Q3 2022 Phillips Edison & Co Inc Earnings Call
Good day and welcome to the Phillips Edison and company's third quarter 2022 earnings Conference call. Please note that this conference is being recorded I will now turn the conference over to Kimberley Green Vice President of Investor Relations. You may begin thank you operator.
<unk>.
You everyone for joining us today for Phillips Edison third quarter 2022 earnings conference call. Once we conclude our prepared remarks, we will open the call to Q&A. After today's call. An archived version will be published on our Investor Relations website I'm joined on this call by our chairman and Chief Executive.
Jeff Anderson, our President Devon, Murphy, and our Chief Financial Officer, John Caulfield.
A reminder, today's discussion may contain forward looking statements about the company's views of future business and financial performance, including Florida earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties as described in our SEC filings specifically.
And our most recent Form 10-K, and 10-Q and in our discussion today. We will also reference certain non-GAAP financial measures information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in the earnings press release, and supplemental information packet, which we posted to our Investor relations.
Websites. Please note that we have also posted a presentation on our website with additional information our caution on forward looking statements also applies to the presentation materials.
Now I'd like to turn the call over to Jeff Edison, Our Chief Executive Officer, Jeff.
Thank you Kim Thank you everyone for joining us today.
Our differentiated and focused strategy of owning grocery anchored neighborhood shopping centers together with our integrated operating platform has delivered another strong quarter with same center NOI growth of four 3%.
This performance has allowed us to raise the midpoint of our 2022 guidance for the third quarter in a row.
As reflected in our results 2022 has been a year of reaching record highs in occupancy and re leasing spreads a strong leasing environment and our current positive momentum are evidence of tailwind for us that we believe will continue as we head into 2023 and beyond this provides us with confidence in our ability.
To successfully execute our growth strategy and continue to deliver strong results.
As we've discussed our grocery anchored neighborhood centers continue to benefit from structural and macro economic trends that create strong tailwind. These include population shifts from urban to suburban communities the increase in hybrid work.
Importance of physical locations and last mile delivery.
Oh supply and lack of new construction.
Wage growth student debt relief and low unemployment.
And most importantly, the retailers recognition of the benefits to them of being located in growing suburban markets.
Looking ahead inflationary impacts on the consumer combined with higher interest rates introduce uncertainty.
However, as we reflect on the resiliency of our portfolio throughout the pandemic combined with the aforementioned tailwind we believe <unk> portfolio is well positioned for a recession.
This resiliency comes from the following.
Our grocery anchored and necessity based neighbor mix.
Our right sized format, and well positioned locations and growing markets.
Our record high occupancy with continued strong neighbour demand are talented and cycle tested team.
Our strong credit neighbors and diversified mix.
Our lack of big box exposure and the lack of distressed retailers in our portfolio.
With regards to our growth profile, we expect future organic growth to come from continued increases in occupancy contractual rent increases and our pipeline of redevelopment and development activity.
<unk> also continues to be well positioned to capitalize on external growth through new acquisition opportunities as they arise.
Currently we're seeing cap rates expand with borrowing costs are increasing and the volatility in the equity markets. We have moved up our targeted return for new acquisitions to an unlevered IRR of 9% and above.
Acquisitions are a key part of our long term growth strategy and we will continue to participate in the market, while exercising an appropriate level of caution.
As we've said our focus is on cash flow and earnings per share growth. We will ensure acquisitions will be accretive to earnings and we will continue to evaluate each acquisition with the same diligence we've always exercised.
I know everyone is looking for signs of weakness in both the market and with the consumer but we are not currently seeing it in our grocery anchored portfolio. We continue to enjoy solid growth. Despite the headwinds we have a great balance sheet low leverage and strong occupancy were located in markets that are growing and have a strong competitive.
Advantage with our resilient grocery anchored and necessity based neighbors.
I would like to briefly comment on the recently announced proposed merger between Kroger and Albertsons based upon what we currently know we believe that overall. This is positive news for Pico with an expanded footprint post merger, we will see our largest neighbor become stronger and more profitable following the merger.
<unk>. These grocery stores will be managed by an operator, who has generated higher sales productivity at the store level invest in their physical stores and has a proven ability to drive strong customer traffic to our centers.
As we specifically think about the impact of this merger on our portfolio remember our strategy is focused on owning centers anchored by the number one or two grocer within a market. So we do have a number of stores that are potentially impacted we have eight stores located within one mile of another store 15 stores.
In one to two miles and 10 stores within two to three miles in total there are 33 stores located within three miles of another store.
These 33 stores are productive locations as demonstrated by the following.
Their average store sales are $35 million or $620 per foot, which compares to <unk> average of 638 per square foot.
And in average health ratio of two 1%, which is a key indicator of profitability for the locations.
As you can see these are strong and viable grocery stores.
It's still very early we will continue to carefully evaluate the potential impact of Pico as we learn more we'll update the market accordingly.
With that I will turn it over to Devin.
Kevin.
Thank you, Jeff and good afternoon, everyone.
Thank you for joining us.
The Pico team supported by the strength of our neighbors.
Continues to drive outstanding operating results.
We are excited about our record occupancy level of 97, 1%.
And as you can see these occupancy levels are driving immediate and measurable growth in our financial results.
We continue to see the many benefits of P codes grocery anchored portfolio with our healthy mix of national regional and local retailers.
More than 70% of our rents come from neighbors offering necessity based goods and services.
Throughout 2022, we have seen our grocers continue to strengthen their businesses.
Year to date through September 30.
U S grocery sales grew by eight 4%.
And margins are holding.
Grocery sales are expected to continue to grow in 2023 and.
And our top grocers continue to drive strong recurring foot traffic to our centers.
Our inline nabors continued to be successful in our centers.
On a trailing 12 month basis.
Our average inline neighbor health ratio is 10%.
Which we believe is healthy.
Constraints that retailers can operate profitably in our centers.
Third quarter foot traffic at Chico's centers remains strong.
And is generating healthy sales levels for our neighbors.
Our record high occupancy levels provide us pricing power.
Can you to grow rents at attractive rates.
With good health ratios.
Record occupancy and strong foot traffic trends we.
We do not see any signs that we will not be able to continue to push occupancy and rents higher.
As you know.
25% of P codes ABR is derived from local neighbors.
64% of our local NEVA rents come from retailers offering necessity goods and services.
Our local neighbors are successful businesses run by hard working entrepreneurs.
30% of our local neighbor rents come from personal services, such as beauty and hair care.
Personal services is one of the most stable uses in our centers.
These neighbors paying market rents renew at attractive rent spreads and demand less capital.
Our local neighbors are unique and successful retailers.
One example of a unique Pico local neighbor is the backyard kitchen and cocktails at our Murphy marketplace Center located in Murphy, Texas.
Its neighbor is the winner of Texas living magazine, Best Patio and bar.
Also included in our local naval category, our medical neighbors, including dentists, chiropractors and physical therapist.
Ned tail as we call it.
Is a growing use in P codes local neighbor mix and currently represents 12% of our local ADR.
Our local neighbors are resilient and have been in our centers and average of eight seven years. This.
This way of tenancy compared favorably to the capital investment payback period of Jets 10 months.
Over the last three years, we have retained 76% of our local neighbors.
And when we did replace them the average re leasing spread was 14% on a trailing 12 month basis.
In summary.
Our local neighbors are less expensive put into spaces.
Have high retention rates.
Renewal spreads similar to nationals and offer an attractive economic package.
We believe in the strength and resiliency of our local neighbors and we've added new slides to our investor presentation.
Highlight these neighbors.
In addition to the compelling economics behind our local neighbors they.
They also differentiate our centers and provide a unique attraction for customers.
As we have said before successful local operators prosper and our grocery anchored neighborhood centers.
As Jeff mentioned earlier.
Mart retailers are taking advantage of the growth available in secondary markets.
According to recent placer AI data insights migration changes since 2018 have flipped the script.
And made these markets appealing for many retailers.
Urban markets are gaining at the expense of major urban markets, which suburban markets being higher growth.
According to placer, our suburban markets offer retailers several advantages in today's environment, including.
One <unk>.
Comparable if not superior visit per location trends when compared to larger markets.
Two less competition.
Three greater diversification of customer base.
For easier access to labor as an employer of choice within a market.
In five less expensive build out cost.
These metrics and result in higher margin stores, which are more profitable to the retailer.
National retailers, such as Chipotle are raising their long term store base targets in our markets.
Because these locations have proven to deliver the same or better store level economics.
In addition, retailers such as Chipotle, Petco, Kohl's and shake Shack saw higher visits per location in suburban markets compared to the top 25 msas According to the place or data.
Since 2018.
The combined number of national neighbors, including Chipotle.
And donuts.
Starbucks five guys Jersey, Mikes and Wingstop in <unk> portfolio increased by 40%.
Evidencing this trend.
During the third quarter, we executed first time deals with national neighbors, including Shipley Donuts and coffee.
<unk> market center in <unk>, Texas.
And pizzeria locale.
Lay back concepts at a wrap a whole marketplace in Greenwood village, Colorado.
We continue to see strong retailer demand for our suburban markets.
We expect these favorable demographic trends to continue to benefit P codes, well located neighborhood centers.
We have added slides on these placer insights.
I just discussed so our investor presentation.
Sure to check them out.
I would also like to reiterate that silver lining of the pandemic.
Less resilient neighbors were called from our portfolio.
Our neighbor mix emerged stronger post pandemic.
Another strength of our strategy that we like to highlight is that we have limited exposure to high risk retailer categories and are well diversified.
Our largest non grocer neighbor is T J maxx at one 4% of ABR.
And all other non growths are neighbors are below 1%.
Our combined exposure to distressed retailers, such as bed Bath and beyond and party city is minimal and these two retailers represent less than 30 basis points of our ADR less than 1%.
In addition to our strong rental growth trends, we continue to focus on our pipeline of ground up development and repositioning projects.
We currently have 17 projects under active construction.
Of these <unk> are being developed on land we already own.
Three are being developed on adjacent land that we acquired.
Our total investment in these projects is estimated to be $55 million with an average estimated yield on cost between 10 and 12%.
Additionally.
Five projects stabilized during the third quarter, and we delivered over 131000 square feet of space to our neighbors.
Yes.
This space adds incremental NOI of approximately $1 $9 million annually.
These projects are attractive because they provide superior risk adjusted returns and have a meaningful impact on our NOI growth rate.
The list of projects and our third quarter supplement.
Represents projects currently in process and does not include the pipeline of projects that we are evaluating.
The 16 projects that we expect to complete in 2022 is the largest number we've ever achieved in a year as a company.
This is an area, where we see ongoing opportunity.
And we are focused on growing our level of opportunity in these activities in the future.
Thank you I'd now like to turn the call over to John .
Thank you Devin and good morning, and good afternoon, everyone as.
As Jeff indicated you won't curious say, we're completely immune to all of the impacts of an economic downturn.
The good news is that we are operating from a position of strength with several tailwind heading into 2023 or.
Our growth opportunities remain attractive featuring a healthy mix of neighbor demand across our growing markets strong grocery anchors necessity based goods and services and are right sized format with retention rates that continue to be above historical averages.
With that I'll get into the quarter.
Third quarter 2020 to NAREIT, <unk> increased 26, 4% to $72 million or <unk> 55 per diluted share.
This result benefited from an increase in rental income and reduced interest expense.
Our third quarter core <unk> increased 15, 4% to $76 $6 million driven by increased revenue at our properties from higher occupancy levels and strong leasing spreads as well as lower interest expense.
Our third quarter 2022, same center NOI increased to $92 $5 million.
Four 3% from a year ago.
This improvement was primarily driven by higher occupancy and an increase in average base rent per square foot, which was partially offset by lower collectibility reserve reversals in the current period when compared to 2021.
Now I want to provide some commentary on our guidance.
As Jeff mentioned based on the performance. We have continued to achieve in 2022, we are raising our NAREIT <unk> and core <unk> per share guidance.
Our new core <unk> per share guidance range increased to $2 22 to $2.26.
We're also increasing our same center NOI guidance to a range of four 1% to four 5%.
These increases are a result of strong property results from record occupancy and leasing spreads to date as well as lower than expected corporate and general and administrative expenses.
As we look at the fourth quarter of 2022, we anticipate some slowdown as a result of approximately $1 5 million.
Of additional interest expense, primarily due to planned acquisitions as well as seasonally higher expenses.
Additionally, we are narrowing our net acquisition guidance range to $200 million to $250 million.
This is partly due to timing of certain acquisitions awarded are expected to close in 2023.
We also believe there will be even more acquisition opportunities in 2023 as a result of this changing market and we continue to be committed to buy $1 billion of acquisition net in the first three years post IPO.
Despite lower acquisitions than we anticipated this year, our operating performance has allowed us to meet and exceed our expectations for core <unk> per share.
Turning to the balance sheet, our leverage ratio continues to be strong as a result of our continued earnings growth as well as our prudent balance sheet management with our net debt to adjusted EBITDAR of five four times as of September 32022, compared to five six times at December 30.
<unk> 2021.
At September 32022, our debt had a weighted average interest rate of three 3% and a weighted average maturity of four six years, approximately 87% of our debt was fixed rate.
At the end of the period, we had approximately $733 million of borrowing capacity available on our $800 million credit facility.
We have no significant debt maturities until 2024.
Between the free cash flow generated by our portfolio and the significant capacity available on our revolver, we have excellent liquidity, which is a nice place to be given the current capital markets environment.
With the macro market concerns around recession inflation and rising interest rates. We believe the importance of a fortress balance sheet has increased our leverage gives us meaningful capacity and flexibility to pursue accretive acquisitions as they arise in the market and extend our acquisition runway beyond.
2024.
We still have a target leverage level of low to mid six times net debt to EBITDAR.
As Jeff and Devin mentioned, we have a strong pipeline of growth with the flexibility to be patient and pursue accretive opportunities that we expect will provide meaningful NOI contribution in 2023, and 2024 and maybe most importantly, as we consider the economic uncertainties, we have one of the stronger.
Balance sheets in the sector, allowing us the ability to remain on offense and pivot quickly to create value through acquisitions and respond to changing market conditions.
With that we look forward to taking your questions.
Thank you to ask a question. Please press Star then the number one on your telephone keypad again, that's star then the number one to ask a question, we'll pause for a moment to compile the Q&A roster.
Yeah.
Okay.
Okay.
Okay.
Your first question comes from Hendel, St Juste with Mizuho.
Hi, Good morning. This is Ravi very on the line for Han Bell I Hope you guys are doing well.
Just wanted to ask you about the broader transaction market, where do you where are cap rates for grocery anchored centers in your in your target markets and where do you think transaction volumes and acquisition cap rates.
Like what's your forecast for 2023 versus <unk>.
It was 22, given everything that's happening with financing and rising rates.
Yes, Ravi this is Jeff thanks for the.
Question.
Yeah.
Sure.
Seeing the market as well.
And again I'm.
Really just focused on right.
Right sized grocery anchored shopping centers were not talking about power centers or large.
Kurt centers. So that's the market that we are.
Obviously, one of the leaders in in terms of acquisition. So we're very active in that market.
But what I would say is that.
Has been what are the most attractive sector.
Sector of the retail.
Market.
And.
So pricing was very aggressive and it was clearly.
A seller's market.
Over the last two.
18 months.
And what we've seen is we've seen that changing.
It's really much moving into much more of a buyer's market.
And we anticipate that will continue with obviously with that increase again.
Public markets the equity cost increasing so.
Our feeling is that that will change we will see some change in there.
Yes.
I guess that were.
You really cant go across the country and say because because the markets are very different regionally.
And but there is certainly expansion of cap rates and as you know I mean, we're not really cap rate buyers, where IRR buyers and if you look at where our Unlevered IRR is are today I mean, we're what we're looking.
Looking for is north of benign and you look.
Nine.
12 months ago, we were looking north of an eight so you can see that there is an expansion in our are.
Underwriting on an IRR basis, and obviously that would affect cap rates as well.
Got it thanks for the color just one more here.
How is food inflation impacted your grocer tenants are you seeing additional sales or foot traffic at your properties, given the higher pricing and a broader pullback in casual dining given elevated recession risk.
Kevin you want to you want to take that one.
Sure. Thanks, Jeff Thanks for the question.
As foot traffic at our centers is.
Remaining constant.
So the number of visitors to our centers.
Is equivalent to what it's been.
Last year and this year, what we're finding is that the average spend per visit is higher and as we mentioned in our prepared remarks U S. Grocers saw sales increased by over 8%. This year and they are expected to increase again next year and the good news is that their margins.
Our holding.
So we are optimistic that the grocers that are going to continue to.
Have a favorable operating environment, they're going to continue to perform well and theyre going to continue to drive strong recurring foot traffic to our centers.
Yes.
Thank you.
Thanks Ravi.
Your next question comes from the line of Juan Sanabria with BMO capital markets.
Hi, Good morning, it's Eric on for one.
I appreciate all the color on the in line portfolio I was just curious if you could kind of talk about the health ratio for in line quarter to 10% I'm just wondering how that's trended coming out of the pandemic and how should we think about that 10% going forward into 2024, 23 and 'twenty four.
Great Kevin you want to take that one.
Sure Eric Thanks for the question.
Again that metric has held.
Fairly consistently our instincts are that there's an ability for that metric to increase from the 10% that it currently stands at two again, it's going to depend on us.
You know certain retailers can absorb a much higher helped ratio than other retailers, but on average we believe that there's an incremental.
Growth in that health ratio to circa 12%.
So we believe that as long as sales are holding constant and growing.
There is an ability to continue to push rents and as you've seen you've seen our re leasing spreads.
In this quarter be up 15, 5% and one of the things that I like people to look at is if you look at what our re leasing spread trend has been.
It's grown from Q4, 'twenty, one where it was circa 8%.
You know, it's almost double that at 15, 5% and in addition to that increase in the re leasing spread we've been able to generate a higher.
CAGR, where in Q4, we were had a 2% CAGR and we're now at almost a 3% CAGR.
We believe that.
Our.
In line tenants are operating a level.
Where they continue to be successful and that they're operating at a health ratio, where there is additional room, which will allow us to continue to grow rents.
Okay appreciate that and then I'll.
On the inland portfolio, maybe outside of medical or beauty and hair care are you are you seeing any.
Any of the less affluent customer kind of step away or any weakness there I just wanted to better understand what we're reading in the news and what you're actually seeing on the ground.
It's.
It's hard to get a clear picture of that.
I would tell you that we look across segments.
No.
Both.
Primarily on AR.
Household income basis, and we are not seeing that change we are hearing from some of our grocers that yes, we're seeing people theyre seeing some people trade down to private label, they're seeing some people trade down to lower level grocers.
But it is.
At the margin and not not substantial at this point.
Thats certainly one of the things that we look at pretty closely to make sure that we aren't seeing that certain segments.
And being able to adjust accordingly, but it's.
The truth is we're not seeing it.
And.
We'll obviously talk about it when we when we start to see some change in that in that segment I.
I don't know Devin if you have anything to add to that but that's been our experience so far.
Yeah, I mean, Jeff the only thing I would add to that is understand that in our portfolio.
The average household income in the three mile ring is circa 77000. So this is a middle class customer.
That is shopping at our centers, so it's not a a lower end customer.
I just wanted to emphasize that point number one.
And then number two.
The one thing that's under reported from our perspective in the media is the fact that.
Household balance sheets today are in materially better shape than they were pre pandemic.
And the average American consumer has a very strong balance sheet.
They have capital.
That will allow them to continue to spend in a higher inflation environment now.
Can't go on forever, because they will begin to dig into that savings, but the bottom line is.
Employment is at a level where.
People are continuing to find jobs as you know.
One of the big things that fed is concerned about is how strong.
The employment dynamic continues to be so.
The consumer is employed they have a strong balance sheet and therefore, they are continuing to spend and we are not seeing any signs in our portfolio.
Retailers that are beginning to see a negative trend.
From the from the consumer.
I appreciate it thank you guys.
Yes, Thanks, Eric.
Your next question comes from the line of Mike Mueller with Jpmorgan.
Yeah, Hi, I guess looking at the Crossroads acquisition can you give us a sense as to.
I appreciate that you're focused on IRR, but since as to what the going in cap rate was the initial yield and then it looks like you bought it with about 88 or 89% leased rate on it.
Is that still about where the lease rate is today or has there been any progress on that.
Yes.
Thanks, Mike for the question. So we have made some progress on that.
One second floor space that is probably the key lake.
<unk> been to getting that to substantially moving the occupancy as the others are smaller spaces that will.
Where we have activity and we have.
Signed a couple of leases we have not moved it I wouldn't say substantially yet but have I think.
Or at this point, we're ahead of where we had projected BP.
On the leasing pace and we continue to see Las Vegas is having a very strong.
Being a very strong market with really good demand, but again, we're cautious about that but yes.
And in terms of where we bought it.
This was a deal that.
Came back to us.
We increased our.
Pricing from where it had been.
And then.
When we underwrote it we underwrote it pretty tough and ended up getting it.
At a level that was substantially higher I mean, I think it was under contract.
High fives.
And we ended up buying it at close to a seven.
And that got us an unlevered IRR north of benign in our view.
This met our criteria for what.
How we're looking at.
These centers today.
Okay.
Got it okay that was it thank you.
Yes, Thanks, Mike.
And your next question comes from the line of Ronald Kingdom with Morgan Stanley .
Hey, Greg a couple of quick ones, just going back to the acquisitions.
The acquisition market and I'm, just wondering if you could talk a little bit about sort of what the competition looks like today versus sort of six to 12 months ago. For example, like this recent deal that was closed.
At at or where you guys are the only ones just trying to get a sense is still out there.
Who is the biggest compare thanks.
Yes.
So.
<unk>.
I mean the.
There were.
Number.
<unk> leverage buyers, who were very active in the market. Some of them were 10 31 buyers, but there were also just leverage buyers that were.
Very active in the market.
I would say that that <unk>.
<unk> of the competition has gone.
I would say that the public companies have effectively stepped back from the acquisition market. So that's a less competitive part of the market.
There continue to be some.
Yes.
Families that have that are that continue to buy but the level of competition is down dramatically now.
It's early days and it's hard to know.
Because we haven't there has not been a lot of new product coming out in the market. So is there.
It's a lot of this is anecdotal on a very small base, so I wouldn't I wouldn't.
It's early to be making conclusions from it but yes generally I think we are.
The level of competition is is down and it's moved to be much more of a buyer's market.
Then it was.
Months ago.
Hello, Devin if you have anything to add to that.
No I mean, I would just run that.
A year ago.
There were there was the depth to the marketplace and on the contact centers that we are looking to acquire.
The depth was $5 six buyers very close to one another in terms of pricing.
And that number has come down by probably half. So now there is two to three when there was five to six so there is still demand.
And it's still an active market.
But its lets theres less depth to it than there was.
A year ago.
Yes.
Got it and then just my last my last one was just on the Kroger deal I think you guys commented. It's it's it's you view it as a positive for the portfolio.
I think there were sort of talks of.
A potential sale portfolio and so for us that was the view that you guys wouldn't be impacted by that at all or how do you think about that.
Yeah.
Well.
The announced today that they're not going to let the dividend go through this we know that this is really early days to be able to say because what propco looks like.
What the transaction looks like it's just.
There are an awful lot of different variables ways that it could it could move.
Including that closing.
Closing with.
Maybe three or 400 stores in propco.
We.
So we're.
We're kind of I think we're trying to stay very informed beyond sort of the.
The front of the of the information.
As a whole like Kroger and Albertsons don't know where this is going the FTC doesn't know where this is going the courts don't know where this is going so.
So.
I think it's a little early to be making any kind of prognosis of what where it ends up but we're obviously going to stay really close to it and.
If you end up with.
Our goal is to have great operator, running each one of our grocery stores and we think that that will be the outcome of this.
And we want we want to make sure that we do everything we can make sure that that that that happens.
Yes.
Got it helpful. Thank you.
Your next question comes from the line of Paulino Rojas with Green Street.
Good morning, and in your prepared remarks, you mentioned that.
Period collections were a drag this quarter.
It's not evident to me from the number of cycles. So can you piece.
Sure.
Share with us how much that drag was and are more.
More broadly in year to date, how much 'twenty 'twenty rents have you collected.
And.
Is it a reasonable assumption to think.
Zero and additional collections in 2023.
Lisa Thanks for the call John do you want to take that.
Hi, yes, thanks, Paul for the question. So as we look at it we did have additional out of period, but we really feel like we are back to normal.
And when we look at it if I look at the net reserves in the period, both on the three months and the nine months. We've historically said that our bad debt is 60 to 80 basis points I would say in 'twenty two that is getting closer to 50 basis points.
The challenge is that 'twenty one.
The collections were even stronger from 2020, I think when you look to the full year and the impact we do have negative reserves for collectibility, which is kind of what you would typically expect when we think about that for 'twenty two year to date. If you use that 60 to 80 basis points, you kind of get there net of reserve reversals. So when you do that.
It's roughly about about a $2 million difference from from what's there on a year to date basis. When I look forward to 2023, and even the fourth quarter here, we're down to less than $1 million that's on payment plans.
And our collection to those who have been very positive so.
I think I.
I'd expect 2023 to get back to sort of historical levels in the 60 to 80 basis points of revenue.
And.
Oh.
I'm not sure I follow all the details because there you're talking about bad debt and non traded REIT at type curve youre not isolating just.
Collections right.
Yes, the the challenges even if I look at just the third quarter I have movement from stuff that was recorded in the second quarter.
So that's why I tend to look at it over a longer timeframe. So I think on the nine months, that's where I'm looking at it because when you get down to an individual quarter.
I have things that are reserved in Q1 reversed in Q3 things are hitting Q2 released in Q3, so when I say, we're back to normal it kind of ebbs and flows and so when I break apart the pieces and say well what did I have in 'twenty two related to 'twenty, one I would say, it's probably in that $2 million and then as I look to 2003.
If you consider we're back to normal I mean, I think in 'twenty three we will have some reversals from 'twenty two but it's at that point its normal course, the only thing that's residual from.
Previous years is about $700000.
Okay. Thank you.
And then a more detailed.
A detailed question. So you highlight that you are.
Our buyers.
And I'm wondering what assumptions you use when you calculate that IRR. So.
I assume of course, the intermediate growth is driven by the specifics of the properties you have that youre going in cap rate. So what we usually assume for your exit cap rate is the question.
If you approach these more from the perspective of a longer term holder, maybe what do you assume for long term growth and do you have any traditional and.
Functions that you used there.
Yes.
Yes.
They are very project specific.
So.
Yes.
Making any kind of generalizations is probably just not how we really look at it we look at it as we go into the.
Market, where this center is and we underwrite each space to a rent that we.
Fortunately, we're in a lot of these markets. So we know rents and we know what we can get there we underwrite each phase two a rent to a ti to timing in terms of when it's going to either be leased if it's bacon or.
Rolled over when when when their lease term happens.
And then.
From that we generate a very a very specific plan of what we.
It's a seven year plan of what we think we can do to the project.
Sure.
It's both from an operating side, but also from a from a financial side and then in terms of cap rate obviously, the lung we move out the less driver the cap rate is.
But R R.
Rule of thumb is it will it will not go down.
We'll in certain cases expand it based upon what product. We think we have at the end of the turnaround period, and where we think that will be but generally it is at starting cap rate or above and.
We're not we're.
We're not bringing cap rates down in order to get to those levels.
Really all driven operationally and yes.
Fortunately, we do honor.
Very regular basis go back and look at each of our acquisition underwriting compared them to actuals and we across the portfolio over the last three years you look at those properties. They have performed above what we underwrote them too. So we feel really good about that.
Maybe we've been too conservative in our underwriting, but we'd rather be there.
Thank you very helpful.
Yep. Thanks.
Thanks, Paul for the question.
Your next question comes from the line of Todd Thomas with key Banc capital markets.
Thanks.
Just a follow up on the discussion around investments a little bit.
Jeff I appreciate the detail around that Las Vegas deal.
Sounded like a big price adjustment in some of the color you just provided around your targeted irr's.
But just generally how far are the deals that youre looking at today from from sort of penciling out to that 9% Unlevered IRR and and then John can.
Can you elaborate a little bit on your comments around that $1 billion of investments that you've talked about you know over the first three years following the IPO and what the sort of expect in the near term just trying to get a handle on.
The next several quarters really you know thinking about 'twenty three just given the changing market conditions.
Sort of the.
Paul back in the near term that we've seen in terms of investments.
Okay.
Youre thinking about the same things we're thinking about the same.
Same sort of level of uncertainty in the market.
We're pretty confident there's going to be.
Strong opportunity.
We're less confident and when thats going to happen.
And so.
We're taking probably a pretty conservative look in terms of what we think we will buy.
Next year.
But by again.
One of the reasons, we've worked really hard to get the balance sheet, we have and.
Get public and have access to capital was that we.
Want to be able to take advantage of opportunities as they arise and we do think that there will be opportunities in 'twenty three.
And.
We want to we think we're really well positioned to take advantage of those so we will.
Going to stay sort of.
Laser focused on see everything thats in the market, which we do.
And then finding those unique opportunities where they truly are opportunities and where we can get to pricing that is commensurate with the change in the cost of capital that's happened and I think.
<unk>.
Certainly the things that we have closed in the second half of the year, we feel really good about being in that in that position and.
I think we will keep the same discipline going forward and then Mark will tell us.
Yes.
How much of that there is that we can we can buy them and we will.
We'll be very active there.
And.
But again, it's as you said, it's difficult to know where the market's going other than directionally. The cost of capital has gone up and traditionally that's going to put some pressure on them and we are seeing in the market, where say less buyers we're seeing.
<unk> come back to us that we haven't seen for 18 months.
So we are optimistic about that opportunity.
Okay.
And then in terms of the same store results.
No John the rental income was higher by six 7%.
So very strong resolve nice pick up from five 2% last quarter.
I see in the disclosures.
It's a cash number it doesn't include reserves or expense recoveries or lease term fee income or anything like that I think it's just you know minimum rents right you.
Now, what's driving that big increases or is there anything behind that growth other than a leasing and.
Occupancy gains.
Sure. Thanks Todd.
So in that rental income you do have things like temporary rent and percentage, but the answer is that it is the it's the re leasing spreads that we've had in our leasing activity New we mentioned we're at peak in all 10 occupancy it but it doesn't have collectibility reserves like we do have a page in the supplement that Gibbs.
Some additional incremental detail on total revenue that I think can help with that.
Kind of the breakout there, but when we think it is a solid place for us to continue and to grow off of.
This is Jeff.
The part of this.
We probably saw a little bit like a broken record on is there are macro tailwind is as I've talked about in the presentation that our real I mean, this is not something we're making up to explain something I mean, theyre going on they're happening in the market and we're getting the benefit of it and we.
We're we're really laser.
The new sort of laser focus on what we call Ross Ross and Thats rental rate rental renewal rates rent spreads and occupancy.
When you take those three things and you look at sort of why we are market leading on those in those three areas.
It's because the retailers are making the decisions to be in our centers and theyre being at a cost where they obviously think they can make money and thats and that gives us really good.
Renewal rates for the ones, who are there who know what they're doing they know what their sales are they know what they can grow.
Our occupancy levels are are really high so.
They're staying there in our spaces.
Good consistently across the portfolio and then a rental spreads and if you put those three things together.
In what we call Ross you have.
Really good definition of the quality of the assets.
You look at those things they are pretty good.
They have a pretty good correlation with the ability to.
To really grow the cash flow of the business and that's what we're focused on.
Hey, Jeff Todd.
Hey, Todd It's Kevin you had also asked about the $1 billion and as you know.
At the time of the IPO, we committed that we expected to invest.
Acquire a $1 billion of assets in the three year period ended in the second quarter of 2024.
So we're basically halfway through that period of time, and we've acquired $400 million of assets to date. So we are.
On track reasonably.
In terms of hitting that metric.
We'll continue to be disciplined and as you know the market's evolving as Jeff has just indicated but the point that John was making in terms of our capacity is we have the ability today to acquire an incremental billion dollars given our balance sheet flexibility because as you know we're.
Only five four times Levered number one number two we generated $100 million a year free cash flow post dividends.
So we have the capital capacity to acquire an incremental billion dollars of assets and stay within our leverage metrics before needing to go back to the equity market. So number one we're on track to hit the $1 billion guidance that we gave at the time of the IPO and we believe we will do that the timing is on <unk>.
Certain given the uncertainties in the market, but number two we've got more than enough balance sheet capacity.
To hit that metric. So that's the reason why we believe that that metric is one that we will be able to achieve.
Okay, Yeah, no that's helpful.
I appreciate that follow up.
And then John .
Back to to rental income, though for a second and can you remind us whether it is some of the D. A.
Ground up and redevelopment that's taking place within the same store centers is that you know a potential contribution is that is that impacting positively impacting the same store is that NOI comes online.
It is that's right.
Okay.
What's the contribution from <unk>.
Development and redevelopment look like for the full year within the revised same store guidance.
So I believe when I look at the revised I believe its about 100 basis points of our growth.
And we are very optimistic about our continued.
About the pipeline that we disclosed and we have I should say the projects. We have in progress we have not disclosed our pipeline, but we have.
Development because of the.
Just the positive tailwind we have there I mean, obviously our occupancy is at record high and we do this in a very controlled way that allows us to expand our footprint and redeploy capital with great returns. So we think that this can continue our growth into the future.
Okay, Great. That's helpful and just one last one for me the transaction expenses in the quarter about $3 7 million.
What is that attributable to I guess why why are they being.
Expense at that level, I guess, if crossroads or the Las Vegas deal.
I know you know.
Some of the accounting changes.
It's back and forth over the years, I guess, but I thought deal costs were capitalized. So are these deal related costs from deals that are not being completed that youre pursuing and I'm. Just curious you know what.
What that is it seems like a pretty big number.
Sure I'll take John you want to take any.
Yeah. Thanks, so on that so a component of it is we.
Youre right capital on acquisitions that we closed we are able to capitalize those we did have transactions that were in pursuit of that given the changes. We terminated. So we did have have assets that we determined that based on the moves we did not continue with those so there is a component of that but then we also do have some.
Expenses that we've had each year that we anticipate will be declining.
Related to our IPO that is just amortization from that.
Okay.
Alright, great. Thank you.
Thanks, Doug.
Again, if you wish to ask a question. Please press Star then the number one on your telephone keypad.
Your next question comes from the line of Tayo Okusanya with credit Suisse.
Hi, yes, good afternoon, everyone.
On one of the on the earnings calls of one of your peers.
They were really kind of stressing their higher demographics, that's something that's going to be a key differentiator in kind of a slower economic backdrop.
Curious, how you guys kind of think about that.
Typically how you know in a slower economy.
Portfolio may perform.
Granted I understand your focus on macro for the shopping again, you're more of a middle class shopper.
With the demographics, but relative to the.
The affluent end of the of the market. If I may use those words with how do you think you end up kind of performing against that backdrop.
It is.
A great question and we have kind of been.
Talking about this for a long time and what.
What our belief is that we are centers service the average to.
Above slightly above average American and we get them Theyre necessity goods close to their home that's what our properties do.
And.
That customer is.
It's where publix and Kroger.
Albertsons, that's where they make their money.
And were very aligned with them on that and when you look at.
That segment of the business, it's often confused with a lower end customer.
And the lower end customer is.
Sure.
They are not at our centers.
That's the 30.
$50000 median household income not the 77000 median household income and this is <unk>.
Most of America and that is the way we look at it and most of America shops at a Kroger Publix Albertsons.
Albertsons.
And does a necessity based.
Shopping somewhere within three miles of their house and.
<unk>.
That customer today has a.
A much stronger balance sheet than they have had.
Going into any recession that I can remember.
So they've got a strong balance sheet.
We have a really low unemployment rate. So you've got you kind of are looking at the thing that is most.
Difficult on the Middle class has been there when they can't get a job and that is not the issue today it.
It may be.
And I think the fed is trying to make it more of an issue.
But to date the only issues places we're seeing that are in really on the technology side, where youre seeing significant.
Layoffs and reductions from a a very rapid pace. So.
When we when we look at our centers.
Kind of.
What we really believe is that with the tailwind that we talked about in the presentation in our markets.
And the stability that our centers and their necessity based bring in.
More difficult time.
Our centers really do provide more alpha with a lot less data and Thats, we think why.
At this point in time it's.
Great place to be with your capital because you're you're really you're hedging your downside and giving yourself to the upside.
That's actually very helpful. Thank you.
Yes. Thanks.
Your next question comes from the line of Craig Schmidt with Bank of America.
Yes. Thank you.
I know we've been talking about the progress on Albertsons merger, but what happens if the merger between these two doesn't go through what does that mean I mean.
We hear that the mergers.
Trying to help them compete against Walmart and Amazon in that some of the investors in Albertsons are looking at a way to exit stocks.
What are your thoughts about the merger doesn't go through.
Well.
I mean, I think you mean my great. Thanks, Thanks for the question.
My take on it is service is going to drive the bus they're going to be the one who decide what the outcome is.
Post lawsuit.
When they if they lose the lawsuit and the merger does not go through.
If that if that does happen.
The playbook is has been pretty clear they want to sell and get out of.
<unk>.
The investment so.
Sure.
We have heard rumors that there are other buyers there were other buyers in the discussion.
That maybe they go back to them.
Maybe they break the brake.
The company up and sell it off regionally that's another another possibility.
There is a possibility they say look we're just going to hold us long term and we're going to keep.
Keep keep.
Keep bleeding.
Shares into the market and get out that way.
So those two are public execution, it's really uncertain for us Craig.
<unk>.
We.
I would say that there is that's probably.
Our.
Rio where they actually sell to another somebody other than Kroger is probably.
Certainly for US one of the best outcomes.
Because now youre, introducing another competitor into the market, but with a really strong operator, who would put reinvest in the stores and just so that I mean.
That's a really good scenario for us.
And.
And then the breakup if they break it up and sell it in pieces that'll be that'll be regionally, which who buys what.
I do think they have the opportunity to do that.
But.
We.
<unk>.
Like even the announcement today I mean, this is going to be a saga that is going to go on for 18 to 24 months easily.
<unk>.
We'll know more as things get closer, but as I like to say that the biggest decision about this whole thing is when they decide which judge is going to oversee the case.
Yes.
In.
Probably in Washington D C on the.
The FCC is challenging.
That's that who that judge is going to be probably the most important part of all this.
Not all of the other pieces that we are.
Yeah that we're focused on and talking about.
Great. Thanks, Thanks for those comments.
And then just.
Thinking about the more recessionary resilient portfolio that you have does this mean that your sales will be flat, while other formats may be negative or do you think <unk> can actually see stronger sales.
Foot traffic in 2023.
Okay.
We believe that.
We can continue to see stable traffic, probably increasing cost per basket so sale.
Sales going up probably not we don't see a ton of increased traffic because I think things will probably not.
Probably move as much in that direction.
So that would be an increase that would be increasing sales.
We could.
But we would say that that's a likely outcome for for 2023 now if.
The fed has too.
Slammed the brakes on.
Harder and harder and harder and we don't see to be able to handle inflation it doesn't seem to be now.
Then it's a different story you will I mean.
The customer will.
<unk> their habits.
Our view is the customers most likely to change habits when employment changes when they don't have the certainty in their job.
That's what it tends to move even more in our mind the balance sheet, it's like when they if they've got a job there. They will continue to spend maybe at a slightly reduced rate, but they'll continue to spend so I would say that our centers grocery sales will be up in a recession and they historically have been.
Our small stores will be stable.
In terms of sales that's our guests.
Okay.
Thank you.
Yes, Thanks, Craig.
This concludes our question and answer session I would like to turn it back to Jeff Edison for some closing comments.
Great. Thanks, Thank you operator.
Our third quarter results continue to highlight the strength of pickles focused and differentiated strategy of owning and operating small format neighborhood centers anchored by the number one or two grocer in the market. This drives high recurring foot traffic and neighbor demand and results in superior financial and operating performance, which we have.
This quarter, our experienced and cycle tested team our integrated operating platform a grocery anchored strategy placed pico in a strong position. Despite notes and that is even despite the uncertain macroeconomic environment, our fortress balance sheet and liquidity will allow us to take advantage of the opportunities as they arise.
On behalf of the management team I'd like to thank our stockholders associates and importantly, our neighbors for their continued support.
Have a great day and great weekend, thanks for being on the call.
Thank you for participating you may now disconnect.
Yeah.
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Okay.
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