Q2 2023 Brixmor Property Group Inc Earnings Call

Speaker 1: Greetings and welcome to the Bricksmore Property Group second quarter 2023 earnings conference 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 do so.

Speaker 1: Please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stacey Slater. Thank you. You may begin. Thank you, operator, and thank you all for joining Bricksmore's second quarter conference call.

With me on the call today are Jim Taylor, Chief Executive Officer and President, Angela Ahman, Executive Vice President and Chief Financial Officer, and Brian Finnegan, Executive Vice President and Chief Revenue Officer. Mark Corrigan, Executive Vice President and Chief Investment Officer will also be available for Q&A.

Before we begin, let me remind everyone that some of our comments today may contain forward-looking statements that are based on certain assumptions and are subject to inherent risks and uncertainties, as described in our FCC filings, and actual future results may differ materially. We assume no obligation to update any forward-looking statement.

Also, we will refer today to certain non-GAAP financial measures. Further information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in the earnings release and supplemental disclosure on the investor relations portion of our website.

Given the number of participants on the call, we kindly ask that you limit your questions to one or two per person. If you have additional questions regarding the quarter, please re-queue. At this time, it's my pleasure to introduce Jim Taylor. Thank you, Stacey, and good morning, everyone. Our results this quarter once again demonstrate that platform and rent basis matter.

as this long-awaited tenant disruption is providing us the opportunity to bring in better tenants at better rents, continuing to drive our transformational value-added plan, and importantly setting us up for future outperformance.

Consider that in a quarter where we recaptured nearly 300,000 square feet of space associated with tenant failures, we still grew overall in small shop occupancy to platform records.

We realized new leasing spreads of 22.4% and set an all-time high new lease rate of $24.30 a foot, bringing our average in-place rent to $16.60 a foot, up 4.4% on a year-over-year basis.

And as our record high net effective rents once again demonstrate, we continue to be disciplined with capital as we drive this high ROI activity.

Importantly, we are not only leveraging this disruption to drive growth in rents and returns, we are also bringing in more vibrant uses to our well-located centers in the segments of grocery, specialty grocery, value apparel, quick-serve restaurants, health, beauty, and home. We can see the follow-on impacts in terms of not only traffic, which continues to be

improving the value of the centers impacted in terms of applied cap rates. In fact, when you consider our forward leasing pipeline, we expect our ABR from centers with a grocery anchor to increase over 80% as we sign deals for new stores with tenants like Publix, Whole Foods, Sprouts, Trader Joe's, Aldi, and others.

Speaking of our forward leasing pipeline, it continues to rapidly build as Brian will discuss. And that pipeline continues to convert into our pool of signed but not commenced leases, which at quarter end stood at $56.7 million of ABR that will rent commence, as Angela will discuss in a minute. Those rent commencements.

will allow us to continue to deliver top line growth at the top of the sector, just as we did this quarter with base rent contributing 520 basis points.

During the quarter, we continued to deliver highly accretive reinvestments, bringing our total since we began to over $890 million at an incremental 11% return. We also grew our in-process reinvestment pipeline with $77 million in new projects, including adding specialty grocers at Roosevelt Mall in Philadelphia.

Beyond that, our shadow pipeline includes over $900 million of additional investment that will allow us to continue to drive attractive ROI and growth in cash flows for the next several years, even in a rising rate environment. Remember, our plan is self-funded through free cash flow and, importantly, driven by opportunities we own and control.

From an external growth perspective, we remain disciplined, holding on acquisitions and continuing to build dry powder through opportunistically harvesting non-core assets and through retained free cash flow. I believe that discipline will begin to pay off in the coming quarters as we are now seeing acquisition opportunities coming back to us at pricing meaningfully large.

These are assets where we can leverage our value added platform and tenant relationships to deliver compelling returns. Remember to come there.

Finally, I'd like to give a shout out to the Bricksmore team, who across all fronts continues to exceed expectations.

delivering exceptional value to our stakeholders, and in so doing continuing to drive us towards our purpose of creating and owning centers that truly are the center of the community they serve.

Now I'll turn the call over to Brian who will provide additional color on the strength of tenant demand to be in our centers. Brian . Thanks, Jim. And good morning everyone. As Jim highlighted, the broad depth of tenant demand to be in our centers is not only evident in our results during the quarter, but in our forward leasing pipeline as we continue to attract best in class operators at the highest rents we've ever achieved.

of new and renewal leases executed in the past year. Included within this activity were new leases with the top tenants in open-air retail such as Burlington, TJX, Ross, Chick-fil-A, and Five Below. In addition, we added several exciting new tenants to the portfolio during the quarter, during the company's first new lease with Tesla.

back filling a 64,000 square foot box in the Houston suburbs for Tesla's showroom and repair center concept.

Our team also continued to capture the upside embedded in our below market leases with this activity as well, with new and renewal spreads of 15.4%.

New lease spreads were at 22.4%, reflecting a larger mix of small shop leasing during the quarter and the eighth consecutive quarter of new lease spreads over 20% with our record new lease ABR of $24.30 per square foot representing a 46% increase versus our in-place ABR.

The strength of the overall leasing environment and the desire for tenants to remain in the Bricksmore portfolio was also demonstrated in our renewal spreads, which at 13.6% is 200 basis points above our trailing 12 month average.

The consistent execution in driving rate higher is a testament to our team and how they have capitalized on the transformation of this portfolio.

We continue to make progress on our bankrupt tenant space as well, out leasing the vacancy we took back during the quarter to continue to grow portfolio occupancy to new heights.

specifically on bed bath, were either least assumed or at least on approximately two-thirds of our bed bath space.

with the top operators in the open air space at rent spreads that are consistent with the 30 to 40 percent we communicated last quarter.

We expect the majority of this income to come back online in 2024 as we are primarily negotiating with single-tenant users for these spaces.

This expected tenant disruption provides us a great opportunity to lease to better tenants at much higher rents.

Looking forward, we are encouraged by the resiliency of the leasing environment, with more anchor leases currently being negotiated than we've had in over three years, and more new rent in our legal pipeline than we've ever had. The forward pipeline, along with a lack of new supply and a completely transformed Bricksmore portfolio.

put us in an excellent position to drive long-term sustainable growth. With that, I'll hand the call over to Angela.

Thanks Brian , and good morning. I'm pleased to report another quarter of continued execution as we quickly and accretively capitalize on the strength of the current environment to address recent tenant disruption.

NAIRID FFO is $0.52 per diluted share in the second quarter, driven by same property NOI growth of 2.7%.

Base rank growth contributed 520 basis points to same property NOI growth this quarter, despite a drag of approximately 50 basis points related to recent tenant bankruptcies.

In addition, net expense reimbursements, ancillary and other income, and percentage rents contributed to 80 basis points on a combined basis.

As anticipated, revenue seemed uncollectible and detracted 330 basis points from same property NOI growth, primarily due to the ongoing moderation of out-of-period collections of previously reserved amounts.

As highlighted last quarter, out-of-period collections in the second quarter of 2022 were materially higher than in any other quarter during the year, creating the most difficult comparison period during 2023.

We remain pleased with the significant velocity we continue to experience within our signed but not yet commenced pool. During the second quarter, we added newly executed leases representing approximately $16 million of annualized base rent, while commencing leases representing nearly $15 million from the pool. As a result, at June 30th, the signed but not yet commenced pool totaled $2.7 million in 2018.

for $25 million of annualized base rent to commence during the remainder of this year.

These commencements will more than offset an additional 440,000 square feet of occupancy loss expected from Bed Bath and Beyond, Christmas tree shops, Tuesday morning, and David's Bridal in the second half of the year as we harvest the below market rent basis embedded in our portfolio.

Our fully unencumbered balance sheet remains well positioned to support our balanced business plan with debt to EBITDA of 6.1 times, 100% fixed rate debt, total liquidity of $1.3 billion, and only $300 million of debt maturities through year-end 2024.

In terms of our forward outlook, we have raised our 2023 guidance for same property NOI growth to a range of 2.5 to 3.5%, reflecting improved expectations for base rent and revenues deemed uncollectible at the lower end of the range.

Our assumptions for revenues deemed uncollectable have been modified to a range of 75 to 85 basis points of same property total revenues for the full year versus the prior range of 75 to 110 basis points.

In addition, the midpoint of our same property NOI guidance range now reflects approximately 125 basis points of year-over-year impact related to lost rent and recovery income from recently announced or anticipated bankruptcy activity.

Approximately 100 of the 125 basis points is related to store closures or lease rejections that have occurred or been announced to date, while the remainder will accommodate additional disruption that may be experienced during 2023.

We have also raised our guidance for 2023 NAIRID FFO to a range of $1.99 to $2.04 per diluted share.

including non-cash gap rental adjustments, G&A, and interest expense. And with that, I'll turn the call over to the operator for Q&A. Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star-1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star-2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

First question, Todd Thomas with KeyBank Capital Markets. Please go ahead.

Morning, Jim. Uh, first question I just wanted to ask about the investment environment, uh, a little bit in light of your comments around, um, you know, assets coming back to the market at more favorable pricing. What what's the company's appetite like today, uh, to deploy capital, new investments. And can you talk about what that change in pricing, um, you know, equates to in terms of, uh, you know, either higher yields or IRRs that you're underwriting today with, uh, some of this new or new product coming back to, to, to the market? Yeah. I'll let Mark comment a little bit, but maybe just to set the table, it's going to be driven by the returns that we see available in the assets that are coming back.

So, you know, we are really focused on those assets where we can drive out-sized IRRs through lease-up, density, better tenoning, leveraging our national relationships to basically take what will typically be privately held assets and drive returns.

You know, in terms of the pricing move, they're starting to move to a place where we believe that we can even in this higher rate environment, higher cost of capital, acquire them accretively, but it's going to be driven, Todd, solely by where those assets ultimately price. So we'll expect this to remain disciplined.

We just are encouraged by what we're seeing in terms of the movement in price, some of which is being occasioned by the lack of asset level financing or the constrained credit environment, as well as tenant capital requirements as we see tenants moving out. Mark?

Yeah, what I'd add is volumes continue to be somewhat low, but I'd say real time we're starting to see more sellers willing to meet the market. As Jim mentioned from a value perspective we're seeing assets settle out at pricing that starts to make more sense from our perspective and you're seeing probably the biggest hit to value on those assets from a really deemed as core last few years really seeing those.

the biggest hit to value. You have to bit about IRR. We think we can underwrite deals into the high single-digit, low-double-digit on-lovered IRRs for what we're seeing today given yields and growth. We expect to see in a half that we'll be requiring. The other piece I would add is...

We're starting to see more interesting yield opportunities in larger deals, say about $50-60 million. We think there's a pocket of opportunity there in those larger deals that will show some higher yields and some good growth opportunities.

from here, so the more to come hopefully in the next quarter or so.

Okay, that's helpful. And then, are these one-off assets that you're seeing, or is there anything of size, any portfolios that you might affect to sort of transact? And then, separately, you increased your redevelopment and value enhancement pipeline spend.

during the quarter, you see more opportunities to accelerate projects, the air, given the lack of available space, and a step pretty good leasing demand that you're seeing. And should we expect to see that pipeline continue to build further these of what sounds like a better environment for acquisitions?

Yeah, you know, we're seeing obviously the most compelling returns still within opportunities that we own and control within our redevelopment pipeline. And part of what's accelerating some of those opportunities is frankly the recapture of some of this bankrupt space, where, you know, with 30 to 40% spreads, for example, on the dead bath boxes.

we can drive some highly accretive, not only in terms of ROI projects, but as I highlighted in my comments, the cap rate that would otherwise be applied when you backfill a bed bath with a specialty grocer or with a more vibrant soft goods retailer. In terms of the transaction market, most of what we're seeing and where we think the opportunities are gonna be.

driven by the opportunity and the type of returns that we think we can deliver. Because importantly, we do have a lot of great opportunity in what we own and control. So as we weigh our capital allocation decisions, I think the good news for us is we're not wanting for opportunities. So as we think about external growth, it really has to be driven by the opportunity and the type of returns that we think we can deliver.

Angela, on the bad debt assumptions that you've improved here, given results to date, how should we think about that flowing through to occupancy for the second half? How much space is kind of coming back vacant temporarily?

Is that the main driver for the implied decel and FFO from the second quarter run rate stripping out that one cent from the debt gain?

As I mentioned in my remarks, we are expecting something like 440,000 square feet to come back in mostly the third quarter but a little bit into the fourth quarter from the currently announced bankruptcy activity. So bed bath, Christmas tree shop, Tuesday morning and then Davis bridal.

We do have in the Simonon commence pipeline about 1.3 million square feet that's expected to commence over the second half of the year as well. Even with some natural attrition from normal coarse lease expirations, we're in a good position, we think, to grow occupancy through the second half of the year as well. We feel good about that. In terms of the FFO deceleration, I'd note a couple of things.

some straight line rental income re-establishments that were, again, just under a penny a share. So those two things together were about two and a half cents in the second quarter, stripping those out and using that to annualize for the second half of the year, plus first half actuals get you to about the midpoint of our range. From there, whether we come out at the low end or the high end is very much going to be dependent on... Banks Revelation 24 General

You know, something that we're continually focused on is bringing that sign but not commence pool into occupancy and rent paying. And we've done a pretty good job, as Angela highlighted in her remarks, getting it rent command.

And my second question, just curious on what you guys are hearing or seeing from some of the pharmacies.

You've seen Walgreens kind of cut headcounts, CVS came out today.

I said he was going to cut some corporate head accounts. So just curious....

on latest discussions with the pharmacies and space usage and kind of just how you're feeling about that business and changes that we might expect going forward. Yeah, Juan, hey, this is Brian . I think if you look at the pharmacy real estate that we have across the portfolio, we've got some very attractive upside, particularly on some of those older, older, older, older

Rite Aid locations or older CVS locations that might have been in line. We backfilled one of them with Ulta recently. You have seen some of the pharmacies look for smaller units, too. So we executed a couple Walgreens locations in Texas for their smaller concept. I think if you look at some of the pad locations that they have that they were really focused on kind of in the early 2000s of expanding.

greens purchase some of the Rite Aid boxes, we feel really good about the demand for those overall. So certainly changing dynamics in terms of how they're thinking about their real estate, but as we said overall we feel like we have some pretty good attractive upside in our pharmacy space.

Thank you very much.

Thanks. Just going back to the bad debt reserve, can you just remind us what that reserve was? I think it was like 75 to 110 basis points, not including the known budgeted move-outs. How that's evolved by 2Q and what your projections are for the remainder of the year.

Right, yeah, so the 75, our current guidance for revenue seems uncollectable is 75 to 85 basis points. The prior guidance for that was 75 to 110 basis points. That's pretty much in line with our longer term historical average when you take out some of the disruption during the pandemic. So we do think on a net basis.

for this year, we're going to come out kind of in line with the historical average for that number. On a year-to-day basis, we're running a little bit below that. We're about 50 basis points within the same store pool. Year-to-date. We were closer to the low end of that range at about 70 basis points in the second quarter. So that does imply a slightly higher run rate in the second half of the year.

but feel good that we're going to be within and actually towards the lower end based on the revised guidance of where we've been historically.

Great. And just a high level question. When you look at some of the at-risk tennis like Joe and Michael's or Big Lots, any high level commentary you can share on what the potential upside or challenges might look like compared to the current slate of bank refugees that you had to deal with, such as that that party city and so forth.

you would think would be on there, or on there. And I think over the years, our team has done a fantastic job of proactively addressing this space. We're talking about that bath today. We went ahead and took back four of that bath spaces. So as we look ahead of the bankruptcy and we've seen very attractive leasing, we've gotten ahead of those. We got ahead of Tuesday mornings.

as well. So as we look out, we are certainly looking at those opportunities we have been aggressive in terms of recapturing space where we have the availability to do so. And in terms of the rents overall, I mean, we feel pretty good. I think those rents are in line with the $9 and change rents that are expiring here over the next three years and we've been signing those leases between 14 and 15.

box environment is today in terms of what you saw at the auction for Bed Bath with retailers bidding on space, competition for our box space across the portfolio. So we feel pretty confident to the extent we do get a few of those boxes back for the names that are on the watch list here in back filling them quickly with better tenants at higher rents.

Okay, thank you.

Hi, good morning everyone. Maybe on small shop lease occupancy, it's at a record 89.4%. When you consider that 10% plus of availability, can you give any description of that vacancy, kind of what's frictional in process to be replaced quickly, maybe what's been vacant longer, and what that kind of means for the path for small shop occupancy and ultimately overall occupancy.

Because within our active reinvestment pipeline, we have a couple hundred basis points of drag on occupancy for assets where we're replacing anchors or doing facades or doing larger reinvestments that we fully expect that we'll lease those spaces as we deliver the reinvestments.

In fact, our experience has been that we pick up our small shop occupancy and reinvestment projects by several hundred basis points. And it's not only the pickup in occupancy, but the growth in rate can be 20, 30, 50 percent in the small shop spaces when we've substantially improved the center.

So we have that growth, if you will, in reserve. The other thing to think about is as we continue to transform this portfolio, we'll continue to set new records in terms of small shop occupancy. And we see we have more than a couple hundred basis points to run there. So,

It is an important growth lever. As I mentioned in my remarks, it's somewhat of a flywheel growth effect to, you know, you replace a tired anchor with a vibrant, you know, a flat anchor.

soft goods or specialty grocery use, you see the benefit throughout the property, even those spaces that you don't impact directly. So it is something we're very focused on. We're managing our portfolio for growth, not occupancy. I want to highlight that. And our strategy of...

Keeping Space as They Can reinvestment project speaks to that.

Got it. Makes sense. And maybe just back to the acquisition topic, so when we look at the leverages now 6.1 times, to the extent you were to identify an opportunity, I guess, how would you think about funding that maybe up until a certain size, just retained cash, but over a certain amount, like debt dispositions or how are you thinking about that?

Well, you know, obviously pre-cashlow first, asset dispositions as we continue to harvest some non-core assets, and then we'll look at the investment opportunity relative to what our overall cost to capital is as we always do to make a decision to responsibly fund it. We're not going to lever up.

We're going to continue to be disciplined from a capital standpoint and mind our balance sheet.

Thanks. Next question, Craig Melman with Citi. Please go ahead. I'm going to go ahead.

Okay, guys, I just wanted to follow up on the acquisition piece a little bit. I know Jim, you and Mark kind of went through the yields there, but I'm just kind of curious to you guys are evaluating these. How much weight you're putting on that current going in yield versus the longer term opportunity on the IRR side and kind of bouncing the accretion versus cost of capital year versus long term? It's a great question and we're focused on that going in yield. That's the in place cash flow, right? But we're also looking for opportunities where we can grow that and importantly, very visible opportunities.

In other words, we're not really having to spec a lot because of our understanding of tenant demand to be in that particular center, our understanding because we are in the markets where market rent is, and our understanding of how we can densify the site, add out parcels, and other uses to drive returns.

And really it's a focus on that going and return, yes, but also within very highly visible growth opportunities within the first three to five years. If you look much past that, I think it becomes anybody's guess. So as you overlay that sort of thinking and you think about what we've done historically, you'll see our past.

California, Brea, you know, where we have actually exceeded our underwriting in terms of rents achieved and overall growth and returns. So think about it as more fuel for our value-added furnace and if we don't see the opportunity, it's not evident, we're just not going to be as competitive.

Just how to manage that risk going forward. It's a great question and something we're laser focused on as we think about tenants going forward that we want to do more business with. We obviously have a very diversified tenant base. One of the most diversified in the sector. We don't have any tenants constituting really any significant part of our rent. And we do think about tenant diversification and credit quality as we make those decisions so that we're not just making a decision about growth which you see in our results but also the stability of the tenants and their credit worthiness as we make those decisions.

We do a lot of credit underwriting led by Angela and team, but we're also really using data more than we've ever done before to understand how productive a tenant is going to be in a particular location. Because it's not just the credit quality of the tenant, it's also how successful are they going to be.

Are they going to drive good sales? Do you have a high likelihood that they're going to renew and they're going to renew at a higher rate? So those are the types of things that we think about. And if you just look at our top tenancy over a long time series, you can see the continued improvement in the credit quality. It's part of why we outperformed.

through the shock of the pandemic. But it's also, I think, going to be a crucial part of our outperformance going forward.

Thank you. Next question. Greg McGinnis with Scotiabank. Please go ahead.

Hey, good morning. Could you just provide some more color on the outcome of the Bed Bath Bankruptcy process, including number of leases assumed and specific tenants that won those leases at auction or tenants that are signing new leases and LOIs?

Sure Greg, this is Brian . So we have we had nine boxes remaining at the end of the quarter. We're taking six back here in the third quarter. Two were assumed by Cost Plus, one was assumed by Burlington. We also took back one box in the Northeast as well.

And just to piggyback on what Jim was just talking about, I mean the depth of demand that we're seeing overall for boxes has been very encouraging. We signed a lease on one of the boxes last week with one of the top operators in the off-price space. We've been seeing specialty grocery, home, fitness. And I think outside of that you see operators in the sporting goods sector. You see operators in the wellness sector.

on the bed bath space and really all the bankrupt space that we took back. I mean the team's done a fantastic job quickly addressing the Tuesday mornings with the likes of Five Below and JD Sports and Ulta. So as we proactively have taken and we're getting some of this space back overall we've been pretty encouraged with the depth of the band.

credit concerns or bad debt aside from Sally Beauty Holdings are there any other tenants pursuing store optimization plans that might be a headwind over the next 12 months and then to clarify one point when you mentioned growing occupancy in the back half the year is that both in place and leased occupancy

I could take the first part of it again not to get into individual tenants but we're constantly monitoring tenants our watch list is not just credit our watch list is also tenants that are looking at pulling back on some of their store openings what we've seen though particularly in the small shop space

is just an incredible depth of demand. And we hit on some of the anchors, but if you look at Boutique Fitness, if you look at QSR restaurants, if you look at all the mall-native retailers that we're attracting to the portfolio, there's a significant depth of demand that's there to backfill any closures that we may get back. And as Jim mentioned, as we continue to bring more anchors in as we continue to reinvest in the portfolio.

We are facing some potential occupancy headwinds here in the third quarter from those banker tenants, but with the pipeline that we have, we feel long-term a good trajectory to grow occupancy by year-end. Yeah, I think that's right. The comments I made were specifically about build occupancy and the flow through to the same property on a wide growth, but as Brian highlighted, we feel very strong about the pipeline.

about the continued transformation of this portfolio and our ability to continue to push both build and lease occupancy higher over the near term.

Thanks for the time.

Next question, Jeff Spector with Bank of America, please go ahead.

Great, thank you. Maybe just quick follow-up on the earlier conversation on anchor space and you know anchor space for a small shop. I know it almost feels like every few years it changes on the mix. I guess Jim to confirm you know I guess from your analyses are you saying that you know is there a certain

right mix between small and anchors. Have small shops basically held up a lot better over the years than expected that you would want to shift a bit more to small shops?

You know, it really depends on the center. It's a great question and also the other follow-on question of what's needed in that particular submarket. We like that our centers generally have a great mix of anchors, junior anchors, and small shops to allow us to drive the best growth. You know, you get.

but you also need the anchors. So it's really a asset by asset decision, but when you look at the portfolio overall, I think we have a great mix. And we'll make decisions to downsize junior anchors into small shops. We'll similarly in a particular market.

anchor. It's one of the great flexibilities of our asset class, which I really like. It's basically a simple industrial building with a pretty facade where you've got the HVAC on the roof, power comes in the back, so you have the ability to optimize the center to serve a particular community and get the mix right.

Okay, thank you. And then second, I mean there's clearly some concern today let's say over some slowing and I'm just again thinking about all the remarks on leasing and the bankruptcies. Just to clarify on the BKs for the year, is it are they in line with your expectations? Let's say if we go back to...

really explicit guidance as it relates to the impact on the portfolio and on same property NOI growth from bankruptcy activity over the course of this year and that number is clearly improved. Our original guidance was a drag on a year-over-year basis of 150 basis points. We've tightened that into 125 basis points this quarter.

I think the names we're talking about that make up sort of that known bucket, which include Bed Bath & Beyond and Christmas Tree Shops and Tuesday Morning at David's Bridal or bankruptcy situations we've been following or monitoring for some time. So not a lot of surprises within that pool. We haven't seen additional filings that we have continued.

Okay, great. Just wanted to confirm. And then last, if I could just confirm on commencements, you know, how are our commencements happening on schedule, you know, how does it compare to let's say six months ago or a year ago, and how are you thinking about commencements over the next six to twelve months? Yeah, I mean we're really pleased the degree to which we've been able to continue to not just commence the leases we have coming online, you know, on time but actually continue to accelerate some of those commencements.

into earlier periods, which we did in the second quarter as well. I think we outperformed our expectations on commencements by two and a half to three million dollars, just pulling forward some leases that weren't expected to commence until the third and into the fourth quarter of this year. So that's a pretty stable trend and has been over the last couple of years as we really work to sort of optimize the process.

recognize efficiencies in order to get tenants open and operating more quickly. As I mentioned in my prepared remarks, we've got about $25 million of ABR coming online in the second half of the year. It's 1.3 million square feet. And we will continue to focus on getting those tenants not just open on time, but continuing to accelerate some of those commencements and even commencements expected in the first part of 2024.

Great, thank you. Next question, Dori Kesten with Wells Fargo. Please go ahead. Thanks, good morning. Have you seen any notable improvements or slowings in the timing of rent collections within small shop of late?

of revenue steamed on collectibles that we've recognized in the portfolio on a year-to-date basis. It's about 50 basis points, which was below the low end of the guidance we had given and allowed us to really tighten in our expectations for the full year. Then on your, I think you said $900 million shadow pipeline, can you compare these developments to your existing pipeline? Maybe just return expectations, time to completion, any regional leanings? The returns are equally compelling and the reason it's our shadow pipeline is we have these pesky things called leases that are in place today. But if you look at our rolling lease expiries and the mark that we have of over 50% between...

where those anchor leases are rolling and where we're signing rents today, it gives you a very clear view of our path to be able to continue to tap into that opportunity as it ripens, as it comes to. You know, one of the other things that I think is important to appreciate.

is that we're not committing substantial capital until we've got those projects largely pre-leased. So as you think about the coming economic environment, whatever it might be, it's really an all-weather strategy. We're really not taking substantial risk. So we've identified the opportunities, we're working towards them.

and it really represents several years of a forward pipeline, driven in part by when the leases expire and when we can take control of the space. Things like Bed Bath, you know, allow us to pull some of that forward, and we added a couple of projects into the pipeline this quarter that reflect some of that. So.

years of a forward pipeline driven in part by when the leases expire and when we can take control of the space. Things like bed bath you know allow us to pull some of that forward and we added a couple of projects into the pipeline this quarter that reflect some of that.

It truly is a very visible pipeline for us and you can see it based on the marks that are embedded in our anchor rats.

Next question, Anthony Powell with Barclays. Please go ahead.

Hi, good morning. A question on lease spread. They're strong in the quarter, but I guess they were doubts eventually on the news side especially. Is there anything to be aware of in terms of either a mix shift or comps on a lease spread in the quarter? Anthony, hey, this is Brian . Yeah, I talked about it in my opening remarks that that was really a mix issue. We had a higher percentage of small shop leasing during the quarter.

feel very good long term about our team's ability to bring leases to market. As we've highlighted a couple times on this call, is we look out three years, we've got anchor leases expiring in a high single digit. So we're just over nine bucks and we've been signing those between fourteen and fifteen dollars. So long term, we feel good about our ability to continue to drive new lease growth.

520 basis points a year of year that's pretty strong. What's the split between occupancy and rent growth there? And do you think that number could stay above 5% the next few quarters as you deal with these, tenant bankruptcy and releasing?

Yeah, I mean, if you look at our full year guide for base rent, sort of at the midpoint of the range is probably about 425 basis points. So we are expecting deceleration as you get into the back half of the year. I would say that's driven by two things. One is, as you pointed out, the impact of some of that vacancy. That's coming back to us.

through some of these bankruptcy situations, which really didn't have really any impact in the first quarter, and a more muted impact on the second quarter. So that's certainly part of it. The other factor I would just point out when you think about that as a year-over-year contribution is the ramp we had in base rent between the third and fourth quarter of 2022. There was substantial growth there. So some of it's...

based rent. I would say on a net basis within that 425 basis point contribution it's about a hundred basis points give or take that relates to occupancy growth outside of on a net basis for the bankruptcy activity so clearly the degree to which we're increasing billed occupancy is definitely driving some of that outside performance.

over the course of the full year, the rest is really round-growth. Thank you.

Next question, Handel Just with Lezuho. Please go ahead.

question Handel Juszt with Lizzuho. Please

Good morning. First question maybe for you Angela. I appreciate the color on the expected ABR in the back half of the year. I think you mentioned 25.3 million. But I was hoping we could get a bit more color on a good starting point for quarterly ABR as we start thinking about the portfolio's growth potential near term in light of the recent BKs.

And if there's any impact from FAS 142, we need to be making in there. Thanks. Yeah, nothing really to note at this point in terms of FAS 141 impact related to the bankruptcies. You know, I think we provide some disclosure in the 10Q that kind of gives you...

a sense of what to expect in terms of FAS 141 for the balance of the year, but no real outliers from that perspective. You know, on a quarterly basis, I can say if you look at all the bankrupt space we had that we expect to come back, that ties back to that 440,000 square foot number I gave earlier in terms of occupancy loss expected in the third quarter.

related to the bankruptcy situation. That translates into about $1.5 million of quarterly ABR that would have been recognized in the second quarter. That'll be lost as we get into Q3 and on a full quarter basis in Q4.

And one more perhaps on CapEx and certainly the CapEx that's absolute and percent of NOI has barely grown in the industry in the last couple of years. I'm curious if and when the recent leasing velocity, the higher occupancy, less big boxes to fill and improved. Does that define the Please

centers that you outlined, we'll start helping that line item. So maybe some thoughts on how we can be thinking about CAPEX expectations in your term. Thanks.

You know, an opportunity we saw when we came in was to make the centers look better. So you certainly saw us increasing in earlier years the capex per foot. As we get through this program and we're already seeing it, we expect the capex on a recurring basis to decline given the improvements we've made to the centers.

The other area where I think we continue to show discipline is within net effective rents.

show you our net effective rents, which is not common practice. I think it should be, because to really understand how much ROI we're driving, you've got to look at not just the...

spreads, but you've got to look at what you're giving in terms of TAs and other capital. So I feel really good about our ability to continue to drive high ROI in this environment given our rent basis and given the discipline that we've approached that capital question with. Thank you.

That's it for me. Thank you.

Next question, Mike Mueller with JP Morgan. Please go ahead.

Yeah, hi. I'm curious, how does it return expectations on the $900 million shadow reinvestment pipeline compared to the current returns? And if you're looking within that pipeline, are there any larger scale projects in it like Pointe Orlando or Roosevelt in it, or is it just more smaller scale?

It's a mix. We do have some larger projects. The returns are high single digit, low double digit, incremental returns, Mike. And I think that's important because not everybody is showing you what their incremental returns are.

And with some of the larger projects, we continue to phase them to manage our capital at risk. And frankly, we find through phasing that we drive even better rents in subsequent phases. So there are some larger projects in there, many of which we've already started initial phases.

like Point Orlando? Yeah, just note Mike, we do provide some disclosure in the supplemental that lists by project, the projects that make up that $900 to $950 million of future redevelopment pipeline and we break that down between major redevelopment projects and minor redevelopment projects. So while we haven't given specific expected dollar amounts by project, we do provide some

I think you can get a sense of where some of the larger opportunities in the portfolio are from that disclosure. Got it. Okay....

Next question, Florence Van Dijkke with Compass Point, please go ahead. Hey, Florence. Hey, Jim. A question getting back to the small shop opportunity.

because to me that's one of the more exciting things that you guys have, historically lower occupancy.

typically within a few years of the project delivering. We see typically we'll let some of the small shop go vacant as we execute upon the redevelopment. Then we see several hundred basis points of improvement as we deliver the anchors and deliver the overall reinvestment. That implies a load of, if I take 92.5, 93%, I mean it's 250, 300 basis points potential upside still left in your shop. Is that the right way to read about or think about it? Yeah, we're not going to be so precise, but we think it's in that range.

Yeah, I would just also note, Floris, what Matthew just did sort of compares the build occupancy number that Jim's talking about and some of the stabilized redevelopment projects versus where we stand from a leased occupancy perspective today. Build occupancy in small shop is actually 84.6. I would note that there's a lot of opportunity relative to where we stand on.

of big, you know, your biggest projects or biggest, most valuable properties like Roosevelt Field, obviously, you're getting a sprouts now that that'll become grocery anchored. And that should be very positive. I mean, that if I recall, I mean, the, the average rent in place in that property are still relatively low, although the shop

some of the shop rents are in the 60s or higher. So that's potentially an exciting growth opportunity on a large site, but.

So I guess maybe if you can expand a little bit on some of these larger assets and the growth opportunities that you see, and also talk about the residential components at Mira Mesa, and would you look to offload that or partner with a local developer? Well, let me take the last part of that question first. We have several opportunities like Mira Mesa.

My instincts are that in most circumstances, as we did in College Park, Maryland, we'll harvest the entitled land value and let somebody else build it to a sixth-type development return. I think that's the way for us to maximize value. In terms of larger projects, you mentioned Roosevelt. We're launching the first phase, which includes sprouts.

we have some exciting additional densification opportunities there that we're rapidly leasing and getting ready to launch. So, you know, big value creation both in terms of density but also rate as you mentioned. Projects like Wynwood outside of Dallas, a large site where we're bringing in a target, we're bringing in other great uses into a very well-oiled site.

Trader Joe's. So we have several projects like that across the portfolio where as I mentioned earlier, typically we'll deliver them and execute them in phases, leveraging the leasing momentum, the upgrade in tendency, the ability to add density.

And then as it relates to complementary uses, we'll work to get those entitled, but typically, you know, when you do the math, it may make sense to harvest that value versus taking the capital risk of development.

Thanks Jim.

So, two questions. First off, on insurance, obviously we're all well known of the property insurance issues. From a tenant business insurance perspective, are there similar issues on the business operation insurance or insurance that tenants will get, or are the issues that we're reading about with insurance rates solely property and is not affecting tenants' ability to get their own business type insurance? I'd like to say this is Brian , we haven't heard any tenants talk about ability to access insurance. I think some rates have gone up, particularly in some parts of the country, you think about Florida, but it really hasn't impacted in terms of the availability of getting insurance related numbers yet, so that's nicely said, the

As the portfolio leases up and gets near full occupancy, do you see that your cash flow will naturally increase or is it because you're always going after under market space and doing the small scale redevelopment that that cash, whatever cash you save by the occupancy getting up near full is going to be used for reinvestment so that way net cash flow that the company is generating really won't increase. It's just a matter that it gets redeployed. No, the net cash flow should continue to increase as we're investing that at high single digit, low double digit incremental returns and we're actually delivering those projects and we're recommending

sooner than what we have budgeted. So you see the follow-on impact to our cash flows and you know I'm very pleased that our cash flows off of a portfolio of 370 assets are in line with what 520 or 530 were really reflecting that discipline with capital.

What I was referring to also is the recurring capital that occurs at the center, your recovery rates obviously improve upon that as you drive occupancy in addition to our reinvestment program brings down that recurring CapEx load. All three of those things continue to contribute to growth in our net cash flow.

Hi. I think historically the industry might have seen more retailer closures than bad debt in the first half of the year versus the second half. And while you improved your overall bad debt guidance, guidance implies more bad debt in the second half. Do you see this as a function of building, of, you know, closures building as we head into next year, or was there anything specific to the first half, second half cadence this year? I mean, I think if you look back over the last couple of bankruptcy cycles, that historical concentration of bankruptcy activity right after the holidays has really evened out over the course of the year. We've seen more filings.

in the late summer and fall as tenants work to build inventory for back to school or holiday periods. So you have seen more later in the year bankruptcies than you would have 10 or 15 years ago. I think given the complexities of the environment these days, including interest costs and all kinds of stress on lots of different businesses across lots of different sectors.

We're maintaining, I think, a thoughtful approach as we look at guidance for bad debt in the second half of the year. But as you pointed out, we are running a little bit below end of that level year to date.

And then in terms of the depth of demand across small shops, is there a particular space size where you're seeing more demand?

Yeah, Linda, this is Brian . I would say just in front of category, it's Al Parcel Space for sure. I mean in that kind of 2,000, 3,000 square foot QSR restaurant. That probably is a little bit smaller if you look at the inline 1 to 2,000 square feet from whether that's health and wellness, smaller boutique fitness operators.

specialty desserts like crumble cookies. They've been a really exciting tenant we've added across the portfolio in a number of locations. So overall I think we've been pretty pleased but if you're thinking of a specific size range I'd say it's in that two to three thousand for out parcels in the small shops and then one to two as well for in line.

exciting tenant we've added across the portfolio in a number of locations. So overall I think we've been pretty pleased but if you're thinking of a specific size range I'd say it's in that two to three thousand for out parcels in the small shops and then one to two as well for Inline. Thanks.

Thank you. There are no further questions. I would like to turn the floor over to Stacey Slater for closing remarks. Thanks everyone. Enjoy the rest of your summer.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.