairman and CEO
Thank you.
Operator
Thank you. And our next question comes from Floris Van Dijkum from Compass Point. Your line is open.
Floris Van Dijkum -- Compass Point Research & Trading -- Analyst
Great. Thanks for taking my question guys. John, you touched upon NAV. As I look at consensus cap rates for KRG, they've basically risen, appears like by about 50 basis points over the past 12 months to the range of 7 to 7.15. You sold presumably some of your worst assets or your non-core assets for $540 million of that. Can you provide any evidence that cap rates should be lower than where the market ascribes your values right now?
John A. Kite -- Chairman and CEO
Yes, it's great question. Absolutely, for us. I mean, I think -- look, what I can say is a couple of things. The first part of that, yes, we sold our lower tier assets at approximately acap [Phonetic] effect. If you look at 2018 NOI, slightly below acap. And the remaining assets that we own are of a significantly greater quality, evidenced by tons of data we've given you, but not the least of which is a 20% improvement in our average base rent from before when this program began.
So, when we go out and look at assets in the market for us, for sale, like we have recently, multiple deals that we've looked at, we absolutely could not add anything that is complementary to our portfolio at a cap rate that's higher than 6 right now. In fact, the majority of the deals that we see that we think are complementary to our portfolio, basically trade-in-the-fives and low 6 range. A 7 is funny. I mean, it's just not even -- there's no way. The only way you can do that is in a situation like, let's say, even a high 6, where you're buying an asset that has significant capex deferral, quite frankly, similar to what we bought with Nora, where -- it's a good asset, but we've got to spend a lot of money to bring it up to where we want it to be.
So, I think it's a very important question. I think people are missing it tremendously. And obviously, our stock has moved a lot in the last year, but we're not even close to where we think that should be right now. And I think if you talk to any of our peers that are similar in asset quality, they would tell you the same thing that if you want to buy something you think is complementary that doesn't have a lot of work to do, in other words, capex to spend to get higher NOI, being higher than a 6, I just don't see it.
Floris Van Dijkum -- Compass Point Research & Trading -- Analyst
Great. Thanks. That's helpful. So, the other question I have for you guys is, if I look at your development pipeline and I compare --if I look at it both on an absolute and relative basis compared to your peers, it seems smaller. Can you maybe give us some background to your thinking on development and redevelopments and why you pursued this approach?
John A. Kite -- Chairman and CEO
Sure. In terms of why we've kind of taken the approach? A lot of it has to do with the fact that if you look at 2015, '16, '17, '18, we were actively engaged, particularly '16 through '18, in a significant amount of redevelopment in the portfolio. So, frankly, some of it, we just got to earlier than others. And then the second part of it is the balance sheet management that we want to be in a position to manage our capital expenditures. We spent a great deal of capital on the Big Box Surge and still have $16 million yet to spend there, which we view as a de facto redevelopment program in the sense that the returns are higher and have less risk associated with them.
I think it's a combination of all of that. And then also, we've talked a lot about -- we're interested in adding value to assets like the three that we mentioned, which would be mixed use style development, but we're not interested in doing it just for the sake of doing it.
And when you look at the returns you generate there, you have to be very careful. So, overall, this is definitely part of our strategic plan and we're -- based on our size, having two or three of them that we're working on at one time is plenty. We don't want to overspend either. So, I think it's a combination of all those things for us.
Floris Van Dijkum -- Compass Point Research & Trading -- Analyst
Thanks, John. Appreciate it.
John A. Kite -- Chairman and CEO
Thank you.
Operator
Thank you. [Operator Instructions] And our next question comes from Barry Oxford from D.A. Davidson. Your line is open.
Barry Oxford -- D.A. Davidson -- Analyst
Hey, John, to build off of that question, when you're looking at future development in site, which MSAs are you like, look, if I could get some raw land in this MSA, I think that makes sense?
John A. Kite -- Chairman and CEO
Sure. Barry, I mean, look, right now, it just happens to be the three that we've highlighted are in our home market. And they have all -- they all have mixed use attributes relative -- associated with them. I mean, I think we've been pretty clear that our target markets would be those markets that we deem to be the warmer cheaper markets in the south and west where we would be looking to actively engage. We're not, as you know, we're not actively out looking for raw land. And I don't know, Tom, we haven't done that in --
Thomas K. Mcgowan -- President and COO
It's been years.
John A. Kite -- Chairman and CEO
We were definitely doing that. So, I think right now, we made it pretty clear that we've got a certain amount of target markets, 15 to 20 markets where we're moving in the direction of having the majority of our NOI come from those markets. I think we're going to do a lot more education within our investor community in the next year about that. But, I mean, look, the data is pretty clear when you look at markets like Raleigh and Dallas and Houston and Orlando, to name a few. People are moving there in droves. The cost of living is exceptionally lower than in the high tax states and we just happen to be positioned to take advantage of it.
Barry Oxford -- D.A. Davidson -- Analyst
Perfect. Thanks for the color, guys.
John A. Kite -- Chairman and CEO
Thank you.
Operator
Thank you. And our next question comes from Chris Lucas from Capital One Securities. Your line is open.
Christopher Lucas -- Capital One Securities -- Analyst
Good morning, guys. Just wanted to get a better sense as to what the spread is right now between leased and commenced and just sort of understand sort of what the tailwind looks like to rent growth this year?
Thomas K. Mcgowan -- President and COO
Yes, so it's 230 basis points now. And so you'll see sort of, at the beginning of the year, as you'll see it GAAP out a little bit more as some of those other boxes are getting signed. And then you'll see it start to skinny to the balance of the year as more of those boxes open. So, it will still be elevated throughout 2020, but not nearly as elevated as it was toward the back half of this year.
Christopher Lucas -- Capital One Securities -- Analyst
Okay, great. Thanks, Heath. And then on the A.C. Moore, can you remind me how many sites you had and if there is any progress on backfilling those locations?
Heath Fear -- Executive VP, Chief Financial Officer
Yes, there is just one site and we are in very deep negotiations for our backlog for that site.
Wade Achenbach -- Executive VP, Portfolio Management
I mean, it's a nice size and in the location that we feel like we're going to be successful.
Christopher Lucas -- Capital One Securities -- Analyst
Thanks for that. And then last question from me. Just, John, you keep pushing the envelope in terms of shop occupancy or shop lease rate. Obviously, you will take a hit with the Dress Barns and then to the degree that there is any anything else that comes through. But just big picture, 92.5% is the new high watermark, is there ability to push beyond that or do you feel like that's kind of where the frictional point is for shop space?
John A. Kite -- Chairman and CEO
I don't know. Tom, shaking his head, yes, we can push. Look, we've actually, as you know, Chris, we've talked about this and it is an interesting thing to think through and at what point do you reach some sort of frictional vacancy on just locations. But we are very focused on continuing to push forward. We will take a couple of hits. And as far as our guidance goes, we've been very conservative around what we would lease up.
But when it comes to small shops, you can move faster. And frankly, even in that 8,000-9,000 square foot range, like Pier 1 and in Dress Barn, we can move faster than you can in a 20,000-30,000 foot box. So, I'm optimistic that our team will continue to overachieve. And pound for pound, Chris, if you look at what we've accomplished, it's kind of why I wanted to look back a little on what we accomplished in the year because companies that trade at significantly higher multiples and lower cap rates did not achieve what we achieved and have not laid out guidance that they would achieve more than us this year, but yet we trade where we trade.
So, what we're going to do is continue to kick butt and do what we do. And we take that as a great challenge. So, I will never say that we will be happy going backwards.
Wade Achenbach -- Executive VP, Portfolio Management
Just watch out. Let's see where we go to.
Thomas K. Mcgowan -- President and COO
I'll add two things. Listen, Chris, at 92.5% leased, it really gives us an opportunity to drive rents. So, that's one of the benefits of being so highly occupied. And the other thing -- and Tom's [Indecipherable] leasing folks, yes, 92.5%, high. But we will not capitulate the other 7.5%. So, we'll do our best.
Christopher Lucas -- Capital One Securities -- Analyst
Great, thank you. Appreciate it.
John A. Kite -- Chairman and CEO
Thank you.
Operator
Thank you. And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to John Kite, for any closing remarks.
John A. Kite -- Chairman and CEO
I just wanted to thank everybody for being with us on the call today. Thank everyone for the support and we look forward to continuing to meet with you going forward. Thank you.
Operator
[Operator Closing Remarks]
Duration: 42 minutes
Call participants:
Bryan McCarthy -- SVP, Marketing and Communications
John A. Kite -- Chairman and CEO
Thomas K. Mcgowan -- President and COO
Heath Fear -- Executive VP, Chief Financial Officer
Dave Buell -- SVP, Chief Accounting Officer
Wade Achenbach -- Executive VP, Portfolio Management
Craig Schmidt -- Bank of America Merrill Lynch -- Analyst
Christine McElroy -- Citigroup -- Analyst
Todd Thomas -- KeyBanc Capital Markets -- Analyst
Floris Van Dijkum -- Compass Point Research & Trading -- Analyst
Barry Oxford -- D.A. Davidson -- Analyst
Christopher Lucas -- Capital One Securities -- Analyst
