Q3 2023 Phillips Edison & Co Inc Earnings Call
Good day, and welcome to Phillips Edison and company's third quarter 2023 earnings Conference call. Please note that this call is being recorded.
I will now turn the conference over to Kimberly Greene head of Investor Relations Kimberly you may begin.
Okay.
Thank you operator I'm joined on this call by our Chairman and Chief Executive Officer, Jeff Edison, Our President Devon, Murphy, and our Chief Financial Officer, John Caulfield. Once we conclude our prepared remarks, we will open the call to Q&A.
After today's call an archived version will be published on our website. As a reminder, today's discussion may contain forward looking statements about the company's view of future business and financial performance, including Ford earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and.
As described in our SEC filings specifically in our most recent Form 10-K and 10-Q and.
In our discussion today, we will reference certain non-GAAP financial measures.
Information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in our earnings press release, and supplemental information packet, which have been posted on our website. Please note that we have also posted a presentation with additional information our caution on forward looking statements also applies to these materials.
Now I'd like to turn the call over to Jeff Anderson, Our Chief Executive Officer, Jeff.
Thank you Kim and thank you everyone for joining us today.
The Pico team delivered another solid quarter of growth with same center NOI, increasing by three 2% and continued strength in portfolio occupancy and rent spreads.
This performance has allowed us to reaffirm the midpoint and tightened the range of our 2023 core <unk> guidance.
The midpoint represents year over year growth of two 6%. Despite interest expense headwinds of <unk> 10 per share. We believe we will continue to deliver positive earnings growth despite interest expense and other macro headwinds.
The continued strength of our operating performance is attributable to our differentiated and focused strategy.
Lucidly owning grocery anchored neighborhood shopping centers anchored by the number one or two grocer by sales in our market and our ability to drive results at the property level through our integrated and cycle tested operating platform.
Today, we see a continued strong operating environment and the transaction market that has improved.
The consumer continues to be resilient and our grocers continued to drive strong foot traffic to our centers, we remain 98% occupied which gives us pricing power.
Leasing demand continues to be elevated for our in line spaces, and we have limited exposure to big box retailers, we have a great balance sheet and are well positioned for accretive acquisitions.
We have seen an increase in deal activity beginning in the third quarter as cap rates continue to adjust in response to higher interest rates.
Based on our current pipeline, we have increased the low end of our guidance range for acquisitions, while it's still a market in transition we're confident in our ability to close on $250 million to $300 million and net acquisitions. This year.
We continue to have a very disciplined acquisition process, we remain focused on accretively growing our shopping center portfolio at the right price.
Achieving our acquisition hurdle of a 9% Unlevered IRR.
The acquisitions that we will complete in the second half of the year underwrite to a nine and a half plus unlevered IRR.
With <unk> experienced in house acquisition team, we are well positioned to continue to grow our portfolio. The Pico team looks forward to sharing an update on our acquisition strategy, including case studies, our underwriting process and our targets for 2024 during our investment community day on December <unk>.
<unk>.
In September <unk> announced the divestiture plan with Cedar as wholesale grocers in connection with the proposed Kroger Albertsons merger.
We remain cautiously optimistic about the impact on Pico.
We continue to believe it is ultimately a positive for Pico.
Centers and for the communities that our centers serve.
While the market is still gives the merger a low probability of occurring should it close and 413 stores are sold to CNS. The impact on Pico is a net positive.
CNS has been operating for over 100 years and they were one of the largest wholesale operators with demonstrated experience in retail operations.
The recent announcement is potentially a better outcome for Pico that a new spin co that Kroger and Albertsons had considered.
Importantly should the merger occur the majority of our Albertson stores will be operated by an excellent operator and Kroger if the merger does not occur or Albertsons anchored centers will continue the strong performance that they have enjoyed to date.
I will now turn the call over to Davin Kevin.
Thank you Jeff.
Good afternoon, everyone and thank you for joining us.
Our leasing team continues to convert strong retailer demand into higher occupancy with higher rents at our neighborhood shopping centers.
Anchor occupancy ended the quarter at 99, 3% leased representing a year over year increase of 40 basis points.
In line occupancy increased 10 basis points sequentially to 94, 9%.
Representing a year over year increase of 130 basis points.
We believe there is still upside in our inline occupancy given the continued strong demand for space.
As of September 30th in place ABR per square foot for our inline neighbors increased five 2% compared to a year ago.
We continue to capitalize on strong renewal demand and are making the most of the opportunity to strengthen key lease term and drive renewal rent higher.
Specifically for the third quarter, we achieved a 16, 9% increase in renewal rent spreads.
In terms of new lease activity, we continue to have success in driving meaningfully higher rents.
New rent spreads for the third quarter increased 26, 3%.
We expect that leasing spreads will continue to be strong through the balance of this year and into the foreseeable future.
<unk> retention rate remained strong this quarter as well at 93%.
An important benefit of high retention rates is that we have much lower ti spend on renewals.
In Q3, we spent less than a dollar per square foot.
Our Gi for renewals.
The exact amount was <unk> 88 per square foot.
On average, our new and renewal in line leases executed in Q3 and annual contractual rent bumps of two 5%.
An important contributor to our long term growth rate.
The leasing spread that we are achieving.
Combined with our strong retention rates are clear evidence of the continued high demand for space in our grocery anchored centers.
Our continued pricing power is a reflection of the strength of our strategy and the quality of our portfolio.
During our upcoming Investor Day, you will hear from our operations gain meters on how the Pico team delivers growth at the property level and why we remain confident in our ability to deliver long term same center NOI growth of 3% to 4% on an annual basis.
The team will be prepared to share insights on why our assets are successful our strategic location and suburban markets are right sized format.
Other advantages we enjoy in the markets, where we operate.
Turning to redevelopment and development.
We continue to invest in our value, creating ground up out parcel development and redevelopment projects.
Which remain an excellent use of our free cash flow and deliver very attractive returns.
Year to date, we have stabilized Ken project delay.
Delivering over 223000 square feet of space to our neighbors with incremental NOI of approximately $2 $9 million annually.
These projects provide superior risk adjusted returns and have a meaningful impact on our long term NOI growth.
For the full year 2023.
We continue to expect to invest $35 million to $45 million and ground up out parcel development and redevelopment opportunities with weighted average cash on cash yields on this activity between nine and 12%.
During our upcoming Investor day, the Teco team will provide an update on our pipeline of ground up development and redevelopment projects across our portfolio.
Pico continues to benefit.
From a number of positive macroeconomic trends that create strong tailwind and drive strong neighbor demand for us.
These trends include a resilient consumer.
Hybrid work.
Migration to the Sunbelt pop.
Population shifts that favor suburban communities and the importance of physical locations and last mile delivery.
The impact of these demand factors are further amplified due to limited new supply being created over the last 10 years and going forward.
Given that current economic returns do not justify new construction.
In summary, our differentiated strategy continues to position <unk> well for continued steady growth in all economic cycles.
This is due to.
Our exclusive grocery anchored focus on centers anchored by the one or two grocer in a market.
Our necessity based neighbor mix.
Right side format.
Our well positioned location growing suburban markets.
Our high occupancy with continued strong neighbour demand for space.
Our high leasing spread and retention rates.
Our well diversified neighbor mix.
Our lack of exposure to distressed retailers.
Our strong balance sheet.
And most importantly are well aligned and cycle tested team.
I'd now like to turn the call over to Jonathan.
John.
Thank you Devin and good morning, and good afternoon, everyone I'll.
I'll start by addressing our third quarter results, then provide an update on the balance sheet and finally speak to our updated 2023 guidance.
Third quarter 2023, NAREIT <unk> increased 70 basis points to $72 5 million.
Or <unk> 55 per diluted share.
Driven by an increase in rental income from our strong property operations.
Results were partially offset by higher year over year interest expense of $4 million as well as a onetime noncash impairment charge of $3 million related to a third party investments.
Third quarter core <unk> increased 50 basis points to $77 million or <unk> 58 per diluted share.
By increased revenue at our properties from higher occupancy levels and strong leasing spreads partially offset by higher interest expense.
During the quarter, we acquired Lake point market, a grocery anchored center in the Dallas, Texas suburbs for $12 $9 million, we expect to drive growth by increasing occupancy and enhancing merchandising mix. In addition to the potential for development of out parcels. In addition, we purchased a land parcel adjacent to.
The marketplace at past farms, located in Milwaukee, Wisconsin et cetera.
We expect to drive growth through expansion development opportunities.
Subsequent to quarter end, we acquired one property and whatnot parcel landfill village and 89600 square foot shopping center is anchored by Kroger and in Atlanta, Georgia suburb, we expect to drive growth in the asset through occupancy increases and rent growth.
As of October 31, Pico is under contract to acquire additional assets that are expected to close during the fourth quarter of 2023. This will bring our net acquisition volume for the year to between $250 and $300 million.
In the third quarter Pico issued approximately 2 million shares under our ATM facility, which resulted in net proceeds of $71 million or gross weighted average share price was $35 59.
Assets acquired year to date and currently in our pipeline are accretive to earnings per share at these levels, we were intentional and match funding acquisitions with equity at a time when our access to the equity market was favorable while keeping our leverage low. In addition to the recent term loan extensions this issuance delays or need to go.
To the long term debt market, which we believe is currently unfavorable.
From a balance sheet perspective, we ended the quarter with approximately $714 million of liquidity, including cash and capacity on our $800 million credit facility.
Our leverage ratio continues to decrease as a result of our strong earnings growth and our equity issuance with our net debt to adjusted EBITDA at four nine times as of September 32023.
Our debt had a weighted average interest rate of four 1% and a weighted average maturity of 440 years, when including extension options.
2% of our debt was fixed rate.
As we look at our floating rate debt exposure, our long term target is to limit our floating rate debt to less than 10% of our total debt.
Currently in an unusual environment, given the inverted yield curve wider spreads and other factors, which is why we're exercising more patients before locking in long term rates are.
Our lack of near term maturities provides us with flexibility to be patient.
That said, we remain focused on all options to meet our long term target as soon as possible.
Between the free cash flow generated by our portfolio and the significant capacity available on our revolver, we remain confident in our ability to successfully fund our growth plans.
Turning to guidance, we have updated our NAREIT <unk> and core <unk> per share guidance.
<unk> really due to a onetime noncash impairment charge related to a third party investment we have lowered our NAREIT <unk> guidance to a range of $2 23.
Per share to $2 27 per share.
We have reaffirmed the midpoint of core <unk> guidance and tightened the range to $2 31 per share to $2 35 per share.
As Jeff mentioned.
Midpoint represents year over year growth of two 6% despite interest expense headwinds of <unk> 10 per share.
We also reaffirmed our same center NOI guidance in the range of 375% to four 5%.
Importantly, despite the impacts of higher interest rates and other macro headwinds we are delivering earnings growth due to the continued strong performance of our portfolio driven by leasing spreads occupancy and high retention.
We plan to provide preliminary guidance for 2020 for an update on our long term growth drivers during our upcoming Investor day.
With that I'll turn it back over to Jeff Jeff.
Thanks, John.
Before we get to your questions I'd like to acknowledge the press release, we issued yesterday announcing changes to <unk> leadership team Deb.
Kevin will step down as president on December 31.
At that time, Bob Myers currently CLO will become president and Joe Swather currently head of portfolio management will become Chief operating officer, and Executive Vice President.
This is the culmination of our longstanding succession plan.
I would like to extend our sincere gratitude to Devin who has worked side by side with me to transform <unk> into one of the largest owners and operators of grocery anchored neighborhood shopping centers in the country.
Bob and Joe are extremely talented proven leaders and team players who have been critical to the consistent strength of our operating performance. They have played an important role throughout the majority of <unk> 30 year history growing the portfolio into what exists today.
Bob and Joe have bandwidth Pico for over 20% and 19 years, respectively.
I have successfully manage operations development acquisitions and dispositions through multiple cycles.
I'm confident they will continue to scale the portfolio from here and I look forward to continuing to partner with them and delivering long term growth and value creation.
Gavin will serve as the managing director of investment management through his planned retirement at the end of June.
During this time he will work closely with me and the team to ensure a seamless handoff of his current responsibilities.
Devon is also in discussions with the nominating and governance committee about joining <unk> board of directors following his retirement.
I would also like to highlight the recent appointment of Toni Terry to serve as an independent director of <unk> Board effective October 30.
We are delighted to welcome Tony to the board with more than three decades of public company business experience working with senior management and boards to drive growth and innovation Tony brings a proven track record of strategic planning corporate and operational finance regulatory matters and capital allocate.
<unk>.
Excited to have Tony on our board.
With that we look forward to your questions operator.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. If you would like to remove yourself from the queue Press Star one again.
We'll take our first question from Caitlin Burrows at Goldman Sachs.
Hi, everyone. Good afternoon, maybe to the topic of the floating rate debt exposure you guys mentioned, the long term goal of under 10% floating rate.
And then you also mentioned that the equity issuance during <unk> was to match fund acquisitions.
I know you don't have meaningful debt maturities in 'twenty four but there are interest rate swaps expiring and other floating rate debt out there.
So I'm just wondering if you can comment on kind of your ability and then separately the willingness to use equity to reduce that floating rate debt.
Okay. Thanks, Colin for the question John do you want to take that.
Question.
Sure.
Good morning, Caitlin so at the ended the quarter, we were 82% fixed rate on our debt and.
Higher interest rates are certainly a headwind we are estimating that for the full year. It will be about 10 cent impact on our <unk> as a headwind, but we continue to have positive core <unk> growth for the year. So with this uncertainty in the environment. We are taking the position to flip more of our debt than the 10% floating rate.
Target and we do believe that the long term debt market continues to be unsettled as spreads are wide given the volatile treasury environment and things going on in the macro.
We do want to be a long term issuer and we do have that long term target of 10%.
But we think accessing those longer term fixed rate instruments will be more appropriate when there is more stability.
In the market and liquidity in the capital markets. So I think that the piece for us when it comes to issuing debt and equity it's really.
It matches with our acquisitions and so as we look at the acquisitions that we have upcoming as well as those that we made when we looked at the equity that we were and where we were raising their price. We know that it's accretive to earnings and that was important to us. So.
Think it is going to be a combination of both that we can we're able to borrow accretively with the acquisitions and the same with.
Raising equity so I think it will be both but it'll depend on on that availability I mean overall our leverage.
Four nine times and as you say no meaningful maturities for about 24 months.
It gives us that flexibility to be patient and so in this market that is that youll see us flow more than we otherwise typically would.
Got it okay, but it doesn't sound like youre necessarily looking or maybe the options open to use equity to address some of that.
Near term.
Yes.
Thank you.
Yes got it.
Okay, and then maybe just turning to acquisitions in order to make the guidance range that you guys.
Put out with the updated range. It seems like there is either a lot of properties or some larger deal that youre expecting to happen in the fourth quarter. So I'm. Just wondering if you can comment on the types of properties you are seeing for sale and then which are most attractive to at <unk> at this time.
Yes.
The.
There is there is no major transaction these are multiple transactions with multiple sellers.
Consistent with our existing strategy.
Unknown Executive: Good day and welcome to Phillips Edison and Company's third quarter 2023 earnings conference call. Please note that this call is being recorded.
We.
We've been as you know we've been cautious the last <unk>.
Quarters on the acquisition side.
Kim Green: I will now turn the conference over to Kimberly Green head of investor relations. Kimberly, you may begin. Thank you operator.
And a lot of the deals or deals that had worked through during that longer period of time.
With price concessions and a variety of different.
Kim Green: I'm joined on this call by our chairman and chief executive officer Jeff Edison, our president, Devin Murphy, and our chief financial officer, John Caulfield. Once we conclude our prepared remarks, we will open the call to Q&A. After today's call, an archive version will be published on our website.
Tools that we've had to get these to where they made sense for us.
And we feel really positive about the projects in.
We think that there.
Sort of fairway in terms of.
Fitting with our core strategy.
Kim Green: As a reminder, today's discussion may contain forward-looking statements about the company's view, future business and financial performance, including forward earnings guidance and future market condition. These are based on management's current beliefs and expectations, and are subject to various risks and uncertainties as described in our SEC filings, specifically in our most recent form 10K and 10K. In our discussion today, we will reference certain non-gab financial measures. Information regarding our use of these measures and reconcilations of these measures to our gap results are available and our earnings press release and supplemental information packet, which have been posted on our website. Please note that we have also posted a presentation with additional information. Our caution on forward-looking statements also applies to these materials.
And I think we're we when we underwrote them and got to sort of a mid nines plus in terms of it.
Unlevered IRR, we felt that they were being sort of risk rewarded for being active in a market that is.
As you know is very.
Fluid right now.
One of the things that got us comfortable with it was when you looked at the price per foot we were paid.
Under our $260 a foot.
Really for us is.
Is going to continue to give us really strong pricing power in these particular markets.
To be able to really drive.
And be able to grow our <unk>.
Jeff Edison: Now I'd like to turn the call over to Jeff Edison, our chief executive officer. Jeff? Thank you, Kim, and thank you everyone for joining us today. The Pico team delivered another solid quarter of growth with same center NOI, increasing by 3.2% and continued strength in portfolio accuracy and red spreads. This performance has allowed us to reaffirm the midpoint and tighten the range of our 20-23 core FFO guidance. The midpoint represents year over year growth of 2.6% of 26% despite interest expense headwinds of 10 cents per share.
Earnings from.
From these particular properties. So we're very excited about the progress we've got under control.
As we said we feel comfortable will be in that $2 50 to 300 range.
Got it and sorry, just one quick thing you mentioned, there Jeff price concession by that do you mean that.
Over the course of the discussion the seller was willing to follow on a lower price to get it done.
Yes, I mean I think they were.
In this environment, you've got to have sellers, who.
Our eyes open to the market and what's changing with the in this interest rate environment.
And so we.
Jeff Edison: We believe we will continue to deliver positive earnings growth despite interest expense and other macro headwinds. The continued strength of our operating performance is attributable to our differentiated and focused strategy of exclusively owning grocery anchor, neighborhood shopping centers, anchored by the number one or two grocery buy sales in a market. And our ability to drive results at the property level to our integrated and cycle-tested operating platform. Today, we seek a continued strong operating environment and the transaction market that has improved.
Getting a seller who is realistic about.
Where the market is today is one of the more important things in the in the acquisition process and continues to be front of mind for us to make sure that we can we're not wasting our time, we're actually spending on things. Unfortunately. These these deals have worked through.
Got it okay. Thanks.
Thanks, Kevin.
We'll go next to Jeff Spector of Bank of America.
Great. Thank you.
First congratulations to Devin Bob and Joe.
Follow up question to on acquisitions.
Jeff Edison: The consumer continues to be resilient and our groceries continue to drive strong foot traffic to our centers. We remain 98% occupied, which gives us pricing power. Leasing demand continues to be elevated for our in-line spaces and we have limited exposure to big box retailers. We have a great balance sheet and are well positioned for creative acquisitions. We have seen an increase in deal activity beginning in the third quarter as cap rates continue to adjust in response to higher interest rates.
Did I Miss it Jeff did you discuss the cap rate range I heard you say, the IRR of 9% plus but.
Anything on kind of cap rates.
I think the way I would look at it.
As we've.
We have seen in our view I mean, you know first of all you said that we're really not cap rate underwriters, where we're unlevered IRR underwriters, but if you do sort of translate that back and you say there has been.
Jeff Edison: Based on our current pipeline, we have increased the low end of our guidance range for acquisitions. Williams. While it's still a market in transition, we are confident in our ability to close on $250 to $300 million in net acquisitions this year. We continue to have a very disciplined acquisition process. We remain focused on a credibly growing our shopping center portfolio at the right price, while achieving our acquisition hurdle of a 9% unlearned IRR. The acquisitions that we will complete in the second half of the year underwrite to a 9.5 plus unlearned IRR. With PICO's experienced in-house acquisition team, we are well positioned to continue to grow our portfolio.
100 to 150 basis points movement in cap rates.
I would say that we're seeing that in the marketplace today.
We're not seeing a huge volume, but we are seeing that in the in the market today.
Okay, and I know these things are hard to forecast, but it feels like that things are improving a bit since we last saw you. When you said the transaction market is improving I guess.
Think that things will open up even more in 2004 do you again, those conversations are improving with the sellers or again 24.
Uncertain at this point.
I would say uncertain at this point I mean, there continues to be a big data in terms of acquisition volume.
Jeff Edison: The PICO team looks forward to sharing an update on our acquisition strategy, including case studies, our underwriting process and our targets for 2024 during our investment community day on December 14th.
We're trying to give you guys as much direction as we can but it's it's a difficult environment.
No.
It's a really tough environment. When you are moving to really what is a much more of a buyer's market than a seller's market and we've all been through those transitions. They take a long time and there are difficult.
Jeff Edison: In September, CROGRA announced the Investiture Plan with CES Hostel Grocers in connection with the proposed CROGRA in Albertson's merger. We remain cautiously optimistic about the impact on PICO. We continue to believe it is ultimately a positive for PICO for our centers and for the communities that our centers serve. While the market still gives the merger a low probability of occurring, should it close, and 413 stores are sold to CNS, the impact on PICO is in that positive.
And so these.
These are the times you got to be more disciplined than ever in your underwriting and your patients to get to where you think the pricing.
Pricing is so were.
I wouldn't look at 'twenty four I hope, we will give you some more clarity.
Our investor meeting in December.
But it is it's choppy.
Jeff Edison: CNS has been operating for over 100 years, and they are one of the largest host-hale operators with demonstrated experience in retail operations. We believe the recent announcement is potentially a better outcome for PICO than a new spit-in code that CROGRA and Albertsons had considered. Importantly, should the merger occur, the majority of our Albertson stores will be operated by an excellent operator in CROGRA. If the merger does not occur, our Albertsons anchored centers will continue the strong performance that they have enjoyed today.
Each deal has a story to it today.
And.
That means it's going to be I think youre going to it's going to be a choppy environment.
But I would say that generally we're optimistic that we will have a decent backlog going into next year. So we will be.
In a decent position going forward.
Thanks, Jeff and then just my last question.
Devin you talked about still.
Improving in line occupancy.
Devin Murphy: I will now turn the call over to Kevin. Thank you, Jeff.
Increasing that.
I assume next year the following year at.
At the same time, we are seeing and John talked about macro headwinds right.
John Caulfield: Good afternoon, everyone, and thank you for joining us. Our leasing team continues to convert strong retailer demand into higher occupancy with higher rents at our neighborhood shopping centers. Ancure occupancy ended the quarter at 99.3% least, representing a year-over-year increase of 40 basis points. Inline occupancy increased 10 basis points sequentially to 94.9%, representing a year-over-year increase of 130 basis points. We believe there is still upside in our inline occupancy given the continued strong demand for space.
More retailers reporting misses more concerns over the consumer going forward. How are you balancing I guess the you know the.
Leasing decision.
More local tenants regional national like what are you doing as the environment. It does seem to be changing here with the consumer right you've been doing this a long time, so how do you.
I guess change the leasing strategy or do you not.
Yes.
I mean, Jeff we're very focused.
Just on the health of the consumer and.
The volatility among retailers and we stay focused on that.
John Caulfield: As of September 30th, in place ABR for square foot for our inline neighbors increased 5.2% compared to a year ago. We continue to capitalize on strong renewal demand and are making the most of the opportunity to strengthen key least terms and drive renewal rent higher. Specifically, for the third quarter, we achieved a 16.9% increase in renewal rent spreads. In terms of new ease activity, we continue to have success in driving meaningfully higher rents.
That being said, we believe we can grow our occupancy by our inline occupancy by circa 100 basis points. So to take it up from where it is today, which is just under 95% to 96%.
And the reason we feel that is because when we look at our retention rates and we look at our spreads the demand for our space continues to be very high.
Youre seeing our renewal spreads increase.
Every quarter over quarter, so our releasing spread.
John Caulfield: New rent spreads for the third quarter increase 26.3%. We expect that leasing spreads will continue to be strong through the balance of this year and into the foreseeable future. Pico's retention rate remains strong this quarter as well at 93%. An important benefit of high retention rate is that we have much lower T.I, spend on renewals. In Q3, we spent less than a dollar per square foot on T.I, for renewals. In exact amount with 88 cents per square foot.
On renewals.
In the third quarter of last year were 15, 5%. This quarter. They were 16, 9%. So again, we are seeing.
The retailer Who's obviously, most aware of their conviction in their business model being willing to.
Remain in our centers at higher rents and they're also signing up for higher rents at higher CAGR. So again the environment as of the moment continues to be strong and our perspective is that it will continue to be so based on what our.
John Caulfield: On average, our new and renewal inline leases, executed in Q3 had annual contractual rent pumps of 2.5%, an important contributor to our long term growth rate. The leasing spread that we are achieving, combined with our strong retention rates, are clear evidence of the continued high demand for space in our grocery anchored centers. Our continued pricing power is a reflection of the strength of our strategy and the quality of our portfolio.
<unk> tells us about our pipeline and then in terms of uses.
Again, our view is Jeff <unk>.
Over 70% of our rents come from necessity retail our view is that necessity retail will continue to prove to be more resilient.
Hey.
Economic downturn and there are certain components of retail where there.
They're thriving.
And if you look at like foot traffic data for fitness year to date, it's up 7%.
John Caulfield: During our upcoming investor day, you will hear from our operations team leaders on how the Pico team delivers growth at the property level and why we remain confident in our ability to deliver long-term same-center NOI growth of 3-4% on an annual basis. The team will be prepared to share insights on why our assets are successful, our strategic locations, and suburban markets, our right size format and the other advantages we enjoy in the markets where we operate.
Foot traffic for beauty year to date up 7%. So there are categories that are continuing to be strong and are enjoying increased.
Tenant.
Consumer traffic and then lastly.
Our foot traffic remains consistent.
With what it's been over the last year and a half. So all these things go into the mix and give us the confidence that we will continue.
Grow our inline occupancy and continue to maintain our strong spreads.
John Caulfield: Turning to redevelopment and development, we continue to invest in our value creating ground-up, out-partial development, and redevelopment projects, which remain an excellent use of our free cash flow and deliver very attractive returns. Year-to-date, we have stabilized 10 projects, delivering over 223,000 square feet of space to our neighbors with incremental NOI of approximately $2.9 million annually. These projects provide superior risk-adjusted returns and have a meaningful impact on our long-term NOI growth. For the full year 2023, we continue to expect to invest 35 to $45 million in ground-up out-partial development and redevelopment opportunities with rated average cash-on-cash yields on this activity between 9 and 12%.
Great. Thank you.
We'll go next to Mike Mueller at Jpmorgan.
Yeah, Hi, I guess following up on the prior acquisitions and balance sheet questions should we think of the <unk> transactions as having a.
Pretty healthy equity component in there as we saw in Q3.
Yes, I think that's fair Mike.
<unk>.
I'm not exactly sure, how you're sort of laying that out but.
When we're at.
Sub five debt to EBITDA, we've got a strong equity component of the things, where we're buying and as you can see we're match funding with the ATM to make sure that we're.
Keeping a really strong balance sheet well.
While we are.
John Caulfield: During our upcoming investor day, the PICO team will provide an update on our pipeline of ground-up development and redevelopment projects across our portfolio. PICO continues to benefit from a number of positive macroeconomic trends that create strong tailwinds and drive strong labor demand for us. These trends include a resilient consumer, hybrid work, migration to the Sunbelt, population ship that favors suburban communities, and the importance of physical locations in last mile deliveries. The impact of these demand factors are further amplified due to limited new supply being created over the last 10 years and going forward. Given that current economic returns do not justify new construction.
Spring, our external growth through the acquisition model.
Yes, that's what I was maybe I phrased it the wrong way of thinking about it using utilizing the ATM and <unk>.
You did in Q3 to keep that up.
Yes, well, we will see what will again, we've kind of focused on.
The acquisition pipeline, we have right now.
A lot of that will be driven by the acquisition pipeline, we have going into that.
We find accumulating.
Accumulating over the next couple of months.
And then enter into January.
Got it and then I guess on the portfolio side I think I think this spread between your economic and leased occupancy is 20 bps.
Where do you see the more normalized level because it.
Is it $50 $60 70 somewhere in that neighborhood.
John you want to take that.
Sure Hey, Mike, Yes, it's typically historically over a long period of time. It is 60 basis points I think part of that is is that as we get to the.
John Caulfield: In summary, our differentiated strategy continues to position pico well for continued steady growth in all economic cycles. This is due to our exclusive rocer anchor focus on centers anchored by the one or two grosser in a market. Our necessity based neighbor mix, our right side format, our well-positioned locations in growing suburban markets, our high occupancy with continued strong neighbor demand for space, our high leasing spread and retention rates, our well-diversified neighbor mix, our lack of exposure to distressed retailers, our strong balance sheet, and most importantly our well-aligned and cycle-tested team.
These higher occupancies.
I would imagine you will continue to see this compressed, but there'll always be a gap of some sort just through the <unk>.
Natural churn of neighbors until we get to a 100% retention but.
20 basis points is very strong, but I would say on a more normalized basis and depending on the timing of deliveries I would say 50 to 60 basis points is reasonable.
Got it okay. Thank you.
Thanks, Mike.
We'll go next to Handel St Jude atmosphere.
Hey, guys, sorry about that yes.
Yes.
Congratulations to Devin it's been a pleasure.
Thank you Bob Joe.
Zhang Zhang: I'd now like to turn the call over to Zhang Zhang. Thank you, Devon.
My first question I guess is on the updated same store NOI guide $3 75 to four 5%.
John Caulfield: Good morning and good afternoon everyone. I'll start by addressing third quarter results, then provide an update on the balance sheet and finally speak to our updated 2023 guidance. Third quarter 2023 may read FFO increase, 70 basis points to $72.5 million or 55 cents per diluted share driven by an increase in rental income from our strong property operations. Results were partially offset by higher year-over-year interest expense of $4 million as well as a one-time, non-cash impairment charge of $3 million related to a third-party investment.
Any wide with where we are in luck in year and implies.
Some some declines as the fourth quarter here, so maybe some color on.
Whats going on there and maybe what the range purposes at the top or bottom end, perhaps why its still so wide at this point in the year. Thanks.
John do you want to take that one.
Sure I'll take that so hey, Handel.
So really the the guide is it just a.
As we've looked at it I mean in the third quarter I referenced I mean it was.
Still very strong, but it is a little slower because that really more activity from 'twenty two than anything in 'twenty three and as we look at the fourth quarter. We continued to see strength from an operating standpoint, but we do have I would say more normalized bad debt kind of bad debt or uncollectible. There was about 57 basis points in the quarter, but on a full year.
John Caulfield: Third quarter core FFO increased 50 basis points to $77 million or 58 cents per diluted share driven by increased revenue at our properties from higher occupancy levels and strong leasing spreads partially offset by higher interest expense. During the quarter we acquired Lake Point Market, a grocery anchor center in the Dallas, Texas suburbs for $12.9 million. We expect to drive growth by increasing occupancy and enhancing merchandising mix in addition to the potential for development of out parcels.
It's only 48 basis points and so this portfolio is typically between 60 and 80 basis points and so I think that is is weighing a little bit on the.
The fourth quarter, but still projecting to be.
Good growth quarter year over year, but then also on a full year basis with that range and we just we wanted to affirm at kind of where we were from an overall guide, but would expect it certainly to be more towards the middle range in there around the midpoint.
John Caulfield: In addition, we purchased a land parcel adjacent to the marketplace at past farms located in the Lockheed Wisconsin suburb. We expect to drive growth through expansion development opportunities. Subsequent to quarter end, we acquired one property and one out parcel. Mansell Village and 89,600 square foot shopping center is anchored by Kroger in an Atlanta, Georgia suburb. We expect to drive growth in the asset through occupancy increases and rent growth. As of October 31st, Pico is under contract to acquire additional assets that are expected to close during the fourth quarter of 2023.
Got it got it okay.
Maybe a bit more than on the.
Actual bad debt or the Wassa, specifically can you talk a bit about maybe any neighbors or categories that you are concerned about and if you're seeing anything that gives me any color on like perhaps a delay in timing of rent payments. Thanks.
Now if you wanted to take the.
Sort of the retailer straight line of it and then John if there are any specifics on the on the numbers that would be great.
So handle our watch list continues to be moderate.
John Caulfield: This will bring our net acquisition volume for the year to between $250 and $300 million. In the third quarter, Pico issued approximately two million shares under our ATM facility which resulted in net proceeds of $70.1 million. Our gross weighted average share price was $35.59. Assets acquired year to date and currently in our pipeline are accreted to earnings per share at these levels. We were intentional in match funding the acquisitions with equity at a time when our access to the equity market was favorable while keeping our leverage low.
The top 10 neighbors that currently sit on our watch list represent two 4% of our total ABR as you know given our strategy, we have very limited exposure to distressed retailers.
The retailers that have filed bankruptcy year to date bed Bath Party City Tuesday morning, They aggregated 40 basis points of ABR in our portfolio. So again.
Given the strategy, we have and the well diversified neighbor mix that we have we do not have any meaningful.
John Caulfield: In addition to the recent term loan extensions, this issuance delays our need to go to the long term debt market which we believe is currently unfavorable. From a balance sheet perspective, we ended the quarter with approximately $714 million of liquidity, including cash and capacity on our $800 million credit facility. Our leverage ratio continues to decrease as a result of our strong earnings growth and our equity issuance with our net debt to adjust to EBITDAR at 4.9 times as of September 30th, 2023.
Concerns.
In the portfolio, we have zero Rite AIDS.
And so.
Our tenant our neighbor mix is extremely well diversified we do not have exposure to the <unk>.
Weaker retail categories and so we don't have a concern handle in terms of.
Fallout from distressed retailers.
Yeah.
Yeah.
Got it thank you.
And then one more if I could.
John Caulfield: Our debt had a weighted average interest rate of 4.1%, and a weighted average maturity of 4.4 years when including extension options. 82% of our debt was fixed rate. As we look at our floating rate debt exposure, our long term target is to limit our floating rate debt to less than 10% of our total debt. We are currently in an unusual environment given the inverted yield curve, wider spreads and other factors, which is why we are exercising more patience before locking in long-term rates.
One of your peers recently announced a spin off with an emphasis on convenience assets I'm curious if you guys have looked into this asset is so do you think it can fit within your overall strategy of earning a necessity based retail risk with.
Necessity.
Retail with low anchor risk and.
I'm kind of curious high level thoughts you might have on it.
Yes.
And we have.
It's an area that we have been in before we.
John Caulfield: Our lack of near-term maturities provides us with flexibility to be patient. That said, we remain focused on all options to meet our long-term target as soon as possible. Between the free cash flow generated by our portfolio and the significant capacity available in our revolver, we remain confident in our ability to successfully fund our growth plans.
We know it fairly well.
I think there is opportunity there.
It is a.
It's not a in my mind, it's not a boiler plate kind of business.
Property by property business at a very small asset size.
And you have to have.
The rate.
John Caulfield: Turning to guidance, we've updated our May Read FFO and Core FFO per shared guidance. Primarily due to a one-time non-cash impairment charge related to a third-party investment, we have lowered our May Read FFO guidance to a range of $2.23 per share to $2.27 per share. We have reaffirmed the midpoint of Core FFO guidance and tightened the range to $2.31 per share to $2.35 per share. As Jeff mentioned, the midpoint represents year-rear growth of 2.6 percent, despite interest expense headwinds of 10 cents per share.
Sure.
Organization team set up to actually be able to find the right opportunities at the right prices.
And with the right overhead given that you've got a much smaller.
Size asset but.
We find it sort of dragging and have looked at it.
A number of times and have owned a number of centers that were in that category overtime.
They've done fairly well and I think.
The.
To me the thing that the message there.
John Caulfield: We also reaffirmed our same-center NOI guidance in the range of 3.75 to 4.5 percent. Importantly, despite the impact of higher interest rates and other macro headwinds, we're delivering earnings growth due to the continued strong performance of our portfolio driven by leasing spreads, occupancy, and higher attention.
Is the strength of the small store retailer.
<unk>.
Yes.
When you get into that category that is who you are talking about and as you know our experience with the small store retailers has been very positive and we've.
On a delinquency standpoint bad debt standpoint.
Across the board they have been very resilient in multiple cycles.
John Caulfield: We plan to provide preliminary guidance for 2024 and updates on our long-term growth drivers during our upcoming investor day.
And I think Thats, what youre seeing here is the deal.
The lack of new construction and the strength of the small store retailer.
Jeff Edison: With that, I'll turn it back over to Jeff. Thanks, John.
It's a strategy too.
Jeff Edison: Before we get to your questions, I'd like to acknowledge the press release we issued yesterday, announcing changes to Peackel's leadership team. Devin will step down as president on December 31st. At that time Bob Myers, currently COO, will become president and Joe Schlosser, currently head of portfolio management, will become chief operating officer and an executive vice president. This is the culmination of our long-standing succession plan. I would like to extend our sincere gratitude to Devin, who's worked side-by-side with me to transform Peackel into one of the largest owners and operators of Groschrankard Neighborhood Shopping Centers in the country.
To take advantage of that.
I don't it'll be really interesting to see how the market reacts to it because it's not.
We've been talking about for a long time.
In terms of the strength of the small store retailer.
But it hasnt been universally accepted I mean, there are there is still a lot of people who are very very questioning of that.
And.
Yes.
It'll be interesting to see how the market transforms and looks at that concept.
I appreciate the color on the perspective, but just to put a final.
Dot at the end there it doesn't sound like that's something that for you you see enough opportunity with the core assets that youre looking at.
Jeff Edison: Bob and Joe are extremely talented, proven leaders and team players who have been critical to the consistent strength of our operating performance. They have played an important role throughout the majority of Peackel's 30-year history, growing the portfolio into what exists today. Bob and Joe have been with Peackel for over 20 and 19 years respectively. They have successfully managed operations, development, acquisitions and dispositions through multiple cycles. I am confident they will continue to scale the portfolio from here, and I look forward to continuing to partner with them in delivering long-term growth and value creation.
Where this perhaps will be a focus for you anytime soon thanks.
Yes.
We never say never and we do and we continue to look at opportunities like this.
But again.
Theres a difference between our strategy and are there.
Looking for specific opportunities for us it's much more a specific opportunities.
Are there specific opportunities near centers that we've got where we have a really good vision into the.
Due to the market are there other opportunities there and as you can see from some of the things that we've acquired out lots and the rest there are there we believe in and that and we believe that when you have the local knowledge that we do at our specific properties you do have a competitive advantage in terms of acquiring in those mark.
Jeff Edison: Devin will serve as the managing director of Embaer in office at management through his planned retirement at the end of June. During this time, he will work closely with me and the team to ensure a seamless handoff of his current responsibilities. Devin is also in discussions with the nominating and governance committee about joining Peackel's Board of Directors following his retirement.
<unk>.
Appreciate the time, thank you guys, yes, thanks Sandra.
Jeff Edison: I would also like to highlight the recent appointment of Tony Terry to serve as an independent director of Peackel's Board, effective October 30th. We are delighted to welcome Tony to the Board with more than three decades of public company business experience working with senior management and boards to drive growth and innovation. Tony brings a proven track record of strategic planning, corporate and operational finance, regulatory matters and capital allocation. We are excited to have Tony on our board.
Well go to our next question from Juan Sanabria at BMO capital markets.
Hi, Good morning, just wanted to follow up on the fourth quarter acquisitions believe last year, the weighted average cap rate for acquisitions, where it was about six one so would you say the at 100 150 basis points as per your prior comment like a low to mid sevens cap rate is indicative of where the market is today.
Or is that more for acquisitions that would close in the fourth quarter and may be backward looking because the market like you said its fluid maybe cap rates inch up further from from that kind of low to mid severance.
Unknown Executive: With that, we look forward to your questions. Operator? Thank you.
Unknown Executive: At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. If you would like to remove yourself from the queue, press star one again.
Range.
So what are you really trying to get US give you a cap rate I think I think youre sneaking up on us.
Yes.
Caitlin Burrows: We'll take our first question from Caitlin Burrows at Goldman Sachs. Hi, everyone. Good afternoon.
The VEB the answer is yes.
I think the 100 to 125 basis points 150 basis points movement was probably more from.
Caitlin Burrows: Maybe to the topic of the floating rate debt exposure. You guys mentioned the long-term goal of under 10% floating rate. And then you also mentioned that the equity assurance during 3Q was to match fund acquisitions. I know you don't have meaningful debt maturities in 24. But there are interest rate swaps expiring and other floating rate debt out there. So I'm just wondering if you can comment on kind of your ability and then separately the willingness to use equity to reduce that floating rate debt.
Prior to that served sort of when the cap rates were more more in that five five range.
So yes.
Take that for what it was but.
We had already seen movement when we were.
In that.
Both <unk> range from where we thought.
The market had sort of.
Peaked out so I think that would give you a general feel that.
Caitlin Burrows: Sure, good morning, Caitlin. So, at the end of the quarter, we were 82% fixed rate on our debt. And, you know, higher interest rates are certainly a headwind. We're estimating that for this full year, it'll be about 10 cent impact on our headwind, but we continue to have positive core FFO growth for the year. So with this uncertainty in the environment, we are taking the position to flip more of our debt than the 10% floating rate target.
It's not.
It's more in the mid <unk> mid sixes range than it is a low sevens range from from our perspective of where the market.
<unk> falls out today, but those are projects that have significant upside to them. So when things get stabilized it does.
That's why we try not to talk about cap rates, but really unlevered IRR is because there are southern cap rate deals today that.
Caitlin Burrows: And we do believe that the long-term debt market continues to be unsettled as spreads are wide, given the volatile treasury environment and things going on in the macro. And we do want to be a long-term issuer, and we do have that long-term target of 10%. But we think accessing those longer-term fixed-rate instruments will be more appropriate when there's more stability in the market and liquidity in the capital markets. So, I think that the piece for us when it comes to issuing debt and equity, it matches with our acquisition.
<unk> generated an unlevered IRR of seven five or eight and those are not things that we are we are looking at though they have a nice nice yield to them theyre, not where where we think the market is.
And then just one of your peers Simon commented about seeing some softness on the lower end consumer and I take your point about not really having any.
Our exposure to the bankruptcies to date in the watch list being pretty small, but where would you see if the lower end consumer gets hit where would you expect to see maybe some pressure amongst your your neighbors any categories or.
Caitlin Burrows: And so, as we look at the acquisition that we have upcoming, as well as those we made, when we look at the equity that we were raising that price, we know that it's a creative earnings, and that was important to us. So, I think it's going to be a combination of both that we can, you know, we're able to borrow accretively, you know, with the acquisitions and the same with raising equity.
And that you could eliminate.
Eliminate would be helpful.
Yes.
I think I think you have to start by defining what lower end is because if lower end is 50000 median household incomes and below we really don't have exposure to those markets. Those are those are lower end markets than where we're at.
Caitlin Burrows: So, I think it'll be both, but it'll depend on that availability. I mean, overall, our leverage of 4.9 times, and as you say, no meaningful maturities for about 24 months gives us that flexibility to be patient. And so, in this market, that is, you know, you'll see us float more than we otherwise typically would. Got it. Okay, but it doesn't sound like you're necessarily looking or maybe the options open to use equity to address some of that near-term. Yeah, exactly. Yeah. Got it.
But when you talk to.
10% above the median household income number which is where we are.
We are not seeing any traces of what.
Youre talking about and these are high Seventy's median household income which is sort.
Right over where Kroger and publix are even though even a little above them in.
In terms of median household income. So we're we I would say that we aren't seeing that where.
Where we would expect to see that is.
Caitlin Burrows: Okay, and then maybe just turning to acquisitions in order to make the guidance range that you guys put out with the updated range seems like there's either a lot of properties or some larger deal that you're expecting to happen in the fourth quarter. So, I'm just wondering if you can comment on the types of properties you're seeing for sale and then which are most attractive to PICO at this time. Yeah. Well, there is no major transaction.
What we've I think talked about before as you start to see.
We're very fortunate to be a necessity side of the business. We when we're talking about impact we're not talking about the kind of impact you have on the discretionary side of the business, but even in our part of the business, where what you see in a really.
Difficult recession as you start to see the brand name categories in the grocer people.
Caitlin Burrows: These are multiple transactions with multiple sellers consistent with our existing strategy. And, you know, we, we, you know, we've been, as you know, we've been cautious the last several quarters on the acquisition side. And a lot of these deals are deals that have worked through during that longer period of time with price concessions and a variety of different tools that we've had to get these to where they made sense for us.
Changing that those those shopping habits to private label, where they can get a better bet.
Pricing.
Can see transaction transitions from.
The whole foods of the world to the krogers and from the progress to the all these you can see that that transition.
As well.
I would say from our conversations.
Caitlin Burrows: And, you know, we, we feel really positive about the projects and, you know, we think that they're, you know, sort of fairway in terms of fitting with our core strategy. And, you know, I think we're, you know, we, we, when we underwrote them and got to, you know, sort of a mid-ninze plus in terms of an unlevered IRR, you know, we felt that they, you know, we were being sort of risk awarded for being active in a market that is, you know, as, you know, is, is very fluid right now.
We are not seeing that in the market today, but again.
That's just our the niche that were in that we're not seeing those.
Any any significant changes.
Does that answer your question.
Yeah, Okay, I got to say congratulations to Devin. Thank you very much guys.
Yes.
We will take our next question from Todd Thomas at Keybanc capital markets.
Hi, Thanks, good afternoon, yes.
Yes, Congrats Devin on your retirement and congrats to Bob and Joe on the new roles.
Caitlin Burrows: And one of the things that got us comfortable with it was, you know, when, when you looked at the price for foot, we were paying, you know, it was under 260 dollars of foot, which really, you know, for us is, is going to continue to give us really strong pricing power in these particular markets to be able to really drive growth and be able to grow our earnings from, from these particular properties. So, we're, we're very excited about the properties we've got under control. And, you know, as, as we said, you know, we feel comfortable. We'll be in that 250 to 300 range.
First question I guess circling back to the fourth quarter acquisitions.
Look it sounds like the upside growth opportunity is.
It's fairly meaningful.
And I was just wondering if you could talk about just provide a little bit more detail around.
Either the blended average occupancy rates across that the acquisition pool.
The occupancy lift that you're expecting and maybe talk about the mark to market opportunity over time, just curious if you could break out the <unk>.
Caitlin Burrows: Guy, I'm sorry, just one quick thing. You mentioned their Jeff Price concession. By that, do you mean that over the course of the discussions, the seller was willing to settle on a lower price to get it done? Yeah, I mean, I think they were, you know, in this environment, you've got to have sellers who are eyes open to the market and what's changing with the, you know, in this interesting environment. And so we, you know, I think that, you know, getting a seller who is realistic about where the market is today is one of the more important things in the, in the acquisition process and continues to be front of mind for us to make sure that we can, you know, we're not wasting our time. We're actually spending on things. And fortunately, these, you know, these deals have, have worked through. Got it. Okay. Thanks. Thanks, Kayla.
Growth a little bit more that you are underwriting and then and then are these assets under contract at this time.
So, yes, they're yes, they're under control or contract or towards closing and some of them are firm.
So we have a.
I'd say, we have a strong degree of.
Belief in them closing so.
<unk>.
Todd just gave me the great a great opportunity to advertise for our Investor Day, we are going to go through a lot of this stuff and a lot of detail in December and we hope that everybody on the call can can can be there for that and we will give you I think.
The types of clarity that you're looking for.
To just give you a little bit of color.
No.
The projects have.
That we are looking at they fit that number one or two grocer in the market. The concept that we have but they have vacancy and they also have.
Jeff Spector: We'll go next to Jeff Spector at Bank of America. Great. Thank you.
Jeff Spector: And first, congratulations to Devon Bob and Joe. Follow-up question to on acquisitions. Did I miss it? Jeff, did you discuss the cap rate range? I heard you say an IRR 9% plus, but anything on kind of, you know, cap rates. You know, I think the way I would look at it is, you know, we've seen in our view. I mean, you know, with, first of all, you know that we're, we're really not cap rate underwriters, we're, we're unlevered IRR underwriters, but if you do sort of translate that back and you say there's been, you know, 100 to 150 basis points movement in cap rates.
In our mind below that below market rents in the existing base, where we think we can grow those so I think both of those will be the two biggest.
Opportunities there are some outlet development opportunities in these in these assets that we will take take advantage of and there are some adjacency.
While we may be able to buy some additional land.
To expand them as well.
But they.
A fit very much fairway in terms of having all the pieces of growth that we traditionally have in our portfolio only there are little bit theres more of it.
Because we've completed that on a lot of the centers that we have.
Jeff Spector: I would say that we're seeing that in the marketplace today. We're not seeing a huge volume, but we are seeing that in the market today. Okay. And I know these are things are hard to forecast, but it feels like then things are, you know, improving a bit since we last saw you. And you said the transaction market. It is improving. I guess do you think that things will open up even more in 24?
I think there is more upside through that and we will definitely go through some case studies on these assets.
In December at the Investor meeting.
Okay.
Is there is there any appetite for four ground up development today aside from aside from the out parcel program seems like Theres a lot of demand from smaller format grocer specialty and discount.
Jeff Spector: Do you, again, those conversations are improving with the sellers or, again, 24? It's just uncertain at this point. I would say uncertain at this point. I mean, there continues to be a big beta in terms of acquisition volume. We're trying to give you guys as much direction as we can, but it's, it's a difficult environment. And, you know, it's, it's a really tough environment when you are moving to really what is a, you know, much more of a buyer's market than a seller's market.
This development pencil at all and is there any appetite for some smaller scale.
Developments.
Yes, I would say it's.
It's very anecdotal there are the answer is no but there are examples where there is some some happening, but it's such a small piece that.
It's not real and it's just it's really hard I mean, we're buying these projects at $260 a foot.
Jeff Spector: And, you know, we've all been through those transitions. They take a long time and they're, and they're difficult. And so, you know, you really, these are the times you got to be more disciplined than ever in your underwriting and in your patients to get to where you think the pricing, you know, the right pricing is. So we're, you know, I wouldn't look at 24. I hopefully will give you some more clarity at our investor meeting in December, but it is, it's choppy.
Less than that so.
If you do.
Do new development, I mean to get anything in the $300 a foot range and new development is really really hard I mean, it's much more likely to be in the mid fours in terms of so.
So the answer is yes.
It doesn't pencil in the vast majority of the cases.
And there.
I mean, there are exceptions, but in terms of any real impact there.
Jeff Spector: It's, you know, each deal has a story to it today. And, you know, that, that means it's going to be, you know, I think you're going to, it's going to be a choppy environment. But I would say that generally we're optimistic that, you know, we'll have a decent backlog going into next year, so we'll be, you know, in a decent position going forward. Thanks, Jeff.
We don't see a window to ground up development and as you know I mean, we've we've done that throughout our history.
A lot of different times.
<unk>.
But we are.
Well I would say that that opportunity is very slim and.
Jeff Spector: And then just my last question, Devin, you talked about, you know, still improving in line occupancy or, you know, increasing that. I assume next year the following year. And at the same time, I mean, we are seeing, and John talked about macro headwinds, right, the more retailers reporting misses, more concerns over the consumer going forward.
It's a tremendous amount of work for what is probably a marginal return from our perspective at this point and not and no return in a lot of things that we're seeing so we are.
As you can tell we are not really pro ground up development at this point thinking that it creates an opportunity for us other than your outlet.
Where we really are doing.
Triple net lease kind of business and that that continues to be very profitable for us.
Devin Murphy: How are you balancing, I guess, the, you know, the leasing decision, are these more local tenants, regional, national, like, what are you doing as the environment? It does seem to be changing here with the consumer, right, you've been doing this a long time. So, how do you, you know, I guess change the leasing strategy or do you not? Yeah, I mean, Jeff, we're very focused on the health of the consumer and the volatility among retailers.
Okay and John just last question, what was the $3 million noncash charge related to the investment in a third party company what was that related to.
Sure.
So.
In the quarter, we recorded a noncash impairment on investment that we made several years ago. There was a neighbor that was seeking a high capital investment to open in several of our shopping centers and as part of the deal we negotiated for your investment interest in the company with those funds to be invested in our centers.
Devin Murphy: And we stay focused on that. That being said, we believe we can grow our occupancy by our inline occupancy by circa 100 basis points. So to take it up from, you know, where it is today, which is just under 95% to 96%. And the reason we feel that is because when we look at our retention rates and we look at our spreads, the demand for our space continues to be very high.
Unfortunately that operation was not successful in our centers and as such we rode off our interest in the company. This quarter is the first and the only time, we've invested in a neighbor.
So we don't have other instances of this I would note that that's where we do talk to our core SFA guidance between did affirm <unk> tightened that range, which we use the metric that best highlights our ongoing recurring business.
Devin Murphy: You know, you're seeing our renewal spreads increase every quarter over quarter. So our releasing spread on renewals in the third quarter of last year, we're 15 and a half percent this quarter, they were 16.9%. So again, we're seeing the retailer who's obviously most aware of their conviction in their business model, being willing to remain in our centers at higher rents. And they're also signing up for higher rents at higher takers. So again, the environment as of the moment continues to be strong.
Okay alright, thank you.
As a reminder, if you'd like to ask a question. Please press star one well move next to Daria keys.
I apologize, we will move next to Florida, San disk at Compass point research and trading.
Hey, thanks.
I will.
Also.
Which devin.
Much success in his new venture and hopefully you will not lose this advice if he's going to join the board.
He is a he is well respected throughout the industry. So congrats and congrats on the new guys.
Question for you guys I mean, obviously.
Devin Murphy: And our perspective is that it will continue to be so based on what our leasing team tells us about our pipeline. And then in terms of uses, you know, again, our view is Jeff over 70% of our rents come from necessity retail. Our view is that necessity retail will continue to prove to be more resilient in a in an economic downturn. And there are certain components of retail where, you know, they're thriving.
Issuing equity I think makes a lot of sense.
Issued at 35, you could issue it even today at the current share price.
Would appear.
That is something that nobody else in the shopping center center sector has to be able to tap the equity markets. So.
I would I would encourage you to look at that.
To fund those acquisitions going forward as well.
My question is on the growth.
Devin Murphy: And if you look at like foot traffic data for fitness, year to date, it's up 7% foot traffic for beauty, year to date up 7%. So there are categories that are continuing to be strong and are enjoying increased kind of trap consumer traffic. And then lastly, you know, our foot traffic remains consistent with what it's been over the last year and a half. So all these things go into the mix and give us the confidence that we'll continue to be able to grow our inline occupancy and continue to maintain our strong.
The underlying growth was down a little bit I know there were some one off events.
Higher bad debt, obviously being a big part of that.
Maybe if you can give a comment a little bit on the underlying growth expectations clearly it seems like the fourth quarter could also be slower than what it's what has occurred so far this year should people be concerned about.
Devin Murphy: Great, thank you.
Having you having reached peak growth and growth slowing down from from from where we are today.
Flora thank you.
In.
Yes, we.
We're not going to let them go.
He'll still be around helping us as he has for the last 10 years. So I don't think that's going to be anything.
Mike Mueller: We'll go next to Mike Mueller at J.P. Morgan. Yeah, hi. I guess following up on the prior acquisitions and balance sheet questions. So we think of the four Q transactions as having a pretty healthy equity component in there as we saw on Q3. Yeah, I think that's fair, Mike. I mean, we we, I'm not exactly sure how you're sort of laying that out. But when we're at sub five debt deep it down, we've got a strong equity component of the things we're buying.
Obviously, a major transition for us but.
The on the.
Mike Mueller: And as you can see, we're matching funding with the ATM to make sure that we're keeping a really strong balance sheet while we're, you know, you know, spraying our external growth through the acquisition model. Yeah, that's what I was maybe I phrased it the wrong way. I think you about use it, utilizing the ATM and four Q as you did in Q3 to keep that up. Yeah, we'll see. We'll, we'll, you know, again, it, you know, we're, we're, we've kind of focused on the acquisition pipeline we have right now.
Uh huh.
John maybe you can help on the growth side, but what I want to make sure we don't.
Music, where we're still in an unbelievably strong operating environment and there are no like cracks that are saying Oh. This is about to happen or that it will I assume it will happen at some point when we get when we ended up in a recession, but we're not seeing any of that right. Now I mean, if you look at our retention rates you look at our retention spreads.
Those are those are really really strong numbers.
And I think we will continue to be able to drive really good internal growth through that and less of it will more will come through spread than from occupancy increases, but it's still.
In a really good spot and as you can see from our guidance I mean, we do believe that there is also a really good.
External growth.
Possibility for us or our opportunity there and we're taking advantage of that well.
Being careful to make sure we manage our balance sheet to where we're we're sort of match funding that that opportunity and as John pointed out I mean these are accretive.
Mike Mueller: A lot of that will be driven by the acquisition pipeline we have going into, you know, that we find, you know, accumulating over the next couple months and, and, and then into, into January. Got it. And then I guess on the portfolio side, I think, I think this spread between your economic and least occupancy is 20 bips. Where, where do you see the more normalized level? Because it is, is it 50, 60, 70 somewhere in that neighborhood?
Initially accretive to us they have really good growth potential for us. So we're very optimistic about what this our external growth is going to be able to to help us drive and if you want to John on what was going to go through the pieces of that and how we're seeing that would that would be helpful for us.
Sure.
Yeah, So hey, Floris I would say that as we look at the fourth quarter as I mentioned with the bad debt, that's really more related to 2022 activity than anything we've seen in 'twenty three I mean, when we look at the end of the quarter at kind of our reserves relative to our debt.
Mike Mueller: John, do you want to take that? Sure. Hey, Mike, yes, it's typically historically over a long period of time. It is 60 basis points. I think part of that is that as we get to these, these, these higher occupancies, I would imagine you will continue to see this compress, but there will always be a gap of some sort just through the, you know, the natural turn of neighbors until we get to 100 percent retention. But, you know, 20 basis points is very strong, but I would say on a more normalized basis, and depending on the timing of deliveries, I would say 50 to 60 basis points is reasonable. Got it.
Mike Mueller: Okay, thank you.
Those reserve as a percentage of that are just continues to come down.
But ultimately when you're at 57 basis points and I put that up against anyone else.
In terms of performance there you do see that change until I would say that when you look at the full year, we are going to be over 4% and then as we look to next year and again quick plug for our investment community day in December.
Unknown Executive: Next week. We'll go next to handle St.
We're going to highlight that we believe that this portfolio organically can continue to deliver 3% to 4% same store growth and we provided that the pieces before but.
Unknown Executive: Joseph at Mizzouho. Hey, guys, sorry about that. Yes.
I think there is a concern around.
Haendel Juste: So, first of all, yes, congratulations to Devon, been a pleasure, and thank you, Bob and Joe. My first question, I guess, is on the, the updated, same for the wide guide, 3.7, 5 to 4.5 percent. Those things pretty wide and where we are left in year and implies, you know, some decline is the fourth, 40 years, or maybe some color on what's going on there, maybe what the range kind of assumes at the top of bottom, and perhaps why it's still so wide at this point in the year.
Occupancy, but occupancy is a sign of strength and we're actually turning that into pricing power with with renewal spreads and in new leasing spreads and using that to push embedded rent bumps and so we'll get into into the components at our investment community day, but we feel very strongly that we will be able to continue.
To live to deliver 3% to 4% growth for the foreseeable future.
Thanks, and if I can maybe follow up.
Haendel Juste: Thanks. John, do you want to take that one? Sure, I'll take that. So, hey, handle. Yes. So, really, the guide is just a, as we've looked at it, I mean, in the third quarter, I referenced, I mean, it was still very strong, but it was a little sorry because, you know, really more activity from 22 than anything in 23. And as we look at the fourth quarter, you know, we continue to see strengths from an operating standpoint, but we do have, I would say, more normalized bad debt.
I know the I noticed that and I think Devin are I think might have mentioned this or maybe Jeff did as well I can't remember the your spreads on.
On your local tenants.
Local neighbor excuse me are higher than on your national ones now.
I wonder.
Haendel Juste: So, you know, kind of bad debt or uncollectables was about 57 basis points in the quarter, but on a full year basis, it's only 48 basis. And so this portfolio is typically between 60 and 80 basis points and so I think that is is weighing a little bit on the on the fourth quarter but but still projecting to be a good growth quarter year over year but then also on a full year basis with that range and we just we wanted to affirm at the you know kind of where we were from an overall guide but you know would expect it certainly to be you know more towards a middle range in there around the point.
Wonder does that mean that their rents were initially lower and are the new rents in line with the national tenants or are they actually paying a premium rent to be in your centers.
Sure, Jeff Hi, Floris, thanks for the kind words.
On the local neighbors.
They're spread is slightly higher than the the non locals so in the third quarter and.
Renewal spread on locals was 19, 8% and on our total portfolio was 19, 6%. So it's fundamentally the same number the reason we like the local neighbors and the reason we believe that there is strength of our portfolio is.
Haendel Juste: Yeah, okay, maybe a bit more than on potential bad debt or the watches specifically can talk a bit about maybe any neighbors or categories that you're concerned about and if you're seeing anything that gives you any call like perhaps a delay and timing of front payments. Thanks. Yeah, if you want to take the sort of the retailer's point of it and then John if they're any on the specific on the numbers that that's great.
Number one they have been in our centers for an average of nine years. So they're successful retailers that are sticky.
Number two.
The average cost per square foot that we have to spend on <unk> for the local neighbor versus the nationals to achieve the same rent is about 50% of the Ti that we have to spend on the national tenants. So we're getting comparable rents comparable spreads.
Haendel Juste: So, Handell, our watch list continues to be moderate the top 10 neighbors that currently sit on our watch list represent 2.4% of our total ABR. As you know given our strategy we have very limited exposure to distressed retailers, you know the retailers that have filed bankruptcy year to date bedbath party city Tuesday morning they aggregated 40 basis points of ABR in our portfolio. So, again, given the strategy we have and the well diversified neighbor mix that we have we do not have any meaningful concerns in the portfolio.
They are sticky and we're spending a lot less that economic side of the equation and then on the non economic side. They are much less difficult in terms of leasing terms, such as noncompete et cetera.
And so our view of the local neighbor is that we're getting a meaningfully better economic deal or better non economic deal and the tenants are meaningfully more resilience in our portfolio then.
A lot of investors' belief.
Yeah.
Yeah.
Haendel Juste: We have bureau right aids and so you know our tenant our neighbor mix is extremely well diversified we do not have exposure to the week or retail categories and so we don't have a concern. Handell in terms of fall out from distressed retailers. Yeah, thank you and then one more if I could.
Thanks, Kevin.
Well move next to Ron Camden at Morgan Stanley.
Hey, just a couple quick ones, so going back to the interests.
<unk> question I think last quarter.
You talked about I think it was like a $10 million headwind.
Over a year and 24, so obviously rates have moved but just wondering is that still sort of the right ZIP code, we should be thinking about or has anything changed there. Thanks.
Haendel Juste: One of your peers recently announced a spinoff with an offensive on convenience assets. I'm curious if you guys have looked into this asset as it goes do you think it can fit within your overall strategy of owning. We have a necessity but it's we tell risk with this is the on retail with low anchor risk and kind of curious high level thoughts you might have on it. Thank you. Yeah. And we have it's an area that we have been in before we you know we know it fairly well and I think there's opportunity there you know it is a it's not a in my mind it's not a boilerplate kind of business.
John you want to take that.
Sure Hey, Ron.
So as we look to 'twenty four that is something that we will talk about at our investment community day Youre right. The curve has moved but it's still moving and I think that what.
Youre hearing from us as it is.
Portal that we think the low leverage that we have is really the best strength, we have as we balance the different options, we have available to us and so in terms of the dollar amount of interest expense I mean, we do plan and I believe we said this we do plan to provide initial guidance for 'twenty four at that investment commute.
<unk> and I think the as.
Haendel Juste: It's a property by property business at a very small asset size and you have to have the right organization team set up to actually be able to find the right opportunities at the right prices. And with the right over had given that you got a much smaller size asset but I I we we we find it sort of intriguing and have have looked at it. You know a number of times and have owned a number of centers that were in that category at over time and you know they they've done fairly well and I think you know the.
As you are looking at models and things that interest number is highly dependent upon what your acquisition assumptions are for both the balance of this year and next year. So it's a little bit harder for us to talk specifically about like a dollar amount, but it is a headwind this year that we quantified at about 10 cents on our earnings in 'twenty three.
I would say.
Based on what we see is at least that four into 'twenty four but I do want to take a moment to say that based on.
The operating performance and the strength of our centers that we've all been talking too we do anticipate we will have positive.
So growth in 'twenty four so I'm not exactly answering your question because there are more variables and inputs to it but we hope to provide more clarity in December.
Haendel Juste: Yeah. To me, the thing that the message there is the strength of the small store retailer. And when you get into that category, that is who you are talking about. And as you know, our experience with the small store retailer has been very positive. And we both on a delinquency standpoint, that debt standpoint across the board, they have been very resilient in multiple cycles. And I think that's what you're seeing here is the lack of new construction and the strength of the small store retailer.
Great. That's helpful. And then I wanted to go back to something else that was bought out which is the record occupancy target.
We've talked about sort of new tenant.
Articles I think metal was one that you guys had mentioned just maybe can you remind us when.
When you're thinking about that new occupancy record occupancy target.
How much of that how much of that is from the sort of new tenant verticals pushing occupancy up versus just being smarter about sort of how you use space in the portfolio.
Haendel Juste: It's a strategy to take advantage of that. And I don't, it will be really interesting to see how the market reacts to it because it's not, it's something we've been talking about for a long time. In terms of the strength of the small store retailer, but it hasn't been universally accepted. I mean, there are still a lot of people who are very, you know, very questioning of that. And it will be interesting to see how the market transforms and looks at that concept.
Kevin you want to take that one sure.
Ron Thanks for the question.
Again, we believe that we have upside in our inline occupancy of circa 100 basis points and that will be realized over the next five quarters type of timing.
The type of tenant use that we are seeing the strongest demand farm is again bad tail as we discussed.
On a number of recent quarterly call. So med Cal today at 6% of our ABR and it's 20% of our leasing pipeline. So the demand from med tail tenants continues to be extremely strong.
Haendel Juste: I appreciate the color and the perspective, but just to put a final dot at the end there doesn't sound like that's something that's imminent for you. You see enough opportunity with the core assets that you're looking at, where this perhaps will be a focus for you anytime soon. Thanks. Yeah, and handle, I mean, I, we never say never and we don't, and you know, we continue to look at opportunities like this.
Again health and beauty is another category, where we're seeing strong leasing demand that's 11% of our of our current.
Our leasing pipeline.
Medical.
For a lot of reasons.
Most importantly, they're very sticky the met tail tenants that are in our portfolio have been in the centers for on average 10 years health and beauty tenants are also very sticky to health and beauty tenants in our portfolio have been in place for an average over 11 years. So those are the the uses where we're seeing.
Haendel Juste: But again, there's a difference between a strategy and a very, and looking for specific opportunities for us, it's much more specific opportunities thing, you know, are there specific opportunities near centers that we've got where we have a really good vision into the market. Are there other opportunities there? And as you know, you can see from some of the things that we've acquired out lots and the rest, there are, they're, you know, we believe in in that. And we believe that when you have the local knowledge that we do at our specific properties, you do have a competitive advantage in terms of acquiring in those markets.
Continued strong demand those are uses that we like a lot we think they add to the merchandising mix, we think they drive consistent traffic to our centers and then they stay in our centers for a meaningful amount of time.
Great. That's it for me congrats David and the rest of the team pleasure working together.
Sure Ron Thanks. Thanks.
Thanks, Rob.
And well go next to Jerry Heston at Wells Fargo.
Haendel Juste: Appreciate the time. Thank you, guys. Yeah, thanks.
Thanks, and congratulations on all the management changes.
Juan Sanabria: Well, good to our next question from Juan, Sanabria at BMO capital markets.
What percentage of your small shop leases have contractual bumps over 3% today and where do you think that you can.
Juan Sanabria: Hi, good morning. I just wanted to follow up on the fourth quarter acquisitions. I believe last year, the weighted average cap rate for acquisitions were about was about six one. So would you say the, you know, add 100 to 150 basis points as prior prior comment, like a load or mid seventh cap rate. Is indicative of where the market is today, or is that more for acquisitions that would close in the fourth quarter and maybe backward looking because the market, like you said, is fluid and maybe cap rates would end shop further from that kind of load amid several range.
Push that to over the next year.
Kevin you want to take you there Jon.
Dori I don't know.
Got my head what percentage have bumps above three we will come back to you on that.
Our average in the third quarter was two 5%.
So we will have to come back to you on what percentage have above three and we will do that.
Okay.
Yes.
Sorry, I was going to say so really when we look at the overall contribution to NOI growth is up to 80 basis points of our NOI growth is coming from.
Juan Sanabria: So, Juan, are you really trying to get us to give you a cap rate? I think, I think you're sneaking up on. Yeah, the, the, the, the, the, the, the, the answer is, you know, we, I think the, the hundred to hundred and, you know, 25 basis points, 150 basis points movement was probably more from, you know, prior to that sort of when the cap rate for more, more in that, you know, five and a half range.
Overall escalators and we believe that that number is going to continue to rise and Devin given the pieces on the escalators and we just think that that's an area that we can continue to grow two to 100 basis points or better.
Okay. Thanks.
And then when you look at assets you sold.
Thank you and last one is the realized Unlevered IRR.
Juan Sanabria: So, you take that for what it was, but I, you know, we, we'd already seen movement when we were, you know, in that, you know, those sixes range from where we thought the, you know, the market had sort of peaked out. So, I think that would give you a general feel that it's, it's, it's not, you know, it's more in the, you know, mid sixes range than it is a low sevens range from, from our perspective of where the market probably falls out today, but those are projects that have significant upside to them.
So dairy.
When are you asking what.
For our hold period, what were the Unlevered IRR.
Is that weird.
Yes.
I don't have the specifics it's actually.
I mean, we actually do a full analysis of each property as we as we sell it.
They they have.
I know that across the board they have been well above.
Our targeted nine Unlevered IRR, but I don't have the what exactly the numbers for.
Juan Sanabria: So, you know, when, when things get stabilized, it does, that's why we try not to talk about cap rates, but really, you know, unlevered IRRs, because there are seven cap rate deals today that, you know, generate an unlevered IRR of a seven and a half or an eight. And those are not things that we are, we are looking at, though they have, you know, nice, nice yield to them. They're not where, where we think the market is.
Across the board, but I can certainly get that to you.
Okay. That's fine. Thank you very much hey, Jeff Jeff I'll, just jump in there and the answer is that when we look at theirs.
Over asset that we sold in the years the actual underwriting would have been because at the time and a lower interest rate environment and the underwriting was certainly lower we outperformed by over 100 basis points in the actual under realized was over at night, but.
Juan Sanabria: And then just one of your peers, Simon commented about seeing some softness on the lower end of the consumer and take your point about not really having any exposure to the bankrupties to date and the watch was being pretty small. But where would you see if the lower end consumer gets hit? Where would you expect to see maybe some pressure amongst your neighbors? Any categories or anything that you could do? Eliminate would be helpful.
But relative to what we anticipated we actually exceeded that underwritten unlevered IRR by 100 basis points on assets that we've taken full cycle from acquisition to a management through disposition.
Got it thank you.
Yes.
Thanks Terry.
Juan Sanabria: Yeah, you know, I think I think you have to start by defining what lower end is because if if lower end is, you know, 50,000 median household incomes and below, you know, we really don't have exposure to those markets. Those are those are lower end markets than where we are at, you know, but when you talk, you know, 10% above the median household income number, which is where we are. You know, we are not seeing any traces of what, you know, what you're talking about in these are, you know, high 70s median household income, which is, you know, sort of right over where Kroger and public sorry even a little above them in terms of median household income.
And we'll go next to Paulina Rojas at Green Street.
And <unk>. Your line is open you may be muted.
Excuse me I was yes.
The question is about the Kroger albertsons merger and.
And excuse me if you mentioned this at the beginning and I missed it but my question is.
So.
Yeah, CNS experience seems to be more in the wholesale world and what gives you confidence that they would be good operators.
In grocery stores.
At a large scale.
Juan Sanabria: So we're we, I would say that we aren't seeing that where we would expect to see that is, you know, we're what we've I think talked about before as you start to see. You know, I mean, we're very fortunate to be in the assess beside the business. When we're talking about impact, we're not talking about the kind of impact you have in the discretionary side of the business, but on the even in our part of the business where what you see in a really.
Yeah.
Well thanks for the question the answer is I E.
A big question Mark out there.
They do they have been they've been a wholesaler for 100 years they have they do operate stores specifically.
Don't think they are of the quality of stool of store that we would like.
But they are they have they do have a history of actually operating stores. In addition.
Juan Sanabria: You know, difficult recession is you start to see, you know, the brand name categories in the in the grosser people, you know, changing that those those shopping habits to private label where they can get a better better pricing. You can see transaction transitions from, you know, the whole foods of the world to the Kroger's and from the Kroger's to all these. You can see that that transition as well. I would say from our conversations. We are not seeing that in the market today, but again, that that that's just our, you know, the niche that we're in that we're not seeing those any any significant changes.
The thing from our perspective is relative to.
Ah prop co where you have basically a separate company stepped up we think they clearly are better than that.
The question is.
Todd Thomas: Thank you.
How good of an operator are there.
We won't know until they get in and operate.
We do want to emphasize I mean, the market is still saying, there's not a great chance. This merger is going to go through I mean, there I think you are still up.
Our mid.
To high teens discount between Albertsons stock price and where they would exchange in the CRO and the Kroger merger. So the market is still I think.
Skeptical about whether it's going to happen or not.
I think you know the.
And there is still.
A big question about what how good these guys are going to be as a as a true grocery operator.
Todd Thomas: We'll take our next question from Todd Thomas that keeping capital markets. Hi, thanks. Good afternoon.
Yes.
Todd Thomas: Yeah, congrats, Devon, on your retirement, congrats to Bob and Joe on the new roles. First question, I guess, yeah, circling back to the fourth quarter acquisitions. So look, it sounds like the upside growth opportunity, you know, it's fairly meaningful. And I was just wondering if you could talk about just just provide a little bit more detail around, you know, either the blended average occupancy rates across that the acquisition pool and the occupancy rates across the acquisition pool.
Molina.
Yes.
Sorry.
And I'm breaking up I think so.
Sure. Thanks.
And.
And then my other question is of course, you raised money probably not the best comfortable to ask but what are you seeing in the lending environment and.
Have you seen more distress.
From an onerous.
It seems so far that it's more a matter of right, but that financing is available and so anything you can share in terms of what you're seeing especially from the from a.
Todd Thomas: Steven C. Lyfty, you're expecting and maybe talk about the mark to mark an opportunity over time, just curious if you can break out the growth a little bit more that you're underwriting and then and then are these assets under contract at this time? Yes, they're under control or contract or towards closing and some of them affirm it. So we have, you know, I'd say we have a strong degree of commitment, you know, belief in them closing.
Yes.
Yes.
I would say that we are not seeing a lot of.
The owners.
On the market with projects that where they can't get financing.
So that that hasn't happened yet.
It probably is a little early for that to happen if that's going to happen at all.
But that we havent seen that happening.
Todd Thomas: So, you know, Todd, this you gave me the great opportunity to advertise for our investor day. We are going to go through a lot of this stuff and a lot of detail in December and we hope that everybody on the call can can be there for that. And we will give you, I think that the types of clarity that you're you're looking for to just give you a little bit of color, you know, the the projects have that that we are looking at, you know, they they fit that number one or two grosser in the market concept that we have, but they have vacancy and they also have.
Happening, we do hear that.
There is some pressure, particularly in the regional banks, which were a source of a lot of family office financing.
And some of that that win.
Loans come due.
It's a more complicated negotiation and there are.
Certainly some of those assets that will come on the market, we haven't seen a big splurge of that yet.
But it is certainly something that is a.
But pretty good possibility, but again as you know what I mean.
Todd Thomas: In our mind below not below market rents in the existing base where we think we can grow those so I think both those will be the two biggest. Opportunities there are some outlaw development opportunities in these in these assets that you know, we will take take advantage of and there's some adjacency. Opportunities where we may be able to buy some additional land to to expand them as well, but they, you know, they fit there very much fairway in terms of having all the pieces of growth that we traditionally have in our portfolio. Only there are a little bit there's more of it because we've completed that on a lot of the the centers that we have so we that I think there's more upside through that.
Our business on the grocery anchored shopping center business, it's a really fragmented ownership.
So there you would expect that we will see when you have a kind of change in interest rates that we've had that there will be some disruption in terms of ownership.
I would say that if you look at the deals that we have done in or have under contract now in the in the second half of this year.
It Hasnt been family offices in distress, it's been other types of sellers as a whole so.
The answer is we anticipate that but we have not seen that.
Thank you very much.
Thanks, Brian.
And this concludes our question and answer session I would like to turn the call back to Jeff Edison Jeff.
Jeff Edison: And we will definitely go through some, you know, case studies on these assets in in December at at the investment. Okay, is there is there any appetite for for ground up development today aside from aside from the out parcel program seems like there's a lot of demand from smaller format grosser specialty and discount. Does development pencil at all and is there any appetite for some smaller scale. Yeah, I would say it's it's very anecdotal there there are the answers no but there are examples where there is some some happening, but it's such a small piece that it it it it it's not real and and it's it's just it's really hard.
Thank you operator, and thanks, everybody for being on the call today.
In closing, we remain focused and committed to successfully executing our growth strategy, both internal and external we believe that we continue to generate more alpha and less data in the markets, we're in and the properties and given our very specific strategy.
In addition, we still have one of the lowest levered balance sheets in the shopping center business. This gives us the financial capacity to successfully meet our acquisition objectives. We look forward to providing additional information about our outlook and business plans during our upcoming Investor day on behalf of the management team I'd like to thank our shareholders <unk>.
Celsius and our neighbors for their continued support thanks.
Jeff Edison: I mean we're we're buying these projects at $260 a foot less than that so if if you to do new development I mean to get anything in the $300 book range and new development is really really hard. I mean it's it's much more likely to be in the mid fours in terms of so the answers it it doesn't pencil in the vast majority of the cases and you'll you there I mean there are exceptions but in terms of any real impact yet that there we we don't see a window to ground up development and as you know I mean we we've done that throughout our history you know a lot of different times and.
Thanks, again for being on the call today and have great day.
And this concludes today's conference call. Thank you for your participation you may now disconnect.
[music].
Jeff Edison: And but but we're. I would say that that opportunity is very slim and it's a tremendous amount of work for what is probably a marginal return from our perspective at this point and no return in a lot of the things that we're seeing.
Jeff Edison: So as you can tell, we are not really pro ground up development at this point, thinking that it creates an opportunity for us other than our outlawed stuff where we really are doing a triple net lease kind of business and that continues to be very profitable for us.
John Caulfield: Okay, and John, just last question, what was the $3 million non cash charge related to the investment in the third party company? What was that related to? Sure, so in the quarter we recorded a non cash impairment on investment that we made several years ago. There was a neighbor that was seeking a high capital investment to open in several of our shopping centers and as part of the deal, we negotiated for investment interest in the company with those funds to be invested in our centers. Unfortunately, that operation was not successful in our centers and as such, we wrote off our interest in the company this quarter.
Okay.
[music].
John Caulfield: This is the first and only time we've invested in a neighbor so we don't have other instances of this. I would note that that's where we do talk to our core social guidance, which we did affirm and tighten that range, which we do is the metric that best highlights are ongoing recurring business. Okay, all right. Thank you. As a reminder, if you'd like to ask a question, please press star one. We'll move next to Dorikis. I apologize.
Floris Dijkum: We'll move next to Flores Van Dishcombe at Compass Point Research and Trading. Hey, thanks. I will also wish Devon much success in his new venture and hopefully you will not lose this advice if he's going to join the board. He is well respected throughout the industry. So congrats and congrats with the new guys.
Floris Dijkum: Question for you guys. I mean, obviously issuing equity, I think, makes a lot of sense that, you know, if you issued a 35, you could issue it even today at the current share price would appear. That is something that nobody else in the shopping center center sector has to be able to tap the equity market. So I would I would encourage you to look at that, you know, to fund those acquisitions going forward as well.
Floris Dijkum: My question is on the growth. Obviously, the underlying growth was down a little bit. I know there were some one off events higher bad debt, obviously, being a big part of that. Maybe if you can give a comment a little bit on the underlying growth expectations clearly it seems like the fourth quarter could also be slower than what it's what has occurred so far this year. Should people be concerned about having you having reached peak growth and growth slowing down from from from where we are today.
Jeff Edison: Floris, thank you. And yes, we're not going to let Devin go. He'll still be around helping us as he has, you know, for the last 10 years. So I don't think that's going to be anything, you know, any, obviously major transition for us.
John Caulfield: But the, on the, John, maybe you can help on the gross side. But what I, I would want to make sure we don't, you know, music, we're still in an unbelievably strong operating environment. I mean, and there are no, like, cracks that are saying, oh, this is about to happen. Or that, I mean, it will, I assume it will happen at some point when we get, you know, when we end up in a recession.
John Caulfield: But we're not saying any of that right now. I mean, if you look at our retention rates, you look at our retention spreads. I mean, those are, those are really, really strong numbers. And, you know, I think we'll continue to be able to draw really good internal growth through that. And less of it will, more will come through spread than from, you know, occupancy increases. But it's still, you know, in a really good spot.
John Caulfield: And as you can see from our guidance, I mean, we do believe that there's also a really good external growth possibility for us or our opportunity there. And we're taking advantage of that. While, you know, being careful to make sure we manage our balance sheet to where we're, you know, we're sort of match funding that that opportunity. And as John pointed out, I mean, these are a creed of not only initially a creed of to us. They have really good growth potential for us. So we're very optimistic about what this our external growth is going to be able to help us drive.
John Caulfield: And if you want to, John, I don't want to go through the pieces of that and how we're saying that. Would that be helpful for us? Sure. Yeah. So, hey, Flores, I would say that as we look at the fourth quarter, as I mentioned with the bad debt, that's really more related to 2022 activity than anything we've seen 23. I mean, when we look at the end of the quarter at, you know, kind of our reserves relative to our AR, that those reserve is as a percentage of the AR just continues to come down.
John Caulfield: But ultimately, you know, when you're at 57 basis points and I put that up against anyone else in terms of performance there, you do see that change. And so I would say that when you look at the full year, we were, you know, going to be over 4%. And then as we look the next year and again, click plug for our investment community day in December, we're going to highlight that we believe that this portfolio organically can continue to deliver 3% to 4% same sort of growth.
John Caulfield: And we've provided the pieces before, but, you know, I think there's a concern around, you know, occupancy, but occupancy is a sign of strength. And we're actually turning that into pricing power with, with renewal spreads. And new leasing spreads and using that to push embedded ramp pumps. And so we'll get into into the components at our investment community day, but we feel very strongly that we will be able to continue to deliver 3% to 4% growth for the foreseeable future.
Devin Murphy: Thanks, if I can maybe follow up. I know that I noticed that and I think Devon or I think might have mentioned this or baby Jeff did as well. I can't remember the your spreads on, on your local tenets, or local neighbors, excuse me, are higher than on your national ones. Now, I wonder, does that mean that their rents were initially lower, and are the new rents in line with the national tenants, or are they actually paying a premium rent to be in your centers?
Devin Murphy: Sure, Jeff. Hi, Flores. Thanks for the kind words. On the local neighbors, their spread is slightly higher than the non-locals. So in the third quarter, the renewal spread on locals was 19.8%. And on our total portfolio was 19.6%. So it's fundamentally the same number. The reason we like the local neighbors, and the reason we believe that their strength of our portfolio is number one, they've been in our centers for an average of nine years.
Devin Murphy: So they're successful retailers that are sticky. Number two, the average cost per square foot, that we have to spend on TIs for the local neighbor versus the nationals to achieve the same rent is about 50% of the TI that we have to spend on the national tenant. So we're getting comparable rents, comparable spreads, they're sticky, and we're spending a lot less. That's the economic side of the equation. And then on the non-economic side, they are much less difficult in terms of leasing terms such as non-compete, et cetera.
Devin Murphy: And so our view of the local neighbor is that we're getting a meaningfully better economic deal, a better non-economic deal, and these tenants are meaningfully more resilient in our portfolio than a lot of investors believe. Thanks, David.
Ronald Kamdem: We'll move next to Ron Camden at Morgan Stanley. Hey, just a couple quick ones. So going back to the interest cost question, I think last quarter, we sort of talked about, I think it was like a $10 million headwind year over year in 24. So obviously rates have moved, but just wondering, is that still sort of the right zip code we should be thinking about or has anything changed there? Thanks. Sean, do you want to take that? Sure. Hey, Ron.
John Caulfield: So as we look to 24, that is something that we will talk about at our investment community day. You're right, the curve has moved, but it's still moving. And I think that, you know, what you're hearing from us is it's important that we think the low leverage that we have is really the best strength we have as we balance the different options we have available to us. And so in terms of the dollar amount of interest expense, I mean, we do plan, and I believe we said this, we do plan to provide initial guidance for 24 at that investment community day.
John Caulfield: And I think the, you know, as you're looking at models and things, that interest number is highly dependent upon what your acquisition assumptions are for both the balance of this year and next year. So it's a little bit harder for us to talk specifically about like a dollar amount, but it is a headwind this year that we quantified it about 10 cents on our earnings in 23. I would say it's, you know, based on what we see is at least that for into 24, but I do want to take a moment to say that based on the operating performance and the strength of our centers that we've all been talking to. We do anticipate we will have positive FSO growth in 20.
Ronald Kamdem: I'm not exactly answering your question, because there are more variables and inputs to it, but we hope to provide more clarity in December. Great, that's helpful.
Devin Murphy: And then I want to go back to something else that was bought out, which is the Record Occupancy Target. We've talked about sort of new tenant verticals, I think MedTel was one that you guys had mentioned, maybe can you remind us when you're thinking about that new Occupancy Record Occupancy Target. How much is that, how much of that is from these sort of new tenant verticals pushing Occupancy up versus just being smarter about sort of how you use space in the portfolio.
Devin Murphy: Do you have anyone to take that one? Sure. Ron, thanks for the question. Again, we believe that we have upside in our inline occupancy of circa 100 basis points and that'll be realized over the next five quarters. There's type of timing, the type of tenant use that we are seeing the strongest demand for is again, MedTel, as we discussed on a number of recent quarterly calls. So MedTel today is 6% of our ADR, and it's 20% of our leasing pipeline.
Devin Murphy: So the demand from MedTel tenants continues to be extremely strong. Again, health and beauty is another category where we're seeing strong leasing demand. That's 11% of our current leasing pipeline. We like medical for a lot of reasons. Most importantly, they're very sticky. The MedTel tenants that are in our portfolio have been in the centers for on average 10 years. Health and beauty tenants are also very sticky. The health and beauty tenants in our portfolio have been in place for on average over 11 years.
Devin Murphy: So those are the uses where we're seeing continued strong demand. Those are uses that we like a lot. We think they add to the merchandising mix. We think they drive consistent traffic to our centers, and then they stay in our centers for a meaningful amount of time.
Ronald Kamdem: Great. That's it for me. Congrats, David and the rest of the team. Pleasure working together. Appreciate it, Ron. Thanks. Thanks, Ron.
Dori Kesten: And we'll go next to Dory Keston at Wells Fargo. Thanks, and congratulations on all the management changes. What percentage of your small shop leases have contractual bumps over 3% today? And where do you think that you can push that to over the next year? That you want to take it or jump? I'll, I mean, Dory, I don't know. Well, I've got my head. What percentage have bumps above three.
Dori Kesten: We will come back to you on that. Our average in the third quarter was two and a half percent. So we'll have to come back to you on what percentage have above three. And we will be that.
John Caulfield: Okay. Dory, I was going to say, so really when we look at it, the overall contribution to N O Y growth is up to 80 basis points of our N O Y growth is coming from overall escalators. And, you know, we believe that that number is going to continue to rise. And even given the pieces on the escalators, we just think that that's an area that we can continue to grow to 100 basis points.
Dori Kesten: Good, thanks. And then when you look at assets you sold this year and last, what has the realized unlovered IRRs been? So Dori, are you asking what, for our whole period, what were the unlovered IRRs? Is that weird? Yeah, I don't have the specifics, it's actually, I mean, we actually do a full analysis of each property as we as we sell it. They have, I know that across the board, they have been well above our targeted nine unlovered IRR, but I don't have the, what exactly the number is for across that board, but I can certainly get that to you.
John Caulfield: Okay, that's fine. Hey Jeff, Jeff, I'll just jump in there. And the answer is that when we look at there's over assets that we sold in the years, the actual underwriting would have been, because at the time in a lower interest rate environment, you know, the underwriting was certainly lower, we outperformed by over a hundred basis point, and the actual under realized was over a nine. But we relative to what we anticipated, we actually see that that underwritten unlovered IRR by a hundred basis points on assets that we've taken full cycle from acquisition to management through disposition.
Dori Kesten: So I got it.
Dori Kesten: Thank you.
Dori Kesten: Thanks, Dori.
Paulina Rojas: And we'll go next to Paulina Rojas at Green Street. And Paulina, your line is open, you may be muted. Excuse me, I was, yes. My question is about the proger algorithm merger, and excuse me if you mentioned these at the beginning and I missed it, but my question is, so CNS experience seems to be more in the whole sale world. And what do you feel confident that they would be good operators of grocery stores at a large scale? Yeah. Paulina, thanks for the question.
Paulina Rojas: The answer is I, that's a big question mark out there. I mean, they do, you know, they have been, they've been a wholesaler for a hundred years. They have, they do operate stores specifically. I don't think they're of the quality of store that we would like. But they have, they do have a history of actually operating stores and addition. The thing from our perspective is relative to a prop code where you have basically a separate company stepped up. We think they clearly are better than that. The question is, how good of an operator are they? And honestly, we won't know until they get in an operate.
Paulina Rojas: We do want to emphasize, I mean, the market is still saying there's not a great chance this merger is going to go through. I mean, they're, I think they're, you're still a mid to high teams discount between Albertsons stock price and where they would exchange in the, in the Kruger merger. So the market still, I think, skeptical about whether it's going to happen or not. I think, you know, the, and they're still a, you know, a big question about what, how good these guys are going to be as a, as a true grocery operate. Bolida Sorry, I'm breaking up, I think, but I answer.
Jeff Edison: Thank you. And my other question is, of course you raise money, it's probably, probably you're not the best company to ask, but what are you seeing in the lending environment? Have you seen more distress from owners? It seems so far that it's more a matter of rate, but that financing is available. So anything you can share in terms of what you're seeing, especially from them from. Yeah, I would say that we are not seeing a lot of owners on the market with projects where they can't get financing, so that hasn't happened yet.
Jeff Edison: It probably is a little early for that to happen if that's going to happen at all, but that we haven't seen that happening. You know, we do hear that, you know, there is some pressure, particularly in the regional banks, which were a source of a lot of family office financing and some of that that when loans come due, it's, you know, it's a more complicated negotiation, and there are certainly some of those assets that will come on the market.
Jeff Edison: We haven't seen a big splurge of that yet, but it is certainly something that is a, you know, I think a pretty good possibility, but again, you know, as you know, I mean, we're, our business on the grocery anchored shopping center business, it's a really fragmented ownership. So there you would expect that we will see when you have a kind of change in interest rates that we've had that there will be some disruption in terms of ownership.
Jeff Edison: I would say that if you look at the deals that we have done or have under contract now in the second half of this year, it hasn't been family offices in distress, it's been other types of sellers as a whole.
Jeff Edison: So, you know, we anticipate that, but we have not seen that.
Unknown Executive: Thank you very much. Yep, thanks, William.
Unknown Executive: And this concludes our question and answer session.
Jeff Edison: I would like to turn the call back to Jeff Edison, Jeff. Thank you operator and thanks everybody for being on the call today. In closing, you know, we remain focused and committed to successfully executing our growth strategy, both internal and external. We believe that we continue to generate more alpha and less beta in the markets we're in and the properties and given our very specific strategy. In addition, we still have one of the lowest levered balance sheets in the shopping center business, this gives us the financial capacity to successfully meet our acquisition objectives.
Jeff Edison: We look forward to providing additional information about our outlook and business plans during our upcoming investor day. On behalf of the management team, I'd like to thank our shareholders, pico associates and our neighbors for their continued support. Thank you very much. Thanks again for being on the call today, and have a great day.
Unknown Executive: And this concludes today's conference call. Thank you for your participation. You may now disconnect. Thank you very much.