Q2 2022 Brixmor Property Group Inc Earnings Call
Hello, and welcome to the Brits small property group second quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should the prior operator assistance. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It's now my pleasure to turn the call over to Stacy Slater. Please go ahead.
Thank you operator, and thank you all for joining bricks and mortars second 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 as Mark Horgan Executive Vice President and Chief Investment Officer, and Brian Finnegan Executive Vice President.
See if Robyn your officer will be available for Q&A before you 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 we assume no.
Asian to update any forward looking statements.
So 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 in 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. If you have additional questions regarding the quarter. Please re queue. At this time, it's my pleasure to introduce Jim Taylor.
Thank you Stacey and thanks to each of you for joining our second quarter call. Our results. This quarter once again underscore the transformative in an accelerating impact of our value added plan as well as the outstanding execution of the brake smart team.
Our progress is evident nearly every observable metric, including our robust leasing volumes and spreads under Brian in the leasing team's leadership, we executed nearly 2 million feet of new and renewal leases at a cash rent of $18.79 and a blended spread of 14.6% include.
<unk> 870000 square feet of new leases at a comparable spread of 34, 3%.
We continue to attract the very best retailers to our centers are growing rats, which Brian will provide some commentary on in our Q&A session.
It's also evident in our continued growth in a b R. Our activity this quarter drove another post IPO record for our overall average in place ABR, which increased to $15.90 a foot.
And importantly, we remain disciplined with capital as we achieved an average net effective rent of $16.91 a foot on our new leases.
Our progress is evident in our sequential and year over year growth in both build and leased occupancy we set yet another record for small shop occupancy for the portfolio of 87, 7% and overall occupancy grew to 92 and a half per song just 30 basis points shy of our all time record.
And Theres a lot more room for us to run there as we deliver our value added pipeline, which currently drags our overall occupancy by 150 basis points and importantly, it's also evident in our strong same store NOI growth and bottom line <unk> growth, while we continue to realize the benefit of strong park.
Period collections. It is important to note that most of our growth was driven by our topline revenue growth of four 3%.
Which reflects the accelerating momentum of our value added plant.
Now those are indeed fantastic results as is our increased guidance for the balance of year that Angela will cover in a minute, but what about 'twenty three and beyond as we look forward and consider the natural moderation of prior period collections as well as the potential for economic disruption, we remain very pleased and <unk>.
Confident in our strong visibility of continued growth as reflected in our $53 8 million of ABR and leases signed but not commenced that will commence through 'twenty 'twenty four our forward new lease legal pipeline of 50 million of additional leases under negotiation.
Our real time volume of new deals coming into our leasing committee for commencement in 'twenty three and beyond.
Our current and ongoing discussions with tenants to accommodate their store plans in our centers as retailers try to grow their most profitable channel and it's reflected in the continued real time growth in our traffic to our centers versus 19, which has averaged in the mid to high single digits relative growth that I believe leads the sector.
But importantly reflects the strength of our centers.
In addition to these visible growth drivers, we continue to deliver tremendous value through the ongoing execution and delivery of our reinvestment pipeline as evidenced by another $39 million of reinvestment delivered during the quarter at an incremental return of 11%.
Parenthetically, our gross returns are much higher.
And we're pleased that we have another $400 million of reinvestment underway at an incremental 9% return.
Phenomenal execution by Bill Hog in the readout and construction teams to continue to deliver these projects on budget, even with supply chain disruption and as highlighted in the past these investments generate follow on value beyond their ROI through increased occupancy and market rates at the centers impacted in.
Fact for our stabilized Redevelopments small shop occupancy has increased over 600 basis points versus one year before a project start and the in place market rate increased over 20%.
Our value add strategy, which demonstrated its resilience and outperformance through the pandemic positions us very well to outperform not only in stronger market environment, but weaker ones as well from.
From an external growth standpoint, we continue to source centers, where we can drive strong returns through leveraging our value added platform. Those opportunities include like point village.
Whole foods anchored asset in Houston, which with our braids height centers represents the number one into volume whole foods stores in the entire Houston MSA Importantly, like point village also presents highly visible growth opportunities through the lease up of small shop vacancy, which the leasing team is already.
Driving as well as the addition of highly accretive out parcels, great job by Mark and team and.
In the coming months, given the cat volatile capital markets, we expect to be a net seller as we found strong demand for our smaller and noncore assets. We also plan to keep our acquisition powder dry should the volatile capital market conditions lead to even more opportunistic pricing of assets that fit our value add strategy in that regard.
God I'm pleased that we have over $1 2 billion of liquidity, including a 200 million Undrawn term loan and we have no maturities until 'twenty four great job by Angela and team managing our balance sheet.
As I said at the outset I'm grateful for how this breaks more team continues to execute and deliver upon our purpose of creating and owning centers. They truly are the center of the communities we serve.
And as we detail in our recently published corporate responsibility report, we are executing our plan in a manner that is environmentally sustainable and socially responsible with that I'll turn the call over to Angela for a more detailed discussion of our results our outlook and our liquidity.
Thanks, Jim and good morning.
I'm pleased to report on another strong quarter of performance is the transformative nature of our value add strategy continues to result in record operational results across our portfolio.
NAREIT <unk> was 49 cents per share in the second quarter, driven by same property NOI growth of six 7% base rent growth contributed 430 basis points to same property NOI growth this quarter excluding.
Excluding the impact of lease modifications and rent abatements base rent growth contributed 370 basis points, representing a 90 basis point acceleration from last quarter, reflecting continued growth in billed occupancy and re leasing spreads over the last year.
Revenues deemed uncollectible contributed at the 150 basis points and ancillary and other revenues and percentage rents contributed 120 basis points on a combined basis.
Importantly, the positive contribution from revenues deemed uncollectible. This quarter was due entirely to improvements in current period collections from cash basis tenants as collections of previously reserved amounts totaled $10 $3 million down slightly from the $10 $6 million collected in the prior period.
And that expense reimbursements to attract at 30 basis points from the same property NOI growth in Q2 due to the quarterly volatility of operating expenses experienced in 2020. One we continue to expect that full year operating expense growth will be approximately 3% and.
And that net expense reimbursements will be a positive contributor to growth for the full year due to prudent expense management and occupancy gains across the portfolio.
Our operational metrics continue to reflect the strength of the current leasing environment, despite macro headwinds and a continuing successful transformation of our portfolio.
Build on leased occupancy were both up 40 basis points this quarter.
The anchor lease rate now stands at 94, 8% up 40 basis points sequentially and as Jim highlighted the small shop lease rate now stands at 87, 7% up 70 basis points sequentially, reflecting a new portfolio of record.
The spread between leased and build occupancy remains 350 basis points and the total signed but not commenced pool, which includes an additional 70 basis points of GLA related to space that will soon be vacated by existing tenants increased by $2 million this quarter to $54 million at a blended rate of $19 20 per square foot.
More than 20% above our portfolio average ABR per square foot.
I'd like to underscore that the total size of the signed but not commenced pool and the blended rate on the pool. Both grew this quarter, despite leases representing more than $15 million of annualized base rent commencing during the period, reflecting exceptionally strong leasing activity.
Expect that over 50% of the current signed but not commenced pool are $27 million will commence throughout the balance of this year with another 26 million slated for 2023 and beyond establishing a strong foundation for growth in the coming years.
As discussed with you last quarter, we amended our unsecured credit facilities in April improving pricing, adding a sustainability linked feature and extending the maturities of our revolver and $300 million term loan.
In addition, our amended term loan has $200 million of additional capacity, which may be utilized by the company at any point through April 2023.
As of June 30th we have over $1 $2 billion of available liquidity and no debt maturities until mid 2020 for providing valuable financial flexibility.
Turning to guidance, we have increased our 2022 same property NOI growth expectations from three to four 5% five 5%, 6% as a result of the significant out of period collections of previously reserved amounts recognized again in the second quarter Anthony.
And an improvement in our outlook for revenues deemed uncollectible ancillary and other revenues and percentage rent.
Consistent with our prior methodology the bottom end of our same property NOI growth guidance range does not assume any additional collections of previously reserved amount NAREIT.
NAREIT <unk> guidance has also been revised to a range of $1 93 to $1 97 per share from the previous range of $1 88 to $1 95 per share.
And with that I'll turn the call over to the operator for Q&A.
Thank you will not be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to move your question from the queue for participants using speaker equipment. Please press star one on retail.
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Our first question today is coming from Craig Schmidt from Bank of America. Your line is now live.
Thank you.
Yeah.
Clear that the leasing.
Year to date as it continues to really drive the company.
Just wondering are you still seeing leasing appetite in the third quarter of.
Unchanged, despite the inflationary pressure.
We are where you know as I mentioned in my remarks, we're very encouraged by what we're seeing not only under negotiation, but also what we're seeing in our weekly leasing committees, Brian Yeah, Craig and coming out of ICSC. We were very encouraged by the conversations the portfolios that we've had since then and you can really see as Jim mentioned.
That for the legal pipeline. Despite all that we signed during the quarter, that's up 17% from where we were a year ago and traffic continues to exceed pre pandemic levels at our center. So we're really seeing our core retailers those and the value apparel mass merchants specialty grocery <unk> restaurants.
Face more mall native tenants that we continue to do a lot with you saw it again during the quarter with Bath and body works and Clearers and rally house. So the depth of demand has been pretty strong and we continue to be encouraged by for retailers that again as Jim mentioned, our open or looking to open stores in both 'twenty three 'twenty four.
And Brian if Theres anything you can say regarding the.
The appetite for the small shops, the mom and pops, the locals as opposed to national.
We continue to be encouraged by that as well I think the pandemic created an opportunity for really strong local tenants, particularly in that restaurant space and we've seen over the course of the past 18 months good quality operators multi unit operators that are coming in and taking second generation restaurant space. The team is really capital.
<unk> on the investments that we've made in our centers better anchors that are driving more traffic that are helping attract those so local tenants are still roughly about 17% of our ABR, but what I would tell you Craig is the strength of those local operators. We're really encouraged by the team's done a really nice job in their particular markets driving strong local tenants.
Centers and another trend that we talked a lot about during the pandemic and which has continued as we are seeing a lot of small shop demand from national and regional players as well. So it's been an interesting evolution and the composition of our small shop tenancy.
Right.
Great. Thank you.
Yeah.
Thank you. Your next question is coming from Alexander Goldfarb from Piper Sandler Your line is now live.
Hey.
Good morning, good morning down there.
Jim question about about the shopper.
It seems that when I've asked this question of peers, everyone seems to be stating that basically all shoppers not just the core diehard shopper that drives retailer sales, but all the shoppers are pretty pretty much hanging in there and engaged last night on Simon's call David spoke about sort of the teen shopper.
The value shopper being pinched yeah.
In some of their categories, but overall the consumer being strong how would you characterize your shopper base and what are the tenant staying as it strength across everywhere are you seeing any cracks just curious a little bit more perspective.
Well you know you have seen you know really strong traffic levels, which have continued and which we find to be very encouraging at the same time you know our tenants are reporting strong sales across the board. In fact, he you noticed that we picked up some percentage rent in the prior quarter.
Reflecting the strength of traffic and the sales volumes that our tenants have been achieving including tenants in the value segment. So.
So if you take a step back and you think about our centers more generally grocery anchored necessity based value apparel. Those categories have all remained pretty strong certainly you've seen within the earnings reports of some of the tenants some shifting in consumer habits and what can.
Sumer, they're spending money on but what I'm. Most encouraged by Alex is the continued real time demand of tenants to open up new stores. So they're they understand very well, where the consumer is and are investing more in their most profitable channel which is the store.
So you know as you think about our traffic levels as you think about the tenant demand as you think about the forward leasing pipeline and you think about the consumer hanging in there we feel pretty good.
Okay.
You bet.
Thank you next question is coming from one single area from BMO. Your line is now live.
Hi, Good morning, just hoping you could tease out a little bit about your comments on maybe being a net seller for the back half of the year.
The quantum around that and where asset values are for for the stuff you're looking to sell.
You know one we we've always been hesitant to provide specific levels of guidance because we do want to continue to be opportunistic much as we're being right now as we find good demand for some of the smaller noncore assets, we're really not seeing a lot of very compelling product in this period of.
Capital markets volatility that would interest us from an investment perspective that could certainly change and we're certainly on the front of our foot watching to see how that market.
Responds and in our core markets.
But you know we do expect given what we have in the near term pipeline to be net sellers over the coming months and continue to have importantly, the acquisition dry powder to pivot.
Should great opportunities present themselves.
And any color on where you've seen cap rates or how have you seen cap rates change as a result of I'm.
Uncertainty in the economy and some volatility on the rate side Mark.
So what what's been surprising is we've seen a continued relatively strong market for grocery anchored assets that have growth and value creation potential certainly like the assets. We have recently purchased.
When you look at assets that are more commodity based because that really don't have growth those cap rates likely to drift up a bit.
Certainly nowhere in lockstep with the rise in the risk free rate I do think it's important to look at what cap rates have done over time in the open air sector, they've actually proven to be pretty sticky. So I do think that relative stickiness and cap rates rather than a retail and frankly the proven for proof of performance that we're seeing through some challenging times over the last few years, we will continue to attract capital.
So the sector and keep values.
Thinking.
Thank you very much.
Thank you next question is coming from Todd Thomas from Keybanc capital markets. Your line is alive.
Hi, Thanks, good morning.
Jim or Angela maybe you know theres been a little bit of volatility in.
Your current same store NOI growth results, just given the out of period collections and and Jim You commented that you know you're excited about the future 2023 and beyond.
Base rent growth is expected to pick up a bit from the four 3% year to date based on.
Your revised guidance so call it ending the year in the mid to high 4% range is that a realistic growth rate to anticipate.
Moving forward into 'twenty, three sort of an appropriate level of minimum rent growth upon exiting 'twenty two and in looking ahead, well without giving guidance. We expect rent growth to continue to be strong and continue to reflect that accelerating momentum as we continue to deliver our value added reinvestments.
And you know what gives us confidence and that forward look assuming remember that.
Prior period collections are definitely going to moderate right you got to remember that but as you look forward to kind of the base period, and you look past the noise of the prior period collections.
The engines firing in all cylinders and you know what we're particularly encouraged about.
It's again that not only the signed but not commenced pipeline, but the forward legal leasing pipeline and the conversations that we're seeing that allow us to capitalize and continue to capitalize on our attractive rent basis to drive more accretive reinvestment projects in more fundamental growth in ROI. So.
We like the trajectory, we like how the business plan is delivering and you know honestly.
I think it gives us a little bit of a differentiation.
Versus a business plan, that's just modeled on a steady state of replacing tenants and.
Failing when you've got you know rents that may be at or above market. So that's the nice thing about our plan as it allows us to look several quarters forward and you know again, we're doing business today for 'twenty, three and 'twenty four yeah.
Yeah, just I just make one comment on the out of period collections. It is certainly as Jim said, a headwind as we head into next year from an optical growth perspective, we recognized a little over $10 million this quarter or about 10 million last quarter as well.
While that is a finite pool and as Jim said those are naturally going to moderate as we move forward and we have addressed them.
You know at this point a lot of the most likely to collect amounts there should still be some as we move forward, but if you think about the collections. Just you know year to date I think it says something really positive about the strength of the underlying tendency over 80% of what we collected in the second quarter was related to tenants who are still active in the portfolio today.
And the fact that they are you know coming current on some of those legacy amounts from the pandemic I think says something really positive about how they've recovered and how their businesses are positioned right now.
Okay. That's helpful and then just a follow up.
Would you expect Angela I think you commented on.
Net recoveries in the back half of the year.
But you know looking forward would you expect net recoveries to become sort of a greater contribution to same store NOI growth just given the increase in occupancy rates or is or are likely to be some continued volatility.
Impacting margins yeah, there's there's certainly volatility this year you know to your point are related to the timing of expenses in 2021 and the fact that they were much more backend loaded, particularly in Q4. So while we do expect net recoveries to be a positive contribution for the full year, which does reflect the growth we're seeing in billed occupancy there.
Sure. It is negative at this point in the year and that will revert as expenses kind of normal either as you get into some easier comps in Q3 and Q4 you know as you look forward to next year, certainly I think we can continue that momentum based on.
Prudent expense management and continued growth in billed occupancy we've done a great job at continuing to navigate the inflationary environment and are seeing a tremendous amount of pressure on margins related to that.
Yeah.
Okay, great. Thank you.
Thank you thank.
Thank you next question is coming from Craig Mailman from Citi. Your line is not a lot.
Everyone. Just a couple of follow up on the $15 million, a python or at least under negotiation could you just give us a sense of how much of that is renewals versus new and.
You know what that could mean for kind of small shop occupancy if the majority of that.
Actually signs like Hey, this is Brian that's new.
That's the new lease pipeline that we have and we're very like we've said encouraged by it particularly because of how much GLA.
G L. A that we've signed year to date, so I think what it means for small shop occupancy as Jim mentioned, we see continued runway for growth. We've got about 150 to 150 basis point drag in both overall and small shop occupancy from that redevelopment pipeline as the teams continue to deliver that as well.
Continue to bring anchors in that are driving a lot of traffic to our centers. We expect that to continue to grow but we've been very encouraged by the growth to date, but we still see a lot of runway going forward.
Okay. So maybe another way to ask it then I guess just how much of that is kind of same store space versus value.
You bet.
I think it's broad across the portfolio I mean, I would say from the from the most part we're not seeing a I mean, we definitely see an impact when we do a reinvestment, but I would say broadly for the portfolio. Our centers look a lot better today. The operating teams have done a fantastic job managing them. So we're seeing gains.
Really across the portfolio and then in particular, when we do make a reinvestment we're seeing significant small shop occupancy gains of about 600 basis points. So I would say that that legal pipeline is fairly broad based but we're encouraged by the gains that we're seeing across the board yeah. I would just point out obviously all of our reinvestment projects remain in the same property pool. So the same property pool.
I think over 90% of the total portfolio.
Thank you for the clarification and then just one for Angela real quick you kind of broke down the commencements are.
54 million between 'twenty to 'twenty three if we think about it from.
Yes.
That's a forward pack perspective shall we think about like kind of 50% of that.
7 million hitting in the back half of the year than 50% to 75% of that $26 million hitting in 'twenty two plus the other.
Half of the time weighted 20 acute commencements.
Yeah, I can give a little more color there we do in our supplemental provide a breakdown between 'twenty three and then 24 and beyond so.
As we talked about on the call. It 27 million in 2022, a little bit Q4 weighted but.
But not substantially so as you get into 2023 is about $19 million of the remainder and then 'twenty 'twenty four and beyond is about $8 million of what's left so that's kind of how it breaks down.
Perfect helpful. Thank you Beth.
Thank you. Your next question is coming from keeping Kim from <unk> Securities. Your line is now live.
I don't think.
So just wanted hi, Hey, Jim.
Wanted to go back to the $50 million of ABR that are that are in negotiations, but not the signed but not opened but under negotiation.
You know obviously either leases that are going into that bucket and some pieces that are being converted to sign.
That number is the same as last quarter $50 million.
But like I. Just said is obviously dynamic can you just talk a little bit more about.
What about that math.
With real time demand Youre seeing.
Yes, keeping its about to say it's about the same number but consider I mean, we signed 900000 square feet of leases during the quarter. So we've added more to the pipeline in terms of the real time demand as I mentioned, we were very encouraged by the conversations at ICSC, which we're on the heels of retail earnings.
We continue to have great discussions with portfolio reviews, following up and what we're hearing from our core tenants and from new tenants to the portfolio is still a desire to expand or open air footprint, they're looking to fill their slots for 2023, and 2024, theyre, making long term decisions because they.
See as Jim mentioned that this is the most profitable way to deliver goods to the consumer and they are looking to expand their touch point with the consumer and as you look at what we've done at our centers.
Our centers look a lot better where our traffic drivers continue to keep traffic up at our centers versus pre pandemic levels. So we've been really encouraged by the demand and particularly if the demand that we've been seeing over the last six to eight weeks.
As you know and I. Appreciate the question key then cause it's Brian highlights, where we're constantly back filling that pipeline. So you know we delivered.
Over $15 million of ABR from what was in legal last time is we signed it for 17 excuse me and you know we continue to see activity not only with what where.
In negotiations on but in the very front end is where siding L. O I's are were talking to tenants about their needs.
Those activities remain very robust.
Which I think reflects the quality of our centers. It also reflects the general environment, where you're not seeing a lot of new supply and you know where were seeing in a lot of circumstances.
Multiple tenants competing for the same space, which as you know a great way to drive better terms better growth and better outcomes.
Okay.
[laughter] accounting question I'm looking at page 30 in your leasing metrics.
You guys cite about $1 77 tenants with the big landlord work in Q I was just curious if that's a fully loaded.
Number, meaning if you do work on like each back our roofing that where the useful useful life extend beyond the kind of lease term is.
Is that Capex included in that 77 or excluded.
Keeping it's those are the tenant specific costs for work related to the space that we're doing generally when we have kind of larger tas for tenants. So it it.
It would have some of those some of that Ti work. That's included in that is it's typically performed by the landlord yeah that typical base building work, it's usually excluded from those numbers and you'll see that show up in maintenance Capex.
Okay. Thank you.
Thank you.
Thank you next question today is coming from Greg Mcginniss from Deutsche Bank. Your line is now live.
I think they're talking about me.
Hey, good morning.
Just want to go back to your comments on the transaction market in terms of not seeing compelling product. During this period of market volatility does that mean, there is no product available to buy or sellers or just not adjusting cap rates. Despite increases in borrowing costs. So just a wider bid ask spread issue.
So there's a couple of points in there one there there's certainly less assets on the market today, particularly on the grocery anchored side. So the ones that are coming to market. As we mentioned the pricing has been pretty sticky stickier than we would've expected.
I think there's just less assets on the market from from that perspective.
From a bid ask perspective, I do think where you're going to see that that wider bid ask is on larger deals as you mentioned or as Jim mentioned his remarks smaller deals are much wider buyer pool, they've got a lot of financing options. So that that market is.
Is somewhat linked with the larger assets, we see less of those trading today. So I do think there's probably a wider bid ask spread there.
It certainly could be some of the opportunity that Jim mentioned as we look at the rest of the year or going into 'twenty into next year. So that's how I would categorize the market today.
Okay. Thanks, and then separately just a point of clarification on the 150 basis point occupancy drags that you've cited for from the redevelopment pipeline does that mean that our assets are currently repositioning and space can't be filled because there's work being done or is that occupancy that you expect to gain after new anchors.
Prasad for Noah Scott occupant its vacancy in those assets undergoing reinvestment, which we do expect to fill as we deliver those reinvestments.
So it's the it's the impact of assets under reinvestment from an occupancy standpoint to the pool overall okay.
Okay, and that's that's the active development pipeline that drag right, but not the billion plus.
All investments.
Okay, Alright, great. Thank you very much you bet.
Thank you. Our next question today is coming from <unk> St. Juste from Mizuho. Your line is that a lot.
Hey, good morning, I had a couple more.
Jim.
So maybe the first one for you Jim you guys have done a great job getting to your snow rents on time, even faster than anticipated.
I have been hearing some comments about potential store opening delays given labor shortage and supply chain concerns. So maybe you can discuss how you were able to successfully.
<unk> successfully get to your rent so consistently and ahead of schedule and are you starting to see any of those delays.
Delays are or have any concerns about the potential delays as we look forward.
It's it's something that Brian and hi, and our leasing and operations teams and our tenant coordinators have been very active in managing and I think you you see our success in terms of our ability to deliver ahead of schedule you know to get there. It's really a multi pronged approach you know your work.
King with tenants to adjust scopes, you're working with tenants to defer certain items, you're getting the tenants to except existing conditions because the tenant wants to get open to and you know at the same time, you're going ahead and getting permits early in the process.
A lot of other things to try to manage that as best you can because it is against the backdrop hindafell of supply chain disruption you know permitting delays that occur, particularly during the pandemic as some permitting offices were shut down yeah. I just think the team has done a re.
Really good job of proactively managing that and delivering.
Better than expected, so hats off to Brian and the leasing team for having the trust with the tenants to.
Work with them and negotiate scope in fact, we've had with many of our major tenants offsite meetings to talk about how do we how do we hit schedules and to partner with tenants in that and of course Hagen. The operations team are doing a phenomenal job.
That's great thanks for that Jim.
Follow up maybe for Angela on the balance sheet.
Yeah, I understand that you have great liquidity no near term.
Maturity is until 'twenty four but your debt to EBITDA is in the.
The mid sixes and I imagine that will somewhat limit your ability to be opportunistic you've talked about being a net seller in the backdrop of yourself I guess I'm curious is this a level your overall comfortable with especially if we that's a slow economic period here.
And maybe you could talk a little bit more about your balance sheet philosophy today as well as your target leverage and pipeline getting there.
Sure Yeah, we're very pleased with where we stand overall today, we spent a lot of time on this call talking about how powerful that signed but not commenced pipeline and as we deliver that space, you're naturally going to see EBITDA growth and you're naturally going to see the debt to EBIDTA number work its way down.
We generate great free cash flow, we're using free cash flow to fund the vast majority of the redevelopment effort, which which continues to create that EBITDA growth going forward. So I do think you'll naturally trend down into the low six times range, probably as we get into next year, but it will be pretty organic in nature.
Great got it and then it looks like.
You were comfortable being overall in that type of environment, where we're looking at yeah. We we really are and it's it's informed by the fact that the portfolio continues to have a very significant mark to market opportunity.
So I think you know it.
What the right the quote unquote right. That's an EBITDA number I should always be informed by what the basis of the portfolio is and where EBITDA is going and where EBITDA is going if we thought that the portfolio. We're above market. We would have a different leverage target. If we thought it were at market. We may even have a different leverage target, but with a continued substantial mark to market in the portfolio.
We're demonstrating quarter after quarter and they executed spreads we believe you're going to continue to see that EBITDA growth and naturally see the debt to EBITDA number trend lower overtime. So six times does feel right in this environment absolutely.
Okay. Thank you for the time.
Sure. Thanks Sundar.
The next question is coming from Anthony Powell from Barclays. Your line is not a lot.
Hi, Good morning, I had a question on revenues deemed uncollectible you mentioned that we expect to see prior questions moderated, but youre also seeing trauma turn your collection. So as you look at that line item going forward into 2023 can we expect that line item to be you know.
Either.
Flat or positive in 2023, as we continue to collect prior period earnings would ask your questions get better.
Yeah, it's a it's a very difficult question to answer because of that prior period collection piece, we've been very pleasantly surprised by our ability to continue to collect some of those those legacy amount, but as you step back and think about it most of what we're talking about relates to 'twenty 'twenty, our revenue and it's we're now two years sort of into trying to collect them.
Those amounts.
What's left to collect is heavily weighted to some of those.
Categories that were more significantly impacted during the pandemic like restaurants fitness entertainment. So well I think the team has done a phenomenal job of continuing to to realized collections on those amounts.
We should naturally I'll expect that that's going to trend down and eventually really doesn't pay it.
We have and we give disclosure on this in our supplemental it's about $39 million remaining of revenue throughout the entire pandemic period that has been accrued for but uncollected and reserved for so that's really the number that in total would have the ability to be positive to the P&L positive to revenue, it's deemed uncollectible overtime only about 18.
A million dollars of that relates to tenants that are still in occupancy in the portfolio that are still active tenants with us that's our highest likelihood of collection as I mentioned earlier.
Over 80% of what we collected in the current quarter was related to active tenants and and those are great trends and say something really I think fantastic about the wherewithal of those tenants at this point in time, but the granularity of that pool has continued to increase we did have one larger settlement in the current quarter.
Looking forward the average balance we're trying to collect from individual tenants is in the 20 to $30000 range. So it makes it very difficult to predict the total amount that might come in or or the timing of that putting all of that aside you know I would say as we look at the watch list in general just continued to trend down as we left a 'twenty 'twenty three we're certainly mindful of the overall.
Current environment.
But we do continue to see improvements in the collections rate from cash basis tenants as we move forward. So at this point you know I would expect that we.
Putting aside the impact of prior period collections that we look at reserve numbers for next year that probably are more in line with our long term historical levels of 75 to 100 basis points, but again not with a big caveat of not really being able to predict what those out of period amounts might be.
Okay. Thanks for that detail and one more point and in sugar land are you talking about the underwriting or the cap rate going in.
That a full redevelopment or more just to yeah.
We've seen leasing up opportunity there.
It's really it's really both so you know we have a vacancy in the small shops, which we've already begun back filling above what we have underwritten as well as some additional pad sites and density that we believe we can add to that highly trafficked asset mark.
Yeah, we're really excited about that about that opportunity, we really bought that asset at a low point in the asset side.
Occupancy history, so that the asset is currently 87% occupied 82% occupied and small shop, both of which are well below our portfolio average. So we really do see near term growth in that asset from a cap rate perspective. It was just below a five cap and we do have as I said leases that we really hadn't him that would drive it well above that here.
In the near term.
Thank you you.
You bet.
Thank you next question is coming from Floris Van <unk> I come from Compass point. Your line is now live.
Good morning, guys.
Taking my question.
Hey, Jim.
I wanted to if you could remind us again, where your occupancy is it was in your portfolio.
Knowing that that's probably maybe not a relevant statistic is <unk>, but significantly.
To your into your properties.
Where do you think that can go in and also maybe you can talk about what that does to your.
NOI margins I noticed that you know you've got still a pretty healthy pipeline of signed not opened presumably I. Suppose you are your margins improve as well well do you think I mean.
Where do you think your NOI margins can can can go to.
Once you get your portfolio even further occupied.
You know as we've talked about and Brian highlighted as well, we've got about 150 basis points of drag in our reinvestment pipeline, which we think will outperform the portfolio as we deliver it portfolio average. So if you think about it we sit at 92.5% today our previous all.
Hi was 92.8 <unk>.
Believe as we continue to execute that will continue to go above that and that will be accretive to our margins as well you know I'm not going to give you an exact basis point, but obviously as we continue to drive the build occupancy.
That continues to accrete to our NOI margin.
Thanks, Jim and maybe my follow up is in terms of I'm curious just.
With all of the cell phone data you guys have really their information on traffic levels, what does a typical redevelopment due to traffic levels in your view and I noticed I saw online, you're Mamaroneck center, which I haven't been to and in a couple of years, but that's it looks a lot nicer now than it did previously.
But maybe if you can use that as an anecdote what what has happened to traffic.
At a center like that post post post redevelopment it's.
It's quite significant I mean, it's you know high double digit.
Kind of growth rate and what the traffic is and it depends on the nature of the of the redevelopment and reinvestment certainly you mentioned the Merrimack you know are the traffic growth. There has been exponential because we had a we had.
A dark A&P box and our shop space, where we were able to add a bunch of shops replace a grocer with a great specialty grocer and you know drive exponential growth in that too you know. The addition of our parcel for example in Rocklin Ware.
We added a very productive out parcel their traffic has increased at the center.
By you know 15, 20% so.
You know it depends on it depends on the nature of what we're doing but we're seeing great growth in traffic I think you know when you take a big step back and you look at our relative growth in traffic overall versus 19, you'll see that we stand apart and that strategy is what.
Driving that differential right.
It's coming through in our traffic numbers as we can.
To replace the tired old oversize box with a specialty grocer and fitness user value apparel retailer or we add an out parcel and what's exciting for us as you know we use now impacted over 130 of our properties, we have another $400 million jet largely leased and underway.
Which will continue to accrete to the traffic levels at the assets impacted and we have a pipeline behind it.
So it's it's great to see it in the traffic numbers and.
You know and to see that type of overall growth.
Thanks, Jeff.
<unk>.
Thank you. Our next question today is coming from Linda Tsai from Jefferies. Your line is now live.
Hi, Good morning, essentially you mentioned earlier success in managing expenses can you give more color on what that entails.
Yeah, I mean, it's just very proactive efforts across all of our property management team.
Team across all of the regions in terms of really working with vendors utilizing the benefit of scale, we have for certain things.
Trying to find more efficient ways to operate and more efficient ways to procure certain things.
So it's a very broad based approach I think the team's done a fantastic job of really looking for every opportunity across all of the expense line item to try to manage proactively managed our inflationary pressures across the portfolio.
Thanks, and then in terms of revenue seemed uncollectible being a headwind to 2023 are there other items, we should think about for next year in terms of impacting growth.
Yeah, No I I mean, I think Jim Hi, Jim framed it up very well in his prepared remarks, which you know was to say, yes. The prior period collections are without question going to be a headwind as we head into 'twenty. Two 'twenty three we know what that headwind it looks like on a year to date basis to the extent, we have additional out of period collections in the second half that creates.
And isn't even larger headwind as we get into 2020 three and you know certainly that the health of the tendency feels very good today and so we're hopeful that continued improvements in the collections rates from cash basis tenants will help to mitigate some of that but without question that's a headwind.
Now the offset to that and then a more important significant way are the fundamental growth piece, meaning that the signed but not commenced pipeline coming online its really going to be the primary driver of growth as we get into next year. Both as we as we increase occupancy, which we've highlighted has an important impact on an overall.
Margins in and recovery rates across the portfolio.
Really excited about the opportunity to continue to drive that forward.
Thanks.
The next question is coming from Paul you know real Huffman from Green Street. Your line is now live.
Good morning.
Yeah, obviously.
Obviously seeing very strong leasing.
Idaho and.
And slowing economy.
Really sweet cleaner behavior.
So I suppose really have seen other cycles is a unique or down the road. We realize that he was in hindsight in line with the usual lag reaction from payers to changes in economic and in.
Well I think you have to frame it up in terms of where we've been for the last couple of years, you know the retailers navigated through a pandemic quite well and through the process of doing that.
I think further solidified their own views as to the importance of the store and serving the customer.
And the importance of the store from a profitability standpoint, So you know, while you're certainly seeing some headlines around inventories and shifting consumer patterns traffic is still strong.
Retailer sales are still up and you know you're you're seeing I think what is a very rational.
Uh huh.
Forward plan for these retailers, who are thinking not just about the next couple of quarters, but from a store perspective. The next couple of years, where they see white space to expand their brand and be profitable and that's why you always hear me say rent bases matters, the retailers aren't going to go into a store that they.
We believe is not going to be profitable to them from a four wall EBITDA perspective.
And you know there are better than ever before Paulina at estimating what the productivity of the store is going to be not only within the four walls, but also what they expect that store to drive in addition, and in additional online revenue.
And you know those those models are utilizing all the data and current real time traffic patterns and understanding of consumer patterns as well.
You know this continued strength in retailer demand.
It feels very fundamental to us and in support of their long term profitability.
Thank you very helpful.
And then another question.
Uh huh.
Hum.
Yes, so consumers with lower household.
Your peers.
Can you talk about what are you what are in your mind the implications of this.
Even though.
Kevin.
No growth scenario.
Well understanding of course, the type of product.
Strip centers, you know our our centers are and been phenomenally strong locations from a national perspective, and I think we're demonstrating that in terms of the fundamental growth that we've been delivering the relative traffic growth to the centers and the real time tenant.
Demand to be in our centers.
So we like how this portfolio is positioned.
There are some assets that might bear higher demographic profiles, but have rents that are at or above market and that's not a long term way in our opinion to drive value.
Drive ROI so.
So we like how we're positioned as a portfolio, we like where our rents are we liked that rent basis, particularly in light of where we're signing new rents and in particularly in light of the fundamental tenant demand and real time traffic patterns.
So we think in that way, we're somewhat differentiated in that.
We haven't chased demography just for the sake of demography, we're looking to invest capital, where we see strong tenant demand and where we believe we can drive great performance from an ROI perspective.
Thank you very much for that.
The next question is coming from Mike Mueller from JP Morgan. Your line is now live.
Yes, hi.
Curious how does the return expectations for your new and planned reinvestment projects today compare to say projects you started a year or two ago.
They remain really strong it changes based on mix.
No typically the out parcel projects will be.
More accretive from a return perspective than a larger scale redevelopment.
But you know, we're getting great incremental returns and importantly, Mike also great gross returns.
On the capital that we're putting to work. So you know today that pipeline that we have underway is it just a little bit under $398 million at a nine.
You know I like how that's positioned its a substantial spread to you.
You know not only where cap rates are today, but where they might move in the future and we believe we're creating a tremendous amount of value there.
Got it okay that was it. Thank you. Thank you Mike.
Thank you we reached end of our question and answer session I'd like to turn the floor back over for any further closing comments. Thanks.
Thanks, everyone for joining enjoy the rest of your summer.
Thank you that does conclude today's teleconference. You may disconnect your lines and have a wonderful day, we thank you for your participation today.