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Good morning. And welcome to the SITE Centers reports First Quarter 2023 Operating Results Conference Call. [Operator Instructions]
I would now like to turn the conference over to Stephanie Ruys de Perez, Vice President of Capital Markets, please go ahead.
Thank you, operator. Good morning, and welcome to SITE Centers’ first quarter 2023 earnings conference call.
Joining me today are Chief Executive Officer, David Lukes; and Chief Financial Officer, Conor Fennerty.
In addition to the press release distributed this morning, we have posted our quarterly financial supplement and a slide presentation on to our website at www.sitecenters.com, which are intended to support our prepared remarks during today’s call.
Please be aware that certain of our statements today may contain forward-looking statements within the meaning of 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 report 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.
Thank you, Stephanie. Good morning, and thank you for joining our first quarter earnings call.
We had a strong start to the year with results ahead of budget, another productive leasing quarter, which pushed our leased rate to an all-time high of 95.9% and continue progress on the lease-up, construction and delivery of our tactical redevelopment pipeline with delivery set to ramp into year end. The net result of all these activities is a $19 million signed, not opened pipeline, with commencements tend to accelerate over the next few quarters into 2024, which provides a significant tailwind for the next several years.
I’ll start with some comments on leasing and tenant activity, including bankruptcies in light of recent macro and capital markets volatility, and then move to transactions before handing it over to Conor to give more details around the quarter and revised 2023 guidance.
In terms of leasing, the trends that allowed us to achieve the leasing volume and economics over the last three years remain in place, despite significantly more macroeconomic concerns. Supply in our sub-markets is extremely low and demand remains strong this quarter from national retailers looking to expand their footprints in the wealthiest suburban markets where we operate. Recent mobile phone data supports the fact that suburban customers are visiting our properties more frequently and more evenly spread through the week than pre-pandemic levels, and we were correct in our belief that this would ignite demand for store locations offering convenient access to goods and services.
Beginning in 2020, we made a number of changes to position our organization to capture this demand and maximize leasing velocity and it feels like those changes continue to bear fruit.
Leasing demand can be highly cyclical and correlated with the overall economy, but to date, we just haven’t seen anything material of note that would indicate a slowdown. The one change that we have seen this year, as I noted in February, is the return of chain bankruptcies including Party City and the widely anticipated filing of Bed Bath & Beyond this past weekend among others. I’ll provide an update on these two identified tenants as we don’t have any real exposure to the other tenants that have filed to date.
For Party City sites had 17 locations at quarter end with total exposure of about 90 basis points of base rent. At this time, we do not expect any of these locations to be rejected or stores to close with no material impact to full year NOI. This result is a function of the high sales productivity within our portfolio, our asset quality with properties located in the top suburban markets in the U.S., and demand from other credit tenants for space, which provided us with significant leverage as we engaged with Party City. The final outcome is dependent on the company’s emergence from bankruptcy, but we are really pleased with the results to date and the implicit stamp of approval on our real estate.
Shifting to Bed Bath & Beyond, we have 17 locations including four buybuy BABY stores, which represent 1.8% of base rent. Now that we finally have clarity on timing and control, we feel extremely well prepared for a focused marketing cycle and are confident that number one, there are single user backfill options for 16 of those locations given the amount of inbound activity we’ve seen over the last several months.
And two, that the majority of our stores will have executed leases over the next 12 months with rent commencements by year-end of 2024. Part of our confidence and demand for these spaces is the fact that our portfolio of assets can contain a Bed Bath or a buybuy BABY has a current lease rate of 99%. This portfolio has zero junior anchor space available, so the opportunity to access these properties is very attractive to growing national retailers.
As you can imagine, we would very much like to recapture space from weak tenants while demand for that space is strong. So our leasing team has been highly focused on replacement tenants in preparation for the chance to upgrade our tenant roster at materially better economics. One such tenant upgraded executed in the first quarter was a new lease for a specialty grocer at our Tanasbourne property in Portland that will replace two legacy junior anchors that we terminated last year.
That lease brings the tactical pipeline to over 88% lease with deliveries expected to ramp into year-end. We made additional progress on a few other key locations in the first few months of 2023 and expect to add projects and details to the supplement in the coming quarters. These deals, while smaller scale in terms of total dollars are expected to boost the company’s NOI growth going forward given their returns and importantly are expected to be immediately accretive to earnings.
Moving to overall portfolio leasing for the quarter as noted activity remained high with almost 500,000 square feet signed. In terms of new leasing, we signed 133,000 square feet of new deals with the leased rate for both anchors and shops up 50 basis points sequentially. Putting that leased rate into context at 95.9%, our leased rate is now 210 basis points higher versus year-end 2019 and 160 basis points higher than the company’s all-time high watermark, which was 94.3% back in 2017.
Looking forward, we have another 300,000 square feet at share of current lease negotiations with blended spreads above our trailing 12-month average. We expect this pipeline to be completed over the next two quarters, concentrated in a mix of national publicly traded credit tenants.
That said, the absolute level of quarterly activity will remain volatile as we simply have less space to lease until we take possession of square footage from bankruptcies. And lastly, with respect to transactions, we had less activity in the first quarter as compared to year-end, but did successfully reinvest the remaining proceeds from the sale of $158 million of assets in the fourth quarter.
Specifically, we repurchased $20 million of stock and acquired three convenience properties for $42 million. In terms of overall transaction activity, macro and capital markets volatility is having an impact on deal volume. And I would expect overall transaction volume to remain low until we have some stabilization in benchmark rates and therefore visibility on cap rates. There is capital available and deals are getting done. They’re just taking longer with more moving pieces and a higher risk of fallout.
That said, volume for smaller properties including convenience assets is still running higher than other retail formats. In summary, we are pleased with our portfolio positioning, balance sheet and investments to date, which we believe prepare the company for a wide range of economic outcomes. A special thank you to the entire SITE Centers team for another great start to the year.
And with that, I’ll turn it over to Conor.
Thanks, David. I’ll comment first on quarterly results, discussed our revised 2023 guidance, excuse me, and then conclude with the balance sheet and capital plans for the year. First quarter results were ahead of plan, as David mentioned, due to a number of operational factors, including higher than forecast occupancy and ancillary income, earlier rent commencements and lower than expected G&A. The operational factors totaled about $0.02 per share relative to budget.
In terms of operating metrics, trailing 12-month new leasing spreads accelerated from the fourth quarter with blended spreads roughly unchanged at just under 9%. We continued to see strong leasing economics of the pipeline, though quarter-over-quarter volumes and spreads will remain volatile given our denominator.
The SNO pipeline was up modestly sequentially to $19 million as new leases offset the impact of commencements. These signed leases represent just under 5% of annualized first quarter base rent and over 5% if you also include leases and negotiation in our pipeline, providing a tailwind to cash flow. We provided an updated schedule on the expected timing of the pipeline on Page 6 of our earning slides.
Same-store NOI grew 4.2% in the first quarter with the uncollectible revenue line item a 130 basis point headwind to year-over-year growth. Same-store base rent growth also accelerated to 3.6%, which was up 80 basis points from the fourth quarter.
Moving on to our outlook. We are revising 2023 OFFO guidance up to a range of $1.11 to $1.17 per share, driven primarily by first quarter outperformance, including better than expected same-store NOI and a higher outlook for full year occupancy. Rent commencements, investment activity and potential tenant bankruptcies remain the largest swing factors expected impact where we end up in the full year range.
We are also raising our same-store NOI guidance to a midpoint of 1.25%. Prior period reversals of $3.4 million in 2022 remain a roughly 100 basis point headwind to growth and we continue to include an annual bad debt reserve along with specific bankruptcy assumptions related to tenants that have filed for bankruptcy, along with others with well-publicized liquidity concerns.
Through the first quarter, we have not used any of the credit loss reserve. We have three notable national tenants in bankruptcy as of today, and that includes Cineworld, y Party City and Bed Bath & Beyond. For Cineworld, we now have the executed agreements at all three of our locations, though the leases have not been affirmed by the court and remain subject to change until the company exits bankruptcy. That said, the net result of a $1.3 million impact from 2022 remains unchanged from our fourth quarter call and first quarter earnings reflect the expected amended terms. For Party City, as David mentioned we do not expect any rejections or store closures as part of the company’s restructuring. Similar to Cineworld though this outcome is subject to Party City’s bankruptcy exit.
And lastly, for Bed Bath, prior to their filing we did receive April rent for the majority of our locations with $300,000 unpaid as of last week. In the midpoint of guidance for both same store and OFFO continues to assume that we recapture all of their Bed Bath flag stores in the second quarter that we don’t know the ultimate outcome of store rejections, potential lease acquisitions or subsidiary sales at this time.
Moving to the second quarter of 2023, there are a few moving pieces to consider from the first quarter. First, G&A is expected to be approximately $1 million higher sequentially with a full year run rate of approximately $46 million. Second, interest expense is also expected to be higher as we repay the $87 million unsecured stub bond in May. And third, we are budgeting an increase in uncomfortable revenue as a result of bankruptcy activity including Bed Bath in the second quarter as compared to the first quarter, which had no material headwinds. A summary of these factors is on Page 9 of our earning slides.
Finally, ending with the balance sheet and capital activity; at quarter end leverage was 5.3 times, fixed charge remained over 4 times and our unsecured debt yield was over 20%. We have the aforementioned stub bond maturing next month, which we expect to repay at maturity with cash-on-hand and availability on the line of credit. Recall, we recently recast our $950 million line of credit less than a year ago, which provides significant liquidity and availability through 2027.
To put this all in context at the midpoint of the guidance range, we expect debt-to-EBITDA to remain below 6 times to generate almost $50 million of retained cash flow with an AFO – AFFO payout ratio of relatively 70% and have no unsecured maturities until August of 2024. This leverage profile and liquidity provides substantial capacity and optionality to fund the company’s business plan.
And with that, I’ll turn it back to David.
Thank you, Conor.
Operator, we’re now ready to take questions.
[Operator Instructions] Our first question will come from Todd Thomas with KeyBanc. You may now go ahead.
Hi. Thanks. Good morning. First question, I guess, look there’s been a lot of uncertainty around Bed Bath and the outcome now that they filed is still uncertain, but you mentioned 16 single user backfills and it seems like demand for their space may be solid. Any thoughts whether there might be a lot of leases sort of assumed or auctioned off during the bankruptcy process, how that might play out based on prior bankruptcies that you’ve sort of lived through and the overall environment today?
Yes. Good morning, Todd. It’s a great question. I mean, we obviously have no information, no more information than you do. The reality is that the mark-to-market on the portfolio of Bed Bath and buybuy BABY is somewhere in the 25% to 30% range, but it varies depending on properties. So number one, we feel really good about the backfill prospects. As I mentioned in our prepared remarks, if you take that portfolio where we have these properties, they’re 99% lease. There’s not a single other anchor space available. So they are very much attractive to a lot of growing retailers. There is some risk or opportunity depending on how I want to define it, that a couple of these leases get bought through the bankruptcy process, but I honestly have no idea one way or the other what the outcome will be.
Okay. And then Conor, you mentioned in your comments around the updated guidance that the midpoint assumes that you get all the Bed Bath boxes back during the second quarter. So you didn’t, $300,000 of April revenue was unpaid. But going forward now until stores, until leases are rejected, you’re expecting to collect rent? And in terms of the timing in the second quarter, is that sort of like a June 30 wind down or recapture of all the spaces that you’re assuming?
Yes. Todd, it’s a good question. Look, to David’s point, we just don’t know yet. We had three leases or three wholly owned leases rejected last night. So obviously we won’t get rent on those three going forward for the rest of the year. But to David’s point and your question, I mean, this could be dragged out a little bit for a number of leases as they get auctioned and potentially as folks acquire them. But you’re right we’ve assumed a lost month for the month of April or May, depending on which location. And then call it one or two more months depending on which location. It’s not material if you assume on a May 31st or June 1st, or excuse me, June 30th rejection date, but it just depend on the location.
Okay. Got it. And it’s just last question, I guess also around Bed Bath, but more around investment activity. Does the filing and I guess plan wind down to their operations improve asset liquidity a little bit? There’s been so much uncertainty around Bed Bath. I’m just curious whether that does improve liquidity for transactions a little bit and whether you might be in a better position to sell or monetize certain assets, either before signing leases or someone else might take on the leasing risk or potentially after the backfill?
Well, there’s really – there’s two aspects to that question, Todd. It is very – it’s a really good question. The fact of the matter is what we’ve been selling are stabilized assets and we’ve gotten the best proceeds historically from core buyers that are looking at stabilized properties. We haven’t really been a seller of vacancy. So for us in particular, I think as we continue to recycle a little bit you’ll see us sell stable assets and buy growth assets. For the overall market liquidity, I completely agree with you that if there is a vacancy and there is a weaker tenant that’s now gone it’s considered an opportunity for a buyer. And so I think you’ll see more opportunistic buyers go into the transaction market when they have something to do and something to grow the property. But I wouldn’t expect that that’s going to be the type of property that we would be selling.
Okay, great. All right, thank you.
Thanks, Todd.
Our next question will come from Craig Mailman with Citi. You may now go ahead.
Hey. Good morning, guys. Conor, I just want to kind of clarify, are you, I think you guys were 250 basis points of bad debt at the midpoint for same store with initial guides. Is that still the assumption?
Hi, Craig. Good morning. It’s come down modestly for couple of reasons. One, I made a comment that we are expecting higher occupancy over the course of the year, so visibility on some renewals is obviously higher today than it was three months ago, so that’d be point one. And then point two, just the calendar, Bed Bath filing, they are going for a historically quick liquidation right, two months. Now, obviously they’ve had quite a bit of time to prepare so, so there is a chance they’re able to pull that off. But as we just get later in the year, if someone files it’s going to take three to five months or longer for them to wind down operations. And so that just puts less pressure on potential bankruptcy risk for the year. So the short answer is it’s come down modestly. It’s closer to 225 basis points today than 250, but that’s a function of our expectation for higher occupancy over the course of the year, and just as we get later in the calendar.
So as we think about the uptick in same search, really like 25 basis points from bad debt and 25 basis points from occupancy is how we should think about it?
Yes. I mean, I think that’s fair. I mean, we could go – you could swing at a couple of basis points either way. I mean, I would just say, Craig, its April 25th David mentioned a number of kind of macro uncertainties we’re seeing. We’re not trying to push things too hard here. There’s a lot of time left and we’ll see how things go. But yes, I think it’s fair to assume it’s a little bit of both.
Okay. And then on the leasing front, it sounds like things are still going well. There’s a lot of demand. I’m just kind of curious on two fronts: one, in the first quarter was there any kind of change in cadence as we got into March and the banking issues kind of came to a head and how does activity look in the first quarter? Then secondly, I mean, is there enough space coming back from Bed Bath and Party City and some of these other retailers that would kind of be that outlet for demand going forward that could kind of set some of the additional leasing you guys may have otherwise seen?
Craig, its David. As far as sentiment changes due to kind of the mid-tier bank drama in the last month, we really didn’t see any change in the pace or the volume of lease negotiations. It just didn’t seem to infect those conversations. I think if anything that the biggest challenge we’re having is there’s just not – not much space left a lease. So to your second question, I’ll pivot to that. Getting back 17 locations in a portfolio that has zero available is really a great opportunity to upgrade credit. And right now I would say there’s more than 17 tenants that want to take those spaces.
So it certainly will take a little bit of pressure off of the valve of the demand for space because it’ll satisfy some of those retailers. But if 17 of 35 end-up getting the space, there’s still a leftover of those tenants that didn’t get the space. And whether that’s true across the country or whether that’s just true in our 100 assets and wealthier suburbs I don’t know. But I think for our portfolio in particular, I do feel like the demand right now is definitely higher than the supply.
Yes. I would say, Craig, one thing we’ve been really encouraged about in the last two years is the breadth of demand. I think we have [indiscernible] 75 anchors signed since the start of the pandemic with 46 different operators. And so what we’re encouraged by is for that 17 spaces, there’s the usual discounters and fitness operators, but there’s also some – a wider spread, I would say of folks that we don’t normally do business with, which is really encouraging. Again, that could change to your question around macro sensitivity, but we just haven’t seen that yet to date.
Then just last one. I guess to circle back to bad debt, aside from kind of the bigger chain bankruptcies, kind of what does the shop credit look like? Are you, I know that debt was better than expecting the first quarter, but is there any change in that credit profile, some of your smaller tenants, kind of what are you seeing on that front?
Yes. It’s a good question, especially as we grow our convenience portfolio. Remember, we’re still 88/12 national, local from a credit mix. So we don’t necessarily have the exposure to kind of the mom-and-pops. All that said that, that story has changed dramatically since the GSE and there’s just less kind of traditional mom-and-pop leasing regardless of your property type. We haven’t seen any pressure yet, but I mean, typically you see a general lag, a six month lag between GDP growth and shop occupancy. And so if GDP growth starts to turn negative, you’re going to see some pressure on shop occupancy three, six, nine months from now. We haven’t seen that yet, Craig, but it’s a good question because it is a potential headwind in the future.
Great, thank you.
Thanks Craig.
Our next question will come from Haendel St. Juste with Mizuho. You may now go ahead.
Hey there, good morning. What you guys discuss what you’re seeing out there in the market in terms of cap rates for the types of assets you’re looking to – you’re looking at in the, both the convenience and maybe open-air categories? I’m curious, what you’re seeing out there as well as kind of where you’re willing to execute perhaps and how you describe seller sentiment today? Thanks.
Sure, Haendel. Good morning. I guess it’s hard to speak to the overall shopping center sector just because number one, we’re not looking at every format type. And secondly, there just have not been that many transactions. From the convenience standpoint, there do seem to be – there’s more inventory than I think in other formats. So it’s giving us the opportunity for John and his team to do a lot of underwriting. I would say that the ask price if these were assets that we thought had strong markets, good solid tenant and good growth prospects, and we thought 5.5 caps were fair a year ago. It seems like those are 6.5 caps today. So, I think the ask has probably gone up a 100 basis points.
And the question, I think, the second question you asked is where would we transact? I think that really depends on the source of the funds to purchase that. We are doing some minimal recycling, but it kind of depends of what we’re selling at and what we think the growth profile is of the acquisition target. But I guess to summarize, it feels like a 100 basis points is probably fair from the ask side.
Fair enough. And then question on the foot traffic, saw some data place or data that suggests that foot traffic was down year-over-year in the first quarter. Curious if you are seeing any of that. It’s perhaps it’s just a function of tougher comps or any comments maybe on the consumer? Any concerns – any potential concerns there with that trend in the first quarter, thanks.
Yes, I mean, when we look at foot traffic data, cell phone data, I think, we’re parsing it in several different ways. One is the trailing 12 like you’re talking about, but that can be a little lumpy if a year ago there was something unique. And a year ago there was an excess amount of traffic, I think, coming out of the pandemic. So I think a little bit of slowdown doesn’t really warrant a whole lot of concern. If you look at the traffic versus 2019, which is the final year before COVID it’s still very healthily positive. I think what’s even more interesting though is that you’re getting a lot more frequency of trips. And part of that is because the hybrid work culture in most of our suburban locations is just allowing people to take more numerous but shorter trips. And sometimes the cell data that you are reading about nationally doesn’t capture the really short trips. But there has been a significant change of delivery services, in-store pickups, drive-throughs and when you add that to the customer traffic it’s a pretty convincing story that the consumer has changed.
Fair enough. Thank you.
Our next question will come from Alexander Goldfarb with Piper Sandler. You may now go ahead.
Hey, good morning. So two questions. Maybe David, following up on Haendel’s question on the shopper trends, so if customers are shopping more evenly throughout the week, does this change either the tenants who are interested in your centers or the way they merchandise and thus maybe a tenant who is satisfied with one sort of format or space and configuration suddenly wants to shift or do something? Basically, does this change in shopping allow you guys to drive more rents because of the way people are changing their and shopping more evenly? Or you would say, hey, this all just wraps up in increased tenant demands per space, so it really doesn’t matter how the customer shop, the bigger overriding theme is just tenant demand. I’m trying to understand if there is a difference or not on the shopping trends versus overall, tenant demand.
Well, it seems Alex, and good morning, that there’s two different categories. One are the more regional tenants, the junior anchors that are drawing from three, five or ten miles away. A lot of these have gotten very sophisticated with their in-store pickup or their delivery from store, they are using the store as part of their supply chain. I think that those tenants are simply looking at the increase in population in the suburbs and the convenience of having something delivered from the store. And that’s kind of what’s driving a lot of demand.
The cell phone data that I was talking about, I think, is more applicable to the smaller shop tenants, and particularly in the convenience assets, because with customers around more frequently during the week and making more kind of quick in and out trips, that is definitely sponsoring demand from tenants that just want to get as close as they can to the households recognizing that they are probably going to get multiple trips per week as opposed to once per week.
The simplest example is QSR chains, I mean, QSR chains are looking to get very close to the wealthy customers and they really want to drive through. And I think those are both societal shifts that seem like they’re pretty sticky because an awful lot of tenants want that type of format.
Okay. And then the second question is on the rents, I hear you that we should expect leasing trends to slow, just as you guys literally have less space to lease. It’s hard to lease what you don’t have. But as far as the rents go, the spreads are impressive. Is this a function of an acceleration in pricing power or this is just a reflection of either the legacy leases that are rolling? I’m just trying to understand, is it more a function of where the rents were historically, or are you seeing rent acceleration as you price deals?
I think it’s a little bit of both. But I’ll give you some details behind that. I mean, when you’re looking at a company like ours that only has 105 properties and sometimes during a quarter a tenant or leave that’s paying single digit rent, and we might have a hundred percent mark-to-market. So, when you put it all together, it kind of falsely makes everything look good, even though it’s just blending higher because of one lease.
Having said that, I do think that there is significantly more pricing power today than I have seen in my career. I mean, as I mentioned twice now, having 17 Bed Baths go away in a portfolio that has literally zero anchor space left, that defines pricing power. And when you add on to that, the fact that in many cases our enterprise value right now is about half of a replacement cost.
So I just don’t think that you’re going to see a lot of supply come online when the rents to justify new construction shopping centers would have to be 50% higher than the rents are today. That’s another reason why, I think, there’s pricing power.
And in the larger locations, the larger units we might choose credit, we do. We choose credit over total economics in many cases. But when you get down to the mid-size and the smaller shops there are high quality tenants that are definitely pushing rents much higher than I would’ve expected a couple years ago.
Yes. And Alex, you see this play out the, I think, the best in our renewal spreads and we have quite a bit of tenants with options, right, negotiate options that is 0%, 5% or 10%, and you’ve seen slow kind of steady pressure upward on our renewal rates, which are now approaching close to 10%, which implies that for the 5%, 10% options, there’s quite a few leases on top of that, that we’re getting better than that. And so that for us is the most encouraging where our renewal rates have effectively gone from call mid-single digits closer to high single digits. That’s a big, big change. And so again, it’s a reflection of: one pricing power to your point is kind of acceleration rents, but also the mix of what we’ve got.
Okay, thank you.
Welcome.
Our next question will come from Ki Bin Kim with Truist, you may now go ahead.
Thanks. Good morning. Just wanted to go back to your opening remarks regarding client, tenant sentiment. I was just curious what kind of changes in terms of tenant sentiment, in terms of maybe how many proposals they have, for example, if they wanted to open like ten stores, has that incrementally shifted at all to like eight? And if deals are taking longer to get done,
Hey, Ki Bin. Good morning. It’s Conor. Given our footprint, I don’t think we’re a great proxy for kind of overall national tenants open to buys. I would just point you to our leasing pipeline, our new lease pipeline, which again, we don’t have a lot availability. It’s running about 300,000 square feet today. That’s up modestly from where it was last quarter, 250,000 square feet. So, again, to David’s prior answers, we haven’t seen a change in tone or sentiment. We are very macro aware. It just hasn’t flown through in our conversations.
All that said, we’re not a proxy for the national retail environment. We’re a proxy for a pretty small subset of assets located in affluent communities. So, I don’t know how we can expand further from that point.
Okay. And on your couple acquisitions this quarter, Foxtail and Parker Keystone looks like they are pretty well located convenience centers, but looks like they’re pretty fully occupied. I’m just curious what the upside looks like for you guys. [Indiscernible] if you can disclose it.
Yes, it’s a nice transition from Conor’s point about renewal spreads. And when you see us buy a 100% occupied property in a wealthy suburb, there is a reason for that. And it’s because it’s a renewals business. The shop renewals and the in place versus the market is extremely high in some of these high income suburbs and the two that we bought this quarter, that’s the story. It’s a shorter Walt and it’s a higher mark-to-market. And so our belief is that the NOI CAGR is going to be higher than our overall portfolio at the same time with less cost to get there, less CapEx because it’s really renewals business.
And what is the year one yield?
Well, the year one yield for these two is somewhere in the mid sixes. I will say, remember that I don’t really think year one yield is all that exemplary of an investment in convenience when the business is a renewal business. So, when you take the year one yield, but then you factor in a shorter Walt than a higher market-to-market, I think, the unlevered IRR is probably a better way to analyze a property like this.
Okay, thank you.
Our next question will come from Floris Van Dijkum with Compass Point. You may now go ahead.
Thanks. Good morning guys. Couple of questions. Obviously look you’ve done a really nice job, Conor, with the balance sheet, de-risked the company. You talk about the fact that you have got interest rate caps on all of your floating rate debt. Maybe you can talk a little bit about the maturity profile of those caps and sort of as you are thinking about higher rates, what are the things that you worry about right now?
Hey, good morning, Floris. I worry about quite a bit right now to our commentary…
But that’s like throwing [indiscernible].
Yes, that’s – you are talking the right person about concerns. Look, I mean, there is quite a bit to your point. We are worried about a rising rate environment. I know the forward curve shows a lower benchmark rate environment three, six, nine months from now. I just think we generally operate the business, assuming rates are being higher. It is not our job to predict interest rates and as a result, we generally have looked to hedge a hundred percent of our capital structure or debt structure.
So, for us, as I mentioned in my prepared remarks, we do have the May unsecured maturity to stub bond coming up. Our plan is to pay that off with cash on hand in the line. And as a result of that higher line balance, we entered into a interest rate cap in the first quarter to cap so for at 5% the next year.
That gives us the optionality and ability to wait for a window to term out that debt. To your point, to mitigate some of that future interest rate risk. And so whether that’s an unsecured offering, a secured offering, we don’t know, we have the flexibility to go either direction. But you’re right, we are intently focused and acutely focused on making sure we have minimal interest rate risk and as much duration as possible.
The good news is just given the company of our size one offering, whether that’s secured or unsecured has a dramatic impact on our duration. And so, as you know, for the first couple of years we are here, we focus one on reducing leverage, but two, we are even more focused on pushing out our duration. And so again it’s an acute focus of ours, one or two transactions can have a dramatic impact, but we’ve been, I would say, overly cautious to making sure that our interest rate risk and duration risk are minimal over the last six years we’ve been here.
Thanks. And maybe one other question to your convenience thesis, you said okay, the cap rate might not be the right way to look at the latest transactions. You got 3% fixed rent bumps, presumably there’s a 20% to 30% increase in on renewals as well on top of that, does that get you into the sort of the low-double digit total returns? Is that how you guys think about that?
Yes. I think, well, the factors you just mentioned, I mean, you certainly have fixed 3% bumps, but you’ve also got when we’re buying properties, we’re looking for tenants that have had long-term and aging properties, but they’re running out of options. So they’re naked renewals as opposed to fixed rent bumps.
And so that’s what drives a lot higher. I mean I would say that on an unlevered IRR perspective, we like to see it be double digits. But it’s difficult to be competitive if you expect it to be mid-teens simply because there’s lots of other people that also see that same growth.
Yes. And then the fourth – the fulcrum piece is the CapEx component. I mean that’s what is most intriguing to us where we are very aware of the cap rate the initial yield. What intrigues us on the economics of the business and why David’s alluding to the fact that the cap rate is not telling the whole story is the lack of CapEx. So 6.5% for an asset we’re buying, the convenience space might not be equivalent to a grocery anchor or lifestyle or power center asset at the equivalent yield.
Right. Maybe you guys mentioned something about when the economy has negative GDP, you tend to see small shop contraction. How does that play into your convenience thesis? Because would they get – would your convenience portfolio get impacted disproportionately in such a scenario?
I don’t think it’d be disproportionately impacted, but of course, it would be impacted. I mean these are small shop tenants where we feel like there’s mitigants from a risk perspective is the submarkets we’re operating in the availability in those markets where there is limited optionality.
And the second piece is our national credit roster. This is not – there are cases where we buy 100% local assets, but the majority is still national to 70/30 national local mix. And so yes, it has exposure to all those factors we mentioned. Everything we own is economically sensitive, but there are quite a few mitigants that make us feel very confident in the investments we’ve made to date and the investments we’ll make in the future.
Yes, that’s useful. And how does that 70/30 mix national local compare to your other is centers that you have? Is it similar or is it a little bit higher national?
It’s – we’re 88/12. We disclose it. I think it’s on Page 2 of the supp, Floris, for the entire portfolio. So implicitly probably the rest of the portfolio, the non-convenience is 90/10, low-90s, high-single digits, something like that.
And that’s for the – and that’s for small shop as well or that’s just…
That’s the whole portfolio. That’s the whole portfolio. I bet you small shops is probably a similar, I mean, for a larger regional center, you’re just not going to get a lot of local mom and pops. For our grocery anchored portfolio, we’ve got a mixture of national locals, but again, it’s not that different of a number between the two.
Okay. Thanks, guys.
You’re welcome.
Thanks, Floris.
Our next question will come from Samir Khanal with Evercore ISI. You may now go ahead.
Hey good morning, everyone. I’m sorry, Conor, just want to make sure on the G&A front. Did you say that it was going to be – thought it was going to be $46 million for the year because I know you guided for $40 million.
Yes. Sorry to cut you out there, Samir. Yes, so I think the last quarter we said was closer to $48 million. This is closer to $46 million and we’re trending modestly ahead. There will be a sequential increase in G&A from this – from the first quarter to the second quarter, but we’re running a little bit ahead of plan. Again, it’s April 25, we feel a little bit better about the number, but nothing material change wise.
Got it. And then looking at net effective rents, I mean it was up a lot in the quarter. Was that just sort of a mix thing or like shops versus anchors or was there something else going on there?
Yes. So on that page Samir, I always point people to the percentage GLA from shops and anchors and you’re exactly right, we have more shops, shops have a hire net effective rent. As we get control of these Bed Bath locations, I would expect that number to come down because that, that GLA attributed to anchors will increase.
So again, the factors that Floris and Alex asked about from in terms of rent growth, they’re positively impacting net effect of rent growth. But for this quarter in particular, it really is just a mixed issue.
Got it. And then I guess my final question, I guess upon David, you talked about sort of the 17 locations for Bed Bath, maybe 16 sort of single users. Can you provide a little bit more color on sort of economics or rent upside you can see in these locations based on the interest? Now I’m not asking for specifics, but generally, what sort of upside do you think based on sort of the negotiation power you have here?
Yes. I mean, based on what we know today, we think the blended mark-to-market is somewhere to 25% to 30%.
Got it. Okay. Thanks guys.
Thanks, Samir.
Our next question will come from Ronald Kamdem with Morgan Stanley. You may now go ahead.
Hey guys, good morning. This is Adam Kramer on for Ron. Look, appreciate all the color. I think everything was really helpful on kind of the retail front and bankruptcy front. We just wanted to ask about kind of the Bed Bath and kind of that, that mark-to-market I think you cited with those locations assuming that’s kind of not in your sign, but not opened kind of number of commencement schedule on Slide 6. We’re really just wondering when we think out whether it’s 2024, 2025, kind of further upside to the model, right, further upside from that SNO schedule and how potentially Bed Bath locations could factor into that.
Hey Adam, good morning. It’s Conor. Let me know if I’m answering your question, but as of the first quarter, the $19 million SNO excludes any of the Bed Bath locations, we don’t have any executed leases outside of the one we mentioned last quarter that that Bed Bath already vacated in Princeton.
So signing those, obviously we’ll have the lost rent from Bed Bath and then any new locations we sign will be additive to it. But there’s probably I guess if you could take the Bed Bath rent, multiply by 1.2 and that will get you kind of the net upside to base rent for the portfolio post Bed Bath coming back online.
But David’s point’s going to take us a year to get those open and rent paying, so you’ll see a dip in occupancy before you start to CVS. No pipeline start to ramp. But let me know if I’m answering that question directly or not.
No, you did that. That was super helpful. It makes total sense. Again, just trying to think about kind of upside to the model, right, as we kind of get whether it’s 2024 or 2025, just thinking about kind of further growth as you guys reach kind of these structurally higher occupancy levels. So – but no, that, that, that was super helpful.
Just the second one, a little bit separately, right, just think a few capital allocation recognize kind of 1Q April transaction activity roughly kind of match trades right on the acquisitions and dispositions. Is that kind of the strategy going forward kind of roughly kind of netting out acquisitions and dispositions, and how are you thinking about kind of the buyback and recognizing of that maturity coming up? How are you thinking about the buyback given that you – we’re a little bit active on it in the first quarter?
Well, the – this is David. The answer to your first question is yes. I mean, our goal generally in the near-term is to be match funding dispositions and acquisitions. But as we’re completing that, and again, it’s relatively small we always have to look at where the stocks trading and make a decision as to how we’re allocating capital. And I think we make that decision on a monthly basis whenever we have capital to deploy.
Great. Thanks again, guys.
Thanks, Adam.
Our next question will come from Paulina Rojas with Green Street. You may now go ahead.
Good morning. If I heard well, I think you quickly mentioned before that you see the value of your company as I think you said half of its replacement cost. Can you elaborate a little bit on the idea of replacement cost? Is there a ballpark number you can provide for development costs per square foot for shopping centers like the ones you have today? And if – how you have seen that change over time?
Sure. Good morning, Paulina, and good early morning for you. Well, as far as our value, you’re probably at least equal if not better than us to look at that. But in terms of comparing it to new construction, we’ve done some construction over the past year especially post the cost increases of inflation, both with labor and raw materials. And I would say of the buildings that we’ve built in the last year, we’re averaging around $500 a square foot to deliver these buildings, not including land. If you built an entire shopping center that had more anchor space, I think those costs would be a little bit lower on a per square foot basis. But even down at $400 to $450 a square foot x land,that’s kind of where I’m getting back to the ballpark of somewhere – enterprise value, somewhere around half of replacement.
Very helpful. Thank you. And then you put a reported shares again this quarter, and so indirectly related to that, I know it’s hard to say in this environment, but where do you see your stock trading today relative to NAV?
Hey, Paulina, good morning. It’s Conor. Just on the share purchase, as we’ve said in our prepared remarks, effectively, we’re reinvesting the proceeds from the fourth quarter from the asset sales. I think it was $158 million, and we sold those at, I think it was a six, seven blended cap rate. And so we took those proceeds and reinvested those in the stock and some assets and debt pay down.
So for us, I just tell you our visibility and our confidence on selling at a six and point seven, and buying a higher number is really high. In the last six years, I think we’ve only bought back stock on four occasions. All four of those occasions have been related to disposition where we sold at X and bought at Y. So I would just tell you we feel comfortable with that spread that we engaged at in the fourth quarter and as we wrapped up that program in the first quarter. But otherwise, we really have no additional comment.
Okay, thank you.
You’re welcome.
Our next question will come from Mike Mueller with JPMorgan. You may now go ahead.
Thanks. Hi. Just to I think quick ones here. So first, just on the Bed Bath. So Conor, it sounds like by the end of June, we should assume roughly $7 million rents go away and then guidance has those coming on within a year or so? Is that correct? And should we be thinking of backend loaded by the end of 2024 and just not a whole heck of a lot until then? That’s the first question. The second one is, it looks like you have about eight redevelopment expansions that come online over the next year or so as well. Is there a shadow pipeline that you see kind of backfilling that pipeline?
Hey, Mike, good morning. On your Bed Bath question, it’s our assumption that we’ll lose that $7 million of rent as of the end of the second quarter. But to David’s answer, to some of the first questions, we just don’t know, like some of those leases could get assumed, we don’t know. I mean, the bankruptcy process, again, they’re trying to wrap it up as quickly as possible. That would be a historically quick process though. So could it go beyond the second quarter? Of course, at certain locations. Our assumption is that you’re right, it just all goes away. There could be some ancillary upside in the back half of the year, but if we’re trying to move as quickly as possible and get these released, we probably wouldn’t go down that path. So then you’re right, you would have downtime.
I mean, there’s nothing that we think would get backfilled this year. And then you’re exactly right. Traditionally, you would have a fall opening at the end of next year. So you would have lost rent from the third and fourth quarter this year and the first and second and maybe third quarter of next year. But obviously, we’ll see how it plays out. But it’s our assumption that they’re gone in the second quarter.
On your redevelopment question, the short answer is yes. Now these are smaller projects, so call it $1 million to $10 million. But we like them, we think they’re incredibly accretive. They’re a 100% pre-lease generally, and we feel really good about the risk reward in the economics. So there is a shadow pipeline. We talked about an asset we bought in Boca last year that there’s a project we’re working on, there’s a couple other longer data projects or longer timeline projects we’ve been working on for some time.
Again, I want to caution, these are $1 million to $10 million projects. These aren’t large scale, taking space offline, mixed use development, but we’re excited about them, we’re doing them because we think the economics make sense. So we’re hopeful to add more, but it’s a process. It’s a slog. We’ve got a great team on it, but you’ll probably see a couple of more get added over the course of the year.
Got it. Okay. Thank you.
You’re welcome.
Our next question will come from Linda Tsai with Jefferies. You may now go ahead.
Hi. I think you said earlier for the Bed Bath & Beyond centers, there’s no inline space available, and then you have 17 anchor boxes, and then more than 17 tenants looking for spaces. Could you talk about some of those tenants? I think you also said that there were some that aren’t ones that you typically see more interested in those.
Yes. Good morning, Linda. It’s David. I think Conor did a pretty good job, I think of summarizing it before. There’s a long history of discounters taking locations, very large national change discounters, Ross, Burlington, TJX concepts. But in the last couple of years what we’ve also seen is new concepts, many of which are sponsored by those investment grade companies. TJX certainly has sponsored a couple of new concepts, same as with exporting goods, same with Dollar General. So we’ve seen new concepts that are IG rated that have started to become very active in the space.
And then on top of that, we’ve seen more regional chains that I have really good balance sheets that are anything from home furnishings to furniture to entertainment. So the variety is pretty wide. I mean, if you think about the number of anchor leases we’ve done in the last couple of years, and the percentage of those that are new concepts or individual concepts, it’s pretty high.
Thanks. And then would you expect to split those boxes and would that require more CapEx.
At this point, I don’t believe so. I mean, the size of the Bed Bath that we’re getting back, it looks to us like the demand is a single tenant backfill. And that’s – so I think in our prepared remarks, we mentioned out of those 17 locations, 16 of them appear to be single tenant backfills, and we feel pretty strongly about that at this point. The last one that makes up a 17 is really a redevelopment project in DC Metro where we expect to be using entitlements to get more densification and we’ll likely split that land and sell off a piece.
Thanks.
Thanks, Linda.
Our next question will be a follow-up from Haendel St. Juste with Mizuho. You may now go ahead.
Hey there. Thank you. Just one more, Conor, maybe. I understand the timing of the bad debt is one of the factors you’ve highlighted as a swing factor, but can you talk a bit about the expected cadence for the same-store NOI growth this year, the low 2% at the midpoint? And as we look ahead, given your SNO related documentary visibility that the band you’re seeing, I’m curious what type of ballpark same for NOI growth that implied for next year. I think many of us have thought about this as a long-term, 2% to 2.5% same-store NOI business. I’m curious if you guys think you can top that long-term average next year. Thanks.
Hey, Haendel, can you repeat the first half of the question? Sorry, I just missed that piece.
Sure, sure. I was hoping to get some color on the cadence for the same-store NOI guide that you’ve laid out this year. Understanding again, that bad debt was one of the factors you’ve outlined as a swing factor, but just wanted to get a sense of the cadence for this.
Sure. So there’s two major factors and you hit one of them on the head in terms of the SNO pipeline and the commencement dates. And so Page 6 on our slides has that laid out by quarter, and you can see it’s a cumulative chart. The fourth quarter is the most impactful, as I talked about, I think it’s on Mike’s question. Typically, you just have for the law of the national anchors a fall – a spring or fall and in this particular year’s, quite a few fall openings. So it is back half weighted from a commencements perspective.
And then the other piece is occupancy and what happens with bankruptcies, Bed Bath, depending on Todd and Mike’s questions, when they reject these leases, when they ultimately move out, it feels like the third quarter could be your trough from an occupancy based rent perspective and then you kind of accelerate from there as rents commence.
To your question on future years, future growth, look, we’ll save that for 2024. I would just say as an industry in general, you have a setup just given what’s going on with rent growth and the occupancy upside, given these historically high SNO pipelines for an above trend same-store NOI outlook. Now, let’s see what happens to the economy. Obviously a hard landing, soft landing, we don’t know, but you do have the ingredients between a lack of supply and I would call outsized SNO pipelines for the industry to do above 2%, above 2.5% for a number of years.
And then I would say just kind of augmenting that or further accelerating that given I would say the accretion from our tactical redevelopment pipeline, you could further add to that. So I would just tell you we’re very macro aware. We’re trying to be sensitive to the uncertainties we’re seeing in the environment, but you do have the ingredients from potentially outsized same-store for the sector for a couple years now. And we’ll see what happens with the economy.
Appreciate the color. Thank you.
You’re welcome.
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 joining. We’ll talk to you next quarter.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.