Q3 2022 Regency Centers Corp Earnings Call
[music].
Greetings and welcome to the Regency centers Corporation third quarter 2022 earnings call.
At this time all participants are in a listen only mode a brief.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce you to Christy Mcelroy as VP of capital markets. Thank you.
Kristina you may begin.
Good morning, and welcome to Regency Centers' third quarter 2022 earnings Conference call joining me today or at least the Palmer President and Chief Executive Officer, Mike Mas, Chief Financial Officer, Jim Thompson, Chief Operating Officer, Chris Leavitt, SVP and Treasurer, Alan Ross Senior managing director of the East.
Region, and Nick with admire senior managing director of the West region.
As a reminder, today's discussion may contain forward looking statements about the company's views of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties. It is possible that actual results may differ materially from those suggested by the fall.
Looking statements, we may make factors and risks that could cause actual results to differ materially from these statements may be included in our presentation. Today and are described in more detail in our filings with the SEC specifically in our most recent Form 10-K and 10-Q filings.
In our discussion today, we will also reference certain non-GAAP financial measures the comparable GAAP financial measures are included in this quarter's earnings materials, which are posted on our Investor Relations website. Please note that we have also posted a presentation on our website with additional information, including disclosures related to forward earnings guidance, our caution on forward looking.
This also applies to these presentation materials Lisa.
Thank you Christie.
Everyone. Thank you for joining us today.
We are pleased to report another quarter of solid results. We've continued to see positive operating trends as tenant demand is strong and rent growth remains at healthy levels. Despite the challenging macroeconomic backdrop.
We do recognize that neither we nor our tenants are immune to macro pressures, especially higher levels of inflation rising interest rates and lower consumer spending and this does create some uncertainty in the near term.
But at the last few years have proven anything it's the resiliency of our people assets and our balance sheet and tough times.
It is through a lens of what I would characterize as cautious optimism that we look ahead.
And we remain confident that we are uniquely positioned to outperform.
The demographic profile of our portfolio provides greater cushion for inflationary impacts to be absorbed by consumers and for spending to continue through a softer economic environment.
Our dense suburban trade areas also continue to benefit from structural tailwind stemming from post pandemic migration patterns and hybrid work, but also by a renewed appreciation for the value of brick and mortar retailing.
Additionally, and just as importantly, we are well positioned to continue to execute on our self funded growth strategy.
While the cost of raising incremental capital have risen meaningfully over the last several months, our strong free cash flow and balance sheet dry powder enable us to continue to invest in our value creation pipeline.
Earnings accretive basis without the need to raise new equity capital or sell assets into an illiquid transaction market.
We remain focused on further growing our development and redevelopment pipelines and the commencement of our town and country project last month as an example of that.
Another example is our acquisition of East Meadow Plaza on long Island.
We bought this as a redevelopment opportunity.
And with the backdrop of a more challenging financing environment, we are starting to see more opportunities come to us to co invest in attractive development projects.
On the acquisition side, while we always are looking for compelling opportunities bid ask spreads remain wide and volumes are low so it will likely take time to get real price discovery.
But regardless of when or where things settle we do believe there'll be less of an impact to values for well located grocery anchored neighborhood and community centers at the upper end of the quality spectrum in other words for the types of assets that we own.
But in the meantime, we are fortunate to have the liquidity and balance sheet capacity to take advantage of dislocation or other opportunities that may arise.
Finally, as I step back and think about the potential for operating in a more challenging environment or in any environment for that matter.
I feel grateful to be leading regency with the quality of the assets and the caliber of people that we have.
I believe we are well positioned to outperform over the long term.
I think it's both a safe haven, and generating solid and sustainable growth driving total shareholder returns with earnings growth plus dividend.
I always like to remind you that I'm proud that we delivered our dividend consistently during the pandemic even growing it with another 4% increase just announced for the fourth quarter.
Jim.
Thanks, Lisa and good morning, everyone.
We had another strong quarter and continued to experience healthy operating trends throughout the portfolio.
Some of the highlights include.
Continued robust tenant demand as evidenced by achieving our highest quarterly total leasing volumes on record both in terms of square footage and number of deals executed.
A strong leasing pipeline, including over $34 million of annual base rent forecasted from our 240 basis points of leases signed but not yet commenced.
Further occupancy gains as we continue to fill vacant space with percent leased up another 20 bps over the second quarter and up 90 basis points over the prior year.
Above average retention rates with record high renewals executed in the third quarter.
Healthy cash spreads of 7% and GAAP rent spreads over 13% in the quarter.
Continued prudent management of leasing Capex, resulting in net effective rent growth in the mid teens.
And to return to pre Covid historical levels of current year bad debt as a percent of revenues.
Importantly, we're carefully monitoring our portfolio for any signs that these trends are softening, but we remain encouraged by the continued strength and progress we are seeing.
Leading us to further increase our 2022 same property NOI guidance, excluding prior year collections by 25 basis points to five 5% at the midpoint.
Turning to development and redevelopment, we continue to make great progress on our nearly $400 million of in process projects around the country.
Even with the increases in construction costs that we've seen over the last several years, our average yields have held firm in the 7% to 8% range.
Notably, we anticipate roughly $15 million of NOI coming online over the next two years from development and redevelopment projects currently in process.
At our new much anticipated ground up east San Marco development here in Jacksonville public.
Publix opened their doors in August .
And the stores outperforming sales expectations.
Leasing demand for shop space was also very strong as the project is already 100% leased.
We've also made significant progress over the last quarter at the Abbott a redevelopment project in Cambridge, Massachusetts.
The first tenants successfully opened and rent commenced in Q3, and we've recently signed a 17000 square foot lease for the entire fourth floor and have good momentum and interest in the remaining penthouse space.
As Lisa mentioned last month, we commenced construction at the town and country Center in Los Angeles located across the street from the Grove and the L. A farmers market.
This long awaited project will include a redevelopment of the former Kmart building and two new retail space and approximately 300 luxury mid rise apartments we.
We have partnered with a leading multi family developer who will construct the apartments on a ground lease.
Looking ahead, we are very focused on continuing to build our pipeline of value add development and redevelopment projects.
By executing on redevelopment opportunities that we have with our existing portfolio.
Sourcing new redevelopment projects through value add acquisitions, like our east meadow and by sourcing new ground up development opportunities like our recently announced Glenwood Green.
This is a key element of our growth strategy and a core competency of regency and we believe that the tightening of the financing markets will favor our strong balance sheet and access to capital affording us greater investment opportunities with development developers and owners.
In closing I spent the last 42 years in my career learning and growing this business with this incredible company.
There isn't a stronger team or more thoughtfully curated portfolio of shopping centers in this business and what regency owns today.
I have the utmost confidence that our operating and development platforms will continue to thrive under the leadership of Alan and Nick.
And I look forward to watching regency's future successes from the sidelines.
Over the years to come.
Thanks, Jim.
Good morning, everyone.
I'll start by addressing third quarter results walk through a few changes to our current year guidance provide some comments on 2023 and touch base on our balance sheet.
Same property NOI, excluding prior year collections was up two 6% in the third quarter.
This metric continues to be impacted by the noisier comps of uncollectible lease income last year diluting the growth rate.
But as we've indicated previously we are now back to a more historical run rate on collection losses of about 50 basis points on current year billings.
Importantly base rent contributed three 9% to that growth rate, reflecting our strong embedded rent steps combined with the progress we've made growing occupancy and marking our rents to market as we convert on our strong leasing pipeline.
I'll continue to stress that while we are we still have some remaining pandemic related accounting anomalies impacting our same property to property NOI growth rate, we believe that base rent growth is the best representation of the trends driving our business today.
Included within our Q3 results is close to $3 million of prior year reserve collections now totaling $18 million year to date.
And we have increased our fourth quarter expectations for continued collections by another $2 million, bringing our full year 2022 guidance range to an anticipated total of $20 million.
We also converted another 3% of our cash basis tenants back to accrual in the third quarter, resulting in a reversal of straight line rent reserves that contributed another $4 $6 million to NAREIT <unk>.
Following these conversions, we now have about 9% of our ABR remaining on a cash basis of accounting.
As has been our practice, we have not included any potential fourth quarter conversions in our guidance, but it is possible that we may see another 1% to 2% convert before year end.
Which could result in additional straight line rent of $2 million to $3 million on top of what's currently in the 2022 guidance range.
We raised our full year 2020 to NAREIT <unk> range by seven and a half cents at the midpoint.
Four five cents of which was driven by the prior year collections and straight line rent reversals that I just discussed.
But most importantly, a large contributor to the increase was also further improvement in core trends.
Reflected in an increase in same property NOI growth ex prior year collections of 25 basis points at the midpoint to a new range of five and a quarter to five and three quarters percent.
Our revised core operating earnings per share range of $3 75 to $3 78 excludes the impact of noncash items and when further backing out the impact of prior year collections represents a year over year growth of 7%.
We also made a few tweaks to our transactions guidance, mostly to adjust for the $30 million acquisition of East Meadow.
Which closed shortly after quarter end.
This is a value add opportunity for us a low going in cap rate under earning center immediately adjacent to the Stu Leonard's anchored center that we bought as part part of our long island portfolio late last year.
This property is an ideal addition to our future redevelopment pipeline.
Looking ahead to 2023 as usual, we will provide full year guidance in February .
But recognizing that we still have some pandemic hangover noise in our numbers, we would like to provide some context as you think about modeling our earnings over the next year.
I'd also I'd also refer you to slide eight of our earnings presentation for additional details.
First with regard to prior year collections in area, where we certainly experienced the most dramatic change over the last several years.
Recall that in 2021 earnings benefited from prior collections by $46 million and our current 2022 guidance now implies an impact of $20 million.
We're proud of the success, we've had collecting those rents much of which we reserved during the height of the pandemic in 2020.
These collections are evidence of the strength of our tenant base.
Thankfully, there's not a whole lot left in this bucket.
As we look ahead, we only expect to recognize another $3 million next year related to collections of receivables initially reserved in 2020 in 2021.
Beyond those anticipated collections the impact from of pandemic related reserves should start to normalize.
I'd also like to point out the impact of noncash items, where our current year guidance of $43 million includes 12 million positive contribution from the reversal of straight line rent reserves.
'twenty 'twenty three guidance will not include any further impact from conversions as.
As of right now, we expect total noncash items, which includes straight line rents above and below market rents and amortization of above and below market debt.
Of approximately $30 million for the full year 2023.
Turning to the balance sheet, we remain well positioned with one of the strongest balance sheets in the REIT sector.
And we're proud to have been recognized for that strength by Moody's, placing us on positive outlook during the third quarter.
Our leverage is at five times net debt to EBITDA, which is the lower end of our target range and we ended the quarter with full capacity on our revolver.
We are extremely well prepared whether the future holds further challenging conditions or increasing opportunities for value add investment.
The debt markets have remained volatile and the rise in treasury rates, along with wider credit spreads has meaningfully impacted everyone's cost of new debt capital.
But with no unsecured debt maturities until the middle of 2024, we have no need to access these uncertain credit markets in the near term.
We can remain patient.
In addition, 99% of our pro rata debt is fixed rate.
And our low leverage and long dated maturity schedule will help to further suppress any potential negative impacts to our growth rate of marketing, marking our debt to market in the coming years.
With that I'll turn it back over to Lisa.
Thanks, Mike before turning to Q&A I do want to take a moment to recognize Jim.
Jim has been a cornerstone for regency's success over the past 42 years, and so I think you Jim on behalf of our entire company for your dedication and enormous contributions to regency Bill.
Building, a legacy that will carry forward.
With al and neck with all that you've taught them.
I also thank you for being such a terrific partner to me and to Mike and also to Hap.
As a parting gift today for your last earnings call, Alan and Nic will handle the Q&A for you.
And I wish you all can see a smile right now Ah Congrats Jim and enjoy the enjoy the next chapters with that we'll open it up for Q&A.
Thank you at this time, we will be conducting a question and answer session.
If you'd like to ask a question. Please press star one on the telephone keypad, a confirmation tone will indicate that your line is in the question queue.
You May press star two if he would like to remove your question from the queue.
And so participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
One moment, please what we call for questions.
Our first question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question Congratulations Jim.
The leasing environment continues to be strong can you talk a bit about your pipeline and the visibility you have into it even.
As the macro remains uncertain as you said in your prepared remarks, and then on that topic.
Leased and commenced occupancy continue to move in line are construction delays that we've heard about kind of pushing out the ability to to realize to realize some of this leasing faster than maybe at first thought thanks.
Thanks, Michael I'll I'll, let Alan address that question.
Yeah, Michael Good morning.
Pipeline remains really strong strong demand is out there for sure we've got north of a million square feet of leases that are still in negotiation right now so I feel really good about.
About the future.
Last question relative to as construction delays the issue not really in fact, it's actually more permitting delays and so it's more on the front end that we're dealing with.
Our teams, whether it's our tenant coordinators in house that are working on things diligently whether we're engaging expediter.
From the outside whether we are doing advanced landlord work on some vacant spaces to really help trying to speed that process up theres a number of different levers that we're certainly working on.
To help compress compress those gates, but but it gives more permit driven than it is necessarily construction driven.
Is the permitting is that getting better or worse like is are the Italy is getting longer or is it is it narrowly narrowing at this point.
I'm going to choose excuse door number three and say, it's staying pretty constant it hasn't really gotten worse or better Michael.
That's helpful and then as a follow up Mike on 2020 three Oh, well you appreciate the disclosure on page eight of the presentation and your commentary so it looks like you're expecting prior year collection of noncash items in 2023 that are $30 million less in 2022.
Can you kind of walk through the assumptions there what's included with that and then I believe straight line is not included so that could be.
<unk> a potential benefit next year can you just walk through that again thanks.
Yeah I'll I appreciate you, noting page eight in the deck. It's a very helpful reminder, for folks that prior year reserve collections as we highlighted in the prepared remarks aren't expected to recur at the same level that they did in 2022, there is frankly less to collect in fact, our unresolved bucket of a R is down.
About $5 million and it's largely out west and this has been a theme for us over the last 18 months and we're making the teams out there, making great progress and we're really happy to see see us in the final innings of that where we're only so $20 million and 22 on prior year collections. We're telling you now to expect about 3 million.
And that line item next year, so think about that in the context of 2023 expectations from a noncash perspective that is where the straight line rent impact is included.
It's really the conversions that there are the outlier not the recurring nature of straight line rent. So we had about $12 million of recurring sorry conversions in 2022, those obviously wont repeat I gave a little bit of color on some anticipated Q4 conversions again, 1% to 2% of our ABR could can.
<unk> in the fourth quarter this year that could lead to another $2 million to $3 million of impact in the fourth quarter be cognizant of that as well as you think about 2023, and then the $30 million plus or minus guidance on that page eight is the combination of straight line rent above below market rent amortization and the amortization of any.
That mark to market.
Thank you very much good luck in the fourth quarter.
Thank you Michael.
And our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.
Hi, Good morning, I guess, a follow up question on the on the lease to commence that how do you expect that to evolve next year as as it continue to guess, but we can also get new get new stores open.
Since since we're getting into the guidance around realm. There I think I'll think I'll, let Mike address that one yeah, I'll I'll take that Anthony.
Great question, and I'm going to be a little careful with respect to 2023.
As we talk about guidance, we want to help with as many themes as we can as you can imagine we're still putting the finishing touches on our plan.
And Theres, a that we have some tailwind, which I'd like to talk about and the S. N O pipeline, but there's certainly some headwinds farming. So we're gonna be patient between now and February .
I mean, we're.
We're fortunate to have this 240 basis point S. N O pipeline that we will deliver into 2023 about 75% of that we anticipate delivering by the middle of next year we'll.
We will deliver all of it by the end of next year for our plan.
That's $34 million in total.
Eight of ABR.
Alan mentioned behind that the million square feet of leasing that's in our pipeline, whether it's in lease negotiation or our negotiations of LOI, that's about six months worth of activity.
Been carrying that level of activity for quite some time and continue to feel really good about the demand for our space. So those are really good indicators of how we think about the directionality of occupancy going into 2023.
You've heard US also talk about post pandemic, our recovery pace being in that 100 basis point area from a commence occupancy occupancy perspective, I'm really pleased to say that.
A year ago. This time Q3, a year ago. We're now 80 basis points ahead of where we were so we're delivering space. We are leasing space, we're delivering space, we're really achieving those recovery rates that we had thought we could and that our property portfolio deserves so.
The outlier I mean, the consideration Anthony is gonna be move outs.
That is when I when I talk about the finer points of our plan for next year that'll be.
What really drives our occupancy expectations next year more to come on that in February .
But you know you would anticipate that some elements like you ally we are at historical averages now in the third quarter and we anticipate to stay there in the fourth.
Does 2023 sound like a historical average year those are the considerations, we're having I would anticipate that you will I expectations, probably on the margin are modestly are expected to be a little higher and again more to come out from a detailed perspective, but those are the elements that I would think about today as you model out 2023.
But if if I may just add one thing because this is something that we have said.
Repeatedly and in oncology and meetings.
Who knows what 2023, he's going to bring with regards to a recession.
But one thing that is different because we've been through cycles before when we entered other cycles. We've typically been at peak occupancy and exactly what Mike just just building on exactly what Mike just said we're entering this one if it happens.
With still room to move and in terms of increasing occupancy and we expect that to be the case. We're also entering it having been through a really tough two and a half years for our tenant base and so our existing tenant base is really healthy.
And I think that that is a differentiator with regards to what may be coming from an economic cycle and I think that's a really important.
Difference and wanted to consider.
Thanks for that detail and maybe one more I mean can we see you mentioned that you know youre.
You're looking to do new development with partners.
Ground up development are you seeing more people getting looking to do more ground up development given kind of the strength in this sector are until we see supply goes really finally start to tick up a bit.
Given kind of given what we seen here.
Let me clarify my prepared remarks were that given the scarcity of capital in <unk> and in today's capital markets. Some of the smaller developers are having a more difficult time sourcing debt financing and so we are starting to have a rising number of incoming calls.
To potentially partner and and help be that.
Kind of source of funding for the smaller developers. So it's very different than actively just seeking JV development partners. We will when opportunities are brought to us.
From from JV partners look to that but we're still very very much committed to achieving our strategic objectives of annually, having a consistent start.
And completions of developments and redevelopment dollars I like to say a I like to say at least at least that 200 million if not north of.
Yeah.
Understood. Thank you.
And our next question comes from the line of Craig Mailman with Citigroup. Please proceed with your question.
Great. Good morning, everyone, maybe I just want to follow up on that last.
Topic, when you say that your commentary around the JV partners and just kind of square that up with your also your commentary about the lack of movement or more minimal movement potentially in valuations for the quality of assets that you guys see inherent in the portfolio.
I mean would that suggest that maybe you guys would be more interested in the debt side of some of these potential transactions versus the equity side or if you do the equity side would it be more opportunistic where you might want to flip it I'm just kind of curious.
What are the opportunities relative to what you guys typically look for.
For the last I would say coming out of the G. S. C. I believe that our development program has been very disciplined and.
<unk> on the quality of the assets.
And that has that that remains constant and so any opportunities that we think about in terms of like we have others coming to us to help them. It starts with the quality of the opportunity and the real estate and the asset is this something that we want to own long term and if the answer to that.
It is yes, then the decision tree is to continue the conversations and move forward and evaluate the opportunity, but it always starts with the quality of the shopping center.
Okay.
And you guys noted I think you throw off around 40 million, our free cash flow you kind of lever that up it's around the $200 million, yes kind of like to look out put out per year. Rather can you guys. Just talk about how you view that cost of capital versus.
Kind of potential deployment opportunities and kind of a cushion that that may give you from an accretion standpoint kind of risk adjusted returns.
Sure, Greg I'll start and and Lisa may jump in here too, but you're exactly right. We are we have talked about $135 million, plus or minus plus or minus an anticipated free cash flow that the portfolio is throwing off in connection with our levered the low leverage that we carry.
That whether it let's call it non dilutive capital maybe that's a better description for that so we have access to 135 million of non dilutive capital. We are also targeting five to five five times leverage overall, so we can lever that capital out of a rate of about 50% and that provides actually north of the 200.
Million about 270 approaching $300 million of.
Capacity for us to invest Accretively.
Now to your question how do we then think about investment return thresholds.
You know we have this great source of capital in non dilutive capital, we can't be competitive we can be aggressive.
But we also are very conscious and aware of what valuation where valuations are what risk premiums need to be especially in the development business.
And those remain the same we do target you know spreads of 150 plus basis points to what we would determine what would think to be in.
In place cap rates today, those that's a little bit more challenging to wrap your head around because of the lack of data points that are out there in the market today, but.
But we are finding as Lisa mentioned just.
Good conversations opportunities to advance conversations in this space and and those returns we have confidence it will be accretive to earnings because of that non dilutive capital source and we also think we will end up achieving return thresholds that makes sense to to us from a NAV basis and from a incremental.
Rental cost of capital basis.
Great. Thank you.
And our next question comes from the line of key then Kim with <unk> Securities. Please proceed with your questions.
Thank you good morning.
Congratulations Jim.
So first question.
You know your occupancy today is about 94 seven when you look at the prior peak is hovering around 95% I know this isn't perfectly apples to apples in your portfolio has shifted but how.
How should we think about the leased occupancy upside from here on out and.
Can you describe the existing vacancy quality or desirability as it compares to the rest of the rest of the portfolio.
I'm very quickly I'll, just I want to comment on that peak occupancy comment and then I'll have Alan address the.
The quality of the vacant space, if you will and.
I'm, probably a little bit older then you're keeping so perhaps I remember the peak occupancy a little bit more clearly.
But we I mean, we were north of 96%.
Certainly gone into the GSC and got and got pretty close to it again, if not exceeded it coming out I'm getting I'm getting very very Adam.
Adam It head nods, yes, I'm around the table, so exceed at 96% and our shop space.
Exceed at 94% and the peak for a very short period of time and I believe that we have the I'm, sorry, 90% to 92%.
And I believe we have the ability to get back there again and so that's when I talk about entering this potential.
Recession, if that's what it is and becomes that we still have opportunity to continue to grow that occupancy.
Yeah.
Yeah, Yeah, and you've key Ben this is Alan to answer your vacancy quality feel really good about what's there and I think thats evidenced by.
You look at our cash rent spreads for the quarter at 14%.
Which were obviously strong and if you think about it also in the context of space, that's been vacant for less than 12 months.
We actually were driving 20% cash rent spreads again, another testament to the quality and on top of that if we look at our embedded rent steps.
Was the highest quarter, we've ever had and so our ability to drive those cash rent spreads our ability to have these embedded rent steps at averaging two 5% and in many instances.
Instances, well north of 3% does speak to the quality of the vacancy and I feel really good about setting our eyes at that 96 plus percent that Lisa had mentioned.
And we can figure right I had a couple of columns and my Excel model 96 is right.
So second question.
On the signed but not least our pipeline 34 million of ABR, how much of that is replacing existing vacancy.
Replacing existing occupancy.
Keep in and it's all incremental.
None of that is replacing anything that is rent paying today.
Okay. Thank you.
Thanks Steven.
And our next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.
Hey, everybody good morning, and thanks.
You know the lease rate pretty close to pre pandemic Oh, you know able do you feel to focus on rates over occupancy.
How does the possible recession kind of impact your underwriting in thinking or actual ability to push rents and I'll make it a two part because you might not answer the second part.
It feels like a realistic goal for the lease break over the next year.
Hi, Derik.
Derek I'm I'm actually looking at Mike to make sure that I don't I don't speak out of out of turn too much. So I'll try to stay away from guidance, but and keep it at a much higher level and macro generally speaking I think that if you were to run a correlation between percent leased and rent spreads youre going to see that there's a pretty strong correlation I mean, the more occupied.
There are you are the less space there is available to lease the more pricing power that you have and we continue to see that and add on top of that inflation.
And I think that we're gonna be able to continue to drive healthy.
Increases in rents.
So I'm Lucky I think that's probably all I will leave it I'll leave it at that and in terms of guidance from them from rental spreads will continue well contractual rent spreads we've talked about we continue to see that and almost nearly all of our leases are more than the vast majority and.
We were always close to averaging close to 3% and we are seeing that.
Still very very steadily and and and and.
And in more cases than even last quarter greater than 3%.
So we continue to see increases in rents yeah Derek.
With respect to 'twenty three guidance I mean, largely from a rent spread perspective, it's largely what's in our S. N O pipeline. So the spreads that we've already achieved our what's really going to drive our growth into 2023, the challenge for us and we are up to the challenge is to maintain what we're seeing in today's spreads in that mid to upper <unk>.
Single digit area that is our strategic objective, we think we have the right portfolio the right team.
Sourcing the right tenants to fill at this point in spite of some of these headwinds or challenges to continue to drive rent spreads at those levels to continue that pace of growth.
In 2024 and beyond.
Okay, Great and then just.
Touching on the Abbott.
Can we get a little more clarity on the early leasing that was mentioned in the opening remarks and now obviously, how it's tracking versus plan. Our initial underwriting and you know how you how you're feeling about it and what about leaning in and possibly commencing some more of these mixed use projects you know given what.
It seems to be pretty good success in Cambridge.
I'll start with the latter part of that question and then I'll kick it over to Alan to talk about the the.
The property, specifically and generally speaking again I'll go back to the 12 plus years coming out of the Dfc been very focused and disciplined on developing.
Developing quality, primarily grocery anchored shopping center does it doesn't mean that it won't that it has to be grocery anchored but primarily grocery anchored shopping centers and even in those cases, where we have had the opportunity to densify to add density to existing.
Shopping centers, we also again really focus on.
Participating in developing the retail portion of that of that shopping center and when there is other opportunities to bring in for example town and country is a great example, since we just started that are where we partnered with a multifamily developer to take to do the multifamily development of that that's how we will pursue those types of projects the Abbott.
I was a little bit differently did that did come with our merger with equity one it was already in process.
And it's also it's a it's a lot more vertically integrated and I'll, let Alan speak to the leasing and how it even with our leasing of that it's still very similar uses to what we would do if it was a horizontal shopping center and.
So with that I'll I'll talk to I'll I'll toss it to Alan.
Yes, Derrick I am really proud of what the team has accomplished there all of our ground floor retail is spoken for and leased and they've done an exceptional job.
With the uses in terms of merchandising credit.
Rents et cetera, what remains left is our premier penthouse space.
It's a space that originally was going to be taken by a fourth floor tenant and they just decided an 11th hour just to take one space but.
If we're if we want to have one space left to lease it's got one and the demand has been really strong on it we just hoping it hosted a grand opening event there last week well attended.
Feedback from the retailers that are open is that they are doing remarkably well. So again, we're thrilled with.
With the project and we're thrilled with the support that we've gotten from the entire Cambridge community.
Thank you.
Yeah.
And our next question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.
Thank you.
My questions are on the town and country.
First congratulations Jim.
Okay.
It's been very interesting too.
What you and your work at Regency.
Going to town and country I'm, just wondering do you know any of the new retailers, you're going to be adding to that.
Complex.
Well I'll, let Nick Nick has been dying for someone asked me about town and country, So well that Nick it's that question.
Yes good.
Good morning, Craig and thank you for the question no. What we're extremely excited as Jim mentioned in the opening remarks, just a phenomenal piece of real estate, obviously across the street from the Grove and so retail demand as you can appreciate it's been extremely strong even with the long lead time before delivery, but the new anchor tenant to the new phase will be hold.
Food building a new store. So they are currently a tenant shopping center it'll be relocating into a a new prototype.
Underneath that divert the vertical residential that holiday is developing so really excited about having them re imagine what their experience of the consumer will be in that shopping center and clearly excited about our future tenants, we will add in and around that in the future phase.
And do you have.
Obviously you do.
Comps for luxury apartments in the mid Wilshire area.
We do but again just to reiterate we are leasing the air rights to halt and so the good news about that structure is our our rent is 100% committed from Holland through an air rights lease structure and so as you can appreciate Holland is hyper focused on what those rents are going to be.
But we feel very very confident they're going to achieve their underwritten rents and therefore feel extremely confident that it's going to be really successful partnership for both.
Great and then just yeah.
I was reading about you've had robust community feedback.
What are some of them some of that feedback and how did that relate to how you're setting up the property going forward.
The really good news is again with lead time, we have we can be extremely patient and so the conversations we've been having with tenants are really at the preliminary stage.
Now that construction is starting now that we are gonna see shovels in the ground now that become public at whole foods will be relocating it really allows us to lean in to those conversations and so again with this type of quality of real estate with a couple of years of lead times, we're going to continue to progress conversation to appropriately.
But also continue to be extremely patient as we expect to be able to pick from the best of the best throughout the industry.
Okay. Thank you very much.
Thanks, Craig.
And our next question comes from the line of Hong Zhang with Jpmorgan. Please proceed with your question.
Yeah, Hi, I guess, a quick question on how to think about commenced occupancy given your you've grown commenced occupancy 60 basis points since the beginning of the year just given your comments about strength of.
Checked with tenant quality and your backlog its commencement is it fair to say that you would expect a greater greater than 60 basis points increase in commenced occupancy by year end next year.
Hum.
We will take it easy on 2023.
I'm sorry, it more to come I think is something you'll hear from us pretty often but let me take the opportunity to take your comment and speak to 2022.
And then we can extend that from a trajectory standpoint base rent as I said in my remarks, just continue to focus on base rent as the best indicator.
Because of our high degree of cash basis, Tennessee, 2021 is providing a very sloppy comparison here in our quarter over quarter results were all accustomed to that our disclosure does an excellent job of explaining that phenomenon, but base rent growth just to repeat some numbers in first quarter of this year was two eight.
Percent that grew to 3% in the second quarter that grew to three 9% in the third you can imply from our guidance.
And our revision to guidance that the fourth quarter will continue to March forward again, consistent with the 60 basis points of Verizon commenced occupancy as you mentioned Hong.
Pair that with some of the comments, we've made about leasing demand about our S. N O pipeline that exists today about the shadow leasing pipeline that extends beyond that that that Alan shared some details with us on.
I do think it's fair to say that we are we are positioned to grow our base rent.
Through what could be a softer economy.
And one of the reasons, we're positioned to do that is because of the circumstances that Lisa articulated much of the weakness was eliminated in 2020 in 2021, So we're coming into this position from a period of strength.
Good good well located vacancy good demand from the markets more to come on how much growth, we should anticipate in 'twenty 'twenty three but I do think we like the trajectory that we're on.
Thanks, and I apologize if you talked about it before but could you talk a little bit about the value add opportunity you see at east metals.
Yeah, I'll, just start really quickly and again toss it toss it to Alan to talk about the project, but as I said in my prepared remarks, we bought that has a redevelopment opportunity and clearly with our disclosure you can back into what the ingoing cap rate was so it was a very low ingoing cap rate, but we are we.
Unlevered IRR is approaching 10% of that so it is a development like returns so I'll toss that to Allen.
Yes.
So we bought that from a family that's owned the land since the 19 twenties, and obviously coming off the heels of acquiring the adjacent stew Leonard's anchored asset back in December of last year.
We're really excited about our ability to connect these two assets are.
We are going to be working with a local municipality on a redevelopment, but our team up in the northeast is really excited to do what we do best and that is enhanced merchandising implement our place making strategy and connect to the community through through the redevelopment of the asset so a lot to unlock.
And I just think.
The center of gravity by creating both of these assets into one larger project will really be fantastic. So we're looking forward to that.
That completes shot so it sounds like so it sounds like it's we'll see and did not redevelopment pipeline sooner rather than later.
Correct, yes.
Well, thanks, and congrats Jim.
Thank you.
Yeah.
That's a question please press star one.
Our next question comes from the line of Wes Golladay with Baird. Please proceed with your question.
Hey, everyone. Let me go.
Go back to the comment about talking about the catching up with inflation.
Is there a way to measure how much upside in the portfolio has been that these are long duration leases is the best way to look at it as a renewal with no option.
And if you have that data that would be nice.
I didnt pick up yeah.
Words before option I'm, sorry, Wes do you have the a is the best way to look at it.
The embedded growth in the portfolio to look at the.
The renewals that you're citing that don't have an option.
Okay.
Hum.
Sure that we'd do address it as we can so if you do I think when you think about.
How can how are we positioned I think this is what you're saying to capture what may be rising market rents due to inflation and the best way to look at that really is to look at what percentage of our spaces expiring.
And what market rents are that are expiring what it's difficult for you to see what the mixes of anchor and shop and that gets a little bit.
That gets a little bit more difficult. So your question then becomes is what percentage of them have options.
Is that is that.
Yeah, well I guess when you do renewals you got your renewal spread that you cite as a mix of tenants that have options that are that were maybe set out of lock rate and then ones, where you would negotiate with them Hey, This is where the new rate is and you get a big pop on the the ones that they don't have an option on this I was wondering if you had the delineation.
Tween those two types of renewals.
Okay.
The question is more clear now the renewal rates.
Sorry, west the renewal rate.
The lease spread on renewals without options was 8%.
Bucket status exercise options is at Fox.
Got it and is that the best way to look at the.
Embedded growth in the portfolio as it stands today.
And your I mean, I guess, a little bit more complex than that I think we have to start with or at least you have to start with contractual rent increases.
You know.
Sure we are putting in a plus 2% we have in place 2% contractual increases in our kind of same same space portfolio that contributes about 131, 4% to our growth profile. So I think you'd have to start the conversation there and as Alan mentioned earlier, where we're hitting kind of peak level.
<unk> that we haven't seen from a new threshold from a contractual increase perspective, then you add onto that what we're experiencing on the lease spreads.
Yes, some of that is gonna be contractual some of our tenants have fixed rate options that they have to their benefit that we'll have as I mentioned a bit of a dilutive impact on the ability to grow but where we can maintain control of the space limit options to our tenants.
Then attack that new market rent growth, that's where we that is the other lever that we can pull to.
To increase our growth profile, but the third element that is available to us today is all about this peak occupancy level and we've spent some time today talking about that we have room to run and.
And that'll be probably more of an amplified impact going in as we think about the 'twenty 'twenty three 'twenty 'twenty four and the near term than the impact coming from the lease spreads.
Got it thanks, everyone and congratulations Jim.
Thanks Wes.
And our next question comes from the line of Ronald Camden with Morgan Stanley . Please proceed with your question.
Great just a couple quick ones, starting with sort of the.
The occupancy gains just trying to get a sense of in your mind, just how much more full of the portfolio can get or when we're thinking about sort of the same store growth function. You know in the next couple of years clearly the base rents are a big driver, but trying to understand how much more occupancy can drive that.
Yeah I think.
I think it's been the guidance again, yeah, it's a little bit of guidance and kind of asked and answered today, but more to come around on our expectations for 'twenty three but I'll.
Just reiterate we we feel good about the quality of the portfolio we don't.
The weakness is largely been shed we feel good about our S. N O pipeline and delivering that right. We feel great about the the shadow pipeline that that's behind that and the negotiations that are ongoing.
So we do see continued opportunities to grow base rent for from here and just more to come on.
The conditions for achieving peak occupancy whether that's at the end of 'twenty three 'twenty four more to come on that in February .
Great.
And then I apologize if its been asked already but can you just kind of have you commented on sort of the Kroger Albertsons deal just curious what implications for the company pays for the industry what what your take on that is.
And we had not had that question yet so generally speaking.
As long as I've been in this business, which is now over 26 years, its not quite as long as Jim's 42 years.
But gross the grocery industry clearly has always been one of consolidation and the stronger operators getting stronger and the top grocers getting better and it's why our strategy has always focused on investing in shopping centers that are anchored by the top grocers.
In that market, whether it's market share, but it's really by the productivity of those stores and the sales that they generate.
The combination of Kroger and Albertsons, just creates an even better operator.
And we think that that's a positive it'll allow them to invest further into their business in all aspects of their business. Both digital and also in the in store experience, which they both were already doing and now combined them they will be able to do that even better.
Great. Thanks, Congrats Jim.
Thank you.
And I was talking for so long Linda Tsai with Jefferies. Please proceed with your question.
Hi, good morning can.
Can you remind us pre pandemic what percentage of your tenants or a cash basis I know, it's been going down about 2% to 3% a quarter and it's at 9%, but what do you think it ends up by year end 'twenty three.
Hey, Linda it's Mike So we're at 9% today, we get this question often and it's hard to answer only because the way the policies from a GAAP perspective that we're applying today don't quite match, what they what those policies and GAAP treatment was pre pandemic, but we were in the mid single digit.
Area, five 5% plus or minus previous to that you know I called for maybe another 1% to 2% that could convert in the fourth quarter, we're getting down to where we're going to normalize somewhere in that mid single digit area.
Got it and then maybe on the idea that you could see a slight up tick in move outs early next year, given the more uncertain environment, but coupled with the idea that your tenant basis, a lot stronger headed than you know versus headed into past recessions, what's the best way to think about bad debt for next year.
A couple of questions in there. So we didn't comment on the seasonality expectation of Q1 move outs I think you're alluding to the fact that it typically is a stronger move out type of quarter more to come when we put out for 2023 expectations.
From a bad debt perspective, I'll reiterate what I said earlier, we are at historically.
Average rates today are from a third quarter and the fourth quarter from an expectation standpoint.
It would not be out of the question again is next year, a historically average year.
Would not be out of the question to think that it would not be in that we would be prudent to plan for some sort of modest.
The increase in our rate, but I don't by no means do I anticipate that we will.
Equal the rates that we had in 2021 or 2020.
Just reiterating again I'll go back to my prepared remarks of I characterize it as cautious optimism.
And that we none of us really do know where the economy is going to settle if you will with regards to the recessionary. If there are recessionary impacts and what I think to clarify mikes comments. So the question the answer to a question earlier is the.
The leasing is essentially accounted for because we have our signed not occupied leases that are coming online. The uncertainty is and the level of move outs because when you have a move out that impact is immediate because they stopped paying rent.
And that I think that's what you're that's what you're referring to we did not indicate that we expect it to be there to be an uptick.
Said that more to come in February when we give guidance.
Thank you.
Yeah.
And our next question comes from the line of Paul You know Rojas with Green Street. Please proceed with your question.
Hello, and I only have one quick question.
Regarding the transaction market or are there any areas or markets, where cap rates have been less.
On the reaction.
So back to the macro headwind from staying in your mind more market agnostic.
Yeah, Paulina I'll I'll, just I'll address that by a little bit of what I said in the prepared remarks as well.
There has been very low volumes in the transaction market. So very little price discovery. The bid ask spreads are still really wide.
And I would say that is market agnostic. It is not that there's and there arent any specific markets, where price discovery is better than others.
And volumes are low across the country.
So at this point in time, it's there's it's still market agnostic.
Well. Thank you Paul Thank you.
There are no further questions at this time.
I turn the floor back over to Lisa Palmer for any closing comments.
First thank you all for your time this morning, one last.
You heard me say when we're closing the prepared remarks that I wish you all can see Jim Smile when.
When we said that he wasn't going to answer the questions. You also didnt have the opportunity to see how relaxed. He was this whole time, well we were well we're answering your question. So Jim that's the least you there's the lease that we could we could give you a new deserved. Thank you so much.
And enjoy enjoy your time. Thank you much thanks for the bi.
Thank you all have a great weekend.
Yes.
Yes.
You may now disconnect your lines at this time. Thank you for your participation and have a great day.
Okay.
Hum.
Okay.
Yeah.