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Retail Properties of America Inc (NYSE:RPAI)Q4 2018 Earnings Conference CallFeb. 13, 2019, 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 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Mike Gaiden, Vice President, 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 2018 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 2019 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 13th, 2019 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, our earnings release and our 2018 Investor Day presentation, 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'll 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
Thanks, Mike. We would like to officially welcome you to the team and your first of many earnings calls, you're doing a great job. I would like to begin my prepared remarks by highlighting some of the many accomplishments reached by the RPAI team during 2018. We completed our multi-year portfolio transformation during the second quarter. Our repositioning, which more than half of our property count resulted in the high quality retail portfolio we own today.
Our 105 asset operating portfolio is comprised of approximately 80% neighborhood community and lifestyle mixed-use centers and contains a significant amount of embedded growth opportunities. We have over 425,000 square feet of commercial GLA and nearly 1,200 multi-family rental units contained in our announced expansions and redevelopments.
All of these projects are located within our top five markets, representing approximately 65% of our ABR. Most significantly, we launched RPAI 2.0, which we detailed at our investor Event in September. We will continue to redefine our portfolio and enhance shareholder value with self-sourced opportunities to development growth within our existing base of assets and focus leasing efforts across the operating portfolio.
Our efforts over the past five years will enable us to keep pace with consumer preferences during a time of rapid change in retail. And with our owned high-quality portfolio and our embedded expansion and redevelopment opportunities coupled with our solid balance sheet, we now hold a unique position within the sector of having virtually all of our growth opportunities organic to our existing portfolio.
2018 was a pivotal year for us strategically, and we also proved successful operationally, bolstered by the strength of our focused and improved footprint, our leasing momentum continue to accelerate which Shane will detail for you shortly. We completed 512 leases in 2018 for a total of 3.4 million square feet, at an annual base rent of $20.58 a foot. Our execution strength helped us to exceed our 2018 earnings guidance, whereby we ended the year operating FFO per diluted share of $1.03, being the high-end of our full year guidance range of $1 to $1.02 by $0.01. Full year same-store NOI came in at 2.2% in line with mid-point of our 2% to 2.5% same-store NOI growth assumption.
Also dovetailing with our guidance assumptions, we completed $201 million of dispositions and $100 million of acquisition, which included $25 million for One Loudoun Uptown and $75 million of share repurchases at an average price of $11.80 per share. By all means 2018 was a very successful year for RPAI.
From a tenant risk perspective, we continue to benefit from zero exposure to Sears and Kmart bankruptcies and hold no risk from potential further distress at JC Penney. We also hold no exposure to Shopko or Charlotte Russe. We witnessed a rapid resolution of the matters from bankruptcy which will result in previously unanticipated termination fee income, a geographic shift of those dollars out of expected same-store NOI, but contributing to our increased 2019 outlook for earnings.
We continued to invest in our active expansion and redevelopment projects. During the fourth quarter, we stabilized the Reisterstown redevelopment and brought that property back into the operating portfolio. We also kicked-off the Plaza del Lago multi-family rental unit project just one year after acquiring the assets. During 2019, we anticipate achieving additional milestones at other project and we look forward to providing updates along the way.
I would encourage all of you to visit pages 10 through 14 of our supplemental to learn about our significant organic growth opportunities through expansions and redevelopments. We continued to enhance the strength of our balance sheet by executing on several key capital markets initiatives throughout the year including upsizing our revolver and extending our unsecured facility with an advantageous rate structure. Our efforts provide us with the resources needed to pursue our expansion and development goals with two free hands as Julie will detail.
Because of our modest 5.5 times leverage and sound liquidity position, we hold no need for additional external sources of capital to finance our development plans. However, in an effort to improve duration and maintain ample access to liquidity, we plan to issue $200 million to $300 million of unsecured debt in 2019, as interest rates and spreads continue to be compelling.
We continue to improve our strategic positioning through selective dispositions. We sold another non-core property in December with the disposition of Orange Plaza for $8.5 million, exiting the state of Connecticut. We plan to remain opportunistic on acquisition and disposition activity in 2019, but are not guiding to any specific transaction activity. We expect a widening dispersion and retailer results in 2019. Merchants with differentiated assortments, compelling customer experiences and well-tuned technology offerings that amplify a combined online and bricks-and-mortar presence will continue to outperform. We also expect mounting challenges for retailers who have not found the best way to incorporate e-commerce into their physical stores. Consumer preferences continue to mark through the connectives brought by the ongoing growth of digital technology.
2019 looks to be a year of accelerating transition for the retail industry. Those retailers that continue to adapt to the changing expectations of consumers will thrive. Other merchants that failed to make this a mandate will see growing pressures on their results. Our owned portfolio and targeted expansion and redevelopment projects centered on live, work, play, address the needs of customers and retailers in this increasingly experiential driven consumer landscape.
The recent macroeconomic backdrop is further exacerbated the challenges facing some of these retailers. After reaching a new cyclical high in October, consumer confidence posted its largest drop since July 2015 during December, on the heels of the Federal Government shutdown. We have seen signs of softening of sentiment in the reports discussing the acceleration of retail promotional cadence post holidays and into the New Year. Yet the jobs market remains robust with more than 300,000 non-farm payroll adds in January. Amid these various puts and takes, our real estate first strategy and industry leading concentration in Super Zips and lifestyle mixed-use positions us well.
Many macro-related sentiment factors brought substantial pressure to the stock market in December. Confident in both our near and long-term outlook, we took advantage of that pressure and accelerated our share repurchase activity into the holidays and bought back shares at $11.03 on average in December. Share repurchase has continued to be a tool in our toolbox, but please be reminded that RPAI 2.0 has additional funding needs for long-term growth initiatives and share repurchases, if completed will be done on a leveraged neutral basis.
With that, I will turn the call over to Julie, who will discuss our financial results and our outlook for 2019, Julie?
Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer
Thank you, Steve. This morning I will discuss our fourth quarter and full year financial results, as well as our updated outlook for 2019. I will also detail some of our recent and anticipated capital markets activities. Operating FFO for the fourth quarter was $0.26 per diluted share of $0.01 compared to the elimination of preferred stock dividends, due to the redemption of our Series A preferred stock in the fourth quarter of 2017 and a reduced share count, which more than offset a $0.02 decline from capital recycling.
Full year 2018 operating FFO per diluted share measure to $1.03, down $0.03 from 2017 due to a variety of factors. Gains of $0.06 from a reduced share count, $0.04 from the elimination of preferred dividends, $0.03 from same-store NOI growth, $0.02 from lower interest expense and $0.01 from the low market lease amortization were more than offset by a $0.19 reduction from capital recycling.
Same-store NOI for the quarter increased 2.5% over the same period in 2017, driven primarily by base rent growth of 160 basis points and a decrease in property operating expenses net of recoveries of approximately 110 basis points, largely stemming from our property-level management expense reduction efforts, partially offset by modest declines in percentage and specialty rent.
The growth in base rent largely resulted from contractual rent increases and releasing spreads. Full year 2018's same-store NOI increased 2.2%, driven primarily by base rent growth of 140 basis points and a decrease in property operating expenses net of recoveries of 90 basis points. Our full year same-store NOI growth achieved the midpoint of our previously communicated same-store NOI growth assumption of 2% to 2.5%.
As Steve highlighted, we remained active on our share repurchase program in the fourth quarter, adding to our third quarter volume and repurchased nearly 3.8 million shares at a weighted average price of $11.57 per share for $43.8 million. For the full year, we repurchased more than 6.3 million shares at an average price of $11.80 per share for a total of $75 million, which leaves $189 million still available under the current Board authorization.
Also during the quarter, we continued to proactively address the right side of the balance sheet by amending our $200 million term loan to reduce our credit spread by 50 basis points. As we previously detailed on our third quarter call, the impact of two interest rate swaps that we locked into in September in order to fix our interest expense through the November 2023 term loan maturity more than offset the interest rate savings from this 50 basis point credit spread reduction. Producing a net $0.01 drag on operating FFO per share in 2019.
At the end of the quarter, our weighted average interest rate measured 3.98%, up 16 basis points from the third quarter, driven by the change in interest rate on the term loan I just mentioned and a 28 basis point increase in the cost of our LIBOR-based revolver. Our net debt to adjusted EBITDAre now stands at 5.5 times, availability under our revolver measures $577 million and we hold no debt maturities in either 2019 or 2020. All of which position our investment grade balance sheet very well.
Turning to guidance. As we detailed in our release last night, we now expect 2019 operating FFO per diluted share of $1.03 to $1.07, compared to our prior projections of $1.01 to $1.05 that we outlined at our September Investor Day. This $0.02 increase in full year guidance is primarily attributed to our third and fourth quarter share repurchase activity, and an increase in expected termination fees, resulting from the Mattress Firm bankruptcy, partially offset by a lower same-store NOI growth assumption. Our earnings guidance now assumes 2019 same-store NOI growth of 1.75% to 2.75%. Our 100 basis point revision at the midpoint is due to the resolution of the Mattress Firm bankruptcy, which converts certain amounts from expected same-store NOI to expected incremental termination fees, representing roughly 25 basis points.
The non-renewal of one anchor tenant representing another 15 basis points and incremental occupancy and rent commencement adjustments make up the balance. Mirroring 2018, we expect the majority of our 2019 same-store NOI growth to occur in the second half of the year, based on large part on the pattern of tenant bankruptcies in 2018 and our expectations around backfilling those and other vacant spaces.
In terms of the key drivers of our 2019 same-store NOI growth, base rent is expected to be the primary driver due to strong contractual rent increases and releasing spreads. Whereas property operating expense net of recoveries contributed meaningfully to our same-store NOI growth in 2018 to the tune of 90 basis points of growth.
We are expecting our same-store NOI growth in 2019 to be almost entirely base rent growth driven. In last night's release, we provided a reconciliation from our reported 2018 operating FFO of $1.03 per diluted share to our expected guidance range for 2019, which is $1.05 at the midpoint. The primary drivers of this $0.02 increase are same-store NOI growth and increased lease termination fee income, as well as the impact for 2018 share repurchase activity, partially muted by expected interest expense and the impact from non-cash items.
Being mindful of the $273 million drawn on our revolver at year end, as well as redevelopment and expansion investment levels planned for 2019, we currently anticipate taking advantage of the attractive interest rate environment with an issuance of $200 million to $300 million of unsecured debt subject to market conditions, targeting mid-year funding. We expect proceeds from this issuance to be used to reduce borrowings on our $850 million revolver, which will improve duration and enhance access to liquidity. And we expect to maintain leverage levels in the 5.5 times to 6 times area.
And finally, many in the industry are discussing the impact on 2019 earnings of the adoption of ASC 842, the new lease accounting guidance. As we outlined previously, we expect the adoption of this new lease accounting standard pertaining to the capitalization of certain leasing costs to bring no impact to our operating FFO. Under our long standing policy, we capitalized only internal direct leasing costs and external lease commissions that are incremental to a signed lease. The new guidance continues to permit capitalization of these types of costs and therefore does not affect us.
And now, I will turn the call over to Shane.
Shane Garrison -- President & Chief Operating Officer
Thank you, Julie. As we have discussed previously, the divide between great retail-driven real estate and the rest is increasing as retailers with poor balance sheets and limited imagination are now disappearing at a much increased pace, reducing viable retail assets in the US. And while it will continue to be bumpy for a while, the best assets will only get better, enabling real estate investors in both hard assets and equities to better choose and invest where the value is more tangible as the current fog over retail clears.
On that note, we continue to benefit from a great platform and a high-quality portfolio, driven by our significant repositioning efforts in prior years. During the fourth quarter, we delivered record leasing volumes as a percentage of GLA, tapping our previous record results from the third quarter. In Q4, we completed nearly 1.1 million square feet of new and renewal leases, representing more than 5% of our GLA. In fact, we have realized sequential increases in both total number of leases and GLA sign in each of the last three quarters.
For the full year, we leased 17% of our total portfolio GLA, the highest since our 2012 listing, including 756,000 square feet of new leases. We continue to focus on maximizing our long-term stability and merchandising while driving cash flows through a higher annual contractual bump profile and an increasingly diverse rent roll.
In 2018, we achieved 186 basis points of contractual annual rent growth on new leases. Once again demonstrating this commitment to a thoughtful approach to asset management and leasing. Specific to overall lease spreads, leases executed during the fourth quarter blended to a 6.3% spread in line with the 5% to 6% realized in the prior three quarters with new leases being executed at a significant spread of 34.9%, driven by several anchor leases including two former Toys "R" Us locations at an average spread of approximately 80%. The 3.4 million square feet of total leasing in 2018 executed at $20.58 per square foot, once again demonstrates the pricing power of this portfolio and the abilities of our leasing team.
As a result of this strong execution, occupancy increased significantly during the fourth quarter, up 170 basis points to 93.8%, driven by an anchor occupancy gains of 240 basis points to 95.8%. As we highlighted on last quarter's call, noting the significant spread between lease rate and occupancy, several tenants were expected to take occupancy in the fourth quarter and we completed several significant deliveries and store openings in Q4, including the Container Store, Dick's Sporting Goods, multiple Total Wine & More locations, Ulta and others. In addition to the anchor occupancy gains, small shop occupancy also increased during the quarter and we ended the year up 40 basis points to 89.8%.
On a spread-to-lease basis, our momentum continued as we ended the quarter at 94.8% lease, up 80 basis points from 94% at the end of the third quarter, consistent with our prior goal for 95% at year-end. A 130 basis point improvement sequentially and anchor percent leased to 97% at year-end, reflecting the signing of two toys backfills drove these gains.
Small shop percent leased decreased a normal 20 basis points in the quarter to 90.4%, driven by the 40 basis point impact from the Mattress Firm bankruptcy. While we are on the Mattress Firm topic, this tenant has now dropped out of the Top 20 tenants summary in our supplemental information package.
Previously Mattress Firm leased 24 locations within our portfolio as of year-end, we now have 17 stores remaining in the portfolio after one naturally expired and six others representing 28,000 square feet or or approximately 15 basis points of GLA rejected as part of the bankruptcy proceedings. We expect termination fee income from those six rejected leases to more than offset the lost NOI from these stores in 2019. However, as a reminder, we do not include termination fees in same-store NOI, so that was a same-store impact, but the overall earnings impact is slightly positive.
As it relates to our expectations for same-store and leasing trends for 2019, we have seen several smaller bankruptcies this year, including Shopko Gymboree, things remembered beauty brands and Charlotte Russe. And while we have been relatively unaffected to-date, we remain cautious on our watch list and same-store NOI growth assumption. In addition to our 50 basis points of bad debt embedded in that assumption, we have assumed that a small number of our watch list tenants do not renew certain locations this year based on our credit surveillance and early discussion around renewals and/or remerchandising and mark-to-market opportunities on those spaces. This proactive stance continues to be important as it relates to future cash flows and asset relevancy and we are already in lease at multiple locations.
We will provide updates on this and other remerchandising activity as we progress on these and other initiatives in 2019. While we hold a pragmatic view on the outlook for retail overall and expect more challenges for certain merchants, we also hold confidence in the strength of our portfolio and ability of our team to address any tenant distressed scenarios, as we have done successfully in the last several years.
Turning to an important part of our future here at RPAI. Our redevelopment and expansions continue to progress with several notable project set for construction this year. First, as noted in our supplemental, Reisterstown Road Plaza stabilized during the quarter, so it is back in the operating portfolio as of year-end, it was completed on-time and on-budget and we expect it will generate a return of 10.5% to 11%.
With Reisterstown now complete, we continue to build our development resume and have commenced our redevelopment project at Plaza del Lago here in Chicago, where in we have demolished the interior of the apartments and we'll expand from 15 to 18 units. While not a large expenditure at $900,000 to $1 million. The expected value creation is compelling and demonstrates robust multi-family returns at approximately 8% to 11%.
Next, our Circle East project continues to progress in Towson, Maryland, where our team's efforts have focused on the former Hutzler's building and on the adjacent block Avalon Bay is now eight stories up on the main building, composing the multi-family residential portion of the project. The street level retail at Avalon Bay will deliver back to us, continues to be on track for late this year or early 2020 as planned.
We have several dynamic retailers, we are in various stages of discussion with and expect to provide leasing updates and merchandising in the back half of the year as this complex project continues toward the lease-up phase. In Loudoun County, we continue to be extremely focused on all aspects of this increasingly important asset, playing defense and offence with an extended investment and a hold period in mind. During the quarter, we closed on our previously announced $25 million acquisition of One Loudoun Uptown, which lies directly adjacent to One Loudoun Downtown and is comprised of approximately 58 acres and is currently entitled for 2.3 million square feet of commercial GLA.
This acquisition allows us to be patient while planning for a holistic approach to this quickly growing, high visibility asset, setting up better integration with One Loudoun Downtown, as we are on schedule to begin construction on Pads G & H in the coming months with our multi-family partner Cutler.
Lastly, regarding Carillon, the hospital is well under way and continues to be on track for 2021 opening, directly adjacent on phase I of our project, we're finalizing design with our multi-family partner and expect to execute our medical office joint venture in Q1 of this year. We continue to work toward a construction start of Q2 or Q3 of this year. Given our continued conviction around these projects and our execution to-date on both finished projects and current construction, we expect a total construction spend of approximately $80 million to $90 million in 2019.
With that, I will turn the call back over to Steve.
Steven P. Grimes -- Chief Executive Officer, Director
Thank you, Shane and Julie for those updates. I am deeply and genuinely proud of the results delivered by the RPAI team in 2018. And the team and I are energized and focused on building on last year's momentum into the year ahead.
With that, I will turn the call back to the operator for questions.
Questions and Answers:
Operator
Thank you. (Operator Instructions) Our first question comes from the line of Christy McElroy with Citi. Please proceed with your question.
Christy McElroy -- Citigroup -- Analyst
Hi, good morning everyone. Julie, just following-up on the 100 basis point same-store NOI revision. You had talked about the sort of the remaining amount, which -- it sounds like it was about 60 basis points was related to occupancy and rent commencement adjustments. Can you just provide some more color there? And then, sorry if I missed this. I think you had previously assumed a 100 basis points to 200 basis points of upside in occupancy in your range what is that assumption now?
Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer
Sure. Thanks, Christy, and good morning. As you mentioned, the occupancy and the rent commencement timing is the balance, I'll just reiterate just for the purpose of the call, the Mattress Firm bankruptcy it's the 25 basis points of the 100 and really a complete wash, slightly accretive actually from an earnings perspective.
Adding to that we had not expected the anchor to not renew, that was another 15 basis points. I'll let Shane, provide some color on the balance there. But before I turn it over to him, I will mention the Investor Day bridge where we had occupancy of 100 basis points to 200 basis points as components of the same-store NOI growth assumption for 2019, that is looking more like 50 basis points to 90 basis points, so call it 80 basis points down. And the balance of the 100 basis points within there would go into that other category that we had primarily recoveries based.
Shane Garrison -- President & Chief Operating Officer
Okay. Thanks, Julie. Christy just additional color on some of the new assumptions since Investor Day. So on that remaining GAAP we had -- I guess, some color on the anchor itself, it's a 20 year-old lease, I think there's a very compelling mark-to-market, there it's almost 70,000 square feet, it's in core asset and high barrier, so we have activity on it now. I think the mark-to-market there could be as high as a 100%, so hopefully in next quarter, we can give you additional color there. As it relates to the rest, it's not necessarily one tenant or one space on the watch list or necessarily one rent commencement. I think the good news here is that as we look at our expected activity, as it relates to renewal activity on the anchor side, we are 70% plus done with our expected renewal activity on anchors and we're 60% plus done with our renewal activity on the Inline side. So we have better transparency or a more finite picture as it relates to same-store on the renewal side.
And on the spec activity, I think worth 30% plus there. So I think some of the rent commencement as it's moved or as we moved it in the range has been around signed leases to the extent we knew we would have to push that out on the deliveries especially, as it relates to fourth quarter. And again, the rest of the activity is largely related to one or two, call it a restaurant here or there, performance spike we had two of those as an example which was also a recent bankruptcy. Gymboree, we have three of those remaining we assume those are going at some point as well. So I think appropriately cautious given the continued retail environment will be obviously continue to have a very proactive stance.
Christy McElroy -- Citigroup -- Analyst
Okay. And then just sort of following up on that in terms of cautiousness around the retail environment and Steve, you talked about sort of mounting challenges for certain retailers in 2019 being sort of a year where we're going to -- that's going to play out. Obviously, there was some buffer in there in that range that seems the range that you provided back in September, that's also within the lower-end. Can you just give us a sense for how much buffer is in there now? Baked into that guidance range, if we get another bankruptcy around of store closures could there be more risk in that range ?
Steven P. Grimes -- Chief Executive Officer, Director
Thanks, Christy, I think you might be getting back to more to our bad debt assumption which I'll turn it over to Julie here in a moment. But generally speaking, as we start every year, we start with that 50 basis points for the bad debt reserve. But fully expect that there could be fallout elsewhere in the P&L, if there is a bankruptcy. And as Shane pointed out there are some bankruptcies or risky tenants that we've kind of modelled in either to not renewing or potentially have to absorb some of that reserve that we have for bad debts.
Historically, we -- over the past couple of years, our bad debts have actually exceeded the amount that we had originally proposed at the onset of the year, not terribly so, but to some extent have exceeded the amount that we had reserved initially. So this year, when we talk about being cautious, we just want to make sure that we are covering what the more recent historical trend has been in terms of how our outlook on guidance.
Julie, can give you some specifics, I think. But that's generally the high level understanding of how we're approaching bad debts again this year.
Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer
Yeah, exactly what you said Steve. In terms of our approach consistent as prior year's 50 basis points of revenues, which is about 75 basis points of same-store NOI. So we've been comfortable with that, it's served us well over the years. And if I look back to 2018, the bad debt expense that is in that actual category isn't even 50 basis points over the last several years. But if we factor in Toys bankruptcy fallout and other P&L line items for example, it was about 100 basis points of same-store NOI, so slightly additional to the 75 basis points estimate, but certainly within the same-store guidance range. And the same would be true for 2017, when you go back another year and compare, it's about the same as '18.
Christy McElroy -- Citigroup -- Analyst
Okay. Thanks for the color.
Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer
Sure.
Steven P. Grimes -- Chief Executive Officer, Director
Thank you.
Operator
Thank you. Our next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.
Derek Charles Johnston -- Deutsche Bank -- Analyst
Good morning. Thanks. Can you give us a little more detail on the timing and economics of some of the redevelopment, for example, as Circle East. So when did that street level retail come offline? And with the target stabilization of fourth quarter 2020, is that in regards to the whole redevelopment or just the retail aspect? I'm trying to get a sense of the cadence of NOI and any pre-leased levels.
Shane Garrison -- President & Chief Operating Officer
Hi, Derek, good morning. It's Shane. I guess on a forward basis as it relates to Towson specifically and the stabilization date that is specific to the retail itself. I don't know when the last time you've seen the site, but the Hutzler's building, which was the old department store at multi-level in this case. We are largely complete with the exterior and continue some minor work on the interior as we continue stage IV, tenant storefronts and more specific tenant design inside. As it relates to Avalon Bay, we are nowhere near that or they are no where near that, as far as delivering the retail shell back to us, which again we anticipate sometime early next year.
Nevertheless as construction does continue to settle down and tenants can see and walk the site and understand the configuration of the dynamics. We have had much more meaningful conversations as it relates to certain spaces at certain lead tenants. So we still expect stabilization, call it in late '20 or '21. And again for Avalon Bay, I think they're continuing to update their occupancy projections as well.
Derek Charles Johnston -- Deutsche Bank -- Analyst
Okay, got it. Thank you.
Steven P. Grimes -- Chief Executive Officer, Director
Derek, I'm sorry, this is Steve. I was going to add to that one. Just generally speaking, Just to state what's out there. Things haven't changed too much in terms of our outlook for development. But as Shane alluded to in the opening remarks, about $80 million to $90 million in spend this year a little bit closer to $200 million next year, stabling out roughly around the $100 million per year mark. So I would encourage you and others to kind of look at the development spend that we have in our investor deck that actually shows the shape of the spend and then the shape of when the NOI is coming online, because I think that is your broader question. And I think we do provide a lot of detail that will be out there in published materials.
Derek Charles Johnston -- Deutsche Bank -- Analyst
Okay. And just quickly on the apartment portion. Remind me, did you guys retained any upside in the apartments or was the idea with the air rights sales to minimize any exposure to the non-retail aspect ?
Shane Garrison -- President & Chief Operating Officer
Yeah, I think that's exactly right when it goes back to where we were at as a company from an exposure to call it mixed-use development, that was our first project and obviously have a great partner that validates us and the site. So I think thought process there was to monetize their rights, which is what we did, we have no promoter or anything in that, Avalon Bay owns all of the vertical there. And then, as we've going on obviously and become more proficient as it relates to mixed-use, we've obviously stepped further into that with operating partners on the other projects including Loudoun and Carillon.
Derek Charles Johnston -- Deutsche Bank -- Analyst
Great. Understood. If I could just have one more fun one. So there's been some headlines recently about Toys "R" Us reemerging as true kids, I think there's 70 international stores planned. Just wondering, any thoughts with this with regard to the US, it seems that they will have some type of presence, has there been any conversations or any details?
Shane Garrison -- President & Chief Operating Officer
It's interesting, I think it's more of a pop-up kind of call it seasonal demand model, assuming it's viable than anything. I think you've seen certain retailers in the US, Walmart comes to mind specifically that has actually expanded the Toy area and the store with permanency, right, so they've captured those sales, I think it is tough for a call it retailer who is exclusively focused on Toys, especially on an annual basis tax would be profitable long-term. But we will see.
Steven P. Grimes -- Chief Executive Officer, Director
Derek, I would add to that, if anybody on this call know Shane, he knows, unless they're going to pay the rent they're not getting that space. So I don't anticipate that there's any sort of interest there for us to add insult to injury by moving on with that kind of a tenant. But I do want to go back to your comment on development again, and just reiterate some of the things that I think Shane might have had in his prepared remarks, but also what we've been touting outside of these four wells is that, the optionality that we have with the developments, I think is incredibly important for everybody to understand.
First of all with the Towson asset which is now our Circle East asset, we did actually move forward with the selling of the air rights there in the case of One Loudoun, it is a true expansion we want to stay in the game that is adjacent to a very compelling center that we want to stay very close to in terms of the commercial side of the business and don't necessarily want to give up any of the upside on the revenue side as well.
In the case of Carillon, Carillon is a big multi-phase development, it has all food Groups, we have such optionality in that asset in terms of our ability to either sell air rates or JV, that is going to be essentially a good source for us in terms of further funding development, further funding growth in the core portfolio. So it's a good thing to understand that we have all three food groups and development that we have at our fingertips.
Derek Charles Johnston -- Deutsche Bank -- Analyst
Thank you so much.
Operator
Thank you. Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.
Todd Michael Thomas -- KeyBanc Capital Markets -- Analyst
Hi, thanks, good morning. Just first question, sorry if I missed this. But last quarter you mentioned that there were $7.6 million of ABR that was signed not yet commenced. How much of that started paying rent in the quarter and where does that stand today?
Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer
Yeah, I mean what came out during the quarter was consistent with what our expectations were and I think you saw that in our same-store NOI print for Q4. In terms of the spread now 100 basis points, that's about $3.5 million and timing, just some color around timing there about half of it should come online in the first half of '19 and half of it after that, I guess the back half portion is some of that anchor space that was signed during the quarter. So a little mismatch between ABR and GLA when you're looking at that 100 basis point spread.
Todd Michael Thomas -- KeyBanc Capital Markets -- Analyst
Okay. And just following up on the same-store NOI revision. So you had a wide range to start and I understand the Mattress Firm and some of the moving pieces. But, what specifically turned out to be a surprise, relative to what you were previously forecasting? I guess what materialize that you weren't anticipating, when you first provided guidance?
Steven P. Grimes -- Chief Executive Officer, Director
Todd, I'm going to take that one quickly and I'll kick it over to Julie and/or Shane. Keep in mind we came up of Investor Day after the June quarter, we did not have clarity around Mattress Firm at that point in time that's one thing. Two things, obviously we were lucky enough to get the Toys "R" Us space back earlier than most, so we had some clarity there. But as the year progressed and as the threat of Sears ultimately came to fruition, I would say generally speaking bigger box, not necessarily can't be leased, but it's a longer duration in terms of time of rent commencement.
So Shane has pointed out a lot of that rent commencement initially was to come on in Q4. It's very easy to bridge a quarter if you miss a 12 month delivery and it's a 15 month delivery you could bridge the year. So I wouldn't say that it's any one big surprise other than that one lease that we expected to renew that didn't renew, which was about 15 basis points. But it was more of a cautionary tale on yeah, there is more big back out there we want to be cautious, we want to make sure we get the right tenant in there, the right spread, the right growth. And I think in that regard, more critically eye as the year progress is ultimately what prevailed in our same-store guidance downward from where it was at investor event.
Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer
I guess I'll take this opportunity just to remind you that -- remind all that the shape of same-store NOI in 2019 is expected to look very similar to how it looked in 2018, it's another year where we've got, I guess last year second half of '18 was comping often easier, second half of 2017 and we're going to be in the same spot this year. So second half of '19 comping-off '18. So Toys was out, several anchor tenancy took occupancy as we just mentioned during fourth quarter, not all, right at the beginning of fourth quarter of '18. So -- and again, we do anticipate much of our signed anchor ABR to come online in the back half of the year. So just wanted to reiterate that.
Shane Garrison -- President & Chief Operating Officer
I'll just throw in here. I think momentum is important, right. So we're coming off two quarters in a year of an all-time record, especially when you consider our markedly smaller denominator. And this quarter, the first quarter already feels very dynamic relative to first quarter last year from a volume perspective and a merchandising perspective. So, yes, it's a temporary setback, but it's retail today. And I think what we have modelled today reflects some conservatism, right, But I think appropriately so, given what we've seen. We have, I think filtered through a lot of the noise as it relates to some early move-outs and bad debt. And I think from my seat, I'm hopeful that the 50 basis points of debt at this point is more than enough given what we've realized so far.
Todd Michael Thomas -- KeyBanc Capital Markets -- Analyst
Okay, that's helpful. And then you list Michaels as a top 10 and that includes Aaron Brothers, which they're announced they're going to shut those 94 stores mid year. What's the breakout in your portfolio between Michaels Stores and Aaron Brothers. How many Aaron Brothers, do you have?
Shane Garrison -- President & Chief Operating Officer
We have one.
Todd Michael Thomas -- KeyBanc Capital Markets -- Analyst
Okay. And then lastly, Shane. So on the renewal leasing that's complete. I think you said 70% of anchors and 60% of inline is complete. Is that of the 2019 expirations or was that something else? And any indications overall on renewal leasing spreads over the next several quarters?
Shane Garrison -- President & Chief Operating Officer
That is 29 expirations exclusively. I don't or I haven't looked at what our renewal spreads look like so far this year. And to the extent obviously anchors have a six to nine months early option renewal notice right, so some of that renewal you've already seen in Q4, in the numbers.
Todd Michael Thomas -- KeyBanc Capital Markets -- Analyst
Got it. All right, thank you.
Operator
Thank you. Our next question comes from the line of Chris Lucas with Capital One Securities. Please proceed with your question.
Christopher Ronald Lucas -- Capital One Securities -- Analyst
Yeah, hi, good morning everybody. Just maybe following up on Todd's question there on the renewals. I guess, Shane on the retention rate, what are you seeing this year and how does that compare to sort of what you've had over the last couple of years?
Shane Garrison -- President & Chief Operating Officer
It's a great question a bit nuance so the top line Chris, we ran -- I'm going to say 80.5% or so last year, and we're just at 80% on a pro forma basis this year, all be it again with a large percentage of renewals complete for call it February. But the nuance here is that we ran high 80s on the anchor in '18 and we are low 80s again projected this year. So you're going to have some square footage impacts, less so from an income standpoint.
And then on the inline side, you have, I guess the upside a bit of the inverse right, we ran about 70% in '18 and we're projecting call it 75% plus this year based on what we know today. So top line the same, a little bit of geography, which is obviously causing some of the noise as well.
Christopher Ronald Lucas -- Capital One Securities -- Analyst
So, you guys have had a lot of success on backfilling and taking your occupancy up on the anchor side I guess, maybe if you could talk a little bit about what you're seeing on the shop space demand and what you're seeing as it relates to sort of what maybe your upside is to the occupancy levels there?
Steven P. Grimes -- Chief Executive Officer, Director
Yeah, I think we've talked about it in the past, we're still kind of hanging around 90% to 91% on the lease side, it's relatively stable, I don't think we see any difference as it relates to the typical tenancy, whether it's service, fitness or otherwise. I think the space that we continue to have opportunity as it relates to some occupancy and certainly call it a shadow watch list or the watch list is that call it 10,000 square foot space and we're very focused on that, because the 10,000 feet to 15,000 feet, I think is very interesting, if you have a watch list tenant that really wasn't doing much for the center. There's a lot of unique tenancy that you can drive there or split as it relates to call it beauty or call it organic grocery, we have several of those deals that we hope to announce this year.
So we're very focused I think on our forward cash flow, but also I think merchandising and long-term relevancy is also paramount and we try to balance those to the best we can.
Christopher Ronald Lucas -- Capital One Securities -- Analyst
And then last question for me. Just on the disposition side, you have the one asset that is under contract and then the land rights as well. Anything else that you're looking at potentially either being in the market now or you expect to get under contract at some point here in the first half of the year?
Shane Garrison -- President & Chief Operating Officer
Sure. We -- look, we always have something or try to have something in the market, because I think is our obligation, especially from an opportunistic standpoint to understand what assets priced at today, so we will continue to do that. I think we have obviously 20, 25 centers that are still non-strategic long-term. So as we think about balance sheet integrity, optionality and funding, our development pipeline as it continues to pick up and as we've spoken to you before, we'll continue to look to that bucket as a form of liquidity as needed.
Christopher Ronald Lucas -- Capital One Securities -- Analyst
Great, thank you. Appreciate it. That's all I have this morning.
Steven P. Grimes -- Chief Executive Officer, Director
Thanks, Chris.
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. Just following up on that last point. Can you provide a little bit more detail on the funding plan for the roughly $300 million in development spend over the next two years? And really how are you balancing debt issuances and levering-up some versus asset sales?
Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer
Yeah. And Vince, as Steve mentioned earlier we'll remind folks of the Investor Day presentation that has quite a lot of granular detail on the topic and there nothing materially has changed since then. We do expect to lever up, we mentioned, and continue to see 5 times to 6 times net debt to adjusted EBITDAre. I would say 5.5 times to 6 times at this point, not going above 6 times during the course of the investment ramp. We do have, as I mentioned $80 million to $90 million in 2019 and significant spend thereafter.
We are contemplating in the current year to take out part of the revolver, the revolver is at $273 million as of the end of '18. We're looking at $200 to $300 million deal, it could come in the form of term loans to be specific in terms of the funding methodology term loans from our bank group, which has continued to be very supportive of us and our story, or the public debt markets or the private placement markets, and there's advantages to each of those options. I would like to term out our maturities a bit, we're at 4.7 times -- 4.7 years and we'd like to extend that a bit. So some of those options are more beneficial there keeping in mind rate.
So we are still at historic lows with interest rates, spreads have come in a bit, just even in the last few weeks. So I would hope to have more in the short-term funding our next quarter's call for you.
Vince Tibone -- Green Street Advisors -- Analyst
That's really helpful. What kind of pricing difference you think you could get on a public market bond versus swap term loan. What's the difference in pricing you think between those two?
Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer
Well, I think our point to our bridge, in last night's release, where we do show I think it's a $0.01 distance between the high and the low FFO, so there is an interest rate component. What we disclosed at our Investor Day event was $200 million contemplated in those earnings guidance figures at 4.5% to 5.5%, I would still feel comfortable with that range. The term loans would be toward the lower end of that range and the public debt deal would be at the higher end, just based on our current credit rating. So, again more to come next quarter.
Vince Tibone -- Green Street Advisors -- Analyst
Okay. Great, thank you. One last one for me. Can you just provide a little bit more color on the operating expense improvements that took place in 2018? And do you think there are any further opportunities on this front?
Julie M. Swinehart -- Executive Vice President, Chief Financial Officer and Treasurer
I think as we look to 2019, as I mentioned in my prepared remarks that's really going to be base rent growth driven, in terms of NOI, we did have the property level management fee expense reductions, we had closed some field offices toward the end of '17, which benefited us in '18 with reduction enforces well. So we're that contributed to same-store NOI growth in '18 to a significant amount I don't see that repeating in '19, I guess that differently recoveries are expected to be pretty much inline with 2018 and most of our growth if not all the growth will be from base rent with some slight offsets in the other categories.
Vince Tibone -- Green Street Advisors -- Analyst
Thank you. That's all I have.
Operator
Thank you. Our next question comes from the line of Michael Mueller with JPMorgan. Please proceed with your question.
Michael Mueller -- JPMorgan -- Analyst
Hi, thanks. Shane, a couple years ago, I mean all people talking about was bankruptcies, it seemed like last year, the conversation shifted and it was retailers doing a lot better and sales were picking up. This year again it feels like it's more bankruptcy related. You talked a little bit about some names that have filed already. And I'm just curious, I mean, if you're thinking from a big picture perspective, I guess how deep is the watch list you're looking at right now? And do you think we're going to see restructures and store closings or liquidations? You'll try to answer it now.
Shane Garrison -- President & Chief Operating Officer
I will. Look I think bankruptcies will continue. I think the question is at what pace and how significant the GLA is? I think from my seat, if I had one wish for the space it would be that more GLA would come offline sooner right, so we can start rationalizing down to a square footage that makes sense per capita for the US specifically which is a nuance market as we all know. And I think the sooner that happens, the better off tenants are and certainly the better off landlords and investors are because we can all better understand what the assets look like, that when and what appropriate pricing is across the spectrum.
But from bankruptcies in '19 serious aside because the GLA is going ordinate, I don't know from my seat that I have any different expectations, I think it's a bit more granular. But there are certain tenants on our watch list that I think may have a bankruptcy event, what the great unknown there is, is really to your earlier point, is it a liquidation or is it some broader restructure, and I think that remains to be seen.
But nevertheless, again, I think it's where are you from mark-to-market perspective as a landlord? What is obviously your relative quality? And I think in that regard, we still feel extremely compelled about our portfolio overall. When we look at the last exercise, relevant exercise as it relates to Toys "R" Us, we signed two of those boxes in the fourth quarter north of 80% blended, Q1 this year, we've already signed another one, we are in north of 90% on that one and we have a couple others.
So we still expect to plan on the Toys "R" Us exercise to call it 80% and our TIs are running 60% to 70%, so in check there as well. So again, more and more I think the best assets get better and your relative quality is extremely important.
Michael Mueller -- JPMorgan -- Analyst
Okay, that's it. Thank you.
Operator
Thank you. (Operator Instructions) Our next question comes from the line of Omotayo Okusanya with Jefferies. Please proceed with your question.
Omotayo Okusanya -- Jefferies -- Analyst
Hi, good morning everyone. In regards to the same-store NOI guidance, I think I get most of the reductions around Mattress Firm and the one anchor that didn't renew. But those statement in the earnings release just around management reducing rent commencement and occupancy projections. I was just kind of hoping you could talk a little bit more about that. And how you guys kind of came up with that decision based on the overall kind of leasing environment?
Steven P. Grimes -- Chief Executive Officer, Director
I'll take that one quickly and then kick it over to Shane. But -- it goes back to what I had said earlier in terms of coming off of investor event, we were coming off of June numbers, a lot it happened in the back half of the year, starting with Mattress Firm and the announcement of Sears. And then obviously, we had some Toys "R" Us boxes that we were dealing with. So going back to the process of fine-tuning any sort of same-store assumption for 2019, you take a hard look at the timing of getting that rents commenced. And as Shane will point out, it's -- you're still going to get the rents, you're still going to get the rents started, it's just the timing of that rent commencement moving from maybe a 12 month downtime to a 15 or 18 month downtime.
So that's really kind of the primary driver there. So a lot changed in the back half of the year. And I think we took a very appropriate stance coming out the way we did in terms of what we expect for '19 and potentially what could still for into '20. But Shane can give you some specifics there. But I think generally we've answered this question throughout the transcript. So there's a lot of information out there to kind of read, understand our positioning on this.
Shane Garrison -- President & Chief Operating Officer
I don't know if I have anything new color that we have --
Omotayo Okusanya -- Jefferies -- Analyst
But is it this the tenant that's taking the vacant space clearly nothing. I need an extra three to six months before I can take the space. And what's the reasoning behind that kind of decision like why they're making that decision to certainly elongated the time, like if that's what I'm trying to understand?
Steven P. Grimes -- Chief Executive Officer, Director
No, I don't think it's any one tenant again any one situation, right, this is a lot of different variables and a lot of different leases. But some of this again is the extent we have signed leases now and you can better understand any delays in permitting, any delays in construction, which of course then you work around some blackout periods in center. So there's different variables that are pushing rent commencement dates in certain centers, it isn't any one certain situation.
Omotayo Okusanya -- Jefferies -- Analyst
Okay. That's helpful. And then as to kind of think about the stock buyback, again you guys still have some capacity. How do we kind of think about that relative to the stock being up 20% year-to-date?
Steven P. Grimes -- Chief Executive Officer, Director
Detailed in -- in my prepared remarks I talked about share repurchases being a tool in the toolbox. But I also talked about the capital requirements of RPAI 2.0, which we feel very strongly about has significant amount of growth components to it. So to Julie's earlier comments that the comments throughout this call, we do intend to maintain leverage between 5.5 times to 6 times. With buybacks essentially we won't risk any sort of changing of that leverage mindset to buyback shares. And we do have a funding component of development that has some very good long-term considerations for us in terms of value growth opportunities.
So it's competing dollars right now, real dollars are competing for development right now. So I would caution people to understand that we are not going to do any sort of buyback activity at the expense of leverage. We could potentially, if the opportunity presents itself to dispose some assets. But again those are just tools we have in the toolbox to manage the balance sheet for better growth orientation.
Omotayo Okusanya -- Jefferies -- Analyst
Got you. Okay. And one more, if you could indulge me. The morning (ph) you kind of talked a lot about again all these e-commerce concept now suddenly I'm taking physical space in the mall. We don't hear that much about that on the shopping center side. Could you just talk a little bit about, if you guys have kind of seen anything of that nature on your side of the business?
Shane Garrison -- President & Chief Operating Officer
I think the lifestyle component has obviously some similar characteristics from the enclosed malls. So we have done, we'll call it the notables (inaudible) deal, we've done Tesla, obviously we have Apple in the portfolio, and I think recently, Casper as well. So we do see some of that again, which because we have assets, large open air assets that have a lot of the same attributions. But absolutely not to the extent that the mall companies do.
Omotayo Okusanya -- Jefferies -- Analyst
Okay, fair enough. Great. Thank you very much.
Steven P. Grimes -- Chief Executive Officer, Director
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
Thank you, operator. Thank you all for joining us today, it's kind of early in the earnings process we know you have a lot to get through. We are ready to start the conference circuit again starting in the latter part of this month and through March, so hopefully we'll see many of you on the road. And have a great day. Thanks again.
Operator
Thank you. This concludes today's teleconference. You may disconnect your lines.
Duration: 60 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 Garrison -- President & Chief Operating Officer
Christy McElroy -- Citigroup -- Analyst
Derek Charles Johnston -- Deutsche Bank -- Analyst
Todd Michael Thomas -- KeyBanc Capital Markets -- Analyst
Christopher Ronald Lucas -- Capital One Securities -- Analyst
Vince Tibone -- Green Street Advisors -- Analyst
Michael Mueller -- JPMorgan -- Analyst
Omotayo Okusanya -- Jefferies -- Analyst
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