Q3 2022 Brixmor Property Group Inc Earnings Call

Greetings and welcome to Brooks more property group incorporated third quarter 2022 earnings conference call.

At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host Stacy Slater Senior Vice President of Investor Relations and capital markets. Thank you you may begin. Thank you operator, and thank you all for joining <unk> third quarter conference call with me on the call today are Jim Taylor, Chief Executive Officer, and President and Angela Aman Executive Vice.

President and Chief Financial Officer, as well as Mark Horgan Executive Vice President and Chief Investment Officer, and Brian Finnegan Executive Vice President Chief revenue Officer, who will be available for Q&A.

Before we begin let me remind everyone that some of our comments today may contain forward looking statements that are based on certain assumptions and are subject to inherent risks and uncertainties as described in our SEC filings and actual future results may differ materially we assume no obligation to update any forward looking statements also.

We will refer today to certain non-GAAP financial measures further information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in the earnings release and supplemental disclosure on the Investor relations portion of our website.

Given the number of participants on the call. We kindly ask that you limit your questions to one or two per person. If you have additional questions regarding the quarter. Please re queue.

At this time, it's my pleasure to introduce Jim Taylor.

Thanks, Stacy and good morning, everyone I'm really pleased to report another quarter of phenomenal execution by our break smart team that highlights the accelerating and transformative impact of our disciplined value add strategy.

Those impacts are reflected in every metric many of which are post IPO records for the company and importantly that execution provides exceptional visibility on forward growth through 'twenty, three and beyond even in a more disruptive economic environment allow me to dig into our results and highlight how our all weather.

Land positions <unk> for continued outperformance.

During the quarter, we signed $1 7 million feet of new and renewal leases at a record rent of $19.26 a foot and a blended cash spread of 14, 2%, which included 660000 square feet of new leases at a record rent of $21.20.

On a comparable cash spreads of 32% and as reflected in our strong net effective rents we achieved those records, while remaining disciplined with capital.

This record setting performance underscores the transformative impact of our value add plan and the related tenant demand to be in our well located highly traffic centers. I'm also pleased by the breadth of that demand as we continue to drive strong market share of store openings for our core tenants in categories like grocery fast.

All wellness and value apparel and have also recently brought exciting new concepts to the portfolio that will drive additional traffic such as yardbird bed Bath are best buy's outdoor furniture concept or bark, social or the life by Kurdish fan here.

Our leasing activity drove overall leased occupancy to a company record of 93, 3% a year over year increase of 180 basis points and importantly, we commenced another 14 million of new ABR during the quarter driving our billed occupancy to 89, 6% importantly, we also saw.

Another record in small shop occupancy, which rose to 88, 8% on new rents achieved a $24 78 a foot.

More than any other milestone achieved this growth in occupancy and rate for our small shops truly underscores the transformative follow on benefit of our reinvestment strategy.

We also drove our average in place ABR to over $16 a foot another record for the company, but which still has plenty of room to run as demonstrated by the nearly $20 a foot achieved on all new leases over the trailing 12 months as we've said many times our attractive rent basis provides the opportunity to outperform.

Through disruptive environments, such as we experienced in 2020 as well as strong supply demand environments, such as were experiencing today.

Our execution delivered top line same store growth of four 8% and NOI growth of three 6%, which is particularly impressive when you consider the drag of 250 basis points from revenues deemed uncollectible due primarily to declining prior period ran collections as we work down our remaining.

Receivables year to date, as we've driven occupancy and improved recovery rates, we've grown bottomline episode by six 5% on a comparable basis.

Looking ahead, we have 53 million of signed but not commenced rent, which will commence over the next several quarters as well as $40 million of annual base rent and our forward new leasing pipeline, even with the declining rate or they're naturally declining rate of prior period collections as those receivables are paid in full and the increased parcel.

<unk> of disruption as economic concerns limb, we still expect continued outperformance in our revenue and NOI growth in 'twenty, three and beyond this level of visible forward growth truly underscores the all weather nature of our plan.

Given our increased cash flow and confidence in continued growth. We are pleased to announce a dividend increase of eight 3%, which will keep us still at one of the lowest payout ratios in the sector as we utilize free cash flow to self fund our value add plan without reliance on the volatile capital markets speaking of that plan are we.

Investment pipeline continued to deliver despite ongoing supply chain issues as we partnered with tenants to get stores open on time, we stabilize $46 million and projects during the quarter and an incremental yield of 8%, bringing our year to date deliveries to 113 million at a 10% yield creating significant value.

Even at a higher cap rate environment.

Since we began this program we've completed over $800 million of Reinvestments at an incremental return of 11% and importantly, we have another 400 million leased underway, providing a significant future value creation.

Please do check out are at the center of video series on our website, they're truly highlights the transformative impact and were accretive returns of our program.

From an investment standpoint, we continued our pause on acquisition keeping our powder dry as we believe there will be compelling opportunities in the coming quarters as private less well capitalized landlords struggled with upcoming debt maturities and cash flow constraints with that said even in this more challenging capital markets environment.

We've continued to find some liquidity to sell smaller noncore assets at opportunistic values with over 110 million in sales transactions completed during and subsequent to the end of the quarter.

And importantly, it's Angela will discuss further we have $1 3 billion of liquidity and no debt maturing until 2024, allowing us to be opportunistic from an external growth perspective.

With that I'll turn the call over to Angela for a detailed discussion of our results our outlook and our capital structure Angela.

Thanks, Jim and good morning, I'm pleased to report on another strong quarter of execution by the Brexit our team that highlighted both the value creation potential of our portfolio and the ability of our platform to harvest embedded upside.

You read off a <unk> 49 per share in the third quarter driven by same property NOI growth of three 6% base.

Base rent growth continues to accelerate and contributing 480 basis points to same property NOI growth this quarter excluding.

Excluding the impact of lease modifications and rent abatements and the prior period base rent growth contributed 440 basis points, representing a 70 basis point acceleration from last quarter, reflecting continued growth in billed occupancy insignificant re leasing spreads over the last year.

Ancillary and other income and percentage rents contributed 80 basis points on a combined basis on that expense reimbursements contributed 50 basis points.

Revenues deemed uncollectible detracted 250 basis points from same property NOI growth, primarily due to the fully expected moderation of out of period collections of previously reserved amount.

Year to date, we have recognized approximately $21 million or seven cents per share a lot of peering collections related to prior years and our current expectation is that such amounts will be minimal in 2023.

First of all we do expect revenues deemed uncollectible to be a headwind to those same property NOI and <unk> growth next year. That's the total level of revenues deemed uncollectible reverted to historical level.

Our operational metrics continue to reflect that.

The strength of the current leasing environment, despite macro headwinds and the continuing successful transformation of our portfolio.

Build occupancy was up 60 basis points sequentially at least occupancy was up 80 basis points sequentially. The anchor lease rate now stands at 95, 4% up 60 basis points sequentially, while our small shop lease rate stands at 88, 8% up 110 basis points sequentially, reflecting another new portfolio.

Record for this metric.

The spread between leased and build occupancy grew to 370 basis points this quarter and the total signed but not yet commenced pool, which includes an additional 50 basis points of G. L. A related to space that will soon be vacated by existing tenants totaled $53 million.

While the size of the pool is in line with last quarter with their spend significant continued velocity within the pool as we commenced leases representing over $14 million of annualized base rent this quarter, while adding $14 million of newly executed leases to the population.

As we've highlighted in the past one of the strongest indicators of forward growth is a persistently widespread between leased and build occupancy while both built and leased occupancy are increasing.

In addition, the blended annualized base rent per square foot on the signed but not yet commenced pool remains well above $19 approximately 20% above our portfolio average, reflecting the broad based impact of our granular reinvestment initiative.

From a balance sheet perspective as of September 30th we had $1 $3 billion of available liquidity, only 4% floating rate debt and no debt maturities until mid 2024.

As a reminder, with the execution of our amended credit facility in April we obtained in $200 million delayed draw term loan that we expect to utilize before April 2023 to continue to extend the duration of the balance sheet.

All of our existing $300 million term loan has been swapped through July of 'twenty 'twenty four the delayed draw term loan has not yet been swapped.

As noted in last night's release.

We have also renewed both our $400 million share repurchase program and our $400 million at the market equity offering program, which were set to expire in January proactively extending our ability to capitalize on a wide range of capital markets conditions.

As Jim highlighted we are pleased to also announce an 8% increase in our quarterly dividend last night to 26 cents per share or $1.04 on an annualized basis.

This dividend increase reflects the strong growth in taxable income experienced over the last year, while also allowing the company to retain as much free cash flow as possible to continue the execution of the value enhancing reinvestment program.

The revised dividend level represents a payout ratio of just over 50% of our third quarter F L and a dividend yield of four 8% on last night's closing stock price.

As it relates to guidance, we have maintained our previous guidance range for same property NOI growth at 5.5% to 6% and we have revised our <unk> guidance to a range of $1 94 to $1 97 per share.

With that I'll turn the call over to the operator for Q&A.

Thank you.

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My first question comes from Craig Schmidt with Bank of America. Please proceed with your question good morning.

Good morning.

Jim I'm wondering will there be any pullback on the redevelopment investment given the potential for recession in 'twenty three.

You know what we're finding is continued demand as well as highly accretive returns so even in an environment of increasing costs, we're offsetting that very effectively with the rent that we're able to achieve.

We've talked a lot about a lot you know our business plan is built for an environment of higher rates less liquidity, because it's self funded and because importantly, the absolute returns that we're achieving are quite compelling and we also as youre seeing in all of our metrics Craig we're driving some real important follow on.

I said not measured in his initial returns in terms of follow on occupancy and rate in our small shops. So we like how our plan is positioned we liked that it allowed us to outperform during the disruption of Covid, where over that two and a half year period. We grew our NOI I think at the top of the peer group, but also.

So in a strong environment such as the one we're in today, where really we're seeing more tenant demand than we've seen in quite some time, but then importantly to what's implicit in your question should we see a reversion to more normalized levels of tenant failure et cetera.

We believe this reinvestment plan as a way to really position us to outperform in that environment as well.

Great and then just.

What are the positives and negatives of having local tenants at a 21% of your ABR.

You know, it's it's a it's important to have the center it would be relevant to the community. It serves and one of the things that really struck us through the pandemic was the strength of that tenancy.

We did have some failures and interestingly, even with the small and local tenants.

We saw demand to backfill those tenants with better more well capitalized operators and so you know it's a balance obviously out of the small shop tenancy, whether it's local regional or national we're able to drive higher absolute rents were typically able to drive a higher than that.

It grows as well as absolute growth in that portion of our tendency, but we like importantly, how it's positioned today. We think we've got a very good balance of national regional and local tenants that provides great visibility and stability for from a cash flow per.

<unk>.

Thank you you bet.

Our next question is from Todd Thomas with Keybanc. Please proceed with your question.

Hi. Thank you. Good morning, just first question I guess following up on the local tenants and you're in that exposure in the portfolio I'm wondering if you're seeing any change in the health or ability of your local small shop tenants to pay rent today.

Any increase in rent relief requests or otherwise at all.

On the contrary you know, we're seeing very good strength out of our entire tenant base and particularly in the small shops, it's reflected Todd in the rents and occupancy levels, we're achieving which we're really proud of and you know frankly as we've executed this plan and upgrading the quality of tenancy, which we think is.

Implicit in our results, but something that's worthy of being highlighted our collections levels continue to be very strong and importantly, also our traffic levels continue to be very strong to our centers.

So we like how we're positioned.

Just you know add up as it relates to revenues deemed uncollectible I'm. There's some disclosure in the stop that gives you a good sense for what we're reserving them as it relates to collection shortfalls for current period revenue and.

And that's been stable over the last few quarters at around 135 to 140 basis points. So certainly with some of the macro headlines lately, we have not seen any deterioration in credit quality and the other thing I would emphasize as both Jim and I sort of talked about in our remarks, you know out of period collections of previously lever is our analysis continued to be pretty significant.

We are continuing to collect amounts from from 'twenty to 2020 'twenty, one and even earlier in 2022, I think that says something despite the fact that there were some delays in payment with those tenants. The fact that many of those tenants are are.

You know fully paying off amounts that were underpaid during the pandemic because it really can sign of how they've come through the last few years and how they are positioned going into a more disruptive and economic environment, Yeah, and I'd I'd put our collections experience you know at the top of the group when you look at what we've been able to drive in terms of.

Collections and and the enforcement of our leases I think we've done a really good job there.

Okay, and then and then Jim I, you know I wanted to ask about.

You know your comments in the prepared remarks around the embedded growth from leasing and the signed not occupied pipeline.

Notwithstanding some of the noise from out of period collections that you mentioned Angela.

Are you expecting to see minimum rent growth continue to improve into the fourth quarter from.

The 4.4% in the third quarter and can you provide some additional context around.

What you're anticipating for for minimum rent growth heading into 'twenty three I appreciate the question and the and the focus on this point because it is important so without giving specific guidance. What I will tell you is that we do expect continued strength in topline growth.

And it's it's being driven by that visibility on the signed but not occupied pipeline as well as a forward pipeline. So you know if you think about it over a long period of time, we feel good that that rent growth is going to trend towards the upper end of the range.

Yeah, I would say on a year to date basis, our contribution from base rent growth sort of stripping out the lease modification that abatement number.

Year to date is at 430 basis points the guidance, we've given earlier in the year, we said that for the full year, we'd be somewhere between 405 hundred basis points and so certainly I do think you could see some acceleration in Q4 to get us to the midpoint of that range and as Jim said, you know, we're very I'm pleased with assigned but not commence a pipeline in the way that that continues to.

The liver and the leasing pipeline Jim mentioned in his remarks behind that.

Yeah.

Alright, great. Thank you. Thank you Todd.

Our next question is from Handhelds St Juste with Mizuho. Please proceed with your question.

Hey, there good morning.

Given the recent transaction activity was hoping you could provide some perspective on the cap rates are.

Especially curious on where cap rates are closer versus non grocery assets are today and how they've moved to you over the last quarter and did you provide or can you give the cap rates with $81 million and sold here in the fourth quarter.

You know we we are we are seeing handle and I think it's true across the universe, a real slowdown in overall transaction activity. So you know data points are are are less instructive I think in an environment a transition like this everybody can point to a tight cap rate or a wider cap rate.

With that said I think it's it's it's clear that there is upward pressure on cap rates, even for the most core grocery anchored shopping centers due to where the 10 year has gone and where the cost of financing has gone I don't believe that that by the way that movement is.

The way our near as wide as the movement in asset classes that are trading closer to that risk free rate.

If you look at the cap rates that we achieved in what we've sold through the quarter and subsequent to the quarter, they're very attractive and in part it's a testament to mark and team finding liquidity from both smaller private buyers 10, 31 buyers et cetera, as well as buyers looking at alternative uses.

For the properties such as what we capitalized on in College Park, Maryland Mark.

Yeah I would comment then when you look at the market over the past few months, it's really been driven by a pretty wide bid ask spread between owners and sellers. So there's clearly demand for the asset class and people looking to buy.

We're seeing some some owners, saying, they're going to wait and see what happens in the rate environment and that's really what's driving.

I think some of the slowness in the market today.

Would you be willing to provide the cap rate on the 81 million in the fourth quarter so far.

Yeah, I mean, you know when I look at the pool of assets. We sold subsequent to quarter end. There were I believe five shopping centers in that pool, one of which was sold.

For an alternative use at a very low cap rate. So you know the cap rate the blend on the $81 million subsequent to quarter end is gonna be below where you've seen us transact historically, but we would prefer to wait and give cap rate on the full quarter. Once the weekend Q4 result.

And Angela.

Maybe one for you.

It looks like the snow spread widened 20 bps from last quarter, but the embedded wet declined by about 1 billion. So I guess first off I'm curious why the ADR within the slow pipeline is decreasing a bit here, while the spread is expanding is that a mix issue and then second as you know historically high Occupancies is this low spread.

As good as you think it's going to get.

Sure so theres a bit of a nuance between the spread between.

Leased and build occupancy and what we report in the signed but not commenced pool that's footnoted.

In the supplemental under that signed but not commenced table and the delta really relates to leases that have been signed.

I have not yet commenced on space. That's currently in billed occupancy from the prior tenant alright, so backfill some existing tenants.

You know so last quarter, the total signed but not commenced ball.

<unk> represented 420 basis points and included 70 basis points of space related to tenants that we're currently in billed occupancy getting you down to that 350 basis point spread between leased and build occupancy today, we're still at 420 basis points in the signed but not commenced pool, but only 50.

Basis points of that is related to tenants that are currently in occupancy so more of the signed but not commenced well even though the total number did not change more of that pool today is incremental and then it was a quarter ago.

Got it got it now do you see any delays sorry, just wanted to follow up on just the slow pipeline are you seeing any logjams, forming you still expect to get stores open next year and that snow that sometimes they don't.

Hey, this is Brian our team has done a great job of minimizing that we certainly had some delays across the portfolio, but I think as Jim talked about in his opening remarks and as we've talked about on prior calls our operating teams are working very closely with retailers. We found that our retail partners are being incredibly flexible in this environment keeping existing HVAC unit.

So we're keeping the bathrooms in the locations where they're at because they're incentivized to get these stores open and we've had some great successes year to date and I think what we've been able to do has really positioned us go forward to negotiate those scopes upfront. So some of the best practices. We're learning will even take advantage of in a more normalized environment. So I think the team's done a great job I would.

I agree and I would say, what we're actually commencing in the quarter is exceeding our expectations. So you know we talked about the $14 million of rent that commenced this quarter.

The team is doing a phenomenal job of getting the tenants open and in occupancy and as you can imagine it we're absolutely aligned with the tenants in that regard so as Brian highlighted we and the tenants are working together to get those stores opened as quickly as possible.

Thank you Greg.

Our next question is from Greg Mcginniss with Scotiabank. Please proceed with your question.

Hey, good morning, good morning, just thinking about occupancy I'm curious what you see is reasonable reasonably achievable full occupancy I'm doing air quotes for those not in the room with me.

For the portfolio as it stands today, you've spoken about the 150 basis points of occupancy locked up the active redevelopment pipeline I'm curious how much more benefit.

But it in the future pipeline.

And really kind of what do you see as the low hanging fruit left to fill it in the near term.

Loved the question and appreciate the air quotes.

You know as we think about the plan. What we're excited about is that we continue to increase not only occupancy but potential occupancy for the portfolio and so that's why you're seeing our set records today, but we still believe we have room to run we believe we have room to run both an overall occupancy of a couple of hundred basis points, but we also.

Importantly in the high rate Ah Ah Ah small shop, a component of our portfolio as well. So you know this this strategy has had the follow on benefit of increasing the potential occupancy of this portfolio and that's something that's important to understand.

And so that I fully see this portfolio hitting a stabilized occupancy.

Above what its ever achieved in the past.

But another important thing to consider about this strategy, it's not simply about getting to full occupancy.

It's about maximizing the ROI on the assets that we have recycling capital effectively improving rate driving NOI growth.

And doing so in a value added and disciplined manner. It's a very granular strategy, but all you need to do is look at the metrics and results to see the success of it overtime. So even in a more full occupancy environment. This is a platform that will continue to create value as we are.

Recycle through opportunities that that exists throughout the portfolio to create value.

Thanks, and then just a kind of just thinking back on that do you have any thoughts on the.

The future redevelopment pipeline and what might be contributed from that in terms of occupancy.

You know I can't give you specific occupancy guidance on the future redevelopment pipeline, but you know when you look at it.

Another 400 million underway are substantially leased that's gonna be a 9% to 10% increase.

Incremental return and then we have close to $1 billion of opportunity beyond that that we've identified in the properties that we will get to as leases mature and give us the opportunity to recapture space.

And drive the potential of those of those asset. So you know we like that we've got several years of visibility.

You added activity, even in an environment today, where it's a self funded and internal growth driven plan.

I'm really pleased with what we've done with acquisitions that have been value added obviously, we're in an environment today, where I think it makes sense to pause, but we'll find in the future or our openings to continue to grow in that regard as well, but what I like about how we're positioned.

We don't need that.

We've got several years of runway of growth and opportunity that's embedded in the assets that we own and control.

Okay. Thanks, Angela if I could just follow up with how are you accounting for rent from Regal at this point.

Yeah.

It's fair to say that all of our entertainment tenants are movie theater tenants have been on cash basis three of the pandemic. We had three vertical locations at the time of filing one west are intact, and we have to still in place.

So we are recognizing revenue from all of our movie theater tenants of cashes firsthand.

Great. Thank you.

Yeah.

Yeah.

Our next question comes from wanted Santa Maria with BMO Capital markets. Please proceed with your question.

Yeah.

Hi, good morning.

Hoping to go back to Craig's question on the redevelopment and maybe a comment you made about <unk>.

The rents you're getting there do you expect that the yields you're targeting on those will increase as rents move higher or that the spread would maybe compress a little bit although still be positive, but definitely better than traditional ground up development, just given a higher cost of capital in today's environment with particularly higher interest rate.

Yeah, you know what we've seen and also on the cost side of the equation is we're seeing it come through in terms of the cost.

Redevelop these these centers, but fortunately, we've been able to offset that with the rents that we're realizing on the reinvestment projects driven by the tenant demand. So you know again, we have pretty good visibility on continuing to be able to drive 910, 11% incremental returns of course.

Returns are much higher but and we think what we like about that is even in a in an environment of rising cap rates and rising interest rates, which we've always underwritten, we're still creating significant value maybe not as much incremental value is when interest rates were in the low single.

<unk>, but were still clearing it by a healthy margin and importantly, we're setting these assets up for continued growth as the balance of the assets benefit from the investments, we're making I would also just add to that that the the risk associated with the type of redevelopment work. We're doing continues to be very low this is very much.

As Jim said earlier attendant German exercise, where we're really not beginning projects, we have no capital at risk until we have them substantially all of the leases signed all of the revenue kind of contractually obligated. So when you think about that complexion from a risk standpoint against the returns, where we're achieving and where cap rates are today or where they might go I think that activity.

She needs to be very attractive on a risk adjusted basis.

Okay.

And then just as a follow up on foot traffic have you seen any.

Bifurcation in port traffic to your centers.

If you cut.

Your portfolio to courthouse or what have you on different demographics of affluence levels have you seen any.

Ah well work for traffic person or you're.

Less affluent neighborhoods or anything to point out.

Well no. This is this is Brian it's actually been fairly broad based across the portfolio, whether it's by region, but whether it's by demographic. We've been really encouraged by what we've seen in terms of consistent traffic growth both over last year and pre pandemic. We've obviously had some assets, where we might've had a dark anchor.

Now is that anchors open where we're seeing growth, but also interestingly we've seen it from both grocery anchored and non grocery anchored portfolio, which really.

It makes us really encouraged about what we're seeing in terms of the overall demand and traffic in centers.

Thank you you bet.

Our next question is from Floris Van <unk> with Compass point. Please proceed with your question.

Thanks for taking my question guys.

I'm intrigued by this signed not open a pipeline as you know Jim not all space is created equal and the upside potential here in your small shop is is actually more valuable than the than the anchor space could you quantify for us what 1% increase in small shop.

That means in terms of AVR.

Angela.

Let us let us get back to you on that in terms of the specific quantum but you're hitting on youre hitting on them a very important point, which is the rents in the small shops are higher and where we are.

We're driving benefit from that reinvestment both in terms of occupancy in the small shop and right and to that end. You know are in in process reinvestment pipeline is actually a drag on our occupancy right. So we have a real follow on benefit for the assets that were impacted.

And we're seeing in those assets growth in the small shop occupancy of several hundred basis points not to mention rate, but you know to something implicit in the start of your question, we're creating huge value in the boxes to.

That's a lot of rent.

And you know, it's it's big spreads you know you're talking about spreads Flores of 30, 40%. So I'm excited about that too and you know when you look at the yields that we're driving just on the absolute capital invested repositioning anchors or repositioning portions of shopping centers.

That's pretty compelling.

And you know the small shop is a great follow on to the extent. It is not included in what we originally touch so.

Yeah, I can just say floris, we do give some good disclosure I think in a portfolio overview page on the Sop about the different components of the GLA in the portfolio and the rent on each of those buckets, but as your point sort of underscore as you know all small shop is a smaller portion of the portfolio our small shop space only represents about 31%.

Of our total GLA across the portfolio and occupancy gain and that smaller portion of the portfolio. Certainly has just proportionate impact given that the rents in small shop, even in place today are $25 versus $16 for the portfolio overall.

Basis point occupancy gain in that 31% of the portfolio translates into something more like a 50 or 60 basis point improvement in our current ABR per foot.

So higher than the 30, you would expect based on the composition of the portfolio.

Thanks, Ed.

Okay.

Our next question is from a severe Chanel with Evercore. Please proceed with your question.

Hey, Angela and good morning, I guess, just a little bit more on the prior period when collections at this time.

I know that bucket was about 40 million I think in the last quarter.

It didn't really change this quarter I guess just trying to understand.

Better I guess, the collectability of that amount over the next few quarters and you know maybe maybe provide some color on how many of those tenants are still active in your portfolio.

I'm, just trying to get a better sort of trying to figure out what what sort of upside you can see in your numbers coming from that in the coming quarters, yeah well.

Thanks for the questions in there I'd say, a couple of things I kind of break it down and that's why I would say about a third of the $38 million that are that we report that has been accrued for throughout the pandemic period, but uncollected and reserved for so that's the number that has theoretically the potential to be positive to the income statement.

Weren't collected if you break that down into thirds basically I would say a third of that 38 million I would put as the oil percent probability on collecting those are amounts that we've we've gone through the process. We've determined there, they're highly likely and being uncollected, we've written them off from a balance sheet perspective.

Another third of that relates to tenants that are have vacated the portfolio. So you know the way we continue to actively pursue all amounts outstanding we're continuing to work with some of those prior tenants to get those amounts collected but clearly the probability on that bucket is lower than on the one third of the 38 million that relates to 10.

So they are still active in the portfolio and.

So in terms of probability weighting again, a third related to active tenants higher probability of third relating to tenants that have moved out but we're still pursuing and then a third I would put effect zero percent probability on.

I would also say you know just in terms of the granularity of that pool today. It is a very small balances spread out across many many tenants across the portfolio. We no longer have some of the big chunky National AR collections that were still pursuing most of those have been fully resolved to the companies.

The benefit to the company in favor. So it is much more difficult to predict the timing of when those amounts come in and I would say not only might we see some in 2022, maybe some in 'twenty two 'twenty three as I said in my remarks, we expect it to be pretty minimal and that those amounts will even stretch out past 2023, it's just a it's becoming much more difficult to.

<unk> got visibility on on the timing of those collections given the granularity.

And when you think about the total rent during the pandemic period.

And the collection percentages that this company has achieved its pretty impressive and I I think it stacks up against anybody and I think that goes to the quality of our centers the quality of our leases and frankly, the focus of the team and making sure that we drive the collection of those prior period amounts but it.

It is something as Angela laid out very well is a declining benefit as we look forward I'm. So I'm real pleased with the cash flow that we've been able to capture and frankly as Angela alluded to earlier, the strength of the tenancy and being able to pay some of those prior period them out some of those deferrals et cetera.

We're finally moving to the other side of that and you know I think we fully expect as Angela said in her remarks, the benefit of that prior period collection to moderate significantly in the coming years.

Got it and then thanks for that color, Jim I guess, just switching over to <unk>.

Maybe you know the watch list for next year right clearly the pipeline is strong here from a leasing perspective, you talked about the pipeline.

I guess help us understand what the level of fall out you can see whether it's box as their shop, there's clearly been some noise.

In the news about some sort of retailers, but I'm just trying to frame out sort of the puts and takes for next year as we think about it.

Growth rate in 'twenty, three which is sort of the main focus for everybody and in light of our pending slowdown. Thanks, So much yeah and I. Appreciate the question and we really tried to lay it out in our prepared remarks as we look at.

Returning to a more normalized level of tenant disruption as we look at the coming quarters.

The tenants that we have on watch list wouldn't surprise anybody.

And you know, we're watching them closely and where we have any opportunities to recapture space, we're doing it and reducing our exposure to those tenants as you would expect us to I I think an important thing to consider is if we do see a more normalization of tenant disruption, which we.

Fully expect and have incorporated into our <unk>.

Outlook, who's well positioned to perform.

And this is where rent bases matters right. So when you look at the in place rents that we have and you look at where we've been signing new brands, we have a lot of room to run.

And you look at the discipline on capital, we're not buying these rents so I like again, the all weather nature of this plan and how it positions us to grow in a high demand environment such as the one we're in but also one that's choppy or and I think it's logical to assume and I think it's a good exercise for you to see.

Go through as we have an understanding of the puts and takes as we look into 'twenty three and beyond and we're just really pleased with how we're positioned to grow and the cumulative impact of this reinvestment plan, we think will continue to shop.

Yeah.

Thanks, So much you bet.

Our next question is from Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Hey, good morning down there.

So Angela maybe just continuing on some mirrors.

Your line of questioning not asking for specific 2023 guidance, but you guys have discussed yeah, well the 250 basis point headwind from you know.

Back rents that were paid this year yeah. There's also it sounds like Jim's comments normalization or I'm, sorry, going to a normalized kind of credit loss I don't know if that's maybe in the 50 to one.

100 basis point range, but and then I think you guys are pretty good in the balance sheet. So not really too worried on floating rate exposure, but can you go through some of the things that absolutely and then yeah, maybe and in dollar amounts that we should be thinking about as we're updating our models and thinking about 2023.

Yeah, I mean, I I just go back to my prepared remarks, Alex in the few things, we mentioned, which.

For the most part I think you just articulated then the first thing I think to really think about as it relates to 2023 is the out of period collection.

And as I mentioned, it's about $21 million of out of period collections, we've seen year to date in 2022.

Well absolutely act as a headwind to growth next year and so that's something to be mindful of I also said in my remarks, and you heard Jim reiterated as well that we expect bad debt in total to to look like historical levels and our historical run rate average has been somewhere between 75, and 100 basis points to try I deduct them based on total revenue.

It was 75 to 100 of total revenues in any year for bad debt expense, we were coming off of a two year period really where revenues deemed uncollectible has been positive to the income statement. That's obviously in the absence of prior period collections not.

Not something anybody should be expecting continued to continue going forward at the balance sheet. As you mentioned is isn't very good shape. Today, we we don't have any debt maturities at this point until 'twenty 'twenty four and June of 'twenty 'twenty four.

I also mentioned in my prepared remarks, we have a $200 million delayed draw term loan that we may utilize to continue to extend duration across the balance sheet and so those are some of the things to think about I think.

Regardless of what you know the full picture looks like when we give complete guidance in the fourth quarter I would just really emphasize them as we talked about earlier, how strong the fundamental growth of the portfolio and used to be.

It's we're talking this year the same property guidance implies kind of a 450 basis point contribution from base rent at the midpoint of the range that's relative to the last high watermark for the portfolio of 260 basis points. So the growth we're seeing in the current environment based on the strength of leasing demand and based on the minimal amount of fallout.

We have had this year.

Certainly can support as we look into 2020 three.

<unk> level of tenant disruptive activity, while still putting up is as Jim underscored in his prior comments very strong topline growth.

Okay. So just and Andrew just to be clear then the only real two things that we should be considering in our model is the $23 million of catch up rents that you got this year from from Covid back pay and then to the normalized 75 to 100 bps, a bad credit right. Those are the only two big ones right and that's all we highlighted at this time Alex.

Okay second question is for Brian Finnegan.

Yeah, we hear a lot from you and peers about retailers re engaging their store fleets you know after a decade of E. Com only focused and you know whether it's last mile are just realizing that they need to focus more on.

Capitalizing on.

The the resurgence of people shopping at shopping centers you know after you know they relocations. During Covid can you just give us some tangible you know evidence or examples of where you've seen retailers shift dollars from E. Com to stores. So that you know we have this conceptually but.

It would be great to hear some actually real anecdotes that are material not just sort of one offs, yes sure as it's a great question I think first you start with target who is said, they're distributing 95% of their orders are coming from their stores and they said on multiple calls, but the store is the center of what they do and looking at taking.

A portion of those stores for last mile fulfillment you saw Walmart do the same thing at the start of the pandemic and now that's flowing down into some smaller retailers like junior boxes, where you see an old to for instance is taking a portion of their store to allow for it we've talked about on prior calls to just the vast vast amount of.

Retailers that are now doing curbside pickup prior to the pandemic, we had mostly large format retailers and grocers now its a wider range, where they're interacting with the customer both in the store are taking the most expensive part of the delivery out of it by having curbside pickup so where we've really seen.

It though is in I think some of those small shop and junior anchor retailers like in Ulta who's utilizing their space and their sales floor area are a portion of it for last mile and I think it just points to the flexibility of the format right and the terms of your you're seeing traffic, that's being driven to the stores as well as <unk>.

Retailers continuing to be flexible, but I think for us. It's just really encouraging that we're seeing that investment in the stores.

Thanks.

Yeah.

Our next question is from Craig Mailman with Citi. Please proceed with your question.

Just wanted to follow up on the small pipeline progression.

Angela.

'twenty three I think about $14 million sequentially, but just from a timing perspective can you just give a little bit of a sense of when that commences.

Or like a time weighted.

For the year.

Great.

Incremental color on how we should be kind of flowing through the model.

Yeah, if I look at the 2020 three commencement so it's $32 million in total in 2023 at this point it is a pretty first half weighted as you would expect it to be.

As we continue to sign leases in the fourth quarter and early in 2020 three you'll continue to see that second half number would be added to the.

The existing 32 million and that pipeline, it's it's it's pretty weighted to the first half of the year.

That's helpful. There's only about 20 to 25 million in the first half.

Hum.

If we think about and again I know he doesn't get in 'twenty three guidance, but you talked about kind of the minimum rent growth for this year.

The 5% range.

If you were able to maintain that level for next year, how much of that would be in the bag.

You guys have kind of already.

And the signed not occupied bucket.

Yeah, I think it's a it's a bit of a tough question to answer I think we've got really good visibility on the signed but not commenced pool, where we end up in total is going to depend on things like tenant disruption move out activity all the other things. So I think at this point.

Bit of a hard question to answer, but you know I would just reiterate that I think the total size of the signed but not commenced pool. The weighting as we described in 2023 the timing in 2023 mm is you know as high as it's been in any year, certainly and I think that bodes really well for growth overall and it gives us a good bit of confidence as we look into.

Next year, we're not counting on significant speculative activity.

Done most of the business already which is always a good position to be in.

And you know we're liking how we're seeing tenant demand and momentum continue to build and our forward pipeline.

So yeah, we feel pretty good about how we're positioned.

Okay.

That's helpful. And then just kind of one curiosity I guess, we talked earlier in the call about 21% from the local tenants.

How much of that bucket is like single kind of human operator versus local guys, who may have kind of multiple units.

Little bit more of a revenue base to lean on in case, the economy does because just trying to get a sense of.

The real credit profiles that local local cutting a lot of different takes a while for some people. It's this is Brian its a bit of a mix and I would point to some things we talked about on prior calls in terms of our underwriting standards because coming out of the pandemic. Our leasing teams partnered with Angelus group and finance to really tightened that up and what we can.

To see is strong multi unit operators and then also operators that are taking advantage of of an environment, where there were some built out restaurant vacancies or there were some kind of move in ready spaces. So our credit profile is much better today I'd say, both from a local and in there.

National perspective, but we're really excited about the depth and quality of local tenants that we have and as Jim kind of alluded to earlier in the call. Those act as many anchors to our centers their unique businesses that really helped cultivate our merchandising mix that that we really like and help us help make those centers the center of the communities they serve.

So I'd say overall, our local tenant base is much stronger and it has to do a lot that has to do a lot with the work that our teams both on the leasing and finance side have done building the write those deals.

Great. Thank you.

Our next question is from Keybanc, Kim with <unk> Securities. Please proceed with your question.

Thanks, Good morning out there.

So Jim I think all of US on this call are trying to balance the good results that might be a little bit backwards looking.

Versus some of the macro concerns and.

You know it does feel like.

After a couple of more bad data points now how does demand shift that's probably the big question. So when you look at the collective basket of conversations you're having for future leasing demand no. How resilient do you think that those conversations are if kind of the macro data points start to close up a little bit further.

You know, it's it's proven to be incredibly resilient and you know one of the interesting things. He then as you well know is.

We're working with our tenants on store openings now that stretch into 'twenty four and beyond so the tenants or are planning pretty far forward understanding as everybody does that we may see some disruption in the coming year.

One of the fundamental things that's important to appreciate is that these stores are very profitable for the tenants and they're a key part of their their plans to serve the customer and that's the only proven to be more true and it's against key event I think versus other environments.

A supply demand backdrop, that's incredibly supportive for landlords, there's virtually no new supply. So you know as we have calls with national regional and local tenants alike in meetings.

We remain very encouraged by the breadth of that demand as I talked about.

And the depth of it and the position that it puts us in as a landlord to continue to drive.

All right so while certainly our results to date are.

The factor of what we've done.

I think what's also important.

Important to appreciate is how what we've done is set sets us up to be pretty confident in terms of where we're going to be over the next several quarters, even with the moderation in tenant demand.

I don't see it we haven't seen it yet, but we've always prepared ourselves for an all weather environment. It's part of our exacting standards on capital allocation. It's part of the follow on benefits that we've been willing to harvest.

And discipline around capital recycling so.

I like how we're positioned I like how we're positioned to perform particularly on a relative basis again, given our rent.

So you know the the strength of the tenant demand remains really robust the supply demand picture really favors our asset class our traffic levels continue to make strong and elevated and we in particular are benefiting from a value added reinvestment program, that's transforming the portfolio.

Okay and the second question.

What are you expecting from the Kroeber's albertsons merger and any type of and store closures within your portfolio that we should expect he'd been hey. This is Brian . This is gonna be a long process I think the companies have given themselves through early 2024, there's a big regulatory process that they have to go through.

I would just say that we feel really strong about both our Kroger and Albertsons fleets, we've got great partnerships with both of those retailers, great well performing locations throughout the southeast places like Texas, Southern California, Denver, we have a very strong kroger.

Portfolio in the Midwest and some of you on the call have mentioned, we have one of the lowest overlaps in the sector of these two companies. So it's something that we are closely watching and we'll continue to monitor but really early innings for that and no matter. The outcome, we feel really good about our fleets.

And by the.

<unk>.

These stores so not not only do we have low overlap our store sales numbers are very strong.

And what does that little overlap mean.

What will you look at is the number of stores that you have a competing with each other within a five mile radius.

As stores that may be impacted by the combination of either in terms of.

Required divestitures or potential store closures as the two chains consider what they want to do from a strategy perspective.

There's a long regulatory road ahead and as Brian said this will take time to play out, but we like how we're positioned both on an absolute basis, given the productivity of the stores as well as the relative basis, given the limited degree of overlap of our portfolio.

Okay. Thank you guys you bet.

Our next question is from Mike Mueller with Jpmorgan. Please proceed with your question.

Yes, Hi, Angela I was wondering can you walk through how you think about I guess, the balance sheet leverage and funding redevelopment next year in a scenario where.

The disposition market still may be sketchy and you don't like your stock price.

Yeah sure Mike. Thanks for the question you know I would say based on the significant amount of free cash flow. We generate we can continue to fund 100% of our redevelopment activity on a leverage producing basis. You know if we use that free cash flow and a little bit of incremental leverage debt to EBITDA comes down as we execute on that program given that.

Thats substantially funded with free cash flow. So we're really not as Jim mentioned earlier, we're not beholden to the disposition market or the public equity market in terms of continuing to find the portfolio transformation efforts and generate those very attractive 9% to 11% incremental return.

Got it okay. Thank you.

Our next question is from Paulina Rojas with Green Street. Please proceed with your question.

Good morning.

Good morning.

I'm trying to.

The economics behind getting in box bank in the current environment.

They can see in Jersey promotion.

In doing.

During the last 12 months the average ABR from new Alkermes is being around 16 and Donuts that's correct.

How much snow and said and number Australia capex on a net effective basis.

I know you have some decision or was it depends it depends on it depends on the plan to backfill so.

So if it's a consistent use your capital per foot over a 10 year basis can be a couple of bucks a foot if its a situation where you are coming back and you're dividing the box for two junior anchor tenants. Your rent spreads can be much more significant and cover the capital that would be required.

And that's paulina really the basis and the important part of this question is.

Because it does take capital to bring in a new tenant and we show you what those net effective rents are.

It does take capital to divide a box what is your going in right and so when you're coming off of rent, that's eight $910 and you're dealing with a new rent that 16 or higher you have the ability on a net effective basis to be positive not to mention the Ara.

Roy So that's it depends on the box itself, what we do in addition to disclosing our net effective rents as we show you what the returns are across our reinvestment activity.

Then every quarter, we show you what we've delivered and that's really I think the litmus test for us in terms of whether or not we're creating value in the repurposing of the box.

How much would you say the capex, even in a worst case scenario, where you need to bring in another use and maybe speed of boxes today.

You know again it depends so you could spend 40 bucks a foot you could send $70 a foot $80 a foot.

Even more depending on.

What you're doing with the box if you're coming back with a similar use you can be below that if you're dividing the box up say, you're taking a large box and you're making a small shop you could be at the upper end of that range.

And again.

The decision as to what to do with that box is going to be driven by what we believe is right for the center, but also what we think is going to maximize ROI and that that comes through in those reinvestment yields that we show you.

Thank you and then last question I know you have no expirations in the near term, but can you talk about how you proceed how we're stretching for expense in your pension fund, yes financing for the strip Center.

Okay.

It's interesting.

I think what's happening in the capital markets is clearly.

We're going through a reset and I don't think our levels of have found normalcy.

Not only with respect to the base rate, but also importantly with respect to spreads.

The other thing that you have going on Paulina right now is a constrained liquidity. So you have many lenders who have pulled back in terms of providing.

Providing debt capital or where they do it's pretty high cost debt capital that will work itself through but even in that environment. I do think you have private landlords that have upcoming debt maturities who've been rely on perhaps on low interest rates to <unk>.

Capitalized refinance and take equity out of assets, that's going to present, some interesting opportunities as those maturities come due in a higher interest rate environment, and that's where we think our advantages as a national platform with access to understanding tenant demand.

The ability to redevelop and reposition boxes and importantly, the track record to do so and also the liquidity to capitalize on it.

So we're excited about the potential for that opportunity coming out of this disruption, we're not pounding the table and saying it absolutely will happen, but it feels to me like we're setting up for a very attractive cyclical redeployment period.

Thank you you bet.

Our next question.

Our next question is from Tayo.

Tayo Okusanya with credit Suisse. Please proceed with your question.

Good morning. Good morning, Good morning, guys. Thanks for taking my call I know earlier on you emphasized you don't need acquisitions to still put up a very strong earnings outlook, but I am curious what the what kind of signals you are looking for before you feel more confident about the transactions market is it is it more.

Cap rates backing up 150, 200 basis point does it more have you guys feeling you have a better sense of your cost of capital just kind of curious what would make you kind of get back on that horse.

I think it's a it's a little bit of both of those things you know one one you want to you want to see where.

Cost of capital is settling out, but also perhaps even more important than than cap rate or equally important the cap rate is that you're finding opportunities to truly grow ROI and achieve very attractive unlevered returns even in an environment such as the one we're in.

So I I think you know.

It will become clear as the market evolves.

I just think we're in a transition period right now in the wise thing to do is to be patient because I think opportunities are going to move our way from a return perspective.

Gotcha, and then just kind.

What moved eating in regards to a lot of the shopping center names are trading at big discounts to NAV.

Just curious what your thoughts are in regards to another round of consolidation.

So a few years ago with some of the.

That'd be cool if that happened back then.

You know, it's certainly something that happens in cycles, and we could see platforms combining a in part because there's certainly benefits to having scale such as we have in dealing with landlords or excuse me in dealing with tenants.

So I think you could see.

Some additional consolidation, particularly amongst some of the.

Smaller platforms.

Platforms that don't have the scale or efficiency or liquidity.

But we'll see I think.

Uh huh.

It's it's something that's often predicted and Oh no it.

It doesn't occur quite as often as it's predicted.

Okay. Thank you. Thank you Tao.

Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Hi, good morning.

A similar question could you comment on the renewed and slightly expanded share repurchase authorization and how that could rank in your priority of the next several quarters.

We're always we're always trying to make the best.

And most appropriate capital allocation decisions and so as Angela highlighted in her remarks, the shelf really gives us a.

Uh huh.

Our battery pack for our tools as we you know moved.

Move forward.

Not a statement that we're going to use it or not use it but we've always wanted to have.

Those tools available to us as with every other tool necessary that we think can drive our growth as an enterprise, but again I think what's important here to appreciate as what Angela highlighted before which is we have a self funded plan generated driven by opportunities.

Embedded in the assets that we own that we believe is going to deliver growth towards the top of the peer group we.

We like that we like that it's not dependent upon where the capital markets might be at a particular point in time or the availability of attractively priced acquisitions or attractively priced dispositions. It's a plan that we think is all weather and again, it's driven by opportunities that we control.

And funded by free cash flow as Angela highlighted on a leverage deleveraging basis. So we like that but I think as we've demonstrated over the last six plus years that we've been part of this team we we will be.

Opportunistic with capital.

And and step into those situations that we think really enhance long term shareholder value.

Okay. So maybe one more like a Halloween labor staffing levels at your centers to the best of your knowledge are most of the stores fully staffed appropriately staffed.

And how has that trended across the year and you think maybe.

At least your labor market in the next few quarters should help store openings and store it.

Yeah. This is Brian we've seen that improve a bit I think retailers, it's something that I think the entire market that was grappling with your over the past few quarters, but I think we've seen that stabilize a bit.

Retailers are very excited about the store openings. This year in our discussions with our retail partners incredibly focused on getting those stores in an open ahead of the holidays and even work out working outside would typically would be blackout windows pushing those out there were periods, where they didn't want to get very close to Thanksgiving, but they're really focused on getting those.

<unk> open and having those stores fully staffed so we've seen that certainly improve and be a good signal of that from our retail partners is that focus on getting a lot of those stores opened this year.

Alright, thank you.

Thank you.

Our next question is from Lizzie Dorking with Bank of America. Please proceed with your question.

Youre live with our speakers are you muted.

Okay. He disconnected.

Yeah.

We have reached the end of the question and answer session. At this time I'd like to turn the call back over to Stacy Slater for closing comments. Thanks, everyone. We look sorry to seeing many of you at NAREIT.

This concludes today's conference you may disconnect your lines at this time and thank you for your participation.