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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and welcome to the SITE Centers Reports Fourth Quarter 2021 Operating Results Conference Call.
All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad, and to withdraw your question, please press star then two. Please note this event is being recorded.
I would now like to turn the conference over to Ms. Monica Kukreja. Please go ahead.
Thank you Operator. Good morning and welcome to SITE Centers’ fourth quarter 2021 earnings conference call. Joining me today is Chief Executive Officer, David Lukes, and Chief Financial Officer, Conor Fenerty.
In addition to the press release issued this morning, we have posted our quarterly financial supplement and slide presentation on our website at www.sitecenters.com which is intended to support our prepared remarks during today’s call.
Please be aware that certain of our statements today may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from our forward-looking statements. Additional information may be found in our earnings press release and in our filings with the SEC, including our most recent reports on Form 10-K and 10-Q.
In addition, we will be discussing non-GAAP financial measures on today’s call, including FFO, operating FFO, and same store net operating income. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today’s quarterly financial supplement.
At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes.
Thank you Monica. Good morning and thank you for joining our fourth quarter earnings call.
Quarterly results and investment activity capped what turned out to be a fantastic year for SITE Centers. OFFO was ahead of plan really on all line items, and new leasing volume was the highest in four years. We utilized a portion of the $190 million distribution from RVI to acquire $143 million of real estate, beginning the transformation from RVI fees to property cash flow, and we repaid mortgage debt ahead of maturity.
Our balance sheet remains in great shape with debt to EBITDA in the low 5s at year-end. Thank you to the entire SITE Centers team for working so hard to get so much done in one quarter to position the company for growth in 2022 and onward.
I’ll start this morning discussing fourth quarter results, talk briefly about leasing and tenant demand, and then discuss our investments in capital allocation as we look to grow our portfolio of assets in wealth suburban communities.
As I mentioned, fourth quarter OFFO was ahead of our budget on better operations, which Conor will provide more details on later. We collected 99% of our build rent for the fourth quarter and for the full year 2021 and are effectively back to pre-pandemic collection levels. Our tenant assistance program is essentially complete as well, which speaks to our credit quality and is a reflection of the fact that almost 90% of our base rent is from national tenants.
Moving to leasing, tenants are paying more to get into properties in the last mile of wealthy suburban zip codes and renewing leases at a higher rate than pre-pandemic levels. We had our highest level of new leasing in four years despite having a considerably more focused portfolio and signed more shop square footage in the quarter than as far back as the company has been tracking retailers as they expand their store fleets.
Over the course of the year, we signed 900,000 square feet of new leases, increasing our leased rate by 110 basis points. More importantly, we signed deals with well-capitalized national credit tenants with 85% of our anchors signed with publicly traded companies and 22% of the square footage signed from new concepts that were launched in the last 18 months and are sponsored by investment-grade parent companies. Almost 10% of the new leasing activity by base rent was with grocers and another 23% was with first-to-portfolio tenants.
Looking forward, we have a half million square feet at share in lease negotiations which we expect to be completed in the next six months with similar characteristics to the deals we signed in 2021. We expect the leases recently signed, along with the current activity, to be a material driver of our growth over the next several years.
Shifting to investments, we had a very active fourth quarter buying out partner interests in joint ventures in Arizona and Florida, acquiring peripheral land in Charlotte and Princeton, and adding another convenience property in Charlottesville. I’ll start with our Florida portfolio acquisition.
We acquired five public anchored properties from our partner in key markets for us, like Tampa and Miami. The grocers generate on average almost $800 per square foot in sales, and the properties at year end were 87% leased, offering a mix of leasing and tactical redevelopment upside with a five-year underwritten NOI CAGR north of 5%. We have activity on every one of the vacant anchors in this portfolio and are seeing strong momentum on the shops as well. Pro forma for this acquisition, Florida is now our largest state by base rent with just under 20% of the company’s ABR and growing.
In Phoenix, we bought out another partner in a property with average household incomes above $130,000 yet with occupancy rate of just 56%. We have activity on the vast majority of the vacant square footage with an exciting mix of new retailers and expect to double the property’s NOI over the next five years.
For the year, we invested $223 million in assets, including four convenience properties with an underwritten five-year NOI CAGR over 5% and a blended cap rate of just under 6%. Each of these properties, all located in key markets for the company, including Delray Beach, Scottsdale, Atlanta, and Princeton, will be drivers of the company’s future growth.
Shifting to investments, I’d expect us to be active in both anchored and unanchored assets that fit our growth and our sub-market criteria. We remain encouraged by our initial investments in convenience properties that do not have a traditional large format tenant, especially given the advancements in geolocation data. As a result, this compelling sub-sector in open air shopping centers remains a key area of focus for the company.
The sub-sector stands to benefit from the pandemic-induced societal shifts like work-from-home and urban to suburban. Our property data aggregated over the past few years is showing a distinct rise in customer traffic, especially in wealthier suburbs where retail GLA per capita is low, and driving outsized rent growth in those same markets as evident in our own results. We are hyper focused on acquiring properties that fit these characteristics within our top markets since our portfolio has a weighted average population growth rate that’s double the national average.
All of us at SITE Centers are incredibly proud of the work that generated our 2021 results and we’re even more excited about our growth prospects in 2022 and beyond.
With that, I’ll turn it over to Conor.
Thanks David. I’ll comment first on fourth quarter results, then 2022 guidance, and conclude with our balance sheet.
Fourth quarter results were ahead of plan, as David mentioned, on really all fronts. Total uncollectible revenue at SITE share included $1.4 million of income or $0.01 per share from payments and settlements related to prior periods. Ancillary income, overage rent, and occupancy also were well above plan, which in aggregate totaled another penny relative to budget, with the balance of the outperformance due to a number of smaller line items.
In terms of operating metrics, the lease rate for the portfolio was up 40 basis points sequentially, which is on top of 50 basis points last quarter and comes despite the negative impact from fourth quarter transaction activity. Based on our current leasing pipeline that David outlined, we continue to see additional upside to the company’s lease rate given current activity and the level of demand across our portfolio.
Despite 111,000 square feet or $2.7 million of annualized base rent commencing in the fourth quarter, our SNO pipeline increased to $15 million from $12 million last quarter. We provide an updated schedule on the expected ramp of the pipeline on Page 9 of our earnings slides. The SNO pipeline now represents 4% of annualized fourth quarter base rent, or over 5% if you also include leases in negotiation in our pipeline.
Moving onto our outlook, we are introducing 2022 OFFO guidance with a range of $1.08 to $1.13 per share. Rent commencements, uncollectible revenue and transaction timing are the largest swing factors expected to impact full year results and where we end up in the range.
We have also introduced same store NOI guidance with a range of 2.25 to 4.25, adjusting for the roughly $14 million impact of 2021 uncollectible revenue. 2022 same store guidance implies that comparable property NOI will be ahead of 2019 levels, highlighting the strength of the portfolio’s recovery and recent and forecast rent commencements. Details on same store NOI are in our press release and earnings slides.
Additional assumptions for full year 2022 guidance include net investment activity of $100 million, the settlement of the $35 million of forward ATM shares in the first half of the year, RVI fees of about $1 million, joint venture fees of $8 million to $10 million, and interest expense at SITE share roughly flat from 2021. Lastly, included in 2021 results are $13.8 million or $0.07 per share of non-recurring reserve reversals related to prior periods. We have not budgeted additional reserve reversals in the bottom half of our guidance range.
In terms of the first quarter of 2022, there are a few moving pieces to consider from the fourth quarter of 2021. First, as I previously mentioned, we had $1.4 million of non-recurring uncollectible revenue in the fourth quarter. Second, we had quite a bit of JV transaction activity in the fourth quarter. The assets sold in the quarter contributed $580,000 at SITE share of unconsolidated NOI and $465,000 of fees. Third, we expect RVI fees to be about $200,000 in the first quarter, which is down from $3.6 million in fourth quarter. A summary of these factors is on Page 11 of our earnings slides.
Turning to our balance sheet, our COVID deferral program is effectively fully repaid with only a few hundred thousand dollars of receivables on the balance sheet at year end. In total, approximately $22 million of deferrals have been repaid to date, which represents 98% of total deferrals due to date. The rate of repayment, repaid dollars and collections, all of which have led the sector, highlight the strength of our national tenant roster.
Finally wrapping up with liquidity and sources and uses, we received a $190 million distribution from RVI in the fourth quarter which was used to repay mortgage debt and acquire properties, as David outlined. At year end, leverage was 5.4 times, fixed charges over 4 times, and our unsecured debt yield was over 21%. The company has just over $40 million of cash on hand, $35 million of common equity from forward ATM sales available for future settlement, and full availability on our lines of credit. This capacity will allow us to take advantage of investment opportunities as they arise and to drive sustainable OFFO growth and create stakeholder value.
With that, I’ll turn it back to David.
Thank you Conor. Operator, we’re now ready to take questions.
[Operator instructions]
The first question will come from Rich Hill with Morgan Stanley. Please go ahead.
Hey, good morning guys. I wanted to maybe start off with some questions about acquisitions. Appreciate the net acquisition guidance of $100 million - I think I have that right, but could you maybe break down what that is between buys and sells, and then maybe just talk about the acquisition market a little bit more. Our understanding is it’s pretty fierce out there. You seem to be doing a lot of JVs, which is great, so do you see those acquisitions coming from more JV buyouts or do you see opportunities to buy one-off properties?
Rich, it’s Conor. I’ll let David take the second half of the question. In term of the gross volume, you’re right - it does imply additional JV transactions. If you look at our JV fees over the course of the year, you can see they are expected to climb year-over-year, which implies additional activity. We announced with the release the sale of the--the buy-sell provision for the SAU portfolio, which we’ll be selling our stake to our partner, so. We haven’t given the gross dollars, but the underlying activity really is additional JV sales, some modest wholly-owned sales as we continue to do annually over the last five-plus years, and I’ll defer to David on the state of the transaction market.
Yes Rich, I’m sure it’s not lost on you that the transaction market has been, I think fierce was the word you used. If you look on our supplemental on Page 18 and you see the transactions throughout the full year in 2021, the vast majority of our activity was off-market, and the off-market activity was primarily joint ventures but also a couple of unanchored strip properties that we bought off-market.
I would say in our unanchored thesis, we are finding more product simply because I think there’s less institutional capital chasing those size deals and those types of properties. It seems like most of the activity right now is still in the grocery sector, so I do feel pretty confident that we’ll be able to acquire enough assets to meet our budget. Then of course, there’s also just the larger question of capital allocation and our own stock price, so I do think we have options throughout the year and feel pretty good about the budget, despite the fact that the market is pretty hot.
Got it. I was just channeling my 9-year-old daughter when I used fierce, so sorry for using that term.
That’s okay.
Can you maybe talk through cap rates a little bit? When we’ve talked about it in the past, it seems like they’re ratcheting tighter and tighter. Are you seeing any floor? What should we think about as we think through 2022?
Well, if you don’t mind me pivoting a little bit, I think the larger question is what’s the unlevered IRR expectation, because we’re seeing so much rent growth and market rent growth in a lot of sub-markets, that I think it’s kind of a little bit of a head fake that cap rates are so low because the rent growth is actually there, so I think on an unlevered IRR, you can still buy really high quality assets at a 6% unlevered IRR.
Got it.
But because there’s so much growth, some of the cap rates in the 4s, for sure.
Okay, that’s exactly what I was looking for. Conor, just one more question from me, if I can. I appreciate the disclosure on the $1.4 million of uncollectible revenue and then the $14 million that you disclosed in the guidance. Should we think about that $14 million as the right number for 2021 in aggregate, or is that a different number?
No, I--
I mean, like--go ahead?
I apologise for cutting you off there, Rich. In terms of what’s on the balance sheet, like I said, we’ve only got a couple hundred thousand left on the balance sheet of receivables. There are fully reserved cash basis tenants that either have deferrals outstanding, taxes outstanding, or other reserves we’ve taken outstanding, so the total magnitude of that is probably closer to $10 million than $14 million. But that won’t all be recognized in 2022, and implicitly we don’t expect to recognize any of that.
That being said, our collections team has done a really, really good job. I’m optimistic we’ll have more settlements over the course of the year, but I don’t envision it will be anywhere near the $13.8 million we had in 2021.
Got it, thanks guys. I’ll jump back in the queue.
Thanks Rich.
The next question will come from Samir Khanal with Evercore ISI. Please go ahead.
Hey Conor, just a question here on G&A for the year. What sort of run rate should we be thinking about? I know you’ve been doing a lot of acquisitions here. I’m just trying to get a little bit more view on the run rate.
Hi, good morning Samir. I mentioned last quarter that we were targeting about $52 million, and that estimate is unchanged.
Okay, so that remains unchanged. Just remind me, sorry I missed this, but what’s the total bucket that you can still collect from, from a rent collection standpoint for past periods here?
Yes, so one thing we’re pretty excited about is we collected effectively all of the rent from last year, so we were over 99%, and if you look in our slides, Samir, we’re up to 96% for the prior year, so in terms of just straight rent collections, the bucket’s shrinking, which is great. I think it speaks to, as David and I both mentioned, the credit quality of our tenant roster.
Coming back to Richard’s question, it’s probably closer to just under $10 million for all outstanding rent, whatever might be receivables from tenants, but again effectively 99% of that is fully reserved, so each day we move past COVID, it’s harder and harder to collect on that, or implicitly there’s a lower probability of collections. Look - I’m optimistic we’ll have more collections over the course of the year, but in terms of just straight rent, we’re running out because our collections have been so high, which is great.
Okay, got it. I guess my final question is on--I mean, you’ve highlighted you’re looking at 19 additional anchors that you’re in negotiation with today, and you signed about 27 in 2021, right? From a leasing perspective, what are the differences you’re seeing in terms of annual rent bumps, or is there anything that you want to highlight here?
I wouldn’t say there’s any broad-based changes. Some of the reasons that you can get so much leasing done in one year is just the longstanding relationships with tenants. A number of the leases, we have been moving into fair market options as opposed to fixed options because it’s a better inflation hedge. Other than that, I think annual increases on the non-anchor spaces are definitely moving up.
But for right now, I think our story going forward is the amount of anchors that have been leased in the last year has been nothing short of shocking, and I would expect the next six months to continue, which means that our next big wave is going to be the shop leasing. If you look on Page 10 of our supplement, you can see the commenced versus the leased rate on the shops, and you’ll notice a widening spread between leased and rent paying in the shop spaces - that’s, I think, going to be the story for this year, is that you’re going to start to see a lot of shop activity and that’s where a lot of growth is going to come from in the second half of the year.
Thanks so much.
You’re welcome. Thanks Samir.
The next question will come from Tammi Fique with Wells Fargo. Please go ahead.
Thank you, good morning. Just wondering the same store NOI growth range for 2022, the 2.25 to 4.25, can you just talk about maybe the primary drivers of that growth - you know, how much of that is related to leasing that has already been completed and is just commencing in 2022, and maybe what the swing factors are that get you to the low and high end of that range. Thank you.
Sure, hey Tammi, good morning. There’s a couple things to say.
First off, just in terms of 2022, we’re coming off a really strong 2021, so we were positive 14.9% for 2021, which I think will be up there in terms of the sector, in terms of one of, it not the highest growth rates, so that’s one factor.
The second one, as we’ve alluded to or explicitly mentioned a number of times, is the $13.8 million headwind from uncollectible revenue, as well as the fact that we collected all of our rent last year, so rent collections aren’t a tailwind. Really, the number one driver of next year is base rent growth, and what’s fascinating is when you kind of unpack base rent growth over the course of the year, we start the year in kind of mid-200, call it 2.5% base rent growth year-over-year, and we end up the year, at least based off our projections today, in the kind of mid-4s, so 4.5%.
What’s driving that is this $15 million SNO pipeline, and what’s really interesting, while 80% of it commences next year, we’re only recognizing about half of the total dollars in terms of annualized dollars, so it sets us up really well in terms of back half of the year and into 2023, and it’s something we’re really excited about. That’s really what the driver is for next year, it’s all about leases commencing, and it’s the dollars coming on board in terms of dollars per share and total dollars, it’s pretty staggering relative to enterprise.
Great, thanks. Maybe just one more question. What are you hearing from your tenants in terms of new store demand? Just trying to get a sense of how leasing activity will look in 2022 versus the strength you experienced in 2021, particularly given maybe the more volatile environment and supply chain issues, and other headwinds that we’re seeing. Thank you.
Well at this point, I think that the desire to grow footprint is pretty strong across almost every sector - discount, grocery, service tenants. There’s just a tremendous amount of demand. If you think about the shop leasing, it’s the highest in years and years, and anchor leasing is the highest in over four years. I don’t see it slowing down, Tammi, unless there is some macro event that causes an entire chain or a sector to kind of put the pause button on leasing. Right now, I don’t know what that would be, but the tenant sales are very strong.
They seem to be not as concerned supply and labor. I would say that both the tenants and the landlords are having conversations about construction costs because with labor and supply chain and materials, that has been rising, and I think that’s a part of the reason why we’re driving rents up. But I think in general, the activity from the retailers is incredibly high right now.
Great, thank you.
The next question will come from Katy McConnell with Citi. Please go ahead.
Great, thanks. Good morning.
Just given all the [indiscernible] leasing progress you’ve made, can you update us on your expectations for total capex spend in 2022, and would you expect this to remain elevated at a similar pace in 2023?
Hey Katy, it’s Conor. I think you asked about capex spending, and correct me if I’m wrong, I’m sorry, but we do expect, to your point, given all the activity just in total leasing, whether it’s shops, anchors, and our redevelopment pipeline which we added a couple projects to this last quarter, we do expect capex to be up certainly over last year and definitely over 2020, which was depressed obviously given the initial COVID impact.
We haven’t given the total dollars, but I would just tell you based off our current budget at the midpoint, we expect to have retained cash flow of around $35 million, which equates to kind of a mid-70s payout ratio, which has been our target for the last couple of years. We’ve got the capital and the operating cash flow to fund capex, and to your point, as long as leasing activity remains elevated, capex will as well.
That being said, we’re running out of space. I think to point back to Tammi’s question, what could impact leasing volume is simply running out of space, so our expectation is it will be elevated for this year and the start of next year, and then it will fall off fairly dramatically as we reach peak lease rate, peak occupancy.
Hey Conor, it’s Michael Bilerman here with Katy. Can you just outline a little bit of the balance sheet moves and how they impact guidance this year? I think, at least in the supp, you talked about $35 million of settling the forward equity. I think you have the prefs midyear that carry a pretty high rate that can be redeemed. There’s a bunch of JV mortgage debt that I would assume has to get refinanced by the beginning of the second and end of the second quarter. Can you just talk a little bit about what you have planned and what’s embedded from an accretion/dilution standpoint?
Yes, thanks Michael. There’s not much embedded from an accretion/dilution standpoint - I’ll start there, just because we expect our share of interest expense to be effectively flat year-over-year, and you’re right, there are a number of moving pieces and we have a number of options, which is really exciting.
You are correct - the Class A preferred are redeemable without penalty starting in June of this year. That is one option. We talked a lot about investment opportunities we’re excited about. If we can’t find them, we always have that, which is, to your point, a high coupon piece of paper.
You’re right - there are some mortgages that are due. There are also, I think as Richard’s question around transactions, the expectation you’ll see the monetization of a number of joint ventures as well, which will take down that. From a refinancing perspective, I do think we’ll have a couple mortgages refinance this year; otherwise, I think you’re going to see transaction activity, net proceeds from transactions kind of satisfy those.
But I would just say a global answer to your question, our capital markets activity will be totally dependent on investment activity, meaning if we are able to find some opportunities that we like and think are accretive to the enterprise, then we’ll be more acquisitive--sorry, we expect to be more active on the debt and the equity side, obviously depending on where we see the best source or best cost of capital.
It’s a very long way of saying it’s totally dependent on transaction activity, but you’re right to point out there’s some exciting things and some higher cost of paper out there that we can now look to address, should we fail to find investment opportunities.
So you have nothing from a positive refinancing perspective, even though you could argue that the mark-to-market of your debt and preferred would be highly accretive to cash flow and FFO?
I don’t want to say we have nothing accretive from an opportunity perspective. As you pointed out, the prefs are carrying a low 6-handle coupon, so it’s a range, Michael. At the top end of the range, you should assume that we’re taking out some of the higher cost debt.
Also, we could look at liability manage as well. We’ve got some 23s and 24s that we could probably reissue accretively today, so I would just say on our base case budget, there’s nothing in there, but you’re right to point out that there’s some opportunities we have across the capital structure, but it’s totally dependent on investment activity.
Okay, and then just lastly, just finishing this topic, you have, I think twice issued equity to redeem preferreds and de-lever the balance sheet. How are you thinking about common equity, because I do think that some of those historical--you know, when you’ve had a very high balance of preferreds relative to your enterprise value, you had the choice of replacing it with really cheap debt or more expensive equity, and you chose the de-leveraging path. Where is your mindset now in terms of equitizing the balance sheet?
Yes, it’s a great question, and I would point to simple changes in our leverage profile. As I started my prepared remarks, Michael, we’re 5:4 debt to EBITDA, 21% unencumbered debt yield, over four times fixed charge, so I would tell you you’re right - when we did those first two trades, the preferred as a percentage of the total capital structure and our overall leverage was materially higher. We are in a materially different place today from an overall leverage perspective, so the sensitivity around issuing equity to take out prefs is extremely high.
That doesn’t mean we don’t look at it, we don’t consider it. As you know, we consider everything every single day in terms of every one of the levers we can pull. I would just tell you that that sensitivity is materially higher today given how lowly levered we are on an absolute, and certainly on a relative basis relative to peer group.
Great, appreciate it. See you guys down in Florida.
Thanks Michael.
The next question will come from Todd Thomas with Keybanc. Please go ahead.
Hi, thanks. Good morning.
I wanted to first follow up on the joint venture commentary and the Madison or DDRIM JV in particular. There were some bits and pieces, I think, in your comments touching on this, but I wanted to ask about that joint venture and the latest thinking with regard to the remaining 24 assets there, gross real estate on the books of $760 million. What’s in the guidance for that JV throughout the year with $350 million of debt maturing in July?
Todd, let me start - it’s David, and then I can turn it over to Conor with respect to the budget.
The nice thing about having joint ventures is that there are times when the partner would like to sell and we can find assets that we think match our growth profile or exceed it. If you look at what we bought from Madison already, the SITE Centers grocery portfolio generates about $750 a square foot in grocer sales, and this portfolio is almost $800. The demographics are in the top quartile in the U.S. There’s a lot of similarities in the portfolio that we bought with our captive portfolio.
The amount of inventory left in the DDRIM pool that is substantially similar to our core portfolio is shrinking, so I think the likelihood that we’ll continue to buy from that JV is probably smaller transactions and not portfolios like we’ve done in the past year.
As far as budget goes, I think Conor can probably speak to that better.
Yes, we can’t provide guidance on what our partners will do, ultimately it’s a partnership decision, Todd. I would just say our assumption is over the next couple of years, just given the life of that fund and the funds of some of the other partners involved, you’ll see continued asset sales and our budget reflects that. The total dollar amount could swing, and that’s why we have a range.
As Michael alluded to, there is some debt that comes up this year, and at times when debt matures, that necessitates the end or monetization of a fund, so I think you’ll see some of the assets get refinanced, some of the assets get sold, and it will be really a range across our joint ventures. Our guidance reflects, as you’d assume, at the bottom end the most dilutive outcome of that transaction, and the top end assumes less transaction activity.
I would just say to David’s point, if we find an opportunity to acquire assets that have a growth rate at least commensurate with our portfolio, we’ll take advantage of it, and if not, then by definition we’re improving our overall portfolio quality. It’s just an opportunity for us to take some of our capital out of those joint ventures if we want, reinvest it elsewhere, pay down debt - whatever we want to do.
Again, we can’t provide specifics on what each joint venture will be doing, but I would just say our range reflects what we think is a range of outcomes across the different partnerships.
Okay, got it. Then I think, David, in the past there was some commentary suggesting that there was interest in utilizing joint venture capital. You’re obviously talking about consolidating interest and seeing a decrease in activity today, but on the other hand, it seems like you’re finding a lot of investment opportunities - anchored, non-anchored, product. What’s the current view of either inking a new joint venture partnership or utilizing joint venture capital going forward?
I think going forward, I would always like to have a joint venture arm of our business. I think we have a very, very long track record with some very large institutions. We just recently did a look back on a number of the JVs we’ve had over the past five or six years, and I think we’ve been a very good partner to a lot of pretty sophisticated capital.
I think you’re seeing the benefits of having a joint venture business now, when it’s hard to acquire assets and we’ve got inside information and experience on captive portfolios that we can purchase when the time’s right, so I’d like to see us rebound a little bit and grow that joint venture business. I’m not sure if this year is the time that that will happen, but long term I think it’s always going to be a part of our enterprise.
Okay, and then just lastly, Conor, you said you see current upside to the portfolio’s lease rate, and you and David talked about the 500,000 square feet of new lease deals in negotiation and the signed not occupied pipeline. Can you just share what’s in guidance for occupancy during the year, and any color on maybe tenant move-outs or whether you expect to see a moderation in lease and occupancy rates to start the year, as you might typically see on a seasonal basis or any space recaptures or anything like that, or do you see the lease and occupancy rate gains just carrying straight through the year?
Todd, I’ll let David talk about the lease rate and how the demand factors into that. I think to your last point, though, our expectation is you’re going to see a steady increase over the course of the year, definitely in terms of occupancy and certainly in terms of the lease rate as well.
In terms of occupancy, by the fourth quarter of this year--the fourth quarter of next year, excuse me, the expectation is to see a couple hundred basis points of occupancy increase. I will tell you the percentage is always going to be misleading, just based off rent and GLA, etc., but from an economic or a rent-adjusted occupancy, we expect this to be up over 200 basis points over the course of the year.
Yes Todd, I would just say that we obviously don’t guide or provide guidance on occupancy at year end, but from a lease rate perspective, the demand right now is so strong to lease space, both in shops and anchors, if this pace continues, then I think we’ll be stabilized from a leased rate perspective by the end of the year, which I would say is 95%, 96%.
What can change that is what we purchase, so last quarter we purchased vacancy, and that’s part of the strategic move. I think for the core portfolio today, we seem like we’re trending pretty quickly to full stabilization, but I’d love to see us buy a little bit more vacancy.
And Todd, there’s nothing coming--I failed to mention this, there’s nothing coming offline in terms of anchors or redev or anything like that impacting the course of 2022.
Okay, thank you.
You’re welcome.
The next question will come from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, good morning gentlemen. Just a few questions, and maybe continuing on the JV theme. David, I appreciate your comments that on your look-back, you guys have done really well on the JVs. On the other hand, I think when you guys came in and took over running SITE Centers, there was a big focus on simplifying a lot of legacy JVs and getting rid of a lot of housecleaning to simplify the company, simplify the NOI structure. Did the China deal--I think that may have been two years ago, three years ago, I forget, but that’s been pretty quiet, so maybe you can just talk a little bit more about what your enthusiasm for joint ventures is now compared to the housecleaning you did over the past number of years, and then two, are there--when you say you’re excited about joint ventures, is this more one-offs or are you thinking about a fund, like Boston Properties has dedicated joint venture partners that they use on deals, are you thinking something like that?
Yes, it’s a great question, Alex, because you’re right - we spent a number of years simplifying the portfolio, and to be perfectly frank, this is the year we’re dealing with the final shift from fee income to property NOI, and there’s a higher multiple on property NOI than there is fee income.
My critique of the unwind of a lot of those legacy JVs was just simply that they were very, very large joint ventures, and our fees were somewhat low. When they get too large, then the enterprise becomes a lot more about the JV business and less about the wholly owned, and so I think it starts to impact how people view your portfolio. I’m much happier with the simplicity we have today.
When I talk about JVs in the future, I’m really not talking about anything imminent, I’m just saying that as part of an overall business plan, it’s nice to have access to capital partners that have a similar viewpoint as yours and can probably provide capital for a strategy that you may not be able to put 100% into. That could occur if we found a portfolio we liked but it was too large and we wanted to bring in a partner. It could happen if we had a strategy that is maybe a long duration strategy and we wanted to find a partner that had that same viewpoint.
But at the end of the day, what you’re really trying to do is build up inventory that you might be purchasing 100% of in a number of years, and one of the ways to make sure you’re always able to access off-market deals is to have long-term joint ventures with institutions that you can access those investments at a later date. I think it’s just more of a long-term viewpoint.
I see joint ventures as being an important part of our business, but I really do think they need to serve a purpose, and I think you need to get paid for that service you’re providing them.
The only other thing, Alex, if you remember the joint ventures that, to use your phrasing, we cleaned up a couple years ago, there was a stark contrast in terms of growth rates and quality versus the wholly-owned portfolio as well. If you remember, Michael asked the question, I think it was three or four years ago about why there was such a differential between same store NOI at 100% and our share, and the truth of the matter was the JVs were a drag, and we talked about that when we unwound a couple of them. That’s another point to David’s commentary, the JVs today are consistent with our portfolio quality. They’re growing at a very similar rate, and to David’s point, if we could find assets that are also growing at similar rates, and then we’d add to them and add them to the enterprise.
On just the other part of that question, are you guys looking to do a strategic audio [ph] or some sort of GIC, or something like that, like a dedicated third party capital source, or David, you’re looking at these as just making sure that you have a rolodex of a lot of different JV partners who think the same way you do and as things come up, it would be sort of a one-off?
The latter.
Okay. Then second question is on the--I hear your enthusiasm for the leasing demand, and certainly we’ve been holding that for quite a while now. But just curious, there is a point of structural vacancy - you know, I think your portfolio is probably lower on that just because it’s more big box, less on the small shop, but still, is there a point where you’re like, hey, we could have all the demand that we want but for the street, keep in mind that even getting to the 94, 95, maybe that in itself is really difficult just given natural churn and time it takes to open, etc. What’s sort of a realistic number that we can think about versus what an optimum level is?
Well, that’s a tough question to answer. I see your point. I mean, historically I would say that 95 to 96% is stabilized, and the reason is you’ve always got a little bit of bankruptcy every year, a little bit of move-outs, and when you have a larger space move out, the downtime does have an effect over the course of the year. That’s why I’ve always felt like 95 to 96% is really a stabilized portfolio.
I’m personally very curious what happens in this cycle, because I think that retail in wealthy suburbs are running out of space, and it’s a little bit strange to say that given that we’re still in COVID, but demand is so high, what’s really happening, Alex, is that the tenants are renewing at a much higher rate than they used to, and they’re hitting their options at a much higher rate than they used to, even in the good times six or seven years ago. If the retention rate goes up, it means that by definition, you have fewer move-outs and fewer bankruptcies, and if this cycle has more of that and if rents are growing, it means fewer tenants can move because the rents for new construction become higher. It could kind of test that cap of 95 to 96%.
The second piece of that puzzle I also think is the middle-sized spaces; in other words, junior anchors and then small shops have a long history of maintaining high occupancy. It’s that kind of 6,000 to 10,000 square foot space that’s always been a little bit difficult. What’s changed in the last year is you have some very, very large new concepts, particularly pOpshelf and Gopuff that are starting to really look hard at wealthy suburbs in that size range, and that does change the dynamic. If you can get credit tenants in space that are that middle size, that can have a material impact on retention rates going forward.
Okay, thank you.
Thanks Alex.
The next question will come from Floris van Dijkum with Compass Point. Please go ahead.
Thanks guys, morning. I had a question on the rationale behind the convenience investments and how should investors think about that, and how would you--the convenience, i.e. the non-anchored space that you’re buying, how does that compare to traditional street retail in your view in terms of the throughputs or the people who go by there? You said you looked at some close data for cell phone usage, etc. Maybe you can give us some more insight on why you feel so comfortable buying unanchored parts or retail right now in the convenience segment.
Yes, sure Floris. It’s probably a longer discussion than earnings call, but I guess in the most simplistic form, I think before cell phone data allowed landlords and tenants to understand shopping traffic, you had to rely on one of two things: either you’re relying on an anchor traffic, like a grocery store, a mass merchant or a discounter, or a department store, or you’re relying on pedestrian activity, which tends to be street retail, high street retail. Those two things drove traffic, and so the assumption was that if traffic was there, the tenants could measure their probable sales.
What’s changed with geolocation data is that you don’t have to rely on the anchor anymore. You really can look at the current productivity of the existing tenants, you can measure where the customers are coming from and why - are they coming from work, are they going to work, are they just coming from their homes, are they coming from school, and the retailers have all figured this out.
If you look at the two properties that we bought in Charlottesville in the last couple of months, the tenants are Verizon, Cava, Starbucks, and a Wells Fargo - those are sophisticated tenants. They have geolocation data themselves. We have the same data, and I think both of us agree that there’s a reason why they’re there, and so if we can buy that property and understand the rent growth and the lack of capex in that asset class, you don’t really have to rely on a traditional anchor, and that’s why I think the thesis for us makes sense. You’ve got data to understand it, you know the capex is low and you know the rent is more likely to keep up with mark-to-market because you can capture shorter term leases. Those are the input assumptions.
The one thing I’ll just remind you is that there is a big difference between convenience properties and street retail, and it has everything to do with parking and convenience, and we are all in the suburban parking, convenient, close to the curb. We’re less interested in street retail where it’s really pedestrian or it’s daily office traffic - that’s not part of our thesis.
Great, thanks David. That’s it for me.
Thanks Floris.
The next question will come from Linda Tsai with Jefferies. Please go ahead.
Hi. In terms of the space running out in wealthy suburbs and retailers signing on at higher rents, how much would you attribute this to work-from-home, hybrid working models, pandemic-induced migration or retailers coming out of lower quality malls? Does your traffic data help you parse out any of this data?
Yes, it’s very interesting, Linda. A year ago, I think what we were saying was the balance sheets of the retailers got better and therefore they could grow their businesses. That was the primary driver, was balance sheets were significantly better coming out of that first year in COVID.
I think what’s changed, my own personal view, is that the data is showing us and the tenants are telling us that they’re betting that hybrid work is going to be a long term part of the U.S. white collar workforce, and they’re willing to make bets on that, given their sales and higher productivity. The hybrid workforce is showing up in the data - that doesn’t’ surprise you any given that people are still remote, but the amount of customer traffic during the weekday as opposed to the weekend is substantially different than it was three years ago.
I think the number of trips per week has gone up, the duration that a customer stays on the property has gone slightly down. Why is that? It’s likely because people are doing more short trips and you’re starting to see the impact of a lot of these ghost shoppers that are showing up at the properties to grab items that you purchased online and they’re being fulfilled from the store fleet, so that’s why you’re seeing some of this data prove that the ghost shopping business is having a very positive effect on suburban strip centers.
I think those are the primary reasons, Linda. I wouldn’t put a huge impact from mall tenants moving to the strips. I think the much larger driver of this leasing volume is retailers just trying to get their fulfillment into the last mile of wealthy suburbs.
Thanks, and then some of your peers have discussed challenges in getting new tenant open and operating on time. Is this something that you guys are seeing in your portfolio?
Last year, it was definitely challenging from a building permit standpoint; in other words, the local building permit counters were slow and they started to get a lot of building applications, they were still remote. I spoke to our head of construction and development yesterday, and what he’s seeing is that the building permits are starting to get back to the pre-pandemic levels, they’re getting a little bit faster, so I think permitting has gotten better.
What’s gotten worse is the procurement of some of the long lead items, like insulation and roofing and HVAC equipment. I think most landlords and tenants, including us, are just starting to buy those long lead items earlier in the construction process. For instance, when the lease gets signed, we’re ordering MEP units and roofing materials, whereas in past years we might have waited three or four months to get closer to permit. A lot of that, I think, supply chain has just been solved by buying things earlier. We haven’t had--I mean, I don’t think we had any tenants last year miss their opening date because of either labor or materials, or permitting.
Thank you.
The next question will come from Chris Lucas with Capital One. Please go ahead.
Hey, good morning guys. Just a couple from me. On your same store NOI guide, I guess maybe you could help us think about some of the drags on your outlook as it relates to how bad debt expectations are in your current forecast versus, say, pre-pandemic, and same thing with tenant fallout. David, you commented a bit on tenant fallout, I just want to understand how you’re thinking about it relative to your same store NOI guide.
Hey Chris, it’s Conor. The biggest driver, as we’ve laid out in the guidance table, is uncollectible revenue. It should be, to your point, an expense, not a source of income, and we expect it to be an expense in 2022. That’s the number one driver in terms of the headwinds.
There are some smaller paper cuts - you know, our ancillary income will be lower year-over-year because we have less vacancy to lease to tenants. That’s another one, but again it’s a paper cut. The number one driver really is just uncollectible revenue shifting from a source of income to an expense.
In terms of bad debt, to your question, our expectations around bankruptcies, about move-outs, around anything that would be a drag from an operations perspective are materially lower today than they were pre-COVID. I think if you recall from our investor day three or four years ago, we talked about 150 basis points annually of bad debt, bankruptcies, kind of everything rolled in there. Today I think that number is much closer to 50 basis points, and our range includes somewhere--you know, a little bit above that, a little bit below that.
It is a materially different operating environment. David talked about our retention rates earlier. Our known move-outs or expected move-outs is down dramatically as well, so really what’s driving 2022 is uncollectible revenue.
Okay, thanks for that. Then just quickly on the acquisitions for the fourth quarter, can you give me a sense as to what that cap rate was broadly at your share?
Well Chris, I think in my prepared remarks, what I said was if you look at the blended overall cap rate for the activity in last year, it was just under 6%, but we haven’t broken it down by transaction and particularly from joint venture partners. I don’t think we would ever release cap rates on a specific transaction.
And then David, the leasing volume split GLA last year was 50/50 on new leases. What are your expectations between shop and anchor leasing volume on new leases in 2022? Any sense in terms of how that should play out?
Chris, I’m sorry - I could barely hear you. Could you say it again?
Yes, I’m sorry, David. Leasing volume for 2021 between anchor and shop space was 50/50 in terms of the GLA on new leases. What are your expectations for 2022 with that split between shop and anchor?
Hey Chris, it’s Conor. I think in the first half of the year, it will probably be consistent with 2021, that kind of equal split. As we talked about at your conference and at NAREIT, we are running out of boxes, and so boxes will naturally fall off, so I think based off our current forecast, and this could obviously change tomorrow, probably that split would be even or consistent with 2021 in the first half of the year and then you’d see a higher percentage of shops in the back half of the year, but that’s just a guess.
Okay, and then last question from me, specific to Paradise Village, interesting to buy vacancy out from a partner. Is there anything that you can chat about that gives some background on why that transaction worked for you guys and not for your partner?
Yes, I think that’s pretty simple. It’s in a very wealthy sub-market. Our vice president of leasing for the west coast lives a couple blocks away, so there’s a personal agenda there to have 100% ownership. It was an old Albertson’s anchored property where we were able to buy back the ground lease from Albertson’s, which effectively created that vacancy at a pretty low cost. The challenge for our partner is that they’re a private entity and it takes a lot of capital to reposition the property, and so we were able to negotiate a price at which we were happy with the growth and the cost of that growth, and they were happy with exiting the property and letting somebody else effectively redevelop the property.
Thank you, appreciate it.
The next question will come from Mike Mueller with JP Morgan. Please go ahead.
Yes, hi. Sorry for another JV question, but just a quick one here. Just curious, what was the trigger that prompted you to sell the JV for the Utah JV, actually, that saw you taking it?
Yes, that’s a good question. It comes down to what’s most similar to our wholly owned portfolio and accretive, and what is least similar and dilutive. From DDRM Madison pool, as I mentioned, if we’re buying grocers at $800 a square foot and our portfolio generates $750, it’s in the top quartile of demographics nationwide, it has a lot of similarities in location in terms of being mostly in Florida.
The SAU portfolio was different - it was much more rural, it’s in the bottom quartile of demographics, the densities are much, much less, the household incomes are more blue collar whereas ours are more upper middle income and high income, and most of the grocery stores in that pool were doing less than $500, $550 a foot, so it really just didn’t have the growth and the durability that we look for in our own acquisitions, so we were happy to basically recycle our 20% out of that portfolio and reinvest it somewhere else.
Got it. That was it, thank you.
The next question will come from Ki Bin Kim with Truist. Please go ahead.
Thanks, good morning. Just a couple questions on leasing. Given that you’re reaching mid-90% lease rates, how should we think about your pricing power and lease spreads going forward?
Yes Ki Bin, I think that’s going to be the--I mean, it’s already started where the pricing power that the landlord has is much more than two years ago, three years ago. I mean, it has definitely tilted in the favor of the landlord, and I think you’re starting to see that in spreads.
I think that once we start to run out of box space, then the competition increases for the shops, and so I think we’ll see the most growth in the shops in the back half of the year. I also think that the longer the economy does well, particularly with just a little bit of inflation which is good for retailers, you’re going to see a lot more aggressive behavior from some of these tenants that really need to secure space. There’s been a half dozen very high quality restaurants that have gone public, there’s a bunch of tenants that are being sponsored by investment-grade tenants. I would point to pOpshelf, which is a Dollar General concept, and they’re doing fantastic. That type of tenant that’s high credit and has to roll out because they’ve got an open to buy, the space is getting more competitive.
I, like you, am very curious to see how high the rents get, but we’ve hit all-time highs in shop rents in a number of our sub-markets, including Miami, Cleveland, Portland and Boston, and I mean shop rents that are $50, $60, $70, $80, $90 a foot, and I hope that continues. I think as long as the economy keeps humming along, we’re going to be very careful about leasing to credit as opposed to local, because I think that’s going to inure to the benefit of our stakeholders once the next recession comes.
A couple follow-ups there. Given your lease expiration schedule and the options for big boxes, how much are you actually getting to on an annual basis? That one first.
Ki Bin, that’s a great point. If you look historically, new leasing activity has generally been about 10% to 15% of total leasing volume, so you’re right - the negative is potentially you could have tenants hitting options. The great part about that, as David has alluded to a number of times, it means no downtime, no capital, and a 5% to 10% bump or even higher for some of the fair market value options we have. It’s a double-edged sword, but I would tell you from our perspective, it’s a net positive.
And what is implicit in your guidance for lease spreads?
We haven’t guided to lease spreads historically. If you remember from our investor day, Ki Bin, our view is that renewals, which generally the majority of which are options, are going to be in that 2.5% to 7.5% range, and for new leases you’re starting to see the re-acceleration from the COVID trough - you know, we’ve done anywhere between 10% and 30% historically, so I would be surprised to see on a trailing 12-months numbers outside of those ranges, but given how focused we are from portfolio-wise, one lease can really move the needle positively or negatively.
I think just historically, that trailing 12-month number is the right one to use, and until we say otherwise, I think it’s appropriate going forward.
Okay, thank you.
You’re welcome.
Thanks Ki Bin.
The next question will be a follow-up from Katy McConnell with Citi. Please go ahead.
It’s Michael Bilerman. Just a real quick follow-up. David or Conor, the Madison JV, did it have any sort of promote feature in it that would have benefited your purchase price at all?
No.
So it’s just a clean buy-sell, or it was a negotiated deal?
A little bit of both. The one in Arizona was a negotiated unwind, SAU was a clean buy-sell, and Madison was a little bit of a combination of the two.
And Madison, who approached who? Was Madison approaching you to liquidate the assets and then you chose, or you approached them to buy these assets?
It’s a little bit of both, Michael, and I’m not trying to be evasive. It’s just there were several different debt pools in that joint venture, it’s a very sophisticated partner, Madison. They have their own desires as to when they want to exit portfolios or properties, and we have certain ones we want and other ones that don’t fit, so it’s a little bit of both.
Then when you look back, if memory serves, this was the old [indiscernible] portfolio from 2007, that I know a bunch of t hose assets were probably developed in the early 2000s, or bought. But effectively, now you’ve got a 15-year performance history from when DDR originally acquired the assets, Year 10 you’re recapped with Madison and now at Year 15 you’ve taken in, call it a third of the portfolio. How has NOI trended for this group of assets that you just bought over the last 10 to 15 years, and how do you look at relative value today versus when you did the deal in 2017 and 2007? I’m just trying to get a picture of how these assets have performed over time.
Well as you know, we don’t report segmentated NOI by portfolio, so that’s a tough one to answer. I’d say from a value perspective, if grocery cap rates are where they are today and where they were even five years ago, it’s not hard to imagine that this portfolio has done pretty well from a value standpoint. But from an NOI standpoint, it’s really tough to answer.
I mean, 2007 was a peak Q in terms of pricing and there was a pretty robust level of NOI, and you could almost say the same thing about ’17, so it’s just interesting data points from a transaction perspective, but I would also assume that from an NOI, I would hope that you’d be able to at least comment on here’s the average base rent of the portfolio, this is how it’s grown, this is--you know? Just to give a little bit more color on how--whether these have been good outperformers, have they been in-line performers, have they been underperformers. Just trying to get a relative sense, but we can--it doesn’t sound like you may have the data at your fingertips, so maybe we can follow up after.
Sure.
Great, thank you.
Thanks Michael.
This concludes our question and answer session. I would like to turn the conference back over to David Lukes for any closing remarks. Please go ahead, sir.
Thank you for joining our call, and we look forward to talking to you next quarter.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.