Q4 2024 Curbline Properties Corp Earnings Call
After the Speakers' remarks, there will be a question and answer session and if you would like to ask a question. During this time. Please press star one on your telephone keypad.
Speaker Change: I would now like to turn the conference over to Stephanie routes to Perez Vice President of capital markets you may begin.
Speaker Change: Thank you good morning, and welcome to curb line properties fourth quarter 2024 earnings Conference call. Joining me today are Chief Executive Officer, David Lukes, and Chief Financial Officer, Conor <unk>. In addition to the press release distributed this morning, we have posted our quarterly financial supplement and slide presentation on our website at <unk> Dot com.
Speaker Change: Which are intended to support our prepared remarks during today's call.
Speaker Change: Please be aware that certain of our statements today may contain forward looking statements within the meaning of federal Securities laws. These forward looking statements are subject to risks and uncertainties and actual results may differ materially from our forward looking statements.
Speaker Change: Additional information may be found in our earnings press release and in our filings with the SEC, including our registration statement on form 10, and our quarterly report on Form 10-Q.
Speaker Change: In addition, we will be discussing non-GAAP financial measures on today's call, including <unk> operating <unk> and same property net operating income descriptions and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's quarterly financial supplement and investor presentation at this time.
David Lukes: It is my pleasure to introduce our Chief Executive Officer, David Lukes.
David Lukes: Good morning, and welcome to curb line properties fourth quarter 2024 conference call, our first as a Standalone public company.
David Lukes: I'd like to start by thanking all of my colleagues at both curb line and site centers for their tremendous efforts to get us here today.
David Lukes: Their work allowed us to unlock a differentiated growth company capable of generating double digit earnings and cash flow growth well above the REIT average for a number of years to come. This growth is driven by the economics of the convenience property type, which is our exclusive focus.
The large opportunity set in front of us and our unmatched balance sheet that is aligned with the company's business plan.
David Lukes: Given this is our first call I'll start with an overview of the convenience sector and its unique elements and then share with you our vision for continuing to dominate this attractive sub sector and it's substantial addressable market.
David Lukes: Conclude with some comments on operations and then Conor will talk about fourth quarter results and outlook for 2025.
David Lukes: We began investing in convenience assets now over six years ago, recognizing the strong financial performance of the small format asset class both within the site centers portfolio and the broader retail real estate industry.
David Lukes: Tenant retention was high credit was strong and diversified.
David Lukes: And the Capex load was extremely low on a relative and absolute basis.
David Lukes: Importantly, mobile phone geolocation data was also emerging during this period as a sophisticated new tool that we could utilize to identify underwrite and provide hard facts around investment opportunities.
David Lukes: There are traditional real estate underwriting of boots on the ground market knowledge became supplemented by data analytics that allowed us a window into tenant performance and customer utilization utilization of the small format property sector.
David Lukes: Retail and service tenants for their part are also using more sophisticated site selection tools based on consumer location data.
David Lukes: These tenants recognize that a significant portion of consumer spending is not only going shopping but also running errands. These quick trips to a local convenience center are highly profitable for the tenants, but need to be in fact convenient.
David Lukes: In other words tenants are willing to pay higher and higher rents to secure a superior and convenient location, that's more profitable and that is driving demand for a simple and flexible spaces.
David Lukes: Growing demand for the right locations and our property type has produced two noteworthy financial outcomes.
David Lukes: First the capital efficiency of the business is superior to many other retail formats and is especially important as capital has become more expensive and valuable.
David Lukes: Desirable small format space not only has high tenant retention rates, but is also inexpensive to prepare for the next tenant when.
When compared to larger buildings that require significant adaptations and longer construction periods. The capital efficiency of our simple business is unique.
David Lukes: In other words less capital as needed to generate the same organic growth as the rest of the retail real estate industry and helps generate compounding cash flow growth for <unk>.
David Lukes: To that point in the fourth quarter Capex as a percentage of NOI for curb line was just over 5%, which led to over $25 billion of retained cash before distributions. Despite the fact that NOI was just $26 million.
David Lukes: As curb scales. This retained cash flow will increase providing a durable source of capital that is outsized relative to the companys size and boosting earnings and cash flow growth.
David Lukes: Second the sector has kept up with inflation remarkably well.
David Lukes: Lease durations and the <unk> portfolio are generally shorter when compared with properties with an anchor and.
David Lukes: And given the aforementioned tailwind and the supply demand imbalance that provides an opportunity to drive rent growth.
David Lukes: In other words this is a renewals business, where we can capture growing market rents with little landlord capital or downtime as most tenants are renewing leases since there is a shortage of high quality convenience real estate and urban communities and steady demand.
David Lukes: All of these factors are flowing through into <unk> operating metrics with 2020 for same property NOI growth of five 8% 12.
David Lukes: 26% blended straight line leasing spreads and our expectation that same property NOI growth will average greater than 3% for the three year period ending in 2026.
David Lukes: Shifting to the investment side, the positive attributes of capital efficiency and strong top line growth that I. Just described let us to explore the addressable market for convenience properties six or so years ago.
David Lukes: We now have years of transaction data under our belts and arguably one of the largest high quality portfolio of convenience assets in the United States with over 3 million square feet of inventory.
David Lukes: Despite that fact, what we own today represents just over one quarter of 1% of the 950 million square feet of total U S inventory according to ICSC, providing a significant runway to scale and grow <unk>.
David Lukes: In fact, the addressable market is so large that we see a long path of growth.
David Lukes: That can stay focused on high quality convenience sector without needing to broaden our simple and focused strategy.
David Lukes: For context, each week, our team is reviewing hundreds of millions of dollars worth of deals.
David Lukes: Not every asset will be a fit for curb line, but we believe there is a significant opportunity set of properties that do share common characteristics with our existing portfolio, including excellent visibility access and compelling economics highlighted by a broad available tenant universe and limited capital needs.
David Lukes: One of the key differentiating aspects of the curb line spinoff was matching the balance sheet with the business plan with over $625 million of cash and over $1 billion of liquidity at year end, we have ample capacity to scale.
David Lukes: We are confident that we can close on $500 million of convenience acquisitions per year, which equates to around $125 million per quarter.
David Lukes: We significantly exceeded that pace with $351 million of acquisitions in the last six months.
David Lukes: While the pace of closings will not always be evenly spaced our current pipeline of awarded deals that are working through contract and diligence stands at just under $200 million.
David Lukes: Since our spin off and subsequent marketing efforts, we have seen a large number of brokers and sellers proactively engaged with us have changed from the pre spin environment.
David Lukes: The situation allows us to work directly with sellers on a timeline and a structure that works best for both parties and further supports our confidence in meeting or exceeding our annual target of $500 million and external acquisitions of high quality convenience properties.
David Lukes: That was a key driver in the fourth quarter, where we acquired 20 properties for just over $206 million with the assets concentrated in the affluent markets that <unk> currently operates including Atlanta, Houston, Denver, Los Angeles, and Phoenix, We also made acquisitions in wealthy submarkets, such as Kansas City Memphis.
David Lukes: In Minneapolis, which share the key characteristics, we seek and where we hope we can scale long term.
David Lukes: Average household incomes for the fourth quarter investments were nearly $140000 with a weighted average lease rate of over 96% highlighting our focus on acquiring properties were renewals and lease bumps drive growth without significant capex.
David Lukes: Ending with operations not surprisingly overall demand for space remains strong driven by a mixture of existing retailers and service tenants expanding into key suburban markets, along with new concepts competing for the same space.
David Lukes: Recent new and renewal deals include several first to portfolio and recurring national tenants, such as copper Panda Express Chase the UPN store Lenscrafters and Comcast with notable activity from service tenants banks fitness operators and quick service restaurants.
Speaker Change: Before turning the call over to Conor I want to again, thank everyone at curb line along with the team at site centers for their work to complete the spinoff of <unk> properties. It took the work of our entire organization to get here and I couldnt be more optimistic about the opportunity ahead for <unk> and our ability to generate compelling stakeholder value.
Speaker Change: And with that I'll turn it over to Conor Thanks, David I'll start with fourth quarter earnings and operations before shifting to the company's 2025 outlook and concluding with the balance sheet.
Conor: Fourth quarter results were ahead of budget due to better than expected operations and higher than expected acquisition volume.
Conor: Outside of that outperformance on the NOI side, there were no other material surprises or callouts for the quarter, which speaks to the simplicity of the <unk> business plan.
Conor: In terms of operations.
Conor: Leasing volume in aggregate was sequentially higher in <unk>.
Conor: I would expect to continue to tick higher in terms of volume as the portfolio scales.
Conor: However, with this small but growing denominator operating metrics will remain volatile and be heavily impacted by acquisitions.
Conor: That said overall leasing activity remains elevated and we remain encouraged by the depth of demand for space, which is likely to translate into TTM spreads over the course of the year consistent with 2024.
Conor: It's important to note that curbs leasing spreads include all units, including those that have been vacant for more than 12 months with the only exclusions related to first generation space and.
Conor: In units vacant at the time of acquisition.
Conor: Same property NOI was up five 8% for the year and above the top end of the guidance range of three 5% to five 5% with outperformance driven by a host of factors.
Conor: Importantly, this growth was generated by limited capital expenditures with fourth quarter Capex as a percentage of NOI of just 5%.
Conor: Moving to our outlook for 2025, we are introducing <unk> guidance in a range between 97 per share and $1 one per share.
Conor: Underpinning that range is one approximately $500 million of investments funded roughly 50 50 with debt and cash on hand.
Conor: Two.
Conor: A 4% return on cash with interest income declining over the course of the year as cash is invested.
Conor: And three G&A of roughly $32 million, which includes fees paid to site centers as part of the shared services agreement.
Conor: You will note that in the fourth quarter of 2024, we recorded a gross up of $500000 of additional noncash G&A expense expense, which was offset by $500000 of noncash other income.
Conor: This gross up which is a function of the shared service agreement nets to zero net income and will continue as long as the agreement is in place and is excluded from the aforementioned G&A target.
Conor: In terms of same property NOI, we are forecasting growth of approximately two 8% at the midpoint in 2025, but there are a few important things to call out.
Conor: Similar to our leasing spreads the pool is growing but small and is comping off of 'twenty 'twenty four is outperformance.
Conor: Additionally, <unk> same property pool is set annually. So it includes only assets owned for at least 12 months as of December 31 2024.
Conor: This results in a larger non same property pool, which was roughly 33% of fourth quarter NOI and is growing at a faster rate than the same property pool.
Conor: To highlight this point the occupancy for the entire portfolio was 93, 9% at year end.
Conor: Versus the same property pool of 95, 1%.
Conor: This relative gap is expected to compress in the first half of the year delivering significant organic growth.
Additional details on 2025 guidance and expectations can be found on page nine of the earnings slides.
Conor: And on the balance sheet <unk> was spun off with a unique capital structure that is positioned to execute on its business plan and differentiate itself from the largely private buyer universe acquiring convenience properties spa.
Conor: Specifically at year end, the company had approximately $626 million of cash on hand.
Conor: No debt.
Conor: A $100 million.
Conor: Undrawn delayed draw term loan and full availability under its $400 million revolving credit facility.
Conor: We expect to fund the term loan in the first quarter of the year, providing additional capacity liquidity and then we'll utilize additional sources of capital to fund the company's substantial growth profile.
Conor: The changes in the capital structure to David's point are expected to lead to significant earnings and cash flow growth for a number of years well in excess of the REIT average with that I'll turn it back to David.
Speaker Change: Thank you Connor operator, we are now ready to take questions.
Speaker Change: Thank you if you would like to ask a question. Please press star one on your telephone keypad. If you would like to draw your question simply press Star one again.
Speaker Change: Please ensure you're not on speaker phone and that your phone is not on mute when called upon thank you.
Speaker Change: Our first question comes from.
Speaker Change: <unk> with Citi. Your line is open.
Speaker Change: Hey, good morning.
Speaker Change: David you talked about.
Speaker Change: Kind of the inbounds, you're now getting from brokers and sellers here. After you guys closed the transaction and that kind of led to a higher pace of acquisition closings could you just talk a little bit about.
Speaker Change: The the pricing expectations right now that everyone knows you guys have a couple of hundred million dollars of cash.
Speaker Change: Of where you are.
Speaker Change: Pricing and underwriting deals today versus.
Speaker Change: Maybe six to 12 months ago. When you guys are still part of the site.
Speaker Change: Sure Good morning, Craig.
Speaker Change: I guess the first comment is that this property type.
Speaker Change: Historically has been.
Speaker Change: Brokered by a lot of small and regional brokers and.
Speaker Change: And even some of the smaller kind of pods within the larger brokerage community.
Speaker Change: I think theres definitely been.
Speaker Change: A broader spotlight on sub sector in the last 12 months.
Speaker Change: And that just caused a lot more dialogue.
Speaker Change: So we tend to get more inbounds from from teams that handle this type of product, which just allows for a lot more visibility into.
Speaker Change: Product that we may not have seen a year or two ago.
Speaker Change: In terms of pricing it's.
Speaker Change: It's interesting I would say in conclusion, the cap rates are probably flat to down a little bit.
Speaker Change: But the number of deals that we're seeing has grown fairly substantially. So I guess the net result is the the unlevered IRR expectations that we have haven't really changed a whole lot I would say assets where cap rates have compressed it's offset by the fact that market rents are growing and that kind of feeds into the same IRR math.
Speaker Change: And where are you guys on a blended kind of cap rate going in or stabilize. However, you want are reported for the deals you guys closed the fourth quarter.
Speaker Change: Yes for what we've closed company to date fourth quarter.
Speaker Change: First quarter is thus far were six in the quarter.
Speaker Change: Okay.
Speaker Change: And I guess, just one more question on the.
Speaker Change: Underwriting here because you guys put in the deck you guys are about 5% of.
Speaker Change: Our capex is about 5% of NOI kind of what was that.
Speaker Change: On.
Speaker Change: Traditional grocery anchored.
Speaker Change: And how does that kind of impact what you guys are willing to pay that going in to get to the same sort of levered IRR Unlevered IRR.
Speaker Change: Yeah, well first of all the 5% Capex load in the fourth quarter was remember, it's one quarter of a new company with a fairly small portfolio. So I would take that with some grain of salt and our previous decks that we've had out the investment community has shown that the sub sector is more like mid to high single digits. So I do think thats going to bump around a little bit based on the <unk>.
Speaker Change: But it's definitely a sub 10% capex load asset class I mean, historically I think anchored retail has traditionally even north of 20%.
Speaker Change: Add redevelopment into that Youre seeing capex load that can far exceed the twenty's and get into the <unk> and <unk>.
Speaker Change: So mathematically it should mean that cap rates should be lower for this asset class to generate the same unlevered IRR.
Speaker Change: I think you have seen that in the last couple of years.
Speaker Change: Subsectors that used to trade in the 7% to eight and now it's in the kind of mid to low sixes.
Speaker Change: And whether it stops here, whether it keeps going down Craig. It's a really good question, but it's just interesting to note that the market rents keep growing the renewal spreads keep increasing and the capex load is staying the same so arguably we can pay more to achieve the same unlevered IRR.
Speaker Change: And then one last quick one.
Speaker Change: I know the whole.
Speaker Change: Point of the.
Speaker Change: Our strategy is to not have anchor tenants are really lower that exposure, but and again I know, it's a smaller portfolio today, but just looking through the top tenant list you have more some radical or Sonoma total wine <unk> more and some of those are bigger boxes and how should we think about you guys mixing some of that type of product in going forward versus.
Speaker Change: As.
Speaker Change: The smaller six two.
Speaker Change: 6000, or less kind of tenant sizes.
Craig: Yes, it's a great question Craig.
Speaker Change: Thank you should assume that we will be.
Speaker Change: Mostly small shop tenants it just so happens that.
Speaker Change: Good real estate attracts a lot of different national tenants and sometimes if we see a property that we really like it happens to have an anchor tenant for comfortable with that anchor or worth coupled with the rent at that anchors paying and what a small shop would pay in.
Speaker Change: So we'd be happy to make that investment it's never going to be a large portion of the company, but it's it's sometimes unavoidable if you want to buy high quality real estate.
Speaker Change: Great. Thank you.
Speaker Change: Thanks, Greg.
Speaker Change: The next question comes from Floris Van <unk> with Compass point Your line is open.
Speaker Change: Hey, good morning, guys.
Speaker Change: So I will.
Speaker Change: I guess my question is I noticed your NOI margins and expense recoveries. This quarter I know, you're a small company and the strange same store pool is not the whole company.
Speaker Change: Portfolio is still relatively small but.
Speaker Change: NOI margins declined by 200 basis points in your recovery ratio I think also declined by 360 basis points.
Speaker Change: That you can point us to that cause that and should we not be worried about that.
Hey, good morning, it's Conor so the fourth quarter. It was impacted by the O&M requests so prior to the spin off the metrics youre, referring to didn't include any expense or reallocated from G&A to opex and so in the fourth quarter, we started that.
Speaker Change: Kind of reclassification of expenses so.
Speaker Change: Youre right on an apples to apples basis. It would look like recoveries, where margins went down but if you look at the same store pool, which is a better reflection of actual property level.
Speaker Change: Operating metrics Youll see recoveries were up year over year, the margins were up year over year, which I think is consistent with what we expect over time.
Speaker Change: Great. Maybe also I noticed I mean, if I look at your two your biggest markets.
Speaker Change: Miami I think you'd the average size of your assets, it's like 75000 square feet in Atlanta, like 29000 square feet.
Speaker Change: As your sweet spot and any particular reason why.
Speaker Change: As such.
Speaker Change: Wide discrepancy in two of your biggest markets.
Speaker Change: For us not to sound like a broken record, it's a very small pool. So to Craig's question, you can have one or two tenants or one or two properties skew a certain market is skewed.
Speaker Change: Sub market to your point, we do have a larger asset in Miami and one of them has anchors or excuse me two of them have anchors, which again will skew those metrics.
Speaker Change: Theres a right sweet spot that we think through to David's point, we're trying to find the best or in the best Submarkets at times Thats, a 4000 square foot unit are building excuse me other times it could be on a year to 25000.
Speaker Change: If you look our average unit size or average property size excuse me is about 30000 feet. My guess is that's a pretty consistent or stable number number over time as we scale.
Speaker Change: Great. My last question is.
On the dividend if you can touch on your dividend policy and what you expect to.
Speaker Change: To payouts over.
Speaker Change: Over the next year or two.
Speaker Change: Sure. So obviously, it's a board decision management is always recommended when you think back DDR site centers et cetera, we've always recommended the minimum in terms of taxable minimum but again, it's a board level decision. There are some interesting unique aspects of <unk> that are different than other peers are different than peers have been public for some time.
Speaker Change: The biggest one is just our tax depreciation shield in the sense that as we scale that shield will grow but in the near term. That's a smaller shield. The net result is we are closer probably to have a payout ratio should the board accept their recommendation closer to 75% then our preference would be high <unk> low <unk>.
Speaker Change: But again I don't think it would be inconsistent in terms of management recommendation to the board versus sites centers of the peer group.
Connor: Thanks Connor.
Speaker Change: Welcome.
Speaker Change: The next question is from Ronald Camden of Morgan Stanley. Your line is open.
Quinn.
Speaker Change: Hey, just two quick ones for the same store NOI guide for 'twenty five just wondering if we could double click in terms of the assumptions for bad debt as well as occupancy gains.
Speaker Change: Anything else you're willing to share.
Sure Hey, Ron it's Conor.
Ron: Good morning.
Speaker Change: As we mentioned we continue to expect same store to average greater than 3% for the three year period and 24 to 26 2024 was five 8%, which was which was above our prior guidance range for bad debt for 2025, the midpoint of the range is about 55 basis points.
Speaker Change: The only thing I will just again caution again to sound like a broken record. It is a very small pool. So how you get to the low end really is related to move outs or unexpected move outs. There are no bankruptcies, we're tracking or are worried about we have one TGIF. We don't have any exposure to party city big lots.
Rattle off the folks in bankruptcy today. It really is a function of just a small pool on a couple of shops moving out but as I mentioned in my prepared remarks were 95, 1% commenced which we think is a pretty good run rate for the pool going forward, but that's just can lead to a little volatility over time, just given how small the nam areas.
Speaker Change: Great helpful. And then just going back to the acquisitions.
Speaker Change: But we think we think this market could be 200 $300 billion in terms of activity in terms of Tam. So clearly a long runway, but just wondering if you could provide just a little bit more details on sort of the competition and the cap rate trends in <unk>.
Speaker Change: And how that sort of.
Speaker Change: Played out versus your expectations and you mentioned sort of the going in cap rate, but curious is there sort of a target IRR.
Speaker Change: Hurdle that that Youre also looking at thanks.
David Lukes: Sure Good morning, David.
David Lukes: I would say that the unlevered IRR expectations that we have been fairly consistent in that there are high single digits. Sometimes we're seven five sometimes we're able to have nine but on an unlevered basis, that's where we've been making investments I think if you get into.
David Lukes: Other formats that have.
David Lukes: A lot more repositioning involved that is one component of any sector is kind of the value add component ours is a lot more oriented towards core real estate that I think is going to outperform in a recession.
David Lukes: And the competition for core real estate that has low capex and high rent growth in market rents has been pretty fierce and I would say has been getting more so so cap rates have definitely come down.
David Lukes: 50 to 75 basis points in the last three years, but I haven't really seen a whole lot of change in the last six to 12 months.
David Lukes: I think if cap rates are coming in a little bit it's likely that the rents are growing and thats, causing the unlevered IRR expectations to be about the same so competition is getting.
David Lukes: Definitely more active than it was in the past couple of years.
David Lukes: I would still say it's mostly.
David Lukes: Local and regional private capital.
David Lukes: Have not really bumped into a lot of institutional capital yet.
David Lukes: Super helpful. That's it for me. Thank you. Thanks.
Ron: Thanks, Ron.
Ron: The next question is from Alexander Alexander Goldfarb with Piper Sandler Your line is open.
Speaker Change: I don't know.
Speaker Change: Thank you good morning down there.
Speaker Change: So just a few questions here first.
Speaker Change: <unk>.
Speaker Change: David I think you outlined $500 million of acquisitions targeted for the year.
Speaker Change: Sort of curious what the total.
Speaker Change: Pool of assets that Youre looking at the total pipeline is it like.
Speaker Change: One 1 billion of deals 1 billion half of deals I'm, just trying to understand how many deals come across your desk versus.
Speaker Change: The ones that you actually look at versus the ones that you are successful in women.
Alex: Good morning, Alex.
Speaker Change: I would probably break it down into three categories those that cross our desk those that we decided to work on and those that we ended up trying to acquire.
Speaker Change: So I would say the ratio of what we're looking at is probably 10 X what we buy.
Speaker Change: The ratio of what we spend time underwriting and decided to make an offer on is probably three or forex.
Speaker Change: And that's what's giving us a lot of confidence that there is plenty of room for us to grow in the sub sector I think the available subset is pretty large.
Speaker Change: Okay and then the next question is you guys talked about.
Speaker Change: Same store, 3%, maybe 3% or better but you also spoke about the original impetus for the company.
Speaker Change: The annual growth rates, the annual rent bumps are faster and more broader based across the tenants in traditional shopping center. So just trying to understand.
Speaker Change: I am not a same store person, but still it stands out there why wouldn't the same store metric be faster.
Speaker Change: Internally, if you guys have better internal rent bumps than traditional open air.
Conor: Yes, Alex it's Conor.
Conor: I think we agree with the premise.
Alex: Your savings.
Alex: Okay, but it's still like I'm, just trying to understand the 3% versus.
Speaker Change: Thinking it would be better if you guys are getting three or 4% annual bumps yes.
Alex: So so.
Alex: On average our annual bumps or just under 3%, they're kind of mid twos right. So we are to my to my earlier comment the same store pool was 95, 1% commenced right. So there's there's maybe a little bit of occupancy growth, but essentially the midpoint of our range is four 3% growth with no occupancy and so when you think about that growth rate relative to the peer group.
Alex: Which I'm assuming is the genesis of the question.
Alex: We are doing better same store on an occupancy neutral basis. We also have no redevelopment pipeline to David's point right. So the capital needed to generate that growth is substantially lower than I think the equivalent groups.
Alex: Our equivalent growth rates you are referencing so it's a really good question.
Alex: But effectively the same store pool has little to no occupancy growth and even despite that back we're still doing effectively 3% growth, which I think speaks to the to your question.
Alex: So kind of just sorry to follow up.
You said I think like two and a half internal bumps recollection was that you guys were getting sort of 3% to 4% annual bumps.
Alex: I think that or no.
Alex: Alex I think Youre is David I think when we're blending tenants that have options or tenants that have longer term leases, let's call. It a starbucks.
Alex: Versus a tenant that has maybe two years left of term and they've got 3% annually and theyre going to get a big bump at the exploration of their term when they have no option. When you blend all of that together and you take out some credit loss assumption, that's what counter is talking about.
Alex: It's I think it's just a different it's a different category than saying, yes. When we signed leases, we generally have 3% rent escalations, but when you put it all of the other algebraic formula as I think you get down to just below 3%.
Speaker Change: Okay. Thank you for that what would materially change that obviously is market rent growth because it is a renewables business. So yes, youre getting fixed rent bumps on most tenants have call it 3%.
Speaker Change: But as you can see from our disclosure. It's whenever you have a tenant that comes due with a shorter lease term and there is a renewal and the market rents have been growing so it does feel like the opportunity to overachieve that is definitely there.
Speaker Change: Okay I appreciate that.
Alex: Thanks, Alex.
Speaker Change: Thanks.
Speaker Change: The next question comes from Michael Mueller with Jpmorgan. Your line is open.
Michael Mueller: Yes, hi.
Michael Mueller: I guess first what gets you to the low and high ends of the same store NOI guide for 'twenty five given that you have 55 basis points of bad debts at the midpoint and you've talked about economic occupancy being fairly stable at 95, 1%.
John: Hey, Mike, It's John and good morning. It really is just just on budget and move outs.
Speaker Change: The only thing I would just qualify that is even if we hit the low end of the same store guidance range, which is not our expectation, but it feels prudent difference February 11th that wouldn't push us to the low end of the <unk> range and so do you think about like factors that matter for growth over the course of 'twenty five 'twenty six.
Speaker Change: It feels odd to say at the same store is not the biggest driver in fact, it's probably the fourth or fifth biggest driver in terms of what drives growth. So I don't want to downplay is important but given that it's just over 60% of the NOI pool, whereas if you look at the peer group or reach an average same store in general usually with 95% to 100% of NOI. So it's a little unique for us just given.
Speaker Change: We.
Speaker Change: The buildup of our pools and how we just given the point we are in terms of our kind of lifecycle of growth, but it's a little funny in that regard until we get bigger over time.
Speaker Change: Got it.
Speaker Change: That's a good segue to the second question the overall portfolio economic occupancy rate of 93 nine obviously.
Speaker Change: Stuff youre buying is going into that.
Speaker Change: What do you think a timeline to get up to the same store level of 95 or 95, one is that.
Speaker Change: A two year process is faster just take longer.
Speaker Change: Materially faster and so that was my point in the prepared remarks, but non same store pool will effectively on top of the same store pool in the first six months of the year. This is not if you think about David's opening comments.
Speaker Change: And we're back filling tenants, we arent repurposing space. It's one tenant goes into the exactions base at the prior tenors and so there's very little downtime. There is lots of this big SNL pipeline.
Speaker Change: That you've seen with some of our peers, we shouldn't have that which I think again the same store pool, which is 95% commenced and a lease rate of 95, 9% or 96, one that's a good spread of 100 basis points. We're never going to have this 400 basis point <unk> pipeline that some of the peers have.
Speaker Change: Got it okay. Thank you.
Speaker Change: Youre very welcome.
Speaker Change: The next question comes from Todd Thomas of Keybanc capital markets Your.
Speaker Change: Your line is open.
Speaker Change: Hi, Thanks, good morning.
Speaker Change: When you announced the spin and since that time over the last year the market was pricing in <unk>.
Speaker Change: More rate cuts and perhaps a lower interest rate environment altogether now.
Speaker Change: The market seems to be pricing in a higher for longer environment for a more extended period of time does that impact or change your capital raising our capital allocation strategy at all at the margin.
Speaker Change: How do you think about either either side of the balance sheet moving forward.
Speaker Change: James.
Speaker Change: If I'm understanding your question correctly, Todd I would say that remember if there is higher for longer.
Speaker Change: It has happened is that.
Speaker Change: Cap rates may not have moved up according to what the forward curve would suggest but market rents have.
Speaker Change: And so our allocation to purchasing properties, where we think we can keep up with inflation or exceed inflation is still pretty strong which puts us in a pretty happy place to be in the sub sector, our ability to keep up with inflation with this type of tenant roster lack of downtown and lack of Capex makes us even more convinced that it's a it's a really good place to be in hyper longer environment.
Speaker Change: Yes.
Speaker Change: Okay and then it sounds like your plan is to fund acquisitions.
Speaker Change: 50 debt and equity.
Speaker Change: Is there any thought to.
Speaker Change: Tapping the equity markets at all during the year.
Speaker Change: Perhaps a little bit sooner rather than later.
Speaker Change: To sort of maintain the balance sheet advantage that you have by locking in your cost of capital today, and along gating the companys runway for investments.
Conor: Hey, Todd it's Conor.
Conor: I'd, just say remember even if we used all of our cash rates of $626 million remaining.
Conor: Still have no debt and our balance sheet advantage would still be dramatic versus rates overall are private investors lever might be alright. So I'll start with that the second point is on equity the <unk>.
Conor: <unk> is not an option until September of this year, it's just a function of being a new public company and we always look at our cost of capital, whether it's debt, whether it's equity everyday versus.
Conor: Every opportunity we're looking at so if there was an opportunity whether it's debt or equity we saw and we had a compelling investment opportunity I think we would look to that option and there are a number of alternatives. We can look forward to raise capital today.
Conor: I'd just tell you again, we're always looking at the source and the use it's never just saying here's a source we liked the price.
But there's nothing in guidance today for call it an acceleration of capital investment or capital funded with equity. We'll just we'll just see how it plays out over the course of the year.
Conor: Okay, and then just lastly, I'm just curious.
Conor: I know youre again, and sort of capital deployment mode and have the capacity on the balance sheet to fund.
Conor: Our investments.
Speaker Change: All on balance sheet, but I'm, just curious where you stand on on joint ventures.
Speaker Change: Open to exploring partnerships previously for the right type of partners the right type of.
Speaker Change: <unk> timeframe and so forth is that something that you'd be open to.
Speaker Change: At <unk> in a way to further leverage our equity and maybe help accelerate sort of the increasing scale for the platform a little bit more quickly.
Speaker Change: Got it David I would say that our.
Speaker Change: Our happiness and a very simple strategy with a simple plan and a simple capital structure.
Speaker Change: It makes us very confident that we've got the right strategy right now I think our desire to come to make that more complex would be extremely low.
Speaker Change: We've had a number of investors.
Speaker Change: Talk about the idea of doing something together I think frankly, we have a great runway ahead of US we've got a balance sheet that matches our plan and so I just don't see the use for making our platform any more complicated than it is today.
Speaker Change: Okay alright, thank you.
Speaker Change: Thanks Todd.
Speaker Change: The next question comes from Paulina Rojas with Green Street. Your line is open.
Paulina Rojas: Good morning.
Speaker Change: You mentioned expecting to close off with tissue with about 500 level at year end.
Speaker Change: One <unk> you only closed around $400 million.
Speaker Change: Guidance.
Speaker Change: Thanks, everybody put you slightly prudent.
Speaker Change: But my question is are there any specific facts.
Speaker Change: But you can believe that strong for.
Speaker Change: For Q shouldn't be extrapolated into 2025.
Speaker Change: Good morning, Pauline it's David it's a little hard to hear you, so I'm going to I'm going to take a crack at it and you can tell me if we miss anything but.
Speaker Change: Yes, we recognize the fact that we have earmarked $500 million of external acquisitions as our target annually in the first quarter out of the gate, we exceeded that so I think what youre asking is why can't we simply extrapolate the fourth quarter.
Speaker Change: And I would just say we've been public for 120 days and.
Speaker Change: During that 120 days, where we happen to have a quarter in which we closed a lot of real estate.
Speaker Change: We don't really know what the eventual pipeline should be or will be and so I think our comfort level, saying $500 million still seems like an achievable goal that were confident with could we exceed that we probably could but are we comfortable with 500, yes. We are I still think that keeps us in the acquisition mode of maintaining a precision on.
Speaker Change: High quality properties.
Speaker Change: Thank you.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: Your strategy.
Speaker Change: Centered around owning assets located in high traffic and transactions in affluent suburbs.
Speaker Change: So as you evaluate potential acquisitions can you.
Speaker Change: And sort of hard benchmarks in terms of median household income.
Speaker Change: We're in daily traffic for the centers that you are considering.
Paulina Rojas: Thank you that was really interest it's a really interesting question I would say Paulina a.
Speaker Change: A couple of years ago, we had a fairly simple chart as to what we were looking for to sort through deal flow because as per one of the previous questions.
Speaker Change: Looking at 10 times the number of assets that we bought it's a lot of real estate underwriting. So we started with.
Speaker Change: A chart of what we thought were the most important metrics.
Speaker Change: What we've learned over time is that.
Speaker Change: They're all important but theyre not necessarily a hard yes, or a hard now.
Speaker Change: If I look at what we've eventually bought over the years household income is very important there is no question that it does better during a recession.
Speaker Change: Theres, just a lot more air and running Theres lot more discretionary spending which means there's more types of tenants that want to be in those submarkets. So we're more focused on the Zip code or the.
Speaker Change: The tap score if you'd like to use that.
Speaker Change: That tells us the consumer health in that market and that might be in a relatively small city and it might be in a large city.
Speaker Change: The second thing we tend to look at is traffic driving by and I think the average daily traffic on the road is a really important fundamental differentiator you can buy on acreage strip centers that are buried inside of communities with low traffic counts, but they just don't generate the tenant demand of having that same property type up against.
Speaker Change: Erode that has a strong traffic intersections, so I would say between demographics and.
Speaker Change: Daily traffic on the intersection of those are probably two of the most critical.
Speaker Change: Thank you.
Nina: Thanks Nina.
Speaker Change: Okay.
Speaker Change: Your next question comes from Kevin Kim with <unk> Bank.
Speaker Change: <unk> is open.
Speaker Change: Hey, Thanks, Kevin.
Speaker Change: Just a quick question on G&A.
How much more G&A is being allocated to operating expenses than previously when we go back to the model, we will make sure that we can reconcile.
Speaker Change: Previous estimate.
Speaker Change: Hey, Kevin it's Conor so its $300000 of G&A is allocated to opex in the fourth quarter, that's consistent with our guidance from the September 17th pre spin off deck.
Speaker Change: That number should be pretty static over the life of the shared services agreement now once that agreements over you could see the composition change a little bit at the margin, but in terms of total G&A, it's a pretty static number.
Speaker Change: Okay.
Speaker Change: And thats for the quarter right.
Speaker Change: Im sorry, Youre exactly right, so it's $300000 per quarter about $1 $2 billion per year.
Speaker Change: And can you just help me understand I understand the expense going to fight but.
Speaker Change: <unk> income accounting for it.
Speaker Change: Where does that stand point.
Speaker Change: Referring to the gross up.
Speaker Change: Yes.
Speaker Change: So effectively it's the value of the services, we are receiving from site versus the value of the fees paid to them and the gross up as horrifically tortured calculation to compare the two effective value streams that number will move around over time, depending on the relative size of both curve in sight and the services provided in both directions.
Speaker Change: So that's why we've excluded it from guidance G&A guidance going forward the critical pieces to flag and understand is the net income is zero per quarter.
Speaker Change: So there might be quarters, where the gross up expenses $1 million in the course of income is a million dollars, but it's always a push.
Speaker Change: In terms of net impact to curb post termination of the shared service agreement that goes away. So it is unfortunate.
Speaker Change: Tortured accounting noise that we have for the first couple of years of life of curve and then it goes away, but again I'll just reiterate it nets to zero over the course of the each quarter and year.
Speaker Change: Okay. Thank you.
Speaker Change: Youre welcome.
Speaker Change: This concludes the question and answer session I'll turn the call to David Lukes for closing remark.
David Lukes: Thank you everyone for joining and we'll talk to you next quarter.
Speaker Change: This concludes today's conference call. Thank you for joining you may now disconnect.