Q1 2022 Phillips Edison & Co Inc Earnings Call
Yeah.
Good morning, and welcome to Phillips Edison and company's first quarter 2022 results presentation. My name is Latif and I will be your conference call. Operator today before we begin I would like to remind our listeners that today's presentation is being recorded and simultaneously webcast.
The company's earnings release quarterly financial supplement and 10-Q were issued yesterday may 5th after market close.
These documents and a replay of today's call can be accessed on the investors section of the Phillips Edison and company website at Phillips Edison Dot com.
I would now like to turn the call over to Stephanie, how well Phillips Edison and company.
Thank you operator, good afternoon, everyone and thank you for joining my name is Beth Anyhow and I'm, the director of Investor Relations with Phillips Edison Company. Joining me on today's call are chairman and Chief Executive Officer.
Yeah.
Our president Devin Murphy, and our Chief Financial Officer, John Cahill.
During today's presentation, Jeff will discuss our differentiated strategy and touch on the highlights for the quarter.
Devin who will discuss our first quarter operational results and John will review, our first quarter financial results, our recent capital markets activity and discuss.
Okay.
Lastly, Jeff will return to provide an update on our investment activity and provide closing comments.
Following our prepared remarks, we will answer questions from the institution.
D.
Before we begin I would like to remind our audience that statements made during today's call may be considered forward looking which are subject to various risks and uncertainties as described in our SEC filings.
In addition, we will also refer to certain non-GAAP financial measures.
Information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in our earnings release and supplemental disclosure issued yesterday, which are on our website with that it's my pleasure to turn the call over to Jack <unk>, Our Chief Executive Officer, Jeff.
Thank you Stephanie and good afternoon, everyone.
Encouraged by the activity we have seen since the start of the year, which is reflected in our Q1 results.
The leasing environment continues to be strong as evidenced by our robust leasing spreads high retention rate and resulting high occupancy level.
There is continued demand in the market to be located centers anchored by the number one or two grocer.
These grocers are necessity based retailers drive high levels of foot traffic to our small shops.
Our team has been able to leverage this demand and the pricing power that we have as a result of the high occupancy to produce exceptional new and renewal leasing spreads.
Our strong retention rates and high level of collections are a testament to our strategy our neighborhood shopping centers and therefore, Matt drive results.
On the acquisition front the market for grocery anchored centers remains competitive.
However, we believe a key differentiator for us as the markets we operate in.
Our team continues to find value and drive returns in centers anchored by the number one or two grocery in our markets.
We have successfully done this across multiple cycles for over 30 years, one asset at a time.
We remain disciplined in our acquisition efforts and continue to target acquisition IRR is over 8%.
When we review the assets we have acquired in 2021, they are all performing better than our underwriting and we're very optimistic about our 2022 acquisitions.
Yesterday, we announced we are reaffirming our 2022 guidance of net acquisitions of $300 million to $400 million. This year, we're targeting unlevered IRR of over 8%.
Our strong results for the quarter and the continued successful execution of our growth strategy by the team have allowed us to raise the lower end of our core <unk> and same center NOI guidance for 2022, John will speak about this shortly.
Now I'd like to turn the call over to Devin who will speak in more detail about our operating results for the quarter Devin.
Thank you Jeff Good afternoon, everyone. Thank you for joining us today.
First I will review the operational and leasing highlights of the quarter.
As of $3 31, our leased portfolio occupancy was 96, 2%.
Compared to 94, 8% at $331 21.
An increase of 140 basis points.
Anchor leased occupancy increased by 80 basis points from a year ago to 98, 1%.
Our in line Restock, you can see increased by 280 basis points over last year and 92, 6%.
Sequentially, our inline leased occupancy decreased by 10 basis points from 12 31 21.
<unk> vacancy that we gained through acquisition that we closed on in the quarter.
Our economic occupancy improved this quarter to 95, 7%.
And the spread between leased and economic occupancy tightened by 50 basis points, which brings the spread close to our historical level of approximately 60 basis points.
The smaller sized spaces in our centers allow us to move neighbors into the space quickly post lease execution.
During the quarter, we executed 92, new and 152 renewal leases and options totaling 776000 square feet.
This total lead volume is consistent with our historical levels of leasing volume.
Our expectation is that renewals will continue to make up a larger percentage of our leasing volume given our high retention rates.
We view our high retention rate as a strength since there is no downtime and less ti required for a renewal lease versus a new lease.
Comparable new lease rent spreads were 34% this quarter.
Comparable renewal rent spreads or 14, 7% the.
The total combined rent spread for the quarter inclusive of new renewal and option leases was 14, 6%.
We continue to see strong demand for space in our centers and executed leases this quarter with retailers such as Panera Bread Jersey, Mikes and center, while primary care Humana company.
As Jeff noted we are encouraged by the continued success that our neighbors are enjoying at our centers.
During the first quarter, we realized a retention rate of 89, 7%.
The leasing spreads that we are seeing combined with our strong retention rate is clear evidence of the continued high demand for space in our centers and the pricing power that we currently enjoy.
Lastly, I will discuss the results, we achieved through our development and redevelopment activities.
We continue to execute on our pipeline of ground up and repositioning projects. Currently we have 20 ground up and redevelopment projects under active construction, which represent a total investment of approximately $48 million.
The average yield on these projects is estimated to be 10% to 12% Unlevered.
We stabilized two of these projects in the first quarter, both are fully leased and rent has commenced.
In addition to the 20 active projects. We also have a pipeline of 10 plus projects expected to begin construction throughout the balance of this year.
This activity will keep us on pace to meet our target of $45 million to $50 million of total redevelopment spend for 2022 with yields of 10% Unlevered.
This concludes the summary of our operating results for the quarter I will now turn the call over to John for a discussion of our financial results recent capital markets activity and guidance John .
Thank you Devin and good afternoon, everyone.
First quarter of 2020 to NAREIT episode increased 49, 1% to $67 1 million or 52 cents per diluted share.
This result was driven by an increase in rental income and improvement in collections as well as a reduction in noncash expense as a result of the final settlement of the earn out liability with the issuance of $1 6 million operating partnership units in January of this year.
Our first quarter <unk> increased 14, 2% to $72 $6 million driven by increased revenue at our properties from our higher occupancy levels and strong leasing spreads our expanded portfolio as well as lower interest expense from our lower leverage level versus a year ago.
On a per share basis core <unk> decreased to 56 per diluted share as a result of the number of incremental shares we issued during our July 2021, underwritten IPO sequentially, our core <unk> per share increased from 47 in the fourth quarter on higher revenues.
And lower property operating and G&A expenses.
Our Q1 2022 same center net operating income or NOI increased to $89 8 million up six 8% from a year ago. This improvement was primarily driven by higher occupancy a two 8% increase in average base rent per square foot and stronger collections compared to two <unk>.
'twenty one.
Turning to the balance sheet, we continue to view our balance sheet as a strength with our net debt to adjusted EBITDAR of five seven times as of March 31, 2022, compared to five six times at December 31 2021.
At March 31, our debt had a weighted average interest rate of three 2% and a weighted average maturity of five one years approximately 96% of our debt was fixed rate.
At the end of the period, we had approximately $462 million of total liquidity comprised of $17 million of cash cash equivalents and restricted cash plus $445 million of borrowing capacity available on our $500 million credit facility.
We intend to utilize our revolving credit facility to fund our acquisition plan.
With no significant debt maturities due until 2024, we continue to carefully evaluate and monitor the capital markets as we consider our future financing options.
On February 10, we filed and automatically effective shelf registration statement and commenced the $250 million ATM equity offering program.
This provides us with a useful tool to efficiently access the capital markets as opportunities arise.
We have not utilized the ATM to date, and we will evaluate future use based on a combination of favorable market conditions acquisition opportunities and identifying uses of proceeds that are earnings accretive.
As we have previously communicated we have an external growth targets by $1 billion of assets over the three years post our July 2021, underwritten IPO, while we do not need to issue equity to execute this plan, we will consider equity opportunities in the future as appropriate to allow us to maintain our strong balance sheet position.
I want to reiterate that any proceeds raised in the equity or debt capital markets will be invested in a manner that we believe will be accretive to our per share financial metrics.
As Jeff mentioned, we're pleased to raise the midpoint of our NAREIT <unk> and core <unk> per share guidance based on our success in identifying assets early in the year and our favorable operating results year to date.
Our new range for core <unk> per share is $2 18.
The $2.24.
We're also tightening the range and increasing the midpoint for our same center NOI guidance to $3, two 5% to 4%.
We are reaffirming our net acquisition guidance of $300 million to $400 million for 2022.
Jeff will be discussing our acquisitions during the period as well as our pipeline the opportunity to reach our acquisition target ahead of schedule gives us confidence in our financial guidance for the year.
We continue to evaluate all centers that fit our investment criteria as they come to market and as we look ahead, we will use our quad squad portfolio analysis to consider trades of additional acquisitions for lower growth assets in our existing portfolio. We believe this strategic exercise of match funding as prudent as we.
The impact of the debt capital markets and rising interest rates on the transaction market.
With that I would like to turn the call back over to Jeff to expand on our investment activity for the quarter and recap our long term growth strategy Jeff.
Thank you John .
In the first quarter of 2022, we acquired three grocery anchored shopping centers for approximately $100 million.
Our acquisitions included Cascades overlook in Sterling, Virginia in the DC MSA This center.
Trade area with very favorable income and population demographics and.
In addition to the vacancy we plan to lease at the center. We believe there is leasing upside at this asset through increasing occupancy and marking rents to market.
We also purchased Oak meadows, and the Austin MSA. It is at a location, where we expect to see continued growth as a result of planned in product and process developments and the surrounding trade area. We believe we can achieve growth by completing the leasing efforts as well as through existing contracts.
Actual rent bumps.
Our final purchase during the period was the shops at Avalon located in Spring Hill, Florida near Tampa.
This center provides a unique opportunity for us to purchase include multiple undeveloped land parcels, where we believe we can deliver growth through various forms including ground leases ground up development and land sales.
This is in addition to the growth we can achieve through the upside in leasing the existent vacant space.
We are currently in the closing process of an additional grocery anchored shopping center up for approximately $70 million, which should close this month.
Additionally, we are in active negotiations on other centers that would bring us meaningfully closer to our acquisition target.
We're confident we will meet our acquisition guidance.
All of these centers acquired or under contract would exceed our 8% Unlevered IRR.
We're excited at the opportunities our team has been able to identify and convert in this market.
Now before we get to the Q&A section I would like to quickly recap our quarter.
The leasing environment continues to be strong as evidenced by our leasing spreads and retention rates.
We are capitalizing on our ability to drive rents.
Our team continues to find opportunities in the acquisition market that meet our required returns.
As a result of this internal and external growth were able to tighten and improve our financial guidance ranges.
Now with that we will begin the Q&A portion of our call operator.
Thank you to maintain an efficient Q&A session. You may ask a question with an additional follow up if you have additional questions you're more than welcome to rejoin the queue to ask a question press star one on your Touchtone telephone to remove your question press the pound key.
Our first question comes from Craig Schmidt of Bank of America. Your line is open.
Well thank you.
I'm wondering given.
Given the reduction in activity post quarter that 'twenty two versus 21.
Do you see that happening for the second third and fourth quarter or was this just a pause and you might return.
Leasing volume.
Yeah.
Greg This is Jeff Thank you for the.
A question and.
We.
I mean, if you look at the total volume of all of all of our leasing activity.
Right in line during the first quarter, we just had a lot more retention then.
As normal and our new leases were down slightly but overall I mean, I think our backlog going into the quarter is that.
A very strong level.
Very consistent with what we've been able to do historically, if not a little ahead of that.
Okay, I guess that kind of ties into the follow up.
You had strong leasing, but particularly impressive.
Our strong leasing on renewals.
Or anything like that that's driving your renewals better than some of your peers.
Yeah.
Devin you wanted to take that.
Sure.
I mean, Craig we've always enjoy very high.
Retention rates in our portfolio.
We believe this is one of the benefits of our business model.
And our retention rate in the quarter was highly consistent with what our retention rate has been over time, we've over time enjoyed a retention rate in the high 80, and the reason that we.
Do you that as a strain.
And then as you know with a retention rate at that level, we're not incurring any downtime and the amount of Ti that we're having to put back into the states relative to what we have to put in on new leases is dramatically lower so we just think it's a function of our format and a function.
Our neighbors are performing well and our centers and want to stay in our centers and therefore, we're able to get the kind of equally spread we saw in the quarter, which on our renewals were in the mid teens, which is again, a very high level and compares very favorably to what that level has been historically.
Which has been circa 8% to 10%.
So where we enjoyed we enjoyed that.
And we expect to see that continue because we continue to be the beneficiary of a number of the macro trends that our portfolio was benefiting from which is the growth in the sunbelt over 50% of this portfolio sits in the sunbelt and its 100% in the suburbs and we.
We benefit from the trend of suburbanization on the trend of working from home, which is creating incremental demand for our centers.
Yes.
Okay. Thank you.
Thank you. Our next question comes from Caitlin Burrows Goldman Sachs. Your line is open.
Hi.
Good afternoon, everyone, maybe just a follow up on the leasing side.
This other question. So it looks like you guys do you have some good pricing power. There is good demand, but specifically looking at that leased versus occupied spread. It has narrowed so I'm wondering if you could give some commentary on how leasing activity has been progressing over the past six months, maybe how deep it is types of tenants and what's the outlook for continued occupancy increases and.
I know that's a lot, but also have you noticed any potential tenants get more cautious due to the current macro situation.
Sure I can't do and thank you for the question, Doug do you want to take that.
Sure, Thanks, Caitlin and good afternoon.
Caitlin knee this spread in the quarter actually is more consistent with our historical spread.
Sort of 50 basis points spread that you saw in Q4 and Q3 last year of circa 100 basis point was wider than what we typically seen.
Again, one of the benefits of our format is that you know our average tenant X. The grocer is 2500 square feet and we're able to get the tenants tended to stay very quickly once they sign a lease you know our average time from signature to rank commencement date is between four and five months.
So we don't have a lot of downtime between signing the lease and the tenant actually taking possession and beginning to pay rent, which is a real benefit to our format.
In terms of what we're seeing on leasing activity Caitlin the pipeline continues to be very strong. We believe we can continue to grow our occupancy. We believe we'll be able to hit inline occupancy of 95% by the end of 2023, which is another.
250 basis points of occupancy upside and we're confident we'll be able to hit that.
And then we are not seeing a.
Tenants pull back yet.
It's something that we're very focused on and watch very carefully.
But we have we have not yet seen it.
Tenants pullback in fact, you know when you look at the kind of occupancy gains we had the kind of leasing spreads were getting in addition to the very attractive leasing spread were getting the tend to sign up for rent CAGR that are in the mid teens. So not only are they bringing the rent bumps on renewals in there.
Mid teens.
But they're also signing up for CAGR in the mid teens. So we just think that points to the continued strength of the leasing environment.
Got it yes, no that average time of four to five months.
Is.
Impressive are great. So good to hear that.
And then maybe follow up on the balance sheet side, John I know you mentioned that you don't need to.
Issue actually to meet your acquisition targets, but with debt to EBITDA now at five seven times could you comment just what range do you want to stay within is lower necessarily better or are you equally as comfortable at some higher number and if so just wondering what that number ranges.
Okay.
Thanks, Kevin Yes. So we are at five seven times and we're very comfortable with that but we do have that growth plans in front of us we would envision that we can take this two six times and given the macro uncertainty. We've communicated previously and are still comfortable with that below six times range, but I think that.
That around six is what we're looking at but as I also mentioned on the call. At this time, we want to have all options available to us or that we can seize opportunities as we see them so with with our leverage at five seven times I think we're in a good position to continue to do that.
Okay. Thanks.
Thank you. Our next question comes from Richard Hill of Morgan Stanley . Please go ahead.
Hey, good afternoon, maybe just impacting Caitlin <unk> questions, just a little bit deeper.
So 250 basis points of upside on in line space.
It sounds like anchor space.
It's pretty good at $98, one there's I've seen some structural reasons that you might not be able to get higher than that so as we're thinking about total portfolio does that mean total portfolio can maybe go up to around 97% or so.
Yes, that's correct rich that's the right number.
Right.
As we think about.
Renewals.
Greg highlighted how well your renewal spreads were.
In.
<unk> 22.
Is that the new normal given your the amount of country will to capture.
Or do you think we're going to go back down to more of an 8% to 9% level and by the way those 8% to 9% levels are still really strong as well what I'm trying to unpack in my own mind is sort of like without asking you a guide I'm trying to do it myself what is same store NOI look like in 'twenty. Three so if you have 100 basis points of uplift on occupancy.
I get that but should we be thinking about renewals in the 8% to 9% range or should we be thinking about renewals and more on the call. It low double digits to two to maybe even.
The 14% range.
Rich we haven't seen anything in the environment that leads us to believe that these spreads are going to be declining from where they are right now.
And as you know we're in a very dynamic environment.
With so many things going on between interest rate and war in Europe , et cetera et cetera. So.
We're very hesitant to predict that we're going to see long term re leasing spreads in the mid teens, which is almost double what they had been historically.
That being said, we haven't seen anything that leads us to believe that we're not going to be able to continue to see these kind of spreads in the near term, but in terms of predicting a longer term trend.
You know what you know.
Re leasing spreads in the high single to low double digit is a very.
Strong number and we're confident with the number in that range.
Speculating on a number that is almost two <unk> that number is something that we are not.
They are willing to.
Be that aggressive at this point in time, given all the uncertainty out there in the environment.
Yeah, Devin that's very helpful. Thank you for that and so maybe that just leads me to my final question here and at the risk of asking an obnoxious question.
Your first quarter was really really strong and the outlook feels really good why or why not be more aggressive on the guide I recognize that you're still are new.
Our newly IPO company in the scheme of things is it just really taking a conservative approach wanting to make sure you're you're meeting and exceeding expectations, especially against an uncertain backdrop.
Rich, it's Jeff John why don't you take the first and then I'll I'll also wanted to have a couple of things to say.
Yeah, Thanks, thanks to it than that.
Centric. So we did have a solid first quarter.
Okay.
And we see strength for the remainder of the year.
Okay.
John you're on mute.
Sorry about that.
Yeah Alright.
We had a solid first quarter and we see strength for the remainder of the year, but there is uncertainty with both inflation and interest rates.
And in this first quarter, we did have a few higher items like I think lease termination income was up a little which is seasonally higher in this first quarter and also our bad debt of approximately 60 basis points is a little lower than our historical levels. So as we look to the full year. We are kind of in that 60 to 90 basis points range on bad debt.
But interest rates have risen since our initial guidance.
So that's also included in there so our operating strength is allowing us to improve our guidance and estimates overall, but we still want to be conservative as we look to the full year.
Yeah.
Hey, Richard.
Jeff the only other thing I would add there is we are in a battle of the operators are really strong operating environment and an increasing interest rate environment and so early in the year, we're going to take a generally conservative approach to how that how that battle will work its way out in the market.
We are.
But as Devin pointed out.
The operating environment Theres nothing on the operating environment from our perspective, right now, but that where they're big clouds, but we're watching it and you know in this kind of environment, we're going to we're going to keep we'll be watching it closely and seeing where we can where we can go. So we're I mean, obviously the.
We're very excited about the operating environment as you can tell and.
We continue to push hard for.
The kind of results that we were able to get on the operating side, the first quarter and we hope.
Hopefully we can continue that through the year and that the interest rate impact is not it's not too big.
That's really what why we took the approach that we did.
Thank you guys congrats on a really nice quarter.
Thanks, Robert Thanks.
Thanks Rich.
Okay.
Thank you. Our next question comes from Floris Van <unk> of Compass point Your line is open.
Hey, guys. Thanks for taking my question.
Maybe if you can just.
I know, we've talked a little bit about occupancy, but what was your peak occupancy for both.
Small shop and anchor and what gives you the confidence that.
Of the 97% or maybe even going beyond that.
Yeah, Florida. So we are at historically high occupancy levels, both overall and in line.
But the reason for that is that we have improved the quality of the portfolio overtime in the portfolio today is of a higher quality than it has been historically and therefore, we are confident that we can take the occupancy levels up to the numbers we're speaking about.
We also believe that when we look at.
The environment that these are levels that others have achieved and therefore, we're confident we'll be able to achieve them as well and then lastly.
Given the environment that we're in and what the leasing team is telling us that adds to our level of confidence. So it's a combination of all those factors for us.
Thanks, Devin Devin maybe maybe ask.
One more question for me, which is your average size of your assets about $20 million.
In terms of value on the low side relative to your public peers. The stuff that you've been buying is more in the $40 million.
Our center, although you bought a couple of small ones.
This quarter as well, but how do you see that.
How your portfolio of transforming and are you going to be looking to buy.
Larger assets than your typical asset that you currently own and what are the benefits in your view of that and what does that mean in terms of how does the composition of your portfolio look like.
Three years from now.
Or is this this is Jeff great question.
As you know we are our average center is 115000 square feet. It's got a 40 to 50000 square foot grocer in at 34% of our income is coming from that grocer.
And that that.
That dynamic as a whole will not change.
There are selective opportunities that we're seeing in the market, where we think we can get outsized returns with slightly bigger or slightly more.
Big box.
And what we have had historically, but that is not where I mean, if you look at where what the core of our buying is that that is a by exception not at the core and but.
All buyers are we've got to be opportunistic in this kind of environment to make sure. We're taking advantage of certain circumstances, where things are in our mind slightly mispriced and that is the goal. We will continue to do that and you'll see that throughout the history of the company, we've always done that where we've got.
Things that where we are highly confident in what we can do with the centers and we turn that eight plus unlevered IRR with a.
Even a better risk profile, just because of the unique situation and that that's what I think you will see as we go forward.
We're actually very excited about the.
The projects that we've got under contract as well as working to get under contract that have sort of some unique you will notice there is a consistency.
Still having the number one or two grocer in them, which obviously is an important thing from our perspective.
Thanks, Jeff I appreciate it.
Yeah, Thanks, a lot.
Thank you. Our next question comes from Juan Sanabria of BMO capital markets. Your line is open.
Hey, guys its Eric on for one.
Thanks for taking my question kind of switching gears on the development pipeline. So are you seeing any cost increase across your build and then how should we think about the numerator side of things as we think about your target yield of 10% to 12% is there any risk embedded there.
Yeah Eric.
Oh go ahead.
Eric.
So one of the benefits again of our format is that our redevelopment projects are small and they have a shorter duration. So we're able to build in Q, our financial projections increases in cost that we're seeing real time. So the numbers that we're quoting a 10 to 12.
Our inclusive of the current environment from a Cogs basket.
Our view is that given the fact that these projects are typically delivered in 12 circa 12 months that we're able to build into our financial models current costs and to date, we've been able to get the rents we need to continue to hold that 10% to 12% return on costs.
Okay got it thank you very much.
Yes.
Thank you. Our next question comes from Mike Mueller of J P. Morgan Your question. Please.
Yeah, Hi, I know you've been trying to increase your portfolio escalators over time, but has the magnitude of what you are asking for today stepped up over the past several months just given the backdrop.
Drop.
So Mike it's a great great question and one that we are.
We're working on.
In real time.
The.
The answer is that we are.
We're able to get today is bigger.
Rent increases upfront in our CAGR is staying in that.
Mid twos kind of range.
Our target is to continue to keep that process going and to bump those those.
The regular bumps the CAGR that we get in the leases that we're signing but.
We've seen probably I mean, and this is one of the reasons we had the results that we've seen less.
Pushback on bigger rent spreads.
Upfront than we have on getting the CAGR is up to three or four 5%.
To match kind of where people are seeing inflation. So I I believe it will get there if inflation stays.
<unk>.
As it is right now but.
But right now we're seeing it in the rent spreads more than we are in the CAGR and we'll continue to push that.
Got it okay.
That was it thank you.
Thanks.
Good luck.
Thank you. Our next question comes from Todd Thomas of Keybanc Capital markets. Please go ahead.
Hi, Thanks for taking the question I wanted to circle back to two investments real quick.
You're well on track towards achieving the $3 million to $400 million.
Annual guidance, you talked about whats under contract sounds like the pipeline is pretty healthy, but but leverage did tick up a little bit and it sounds like from John's comments that the line will be used to fund investments going forward.
And you have room and capacity to continue acquiring before hitting that six times range or low six times leverage level, but just given the macro headwinds and the.
The increase in borrowing costs does the thought process toward investments and increasing leverage a bit at the margin change just given the greater uncertainty today.
Todd It's a great question thanks for it.
We it's.
It's something where it kind of constant discussion about.
We were the thing that we're laying over this.
All of the outside noise is the strong performance, we are having at the property level.
And.
If you if you if you match the strong performance at the property level.
On a go forward basis, a lot of the pricing that we're seeing in the market is not expensive.
If you can continue this kind of grow your way I mean.
As a as a risk reward we're weighing up those two things of increasing interest rates and those costs against a.
Really strong operating results.
We keep coming back to the tailwind that are in our business today.
That are driving more people to our centers more often and as long as that pace continues in that those tail wins continue where people more people are working from home and more people are seeing the convenience of a shopping center.
Three miles from their house that we were going to continue to make that bet and think that we're going to be able to get better returns than even we underwrite.
The strong operating environment, we're in but as you point out there are headwinds as well as tailwind and we're always going to have to be kind of weighing those two things are.
Those two things up but as we said at the IPO and continue to do we we've got a plan for over three years buying a $1 billion debt.
Of of dispositions.
And we.
At this point, we're not coming off of that guidance, we think that.
That is a prudent use of capital in the current environment.
Hey, Jeff the only thing.
And to that Todd to give you a little bit more perspective on what Jeff just said.
And when we look at the assets that we acquired in 2021 and as you know we're targeting an eight unlevered.
When we re underwrite the fact that given the strength of the operating environment we.
We believe the Unlevered IRR on those assets will be circa 100 basis points higher than what we underwrote. So that that reflects what Jeff just said in terms of.
We believe that there are there's a depth to the acquisition environment, where we can continue to hit the returns we're targeting given the strength of the operating environment.
Yeah.
Okay.
Helpful. Appreciate that are you seeing any change in pricing at all.
Maybe relative to the five 8% cap rate on the three assets completed in the quarter.
Are you expecting any change in pricing as you move forward to maybe compensate for some of the greater uncertainty I mean, whats kind of the forward pipeline look like in terms of pricing here.
I would say that for us on our on our examples of forward pricing has.
<unk> is on a IRR.
IRR basis, better than what we have been able to buy in the past.
It may appear on a cap rate basis to be more aggressive.
But when you look at the.
The long term returns.
We think we've found stuff, where there is significant upside and in the environment. We're in we think that's the right that to be making and so.
Cap rate tells a little bit of the story, but certainly not the story that we believe which is really going to be driven by very strong IRR in a.
<unk>.
To do this.
Strong operating environment with good good amount of vacancy and an ability to move properties. So that's that's sort of what we're seeing we do is as always we're paranoid about the you know.
The market and because there are certainly headwinds too.
Pricing.
We are seeing no real let up in demand in real time.
But we do anticipate that there will be some as as though as the years progresses. I mean, you certainly the the leverage buyer, we think will be a much.
Less effective.
Petitor going forward than they had been historically over the last 18 months. So that part should should be positive, but there's still a ton of of less leverage capital that's out there and we don't see that.
Getting used up quickly.
So, we'll we'll continue to monitor it.
I think we've talked about one of our questions as has the risk profile of grocery anchored shopping centers relative to other real estate types is that moving away from really the really tough.
The markets that we've been in over the last three years, where everything.
Retail is coming to an end are we seeing some repricing in terms of that risk profile as well. So you are.
With all of it there's just an awful lot going on and I don't think it's just one theme I think it's all of these things sort of working their way out, which will drive which will determine where sort of values go.
Over the next 12 to 18 months.
Okay. That's helpful and just a last question for John Real quick the interest rate swap.
With a notional value of $175 million that had an exploration.
Of the April 22, what what happened there and what's the impact.
Yeah.
Yes, Todd said that we did let that expire and so the impact is that.
Post effective for that we would be 87% fixed.
At that at the end of at the end of April or where I sit today.
What's the change in interest on the interest expense related to that $175.
Oh, yes, so so when we look at that I actually think that it would have been.
Close to where it is currently because the swaps were put in place yet.
Several years ago, So I think its neutral, but as we look at that and as we look at the forward curve I mean, we do see the interest rates higher which which we're taking.
<unk> into our guidance I mean, I think that we for the quarter. We were at three 2% and I want to say it gets to $343. Five later this year.
Okay got it alright, thank you.
Thanks, Bob.
Thank you. Our next question comes from Jeremy Peak.
Wells Fargo Securities.
Line is open.
Thank you good afternoon, maybe just following up on the acquisitions I guess, one are you seeing you know more.
More sellers come to the market in anticipation of.
Higher rates and sort of the risk of lower demand from leveraged buyers.
Jeremy This is Jim.
Yes.
We have seen that actually coming into the beginning of the year and it has continued through the first.
First quarter, but there is.
Fairly.
So increase in the in the.
Volume of product now part of that is just there was just no volume during the pandemic.
And we started starting to see increases in the fall of last year.
We continue to see that and I think the.
The aggressive <unk>.
Man for grocery anchored shopping centers has continued and continues to expand the number of centers that are on the market.
And I would say, we don't want to.
Regular investment Committee meeting, we're seeing probably close to 25% more deals than we did.
In the third and the fourth quarter last year, but that's just a sort of.
A guesstimate.
Okay. Thank you.
And then sorry about that did you quantify the range of going in cap rate on this next group of acquisitions that Youre looking at today.
Just wanted to understand more about how you are still underwriting TD eight persons.
And what might have changed.
Felicia.
I don't think we have disclosed the.
Cap rates on the the the ones that are not closed yet we just have not done that.
I can tell you that the you know.
The underwriting is very similar I mean, we have not gotten more aggressive on our underwriting.
Even though the environment is.
Is really strong we stayed fairly conservative on the underwriting of these these are.
The new assets that we're buying we have we have found a couple of unique and we believe we found a couple of unique circumstances, where.
We have more occupancy or more vacancy to to create some upside.
Upside than we have historically and they just they just happen to be centers that.
Does that fit that mode.
Okay. Thanks, and then my last question is really just.
So Ted Koppel.
In the quarter.
Just wondering if you.
Have anything under contract right now are looking to sell additional just additional assets this year.
Yes.
We closed we closed the things that we have in the market.
And we are we're continuing to monitor the.
Our acquisition market. So that we can start to match fund.
Some of the disposed in the second half of the year, but right now were.
We're in the very early stages of looking at that.
And so.
So I would anticipate we will do additional dispositions as well as additional acquisitions.
Through the <unk>.
The really the second third and fourth quarter, but again with that number of three.
300 to.
$400 million being a net number.
Matching match funding the others.
Okay.
Answer your question yes.
Yes that does.
Thank you great.
Yes.
Thank you. This concludes our question and answer session I would like to turn it back to Mr. Edison for some closing comments.
Great well, thanks, everybody for being on the on the call.
As we sort of think about the quarter some of our highlights are that.
We do think we're going to generate almost $90 million of free cash flow. This year from the company, which is again a great growth engine for us.
Operating environment strong, which is augmented by a high level of occupancy.
Both leasing spreads and retention are at really really strong levels.
As we talked about on the acquisition side.
Demand for grocery anchored remains strong there's a lot of capital there. So we don't we see and we don't see that going away.
We feel good about the fact that to date, our neighbors have been able to pass on.
Most of their increasing cost to the customer and they they appear to be doing quite well and obviously the renewals in the.
And the leasing spreads are a testament to that and we think that the macro trends that we have that have been a help helpful tailwind for us.
Over the last 12 months continued to be positive obviously, there's some headwinds that are that are out there now that wil.
We've got to keep a close eye on but where we think is as in that the tailwind helping us more than that the headwinds are are hitting us.
And we will continue to tell you that we think there's a value proposition in.
Our format centers.
Number one or two grocer.
We're not priced like others, who are in that business and we think we will be and we're going to keep pushing you guys to get us there, but we think there's there's a value opportunity there and with that we will.
Really happy we were able to beat and raise our guidance for this quarter and we're looking forward to continuing to push through the year and see really strong results. So thank you guys for your time, we appreciate it and we'll talk to you probably before our next quarter hopefully at the ICSC are at there.
So thank.
Thank you guys.
Thank you you may now disconnect.
Okay.
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