Q4 2022 Site Centers Corp Earnings Call
Good morning, and welcome to the site centers reports fourth quarter 2022 operating results conference call.
All participants will be in a listen only mode should you need any assistance during the call. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note that this event is being recorded today.
I would now like to turn the conference over to Stephanie routes do Perez. Please go ahead.
Thank you operator, good morning, and welcome to the site centers Fourthquarter 2022 earnings conference call. Joining me today are Chief Executive Officer, David Lukes, Chief Financial Officer Conor Kennedy. In addition to the press release distributed this morning, we have posted our quarterly financial supplement and slide presentation on our website at www.
At site centers, Dotcom, which are 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. These forward looking statements are subject to risks and uncertainties 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 of you.
<unk> report on Form 10-K and 10-Q.
In addition, we will be discussing non-GAAP financial measures on today's call, including F. F. L. 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 todays quarterly financial supplement.
At this time it is my pleasure to introduce our Chief Executive Officer, David Lukes.
Good morning, and thank you for joining our fourth quarter earnings call.
The fourth quarter concluded a very productive year for site centers with results ahead of budget another quarter of elevated leasing volume, despite having less available space. The opportunistic sale of three wholly owned properties with pricing well inside of where are we repurchased stock and a balance sheet that remains in great shape with full availability on our line of credit.
Minimal near term maturities and debt to EBITDA in the low fives, which remains well ahead of the peer group in the sector overall.
I'll start with detailed comments on leasing and then move to transaction activity before handing it over to Conor to give more details around the quarter and 2023 guidance.
In the fall of 2020, we saw the early signs of an acceleration of demand from national retailers. Following a six month COVID-19 pause.
The junior anchors were the first to accelerate followed by small shop and midsize users.
The common theme behind their expansion plans and new concept growth, what's the desire for well capitalized retailers to get into or closer to the wealthiest suburban communities in the country to take advantage of population growth pandemic induced work from home trends and the benefits of our store fleet that could be used for in person clicking.
Collect or ship from store.
The unusual strength and speed at which leasing demand accelerated led us to quickly expand our leasing department and regionalize, our leasing leadership to ensure that we run in front of our best relationships at the time when they needed space.
John Circle was named senior Vice President of leasing at this time and his team of five veteran regional Vice presidents have used their relationships to our advantage to produce exceptional results for our company.
Ultimately site centers signed over 2 million square feet of new leases in 2021, and 22 at a 20% spread including 73 anchor boxes signed since the start of the pandemic and increased our leased rate by almost 400 basis points I can't thank the leasing team enough for their dedication and hard work.
This congratulations also extends to our legal leasing department led by Air and Fair, who have also use their deep relationships to quickly respond to tenant demand and complete a very high volume of new leases in a short period of time.
Going forward the trends and factors that allowed us to achieve these high leasing volumes are still firmly in place.
Supply in our Submarkets is extremely low and demand remains very strong from national retailers looking to expand their footprints in the wealthiest suburban markets, where we operate.
Our execution of new leases to satisfy these retail tenant expansions combined with high tenant retention resulted in a 40 basis point sequential increase in our portfolio leased rate to over 95%, which achieved the target that we laid out over a year ago.
The one change we have seen more recently is the return of post holiday bankruptcy filings following a two year hiatus spin.
Specifically as it relates to tenants, including party city and the widely publicized potential filing a bed bath and beyond.
I'll spend some time on our strategy for both of these tenants.
For Party City site had 12 wholly owned locations at year end, excluding jv's and the franchise location with total exposure of about 90 basis points of base rent base rent.
Given the high sales productivity in our portfolio and the demand from other credit tenants for that space, we were not surprised that none of our locations were on the initial rejection list as part of the bankruptcy process.
Tenants looking for space in this unit size include pop shelf Ulta, five below Sephora J crew and a variety of medical users among others.
As a reminder, the party city unit size is similar to pier, one which liquidated early in Covid and none of those units are available to lease in our portfolio today.
During any bankruptcy process there are times when a landlord works with a weak tenant to restructure leases.
This is not one of those times, we expect to pursue an aggressive recapture of space. So that we have more inventory to satisfy demand from other high credit national tenants.
Shifting to bed Bath and beyond which has been widely publicized publicized may file for bankruptcy given the possibility that we might eventually recapture all of their locations our asset management team began working with our leasing team in the fall of last year to identify a strategy for each unit along with potential backfill candidates.
And we feel very well prepared for a focused marketing cycle.
To date, we've recaptured one location that natural exploration and that store has already been re leased to planet fitness with a 2023 expected rent commencement date.
The remaining 18 stores, which represent one 9% of base rent. We are confident that there are single use or backfill options for 17 of those locations.
The last remaining split space is slated for demolition to prepare for an asset sale for a multifamily redevelopment project in Washington D C, which we completed the requirement for rezoning almost two years ago.
As a result of these activities I would expect that the majority of our stores will have executed leases. This year should the company file with rent commencement by year end 'twenty four.
Moving to the overall portfolio leasing for the quarter as noted demand and activity remains very high in the fourth quarter with over 800000 square feet signed.
In terms of new leasing we had another quarter of almost 200000 square feet of new deals with strength again from national shops as a standout.
Our shop lease rate was up 120 basis points sequentially and 530 basis points from the fourth quarter last year.
Quite a bit of this leasing was again in our tactical redevelopment pipeline with a specialty grocer signed post year end at our tenants foreign project in Portland, bringing the pipeline to over 85% leased.
The project is broken out in our supplement started to deliver last year with the majority of stabilizing by year end 2023.
Importantly, each of these projects are expected to be immediately accretive to earnings.
Looking forward, we have another 250000 square feet at share in current lease negotiations, which excludes any of the activity on bed Bath or party city locations that I, just outlined with blended spread above our trailing 12 month average.
We expect this pipeline to be completed over the next two quarters concentrated in the mix of national publicly traded tenants.
That said the absolute level of activity in the first quarter will moderate as we simply have less space to lease until we can take possession of some of the bankrupt tenants square footage outlined earlier.
Shifting to transaction activity, we had another very active quarter recycling capital highlighted by the sale of three wholly owned properties with total dispositions in the quarter of $158 million at share.
Two of the three properties were sold not marketed but were the result of a 10 31 investor that approached our team looking to reinvest proceeds at pricing, which we felt was attractive for our stakeholders.
Net proceeds were used to pay down debt repurchase stock at roughly a 150 basis point spread to the cap rate on the deals and reinvest and convenience assets in the mid Atlantic and Denver.
Specifically, we acquired two properties in Denver for almost $17 million and one property outside of D C for $15 million.
There will be a lag until we are able to reinvest all of the proceeds but we have an additional $75 million of convenience assets under contract or awarded as of today, which we would expect to close by the end of June .
The assets acquired or under contract are in our core markets, including Denver, Atlanta, Phoenix, and Washington D. C and have attributes similar to those assets bought in the third quarter and to date, including strong submarket demographics with top quartile incomes.
Tenant lineup made up of services financial services quick service restaurants, and a majority with a drive through units.
Underwritten five year NOI CAGR of roughly 3% with minimal Capex, which is consistent with our existing convenience portfolio and one of the key attributes of our thesis.
In summary, we are extremely pleased with our portfolio positioning and future leasing prospects our investments to date, which have increased our long term growth profile.
And shifted our portfolio to the top submarkets in the country.
And future investment prospects, which we believe will create stakeholder value, while prudently managing our balance sheet.
A special thank you to the entire site centers team for another incredibly productive quarter and year and with that I'll turn it over to Conor.
David I'll comment first on quarterly results discuss our 2023 guidance and some of the moving pieces embedded in guidance and then conclude with the balance sheet.
Fourth 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 totaled about one cent per share relative to budget.
The quarter also included $300000 of Unbudgeable straight line rent from the conversion of cash basis tenants.
$800000 from payments and settlements related to prior periods.
For the full year, we generated $1 18 per share, which compares to $1 17 in 2020 one despite a 10 million dollar headwind from prior period reversals and a $16 million headwind from lower RV I fees.
This roughly 12 cents per share headwind in aggregate was offset by higher NOI as we transition the company to one with lower fees as a percentage of EBITDA and a higher quality property income stream.
In terms of operating metrics trailing 12 month leasing spreads accelerated for both new leases and renewals with blended spreads for the year just under 9%.
We continue to see strong leasing economics for the pipeline, though quarter over quarter volumes and spreads will remain volatile given our denominator.
The lease rate also had positive momentum and was up 40 basis points sequentially and 270 basis points year over year with our lease rate now at 95, 4%.
Well above the Companys pre Covid high watermark of 94, 3% set back in 2017.
Highlighting our leasing volume and backlog, we had over 290000 square feet of new leases commenced in the fourth quarter, representing over $6 $4 million of annualized base rent.
Despite that the SNL pipeline was down only $3 million sequentially to $19 million as new leases, partially offset the impact of commencements.
These signed leases represent just under 5% of annualized fourth quarter base rent or over 5%. If you also include leases in negotiation in our pipeline.
We've provided an updated schedule on the expected ramp up of the pipeline on page six of our earnings slides.
Same store NOI grew one 8% in the fourth quarter with young collectable revenue line item, a 110 basis point headwind to year over year growth for.
For the full year same store NOI was up 80 basis points or 4.6% after adjusting for 2020, one uncollectible revenue with same property NOI for the portfolio for properties owned for the last four years, well above 2019 or pre COVID-19 levels.
Moving on to our outlook, we are introducing 2023 O F O guidance with a range of $1 10 to $1 16 per share.
Rent commencements investment activity and potential tenant bankruptcies are the largest swing factors expected to impact where we end up in the full year range.
I'll start by breaking down the components of 2023, including tenants N or widely reported to be close to bankruptcy and then talk about the transition to the first quarter from fourth quarter results.
Starting with same store NOI, we expect growth of 75 basis points at the midpoint of the range with prior period reversals of 3.34 excuse me a million dollars in 2022 of roughly 100 basis point headwind to growth.
Included in same store is a 250 basis point credit loss estimate at the mid point that includes our annual bad debt reserve.
Along with specific bankruptcy assumptions related to tenants that have filed for bankruptcies to date, along with other tenants with well publicized liquidity concerns.
We have three national tenants as of today, either in bankruptcy or widely publicized to be close to bankruptcy and that includes Cineworld Party city and bed Bath and beyond.
Personal world, we have three locations with total annualized base rent of $2 $9 million as of December 31.
None of the leases have been rejected to date, but based on initial conversations we expect to execute short term agreements at two locations, which allow us to maintain some income, but more importantly control a potential multifamily locations in Washington D C and Atlanta.
The net result of these agreements is a 1.3 million dollar impact to 2022 revenue excuse me from 'twenty towards your revenue.
For party city and bed Bath outside of the three locations that were included on bed baths recently posted store closings list there had been no rejections or closures to date.
That said as David mentioned, we intend to make sure. We are maximizing the long term value of our real estate, which means there are likely several locations, where we will recapture to re tenant with a more productive user at better economics Spa.
Specific to the bed Bath and beyond there was quite a bit of new news in the last 48 hours the midpoint of guidance for both same store and also assumes that we recapture all of their bed Bath stores in the second quarter.
The top end of guidance assumes that they are in place for the entirety of the year.
In terms of 2023 fee guidance, we expect to JV in RBI fees to total $5 million to $7 million with minimal contribution from RBI.
This assumption reflects additional expected JV asset sales.
G&A is expected to total about $48 million.
And finally on transactions, we expect $100 million of net investments at the midpoint of the range with the assets completed asset sales completed in December roughly a <unk> <unk> dilutive in year, one given the reinvestment gap that David mentioned.
Moving to the first quarter of 2023, there are a few moving pieces to consider from the fourth quarter first as I. Previously mentioned, we had $300000 of nonrecurring straight line rent and $800000 of nonrecurring uncollectible revenue in the fourth quarter.
Second the assets sold in December generated $1 $6 million of NOI at share and $250000 in JV fees in the fourth quarter, which implies total JV fees about $1 $7 million for the first quarter of <unk>.
Summary of these factories is on page 11 of our earnings slides.
Finally, ending with the balance sheet at year end leverage was five one times fixed charge remained over four times and our unsecured debt yield was over 20%.
In the fourth quarter, we repaid two maturing mortgages along with the balance outstanding on our line of credit with proceeds from asset sales improving upon our already sector leading leverage levels.
As a result, the company has just $87 million of debt maturing through year end full availability on the $950 million recast line of credit and 2% variable rate exposure.
To put this all in context, even at the low end of the guidance range, we expect debt to EBITDA to remain below six times, the <unk> payout ratio to remain below 75% and to generate $35 million of retained cash flow.
Additionally, this leverage profile and liquidity provide substantial investment capacity and Optionality to fund the company's business plan and take advantage of potential opportunities as they arise and with that I'll turn it back to David.
Thank you Connor operator, we're now ready to take questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
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 will pause momentarily to assemble our roster.
And our first question here will come from Todd Thomas with Keybanc capital markets. Please go ahead.
Hi, Thanks, good morning.
I guess first question.
David you know the leasing environment has been fairly favorable here for landlords you discuss that and talked about your leasing activity in the quarter and you talked about bed Bath and party city and loosely outlined some of the demand that youre seeing there, but you you have signed leases.
And cannot I guess until you really recapture space to the extent that you do do you do you see risk that the market loosens up a little bit from <unk>.
Bed Bath closures and maybe some space, that's being recaptured a little bit more broadly with they can see having an impact on rents or do you still anticipate a.
Favorable leasing environment and demand.
<unk> strong.
So you kind of work through some of these.
You know sort of challenges during the months ahead or quarters ahead.
Yeah. It's a really good question Todd I mean first of all I would say the leasing environment today is.
Significantly better than favorable led side, it's extremely robust so the time to have a space back is right now.
Whether that continues that's a really good question I mean, we we have not seen a decline in demand.
Youre right that were not formerly formerly marketing.
<unk> from tenants that have a legal right to be in that space and they haven't filed yet but that doesn't mean that tenants can't send us L. O I's in anticipation of that and the the activity that we're receiving from tenants on the bed Bath and party city spaces is for virtually all of those locations. So I feel very good about the demand right now.
Which is why if we get space back I'd, rather have it now.
Because we don't know where the economy's going we don't know where tenant demand can go and as you and I both know when.
When retailer demand stops it stops fast and right now it's still you know the green light is on so I'd prefer to have the space back sooner rather than later.
Okay and you mentioned you know you talked you you mentioned the planet fitness.
Lease that you signed for one bed Bath like location that you recaptured.
You mentioned that there are you you think that there are 17, a single user backfill you can you just you talked about you know some of the party city backfill opportunities that you're seeing can you can you discuss the the tenants that you would expect to take the bed Bath space and and maybe also talk about the.
The replacement rents that that you might be anticipating relative to bed baths in place rents today.
Sure well Party city I mean, let me start with that for a second party city, you know, having some similarities to pier one meaning some of them are in line stores. Some of them are out parcel pad stores and so party city has more to do with what's the highest and best use is it a single tenant backfill is it a split into shops, how much rent can we drive from that I would.
That the rent spreads on the party city portfolio.
Portfolio can range anywhere from 5% to 30% depending on whether it's an AD as backfill around or up subdivision for shops in the shop demands are so strong right now that we were likely to tilt higher to that value creation.
And bed Bath and beyond.
If you look back in the last two years of the anchor tenants. We've been signing it's virtually the same as that inventory of perspective tenants at any of the T. J Maxx concepts the Roth concepts Dick's sporting goods.
Cosmetics, you know any of that the discount chains.
So I think that those tenants that have been active for the last two years are still the ones that are active today in seeking out of bed Bath location and the one thing I'll point out is if you rewind back to 2017, you think of the inventory that we got back specifically from.
Toys R us and babies R. Us that the average unit size was a lot larger than our average unit size with bed Bath. So the bed Bath size fits a lot of concepts right now which is why our confidence is pretty high that single tenant backfill will be likely for the vast majority of them.
Okay, and then kind of appreciate you know all of the detail around around the the 'twenty three guidance I just want to make sure I heard you correctly. So the high end of the guidance range assumes that.
Hum.
All party city, all bed Bath and beyond locations are in place and continue to pay rent and the only adjustment that you've made in guidance is the $1 $3 million expected impact from the two center world locations is that correct no. The midpoint of guidance assumes that bed Bath, we recapture all of the bed Bath.
Locations in the second quarter and the high end assumes that bed bath as in for the entirety of the year Party City, we made an explicit assumption around each individual space, where we expect to reap potentially recapture as we have conversations with them are post bankruptcy filings. So.
Isolated my comments to bed about just given the fluid situation for lack of a better phrase in the last 48 hours, but obviously, there's a multitude of other factors the budget or the midpoint also impacts or incorporates the center World comments, you had mentioned as well. So again, we're just trying to isolate bed bath for the top in the midpoint of the range.
Okay got it yeah. That's helpful. Alright, Thank you Youre welcome Thanks Pat.
Our next question will come from Craig Mailman with Citi. Please go ahead.
Hey, guys. Good morning, just.
Following up on maybe just to specifically 250 basis points of credit loss in same store kind of what does that translate to.
But for <unk> purposes could you break that out and to maybe how much of that's already on a cash basis accounting versus accrual.
Craig I'm struggling with the first part of the question of how that translates to episodes I mean, the simple way. If you took 250 basis points of our same store run rate I mean, the vast majority of our NOI is included in our same store, you'll you'll probably get a decent dollar amount on my guess is just think about this off top my head, it's probably $8 million to $10 million.
At the midpoint somewhere around there.
In terms of total dollars and then the second part of your question I'm, sorry, I don't follow that one as well to cash basis accrual question.
Are all the tenants on your watch list or a bed Bath party city or are they already being accounted foreign cash basis or are they is there going to be straight line that needs to be written off I'm just trying to get a sense of do you have a full impact if we see you know bed baths file from.
Straight line versus just cash rents disappearing and you know how maybe what percent of your tenant base is on cash basis accounting say versus accrual.
So we don't specifically identify which tenants are or are not on a cash basis until or if they have filed for bankruptcy. What I would just say to you. Craig is every tenant and I mentioned in my script. There's no ey are on the balance sheet at year end. So if any of the tenants that I mentioned file or continue on with their bankruptcy process Theres no impact to us from straight line or whatever it might be a R. R.
Our balance sheet. So that's the easy one in terms of percentage of cash basis I can't recall top of my head. The number of tenants is lower from the end of the year as I mentioned in my prepared remarks, we added $300000. Good guy in terms of the reversal from taking cashless tenants off cash basis, but I can't recall off the top of my head what percentage, but its lower by.
Count from the end of the year.
Okay, and then I think in the presentation you guys had said.
Party City didn't pay rent for January is that accurate is that just a stub period.
Following the bankruptcy announcement, and then that should cause.
Because they have been rejected leases kind of that should come back on in February beyond yeah. So for party city. They didn't pay the majority of their locations rent in January there were a couple of paid its not rare to see that in the bankruptcy process, where some rents are get paid as part of kind of some confusion out of the process.
The majority of rents were not paid we obviously, it's your point called that out in our slides. They have paid February rent and to your point as long as they are in occupancy they are required to pay our rent as well bed Bath has not paid us February around they have not filed for bankruptcies without rentals required. So you should expect us to pursue that AR collection.
As a.
You know per our leases are contracts. So again, it's a fluid situation, but that is something to keep in mind. It's a really good point to bring up Craig.
The kind of prolonged period of rent payments as part of the bankruptcy process to your point typically there's some rent unpaid the month or the month that are that are tenants filing for bankruptcy, but then they're obligated to pay for the remainder of until they reject the lease if you recall back in 2020 peer one actually occupied space for as much as nine months for some location.
So the impact of 2022 might not or 'twenty, three excuse me might not be as significant for some tenants depending on when they file when they rejected leases, but obviously you will you know as that as that process unfolds, we'll update folks over the course of the year.
Okay. That's helpful. And then just one last one as we think about kind of Capex here with all these moving parts about maybe recapturing stores and you know the commencement timing maybe in 'twenty four how should we think about kind of capex spend here for 23, and 24 versus sort of a normalized run rate.
Yeah. It's a good question, so 23 versus 2022 it should be very similar in terms of total dollars Craig and I mentioned in my remarks, even at the low end of the range, including that Capex budget, you still have $35 million plus the retained cash flow for 'twenty four and 'twenty five we'll see how the party city bankruptcy process plays out we'll see how.
The bed Bath news over the last 48 hours plays out, but obviously you know if if if we got the aerospace back I would expect a dramatic decline in Capex and if we get more spaces back then I think that you'll see kind of a steady state. The other piece to keep in mind is as David mentioned in his prepared remarks, we are buying more convenience assets in convenience as a percentage of the portfolio.
Leo is increasing one of the key kind of pieces are tenants behind why we like.
That property types, so much as the lack of capex. So I would imagine for the entire portfolio of Capex as a percentage of NOI will continue to decline just as convenience increase as a percentage of the overall portfolio market share, but again the big dollars will depend over the next two years really on what happens with with a couple of tenants that we mentioned in our prepared remarks.
Great. Thank you.
Our next question will come from Hendo St Juste with Mizuho. Please go ahead.
Hey, good morning.
So I wanted to ask about capital allocation I think you outlined 100 million of net investments.
As part of the guide so I'm curious, how you're thinking about prioritizing that today, you've been actively buying back stock are you doing more convenient feels as you outlined and you still have the outstanding preferred at six and three eights I believe so I guess can you give us a sense of how you're considering these various options on the menu.
Sure.
Our strategy going forward at this point is similar to what you've seen in the last year or two which is that.
All options are on the table.
We're actively in the market trying to find more convenience assets from sellers that are willing to sell at a price that we want and we'll also we're keeping a pretty close eye on our share price I mean, those are the the two activities that I think we're most focused on but.
I think that we can make a decision as we get through the year.
Fair enough I think the.
My follow up I would have is regarding these transactions I guess I'm curious what you're seeing out there in the marketplace you've been active.
Buyer seller bid ask spread what do you think cap rates are for the type of centers you're interested in and then maybe some color on the cap rates for the assets you have under contract yeah.
Well my AR as you can imagine that we figured this would be up.
Important topic for all of the management teams in the cycles, where cap rates and what's happening I think all of us that see that costs rising had assumed that cap rates would follow.
And I think at this point the lack of.
Volume of deals that are actually closing means that.
There is still a pretty wide bid ask spread.
So I my summary is simply that the sellers want to see pricing from six months ago, and the buyers want to see pricing for six months from now.
And and therefore very few transactions are actually taking place and we were able to sell three fairly sizable properties in the fourth quarter.
But the buyers of those property has tended to be something unique it was a local person that had always wanted it with a 10 31 buyer that needed to shield proceeds.
And on the buy side, we've made a number of offers to buy assets that have been rejected. We've also made a number of assets that had been accepted so I think the bid ask spread is at least 100 basis points and I I would look to see that close a little bit tighter through the end of the year.
That's about all I can come up with honestly handout.
Yeah.
Fair enough and I understand the market and it's a pretty solid out there last one if I could just curious on the comments on the convenience assets you guys have been buying more or is there a thought here on the sizing of perhaps how large that could.
It could be as a part of the portfolio just curious how you're you're initially thinking about the opportunity here in relation to your portfolio. Thanks.
Well I think we're we're very convinced about the thesis we've seen good results from what we bought to date and saw it as much as you've seen us recycling in the last year I think we'll continue to do so as long as we see opportunity. That's that's one of the key areas, where we'd like to place capital.
Fair enough. Thank you.
And our next question will come from Samir Khanal with Evercore ISI. Please go ahead.
Good morning, everybody I guess, David on bed Bath in the event that there is a liquidation here I mean, how long do you think.
It would take to sort of backfill that space you know given that you know even these days it takes long to get permits et cetera, I'm, just trying to understand sort of the timing to get some of that went back.
Yes, Amir it's you know if you look back at the last.
Last cycle. The last 10 years, you know normally you would expect 18 to 24 months of downtime before rent commences.
For larger box spaces.
What's different today is that the demand is so strong and the demand is primarily from single tenant backfill and the single tenant backfill significantly reduces the permit time in the construction time required to deliver that space.
So in my prepared remarks, one of the things that I that I mentioned that you could reference is that I would expect that almost all of the bed bath spaces. If we get them back soon will be leased by the end of the year, which means that we would expect rent commencement date to be sometime towards the end of next year.
So maybe a little shorter than a traditional cycle, but in some cases, you can't really shorten it tremendously.
Okay got it and then I guess my second question is.
You know on the convenience and the unanswered centers.
As it relates to those I mean, what's the risk.
These tenants in a downturn just trying to understand that a little bit more.
I think the risk in.
Any any small shop.
Is is at risk of a recession, just like a large tenant is.
And that's why credit becomes extremely important so we tend to focus on convenience assets that don't require some other anchor to draw traffic they tend to be right up on the curb line. They tend to have high traffic counts in the credit if you look at our tenant roster, it's pretty much national chains.
Theres always going to be some local shops and in any recession I would expect that we would lose some local shops.
The difference really is what's the cost to replace that shop, when the economy turns and the reason that convenience assets, a really intriguing to us is that the the sheer volume of tenants that want to be in small shop spaces up along the curb.
Don't really take as much capital to replace as a larger tenant does and they don't change their square footage very frequently so yes, I would still expect in a recession that the risk that the convenience assets would see a decline in occupancy, but I think the cost to bring that occupancy back up and the changing in the direction of the economy would be much less than it is a traditional anchors.
Enter and Sameer to David's point, we have disclosure in our slides on the tenant roster, which you see at Starbucks total wine JP Morgan Fedex et cetera. So.
Each of the assets we've purchased to date have had a the vast majority of NOI from national tenants, which is consistent with the rest of the portfolio. So if you look at our or I know you're focused on this national local percentage of ABR. It really hasn't hasn't moved much. Despite the fact that 10% of the portfolio is now in convenience. So the reason.
Why obviously is because of the vast majorities of national anchors. So again that helps mitigate some of the rest of David's point, but obviously not all the risk.
Thank you.
And our next question will come from Floris Van Dicom with Compass point. Please go ahead.
Okay.
Alright, Thanks Scott.
Yeah I this convenient center thing, which I guess, maybe David you've been spending some time with the Jeff Edison as well because he's touting some of these the benefits of of the small shop and the you know the resiliency.
It's it's it's very intriguing.
No I've spent some time with you guys to understand it a little bit.
Better as well, but I do think that it's still such a small part of your portfolio at what point do you think we can call you convenient center owner.
And we'll use breakdown because I would imagine that your metrics for that portfolio are significantly better than your.
Our legacy portfolio in terms of same store NOI growth and net effective rental growth and obviously lower leasing costs as well.
When can we expect to see.
That portion of the portfolio broken down into more granular detail just to get people more convinced that this is a a viable and an intriguing.
Aspect of the shopping center space.
Yeah of course, there's a lot to unpack there I'll start with a couple of points look it's it's 10% of the portfolio, we're still a $5 billion enterprise in and it's a small percentage relative so we're a long ways from from a I would say call. It segment reporting or provide any additional detail what I will tell you though to your point.
She is dilutive to the same store for the first couple of years and the reason why is the vast majority of these assets are a very heavily Lisa so I'll have to call it 2% to 3% NOI CAGR, but that's coming just from fixed bumps renewals et cetera, the larger kind of anchored properties, whether it's our grocery portfolio, which is also a fairly significant real estate enterprise or a power center assets.
Significant occupancy upside that's what's in the signed not opened at least not occupied gap. So it's funny and actually the first couple of years in the model, it's dilutive to same store, but you're right on other metrics. They their net effective rents whatever it might be you do have better metrics. So again, it's 10% of the portfolio, we really like the thesis we're investing in it but where are we.
Ways off from providing.
Additional disclosure around our economics, regardless of property type.
David I know, if you'd add anything to it.
And then maybe my my follow up are the cap rate on the $158 million of asset sales that occurred in the fourth quarter.
Six and three quarters on in place.
Thanks, guys.
Thank you Carlos.
Our next question will come from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, good morning, good morning down there.
Two questions.
First off a corner on the guidance if I hear correctly. That's been asked several times. The midpoint assumes you get all the bed Bath back in the second quarter. It already assumes the initial hit from Sino World.
You're also including 250 bps of bad debt.
So it seems like you know the midpoint is baking in a lot of you know call. It damage if you will.
So what would get you to the low end as the low end just a buffer in case, you know bankruptcies or credit explodes, because otherwise it really seems like you guys have put a lot of.
The stuff into the into the bucket to get to the midpoint, which then seems they the low end is pretty draconian I just wanted to understand if that's a correct way to think about it yeah. It's a good question Alex So so I'll unpack it in a couple different ways. So that the midpoint of guidance assumes that a specific assumption around cineworld.
<unk> and party city I E recapture some locations are and and we have the rent agreements with Cineworld. The 250 basis points includes the impact from bed Bath of of course of the year, we don't know exactly if or when will recapture them, but it's fair to assume the mid point is essentially are we recapture all of the stores in second.
What gets us to the bottom of the range is if there's bankruptcies on top of the $2 50. So the reserve is not great enough also look investment volume and rent Commencements for the other two factors I mentioned, so if we aren't able to deploy capital at returns that David mentioned that we're targeting and or rent commencements slip for whatever reason, we haven't had that.
Happened, but it certainly is a risk given all the moving pieces in permitting that Samir mentioned and others have called out as well. So the bottom of the range is there for a reason it's if bankruptcies are greater than we budgeted and then if we can't deploy capital or rent a timing slip, but you know it's it's there's nothing else I can say about it other than it feels prudent in light of all the kind of ongoing conditions today.
And then the second question is David You mentioned, you know right now.
Demand is hot you want to strike.
Capture space.
And take advantage of all the tenants who basically are spoke.
Spoken for.
All of the potential available space that could come back.
What would cause you or what signs would you have to see to have tenants cooling and the reason I say that is we've already endured significant inflation, we've endured the consumer dipping into their savings gas prices I mean, yeah carton of eggs go down the list.
And if none of that has has dissuaded tenants from from remaining a voracious for leasing you know what do you think would cause them the tenants to deviate from their current trajectory to take space.
Yeah.
I mean from a purely from a from a landlord's perspective. The thing you always used to worry about the supply.
But there is no new supply under construction.
And so that really leaves the demand side and the tenants today are so have such an appetite for wealthy suburban communities because of all the things you mentioned and Youre right. They have endured a lot and they are still expanding and growing I think Alex if I had to put a name on it I would just say sentiment because just.
Like any other business you know retailers when they signed 10 year commitments to open stores a lot of that is based on their confidence as a business if sentiment changes somehow leasing will slow down fast.
It always starts with a trickle in and ends very quickly so.
I don't see anything right now that stopping the tenant demand. We just had a long leasing call yesterday and went through all of our assets and all of our regions and the demand is still very robust I mean, we're getting L. O I's from.
From tenants on spaces that we don't even control yet we have tenants asking for 2024 and 2025 openings. So it feels to me like the demand is really strong I agree with you that I don't see anything today that is going to slow that down but sentiment is the one thing that can change quickly and retail yeah. The only thing I would add Alex is remember we own 101 wholly owned properties. We are this.
Tiny little subset in the Grand scheme of the National retail landscape and so our comments are reflective of the assets, we own right. It might be a different story, if youre asking someone with a larger footprint and it was more of a comp national proxy, but to David's point for our Submarkets, where we can very closely track supply it feels like a very different conversation.
Okay. Thank you thanks.
Thanks, Alex.
Our next question will come from Ronald Camden with Morgan Stanley . Please go ahead.
Hey, just two quick ones just going back to the convenient center trying to get a better sense of just the secret sauce in how you're thinking about it because it seems like everybody gets sort of figure out where the high demographics are.
On the demos that that's clearly important but is there sort of anything else that you can.
Guys look at or do differently or is the thought that you know you just have sort of a pretty good cost of capital and you can be opportunistic when when things pop up.
Ronald.
Missed the first part is this on the convenience properties that we've been buying correct correct. Yeah. The big the big changes is mobile phone data I mean, four years ago I don't think convenience was really considered an asset class.
When you bought small shops, you bought them based on the assumption that consumers are coming to an anchor you can measure how the anchors doing and therefore, you can deduce how well the shops are going to do what's really changed is the mobile phone data, which allows you to figure out where your customers are coming from are they indeed crossing over.
To the anchors is the anchor really drawing that customer traffic and so we've been using that data to focus on assets that are purely based on convenience.
It's the traffic counts nearby if the demographics as the time of day, it's a direction of travel of the easiest way to put it is if you're buying a starbucks with a drive through you want to be on the going to work side of the road.
If you are maybe a convenience restaurant, that's <unk> you might want to be on the going home side of the road, but those are anecdotes pre data now the data is so robust I think we can use it in a variety of ways to feel confident that we can buy assets from local owners that are not using that information and it can help us when we <unk>.
We lease space at higher rents so that that I would say is a lot of what we're using to define our growth yeah, I would I would expand on that and say, it's a lot more than just our cost of capital and we've got now five years of experience behind these assets Theres a lot that we've learned so I would say our transactions team has it as a huge competitive advantage. There obviously, David mentioned, our regional Vice presidents, who are having boots.
On the ground and in teams locally that we can source deals are either from them or have them help and underwrite is a huge advantage as well and then as Samir mentioned from a tenant perspective. These are tenants that we have across our assets, whether the grocery of power as well so having those existing relationships, where we can call ask about performance asked about sales and make sure that theyre seeing what we own as well as other vantage.
So I would say, it's a multitude of factors well in excess of just the cost of capital that allows us to really.
Focus on this and expand it.
Great and then my second one was just just on the occupancy.
Question, just I'm looking at sort of that I think this is small shops.
Lease rate at at sort of a 90 93, I'm just trying to get a sense of you know demand is pretty robust as you mentioned earlier.
In your mind, how high does that go.
From here thanks.
Yeah, I'll start with occupancy just for this year I mean based off our budget, we're expecting oxy declined in the first half D or whether it's from bankruptcies or just the return of seasonality you know think back the last two years. The commence rate has increased from the fourth quarter to the first quarter that is atypical and so to Davids point, we were more aggressive in the fourth quarter and the first quarter for tenants that came to us in either one.
A flat rent or rent reduction you know moving on and finding a better tenant so occupancy in general will decline in the first half of the year, obviously bankruptcies will have the biggest impact of that but you'll just see a return to seasonality Ron we haven't put out a target number for small shop leased rate, where we're over 90%, it's a high watermark for the portfolio.
We feel really good about it its fair to assume we're going to try to push that even higher but at some point youre going to run at a kind of structural or frictional vacancy and were probably only a couple of hundred basis points away from that.
Great. Thank you.
You're welcome.
Our next question will come from Linda Tsai with Jefferies. Please go ahead.
Hi, Good morning, just to clarify the 250 basis point credit loss that only related.
Bed Bath beyond party in Regal or are there other tenants factored in.
So party city and Regal are part of our budget, they're not included in the 250 basis point, the 250 basis point accounts for our bad debt assumption for the course of the year that typically relates to shops, and then on top of that as a bankruptcy assumption tenants does not have have not filed for bankruptcy, including bed Bath and beyond would be included in there, but it is important window to think through the timing.
And the impact over the course of the year, meaning if someone filed today they wouldn't be out for two to three months and they're required to pay rent over that time period. So the $2 50 includes tenants that have not filed to date and so that would include potentially bed Bath and others, but party city and center World are part of our budget and not included in that 250 basis point reserve.
Okay.
Got it.
And then did you see rent.
Commencement slip in 2022 in the context of <unk>.
You know just the slower pace in terms of getting new tenants signed open now.
No I think it's been a source of upside for US every single quarter over the course of the year.
I'm surprised given all the difficulties so kudos to our operational team to making sure. It's a tailwind not a headwind for us.
And then just broadly what does the rent upside look like on the boxes that you might cut back for bed Bath and party city and maybe you could just talk about the new lease spread strengthen <unk>.
Atlantis, David If you look if you look back at the 73 boxes. We've leased in the last couple of years, which is a very high number I think we've got.
Very good data on the market.
Spread so I think from a bed bath and beyond perspective, I would expect the market spreads to be about 20% plus.
On party city I think it has a much wider range as I mentioned earlier, it's probably between 5% and 30% depending on where the box is is it in line is that on an out parcel should it be subdivided as the demand for rents higher from shops than it is a 10000 square foot user so for bed Bath, 20% plus for party city somewhere between 5%.
30%, depending on whether we split it or do single tenant backfill.
Thanks.
Thanks Linda.
Again, if you have a question. Please press star then one to join the queue.
Our next question here will come from Michael Mueller with Jpmorgan. Please go ahead.
Yeah, Hi, two quick ones here first of all David when you were talking about convenience being 10% of the portfolio. What metric is that based on is that investment count a b R. A T.
And then maybe going back to occupancy I know Theyre, obviously, moving parts with bed Bath and party city and things like that but if we're looking at your 92, 5% occupied rate, what's embedded in guidance where that trends to by year end as it is.
I guess going to page six in your.
Slide deck and tracking the a D are coming online there.
Hey, Mike it's Conor so that the metric I mentioned, 10%. It was an AVR. It's it's I think it's like $9 four 900 flights at just under 10.
10% for our share of ABR is that convenience portfolio and in terms of occupancy.
My earlier comments I would expect a return to seasonality so a modest decline Ah.
Just on the kind of natural explorations in the first quarter and then depending on what happens with party city and other tenants. We mentioned it could be even move lower over the course of the year to your point on page six of the rent Commencements I would expect it to come back up and so the year end number I would expect would be what.
It ended up pretty close to where we started maybe marginally higher and the net result is obviously putting us in the.
Our guidance range of a same store call it 75 basis points at the midpoint. So.
So if that helps but I'm happy to expand on that offline.
Yeah got it thank you.
Again, if you have a question. Please press Star then wanted to join the queue.
Our next question is from Sunny Ali.
Pardon me.
Yeah.
That will conclude our question answer session I would like to turn the conference back over to David Lukes for any closing remarks.
Thank you all for joining our call and we will speak with you next quarter.
Okay.
The conference has now concluded. Thank you very much for attending today's presentation and you may now disconnect your lines.
It was thought of as the first.
And then one of them.