Q1 2023 Phillips Edison & Co Inc Earnings Call
Good day, and welcome to Phillips Edison and company's first quarter 2023 earnings conference call.
Please note that this call is being recorded.
I will now turn the conference over to Kimberley Greene head of Investor Relations Kimberly you may begin.
Thank you operator, I'm joined on today's call by our Chairman and Chief Executive Officer, Jeff Anderson, Our President, Kevin Murphy, and our Chief Financial Officer, John Caulfield. Once we conclude our prepared remarks, we will open the call to Q&A. After today's call an archived version will be available on our Investor Relations web.
As a reminder, today's discussion may contain forward looking statements about the company's future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties as described in our SEC filings specifically in our.
Most recent forms 10-K and 10-Q.
The discussion today, we will 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 our earnings press release and supplemental information packet, which are on our website. Please note that we have also posted a presentation with additional information our caution on forward bookings.
Statements also applies to these materials now.
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.
The <unk> team delivered another solid quarter of growth with same center NOI, increasing by four 9% and achieving record highs and occupancy renewal leasing spreads and retention.
The consistent strength of our operating performance is attributed to both our differentiated focus strategy of exclusively owning grocery anchored neighborhood shopping centers and our team's ability to drive results at the property level.
I know you've heard.
<unk> said, many times before but it bears repeating.
That drives results and not all space is great equal we focus on exclusively owning right size neighborhood shopping centers anchored by the number one or two grocer in the market with over 70% of our rents coming from necessity based goods and services.
Why.
Because we know the average American family visits a grocery store at one six times per week are grocers draw consistent daily foot traffic to our shopping centers benefiting our small stores basis.
Well, our right sized grocery anchored format is critical pillar of our long term success. We believe the quality of our portfolio continues to be another important differentiator at.
At Pico, we defined the quality of our portfolio through the use of the acronym SOR.
This includes spreads occupancy the advantages of our markets and retention.
He goes high new and renewal leasing spreads are driven by demand from our neighbors.
Our retailers provide necessity based goods and services that serve the essential needs of our communities.
We pride ourselves on being locally smart a grading neighborhood centers that had the optimal merchandising mix for the communities they serve.
Our leasing pipeline continues to remain strong and there are currently no signs of it slowing.
The most active categories continued to be medical quick serve restaurants, and health and beauty.
We're also seeing consistent strong demand across all geographic regions.
He goes record occupancy level of 97, 5% combined with the leasing spreads.
I just mentioned are assigned that retailers are successful at our centers.
Our neighbors wanted to be closer to the customers and in the neighborhood of the communities they serve.
Our lease portfolio occupancy increased by 10 basis points sequentially from the fourth quarter and by 130 basis points year over year, reaching an all time high of 97, 5% we.
We still believe theres occupancy upside in the portfolio.
With occupancy as a driver of growth is no longer available. We believe our NOI growth will continue as a rent spread growth increases because of our pricing power.
In addition, our exposure to at risk retailers continues to remain limited.
This is deliberate and result of our grocery anchored strategy focused on necessity based goods and services.
Because unique advantages in the market are driven by our focus on the number one or two grocer.
Our strategic presence in the sunbelt and other fast growing suburban markets are.
Our top neighbors are strong grocers.
Kroger and Publix are P goes number one and two neighbors, respectively. Pico is kroger's largest landlord and Publix is second largest landlord.
It goes trade area demographics are in line with Kroger and Publix store demographics. Our centers are close to the end consumer where America's leading grocers make money and in turn our neighbors make money, which allows peak out to make money.
In addition, our portfolio is geographically diverse rather than focusing exclusively on coastal markets. We focus on well located suburban markets with growing populations and strong demographics we.
We compete on the corner of main and main.
Our neighbors are healthy and diverse mix of national regional and local retailers, who run successful businesses and enable us to grow rents at attractive rates over time.
We continue to have excellent success, retaining our current neighbors as demonstrated by our first quarter retention rate of 95%.
A record high and well ahead of the historical five year average of 87%.
Our local neighbors remained resilient and our successful retailers who have been in our centers on average eight eight years.
Importantly, a differentiate and enhance the merchandising mix that are neighborhood centers offer.
With more than 30 years' experience in the grocery anchored shopping center industry.
Some perspective on what drives quality and success at the property level. We believe sore provides important and sustainable measures of quality.
Drive long term growth.
Spreads occupancy the advantages of our market and retention.
If history is any indication it goes right sized grocery anchored neighborhood shopping centers will continue to be resilient in all market cycles, Devin will provide more details on our cycle tested performance in a moment.
Looking ahead, we continue to benefit from a number of positive structural and macroeconomic trends that create strong tailwind and drive neighbor demand.
These trends include the healthy consumer hybrid work migration to the sunbelt population shifts that favorite suburban communities and the importance of physical location and last mile delivery.
These demand factors are further amplified due to the limited new supply and lack of new retail construction since 2008.
When we consider our pricing power indicated by continued strong demand and record high renewal spreads occupancy and retention combined with the advantages of our markets are necessity based retailers and the aforementioned tailwind. We believe our growth strategy will continue to generate more alpha.
With less data.
With higher interest rates and constrained capital availability in the market, we continue to be patient and use our national platform to be opportunistic.
On the transaction front, we're pleased with our strong acquisition volume in the first quarter, which was largely driven by activity that started last year.
These high quality right sized grocery anchored neighborhood centers fit well with our Pico portfolio. These properties will drive incremental earnings growth that will allow us to achieve and exceed our acquisition hurdle of a 9% Unlevered IRR.
We were also pleased with the performance of our acquisitions relative to our underwriting on average assets acquired since our IPO are outperforming relative to the underwriting.
The transaction market continues to be fragmented and sporadic and we're seeing a slower pace in the second quarter.
While we're seeing cap rates move in the private markets in response to higher interest rates there are still wide gaps between the buyer and the sellers expectations.
That being said, we are affirming our guidance for $200 million to $300 million of net acquisitions. This year.
We provide a wide delta in a range because it allows us to be strategic based on current market conditions and still deliver on our expectations.
We remain focused on Accretively growing our shopping center portfolio and we will continue to be opportunistic as we always are.
There's no question that record inflation.
Rising interest rates global conflict and bank failures continued to create challenges. Despite these headwinds we remain focused on investing in our portfolio and driving cash flow growth.
With our combined internal and external growth drivers. We continue to believe our portfolio can deliver mid to high single digit <unk> per share growth on a long term basis.
In addition, we still have one of the lowest levered balance sheets in the shopping center space with a fortress balance sheet and ample liquidity, we remain prepared for challenges and opportunities that may arise for.
For the rest of this year.
I would like to provide a quick update on the proposed Kroger and Albertsons merger, while there haven't been any major new developments in the merger we remain positive on the impact that it will have on our centers. We continue to believe it is ultimately a positive for Pico for our centers and for the communities our centers serve if the merger.
Would occur.
The merger does not occur or Albertsons anchored centers will continue the strong performance that they have enjoyed to date.
With that I will now turn it over to Devin Devon.
Thank you Jess.
Good afternoon, everyone. Thank you for joining us.
The operating environment remains strong.
Our leasing team continues to convert strong retailer demand into higher rents at our centers.
Jeff highlighted earlier the continued strength in leasing, but let me emphasize a few metrics of note.
Our anchor occupancy increased to 99, 3%.
And our inline occupancy increased to 94, 3% during the first quarter.
Year over year increases of 120, and 170 basis points respectively.
Leasing activity remained strong and our volume of deals executed in the first quarter increased year over year.
263 leases executed totaling one 1 million square feet.
Compared to 244 leases executed an 800000 square feet lease a year ago.
<unk> retention rate this quarter was exceptional at a record high 95%.
Driven by increases in our small shop retention rate to 83, 3%.
High retention.
No downtime and lower tenant improvement costs.
As a reminder, our tenant improvement spend on renewals over the last five years has averaged below $2 per square foot. We continue to remain optimistic that we can drive favorable lease terms, including attractive re leasing spreads with solid contractual.
Rent bumps.
Comparable new and renewal rent spreads for the first quarter were strong at 27, 4% and 16, 1% respectively.
On average, our new and renewal in line leases.
You did in Q1 had annual contractual rent bumps of two 8%.
Another important contributor to our long term growth.
The leasing spreads that we are continuing to see <unk>.
Combined with a record high retention rates.
Our clear evidence of the continued high demand for space in our grocery anchored centers.
Our strong and steady pricing power is a reflection of the strength of our strategy and the quality of our portfolio.
Turning now to our redevelopment and development activities, we continue to invest in value, creating ground up out parcel development and repositioning projects.
This activity remained a great use of our free cash flow and produces attractive returns with limited risk.
We are making great progress on these projects and we are working hard to continue to build our future pipeline.
In the first quarter, we stabilized re projects.
Which delivered over 74000 square feet of new space to neighbors, and adding incremental NOI of approximately $930000 annually.
Returns on costs of approximately 10%.
These projects provide superior risk adjusted returns and have a meaningful impact on our long term NOI growth.
For the full year of 2023.
We continue to expect to invest $50 million to $60 million in ground up out parcel development and repositioning opportunities.
With average estimated.
Cash on cash yields between nine and 12%.
We continue to see the many benefits of our growth strength portfolio with a healthy mix of national regional and local retailers.
More than 70% of our rents come from neighbors offering necessity based goods and services.
Our top grocers continue to drive strong.
Current foot traffic to our centers.
Our foot traffic in Q1 remained strong and was in line with the first quarter of 2022 levels.
Looking ahead we.
And our neighbors believe consumers will continue to visit our centers and spend on necessity based categories.
Even if they reduce spending on luxury items and other discretionary purchases.
Our portfolio has proven to be resilient through economic downturns historically.
When we look at Chico's performance following the 2008 global financial crisis in.
It highlights the resiliency of our grocery anchored portfolio.
We currently own 29 centers that were owned by Us in 2008.
We went back and reviewed the performance of those assets.
By 2010, NOI had decreased by 270 basis points, but recovered to pre <unk> levels by 2011.
Occupancy declined 180 basis points to its lowest level in 2009.
But fully recovered by 2010.
Looking back at 2020, and the Covid induced downturn.
<unk>, just 70 basis points of occupancy during the peak of the pandemic.
We fully recovered by the middle of 2021.
We lost the weaker operators during 2020.
And today, our small shop neighbors, including our locals are strong and Friday in our centers.
Our neighbours continued to demonstrate their resiliency and ability to manage the many challenges they face.
Including inflation.
Fly chain issues and labor shortages.
Despite these many challenges our neighbors continue to invest in their stores and technology platforms in order to provide high quality customer experiences.
We believe <unk> portfolio continues to be well positioned given our grocery anchors.
Right sized format.
And our necessity based neighbor mix.
We enjoy a well diversified neighbor base.
Our top neighbor list is comprised of the best grocers in the country.
Our largest non grocer neighbor makes up only one 4% of our rents.
That Nabors T J maxx.
All other non grocer neighbors are below 1% of our ADR.
A finer point on that.
Pico has no exposure to luxury retail office or theaters.
And very limited exposure to distressed retailers.
The top 10 Nabors currently on our watch list represent just 2% of our ABR.
As a reminder, our combined exposure to bed Bath <unk> beyond <unk>.
<unk> city.
Tuesday morning is minimal at just 40 basis points of ABR.
In summary, our differentiated strategy continues to position <unk> well for continued steady growth.
In all economic cycles.
Alright.
Our exclusive grocer anchored focus.
Our necessity based neighbor mix.
Our right sized format.
Our well positioned locations in growing suburban markets.
Our record high occupancy with continued strong neighbour demand.
Our high leasing spreads and record high retention rates.
Our strong credit neighbors and diversified neighbor mix.
The lack of exposure to distressed retailers.
Our strong balance sheet.
And most importantly are well aligned and cycle tested team.
I will now turn the call over to John .
John .
Thank you Devin and good morning, and good afternoon, everyone.
First quarter 2023, NAREIT <unk> increased 13, 9% to $76 3 million or <unk> 58 per diluted share driven by an increase in rental income partially offset by higher property operating expenses.
First quarter core <unk> increased seven 7% to $78 2 million or <unk> 59 per diluted share driven by increased revenue at our properties from higher occupancy levels and strong leasing spreads partially offset by higher property operating expenses.
Our first quarter 2023 same center NOI increased to $98 6 million up four 9% from a year ago.
This improvement was primarily driven by higher occupancy and an increase in average base rent per square foot driven by our strong leasing spreads.
In addition, we collected approximately $2 million in overage rent in the first quarter, a 69% increase over last year, reflecting the strong sales performance of our grocers.
Overage rent is typically annual and is highest in Q1. So I will note that we do not expect this again until Q1 of next year.
During the quarter, we acquired for Publix anchored shopping centers for $78 $7 million.
These neighborhood centers are located in the suburbs of Atlanta, Miami and Nashville, with strong median household income and growing populations, we expect to drive growth in these assets to occupancy increases and rent credits.
From a balance sheet perspective, we ended the quarter with approximately $622 million of borrowing capacity available on our $800 million credit facility and we have no significant debt maturities until the second quarter of 2024.
Between annual free cash flow of approximately $100 million generated by our portfolio and the significant capacity available on our revolver. We are confident in our ability to fund our growth plans.
We continue to closely monitor the debt capital markets for the right opportunity to extend our maturity profile and this is a high priority for us.
This uncertain market and we are considering all available options in order to obtain the lowest cost of capital for our debt, including the unsecured public bond market private placements secured and bank markets.
We anticipate addressing our 2020 for maturity along with long term funding for our acquisition volume later this year.
Our low leverage ratio continues as a result of our strong earnings growth as well as our prudent balance sheet management with our net debt to adjusted EBITDAR remaining at five three times as of March 31 2023.
At the end of the first quarter, our debt had a weighted average interest rate of three 8% and a weighted average maturity of four one years approximately 82% of our debt was fixed rate.
During the quarter Pico Opportunistically executed a three year forward starting swap effective September 15, 2023, with a notional value of $200 million.
At a rate of 336%.
We are pleased with the continued strength of our business and are affirming our full year guidance for NAREIT <unk> and core <unk> per share. We are also affirming our same center NOI guidance of 3% to 4%.
We do anticipate earnings to moderate in the remainder of the year due to the seasonality of our earnings as well as a result of higher interest expense, which is reflected in our guidance assumptions.
As Jeff mentioned, we believe we continued to be well positioned for long term growth and we are delivering strong internal and external growth importantly, we have the flexibility to be patient and pursue accretive opportunities as they arise that we expect to provide meaningful NOI contributions in 2023 2024.
Beyond maybe.
Maybe most importantly, as we consider the current economic uncertainties. We continue to have one of the strongest balance sheets in the sector, allowing us the ability to remain on offense and pivot quickly in response to changing market conditions.
With that we look forward to taking your questions operator.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad.
Your first question comes from the line of Craig Schmidt with Bank of America. Your line is open.
Thank you.
And looking at.
Because our results and positioned.
It's hard to see what could derail you.
And in your operating results I mean, the leasing remains strong and even if the consumer.
Is weaker in the second half of the year.
That would be dynamic that would more likely impact 2020 for 2020 III.
I'm just wondering what.
Youre seeing out there that.
That could lead to your downside in terms of the earnings for the year.
Craig This is Jeff. Thank you for the call for the question in the end the call and.
<unk>.
I think your I think your analysis is accurate.
I think that 23 is it's fairly well baked.
Are always questions and concerns and.
<unk> got out there that but but.
But as you pointed out I mean, we don't have exposure to the big box potential.
Closures that are out there.
And.
Obviously, we are impacted on the interest rate side to what extent, but we are we're highly fixed I think were fixed at eight in the 80% range but.
Those would be those would be the things that were that were.
We're looking at and then obviously a change in the consumer but as you pointed out that that's really an effect too.
<unk> 'twenty four 'twenty five that it is 2023.
Great and then just I noticed in the last four assets were acquired in the suburbs of some more major markets.
I just wonder if if youre looking to grow in the larger Msas and then what is the current occupancy level.
These four assets.
John can you get the occupancy the exact occupancy number for us and so I don't have but Greg.
Craig the one thing I do I do and we should point out I mean, if you look at the Mark our top 10 markets, They're Atlanta, Dallas, Chicago, Sacramento, Denver, Minneapolis, Washington, D C Las Vegas and Tampa.
In the 10th as Phoenix So.
Our top markets are not a lot different than where were then then are the two projects that we bought.
And in Florida, and the projects, we bought in Nashville, I mean, they're there they're very similar markets, where we have.
Extensive experience.
The.
But.
Again.
If you look at at Atlanta, Nashville, and then.
Florida and in the sort of mid southern Florida. Those are those are key markets for us that we've been in for a long time and.
Well, we'll continue to stay focused on do you have the China can be of the occupancy numbers of the of the centers we bought.
I do I do so they're about 93% occupied across the four of them and so we have opportunity as Jeff said to grow through both occupancy lift as well as.
Pushing rents.
Yeah. We also have some land that we're purchasing we purchased with those assets that will give us additional opportunity as time goes on which we're actually excited about them.
Actually making great progress at those assets already so yes, I think we're well underway to getting what our underwriting was which was across the board, it's going to be well north of nine Unlevered and that is we think a pretty strong return in this in this market.
Jeff the only thing that I would add Craig John gave you the average occupancy of the floor, but one of the properties has an occupancy level in the mid eighties, and we see pretty attractive upside in that in that particular asset.
Okay.
Great. Thank you. Thank you.
Thanks.
Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Your line is open.
Hi, good afternoon, everyone.
Jeff I think you mentioned that.
A lot or maybe all of the acquisitions that you did in <unk> had been started in 2022. So I was wondering now as you think about the pipeline that you have and your expectations for the year.
Is the guidance that you guys laid out based on the activity that you're already seeing or to what extent is it just activity you think will come to fruition kind of as the year goes on.
Right.
Okay, well thanks for the question.
We I think we had a strong first quarter.
And our backlog going into <unk>.
Second quarter is much more muted than what we got in the first quarter. So that's why we're keeping a pretty wide range on the on the acquisition target for the year.
The.
So I.
That's a roundabout way of answering the question, which is that the market is cooler right now than it was in the first quarter and late last year. When we put these four projects under contract. They did take a long time to close because there were significant changes in the Uh huh.
Through the process on the on the acquisitions so.
I would say that we are less than that.
Certain about where the market is going to be between now and the end to end the end of the year and that's what's really going to drive our results in terms of how much we acquire and again that we've got to feel confident that we've got that number one or two grocer in that we're in markets, where we can really grow rents and grow.
Occupancy and.
If we can get that and get to that nine a levered. We will we'll be at the high end of the range. If we can't we'll be at the lower end of the range and that that's how we're we're sort of thinking about it.
Got it Okay, and then maybe switching over to the balance sheet. So you guys have the interest rate swaps expiring in September you've now address $200 million of that I guess going forward. How are you thinking about the remaining $55 million, but maybe bigger picture, what's the right amount of floating rate debt is to have and how that may play into your decision.
And as for addressing the 2024 maturities.
John do you want it you want to take that in terms of what our plan is.
Sure good.
Good afternoon, you Caitlin.
So the we are floating were about 81% fixed today than we did execute that swap opportunistically I think as I said in the prepared remarks.
We are trying to keep all of our options open and the different strategies come with either fixed or then we can kind of synthesize it with it with a swap and so our target is certainly to be higher.
I would say certainly above 90%, 95% would be our long term target, but at this time as we are evaluating opportunities to and the different forms of financing that we will address it at that time and so we did opportunistically execute that forward starting swap and I would think that as we.
Move forward with our plans for extending 24 maturities and funding. Our 23 acquisitions. Then we will we will swap into fixed at that time.
Part of it was just taking some of the pieces offset the table over time as well.
Okay. Thanks.
Thanks Carolyn.
Your next question is from Tayo Okusanya with credit Suisse. Your line is open.
Hi, Yes, good afternoon, everyone. Congrats on another solid quarter.
I wanted to talk about guidance you guys maintained it but when you look at your <unk> performance again granted maybe there's some overage rent in there and that's not going to recur for the rest of the year. What did we used to just annualize your first quarter you kind of you know.
Even further ahead.
Then the high end of your current guidance and you're probably going to do more by real acquisitions and the rest of the year.
I'm curious how you are thinking about guidance right now, especially kind of like the lower end than the high end relative to your strong performance in <unk>.
Yeah. Thanks, Thanks for the question.
I will tell you, we're naturally going to be conservative in the first quarter across the board as we get more visibility into the rest of the year.
And yes, we did have a fairly strong percentage rent paid in the first quarter, which was obviously very positive driven by the really strong sales that we've had at our grocers.
And that'll be something that will occur each year, but it will recur in the first quarter.
Overall, we are.
We almost I mean, that's part of our thought process is to be relatively conservative in the coming out of the box in terms of Av.
What what kind of.
Affirmation or acceleration of our.
Guidance what will happen.
And.
In this environment.
Well, we will err on the conservative side.
Given just the uncertainty in the overall economic environment with interest rates and the rest and we will have as we have more clarity in that we will get more.
Certain as the quarters go by.
Okay. That's helpful. And then just curious to get your kind of some high level thoughts heading into ICSC.
That's kind of giving you confidence about future demand or not and also specifically for kind of as you know when you kind of retail that categories are trying to take meeting with your leasing team and just a general sense of Huntington's.
What's that telling you about kind of the day.
Demand environment.
Yes.
So we we have a really strong.
Backlog of meetings on the on the leasing side. So I would say it is all indications are that the ICL from the ICSC bookings that.
The retailers continue to have but we are really strong.
Man.
We're hearing anecdotally that there's going to be.
Or.
A fair amount of product coming on the market in the grocery anchored right size number one or two grocers are our target that there's there will be a we understand little there'll be several if not more.
Of those projects coming on the market as part of the ICSC as you remember I mean, that's always been a cycle thing where at the ICSC you get a big.
A lot of people coming out with product for sale.
That sort of went away for the last two or three years and it's now appearing to be coming back and we'll see how that how that plays out and what kind of what whether there is a realistic seller or a more.
You know sort of seller from the past we try to get the old pricing. We are we understand through the brokers is that there should be some decent demand coming.
ICSC, but well you know obviously, we will see.
That comes through.
But but activity seems good I think the.
They're talking about 25% to 30000 people I'm coming for it so that it's.
Not back to pre pandemic numbers, but positive and.
So I'd say, we are we're optimistic but we'll we're sort of wait and see in terms of how how positive the the Ics It comes out.
Hey, Jeff the only thing I would add to that in terms of.
Where we're seeing.
Retailer demand by category for your question so.
It's in line with with the with the current portfolio. So quick serve restaurants continue to have strong demand for our centers medical continues to have strong demand.
The growing percentage of the demand our current pipeline approximately 20% of the pipeline is medical and then lastly, health and beauty.
So those are the three categories, where we're continuing to see.
Retailer demand.
Those retailers do not seem to be concerned.
About the strength of the consumer enter are being very aggressive in their growth plans.
Great. Thank you.
Did we answer your question what was that.
Well I'll make sure we got it covered.
Yes.
Yes, we did hopefully.
Your next question is from the line of Mike Mueller with Jpmorgan. Your line is open.
Okay.
So quick question in terms of the small shops.
Is the mix today any different than it was say heading into COVID-19.
Has it evolved significantly.
Well there are two answers to that one one is that.
There had been a significant amount of time between the great financial crisis.
And so what happens is there's a natural.
Where were you.
You have some weaker retailers that get into the business and are able to survive because of the market.
When the when the pandemic hit.
It eliminated a lot of those.
Sort of more marginal players.
Players and so as we look at it today you know, we're not that far out and so we think we've got it.
Strong if not stronger base than we've ever had in terms of our small tenant makeup and.
But it's pretty much over a long period of time maintained that local sort of being somewhere in that 25% range of our of the of the small stores and then regionals and nationals being the bigger I don't know Devin if you have any other points in terms of like sort of.
The mix that we that we've got.
Yeah, Mike the only thing that I would add to capture that.
In terms of medical.
A number of those retailers tend to be more local neighbors.
And as.
As we look at our portfolio, what we liked about that use and again as I mentioned in my answer to <unk> question, we see medical as a growing percentage of our.
Total rent roll right now, it's about 12%, but the pipeline, it's about 20% and <unk>.
A percentage of our local neighbors are medical users about 12% of our local neighbors or medical.
And what we like about them is this number one they typically sign longer leases and they are very resilient on average in our portfolio. The local medical neighbors have been in our centers for 10 years on average so.
They signed long leases that may stay in that space.
Other use it that has evolved as health and beauty again, we like that because it tends to be e-commerce resistant.
Can't get your hair dine in your nails done on the Internet and so AD with medical it's a e-commerce resistant use and again similar to medical these local tenants tend to sign longer term leases and in our portfolio. They have been in this space for an average over 11 years.
Again resilience so.
That's been the evolution in the in the local neighbor base in those particular categories and we believe that now that.
<unk> is highly constructive given the length of time that the tenants are signing up for and then the fact that they're continuing to be tenants for over 10 years.
Got it and then just a quick follow up I think I think the.
In line occupancy is 94, three if I'm not mistaken, where where do you see the ceiling for that.
Mike as we've said.
Instantly, we think we've got another 100 to 200 basis points of upside in that in that metric.
And again as we continue to emphasize we know that the level of occupancy that we have been able to achieve in the portfolio.
Potentially perceived as a as a weakness which is an interesting concept with a strength being highlighted as weakness, but as we've continued.
To state what we're doing given the high level of occupancy that we have is we're pushing spread.
And as you can see in the first quarter.
Spreads were 16%, which is higher than they've been at any point over the last five quarters and is meaningfully higher than that metric has been historically and that's how we'll continue to get NOI growth, which is as we bump up against this.
Ceiling in terms of occupancy, we will continue to push rents and as you've seen from our metrics in the first quarter, we've been able to do that.
Got it okay. Thank you.
Thanks, Mike.
Your next question is from the line of Handel St Juice with Mizuho. Your line is open.
Hey, there thanks for taking my question.
My first question is on the watch list I think you mentioned in your remarks that it's about 2% overall, but then you also mentioned that you have about 40 bps of exposure to bed Bath Party city on Tuesday morning. So I guess can you talk about what else is on that list. What other categories. You concerned about and also remind us what you've budgeted in your guide this year for known or anticipated tenant risk.
And what's your bad debt reserve for unanticipated tenant risk is.
Great Thanks, and thanks for calling in.
Devin do you want to take the first and then John you want to talk about the bad debt.
Sure.
Sure Hi, handheld thanks for joining the call.
In terms of the three tenants.
Party City.
You say morning in bed Bath handout.
Again to just remind everyone. We have five party city in the portfolio and all five of those leases we expect to be assumed so we will not have any backfill on those five stores.
On Tuesday morning, we have three.
Three of them to our already backfill.
And one is in negotiation.
And the rental metrics on those locations are meaningfully better than the in place rents.
The 20% to 25% increase range.
On the two bed Bath that we have in the portfolio.
We have not backfill those.
These locations yet, but we're optimistic in terms of what the backfill rents will be able to be.
On one.
We have a $6 rent that we think can go to the low double digits and then on the other we will have a little bit of a backslide in rent from <unk>.
$11 range to a $9 rent so overall.
We are not concerned about the impact that those III tenants will have on the portfolio in terms of the other tenants on our watch list and handle those are our top 20 tenants on the watch list. So it's a it's a.
A large universe of.
Of tenants.
And it ranges from <unk>.
Retailers that are in the physical.
Therapy space to the pet space.
Two personal care et cetera, so it's a wide range.
<unk> not one of those tenants represents more than 30 basis points. So the ADR for us. So again the diversity in our rent roll continues to benefit us and so we're not particularly worried about any.
One category in our watch list.
Okay.
And I will jump in on the bad debt. So we do provide guidance disclosure and this portfolio has consistently delivered over a long period of time between 60, and 80 basis points of bad debt that is what our guidance is based off of and our experience in the first quarter is right down the fairway on that.
We do space by space budgeting, but to with regards to you know.
Unexpected fallout or things like that but it to devins point, we just don't have had that volatility.
So I think we're in a good place from from a guidance perspective.
Great great.
Very helpful.
I think that's all I had on my list. So thank you all yield.
Yeah. Thanks, Andy Thanks, So Devin.
Your next question is from the line of Ronald Camden with Morgan Stanley . Your line is open.
Hey, just two quick ones.
Some of these have been asked already but just going back to the acquisitions.
I see the cap rate just remind us how those deals came about number one and number two.
After the events of the past month and a half.
Is your is your thinking that people are still on pause and that activity is going to pick up in the second half of the year or just trying to figure out when does this sort of tighter lending environment translate into.
For a more deal activity more opportunities for <unk>.
For the company and for your pipeline.
Okay.
Thanks Ralph.
D a.
If you if you look at the four projects each one has a very specific story to it.
And that story at its core is about a seller that is motivated because in this environment.
Where youre seeing a transition where we're really trying to find motivated sellers, who will accept the new <unk>.
And one of the ways, we were able to do that as we found assets that had.
Significant upside to them.
And in a lot of that was in new leasing spreads a lot of it was in new.
The outlet development opportunities.
And.
And then it contractual ramp ups. So these were these were things that were very specific to the property, but they allowed us to have a what could be perceived as a more aggressive cap rate, but with a a tremendous with a lot more upside and that was really where we were how we are able.
To bridge the gap between the.
The seller.
Our pricing expectations were.
And those would be things like the last asset in a bond that they would be.
Institutional owners with alternative needs for portfolio management in terms of what they were selling so it was a variety of different pieces, but all sort of had a similar story of which was a motivated.
A seller.
In terms of pace.
We'll see a lot from the ICSC I think that will tell us a lot about what type of pace. We can anticipate for the second part of the year.
I do think it will be muted this year I think across the board it will be you know the.
It'll be.
Difficult to find.
The appropriately motivated sellers, but it's a big market I mean, we've got 5800 centers across the country that we'd like to buy.
With the number one or two grocer in the demographics that we want so it's a big market.
And there is always volume minute.
But obviously, it's a lot more muted today as pricing gets gets recognized.
That answer your question Ralph Yeah that was perfect and then just my second question was just going back to the swaps I'm just looking at that the that that page on the supplemental.
I guess I'm trying to figure out so when I look at 24.
And I see those three term loans coming due.
So what what's going to happen to know like what's the mark to market on the on the interest cost there.
So basically where do you think you can issue.
Today, and how should we think about when those come due.
What are you guys planning for that thanks.
John do you want to take that one.
Sure Yes.
Yes, so Ron.
We are very focused on this 24 maturities and as we look at the various options, we have and they come with that.
Different different rates, but I would say from a a swapped in rate perspective, there can be some variability, but it goes anywhere from the low fives to the low sixes.
In terms of when you look at where those interest rate swaps are at close to 2%.
Depending on what you're looking at there that's probably in the spring of quarter, three and a half range.
Is is what you're looking at and that could be based on that the 10 year. It could be based on a five year. It could be based on where so far is I mean, the swaps. We just executed we're at $3 36, and so I think if you look at what those swaps or fixing on there is that headwind, but I think the growth of the operating performance of the portfolio, allowing us to kind of continue to grow at Adam.
Full level, but it is something we're very focused on because it does play into funding our acquisition plans and the like so the reason that island.
Less exact on that is because as I mentioned, we are examining various forums and durations of maturities, but hopefully that gives you a sense for the rates that we're looking at.
Perfect. Thanks, so much.
Thanks, Rob.
Your next question is from the line of Juan Sanabria with BMO capital markets. Your line is open.
Okay.
I just wanted to follow up on the earnings trajectory of a strong first quarter again, so I guess.
If you could just.
Breakdown.
First what's assumed in that sequential drop off from the percent rent or overdrafts from the grocers that Bruce.
Our kind of our annual event in the first quarter and then secondly, any anything that youre budgeting for an occupancy perspective, there was a two bed bath stores, a little bit on Tuesday morning, but how should we think about occupancy trending throughout the year just thinking about your first quarter performance relative to the bottom end of your guidance range for earnings.
Great.
Thanks for calling in John do you want to take that one.
Sure so.
In the in the first quarter I would say I think Devin mentioned it was in my prepared remarks, I would say that there was about a penny of increased over trend over the you know call. It even a year ago that we would expect to repeat in 2004 as our groceries continue to increase their sales volume, but it is.
It is not likely to repeat at that scale as we go forward. So I would say that's starting piece. The second is in the second quarter, you get a little bit of seasonality around certain expenses.
And that are seemingly smaller dollar amount, but probably give you at another.
Not not a full penny, but a little bit there.
And then and then from there you've got you've got better growth that gives us kind of the range that we're looking at so I do think that normalizing off of Q1 gives you a little bit of a different result in a full year with regards to occupancy.
For us, it's really stability in terms of as Devin mentioned, you talked about those leasing plans, but when you're given the diversity of our base.
We do expect that we will continue to grow our occupancy levels I will note that the economic.
Increased and tightened.
The spread between our economics, and our leased occupancy, which really again underscores the ability for us to execute a leasing and move our neighbors in as quickly as we can and so that is something that we compressed this quarter on a long term basis, that's usually been about 60 basis points to 80 basis points. This quarter. So there's some some.
Oppression, there, but we do not foresee any major adjustments or swings in that it's just more of the items I just mentioned.
Thank you that's it for me.
Okay. Thanks.
Your next question is from the line of Todd Thomas with Keybanc capital markets. Your line is open.
Yes, hi, thanks.
Two questions one John so so in terms of just following up I guess on that guidance a little bit more.
You mentioned the seasonality that you anticipate so what exactly are you referring to in terms of seasonality outside of the overage rent that you just discussed.
What sort of seasonality are you.
Pointing to and in the second third and fourth quarters.
It was really my comment was more specific I would say to the second quarter and as we look at it.
Kayo brought up ICSC. So there's a there's a cost and then you've also got kind of a proxy costs, though.
Not big dollar amount, but then in terms of the sequencing. So I mean again the stability of our base. It's just that the 59% that we had.
And those items that would just be something difficult to annualize off up but then as you get to later quarters. Then you can see that that increase there is nothing more than that.
That was referencing.
Okay got it and then.
In terms of the portfolio is well leased well occupied and the spreads youre leasing spreads have been strong to date.
Jeff You mentioned that you expect pricing power to improve further.
How do you know if youre pushing too hard driving rents too high particularly around.
I'm sort of thinking around the 25, 26% the portfolio.
Local tenants.
Is that a concern at all just given some of the uncertainty around the consumer and in the economy, which you've sort of cited.
And how do you measure the portfolio's health.
Yeah. So Todd it's a great question and we do talk about it a lot in it.
At the end of the day, when our retailers deciding to stay in our shopping center. So in our in our negotiations on retention.
That is the direct decision on their part about profitability.
And when you see that we're able to retain.
Not only retain a high percentage.
95%, but we were also able to get to 16, 1% growth on it.
That means that they're.
They're not doing this for philanthropic reason, they're doing it because they can make money at these at these locations and when you see those two kind of numbers.
Means that we are we're nowhere near that kind of issue that you're talking about where we're getting to two high.
The number that they can't.
Can't be profitable.
And in addition to that we know we're getting close to a 3% annual bump on those as well so.
The retailers.
<unk> are telling us with their actions that they are profitable at our centers and when they when that number when those numbers start to change dramatically youre going to be probably asking the question that that you've got more.
More often.
But right now, we're not saying that at all.
Okay, and if I look at it makes sense here.
Yeah, that's helpful and if we look at.
Anchor and inline expiring rents and in 24, and 25% compared to the rents that you've been achieving on new and renewal leases is there anything that you see today or anything.
Yes.
In those two years.
Specifically that would prevent you from seeing similar rents and similar rent spreads.
Moving forward.
Yes, I don't we don't have a crystal ball. So you never know what can happen.
But theres nothing on our radar screen right now, that's indicating anything but our ability to continue to grow those and you know and as we.
We look at it you know win.
We have less space to lease and we've got more demand.
We would anticipate.
Being able to be very strong in that in that position.
And.
You look at just the supply demand dynamics and there. They are very positive for US right now and that we don't see anything out there that would say, okay, well, that's going to change dramatically one way or the other I mean, theres certainly nothing being developed so theres no new construction that's going on.
Change changed the amount of supply and and so we.
Basically it's a demand issue and you know the only thing that would drive demand.
Negative from where it is and we're certainly not saying that now is a major recession.
We don't anticipate that.
We're planning for.
Our stuff for slowdown with interest rates, increasing but we're certainly not any kind of major recession.
And any of that that would be the thing that would be sort of an outlier to current thinking that we'd have to play it out but again, you know as well as anybody are necessity based focus.
It it gives us a lot of stability.
And that.
That we think as you know in these kind of environments are a real positive.
And a similar distribution.
Of leases expiring that have stated option rents and are you doing away with stated option rents at all a little bit more at the margin as you renew or signed new leases yes.
At the margin, yes, but it is still a part of a lot of retailers.
Demand I mean, they they they want they're they're they're building a business. They want it for a long term you know on average our small stores have been with us nine years.
They want the they want to control the space on a long term basis and so it's it's a fight for us.
A day to day basis.
Getting rid of options and where we get out where they get options, making sure that we get commensurate bumps.
Accommodate.
Where the market could be you know it does help to have you know a.
Contractual rent bumps during the term which has become much more consistent I would say about pricing power. That's one of the things that we have been able to accelerate and feel really good about our ability to get that so if you're getting 3%.
Bumps each year for the five year term of the small store space and and then you're getting a bump it at at the time of the option.
We feel okay about being able to stay at market rents in that way in that regard.
Does that does thank you.
Yeah, absolutely. Thank you.
Thanks, Dave.
Your next question is from the line of Floris Van <unk> with Compass point Your line is open.
Hey.
Sorry about that had you on mute.
So I looked at.
A couple of things there I think we sort of touched on it a little bit before.
Your shop.
Space would appear to have the greatest.
Upside opportunity here I mean, clearly in terms of occupancy, but also in terms of rents and you get that space back a lot more quickly. If I look you say that your average lease term for your shop space is four 1% remaining.
Eight 2%, including options and you were just talking about this before Jeff but I.
I mean.
Do all of your shop tenants essentially have an option for another.
But it sounds like it looked like a four year for your terminal $4, one year term or how does that work and.
And then maybe I look at your if your stated expiry of 13% of your rents next year, that's a massive opportunity potentially particularly as the rents are.
Being pretty low at $13 58, maybe if you can touch on on the.
The opportunity there and the ability to drive earnings going forward.
Thanks for the call Devin.
Kevin do you want to take that or and John maybe you can you can walk into the sort of where our mark to market I think kind of feeling is for for the the leases are coming due next year.
Sure I'll take a crack at it Florida is the simple answer is not every.
Small shop, we had an option as Jeff just Takeda so the national retailers push hard for options in order to signing leases and that's where the auction comes in John what percentage of our tenants have.
Auction.
Phase of the inline guy.
Number off top of your head.
I don't know that off the top of my head, but they do I mean, it is a mix, but I think the 8.2 is a blend of multiple options. So again the percentage that have them versus something that has a two options versus one option is what factors into that eight point too.
Yes, So Florida will will will follow up with with with you on that and give you. The exact specifics. This is something as Jeff indicated that our leasing team is pushing back on.
To the extent they can.
But it is a.
Meaningful negotiating for the national retailers, where when they are signing leases. They are looking for options in that lease and as Jeff mentioned, what we're trying to do is given the annual increases that we're seeing in our market rents build that into the.
Option rent that we're willing to agree to with that retailer. So it's a <unk>.
The variable equation that we're taking all the factors into account when agreeing to that.
However, your your thesis is is spot on which is with 13% of our.
Rent expiring in 2024.
And in place rents.
That there is meaningful upside in the portfolio.
We'll be able to capture.
You know on a on a go forward basis.
Okay.
Yeah. Thanks, Devin if you look you just look at yes, sorry.
The renewal spreads that we've got and you know the fact that you know.
We did get 95% renewals.
Yeah.
The 16% spread on 13% of your income I mean that that's obviously, a real positive impact maybe slightly overstated, depending upon market conditions, but there is there is certainly opportunity there.
Great Great. Thanks, guys, maybe Devin you mentioned something else, which sort of caught my attention as well you said you had.
Is it 19 assets that you've owned since 2008 and.
And you talked about the how they they are.
How'd They had limited downside in terms of the in terms of occupancy during the great financial crisis I'd be curious have you guys looked at what the.
The long term same store NOI CAGR on those those assets that you've owned since 2008 has been I'm just curious to see if you'd be willing to share that with that with us for a couple of points for Florida. It's 29 asset that we have.
Alright.
Alright.
In OE.
And the point, we were making is there is a perspective held by some think including new for us.
Okay.
Where our <unk> are that our portfolio has.
Has more potential risk in a downturn.
And so what we did was we went back and looked at how those 29 assets performed during the GSC and NOI decreased by 270 basis points, but it recovered by 2011 and then.
We lost.
That was the NOI and we lost 180 basis points of occupancy so those assets perform.
Well.
During during that.
And there is one other point I wanted to make for US I'm, sorry remind me of your Oh.
Your point was we have not gone back and looked at what the portfolio's asset same store.
<unk> was over that period of time that 15 year period, but we can do that but what I do know is if you look at the Pico portfolio from 2017 to 2022, we had same store NOI that was in the mid threes for the portfolio.
So a lot of the questions. We're continually getting is how do you guys think youre going to continue to be able to put up market leading same store NOI growth. The reason is we don't historically and if you look at the last five years, our same store NOI growth within the mid three which was a 160 <unk>.
Basis points higher than our peers. So we continue to believe that our strategy is differentiated and therefore, we'll be able to realize better growth then.
Maybe it's perceived that the sector can deliver.
Thanks, Devin I appreciate that.
Sure. Thanks, Laura.
Your next question is from the line of Paulino Roadhouse with Green Street. Your line is open.
Okay.
Good morning.
And I'm going to leave a patient.
Hi.
In your presentation, you show foot traffic by region and you have the west lagging other regions, if not by a huge margin.
Spread has being sticky.
So what's the makeup there.
Are there any.
<unk> for the way.
You were thinking about there.
Portfolio management.
Yeah.
Can you repeat that played it because I wasn't I wasn't play Fi youre, saying that that our traffic our our placer numbers are saying that the traffic in the western states was higher or I didn't I wasn't exactly upon which which segment you were talking about yes.
Yes, he showed the Wes.
Lagging so your office assets in the West language in terms of foot traffic and I think you're you're indexing everything again 2019, if I remember well.
Oh, yes and no.
Again, it's not a huge margin, but its tiki. So I wonder are you may be seeing this kind of lagging the other metrics as well not just with traffic and.
Yeah, how do we do.
Yes.
Kind of.
If it doesn't make total sense, because if you look at where we've been able to grow rents and occupancy are the west has actually been one of our strongest regions.
So.
My my gut is when we.
We just don't trust the placer numbers to be accurate to that degree. We we look at general trends with that we look at you know the sort of pieces, but we just haven't found it to be accurate enough to say, okay, 3% is a real number.
We're looking at more.
Directionally, how it how it is and you know the.
The if you look at our grocer sales you look at our occupancy and you look at our rent spreads the west is still performing very well so it.
It would.
I don't know how to answer that other than we're not saying in terms of operating results what a place we're seeing like in the in the on the traffic side.
Hey, Devin I don't know if you have anything to add.
There, but that's been our experience.
Yeah, I mean pulling in the only the only thing.
That I would add is we are benchmarking into pre COVID-19 to give people perspective on.
What foot traffic looks like today relative to what it was like pre COVID-19.
And if.
If you look at our 2022 foot traffic it was 8% higher.
2019, again to pre Covid metric and then our foot traffic in Q1 of 'twenty three relative to Q1 of 'twenty two with comparable it was a slight tick lower.
So again, our view on our foot traffic is that it continues to be strong and again, the leasing and sales metrics that we touched on we think support that but the Bottomline point is.
As we dug into the place or data in detail to Jeff's point it can be relied on directionally, but it can't be relied on to give you a actual.
Meaningful pinpoint accuracy.
Yeah, Okay that makes sense.
Yeah.
<unk>.
My other question is.
You have you fully own almost all of your properties, except for 20 assets that you have in a JV.
Do you see a scenario, where you would buy the remaining interest in those sockets or.
So when would you be interested in to do you have at all and the ambition having at all.
Sure.
Well I'll take the first part revenue could add it.
Go ahead Deb.
Oh, I was going to say, Jeff Paulina our partner on that venture is northwestern mutual.
10 year joint venture we're in year five of the 10 year venture, it's a high quality portfolio that.
We would love to own all up at some point in time, if that were available to us by our partner is very happy with the performance of <unk>.
That venture they bench.
Benchmark is to NAREIT and in 2022, we outperformed decreased by <unk>.
Over 1000 basis points. So that's a very strong performing portfolio with a happy partner. So our view is is that venture will stay in place.
At least through its.
10 years.
Yes, thank you that answers it.
Yeah.
This concludes our question and answer session I would like to turn the call back to Jeff Edison.
Great well I want to thank everybody for being on the call. This was a great quarter for us when you have 95% retention, 16% spreads and then you got four 9% same center NOI growth.
Occupancy numbers, we beat consensus on our <unk> per share.
We're ahead of pace on our acquisitions at returns that are above what we underwrite and we balance sheet very disciplined and in a great shape. So we're very.
Excited about the quarter. We think you know we will we hope that we can continue this positive motion and.
Through the rest of the year and we think our strong results continue to highlight the strengths of our focus on differentiated strategy getting that number one or two grocer and theyre driving the traffic, making it the right demographics of our small stores can be successful and we will give a lot of credit to the team. This team has been doing this for a long time.
Where we've got a fully integrated platform. We are focused on a very specific niche of our of our business and that we think is going to not only get results for this last quarter, but good results for the next five years or 10 years as we continue to to grow this to grow this business. So on behalf of the management team I want to thank our shareholder.
As our associates and importantly, our neighbors for their continued support and thanks, everybody for being on the call today.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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