Q2 2025 Curbline Properties Corp Earnings Call
Speaker: Corp.
Operator: Second Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. And if you would like to ask a question during this time, please press star 1 on your telephone keypad.
Hello and welcome to the Curbline Properties Corp. Second Quarter 2025 Earnings Conference Call.
All lines have been placed on mute to prevent any background noise.
Stephanie Rouse de Perez: I would now like to turn the conference over to Stephanie Rouse de Perez, Vice President of Capital Markets. You may begin. Thank you.
After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, please press *1 on your telephone keypad.
I would now like to turn the conference over to Stephanie Perez de Rouse, Vice President of Capital Markets. You may begin.
Stephanie Rouse de Perez: Good evening and welcome to Curbline Properties' second quarter 2025 earnings conference call. Joining me today are Chief Executive Officer David Lukes and Chief Financial Officer Conor Fennerty. In addition to the press release distributed earlier, we have posted our quarterly financial supplement and slide presentation on our website at Curbline.com, which are intended to support our prepared remarks during today's call. 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.
Thank you. Good evening and welcome to curb line properties. Second quarter 2025 earnings conference call. Joining me today are chief executive officer, David, Luke's and Chief Financial Officer. Connor Kennedy, in addition to the press release. Distributed earlier, we have posted our quarterly, Financial supplements and flood presentation on our website at Curb line.com, which are intended to support our prepared remarks during today's call.
Please be aware that certain of our statements today may contain forward-looking statements within the meeting of Federal Security laws.
Stephanie Rouse de Perez: Additional information may be found in our earnings press release and in our filings with the SEC, including our most recent reports on Forms 10-K and 10-Q. In addition, we will be discussing non-GAAP financial measures on today's call, including FFO, Operating FFO, and Same Property Net Operating Income.
Stephanie Rouse de Perez: Descriptions and reconciliation 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.
David Lukes: At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes. Good evening and welcome to Curbline Properties second quarter conference call. The last four months have been incredibly active period for the company that highlight the significant growth potential embedded in Curbline. Specifically, we acquired $415 million of properties in the second quarter and third quarter to date, reported our highest quarterly new leasing volume since we began tracking, and have raised, or are in the process of raising, $300 million of debt capital. And importantly, in terms of investments, our team on the ground are creatively sourcing and reviewing a larger pool of opportunities than ever before, including both marketed and off market deals.
These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from our forward-looking statements. Additional information may be found in our earnings press release and in our filings with the SEC, including our most recent reports on Forms 10-K and 10-Q. In addition, we will be discussing non-GAAP financial measures on today's call, including Funds From Operations (FFO), Operating FFO, 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, it is my pleasure to introduce our Chief Executive Officer, David Lukes.
Good evening and welcome to Curbline Properties. Second quarter conference call.
The last four months have been an incredibly active period for the company that highlights the significant growth potential embedded in Curbline.
Specifically, we acquired 415 million of properties in the second quarter and third quarter to date reported our highest quarterly new leasing volume since we began tracking.
and have raised or are in the process of raising $300 million of debt capital.
David Lukes: In many cases, working directly with owners where we can come to an agreement on assets that are consistent with our portfolio characteristics. More on that later.
And importantly, in terms of investments, our team on the ground is creatively sourcing and reviewing a larger pool of opportunities than ever before, including both marketed and off-market deals.
David Lukes: I'd like to start by thanking our incredible team for achieving the results that we reported tonight that support our differentiated investment strategy, 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 underpinned by the economics of the convenience property type, which is our exclusive focus, the large addressable market in front of us, and our unmatched balance sheet that is aligned with the company's business plan. These ingredients clearly position Curbline to outperform in a variety of macro environments.
In many cases, we are working directly with owners where we can come to an agreement on assets that are consistent with our portfolio characteristics. More on that later.
I'd like to start by thanking our incredible team for achieving the results that we reported tonight, which support our differentiated investment strategy capable of generating double-digit earnings and cash flow growth well above the read average for a number of years to come.
This growth is underpinned by the economics of the convenience property type, which is our exclusive focus.
The large addressable market in front of us and our unmatched balance sheet that is aligned with the company's business plan.
David Lukes: I'll walk through operations first and then conclude with more details on acquisitions before turning it over to Conor to talk more specifically about the quarter, the increase in expectations for 2025 outlook, and our balance sheet. We began investing in convenience properties almost seven years ago, recognizing the strong financial performance of the small format asset class, both within the retail sector and the broader real estate industry. Demand for the right locations and our property type has produced two noteworthy and differentiated outcomes. First, the capital efficiency of the business is superior to many other retail formats. Desirable small format space not only has high tenant renewal rates, but is also inexpensive to prepare for the next tenant in the event there's vacancy.
These ingredients clearly position Curbline to outperform in a variety of macro environments.
I'll walk through operations first and then conclude with more details on acquisitions. Before turning it over to Connor to talk more specifically about the quarter, the increase in expectations for the 2025 outlook, and our balance sheet.
We began investing in convenience properties almost seven years ago, recognizing the strong financial performance of the small format asset class both within the retail sector and the broader real estate industry.
Demand for the right locations in our property type has produced two noteworthy and differentiated outcomes.
First, the capital efficiency of the business is superior to many other retail formats.
David Lukes: When compared to larger buildings that are generally purpose built with longer construction periods, the capital efficiency of our simple business is unique. In other words, less capital is needed to generate the same organic growth rate as the rest of the retail real estate industry and helps generate compounding cash flow growth for Curbline. To that point, in the second quarter, CapEx as a percentage of NOI for Curbline was just over 7%, which led to almost $25 million of retained cash before distribution. As Curb scales, this retained cash flow will increase, providing a durable source of capital that's outsized relative to the company's asset base.
Desirable small-format space not only has high tenant renewal rates, but is also inexpensive to prepare for the next tenant in the event of a vacancy.
When compared to larger buildings that are generally purpose-built with longer construction periods, the capital efficiency of our simple business is unique.
As the rest of the retail real estate industry helps generate compounding cash flow growth for Curbline.
To that point in the second quarter, capex as a percentage of NOI for Curbline was just over 7%, which led to almost $25 million of retained cash before distributions.
David Lukes: Boosting Earnings, and Cash Flow. The second outcome is that our space is highly liquid because of the number of tenants that are willing to take a one to 2000 square foot shop unit is significantly higher than for purpose built large format unit. This liquidity allows the property type to keep up with inflation remarkably well, improves tenant diversification, reducing credit risk concentration, and provides an opportunity to drive rent growth as we seek to maximize rental income given the productivity of the unit size. The strength in demand for our units was highlighted by the depth and the breadth of second quarter leasing volume with almost 50,000 square feet of new leases signed, which is our highest level since we began tracking operating metrics for the Curbline portfolio.
As curb scales, this retained cash flow will increase. Providing a durable source of capital. That's outside relative to the company's asset base.
Boosting earnings and cash flow.
The second outcome is that our space is highly liquid because the number of tenants willing to take a 1,000 to 2,000 square foot shop unit is significantly higher than for purpose-built large format units.
This liquidity allows the property type to keep up with inflation. Remarkably, well,
Improved tenant diversification reduces credit risk concentration and provides an opportunity to drive rent growth. As we seek to maximize rental income, we are considering the productivity of the unit size.
David Lukes: New deals included leases with Chick-fil-A, Just Salad, Chase, Club Champion, and a variety of other service users. Activity remains wide in terms of tenants seeking to lease space and includes primarily national service tenants, banks, medical and wellness operators, and quick service restaurants. Net leasing volume pushed the company's lease rate up to 96.1% sequentially, among the highest in the sector, and drove 22% blended straight-line leasing spreads for the trailing 12-month period. The economics of our business, a high return on leasing capital, and the widest pool of tenants to work with, along with significant national exposure, position Curbline for absolute and relative success throughout a cycle.
The strength and demand for our units was highlighted by the depth and breadth of second quarter leasing volume, with almost 50,000 square feet of new leases signed. This is our highest level since we began tracking operating metrics for the Curbline portfolio.
New deals included leases with Chick-fil-A, Just Salad, Chase Club Champion, and a variety of other service users.
Activity remains wide in terms of tenants seeking to lease space and includes primarily national service. Tenants include banks, medical and wellness operators, and quick-service restaurants.
Net leasing volume pushed. The company's lease rate reached up to 96.1% sequentially, which is among the highest in the sector, and drove 22% blended straight-line leasing spreads for the trailing 12-month period.
David Lukes: Shifting to the investment side, which is the second driver of Curbline's growth. Part of the thesis behind the Curbline spinoff was the large addressable yet fragmented market that had not been institutionalized. Not every asset is a fit for the company, but we believe there's 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. To that point, since the company spinoff, Curbline has acquired over $750 million of assets and demonstrated now for five straight quarters the depth and liquidity of the asset class with acquisition volume of over $100 million per quarter.
The economics of our business—a high return on leasing capital and the widest pool of tenants to work with—along with significant national exposure, positioned Curbline for absolute and relative success throughout a cycle.
Shifting to the investment side, which is the second driver of career blinds growth.
Part of the thesis behind the curb line spin-off was a large addressable yet fragmented market that had not been institutionalized.
Not every asset is a fit for the company, but we believe there is a significant opportunity set of properties that 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: Our original 2025 guidance range included $500 million of convenience acquisitions for the year, which equates to around $125 million per quarter. We've obviously significantly exceeded that pace with the acceleration in activity, a function of our marketing efforts, as we've seen a larger number of brokers and individual sellers proactively engage with us. This is a distinct change from the pre-spin environment. The situation also allows us to work directly with sellers on a timeline and a process that works best for both parties and has increased the visibility and the volume of our pipeline of investment.
To that point, since the company spin-off, Curbline has acquired over $750 million in assets and demonstrated, for five straight quarters, the depth and liquidity of the asset class, with acquisition volume of over $100 million per quarter.
Our original 2025 guidance range included $500 million of convenience acquisitions for the year, which equates to around $125 million per quarter.
We've obviously significantly exceeded that pace with the acceleration in activity.
A function of our marketing efforts, as we've seen a larger number of brokers and individual sellers proactively engage with us.
This is a distinct change from the Press pin environment.
David Lukes: To this point, just this past week, we closed on a 23-property portfolio for $159 million. Over the last several years, we developed a relationship with the principles of one of the larger and sophisticated convenience center owners in the country. That relationship led to a joint effort to structure a transaction of individually selected properties that work for both sides. The assets acquired have characteristics consistent with our portfolio and our investment thesis, and are located primarily throughout the southeastern United States in markets that we know well. While portfolios remain unique and difficult to find in the convenient space, our ability to source and structure these unique opportunities further differentiates Curbline as the trusted partner for owners of high-quality assets seeking liquidity.
The situation also allows us to work directly with sellers on a timeline and a process that works best for both parties and is increased, the visibility, and the volume of our pipeline of Investments.
To that point, just this past week, we closed on a 23-property portfolio for $159 million.
Over the last several years, we developed a relationship with the principals of one of the larger and more sophisticated convenience center owners in the country. That relationship led to a joint effort to structure a transaction of individually selected properties that work for both sides.
The assets acquired have characteristics consistent with our portfolio and our investment thesis, and are located primarily throughout the Southeastern United States in markets that we know well.
David Lukes: For the second quarter, Curbline acquired 19 properties for $155 million via 17 separate transactions. Investments continue to be concentrated in the affluent markets the Curbline currently operates in already, including Houston, Chicago, Phoenix, and Atlanta. However, we continue to make acquisitions in new sub-markets that share the key characteristics we seek, including our first properties in Dallas and the New York Metro area, where we hope to scale long-term. Average household incomes for the second quarter investments were nearly $137,000, with a weighted average lease rate of over 96%. Highlighting our focus on acquiring properties where renewals and lease bumps drive growth without significant capex.
While portfolios remain unique and difficult to find in the convenient space, our ability to source and structure these unique opportunities further differentiates Curbline as the trusted partner for owners of high-quality assets seeking liquidity.
For the second quarter, Curbline acquired 19 properties for $100.155 million via 17 separate transactions.
Investments continue to be concentrated in the affluent markets. The Curbline currently operates in areas including Houston, Chicago, Phoenix, and Atlanta.
However, we continue to make acquisitions in new sub-markets that share the key characteristics. We seek to include our first properties in Dallas and the New York metro area, where we hope to scale long term.
David Lukes: Before turning the call over to Conor, I do want to highlight one of the key differentiating aspects of the Curbline spin-off, which is our balance The net cash position at quarter end matches the business plan with almost $430 million of cash and over $1 billion of liquidity, including financings expected to close in the third quarter. I could not be more opportunistic about the opportunity ahead of us.
Police rate of over 96%, highlighting our focus on acquiring properties where renewals and lease bumps drive growth without significant capex.
Before turning the call over to Connor, I do want to highlight one of the key differentiating aspects of the Curbline spin-off, which is our balance sheet.
The net cash position at quarter end matches the business plan, with almost $430 million of cash and over $1 billion of liquidity, including financing expected to close in the third quarter.
Conor Fennerty: And with that, I'll turn it over to Thanks, David. I'll start with second quarter earnings and operations before shifting to the company's 2025 guidance raised and then concluding with the balance sheet. Second quarter results were ahead of budget, largely due to higher than forecast NOI, driven by stronger base rent, recoveries, and other income. NOI was up over 8% sequentially, driven by organic growth, along with acquisition. Outside of the quarterly operational outperformance and some upside from lower G&A and higher interest income, there are no other material callouts for the quarter, highlighting the simplicity of the Curbline Income Statement and business plan.
I could not be more opportunistic, about the opportunity ahead of us. And with that, I'll turn it over to Conor.
Thanks David.
I'll start with the second quarter, earnings and operations before shifting to the company's 2025 guidance raised.
and then concluding with the balance sheet,
Second quarter results were ahead of budget, largely due to higher than forecast NOI.
Driven by stronger base rent, recoveries, and other income.
Noi was up over 8% sequentially, driven by organic growth along with acquisitions.
Outside of the quarterly operational outperformance and some upside from lower GNA and higher interest income, there are no other material callouts for the quarter highlighting the simplicity of the Curbline income statement and business plan.
Conor Fennerty: In terms of operating metrics, as David noted, leasing volume in the second quarter was extremely strong even after adjusting for the growth in the portfolio. And given the current pipeline, we expect another strong quarter in terms of volume and spreads in the third quarter. However, as we've noted each quarter since the spinoff, with this small but growing denominator, operating metrics will remain volatile and be heavily impacted by acquisition. That said, overall leasing activity remains elevated, and we remain encouraged by the depth of demand for space, which we expect to translate into trailing 12-month spreads over the course of the year, consistent with 2024.
In terms of operating metrics, as David noted, leasing volume in the second quarter was extremely strong, even after adjusting for the growth in the portfolio.
And given the current pipeline, we expect another strong quarter in terms of volume and spreads in the third quarter.
However, as we've noted each quarter since the spin-off,
With this small but growing denominator, operating metrics will remain volatile and be heavily impacted by acquisitions.
Conor Fennerty: It is 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 units vacant at the time of acquisition. Same property NOI was up 6.2% for the quarter and 4.4% year-to-date, driven in part by the aforementioned operational outperformance. Importantly, this growth was generated by limited capital expenditure. with second quarter CapEx as a percentage of NOI of just over 7%. For the full year, we continue to expect CapEx as a percentage of NOI to remain below 10%, though the third quarter is expected to be higher than year-to-date levels due to the timing of rent commencements and resulting tenant allowance.
That said, overall leading activity remains elevated, and we remain encouraged by the depth of demand for space, which we expect to translate into trailing 12-month spreads over the course of the year, consistent with 2024.
It is important to note that curves, 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 units vacant at the time of acquisition.
Same property and AI were up 6.2% for the quarter and 4.4% year-to-date, driven in part by the aforementioned operational outperformance.
Importantly, this growth was generated by limited capital expenditures, with second quarter capex as a percentage of NOI of just over 7%.
Conor Fennerty: Moving to our outlook for 2025, we are raising OFFO guidance to a range between $1 and $1.03 per share. The increase is driven by better-than-projected operations. along with the pacing and visibility on acquisitions that David mentioned. Underpinning the midpoint of the range is one, approximately $700 million of full-year investments funded roughly 50-50 with debt and cash on hand.
For the full year, we continue to expect capex as a percentage of NOI to remain below 10%. However, the third quarter is expected to be higher than year-to-date levels due to the timing of rent commencements and resulting tenant allowances.
Moving to our outlook for 2025, we are raising our guidance to a range between $1.00 and $1.03 per share.
The increase is driven by better-than-projected operations.
Along with the pacing invisibility on acquisitions that David mentioned.
Conor Fennerty: 2. A 4% return on cash, with interest income declining over the course of the year, as cash is invested, and 3. G&A of roughly $32 million, which includes fees paid to site centers as part of the Shared Service Agreement. You will note that in the second quarter, we recorded a gross up of $625,000 of non-cash G&A expense, which was offset by $625,000 of non-cash other income. This gross-up, which is a function of the Shared Service Agreement and nets to zero net income, will continue as long as the agreement is in place and is excluded from the aforementioned G&A target.
Underpinning the midpoint of the range is approximately $700 million for a full year, with investments funded roughly 50/50 with debt and cash on hand.
2, a 4% return on cash with interest income declining over the course of the year as cash is invested, and 3 DNA of roughly 32 million, which includes fees paid to site centers as part of the shared service agreement.
You will note that in the second quarter, we recorded a gross up of $625,000 of non-cash DNA expense, which was offset by $625,000 of non-cash other income.
This grows up, which is a function of the shared service agreement, and that's to zero. Net income will continue as long as the agreement is in place and is excluded from the aforementioned GNA target.
Conor Fennerty: In terms of same property NOI, we continue to forecast growth approximately 2.8% at the midpoint in 2025. But there are a few important things to call out. similar to our leasing spreads, the same property pooling, but small, and it's comping off of 2024's performance. and it includes only assets owned for at least 12 months as of December 31, 2024, resulting in a larger, non-same-property pool that is growing at a faster rate on an annual basis driven by an expected increase in occupancy. Additionally, uncollectible revenue was a source of income in both the third and fourth quarters of 2024.
In terms of same property, noi we continue to forecast growth of approximately 2.8% at the midpoint in 2025.
But there are a few important things to call out.
Similar to our leasing spreads, the same property pooling but smaller, and it's coming off of 2024 upper performance.
And it includes only assets owned for at least 12 months as of December 31, 2024, resulting in a larger non-core property pool that is growing at a faster rate on an annual basis, driven by an expected increase in occupancy.
Conor Fennerty: So while base rent growth is expected to accelerate into the third quarter from the second quarter, uncollectible revenue will be a significant year-over-year headwind despite limited year-to-date bad debt activity. In terms of moving pieces between the second and third quarter. Due to the timing of acquisitions and debt capital raised, interest expense is set to increase to about $4 million in the third quarter, and interest income is forecast to decline also to about $4 million. Those two factors total roughly a four cent per sharehead.
Additionally, uncollectible revenue was a source of income in both the third and fourth quarters of 2024.
So, while base rent growth is expected to accelerate into the third quarter from the second quarter.
Today, bad debt activity.
In terms of moving fees between the second and third quarter.
Due to the timing of acquisitions and debt capital raised, interest expense is set to increase to about $4 million in the third quarter, and interest income is forecast to decline to about $4 million.
Conor Fennerty: Additional details on 2025 guidance and expectations can be found on page 12 of the earnings slide.
Those two factors total roughly a 4 cent per share headwind.
Conor Fennerty: Ending on the balance sheet, Curbline was spun off with a unique capital structure that positions the company to execute on its business plan. It differentiates Curb from the largely private buyer universe, acquiring convenience properties. In the second quarter, the company received its inaugural investment grade credit rating from Fitch, further separating itself from other bidders. The rating, in addition to resulting in lower credit facility borrowing costs, allowed the company to tap the private placement market in June with $150 million closed and expected to fund into September. On top of that, in July, the company raised an additional $150 million via new term loans.
Additional details on 2025 guidance and expectations can be found on page 12 of the earnings slides.
Ending on the balance sheet, Curbline was spun off with a unique capital structure that positions the company to execute on its business plan. This differentiates Curb from the largely private buyer universe acquiring convenience properties.
In the second quarter of the company, we received our inaugural investment grade credit rating from Fitch, further separating ourselves from other bidders.
The rating, in addition to resulting in lower credit facility borrowing costs, allowed the company to tap the private placement market in June with a $150 million closed transaction, expected to fund into September.
Conor Fennerty: The $300 million of expected aggregate proceeds have a weighted average coupon of 5.1% and 5.7 years of duration, immediately laddering Curbline's maturity ladder and funding second half acquisitions according to plan. The net result is that the company is expected to end the year with over $300 million of cash on hand, assuming $700 million of acquisitions. and a debt to EBITDA ratio less than 1x, providing substantial dry powder and liquidity to continue to acquire assets and scale. resulting in significant earnings and cash flow growth well in excess of the REIT average.
On top of that, in July, the company raised an additional $150 million via a new Term Loan.
The hundred million dollars of expected aggregate proceeds, have a weighted average coupon of 5.1%. And 5.7 years of duration, immediately latering curb lines, maturity ladder, and funding second half Acquisitions, according to plan.
The net result is that the company is expected to end the year with over $300 million of cash on hand.
Assuming $700 million in acquisitions and a debt-to-EBITDA ratio of less than 1x, we are providing substantial dry powder and liquidity to continue to acquire assets and scale.
David Lukes: With that, I'll turn it back to David. Thank you, Conor.
Resulting in significant earnings and cash flow growth—well in excess of 3, on average.
Operator: Operator, we are ready to take questions. Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. Please ensure that your phone is not on mute when called upon. Thank you.
With that, I'll turn it back to David.
Thank you, Conor Fennerty. We are ready to take questions.
Thank you. If you would like to ask a question, please press *1 on your telephone keypad. If you would like to withdraw your question, simply press *1 again.
Ronald Kamdem: Your first question comes from Ronald Kamdem with Morgan Stanley. Your line is open. Hey, just on the acquisitions pace and pipeline, obviously a pretty large portfolio in there. I just love if you one can comment just a little bit on sort of cap rate trends. And it does seem like there's more portfolios that you guys are looking at, maybe even more than the business plan anticipated. I just wonder if you could comment on that as well, and how you're building out those relationships.
Please ensure that your phone is not on mute when called upon. Thank you.
Your first question comes from Ronald Campton with M. Morgan Stanley. Your line is open.
Hey, um, just, uh, on the acquisitions.
David Lukes: Sure. Good afternoon. Evening, Ron. The cap rates, I would say, have not changed dramatically. If you look at our year to date, we're blending to about a six cap on forward 12 month NOI. A lot of that depends on the pool that you're measuring as we go through the year. Even of the assets that we bought, we've ranged from low fives to high sixes. And a lot of that really just depends on whether there's vacancy. So I would say the cap rate trends are still fairly sticky. In terms of finding more product, there's a tremendous amount that we've downloaded and worked on with the brokerage market.
Pace and pipeline obviously a pretty large portfolio in there. I just love a view 1 can come in just a little bit on sort of cap rate trends and it does seem like there's more portfolios that you guys are looking at maybe even more than the business plan. Anticipated. I just wonder if you could comment on that as well and how you're building out those relationships, thanks.
Sure, uh, good afternoon evening Ron, um, the cap rates. I would say have not changed dramatically. Um, if you look at our year-to-date, we're blending uh, to about a 6 cap on forward 12-month. Noi, um, a lot of that depends on the pool that you're measuring as we go through the year. Um, even of the assets that we bought, we've range from low fives to high sixes. And a lot of that, really just depends on whether there's vacancy. Um,
David Lukes: But I would say as the year goes on, we've definitely had more and more off-market buyers. I would say right now about half of our pipeline is marketed and the other half is off-market. So I agree with you. One of our jobs going forward is to continue to build relationships with people that have been in this business for a long time and have built some pretty enviable portfolios.
So I would say the cap rate trends are are still fairly sticky, um, in terms of, um, of finding more product. There's a tremendous amount that we've downloaded and and worked on uh with the brokerage Market, but I would say, as the year goes on, we've definitely had more and more um off-market buyers. I would say right now, about half of our pipeline is is marketed and the other half is off-market. Um, so I agree with you 1 of our jobs going forward is to continue to build relationships with people that have been in this business for a long time and have built some pretty enviable portfolios.
Ronald Kamdem: Great.
Ronald Kamdem: And then my second question was just, it seemed like, you know, gain occupancy sequentially as well. Just any commentary on tariff impact, what you're hearing sort of from tenants, doesn't seem like it's having an impact. But I did see the leasing spreads. New lease was down a little bit this quarter. Just any comments on that?
Great. And then my, uh, my second question was just, it seemed like, you know, gained occupancy sequentially as well. Um, just any commentary on tariff impact? What you're hearing sort of from tenants doesn’t seem like it’s having an impact. Um, but I did see the leasing spreads; new lease was down a little bit this quarter. Just any comments on that? Thanks.
I'm happy to start on the leasing spreads. As I said in my prepared remarks, we continue to expect leasing spreads for 2025 to be consistent with 2024. I would just point to the fact that there will probably be a pool shift. You know, we've got small.
Denominator across the board, not to sound like a broken record. So we should just see more volatility in our quarterly operating metrics than you would from some of our larger peers. But there's been no change in either the tone of conversation surrounding tariffs, um, and no resulting impact to leasing economics or volume.
Ronald Kamdem: Great, that's it for me. Thanks so much. Thanks, Ron.
Great. That's it for me. Thanks so much.
Craig Mailman: The next question comes from Craig Mailman with Citigroup. Your line is open. Hey, everyone. Just on the portfolios, are you guys, I guess, could you just comment on kind of the process here? Are these ones that you can cherry pick, and kind of put together the portfolio you want?
Thanks Ron.
The next question comes from Craig Mailman with Citigroup. Your line is open.
Are you guys?
David Lukes: Or should we expect if, you know, portfolio acquisitions ramp a bit to see some dispositions as you guys, you know, get rid of some assets that really just don't fit the criteria, but you had to take as part of the Good evening, Craig. Let me start with a punchline so that I can reverse into this. We do not have a disposition pipeline. We do not expect to be doing capital recycling, and we're not buying anything that we don't want to own over a long Most of what we're buying, if you look on the SUP and you kind of look through, you know, what our acquisitions have been, they're mostly individual acquisitions.
I guess, could you just comment on kind of the process here? Are these ones that you can cherry-pick and kind of put together the portfolio you want, or should we expect if, you know, portfolio acquisitions ramp a bit to see some dispositions as you guys, you know, get rid of some assets that really just don't fit the criteria but you had to take as part of the deal?
Hey, good evening, Craig. Um, let me start with the punch line so that I can reverse into this. We do not have a disposition pipeline; we do not expect to be doing capital recycling; and we're not buying anything that we don't want to own over the long term.
Craig Mailman: There are some owners throughout the country that have a similar thesis to us and have bought things that are very similar to what we want to buy. And in some cases, they're willing to sell some or all of them to us. So far, we've done three portfolios. This is certainly the largest one, but we had a six-pack and a three-pack previously. In all of those cases, they were individually selected and did not represent 100% of what that seller owned. Appreciate that. And then, just as you guys do continue to build out the portfolio, I mean, you have some markets that are still kind of single asset markets.
Um, most of what we're buying, uh, if you look on the sub and you kind of look through, you know what our acquisitions have been, they're mostly individual acquisitions. There are some owners throughout the country that have a similar thesis to us and have bought things that are very similar to what we want to buy. And in some cases, they're willing to sell some or all of them to us. Um, so far we've done three portfolios. This is certainly the largest one, but we had a six-pack and a three-pack previously. Um, and all of those cases, they were individually selected and did not represent 100% of what that seller owned.
David Lukes: What's the current thought process on how much critical mass that you would look for to enter a market? It's a really good question, Craig. that from an operating perspective, we really don't have a challenge with operating in a market where we're kind of starting with one and slowly growing. It has more to do with how much we think we could get into that market. So said differently, we're a little light right now in the Northeast and the Pacific Northwest, we would like to be bigger. So you may see us buy one property in a dominant city with the understanding and belief that we're going to continue to do that.
Okay, um, I appreciate that. And then, just as you guys continue to build out the portfolio, I mean you have some markets that are still kind of single-asset markets. What’s the current thought process on how much critical mass that you would look for?
Uh, to enter a market.
It's a really good question, Craig. Um,
Craig Mailman: And that's what you've seen in New York and in Dallas. Those are markets that we expect to be able to be competitive and grow the portfolio. But in terms of operating, you remember, these properties don't have a lot of touch from a property management standpoint. And from an even a leasing standpoint, it's really a renewals business. So I would say that the operating leverage of having scale is not quite as important as it is learning the market and understanding it and want to find the right properties. Great. Thanks, Greg.
From an operating perspective. We really don't have a challenge with operating um, in a market where we're kind of starting with 1 and slowly growing. It has more to do with um how much we think we could get into that market. So set differently. We're a little light right now in the Northeast and the Pacific Northwest we would like to be bigger. So you may see us by 1 property in a dominant city with the understanding and belief that we're going to continue to do that. Um, and that's what you've seen in uh, in the New York and in Dallas, um, those are markets that we expect to be able to be competitive and, and grow the portfolio. But in terms of operating, you remember, these properties don't have a lot of touch from a property management standpoint and from an even a leasing standpoint. It's really a renewals business. So I would say that the um, the operating leverage of having scale is not quite as important as it is learning the market and understanding it and want to find the right properties.
Great, thanks.
Todd Thomas: The next question comes from Todd Thomas of KeyBank Capital Markets. Your line is open. Hi, thanks. First, I just wanted to follow up on the acquisitions in the quarter and the year to date. I think, David, you said, year-to-date, the cap rates are blending. about a 6%. I think that's down a little bit from last quarter, around six and a quarter. And I'm just curious if there's any, you know, outsized embedded mark-to-market opportunities versus the balance of the curb portfolio. Acquisition. Is there any expected... change at all in the CapEx investment required across these deals that's different than the CapEx profile.
Thanks Greg.
The next question comes from Todd Thomas of KeyBanc Capital Markets. Your line is open.
David Lukes: as it pertains to. Yep.
Hi, thanks. Um, first, I just wanted to follow up on uh, the Acquisitions and the quarter and the the year to date activity, the portfolio deal in July. Um, I think David you said year to date, the cap rates are blending to about a 6%. I think that's down a little bit from from last quarter, around 6 and a quarter. Um, and I'm just curious if there's any, you know, outsized embedded Mark to Market opportunities versus the balance of the curb portfolio on on these uh Acquisitions. And is there any expected? Um, you know change at all on the capex investment required across uh these deals that's different than the capex profile of the, the current portfolio as a as a pertains to um, you know, sort of um
Uh, you know, a little bit of redevelopment or some, uh, leasing capital.
David Lukes: Good evening, Todd. You are correct. In the previous two quarters, we've highlighted that our closings to date average a six and a quarter. We're saying that year to day, it's a six. So that obviously means that the pool has changed a little bit, but we've bought quite a bit in the last quarter and a half as well. So the cap rate difference has everything to do with whether there's vacancy, anything that we can find that has a tenant that's expiring. In a number of cases, we've actually asked the seller to not lease that space and let the tenant expire.
David Lukes: That's primarily because there is a pretty big market right now with vintage, older assets and tenants that are losing term. So where a seller might want to tie up that tenant, thinking they're going to get better value for long term. We have a lot of tenant relationships. You look at our top 25 tenants. Those are people we're calling all the time and showing them what we're buying. So in many cases, we'd like to have a little bit of vacancy that we can work with and make sure that we've got the credit and the long term tenant roster that we want to see.
Yep. Uh good evening Todd. You are correct in the previous 2 quarters, we've highlighted that our our closing today, average just 6 and a quarter. We're saying that year to date, it's a 6, So that obviously means that the pool has changed a little bit. Um, but we've bought quite a bit in the last quarter and a half as well. So, um, the cap rate difference has everything to do with whether there's vacancy, um, anything that we can find that has a tenant that's expiring in a number of cases. We've actually asked the seller to not lease that space and let the tenant expire. Um, that's primarily because there is a pretty big Mark to market right now with vintage older assets, uh, and tenants that are losing terms.
David Lukes: So in certain quarters, if you see the cap rate go down, it's not necessarily due to market factors as much as it is vacancy. And I think that's probably more consistent with this past quarter. That's not to say that cap rates might go down. I think that has a lot more to do with, you know, how much competition we see in the bidding. Ten probably has a lot to do with rates. But at this point, I think it's primarily mark to mark and vacancy opportunities that are making that that gap.
David Lukes: And just on the capital needs, there is no plan for for redevelopment or expansion of our construction efforts. And in terms of CapEx percentage in Hawaii, no change in terms of a long term bogey for less than 10 percent of CapEx percentage in Hawaii. A big piece of that one is not having redevelopment. But the second piece is just the structural nature of the business in the sense that, you know, our payback period on leasing volume is about one year or leasing activity, I should say, is about one year. And it's just hard on a twelve or thirteen hundred square foot suite to spend more to drive you in excess of that 10 percent figure.
David Lukes: So, again, no change in terms of the capital needs of the business. That's a key part, a key ingredient of the thesis, as David outlined his prepared remarks.
Charges on the capital needs that there is no plan for for redevelopment or expansion of our our construction efforts. And in terms of capex, percentage, noi known change in terms of our long-term, bogey for uh less than 10% of capex percentage. In a lie, a big piece of that 1 is not having Redevelopment but the second piece is just the structural nature of the business in the sense that, you know, our payback period on leasing volume is about 1 year or at least the activity I should say is about 1 year and it's just hard on a 12 or 1300 square foot Suite to spend more to drive you an access to that 10% figure. So, um, again, no change in terms of the capital needs of the business, that's a key part. Uh, a key ingredient of the thesis is David outlined his prepared remarks.
Conor Fennerty: Okay, did you disclose what the occupancy rate or lease rate is on the acquisition volume? Corridor in July. In the second quarter, Todd, it was roughly in line, just about 96%, so right in line with the portfolio. For the third quarter to date, and obviously we're still acquiring a pretty decent pipeline, it's a little bit lower. It's low 90s. So to David's point, that cap rate is lower because we bought some vacancy that we obviously think we can lease up to portfolio average. So a little bit lower lease and occupancy rate for what we bought in the third quarter to date.
okay, did you disclose what the, um, the occupancy rate or, or least rate is, on the acquisition volume completed in the in the quarter and year in, uh, in in July
Conor Fennerty: But again, once we know the total numbers for the third quarter, we can give an update on where we are for that. Okay. All right. Thank you. You're very welcome.
And and the second quarter Todd, it was roughly in line and just about 96%. Um, so right in line with the portfolio for the third quarter to date and obviously we're still, you know, acquiring yourself a pretty decent pipeline. It's a little bit lower, it's low 90s. So to David's point that cap rates lower because we bought some vacancy that we obviously think we can lease up to to portfolio average. So, um, a little bit lower, at least an occupancy rate for what we bought in the third quarter to date. But again, once we once we know, you know, the total numbers for the third quarter, we can give an update on on where we are for that.
Okay, all right. Thank you.
You're very welcome.
Alexander Goldfarb: The next question comes from Alexander Goldfarb with Piper Sandler. Your line is open. Hey, good evening. David, first, I have two questions. First question is, you know, you guys are are buying not only in the major MFAs, but also, you know, some of the smaller markets, Mobile, Alabama, and other parts of Alabama, you know, deep in Tennessee and elsewhere. And but you mentioned overall, the cap rates seem to be pretty tight. So my question is, we often think of the major metros, the institutional markets, trading tighter than, you know, sort of the tertiary, but it doesn't sound like that's your experience.
The next question comes from Alexander Goldfarb with Piper Sandler. Your line is open.
David Lukes: Plus, you're obviously going for cash flow, which says that the cash flow is pretty attractive, again, whether you're in a major metro or or tertiary. So can you give a little context and how you're looking at where you're acquiring and just a more comparison of, you know, sort of the Alabama's the world versus the Atlantis, and I'm using those sort of just as a generic, you know, for describing the different markets.
David Lukes: Sure, happy to. I mean, one thing I guess I could go back on is normally when you're thinking primary markets, you know, you would be coming at it, at least in my background, you'd be coming at it from a purchasing power standpoint of, um, how many people live in the area and how many people will go to your destination to go shopping. What's different about this asset class is these assets are so small. The most important feature is whether they're convenient for people not going shopping, but running errands. And running errands is a pretty significant part of, uh, kind of the daily suburban life.
Hey, uh, uh, good evening. Uh, David first, I have 2 questions. First question is, you know, you guys are are buying not only in the major msas but also, you know some of the smaller markets Mobile Alabama and other parts of Alabama, uh, you know, deep in, in Tennessee and and elsewhere. And but you mentioned overall, the cap rates seem to be pretty tight. So my question is, we often think of the major metros the institutional markets trading tighter than you know, sort of the tertiary. But it doesn't sound like that's your experience. Plus, you're obviously going for cash flow, which says that the cash flow is pretty attractive. Again, whether you're in a major Metro or or tertiary, so can you just give a little context and how you're looking at, where you're acquiring and just some more comparison of, you know, sort of the Alabama's, the world versus the Atlanta. And I'm using those sort of just as a generic, uh, you know, for for described in different markets.
Sure, happy to. I mean, 1 thing, I guess I could go back on is normally when you're thinking primary markets, you know, you would be coming at at least in in my background. You'd be coming at it from a purchasing power standpoint of, um, how many people live in the area and how many people will go to your destination, to go shopping was different about this asset classes. These assets are so small. The most important feature is whether they're convenience for people, not going shopping, but running errands.
David Lukes: I certainly think it's probably increased with a lot of the flexible work environment. And when you get into markets that have a significant amount of people, but it's not primary, there's still a lot of traffic, um, for us, traffic count, uh, the right intersection of the right side of the road and the right format and visibility for the building does drive a lot of tenant demand. Um, and so our confidence level after, you know, the last seven years of, of underwriting these properties, our competence level in primary and secondary market knowledge, uh, is pretty high, so we're open-minded to buying assets that we do think have long-term growth profile, particularly if they're older properties that have vintage releases that are pretty far below market.
Conor Fennerty: Um, so that I guess is, is the answer to the first question, the cap rate question, um, I think you're right that the cap rate spread on high quality assets with a strong mark to market are not substantially different between primary and secondary. Um, where you get a big cap rate expansion in this asset class is when you're off the main road, you have a very low traffic count. It might be more of a neighborhood, um, center, and there's just not enough traffic to make it convenient for running errands, um, so that, that type of higher cap rate property is available in the unanchored strip category, but I don't think it's convenient and therefore it doesn't really deserve to be in an institutional portfolio.
And running errands is a pretty significant part of uh, kind of the day daily Suburban life. I certainly think it's probably increased with a lot of the flexible work environment, and when you get into markets that have a significant amount of people but it's not primary, there's still a lot of traffic, um, for us traffic count. Uh, the right intersection, the right side of the road and the right format and visibility for the building does drive a lot of tenant demand. Um, and so our confidence level after, you know, the last 7 years of of underwriting these properties our confidence level in, in primary and secondary market knowledge. Uh, is pretty high. So we're open-minded to buying assets that we do think have long-term growth profile. Particularly if they're older properties that have vintage releases that are pretty far below Market. Um, so that I guess is, is the answer the first question, the cap rate question. Um, I think you're right, that the cap rate spread on high quality assets with a strong Mark to Market are not substantially different between primary and secondary, um, where you get a big cap rate,
Expansion. And this asset class is, when you're off the main road, you have a very low traffic count. It might be more of a neighborhood center, and there's just not enough traffic to make it convenient for running errands.
Conor Fennerty: The only thing I would add, if you look at page nine of our supplement, our top five markets, which are Miami, Atlanta, Phoenix, Orlando, and Houston, represent 44% of ABR. So to David's point, the secondary markets that we're in share the common characteristics of the rest of the portfolio, but the foundation of the portfolio in the vast majority still remains concentrated in the largest primary markets throughout the United States. It feels like the secondary assets we're adding on are just additive to that investment pipeline. Yeah, that's helpful perspective.
Um, so that type of higher cap rate property is available in the unanchored strip category, but I don't think it's convenient and therefore it doesn't really deserve to be in an institutional portfolio.
okay, the only
I was going to say, the only thing I'd add is, if you look at page 9 of our supplement, your top 5 markets, which are Miami Atlanta, Phoenix or Atlanta and Houston represent, 44% of our. So the Davis point, the secondary markets that we're in, share the common characters characteristics, excuse me, the rest of the portfolio, but the foundation of the portfolio in the vast majority, Still Remains concentrated in the largest primary markets throughout the United States. It feels like the the secondary assets. We're adding on, are just additive to that to that investment pipeline.
Alexander Goldfarb: The second question is, and I'm asking this from curb perspective, not a site perspective. But you know, your sister company, presumably is in, you know, wind down mode selling assets that just paid a special dividend. From curbs perspective, is there any impact to expenses or the P&L? If they accelerate plans, if they, you know, finish whatever they're going to do sooner than expected versus later, just trying to understand as we think about, I know, Conor, you're not given 26 guidance. But you know, as we think out over the next year or two, is there are there any additional expenses, if you could just remind us that we should be thinking about or curb as is, is unaffected, whatever pace site chooses to do whatever it's going to do?
Perspective. The second question is, and I'm asking this from Curb perspective, not a site perspective, but you know, your sister company. Presumably, it is in, you know, wind-down mode selling assets. That just paid a special dividend from Curb's perspective.
Is there any impact to expenses or the P&L? If they accelerate plans, if they, you know, finish whatever they're going to do sooner than expected versus later, just trying to understand. As we think about, I know Conor, you're not giving 2026 guidance, but you know, as we think out over the next year or two, are there any additional expenses, if you could just remind us, that we should be thinking about or that Curbline is unaffected? Whatever Pace site chooses to do, whatever it's going to do.
David Lukes: Let me start with that and I'll pass it over to Conor, who probably has some specifics he wants to share. But I'll just remind you that the shared service agreement with the two companies, the purpose of that was to allow one company to grow and one company to shrink while sharing certain expenses that would have been difficult to manage if you were on your own. That has been working very well, because we have a lot of departments that serve both companies under the shared service agreement. So I think the basis of your question is, you know, over time, will something change if there was an acceleration in site centers?
Uh, let me start with that, and I'll pass it over to Connor, who probably has some specifics he wants to share. But I'll just remind you that the shared service agreement with the two companies was designed to allow one company to grow and one company to shrink while sharing certain expenses that would have been difficult to manage if you were on your own.
Conor Fennerty: The only thing that's contractual that you could look at is if you look in the Form 10 and you look at the shared service agreement that was published at the time of the spinoff, there is a defined capability for a termination of that shared service agreement at year two, as opposed to year three. But the impact of that happening has to do with the payment from one company to the other. So at the end, I guess, of this speech, I would say that there's there's really nothing noteworthy because site happens to be going faster or slower.
Um, that has been working very well because we have a lot of departments that serve both companies under the shared service agreement. So I think the basis of your question is, you know, over time will something change if there was an acceleration in site centers. The only thing that's contractual that you can look at is if you look in the Form 10 and you look at the shared service agreement that was published at the time of the spin-off. There is a defined capability for a termination of that shared service.
Conor Fennerty: I don't think that pace is going to have much of an impact to curb. Yeah, I would just say, I mean, there's definitely not specifics we'd like to provide this time, to your point, Alex. But the immediate term is as curb scales, as you know, we pay two percent of base revenue, excuse me, of gross revenue to to site. So that that's the only immediate change. And then to David's point, in the event that there was an early termination, there'd be a significant fee paid by site to curb, which would offset any potential expense increase.
Alexander Goldfarb: But in the meantime, you'll just see G&A slowly move higher as curb scales, just given that fee relation. Okay, thank you.
Service agreement at year 2 as opposed to year 3. Um, but the impact of that, uh, happening has to do with the payment from 1 company to the other. So, at the end, um, I guess of this speech, I would say that there's, there's really nothing noteworthy. Um, because site happens to be, um, going faster or slower, I don't think that pace is going to have much of an impact occurred. Yeah, I would just say, I mean there's definitely not specifics. We'd like to provide this time to your point Alex but the the immediate term is as curb scales as you know, we pay 2% of of Base Revenue, excuse me of gross revenue to 2 sites. So that that's the only immediate change. And then to David's point in the event that there was an early termination. There would be a significant fee paid to buy site to curb, which would offset any potential expense increase, but in the meantime, you'll just see GNA, slowly, move higher as curb scales, just giving that um, be relationship.
Floris van Dijkum: Thanks, Alec. The next question comes from Floris Van Dijkum with Landenburg-Stalman. Your line is open. Hey guys, quick question here for me. As you think about these portfolio transactions, Have you had entered into discussion, it doesn't seem like you've done an OP transaction yet, but would you consider doing that? And, you know, would that facilitate some of the tax issues that the sellers might have? And how strategic do you expect that could be going forward?
Okay, thank you.
Thanks Alex.
The next question comes from Flores Vanakkam with Lentin BS, Felman. Your line is open.
Hey guys. Um, quick question here for me, um, as you think about these portfolio transactions? Um have you had entered into discussion? Yeah, it doesn't seem like you've done an OP transaction yet, but would you consider doing that? And and, you know, would that facilitate um, some of the tax issues that the sellers might have, and how strategic you expect? That could be
Be going forward.
David Lukes: Floris, it's David. It is certainly an arrow in the quiver that would be nice to use. We have certainly expressed that opinion to a lot of sellers, particularly ones that that have a basis issue and a tax obligation. You know, OP units is a very elegant way to, you know, to structure something that helps both the seller and the buyer. So we're certainly using it as a as an option. I would say that the relative success of getting those done has been a little bit low. But again, our company is only, what, nine months old now.
David Lukes: So I would say there's still time. But I would expect that to be something that we could use in the future.
A florist is David. Um, it is certainly an arrow in the quiver that would be nice to use. Um, we have certainly expressed that opinion to a lot of sellers, particularly ones that um, that have a a basis issue, uh, and a tax obligation. Um, you know, op units is a, a very elegant way to, um, you know, to structure something that helps both the seller and the buyer. Um, so we're certainly using it as a um, as an option. Um, I would say that the relative success of getting those done has been a little bit low. Um, but again, our our company is only what 9 months old now. So I would say there's still time but I I would expect that to be something that we could use in the future.
Floris van Dijkum: Thanks, David, and maybe if I can ask one one follow up. Part of, I would imagine, your value add besides obviously having sort of discovered and institutionalized this space is the ability to manage the portfolios a little bit better. Can you maybe remind us what the, you talked a little bit about the pending acquisition or the new acquisitions in the third quarter having a lower vacancy. If you look at the average vacancy in the properties that you acquired to where you brought the occupancy levels to today, how much of a pickup do you typically, have you seen over the short history of the company?
Thanks, David. And maybe if I can ask one follow-up. Um,
Part of part of I, I, I would imagine your, your your value, add besides obviously, having having sort of discovered and, and institutionalized. This space is the ability to to manage. The portfolio is a little bit better. Can you, maybe remind us what the uh, you talk a little bit about the, the pending acquisition or the new acquisitions in the third quarter of having a lower vacancy. If you look at the average vacancy in the properties that you acquired to where you brought the VAC, you know, the occupancy levels to uh, today, how much of a pickup do you typically, uh, have have you seen uh, over the over?
For the short history of the company.
David Lukes: I was going to say that, you know, what's funny is that the. The amount of occupancy up or down is so minimal so far that it's not really a measurable impact. I mean, the vast majority of the growth in cash flow for each asset is renewals. When you can find vacancy, it can be very attractive. And there are certain times recently where we have been forcing vacancy because we think that there's a better credit tenant that can pay more rent and do more business. It's in my prepared remarks, I mentioned the productivity of the space.
I was going to say that it's funny that the, um,
Conor Fennerty: There are some tenants that are just simply more profitable out of the same square footage and they can pay more. So market rent is less relevant than the profitability of that particular tenant. So I would say that the rental increases on renewals far outpace the occupancy gains right now. It just so happens if we can find something with some vacancy, it's definitely attractive. Yeah, Floris, in terms of specifics, you know, we're 96.1% leased as the second quarter. If you look back, obviously, we're mid-95s at year end. So, you know, to David's point, the vast majority of what we bought has been 95, 96% leased.
Conor Fennerty: There have been some assets we bought that were high 80s, low 90s. And we've driven that up. But there's been very little, I would say, dispersion in terms of the lease rate really across the portfolio.
Recently, where we have been forcing vacancy, um, because we think that there's a Better Credit tenant that can pay more rent and do more business. Um, it's in my prepared remarks, I mentioned the productivity of the space. There are some tenants that are just simply more profitable out of the same square footage and they can pay more. So Market Market, rent is less relevant than the profitability of that particular tenant. Um, so I would say that the the rental increases on renewals far outpaced the occupancy gains right now. It just so happens if we can find something with some vacancy, um, it's definitely attractive to us. Yeah, of course, in terms of specifics, you know, we're 96.1% least as a second quarter. If you look back you can obviously we're we're mid 909 95s um, at year end so you know, to David's point the vast majority of what we bought has been 95 96% lease or have been some assets. We bought there were high 80s, low 90s and we've driven that up but there's been very little I say dispersion in terms of the lease rate really across the portfolio
Floris van Dijkum: Thanks, Conor. Thanks, David. Thanks, Floris.
Thanks Connor. Thanks David.
Thanks loris.
Michael Mueller: The next question comes from Michael Mueller with J.P. Morgan. Your line is open. Yeah, hi. Two quick ones here.
The next question comes from Michael Muller with J.P. Morgan. Your line is open.
David Lukes: I guess first, for the $150 million in notes closing in September, do you know when in September is that beginning of the month, end of the month? And then for the second question, on the portfolio acquisition, you mentioned you picked 23 assets. Out of curiosity, were there still a substantial number of assets left that you didn't pick that could be interesting for you down the road at some point? I would say the specific number of assets that that seller owns is, I'm not at liberty to discuss, but I will say that this is a group that's very sophisticated.
Yeah. Hi. Uh, two quick ones here, I guess. First, for the $150 million notes closing in September, do you know when in September? Is that beginning of the month or the end of the month? And then, for the second question on the portfolio acquisition, you mentioned you picked 23 assets. Out of curiosity, were there still a substantial number of assets left?
Left that you didn't pick, that could be interesting for you down the road at some point.
David Lukes: They've done a great job acquiring properties over a long period of time. And we would be lucky if they would be willing to do business in the future. But the assets that we picked in this particular portfolio are ones that fit our mandate, that fit our submarkets, and they fit the underwriting criteria that we had at this time. So we're certainly, we're very proud and happy to get this one across the finish line.
Conor Fennerty: Mike, in terms of the private placement, the first week of September, so or early September to your first question. Got it. Thank you. You're welcome.
Uh, I would say the specific number of assets that that seller owns is, I'm not at liberty to discuss, but I will say that this is a group that's very sophisticated. They've done a great job acquiring properties over a long period of time, and we would be lucky if they would be willing to do business in the future. The assets that we picked in this particular portfolio are ones that fit our mandate, they fit our submarkets, and they fit the underwriting criteria that we had at this time. So we're certainly very proud and happy to get this one across the finish line.
Mike, in terms of the private placement, the first week of September.
Or early September to your first question.
Got it. Thank you.
You're welcome.
Paulina Rojas: The next question comes from Paulina Rojas with Green Street. Your line is open. Hello. And are you using occupancy costs as a key metric to monitor rents across your portfolio? And if so, where do you estimate OCR stands today and Do you have any benchmark you're using to manage and optimize your portfolio performance?
The next question comes from Paulina Roas with Green Street. Your line is open.
Hello.
Um, are you using occupancy costs of key metrics to monitor rents across your portfolio? If so, where do you estimate OCR stands today?
Do you have any benchmark that you're using to manage and optimize your portfolio performance?
David Lukes: Hi, Paulina, it's David. There are some cases, and I would say it's minimal, where we have information where we can manage occupancy cost, I would say that's mostly on tenants that are willing to share that information, which most likely are local or regional tenants. So OCRs are very important if we're underwriting someone who is maybe expanding a business, they have two or three units, and they want to do a fourth, and we want to understand how much they can afford to pay. Given that over 70% of the portfolio is national credit, we don't have a lot of visibility other than nationally published information, particularly from public companies.
David Lukes: So, you know, if you look at our top 25 list on page 15 of our stuff, and you look through those tenants, we don't really have an OCR capability when it comes to all of those tenants, but we certainly have the ability to underwrite their credit. And we're demanding, you know, credit to be signed, you know, from the guarantor, being the corporate entity. So I would say credit on one side, the OCR underwriting has much more to do with smaller businesses that are growing, and those are relatively few.
Hi, Paulina, David. Um, there are some cases and I would say it's minimal where we have information, where we can manage occupancy cost. I would say that's mostly on tenants that are willing to share that information which most likely are local or Regional tenants. Um so ocrs are very important if we're underwriting. Uh someone who is maybe expanding a business, they have 2 or 3 units and they want to do a 4 if and we want to understand how much they can afford to pay. Um, given that over 70% of the portfolio is is National Credit. Um, we don't have a lot of visibility other than nationally published information particularly from public companies. So, you know, if you look at our top 25 less done page, 15 of our sub, and you look through those tenants we don't really have an OCR, uh, capability when it comes to all those tenants, but we certainly have the ability to underwrite their credit and we're demanding, uh, you know, credit, uh, to be signed, um, you know, from the guarantor, uh, being the corporate entity. So, I would say credit on 1 side, um, the OCR underwriting has much more to do with smaller business,
Businesses that are growing, and those are relatively few.
Paulina Rojas: Thank you.
David Lukes: My second question, circling back to the market distribution, we have seen some REITs buy assets in the Midwest. And what's your view on the that region specifically? And would you consider establishing a more meaningful presence there? I know you have some assets, but would you consider growing there if the right opportunities emerge in terms of fundamentals? Or you prefer to avoid that from a brand or marketing perspective? I think our acquisitions right now, Paulina, are purely based on the financial returns from the asset that we think we can derive over the long term. There are many cities, you know, in the top 20 or 30 MSAs that we would be happy to be in.
Thank you. Um, my second question. Um, circling back to the market distribution.
We have seen some rates by assets in the Midwest.
And what's your view on that region specifically? Would you consider establishing a more meaningful presence there? I know you have some assets, but would you consider growing there if the right opportunities emerge in terms of fundamentals?
You prefer to avoid that from a brand or marketing perspective.
I think our acquisitions right now, Paulina, are purely based on, um, the financial returns from the asset that we think we can derive over the long term.
David Lukes: We certainly have bought a couple of properties in the Midwest. I would see us continuing to do so, but they have to match the criteria that we want for that particular property, which generally falls into demographics, scarcity of use, high traffic count, easy layout of the building, ubiquitous small shop spaces, and kind of proven tenure of existing tenants. And those are available in a number of cities. So I think our activity in the Midwest has been active and will continue to be. But I wouldn't say it's a driving force as much as it is. You know, the whole country, I think, is open to us as long as it's in a market that we understand and believe in.
But they have to match the criteria that we want for that particular property. Which generally falls into demographics, uh, scarcity of use high traffic count, uh, easy layout of the building, ubiquitous small shop spaces and kind of proven tenure of existing tenants, um, and those are available in a number of cities. Um, so I, I think our activity in the midwest, um, has been active and it'll continue to be, but I wouldn't say it's a, a driving force. Uh, as much as it is, you know, the whole country, uh, I think is, is open to us as long as it's in. Um, a market that we understand and believe in,
David Lukes: Thank you. Thanks Paulina.
Thank you.
Thanks BINA.
Tim Billingsley: The next question comes from Tim Billingsley with Compass Point. Your line is open. Good afternoon. One of the questions I had was just looking at page 13 of the supplement and looking at new leases versus renewals, it looks. Approximately 30% of the leases that you're. Signing on a new sign, but, but the terms are nearly double. So, just trying to get an idea, or are you swap this in a case of. We talked about the occupancy has not really changed much from your acquisition. Are you bringing in more national.
Next question comes from Tim Billingsley with Compass Point. Your line is open.
Conor Fennerty: People with those new leases, or can you just give me a little bit more color on what's going on with those new leases and getting a longer term.
Conor Fennerty: Sure, Ken, it's Conor. So I would just say traditionally a national lease is a 10-year initial term, which is why our new leases are right around 10 and a half years, and we're 70-plus percent national, so that's what's driving that. On renewals, remember, it's a mix of negotiated renewals and options. Typically an option, particularly with a national, is a five-year term, so that's driving that. And in general, we are, just given the rent growth we're seeing in this market, pretty focused on keeping our wall at a manageable level. So I would say that's driving the other piece of that.
Uh, good afternoon, uh, 1 of the questions I had was just looking at page, uh, 13 of the supplements and looking at new leases versus renewals. Um, if it looks, you know, approximately 30% of the leases that you're signing, are on the, on the new side. But but the terms are nearly double. Um, so just just trying to get an idea are, are, are you swap? Is this is a case of, uh, were you talking about the occupancy? Has not really changed much from your acquisition. Um, are you bringing in more Nationals people with those new leases? Or can you just give me a? Give me a little bit more color on what's going on with those new leases and getting a, uh, longer term.
Conor Fennerty: So I would be surprised if our new leases deviated dramatically from 10 years, and I'd be surprised if our renewals moved dramatically from five years. I think it feels like a pretty standard duration in terms of years.
Conor Fennerty: So is there any color you could add on when you are swapping out? So when you talked about how you're wanting to leave some of these acquisitions, leave some vacant space, are you actively being able to swap them out for more national players, or is it a higher percentage of that versus local? Yeah, I would just say we are acutely focused on credit. So if there's a jump ball between a local and a national tenant, nine times out of 10, we'll go with that national tenant. It's not necessarily a thesis of what we're buying, kind of swapping out local or national tenants.
Sure, can, it's Connor. So, I would just say, traditionally, a National Lease is a, is a 10 year, initial term, which is why our new leases are right around 10 and a half years and we're 70 plus percent National so that that's what's driving that on renewals. Remember, it's a mix of negotiated renewals and options. Typically, an option, particularly with the Nationals, is a 5-year term, so that's driving that. And in general we are just giving the the rent growth. We're seeing in this market pretty focused on on keeping our Walt as a manual level. So I would say that's that's driving the other piece of that. So I would be surprised if our new leases deviated dramatically from 10 years and I'd be surprised if our renewals moved dramatically from 5 years. I think it feels like a pretty standard um, uh, duration of years.
So, is there any color you could add on when you are, um, swapping out?
So when you talked about how you're you're wanting to leave some of these Acquisitions and leave some vacant space, are you actively being able to swap them out for more national players? Or um, is it a, is it a higher percentage of that versus local?
Conor Fennerty: Generally, if we're buying great real estate, the national is already there. So again, if there's a vacancy and we see an opportunity to put a national tenant in, great. But the thesis on this property type is not about upgrading tenant roster. To David's point, it's really about pushing rents of who's there. And again, if we buy the right real estate, nine times out of 10, the nationals are already there. Great. I appreciate it. Thank you. Of course.
Yeah, I would just say we are acutely focused on credit. So, if there's a jump ball between a local and a national tenant, 9 times out of 10, we'll go with that national tenant. Um, it's not necessarily a thesis of what we're buying, kind of swapping out local or national tenants generally. If we're buying great real estate, the national is already there. So, again, if there's a vacancy and we see an opportunity to put a national tenant in, great. But the thesis on this property type is not about kind of upgrading the tenant roster.
To David's point, it's really about pushing rents to who's there. And again, if we buy the right real estate, um, nine times out of ten, the uh, the nationals are already there.
Oh great, I appreciate it. Thank you.
Of course.
Speaker: This concludes the question and answer session.
David Lukes: I'll now turn the call to David Lukes for closing remarks. Thank you all for joining our call. We'll talk to you next quarter.
This concludes the question and answer session.
I'll now turn the call to David Lukes for closing remarks.
Thank you all for joining our call, and we'll talk to you next quarter.
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