Q1 2022 Site Centers Corp Earnings Call
Good morning, and welcome to site finished first quarter 2022 results conference call.
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I would now like to turn the conference over to Monica Crazy capital markets and Investor Relations. Please go ahead.
Thank you operator, good morning, and welcome to the site centers first quarter 2022 earnings Conference call. Joining me today is Chief Executive Officer, David Lukes, Chief Financial Officer, Conor affinity. In addition to the press release distributed this morning, we posted our quarterly financial supplement and slide presentation on our website.
Www Dot site centers dotcom, which is intended to support our prepared remarks during today's call. Please be aware that certain of our statements. Today may contain forward looking statements within the meaning of the federal Securities Law. These forward looking statements are subject to risks and uncertainties and actual results may differ materially from our forward looking.
Statements additional information may be found in our earnings press release and in our filings with the SEC, including our most recent reports on forms 10-K and 10-Q. In addition, we will be discussing non-GAAP financial measures on today's call, including <unk> operating.
Operating <unk> and same store net operating income reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's quarterly financial supplement at this time. It is my pleasure to introduce our Chief Executive Officer, David Lukes.
Good morning, and thank you for joining our first quarter earnings call.
We had an excellent start to the year with <unk> ahead of plan another quarter of record leasing volume and the investment of the remaining proceeds from the $190 million distribution from RBI and three compelling properties.
On top of all this our balance sheet remains in great shape with debt to EBITDA in the low fives at quarter end, which is well ahead of the peer group in the sector overall, which provides capacity for continued external growth.
I'll start this morning discussing first quarter results talk briefly about leasing and tenant demand.
And then discuss our investments and capital allocation as we look to grow our portfolio of assets and wealthy suburban communities.
As I mentioned first quarter <unk> was ahead of our budget on better operations, which Conor will provide more details on later.
Our strongest tenants continue to take market share and our construction and property management teams have done a great job getting tenants open for business ahead of schedule, which is part of our outperformance this quarter.
Moving to leasing and tenant demand remains elevated across the portfolio and we built upon our fourth quarter activity with another quarter of record volume relative to the last five years.
Shop leasing in particular continue to surprise to the upside with a number of key deals with first to portfolio tenants, including several leases at our tactical redevelopment projects and Princeton, Boston and Portland.
To put shop leasing volume in context in the last 12 months, we signed 62% more square feet of shops than in 2018, and 52% more square feet than in 2019 the.
The success and the quality of our leasing is giving us increased visibility and confidence on our allocation of capital, which I will discuss later in my remarks.
Looking forward, we have another 600000 square feet at share in lease negotiations.
Which we expect to be completed in the next six months with similar characteristics to the deals we signed in 2021 and year to date in 2022, meaning a concentration on national publicly traded tenants with excellent credit.
We continue to expect leasing to be the material driver of our growth over the next several years.
Shifting to investments we had another very active quarter buying out our partner in Orlando and adding convenience properties in Boca Raton and Scottsdale.
I'll start with our two Florida acquisitions.
With Castleberry comments, we acquired another publix anchored property from our partner, we obviously know the property well and have significant leasing momentum with two recently signed anchors and elevated shop demand the asset is accretive to our grocery anchored portfolio and well above national average sales and an underwritten five year NOI CAGR of almost <unk>.
9% and an excellent sub market with great demographics.
At shops at Boca Center, we acquired for $90 million, an asset that has all of the attributes of the convenience properties that we've been focused on and investing in.
Excellent demographics with trade area household incomes of $126000 convenient access and parking and a site plan that offers a mix of simple liquid shops in demand from a wide range of national regional and local tenants.
Despite a total GLA of just 117000 square feet. The property draws from an actual trade area of over 600000 customers, resulting in high tenant volumes as the restaurant sales alone averaged almost $1000 a square foot.
With lease up mark to market and a new pad opportunity shops at Boca and that has an underwritten five year NOI CAGR of over 7%, which instantly adds to the company's growth profile.
Pro forma for these two acquisitions, Florida now represents over 20% of the company's value and is an excellent representation of site centers portfolio overall with a diverse mix of assets located in the wealthiest submarkets of the state and populated by national credit tenants.
The portfolio includes convenience properties like the shop at focus center and opposite Edison place in Delray Beach.
Dominant regional properties like the shops at Midtown Miami in downtown Miami and Winter Garden village in Orlando grocery anchored properties like castleberry common as Orlando and the shops at new Tampa <unk>.
The site centers, Florida portfolio has an expected five year NOI CAGR of over 4% average household income, 70% higher than the national average and an average expected population growth 200 basis points higher than the country. Overall, it's an irreplaceable collection of properties and a high growth state and we're excited about the prospects.
Additional investments in our other key submarkets.
Moving to Phoenix, we bought another convenience property in the core Scottsdale Submarket and are confident we can find more opportunities to grow our portfolio in this key market.
The Scottsdale corridor has incomes of over $148000 and significant population growth attracting a wide range of tenants, including a mix of foodservice and.
And service users.
Going forward I continue to expect us to be active in both anchored and unanswered assets that fit our growth in sub market criteria.
That said, we remain encouraged by our investments and convenience properties and this compelling sub sector in open air shopping centers remains a key area of focus for the company.
Over the last few years, we've invested over $300 million at a blended cap rate of roughly five 5% and convenience asset with average household incomes of $117000 and an underwritten five year CAGR of 4% with minimal capex.
Each of these properties all located in key markets for the company, including Miami Scottsdale in Atlanta will be drivers of the company's future growth.
The convenient sub sector is clearly benefiting from recent societal shifts favoring hybrid work and suburban housing growth our property data aggregated over the past few years is showing a distinct rise in customer traffic, especially in wealthier suburbs, where it's difficult getting new retail construction approved or.
Pencil given rising construction cross and it's driving outsized rent growth due to the scarcity of convenience retail locations close to where people are now living and working in greater numbers.
Youll see us to continue to pursue this external growth strategy and we've been diligently focused on sourcing a pipeline of potential deals that fit our investment criteria and our return hurdles.
Thank you to the entire site centers team for an excellent start to the year, we've been hard at work for some of the time positioning the company to outperform and remain excited about the prospects for the remainder of 2022.
And with that I'll turn it over to Conor. Thanks, David I'll comment first on quarterly results discuss our revised 2020 guidance and some of the moving pieces heading into the second quarter, and then conclude with the balance sheet.
First quarter results were ahead of plan as David mentioned due to a number of operational factors, including earlier rent commencements higher than budgeted occupancy due to higher retention rates and higher ancillary income.
These operational factors totaled about one per share relative to budget.
The quarter also included $675000 of higher than expected straight line rent from the conversion of cash basis tenants and $1 $3 million from payments and settlements related to prior periods.
Both of these nonrecurring items totaled another <unk> <unk> per share relative to budget.
In terms of operating metrics the lease rate for the portfolio was up 50 basis points sequentially and 180 basis points year over year with our lease rate now at 93, 2%.
Leasing activity remains elevated across all unit sizes and based on our current leasing pipeline, we continue to see upside to the company's current lease rate and well beyond pre Covid high watermarks.
Highlighting our leasing velocity <unk> pipeline increased to $18 million from $15 million last quarter. These.
These signed leases now represent almost 5% of annualized first quarter base rent or over 6%. If you also include leases in negotiation in our pipeline.
We provided our updated schedule unexpected ramp of the pipeline on page six of our earnings slides and expect over 60% of the leases to commence by year end 2022.
Moving on to our outlook, we are raising our 2022 <unk> guidance to a range of $1 10 to $1 15 per share.
Rent Commencements uncollectible revenue and transaction timing remained the largest swing factors expected to impact full year results and where we end up in the revised range.
We're also raising same store NOI guidance to a range of three to four 5% adjusting for the roughly $14 million impact of 2021 uncollectable revenue.
Details on same store NOI or in our press release and earnings slides.
In terms of additional assumptions for full year 2022 guidance.
<unk> and JV guidance ranges remain unchanged along with our assumption for roughly flat interest expense at site share versus 2021.
In terms of investments, we continue to expect net investment activity of $100 million for the full year.
Given year to date net investment activity of $113 million. We are assuming that acquisitions are essentially match funded with dispositions through year end.
Lastly, we have not budgeted additional reserve reversals in the bottom half of our guidance range.
In terms of the second quarter of 2022, there are a few moving pieces to consider from the first quarter of 2022.
First as I previously mentioned, we had $1 3 million of nonrecurring uncollectible revenue and $675000 of nonrecurring straight line rent in the first quarter.
We closed on the sale of the SRU portfolio subsequent to quarter end.
These assets generated about $1 million in JV fees on an annual basis.
Third we settled before to ATM shares in the first quarter, which will increase the second quarter weighted average share count by about one 5 million shares sequentially.
Summary of these factors on page nine of our earnings slides.
Ending with our balance sheet at quarter end leverage was five one times fixed charge was over four times and our unsecured debt yield was roughly 21% as we continue to unencumber wholly owned properties as mortgages mature.
The company has just under $20 million of cash on hand, and $855 million of availability on our lines of credit.
This capacity will allow us to take advantage of future investment opportunities as they arise and to drive sustainable growth and create stakeholder value.
That I will turn it back to Dave.
Thank you Connor operator, we're now ready to take questions.
We will now begin the question and answer session.
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Yeah.
First question today will come from Rich Hill with Morgan Stanley . Please go ahead, hey, good.
Morning, guys, Hey, David I wanted to go back to the comment that you made and hopefully I'm not putting words in your mouth that.
Leasing is going to drive your future growth and so I was maybe hoping to unpack where you think occupancy can go.
I think occupancies around 93, 8% right now is obviously, a little bit lower but as we think about occupancy relative to history. Do you think you can get back to $95 seven where you were in 2014 or do you think a peak in 2019 of around <unk> 94, a little bit higher than that as a better proxy.
It's a really good question rich and now you did not put words in my mouth.
Yes, it's funny.
Another half million square feet or 600000 square feet under lease negotiation right. Now we just haven't really seen the risk of this level of demand and wealthy suburbs go down and so I think our confidence level that we can get back to the high watermark is pretty high.
Yes, rich I mean, we've made the comment David this quarter than in the prior quarter as well the high watermark for this portfolio. I think was 90 393 years ago. We think we can do better than that if you recall, we held quite a bit of space offline for a potential redevelopments and and we've either chose to proceed with those redevelopments or decided to re lease the space.
In terms of retail projects so.
We think we said kind of 94%, 95% leased is achievable and there is a ball scenario, where we get as high as 96%. So again just to reiterate David's points from from our script in a minute ago. We think there is still considerable upside from our leased and occupancy occupancy perspective.
Thank you.
I wanted to maybe talk about the interest rate environment and ask a two part question. Both in terms of what interest rates are doing to cap rates. If anything at this point and does that give you actually even more competitive advantage. So does it shake out some of the smaller less institutional owners of open air shopping centers.
And then.
I recognize you're funding yourself youre funding acquisitions with dispositions for the remainder of the year, but maybe we could just have a quick conversation about.
If you prefer equity over debt.
At current valuations.
Well I'll start with the cap rates and then Conor can take the the equity side of the equation, but.
Rich there seems to be in the last 60 days a tale of two cities with respect to properties that are in the market and I will just remind you that <unk>.
<unk> strip centers in the U S. We owned 92 of them.
We're very focused on what we want to buy so I am not sure that my comments are going to be taken as a proxy for the industry, but for what we're looking at when we see properties that are fully leased.
The tenants have long term and therefore the growth rate of the NOI is somewhat low.
I do think that higher borrowing rates will have an effect in the next month or two as we start to see sellers not being able to achieve what they could before because the competing buyers are levered buyers and we're generally an unlevered buyer.
The irony is that at the same time, we're buying assets like Boca that have a really high hager and that's partly because of occupancy and partly because of tenant rollover and a mark to market and so if youre getting rents that are rising along with interest rates. It means that the hold the same unlevered IRR even in the face.
Of rising borrowing rates I do think that cap rates are holding up pretty well for growth assets, even though they might move a little bit for four more flat stable asset so thats kind of where I'm seeing things in the last couple of weeks, yes, that's exactly what I was looking for on sort of the question about Unlevered IRR versus Levered IRR. So thank you for that.
Kind of any any thoughts on equity versus debt here I was hoping you can forget about that part of the question. Yes, we are.
We're really we're really comfortable with our leverage levels right now as you know it took us five years to get here and we're looking to maintain what we think are prudent leverage and duration levels. So it's always been a mix. We've got retained cash flow. We've got disposition proceeds you referenced we've.
We got the ICU proceeds.
That closed post quarter end. So it's always me a balance I would just say, we're really encouraged by our balance sheet position at this time.
Okay. Thank you very much guys. Thank you thanks rich.
The next question comes from Michael Bilerman with Citi. Please go ahead.
Okay. Thanks for that can.
Can you just talk a little bit about sort of the pipeline that you have right now from an acquisition perspective, and how much you have on the market from a disposition perspective, just as you think about the net funding.
Yes.
I think you've been a little bit more excited on the acquisition front and Im just trying to better understand how much more disposition activity could you generate in the portfolio today.
Mitch that excitement David that you have in finding these assets in affluent suburbs.
Hey, Michael It's Conor I'll start and then I'll turn over to David on the acquisition side on the disposition side excuse me as you know we've always.
Cycled capital, whether it's one or two wholly owned properties per year and that generally has been about 25% to $50 million of wholly owned assets per year and I don't think 2020 would be any different in that regard.
The other piece and we talked about this last quarter with everyone and with you was on the JV side, where we got the MCU portfolio, which we announced closed subsequent to quarter end and obviously some of our other partners are nearing debt maturities, which is a natural time for them to consider.
Long term plans for their joint ventures, as well, so you'll likely see some joint additional joint ventures property is sold on top of.
Are you in terms of kind of the impact in guidance, it's really not really a mover for the year is probably a half basis or excuse me half a penny in terms of a headwind just from some of the JV assets, but I'll, let David expand on the acquisition side as well.
Yeah, Michael I would say that our confidence level in what we're seeing.
Of assets that we would like to acquire is growing.
I would shy away from trying to guide as to what the volume might be simply because we're most interested in this is high rent growth convenience oriented properties, because theyre responding back to a lot of the societal shifts that I think have taken place coming out of the pandemic.
But the thing to remember is that most of the sellers of private sellers a lot of them are $2 31 sellers.
It takes a lot of time to transact with them.
I do think that with rates rising those types of owners are being incentivized to sell sooner rather than later, so I think John and I are pretty hopeful that the pipeline continues to grow with things that we want to buy.
And then how do you balance obviously the asset sale proceeds you can sort of get market, but on the equity.
Youre, obviously beholden to the market and given the fact that your leverage levels are in check in the stock.
Obviously has been volatile and is getting closer to NAV now than it where it was earlier in the year.
But how do you sort of balance sort of goes to Richards question a little bit.
How you grow from here from a capital perspective, if the market is not willing to afford you the cost of capital to do it either on the debt side, where rates have moved up or on the equity side, where the stock still trades at a meaningful discount to NAV.
Yes, Michael to your words still your words its balance I mean, you hit the nail on the head look we've got.
I'm pretty good five year track record for us of balancing debt equity sources uses.
And I'm not trying to be evasive, but I mean, that's what we'll do going forward. We do have a lot of retained cash flow. We do have some assets that are <unk>.
Durable in nature, and well leased but still very attractive that we could recycle.
We'll have more to disclose on that front to David's point of dispositions and acquisitions. The next three months. The other point is if you look at kind of a range of dollar values of what we bought 90. So far has been the largest and $4 million of smallest that does make it a little bit easier. These arent all $300 million properties and so the vast majority of the kind of.
<unk> look at a weighted average closer to call it 25% to $40 million that does admittedly make it a lot easier to kind of achieve the balance that you referenced.
The second topic is just just on sort of frequency of visits.
Hybrid work environment.
Inflation, just tying it all together David in your conversations with your retail tenants and you can go across the spectrum.
Can you just share a little bit about what the data. Your data is telling you what the retailers data is telling you more recently in terms of number of trips that people are taking to your centers maybe average spend.
Whether inflation is impacting that at all either from a retailer perspective and being able to be open.
Or Conversely.
Our ability to drive things.
Yeah, well, let me, let me talk about the two aspects of data that we do have as factual data.
One would be custom.
Customer visit frequency and duration right that comes from the geolocation data and the other piece of data that I think is really interesting is we've done so many box leases in the last 12 months.
That when the tenant goes in for a building permit we can pull their plans and see what the layout of the store it looks like and so those are two different pieces of information on what they are telling us is that the customer visits to our properties are up from pre pandemic call it 10% to 15% and that moves around a bit because the denominator.
With only 92 properties is not it's not large but in general I think we're up around 10% to 15% whats more interesting Michael is that the duration the amount of time that a customer spends on the property is actually down 10%.
And part of that and I think the reason that we're seeing that is the impact of last mile fulfillment and so let me tie that over to what we've seen in the tenant exhibits when they go in for building permits. There is no question that that <unk> wall between front of house and back of House has moved.
Pre pandemic and it's moving to the shrinkage of the front of house, which will be the customer space and it's growing in the back of house, which will be sorting and distribution. So I think as we put some data together, we'll try and get something a little bit more robust for NAREIT.
Think it is a pretty compelling story that the customer visits.
More frequent but shorter and the reason of course is that.
Most of our retailers are starting to use their footprint as last mile fulfillment, which might explain why theres been so much anchor leasing in the last 12 months.
Right, Yeah, I guess the worry is it.
In some ways you'd want them to stay at or longer to increase spend across retailers right. The dwell time.
There is obviously an important factor in driving aggregate sales obviously.
I think thats part of the Big question is how much does cross shopping.
<unk> profitability I think that's the real issue.
So a.
A lot of it comes down to the basket size and so forth. What we do know is that the tenant balance sheets are in a lot better shape than they were before I feel pretty good about.
EBITDA margins four wall EBITDA.
And the retailers seem very specific about how many doors they have what access they have to trucking.
And so I think that whole ecosystem has changed a little bit, but its definitely making me, making me feel more confident than less capital going forward.
I appreciate the time thanks, Michael.
The next question comes from Todd Thomas with Keybanc Capital markets. Please go ahead.
Hi, Thanks, good morning.
Just following up on investments.
You talked about potential joint venture asset sales as part of the capital plan for the remainder of the year.
And I was just wondering if you can provide or David if you can provide an update and status of the remaining 23 assets in the Madison joint venture, which you discussed a bit last quarter and were reported to be on the market is there any update you can provide there on timing in institutional demand for those assets.
Whether future investments would would be predicated on the wind down and monetization of that venture.
Todd I would just say as you know.
We discuss deals might close and youre right that but some.
Reports on potential asset sales and again to a point from our comments last quarter and this quarter debt maturities are a natural time for joint ventures to kind of choose our path to choose a direction, obviously for us it led to some acquisitions in the fourth quarter and the first quarter and that joint venture and it could lead to some dispositions of course of the year, but just given our policy we will talk about things.
As they close but youre right to assume that as a potential source of equity for us.
I don't know if that answered all your questions, but I'm trying to think if I did.
Okay.
And David you talked about the 9% IRR casselberry in the five year IRR of bulk center.
That was greater than 7%, what's the initial yield or year.
Year, one yield look like on average for the assets that you acquired in the quarter.
Just trying to get a sense in sort of bridge the NOI growth.
From from acquisition.
During the course of the whole period sure well all the assets we purchased this quarter.
The going in cap rate average to five one in the five year CAGR was 7%.
So those are the five year CAGR as we've quoted not the Unlevered IRR.
Okay got it.
Alright makes sense and then.
David you sound confident.
The growth that.
That you are seeing in assets that youre targeting for acquisition, but are you changing your return hurdles at all in the current environment or the way that you're underwriting future investments as you look ahead.
Yes, I mean, I think that as we're starting to see more things come to market I think some of the sellers and the brokers out there are starting to realize what we're looking for we're just being pretty selective so.
We're certainly not going down and our Unlevered IRR expectations, and given where rates are going I would like to see them move up a little bit.
Okay, Alright. Thank you Todd the real issue is that to generate the types of Unlevered IRR that we expect you can really only do it in two ways either through occupancy or rent growth.
And occupancy is not easy to find but it broke out there were a couple of suites that were vacant that had active deals. So we're getting a lot of growth from <unk>.
<unk> leasing with a couple of spaces.
But the other way to achieve that growth is through their turnover in the rents and what's interesting about shops at Boca and you think about putting $90 million to work at a property. That's got an average base rent of about $38 a square foot and a couple of miles away in Miami, we're signing leases at 70 and 80 Bucks a foot. So that's really where we're generating a lot of the growth is.
From.
The rising rents and a little bit of occupancy and we will be pretty picky about finding things that fit those hurdles. So that we don't get stuck in a in a situation where we've got a low growth asset.
That's what's going to put pressure on an unlevered IRR is going down.
Alright, great. Thank you thanks Todd.
The next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, good morning, good morning.
Two questions first.
Following up on the pricing and the price.
And the markets out there.
Certainly.
An explosion in the non traded REIT.
Pretty much look to be heavy cash buyers. So David I was a little interested that you were saying that some of the competition you see it from Levered buyers because in speaking to some brokers and other you have just seen the fund flows it seems like it's a lot of heavy cash buyers, but more importantly, if you guys are buying sort of at a low five.
Your stock sort of trading north of a seven.
Obviously kudos to you to find deals but at the same time, what do you think the public markets are missing as far as the story of retail rebound because the headlines certainly been good last week online sales were down physical in store.
Sales were double digit positive so the benefit of retail as well known but yet there is this persistent disconnect and that's at odds with the results that you guys are showing with the cap rates, where assets are trading and certainly where the private money gets going so what do you think.
What do you think is missing as far as closing that gap and is it just a matter of the public.
Public markets.
Has a view that is at odds or are you guys confident that that gap can be closed and the value realized from the public format.
Well I would I'll try good morning, Alex I'll try and not speak for the entire public market, but I think when I when we meet with investors.
The number one topic that I think there is a misconception is the long term capex required to run this business with the trends that have changed coming out of Covid.
And I do think companies like ourselves are still burning through a lot of leasing capex I mean, it's significant for the next year and the reason is that there is a lot of occupancy uplift.
But given the inflation in rents.
The ability for tenants to pass on a lot of cost to consumers.
Lack of new supply the difficulty in getting entitlements and wealthy suburbs the cost of replacement. So if you want to build a new shopping center has gone has gone so high I think there's going to be scarcity of space in the future. So in my mind, the big change pre Covid versus post Covid is that retention rates are going to be higher and capex is going to go much lower than it was.
Historically and that does as you know have a huge impact on IRR. So when we're competing against other buyers in the private world I think they are more accurately accurately underwriting capex in the future and that helps them get more aggressive on pricing and that is one of the differences I think between public and private buyers is the expectation of Capex.
And Alex to your point I mean today with response earlier on the on the leverage Unlevered question, I mean, theres still to your point a number of Unlevered buyers out there. So I think David was referencing simply the levered buyers are changing their underwriting but there are to your point there are no shortage of unlevered buyers.
Okay and then so.
Be a classic analyst we have to ask it on the flip side. There is a lot of you guys speak about growth coming from leasing and the signed but not yet commenced and yet in reality. It takes a long time for occupancy to build especially you're sort of at 90 ish in place versus your expectation of <unk>.
Leading the prior high watermark so.
Are we is the analysts too optimistic about that.
That occupancy grow and that this really takes many years or is it your view that there's going to be this sudden acceleration that's going to get us to that sort of normalized occupancy a lot sooner than.
Historically would be expected.
Alex.
It's kind of I would just say we lay out on page seven of our slides.
The commencement schedule and you can see and then in my comments I think I said, 60% of those leases commenced by year end they happen to be pretty back end loaded just the windows that retailers like to open, but we're forecasting effectively 60% of our <unk> pipeline, which is 6% of our base rent to open this year. So youre absolutely right its taken a while to kind of build.
This but we are forecasting pretty significant base rent growth.
During the fourth quarter and a 23% and 24 was also fascinating. If you look at that as no pipeline were signing leases with 2023 and 2024 openings right. It's kind of speaks to David scarcity point, but to answer your question directly it's a this year event.
You recall Tammy asked the question last quarter about your kind of base ran the base rent build over the course of the year. If you look at our same store NOI base rent same store base rent excuse me. This quarter was about plus two 5%, we expect that to build over the course of the year, which speaks to your question on kind of when these leases come online.
Okay. Thank you Youre welcome.
The next question comes from Samir Khanal with Evercore ISI. Please go ahead.
Good morning, everybody I guess, David maybe on.
600000 square feet of leasing Thats under negotiation, maybe talk around who are the tenants that are active in that space.
From a demand perspective, and what changes have you seen any.
From a negotiation standpoint, whether it's terms pricing given the increased volatility from a macro standpoint versus maybe three months to six months ago.
Sure.
The pipeline of leases looks strikingly similar to the last few quarters, meaning.
There's a lot of chunky leases with boxes, they tend to be discounters.
The pop shelves to Burlington that TJ concepts, the losses lot of discount activity going into these wealthy suburbs.
And then there is a component, which I would say is service oriented we're still seeing a lot of demand coming from health and wellness.
A lot of dentists, and doctors and chiropractors and urgent care and so forth coming out of the urban areas and kind of chasing their customers into the suburban areas and then the last piece of it as kind of a more recent growing shop demand.
And Theres a lot of new concepts healthy concepts, particularly on the restaurant side.
Theres been a number of new ipos in the past year that are in growth mode. So I would say, it's probably half to two thirds.
Larger discount boxes, and then you kind of get into the health and wellness and some of the small shop tenants.
It's not very dissimilar from what you've seen in the last couple of quarters.
The real question is what's going to happen towards the end of the year, because we're running pretty low on box inventory.
And I think Thats one of the changes youll see towards the end of this year is that we will effectively be running out of boxes to lease and so thats when youll see us really have a lot more of the deal flow coming from the shops.
Yeah.
Yes.
Thank you for that and I guess, so just curious on the convenience properties that you've highlighted.
How should we think about the NOI growth of those centers I mean, there is about 30% of the leases that expired with that option. So what's the upside in rent that you think you can get maybe the mark to market opportunities there.
Well it depends on the property, but I won't give you. An example in shops at bulk I think the mark to market is probably close to 50%.
The question is how much of that can you capture but with an ABR of $38 in place and leases in the remainder of our portfolio in South, Florida, and the kind of $40 $50 $60 70 range.
The scarcity value is definitely causing a lot of rent growth and that's one of the main theses behind convenience Orient properties is that the number of tenants seeking a simple 30 by 90 foot wide space.
Is very large and so whenever you get the opportunity to renew a tenant who is naked with no options.
The capex required for renewal of zero and the Capex required to replace a shop tenant is pretty low. So I think that a lot of that growth from that sub sector is really coming from just general market rent growth and then a lack of capex required to buy that growth.
Thank you Dave.
Thanks Amir.
The next question comes from Mike Mueller with Jpmorgan. Please go ahead.
Yes, hi.
I think you said the bottom end of the guidance range doesn't include any reversals or prior period collections I think got that right.
Whats baked in there in the top end of the range, yes, it's consistent with last quarter, Mike. It's still another penny so effectively if we have another $2 million of reversals that would be the top end of the range, but in terms of what's on the balance sheet, we've got $13 million or they are about half that was reserved so call. It 657 and about half of that reserve.
He is related to cash basis deferral, so let's call. It another three to three $5 million of deferrals outstanding that we've had a 99% repayment rate to date on the deferrals it as a potential source of upside, but I would just give my usual caveat that is reserved for a reason.
Got it got.
Got it.
And obviously, a lot of talk about acquisitions and pricing and stuff but.
Your redevelopment pipeline it looks like it's about $60 million to $70 million and I guess as you look out over the next few years, how do you see the aggregate size of the pipeline.
Either changing or staying the same.
I think that this is David Mike.
Redevelopment can come from kind of defensive where you need to change the shape and the layout of the property to match current demand.
Or it can come from Densification, where youre trying to add square footage, whether it's in retail or whether it's another another asset class.
It sure feels like the rent growth coming out of Covid.
Years.
Has basically made the numbers far more compelling to lease existing space. So I think in our portfolio. The scarcity value is making rents go up to the point that I don't see our redevelopment pipeline growing from here I think we're really focused much more on just simple rent growth.
Got it.
Okay.
Differently, Mike sometimes.
Myself as this business seems to have gone from a redevelopment business to our renewal business and the renewals business. There is a lot easier to manage and I'm actually looking forward to the next couple of years, because being our renewals business.
Is just a great position to be in and I hope it lasts for a number of years.
Got it I appreciate it thank you thanks.
Thanks, Mike.
Yes.
The next question comes from Florida on data with Compass point. Please go ahead.
Good morning, guys. Thanks for taking my question.
Wanted to follow up on something that.
Michael Bilerman asked and you mentioned something David about the dwell time being 10% down while the visits were up is that to individual stores or is that to your center.
It's to the overall property.
Okay. So that so youre, capturing essentially all of the all of the tenants at this at the at the center I just wanted to make sure I understood that correctly, yes, correct correct. So if you think I mean, Floris. If you just think anecdotally and we're definitely working through the data theres two input assumptions to remember one is every time your work.
<unk> from home and your order Uber eats for lunch somebody goes to our shopping center and is therefore, a whopping three minutes and that counts as a visit.
Another example would be.
We're working remotely three days, a week and instead of doing five Aaron's on a Saturday now youre doing to Aaron's for three days in a row.
And Thats why I think that the tenants have figured out that proximity to the high income customers is what's generating the most trip generation and Thats, where theyre getting the sales.
So for me I think it has everything to do with with proximity and last mile fulfillment and that's really why we're seeing the dwell time be a little bit lower.
Got it that makes sense.
<unk>.
The.
Another question for you guys in terms of Florida, you touted. The fact that you are over just over 20% of value in Florida now.
Like a target that you want to see in Florida do you think that can go to 30% or.
And what other sort of.
I saw that you are in Tallahassee now, but just one asset is that a market that you expect to get greater scale in.
Well I think part of the migration of our value is.
Simply because we've had a couple of large joint ventures that we are in kind of middle market communities that have gone away and so.
The remaining portfolio has become more concentrated in our in our top 12.
Submarkets. So we don't have a numeric target for the state of Florida or for really any other region, we're pretty happy with the with our top dozen markets and you've seen us start buying assets in those markets, including.
Arizona, but some of our other markets like Boston and D C and Atlanta.
When we find things we like I think we're going to go after those properties in our existing markets I don't see us going to new markets.
Tallahassee property came in a small portfolio, we bought from our partner.
But I think we're finding specific property reasons to buy as opposed to a sub market reason, yes and for US just on the point on Metros I think it's 90% of our base rent and our value or in Orlando and Miami. So that's.
It's really those two markets with additional assets in Tampa, Naples and to your 0.1 property outside of those Msas.
Great and then maybe maybe last just talk a little bit about more about the convenience.
Focus that you guys have I mean think about it as sort of the <unk>.
Size of the assets is sort of like a typical.
Pico grocery anchored centers $20 to $25 million to $30 million bucks or something like that if they are relatively small lower capex as you say more upside in terms of marking rents to market.
How should I compare though how should investors compare that too.
Street retail, where again, you've got again higher values.
Per square foot, but typically the beauty about traditional urban street raised that again more cracks to reset rents to market lower capex.
Would that be an extension.
To your to your investment focus or is that are you guys happy being.
Focusing on the convenience because it's such a big potential market anyway.
I think what's interesting for us is to look at the two categories Street retail and convenience retail.
You named a similarity which is a little bit shorter duration fewer options and therefore easier to capture mark to market.
And in general lower Capex, because it's more of our renewals business both for convenience and for St.
The major difference between the two to me is significant and that is that street retail is generally pedestrian.
In convenience retail is is convenience with the automobile.
And with the changes in the pandemic and the cultural shift to hybrid work, which I think is a long standing I do feel like investing around the macro theme of wealthy suburban communities with auto centric trip generation is just a superior thesis so I do not see us moving out of convene.
<unk> oriented into street retail.
I, just think that the customer demand is going to drive higher rents and in these communities. It is very difficult to entitle additional square footage construction cost is going up which means for anybody to build competing supply would have to charge more rent.
I think theres a lot of favorable tailwind to it yes. The only other thing I'd add to that is fee ownership versus a condo right we own the land versus typically it's a condo ownership and and obviously, there's a difference there as well.
Great. Thanks, guys I appreciate the answers thanks Laura.
The next question comes from Pauline Rojas Mitch from.
From Green Street. Please go ahead.
Good morning.
You reported strong isn't that cool. So obviously there is significant.
A significant and sustainable.
What are you hearing from.
And is there any.
Any change in tone.
Are they or are you concerned at all about the higher inflation higher interest rate environment.
On a potential drop in consumer spending.
Good morning, Pollyanna those are great questions.
I mean, we hear anecdotal information from the retailers I would say that.
Their primary concern in the past 12 months has been to get into the locations and the communities. They want to get into so finding space was probably most top of mind.
The second.
Kind of conversations we've had with them. It has a lot to do with finding staff I think labor.
Sometimes.
Not talked about as frequently as inflation for products, but I think labor inflation is a real issue for the retailers and I think it's part of the reason we've been focusing on national credit tenants because the larger tenants that have 401, k's and they have dental and medical programs, they're able to hire staff and Thats why I think youre starting to see a lot of the Nash.
Credit get tenancy signed get leases signed and get opened because they can they can hire to staff in order to occupy and staff those stores.
Going forward I think inflation is on everybody's mind is certainly on the minds of retailers a number of our tenants are.
Discount oriented and so I think they feel like when inflationary environments occur.
The next recession comes what normally happens is high income consumers start to acquire more discount goods and so I think the discounters want to be in those submarkets, where theyre going to capture some of that high end consumer coming down market a little bit.
Thank you and then.
Occupancy change to question.
That sort of thing.
Okay.
But I'm not sure.
This is a clean more lasting property seeker.
Paulina I'm happy to discuss offline. So I mean, our same store commences 90 point to in terms of kind of what changed the only significant pool change I can think of as we added castleberry comments, because we acquired it this quarter, but I can come back to you I mean, I can't think of anything that was material that would impact the sequential change in the same store.
Commensurate.
Okay. So then there was a question at the time.
Im sorry.
Sorry, just to clarify that that same store combined commence excuse me is including redevelopment.
The number you're probably referencing was excluding redevelopment.
But I can get you the apples to apples number if you'd like offline.
Okay. Thanks.
And then the last one I think you mentioned you had been successful in getting tenants opened ahead of schedule.
But the main driver behind this same property guidance.
<unk>.
It's a little bit of everything, yes, sorry, I'm, sorry to cut you off there it's a little bit about you are right for this quarter the benefit to same store NOI was in part due to earlier rent Commencements. We also referenced had higher retention.
Less fallout this quarter that has an impact over the course of the year I think that far outweighed the kind of onetime benefit of a month or two here or there from an anchor opening but both are impactful and material to us, but the far far bigger impact as the full year numbers was was greater retention and greater mark to market those factors as opposed to rent commencement we could have more.
Side over the course of the year from rent Commencements I mentioned is one of the swing factors for the year. That's one of the big three but TBD on that front, we've had great track record kudos to our operations team, but theres nothing else built in on that front, but it could be a source of upside.
Thank you that's all for me.
The next question comes from Stephen Kim with Chile. Please go ahead.
Thanks, Good morning.
So just going back to your acquisition the cost base of this quarter was about 550 Bucks a square foot.
And thanks for all the information on yield and CAGR, but what does this translate to.
To investigate knowledge in terms of occupancy costs, and if you get that 7% CAGR over time.
What does that mean for your five occupancy costs in your underwriting.
Kevin It's a very good question.
It's so dependent upon who is the tenant so we've got a Charles Schwab that came with the Scottsdale property, we've got restaurants doing $1000 a foot in Boca.
So it really really depends on the tenancy and when we acquired them. We do go through their occupancy cost to figure out who is at risk and who can handle more rent growth. So when we're turning properties away do we don't want to buy it's usually exactly what youre, saying the rent may look good from a market perspective, but the tenant roster can't handle more bumps. So we're trying to find.
The properties, where the tenants are generating enough top line sales that they can afford.
To get to market, which is arguably a lot higher than the in place.
Okay.
You mentioned the <unk>.
101 going in yield and <unk>.
Five year, CAGR, 7%, which is great.
12 call it 12% low 12% Unlevered IRR it seems like with those kind of economics.
Capital B capital would be all over that type of acquisition.
So there's a couple of questions is it the way you are.
<unk>.
Is it a different set of underwriting that led you to be the winner on those type of deal.
If you can just kind of provide some color around that.
I think it's only a matter of time before a lot more capital starts chasing similar type of properties. The reality is.
Win win.
Institutional or private capital allocates to an investment thesis a lot of it is around who the anchor is and what that anchor does.
And I think what's changed for US is that the geolocation data that all landlords have access to now does kind of free you from having to go to a specific anchor.
And it allows you to go into unanswered or convenience oriented properties and so I do think that having that data allows us to be a lot more nuanced about our acquisitions.
And we are competing against a lot of other buyers. It's just that we are kind of willing to really work hard to source. Some of these smaller deals and that is one of the challenges of this thesis is that.
The deal size does tend to be a little bit smaller and so it just takes a lot of a lot of leg work to get to get the deal pipeline built.
Okay. Thank you.
The next question comes from Linda Tsai with Jefferies. Please go ahead.
Hi, Thanks for taking my question in terms of your earlier comments, just now about going into convenience oriented properties because of Geo location data you don't need an anchor.
What would be like the mix of certain retailers that you would require in order to do this.
While we still can be like we still like credit I mean, I think in the next downturn, we're going to be happiest with buying credit. So you've seen everything we've bought it there's a lot of financial institutions, where we can measure their deposits.
Theres a lot of high end.
Credit restaurants, a lot of Starbucks theres lot of horizons.
Wells Fargo Chase, Schwab et cetera, J P. Morgan.
So we are getting a lot of credit I think that.
The the noncredit tenants that we like to see tend to be service users of restaurants that have proven sales yes.
And when you think about the kind of common denominator. So the existing portfolio. There's three factors credit to David's point, our national tenants are 89% of base rent. The second is market. We generally have invested in markets that we already know or have existing assets and the third is income I mean, those are those are three pretty powerful filters that to David's point remove a lot of the investment subset. So.
Again, you'll see that kind of as David mentioned is Florida comments. The common attributes are the market incomes in the credit and that's what we're kind of investing around.
That makes sense and then last quarter, you talked about the 200 basis point increase in occupancy from the end of 'twenty two to the end of 'twenty. Three do you think it could be higher than that.
No I think it's fair I mean to kind of poly and his question.
Could we have our we do now have higher oxitec patients of course of the year, yes, but I still think the built in growth is very similar if you look our <unk> pipeline is generally unchanged. It's just maybe you have a little earlier commencement here or there or a higher kind of initial starting point, but but it should I think generally kind of move higher over the course of you called out one to 200 basis points.
<unk> could we pull forward some some some potential commencement from $23 22, yes, but we're not ready to kind of.
Estimate a bunch of that yet.
Thanks, and last question, just the $3 5 million as a potential source of upside from Missouri tenants.
Do you have any of that that could potentially benefit 2023 earnings.
No I think to Mike's question, we've got about.
The top end of the range of $2 million of potential.
<unk> reversals that would include either just reserves, we have in general or that can include the cash basis deferrals that I referenced just know that as we get longer in this kind of a collection cycle that probability of collection drops right. Additionally, if you think about a deferral. We made was a tenant that implied a 'twenty two or 'twenty three 'twenty four repayment means.
That they probably had a higher level of stress during COVID-19 as well so.
Youre right Theres, a potential source of upside I would just caution folks that it doesn't mean, we have $3 $5 million in the bag. One is spread out over a couple of years and two these are tenants that that needed a longer data deferral for a reason.
Thank you Youre welcome.
As a reminder, if you have a question. Please press star then one to be joined into the question queue.
The next question comes from Tammy <unk> with Wells Fargo. Please go ahead.
Thank you good morning.
Just maybe following up on the convenience oriented acquisitions I'm. Just wondering is the focus there geographically around existing assets I guess I'm, just trying to get a sense for the operating efficiencies of.
This smaller assets as well as your appetite for expansion into additional markets.
Tammy I would say, it's definitely within Submarkets, where we own existing properties and.
And that's really for two reasons one as you mentioned from an operating efficiency standpoint, we have property management and leasing covering that market anyway.
It's kind of a way to scale G&A without having to increase staff and the second is market information.
We're doing recent deals in Arizona, and we see recent shop leases at $60 a foot and then we see a property for sale a mile away Thats in the 30% that tells US something so I think the market intelligence is kind of equally as important as the G&A scale.
Okay. Thank you and then can you just provide us some perspective on changes in the lending environment on the both the secured and unsecured side and how you were thinking about the 'twenty three maturity in terms of repayment or refinancing.
Sure Hey payments Connor.
Look I mean to say that the lending of our market is volatile, it's probably an understatement.
Our all in rate our coupon on a bond deal could change.
Feels like 20 basis points in the day so.
Thankfully, we've got access to a wide variety of sources and some great banking partnership so whether the term loan market the unsecured bond market or the mortgage market. All are open today, but to your kind of Genesis of your question.
All our rates are up between 75, and 150 basis points, depending on which market I just referenced so again, we think <unk> got a very wide variety of sources as I mentioned between the big three and.
Given our balance sheet, there's nothing needed right now, but you are right with 'twenty three 'twenty four 'twenty five there's some sort of capital market activity necessary in the next call. It nine to 18 months that we will take advantage of one of those three buckets, but it's again volatile is an understatement and pricing is definitely out call. It round numbers 100 basis points in the last four months.
Yes.
Okay, great. Thank you Youre welcome.
The next question comes from Handelsbank Jets with Mizuho. Please go ahead.
Hey, there good morning, Thanks for taking my question.
I guess what is it.
Ask you about the preferred I think coming due.
On June six in the quarter curious given the change in your cost of capital and how you're thinking about redeemed.
Redeeming that.
Sourcing.
So any comments on that would be appreciated. Thanks sure Hey, good morning, It's Conor.
So youre right there are pre payable at par.
In June of this year as you know there is no maturity on that so.
It depends on kind of our cost of capital at a time and if you want to do anything the nice part is we don't have to do anything given the move in rates. There they are potentially even more attractive today than they were four months ago, but if.
If we have a use of capital and that is the best use to take those out and will do so but at this time at this time excuse me there is no plan to do anything.
And we're excited about the perpetual nature of that piece of paper.
Got it got it thanks.
I think I heard you mentioned that there is still within the guidance some recapture of prior periods.
I guess can you quantify what's in the upper end of the guidance range and then overall with remaining opportunity.
What's left here and if any of that.
Carried over into 2023, thanks so.
So just at the top end, it's about opinions of $2 million of potential reserve reversals and that could be in the form of COVID-19 deferral of repayments or excuse me cash basis deferral repayments or just other reserves, we have on the balance sheet.
So that could occur over the course of the year it could be pro rata of course here, it's kind of a TBD there could be to Mike.
Early response additional reserve reversals in 'twenty, three and 'twenty four.
See I would just again reiterate my point as we get further away from 2020, and those deferral agreements the risk grows right and so they're reserved for a reason.
So again, it's a penny in 2022 could there be additional upside in three and four absolutely, but again I wouldn't bank on it as of today.
Okay. Thank you that's helpful. And then lastly, I'm just curious maybe comment earlier, a couple of times that you're continuing to get some stores opened ahead of schedule with hopefully a little bit the quarter, but I guess I'm curious.
What maybe some of the secret sauce, there is and hearing some of the challenges with the labor shortage and supply chain issues. How have you been able to get the stores open.
Is that something that you anticipate you will continue to be able to do into the into the back half of the year. Thanks.
Well, one input to that handles that when we budget for store openings, we budget for the last possible date that they are allowed to open in the lease and it just so happens with tenant sales the way that Ben the tenants are trying desperately to get open earlier. So there is certainly part of the part of the assistance on that the second is that we're a large enough company with a dedicated construction staff.
But.
As sourcing some of the long lead items.
Like insulation and roofing materials and MEP units Theyre, just theyre just sourcing those long lead items when the lease gets signed as opposed to when they pull the building permits so they've done a great job of getting the materials that we need the challenge has been turning into labor I think that's the issue so going forward I.
I think we're certainly not banking on earlier rent commencements going forward simply because labor seems to be getting more and more difficult to find particularly on the skilled side.
Well. Thank you guys I appreciate the comments thank you.
This.
Our question and answer session I would like to turn the conference back over to David Lukes for any closing remarks.
Thank you all for taking the time, we will talk to you next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.