Q1 2023 Regency Centers Corporation Earnings Call
Greetings and welcome to the Regency centers Corporation first quarter 2023 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please.
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Binder. This conference is being recorded it is now my pleasure to introduce your host Christine MC Elroy Senior Vice President of capital markets. Thank you Christine you may begin.
Good morning, and welcome to Regency Centers' first quarter 2023 earnings conference call joining me today or at least the Palmer, President and Chief Executive Officer, Mike Mas, Chief Financial Officer, Alan Ross EVP National property operations in East region, President and Nick with admired EVP and West region President.
A reminder, today's discussion may contain forward looking statements about the company's views of future business and financial performance, including forward earnings guidance and future market conditions.
These are based on management's current beliefs and expectations and are subject to various risks and uncertainties. It is possible that actual results may differ materially from those suggested by these forward looking statements we may make.
And rest of that could cause actual results to differ materially from these statements may be included in our presentation. Today and are described in more detail in our filings with the SEC specifically in our most recent Form 10-K, and 10-Q filings in our discussion today. We will also reference certain non-GAAP financial measures the comparable GAAP financial measures are included in this quarters.
Earnings materials, which are posted on our Investor Relations website. Please note that we have also posted a presentation on our website with additional information, including disclosures related to forward earnings guidance. Our caution on forward looking statements also apply to these presentation materials Lisa.
Thank you Christy and good morning, everyone and thank you for joining US today, we're pleased to report another solid quarter with positive results.
Yes, we acknowledge there is uncertainty in the economic outlook, especially given the recent bank turmoil. So we do continue to look for signs of softening in our business, but to date, we haven't seen it operational trends remain positive and this is consistent with our update a quarter ago.
And in fact with three more months in the book, we have even more conviction in our outlook for this year tenant demand for space in our centers remains strong sustaining them at the momentum in our leasing pipeline.
And also in our ability to drive rent growth. This is the case across our entire operating portfolio as well as within our development and redevelopment program.
We think continuing outperformance in tenant sales as well, which have resulted in higher percentage rents, especially in restaurant and grocery.
We believe this reflects strength in those categories as well as an ability of consumers in our trade areas to absorb elevator inflationary impacts.
As we discussed in our last call. We are seeing more activity related to tenant bankruptcies. Most recently with a widely anticipated filing from bed Bath and beyond nearly two weeks ago, but none of this activity has been a surprise to us as these retailers had been on our watch list for some time.
And as Alan will discuss our teams have been proactive and we're seeing strong demand from tenants to backfill the space.
Regency's relatively limited exposure to these bankruptcies is not by accident or luck. It is the result of proactive asset and portfolio management over a long period of time.
As the quality of our assets and locations gives us the advantage and the ability to be selective in the merchandising of our centers.
We believe that our in place tenant roster today is as strong as it's ever been.
One change that we have seen since our update last quarter is in regard to the transaction markets. You may recall that I commented that we were starting to see increased activity in competitive bidding situations returning but that was that was pretty short lived as within weeks. After that the transaction market was again impacted by uncertainty and instability in the financing.
Markets.
Was hoping that today, we'd have more concrete data points to share with you but transaction volumes remained very soon.
That said, we remain on our front foot from an investment perspective, as Nick will discuss in a few minutes. The team is hard at work finding new opportunities to invest our free cash flow and grow our development and redevelopment pipelines. This has long been a core competency of regency as many of you on this call are aware and I'm proud of our industry, leading team and long track record.
Our successful execution.
In summary, we believe that.
Given the positive structural trends supporting continued tenant demand in suburban trade areas, we and the shopping center sector as a whole are in an enviable position with greater resistance to potential adverse economic and capital market impacts.
And further we also believe regency benefits from competitive advantages, including the exceptional quality of our assets and our people our liquidity access to capital and balance sheet strength that uniquely positions us to be opportunistic while still delivering quality results Alan.
Thank you Lisa and good morning, everyone.
The positive leasing and retail environment, we experienced last year has continued as evidenced by another quarter of strong operational trends.
Leasing activity remains robust with new leasing volume, 20% above our historical first quarter average.
Activity was led by continued strength in shop leasing where occupancy was up another 20 basis points in the quarter on top of a 200 basis point increase during 2022.
Cash rent spreads remain healthy and importantly, our GAAP and net effective rent spreads were both in the mid teens in Q1 and on a trailing 12 month basis.
The GAAP in net effective rent spread metrics are the most reflective of our ability to drive base rent growth, while prudently managing our capital investment and maximizing our return.
We believe these mid teen spreads are reflective of the quality of our shopping centers and locations, which gives us leverage in lease negotiations and allows us to limit leasing capital spend.
To that end I would encourage you to review our new net effective rent disclosure on page 20 of our supplemental.
Embedded rent escalators are a huge driver of our rent growth and we continue to have success driving these steps.
Nearly 90% of all leasing activity and 93% of shop leases in the first quarter had embedded rent steps, which is our highest percentage on record for shops.
So not only are we pushing the rate of contractual increase is higher but we're getting them and more leases.
These positive operating results and activity contributed to another solid quarter of base rent and same property NOI growth.
Most importantly, it provides further conviction and our forward growth trajectory.
Leasing activity remained strong and are signed but not occupied pipeline is flat quarter over quarter at 230 basis points, representing $32 million of annual incremental base rent. So the.
The leases that we are commencing each quarter, we are replenishing the pipeline with new leases signed notably our new disclosure on page 20 also includes enhanced information are signed but not occupied pipeline.
Today, we also have nearly 1 million square feet of leases under LOI or lease negotiation further reflective of the strength in demand that we continue to see.
This activity includes square footage associated with recent tenant bankruptcies for which we've seen strong interest.
The most notable of these is the recent filing at bed Bath and beyond of which we have 10 locations comprising only 50 basis points of ABR.
Five of these locations were included on last week's rejection list, which we have which we had expected.
Our teams have been proactively engaged on all of our bed bath locations with potential backfill tenants in anticipation of the opportunity to recapture and re merchandise the stores.
Demand is coming from several categories, including grocers off price retailers home decor sporting goods and medical uses.
This is resulting in multiple retailers vying for many of these spaces and we anticipate average mark to market of approximately 20%.
In addition to bed Bath, we continue to actively manage all of our at risk tenant exposure, we own great real estate in some of the best suburban trade areas around the country and leasing demand remains strong.
We are not afraid to get spaces back in an environment of eliminated new supply growth and a surplus of great retailers that are actively looking to expand in.
In summary, our team feels really good about the continued positive momentum we are seeing in the retail operating environment.
Okay.
Thank you Alan.
Good morning, everyone.
We continue to make great progress executing on our development and redevelopment strategy ending the quarter with 300 billion of in process projects leasing activity.
He remained strong and our team has done an excellent job of keeping our projects on schedule within budget.
As we've discussed on prior calls regency is uniquely positioned to grow our investment pipeline or utilizing our three development cornerstone.
Capabilities, our capital and our contacts our unequaled combination of development expertise access to capital given our extensive free cash flow and fortress balance sheet in conjunction with our expansive and deep industry contacts and relationships across our 22 offices.
Some unparalleled advantage to source and execute on attractive opportunities throughout the country.
For instance, we are nearing the finish line on the purchase of a development project in the New York Metro area. This is nearly $90 million of investment will be anchored by best in class specialty grocery and located in extremely high barrier to entry market.
Additionally, this week, we also closed on the first phase of a retail development and it's driving 10000 acre Master planned community in Metro Houston.
Although the first phase is smaller in scale at approximately $10 million, we do anticipate.
Being able to grow the project in future years.
We look forward to sharing more details on both of these projects when we add them to our in process pipeline.
Beyond ground up developments, our investment team continues to execute on opportunities to create value within our current portfolio.
Subsequent to quarter end, we started phase III of our redevelopment that's air Monte Center and Daly City.
It's $37 million project includes the redevelopment of the former Jcpenney and the addition of two small shop building adjacent to Macy's.
We've executed a lease with best in class, South Korean food market and grocery operator for the former Jcpenney space and we're excited to bring a new concept to the Bay area.
This phase of the project sits with a highly visible front door of the shopping center it will bring to centers of 97% leased.
In summary, we remain encouraged by the opportunities we are seeing to drive future value creation and reinvest our free cash flow and are focused on continuing to build our development and redevelopment pipeline to north of $200 million of annual starts.
Hi.
Thanks, Nick and good morning, everyone I'll start with some highlights from our first quarter results and walk through a couple of changes to our full year earnings guidance and assumptions.
Excluding Covid period reserve collections, we delivered same property NOI growth of six 3% in the first quarter.
The largest driver was base rent contributed a strong 430 basis points in the quarter.
Base rent growth is the most important indicator of our portfolio strength and we continue to see positive impacts from embedded rent escalators positive spreads on re leasing space and higher occupancy year over year.
We also saw a meaningful outperformance on percentage rents in the quarter contributing 100 basis points to same property NOI growth despite tougher year over year comps.
Driven by continued strength in grocery and restaurant sales.
Notably percentage rents tend to be seasonal with the majority of sales base billings occurring in the first quarter of the year.
The other meaningful driver to first quarter same property NOI was a 130 basis point positive contribution from uncollectible lease income.
We continue to isolate the collection of Covid period reserves from 2020 in 2021 to provide a better picture of normalized results, but the realities of cash basis tenancy can create some variability in the bad debt line item from quarter to quarter.
And and due to the better than expected collection rates on cash basis that we.
We experienced a positive contribution to uncollectible lease income this quarter as we collected on rents originally built in reserved in 2022.
The increase in collection rates and declining receivable and reserve balances demonstrates that health and resiliency of our tenant base.
Turning to 2023 guidance I'd like to point you to the helpful detail on slides five through seven in our investor presentation.
We've increased both our NAREIT <unk> and core operating earnings guidance ranges each by four cents per share driven largely by the outperformance in percentage rents and uncollectible lease income in the first quarter.
Collectively these items also drove the 50 basis point upward revision in our same property NOI growth guidance to a new range of two and a half to three 5%.
Excluding COVID-19 period reserve collections.
I also want to spend a minute on our credit loss assumption.
Which we revised to a lower range of 60 to 90 basis points for the full year.
From 75 to 100 basis points previously.
Notably the midpoint of our new same property NOI and earnings per share ranges now capture the potential for a full liquidation of bed bath and beyond by by mid year.
This scenario was previously contemplated in the low end of those ranges. However, this change was offset by first quarter outperformance and bad debt that I discussed earlier, which positively impacted our full year credit loss assumption.
On the capital side in late March we repurchased roughly 350000 shares for $20 million at an average price just over $57 per share.
This repurchase was executed to hedge the planned issuance of a light kind of mountain O P units to the seller of the development project in New York that Nick mentioned earlier.
I'll end as I, typically do highlighting the strength and afforded opportunity of regency's balance sheet, the importance of which is never more evident than in times of capital market's turmoil.
Leverage remains at the low end of our targeted range of five to five five times debt to EBITDA. We are generating significant free cash flow are projected to be north of $140 million. This year funding our investment pipeline.
We have access to significant liquidity liquidity with our $1 billion to $5 billion line of credit and there are no significant debt maturities for over a year.
This position of strength allows us to be patient and opportunistic in this evolving environment.
With that we look forward to taking your questions.
Thank you well now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question you May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before.
Mr Archer.
One moment, please while we poll for questions.
Okay.
Yeah.
Yeah.
Yeah.
Yeah.
Thank you. Our first question is from Michael Goldsmith with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question. My first question is on the sustainability of the leasing demand what have you seen have you seen any change in the leasing volumes post Silicon Valley Bank and some of the some of the disruption that was experienced in March and just you know.
Has that sustained in April and if.
If you have seen anyone express any sort of resistance or slowdown in leasing what are what are the reasons that we're talking about.
Just trying to get a sense of the long term sustainability of this recent trend.
Yes, Michael this is Alan I. Appreciate the question, we are still seeing very strong demand across many categories and all of our regions and you know as we mentioned we've got over a million square feet.
Of new activity in the pipeline and when we look back when we think about the bumpy road of the kind of bank announcements that you had mentioned in March our March new activity actually exceeded both January and February and then of course post closing of first quarter, we actually obviously have visibility to April activity as well.
<unk> April new activity has exceeded January February and March independently. So I think collectively we would tell you that we still feel really good again head's not in the sand, but it's quality retailers. It's a deep pipeline. They are the activities are coming across the finish line and we've got plenty that that still remains in the queue is as we look forward.
Got it thanks for that and my follow up question is for Mike. It seems like you know.
Half of the upside to the 23.
Our guidance and the outperformance was driven by.
Base rent, which we kind of talked about but then the rest was kind of driven by per percentage rent and maybe some upside or near term upside in the lease termination fees.
I guess the.
Yeah. The question here is just the sustainability of that or is that sort of one time items that shouldn't recur.
Through the rest of the year.
Hey, Michael.
Yeah, it's a combination of both.
We won't.
Clearly, we had some onetime impacts for the first quarter that.
Our estimates internally and those are flowing through to full year resort results, but there is a little bit of tailwind remaining in our guide.
Becomes slightly more conservative I would say on the with the added visibility to the <unk>.
Ongoing bed Bath, <unk> beyond filing, but and a lot of that's been covered up by those.
First quarter impacts as well as our outlook for the balance of the year. So we do see ourselves floating into <unk>.
Floating back into our guidance range from the first quarter.
There is some headwind in the in the top end from base rent as we lose the bed Bath locations.
Our outlook on on an ongoing basis with uncollectible lease income remains I would call. It historically average maybe maybe to a little bit slightly better from what we had coming into the year.
And the best story that I see is tagging on to Alan's point on our leasing pipeline. The shop demand continues to be there and are and where we're commencing rents the $32 million of ABR. That's in the pipeline, we will deliver that this year, 80% of that in fact will come in this year and that's just a great driving factor of.
The of our of our renewed outlook on same property growth.
Thank you very much.
Thank you. Our next question is from Greg Mcginniss with Scotiabank. Please proceed with your question.
Yeah.
Hey, good morning.
Just to kind of touch on some of those headwinds tailwind thinking about where we might end up at the end of the year I think on the last call you talked about kind of flattish occupancy through year end potentially but given this disconnect healthy Q1 leasing maybe a little bit of an offset from the bed Bath and beyond bankruptcy. How are you thinking about.
Our year end occupancy expectations at this time.
Hey, Greg.
Still flattish.
The bankrate essentially the bankruptcy is turning out how we envisioned it would.
A quarter ago. So our outlook remains the same that.
Depending on how the auction proceedings end up.
We're going to be flat to slightly down potentially by year end, but again from a revenue perspective remember that we have all of this tail end up delivering that.
That occupancy that we have already contracted.
That and that shop space demand that will come through all of which is the word I would use is overwhelming what we may lose through the bankruptcy proceedings.
Great. Thanks, and as a follow up just wanted to touch on the tenant watch list.
I think a regional bank. So <unk>, obviously been in the news a lot based on our look you don't have any exposure to the ones that have been called out yet and it's more like 50 basis points, maybe ish around there I think we love to have you confirmed.
On other regional bank exposure.
Curious on potential backfill some of those kind of spaces, especially on the out parcels and what levels you might you might be seeing there.
Then looking at maybe like Kohl's Rite aid Michaels a were seeing it more risk.
I think limited to one 9% of GLA.
Are you in discussions on some of those spaces as well.
I'm, Greg I'll, just generically answered a question in terms of overall tenant watch list, we are always proactively.
Evaluating who is on the list both those that come off it does get added our teams out in the field are constantly.
And aggressively looking at those spaces in terms of sales volumes in terms of foot traffic in terms of lease explorations upside downside and so if there is an opportunity where we think we you know we want to proactively take it back we're getting we're getting out in front of it. If we are concerned they're going to vacate we're out in front of that and so I think that's just really a no.
Overall comment for the totality of the watch list to include some.
Some that you might've mentioned and others that you didn't.
So I'll just download doesn't mind I'll come over to come over time for the Bank branch I think your observation is correct our exposure to the bank branches or I mean, I think and I own a significant tenant you've got JP Morgan Wells and bank of America, and so any of the regional bank branches that we have would be would be really immaterial.
Great. Thank you.
Thank you. Our next question is from Craig Mailman with Citi. Please proceed with your question.
Good morning, I, just wanted to circle back to the leasing environment, you guys are pushing through escalators and a lot more of your leases in one stretch remain healthy I mean, what kind of pushback are you guys getting from tenants on rent increases attic escalators to this and kind of where.
Or where are these OCR is coming in given the rent resets.
So Craig good question. Thank you.
Look I think there is a way it's widely accepted that you know inflation is impacting all of US to include us and therefore, we're able to pass through a lot of these higher escalators as you saw and heard on our 90% of all deals had had embedded rent steps and 93% of our shops had those and so we're having success not only getting them in our deal.
But we're having them success of getting them at higher VAT.
Values.
I'm not seeing a tremendous amount of pushback there occupancy cost frankly are going in the inverse direction. Because I think sales are generally going up for most of our retailers and so will that provide an ability to push further I think in some categories, It will Craig and and and others, maybe maybe it doesn't but they all seem to be.
I'm pretty healthy reasonable levels that give us the ability to I think really.
Reasonably push those going forward.
Thanks, It's Nick Joseph here with Craig maybe on capital allocation, obviously, it was quiet in the first quarter, but you did repurchase some shares. So I guess number one what are you seeing on the transaction market or are things starting to thaw. It all there and then the second part how are you thinking about additional share repurchases from here.
Well.
I'm the quarterback I'll, let I'm going to have Mike answer the share repurchase and then we'll pass it to Nick for the overall transaction market Hey, Nick Good question. So first on the share repurchase let me say that that was largely tactical this quarter and we outlined it in my prepared remarks tied to a great development.
To me that we have we want to be able to be as flexible as possible to be competitive as competitive in that marketplace and I think this was a point at which we can differentiate.
We are obviously very keenly aware of our NAV and our perspective of value and at the same time when units are necessary to make a deal. We found this opportunity to hedge that transaction and.
We're not big back pattern, but we will Pat ourselves on the back I think we did pretty nicely from a an arbitrage perspective as well time will tell.
But that was what that transaction was designed to do.
Simply to hedge the unit issuance of that of that development pursuit, which we're excited about.
And thank you Nick in regards to the transactions market as Lisa alluded to in her opening remarks that is a little surprising of how few data points. There were in Q1. So it's been very very quiet out there, but as we.
On the on the margin I mean look we're eyes wide open regarding what's going on in the market, but we're again highly focused on making sure it's accretive to us and what is our cost of capital and how do we best use that cost of capital and so depending on the risk profile of any transaction, we evaluate that we decide how we're going to fund it.
Make sure that there's an appropriate spread there and so we're very comfortable that the opportunities were working on right now or are accretive to the company long term.
Rate opportunity for me to remind you of our significant free cash flow that we generate and the best use of that cash flow is what.
As into what I believe the leading development program in the sector.
Thank you very much.
Thank you. Our next question is from Samir Khanal with Evercore ISI. Please proceed with your question.
Hey, good morning, everyone, Hey, Mike on the guidance.
Did the one away near readout for <unk> in the quarter.
And I know there were some one time items I mean, we were looking at some of the term fees, maybe it was a <unk> impact.
But even if we use one of those six sort of for the run rate you're still getting to like $4 20 for the year and I look at your guidance and.
I'm just thinking are you being overly conservative here given the macro or is there something we need to think about that sort of impacting growth. Thanks.
Hey, Samir thanks.
Go back to some earlier comments.
Let's first identify what is timing related in the first quarter and what is uniquely.
One time, so clearly the pursuit income that we recognized as a one time event you know kudos to the team for being very careful with our with our pursuit efforts, there and monetizing that value.
The balance the higher percentage rent that's a that's a timing related impact so it will recur over time and through the years, but within the year percentage rent is largely a one and earlier Q1 of that so we have to factor that in.
Our outlook for uncollectible lease income if you think about the Q1 being positive. This quarter. We are not anticipating that we will replicate that through the balance of the year as I mentioned previously we think will float back down to our historical averages of <unk>, which is in the 50 basis point area of build ramps.
Term fees again more of a we did guide on that element, we knew that we're going to have a significant term fee in 2023.
The $4 million payment was received in the first quarter clearly, we will have to adjust for that and some comments on term fees.
We basically looking over our shoulders get five a foot.
Year in year out as a semi recurring part of the business. So that's about a run rate of a couple of million dollars. So if you think about going forward.
Those are some of the elements there Samir I think it's and then we have the bankruptcy and the impact that losing a bed bath and beyond it will have on our forward growth. So that's going back to us floating from Q1 through same property NOI as well as core earnings back down into the guided levels that we offered.
Thanks for that and then and then my second question is around leasing spreads.
When you when you when you provided the commentary is certainly very positive around around leasing.
But when I look at the spreads and again, it's still pretty good here mid single digits growth.
But if you look at the last few quarters, they've they've sort of decelerated right and and I know look I know, it's volatile month to month I get that but maybe just provide a bit of color on kind of you know.
Got it.
Leasing spreads were seeing.
Yes, Sameer I appreciate the question and thanks for acknowledging that the lumpiness that can happen certainly quarter to quarter with that.
As we look at the last quarter, we did not have any significant new anchor transaction that was within the quarter. We did over 100000 square feet of anchor activity in Q1, but only one deal at represented 11000 square feet with a comparable anchor deal. That's included in that so when you look at our cash rent spreads for.
Q1, it's predominantly all shop leasing, which is generally lower than anchor leasing that gets the big big pop, but I'd bring you back to the 12 month trailing cash spreads of 11%.
On new activity and importantly, our keen focus and.
And success with the embedded rent steps and prudent capital spend and so on that new disclosure page net effective rent as a percent of base rent has been in the mid to high 80% range over the past five quarters and you know we're pretty proud of this metric.
As it is a testament to our team's efforts of achieving those contractual rent steps, while prudently managing our capital spend.
Thank you.
Thank you. Our next question is from one another with BMO capital markets. Please proceed with your question.
Hi.
So maybe just circling up a little bit maybe from a different perspective or asking it differently than Samir just for the guidance.
Sure.
You assume that occupancy is kind of maybe flat to slightly down by year end, but does it dip between now and then as a result of.
Bed Bath before you capture yes in our pipeline and how should we think about that.
The quantum of that decline to maybe piece together. These various pieces, we've talked about on the call.
I mean simply simply I'll get into some details one but simply I'd say use our guide on same property growth.
And I think and if you think about it.
If you're if you're trying to sequence it from quarter over quarter. We know we know when we're losing bed bath.
Rejected half of our locations and coming into the year, our exposure was in the $5 million range to that to that tenant.
So half of that is losing it.
The beginning of Q2.
And then as you think about delivering the $32 million is contracted S. N O that'll come on as I said about 80% of it by year end.
Good secrets that pretty ratably through the year.
Okay.
We're going to float down from six 3% Q1 post on same property growth to a midpoint of 3% by year end.
There is a unique Q4 item.
But we all talked about last quarter from a recovery standpoint, and our numbers for the fourth quarter comp.
There's a little more difficult but.
I hope that helps you in if you need anything else, we'd be happy to connect offline.
No. Thank you that's helpful.
Praful.
A quick.
Question on the <unk>.
Reversal of our cash to gap had a bit of a benefit in the first quarter.
How is that.
Captured in.
His guidance you kind of look at kind of page six and what bucket does that fall under it and is there anything else assumed.
In terms of reversals back to GAAP for the balance of the year.
Yeah. So the majority of those reversals will come through and are noncash.
Guide and we have and so as you can see we didnt change that guide so our.
Our outlook hasn't it's two and a half million dollars roughly of impact embedded within there.
This is a good opportunity to indicate that we are at 7% on a cash basis and that has not changed from fourth quarter I would offer that given the first quarter results and.
The good collection rate that we're seeing out of our cash basis, Tennessee.
Our outlook remains the same that we will continue to convert tenants to accrual through the year.
As we said last quarter, we anticipate that we should be in the plus or minus 5% area by year end.
And so we're we haven't come off of that expectation either.
There is a little bit of a or that could as you convert tenants that could come through as well, but it's de minimis. One so I would just focus on them.
That noncash guidance that we've provided.
Great. Thank you.
Thank you. Our next question is from Anthony Powell with Barclays. Please proceed with your question.
Hi, good morning.
There were some press recently on some of the traditional anchors in malls like Macy's and Nordstrom is expanding there are smaller format.
Shops are you seeing some of that activity in your leasing pipeline.
Anthony Thank you for the question. The short answer is yes. So Macy's is doing market by macys, they've got their sister company Bloomingdale's outlet.
Nordstrom you referenced is really expanding their nordstrom rack concept, one that we just signed down here in Jacksonville. So.
They're out there they're aggressively doing it and I think that entire really off price category is rocking and rolling right now.
Okay. Thanks, and then maybe one more on percentage rents.
I get that there'll be lower this year, but there was a big kind of year over year increase how should we be modeling percentage rents.
Going forward the next year either on it as a percent of base rent or yes growth.
Well give you some big picture items that will help it.
Number one it's up year over year, we've actually increased our percentage rent and two consecutive first quarters by over 40%. However.
However, it's a small number so all we only we get about 1% of our total revenues out of percentage right and I would think about that in your longer term modeling that we should we should keep that level pretty consistent. It is front end loaded. So the majority of what we what we recognized percentage rent income will occur in the first quarter, we will have more percentage rent through the balance.
For the year, but the majority is in the first quarter.
Alright, thank you.
Yeah.
Thank you. Our next question is from <unk> with Bank of America. Please proceed with your question.
Good morning.
I just was curious about that.
G&A line item that was revised up by a million.
Sure first of all year.
Not too meaningful, but just wanted to see what drove the increase in expectations, there and if anything could be noted that's recurring or if we should expect more variability to that as we get through the year.
Oh, Thanks, Lizzy really just a lot of odds and ends in the non salary line items as we look out for the balance of the year and kind of tightened up our re forecast.
It is what it is and we just kind of refining that estimate for everybody looking forward, there's I wouldn't.
Identify any trends any way or the other it's really just a refined outlook.
Got it thank you.
And I was hoping.
Get more details on a couple of the project.
You had discussed that at the opening and checked on it.
And the New York Metro area, and a master planned community in metric you spend.
I understand it.
We are waiting to share more details on.
You're able to add it to the pipeline and that just seeing if there's anything unique to each of those projects that you. You think you could you can find them and other opportunities.
<unk> in the near future and you know what particularly.
Drew you in about about the market.
[laughter] projects.
Absolutely. Thank you for the question Lindsay and good morning.
Yeah as it relates to the New York asset at this point, we can't disclose more we have not yet closed but as I mentioned in my opening remarks, we're excited about the opportunity and looking forward to in the not too distant future being able to give more details as it relates to the Houston opportunity, we did close on that.
Earlier this week and are very excited about that project, although again relatively small approximately $10 million. It is located within a very thriving master planned community. So to be one of the only retail component servicing that community.
Really a blessing and those are the type of opportunities we're looking for what we know.
We have a very captive audience and as I referenced we do plan on expanding that opportunity in the future and so we do think there'll be future phases to grow that opportunity as demand continues to increase in that sub market and so I'm excited to bring it on board and again share even more detail next quarter when it comes into our in process and then just <unk>.
<unk> speaking as I said, you know development is never easy and we're well aware of some of the headwinds that are out there facing development and how challenging it is but as I said, we have the three cornerstones are critical especially in this environment to execute which is the right expertise the right capital and the right relationships and groceries.
Continuing to expand that they've had very good years, we have great relationships with those groceries across the country. We continue to evaluate really coast to coast those opportunities one by one and the team is doing a great job of figuring out which ones. We think we can help with which ones. We think we want to own long term and therefore deploy our human and financial capital.
And Lindsay our overall development strategy.
Our investment strategy and we want to invest in shopping centers that have a long term sustainable competitive advantage, where we're going to be able to grow NOI over the long term and these two developments New York and in Houston fit that fit that criteria.
Great. Thank you.
Thank you. Our next question is from Wes Golladay with Baird. Please proceed with your question.
Yeah. Good morning, everyone I, just want to stick with bed Bath and beyond. Thank you said you had five of the 10 rejected and youre not going to get any rent from those assets at the beginning of this quarter, but what did you get rent during the liquidation what.
Why they liquidate the inventory or have they been doing that I guess behind the scenes.
Yeah, you were so so.
Pre petition rent you, obviously would lose and we planned to and we estimate that to be about half a million dollars less given what they were paid current through first quarter and what we will lose into the filing date and then post petition for the five that have not yet been rejected we would continue to collect rent through their through the events that may or may not.
Happened, which could be an assumption of the lease in the bankruptcy itself or for future rejection as we indicated.
At the midpoint of our guidance, we've accommodated for the worst case scenario, which would be a full liquidation of the chain.
We have some pretty we know we have some pretty good pretty good locations.
The ones that have not yet been rejected we like all of our opportunities, we really like those and theirs, which also tells US is there's a chance that they could be picked up an option. So.
We'll be paying very close attention to the proceedings there.
But that's hopefully that helps you think about the financial impact of bed Bath, Yeah. It does and then sometimes I remember a series that kind of a mark some bigger projects for you. Some some larger scale redevelopment anything.
Any of that potential here with bed Bath and what is your hurdle now with today's capital markets for some bigger projects.
I'll start with the bed Bath, and let Lisa Mike answer the capital question, but the short answer Wes I. Appreciate you asking that Theres, one bed bath that we are evaluating the merits of whether or not we want to entertain redevelopment, but generally speaking its really is just a re leasing exercise.
This is all it is.
And with regards to the Redevelopments I mean, thats all followers on flows directly with our development strategy.
We look at those in the same manner.
We can use our and invest our cash accretively and if we are improving and enhancing an existing center and fortifying that future NOI growth, while getting a really attractive investment returns.
We will do as much as that as we can.
Got it thanks for the time everyone.
Yeah.
Thank you. Our next question is from Florida, Dicom with Compass point. Please proceed with your question.
Yeah.
Hey, good morning. Thanks, Thanks for taking my question.
Your shop space is the most valuable portion of your portfolio was I think Lisa you alluded to in the past as well and you know in.
And the beauty is you know you have over 50% of your ABR comes from the shop space.
And a big chunk of two thirds of your <unk> pipeline of shop space could you remind us again, what your peak shocked shop occupancy was and where do you think that could go over the next.
Two two and a half years or so.
P. J I'll do the reminder, and I'll, let Allen color up.
What he thinks about our guide our glide path to achieving it.
Peaked over 93%.
From a shop occupancy perspective.
That was at a point in time when I think we would all look at each other and I agree that our portfolio is better today than it was then I think even the demand supply and demand characteristics are today or better.
I am not promising you that we will significantly I'll see those peaks because it was a pretty high levels of occupancy.
But 93, three I think was.
And that area was our peak yeah, and as you know we're at $92 one right now and I would just go back to the pipeline.
Really great deals that are that are falling off and I'd put on top of that our upcoming Vegas ICSC show that's up here at the end of May.
The amount of meetings the teams already have scheduled and the attendance that we anticipate from the retail community is really strong. So we have the runway and we're planning to continue to set our sights on and I. Appreciate you first.
Remembering that we say that and I think what's really important when you think about where we sit today versus that peak occupancy and you've heard us say this really coming out of Covid.
We feel really good about the health of our in place shop tenants and we believe that there it's as strong as ever and what makes shop space. So valuable.
The fact that there.
Change is it happens in our business, we say that all the time, there's always going to be some tenant failures, but what makes that so valuable is that we're able to replace it relatively quickly versus an anchor box with a lot less capital and and the rents are higher and so thats what makes that space. So much more valuable we're able to continue to get.
Really good annual contractual rent steps in the shop space. In addition to leasing spreads upon new leasing and that is what makes that space are valuable to us we are not afraid of shop space. That's what you've heard me say over and over again.
No I appreciate that.
Maybe if you can you've talked about the rent bumps and to me that's one of the most underrated.
Aspects of the of the business and sort of the cruising speed that that produces.
You mentioned that almost all of your shop space has fixed rent bumps are you're getting 3% rent bumps and how do you see that.
The cruising speed.
As a as you sign new leases.
Yes, Floris I appreciate that question yes.
We are having more success at higher rent bumps and you know I would tell you historically, if you were to rewind the clock pre Covid I would say our teams are probably asking for anywhere between two and a half and 3% in the shop leasing sector and now we're starting at 3% to 4% depending on the circumstances or even in some cases higher than south.
It has evolved I do think it's become a bit more of a commonplace of where we are in and you know for the foreseeable future I certainly expect us to continue down that path.
Thanks, so much maybe last but not least I'm just.
I hear a wegmans might be coming to Connecticut, any chance that you guys might be involved in that.
I am looking at Allen.
We are not involved in that Floris, sorry, if I didn't know who is going to answer that whether it was nick or myself.
We're hearing the same rumors so there'll be great for the Connecticut community, if they end up making that happen.
Thanks, that's it for me.
Thank you. Our next question is from Mike Mueller with Jpmorgan. Please proceed with your question.
So for the two questions. The first one what are the characteristics of the 7% to 10% of leases, where you're not getting the rent escalators I think you talked about 90 or 93% before so.
The ones, where you're not getting it and then as we look at your development redevelopment pipeline I think it's like 50 million new $2 50 redevelopment for thinking about the shadow pipeline.
What's the mix going forward in the Shadow pipeline is it does it have a healthy component to about development opportunities as well.
Hey, Mike This is Alan I'll answer the first part is pretty simple.
Simply options that are getting exercise that don't have embedded rent steps.
So that's the 7% to 10% you mentioned I'll kick it to net got it.
As it relates to the second part of your question I appreciate it and Youre absolutely right I mean, as we continue to push forward.
Always pruning our portfolio and looking for opportunities to reinvest in it.
We've given you some visibility to some of those opportunities in our investor deck as it relates to those future redevelopments, but clearly can't disclose sort of the same level of detail on potential ground up development that we don't yet own and so I'll tell you. Our shadow pipeline is very focused on that mix, including a ground up developments.
Okay.
Okay. Thank you.
Alright.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question is from Ronald Camden with Morgan Stanley . Please proceed with your question.
Great just a couple quick ones just trying to understand over the sort of the recent events.
With the banking system.
There has been sort of any ripple effects to the business and I'm thinking of it in two to three different ways. One is.
As you guys are thinking about this future redevelopment pipeline opportunities the $115 million to $150 million I see in the presentation does anything change about your timing of conviction to getting those done and.
The other piece of it is you know.
Obviously on the acquisition front.
Have you seen sort of more activity you guys are in a great liquidity position does that create opportunity.
And then I'd love to hear from a tenant perspective, clearly the bad debts feeling pretty good at it went down in the guidance, but our tenants sort of talking about it feeling it.
Just trying to understand if there's any ripple effects, we should be thinking about thanks.
Well, Brian I will start.
Alan can hit the tenant piece and Nick May add some some color, but generally speaking we have not seen any impacts yet.
From whichever word you want to use to describe what's happening and happening in the banking market right now crisis turmoil, certainly some challenges and I'll remind you from our own personal perspective, we're using free cash flow to fund that and we.
We knock on wood do not have any challenges or issues with access to capital beyond that.
So then it becomes how do we how are we thinking about in underwriting the new leasing that's associated with our developments.
As you know we are very disappointed with our development program, we don't do speculative development and we're not going to start a new development until we have real visibility to signed leases.
And where are you know as.
As we talked about we continue to try to look around the corner and see if there are signs of softening or impacts to the business and we have not seen it yet and development is not something you just flip the switch on or off or they take it as a cycle. It takes some time and it's an important part of our of our growth profile and we have developed through cycles in the past successfully and we expect that we will.
To do the same.
We're just a little bit more cautious as we think about our underwriting and I think that that's that's appropriate and prudent.
And Ron from a tenant.
Tenant perspective, the short answer is no. We're just simply not hearing that.
At the property and portfolio level that said.
Our team is utilizing currently on a proactive basis and enhancing programs that we started during COVID-19.
To support our tenants and so we've got a tenant Mentorship program, we do webinars for them. We've got this proprietary merchant success tool kit and so.
We're prepared to not only proactively deal with that but should should that tide turn have the resources are for our retailers to partner with them and help them through that process.
I'll jump back and I apologize I missed your acquisition.
Question Oh.
Oh.
We've been saying we are we are on our front feet.
We believe that we are really well positioned to take advantage of any dislocation in the market and and compelling opportunities as we've discussed we haven't seen a lot come to market.
But we're ready if they do we have the capital and as Nick said when he answered the earlier question as long as we are able to invest that.
Choir Accretively.
And it's equal or accretive to our quality and our growth rate.
We're pleased that we're poised to act.
Great and then just my last one just any quick updated thoughts on the Kroger Albertsons.
Situation.
And views for the company.
I think if you were to go back and probably read my answer from the last quarter. It would say the exact same thing I'm going to say right now and that is we don't have any information that you don't have and we have really good relationships with both of them.
And it just continues to unfold.
Either way. It goes I think is something that will be good for us.
If for some reason the merger doesn't go through.
We have two really good grocers in really good locations and it will be business as usual.
If the merger does go through you'll have a larger operator with greater scale greater ability to invest back into their business and we feel really good about our locations and our real estate for those that may be part of our divestiture plan.
Alright, one more I'm, sorry, I had in my notes I missed it but so we've been hearing about sort of the insurance costs and premiums on property in Florida other markets and so forth you know.
Clearly you guys you're charged some of that back to the tenant but or are you guys. How are you guys thinking about that at all has that has that come up.
What's the thinking there.
Yeah.
Hey, Ron its Mike Yes.
What we're really thinking about it with a recent renewal behind us the team did an extraordinary job.
And our policy, but not without a little bit of pain. The markets are very difficult they're challenging we have.
From a from a results perspective, we're planning, we're expecting about a 15% to 20% increase in that line item.
More on that in a second but our access to insurance I think is better than most given our scale our quality our Mas track record the way, we maintain and think about our properties. So that is a kudos to the team.
Because excess at a small scale level is challenging today, not just about price, but about access.
With respect to that 15% to 20% increase in the line item. It is a relatively small component of the tenant's rent. So when you think about the bleed or the pass through we can pass it through.
Through our lease contracts, we will pass out there. It's in the neighborhood of 10 cents a foot to a tenant so again, it's a pretty small component.
So we feel like we've mitigated that.
That risk or challenge to our forward growth.
And again, I think time will tell when and if the insurance markets soften but today, it's it's challenging.
Thanks, so much.
Yeah.
Thank you. Our next question is from Greg Mcginniss with Scotiabank. Please proceed with your question.
Sorry, I was muted.
I just wanted to talk about.
The transactions and potential development pipeline again.
Sure a couple of points of clarification is the 90 million insight into in the New York Metro area development inclusive of acquisition and development costs similar question for Houston, and whether you need additional land acquisitions for future development phases, there, if you're securing that with that that first.
Investment.
Sure. So it's bringing in New York, Yeah, that's all encompassing all costs, so that would be the acquisition cost of the property as well as future investment.
Build it out our entire.
The entirety, so that's all encompassing the future investment for that opportunity and then the second part I want to make sure I understand it I believe you were asking about the Houston opportunity and are we comfortable with the current phase of the future don't happen.
We are and so we would never purchased an opportunity if we werent comfortable ultimately just owning it passes whereas.
But that being said given its small scale, we are hopeful and we do have an expectation that future phases will be added but if they don't we're very comfortable owning what we purchase and building it and it has tremendous demand already for the retail space.
We anticipate building.
Yes, sorry, I was also saying for the Houston.
Youll need to acquire additional land for future phases, or if you're still carrying that with the $10 million.
Great question, Yes, we have control over adjacent property.
So as part of this acquisition. It also gave us extended control over joining property that we're focused on for future phases. So this acquisition is just for the portion of property, we're going to build phase one on but we do have definitive control over the adjacent property for future phases.
Okay, Great and then what are the targeted returns on these development projects.
Additional risk.
Worthwhile, maybe versus something like redevelopment.
Let me say, you said that youre not taking risky investments here.
Inherently with development, there is going to be a little bit more than where you already have the cash flow. So just curious what expected returns might be.
Yes, great Great question, and as I said before we really look at opportunity by opportunity and so.
Each one of these developments were analyzing we are definitely looking at what we believe the future value of that asset is to make sure. We're comfortable with the ongoing yield and so to give you. An example that Houston asset will be developed at approximately an 8% return. So that gives you one data point.
Of where our eyesight was as it relates to that transaction.
Okay, Great and just final one for me are these investments.
Investments the type of lease that was previously referring to I think it was the Q3 call at least initially on the Q3 call regarding smaller developers about access to capital.
And does that feel like a growing opportunity as bank lending becomes potentially even more scarce going forward.
Great Great question, I mean, I would say exactly that the inverse of the banking challenges out there are it is creating opportunities for us continued opportunities as Lisa mentioned multiple times, we have available capital and we have a desire to play offense and so there is some quality developers out there that are very <unk>.
<unk>, they have great relationships and contacts, especially locally but right now capital is duration. You know question. If there is any place that capital's most restricted as we all know right now its construction lending and so we have the ability to step in and not only brean capital, but bring relationships and expertise to help some of these deals.
Figure out a way to get over the goal line and many times it takes more than just capital.
It does take expertise to dig in with them figure out where we can be cost effective regarding budgeting pricing et cetera, as well as deal with the retailers as it relates to the relationship potentially restructuring transactions and so we're very engaged with local developers to help fill in wherever the hold maybe on these projects that have challenges at the moment and I.
I want to reiterate that because I think that's a really important point that Nick just said our relationships with the retailers are especially the grocery anchors that are driving a lot of our developments.
It shouldn't be underestimated because they know we can perform and in times like this that is extremely important.
That is also helping us to drive that development pipeline and build it further.
Okay. Thank you.
Thank you there are no further questions at this time I'd like to hand, the floor back over to Lisa Palmer for any closing comments.
Thank thank you all appreciate your interest and being with us today.
And everyone have a nice weekend.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.