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Retail Properties of America Inc (NYSE:RPAI)
Q4 2019 Earnings Call
Mar 19, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Retail Properties of America Fourth Quarter 2019 Earnings Conference Call.

[Operator Instructions]

I would now like to turn the conference over to your host, Mr. Michael Gaiden, Vice President of Investor Relations for Retail Properties of America. Thank you. You may begin.

Michael Gaiden -- Vice President of Investor Relations

Thank you, operator. And welcome to the Retail Properties of America fourth quarter 2019 earnings conference call.

In addition to the press release distributed last evening, we have posted a quarterly supplemental package with additional details on our results in the INVEST section on our website at www.rpai.com. On today's call, management's prepared remarks and answers to your questions may include statements that constitute forward-looking statements under federal securities laws. These statements are usually identified by the use of words such as anticipates, believes, expects and variations of such words or similar expressions. Actual results may differ materially from those described in any forward-looking statements, including in our guidance for 2020, and will be affected by a variety of risks and factors that are beyond our control, including, without limitation, those set forth in our earnings release issued last night and the risk factors set forth in our most recent Form 10-K, 10-Q and other SEC filings.

As a reminder, forward-looking statements represent management's estimates as of today, February 19, 2020, and we assume no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Additionally, on this conference call, we may refer to certain non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers and definitions of these non-GAAP financial measures in our quarterly supplemental package and our earnings releases for both the third and fourth quarters of 2019, which are available in the INVEST section of our website at www.rpai.com.

On today's call, our speakers will be Steve Grimes, Chief Executive Officer, Julie Swinehart, Executive Vice President, Chief Financial Officer and Treasurer, and Shane Garrison, President and Chief Operating Officer. After their prepared remarks, we will open up the call to your questions.

With that, I will now turn the call over to Steve Grimes.

Steven P. Grimes -- Chief Executive Officer, Director

Thank you, Mike, and good morning, everyone.

I'm pleased to report that our team again delivered accelerated performance in the fourth quarter, building on our momentum realized through the first three quarters of the year. This continued momentum enabled us to post 2019 operating FFO per diluted share of $1.08, above our previous upward revised guidance of $1.05 to $1.07. Our multi-year focus on market scale and adjacency, in addition to long-term merchandising and cash flow durability, also helped us to achieve full-year 2019 same-store NOI growth of 2.7%, near the upper end of our higher revised assumption of 2.25% to 2.75%.

Today, our rent roll is more diversified than ever before, and we continue to create long-term value through a patient but balanced approach. In the fourth quarter, we again drove inordinate leasing volume, tenant deliveries and improved overall credit quality of our tenant base. This enabled us to achieve record results in a wide array of leasing and occupancy stats, as well as in ABR per square foot in Q4. At 98.8% leased for our anchors and 96.2% leased overall, we are invigorated by the potential brought by the positioning of our core portfolio. Shane will provide additional detail on all of our leasing success in his prepared remarks.

We also continued to deliver progress on our big three expansion projects at Circle East, One Loudoun Downtown and Carillon, which will add a growing source of cash flow in coming years to amplify the base rent-driven growth of our core portfolio. And our newly added near-term pre-leased projects underscore incremental opportunities for high visibility, low-risk growth available in our existing operating asset footprint. Our initial 2020 same-store NOI growth guidance of 0.25% to 1.25% reflects a pragmatic approach to the early 2020 outlook for incremental tenant fallout across the sector versus a year ago. And our initial 2020 operating FFO per diluted share guidance of $1.04 to $1.08 reflects a commensurate level of consideration against this backdrop as well as our expectations for non-repetition of certain non-cash items that aided our results in 2019 and other factors that Julie will detail.

Early 2020 tenant move-outs and Monday's bankruptcy filing from Pier 1 present near-term opportunities for us to address. Our record-high leasing and occupancy position at the end of 2019 as well as our long-standing record of upgrading both rent and tenancy when presented the opportunity bode well for our prospects. Further, we believe that the combination of our highly adjacent operating footprint and sustained strength in our consumer backdrop, anchored on robust jobs and housing markets, which should aid the retail sector overall, positions us well to achieve long-term growth. Our better-than-expected fourth quarter financial results helped us to report net debt to adjusted EBITDAre at 5.4 times to end the year, down from 5.5 times in the third quarter.

With leverage near the low end of the peer group and liquidity of more than $840 million at year-end, we remain in a solid position of holding no need for additional external capital to fund our growth. In combination with another 40-basis-point sequential decline in our top 20 tenant concentration to 26.3%, a record low in our history, and the addition of two pre-leased smaller-scale projects, we continue to advance our aim to deliver steady, improved cash flow growth. Alongside these economic goals, we continue to advance our ESG efforts as well. As an example of our broad-scale sustainability efforts, I am pleased to report that we have signed power purchase agreements to deliver energy from renewable resources such as wind and solar to 27 of our Texas assets that are located in deregulated power jurisdictions.

These contracts account for more than one quarter of the assets in our total portfolio and will commence in July of this year. While addressing an important environmental concern, our investment in renewable energy resources also should hold growing resonance with our tenants and shoppers alike. I look forward to reporting on additional progress on these important corporate responsibility initiatives during the coming quarters and in the release of our upcoming proxy filing. I encourage each of you to monitor our ESG successes via our microsite at RPAIesg.com.

I expect our team to again demonstrate the strength of our high-graded RPAI 2.0 platform in 2020. And in 2021, the ongoing lease-up at our Circle East project in addition to deliveries expected at both Carillon and Loudoun, should add incremental cash flows to the base rent-driven expansion in our core portfolio. We approach both our near-term and long-term opportunity sets with much enthusiasm and expect to deliver steady progress on these goals in the year ahead.

With that, I will turn the call over to Julie to further detail our financial results and outlook.

Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Steve.

This morning, I will review our fourth quarter and full-year financial results, our capital structure positioning and our 2020 guidance. In the fourth quarter, we generated operating FFO of $0.27 per diluted share, flat sequentially and up $0.01 or 3.8% compared to Q4 2018 due to our Q4 2019 same-store NOI growth. For the full-year 2019, we delivered operating FFO of $1.08 per diluted share, $0.05 or 4.9% higher than full-year 2018. Our share repurchase activity in 2018 accounts for nearly $0.03 of the $0.05, but same-store NOI expansion was the strongest contributor at $0.04, and higher net lease termination fee income added another $0.01. The combination of lower non-same-store NOI due to net property dispositions during 2018 and 2019, higher net interest expense and lower non-cash items served as partial offset.

Same-store NOI for the fourth quarter grew 2.7% or $2.1 million compared to Q4 2018. Similar to our results through the third quarter of 2019, base rent continued to propel our same-store NOI expansion, contributing 310 basis points. During the quarter, contractual rent increases and releasing spreads remained the main drivers of this base rent expansion, complemented by occupancy growth as our track record of on-time tenant deliveries continued. Lower property operating expenses, net of recoveries, resulting from higher recoveries associated with increased same-store occupancy and higher other lease-related income also contributed to this year-over-year same-store NOI growth in the quarter.

Higher bad debt and lower percentage and specialty rent served as partial detractors. For the full-year 2019, same-store NOI increased 2.7% or $8.4 million compared to full-year 2018. Base rent contributed 260 basis points, anchored by contractual rent increases and further aided by positive releasing spreads and occupancy gains. Higher other lease-related income and a decrease in operating expenses net of recoveries also contributed, with partial offsets from lower percentage and specialty rent as well as higher bad debt.

Turning to the balance sheet, we did not engage in any significant capital markets activity in the fourth quarter having already exceeded our initial 2019 debt fundraising goals earlier in the year. As previously reported, during 2019, we raised a total of $370 million in unsecured debt capital, surpassing our initial goal of $200 million to $300 million. We raised $100 million in 10-year private placement, which funded in June and $270 million in term loans composed of $120 million five-year term loan and $150 million seven-year loan, both of which closed in July.

We subsequently swapped the LIBOR-based variable-rate portions of these term loans to fixed and used these aggregate funds, which held a weighted average maturity of 7.2 years and a weighted average interest rate of 3.56%, to repay other indebtedness, including prepayment of $108 million in aggregate mortgage principal with a weighted average interest rate of 4.91% and a net reduction of $255 million on our revolver balance year-over-year. All in, our 2019 capital markets efforts contributed to reducing our overall weighted average interest rate by 10 basis points year-over-year to 3.88%, while holding our overall weighted average maturity constant at 4.7 years.

As Steve alluded to earlier, we continue to benefit from our healthy investment-grade balance sheet. Our 5.4 times net debt to adjusted EBITDAre at year-end 2019 sits one-tenth of a turn lower than at year-end 2018 and places us among the least levered in our peer group. And our $832 million of availability under our revolver at December 31 provides for abundant liquidity to invest in both our core operating portfolio and our expansions and redevelopments with no need for incremental external capital.

Turning to 2020 guidance. Our record-high percent leased, occupancy and portfolio ABR per square foot stats as well as our continued quarterly reduction in our top 20 tenant exposure position us well to build on the continuing base rent-driven expansion in same-store NOI from our operating portfolio in 2020, a year in which we expect accelerating investment in our three active expansion and redevelopment projects. At the same time, our outperformance in 2019 across a number of key areas, including our delivery of same-store NOI growth, very near the high end of our February 2019 assumption range of 1.75% to 2.75%, and operating FFO per diluted share above the high end of our upwardly revised $1.05 to $1.07 range set in October, make for a tough comparison in 2020.

In terms of 2020 same-store NOI growth, just as we experienced in 2019, we expect our growth to be fueled by base rent. In fact, the tailwinds we generated in 2019, a year in which we delivered year-over-year increases of 180 basis points in both same-store percent leased and occupancy as well as 210-basis-point increase in ABR per square foot, have more than absorbed certain headwinds facing us in 2020. In addition to the tough same-store NOI growth comp of 2.7% from 2019, our same-store NOI growth guidance range of 0.25% to 1.25% is negatively impacted by our bad debt assumption and our expectations for tenant move-outs in 2020, including those that have occurred already.

First, our increased bad debt assumption of 110 basis points of revenue for 2020, equivalent to approximately 160 basis points of NOI, while pragmatic, also represents a year-over-year headwind in our outlook compared to our 50 basis points of revenue assumed at 2019's outset. Had we not made this change in our bad debt assumption, our 2020 same-store NOI growth guidance range would have been nearly 90 basis points higher.

As disclosed in last night's earnings release, our bad debt assumption for 2020 includes both 65-basis-point allocation for bad debt and unknown tenant fallout for the year ahead, as well as a specific 45-basis-point allocation for Pier 1, which filed for Chapter 11 bankruptcy on Monday. Currently, we have 12 active leases with Pier 1, which decreases to nine by September 1 after three of them expire. Second, while our year-end portfolio operating statistics reflects the incredibly hard work of our team throughout 2019 and the strength of our focused platform, several tenant move-outs shortly after year-end, including all five of our Dressbarn locations, one of our two Forever 21 locations, one of our Pier 1 locations and a significant fitness tenant at our Fordham asset are also reflected as additional detractors from growth in our 2020 same-store NOI guidance.

The impact on 2020 same-store NOI from these eight locations is 100 basis points. However, Shane will discuss our already strong progress on backfills for these and other tenants during his prepared remarks.

Our 0.25% to 1.25% same-store NOI growth guidance is expected to provide $0.005 to $0.02 of OFFO per diluted share growth in 2020, as highlighted in the reconciliation we provided in last night's release. The other expected contributor to OFFO growth this year is reduced interest expense, which we expect will contribute between $0.005 and $0.015 of growth. Our operating FFO guidance of $1.04 to $1.08 per diluted share also illustrates our plans to evaluate capital markets activity opportunistically. While we hold no 2020 debt maturities, we are exploring multiple options in the capital markets to address our 2021 and 2022 maturities. We seek to take advantage of the present combination of low short-term interest rates and a flat yield curve, balancing that with our lack of need for external capital to fund growth. We are motivated to exploit this advantageous backdrop and have provided flexibility in our interest expense projections this year as a result. I also want to remind investors that currently our revolver serves as the only variable rate instrument in our capital structure, underscoring the utility of this funding mechanism for our expansions and redevelopments amid the current low interest rate environment.

In terms of expected operating FFO growth detractors for 2020, the three primary components are non-cash and other, G&A expense and net transactional activity, and we expect lease termination fee income to detract, but to a lesser degree. First regarding noncash items. In both 2018 and 2019, we outperformed in this area because of a handful of tenant move-outs in each year that resulted in us recording significant below-market lease intangible income upon move out. Specifically, in 2019, six tenant move-outs generated $2.6 million or more than $0.01 per diluted share of non-cash income. Our 2020 guidance reflects our expectations for non-cash income from known and anticipated tenant move-outs, but the total expected is less than the amounts recognized in 2019.

Further, our 2020 outlook reflects assumed G&A expenses of $41 million to $43 million, up an incremental $1.5 million at the midpoint as compared to the $40.5 million recognized in 2019, which fell near the low end of our 2019 guidance assumption of $40 million to $43 million. This incremental outlay reflects our ongoing commitment to investing in our high-quality platform where appropriate.

Regarding anticipated net transactional activity, in addition to the $0.005 detraction from net sales in 2019, our 2020 operating FFO outlook incorporates additional opportunistic net disposition activity amid our record operating performance and the current environment of strong institutional bids for open-air retail assets. As highlighted in the release, earlier this month, we closed on the sale of a $14 million non-core power center asset and acquired the fee interest at our existing Fullerton Metrocenter asset for $55 million.

And now I will turn the call over to Shane.

Shane C. Garrison -- President and Chief Operating Officer

Thank you, Julie. Our record fourth quarter results continue to demonstrate the strength of our high-quality portfolio and platform. During the fourth quarter, we executed 168,000 square feet of comparable new leases at a blended 14.1% spread and an additional 388,000 square feet of renewals at a 4.2% comp. In aggregate for the quarter, we completed 132 new and renewal leases for 773,000 square feet, achieving a blended releasing spread of 6.9% while sequentially driving our leased rate and occupancy to 96.5% and 95.5%, respectively, on a same-store basis.

Additionally, we also achieved average annual contractual rent increases on new leases of approximately 160 basis points, continuing to focus on our forward growth profile. For the full year, we leased approximately 3.3 million square feet, representing 16% of our total portfolio GLA, just shy of our leasing record of 17% set in 2018. And in 2019, we achieved blended releasing spreads of 8.1% while also signing our new leases with average annual contractual rent growth of roughly 180 basis points.

During the quarter, our continued proactive leasing velocity and our ability to consistently deliver significant GLA on time, helped us to drive quarterly record highs for the company across a number of key metrics, including, same-store portfolio occupancy of 95.5%, up 190 basis points sequentially and up 180 basis points year-over-year, same-store portfolio percent leased of 96.5%, up 110 basis points sequentially and up 180 basis points year-over-year, same-store anchor occupancy of 97.9%, up 200 basis points sequentially and up 230 basis points year-over-year, same-store anchor percent leased of 99.2%, up 110 basis points sequentially and up 240 basis points year-over-year. For further perspective on this statistic, we ended the year with just eight anchor boxes available for lease across our portfolio.

We also continued to deliver gains in our small shop portfolio, which forms roughly half of our ABR, with average rents per square foot of $29.74. In the fourth quarter, we achieved same-store in line occupancy of 90.6%, up 150 basis points sequentially and up 50 basis points year-over-year as well as same-store percent leased of 91.3%, up 120 basis points sequentially and 70 basis points year-over-year. Our ongoing progress with our small shop tenancy adds visibility to our broader goals of steady contractual-based increase in rents, accretive recoveries, engaging merchandising within our centers and continued diversification of our revenue base.

We delivered 34 commencements totaling approximately 250,000 square feet in the quarter, continuing our on-time rent start cadence seen earlier in the year. These deliveries helped us to narrow our leased-to-occupied spread by 80 basis points sequentially to 100 basis points. As a result, our signed, but not commenced spread, decreased by $4 million to $3.7 million at year end. We also sustained our broader effort to increase the credit quality of our tenant roster, reducing our Top 20 tenant concentration by 40 basis points sequentially and 150 basis points year-over-year to 26.3% of ABR. And given the moderating volume of our lease roll in the coming year, which measured 7.2% of our portfolio ABR at year end compared to 10.3% at year-end 2018, we will continue to proactively push for higher credit quality tenants while working to further diversify our rent roll.

With our portfolio now at frictional vacancy at most assets, we now hold even more leverage to push for credit quality, merchandising mix and economic terms in our leasing efforts. This position continues to produce tangible results in regard to opportunistic merchandising and further efforts to reduce overall downtime as we negotiate through continued volatility in the retail space. As an example, on the merchandising front, we partnered with Macy's at Southlake Town Square to open the first location under the new Market @ Macy's concept, which is a blend of national and local brands in addition to active community gathering space. We will continue to curate our high-quality portfolio with those concepts that provide for patron and community engagement, while creating an interesting and diverse shopping experience.

As Julie noted, in 2020, we again have some disruption on the anchor side, with approximately 14 anticipated anchor boxes vacating, including 2 A.C. Moore locations. In total, these boxes represent approximately 262,000 square feet. However, through continued watch list management and ongoing portfolio reviews, we have already pre-leased four of these locations before the current tenant vacates and have another 4 in LOI or in lease negotiation, once again demonstrating our goal of minimizing downtime through active tenant engagement.

Turning to development. We also made significant progress at our Big 3 expansion and redevelopment projects during Q4. At Circle East, subsequent to quarter end, we signed Ethan Allen in an additional 6,000 square feet on the adjacent corner to Shake Shack. These two tenants occupying adjacent corners, set the table for future merchandising and experience.

In regard to timing, we have extended the stabilization date as outlined in the supplemental by six months and costs are now up approximately 10% to 15%. These increased costs reflect both the delayed timing and carry costs in addition to currently realized tenant build-out costs. As leasing has picked up, and we now have several LOIs and over 10% of the project leased, we have a better feel for remaining costs, and these updated numbers and timing reflect both. While the project stabilization has been extended, we intend to remain patient and thoughtful around merchandising and long-term sales growth and expect on average, two deals to three deals per quarter going forward.

At Loudoun, we are through GMP and are in advanced construction on the garages and foundation work for Pads G & H. Frame construction is anticipated to begin this spring. Based on this progress, we currently expect delivery of the first multifamily units in the second or third quarter of 2021 for Block G and Q4 2021 deliveries for Block H. Our 98.2% retail leased rate and 100% office leased rate at One Loudoun Downtown and the continued outsized wave of technology investment in Northern Virginia continue to backstop our confidence in this mixed-use expansion.

Turning to our largest project at Carillon. We continued grading and other early stage work, ahead of groundbreaking set for this spring. After achieving 37% leased on the retail portion of this mixed-use project earlier in 2019, we continue to make marked progress on the leasing activity with another 12,000 square feet of restaurant space under lease negotiation and approximately 80% of the medical office building under LOI negotiations. In Q4, we continued to explore partnering with an opportunity zone investor for this project and are now in advanced negotiations for up to 50% of the required capital for Phases one and two. We look to have meaningful updates on this project by the next call as it relates to leasing, costs and any additional equity partners.

As previously outlined, we continue to look for opportunities to create value through more immediately accretive redevelopment and pad expansions. Underscoring the multiple opportunities for growth within our existing assets, which include both long-cycle expansions and redevelopments as well as short-cycle investments, we have added two projects to our near-term pipeline, a redevelopment at The Shoppes at Quarterfield and a pad expansion at Southlake. Our project at Quarterfield, enabled by the recent move-out of a struggling Shoppers Food Warehouse, demonstrates our efforts to upgrade tenancy and asset quality when opportunity permits.

At year end, we had pre-leased 62% of the 58,000 square feet with LA Fitness and subsequent to year end, we completed a lease with ALDI for the remainder of this reconfigured building. Additionally, we have commenced demolition and prep work at the site and expect to deliver the space by early 2021.

Our second addition to the schedule, the pad development in Southlake, is 100% pre-leased to a national wireless carrier and serves as another example of our methodical approach to additional incremental low-risk cash flows to our already successful operating assets. We expect to outline additional short-cycle, low-risk accretive projects in the coming quarters.

In addition to these projects, I also want to point out our enhanced disclosure on nine entitled projects in the supplemental. Composing 4 million square feet in commercial GLA and more than 2,600 multifamily units, these expansion and redevelopment opportunities add visibility to our long-term runway for growth.

Turning to acquisitions and dispositions, we continue to enhance our portfolio with opportunistic transaction activity early in 2020. In February, we monetized King Philip's Crossing, a 106,000 square foot power center in Seekonk, Massachusetts for $13.9 million. We also acquired the underlying ground lease at our existing Fullerton Metrocenter asset in the Los Angeles MSA for $55 million, providing for compelling relative value in addition to future liquidity. We plan to continue to opportunistically market select non-core assets in an effort to maximize value through highly occupied asset sales, while balancing earnings accretion and leverage as development spend increases throughout the year.

Lastly, while acknowledging the need to address contemplated vacancies after year-end from the watch list tenants and non-renewals mentioned earlier, I want to relay that my confidence has never been higher in the ability of our platform to productively lease these spaces with more durable cash flows and to merchandise and navigate the ever-changing consumer landscape. After achieving a number of record milestones in 2018 and 2019, I look forward to what our team will achieve in 2020.

With that, I will turn the call back over to Steve.

Steven P. Grimes -- Chief Executive Officer, Director

Thank you, Shane and Julie. As you have just heard, our 2019 outperformance, including our record-setting lease, occupancy and ABR statistics at year end and our sector-leading capital position, bring us much confidence in our outlook for 2020 and beyond. None of this would be achievable without having the high-quality portfolio and platform we do. I would like to thank our RPAI team and our Board of Directors for stepping it up, yet again, in 2019 to position us well for 2020.

With that, I would like to turn the call back over to the operator for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Christy McElroy with Citi.

Christy McElroy -- Citi -- Analyst

Hi, good morning. Thank you. Shane, I wanted to follow up on Circle East. Maybe you could provide some more specifics for us on what drove -- what exactly drove the higher cost, the lower yield, the later timing? And just, can you give us confidence that there's not a read-through here in terms of how we should think about the risk associated with the cost and yield expectations for your other larger projects One Loudoun and Carillon?

Shane C. Garrison -- President and Chief Operating Officer

Sure. Good morning, Christy. Thanks for the question. I think, what's important here is a bit of context around how we got here. Look, the team is very optimistic as it relates to '20 and I think, quite frankly, we should be. We spent six years getting here. Billions in transactions, complete change in field office platform, a proven ability to trade in those assets that really are providing for this future value as we think about the mixed-use portfolio and the retail amenity that we feel will drive the vertical value long term. And we've been very patient. We've been iterative. We've completed eight pad expansions, $30 million in double-digit returns, again, pragmatic stairstep. The first pad was just $2 million. Our last redevelopment was $10 million. And three years ago, we had no significant mixed-use air rights or CIP. Today, we have almost 4 million with a large majority in future income from multifamily and north of 10% medical office.

So, I appreciate the focus on Towson. I don't think there's any read-through to the others, and we'll talk through that, but most importantly, we continue to progress as it relates to future entitlements as well, right. We have 4 million square feet, 2,600 multifamily units off the CIP page. We'll continue to provide additional disclosures there.

As it relates to Towson specifically, we've obviously updated to reflect our additional expectations there. We are two quarters later, and some of that additional cost is driven by that additional carry, but additional incremental costs here are really two or three spots. One, we have a slight change in scale, call it incrementally another 2,000 square feet. As we get closer to the retail shell delivery from AvalonBay, we have a much more finite picture of the leasable area. Additionally, we have increased the scope of our landscaping and pedestrian improvements to really focus on the interaction and viability of pedestrian traffic across the two blocks. And then lastly, we've seen an increase specific to some tenant build-out costs or build-out costs over shell in addition to storefronts. Some of that is market-driven and some of that is configuration-driven.

On the configuration side, we have several leasing plans, as you would imagine, for a project like this. Most of them contemplated a larger format, call it, pseudo-anchor 12,000 feet to 15,000 feet. We now plan to have much smaller average, call it, 2,000 square feet to 2,500 square feet across the project. If you have additional storefronts, you also have additional demising costs. So, there isn't any one large item. There are several changes here as we get closer to finishing up the project and additional carry also added.

So, we still love the project. We are still at, call it, 200 basis points to 250 basis points of accretion over where we feel it would trade on a stabilized basis. It's just going to take a little longer, but we have excellent volume as it relates to the tenants we want, which are largely local and regional from here, but with 5 stores to 10 stores each, it takes a much larger effort for those tenants to sit down and negotiate a lease and open a store. So, we will remain patient with long-term focus being on the merchandising mix and sales viability.

Christy McElroy -- Citi -- Analyst

Okay. Thanks for that. And then it sounds from your and Julie's opening remarks that the vacancies that you've already experienced in Q1 are sort of offsetting the commencement that you saw in Q4, and that's why that momentum that you saw in Q4 doesn't translate more into an occupancy tailwind in early 2020. Is that -- am I understanding that correctly?

Shane C. Garrison -- President and Chief Operating Officer

I think that's fair, in general. We have a higher ABR and a smaller denominator. So, you continue to feel that effect to the extent we have high ABR volatility. Fordham, I mentioned on the last call, Fordham alone is $1.2 million, $1.5 million of disruption because it's right at the beginning of the year. We have a lease for the space. We intend to deliver that by year end. Very happy with the progress as it relates to merchandising comps, etc., but that is downtime. So that is a great example of pre-leasing, but some disruption in the year.

Christy McElroy -- Citi -- Analyst

So, given the range, and appreciate the greater conservatism, can you maybe give us some parameters around how we should think about the trajectory of the growth rate through the year?

Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, Christy, I think the trajectory will largely follow occupancy as we've tended to see. Although bad debt, especially with the amount we're estimating for the current year, has proven to be less consistent quarter-to-quarter as we saw in 2019, for example, but our 2020 same-store NOI growth is still expected to be driven heavily by base rent. So, we talked a lot about our 200 basis points roughly from bumps and spreads. We still expect to see that. And we expect tailwinds from the spaces that we delivered on time throughout 2019 to offset some of those headwinds that we talked about, some of the January move-outs and other tenant non-renewals that we're expecting later in the year. So again, we're encouraged by the progress on backfills and many of the non-renewals that Shane had already highlighted.

In terms of detractors, we tried to quantify the big pieces, again, quantifying the January move-out impact of 100 basis points. Bad debt, tried to be really crisp with the fact that our experience has run more than the historical 50 basis points of revenue assumption, and we saw that in Q4 of '19, for example. So, we're dealing with a lot of things. Part of it is the tough comp, which is great for 2019, right? 2.7% is as high as we've been in probably three years. And even with that though, we look at bad debt and reset saying 65 basis points when you include the impact of bankruptcies, which is harder to see because it doesn't always run through the bad debt number, right? It's the lack of rental income and recoveries. So our transparency effort here is to share that it's been 65 basis points. So we're starting the year there, along with our expectations for Pier 1, which is another 45 basis points. And that assumption assumes that we get no more rent after today. So, there could be some benefit in that number as well.

Christy McElroy -- Citi -- Analyst

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Hi, thanks. Following up on Circle East. Shane, you mentioned that some of the increase in the costs there were due to higher tenant build-out costs. Some were market driven, some driven by configuration. Are you seeing any of those cost pressures elsewhere across the portfolio, either in redevelopment or in the operating portfolio?

Shane C. Garrison -- President and Chief Operating Officer

I think even at the same scope, if nothing else changed, we continue to see construction cost pressure in general. As it relates to ground up, we just went through GMP on the multifamily at Carillon. We obviously just put a bow on Loudoun before we went vertical on the garages. And the one inordinate cost we have seen lately has been concrete. We are up, I don't know, somewhere around 10% in concrete alone. That being said, obviously, before you go to GMP, you have a much higher contingency to cover items like that. So at Loudoun, as an example, in spite of increases, we didn't move the range because at GMP, we tightened it and did some value engineering and we're off and running. So, I think it's situational, Todd, but even if you ran in place on scope, yes, we continue to see inordinate construction costs across the portfolio, especially as it relates to rent growth.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Right. And then thinking about Carillon and Loudoun, how would you compare the risk profile of those projects relative to Circle East?

Shane C. Garrison -- President and Chief Operating Officer

Sure. Look, Circle East is a very unique asset, for those of us -- or those on the phone that have seen it, right, it's more urban. You load from the bottom. You also have a parking deck adjacent off Shealy behind the asset that can be utilized. And in the middle of it, you had an asset where we started below grade and are now 13 stories above grade.

So long story short, a lot of construction disruption through the period. And it was tougher, I think for tenants, given the feedback, to get their arms around the parking configuration, the interaction with the mall behind us as well as loading and just the corridor itself. And now that we have most of that construction done, the apartments are in pre-leasing, it has somewhat stabilized, again the landscaping starts shortly. I think those are just much easier conversations because the configuration is much more tangible.

If you look at Loudoun, the lion's share of that, 378 multifamily units and I'll call it 70,000 feet of commercial, next to a center that is almost 100% leased and arguably the best center in Loudoun County, 450,000 feet, give or take, and everything going on out there, that is just a markedly different scenario where you have a black hole of an asset that is just pulling for a significant radius. And now we are going to turn on multifamily in a county that has a moratorium on multifamily. So, we have the benefit of a phenomenal retail amenity and barriers to entry there and we are very excited to turn on that multifamily there. So night and day, again, Towson to Loudoun, both from a configuration standpoint and adjacency standpoint and really what the rental stream is coming from, from an asset class.

Carillon, ironically, is the farthest behind from a construction standpoint, is also our largest project, but continues to really outrun our expectations around pre-leasing and even market rents. And admittedly, the hospital is -- a hospital as an anchor, a regional Level 2 trauma center, in this case, is not a known anchor, right. That is a unique aspect or amenity to this site in addition to the transit orientation of the site as well as 4.95 [Phonetic] adjacency has really come together to drive a lot of incremental momentum here. I talked about in my prepared remarks that we have 80% now the MOB under LOI, and we're probably close to 100% based on velocity this quarter. And we look to hopefully get that through lease in the next quarter, but certainly in two [Phonetic]. So we are staring at the prospect of being highly to fully leased before we even start foundations on the medical office building. The rents are above where we thought they would be from a pro forma standpoint.

And then turning to retail, again, we have not started. We are still in demo there on the site. But almost 40% pre-leased to a first and second floor AMC, we are now staring at almost 50%, assuming we get this lease done for 12,000 feet for a restaurant that I think will completely change the perception of the asset as well as expand the draw. And hopefully, if we get that done, we will be -- we will have several other deals that we anticipate that come with that execution. So we are through GM -- on the cost side, we're through GMP. At multifamily, we are now just trying to finish up the GMP process on the MOB and retail. So, I expect costs to be up minimally. Again, we'll tighten up some of the contingency costs there in that process and a little additional VE, but all things considered, Carillon continues to be above our expectations from a velocity and rent standpoint from here.

So, all different projects, all in different points and all work differently, as we've talked about before, but there's definitely no correlation or read-through because of the differences in multifamily MOB as it relates to Towson. Just completely different projects.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. Thank you.

Linda Tsai -- Jefferies -- Analyst

Hi. On the third quarter call, you discussed $150 million for development spend in 2020. Is that number still good? And how will you fund it?

Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Thanks, Linda. The number is still good. I would say it's looking like $150 million, or even a little above that. We mentioned in our prepared remarks, and I think you can also glean from the OFFO bridge in last night's release, that we do expect that we may be a net seller this year. So to what extent is not yet clear, as right now we're a net acquirer with what's closed so far. I think we could be a net seller, I would say, up to maybe $50 million or so. So that would be a portion of the funding. And then Shane mentioned, again, that we're working with this potential partner, opportunity zone partner, which would also provide a source of funds.

Beyond that, I'm very happy that the revolver is largely undrawn at year-end. It is our most affordable form of debt today. It's incurring interest at about 2.7%, and we've got capacity up to $850 million there. So we're very well positioned in terms of funding for this year.

Linda Tsai -- Jefferies -- Analyst

Thanks. And then I realize your leverage is healthy now at 5.4 times, but do you have plans to delever further over the course of the year given some modest NOI coming online from redevs?

Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer

We've talked at length about a ceiling of 6.0 times, and I do still expect that we will not pierce that 6.0 times ceiling. In terms of going lower during the year, I wouldn't expect that at this point. This year and next year will be the -- call it, $150-million-plus years with investment in redevelopment. And while we expect to start to see some of the NOI coming on next year toward the back half of the year or late in the year, it's really in the years beyond that that changes to leverage further -- further improvements to leverage from where we sit today would be more on the table at that point.

Linda Tsai -- Jefferies -- Analyst

Thanks.

Operator

Thank you. Our next question comes from the line of Vince Tibone with Green Street Advisors. Please proceed with your question.

Vince Tibone -- Green Street Advisors -- Analyst

Hey, good morning. Are you able to share the cap rate on the Fullerton Metrocenter acquisition? And also just broader discuss the rationale for that investment given where your cost of capital is today.

Shane C. Garrison -- President and Chief Operating Officer

Hi Vince, this is Shane. Thanks for the question. So Fullerton, obviously non-core asset, California, Orange County, that had a underlying ground lease or a portion at least that had a shorter term. So when we looked at the asset as far as not only liquidity, but value in place with that relatively short underlying ground lease versus taking it out at $55 million and lifting some of the restrictions as well from a leasing standpoint, we think we traded at closing somewhere around $7 million to $10 million in value. And then this year, we intend to increase some of the signage, which will also be leasing driven and do a few other things and intend to sell the asset probably in '21 or '22.

So the cap rate, not very compelling. I think it's somewhere around 3% when you think about just straight cap rate. But overall, with the liquidity profile as well as the accretion given the encumbrance or removal of, we feel it was very compelling.

Vince Tibone -- Green Street Advisors -- Analyst

Got it. Okay. That makes more sense. I just wanted to get a little more clarity on the ground lease portion and how all the components work there. And is there any potential to do -- get entitlements there to help the potential sale value for the buyer? Or is this really more of a straight retail play?

Shane C. Garrison -- President and Chief Operating Officer

I don't think, given the -- it's a good question. I don't think, given the non-core nature of the asset and how long the -- in this case, multifamily entitlements would take, are compelling to us. But we do think it provides for additional incremental value given its straight fee for the next buyer. So we'll see how much additional value that concept will create on sale.

Vince Tibone -- Green Street Advisors -- Analyst

Got it. Makes sense. And then maybe just one quick one for Julie. Just what are you budgeting from a free cash flow perspective, after dividend, before redevelopment spend? I'm just trying to get a sense of how much of this external growth can be funded through internal cash flow.

Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Good question, Vince. For 2020, I'm going to look at our TI and routine, our maintenance capex expectations. In 2019, those were around $80 million. It's not accounting for some of the pre-development costs that we share on the page in the supplemental. And I would expect similar amounts for 2020. So free cash flow -- or AFFO payout ratio was just not quite 104% in 2019. I think we could end 2020 in a similar spot. So not a meaningful contributor to redevelopment in 2020.

Vince Tibone -- Green Street Advisors -- Analyst

Got it. All right. Thank you.

Operator

Thank you. Our next question comes from the line of Floris van Dijkum with Compass Point. Please proceed with your question.

Floris van Dijkum -- Compass Point -- Analyst

Great. Thanks for taking my question, guys, and gals, I should say. Sorry, Julie.

Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer

No problem.

Floris van Dijkum -- Compass Point -- Analyst

The question I had was, again, you talked about it a little bit earlier about $300 million of unfunded cost for your three big projects over the next, call it, 18 months. But if I look a little bit beyond and I look at the additional entitlements, both particularly at Carillon and at Loudoun, how much more capital do you think you will deploy at those assets?

Shane C. Garrison -- President and Chief Operating Officer

Floris, I'll start this off. I think that we'll continue on the entitlement front, but it depends. There's a few things moving. One, obviously, we want credit as we get closer to stabilization on these assets. That is key. Two, as it relates to further spend, Carillon, we've talked about in the prepared remarks and otherwise, that we went out in late last year for an opportunity zone partner, which again can be for up to 50% of the required equity for Phases one and two. So to the extent that's a successful endeavor, that would move us farther and faster, given the leasing velocity at Carillon on Phase two, and would certainly provide some cushion as we think about Loudoun or anything else in the pipeline.

So one, we need credit, and two, we need some more transparency and closure around current efforts on -- to solidify the capital stack on Carillon.

Steven P. Grimes -- Chief Executive Officer, Director

Floris, I'd like to answer that question as well. This is Steve. From a strategic perspective, I just want to reiterate a lot of what Shane has said here already. The big three that we have embarked upon at this point in time have been purposeful. They've been assets that are within our portfolio that have very purposeful expansion opportunities to them. In the case of Towson, he talked about that deal ad nauseam. It was a great play to sell the air rights to AvalonBay for us to get the retail shell back to us, and obviously do that on an accretive basis.

Loudoun, as he had mentioned, very purposeful asset, adjacent to virtually 100% of occupied asset, and it's got the moratorium on the multifamily, of which we have all the rights there. And then in the case of Carillon, very purposeful with the hospital. And what that can bring in terms of more mixed-use components, whether it be MOB, hospitality, as well as the resi and the retail, again, very purposeful. But from a strategic perspective, as we begin to deliver this space and we're not seeing the credit in the stock price or the multiple, we of course will have to take a look and see whether these are accretive from a long-term value perspective to keep within our portfolio.

So I would encourage everybody to understand that we are very purposeful here. 2021 -- at the end of 2021 is the beginning of a measurement period for us on whether we are able to deliver on these projects and deliver so accretively, to the extent that we are, full steam ahead. To the extent that we're not, we will rethink. So I want to make sure everybody is very clear on that from an all-time strategic perspective.

Floris van Dijkum -- Compass Point -- Analyst

That's really helpful, Steve. And maybe can you give us some of your thinking in terms of the potential 50% partner of -- at Carillon in terms of an opportunity zone investor? How would that be structured? And would that include them partnering on all the retail space? Or is that just for the non-retail? Or how are you thinking about that?

Shane C. Garrison -- President and Chief Operating Officer

Floris, outside of a ton of specificity here, we're still negotiating and in diligence and document formation. But the concept is basically 50% of the required equity are up to and it's a full mixing bowl. So they would participate in every asset class. Obviously, the retail is a bit of a tougher return in Phase one because you're doing the theater and some other amenitized retail to really drive value throughout future phases. And we think it's fair that if we do bring in a new partner, they'd participate across the stack and across the risk profile.

So it will be up to 50% across all asset classes in both Phases one and two.

Floris van Dijkum -- Compass Point -- Analyst

Great. Thanks, Shane.

Operator

Thank you. Our next question comes from the line of Shivani Sood with Deutsche Bank. Please proceed with your question.

Shivani Sood -- Deutsche Bank -- Analyst

Good morning. Appreciate that the big three projects are really the focus for now. The last quarter, you guys mentioned the decision to hold off at Main Street Promenade and Downtown Crown just due to the building of non-retail-specific cloud. So curious if the additional fallout in recent weeks, if it's changed how you're thinking about the scale or scope of those projects?

Shane C. Garrison -- President and Chief Operating Officer

Hi, good morning. Nothing's really changed with those projects in regard to scale, or use, in this case. I think that given the commentary this morning and further spend on the ongoing remerchandising efforts in the stabilized portfolio, they remain sort of at the ready, and we'll continue to monitor that as we measure our progress against the big three.

Shivani Sood -- Deutsche Bank -- Analyst

Got it. And then, Julie, you had mentioned the move-out of a significant fitness tenant in the quarter. Can you give us some more color there, just given it's been an area of strength recently in terms of fitness?

Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer

I'm sorry, the tenant move-outs that happened in January in terms of tenant names?

Shivani Sood -- Deutsche Bank -- Analyst

No, no, no. Just the situation involving the fitness tenant, whether it was specific to a specific brand maybe or the location? Should we expect anything more from there?

Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer

It's a tenant where we have one other in the portfolio, very, very different locations. And I think it was specific to the location. And I know Shane's got a solid lead on backfill there.

Shivani Sood -- Deutsche Bank -- Analyst

Okay. Thanks so much.

Operator

Thank you. Our next question comes from the line of Michael Mueller with JP Morgan. Please proceed with your question.

Michael Mueller -- JP Morgan -- Analyst

Hi. Julie, I was wondering -- can you give us a sense as to when you expect the, I guess, occupancy is 95.2%. The leased rate is 96.2%. When do you see those rates troughing in 2020? And where do you see ending the year?

Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer

I think from an average perspective for the year and not looking at where we finish 2019, but average for 2020, we should be slightly up over 2019 from a same-store perspective. I think you'd see probably the sharpest drop in January, although we need to let Pier 1 play out a little more fully to see if there's an impact there. But not -- I don't expect a lot of volatility throughout the year. I think the increase comes back half or maybe fourth quarter.

Michael Mueller -- JP Morgan -- Analyst

Okay. And how significant is the 1Q drop?

Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer

I'm not going to guide to specific occupancy. The eight tenants that I mentioned in terms of January alone, that's about 110,000 square feet. So call it 50 basis points, 60 basis points in January alone just from those tenants. And we expect a few others in the first quarter.

Shane C. Garrison -- President and Chief Operating Officer

But I think -- Mike, while we have you, I would just add, again, given the pre-leasing efforts, we might even have, by the end of March, maybe 100 bp drop on occupancy, but I would expect about half that correlation to the leased rate given the proactive leasing progress.

Michael Mueller -- JP Morgan -- Analyst

Got it. Okay. That's helpful. That was it. Thank you.

Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Grimes for any final comments.

Steven P. Grimes -- Chief Executive Officer, Director

Great. Well, thank you, everybody, and thanks for your time today. I know, again, as usual, very busy quarter and lots of information that's out there, especially year-end. So I would encourage all of you, as usual, to review the transcript. We will see many of you over the coming weeks at a couple of conferences. And in the meantime, if you have any questions for any of us, please feel free to reach out. Thanks, and have a great day.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Michael Gaiden -- Vice President of Investor Relations

Steven P. Grimes -- Chief Executive Officer, Director

Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer

Shane C. Garrison -- President and Chief Operating Officer

Christy McElroy -- Citi -- Analyst

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Linda Tsai -- Jefferies -- Analyst

Vince Tibone -- Green Street Advisors -- Analyst

Floris van Dijkum -- Compass Point -- Analyst

Shivani Sood -- Deutsche Bank -- Analyst

Michael Mueller -- JP Morgan -- Analyst

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