Q4 2022 Brixmor Property Group Inc Earnings Call

Speaker 2: A request in the end, successful, and follow the formal presentation. If anyone wants to require operator assistance during a conference, please press star zero on your telephone keypad. At the same time, this conference will be in recorded. It's not my pleasure to do your holds. Please be clear. Bring your flights, President, and rest of the relations, and capital markets. Thank you. You may begin.

Speaker 3: Thank you, operator, and thank you all for joining Brick's Morris Fourth Quater Conference call. With me on the call today are Jim Taylor, Chief Executive Officer and President and Angela Amman, Executive Vice President and Chief Financial Officer, as well as Mark Horgan, Executive Vice President and Chief Investment Officer and Brian Finnigan, Executive Vice President, Chief Revenue Officer.

Speaker 3: 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 that are subject to inherent risks and uncertainties that are described in our SEC filings and actual issues to results made different materially. We assume no obligation to update any forward-looking statements.

Speaker 3: Also, we will refer to data certain non- GAAP financial measures, further information regarding our use of these measures, and reconciliations of these measures to our gap results are available in the earnings release and supplemental disclosure on the investor relations portion of our website.

Speaker 3: 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.

Speaker 4: At this time, it's my pleasure to introduce Jim Taylor. Thanks, Jaycee, and good morning, everyone. Our results this quarter once again demonstrate the strength of our value-add plan, the quality of our team and portfolio, and importantly, the transformative impact our execution continues to deliver.

Speaker 4: Consider, for example, that during the quarter we signed another 954,000 square feet of new leases at an average cash spread of 44%. Bringing our total new ABR for the year to a record 62 million at an average spread of 37%.

Speaker 4: and a record newly established rent per foot of $19.8. We achieved a record total lease document of 93.8% for the portfolio, which does reflect a 360-basis point spread to build occupancy, and which also reflects a drag of 130-basis points associated with our reinvestment activity.

Speaker 4: Both of these reflect powerful tail lens as we commence building those leases and deliver those reinvestment projects.

Speaker 4: We also achieved a record small shop lease document for the portfolio of 89.2 percent, which has more room to run as we execute our value add strategy.

Speaker 4: And we drove our overall ABR per foot to a portfolio record of $16.19.

Speaker 4: demonstrating our continued progress, but also our continued opportunity for growth, given that attractive basis.

Speaker 4: And we continue to drive leading market share of new store openings throughout 22 with core tenants like Burlington, HomeGoods, Ulta, Five Below, Fresh Market, Ross, Chipotle, and Starbucks while also bringing new to the portfolio concepts that drive traffic to our centers like Barksocial, Yardbird, and Free People.

Speaker 4: From a revenue perspective, bottom line, our team once again delivered with top of the sector same store and a wide growth and FFO growth of 7.3% and 6.5% respectively.

Speaker 4: Simply phenomenal job by Brian and the leasing teams capitalizing on the strong tenant demand for our well-located centers.

Speaker 4: where we can capitalize on our low rent basis to bring in better tenants at better rents.

Speaker 4: This is a critical point. Our low-rank basis and the strong demand from thriving retailers to be in our well-located centers positions us to outperform in 23 and beyond while also delivering substantial value creation.

Speaker 4: Let me pause here. Am I coming through?

Speaker 4: For example, we expect 8 bed bath anchor boxes and 2 Harman small shop locations to close.

Speaker 4: We already have control of four of the eight bed bath anchor boxes and are at least our LOI on all four with best-in-class specialty grocery, off-price, and home goods retailers at average spreads of close to 60%.

Speaker 4: Our remaining deadbath and bye bye anchor boxes.

Speaker 4: have an average in-place rent of $10.35 per foot, which compares very favorably to the mid teens rents we expect to achieve as we take control of them.

Speaker 4: in place round of $10.35 per foot, which compares very favorably to the midteens rents we expect to achieve as we take control of them. Looking forward...

Speaker 4: We have 54.7 million in signed AVR that will commence as Angela will detail over the next several quarters and an additional 34 million of annual base rent in our forward and leader's leasing pipeline.

Speaker 4: These pipelines provide us tremendous visibility on robust revenue growth in 23 and beyond, even after the assumed bankruptcy impacts embedded in our revenue guidance that Angela will discuss further. Importantly, this top-line momentum will allow us to continue to grow NOI and FFO in the FFO.

Speaker 4: at a strong pace for the sector, even with the headwinds of naturally declining collections of prior period rents, which topped $23 million in 2022, and more normalized levels of bad debt. Simply put, we are well positioned to continue to be at the top of the sector from an NOI and FFO growth perspective.

Speaker 4: I'll continue to create long-term value as we recapture space.

Speaker 4: From a reinvestment standpoint, Bill Heig and our ReDev construction teams delivered another 12 projects during the quarter, bringing our total stabilizations during the year to 179 million at an average incremental return of 10%.

Speaker 4: We are creating tremendous value here with the additional follow-on benefits of higher rates and occupancy as we do follow-on leasing at the center's impacted. Importantly, we have another 343 million of reinvestment pre-leased and underway at an incremental return of 9%.

Speaker 4: creating value even in a higher rate environment, in a forward pipeline of over a billion in projects that importantly exist in assets that we own and control today.

Speaker 4: We are excited that this year we'll be bringing great projects online like the shops of pom lakes outside of Miami, Marka Town Center in Naples, Florida, in Vale Ranch Center in Riverside, California.

Speaker 4: From a capital recycling standpoint, Mark and team continued to execute well, even in a disrupted capital markets environment.

Speaker 4: closing in 22 on 287 million of dispositions at attractive cap rates, which included the highly profitable sale of campus village shops in College Park to a student housing developer. We redeployed that capital into 411 million of acquisitions with upside in our core markets.

Speaker 4: In addition to upside and rents versus market, these acquisitions also feed our forward reinvestment pipeline.

Speaker 4: as we execute our value-add strategy and leverages the strength of our platform.

Speaker 4: Under Angela's leadership, we continue to enjoy maximum flexibility from a balance-y perspective to continue to grow.

Speaker 4: Excuse me, to continue to fund our growth strategy without reliance on the volatile capital markets, all while benefiting from our earlier decisions.

Speaker 4: the Pre-Pay 22 and 23 maturities.

Speaker 4: From an external growth perspective, we do expect to see some attractive acquisition opportunities in our core markets as private owners face debt maturities and reteniting requirements.

Speaker 4: Expect this remaining discipline, however, as we are able to continue to drive out performance and growth and value creation for the next several years through opportunities that we own and control today. With that, I'll turn the call over to Angela for a more detailed discussion of our results.

Speaker 4: our balance sheet and our outlook. Angela? Thanks, Jim, and good morning.

Speaker 5: I'm pleased to report on a very strong conclusion to 2022 as we continue to deliver on our value-enhancing reinvestment program and set the stage for long-term growth and value creation.

Speaker 5: NAIRI FFO was $0.49 per share in the fourth quarter, driven by same property NOI growth of 7.3%.

Speaker 5: Base rank growth continues to accelerate, contributing 510 basis points to same property and a line growth this quarter.

Speaker 5: Exfuting the impact of least modifications and renovations, base rent growth contributed 490 basis points.

Speaker 5: representing a 50 basis point acceleration from last quarter, driven by growth and build occupancy and significant positive releasing spreads.

Speaker 5: Ancillary and other income and percentage rents contributed 80 basis points on a combined basis, one that expense reimbursements contributed 240 basis points.

Speaker 5: due to improvements in build occupancy and a strong recovery ability of certain fourth quarter expenses.

Speaker 5: Revenues deemed uncollectable detracted 100 basis points from same-property NY growth, primarily due to the ongoing moderation of out-of-period collections of previously reserved amounts.

Speaker 5: Our operational metrics continue to reflect the strength of the current leasing environment, despite macro-headwinds, and the continuing successful transformation of our portfolio.

Speaker 5: Build occupancy was up 60 basis points sequentially to 90.2%, while least occupancy was up 50 basis points sequentially to 93.8%, a record high for our portfolio.

Speaker 5: The anchor lease rate was up 50 basis points sequentially to 95.9%, while the small shop lease rate was up 40 basis points sequentially, or 250 basis points year over year, to 89.2%, reflecting another new portfolio record.

Speaker 5: The spread between Least and Build occupancy ended the period at 360 basis point.

Speaker 5: The total signed but not yet commenced pool, which includes an additional 70 basis points of GLA related to space that will soon be vacated by existing tenants totaled $55 million.

Speaker 5: The size of the pool is up approximately $2 million since last quarter, despite the commencement of leases representing approximately $16 million of annualized base rent this quarter.

Speaker 5: As we've highlighted in the past, one of the strongest indicators of forward growth is a persistently wide spread between lease and build occupancy while both build and lease occupancy are increasing.

Speaker 5: In addition, the blended annualized base rent per square foot on the sign but not yet commenced pool remains above $19. Approximately 20% above our portfolio average, reflecting the broad-based impact of our granular reinvestment initiative.

Speaker 5: In terms of our forward outlook, we have introduced guidance for 2023 same property on a wide growth at a range of 1.5 to 3.5%.

Speaker 5: comprise to base 350 to 450 basis point contribution from base rent, offset by a significant attraction from revenues deemed uncollectable.

Speaker 5: We estimate that the amount of revenues deemed uncollectable recognized during 2023 will total 75 to 110 basis points of total revenues.

Speaker 5: which is in line with our historical run rate.

Speaker 5: This assumption reflects the modest amount of out-of-period collections we expect to realize during the year.

Speaker 5: The normalization of this line item in 2023 will result in a 200 basis point of traction from same property and a wide growth at the low end of the range.

Speaker 5: or 150 basis point detraction at the high end of the range. As the income associated with revenues deemed uncollectible in 2022, once again becomes expense in 2023.

Speaker 5: In addition to our assumptions for revenues deemed uncollectable, which primarily address normal-course credit issues across the portfolio, the midpoint of our same property guidance range also reflects approximately 150 basis points of drag related to recently announced or anticipated bankruptcy activity.

Speaker 5: which is reflected in our expectations for base rents and net expense reimbursement.

Speaker 5: Of this amount, 60 basis points relates to none of them.

Speaker 5: including lease rejections that have occurred to date and the impact of locations that we are proactively recapturing from struggling retailers ahead of a likely filing.

Speaker 5: While the remaining 90 basis points relates to assumptions about potential future events.

Speaker 5: providing us with significant capacity to absorb additional tenant disruption within our range.

Speaker 5: Our ability to deliver a 350 to 450 basis point contribution from base rent growth in a year with over 100 basis points of base rent impact from bankruptcy activity. Under scores the success of our portfolio transformation and the importance of our firm but not yet commenced pipeline.

Speaker 5: as a source of forward growth and momentum. We have also introduced guidance for 2023 Nae Reed FFO at a range of $1.95 to $2.03 per deleted share. We have also introduced guidance for 2020 Nae Reed FFO at a range of $2.03 per deleted share.

Speaker 5: Our guidance assumes the utilization of our $200 million delay draw term loan at the end of April to continue to extend the duration of the balance sheet.

Speaker 5: In early February , we entered into a forward starting swap related to the Delay Draw Term Loan, which fixes SOFR at a rate of 3.59% from May 1, 2023 through July 26, 2027, the maturity of the term loan, resulting in a fixed rate for this loan of 4.88%.

Speaker 5: As of December 31st, we had total liquidity of $1.3 billion, a weighted average maturity of 4.9 years, and no debt maturities until June 2024.

Speaker 5: And with that, I'll turn the call over to the operator for Q&A.

Speaker 2: Thank you. We apologize for the issue with the webcast and the replay will be available today.

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Speaker 6: How are you? I'm doing fine. I hope everything glowed at your opportunity.

Speaker 6: Perfect. What are your expectations for transactions in 2023? I know you didn't acquire anything in the fourth quarter. And how long do you think it's going to take before we find what the new normal capricot for our open air centers?

Speaker 4: I think it's going to take a while and I think what's going to increase transactional activity as I mentioned in my remarks are really two things. One is the disruption and retentiting capital that will be an opportunity for platforms like ours.

Speaker 4: and then refinancing requirements with higher interest rates. So I think that that's going to raise the level of overall transactional activity, certainly above what we saw at the end of 2022. And we're going to be opportunistic, you know, as I highlighted in my remarks.

Speaker 4: The great thing about our business plan is it doesn't require external growth to drive out performance.

Speaker 4: So that allows us to remain very disciplined. We certainly have the flexibility and the capital capacity to be acquisitive, but we're going to pick our spots. And I am hopeful that as we move into this part of the cycle, there will be attractive value add opportunities for us.

Speaker 6: Great. And this is a follow-up question. You're, I mean, you're a leasing activity actually picked up in the fourth quarter. How do you feel about that leasing activity as you head into 2023 relative to 22?

Speaker 4: You know, any quarter can fluctuate a little bit, but I think we're continuing to see great strength and demand and Brian and team capitalize on it. Brian ? Yeah, Craig, we were really encouraged by what we saw in the fourth quarter. It was actually our most productive quarter of the year from a GLA perspective.

Speaker 4: We had a nice uptick and anchor activity, but also you continue to see small shops come through. And as Jim mentioned, he highlighted a number of the retailers that we signed leases with during the quarter, which was pretty exciting. So what's more encouraging is if you look at that pipeline at the end of the year from a legal perspective, leases that are out, it's actually up from where it was a year ago.

Speaker 4: at the end of 2021. So it gives us good visibility in terms of demand for this year, demand that we are seeing for some of that trouble, tenant space from core tenants. And a lot of new ones that we've been able to attract to the portfolio because of all the work the team's done. So...

Speaker 4: We were really encouraged by what we saw in the fourth quarter and what we continue to see at the start of the year.

Speaker 4: encouraged by what we saw in the fourth quarter and what we continue to see at the start of the year. Thank you. You bet.

Speaker 2: Our next question comes from Todd Comich with Keybank Capital, Peace to See.

Speaker 7: Good morning. Yeah, hi, thanks. Hi, good morning. First, I just wanted to clarify with regard to the guidance, Angela. So the 350 to 450 basis points of baseline growth, that includes...

Speaker 7: a 150-base point drag that takes into account. I think you said 60-base points from no events, so move out, police rejections, and an additional budgeting of 90-base points, plus a normalized level of uncollectable revenue. That's the 75-110 base points on top of that. Is that right or am I double counting?

Speaker 5: with the 75 to 110 basis points on top of the comment you made around the 150 basis point track. No, you're right that the 75 to 110 basis points is separate and apart from the 150 basis points of bankruptcy impact I made. I referenced in my prepare remarks.

Speaker 5: The only clarification I would make is that the 150 is on NOI. So while the vast majority of that is in base rent, here is a small piece, probably about 35 basis points of it, which is embedded in our expectations for net expense reimbursement.

Speaker 7: Okay, got it. That's helpful. And then, you know, in terms of the minimum rank growth that you're forecasting, again, the 350 to 450 basis points, you know, I'm just curious, I guess two things, you know, it's, you know, obviously, you know, it was elevated in the quarter.

Speaker 7: at 4.9%. Is this quarter sort of the peak, or do you see that maybe continuing to improve a little bit in the near term? And then can you break that out in terms of sort of the contribution or what you're anticipating within that from occupancy escalators and sort of lease roll over throughout the year?

Speaker 4: space we expect to and frankly hope to recapture during the year. So that's coming in the top line expectation.

Speaker 5: Yeah, I think, you know, just to follow up on Jim's point, you know, sort of the range for the year, given what a significant amount of impact we've embedded within that base ran expectation of 350 to 450 from bankruptcy activity, the timing of that bankruptcy activity and exactly kind of how that bankruptcy activity.

Speaker 5: plays out over the course of the year is going to matter a lot from a trajectory perspective. What I would very much emphasize though is if you step back and think about the pieces I gave, the guidance we gave is 400 basis points at the midpoint of the range.

Speaker 5: That number is in line with what we delivered in 2022 with an additional 100 basis points of bankruptcy impact. So I think pulling that out, you can pretty clearly see we would have been, you know, sort of 5% are better, pretty much in line with the fourth quarter number you referenced.

Speaker 5: It is hard to give trajectory on that line item, I think, as we move through the year. But as I think both Jim and Brian have highlighted, we feel really good about the space that we're recapturing and the ability to set 24 and even 25 up for even better long-term growth.

Speaker 7: Okay, what about some of the moving pieces there, maybe if you could just, you know, in terms of like occupancy or, you know, tell us, you know, where sort of the average escalators are within the portfolio today, just to help us get a sense for the contributions.

Speaker 5: Sure, yeah. The escalator piece is somewhere between 110 and 120 basis points today. The impact from positive releasing spreads is probably in and around 150 basis points, which leaves you with 80 to 180 basis points for occupancy gain, other impacts from the portfolio offset by that bankruptcy impact.

Speaker 2: Thanks for the time. Just a little more details to Todd's kind of last question in terms of the occupancy cadence. Should we expect a seasonal decline in the first quarter? If you could just give us a sense of what's assumed in guidance and...

Speaker 5: I'm not sure if you can hit on the range of expectations for a year end 23, but if you can, that would be helpful. Yeah, I get it's really tough, I think, for us as we move into next year, we feel like we've more than adequately captured the impact of potential bankruptcy activity in the NOI guidance we've given and importantly in that base run guidance we've given.

Speaker 5: exactly how that plays out from a trajectory standpoint in terms of space recapture or other impacts of bankruptcy is a little bit harder to say. But I do think it's fair to expect that there's some seasonal decline as we move into the fourth quarter. From some of the announced bankruptcy activity we've already had, there's likely a few spaces that we're recapturing.

Speaker 4: as well as the four Bed, Bath, and Beyond spaces that Jim mentioned in his remarks. I'll let Brian touch on our enthusiasm about those recaptures. Yeah, as Jim mentioned in his opening remarks, we've been really encouraged by what we've seen so far, just from anchor demand in general, but particularly for these spaces.

Speaker 4: to have four of these effectively spoken for out of the gate at spreads of close to 60%. You're seeing in that size range just a significant amount of demand. And if you think about just the store opening plans for tenants in that size range, you look at Burlington stores, Roth, TJX.

Speaker 4: all with over 100 store openings, the likes of all these sprouts, also with significant open device. And then even if you split some of that space with the five below pop shelves, getters of the world, there's just a significant amount of demand for that space. And to Angela's point, we may see some occupancy headwinds in the start of the year, but based off of what's already in the...

Speaker 2: I'm not sure if it's more services or goods oriented or biogeography to point to at all for if everything is just humming along and really nothing to report in terms of.

Speaker 4: potential slowdown. We continue to be impressed by the strength and resilience of the Open Air format. We continue to see growth in average weekly traffic levels, both over the prior year as well, importantly, over the pre-pandemic levels.

Speaker 4: And from a tenant demand perspective, the breadth of demand continues to grow. And so much so that we actually have tenants anticipating space recapture from weaker tenants, and willing to expect the time and the dollars.

Speaker 4: then are in the yellow eyes and leases should we be able to recapture those spaces. So it remains a pretty healthy environment for us from a demand perspective. And real time we continue to see good traffic. And as I mentioned growing breadth of demand from categories of retailers.

Speaker 8: Thanks, Sean.

Speaker 2: The next question comes from Kibben Kim with Truist. Please proceed.

Speaker 9: Thanks. Good morning. Going to your guidance, are you able to provide interest expense guidance and GNA? Yes, it's—okay.

Speaker 5: Yeah, on interest expense, again, I mentioned in my prepared remarks the utilization of the delay-draw term line. And with that, we believe we're going to probably be, from an interest expense perspective, somewhere between $199 million and call it $201 million for the full year.

Speaker 5: based on where curves sit today and our expectation for revolver utilization during the year. In terms of GNA, we believe we're being very disciplined about GNA spend across the platform, continuing to look for additional opportunities for efficiencies, and believe that we'll be able to...

Speaker 5: and 2023 with GNA, relatively in line to where we were in 2022, plus or minus.

Speaker 9: Okay, and your development pipeline as you've completed some projects has come down a little bit. Can you just talk about the prospects for the next round and how you're thinking about the yield or upside characteristics as a comparison to the existing portfolio? I mean, the existing development portfolio.

Speaker 4: Yeah, you know, keeping it continues to be very robust and a good mix of projects, both smaller anchor repositions, which, you know, frankly, you should expect to see a pickup in as we recapture additional watch list tenant exposure, as well as larger projects, that we're, I'm fairly confident we're going to remain in that 150 to 200 million.

Speaker 4: of annual deliveries and annual project starts that we see importantly for the next several years. In fact, I mentioned it in my remarks, but our shadow pipeline continues to grow. The program…

Speaker 4: It sits at over a billion dollars today. And the yields are frankly still very attractive because of where our rent pace is. So expect us to continue to deliver those projects in the high single digit, low double digit area.

Speaker 8: Thank you.

Speaker 2: Our next question comes from Greg McInns with Colesha Bank. Please proceed.

Speaker 10: Yeah the people.

Speaker 11: Hey, good morning.

Speaker 12: Andrew, just curious which watch looked at it, maybe we should be paying attention to in order to understand whether it will be utilizing that potential 9-neds basis 1 to the additional 10-net disruption cushion.

Speaker 5: Yeah, you know, I'm hesitant to obviously call any tenants out specifically. I would say that this morning's announcement of bankruptcy by Tuesday morning is a good example of, you know, how the environment continues to evolve. That 60 basis points of note events just to be very clear about it relates to the bankruptcy that have already occurred in rejection, so that they've taken place.

Speaker 5: that have been widely reported to be considering a filing such as bedbath and beyond.

Speaker 12: Okay, so the 90 basis points is going to be names we've read about before. So nothing from a small tenant expectations and maybe a more physical economic environment caused with some closures on that side of things. The normal course that debt extends primarily for small shop tenants is going to be really embedded in that 75 to 110 basis points.

Speaker 5: just mentioned that have all been sort of widely in the news. In addition to, you know, and other impacts we've assumed for situations that may play out, you know, over the course of the year that I just wouldn't call out on today's call and that, you know, will continue to evolve as we move through the year. But for the most part, it's names that we've all been talking about and we've assumed a wide range of...

Speaker 13: Great. Thank you.

Speaker 2: The next question comes from Anthony Powell, Barclays. Please proceed.

Speaker 14: Hi, good morning. Question on dispositions. You did about 200 million last year. What's your idea for further pruning of the portfolio? And if you don't acquire assets, what are the best uses of those proceeds?

Speaker 4: You know, the best use of proceeds in this business is reinvesting in well-located centers that have attractive rent basis, which is what drives a good part of our fundamental growth and value creation. So we'll continue to find opportunities like that, and I'm hopeful that we do find some opportunities.

Speaker 4: from an external growth or acquisition standpoint that present the same reinvestment growth and value add. That's really our sweet spot. And it's really where we can leverage our national platform, VZV private owners who typically don't have the visibility on tenant demand or the access little liquidity that we have in our core market. So.

Speaker 4: We'll see how that plays out. Expect this to be balanced. And by that I mean expect that the rate of disposition activity will roughly follow what we see from an external growth standpoint. The timing may be, you know, some more front end loaded, some more back end loaded.

Speaker 4: We'll see. But I'm very optimistic about seeing some...

Speaker 4: acquisition opportunities that help us continue to leverage our platform. But importantly, we don't have to. And that's the point I keep hammering, which is we have tremendous growth embedded in what we own and control today, which is a good position to be in and allows us to be disciplined as we continue to deliver growth at the top of the sector.

Speaker 14: Thanks, and the lease spreads have been very strong. Any pushbacks from tenants as you discuss with them, lease terms, release spreads, escalators, just how are tenants reacting to these conversations?

Speaker 14: Thanks, and the lease spreads have been very strong. Any pushbacks from tenants as you discussed with them, lease terms, release spreads, escalators, just how are tenants reacting to these conversations? Well, that's the beauty of low rent basis.

Speaker 4: You know, and believe me, the tenants aren't going to want to pay any more rent than they have to for a space. They're also much more sophisticated in recent years about what types of sales that they can model in a space. And we work with them very closely. Yeah, and it speaks to both the transformation of the portfolio as well as the transformation

Speaker 4: the leasing environment, which is incredibly supply-restricted, and with all the work the team's done in this portfolio, you're seeing that come through in stronger rents. You're seeing it come through in the highest retention rate that we've had in the last five and a half years. So particularly as you look at those renewal spreads last year, we were really encouraged by...

Speaker 4: strong leasing environment, but also the work that the team's done to put the portfolio in a position to really drive rate with great tenants across the country. And I appreciate the focus on those spreads. I don't think we get enough credit for them, particularly when you view them in the context of the sector overall. Until 100 basis points of outperformance, quarter in and quarter out.

Speaker 4: which just simply underscores the strength of the plan and the strength of the assets and how great a job Brian and team are doing capitalizing on tenant demand.

Speaker 8: Thank you. Thank you.

Speaker 2: The next question is from Craig Melman with City. Please proceed.

Speaker 6: Hey good morning. Not to dwell on bed baths in particular but just kind of curious on a couple things here. Number one you guys gave the 60 basis or the 60 percent kind of mark to market on the four. Could you just give sort of what you think the broader market market is on your total exposure and then

Speaker 6: I know there's some discussion out there whether they even file or what type of filing it is. Assuming maybe a restructuring or non-bankruptcy filing, you guys kind of comb through your exposure.

Speaker 6: to them, what percentage do you think is potentially at risk for them to give back versus kind of strong sales, good locations that you would consider them to keep?

Speaker 4: Well, let me just make this point, if I may. We want every box back we can get. We've got tremendous demand for these spaces, which have an average rent basis of $10.35. We've embedded within guidance.

Speaker 4: what we expect with some cushion in terms of timing. But I think the most important point is that when you look at our bed bath exposure in its entirety, it represents a significant opportunity for us to drive real value, real growth and real value. And so when you think about that $10.35 a basis.

Speaker 4: We're signing replacement tenants in the mid-teens.

Speaker 4: So consistent with what you know, we've already announced on the existing boxes but importantly Spreads that allow us to actually create value as we bring in better tenants into our centers And then we get the follow-on benefit from there of additional small shop leasing

Speaker 4: and increase in rate. So, in terms of the timing of when we recapture the space, I think Angela and team have done an excellent job of going through and handicapping that and making sure we have cushion our growth numbers to handle a wide.

Speaker 4: array of potential outcomes, but let's not lose sight of the more important point, which is it's going to create an opportunity for us to drive real-time value.

Speaker 4: by the way, and still deliver growth in 23.

Speaker 4: Right, which is something that can't be said by many in this sector.

Speaker 4: So, bedbath is just one example. You know, there are other tenants where we hope to get the space back and I can assure you we're leasing ahead. And by that I mean we're driving activity ahead of recapturing the space.

Speaker 6: No, that's helpful. I guess as we think about the snow pipeline continues to increase here, while from a timing perspective taking back these boxes obviously creates some disruption. That snow pipeline could continue to grow as a percent of ABR.

Speaker 6: which kind of sets you up for 24 and beyond from a kind of, you know, did you think there's like a new normalized growth rate for the portfolio as you can kind of pull forward? I think you're spot on and hats off to...

Speaker 4: the leasing and national accounts team for continuing to grow that pipeline and address early recaptures. But I think you're kind of seeing hints of it in our top line numbers, right? That 4% which reflects a meaningful drag from anticipated space recapture during the year.

Speaker 4: in 24, right, as we get the benefit of a full year of those deliveries. So we're excited about how we're positioned.

Speaker 6: And just one more quick one. On the shop, you guys are at kind of record least occupancy there. How much more, given what's in the pipeline that you guys are seeing, net of maybe some of the cushion from potential bad debt that you're kind of baking in.

Speaker 6: you know, what's the maybe year end target on that small shop and from a dollar perspective, you know, I know those are more impactful. So how should we think about, you know, the, the longer term run rate of that portfolio versus maybe some of the near term impact of bad debt.

Speaker 4: We have more than a couple hundred basis points of room to run. We've got drag and our reinvestment pipeline. We currently sit at 89.2%. Over time you can see that number grow into the low 90s and you make the right point and the initial will hit on in terms of what its impact is.

Speaker 4: But that's part of the follow-on benefit of our reinvestment. And as we deliver those new anchors, we get better rate and better occupancy.

Speaker 4: in the small shops of the centers impacted. And the reason I'm making that point is that we're not managing to an occupancy level. We're managing to drive fundamental growth in ROI. And the small shop growth is a great lever for us to pull as the anchors and the broader reinvestment at delivered. And.

Speaker 5: small shop occupancy translates into something a little over 150 basis points of same property NLI contribution.

Speaker 5: and just something a little over 150 basis points of same property and a Y contribution. Thanks.

Speaker 2: Our next question comes from Alexander Goldfarb with Piper Sandler. Please proceed.

Speaker 2: Good morning, Alex. Our next question comes from Hahnville, St. Jude with New Zuhol. Please proceed.

Speaker 15: Good morning. I'm present.

Speaker 15: I'm present. You're your your your president for Alex

Speaker 2: I'm present. Good morning, guys. I guess first question, can you maybe some follow-up comments on the transaction market? Obviously, things are still pretty frozen out there. Retail volumes are down. I think 60% and 4th quarter. Pretty wide bid aspect. So maybe can you talk about the cap rates of the type of assets?

Speaker 15: that you'd like to own what you're seeing out there and then given your cost of capital what kind of a new hurdle rate would need to be or basically where assets would need to be priced for you to get more interested and more active here. Thanks. Our hurdle rate has absolutely gone up you know with the increase in the cost of capital so we're hand out to your the latter part of your question we're remaining disciplined.

Speaker 4: where we expect to find opportunities is where there's been disruption and where we have the opportunity not only to get in at a good initial yield but where we have great visibility on being able to grow that so that you know we can get to those unlearn IRRs.

Speaker 4: in the high single low double digit area. And maybe Mark if you're on you can comment a little bit on what we're seeing real time in the transaction market from a volume and pricing stamp.

Speaker 16: Sure, yeah, in terms of the current market, it's definitely started to flow as buyers and sellers have continued to adjust to the new rate environment. Trades have been limited again in Q1, but I'd say over the last few weeks we're starting to see some more assets come to market.

Speaker 16: Both from some of those institutional sellers who may need some liquidity for redemption requests.

Speaker 16: And probably more interesting is seeing some private owners come to market who are struggling with that debt market. We do like to buy from some of those private owners, as Jim mentioned earlier, our platform just has more liquidity, has more access to tenants and that's where we see opportunity to drive assets and get those higher unlettered IRRs that we seek.

Speaker 16: I'd say in terms of pricing, it's hard to exactly pinpoint where things are given the somewhat slower trading environment. But what's clear is that what we're seeing on the low, what we're seeing the biggest price change part of me is really on those lower caprate assets where it's clear that that caprate should move there from the low point, 50 to 75 basis points.

Speaker 16: So we do think we'll be seeing some better opportunities as the Eurofrogressos, I think is a gem in, so I do expect that to be a bit back-weighted. And I think I'd add just on the acquisitions of the Gemini Angel and Brian mentioned, we focus on value added deals where we can drive value in cashflow, and that's really well suited for this type of environment. And I think you can see that in some of our past acquisitions.

Speaker 16: like Brea where we bought last year, we've released it up to 100% and we've got out parcels in progress. Or Ravinia where we moved occupancy from low 80 to the low 90s in our first year of ownership. So, we're excited about opportunities we'll see this year, but do think it'll be a slow start to the year.

Speaker 15: Thanks, Mark. I appreciate that, Kappeler. And certainly the latter half of your response addressed my follow-up question, which is going to be on if your focus is going to include more of these acquisitions with occupancy upside, more repositioning, that's kind of more what you're saying.

Speaker 15: you're inclined to do or perhaps do a greater opportunity. So it sounds like that's what you're focused on. But maybe a question on the balance sheet Angela, I leverage, you know, I'm saying that there's no near term, or very little near term debt materities, but you're sitting here mid-sixes. I guess I'm curious on your thoughts on target leverage in this type of environment.

Speaker 15: I'm assuming the plan hasn't changed in terms of bee leveraging. You're going to, as you realize, your snow rents, the leverage should come in. So help us understand what the target leverage is, when do you think you'll get there, and maybe some timing for the snow this year and next year.

Speaker 5: Sure, thanks, Kendall. Yeah, our expectations in terms of target leverage haven't changed. We're continuing to work our way to about six times debt to Yvita. A big reason why we feel like that's the right level for this company and this portfolio is due to the below market rent basis and the portfolio. And I'll look through basis. We're clearly well below that.

Speaker 5: below six times once we achieve that level and actually touch below six times now. You're right that continued contribution from the Simon Ockman's pipeline and how that comes in over the course of the next year or two is a...

Speaker 5: meaningful contributor to helping us get there, but I would also sort of pull back from that a little bit and just note that we've got 115 to 120 million dollars a year of free cashflow that we're using to invest in the Value Enhancing Reinvestment Program and funding it with free cashflow in that way is just fundamentally due leveraging as well. So just they can...

Speaker 5: about 76% of that $55 million comes online by the end of 2023. And I would just note that the contributions between first half and second half are roughly radible as we move through 23.

Speaker 2: Thank you. Our next question comes from Alexander Goldfarb with Piper's Handler. Please proceed.

Speaker 9: Hey, morning, hopefully I'm coming through this time. Yeah.

Speaker 17: Okay, awesome, awesome. So quickly, two questions.

Speaker 14: First, first.

Speaker 17: Angela, on the potential, to the prior question where you didn't want to talk about specific future tenant issues, I guess let me ask it from this perspective. The future potential tenant issues that you guys are contemplating in that generic bad debt guidance. Do those tenants also have similar releasing upside?

Speaker 17: that we're seeing from bedbath and some of the other tenants, that 40 plus percent that we're seeing overall and 60 percent on bedbath or that future potential pool have releasing spreads that would be lower than that.

Speaker 4: Alex, hey, this is Brian . Well, just if you think about the Tuesday morning today, which Angela highlighted, you look at what we signed during the quarter. We took a space back in suburban Cincinnati. We doubled the rent. We've been signing leases on that size space in the high teams with the likes of five below in sketchers and boot barns. So for those, certainly, and I'd say across the board, we benefit from low rent basis.

Speaker 4: and we've benefit from low rent basis in particular with these tenants. So we feel pretty good overall about the upside is every space going to be 60% no but we do think that these spaces are going to be in line with where we've been driving rents across the portfolio and we've been pretty encouraged by it.

Speaker 17: Okay, the second question, Brian . You know, one of the big issues out there just seems to be, it's not the demand to back. So it's actually the time to reopen tenants.

Speaker 17: So what are ways, you know, one, I guess, are any tenants willing to take space as is? And if not, are there any ways to sort of accelerate the downtime to minimize that? Or it is what it is between getting the permits, building out the space, etc.

Speaker 4: I'm really glad you asked the question because our operating teams led by Hike, which Jim mentioned, have done a fantastic job in terms of partnering with the operating teams on the ten inside. You know, I point to an example last year, we just opened two altas in Metro, New York, and we got those stores open in less than six months.

Speaker 4: and we have seen tenants from when we sign the leaps. And so we have seen tenants take space as is, but I think as we've mentioned on prior calls, what's come out of the pandemic as a best practice has been retailers utilization of more existing conditions.

Speaker 4: They're figuring out how to change their prototypes so they can keep the bathrooms where they are. They're figuring out how they can utilize the existing HVAC units. And so they're doing that because we're radically aligned in terms of being them open as quickly as possible. So we have done some work that has taken some time on the front end from a least negotiation standpoint, but it's certainly cut down.

Speaker 4: on the time from a buildout perspective. And the other thing is a lot of these, particularly on the spaces that we've been in front of, I mean we've had our folks in the space had tenants representatives in the space to be able to understand plans so that when we ultimately get those spaces back, we're already ahead of the game. So the team's done a fantastic job really across the board and partnering with our tenants. I think some of the things.

Speaker 18: question guys.

Speaker 18: I just wanted to make sure I understand this correctly. And one of the things that, I mean, Jim, capital allocation is how management,

Speaker 18: I just wanted to make sure I understand this correctly. And one of the things that, I mean, Jim, capital allocation is how management, you know,

Speaker 18: provides value to shareholders and you've done a very nice job in terms of self-funding your business and generating a significant amount of free cash. One of the things I'm curious to make sure I understand correctly here. The.

Speaker 18: One of the auxiliary benefits of this reinvestment in your portfolio is that your small shop occupancy has increased quite sharply.

Speaker 18: But there appears to be significant more room to go here. Am I correct that every 100 basis point of small shop occupancy is 150 basis points of NOI growth? And does that imply that if you get your small shop occupancy?

Speaker 18: to another 300 basis points higher, which I think is where it's trending based on your redevelopments. Is that another 600 basis points of upside potential?

Speaker 5: Yeah, I think over time, right? I mean, I think when you just think about the, what a powerful contributor, the small shop, occupancy pickup is when you're bringing that space online, not at portfolio average of 16, and not even at sort of where the sign but not commence overall pool is today at over $19.

Speaker 5: per square foot, but at $25 per square foot, you can really sort of get your arms around how significant the upside and what an important driver that is of growth as we move forward. We still have some, you know, remaining upside opportunity in anchor. We're about 100 basis points below kind of the record anchor occupancy for the portfolios. They're still.

Speaker 5: additional opportunity there, but most of the growth over time, over the next call it, three, four, five years on the anchor side, going to be from continuing to roll those rents to market as we've talked about primarily through reinvestment program and recapture, product of recapture of space like we've been talking about today from some of the struggling tenants. So that's still a contributor to growth.

Speaker 5: But there's no question that the follow-on benefit and the momentum we're seeing in small shop occupancy and the outsized potential of those rents is going to be a very significant driver of growth over the next several years. Yeah, Flores, you're hitting on the flywheel effect we've talked about before, which is, you know, as we deliver these reinvestments that attract the returns.

Speaker 4: We're fully anticipating follow-on benefit and rate in occupancy, particularly in the small shops of the centers impacted. It's part of why we don't manage the business to a particular occupancy target. We manage the business for growth.

Speaker 18: Thanks. One of the other things I presume, you know, you're fixed rent bumps in your small shop or higher as well and they, you know, mark to market more often than your anchor rent. So one of the other benefits of getting that occupancy up, maybe if you can talk a little bit about one of the things that we've been hearing a lot more.

Speaker 18: about in terms of tenant demand is this med tale or medical users in your in portfolios. And I think you mentioned something like that as well.

Speaker 18: It's hard for us to understand how do those tenants think about occupancy costs and their ability to pay rents. Can you guys provide a little bit more color into the demands that you're seeing there and why you feel good about that portion of your portfolio? Well, I think that I'm going to be trying to comment on this.

Speaker 4: but I think as I mentioned many times, we're seeing that funnel of potential users continue to broaden really nicely. And it includes medical users, it includes health and beauty, wellness.

Speaker 4: and many other categories that are basically realizing that there's a real benefit in having a storefront presence near where the customer lives. One that's convenient, one that gives them good visibility, and frankly, one that allows them to benefit from the other traffic daily needs that that center generates. So...

Speaker 4: where we continue to be excited and impressed by the breadth of new users. And it's important to understand that that just creates more competition, which allows us to drive more rate. Yeah, Jim, you hit on it before. I'd also add, this has become a really complimentary use in our centers.

Speaker 4: If you think about the operators in the MedTail space that have been really active, they often have very strong credit profiles backed by large insurance companies. We signed two leases this quarter in southeast Florida backed by United Healthcare. We're seeing really good activity on the dentist front. And then if you think about just the merchandising mix of our centers, right.

Speaker 4: up in our centers, going our leases going forward, we do have some older leases and where you see that this has become kind of part of the normal tenet mix is our national tenets where we have older leases where some of these uses are restricted have been very accommodating to allowing them in because it does go with just another traffic driver in Chisgim's.

Our next question comes from Mike Mueller with JP Morton. Please proceed. Yeah, hi. I guess people always talk about the calendar shifting and things changing. And I'm just curious with this one that just happened. Are you seeing anything different in terms of the volume of product coming to market or on the financing front maybe the financing availability for smaller owners?

You know, we do expect more product coming and Mark kind of alluded to it in terms of what we're hearing in the pre-pipelines of many of the brokers and others that represent these private owners. So.

We do expect it to be more back-end weighted. It takes a while for these processes to roll through. What we see driving the activity are two things.

One, you know, the tenant disruption, right? As private landlords may not have the capital or the leasing wherewithal to backfill some of these spaces.

as well as refinance requirements. As these private owners can still get financing, but the interest rate environment is much more different, which impacts their cash distributions to ownership. So we do expect those two underlying market forces.

to drive more product. Got it. Okay, thank you. You bad.

The next question comes from Tio, Aksumia with Credit Tweets. Please feel free to see.

Yes, good morning everyone. Just going back to the question around the watch list tenants, while you're not specifically talking about any names, could you talk about any particular retail categories where maybe on the margin, you may be expecting a little bit more activity versus last year? Just to reflect...

Sorry, thank you, Damon. No, sir. Yeah, certainly. But there's no real surprises. You know, the weaker and struggling retailers are known to all. You can see their issues coming well in advance. Part of why Brian and the team are way ahead of that and working with tenants to pre-lease a lot of this space that we expect to get back.

But there's no kind of persistent categories. It's really more retailers who've had persistent problems. And, you know, the great merchants continue to thrive. And not only are they thriving, but they're putting more and more important...

on the central role, the store plays, in a multi-channel format. So, you know, it's less category-driven, other than perhaps movie theaters, and much more participant-driven.

central role of the store plays in a multi-channel format. So it's less category driven other than perhaps movie theaters and much more participant

The next question comes from Linda Ty with Jeff Feeds. Please proceed. Linda, your line is live.

Sorry about that. What's your view on TI's in 23 versus 22?

We're going to stay disciplined. I mean, look at our net effective rents. We're going to use that tenant competition to not only drive rate, but to drive lower TI. That's been our approach. We do actually disclose to you what the net effective rents have been. We're going to do that.

which some don't. But I think that that's important. And you can see, there'll be a quarter or two of movement, some look high, some look slow. But when you look at it over several quarters, you can see that we're holding pretty firm there.

Got it. And then on grocers with Amazon, closing some fresh and ghost stores, will you see any impact and then to the extent Prober and Albertson sell, you know, 253, 300 stores. What's the read through for your portfolio?

Linda, hey this is Brian . So I just saw Amazon Whole Foods. They've been a great partner of ours. We were really excited in the fourth quarter. We were able to add or re-announce our Whole Foods in suburban Philadelphia. We're seeing great leasing traction on the Whole Foods locations.

that we purchased in Houston and Chicago. Last year, they're a great operator. They drive a ton of traffic. On the fresh side, look, Amazon has publicly announced a pause, which we think is prudent for them to get it right. They did open this chain in the middle of the pandemic.

But overall, we're really pleased with the partnership that we have with both Amazon and Whole Food. And then it's, it relates to the CROGAR Albertsons. Look, there's not much new to report. I know there was a media report out there regarding a number of store closures. There was always going to be a certain number of the vestitures as part of this. But I would just remind everybody that even CROGAR and Albertsons have said this is going to be a...

Dallas, Southern California, Cincinnati, just a great fleet. And both fleets have been significantly reinvested in over the years. So we think a merger would be good for both companies to allow them to continue to reinvest in those stores. But again, we feel pretty good about our fleet no matter what the outcome is.

Thanks. Thank you. At this time, I would like to turn the floor back over to Stacy's later for closing comments.

Thank you everyone. Have a great week.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation, and have a great day.