Q1 2021 Brixmor Property Group Inc Earnings Call
Greetings and welcome to bricks for property Group, Inc. First quarter 2021 earnings conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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A reminder, this conference is being recorded its now my pleasure to introduce your host Stacy Slater Senior Vice President of Investor Relations and capital markets. Thank you you may begin.
Thank you operator, and thank you all for joining breaks Morris first quarter conference call with me on the call today are Jim Taylor, Chief Executive Officer, and President and Angela Aman Executive Vice President and Chief Financial Officer, as well Mark for again, Executive Vice President and Chief Investment Officer, and Brian Finnegan.
<unk> Executive Vice President and Chief revenue Officer, who will be available for Q&A before we begin let me remind everyone that some of our comments today may contain forward looking statements that are based on certain assumptions and are subject to inherent risks and uncertainties as described in our SEC filings and actual future results may differ materially.
And we assume no obligation to update any forward looking statements also we will refer today to certain non-GAAP financial measures further information regarding our use of these measures and reconciliations of these measures to our GAAP results are available and the earnings release and supplemental disclosure on the Investor relations portion of our website.
Given the number of participants on the call. We kindly ask that you limit your questions to one or two per person.
Additional questions regarding the credit or please re queue at this time, it's my pleasure to introduce Gen and Taylor.
Thank you Stacey and good morning, everyone. Thank you for joining our call on.
I'm extremely grateful for how this breaks more team continues to deliver our performance prior to dairy and now emerging from the pandemic highlights not only the strength of our portfolio, but also the quality of our team our value added platform and the disciplined execution of the business plan, we implemented nearly five years ago.
But just don't just take my word for it simply look at our NOI performance and 2019, 2020, and now emerging from the pandemic and 2021 and each period, our performance stands apart and when you stack that performance for the entire time frame. The difference is even more striking.
This pandemic has revealed several fundamental truths about the shopping center business, including the durability and resilience of our assay class the importance of being within the last mile of the consumer and the flexibility of our format, but and.
Among the most important truth is that if you were looking to drive value and growth and ROI rent bases matters for a retailer to be successful you must not only have a location that is convenient to their customer you must provide a cost of occupancy and which they can be profitable continue to invest in their stores growth sales and thereby.
For growing rents.
If our job is to grow rents and ROI, we believe having a high rent basis theres, a potential liability not and asset we further believe having and attractive rent basis and enhances the cap rate or multiple that should be applied to our centers said differently, it's not where ABR is for where its going.
And it breaks more our attractive rent basis and value added execution position us to substantially outperform the economy accelerates post pandemic the <unk>.
Markers of that coming for outperformance are evident in our sector, leading leasing volumes are building forward leasing pipeline are strong cash spreads on new and renewal leases. Our continued delivery of a accretive reinvestments and importantly, the impact those reinvestments have on our asset value.
During the quarter, the national and regional teams executed leasing at a blistering pace under Brian's leadership, signing one 4 million square feet of new and renewal leases with cash spreads on new leases of over 20% with 140, new leases executed during the quarter new lease productivity was.
On par with the peak in 2019.
We will provide additional color on the question and answer session, but encouragingly, we are seeing demand across all of our core tenant categories, including specialty grocery home general merchandise value apparel pads restaurants, and health and wellness.
Also we're seeing a remarkable recovery and demand from small shop tenants, including national regional and local tenants, which allowed us to drive sequential growth of 40 basis points on our small shop leased occupancy during what is typically a seasonally slow quarter. This.
And this improvement and small shop demand, which in part reflects the fruits of our reinvestment program and enhanced operating discipline will be yet another level of a lever of growth as we move through the recovery.
And our forward visibility on growth continue to improve this quarter as our productivity and executed leases drove over $44 million of signed but not yet commenced revenue, which is equally balanced between small shop and anchor spaces, and 70% of which is expected to commence before year and our strong productivity.
Activity is also reflected and our forward leasing pipeline, which currently stands at over $2 2 million square feet and $41 $2 million of ABR.
We continue to execute under our reinvestment program under Bill and high for leadership, delivering another $28 million and value enhancing investments and an incremental return of 11% with another $400 million of projects underway and on average return of 9%.
These projects not only drive great ROI, while enhancing our centers. They also create value through reducing the cap rate that would be applied to that saturday's enhanced through that leasing and reinvestment.
Since we began the program we've delivered over $500 million of reinvestment at an average incremental return of nearly 10% just on the capital deployed we've created huge value given those accretive yield but in fact those investments have also reduced the applied cap rates on the impacted centers centers they comprise.
Nearly 30% of our total NOI that.
And that cap rate compression as a value multiplier and for those of you focused on growth and NAV.
I would invite you to review the projects, we have completed and our supplement or on our website to fully appreciate that follow on value creation.
We are also seeing positive momentum from an external growth perspective under Mark's leadership, we are pleased to announce subsequent to quarter and the $48 $5 million acquisition of the center at Bonita Springs, located on a prime corner of one of the busiest center sections and southwest Florida.
With an exceptionally highly productive grocers This center, which is our <unk> 48, and the state will generate tremendous upside as we executed the repositioning up on underperforming anchor currently paying only $2 a foot and rent as well as lease up the small shop space, which is currently at 60% occupied.
Mark and team continue to see their pipeline and build a target assets and our core markets that will yield great opportunities for us to continue to leverage our platform and generate growth.
And under Angela's leadership, our balance sheet remains very strong with more than ample liquidity to capitalize on what we believe will be a growing pipeline of attractive acquisition opportunities.
And most importantly, regardless of what opportunities we deliver from an external growth perspective, I am, particularly pleased with how the ongoing execution of our balanced business plan that we communicated over four years ago has demonstrated outperformance both through the pandemic and as we emerge in 2021.
2022 and beyond.
With that I'll turn the call over to Angela for a more detailed look at our results this quarter and our improved outlook Angela.
Thanks, Tim and good morning, and as Jim highlighted the first quarter further demonstrated the resiliency of our portfolio and the strength of our tendency as we leverage our platform to capitalize on the ongoing recovery.
And you read up on sorry, with 44 cents per share and the first quarter, reflecting $3 million for one cent per share of items and the impact comparability, including litigation and non routine legal expenses and loss on debt extinguishment, and addition to $1 6 million or one cent per share of straight line rental income reversals.
Same property NOI growth was negative one five per cent and the first quarter as base rent and net recovery detracted from growth and were offset by positive contributions from ancillary and other income revenue seemed uncollectible and percentage rents.
Well base rent and net recoveries were impacted by 150 basis point year over year decline and build occupancy base rent and was also impacted by 120 basis points of lease modification deferral agreements and abatement, the majority of which were reserved for in 2020 for.
For those previously reserved the results for the geography change between base rent and revenue deemed uncollectible and this quarter with no net impact to same property NOI or at that time.
Total revenues deemed uncollectible totaled $4 million and Q1, representing an $8 million sequential improvement.
Revenue is deemed uncollectible. This quarter was comprised of approximately $11 million related to first quarter built base rent and $2 million related to prior period base rent and $1 million related to the net recovery of reimbursement income, which were collectively offset by net $2 million on lease modification and abatement geography adjustment.
Highlighting earlier and nearly $8 million of cash collected on base rent amounts previously reserved.
As we look forward it remains challenging to predict the exact trajectory of revenue deemed uncollectible.
That said we are encouraged by the continued improvement we are experiencing and collections rates on our cash based on tenant which account for 15% of our total portfolio ABR.
And post March 31, we had collected 66, 2% on our first quarter built base rent from our cash basis tenants.
We can prove it by 250 basis points to 68, 7% as a result of cash collected subsequent to quarter and and the trend has continued to improve and April where we have now collected over 72% of April base rent from our cash basis tenants.
Well there is still work to be done to return to full collection levels on this segment of our tenancy, we're making meaningful progress.
And as Jim highlighted in his remarks, we're also very encouraged by the strength of new leasing demand against the backdrop of significant rent commencements across the portfolio and moderate and move out activity build on.
Occupancy and the first quarter was flat sequentially.
And the typical seasonal trend of declines early in the air.
During the quarter, we commenced over $9 million of annualized ABR and added over $12 million from assigned but not commence pool.
As a result, the spread between Delta and leased occupancy expanded to 300 basis points, representing over $40 million of contractually obligated rent of which approximately $28 million ex.
As expected to come on line Ratably over the course of 2021.
We have updated our 2021 and thats, how expectations to a range of $1 $60 for $1 70 per share based on and improved same property NOI growth range of 1% to 3%.
Our current expectations reflect our strong first quarter performance and the positive trends, we are seeing across the portfolio. While also remaining appropriately balanced at this point and the recovery and.
Always our guidance range guidance contemplate additional expected transaction activity during the remainder of the ear line.
Not contemplate any items that may impact comparability, and future periods, including litigation and non routine legal expenses.
And on debt extinguishment, or any one time items and.
In addition, I would underscore that this range does not contemplate the conversion of any tenants two are from cash basis accounting during the remainder of the year either of which could result in significant volatility in GAAP straight line rental income.
Turning to the balance sheet during the first quarter, we again access the unsecured bond market raising $350 million that was utilized to repay our $350 million unsecured term loan maturing in 2023.
This transaction was opportunistic and consistent with our broader goal of continuing to extend duration across the balance sheet and.
At quarter, and we had $1 $6 billion of total liquidity, representing our Undrawn $1 5 billion revolving credit facility and.
And number $370 million of cash on hand, we have no debt maturities in 2021, and only $250 million of remaining maturities in 2022.
In conclusion I'd like to thank the entire <unk> team for another outstanding quarter that spotlights, the extent of the portfolio and platform transformation that has occurred at the company over the last five years three year efforts, we successfully navigated the pandemic and are well positioned to drive growth and create intrinsic value throughout the recovery and with that I'll turn the call over to the operator for.
For Q&A.
Thank you, ladies and gentlemen at this time and we will begin ducking. Your question and answer session. If you'd like to ask a question you May press star one on your telephone keypad and confirmation tone will indicate your line is and the question to you May Press Star two if you would like to remove your question from the Q.
For participants using speaker equipment, and it may be necessary to pick up your handset before pressing the star T.
Our first question comes from the line of Todd Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, Thanks, good morning, and <unk>.
First question around investments it seems like the investment landscape stalling out a little bit.
Should we expect moving throughout the year in terms of deal flow and then in terms of pricing it seems like there's.
And a greater appetite from Reits and and institutional capital looking for value add deals how how competitive is the landscape. Today are you seeing that competition materialize for for assets that Youre looking at.
You know, it's always competitive and we certainly see competition and some of the assets that we're looking for today. We are encouraged by the breadth of opportunity that we're seeing and part of that is being driven by some of those very same institutional investors looking to reduce their exposure to retail.
And from a value added perspective, we continue to see opportunities and importantly to put our platform to work, where we can leverage our knowledge of tenant demand, our reinvestment and redevelop and capability to really drive IRR. So we're encouraged Todd.
And by what we see but.
Obviously, we're not going to be providing estimates of what we expect to do until we actually get it done so really encouraged by the closing on the center at Bonita Springs that we talked a little bit about and our prepared remarks, that's certainly an asset that I think is emblematic of some of the opportunities that we're seeing and our core mark.
<unk>.
Okay Angela.
And I think you commented that the guidance does contemplate additional transactions can you just elaborate on that a little bit and then can you also touch on.
The cash balance is still north of $300 million. You know do you expect to sit with and above average balance for an extended period of time or is that earmarked for something specific I'm. Just curious if you could talk about the deployment of that cash and also what's embedded in the guidance from that standpoint.
Sure.
And in terms of the transaction activity contemplate it in and are in guidance.
As is typical for us we bake in some expectations for additional activity as we move through the year, we'll update that as appropriate as time passes and.
At this point you know when you when you consider the fact that we rent net seller and 2020, which has implications for 2020, one and then our expectations for acquisition and disposition activity. During 2021 itself I would say that total dilution from both years and afford us the expense range and that is within our guidance and that contemplates like ice.
Our current expectations about the mountain and potential timing.
As it relates to the cash balance.
I think about it that's why we have effectively pre funded the 2020 to maturity, which is it's early in 2022, we have repaid now on our 2023 term loan and <unk>.
And we will continue to you know.
As Jim sort of highlighted look for opportunities and the market, where we might be able to deploy some of that cash, but I would say the guidance range. At this point contemplates that we do carry a higher than average cash balance for the remainder of the year.
Okay. Thank you.
Thank you Todd.
Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Good morning, good morning.
And you're down there.
So two questions first Angela.
Just going to.
For the to the credit side.
Clearly the narrative on retail has done a 180 right I mean, we haven't read a desk retail article and probably a year.
Curbside retailer feedback customer feedbacks open air has been clearly proven.
You guys have sort of still being in the penalty box from the accounting stuff of years ago, while you're on your bonds trade much better than where your reading is.
And your view what are the latest conversations with the agencies or are they still skittish on moving or do you think they'll finally recognize that you know the rating that you have now is not indicative of where your credit truly is.
Yeah, Alex I would say if you go back kind of on pre pandemic. We we're on positive outlook from two of that three agencies that cover us and I do think that was an acknowledgement of the progress that had been made on the balance sheet.
Over those few preceding years and the fact that I think sort of objectively speaking the credit metrics here do line up with some more of our more highly rated peers and I think we were certainly on that path. I think you know that pathways pause and we were moved to kind of stable outlooks and at the beginning of the pandemic and I really.
Believe that you know as we've continued to demonstrate and execute over the course of the last year and our performance and the stability and resiliency of the cash flow stream here really I think speaks volumes about the quality of this portfolio and and how the credit should be price and how the credit should be right and so and I.
Certainly won't speak for the rating agencies, but where were very helpful that the execution over the last year can address any concerns specifically related to the pandemic and I think more than that really highlight and that overall stability and resiliency of this cash flow stream.
Okay, and then a question for for Oregon.
You know you guys made a pretty big acquisition and they think it's the first one and quite a number of years. So just curious.
One any comment around cap rate or how you guys underwrote it but bigger picture how have your acquisition thoughts underwriting the assets that you target how has it changed now versus a few years ago, maybe it hasnt changed or maybe it has changed but just curious.
But we really haven't changed our strategy. We've we've spent years looking at.
And the assets, we want to buy we do have a target asset list. It is updated it as organic but we haven't really changed why we want to buy assets, it's really assets, where we can drive value through leveraging our platform.
So we're just seeing more of it today because the markets back open and we are seeing that there was a bit of a backlog through COVID-19 of assets at one and become markets really are seeing.
Of wider range of opportunities today than we and then we've seen on the last couple of years.
From a cap rate perspective, I think for Nida is a great example, and.
And a great example of why we do have some advantages and the transactions market, we moved pretty quickly from a green day price to closed because of an all cash buyer.
Which is great from a cap rate perspective, it was a mid to high six cap rate, we think it on our rights to that high single digit low double digit unlevered IRR. So we really see a bunch of value add opportunity here, it's actually pretty clear, we've got a really highly productive grocer.
And it's actually in line with the production, we see now and enables the inline occupancy as Jim said is around 60% versus high <unk>, 90% down to enable and so we really do see great value out there and Jim mentioned the.
For box, where we're paying low $2 $2 per square foot and we think Theres a five times rent spread there. So really excited about that one we think we can find.
More opportunities like that as we go through time here.
Okay. So just to be clear the mid to high sixes reflects that.
Line occupancy is at 60% so it's not really a stabilized cap rate for our collective.
And yes in place on line.
Okay cool thank you.
Our next question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.
Thank you.
I was wondering where you expect leasing volume will be in 2021 versus 2020.
Significantly higher.
One of the interesting things when you look at 'twenty is we saw a pretty significant pause and the second quarter as retailers national retail or regional and local.
Took a pause to assess the timing of their pipelines and how they were responding but encouragingly Craig we actually saw a pickup in the third quarter, albeit more weighted towards anchor type transactions that and the fourth quarter and now and this first quarter, we've seen very good volume.
And good balance between.
Anchor and small shop leasing and as we look ahead and the strength of that forward leasing pipeline.
And is about as strong as it's been Brian and I don't know if you have other thoughts.
And I would just add the new and renewal leasing volume, Craig it's up 50% versus the height of the pandemic and ABR per square foot is on an all time high of close to $19 and so.
So if you look at the productivity that we had during the force first quarter. It was in line with the first quarter of 2019, where we had one of our most productive small shop years as a company and Jim mentioned the pipeline of $2 2 million square feet, that's up 15% versus the end of the year. Despite all those execution during the first quarter. So.
We're very excited with the depth of the demand again it speaks for the investments that we've made and on.
Our shopping centers as we continue to deliver those we expect that activity to continue but we're very encouraged by what we've seen at the start of the year.
Great and then just I noted a number of your anchor we channel include the fitness centers.
And maybe can you just tell how you got comfortable with those retailers or for that category.
Yeah.
One of the biggest surprises for us coming through and out of the pandemic has been the strength of the fitness providers certainly we saw some start as some turbulence and the middle of 'twenty, but when we look at traffic levels and we talk to the fitness operators themselves and when you look at their cash flows and their overall credit we've been quite <unk>.
<unk> by the strength of return of the consumer to utilizing gyms and other fitness uses so.
We remain pretty bullish on that segment and continue to see a lot of demand from some very well capitalized operators.
Thanks.
Yeah.
Our next question comes from the line of Canadian Mcconnell with Citigroup. Please proceed with your question.
Great Thanks, and good morning.
Can you go on from Greg on the volume of acquisitions and you evaluate at the screened out over the last quarter.
And frankly like to have on all of the ha from being put on thoughts on price on for one off deals going forward.
Yeah, It's a great question.
We screen a lot more assets than we transact on probably four times, what we actually transact on at least.
And the other thing Mark highlighted Katy which is important to appreciate is that we target assets for acquisition before they become available and we track them such that when it does come a moment in time to trade Ware and are positioned to move quickly as we did with Bonita Springs.
Which is a great example, and also points to the speed with which we were able to get that asset close and the real interesting dynamic right now within the acquisition market is that assets that are smaller in size remained pretty liquid and we see a lot of depth.
And if competition larger more complicated assets with more moving pieces we.
We see less competition.
So as we move forward, we do expect to see some compelling opportunities.
On a little bit hesitant Katie to give you an estimate of what that pipeline.
Line might look like because we aren't going to report on it until we're actually close but we're encouraged by the level of activity that we're seeing.
And then I think you asked about read through from M&A to the property market I think you'd be surprised that you really don't get a lot of like when we issue and we seek dob's brokers and I'd really point to M&A and the REIT space as far as asset values, it really points to transactions and what's happening at the property market.
Okay.
Can you walk us through and some of the key factors that are now and they're a.
So how long does your guidance range and what is the range contemplated for cash.
Channel question.
Yeah.
Yeah.
And as it relates specifically to cash basis collections, which does remain kind of one of the key pieces within the range between the low end and the top end of guidance range I would say at the bottom and at the range you know we've effectively assume trends.
Kind of in line with where they were in Q1 or towards the end of Q1, So really no significant improvement additional improvement from this point going forward and no additional recovery of prior reserved amount at.
And at the low and as you get into the top end of the range. You know we have embedded some additional occupancy upside and improving collections picture from cash basis tenants and or some modest recoveries of prior period amounts, but importantly, you can certainly get from the top end of the range without any prior recovery of.
Amounts that was reserved for in 2020 and without collections from cash basis tenants are getting back to a 100%. So that's kind of how I'd frame up the two hands on the range.
P J and thank you. Thank.
Thank you Katie.
Our next question comes from the line of Paulino Rojas with Green Street. Please proceed with your question.
Good morning, and I'm sure.
If you have to guess how do you think from market rents will evolve in the next and.
Here are a couple of years.
On the one how strong and economic recovery shaping to be and.
Hum and the higher.
And levels of vacancy for Mike.
While we're encouraged by what we see is very broad based tenant demand and in fact, probably and we were hearing from several of our tenants. Please show US your available space Youre available boxes. So as we're working through the opportunity that is vacancy.
We're not wondering how we're going to backfill space and we're in a position where we're able to generate some pretty healthy competition, which is one of the key drivers to growth and underlying rent one of the things as I highlighted in my remarks that I'm, particularly encouraged by is that we're going into this recovery was.
Very attractive rent basis, so even if the recovery is more modest we're still going to be making money, we're still going to be driving growth, we're still going to be finding opportunities to accretively reinvest and our assets.
If the recovery continues as strong as it appears to be that's really like a turbocharger for us because I think we will see that inflation reading through and the underlying rents tenants are willing to pay and drive even better growth over the next couple of years.
And then the more net.
Hey, philosophical question, we're seeing robust missing buttons and on.
And what appears to be and broad based tenant demand for space.
How can we come filed this week paint or appetite for growth, we say, yet, but there is too much and we can G&A and the U S.
And this and there is the risk that.
And on retainer and are being maybe shortsighted and and opening stores to take advantage of a recovery that could be short term in nature.
The retailers themselves have shown remarkable and ongoing discipline as it relates to new store openings and their ability to project. What the sales will be served by a particular location given their access to data has never been better. So they have a very informed view as to what a new unit will produce.
And.
And our discussions and our coverage of these national and regional tenants.
We're seeing that.
Accuracy, if you well and sales forecast.
Coming through the other thing I'd say to you is as it relates to the comment about GLA out there, there's really no new supply being created.
And you do have obsolescence that occurs every year in the base of product out there that's of an institutional quality acceptable to the tenants who are opening stores and this environment. So we like how we're positioned to capitalize on those.
Dynamics and the <unk>.
Other thing I would say is remember.
A segment of the overall retail space and the country and I think what this pandemic has shown is the growing breadth of demand for retailers that previously weren't in open air product to come into open air product why because it's convenient to the customer it's.
It's got great access great visibility and again importantly, a reasonable cost of occupancy so that they can be profitable serving their customer with flexibility by the way to serve them in a multi channel format, whether it's in the store fulfilled from the store fulfilled at the curb excess.
Retailers are seeing the real power of coming into these community and.
And neighborhood centers, such as the ones that we on.
Thank you.
Our next question comes from the line of <unk> bin Kim with <unk> Securities. Please proceed with your question.
Thanks, Scott Good morning, how are you good morning, good hope you're doing well.
And so I wanted to talk about the leasing activity that you guys have been posting and not just for you guys, but I guess for the industry to but.
I'm curious.
The credit quality and the type of tenant.
Closing that leasing activity or has it changed on the margin because I can imagine a scenario right you have a lot of inventory to lease out.
And maybe this isn't the time steep so picky and choosy about what types of repos come in so I can imagine a scenario where on the margin perhaps for you or the industry can be leasing space to perhaps not the same type of credit quality and it was pre COVID-19, we've actually been really encouraged by that trajectory in terms of the improvement is.
The quality of the tenants and Bryan maybe you can talk a little bit about the types of tenants that we are seeing big demand from and and that improvement and quality.
Sure Jim you're spot on in terms of the depth and the credit quality and just the overall quality of the tenant base that we've been doing deals with and Jim touched on a number of the categories. Key then when you look at specialty grocery which has been among the most active categories that we have signed three more grocer leases during the quarter, we have another 15 grocery.
Releases, either at lease or final LOI and thats across a broad range of segments and the traditional ethnic and specialty and all the very strong operators and as we look at value apparel health and beauty pet stores general merchandise and home. These are very strong tenants and we continue to attract of our shopping centers I know you've highlighted the <unk>.
Parcel demands and the path that's another one of our most active categories during the quarter, we signed leases with Starbucks and Chipotle and.
And Chick Fil, a and we have a depth of demand with them as well. So we've really been pleased and to your point about the mom and pop or local tenants. We're seeing entrepreneurs strong operators multiple unit locate multiple unit operators that are seeing an opportunity here with some businesses that may have failed during the pandemic.
Actually improving the credit quality for a number of those tenants that are coming in and say second generation restaurant space or hair salons, and nail salons and so overall, we've been extremely pleased with the depth of our quality of our tenancy.
Okay, Great and of course brands, well, the $40 million of signed but not commenced leases.
I was just wondering if you can provide for more color on because one common question I get it.
Does that really become additive for us are replacing in place tenants that are paying rent when they expire at jet pumps and staying on the treadmill.
So I was wondering if you provide some commentary on that.
Yeah.
And almost all of that is really truly on it at first of all I guess I would start by saying that you know nobody who is who is currently on.
And there was a tenant that's currently paying today, you don't get to be counted and both kind of a build and lease side. So they don't and we don't show them and not $40 million until until the existing tenant.
<unk> and its truly its truly additive when you think about kind of how that $40 million might might compare relative to just the broader lease exploration schedule and I would say based on kind of historical retention rates I would expect something like 80 per cent event to truly be additive relative.
And how the normal course of our move outs kind of trend. So it really is a significant tailwind for us from a growth perspective as we move forward I think if you look at the year over year occupancy decline, we had throughout the pandemic, which is I think 130 basis points on build occupancy and a significant reason for that was the fact that we went into the pan.
With such.
Ah Ah large signed but not commenced pool and we continued to commence leases.
Throughout the course of 2020 and and the first quarter of 2021 and so it certainly you've seen it I think relative to net.
The other interest and the broader industry in terms of like top and to our occupancy over the last year, just how additive and that really can be.
Yes, I think you have to then I would also just highlight that.
We've talked about are signed but not commenced for several quarters and we've delivered that growth for several quarters right. We've delivered that outperformance and in part because of the continued demand and that our forward pipeline.
Thank you again do that.
Our next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.
Hi, everybody.
Thinking pre COVID-19 to now.
However, leasing contracts and evolved or whats stipulations are now included were omitted that was normal practice before the shutdown.
Are you doing more or less percentage rents and how have your omni channel requirements or perhaps focus and asks from tenants on a bomb.
Do you want to handle that for I'm sure I'll take it Eric and what's been interesting for us as we look at our leases as many of the things that we're focused on in terms of embedded rent growth.
Sales reporting <unk>.
Conversion of tenants to recapture more from a can perspective, we still been able to achieve that in fact, our embedded rent growth over the course of our leases and.
2020 was the best and have been since since 2017, we don't have a tremendous amount of percentage on only leases I think we might have done a handful over the past year and as it relates to omni channel. We had spoken on prior calls for for years talking about how accommodating we were being with our grocers in terms of.
Rolling out click and collect and.
And Jim talked about just the flexibility of our format, we've been able to do that with a number of national tenants being able to accommodate a number of national tenants from a curbside pickup perspective, and it really speaks for the platform, where we're able to go to those tenants through our relationships create one agreement and get those deployed very quickly we saw that during the third quarter.
We wanted to have as many of those pickup spaces and place for.
For the holidays for our tenants. So that's been that's certainly been a focus of ours and when we talk to our tenants.
There are number one asset is their stores and everything they are doing around it whether it's shipping from stores or whether it's a curbside pickup is to drive more traffic to the stores. So what we're seeing with a number of these initial this these initiatives. It's just more trips that otherwise would've been here, but from a lease contract perspective, we've been very encouraged by what.
And we've been able to continue to negotiate with our tenants.
And I would say the quality of those leases continues to hold and certainly some tenants were looking for future tight for leaf and we were able to strike the right balance there and continue to make sure that.
Our leases remain enforceable through whatever may happen and the future.
Okay. Thank you and then secondly, secondly.
With leasing demand so strong how patient are you planning to be with your cash basis tenants and both buckets I mean, those that are paying and especially those that are challenges I mean, it seems is it sticking with these tenants may be somewhat of an opportunity cost versus taking space back and re leased.
And given the demand backdrop could you please weigh in.
Yeah, we.
We've tried.
And to approach this on a tenant by tenant basis looking at their productivity prior to the pandemic what impact the pandemic has had on their business and importantly, how they are emerging and we've worked with these tenants, where we think it's appropriate to help them get to the other side and and.
And I think that's been a very.
Positive approach as we've seen our outperformance now coming into the into the recovery, but certainly for tenants that have not engaged with us or who continue to struggle, we're being more and more assertive as it relates to resolving their.
Occupancy and and background, so it's difficult to generalize, but that's the approach that we've taken is really tenant by tenant where we're not trying to make.
High level decisions when really it's what's happening at the real estate level at this center.
And that determines how we're going to approach that particular tenant.
Yeah.
Our next question comes from the line of Greg Mcginniss with Scotiabank. Please proceed with your question.
Hey, good morning.
It was encouraging to see the stabilized occupancy this quarter and especially the increase on the shop leasing side are.
Are you comfortable saying that you've turned the corner on declining occupancy and you can start to build from here or are there still some pockets tenant risk and navigate and if so what categories might you still see consolidated risk.
We're very encouraged by what we're seeing generally within the small shop segment of the portfolio and as Ryan alluded to earlier the strength of some of these operators that they've shown and through the pandemic and frankly the strength of demand that we're seeing for some of the second generation space that we've recaptured.
And so you know could there be a quarter or two where you see some volatility certainly.
But I think most importantly, we're seeing great momentum and great demand out of the small shop tenants.
Really in all categories National regional and local and really and the last quarter and a half we've been very pleased with the strength of demand that we're seeing.
From the.
Mom and pop and local businesses as they position themselves for the recovery.
Was there ever a shift in market rents for those mom and Pops and as the economy starts to open up more and people are shopping could we potentially start to see.
Net spreads expand from here.
I think that the way this recovery is setting up as a strong positive for the direction of where rents go.
And I think we're particularly well positioned to benefit from that.
And it really outperform whether it's a modest recovery or or a strong recovery I like how we're positioned.
You know the the pandemic itself.
On didn't have direct impacts on market rents or you know the impacts for probably two transitory to talk about.
<unk>.
We're seeing good recovery and demand and importantly, we're creating competition for the space that we're leasing which helps us push rents as well.
Great. Thanks, and if I could just sneak in one more here just to touch on cash basis tenants.
If you do and Q2 in Q3 of last year, what you know now about how your tenants are doing and how much that have impacted your decision to ship those tenants for a cash basis trying to get a sense for.
And maybe the uninsured ramp that you may now and reasonably expect to collect without specifically asking for that.
Angela and I'll, let you handle that one yeah look I mean, I think we made the right decisions and each point and the process and given the amount of uncertainty given and what we are seeing at different periods of time are you now.
From a collection standpoint, and and category exposure and a host of other considerations. We took into account when we move tenants for cash based net.
And we always knew given sort of the unique on dynamics of a pandemic that you know and to the extent and we got through to recovery that we're gonna be tenants that would likely be moved back to accrual at some point and I do think that's certainly a possibility as we get further into the recovery and later in the air we have and we haven't moved from a bank actually look for all yet but.
But we're watching a number of tenants where their businesses are categories have had significantly improves maybe they've had a recapitalization event something like that and we will continue to monitor that.
And I think yeah, I really think we went through a very robust process and each quarter on the pandemic and.
And think we you know we made the right calls based on the information we had at each of those points in time, and we'll continue to evaluate it as we as we move into that.
And second quarter, and then the second half of this year.
Alright, Thanks, Angela Thank you Jim Thank you.
Our next question comes from the line of Juan some umbrella with BMO. Please proceed with your question.
Hi, good morning, and thank you beforehand.
Just a question on cap rates, given all of the Redevelopments, you've done and and what's in the pipeline, where do you see stabilized cap rates for.
The high quality shopping center.
And and power centers.
Mark it's.
It's mark.
Were seeing trades for stabilized grocery anchored centers trading into the low fives at this point.
Low to mid fives, and a lot of it is dependent on.
On scale when they're on their religious that grocery anchored asset with some small shop and you get some pretty tight cap rates and and really strong demand from local buyers who are putting some cheap debt on those assets, what's interesting and what we're seeing and the market real time is a bit of a falling on the power center more boxes out of the market. Some of the assets we've been looking to track.
On the liquidity, we're seeing is allowing us to exit the math I think had some pretty opportunistic pricing. So youre starting to see some of those cap rates.
And come back in line with what you were seeing pre pandemic I would say one of the other interesting characteristics about this environment is that because the marginal buyer typically is utilizing leverage and particular asset level bank financing.
And that buyer is not able to put the same type of value on vacancy that we might given our visibility on how we're going to lease that they can see up and drive returns so and that way you know youre seeing a nice environment for our integrated platforms, such as ourselves to capitalize on.
Real value add opportunities.
And then just a quick follow up.
The increase in.
And raw material cost and labor steel or what have you.
Impacted.
And expected redevelopment yields on notice.
The most recent additions being a bit below.
Already and the pipeline and I'm not sure if that's specific to those opportunities are being impacted by what we're seeing on the cost side.
We're watching it carefully for it.
<unk> most of what we have and the pipeline has been pretty committed pre bought.
And is under G. Max type contracts. So we're somewhat hedged there in terms of what we have underway, but we're watching it.
And just on the issues of cost, but also the issues of availability of product, whether it's steel or lumber and.
Certain other equipment that we use and our redevelopment pipeline.
Difficult to point to what its impact might be on future returns.
We're also seeing some nice to.
Demand and growth in terms of rent. So we're watching it closely I think at least in the near term.
And the thing we're most focused on is just timing, making sure that we continue to hit our timing and our days.
Thank you.
Yeah.
Our next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.
Hi, good morning.
And just as a follow up to that one of the prior questions on leasing spreads and pricing Jimmy talked from the beginning even about how high leasing spreads has historically been a differentiator for bricks and mortar, but it does look like that spread on a trailing 12 month basis has come in somewhat on overall leasing and new leases. So I was just wondering if you could talk through that to what extent.
Have those mark to market has been impacted by the pandemic or do you expect it to pick back up or is this how you are always expecting that the trend would play out well. There is no doubt that if you look at it on a trailing 12 basis, you really are picking up the height of the impact of the pandemic and it did have some drag what I'm, particularly encouraged.
<unk> buys we're seeing those spreads whether they'd be new leases renewals continue to accelerate and sort of that longer term trajectory that we've been delivering over the last four to five years and given the quality of what we're seeing and the pipeline I think we feel pretty good about.
Where the spreads will be on a rolling forward basis, you may see a quarter or two of volatility here and there, but we're particularly pleased with what we're seeing and the forward pipeline, both with respect to new and renewal deals.
Okay.
And then just back to the Redevelopments you have a long list of current and future opportunity I was wondering if you could go through to what extent depend that Mike has changed its pipeline of projects at all or not for.
For example have you changed any projects our return expectations are different target tenants or what do you think will work now versus before or has there been any change to many of those clients.
And the things that we've been most encouraged by through the pandemic is the beneficial impact it's had on grocers and terms of their cash flows or willingness to invest and their existing stores as well as their willingness and capacity to invest and new stores. So I would say that.
Against the backdrop of both the pandemic and importantly underlying food price inflation, we've been particularly encouraged by the depth and breadth of grocery demand.
Also though we're seeing great demand from some of our other core categories of tenants and value apparel general merchandise and fitness.
Services et cetera, and.
If anything as we come into this recovery, we're even more encouraged by what we see and that forward a shadow pipeline. If you will that we talk about and the supplement and you can see every quarter, we continue to add new projects to the pipeline that's underway, while we're also delivering.
So this past quarter for example, I believe we added 25 or $35 million of new projects. While we were also delivering 27 or 28 million so that constant refreshment of the pipeline and deliveries and importantly.
And I talked about this a lot, but you see us delivering real time and that that's one of the benefits of the granularity of what we're doing.
Not taking long lead risk.
On the projects themselves are <unk>.
Substantially pre leased we have the costs and hand before we commit so that makes what we're doing from a reinvestment perspective, I think particularly attractive both through the pandemic, but also as we recover and.
And can benefit from where market rents are going versus you know longer term more complicated projects that may have been priced into a different environment.
Got it okay. Thanks, you bet.
Our next question comes from the line of Mike Mueller with Jpmorgan. Please proceed with your question. Good morning, Yeah, Hey, good morning.
So going back to the credit question on cap rates are you seeing any differences and I know you mentioned low fives.
And for grocery anchored but when do you think about different markets say like a major coastal markets versus sunbelt and other areas. I mean, how are you seeing the cap rates differ by geography for similar product Mark.
You do certainly see some cap rate variance.
By market, but again I think a lot of the cap rate is driven by what that future for cash flow looks like.
So you do see assets, where you see strong growth people are definitely leaning into cap rate of it I'd say, where you see a bit wider cap rates on our market's like.
For the Midwest market generally have traded a bit water and then some of the coastal markets and we're seeing you know one of the things I think we have seen in the past.
Two years, if you kind of think for pre COVID-19. We're seeing today is that that spread between tertiary cap rates for grocery anchored and fill so cap rates appear to be shrinking a bit for seeing some positive momentum there, but yet you certainly see some cap rate difference across across different markets market and the market like southern California always trade very tight.
So I guess, that's what I tried to answer your question.
Got it Okay and then.
Just thinking about physical occupancy I mean, do you have a sense as to where.
And just given the leasing that's in place where physical occupancy and a year.
Angela.
Yeah, I mean, I'd say, there's a still a relatively wide range and you know sort of embedded and our expectations are for the course of this calendar year, we're still on that 200 basis point.
Fred and our same property NOI guidance.
And we're certainly very encouraged by what we saw on the first quarter and in particular and build occupancy.
Remaining flat on a sequential basis as I mentioned in my remarks, it's pretty unusual and to see that and the first quarter. So that would certainly.
And a indicator and we do have that $40 million of signed but not commenced.
Continue to provide support and hopefully growth as we move through the air.
But there are as we talked about and previous questions parts of the tendency we continue to watch closely and and watch you know.
How strong or how robust for the recovery is in certain categories. So I think it's too early to say, but there are certainly you know some pretty positive indicators based on how the first quarter shaped up.
Got it okay that was it thank you thank.
Thank you bye.
Our next question comes from the line of Tammy fight day with.
Wells Fargo Securities. Please proceed with your question.
Good morning Tammy.
Good morning.
And maybe just a question for Angela I'm wondering how we should be thinking about the quarterly flow throughout the year, just given kind of the implied drop off and guidance from the 45 from comparable ethical reported and first quarter and I guess, it seems like really and improving and positive and all the positive indicators that you guys are discussing today.
Yeah, I mean, I think there and kind of kind of two factors to think about in terms of how it trends from here sequentially and the first is you know sort of the impact of potential transaction activity, which which I mentioned earlier that 2020 activity 2021 activity should cost us a total of four to six cents on a year over year basis, you're not seeing all of that impact.
And the first quarter.
So that's one factor, but the biggest factor is really just revenue that's deemed uncollectible.
We did and it's highlighted for you I think on on page 11 of our supplemental package pretty well and first quarter definitely benefited from a significant amount of cash collected from amounts that we did reserve for in 2020. It was about $7 $6 million just on the base rent piece and there was probably another one on one.
$2 million of recoveries as well that we weren't we collected and the first quarter and as I mentioned and my commentary or guidance and particularly at the low end up the range. It doesn't assume that we'd collect any additional amounts that we had for reserve last year. So that's that's probably the biggest factor in terms of how to think about you know as we move through the year and like that and what that might look like.
Okay, great. Thanks, that's very helpful.
And then maybe just one question on.
Are you seeing any notable differences and demand kind of based upon geography, particularly given the migration trends.
And if it accelerated or would you say demand is generally strong across the entire portfolio.
Ryan.
Yeah, I'd say certainly in our South region, we've seen a significant amount of demand, but what we've been encouraged by its been fairly broad based.
On the northeast last year for much of the year at the height of the pandemic was having a strong year as they were having in 2019.
We did see and the fourth quarter and early this year in California with the restrictions still in place and the level of those restrictions are little bit tougher tepid demand, but thats really picked up is what's been interesting over the entire period. As these restrictions are lifted we're often seeing tenants come back to the table. So it's been fairly broad based.
We are seeing a significant amount and the south but when we've been encouraged by what we've been seeing across the portfolio.
Great. Thanks for.
Yeah.
Our next question comes from the line of Floris Van <unk> from with Compass point. Please proceed with your question.
Thanks for taking my question guys. Good morning.
Good morning, good morning.
And you look for you just maybe if you can comment on bad debts and.
Also generally.
Yeah.
And what are your expectations later on this year presuming that all of your tenants at watch for are on a cash basis as well.
What are you assuming going forward.
Yeah, I would say it's on the low end of the range, we're assuming that cash basis kind of collections look pretty similar to the way. They look towards the end of the first quarter kind of and not the high 60% range as I mentioned my prepared remarks, so that's kind of our expectations at the low end of the range and I would say the low end of the range I'll say it doesn't contemplate any additional.
And on recovery.
And announced that we reserved in 2020 and I think you know page 11 on the supplemental and does a good job of breaking out specifically, how much we've reserved and Q1.
And just related to Q1 and built base rent based on what was a lower on a cash.
Cash collection number kind of more on the mid Sixty's and the highest next day. So we are assuming some incremental improvement, but again at the low and at the range now recoveries of previously reserved amount.
The higher end of the range, we certainly assume that net cash basis collections improve and.
And so as I mentioned earlier, we can get to the top end of the range without needing cash basis collections to recover and entirely so we don't need to see 100% collections from cash basis tenants to achieve that higher and that the range.
Right and then again you know the range does not include any of the the recapture of previous our previous uncollected rents maybe my my my other question is to Jim Jim as you think about allocating capital and one of your peers just bought another one and your peers are at.
And you know call it a mid five cap rate.
What does that make you think about.
Your appetite to do deals when you've got you know.
Call it $280 million right now.
Redevelopments.
And call it 90, non caps and 1 billion pipeline, presumably it's something similar.
How do you think about you know bigger.
Bigger deals versus just the slow, but steady improvement and you're in your own portfolio.
I am encouraged by what we're seeing and the environment today in terms of not only the continued growth and our own reinvestment pipeline and the yields that.
Thank her as you highlight pretty compelling.
We are seeing some external growth opportunities out there.
At the asset level, where for US I think we have a great opportunity to bring our fully integrated platform to bear and drive value and drive some pretty nice IRR as mark alluded to.
You know the Bonita Springs acquisition I think is a great example of that where we're coming in and.
A pretty reasonable cap rate and the mid to upper sixes on an asset that's got significant vacancy and rents that are below market, we're able to assess what the national regional and local tenant demand has to be at that center and underwrite returns without having to stretch much that are and the high single digit low.
Double digit from an IRR perspective.
And I think again in this environment.
Marginal buyer and and the buyer that we tend to compete with is going to be somebody relying on leverage who's less able given their capital stack and their capital source to give value for vacancy or to underwrite how to address that vacancy so.
I'm excited by what we see both within our portfolio in terms of reinvestment opportunities, but but also what we see from an external growth perspective, as we capital recycle and as we identify.
Assets and our core markets.
Thanks, you bet.
There are no further questions and the queue I'd like to hand, the call back over to Stacy Slater for closing remarks.
Thanks, everyone for joining us today.
Yeah.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Yeah.
Yeah.
Okay.
Okay.
Hello.
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Yeah.