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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, and welcome to the Kimco Realty Corporation’s Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, the conference is being recorded.
It is now my pleasure to introduce your host, Mr. David Bujnicki, Senior Vice President of Investor Relations and Strategy. Thank you. Mr. Bujnicki, you may begin.
Good morning, and thank you for joining Kimco’s quarterly earnings call. The Kimco management team participating on the call today includes Conor Flynn, Kimco’s CEO; Ross Cooper, President and Chief Investment Officer; Glenn Cohen, our CFO; Dave Jamieson, Kimco’s Chief Operating Officer; as well as other members of our executive team that are also available to answer questions during the call.
As a reminder, statements made during the course of this call may be deemed forward-looking, and it is important to note that the company’s actual results could differ materially from those projected in such forward-looking statements due to a variety of risks, uncertainties and other factors. Please refer to the company’s SEC filings that address such factors.
During this presentation, management may make reference to certain non-GAAP financial measures that we believe help investors better understand Kimco’s operating results. Reconciliations of these non-GAAP financial measures can be found in the Investor Relations area of our website.
Also, in the event our call were to incur technical difficulties, we’ll try to resolve as quickly as possible, and if the need arises, we’ll post additional information to our Investor Relations website.
And with that, I’ll turn the call over to Conor.
Thanks Dave. Today I’ll kick things off with a brief update on our strong operating fundamentals and our strategic plan as we navigate what appears to be an uncertain and challenging macroeconomic environment. We’ll also follow with an update on the transaction market, then Glenn will close with our financial metrics and update guidance.
First our results. Another strong quarter continues to validate the quality of our portfolio and our talented team that each continue to shine. These two constants will continue to serve us regardless of the ever changing external environment. The current supply and demand landscape continues to benefit Kimco as retailers prioritize our portfolio of open air, high quality grocery and good shopping centers and mixed use assets, positioned in first ring, last mile suburbs and major metro markets.
Sequentially, total occupancy finished up 20 basis points pro rata to 95.3% and year-over-year occupancy was up 120 basis points due to positive net absorption. Anchor occupancy increased 20 basis points quarter-over-quarter to 97.8% and was up 90 basis points year-over-year. Small shop occupancy ended flat sequentially at 89.2% and was up 190 basis points year-over-year.
It is worth noting that small shop occupancy would have been up 10 basis points this quarter, but for some vacancies associated with our recent acquisition of two grocery anchored centers in Fishtown, Philadelphia and Massapequa, Long Island, which had a 10 basis point impact on our overall small shop vacancy. We view these vacancies as future upside and have leasing activity on all 10 of the small shops at these properties.
During the quarter we signed 146 new leases totaling 620,000 square feet. Our new lease rent spreads were 16.5% with Burlington replacing a vacating Bed Bath & Beyond in the Southwest, a notable driver. This is indicative of the embedded value in many of our older leases, including that former Bed Bath and Beyond boxes which have a mark-to-market upside ranging from 15% to 20%.
In the event we are able to recapture these Bed Bath and Beyond spaces, we have a variety of backfill candidates such as grocers, dominant omni-channel players or off price retailers, many of which have already showed interest in those boxes. With virtually no new supply in over a decade, our strong credit tenants are finding it difficult to meet their new store opening targets and have been aggressively pursuing opportunities.
Nothing accentuates the supply and demand and balance more than the heightened attention levels we continue to experience. During the quarter we closed 315 renewals and options totaling 1.5 million square feet. Third quarter renewals and options spread were 6.2% with options ending at 7.9% and renewals at 5.2%. We reported only 111 vacates totaling 430,000 square feet this quarter which is almost 20% lower than the five-year historical average for third quarter vacates.
Overall third quarter deal volume was a record at 461 deals totaling 2.1 million square feet with a combined spread of 7.5%. Notwithstanding the favorable demand, we continue to monitor the quality of our tenant base and remain confident that the tenants who have endured the pandemic with Kimco are battle tested and have a higher credit quality. We are mindful of the current inflationary environment and the potential shift in consumer behavior.
With that in mind, I want to highlight our strategic priorities that has already put us in a strong position and which we believe will enable us to continue to outperform. At Kimco we always focus on creating long-term value. Building a business for multiple cycles, multiple Black Swan events, is not easy. In the last five years it seems we have experienced more frequent once in a lifetime events than in previous decades combined. And a critical component of our success in navigating these occurrences all starts with our team and our culture.
We are fortunate to have a seasoned, energetic and diverse team and Board Directors that understand it takes resolve and patience to allow our strategic plan to be executed. We prioritize integrity. We’re doing the right thing as embedded in the culture and working together through adversity can be highly rewarding. Having the right people is unequivocally essential for weathering economic cycles and we are laser focused on building out the best team.
Our team building efforts have not gone unnoticed. We are proud to be the only public company to receive a great place to work in real estate award as voted by our employees. We take sincere pride in continuing to elevate and nurture the Kimco culture and serve as a leader in the industry.
Another priority is liquidity, which always needs to be a top priority in real estate. When a company like Kimco has financial strength relative to others, it provides a unique advantage enabling us to seek out opportunities in moments of distress and find those generational opportunities. In addition, we benefit from a long-dated debt maturity profile that is predominantly fixed rate, a diverse lender base, a large line of credit, ample amounts of free cash flow, and an investment grade credit rating which sets Kimco apart.
A recent partial Albertsons monetization has already boosted our unique liquidity position. As we move forward, we’ll have the opportunity to monetize additional ACI shares and reinvest in growth opportunities. We also plan to continue focusing on our core competency, which is owning open-air grocery-anchored shopping centers located in high barriered entry markets with below market leases.
Importantly, our grocery-anchored necessity based portfolio offers proven defensive characteristics while simultaneously offering ample opportunity to execute our re-merchandising plans. These include further improvement in traffic, sales and cash flow at the asset level. This is how we anticipate being able to continue to outperform with the ever changing economic environment notwithstanding.
And finally, we are patient and able to wait for unique opportunities for which Kimco can use its platform to continue to create long-term shareholder value. We are well positioned to look at the broad landscape of investment opportunities and make sure we invest at a spread to our weighted average cost of capital that will help Kimco outperform over the long-term.
And with that, I will turn it over to Ross.
Thank you Conor, and good morning. It’s been a busy few months on a variety of fronts, but importantly Kimco is as well positioned as we have ever been to potentially take advantage of the ever changing market conditions. With the recent bond refinancings and partial Albertsons monetization completed, our liquidity positions us to continue to be opportunistic. On the transactions front as previously mentioned, we began the quarter by completing the acquisition of two grocery-anchored assets from the Cedar portfolio in addition to the participating loan on three grocery-anchored assets in Pennsylvania.
Select disposition activity continued with the sale of nine shopping centers and two land parcels in Q3 for $188 million with KIM’s share of $64 million. These sales included several joint venture assets highlighted by the exit of a legacy Weingarten joint venture consisting of the five remaining assets from the partnership. Kimco’s ownership of that venture was 15% and included assets with demographics inconsistent with our core portfolio.
Additionally, during the quarter, Kimco was repaid in full on the first mezzanine loan that we made since the formation of the Structured Investments Program in 2020. The unlevered IRR on that 20-month investment was 12%. As the quarter progressed, the rising interest rate environment and overall market uncertainty led to a slowdown in deal flow given a widening spread on the bid ask between buyers and sellers.
A majority of assets that were put on the market for sale this summer either have not transacted are delayed until 2023 or have been pulled all together. The exceptions were committed deals that already had financing plans finalized. For Kimco, given the strength of the portfolio, we have minimal dispositions planned and have the luxury of being price sensitive due to our strong liquidity position. As we look at the remainder of the year, we expect to execute on a few dispositions that were committed in prior months and should get done by year end.
Looking ahead to 2023, we remain confident about the fundamentals of our business and our core portfolio, but also excited about the prospect of taking advantage of dislocation that favors well capitalized companies with strong conviction for open-air retail properties. As was the case in the early stages of the pandemic in 2020 and 2021, we intend to be judicious and disciplined with our capital allocation while ready to capitalize on unique opportunities. This should enable us to generate outsized returns on quality real estate when liquidity is at a premium and our enviable capital position is the exception and not the rule.
I will now pass off to Glenn to provide the financial results for the prior quarter.
Thanks Ross and good morning. We had another very productive quarter highlighted by the strong leasing activity that kind of walked through as well as positive same site NOI growth. In addition, we have further improved our leverage metrics and extended our debt maturity profile while maintaining a high level of liquidity. While we can’t predict the future as it relates to stubborn inflation and continuing rising interest rates, so far consumers and our retailers are weathering the impact.
Now for some details on our third quarter results. FFO was $254.5 million or $0.41 per diluted share for the third quarter 2022. This compares favorably to the $173.7 million or $0.32 per diluted share in the third quarter 2021, which included $47 million or $0.08 per diluted share related to Weingarten merger expenses. The increase in FFO, excluding the Weingarten merger related costs was primarily driven by higher pro rata NOI of $42.4 million with $32.4 million contributed from the Weingarten acquisition.
The NOI increase also included $13.7 million from core portfolio growth, $4 million from other net acquisition disposition activity, and $2 million from lease termination fees. The NOI increase was offset by the $9.1 million change in credit loss due to the significant level of credit loss reversals recorded in 2021.
It is important to call out through the first three quarters of 2022 we have recognized $7.4 million of credit loss income from reversals of prior year reserves. In terms of interest expense, although it was only $700,000 higher, it includes a one-time $7 million benefit from the acceleration of the fair market debt amortization from the early repayment of two Weingarten bonds during the quarter. Altogether, we derived approximately $0.02 of FFO benefit in the third quarter that will not carry forward.
Our operating portfolio delivered positive same site and NOI growth of 3.1%, which includes a 10 basis point benefit from our redevelopment projects. If we excluded the impact of credit loss and abatements, the same site NOI growth would have been 5.7% for the third quarter. This is an excellent result as we were comping against a 12.1% level last year. The minimum rent component contributed 480 basis points. Lower abatements added 90 basis points and higher percentage rent added another 60 basis points. These increases were offset by the significant level of credit loss reversals recorded in the prior year quarter.
Turning to the balance sheet, during the quarter, we issued a new $650 million or 4.6% unsecured bond, which is scheduled to mature in 2033. The proceeds along with cash on hand were used to repay all our remaining unsecured debt due in 2022 and 2023, totaling y $902 million with coupons ranging from 3.125% to 3.5%. We also paid off $46 million of mortgage debt during the quarter. These actions enabled us to proactively address all our near-term refinancing risks.
Importantly, our weighted average debt maturity profile now stands at 9.7 years. We finished the third quarter with look through net debt-to-EBITDA of 6.3 times, which includes our pro rata share of joint venture debt and our perpetual preferred issuances. This is the lowest leverage level we have ever reported since we began disclosing this metric over a decade ago. Further, this ratio does not include any benefit from our Albertsons investment, which had a value of just under $1 billion at quarter end.
Our liquidity was approximately $2 billion at the end of the quarter, comprised of nearly $1.9 billion available on our revolving credit facility and $124 million in cash. Subsequent to quarter end, we sold 11.5 million shares of our Albertsons stock receiving $301 million in proceeds. Based on the capital gain of approximately $250 million, we expect to pay approximately $61 million in capital gains tax [ph], which would net Kimco approximately $240 million, which can be used for accretive investments and further debt reduction.
As a side note, to the extent the company pays federal tax on this capital gain, our shareholders will have an opportunity to receive a credit for their pro rata share of the tax the company has paid. We will provide more details on this as we approach year end.
Based on our strong year-to-date results and our expectations for the fourth quarter, we are again increasing our 2022 FFO per share guidance range to $1.57 to $1.59 from the previous range of $1.54 to $1.57. This new guidance range takes into account the one time benefits we derived during the year, higher interest expense from our debt refinancing completed during the third quarter, and the reduction in debt fair market value amortization, credit loss for the fourth quarter of zero to $1 million, positive same site NOI growth and the impact of the Albertsons monetization discussed earlier.
As we have in the past, we plan to provide our 2023 outlook when we report our fourth quarter results. That said, given the ever-changing global economic landscape, we want to provide some perspective for the coming year. Based on our current total debt stack, we expect interest expense to be $24 million higher in 2023. This is the result of the reduction in the fair market value adjustment associated with the Weingarten bonds recently paid off, higher interest rates from the refinancing we have completed, and higher [indiscernible] rate.
We recognized $7.4 million of income from credit loss reversals this year, which we do not expect to continue in 2023. Instead, we will likely revert towards historic norms with an initial credit loss expectation of 75 to 100 basis points to revenues given the uncertain macro environment. In 2022, we had about $0.03 per deluded share of one-time items that we don’t expect to repeat in 2023.
Moving on to our dividend, based on our strong third quarter results and increased guidance range, our Board of Directors has again raised the quarterly cash dividend for the fourth consecutive quarter to a new level of $0.23 per common share. This represents an increase of 4.5% from the previous level of $0.22 per common share and 35.3% over the $0.17 per common share paid a year ago.
We continue to maintain a dividend distribution level in line with estimated taxable income from recurring operations and retain over $200 million of free cash flow annually after dividends and CapEx. These amounts do not include the benefits from our partial monetization of Albertsons stock or dividend proceeds we expect to receive from the announced Albertsons special dividend, which we are scheduled to receive on November 7th, totaling $194 million. Upon receipt, we expect to declare a special dividend comprised of either cash or a combination of cash and common stock before year end to satisfy the redistribution requirements and retain as much cash as possible for future investment and debt reductions.
Lastly, I would like to again acknowledge the efforts and commitments from the entire Kimco team and all they do to create shareholder value.
And now we are ready to take your questions.
Thank you. [Operator Instructions] The first question comes from Michael Goldsmith with UBS. Please go ahead.
Good morning. Thanks a lot for taking my question. Conor, last quarter you qualified the results with cautious optimism. This quarter the market was described as uncertain and challenging. Can you talk about what you’re seeing in your seat on the overall market and how it’s evolving? And presumably tenants are starting to have conversations about 2023 store openings. Has there been any change in posture to their thought process? And I recognize you have a lot of different tenant types, so I’m just trying to understand the change in tone and how that may translate to tenant demand kind of in the upcoming years? Thanks.
It’s a great question. I think when you think about how we positioned ourselves we continue to think our portfolio is poised for growth. And so our cautious optimism remains and our strength of our portfolio and our team is shining through as you see the results really continue on the same path as previous quarter. On the macro side, clearly the clouds have gotten darker on the horizon, there’s more uncertainty. So when you get those types of flashing warning signs, you need to make sure you prepare for what may come next. And that’s where I think the tone in our earning scripts have tried to outline exactly how we’re focused on preparing for what could be a challenging environment.
Now the good part, and the good part for Kimco is we’ve got a very battle tested team and the portfolio has been transformed. So when you look at the supply and demand dynamic for the Kimco portfolio and the resilient Kimco consumer, we feel like because we offer that value and convenience component, we should be in a very good position to weather any type of storm come next year.
So overall, the retailer’s commentary has not changed. 2023 is pretty much baked by this point when you look at the retailer open device most of those deals have already been solidified. They’re already looking for deals in 2024 and they haven’t slowed down. There’s still a lot of demand out there and in a lot of ways this might be the best leasing environment we’ve ever seen because of the depth and breadth of the retailer demand and the lack of supply.
Next question comes from Samir Khanal with Evercore. Please go ahead.
Good morning everyone. Hi Conor. In your opening comments you talked about seeking growth opportunities given your financial strength. Maybe elaborate kind of on that statement and kind of what that opportunity set could potentially look like let’s say over the next 12 to 18 months, especially in light of even the recent monetization of Albertsons that you’ve done? Thanks.
We’re happy to, and Ross you can chime in as well. Clearly we’ve got a nice landscape of opportunities when we look forward. With our liquidity positioning it’s pretty unique to come into a point where banks are already pulling back. You’re not seeing a lot of bond deals getting done. You’re seeing a lot of floating rates that’s coming to maturity. You’re seeing a lot of CMBS maturity coming up. That typically signals distress or some type of dislocation where if you’ve got dry powder, you can pretty much take advantage of it.
So when we look at our unique set of opportunities, clearly we’d love to buy core acquisitions with growth embedded in the cash flow. Those have been hard to come by in our markets where we continue to mine for those unique opportunities. What we have found a little bit more on the opportunity side is on the preferred med structure. We continue to think that that capital with the higher return is a nice opportunity for us to get a foot in the door with a [indiscernible] to have a future acquisition opportunity on that asset. And that may be something that again may come into focus next year as capital starts to get tightened up.
Yes, and now in a lot of ways these environments are where we have the ability to do our most attractive deals. Just looking back to the onset of the pandemic in 2020 and early 2021, I think we were able to accomplish some really unique opportunistic investments that became much more challenging over the last 12 months as the market recovered. A lot of that, that’s fast money that came in 1031 exchanges and we’re really pushing pricing have all subsided at this point. So in a lot of ways we think 2023 will be the perfect environment for us to go back out there and to find some really attractive structured investments.
We continue to have conversations with all of our joint venture partners to see who may have an interest in monetizing in a choppy environment. And as Conor mentioned, while the bid has spread on the core acquisitions have been wide of late, we do hang around the hoop and have lots of open dialogue with brokers and a lot of owners that may consider selling next year. And we’ll be ready to do that with our liquidity position and move quickly if given the opportunity.
Our next question comes from Greg McGinniss [ph] with Deutsche Bank. Please go ahead.
Good morning. You know, Glenn, in line with your goal to retain as much cash as possible from Albertsons proceeds, as you mentioned in your opening remarks, how much might you push that kind of shared a cash ratio on the special dividend?
I’m sorry, can you repeat just the last part? I didn’t hear it.
How much might you push the share versus cash distribution on the special dividend?
Yes, so we haven’t finalized it yet. It’s something that we still need to go over with the Board. There’s a requirement to do a minimum of 20% in cash. So we’re going -- we will finalize it over time, but I mean, ideally we’re going to try and retain as much cash as we can. And again, it’s -- the shareholders role may fall relative to any stock dividend that we would issue since it’s pro rata amongst the full range of shareholders.
Your next question comes from Juan Sanabria with BMO Capital Markets. Please go ahead.
Hi good morning and thanks for the time. Just may be a question for Glenn on the guidance. I think you walked through it and apologies if I missed it, what the driver is from an FFO perspective on the implied fourth quarter the sell for FFO? And then just curious if you can give more comments as part of that on the same-store NOI guidance, I believe you’re 5% year-to-date, but you’re kind of holding the commentary about just being positive. So maybe you could just give a little bit more context around some of the puts and takes for same-store NOI.
Yes, so first just on the guidance. So we didn’t, as I mentioned, we did raise the guidance to $1.57 to $1.59 from the previous level. We are comfortable quite candidly at the upper end of the range. So that would imply roughly a $0.39 fourth quarter. As I mentioned, the third quarter did have about $0.02 of one time as in the fair market value amortization that came through a couple million of LTA. So we feel pretty comfortable at the upper end of the range as it relates to guidance. So on the same site NOI I won’t say we’re going to probably be close to where you saw us in the third quarter in that range, probably in that, you know, 3 percent-ish range.
You know, when you look at the whole, look at it all together again, we are up against a pretty tough comp of over 12%, but I think it will be pretty close to where we saw the third quarter. Again, credit loss income has come down significantly and as I said, as I mentioned, we really think that we’ve come to the end of where we’re having income from credit loss and it will start to revert back towards something more in line with what you’ve seen previously, 75 basis points of credit loss over time.
Your next question comes from Haendel E. St. Juste with Mizuho. Please go ahead.
Hey, good morning. So I guess maybe one for Ross on the transaction side. Given your activity here in the quarter, I was curious, maybe you could give us some perspective on cap rates. I know they’re moving, but curious on where you transacted on your acquisitions dispositions during the quarter. When those occurred I think those probably early in the quarter and then where would you pay cap rates today? And then what would you need to see in terms of cap rates to get more active given your higher cost of capital here? Thanks.
Sure. Yes, I mean cap rates are certainly a bit of a moving target in this environment. While they don’t go necessarily basis point to basis point with interest rates there has been a little bit of a lag as rates have risen pretty dramatically. So it is a little bit difficult to peg exactly where deals are today, particularly because, as I mentioned, deals that are not previously committed as of the last 45 to 60 days plus, you’re really seeing a bit of a pause in the marketplace today where I think buyers are still comfortable moving forward on core acquisitions are not necessarily where sellers are willing to sell today. Now that might start to change if you see a little bit more distress and forced selling, which I think will start to mark where cap rates will transact that, but right now you’re seeing a pretty wide bid asset spread.
But clearly, the sub five cap grocery-anchored shopping center transactions that we saw through the first half of the year are not penciling for investors today. The deals that we did close in the quarter were all based upon an in-place cap rate that were in the mid to high 5s. Again, as we talked about in previous quarters, for us in looking at cap rates, it really is just a spot check and a point in time. I think in the prepared remarks, we talked a little bit about some of the vacancy and the assets that we acquired, which will really be able to fuel our growth and get our CAGR and our IRRs to an acceptable level.
So while cap rate is something that we do factor in, it’s not the end of the metric that we look at. So we’ll be watching very closely. The good position that we’re in enables us to move once the capitulation with sellers starts to occur. But clearly we’re waiting for a little bit more clarity on where sellers are willing to transact before we see a whole lot of closings occurring, certainly by the end of this year and as we get into the beginning of next year.
The next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey good morning, morning out there. It sounds like it’s one question. So I’m going to focus on the Albertsons and the tax and the dividends and capital gains and all that fun stuff. Can you just provide to the extent that you can disclose how much of Albertsons sits in the TRS, how much is in the REIT, abilities to either manage the taxable gain? And it doesn’t sound it sounds like you’re already paying out sort of your taxable income, but maybe there’s some stuff coming up next year, but just give some perspective? And then also more color on what do you mean tax credit that shareholders get? In REIT land we don’t normally hear about that, so maybe just a little bit more color on that aspect as well?
Yes, great, great, great questions, Alex. And you’re right, this is, it’s definitely not the norm for the REIT sector at all. So it’s a really great problem to have, I guess I’ll call it. So first of all, all the shares today sit in the REIT, years ago, now it’s I guess six years ago. Previously we had, in 2016 the shares were in the TRS. We had merged them back into our REIT. And upon waiting five years, which is, which has passed any of the built in gain related to the shares in the TRS really expired. So now all the shares are sitting in the REIT. So now it’s a matter of, as we deal with the gain, it’s a capital gain, so we have to first make sure that we are staying in compliance with the retest, one of the retest being the gross income test.
So we’ve monitored that and we’re fine. The capital gain, then the question is, how best to retain the capital for future investment debt reduction and all things that we do in the business. So we have decided that we’re going to pay the capital gains tax on the piece that we’ve monetized. And as I mentioned, that tax is about $60 million. With us paying as a REIT, with us paying the capital gain tax, we are going to provide information that all of the shareholders are entitled to a credit, not as adoption, a credit for their pro rata share of the tax that we paid. So there’s a form to be filed and tax returns that might be filed by non-exempts. But there’s a clear path to getting that cash, even if you’re non-tax paying entity.
So we plan to provide pretty significant detail on that on our website as well as outreach to our shareholder base so that they understand the roadmap that they need to take. I think it’s a, as you said, it’s a unique situation and we’ll make sure we allocate time and effort to have everybody understand what they need to do to get that tax credit.
And then, and then the other thing I’d add is, we still own 28.3 million shares of stock. And that our expectation is that over the next two tax years, 2023 and 2024 we’ll monetize it. And that will allow us to maximize retaining as much cash as we can as we continue to work through the distribution requirements.
Our next question comes from Craig Mailman with Citi. Please go ahead.
Hey guys. Just a quick question as Ross was running through the investment environment, Glenn was running through guidance, there was no mention of the $400 million acquisition in Long Island that you guys have talked about in the press. Just curious, is that still on the table here or should we think about that as sort of being punted or delayed into 2023?
Sure. yes, I mean look, our policy has really been not to comment on transactions until they close. We do anticipate that there will be additional closings this year in the next 60 days on both the acquisition and the disposition side. So we’ll certainly provide more detail as soon as any of those transactions do close. You know, the one thing that I would comment on the life cycle of some of these deals is that they all have their own nuances and they all have significantly different timeframes.
You know, our bread and butter are all cash transaction can close very quickly. Other larger portfolio transactions oftentimes have different nuances that may include loan assumptions or very significant creative tax structuring. So to that point certain deals do take quite a while to get from the initial conversations to the closing line. So as soon as we have more detail to provide on any of these deals as they close, we’ll be happy to provide that.
The next question comes from Floris van Dijkum with Compass Point. Please go ahead.
Good morning. Thanks guys for taking my question. I wanted to actually follow up a little bit on Haendel’s question, but not necessarily talk about yields and yield expectations, because as you rightly point out, that can be a moving target Ross. But maybe if you could talk about what has happened to your IR expectations since the beginning of the year and how do you see that evolving over the next 12 months as well?
Yes and no. That’s a good question. We absolutely look at our cost to capital on a daily basis. So while cap rates are moving target, frankly our internal hurdles are also a bit of moving target. But I can tell you that from an unlevered IRR perspective, at a minimum we’re looking at transactions that have to clear high single digits, low double digits. In this environment, we’re hopeful that there’s going to be some more opportunistic investment opportunities that will be certainly in the double digits. So, from our perspective, we have a host of potential deals in 2023 that we’re targeting that should absolutely be able to equip that. So we’re staying patient. We’re in a good position right now. While the Albertsons monetization has a very low hurdle to clear to be accretive in that we were only getting about 2% yield, our internal expectations are clearly much higher than that.
The next question comes from Craig Schmidt with Bank of America. Please go ahead.
Thank you. I noticed that the operating expense increased by 16.5% and that year-to-date is up 4.8% [ph]. As a run rate, can we expect closer to the double digit gains in operation expense?
Craig, it’s a good question. I think we’re going to have to get back to you on the detail on that breakdown. I think the operating expenses may have some one-time items in there to create that type of jump, but we’ll unpack that and give you the detail and follow up with you. I don’t think you’ll see that continue. I think we’ve done a pretty good job of making sure we manage our operating expenses and don’t see any sort of spikes that we can’t control. So we’ll get back to you on that one.
The next question comes from Ki Bin Kim with Truist Securities. Please go ahead.
Thanks, good morning. Just want to go back to your earlier comments about 2023, and I think you mentioned that you’re expecting a credit loss reserve of 75 to 100 basis points. I was wondering if you could just split, if you can frame that for us what is, what that looks like in a typical normal year? I realized we haven’t had a normal year in a while. And how much of that reserve accounts for tenants that are pretty much identified versus just a buffer for things that might come from like [indiscernible] yield?
Yes, sure, sure Ki. So the credit loss historically pre-pandemic for a pretty long run rate was running somewhere in that 60 to 75 basis points per year range. So just mathematically, if you look at it, if we’re in this 75 to 100 basis point target area or expectation area because of where we’re viewing the economy and the uncertainty in it, you’re looking at something in a dollar range of around $18 million. So $15 million to $20 million in total on that 75 to 100 basis point spread. So that will give you an idea.
It is not targeted or specific to any particular tenant. I mean the -- our tenants at risk, the list is actually pretty short today. But again, we’re watching pretty closely. It’s been a long cycle of not a lot of bankruptcies. So the tenants have held up incredibly well. But again, we’re in a pretty uncertain time. There’s a lot of rhetoric around recession coming and what that might mean. So our approach is just to be cautious about how we guide.
Okay, great.
Our next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.
Great. Just a quick one from me on just the financing markets. Just number one, can you remind us where you could sort of issue debt today? I recognize you may not need to and so forth, that would be helpful.
And then the second piece of it is, if I just take a step back and I think about the 2025 target that the team has put out, clearly we’re in a different sort of interest rate environment, financing environment for retailers, for REITs. Maybe can you just comment on what you think changes potentially in this new environment? Thanks.
So I’ll take the first part of your question. I would say that we’re really, really happy that we went to the market when we did and we found a very small open window to do the issuance we did. We pushed our debt maturities out, so we have no debt maturing for the balance of this year or really until 2023.
It is interesting, as rates have risen pretty dramatically, normally we would have expected spreads to come in a little bit. But I would tell you, spreads are wider today than the day we issued. Our issuance was done at 190 over. We’re probably in the 220 range in terms of spread today on a 10-year. So you can do the math, but treasury today is around 410. So you’re looking at somewhere around a coupon of around 635 to probably 640. So again, we have no need to go to the market. The nice part about our debt is all the consolidated debt is virtually fixed rate and for a pretty long time at 9.7 years.
So we don’t have short-term exposure to the rate environment. And like anything else, we’ll continue to look at the debt stock and be opportunistic where we can and look to repay future bonds at an appropriate time.
Your question about the 2025 goals, I think that we’re consistent in trying to make sure that we set goals that we want to try and achieve that might be somewhat aspirational, but we want to push out each other to try and reach those goals. Clearly, financing market has changed pretty dramatically.
You see the cash flow growth continuing. That’s the exciting part about our business. The fundamentals are quite strong. When you look at the leasing demand and the lack of supply and the stickiness factor that we’re seeing with our retention rates, we continue to think the business is on very solid footing and so we’ll continue to monitor that situation.
But we’ve got a lot of future entitlement goals that we plan to hit as well. We’ve secured 1,500 units this year. We’d like to get that up to maybe 1,800 to 2,000 by the end of the year. So we’re stretching to hit that and continue to think that when times get tough, typically municipalities sometimes loosen up on entitlements, because that’s usually when they’re trying to find ways to increase their tax base and find ways to increase the operations of their municipalities. So hopefully, we can secure even more entitlements if things do get tough.
Before we go to the next question, I just want to clarify Craig Schmidt’s question on operating expenses. The increase in operating expenses really was derived from having a full quarter of Weingarten in our portfolio this quarter. We closed in August of last year, so now we have a full three months this quarter. If you look at our operating expense ratio margin, which we put in the supplemental this quarter, you could actually see we’re recovering more than we had previously. So to Conor’s point, we’re doing a better job there. You could take the next question.
Thank you. The next question comes from Wes Golladay with Baird. Please go ahead.
Hey, good morning everyone, it’s Wes. Just a quick question on the Albertsons monetization potential for next year, would that be a cleaner year where you call it monetize $375 million and you wouldn’t have to pay any taxes, you’d be able to retain all the cash flow, and then when we look into 2024, if you get the bigger lump sum, we may be looking at a scenario that is more like this year where you may have some cap gains that you have to distribute? And then if I could get an unrelated second part question in here, I’m just kind of curious why the JVs have higher floating rate debt. We’re seeing that for many companies. I just didn’t know if it was something the partners were pushing for.
Great questions. So let me take the Albertsons first, and then I’ll talk about the JV part. So if you look at where our current dividend is, we are very, very close to where taxable income and the dividend are really in line, but just from the recurring operations. It does not include what was a capital gain from the remainder of Albertsons. So it’s going to require additional tax strategies, deductions that we can find along the way to shelter some of that. If not, we would be in the same position actually this year where we would have to either pay the tax to retain as much capital. Those are our options. I mean, because we are keeping the dividend, it’s really important for us to keep the dividend based on the recurring operations to keep that FAD number in that low 70s percent range and leave lots of pushing for us. So the specials, we just have to deal with them as they come along and look for whatever shelter we can find.
As it relates to the JVs, again some of it is because again, they’re somewhat sometimes viewed as a little bit more transitional. We’ve had, as you’ve seen, we’ve brought a lot of properties out of the joint ventures over time. So it’s been -- it’s kind of an agreement between the partners how they want to do it. In the care portfolio, we actually have almost fully -- an unencumbered pool of properties that’s financed with unsecured bank debt. So there it’s been done as floating rate, and it’s been fine because the leverage is so low to just keep it floating for now. But you are right; we do use more floating rate debt within the JVs than anything in the parent and it’s a combination of working with the partners.
I think the partners like it to give them a little bit more flexibility too if they want to put the asset on the market for sale, then they in essence take out the floating rate. So I think that’s part of it as well.
The next question comes from Mike Mueller with JPMorgan. Please go ahead.
Yes, hi. I guess looking at the size of your redevelopment and mixed-use pipelines and just given the backdrop today, can the size of that pipeline stay the same over the next couple of years as projects are completed or should we think of it as likely contracting some?
Thanks Mike, I appreciate the question. I was getting mad, getting quiet over here, so glad I could jump in at the end. We’re very opportunistic with our redevelopment pipeline. As you know, the extent of our entitlement program is pretty exhaustive with thousands of units that are entitled, ready to go when the market’s warranted and when our cost of capital is such, and we can find a structure that makes sense.
And we’re looking at multiple projects in the near-term that could potentially activate while considering all those other variables I just mentioned. The good thing about our program is the markets in which we operate in, there’s still clear demand for the product, especially on the multifamily side. You hear a lot of headlines; you read a lot of headlines related to the undersupply in the residential market. So there is housing demand that’s very much a driver of the opportunity as well in California, Florida, et cetera. So we continue to look at that.
In terms of our core redevelopment pipeline that we continue to activate, it is driven by leasing, right, and the opportunities there. As Conor mentioned in his earlier remarks, the leasing demand is such that we really have the COVID inventory that’s getting into quickly. Retailers are very much out there trying to hit their open-to-buy targets to achieve their growth goals. And our core redevelopment program fits right into that to help solve for their needs and our needs and build a better mousetrap. So we continue to see a nice healthy cadence and pace in the coming year. And again, far more in the coming quarters about the rest of the program.
This concludes our question-and-answer session. I would now like to turn the floor back over to the management for closing comments.
We appreciate everybody taking the time to join us today for the earnings call. We hope you enjoy the rest of your day.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.