Hello, and welcome to the Brixmor Property Group Second Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Stacy Slater.

Please go ahead..

Thank you, operator, and thank you all for joining Brixmor's second quarter conference call.

With me on the call today are Jim Taylor, Chief Executive Officer and President; and Angela Aman, Executive Vice President and Chief Financial Officer; as well as Mark Horgan, Executive Vice President and Chief Investment Officer; and Brian Finnegan, Executive Vice President, Chief Revenue Officer, who will be available for Q&A.

Before we begin, let me remind everyone that some of our comments today may contain forward-looking statements that are based on certain assumptions and are subject to inherent risks and uncertainties. As described in our SEC filings and actual future results may differ materially. We assume no obligation to update any forward-looking statements.

Also, we will refer today to certain non-GAAP financial measures. Further information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in the earnings release and supplemental disclosure on the Investor Relations portion of our website.

Given the number of participants on the call, we kindly ask that you limit your questions to one or two per person. If you have additional questions regarding the quarter, please requeue. At this time, it's my pleasure to introduce Jim Taylor..

Thank you, Stacy, and thanks to each of you for joining our second quarter call. Our results this quarter once again underscore the transformative and accelerating impacts of our value-added plan as well as the outstanding execution of the Brixmor team.

Our progress is evident in nearly every observable metric, including our robust leasing volumes and spreads. Under Brian and the leasing team's leadership, we executed nearly 2 million feet of new and renewal leases at a cash rent of $18.79 and a blended spread of 14.6%, including 870,000 square feet of new leases at a comparable spread of 34.3%.

We continue to attract the very best retailers to our centers at growing rents, which Brian will provide some commentary on in our Q&A session. It's also evident in our continued growth in ABR. Our activity this quarter drove another post-IPO record for our overall average in-place ABR, which increased to $15.90 a foot.

And importantly, we remain disciplined with capital as we achieved an average net effective rent of $16.91 a foot on our new leases. Our progress is evident in our sequential and year-over-year growth in both billed and leased occupancy.

We set yet another record for small shop occupancy for the portfolio of 87.7%, and overall occupancy grew to 92.5%, just 30 basis points shy of our all-time record. And there's a lot more room for us to run there as we deliver our value-added pipeline, which currently drags our overall occupancy by 150 basis points.

And importantly, it's also evident in our strong same-store NOI growth and bottom line FFO growth. While we continue to realize the benefit of strong prior period collections, it's important to note that most of our growth was driven by our top-line revenue growth of 4.3%, which reflects the accelerating momentum of our value-added plan.

Now those are indeed fantastic results, as is our increase to guidance for the balance of the year that Angela will cover in a minute.

But what about 2023 and beyond? As we look forward and consider the natural moderation of prior period collections as well as the potential for economic disruption, we remain very pleased and confident in our strong visibility of continued growth as reflected in our $53.8 million of ABR and leases signed but not commenced that will commence through 2024, our forward new lease legal pipeline of $50 million of additional leases under negotiation, our real-time volume of new deals coming into our leasing committee for commencement in 2023 and beyond, our current and ongoing discussions with tenants to accommodate their store plans in our centers as retailers try to grow their most profitable channel.

And it's reflected in the continued real-time growth in our traffic to our centers versus 2019, which has averaged in the mid to high single digits. Relative growth that I believe leads the sector, but importantly, reflects the strength of our centers.

In addition to these visible growth drivers, we continue to deliver tremendous value through the ongoing execution and delivery of our reinvestment pipeline, as evidenced by another $30 million of reinvestment delivered during the quarter at an incremental return of 11%.

Parenthetically, our gross returns are much higher, and we're pleased that we have another $400 million of reinvestment underway at an incremental 9% return. Phenomenal execution by Bill, Haig and the redev and construction teams, we continue to deliver these projects on budget even with supply chain disruption.

And as highlighted in the past, these investments generate follow-on value beyond their ROI through increased occupancy and market rates at the centers impacted. In fact, for our stabilized redevelopments small shop occupancy has increased over 600 basis points versus one year before project start and the in-place market rate increased over 20%.

Our value-add strategy which demonstrated its resilience and outperformance through the pandemic positions us very well to outperform not only in stronger market environment but weaker ones as well. From an external growth standpoint, we continue to source centers where we can drive strong returns through leveraging our value add platform.

Those opportunities include Lake Pointe Village, a whole foods anchored asset in Houston, which with our braids heights centers represents the number one and two volume whole foods stores in the entire Houston, MSA.

Importantly, Lake Pointe Village also presents highly visible growth opportunities through the lease of a small shop vacancy, which the leasing team is already driving as well as the addition of highly accretive outparcels. Great job by Mark and team.

In the coming months, given, the cap – volatile capital markets, we expect to be a net seller as we found strong demand for our smaller non-core assets. We also plan to keep our acquisition powder dry should the volatile capital market conditions lead to even more opportunistic pricing of assets that fit our value-add strategy.

In that regard, I’m pleased that we have over $1.2 billion of liquidity, including a $200 million undrawn term loan and we have no maturities until 2024. Great job by Angela and team managing our balance sheet.

As I said, at the outset, I’m grateful for how this Brixmor team continues to execute and deliver upon our purpose of creating and owning centers that truly are the center of the communities we serve.

And as we detail in our recently published corporate responsibility report, we are executing our plan in a manner that is environmentally sustainable and socially responsible. With that, I’ll turn the call over to Angela for a more detailed discussion of our results, our outlook, and our liquidity..

Thanks, Jim, and good morning. I’m pleased to report on another strong quarter of performance as a transformative nature of our value-add strategy continues to result in record operational results across our portfolio. Nareit FFO was $0.49 per share in the second quarter, driven by same property NOI growth of 6.7%.

Base rent growth contributed 430 basis points to same property NOI growth this quarter. Excluding the impact of lease modifications in rent abatements, base rent growth contributed 370 basis points, representing 90-basis point acceleration from last quarter, reflecting continued growth in billed occupancy and releasing spreads over the last year.

Revenues deemed uncollectible contributed 150 basis points and ancillary and other revenues and percentage rents contributed 120 basis points on a combined basis. Importantly, the positive contribution from revenues deemed uncollectable this quarter was due entirely to improvements in current period collections from cash basis tenants.

As collections of previously reserved amounts totaled $10.3 million, down slightly from the $10.6 million collected in the prior period. Net expense reimbursements detracted 30 basis points from same property NOI growth in Q2 due to the quarterly volatility of operating expenses experienced in 2021.

We continue to expect that full year operating expense growth will be approximately 3% and net expense reimbursements will be a positive contributor to growth for the full year due to prudent expense management and occupancy gains across the portfolio.

Our operational metrics continue to reflect the strength of the current leasing environment, despite macro headwinds, and the continuing successful transformation of our portfolio. Billed and leased occupancy were both up 40 basis points this quarter. The anchor lease rate now stands at 94.8%, up 40 basis points sequentially.

And is Jim highlighted, the small shop lease rate now stands at 87.7%, up 70 basis points sequentially reflecting a new portfolio record.

The spread between lease and billed occupancy remains 350 basis points and the total signed but not commenced pool, which includes an additional 70 basis points of GLA related to space that will soon be vacated by existing tenants increased by $2 million this quarter to $54 million at a blended rate of $19.20 per square foot, more than 20% above our portfolio average ABR per square foot.

I’d like to underscore that the total size of the signed but not commenced pool and the blended rate on the pool both grew this quarter, despite leases representing more than $15 million of annualized base rent commencing during the period, reflecting exceptionally strong leasing activity.

We expect that over 50% of the current signed but non commenced pool of $27 million will commence throughout the balance of this year with another $26 million slated for 2023 and beyond, establishing a strong foundation for growth in the coming years.

As discussed with you last quarter, we amended our unsecured credit facilities in April, improving pricing, adding a sustainability linked feature and extending the maturities of our revolver and $300 million term loan.

In addition, our amended term loan has $200 million of additional capacity, which may be utilized by the company at any point through April 2023. As of June 30, we have over $1.2 billion of available liquidity and no debt maturities until mid-2024, providing valuable financial flexibility. Turning to guidance.

We have increased our 2022 same property NOI growth expectations from 3% to 4.5% to 5.5% to 6%, as a result of the significant out-of-period collections of previously reserved amounts recognized again in the second quarter. And an improvement in our outlook for revenues deemed uncollectable, ancillary, and other revenues and percentage rent.

Consistent with our prior methodology, the bottom end of our same property NOI growth guidance range does not assume any additional collections of previously reserved amount. Nareit FFO guidance has also been revised to a range of $1.93 to $1.97 per share from the previous range of $1.88 to $1.95 per share.

And with that, I'll turn the call over to the operator for Q&A..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Craig Schmidt from Bank of America. Your line is now live..

Thank you. It's clear that the leasing year-to-date is – continues to really drive the company.

I'm just wondering, are you still seeing leasing appetite in the third quarter unchanged despite the inflationary pressure?.

We are. We're – as I mentioned in my remarks, we're very encouraged by what we're seeing, not only under negotiation, but also what we're seeing in our weekly leasing committees.

Brian?.

Yes. Craig, and coming out of ICSC, we were very encouraged by the conversations, the portfolios that we've had since then. And you can really see, as Jim mentioned that forward legal pipeline despite all that we signed during the quarter, that's up 17% from where we were a year ago. And traffic continues to exceed pre-pandemic levels at our centers.

So we're really seeing our core retailers, those in the value apparel, mass merchants, specialty grocery, QSR restaurant space, more mall-native tenants that we continue to do a lot with. You saw it again during the quarter with Bath & Body Works and Claire's and Rally House.

So the depth of demand has been pretty strong, and we continue to be encouraged by it for retailers that, again, as Jim mentioned, are looking to open stores in both 2023 and 2024..

And Brian, if there's anything you can say regarding the appetite for the small shops, the mom-and-pops, the locals as opposed to national..

Yes. We continue to be encouraged by that as well. I think the pandemic created an opportunity for really strong local tenants, particularly in that restaurant space. And we've seen over the course of the past 18 months, good quality operators, multiunit operators that are coming in and taking second-generation restaurant space.

The team has really capitalized on the investments that we've made in our centers the better anchors that are driving more traffic that are helping attract those. So local tenants are still roughly about 17% of our ABR, but what I would tell you, Craig, is the strength of those local operators we're really encouraged by.

And the team has done a really nice job in their particular markets, driving strong local tenants to our centers..

And another trend that we talked a lot about during the pandemic and which has continued is we are seeing a lot of small shop demand from national and regional players as well. So it's been an interesting evolution in the composition of our small shop tenants team..

Great, thank you..

Thank you. Next question is coming from Alexander Goldfarb from Piper Sandler. Your line is now live..

Hi. Good morning – good morning down there. Jim, a question about the shopper. It seems that when I've asked this question of peers, everyone seems to be stating that basically all shoppers, not just the core diehard shopper that drives retailer sales, but all the shoppers are pretty much hanging in there and engaged.

Last night on Simon's call, David spoke about sort of the team shopper, the value shopper being pinched in some of their categories, but overall the consumer being strong.

How would you characterize your shopper base and what are the tenants saying? Is it strength across everywhere? Are you seeing any cracks? Just curious a little bit more perspective..

Well, you have seen really strong traffic levels, which have continued and which we find to be very encouraging. At the same time, our tenants are reporting strong sales across the board.

In fact, you noticed that we picked up some percentage rent in the prior quarter, reflecting the strength of traffic and the sales volumes that our tenants have been achieving, including tenants in the value segment.

So if you take a step back and you think about our centers more generally, grocery-anchored, necessity-based, value apparel, those categories have all remained pretty strong. Certainly, you've seen within the earnings reports of some of the tenants, some shifting in consumer habits and what consumers are spending money on.

But what I'm most encouraged by, Alex, is the continued real-time demand of tenants to open up new stores. So they understand very well where the consumer is and are investing more in their most profitable channel, which is the store.

So as you think about our traffic levels, as you think about the tenant demand, as you think about the forward leasing pipeline and you think about the consumer hanging in there, we feel pretty good..

Okay, thank you..

You bet..

Thank you. Your next question is coming from Juan Sanabria from BMO. Your line is now live..

Hi, good morning. Just hoping you could tease out a little bit about your comments on maybe being a net seller for the back half of the year.

Any quantum around that and where asset values are for the stuff you're looking to sell?.

Juan, we've always been hesitant to provide specific levels of guidance because we do want to continue to be opportunistic, much as we're being right now as we find good demand for some of the smaller non-core assets.

We're really not seeing a lot of very compelling product in this period of capital markets volatility that would interest us from an investment perspective that could certainly change and we're certainly on the front of our foot watching to see how that market responds in our core markets.

But we do expect given what we have in the near-term pipeline to be net sellers over the coming months and continue to have, importantly, the acquisition dry powder to pivot, should great opportunities present themselves..

And any color on where you've seen cap rates or how you see cap rates change as a result of uncertainty in the economy and some volatility on the rate side?.

Mark?.

So what's been surprising is we've seen a continued relatively strong market for grocery-anchored assets that have growth and value creation potential, certainly like the assets we've recently purchased.

I think when you look at assets that are more commodity based, that really don't have growth, those cap rates likely have drifted up a bit, certainly nowhere in locks that with the rise in the risk free rate. I do think it's important to look at what cap rates have done over time in the open-air sector, they've actually proven to be pretty sticky.

So I do think that relative stickiness in cap rates for open our retail and frankly, the proven performance that we're seeing through some challenging times over the last few years, we'll continue to attract capital to the sector and keep values somewhat sticky..

Thank you very much..

Thank you..

Thank you. Next question is coming from Todd Thomas from KeyBanc Capital Markets. Your line is now live..

Hi, thanks. Good morning. Jim or Angela, maybe there's been a little bit of volatility in your current same-store NOI growth results just given the out-of-period collections. And Jim, you commented that you're excited about the future 2023 and beyond.

Base rent growth is expected to pick up a bit from the 4.3% year-to-date based on your revised guidance, so call it ending the year in the mid to high 4% range.

Is that a realistic growth rate to anticipate moving forward into 2023 sort of an appropriate level of minimum rent growth upon exiting 2022 and looking ahead?.

Well, without giving guidance, we expect the rent growth to continue to be strong and continue to reflect that accelerating momentum as we continue to deliver our value-added reinvestments.

And what gives us confidence in that forward look, assuming – remember that prior period collections are definitely going to moderate, right? You got to remember that. But as you look forward to kind of the base period and you look past the noise of the prior period collections, the engine is firing on all cylinders.

And what we're particularly encouraged about is, again, that not only the signed but not commenced pipeline but the forward legal leasing pipeline and the conversations that we're seeing that allow us to capitalize and continue to capitalize on our attractive rent basis to drive more accretive reinvestment projects and more fundamental growth and ROI.

So we like the trajectory. We like how the business plan is delivering. And honestly, I think, it gives us a little bit of a differentiation versus a business plan that's just modeled on a steady state of replacing tenants and backfilling when you've got rents that may be at or above market.

So that's the nice thing about our plan as that it allows us to look several quarters forward. And again, we're doing business today for 2023 and 2024..

Yes, I just add. I just make one comment on the out-of-period collections. It is certainly, as Jim said, a headwind as we head into next year from an optical growth perspective. We recognized a little over $10 million this quarter, about $10 million last quarter as well.

While that is a finite pool and as Jim said, those are naturally going to moderate as we move forward, and we have addressed at this point, a lot of the most likely to collect amounts. There should still be some as we move forward.

But if you think about the collections just year-to-date, I think, it's something really positive about the strength of the underlying tenancy. Over 80% of what we collected in the second quarter was related to tenants, who are still active in the portfolio today.

And the fact that they are coming current on some of those legacy amounts from the pandemic, I think, says something really positive about how they've recovered and how their businesses are positioned right now..

Okay. That's helpful and then just a follow-up. Would you expect, Angela, I think you commented on net recoveries in the back half of the year.

But looking forward, would you expect net recoveries to become sort of a greater contribution to same-store NOI growth, just given the increase in occupancy rates? Or is there likely to be some continued volatility impacting margins?.

Yes. There's certainly volatility this year, to your point, related to the timing of expenses in 2021 and the fact that they were much more back-end loaded, particularly in Q4. So while we do expect net recoveries to be a positive contribution for the full year, which does reflect the growth we're seeing in build occupancy this year.

It is negative at this point in the year, and that will revert as expenses kind of normalize as you get into some easier comps in Q3 and Q4. As you look forward to next year, certainly, I think we can continue that momentum based on both prudent expense management and continued growth in build occupancy.

We've done a great job at continuing to navigate the inflationary environment and aren't seeing a tremendous amount of pressure on margins related to that..

Okay, great. Thank you..

Thank you..

Thank you. Our next question is coming from Craig Mailman from Citi. Your line is now live..

Hi, everyone. Just wanted to follow-up on the $50 million pipeline on lease that's under negotiation.

Could you just give us a sense of how much of that is renewal versus new? And what that could mean for kind of small shop occupancy if the majority of that actually signs?.

Hi, Craig. This is Brian. That's new. That's the new lease pipeline that we have and we're very, like we've said, encouraged by it particularly because of how much GLA that we've signed year-to-date. So what it means for small shop occupancy, as Jim mentioned, we see continued runway for growth.

We've got about 150 basis point drag in both overall and small shop occupancy from that redevelopment pipeline as the teams continue to deliver that as we continue to bring anchors in that are driving a lot of traffic to our centers, we expect that to continue to grow.

But we've been very encouraged by the growth to date and we still see a lot of runway going forward..

Okay.

So maybe another way to ask it then, I guess, it's how much of that is kind of same-store space versus maybe at least some of the value-add?.

I think it's broad across the portfolio. I mean I would say from the most part, we're not seeing – I mean we definitely see an impact when we do a reinvestment. But I would say broadly for the portfolio, our centers look a lot better today. The operating teams have done a fantastic job managing them. So we're seeing gains really across the portfolio.

And then in particular, when we do make a reinvestment, we're seeing significant small shop occupancy gains of about 600 basis points. So I'd say that that legal pipeline is fairly broad-based, but we're encouraged by the gains that we're seeing across the board..

Yes. I would just point out, obviously, all of our reinvestment projects remain in the same property pool. So the same property pool represents, I think, over 90% of the total portfolio..

Thank you for the clarification. And then just one for Angela real quick, you kind of broke down the commencements of the $54 million between 2022 and 2023.

If we think about it from, I guess, an FFO impact perspective, should we think about like kind of 50% of that $27 million hitting in the back half of the year and then 50% to 75% of that $26 million hitting in 2022 plus the other half of the time weighted 2022 commencements?.

Yes. I can give a little more color there. We do in the supplemental provide a breakdown between 2023 and then 2024 and beyond. So as we talked about on the call, $27 million in 2022, a little bit Q4 weighted, but not substantially so. As you get into 2023 is about $19 million of the remainder and then 2024 and beyond is about $8 million of what's left.

So that's kind of how it breaks down..

Perfect. That's helpful. Thank you..

You bet..

Thank you. Next question is coming from Ki Bin Kim from Truist Securities. Your line is now live..

Thank you..

So just I want….

Hi, Ki Bin..

Hi. Hi, Jim. So just I want to go back to the $15 million of ABR that are in negotiations, so not signed but – not open, but under negotiation. Obviously, there are leases that are going into that bucket and some leases that are being converted to sign. That number is the same as last quarter, $15 million. But like I just, it's obviously dynamic.

Can you just talk a little bit more about that math and the real-time demand drifting?.

Yes. Ki Bin, it's about the same – it's not the same number, but consider, I mean, we signed 900,000 square feet of leases during the quarter. So we've added more to that pipeline. In terms of the real-time demand, as I mentioned, we were very encouraged by the conversations at ICSC, which were on the heels of retail earnings reports.

We continue to have great discussions with portfolio reviews following up. And what we're hearing from our core tenants and from new tenants to the portfolio, it's still a desire to expand their open air footprint. They're looking to fill their slots for 2023 and 2024.

They're making long-term decisions because they see, as Jim mentioned, that this is the most profitable way to deliver goods to the consumer, and they're looking to expand their touch point with the consumer.

And as you look at what we've done at our centers, the centers look a lot better, where our traffic drivers continue to keep traffic up at our centers versus pre-pandemic levels. So we've been really encouraged by the demand and particularly the demand that we've been seeing over the last six to eight weeks..

And I appreciate the question, Ki Bin, because as Brian highlights, we're constantly backfilling that pipeline. So we delivered over $15 million of ABR from what was in legal last time as we signed it for 2017, excuse me.

And we continue to see activity not only with what we're in negotiations on, but in the very front end as we're signing LOIs or we're talking to tenants about their needs, those activities remain very robust, which I think reflects the quality of our centers. It also reflects the general environment where you're not seeing a lot of new supply.

And we're seeing in a lot of circumstances, multiple tenants competing for the same space, which is a great way to drive better terms, better growth and better outcomes..

Okay. And I had a kind of specific accounting question. I'm looking at Page 30 in your leasing metrics you guys cite about $1.77 of tenant-specific landlord work in 2Q. Also just curious if that's a fully loaded number, meaning if you do work on like HVAC or roofing that where the useful life expense beyond the tenant fee curve.

Is that CapEx included in $1.77 or excluded?.

Ki Bin, it's – those are the tenant-specific costs for work related to the space that we're doing generally when we have kind of larger TAs for tenants. So it would have some of those – some of that TI work that's included in that, that's typically performed by the landlord..

Yes. The typical base building work is usually excluded from those numbers, Ki Bin, you'll see that show up in maintenance CapEx..

Okay, thank you..

Thank you..

Thank you. Your next question today is coming from Greg McGinniss from Deutsche Bank. Your line is now live..

I think they're talking about me. Hi, good morning. I just want to go back to your comments on the transaction market in terms of not seeing compelling product during this period of market volatility. Does that mean there's no product available to buy or sellers are just not adjusting cap rates despite increases in borrowing costs.

So just a wider bid-ask spread issue..

So there's a couple of points in there. One, there are certainly less assets on the market today, particularly on the grocery-anchored side. So, the ones that are coming to market, as we mentioned, the pricing has been pretty sticky, sticker than we would have expected. So I think there's just less assets on the market from that perspective.

From a bid-ask perspective, I do think we're going to see that wider bid-ask is on larger deals, as we mentioned – as Jim mentioned in his remarks, smaller deals have a much wider buyer pool. They've got a lot of financing options. So that that market is somewhat liquid, the larger assets we see less of those trading today.

So I do think there's probably a wider bid-ask spread there. That certainly could be some of the opportunity that Jim mentioned as we look at the rest of the year going into 2020 – into next year. That's how I would categorize the market today..

Okay. Thanks.

And separately, just a point of clarification, on the 150 basis point occupancy drag that you've cited for – from the redevelopment pipeline, does that mean that assets are currently repositioning in the space just can't be filled because there's work being done? Or is that occupancy that you expect to gain after new anchors and new facades for new....

No, it's not occupant – it's vacancy in those assets undergoing reinvestment, which we do expect to fill as we deliver those reinvestments. So it’s the impact of assets under reinvestment from an occupancy standpoint to the pool overall..

Okay. And that’s the active development pipeline creating that drag, right, not the billion plus of additional investments you plan on making. Okay. All right. Great. Thank you very much..

You bet..

Thank you. Our next question today is coming from Haendel St. Juste from Mizuho. Your line is now live..

Hey, good morning..

Hey, Haendel..

Couple. Good morning, Jim. So maybe first one for you, Jim. You guys have done a great job getting to your snow rents on time, even faster. I’ve been anticipated, have been hearing some comments about potential store opening delays, given labor shortage and supply chain concerns.

So maybe you can discuss how you’re able to successfully get to your rent so consistently and ahead of schedule? And are you starting to see any of those delays or have any concerns about the potential delays as we look forward? Thanks..

It’s something that Brian and Haig in our leasing an operations teams and our tenant coordinators have been very active in managing. And I think you see our success in terms of our ability to deliver ahead of schedule. To get there, it’s really a multi-pronged approach. You’re working with tenants to adjust scopes.

You’re working with tenants to defer certain items. You’re getting the tenants to accept existing conditions because the tenant wants to get open too.

And at the same time, you’re going ahead and getting permits early in the process, you’re doing a lot of other things to try to manage that as best you can, because it is against a backdrop, Haendel, of supply chain disruption, permitting delays that occur particularly during the pandemic, as some permitting offices were shut down.

I just think the team has done a really good job of proactively managing that and delivering better than expected. So hats off to Brian and the leasing team for having the trust with the tenants to work with them and negotiate scope.

In fact, we’ve had with many of our major tenants offsite meetings to talk about how do we hit schedules and to partner with tenants and that. And of course Haig and the operations team are doing a phenomenal job..

That’s great. Thanks for that, Jim. A follow-up maybe for Angela on the balance sheet, yes, I understand that you have great liquidity, no near term maturities until 2024. But your debt-to-EBITDA is in the mid sixes. And I imagine that will somewhat limit your ability to be opportunistic. You talked about being a net seller in the back half of the year.

So I guess I’m curious, is this a level you’re overall comfortable with, especially as we enter a slow economic period here and maybe you could talk a little bit more about your balance sheet philosophy today, as well as your target leverage and timeline getting there? Thanks..

Sure. Yes, we’re very pleased with where we stand overall today. We spend a lot of time on this call talking about how powerful that signed but not commenced pipeline is. And as we deliver that space, you’re naturally going to see EBITDA growth and you’re naturally going to see the debt-to-EBITDA number work its way down.

We’re – we generate great free cash flow. We’re using free cash flow to fund the vast majority of the redevelopment effort, which continues to create that EBITDA growth going forward. So I do think you’ll naturally trend down into the low six times range probably as we get into next year. But it will be pretty organic in nature..

Great. Got it.

And low six is where you are comfortable being overall in that type of environment where we’re looking at?.

Yes, we really are, and it’s informed by the fact that the portfolio continues to have a very significant mark-to-market opportunity. So I think, what the right, the “right” debt-to-EBITDA number is should always be informed by what the basis of the portfolio is..

And where EBITDA is going?.

And where EBITDA is going, if we thought that the portfolio were above market we would have a different leverage target. If we thought it we’re at market, we may even have a different leverage target.

But with a continued substantial mark-to-market in the portfolio that we’re demonstrating quarter-after-quarter in the executed spreads, we believe you’re going to continue to see that EBITDA growth and naturally see the debt–to-EBITDA number trend lower over time. So six times does feel right in this environment, absolutely..

Okay. Thank you for the time..

Sure..

Thanks, Haendel..

Thank you. Our next question is coming from Anthony Powell from Barclays. Your line is now live..

Hi, good morning. It’s a question on revenues deemed uncollectible. You mentioned that we expect to see prior questions moderate, but you’re also seeing stronger [indiscernible] collection.

So as you look at that line item going forward into 2023, can we expect that line item to be either flat or positive in 2023, as you continue to collect prior period earnings and as your collections get better?.

Yes, it’s a very difficult question to answer because of that prior period collection piece. We’ve been very pleasantly surprised by our ability to continue to collect some of those legacy amounts. But as you step back and think about it, most of what we’re talking about relates to 2020 revenue.

We’re now two years sort of into trying to collect some of those amounts. What’s left to collect is heavily weighted to some of those categories that were more significantly impacted during the pandemic like restaurants, fitness, entertainment. So while I think the team has done a phenomenal job of continuing to realize collections on those amounts.

We should naturally all expect that that’s going to trend down and eventually really dissipate. We have and we give disclosure on this in the supplemental, it’s about $39 million remaining of revenue throughout the entire pandemic period that has been accrued for, but uncollected and reserved for.

So that’s really the number that in total would have the ability to be positive to the P&L positive to revenue deemed uncollectable over time. Only about $18 million of that relates to tenants that are still in occupancy in the portfolio that are still active tenants with us. That’s our highest likelihood of collection.

As I mentioned earlier, over 80% of what we collected in the current quarter was related to active tenants. And those are great trends and say something really, I think fantastic about the wherewithal of those tenants at this point in time. But the granularity of that pool has continued to increase.

We did have one larger settlement in the current quarter. Looking forward, the average balance we’re trying to collect from individual tenants is in the $20,000 to $30,000 range. So it makes it very difficult to product the total amount that might come in or the timing of that.

Putting all of that aside, I would say as we look at the watch list in general, just continue to trend down. As we look to 2023, we’re certainly mindful of the overall current environment. But we do continue to see improvements in the collections rate from cash basis tenants as we move forward.

So at this point, I would expect that we putting aside the impact of prior period collections that we look at reserve numbers for next year. That probably are more in line with our long-term historical levels of 75 basis points to a 100 basis points.

But again, that’s with a big caveat on not really being able to predict what those out-of-period amounts might be..

Thanks for that detail.

And one more on Lake Pointe in Sugar Land, you talk about the underwriting there, the cap rate going in and that a full redevelopment or more just some leasing up opportunity there?.

It’s really both. So we have vacancy in the small shops, which we’ve already begun back filling above what we have underwritten as well as some additional pad sites and density that we believe we can add to that highly trafficked asset.

Mark?.

Yes, we’re really excited about that opportunity. We really bought that asset at a low point in the assets occupancy history. So the asset is currently 87% occupied, 82% occupied in small shop, both of which are well below our portfolio average. We really do see near term growth in that asset. From a cap rate perspective, it was just below a five cap.

And we do have, as I said, leases that we really had in hand that would drive it well above that here in the near term..

Thank you..

You bet..

Thank you. Next question is coming from Floris van Dijkum from Compass Point. Your line is now live..

Good morning guys..

Hey, Floris..

Thanks for taking my question. Hey, Jim. I wanted to – if you could remind us again where your occupancy is was in your portfolio, knowing that that’s probably maybe not a relevant statistic as you put significant people [ph] into your properties. Where do you think that can go and also maybe talk about what that does to your NOI margins.

I noticed that you’ve got still a pretty healthy pipeline of signed not open, presumably as those your margins improve as well.

Well, do you think, I mean, where do you think your NOI margins can go to once you get your portfolio even further occupied?.

As we’ve talked about, and Brian highlighted as well, we’ve got about 150 basis points of drag in our reinvestment pipeline, which we think will outperform the portfolio as we deliver it portfolio average. So if you think about it, we sit at 92.5% today. Our previous all time high was 92.8%.

We believe as we continue to execute that we'll continue to go above that. And that will be accretive to our margins as well. I’m not going to give you an exact basis point, but obviously as we continue to drive the billed occupancy that continues to accrete to our NOI margins..

Thanks, Jim. And maybe my follow-up is in terms of, I’m curious to see with all of the cell phone data you guys have really other information on traffic levels. What does a typical redevelopment do to traffic levels in your view? And I noticed I saw online your Mamaroneck Centre, which I haven’t been to in a couple of years.

But that’s – it looks a lot nicer now than it did previously.

But maybe if you can use that as an anecdote, what has happened to traffic at a center like that layout post redevelopment?.

It’s quite significant. I mean, it’s – high double digit kind of growth rate and what the traffic is, and it depends on the nature of the redevelopment and reinvestment.

Certainly, you mentioned the Mamaroneck, the traffic growth there has been exponential because we had a dark AMP box and a shop space where we were able to add a bunch of shops, replace a grocer within great specialty grocer and drive exponential growth in that to.

The addition of outparcel, for example, in Rockland, where we added a very productive outparcel there. Traffic has increased at the center by 15%, 20%. So it depends on the nature of what we’re doing but we’re seeing great growth and traffic.

I think when you take a big step back and you look at our relative growth and traffic overall versus 2019, you’ll see that we stand apart and the strategy is what’s driving that differential, right. It’s coming through in our traffic numbers is we replace the tired old oversized box with a specialty grocer, a fitness use or value apparel retailer.

We add an outparcel and what’s exciting Floris is we’ve now impacted over 130 of our properties. We have another 400 million of it largely leased and underway which will continue to accrue to the traffic levels that the assets impacted and we have a pipeline behind it.

So it’s great to see it in those traffic numbers and to see that type of overall growth..

Thanks, Jim..

You bet..

Thank your. Our next question today is coming from Linda Tsai from Jefferies. Your line is now live..

Hi, good morning.

Angela, you mentioned earlier success in managing expenses, can you give more color on what that entails?.

Yes, I mean, it’s just very proactive efforts across all of our property management team across all of the regions in terms of really working with vendors, utilizing the benefit of scale we have for certain things, trying to find more efficient ways to operate and more efficient ways to procure certain things. So it’s a very broad based approach.

I think the team’s done a fantastic job of really looking for every opportunity across all of the expense line items to try to manage, proactively manage inflationary pressures across the portfolio..

Thanks.

And then in terms of revenues deemed uncollectible being a headwind to 2023, are there other items we should think about for next year in terms of impacting growth?.

Yes, no, I mean, I think Jim framed it up very well in his prepared remarks, which was to say yes, the prior period collections are without question going to be a headwind as we head into 2023. We know what that headwind looks like on a year-to-day basis.

To the extent, we have additional out-of-period collections in the second half that creates an even larger headwind as we get into 2023. Certainly, the health of the tenancy feels very good today.

And so we’re hopeful that continued improvements in the collections right from cash basis tenants will help to mitigate some of that, but without question it’s a headwind.

The offset to that and in a more important significant way the fundamental growth piece, meaning the signed but not commenced pipeline coming online is really going to be the primary driver of growth as we get into next year.

Both as we increase occupancy, which we’ve highlighted has an important impact on overall margins and recovery rates across the portfolio. We’re just really excited about the opportunity to continue to drive that forward..

Thanks..

Thank you. The next question is coming from Paulina Rojas Schmidt from Green Street. Your line is now live..

Good morning..

Good morning..

You’re obviously seeing very strong leasing demand, despite having a slowing economy.

How rare is this retailer behavior in your experience versus what you have seen in other cycles? Is it unique or down the road we could realize that it was in hindsight in line with the usual lag reaction from retailers to changes in the economic scenario?.

Well, I think you have to frame it up in terms of where we’ve been for the last couple of years. The retailers navigated through a pandemic quite well.

And through the process of doing that really, I think further solidified their own views as to the importance of the store in serving the customer and the importance of the store from a profitability standpoint. So while you’re certainly seeing some headlines around inventories and shifting consumer patterns, traffic is still strong.

Retailer sales are still up and you’re seeing, I think what is a very rational forward plan for these retailers who are thinking not just about the next couple of quarters. But from a store perspective, the next couple of years, where they see white space to expand their brand and be profitable.

And that’s why you always hear me say rent basis matters. The retailers aren’t going to go into a store that they believe is not going to be profitable to them from a four-wall EBITDA perspective.

And they’re better than ever before Paulina at estimating what the productivity of a store is going to be, not only within the four walls, but also what they expect that store to drive in addition – in additional online revenue.

And those models are utilizing all the data and current real time traffic patterns and understanding of consumer patterns as well. So this continued strength and retailer demand feels very fundamental to us and in support of their long-term profitability..

Thank you. Very helpful..

You bet..

And then another question, so your assets are on average located in areas, but so consumers with the lower household income than your peers. Can you talk about what do you, what are in your mind the implications of this, given, the low growth scenario where in and understanding, of course, the type of product found in strip centers..

Our centers are in phenomenally strong locations from a national perspective. And I think we’re demonstrating that in terms of the fundamental growth that we’ve been delivering, the relative traffic growth to the centers and the real time tenant demand to be in our centers. So we like how this portfolio is positioned.

There’s some assets that might bear higher demographic profiles, but have rents that are at or above market. And that’s not a long-term way in our opinion to drive value or drive ROI. So we like how we’re positioned as a portfolio. We like where our rents are.

We like that rent basis, particularly in light of where we’re signing new rents and particularly in light of the fundamental tenant demand and real time traffic patterns. So we think in that way, we’re somewhat differentiated in that. We haven’t chased demography just for the sake of demography.

We’re looking to invest capital where we see strong tenant demand and where we believe we can drive great performance from an ROI perspective..

Thank you very much..

You bet..

Thank you. Next question is coming from Mike Mueller from JPMorgan. Your line is now live..

Yes. Hi.

Curious, how do the return expectations for your new and planned reinvestment projects today compared to say projects you started a year or two ago?.

They remain really strong. It changes based on mix. Typically, the outparcel projects will be more accretive from a return perspective than a larger scale redevelopment. But we’re getting great incremental returns. And importantly, Mike also great gross returns on the capital that we are putting to work.

So today that pipeline that we have underway is just a little bit under [indiscernible]. I like how that’s positioned. It’s a substantial spread to not only where cap rates are today, but where they might move in the future. And we believe we’re creating a tremendous amount of value there..

Got it. Okay. That was it. Thank you..

Thank you, Mike..

Thank you. We reached end of our question-and-answer session. I’d like to turn the floor back over for any further closing comments..

Thanks everyone for joining. Enjoy the rest of your summer..

Thank you. That does conclude today teleconference. You may disconnect your line and have a wonderful day. We thank you for your participation today..