Q3 2022 Site Centers Corp Earnings Call
Good day and welcome to the site centers reports third quarter 2022 operate operating results.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Monica too Crazy our head of Investor Relations. Please go ahead.
Thank you operator, good morning, and welcome to site Centers' third quarter 2022 earnings conference call. Joining me today is Chief Executive Officer, David Lukes, Chief Financial Officer, Conor Saturday.
In addition to the press release distributed this morning, we have posted our quarterly financial supplement and slide presentation on our website at Www Dot site centers Dotcom, which is intended to support our prepared remarks during today's call. Please.
Please be aware that certain of our statements today may contain forward looking statements within the meaning of the federal securities laws.
Forward looking statements are subject to risks and uncertainty and actual results may differ materially from our forward looking statements additional information may be found in our earnings press release and in our filings with the SEC, including our most recent reports on Form 10-K and 10-Q. In addition, we will be discussing non.
GAAP financial measures on today's call, including F. F O operating <unk> and same store net operating income reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's quarterly financial supplement at this time. It is my pleasure to introduce our Chief Executive Officer, Dave.
Good looks.
Thank you Monica good morning, and thank you for joining our third quarter earnings call. We had another very productive quarter with results ahead of budget significant leasing volume, despite having less available space a number of asset sales with proceeds used to continue to invest in our convenience thesis and our balance sheet remains in great.
Shape with debt to EBITDA in the low fives, which remains well ahead of the peer group in the sector overall.
Leasing demand continues to be very strong with national tenants looking to expand their footprints in the wealthiest suburban markets, where we operate and existing tenants looking to lock in their locations with renewals.
This activity along with execution from our leasing team resulted in a 60 basis point sequential increase of our portfolio lease rate to 95%, which is consistent with our commentary and goals for the year.
I'll start my comments for the quarter shift to leasing then move to transaction activity.
As I mentioned third quarter O S. S. Though was ahead of budget, primarily on better operations, which Conor will provide more details on later.
Despite no shortage of headwinds our tenant coordination and construction teams continue to do an amazing job working with tenants to get open ahead of schedule, which drove part of our outperformance this quarter.
Moving to leasing as noted demand and activity remains very high in the third quarter with $1 5 million square feet leased which is the largest amount of total square footage. This company has leased in five years, despite a materially smaller footprint.
In terms of new leasing we had another quarter of over 200000 square feet of new deals with strength from national shops as a standout.
Our shop lease rate was up 180 basis points sequentially and 520 basis points from the third quarter last year.
Quite a bit of this leasing was in our tactical redevelopment pipeline with deals from Cava, Starbucks Sweet Green Vision works dry bar club champion and a few other first of portfolio deals expected to be signed in the coming months.
The project is broken out on our tackle development pipeline that are under construction are now 84% leased with deliveries beginning this year into 2024 with immediate expected accretion.
Looking forward, we have another 250000 square feet at share in lease negotiations, which we expect to be completed over the next two quarters with activity from a mix of national publicly traded credit tenants.
Based on the trending strength of small shop leasing and considering our current pipeline of Unexcused lease negotiations, we believe that the lease rate on our portfolio will continue to decline marginally through the end of the year absent bankruptcies.
That said the absolute level of activity will moderate as we simply have less space to lease.
Shifting to transaction activity, we had another quarter recycling capital highlighted by the sale of the previously announced Madison pool, a portfolio for $388 million net.
Net proceeds were used to pay down debt and reinvest in convenience assets in Atlanta and Phoenix.
We also Opportunistically sold one wholly owned property in Columbus at a cap rate in the 6% range and used the proceeds to pay down debt and to repurchase stock at a double digit F O yield and a mid 8% implied cap rate.
The largest investment this quarter was the acquisition of a four property portfolio for $23 million in Phoenix, Arizona, which is a top 10 market for the company and a market we've transacted in a number of times in the last year.
The properties are 100% leased to a mix of service and quick service restaurants, with 76% of the tenancy national credit and a drive through units at all four properties.
We underwrote a five year NOI CAGR of 3% plus with minimal Capex, which is consistent with our existing convenience portfolio and one of the key attributes of our thesis.
Moving to Atlanta, we bought another convenient asset in our largest market and remain excited about the potential for more opportunities to grow our portfolio in this key MSA given our presence on the ground.
The property is located just a few miles west of Herman Springs, which was another convenience asset we acquired in 2021.
Going forward, we remain encouraged by the unique opportunities in the convenient sub sector that are a direct result of local relationships formed over the past several years.
Future acquisitions would allow us to continue to grow our portfolio of properties with strong credit and low recurring capex located at high traffic intersections within wealthy suburban communities.
Because the cash flow growth profile and risk adjusted Irr's of this property type of elevated with rents accelerating with inflation. We will continue as we have in prior years to utilize retained cash flow and proceeds from recycling fully stabilized assets into the sub asset class when the right opportunities arise.
The decision is always will be measured against other capital allocation options that we have at the time and consistent with our goal to generate sustainable O F O and <unk> growth.
In summary, we're pleased with our portfolio in the current strength of operations, our investments, which have increased our long term growth profile and future investment prospects, which we believe will create stakeholder value while prudently managing our balance sheet.
Thank you to the entire site centers team for another very productive quarter and with that I'll turn it over to Conor.
Thanks, David I'll comment first on quarterly results discuss our revised 2022 guidance and some of the moving pieces heading into the fourth quarter in 2023, and then conclude with the balance sheet.
Third quarter results were ahead of plan as David mentioned due to a number of operational factors, including earlier rent commencements and higher occupancy and higher overage and ancillary income.
These operational factors total about one per share relative to budget.
The quarter also included $200000 of Unbudgeable straight line rent from the conversion of cash basis tenants and $300000 from payments and settlements related to prior periods.
In terms of operating metrics the lease rate for the portfolio was up 60 basis points sequentially and 270 basis points year over year with our lease rate now at 95%, which is well above the companys pre COVID-19 high watermark of 94, 3% back in 2017.
Highlighting our leasing volume in backlog, we had over 250000 square feet of new leases commence in the third quarter, representing over $5 million of annualized base rent.
Spite that yes, or no pipeline was effectively unchanged at $22 million as new leases were added and offset the impact of Commencements. These.
These signed leases continue to represent over 5% of annualized third quarter base rent.
Over 6%. If you also include leases in negotiation in our pipeline.
We provided an updated schedule on the expected ramp up of the pipeline on page six of our earnings slides.
Same store NOI grew one 1% in the third quarter with the uncollectible revenue line item, a 160 basis point headwind to year over year growth.
Included in Uncollectible revenue this quarter were $510000 of reserves related to unpaid revenue from cinema World as a result of its recent bankruptcy filing.
Moving onto our outlook, we are raising our 2022 <unk> guidance to a range of $1 16 to $1 17 per share.
Rent Commencements uncollectible revenue and G&A are the largest swing factors expected to impact fourth quarter results and where we end up in the revised full year range.
We are also raising expectations for fee income to the top end of the prior range and leaving same store NOI guidance unchanged, which we believe is prudent considering the macro environment, despite third quarter outperformance versus budget.
To date outside of the Cineworld bankruptcy, we've had no on budget at fallout or other bad debt headwinds.
Details on same store NOI or in our press release and earnings slides.
For the fourth quarter of 2022, there were a few moving pieces to consider from the third quarter.
First as I previously mentioned, we had $300000 of nonrecurring uncollectible revenue and $200000 of nonrecurring straight line rent in the third quarter.
Second the Madison asset sold in July generated almost $200000 of NOI, I chair and almost $750000 in JV fees in the third quarter, which implies total JV fees of about $1.8 million for the fourth quarter.
Lastly, the third quarter included $1 $3 million of lease termination income, which is about $1 million higher than our trailing two year quarterly average.
Summary of these factors is on page nine of our earnings slides.
Moving to 2023, we are not providing guidance at this time, but wanted to provide clarity on a few line items heading into the new year.
First on fees, we expect JV in RV ice's to total about $5 million with minimal contribution from RBI.
This assumption reflects activity to date, along with additional expected JV asset sales.
Second we would expect G&A to be about $50 million.
Third 2022 year to date results include $2 $8 million of nonrecurring reserve reversals and based on remaining a are on the balance sheet, we expect reversals to be relatively muted in 2023.
And lastly, we have three Cineworld Regal.
Regal cinema locations with total annualized base rent of $2 $9 million as of September 30th.
None of the leases have been rejected to date, but it is likely that we will recapture at least one location based on our initial conversations.
The three leases are generally evenly split in terms of rent and recoveries across our total exposure.
Finally, ending with our balance sheet.
At quarter end leverage was five three times.
Fixed charge remained over four times and our unsecured debt yield was over 20%.
In the third quarter, we repaid the debt associated with the massive pool, a portfolio as part of that sale and swap the $200 million term loan to a fixed rate for the remainder of the loans term at an all in rate of three 8%.
Pro forma for these transactions. The company has just $87 million of unsecured debt maturing through year end 2023 eight.
$870 million of availability on our recently recast line of credit and.
And floating rate exposure is just 6% of total debt.
This leverage profile and significant capacity provides substantial liquidity and allows us to take advantage of potential future opportunities as they arise and to drive sustainable growth with that I'll turn it back to David Thank.
Thank you Connor operator, we're now ready to take questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble our roster.
Our first question comes from Craig Mailman from Citi. Please go ahead.
Thanks, Good morning, everybody.
Maybe just touch on the leasing you know you gave some good detail there.
Piece of them.
Philosophy actually did improve quarter to quarter kind of led by renewal.
There seems to be still some consternation in the market about the headlines you see among the retailers and the kind of the steady fundamentals, we're seeing among the landlords. So I'm just kind of curious if you could give kind of some updated color on what you're seeing.
And also just curious.
How much if any.
Think of demand is being pulled forward this year with a higher piece of good news.
Okay.
Craig It's a little hard to hear you. So I'll try and answer that and then you can let us know if we miss any pieces of it but.
The leasing activity just remains to be very strong I think we've had a number of <unk>.
People speculate when that's going to slow down.
Some of the macro concerns about the consumer or inflation or.
Pending recession is going to.
Kind of put an abrupt halt to leasing but at this point, we're just not seeing a slowdown in demand I would say that we're seeing a slowdown in supply I mean R. R.
Our properties at this point at 95% and I think we and we mentioned in the prepared remarks, the additional square footage. The center negotiations now feels like it has continued to move higher through the remainder of the year I guess, the only color I can give you on that is that it feels like in the wealthier suburban communities, where we operate.
There is two things that have come out of the pandemic that remained very clear in the retailers' minds, one is the convenience matters.
And that's either from in store.
Personal trips that are kind of short duration and quick trips from your local.
Community and the second is that you know the larger retailers are using their store fleets for fulfillment.
And so they're trying to get as much square footage out into these are wealthy suburbs as they can and it's just not that much space left so I think part of that is prompting them to action, where they see rents rising and they want to secure space and 10 year leases.
And that's why most of our leasing activity is with national credit tenants and we just haven't seen that much demand and we have an executed many leases with local small shops, it's mostly been national chains.
That makes sense and just one quick follow up on that you know Congo went through the sort of world impact and you had mentioned that there could be some room. So lease rate going forward absent any bankruptcies could you just guys just give us a sense of how you feel about some of the tendency of portfolio.
<unk> been in the news, whether it's bed bath beyond or others.
And what type of reserves you may have embedded right now are or how we should think about maybe for 'twenty three with bad debt.
Hey, Craig it's hotter again, you're you're hard to hear so let me know if I Miss them.
Any piece of his response on.
So in a world I said in my remarks, we expect to recapture one of the three and the and the revenue is fairly equally split between the three locations. The reserves taken in the third quarter were entirely related to the unpaid rent from the third quarter or unpaid revenue I should say excuse me we have depending on cash basis. Previously said there is no additional.
M. A R head or bad debt hit from from that specific kind of ask for the other you know tenancy you named and in some other names that are on folks walk close you know we can't speak to individual tenants I would just tell you we feel really good about the quality of our portfolio the level of demand we have in.
We've had a period before we've had bankruptcies and I think if you look back in the last five years with this portfolio and our track record we've been able to successfully backfill those locations at higher rents with better tenants. So if if there is a uptick in bankruptcy obviously its outside of our control, but we feel really good about the backfill prospects and AR and AR and the portfolio in general.
And then just comment on slide 23, a happy to address that as we get closer to the.
So next year and provide guidance.
Thanks I appreciate it this is a Nick Joseph here with Craig just one more.
Do you think about deploying capital and have your return hurdles adjusted given the change in your cost of capital and then how do you think about that in terms of either share buybacks or acquisitions from here.
Well there certainly our return thresholds have gone up.
Gone up with commensurately with the borrowing costs I think that.
There's not a ton of deal flow out there. So it's hard to say where cap rates are settling in and things that move so fast, but we have been buying at higher cap rates. This past quarter than we were two quarters ago.
With respect to the allocation decision of capital as to whether we're buying assets or stock or paying down debt. It really depends on the source.
And to date, we've really been using proceeds from asset sales and we've done a little bit of everything and that is a strategy that will likely continue.
Thanks.
Thanks, guys.
The next question comes from Sameer <unk> from Evercore. Please go ahead.
Hey, good morning, everybody, David you mentioned the 250000.
Square feet of activity activity, that's under negotiation.
Maybe walk us through kind of any changes you're seeing in those leases versus maybe what you bought were signed over the last six months.
Any pushback, you're getting from those potential retailers, whether it's higher T. I just find it.
See what given altered the higher clause and potential slowdown out there.
What are the concerns they become kind of come.
Ford.
And those leases because of negotiations.
Hey, Samir if you look at if you look on page 13 of our Sop, which has got the.
The net effective rent category, you'll see that one of the changes over the past years that we've kind of shifted from more box leases to more shop leases and I think that's the trend that's going to kind of drive us through the remainder of the year because we've we've really leased all of our larger square footage locations. There's very few left and so the demand right now is coming from Nash.
Shops, those leases are less of a negotiation than the larger anchor leases and so I don't think the terms have changed very much certainly the cost of building out a space has gone up in the past year.
But rents have also gone up so I think if anything we're just starting to see the speed at which some of these retailers want to get into local shops is has improved and that's kind of the only trend I can come up with I really haven't seen a lot of change in terms.
Even the request for Ti dollars hasn't gone up as much even though I think the spaces are a little bit more expensive.
Got it that's it for me thanks, guys.
Okay.
The next question comes from Todd Thomas from Keybanc Capital markets. Please go ahead.
Hi, Thanks, Good morning, David just following up on the topic around capital deployment.
Deployment I'm just wondering if the market for dispositions is still there to raise capital.
For reinvestment in new properties or buybacks and if you could just talk a little bit more about the appetite for stock buybacks in the current environment with.
The share price below the level at which you repurchase shares at.
In September .
Well on the disposition side. It is kind of interesting you. You'll remember there is one important piece of the transactions world in this country and that is <unk> 31, and there have been a couple of situations, where a 10 31.
Positioned buyer has called us and talk to us about other things that we might want to sell and so I do feel like there's one off activity with smaller or mid sized properties.
Even in the brokerage world you haven't seen a lot of large portfolios marketed right now, but I do think there's still a lot of activity kind of under the covers where youre getting 10, 31 money that has to be redeployed quarter to quarter and in certain cases, thats an opportunity for us.
To recognize.
If you would say yesterday's prices.
With today's transaction and even if it's just a little bit taught it gives us an opportunity to have some recycling the decision as to whether we're buying assets or paying down debt or buying stock I think has everything to do with the sourcing of those funds and so the way we thought about last quarter.
Notwithstanding the fact that the price at which we bought back stock was higher than today's price.
But the cap rate at which we sold the asset and then repurchase stock was awfully accretive and so I think we felt comfortable with that trade because the cost of that capital is a mark on the asset youre selling and not necessarily where the stock is trading that day and Todd the only thing I'd just add to that is we don't need to sell assets to buy assets. We think it's prudent at this point in time.
<unk>, we still have $40 million to $50 million retained cash flow and other sources of liquidity so to David's point. It we think it makes it makes sense right now to match fund, but it's not a requirement given the balance sheet position we're in.
Okay, and then you did mention though I mean, it seems like you're still very very much focused on on acquiring convenience oriented centers.
You've been acquiring over the last several quarters here you know what I would think that that market is a little bit more fragmented in general and might lend itself well to this environment.
Maybe not a lot of distress at the asset level, but do you expect to see some.
Financial distress, perhaps begin to surface.
The longer this environment persists and is this an opportunity for you to be a little bit more aggressive maybe a catalyst.
For a joint venture arrangement or a partnership or do you do you think that you pause and sort of await more visibility and slow down a bit here.
Well to your first point.
I certainly agree that it is a fragmented sub asset class the dollar value of the transactions tends to be smaller and I think we've seen that the movement in cap rates up and down happens a little bit faster simply because the dollar values are smaller.
Our hope is that we're going to find even more better inventory.
Then we've seen to date when peoples mortgages mature and the cost of refinancing is high and therefore, a sale is more likely to happen I know John sitting next to me here and he is still you're still reviewing an awful lot of deals on a weekly basis and so I think we can be very selective.
But the pricing of those seems to have been moving in our benefit.
To your second question on joint Ventures, I think at this point given our capital position, we feel pretty confident that we're finding deals that we like and we can we can decide at that time, whether we want to buy and continue to grow.
We are open minded about joint ventures, but if you look at the reduction in Jbs. This company in the last five years the quality of our earnings is just much higher than it was five years ago and a lot of that is because it's wholly owned assets that we bought as opposed to.
Legacy joint ventures, where some of that income is coming from fees.
Okay got it and just lastly, Conor you gave a little bit of color on 23, which was helpful. But.
Any any thoughts about the may 'twenty, three maturity $87 million at about three 5% how should we expect that to be.
Repaid or funded refinance I guess, yes, it's a good question Todd I mean, thankfully, we still have seven to eight months until that maturity and to your point thankfully, it's a stub bond it's not a it's.
It's not a full size bond. So look there are a number of options to date, we just recast our line of credit so in a in a worst case scenario. We've got five years of term there and we could put on the line. That's obviously not a sustainable long term solution, but other solutions are we are approached the hygiene market, if we see a little more stability or secured debt ratios.
2%. So you know we could go down the secured debt route if if we need be so there are a lot of options to your point, it's quite a bit of ways and it's a stub bonds thought.
It's not significant relative to enterprise, but we've got a lot of options and then the last one was just retained cash flow and paying that down over the course of the year. So TBD until we get closer to that date. The good news is we got quite a bit of time and we'll address it as we see fit at that time.
Alright, great. Thank you Youre welcome to do that.
The next question comes from Alexander Goldfarb from Piper Sandler. Please go ahead.
Hey.
Good morning, good morning, So two questions David.
Mentioned upfront that you were surprised how strong leasing has been in the same breath said, hey look at some point expect overall leasing volumes to just moderate given we're running out of space. So two parts to that one small shop is still sort of in the in the mid eighty's. So it seemed like there is still plenty of runway there.
But even still presumably as you run.
They're happy with the dividends and the collection rate through Covid I think if you look worldwide. It real estate company that can deliver a 7% dividend through COVID-19.
<unk> seen as a pretty secure investment so I don't see any change in the structure of that joint venture in the near term.
Thanks Alan.
Got it helpful and then going back to the question on sort of the maturity next year I know Conor you mentioned theres a lot of options, but just can you just remind us like where could you issue sort of longer 10 year paper today, or just give us a sense of where the market is today.
Yeah. It's a good question, Ron and it really depends to your point on the day.
I'd say the range, we've been quoted from from working with our DCM desks or kind of across the banks. We work with has been anywhere in the last six months between five and 7% and so kind of my earlier response it depends on the day. So thankfully we've got you now.
Extreme flexibility or optionality when it comes to secured debt the <unk> market the term loan market or whatever it might be we've shown kind of proven access to all three of those markets over the last five plus years and so again, we're talking about a stub maturity. That's you know $87 million relative to a five plus billion dollar enterprise value.
Again, we will address it as it comes due in May of next year, but when we think about our kind of risk to the system, which is a company that I've put down the low end of the risk spectrum.
Great that's it for me thanks.
As a reminder, if you have a question. Please press Star then one.
Our next question comes from Mike Mueller from J P. Morgan. Please go ahead.
Yes, hi.
I know, it's not a lot of volume, but can you give us a sense as to what the cap rates were on the third quarter acquisitions and then.
Second question the commenced rate on same store is about 91 five if we look at your signed but not opened a schedule where would that take your commenced level.
Do you think by the end of 'twenty three.
Hey, Mike, It's Conor I think last quarter, we talked about the blended <unk>.
Cap rate on acquisitions over the course of the year was I think just just under five and a half and I think it's fair to assume with the third quarter acquisitions, it's modestly higher than that I mean, it's a small it's only $31 million in the 336, we bought to date to David's point, though we are seeing some some upward movement. There. So I think it's fair to assume are going in cap rate. If we were to buy something going forward will be higher.
Than that and obviously more conducive to our cost of capital more in line with our cost of capital to kind of Craig in next question.
I missed the second question I think it was related to 'twenty 'twenty three so I'll think of a Dodge, but I can't recall the second part of the question was.
It was it was looking at your commenced rate of 91, five and if we follow that signed but not open schedule, where would that put your economic occupancy, but yes. If you look on page six of our slides Mike We've got the commencement schedule for the <unk> pipeline by year, we obviously will break that out by quarter in February as we as we provide more disclosure on the ramp up of 2023.
Hi.
Hard part is the <unk> pipeline is in dollars and your question around the lease rate and the commensurate isn't in square footage. So there's a little bit of a mismatch, but but I would point you to page six and think of that as your guide over the course of 'twenty three 'twenty four and they also know commencement deliveries.
Got it and then maybe going back real quick to the cap rate question again, if we if you think about I know volumes are lower and you're just you're not seeing all the data points, but if you think of your on your comment where you are seeing higher you had been seeing higher cap rates would you say that the cap rates have been moving up.
Kind of in lockstep with what you've seen rates move up or do you think cap rates have moved up less than what you've been noticing on the rate side.
Mike I'll answer that but warn you that we're talking about pretty small volume of transactions.
10, 20 $30 million is not going to really be a great indicator, but I think it's fairly easy to answer that rates have moved up much faster than cap rates have.
And I don't think thats going to surprise anybody because rates have moved up.
Fastest in 40 years, so I think it just takes a little while for.
For cap rates to reset the thing to remember is when we're buying convenience assets about a third of the rent roll matures with no options in the next five years, so even though the cap rates are moving up marginally the market rents are also moving up faster than anticipated. So I think the unlevered IRR. So the ones that are growing a little bit faster than going in cap rate.
Got it okay. Thank you thanks.
Thanks, Mike.
The next question comes from Floris Van Dijk come from Compass point. Please go ahead.
Hey, guys good morning.
Wanted to get your comments on what you think.
Talk a little bit about the the Kroger.
Britain's merger.
Transaction, what that could mean in terms of the impacts with the shopping center sector and for the for the listed sector as well.
Good morning, Floris I will suddenly Dodge that a little bit.
It feels to us like many times when there is retailer mergers and you end up getting in a study of overlap.
We've only got one property that I think even has an overlap with multiple brands.
I think our data points are pretty small on deciding what that means to the overall sector, but.
I can kind of sum it up by saying that anytime there is a merger of two large entities like that you.
You do have to wonder whether store closings are a part of that.
Or the outcome and I think it remains to be seen.
Yeah, No Cooley youre less impacted than some of your peers I just I was curious to get your take on what you thought this could mean for for the grocery.
Sector, and frankly for tenant exposures as well.
I will learn with you overtime will say yeah of course, I would just say from our perspective, we're excited about the majority of our exposures to Kroger I mean, they've obviously done a great job investing in their stores in last couple of years or last couple decades excuse me. So to Davids point, we think the impact to US is it's fairly insignificant in again.
To David's point the overlap in your thinking about overlapping stores, we feel better about owning the stores that have been recently invested and then the ones that haven't.
Great maybe just a couple of other.
Minor points here, but I noticed your your operating margin actually dropped marginally even though your occupancy was higher.
Is that simply a impact.
The impact of the high the rise in operating expenses and not being able to claw that back in your in your recoveries and where do you see and how has that changed how you think about.
Negotiating new leases with your tenants, So hey, Floris, it's Conor it's a great question and I had the exact same question when I saw the first drop if our operating metrics for the quarter. It related to some non recoverable expenses that I would call. The majority of which were onetime in nature related to ancillary income.
There's a mismatch in the income and expense. So I would expect that the kind of operating margin to continue to trend higher as it has in the last two years, especially when you think about commencements and obviously tenants paying recoveries as they as their leases come out. So I think the majority of that was a kind of a third quarter blip and would point you towards kind of the longer term last couple of years and trailing 12 months.
<unk> is a better indicator of where we're going from a margin and a recovery percentage perspective.
And then kind of I guess last question maybe on perimeter points are you I know you sold.
A portion of that I think for $35 million.
Your redevelopment pipeline only has I think a $1 3 million a project on the books for <unk>.
Similarly, the redevelopment of the remainder of that asset.
Which you know gosh, it could be quite quite attractive.
Good location.
Is going to be larger can you guys give us any more color on.
The latest thinking and developments there.
Perimeter point has been an asset that we have.
Liquid for the last couple of years floors as we.
I had a couple of tenants move out.
Not renewed several tenants and we've tried to get the site in a liquid state, but we have not sold any of that piece of land I think in our opinion. That's a piece of property that is likely to be split up and sold two mixed use developers, but we have not we have not consummated any transaction there.
Okay got it thanks.
Again, if you have a question. Please press Star then one.
Our next question comes from Linda Tsai from Jefferies. Please go ahead.
Hi, good morning.
What's your overall expectation for Capex for next year, I know for a while youre expecting elevated capex, but how your occupancy is getting pretty cool, but then we're also in an inflationary environment. So any kind of general thoughts for Capex in 'twenty three.
Connor it's a good question look I mean, the leasing volume remains elevated and there was a lag obviously between when we sign a lease and when we spend the money and generally it's usually a fair to assume half. The cash is spent before the commencement and half post commencement. So I would expect capex to remain kind of elevated versus certainly in 19 and 20.
'twenty in particular, given the lack of leasing that occurred then but we'll provide more disclosure on that was 123 earnings or sorry, excuse me guidance. The only thing I would just say as you know even this year with our heavy spending we had call it $40 million plus of free cash flow just given our payout ratio, even if if capex spending next year, which I think it's fair to assume I think it is.
Also fair to assume that we have a decent amount of retained cash flow just given the payout ratio today. So TBD.
TBD, we'll provide more color on that with our February results, but I would expect it to remain elevated just given the amount of activity we have going.
Thanks, and then just on bad debt you highlighted regal in the presentation.
There are any kind of general thoughts on bad debt levels for 'twenty three.
Yeah, Yeah. It's a good question look I don't think it's gonna be a source of income like it was or has been for the year well like I said some of the Capex question, we'll provide more guidance, but I certainly don't think it will be a source of income given the amount of a are we have left on the balance sheet and just the amount of kind of the macro headwinds we are seeing but TBD on what that number looks like.
Yeah.
Thank you.
Okay.
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to David Lukes for any closing remarks. Thank you for joining our call and we will talk to you next quarter.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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