Q2 2022 Site Centers Corp Earnings Call
Good day and welcome to the site centers reports second quarter 2022 operating results conference call. All participants will be in a listen only mode shouldn't need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question.
Press Star then one on your Touchtone phone and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to MS. Monica Gould Crazy head of Investor Relations. Please go ahead ma'am.
Thank you operator, good morning, and welcome to site Centers' second quarter 2022 earnings conference call. Joining me today is Chief Executive Officer, David Lukes, and Chief Financial Officer Conor affinity. In addition to the press release distributed this morning, we have posted our quarterly financial supplement and slide presentation.
On our website at 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 laws. These forward looking statements are subject to risks and uncertainties and actual results may differ.
Materially from our forward looking statements additional information maybe found in our earnings press release and in our filings with the SEC, including our most recent reports on Form 10-K and 10-Q. In addition, we will be discussing non-GAAP financial measures on today's call, including <unk> operating up all in 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 second quarter earnings call.
We had a very productive second quarter with results well ahead of budget lease.
Leasing demand continued to be very strong from both existing retailers and service tenants expanding into key suburban markets, along with new concepts competing for the same space.
The strength of execution from our leasing team resulted in a 120 basis point sequential increase of our portfolio leased rate.
Additionally, we completed significant capital recycling as we continue to invest in our convenience thesis.
And lastly, we closed a couple of key financings in the last few months improving duration, while keeping the balance sheet in great shape with debt to EBITDA in the low fives at quarter end, which remains well ahead of the peer group in the sector overall.
I'll start this morning discussing second quarter results talk briefly about leasing and then discuss our investments and transaction activity, which adds to our portfolio of assets and wealthy suburban communities.
As I mentioned second quarter <unk> was ahead of our budget, primarily on better operations with Conner will provide more detail on later on.
Our property operations team continued to do a great job getting tenants opened for business ahead of schedule, which drove part of our outperformance this quarter and our improved guidance.
Moving to leasing tenant demand and activity remains elevated across the portfolio and we built upon our momentum over the last two years with another quarter of record volume relative to the last six years.
There were no shortage of key deals this quarter, including the recapture and re tenant ing of a ground leased restaurant in L. A the re leasing of all four available units, including two anchors at one of our shopping centers in Charlotte at a positive 128% Mark to market multiple first a portfolio of shop deals across a number of different assets.
And continued progress on the lease up of our tactical redevelopment pipeline.
The volume and the quality of our leasing is a true testament to our people our processes and the quality of our focused portfolio of real estate and key suburban submarkets.
Looking forward, we have another 250000 square feet at share in lease negotiations, which we expect to be completed by year end with similar characteristics to the deals we signed since the pandemic began with a concentration on national publicly traded credit tenants.
We continue to expect the commencement of our signed leases to be the material driver of our growth over the next several years.
Shifting the transaction activity, we had a very active last four months recycling capital highlighted by the sale of Lenox Town Center, and the Madison pool, a portfolio for a combined $464 million.
Net proceeds along with balance sheet capacity were reinvested into convenience assets in Atlanta, San Francisco, Houston, and Washington D. C. We are really pleased with the execution on both of these deals and the ability to reallocate capital into convenience properties.
The largest investment this quarter was the acquisition of two properties in Lafayette, California, which is a sub market I know well from my time living in the Bay area.
Lafeyette mercantile in Lafayette square offer all of the attributes that we are targeting and convenience properties, including barriers to entry excellent demographics with trade area household incomes up $223000 and average home prices of over $2 million convenient access and parking and site plans that offer a mix of simple.
Liquid leased shops to a wide variety of national regional and local tenants, including Starbucks Blue Mercury and Fedex.
While the Bay area has had no shortage of headlines around CBD office utilization rates in our property data highlights the benefits of dominant suburban convenience properties customer traffic at these newly acquired properties are running ahead of comparable 2019 periods between five and 15%.
With lease up and Mark to market. The Lafayette assets have an underwritten five year NOI CAGR of almost 4% with limited capex, providing compelling capital adjusted growth.
In the Washington D. C Metro we bought a three property convenience portfolio with average incomes of over $150000 and a tenant roster at least largely to a mix of national service and <unk> users.
These properties are located just two miles from our own Fairfax Towne center asset, providing us excellent visibility on market rents and tenant prospects.
And moving to Atlanta, we bought two more convenience properties in our largest market and are confident we can find more opportunities to grow our portfolio in this key MSA given our presence on the ground.
Going forward, we remain encouraged by our investments in convenience properties and this compelling sub sector and open Air shopping center remains a key area of focus for the company.
We've assembled a portfolio of 20 properties now with an average household income of $145000 and weighted average tap scores of 87, and an underwritten five year NOI CAGR of almost 4% with minimal capex.
Each of these properties all located in key markets for the company, including Miami Scottsdale D C. San Francisco and Atlanta will be drivers of the company's long term growth.
Our transactions Department led by John <unk> has done a fantastic job building local relationships within our core markets such that we're able to source and select the right opportunities for us to acquire the.
The convenience sub sector is clearly benefiting from recent societal shifts favoring hybrid work in our property data aggregated over the past few years is showing a distinct ryzen customer traffic.
The recent rise in construction cost is also creating scarcity in this retail format as new construction is low even in the face of rising market rents.
The addressable market in this convenient sub sector is quite large and we look forward to continuing our progress of deploying capital into this growth sector. Thank.
Thank you to the entire site centers team for an excellent first half of the year, we've been hard at work for some time repositioning the company to outperform and remain excited about our focused portfolio and with that I'll turn it over to Conor. Thanks, David I'll comment first on quarterly results discuss our revised 2022 guidance and such.
The moving pieces heading into the third quarter, and then conclude with the balance sheet.
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 overage rent.
These operational factors totaled over $1 10 per share relative to budget.
The quarter also included $250000 of Unbudgeable straight line rent from the conversion of cash basis tenants and $1 $2 million from payments and settlements related to prior periods.
Both of these nonrecurring items totaled almost another one seven per share relative to budget.
In terms of operating metrics the lease rate for the portfolio was up 120 basis points sequentially and 260 basis points year over year with our lease rate now at 94, 4%.
Are you seeing activity in the quarter was elevated across all unit sizes and our lease rate is now above this company's pre COVID-19 high watermark of 94, 3% back in 2017.
Highlighting our leasing volume and backlog, yes, no pipeline increased to $22 million from $18 million last quarter. These.
<unk> signed leases now represent over 5% of annualized second quarter base rent or over 6%. If you also include leases in negotiation in our pipeline.
We provided an updated schedule on the expected ramp of the pipeline on page six of our earnings slides and expect almost 60% of the leases to commence by year end 2022.
Same store NOI was down two 4% in the second quarter with decline almost entirely driven by the headwind of $6 $7 million of prior period reversals in the second quarter of 2021.
Adjusted for this same store NOI would have increased four 8%.
Moving onto our outlook, we're raising our 2022 O F O guidance to a range of $1 13 to $1 16 per share.
Rent Commencements and uncollectible revenue are the largest swing factors expected to impact full year results and where we end up in a revised range.
We're also raising same store NOI guidance to a range of three 5% to $4, 75% adjusting for 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 RBI and JV fee 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 roughly a $100 million for the full year.
Given year to date net investment activity of $136 million, we are assuming fairly minimal transaction activity through year end.
For the third quarter of 2022, there are a few moving pieces to consider from the second quarter of 2022.
First as I previously mentioned, we had $1 $2 million of nonrecurring uncollectable revenue.
And 250000 of nonrecurring straight line rent in the first quarter second quarter.
Second we closed on the sale of Lenox Town Center on the last day of the second quarter and the Madison pool, a portfolio subsequent to quarter end in.
In addition to NOI. These assets generated generated excuse me almost $4 million in JV fees on an annual basis, which implies third quarter total JV fees of about $1 $8 million.
Lastly, the second quarter included $2 million of lease termination income, which is about $1 $5 million higher than our trailing two year quarterly average.
Summary of these factors is on page nine of our earnings slides.
Lending with our balance sheet at quarter end leverage was five four times fixed charge remained over four times and our unsecured debt yield was roughly 20%.
In the second quarter, we recast the company's credit facility extending the maturity of our line of credit an upsized term loan to 2027.
We also extended the maturing Madison that subsequent to quarter end with the pool a portion of the debt repaid this month with the sale of the assets.
Pro forma for these financings the company has just $87 million of unsecured debt maturing through year end 2023, and $825 million of availability on our newly recast line of credit.
This capacity provides substantial liquidity and allows us to take advantage of potential future investment opportunities as they arise and to drive sustainable growth and create stakeholder value with that I'll turn it back to David.
Thank you Connor operator, we're now ready to take questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
Yeah.
And the first question will come from Adam Kramer with Morgan Stanley . Please go ahead.
Hey, guys good morning, and thanks for taking my questions.
I don't want to you know.
Looking at you know pretty.
Pretty significant portfolio activity in the quarter.
It looks like it was kind of similar dollar spent on acquisitions that was generated from dispositions.
Just kind of thinking you know thinking more broadly should we kind of think about you know.
Increased amount of kind of asset trades is kind of going to be a larger part of the strip business. Nims you guys. This business going forward recognizing that you know you can't occupancy probably can't be pushed as much kind of you know.
Nearing all time, all time works here.
You know our asset trades kind of going to be an increased part of the kind of business model going forward.
Hey, good morning, Adam.
I think as we mentioned in the last few quarters that once we achieved our transactions budget for the year that you would expect quite a bit of the transactions, although not all of them to be a.
Source from funds from dispositions.
I think given the amount of leasing demand in our Submarkets is kind of becoming obvious that some properties have a lot of growth left and thats either from renewals or for recapturing space or from occupancy uplift and other ones are kind of fully baked in terms of NOI growth. So I do think it's reasonable to assume that for us to grow the company one of the ways to do.
That is to sell stable assets at a really compelling price and to take that capital and recycle it into properties that we think we can move the NOI significantly through leasing and renewals.
The Genesis of your question, we did have a lot of activity. This quarter. It was larger than I would say kind of normal we typically have targeted selling around $50 million of wholly owned properties per year. Obviously this year was or this quarter excuse me was impacted by the joint ventures, which is a little unique and obviously not something.
Able to occur reoccur going forward. So I do think theres outside activity, but to David's point, it's always been part of our business plan to recycle a handful of assets on the wholly owned side each year.
Got it that's really helpful guys. Thanks, and just in terms of kind of you know cap rates on.
Acquisition and dispositions I mean, any kind of color you can provide there.
And it can be a cap rates or you know fone is talking about unlevered IRR is in kind of the the returns may be and how that maybe you know that may be different than call. It three or six months ago, how things have changed.
Adam I wish I could tell you that theres been a lot of data that's come out let us know where cap rates have gone I think certainly people are expecting and we're expecting that.
Return expectations will go up as borrowing costs go up but there just has not been that much activity I mean, when you look at transactions that happened this quarter.
In the industry. It means the deals were agreed 2345 months ago. So I wouldn't say, it's all of that current of data from our perspective, I do think that growth assets.
Our very much favor I mean, it is an inflation hedge if you can buy a growth asset and so I would expect that the spread between a stable asset and the growth asset growth asset is also widening out a little bit but again, there just hasnt been that much data for us to point to anything yet.
That's great guys. Thanks, again for the time and the chat soon thanks Adam.
The next question will come from Todd Thomas with Keybanc capital markets. Please go ahead.
Hi, Thanks. Good morning, just first I just wanted to follow up I guess, you know in terms of.
Investments going forward and based on your comments I mean, it sounds like we should expect capital recycling to continue within the wholly owned portfolio you mentioned, you're seeing a lot of convenience oriented centers with.
Strong NOI CAGR and it sounds like that would be funded with.
More stabilized asset sales does that is that the right read and then if so what's the sort of spread between.
I realize that.
The difference between the cap rate and the Irr's on these assets, but you know what is the sort of spread delta between.
What youre looking to buy on the initial yield versus what you are.
Maybe looking to sell.
Conor I would phrase it maybe a little differently and come back to my response for atom, we traditionally sold $50 million plus or minus each quarter or each year excuse me from the wholly owned portfolio I think it's fair to assume that going forward, we have the balance sheet capacity to be a net acquirer, which if you look year to date, we're a net acquirer of $135 million.
And we can do so because of our leverage profile EBIT growth et cetera. So I don't think it's fair to assume that every dollar we spend needs to be funded with dispositions. We have leveraged capacity like I mentioned, we're at 5454 times debt to EBITDA, we have $50 million a year of free cash flow, so and we have significant EBIT growth given our snow pipeline. So I think it's fair.
To assume we will be net acquirers, if we find the opportunities. This quarter was unique in that consistent with what we mentioned last quarter. We match funded but we don't need to match fund to grow going forward and that that is not the expectation of this company.
They don't know if you'd add anything to that okay.
I'm, sorry, Tom I can't recall, the second part of your question I'm sorry.
Oh, no. That's Oh I was just curious on those.
<unk>.
The spread looks like in.
In general in terms of the pricing.
Between some of the convenience oriented centers and maybe the stabilized assets.
You probably you brought it up on your question, which is.
For us to recycle and asset and buy a different property one would assume that we believe that the IRR is higher.
I think the going in cap rates are a little bit less relevant.
But I'll also bring it back to counterpoint that it's not like we have a large stable of assets that we would like to recycle out of I think it's been a little bit a little bit more opportunistic I think the spin of RBI is what took away most of our flat assets and now we're kind of looking at a much smaller group of properties that we might recycle and we're doing so because we think the IRR can be higher on acquisition.
Todd for specifics for acquisitions, I think we mentioned last quarter, our or a going.
Going in yield was about a mid five and thats consistent with this year for kind of year to date for the 314 required and for dispositions. It was just under a six and a half blended for the year.
Okay. That's helpful and then I wanted to ask about.
Anchor leasing.
Youre, 97% leased.
And I realize that's 10000 square feet and higher but.
How much availability do you have today for larger boxes say $35 40000 square foot plus and curious what the demands like today from tenants for.
For larger spaces.
Well I mean.
<unk> the inventory is getting pretty low and we've leased 63 boxes more than 10000 square feet in the last 24 months and so that tells you where the demand is the demand is clearly on the anchor side. So sometimes I don't think it's the available boxes as much of it is it is creating opportunities through not renewing tenants Deanna loudly is sitting in the room today.
The vice president of leasing in the southeast.
And one of the deals this quarter that was.
Just a stellar property as you know during the pandemic Deanna was able to get control of an anchor box north of Charlotte.
She released it with two subdivisions with two credit tenant so the credit card quality went up the.
The spreads were over 100% and the entire properties NOI went up 66% pre COVID-19 versus post COVID-19. So that was a box that was not vacant. It was one that we were able to recapture and I think that probably is an indicator in certain submarkets, what's happening with box rents. They are just significantly higher than they were pre pandemic. So to the extent that you've got older.
Tenants that are running on a term.
The vps of our various regions have the ability to recapture some of that space and find better credit tenants.
Okay, and then just one last one on the net effective rents.
Down in the quarter on new leases I was just wondering if that's a little bit of a mix issue in the quarter or strategically are you trying to sort of button up.
They can space or re tenant space, maybe a little bit more quickly in an effort to lock in deals.
Just given the strength, you're seeing in demand and fundamentals today.
Conor it's purely a mix issue. If you look on the right hand side of the page. This is a larger percentage of GLA was signed by anchors, obviously, they're going to have a lower going in randomness net effective rent. So it purely as a denominator issue I would expect that the trailing 12 month numbers next quarter to be consistent with the trailing 12 months numbers this quarter.
Okay alright, thank you.
The next question will come from Craig Mailman with Citi. Please go ahead.
Hey, good morning, guys.
I just wanted to circle back to the commentary about kind of earlier Commencements, helping drive Q2 results because as I was looking into the presentation I know, it's a little bit harder.
Harder to compare quarter to quarter with.
You know the changes, but it looks like.
Three Q4, Q commencement theyre definitely down relative to what was in the <unk> presentation. So I was just curious could you guys run through you know how much of that benefit on a per share basis was in the Q2 number and how much of the guidance bump was just the result of that.
Earlier commencement.
Hey, Craig its corner good morning, you're absolutely right. The reason the third quarter and the fourth quarter came down is because we were able to get some tenants open in terms of specifics I mentioned kind of operationally the operationally driven beach, we're over a penny per share that's rent commencements, along with overage rents I don't have the exact breakdown, but my guess it was probably a million dollars or so so just.
Over a half penny and and as David mentioned, we continue to have great success. Thanks to our operational team getting tenants open earlier, which is which is really exciting given how challenging the supply chain and.
Kind of permanent issues have been throughout the country.
Great.
Mike what was the question too.
Hello.
Just had a quick question just as we think about the convenience.
And these assets you're targeting David you talked about these opportunities.
Tenants in knowing those marketplace and a lot of convenience factors.
I think you mentioned, 4%.
Internal growth rate that youre going to see from some of these assets. How do you think about just sort of the overall.
Generally on incurred.
Smaller labs in terms of providing that future opportunity you just talked about getting back that anchor space can splitting into two and driving that demand. How do you sort of see this portfolio that you are building up and convenience providing that long term opportunity too.
Do that and does it present, a risk if youre in these smaller assets that don't offer that same opportunity.
Well to your point if you if you think about the benefits of larger properties it happens to be those.
Kind of once in a decade chances to recycle a larger box and raise the rent significantly as you well know theres also enter vacation opportunities with larger assets.
I think what we've seen over time, particularly last 15 years or so is that.
Getting large rent bumps out of box is also takes a significant amount of capital right. So if you look at the Capex as a percentage of NOI for doing a lot of tenant recycling and larger property that can be very expensive and secondly, densification has been a relatively small piece of the open air puzzle and I think thats really <unk>.
Does the lease structures, just don't allow it and entitlement and zoning or difficult. So it's not impossible, but it has not been a big driver of value what I'm fascinated by with the ananke or to work the convenience properties.
Is that unlike street retail where there is no surface parking.
A large lot relative to the square footage that you're leasing and the space is tend to be a pretty ubiquitous size. There 200, 2500 square feet on average and there's 30 or 40 tenants that will take that space. So it just tends to be a much easier way to capture market rent growth at a capital cost.
Much less in recycling larger spaces and so for me it has everything to do with hedging inflation and buying into the rent growth thesis, which is really happening because there's not that much supply growth.
But doing so in a way that doesn't cost a whole lot and so I think from a from an <unk> perspective is just superior.
And how should investors think about the portfolio transformation sort of three to five years out is there a target that youre looking at in terms of the mix of properties geographically showcase what is the ultimate goal. David that you are sort of driving towards in terms of trying to build a portfolio or not.
Just a collection of assets yes.
Well the easiest way to put it is financially I mean, what I would love to see is our company could generate <unk> growth and.
And I would love to say that it is in one retail format, which is convenience, but we'd also have some properties that I don't ever see us selling I mean, if you look at Midtown Miami, Michael if you've been there it's our second largest property.
No Theres no rent growth there is so dramatic.
I think thats the type of asset that accompany should hold onto forever.
But it doesn't mean you can't buy that same type of growth in smaller properties in the similar submarkets, So I'm a little less concerned about format.
But I do think you should expect over five year period.
To the question earlier, we will be selling a couple of properties a handful every year in recycling them into something that has growth at this point the convenience thesis seems to have the best growth in the lowest cost and.
And Michael geographically Theres, no plan to kind of enter or exit new markets.
We're just telling you we felt really comfortable with our top 20, which is 80, 687% of our base ran in value and its likely youll see us concentrate our investments in those markets.
Okay helpful color guys. Thanks.
Thanks, Michael Michael.
Yes.
The next question will come from Hendel, St Juste with Mizuho. Please go ahead.
Hi, Good morning. This is Ravi very they're on the line for Hornbill Sanchez I hope, you're all doing well.
Over the last 12 months the shop leasing volume was up 72% versus 19 can you comment on how you're underwriting tenant credit and an inflationary environment, specifically for a mom and pop stores, what's your target occupancy rate for the small shops.
Alright. Thanks for the question it's corner here, we don't have a target occupancy as I mentioned, where we're running our lease rate is now above this.
Portfolio is kind of a high watermark in 2017 so.
There's no kind of target, where we think we could be higher but obviously, it's a function of the macro environment in the inflationary environment that you referenced in terms of credit I would just point you George I think we're at 87% National we don't have a material kind of local mom and pop exposure I would say even post dfc, it's not that the local tenant has disappeared, but youre seeing much more.
Kind of a franchisee or national tenants.
Tenant growth as opposed to the kind of the mom and Pops. So for us the underwriting is easy because we're doing deals with the largest quick service restaurants or largest service users in the country, which all happen to be either national credit or.
Or publicly traded which makes the underwriting a lot easier so.
Again, I would kind of steer you away its not that we don't have local exposure, but the vast vast majority of the small shop underwriting and small shop lease activity has been with national publicly traded kyocera tenants and service tenants.
Thank you.
Just one more here how is your watch list trend recently are there any incremental concerns by large amounts of store closures or bankruptcies.
So I mean say a quarter or two ago, sorry, yes. So I would just say I'm sorry to cut you off there.
Implicitly look if if we had.
The benefit of straight line rent or higher straight line rent from converting tenants from from cash basis that implies that our watch list has shrunk quarter over quarter. There's obviously some names that were worried about and I don't think it surprised who they'd be but overall I would say relative to pre COVID-19 levels and relative to last quarter. The watch list continues to shrink.
And more importantly to David's point, we feel really good when we get space back that we have demand for that space today. So.
Again, there are certainly some tenants were all worried about it's no surprise, but we feel really good about the fact that in our 99 assets, which have average household incomes over 110000 that will backfill those tenants.
Even better and more productive tenants.
Thank you I appreciate the color.
The next question will come from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, good morning, apologies I guess, it's at 10 a M.
So two questions for you.
First just going back to <unk> question on the small shop and totally agree it.
It seems like the capex, the lighter capex and faster NOI growths of small shop on anchored.
It is better than the big anchored dominant centers, but the question is you guys acquire and some of these parcels that you're buying are not contiguous to the site across the street or down the road. So it's not necessarily all connected are those assets as efficient and you get the same amount of growth or is there some something that.
It makes us center more efficient if you can get on an acreage center thats all literally in the same parking lot versus one that you have.
Sort of around.
You know.
The Street I'm, just trying to get a sense as you guys look for more on anchored infill centers.
Alex You mean, you mean operating efficiency from our property management cost standpoint, or do you mean efficiency in terms of dealing with tenants on rent growth and so forth.
I mean theres one the operating efficiency and then two there's the co tenancy right like everyone wants to be near the.
Cool whatever the cool <unk> of the day or the cool, Jim or the cool whatever it is tenant, whereas if you all have all the tenants in a row. It's much easier you have some tenants on one side of the street. Some on the other maybe you'll lose some of that efficiency. So just sort of curious yeah.
Well one of the challenges is operations if you buy one large property from our property management and leasing standpoint, you're focused on one asset if you buy 10 of them in the same submarket in there.
They're all in that community.
I still think you have efficiency of operations, but you've seen us acquiring things basically in markets that we already have a presence, particularly leasing and property management presence.
So I think I think the operation side is.
It's much easier to deal with buying them transactions wise. It is a lot of work I mean, it's a laborious process for John and his team to build a portfolio, particularly if you buy some assets that are five and $10 million to $15 million of time, and that's why you've seen us focus a little bit more on some chunkier ones like Northern California in Delray Beach, and Boca and Atlanta, where they've been.
To $100 million properties.
With respect to leasing and tenant adjacency and wanting to be connected to each other.
I do think there is.
It is reasonable to say that tenants like to group together successful ones and the rents tend to be higher but remember the longer the strip becomes the more.
Middle Space, you have and if you were and cash so sometimes what we're finding is that the end caps, particularly the drive thru have become so desirable from tenants that some of these smaller assets that have maybe two shops in the middle of end to end caps with drive throughs actually have the highest rent growth. So it really comes down to a property by property underwriting.
Okay and then the second question is you know as you look at your shopping centers overall and I asked this question on the Kimco call.
Are you seeing the same level of demand from all shoppers or is it that youre really seeing that.
Core shoppers if you think about the 80 20 rule the core shoppers remaining you know.
Vigilant, while you know maybe some of the other shoppers falloff and I'm thinking about rising fuel costs rising.
Credit card interest rate expense and all this other stuff that is affecting the consumer just trying to get a sense of if it is.
If the core shopper is really what's hanging in there or if youre seeing.
The total shoppers remain.
Just as active as ever at the centers Yeah, I do think that's a really interesting question I don't know the answer.
That that would come from specific sales data per customer that the retailers have and as you can imagine they're not exactly sharing it but.
But it's a really interesting question, we have a couple of anecdotes of things that we've learned one is that the amount of traffic that's coming to our properties and staying less than seven minutes is going up fast.
And I think that's not surprising that's coming from a lot of these click and collect.
Fulfillment from store and also from some of the delivery services like Uber eats and so forth. So it feels like who the final customer is it a product or a service is becoming a little bit more difficult to figure out partly because theres. So many of the services that are going back and forth of the properties were small durations of time.
But that is resulting in a lot higher leasing demand because I do believe that the tenants have decided whether there is a recession coming on line. One are not they've decided that they have to be close and proximate to the customers and that's really what's driving a lot of the demand.
Thank you.
Thanks, Alex.
The next question will come from key bin Kim with the Truest. Please go ahead.
Thanks.
Can you discuss how the mechanics of expense from countries work in your leases in general.
More specific I'm curious.
Usually.
If there isn't all the expenses are fully recovered and.
I would imagine at some.
At some point that the software.
Inflationary cost above and beyond whatever that.
Is borne by the landlord I'm not sure if that's the case and if you can just provide more color on that.
Sure. If you have been on a general sense. Our leases are our goal is a triple net lease.
We don't do fixed Cam leases, we do like full pass throughs.
So if you look at our shop tenants the recovery of expenses Tam insurance and taxes is 100% plus.
Plus administration fees to the landlord so the recovery rate on small shop tenant tends to be somewhere between 100 and 103%.
That also follows why we're fascinated by this convenience thesis because at recovery rates are north of 100% because theyre paying cam fees the larger the tenant the more dominant they are the larger the square footage to more negotiating power they have.
More there can be certain carve outs in the cam reimbursements and that rarely property tax or insurance, but it does sometimes mean that they have a cap on certain cam items or they exclude certain expenses and maintenance expenses and the landlord. So when you wrap it all together smaller tenants are 100% reimbursed the larger tenants are.
A little bit less than 100%.
And you can see that in our supplemental when you look at our recovery rates, which hover around 85%. Some of that is because of vacancy where the landlords paying the triple nets in some of thats because of Cam caps within some of the larger national tenant leases.
But to kind of come to the conclusion of your question with a net lease structure taxes can go up Cam can go up it's still going to be pass through at the same recovery rates. So I don't see any issue with us maintaining our recovery rates. Unfortunately, what it does mean is that on a gross cost basis. The tenant is paying more to occupy that space and so.
If there is a lot of expense recovery this moving up with inflation, our recovery rate is going to be fine, but it will have a head wind against rent growth because they are allocating more capital to taxes or Tam or insurance.
Thank you for that.
A quick question on your cash.
Cash <unk> your <unk> increase guidance increased by a couple pennies I'm just curious.
If you're.
<unk> per share guidance.
But if that trend is also increasing.
Just because at least this quarter you seem to have little bit more capex than we thought.
But just curious yeah, hey, keeping us call it or the short answer is yes. So as I mentioned, the second quarter effectively half the beat was related to operational issues or operational benefits I should say early runs grant commencements overage rent et cetera. So clearly those fall through to the bottom line. So the short answer is if we looked at kind of our retained cash flow forecasts.
<unk> today versus three months ago, it would be higher Capex will continue to increase over the course of the year. One there is some seasonality to that right tenants like to get open ahead of the holidays. So you should assume it will be higher in the back half of the year, but again coming back to my initial response it is higher than it was three months ago because of the operational kind of good guys. We've had over the course of the.
A year.
Okay. Thank you Youre welcome.
The next question will come from Floris Van <unk> with Compass point. Please go ahead.
Hey, guys. Thanks for taking my question I just had a quick I mean, you touched upon it a little bit earlier, David but maybe talk about the your IRR targets how much have they increased since the beginning of the year as borrowing cost has gone up and interest rates have gone up.
And and obviously with inflation as well.
Presumably.
A lot of that would appear to be playing into your thesis for convenience, where you're slightly more protected on an inflation perspective, perhaps than some other property types, but I'm curious to see if you'll return expectations. Your IRR expectations have also increased.
Sure.
For that aspect of the business.
Yes, it's a very difficult question to answer because.
The last 660 days have been so volatile in terms of rates and particularly the credit markets.
I think it's safe to say that our return expectations are higher.
And the question is is that higher are going to come from higher cap rates at acquisition or is it going to come from higher renewal rates on market rents and it seems to be a blend of the two I wish I could give you a more specific target answer.
Other than to say that we are underwriting higher market rents because we're witnessing them and we're also assuming that cap rates will move up a little bit given the fact that our competition in the convenience sector does tend to be private levered buyers.
So our hope is that we're going to get the benefit of both.
And if I could follow up with.
I'm fascinated by this.
Cell phone data information and obviously you guys have looked at this for for more than a year now, but I'm curious to see whether you'd be willing to share some of that with the with the investment community, obviously youre sharing with your tenants what percentage of your of your if I were at what percentage of your centers ranked in the top 10%.
They're in their local markets.
Their MSA and I would imagine the center like downtown Miami, one would rank near the top.
In Miami, but I'm curious to see how many of you know how.
How widespread that is in the rest of your portfolio and how relevant is that in your view because obviously.
Traffic data as you rightly alluded to four for Uber eats drivers I mean, they pick up stuff, but they're not buying anything in your center. So.
There's a lot of parsing and you have to go.
Through that data, presumably yeah.
It is it is absolutely fascinating data and I mean, it really is it's been four years since we've had access to cell phone data.
And I think a lot of companies are becoming very very intrigued because now we can have similar information that the retailers have had ever since credit cards and so it does give the landlords a lot more benefit to understand specifically trade area and customer patterns.
Florida, we've been trying at NAREIT conferences, and so forth to get anecdotal information, we'll do a deep dive study on our property to show some interesting facts. It has been a little difficult to turn it into global assumptions and part of that because we own 99 assets out of 30000 in the U S.
And so it's hard to kind of turn something into a global assumption, but there are some very interesting data points as to how large trade areas really are and they are much bigger than I think any of us thought even those of us that have been in this sector for a long time.
What's the frequency of the customer visit how many times a week do they come.
What changed during the pandemic in terms of trips.
Trips daily versus weekend.
What percentage of people that linger between stores and cross shop versus the percentage that just come in and out for one store all of those data points at this point.
<unk> been hard for us to explain to investors other than anecdotes, where it's been very helpful. As in leasing because we can ask a tenant who is your customer and if they say my customer is.
A woman with two children at a college degree between the ages of 30 and 42, we can tell them exactly how many of those customers came to the site on a Tuesday.
It really has helped leasing and I think it's made the tenants a lot more confident with signing 10 year leases with rent cost.
Thanks I appreciate it thanks Louis.
The next question will come from Mike Mueller with Jpmorgan. Please go ahead.
Yes, hi.
Two quick questions first is the piece of product coming to market slowed or is it still coming in you just see more prevalent bid ask pricing spreads and the second question is who are you typically buying that.
That's correct.
Product my.
Patient product, you mean like assets coming to market.
Yes.
Mike I thought you meant pace of product, meaning lawn furniture.
Okay, Hey pace of market of assets coming to market has definitely slowed.
John sitting right here I think it's definitely slowed from 60 days ago, and Thats not surprising I think sellers are looking at cap rates in the last six months and buyers are hoping for different cap rates for the next six months and so theres a little bit of a standoff.
It is not nonexistent, but with the with the debt markets, where they are and kind of confusion over the longevity of inflation in cap rates I do think the amount of assets that are coming to market is a little bit smaller than it was before.
Yeah.
Got it.
And.
As it relates to the convenience assets, who are the typical sellers that you're buying from.
They tend to be local and regional sellers pham.
Families private.
Got it okay that was it thank you. Thanks.
Thanks, Mike.
The next question will come from Linda Tsai with Jefferies. Please go ahead.
Hi, good morning, just on that.
Conversation with keeping in terms of the reimbursements it sounds like your.
You're focusing in on margin with the small shops.
Maybe trading that a little bit for.
You know trading that off but stability associated with anchors.
How are you should we assume that you're also looking at the credits of the small shops more carefully too.
Tucked yourself on the downside.
Hey, Linda it's Conor I would just say I can't recall, who asked the question, but we feel really good about the credit quality of what we're buying if you look at the top tenants.
That we disclose for the Canadian assets, it's a number of banks financial institutions quick service restaurants that are all public. So I would say a couple of things. One we don't think we're going out the risk curve in terms of credit quality. These are kind of the tenants we operate in our existing shopping centers with a grocery power lifestyle whatever they might be.
And the second point is we aren't focused on margin. We're just saying that's a benefit of the of the investment thesis of the convenience thesis so.
Again, we're looking at kind of the bottom line, but the flow through of free cash flow from NOI as David alluded to in a couple responses, but it's not a focus of ours. It's just a factor that we like as part of the investment thesis.
Got it thanks Youre welcome.
Okay.
And this concludes our question and answer session I would like to turn the conference back over to Mr. David Lukes for any closing remarks. Please go ahead Sir.
Thank you everyone for joining our call we'll speak to you next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
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Sure.
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