Site Centers Corp (SITC) 2022 Q1 法說會逐字稿

Good morning, and welcome to SITE Centers First Quarter 2022 Results Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Monica Kukreja, Capital Markets and Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to SITE Centers' first quarter 2022 earnings conference call. Joining me today is Chief Executive Officer, David Lukes; and Chief Financial Officer, Conor Fennerty. In addition to the press release distributed this morning, we posted our quarterly financial supplement and slide presentation on our website at www.sitecenters.com, which is 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 the federal securities laws. 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 form 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-store net operating income. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's quarterly financial supplement.

At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes.

Good morning, and thank you for joining our first quarter earnings call. We had an excellent start to the year with OFFO ahead of plan, another quarter of record leasing volume and the investment of the remaining proceeds from the $190 million distribution from RVI in 3 compelling properties.

On top of all this, our balance sheet remains in great shape with debt-to-EBITDA in the low-5s at quarter end, which is well ahead of the peer group and the sector overall, which provides capacity for continued external growth. I'll start this morning discussing first quarter results, talk briefly about leasing and tenant demand, and then discuss our investments and capital allocation as we look to grow our portfolio of assets in wealthy suburban communities.

As I mentioned, first quarter OFFO was ahead of our budget on better operations, which Conor will provide more details on later. Our strongest tenants continue to take market share, and our construction and property management teams have done a great job getting tenants open for business ahead of schedule, which is part of our outperformance this quarter.

Moving to leasing. Tenant demand remains elevated across the portfolio, and we built upon our fourth quarter activity with another quarter of record volume relative to the last 5 years. Shop leasing, in particular, continued to surprise to the upside with a number of key deals with first-to-portfolio tenants, including several leases at our tactical redevelopment projects in Princeton, Boston and Portland.

To put shop leasing volume in context, in the last 12 months, we signed 62% more square feet of shops than in 2018 and 52% more square feet than in 2019. The success and the quality of our leasing is giving us increased visibility and confidence on our allocation of capital, which I'll discuss later in my remarks.

Looking forward, we have another 600,000 square feet at share in lease negotiations, which we expect to be completed in the next 6 months with similar characteristics to the deals we signed in 2021 and year-to-date in 2022, meaning a concentration on national, publicly-traded tenants with excellent credit. We continue to expect leasing to be the material driver of our growth over the next several years.

Shifting to investments. We had another very active quarter buying out a partner in Orlando and adding convenience properties in Boca Raton and Scottsdale. I'll start with our 2 Florida acquisitions. With Casselberry Commons, we acquired another Publix-anchored property from our partner. We obviously know the property well and have significant leasing momentum with 2 recently signed anchors and elevated shop demand. The asset is accretive to our grocery-anchored portfolio and well above national average sales and an underwritten 5-year NOI CAGR of almost 9% in an excellent submarket with great demographics.

At Shops at Boca Center, we acquired for $90 million an asset that has all of the attributes of the convenience properties that we've been focused on and investing in. Excellent demographics with trade area household incomes of $126,000, convenient access and parking and a site plan that offers a mix of simple liquid shops in demand from a wide range of national, regional and local tenants.

Despite a total GLA of just 117,000 square feet, the property draws from an actual trade area of over 600,000 customers, resulting in high tenant volumes as the restaurant sales alone averaged almost $1,000 a square foot. With lease up, mark-to-market and a new pad opportunity, Shops at Boca has an underwritten 5-year NOI CAGR of over 7%, which instantly adds to the company's growth profile.

Pro forma for these 2 acquisitions, Florida now represents over 20% of the company's value, and is an excellent representation of SITE Centers portfolio overall with a diverse mix of assets located in the wealthiest submarkets of the state and populated by national credit tenants. The portfolio includes convenience properties like the Shops at Boca Center and Shoppes at Addison Place in Delray Beach, dominant regional properties like the Shops at Midtown, Miami, in downtown Miami and Winter Garden Village in Orlando, grocery-anchored properties like Casselberry Commons in Orlando and the shops at new Tampa.

The SITE Centers Florida portfolio has an expected 5-year NOI CAGR of over 4%, average household income 70% higher than the national average and an average expected population growth 200 basis points higher than the country overall. It's an irreplaceable collection of properties in a high-growth state, and we're excited about the prospects for additional investments in our other key submarkets.

Moving to Phoenix. We bought another convenience property in the core Scottsdale submarket and are confident we can find more opportunities to grow our portfolio in this key market. The Scottsdale corridor has incomes of over $148,000 and significant population growth attracting a wide range of tenants, including a mix of foodservice and service users.

Going forward, I continue to expect us to be active in both anchored and unanchored assets that fit our growth in submarket criteria. That said, we remain encouraged by our investments in convenience properties, and this compelling subsector in open-air shopping centers remains a key area of focus for the company.

Over the last few years, we've invested over $300 million at a blended cap rate of roughly 5.5% in convenience asset with average household incomes of $117,000 and an underwritten 5-year CAGR of 4% with minimal CapEx. Each of these properties all located in key markets for the company, including Miami, Scottsdale and Atlanta will be drivers of the company's future growth.

The convenience subsector is clearly benefiting from recent societal shifts favoring hybrid work and suburban housing growth. Our property data aggregated over the past few years is showing a distinct rise in customer traffic, especially in wealthier suburbs, where it's difficult, getting new retail construction approved or pencil given rising construction costs and it's driving outsized rent growth due to the scarcity of convenience retail locations close to where people are now living and working in greater numbers.

You'll see us to continue to pursue this external growth strategy, and we've been diligently focused on sourcing a pipeline of potential deals that fit our investment criteria and our return hurdles. Thank you to the entire SITE Centers team for an excellent start to the year. We've been hard at work for some of the time, positioning the company to outperform and remain excited about the prospects for the remainder of 2022.

And with that, I'll turn it over to Conor.

Thanks, David. I'll comment first on quarterly results, discuss our revised 2022 guidance and some of the moving pieces heading into the second quarter and then conclude with the balance sheet. First quarter results were ahead of plan, as David mentioned, due to a number of operational factors, including earlier rent commencements, higher-than-budgeted occupancy due to higher retention rates and higher ancillary income. These operational factors totaled about $0.01 per share relative to budget.

The quarter also included $675,000 of higher-than-expected straight-line rent from the conversion of cash basis tenants and $1.3 million from payments and settlements related to prior periods. Both of these non-recurring items totaled another $0.01 per share relative to budget.

In terms of operating metrics, the lease rate for the portfolio was up 50 basis points sequentially and 180 basis points year-over-year with our lease rate now at 93.2%. Leasing activity remains elevated across all unit sizes. And based on our current leasing pipeline, we continue to see upside to the company's current lease rate and well beyond pre-COVID high watermarks.

Highlighting our leasing velocity, the SNO pipeline increased to $18 million from $15 million last quarter. These signed leases now represent almost 5% of annualized first quarter base rent or over 6%, if you also include leases in negotiation in our pipeline. We provided our updated schedule on the expected ramp of the pipeline on Page 6 of our earnings slides and expect over 60% of the leases commenced by year-end 2022.

Moving on to our outlook. We are raising our 2022 OFFO guidance to a range of $1.10 to $1.15 per share. rent commencements, uncollectible revenue and transaction timing remain the largest swing factors expected to impact full year results and where we end up in the revised range. We are also raising same-store NOI guidance to a range of 3% to 4.5%, adjusting for the roughly $14 million impact of 2021 uncollectible revenue. Details on same-store NOI are in our press release and earnings slides.

In terms of additional assumptions for full year 2022 guidance, RVI and JV guidance ranges remain unchanged, along with our assumption for roughly flat interest expense at SITE share versus 2021. In terms of investments, we continue to expect net investment activity of $100 million for the full year. Given year-to-date net investment activity of $113 million, we are assuming that acquisitions are essentially match-funded with dispositions through year-end.

Lastly, we have not budgeted additional reserve reversals in the bottom half of our guidance range. In terms of the second quarter of 2022, there are a few moving pieces to consider from the first quarter of 2022. First, as I previously mentioned, we had $1.3 million of non-recurring uncollectible revenue and $675,000 of non-recurring straight-line rent in the first quarter. Second, we closed on the sale of the SAU portfolio subsequent to quarter end. These assets generated about $1 million in JV fees on an annual basis. Third, we settled the forward ATM shares in the first quarter, which will increase the second quarter weighted average share count by about 1.5 million shares sequentially. A summary of these factors is on Page 9 of our earnings slides.

Ending with our balance sheet. At quarter end, leverage was 5.1x, fixed charge was over 4x and our unsecured debt yield was roughly 21% as we continue to unencumber wholly-owned properties as mortgages mature. The company has just under $20 million of cash on hand and $855 million of availability on our lines of credit. This capacity will allow us to take advantage of future investment opportunities as they arise and to drive sustainable growth and create stakeholder value.

And with that, I'll turn it back to David.

Thank you, Conor. Operator, we're now ready to take questions.

(Operator Instructions) First question today will come from Rich Hill with Morgan Stanley.

David, I wanted to go back to the comment that you made, and hopefully, I'm not putting words in your mouth, that leasing is going to drive your future growth. And so I was maybe hoping to unpack where you think occupancy can go. I think occupancy is around 93.8% right now, comparatively is obviously a little bit lower. But as we think about occupancy relative to history, do you think you can back to 95.7% where you were in 2014? Or do you think a peak in 2019 of around 94%, a little bit higher than that is a better proxy?

It's a really good question, Rich. No, you did not put words in my mouth. It's funny -- with another 0.5 million square feet or 600,000 square feet under lease negotiation right now, we just haven't really seen the risk of this level of demand in wealthy suburbs go down. And so I think our confidence level that we can get back to the high watermark is pretty high.

Yes, Rich, I mean, we've made the comment, David, this quarter and the prior quarter as well. The high watermark for this portfolio, I think, was 93.9% 3 years ago. We think we can do better than that. If you recall, we held quite a bit of space offline for potential redevelopments, and we either chose to proceed with those redevelopments or decide to release the space just in terms of a retail project. So we think we said kind of 94% to 95% lease is achievable, and there's a bull scenario where we get as high as 96%. So again, just to reiterate David's points from our script in a minute ago, we think there's still considerable upside from a lease and occupancy perspective.

Okay. And I wanted to maybe talk about the interest rate environment and ask a 2-part question, both in terms of what interest rates are doing to cap rates, if anything, at this point? And does that give you actually even more competitive advantage. So does it shake out some of the smaller, less institutional owners of open-air shopping centers. And then I recognize you're funding yourself, you're funding acquisitions with dispositions for the remainder of the year. But maybe we could just have a quick conversation about if you prefer equity over debt at current valuations.

Well, I'll start with the cap rates and then Conor can take the equity side of the equation. But Rich, there seems to be in the last 60 days, a tale of 2 cities with respect to properties that are in the market. And I'll just remind you that 30,000 strip centers in the U.S., we own 92 of them. We're very focused on what we want to buy. So I'm not sure that my comments are going to be taken as a proxy for the industry. But for what we're looking at, when we see properties that are fully leased, the tenants have long term, and therefore, the growth rate of the NOI is somewhat low.

I do think that higher borrowing rates will have an effect in the next month or 2 as we start to see sellers not being able to achieve what they could before because the competing buyers are levered buyers, and we're generally an unlevered buyer. The irony is that at the same time, we're buying assets like Boca that have a really high CAGR, and that's partly because of occupancy and partly because of tenant rollover and a mark-to-market.

And so if you're getting rents that are rising along with interest rates, it means that to hold the same unlevered IRR even in the face of rising borrowing rates, I do think that cap rates are holding up pretty well for growth assets, even though they might move a little bit for more flat stable assets. So that's kind of where I'm seeing things in the last couple of weeks.

Yes. That's exactly what I was looking for on sort of the question about unlevered IRR versus levered IRR. Conor, any thoughts on equity versus debt here?

I was hoping you forget about that part of the question. Yes. No, look Rich, we're really comfortable with our leverage levels right now. As you know, it took us 5 years to get here, and we're looking to maintain what we think are prudent leverage and duration level. So it's always going to be a mix. We've got retained cash flow. We've got disposition proceeds you referenced. We've got the SAU proceeds that closed post quarter end. So it's always going to be a balance. I would just say we're really encouraged by our balance sheet position at this time.

The next question comes from Michael Bilerman with Citi.

Can you just talk a little bit about sort of the pipeline that you have right now from an acquisition perspective? And how much you have on the market from a disposition perspective. Just as you think about this net funding, I think you've been a little bit more excited on the acquisition front, and I'm just trying to better understand how much more disposition activity could you generate in the portfolio today to match that excitement, David, that you have in finding these assets in affluent suburbs?

Michael, it's Conor. I'll start and then I'll turn it over to Dave on the acquisition side. On the disposition side, excuse me, as you know, we've always recycled capital, whether it's 1 to 2 wholly owned properties per year. And that generally has been about $25 million to $50 million of wholly owned assets per year. And I don't think 2022 would be any different in that regard. The other piece, and we talked about this last quarter with everyone and with you was on the JV side where we've got the SAU portfolio, which we announced closed at subsequent to quarter end. And obviously, some of our other partners are nearing debt maturities, which is a natural time for them to consider their long-term plans for their joint ventures as well. So you'll likely see some additional joint venture properties sold on top of SAU.

In terms of kind of the impact on guidance, it's really not really a mover for the year. It's probably half basis -- or excuse me, $0.05 in terms of a headwind just from some of the JV assets, but I'll let David expand on the acquisition side as well.

Yes, Michael, I would say that our confidence level in what we're seeing of assets that we would like to acquire is growing. I would shy away from trying to guide as to what the volume might be simply because we're most interested in this high rent growth convenience-oriented properties because they're responding best to a lot of the societal shifts that I think have taken place coming out of the pandemic. But the thing to remember is that most of the sellers are private sellers, a lot of them are 1031 sellers. It takes a lot of time to transact with them.

And I do think that with rates rising, those types of owners are being incentivized to sell sooner rather than later. So I think John and I are pretty hopeful that the pipeline continues to grow things that we want to buy.

And then how do you balance, obviously, the asset sale proceeds you can sort of get market, but on the equity, you're obviously beholden to the market, and given the fact that your leverage levels are in check and the stock obviously has been volatile and is getting closer to NAV now than where it was earlier in the year. But how do you sort of balance sort of goes to Richard's question a little bit, how you grow from here from a capital perspective if the market is not willing to afford you the cost of capital to do it either on the debt side where rates have moved up or on the equity side where the stock still trades at a meaningful discount to NAV.

Yes, Michael, to your words, it's still your words, it's balanced. I mean you hit the nail in the head. Look, we've got, I think, a pretty good 5-year track record for us of balancing debt equity sources uses. And then I'm not trying to be evasive, but I mean that's what we'll do going forward. We do have a lot of retained cash flow. We do have some assets that are durable in nature and well leased, but still very attractive that we could recycle. We'll have more to disclose on that front to David's point of dispositions and acquisitions in the next 3 months.

The other point is if you look at kind of the range of dollar values of what we bought, $90 million so far has been the largest and $4 million is the smallest. That does make it a little bit easier. These aren't all $300 million properties. And so the vast majority if you kind of blend or look at a weighted average and closer to, call it, $25 million to $40 million, that does admittedly make it a lot easier to kind of achieve the balance that you referenced.

The second topic is just on sort of frequency of visits and hybrid work environment and inflation. Just tying it all together, David, in your conversations with your retail tenants and you can go across the spectrum, can you just share a little bit about what the data -- your data is telling you, what the retailer's data is telling you more recently in terms of number of trips that people are taking to your centers, maybe average spend and whether inflation is impacting that at all, either from the retailer perspective and being able to be open or conversely, your ability to drive things?

Yes. Well, let me talk about the 2 aspects of data that we do have is factual data. One would be customer visit frequency and duration, right? That comes from the geo-location data. And the other piece of data that I think is really interesting is, we've done so many box leases in the last 12 months that when the tenant goes in for a building permit, we can pull their plans and see what the layout of the store looks like. And so those are 2 different pieces of information. And what they're telling us is that the customer visits to our properties are up from pre-pandemic, call it, 10% to 15%. And that moves around a bit because the denominator with only 92 properties it's not large. But in general, I think we're up around 10% to 15%.

What's more interesting, Michael, is that the duration, the amount of time that a customer spends on the property is actually down 10%. And part of the -- and I think the reason that we're seeing that is the impact of last-mile fulfillment. And so let me tie that over to what we've seen in the tenant exhibits when they go in for building permits. There's no question that, that demising wall between front of house and back of house has moved. -- since pre-pandemic, and it's moving to the shrinkage of the front of house, which will be the customer space, and it's growing in the back of house, which will be sorting and distribution. So I think as we put some data together, we'll try and get something a little bit more robust for NAREIT.

I think it's a pretty compelling story that the customer visits are more frequent, but shorter. And the reason, of course, is that most of our retailers are starting to use their footprint as last-mile fulfillment, which might explain why there's been so much anchor leasing in the last 12 months.

Right. I guess the worry is in some ways, you'd want some of it to stay there longer to increase spend across retailers, right? The dwell time is obviously an important factor in driving aggregate sales and obviously, rent?

I don't -- I think that's part of the big question is how much does cross-shopping dictate profitability. I think that's the real issue. So a lot of this comes down to basket sizes and so forth. What we do know is that the tenant balance sheets are in a lot better shape than they were before. I feel pretty good about EBITDA margins 4-wall EBITDA. And the retailers seem very specific about how many doors they have, what access they have to trucking. And so I think that whole ecosystem has changed a little bit, but it's definitely making me feel more confident than less confident going forward.

The next question comes from Todd Thomas with KeyBanc Capital Markets.

Just following up on investments. Conor, you talked about potential joint venture asset sales as part of the capital plan for the remainder of the year. And I was just wondering if you can provide or David, if you can provide an update and status of the remaining 23 assets in the Madison joint venture, which you discussed a bit last quarter and were reported to be on the market. Is there any update you can provide there on timing and institutional demand for those assets and whether future investments would be predicated on the wind down and monetization of that venture?

Yes, Todd, I would just say, as you know, we discussed deals they close. And you're right, there have been some reports on potential asset sales. And again, to our point from our comments last quarter and this quarter, debt maturities are a natural time for joint ventures to kind of choose their path or choose the direction. Obviously, for us, it led to some acquisitions in the fourth quarter and the first quarter from that joint venture and it could lead to some dispositions for the course of the year. But just given our policy, we'll talk about things as they close. But you're right to assume that that's a potential source of equity for us.

I don't know if I answered all of your questions, but I'm trying to think if I did.

Okay. And David, you talked about the 9% IRR at Casselberry and the 5-year IRR at Boca Center. That was greater than 7%. What's the initial yield or year 1 yield look like on average for the assets that you acquired in the quarter? Just trying to get a sense and sort of bridge the NOI growth from acquisition during the course of the whole period?

Sure. Well, the assets we purchased this quarter, the going in cap rate averaged to 5.1% and the 5-year CAGR was 7%.

Yes, Todd, those are the 5-year CAGRs we quoted, not the unlevered IRRs.

Okay. Got it. All right, makes sense. And then David, you sound confident about the growth that you're seeing in assets that you're targeting for acquisition. But are you changing your return hurdles at all in the current environment or the way that you're underwriting future investments as you look ahead?

Yes. I mean I think that as we're starting to see more things come to market, I think some of the sellers and the brokers out there are starting to realize what we're looking for. We're just being pretty selective. So we're certainly not going down in our unlevered IRR expectations and given where rates are going, I'd like to see them move up a little bit.

I mean, Todd, the real issue is that to generate the types of unlevered IRRs that we expect, you can really only do it in 2 ways, either through occupancy or rent growth. And occupancy is not easy to find, but it broke, there were a couple of suites that were vacant that had active deals, so we're getting a lot of growth from shop leasing with a couple of spaces. But the other way to achieve that growth is through their turnover and the rents.

And what's interesting about Shops at Boca, you think about putting $90 million to work at a property that's got an average base rent of about $38 a square foot. And a couple of miles away, in Miami, we're signing leases at $70 and $80 a foot. So that's really where we're generating a lot of the growth is from the rising rents and a little bit of occupancy. And we'll be pretty picky about finding things that fit those hurdles so that we don't get stuck in a situation where we've got a low-growth asset and that's what's going to put pressure on unlevered IRRs going down.

The next question comes from Alexander Goldfarb with Piper Sandler.

Just 2 questions. First, following up on the pricing and the markets out there, certainly seen exposure in the non-traded REITs and they pretty much look to be heavy cash buyers. So David, I was a little interested that you were saying that some of the competition you see is from levered buyers because I'm speaking to some brokers and other -- just seeing the fund flows, it seems like it's a lot of heavy cash fires. But more importantly, if you guys are buying sort of at a low-$5, your stock is sort of trading north of $7, obviously, kudos to you to find deals.

But at the same time, what do you think the public markets are missing as far as the story of retail rebound because the headlines have certainly been good. Last week, online sales were down, physical in-store sales were double-digit positive. So the benefit of retail is well known, but yet there's this persistent disconnect, and that's at odds with the results that you guys are showing with the cap rates where assets are trading and certainly where the private money is going. So what do you think is missing as far as closing that gap? And is it just a matter of the public market just has a view that is at odds or are you guys confident that, that gap can be closed and the value realized in the public format?

Well, I would -- I'll try -- I'll try and not speak for the entire public market, but I think when we meet with investors, the number one topic that I think there is a misconception is the long-term CapEx required to run this business with the trends that have changed coming out of COVID. And I do think companies like ourselves are still burning through a lot of leasing CapEx. I mean it's significant for the next year. And the reason is that there is a lot of occupancy uplift.

But given inflation in rents, the ability for tenants to pass on a lot of cost to consumers, the lack of new supply, the difficulty in getting entitlements in wealthy suburbs, the cost of replacement. So if you want to build a new shopping center, it has gone so high, I think that there is going to be scarcity of space in the future.

So in my mind, the big change pre-COVID versus post-COVID is that retention rates are going to be higher and CapEx is going to go much lower than it was historically. And that does, as you know, have a huge impact on IRR. So when we're competing against other buyers in the private world, I think there are more accurately underwriting CapEx in the future and that helps them get more aggressive on pricing. And that is one of the differences I think between public and private buyers is the expectation of CapEx.

And Alex, to your point, I mean to David's response earlier on the leverage unlevered question, there is still, to your point, a number of unlevered buyers out there. So I think David was referencing simply the levered buyers are changing their underwriting, but to your point, there are no shortage of unlevered buyers.

Okay. And then just to be a classic analyst, we have to ask it on the flip side. There is a lot of -- you guys speak about growth coming from leasing and the signed but not yet commenced. And yet, in reality, it takes a long time for occupancy to build especially, you're sort of at 90-ish in place versus your expectation of exceeding the prior high watermark. So are we, as the analysts, too optimistic about the acing of seeing that occupancy grow and that this really takes many years or is it your view that there is going to be this sudden acceleration that's going to get us to that normalized occupancy a lot sooner than historically would be expected?

Alex, it's Conor. I would just say we lay out on Page 7 of our slides, the commencement schedule and you can see. And then in my comments, I think I said 60% of those leases commence by year-end. They happen to be pretty back end loaded, just the windows that retailers like to open. But I mean we're forecasting effectively 60% of our SNO pipeline, which is 6% of our base rent to open this year. So you're absolutely right, it's taken a while to build this, but we are forecasting pretty significant base rent growth starting in the fourth quarter and into '23 and '24.

What's also fascinating, if you look at the SNO pipeline we're signing leases with 2023 and 2024 openings, right. It kind of speaks to David scarcity point. But to answer your question directly, it's a this year event. If you recall Tammi asked the question last quarter about your kind of base rent, the base rent build over the course of the year. If you look at our same-store NOI base rent, same-store base rent, excuse me, this quarter is about plus 2.5%. We expect that to build over the course of the year, which speaks to your question of when these leases come online.

The next question comes from Samir Khanal with Evercore ISI.

I guess, David, maybe on the 600,000 square feet of leasing that's under negotiation, maybe talk around who are the tenants that are active in that space from a demand perspective and what changes have you seen if any from a negotiation standpoint whether it's terms, pricing, given the increased volatility from a macro standpoint versus maybe 3 to 6 months ago?

Sure, Samir. The pipeline of leases looks strikingly similar to the last few quarters, meaning, there is a lot of chunky leases with boxes, they tend to be discounters, the popshelves, the Burlington, the T.J. concepts, the Ross' lot of discount activity going into these wealthy suburbs. And then there is a component, which I would say, is service oriented. We're still seeing a lot of demand coming from health and wellness, a lot of dentists and doctors and chiropractors and urgent care and so forth coming out of the urban areas and kind of chasing their customers into the suburban areas.

And then the last piece of it is kind of a more recent growing shop demand and there's a lot of new concepts, healthy concepts, particularly on the restaurant side. There's been a number of new IPOs in the past year that they are in growth mode. So I would say it's probably half to 2/3 larger discount boxes. And then you get into the health and wellness and some of the small shop tenants. It's not very dissimilar from what you've seen in the last couple of quarters.

The real question is what's going to happen towards the end of the year because we're running pretty low on box inventory. And I think that's one of the changes you'll see towards the end of this year that will effectively be running out of boxes to lease, and so that's when you'll see us really have a lot more of the deal flow coming from the shops.

And so just curious on the convenience properties that you've highlighted. How should we think about the NOI growth of those centers? I mean there's about 30% of leases that expire with that option. So what's the upside in rent that you think you can get maybe the mark-to-market opportunities there?

Well, it depends on the property, but I'll give you an example in Shops at Boca, I think the mark-to-market is probably close to 50%. The question is how much of it can you capture, but with an ABR of $38 in place and leases and the remainder of our portfolio in South Florida in the $40, $50, $60, $70 range, the scarcity value is definitely causing a lot of rent growth and that's one of the main thesis behind convenience oriented properties is that the number of tenants seeking a simple 30 by 90 foot wide space is very large.

And so whenever you get the opportunity to renew a tenant who is naked with no options, the CapEx required for renewal is 0 and the CapEx required to replace a shop tenant is pretty low. So I think that a lot of that growth from that subsector is really coming from just general market rent growth and then a lack of CapEx required to buy that growth.

The next question comes from Mike Mueller with J.P. Morgan.

Conor, I think you said the bottom end of the guidance range doesn't include any reversals or prior period collections. I think you got that right. But what's baked in there in the top end of the range?

Yes, it's consistent with last quarter, Mike, it's still another $0.01. So effectively if we have another $2 million of reversals that would be the top end of the range. But in terms of what's on the balance sheet, we've got $13 million of AR, about half of that was reserve or call it $6.5 million, $7 million and about half of that reserve, excuse me, is related to cash basis deferrals. So, call it, another $3 million, $3.5 million of deferrals outstanding that we've had a 99% repayment rate to-date on these deferrals. It is a potential source of upside, but I would just give my usual caveat that it's reserved for a reason.

Got it. Got it. And obviously a lot of talk about acquisitions and pricing and stuff, but your redevelopment pipeline, it looks like it's about $60 million to $70 million and I guess as you look out over the next few years, how do you see the aggregate size of that pipeline either changing or staying the same?

I think that -- this is David, Mike, redevelopment can come from kind of defensive where you need to change the shape and the layout of a property to match current demand or it can come from densification where you're trying to add square footage, whether it's in retail or whether it's another asset class. It sure feels like the rent growth coming out of the COVID years has basically made the numbers far more compelling to lease existing space. So I think in our portfolio, the scarcity value is making rents go up to the point that I don't see our redevelopment pipeline growing from here. I think we're really focused much more on just simple rent growth.

That's definitely Mike sometimes what I say to myself is, this business seems to have gone from a redevelopment business to a renewals business. And the renewals business is a lot easier to manage and I'm actually looking forward to the next couple of years because being a renewals business is just a great position to be in, and I hope it lasts for a number of years.

The next question comes from Floris van Dijkum with Compass Point.

I wanted to follow-up on something that Michael Bilerman asked and you mentioned something David about the dwell time being 10% down, while the visits were up. Is that 2 individual stores or is that to your center?

It's to the overall property.

Okay. So you're capturing essentially all of the tenants at the center, I just wanted to make sure I understood that correctly.

Yes, correct, correct. So if you think -- Floris if you just think anecdotally and we're definitely working through the data, there's 2 input assumptions to remember, one is every time you're working from home and you order Uber Eats for lunch, somebody goes to our shopping center and is there for a whopping 3 minutes, and that counts as a visit. Another example would be, you're working remotely 3 days a week and instead of doing 5 errands on a Saturday, now you're doing 2 errands for 3 days in a row.

And that's why I think that the tenants have figured out that proximity to the high income customers is what's generating the most trip generation and that's where they're getting the sales. So for me, I think it has everything to do with proximity and last-mile fulfillment, and that's really why we're seeing the dwell time be a little bit lower.

Got it. That makes sense. The -- another question for you guys in terms of Florida, you touted the fact that you're just over 20% of value in Florida now, do you have like a target that you want to see in Florida, do you think that can go to 30% or -- and what other sort of -- I saw you're in Tallahassee now with just one asset, is that a market that you expect to get greater scale in?

Well, I think part of the migration of our value is simply because we've had a couple of large joint ventures that were in kind of middle market communities that have gone away and so the remaining portfolio has become more concentrated in our top 12 submarkets. So we don't have a numeric target for the State of Florida or for really any other region, we're pretty happy with our top dozen markets and you've seen us start buying assets in those markets, including Arizona, but some of our other markets too, like Boston and DC and Atlanta.

When we find things we like, I think we're going to go after those properties in our existing markets. I don't see us going to new markets, Tallahassee property came in a small portfolio we bought from our partner, but I think we're finding specific property reasons to buy as opposed to a submarket reason.

Yes, Floris just on the point on metros, I think it's 90% of our base rent, our value in Orlando and Miami. So that's -- it's really those 2 markets with additional assets in Tampa Naples and to your point, 1 property outside of those MSAs.

Great. And then maybe last, just talk a little bit about -- more about the convenience focus that you guys have. I mean I think about it sort of the size of the assets is sort of like a typical PECO grocery anchored centers, $20 million to $25 million, $30 million or something like that, if they're relatively small, lower CapEx, as you say, more upside in terms of marking rents to market. How should I compare that or how should investors compare that to street retail where again you've got higher value per square foot, but typically the beauty about traditional suburban street, why is that again more cracks to reset rents to market lower CapEx, would that be an extension to your investment focus or is that -- are you guys happy being focusing on the convenience because it's such a big potential market anyway?

I think what's interesting Floris is, look at the 2 categories, street retail and convenience retail, and you named a similarity which is a little bit shorter duration, fewer options and therefore easier to capture mark-to-market, and in general, lower CapEx because it's more of a renewals business both for convenience and for street. The major difference between the 2 to me is significant, and that is that street retail is generally pedestrian and convenience retail is convenience with the automobile.

And with the changes in the pandemic and the cultural shift to hybrid work, which I think is longstanding, I do feel like investing around the macro theme of wealthy suburban communities with auto-centric trip generation is just a superior thesis. So I do not see us moving out of convenience oriented into street retail because I just think that the customer demand is going to drive higher rents. And in these communities, it's very difficult to entitle additional square footage, construction cost is going up, which means for anybody to build competing supply would have to charge more rents. So I think there's a lot of favorable tailwinds to it.

Yes, the only thing I'd add to that is fee ownership versus a condo, right. We own the land versus typically it's a condo ownership and obviously there is a difference there as well.

The next question comes from Paulina Rojas Schmidt from Green Street.

You reported strong leasing activity, so obviously there is still significant enthusiasm. And what are you hearing from retailers, and is there any change in tone? Are they or are you concerned at all about the higher inflation, higher interest rate environment and the potential drop in consumer spending?

Paulina, those are great questions. We hear anecdotal information from the retailers, I would say that their primary concern in the past 12 months has been to get into the locations and the communities, they want to get in, so finding space was probably most top of mind.

The second kind of conversations we've had with them has a lot to do with finding staff. I think labor is sometimes not talked about as frequently as inflation for products, but I think labor inflation is a real issue for the retailers and I think it's part of the reason we've been focusing on national credit tenants because the larger tenants that have 401(k)s and they have dental and medical programs, they're able to hire staff and that's why I think you're starting to see a lot of the national credit get tenancies signed, get leases signed and get open because they can hire the staff in order to occupy and staff those stores.

Going forward, I think inflation is on everybody's mind and certainly on the minds of retailers. A number of our tenants are discount oriented and so I think they feel like when inflationary environments occur, when the next recession comes, what normally happens is high income consumers start to acquire more discount goods. And so I think the discounters want to be in those submarkets where they're going to capture some of that high-end consumer coming down market a little bit.

And then how did commenced occupancy change sequentially on a sort of same-property basis because I see a decline but I'm not sure this is a clean more or less same-property figure?

Paulina, I'm happy to discuss offline. So I mean our same-store commenced 90.2% in terms of what changed. The only significant pool change I can think of is we added Casselberry Commons because we acquired it this quarter. But I can come back to you, I can't think of anything that was material that would impact the sequential change in the same-store commenced rate.

Okay. So then there was this question decline…

Paulina actually, sorry, just to clarify that same-store commence, excuse me, is including redevelopment. The number you're probably referencing was excluding redevelopment, but I can get you the apples-to-apples number if you'd like offline.

Okay. And then the last one, I think you mentioned you had been successful in getting tenants open ahead of schedule. Is that the main driver behind the same-property guidance increase or as you mentioned?

No it's a little bit of everything. Yes, sorry to cut you off, it's a little bit of everything. You're right, for this quarter, the benefit to same-store NOI was in part due to earlier rent commencements. We also, I referenced had higher retention, less fall out this quarter that has an impact over the course of the year. I think that far outweighed the kind of one-time benefit of 1 month or 2 here or there from an anchor opening. But both are impactful material to us, but the far bigger impact was the full year numbers was greater retention, greater mark-to-market, those factors as opposed to rent commencements.

We could have more upside over the course of the year from rent commencements, I mentioned as one of the swing factors for the year, that's one of the big 3. But TBD on that front, we've had great track record, kudos to our operations team, but there's nothing else built-in on that front, but it could be a source of upside.

The next question comes from Ki Bin Kim with Truist.

So just going back to your acquisition, the cost base of this quarter was about $550 per square foot, and thanks for all the information on yield and CAGR. But what does this translate to better your acknowledge in terms of occupancy costs, and if you get that 7% CAGR over time, what does that mean for your 5 occupancy cost in your underwriting?

Ki Bin, it's a very good question. It's so dependent on who is the tenant. So we've got a Charles Schwab that came with this Scottsdale property. We've got restaurants doing $1,000 a foot in Boca. So it really, really depends on the tenancy and when we acquire them, we do go through their occupancy cost to figure out who is at risk and who can handle more rent growth. So when we're turning properties away that we don't want to buy, it's usually exactly what you're saying, the rents may look good from a market perspective, but the tenant roster can't handle more bumps. So we're trying to find the properties where the tenants are generating enough top line sales that they can afford to get to market, which is arguably a lot higher than the in-place.

Okay. And you mentioned the 5.1 going in yield and 5-year CAGR of 7% which is, call it, 12% low, 12% unlevered IRR, it seems like with those kind of economics, capital would be all over that type of acquisition. So there's a couple of questions, is it the way you acquired it, is it a different set of underwriting that led you to be the winner on this type of deal, if you can just kind of provide some color around that?

I think it's only a matter of time before a lot more capital starts chasing similar type of properties, the reality is when institutional or private capital allocates to an investment thesis, a lot of it is around, who the anchor is and what that anchor does. And I think what's changed for us is that the geo-location data that all landlords have access to now does kind of free you from having to go to a specific anchor and it allows you to go into unanchored or convenience-oriented properties.

And so I do think that having that data allows us to be a lot more nuanced about our acquisitions. And we are competing against a lot of other buyers, it's just that we're willing to really work hard to source some of these smaller deals. And that is one of the challenges of this thesis is that the deal size does tend to be a little bit smaller and so it just takes a lot of leg work to get the deal pipeline built.

The next question comes from Linda Tsai with Jefferies.

In terms of your earlier comments just now about going into convenience-oriented properties because of geo-locational data, you don't need an anchor, what would be like the mix of certain retailers that you would require in order to do this?

Well, we still can be like -- we still like credit. I think in the next downturn, we're going to be happiest with buying credit. So you've seen everything we've bought. There is a lot of financial institutions where we can measure their deposits, there's a lot of high-end credit restaurants, a lot of Starbucks, there's a lot of Verizons, Wells Fargo, Chase Schwab, et cetera, J.P. Morgan. So we are getting a lot of credit. I think that the non-credit tenants that we like to see tend to be service users of restaurants that have proven sales.

Yes, Linda, when you think about the common denominators of the existing portfolio, those 3 factors credit to David's point, our national tenants are 89% of base rent. The second is market we generally have invested in markets that we already know or have existing assets. And the third is income, those are 3 pretty powerful filters that to David's point, remove a lot of the investment subset. So again, you'll see the kind of -- as David mentioned in his Florida comments, the common attributes are the market incomes and the credit and that's what we're kind of investing around.

That makes sense. And then last quarter you talked about the 200 basis point increase in occupancy from the end of '22 to the end of '23. Do you think it could be higher than that?

No, I think it's fair. I mean to kind of Paulina's question, could we have or we do now have higher occupancy expectation for the course of the year? Yes. But I still think that build and growth is very similar if you look at our SNO pipeline, it's generally unchanged, it's just maybe you have a little earlier commencement here or there or a higher kind of initial starting point. But it should I think generally kind of move higher over the course of, call it, 1 basis point to 200 basis point level could be pulled forward some potential commencements from '23 into '22. Yes, but we're not ready to kind of estimate our budget that yet.

And last question just the $3.5 million of potential source of upside from reserve tenants, do you have any of that, that could potentially benefit 2023 earnings?

No, I think to Mike's question, we've got about at the top end of the range $2 million of potential reserve reversals that would include either just reserves we have in general or that can include the cash basis deferrals that I referenced. Just know that as we get longer in this kind of collection cycle, the probability of collection drops, right.

Additionally, if you think about a deferral we made with the tenant that implied a '22 or '23 into '24 repayment, means that they probably had a higher level of stress during COVID as well. So you're right there's potential source of upside, I would just caution folks that it doesn't mean we have $3.5 million in the bag. One, it's spread out over a couple of years and 2, these are tenants that needed a longer dated deferral for a reason.

(Operator Instructions) The next question comes from Tammi Fique with Wells Fargo.

Just maybe following up on the convenience oriented acquisitions. I'm just wondering, is the focus there geographically around existing assets, I guess I'm just trying to get a sense for the operating efficiencies of the smaller assets as well as your appetite for expansion into additional market?

Tammi, I would say it's definitely within submarkets where we own existing properties, and that's really for 2 reasons: one, as you mentioned from an operating efficiency standpoint, if we have property management and leasing covering that market anyway, it's kind of a way to scale G&A without having to increase staff. And the second is market information, if we're doing recent deals in Arizona and we see recent shop leases at $60 a foot and then we see a property for sale a mile away, that's in the $30s that tells us something. So I think the market intelligence is kind of equally as important as the G&A scale.

Okay. And then can you just provide us some perspective on changes in the lending environment on both the secured and unsecured side and how you were thinking about the '23 maturities in terms of repayment or refinancing?

Sure. Tammi, it's Conor. Look, to say that the lending market is volatile is probably an understatement, all-in rate or coupon and the bond deal could change, it feels like 20 basis points in the day. So look, thankfully, we've got access to a wide variety of sources and some great banking partnership. So whether the term loan market, the unsecured bond market or the mortgage market, all are open today, but to your kind of genesis to your question, its all-in rates are up between 75 basis points and 150 basis points depending on which market I just referenced.

So again, we thankfully got a very wide variety of sources, as I mentioned, between the big 3 and given our balance sheet, there's nothing needed right now, but you're right, with '23, '24, '25, there's some sort of capital markets activity necessary in the next, call it, 9 to 18 months that will take advantage of one of those 3 buckets. But it's again volatile is an understatement and pricing is definitely out, call it, round numbers 100 basis points in the last 4 months.

The next question comes from Haendel St. Juste with Mizuho.

I guess I wanted to ask you about the preferred I think coming due in June 6.25, curious given the change in your cost of capital, how are you thinking about redeeming that in terms of sourcing? So any comments on that would be appreciated.

Sure. Haendel, it's Conor. So you're right they're pre-payable at par in June of this year. As you know, there's no maturity on that. So it depends on kind of our cost of capital at time and if you want to do anything, the nice part is, we don't have to do anything, given the move-in rates, they're potentially even more attractive today than they were 4 months ago. But if we have a use of capital and that is the best use to take those out and we'll do so. But at this time, there's no plan to do anything and we're excited about the perpetual nature of that piece of paper.

Got it. Got it. I think I heard you mentioned that there's still, within the guidance, some recapture of prior period rents, I guess can you quantify what's in the upper end of the guidance range and then overall what the remaining opportunity that's left here, and if any of that is carried over into 2023?

Yes. So just at the top end, it's about $0.01, so $2 million of potential reserve reversals and that could be in form of COVID deferral repayments, or excuse me, cash basis deferral repayments or just other reserves we have on the balance sheet. So that could occur over the course of the year, it could be pro rata over the course here, it's kind of a TBD. There could be, to my earlier response, additional reserve reversals in '23 and '24. We'll see, I would just again reiterate my point as we get further away from 2020 and those deferral agreements, the risk grows, right. And so they're reserved for a reason. So again it's $0.01 in 2022. Could there be additional upside in 3 and 4? Absolutely. But again, I wouldn't bank on it as of today.

Okay. That's helpful. And then last one, I was just curious, you made the comment earlier, a couple of times that you're continuing to get your stores open ahead of schedule, which helps you a little bit in the quarter, but I guess I'm curious what maybe some of the secret sauce there, is I'm hearing some of the challenges with the labor shortages, supply chain issues. How have you been able to get those stores open and is that something that you anticipate you'll continue to be able to do into the back half of the year?

Well, one input to that Haendel is that when we budget for store openings, we budget for the last possible date that they're allowed to open in the lease. And it just so happens with tenant sales the way they've been the tenants are trying desperately to get open earlier. So there's certainly part of the assistance on that.

The second is that, we're a large enough company with a dedicated construction staff that is sourcing some of the long lead items like insulation and roofing materials and MEP units. They're just sourcing those long lead items when the lease gets signed as opposed to when they pull the building permits. They've done a great job of getting the materials that we need. The challenge has been turning into labor. I think that's the issue. So going forward, I think we're certainly not banking on earlier rent commencements going forward simply because labor seems to be getting more and more difficult to find, particularly on the skilled side.

This concludes our question-and-answer session. I would like to turn the conference back over to David Lukes for any closing remarks.

Thank you all for taking the time. We'll talk to you next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.