Brixmor Property Group Inc. Q4 FY2022 Earnings Call

Greetings and welcome to Brixmor Property Group Incorporated Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stacy Slater, Senior Vice President, Investor Relations and Capital Markets. Thank you, you may begin.

Thank you, operator and thank you all for joining Brixmor's fourth 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. At this time, it's my pleasure to introduce Jim Taylor.

Thanks, Stacy and good morning, everyone. Our results this quarter once again demonstrate the strength of our value-add plan. The quality of our team and portfolio reflects the transformative impacts our execution continues to deliver. Consider, for example, that during the quarter we signed another 954,000 square feet of new leases at an average cash spread of 44%, bringing our total new annual base rent for the year to a record $62 million at an average spread of 37%, with a record new lease average rent per foot of $19.08. We achieved a record total leased occupancy of 93.8% for the portfolio, reflecting a 360 basis points spread to build occupancy and also reflecting a drag of 130 basis points associated with our reinvestment activity. Both of these reflect powerful tailwinds as we commence billing those leases and delivering those reinvestment projects. We also achieved a record small shop leased occupancy for the portfolio of 89.2%, which still has more room to run as we execute our value-add strategy, and we drove our overall ABR per foot to a portfolio record of $16.19, demonstrating our continued progress, while also showcasing our continued opportunity for growth given that attractive basis. We continue to drive leading market share of new store openings throughout '22 with core tenants like Burlington, HomeGoods, Ulta, Five Below, Fresh Market, Ross, AAA, and Starbucks, while also bringing new concepts that drive traffic to our centers like Bark Social, Yardbird, and Freepeople. From a revenue perspective, our team once again delivered with top-of-the-sector same store NOI growth and FFO growth at 7.3% and 6.5% respectively. This represents a phenomenal job by Brian and the leasing teams capitalizing on the strong tenant demand for our well-located centers. Importantly, we've also leveraged this tenant demand to recapture space from watchlist tenants at accretive returns. Our low rent basis and the demand from thriving retailers to be in our well-located centers positions us to outperform in '23 and beyond, while also delivering substantial value creation. For example, we expect 8 Bed Bath anchor boxes in two Harmon small-shop locations to close. We already have control of 4 of the 8 Bed Bath anchor boxes and are in a lease or LOI on all 4 with best-in-class specialty grocery off-price and HomeGoods retailers at average spreads of close to 60%. Our remaining Bed Bath and buybuy Baby anchor boxes have an average in-place rent of $10.35 per foot, which compares very favorably to the mid-teens rents we expect to achieve as we take control of them. Looking forward, we have $54.7 million in signed ABR that will commence, as Angela will detail, over the next several quarters, and an additional $34 million of annual base rent in our forward new leasing pipeline. These pipelines provide us tremendous visibility on robust revenue growth in '23 and beyond, even after the assumed bankruptcy impacts embedded in our revenue guidance that Angela will discuss further. This top-line momentum will allow us to continue to grow NOI and FFO at a strong pace for the sector, even with the headwinds of naturally declining collections in prior-period rents, which total over $23 million in '22, and more normalized levels of bad debt. Simply put, we are well-positioned to continue to be at the top of the sector from an NOI and FFO growth perspective, all while continuing to create long-term value as we recapture space. From a reinvestment standpoint, Billhigh and our redevelopment construction teams delivered another 12 projects during the quarter, bringing our total stabilizations during the year to $179 million at an average incremental return of 10%. We are creating tremendous value here with the additional follow-on benefits of higher rates and occupancy as we follow-on leasing at the centers impacted. Importantly, we have another $343 million of reinvestment, pre-leased and underway at an incremental return of 9%, creating value even in a higher-rate environment. We have a forward pipeline of over $1 billion in projects that exist in assets we own and control today. We are excited that this year we will be bringing great projects online, like the Shops at Palm Lakes outside of Miami, Market Town Center in Naples, Florida, and Vail Ranch Center in Riverside, California. From a capital recycling standpoint, Mark and team continue to execute well in a disrupted capital markets environment, closing in '22 on $287 million of dispositions at attractive cap rates, including the highly profitable sale of Campus Village Shops in College Park to a student housing developer. We redeployed that capital into $411 million of acquisitions with upside in our core markets. In addition to upside in rents versus the market, these acquisitions also feed our forward reinvestment pipeline, as we execute our value-add strategy and leverage the strength of our platform. Under Angela's leadership, we continue to enjoy maximum flexibility from a balance sheet perspective to continue to fund our growth strategy without reliance on volatile capital markets, benefitting from our earlier decisions to pre-pay '22 and '23 maturities. From an external growth perspective, we expect to see attractive acquisition opportunities in our core markets, as private owners face debt maturities and re-tenanting requirements. Expect us to remain disciplined, however, as we can continue to drive outperformance and value-creation for the next several years through opportunities we own and control today. With that, I'll turn the call over to Angela for a more detailed discussion of our results, balance sheet, and outlook. Angela?

Thanks, Jim and good morning. I'm pleased to report on a very strong conclusion to 2022, as we continue to deliver on our value-enhancing reinvestment program and set the stage for long-term growth and value-creation. NAREIT FFO was $0.49 per share in the fourth quarter, driven by same-property NOI growth of 7.3%. Base rent growth continues to accelerate, contributing 510 basis points to same-property NOI growth this quarter. Excluding the impact of lease modifications and rent abatements, base rent growth contributed 490 basis points, representing a 50 basis-point acceleration from last quarter, driven by growth in build occupancy and significant positive re-leasing spreads. Ancillary and other income and percentage rents contributed 80 basis points on a combined basis, while net expense reimbursements contributed 240 basis points, due to improvements in build occupancy and a strong recoverability of certain fourth-quarter expenses. Revenues deemed uncollectible detracted 100 basis points from same-property NOI growth, primarily due to the ongoing moderation of out-of-period collections of previously reserved amounts. Our operational metrics continue to reflect the strength of the current leasing environment, despite macro headwinds and the continuing successful transformation of our portfolio. Build occupancy was up 60 basis points sequentially to 90.2%, while leased occupancy was up 50 basis points sequentially to 93.8%, a record-high for our portfolio. The anchor leased rate was up 50 basis points sequentially to 95.9%, while the small-shop leased rate was up 40 basis points sequentially, or 250 basis points year-over-year to 89.2%, reflecting another new portfolio record. The spread between lease and build occupancy ended the period at 360 basis points and the total signed but not yet commenced pool, which includes an additional 70 basis points of GLA related to space that will soon be vacated by existing tenants, totalled $55 million. The size of the pool is up approximately $2 million since last quarter, despite the commencement of leases representing approximately $16 million of annualized base rent this quarter. As we've highlighted in the past, one of the strongest indicators of forward growth is a persistently widespread between lease and build occupancy while both build and lease occupancy are increasing. In addition, the blended annualized base rent per square foot on the signed but not yet commenced pool remains above $19, approximately 20% above our portfolio average, reflecting the broad-based impact of our granular reinvestment initiatives. In terms of our forward outlook, we have introduced guidance for 2023 same-property NOI growth at a range of 1.5% to 3.5%, comprised of 350 to 450 basis points contribution from base rents, offset by a significant detraction from revenues deemed uncollectible. We estimate that the revenues deemed uncollectible recognized during 2023 will total 75 to 210 basis points of total revenues, which is in-line with our historical run-rate. This assumption reflects the modest amount of out-of-period collections we expect to realize during the year. The normalization of this line-item in 2023 will result in a 200 basis-point detraction from same-property NOI growth at the low end of the range, or 150 basis-point detraction at the high end of the range. As the income associated with revenues deemed uncollectible in 2022 once again becomes an expense in 2023. In addition to our assumptions for revenues deemed uncollectible, the midpoint of our same-property guidance range reflects approximately 150 basis points of drag related to recently announced or anticipated bankruptcy activity. Of this amount, 60 basis points relates to known events, including lease rejections that have occurred to date and the impact of locations that we are proactively recapturing from struggling retailers ahead of a likely filing. While the remaining 90 basis points relates to assumptions about potential future events, providing us with significant capacity to absorb additional tenant disruption within our range. Our ability to deliver a 350 to 450 basis-point contribution from base rent growth in a year with over 100 basis points of base rent impact from bankruptcy activity underscores the success of our portfolio transformation and the importance of our signed but not yet commenced pipeline as a source of forward growth. We have also introduced guidance for 2023 NAREIT FFO at a range of $1.95 to $2.03 per diluted share. Our guidance assumes the utilization of our $200 million delayed-draw term loan at the end of April to continue to extend the duration of the balance sheet. In early February, we entered into a forward-starting swap related to the delayed-draw term loan, which fixes so far at a rate of 3.59% from May 1, 2023, through July 26, 2027, the maturity of the term loan, resulting in a fixed-rate for this loan of 4.88%. As of December 31, we had total liquidity of $1.3 billion, a weighted-average maturity of 4.9 years, and no debt maturities until June 2024.

Our first question comes from Craig Schmidt with Bank of America. Please proceed.

What are your expectations for transactions in 2023? I know you didn't acquire anything in the fourth quarter, and how long do you think it's going to take before we find the new normal cap rates for opening centers?

I think it's going to take a while, and I think what's going to drive transactional activity, as I mentioned in my remarks, are really two things: one is the disruption and re-tenanting capital that will be an opportunity for platforms like ours, and then refinancing requirements with higher interest rates. So I think that's going to raise the level of overall transactional activity certainly above what we saw at the end of 2022. We're going to be opportunistic, as I highlighted in my remarks. The great thing about our business plan is it doesn't require external growth to drive outperformance. So that allows us to remain very disciplined. We certainly have the flexibility in the capital capacity to be acquisitive. But we're going to pick our spots, and I am hopeful that as we move into this part of the cycle, there will be attractive value-add opportunities for us.

Great. And then just as a follow-up question. I mean, your leasing activity actually picked up in the fourth quarter. How do you feel about that leasing activity as you head into 2023 relative to 2022?

Yes, any quarter can fluctuate a little bit, but I think we're continuing to see great strength in demand, and Brian and team capitalize on it. Brian?

Yes, Craig, we're really encouraged by what we saw in the fourth quarter; it was actually our most productive quarter of the year from a GLA perspective. We had a nice uptick in anchor activity, but we continue to see small shops come through. As Jim mentioned, he highlighted a number of the retailers with whom we signed leases during the quarter. So it's pretty exciting. What's more encouraging is, if you look at that pipeline at the end of the year from a legal perspective, leases that are out have actually increased from where it was a year ago at the end of 2021. So it gives us good visibility in terms of demand for this year, particularly demand we are seeing for some of the troubled tenant space from core tenants and a lot of new ones we've been able to attract to the portfolio because of all the work the team has done. So we are really encouraged by what we saw in the fourth quarter and what we continue to see at the start of the year.

And our next question comes from Todd Thomas with KeyBanc Capital. Please proceed.

Yes, hi, thanks. Hi, good morning. First I just wanted to clarify with regard to the guidance, Angela. So the 350 to 450 basis points of base rent growth that includes a 150 basis-point drag that takes into account. I think you said 60 basis points from known events, like move-outs and lease rejections, and an additional budgeting of 90 basis points plus a normalized level of uncollectible revenue, is that right? Or am I double-counting with the 75 to 110 basis points on top of the comment you made around the 150 basis-point drag?

No, you're right that the 75 to 110 basis points is separate and apart from the 150 basis points of bankruptcy impact I referenced in my prepared remarks. The only clarification I would make is that the 150 is on NOI. So while the majority of that, the vast majority of that is in base rent, there is a small piece, probably about 35 basis points of that, which is embedded in our expectations for net expense reimbursement.

Okay, got it. That's helpful. And then in terms of the minimum rent growth that you're forecasting again the 350 to 450 basis points. I'm just curious, I guess two things, it's obviously, it was elevated in the quarter at 4.9%. Is this quarter sort of the peak or do you see that maybe continuing to improve a little bit in the near-term? And then, can you break that out in terms of the contribution or what you're anticipating within that from occupancy, escalators and lease rollover throughout the year? Just a little bit more detail there would be helpful?

Now let me hit that generally, and I'll let Angela get more specific, but it is not a peak. The momentum in terms of top-line growth continues, as Angela reflected that assumption for 2023 is net of space we expect and frankly hope to recapture during the year. So that's coming in the top-line expectation.

Yes, I think just to follow up on Jim's point. The range for the year given a significant amount of impact we've embedded within that base rent, expectation of 350 to 450 from bankruptcy activity, the timing of that bankruptcy activity, and how that plays out over the course of the year is going to matter a lot from a trajectory perspective. What I would very much emphasize, though, is if you step back and think about the pieces I gave, the guidance we provided is 400 basis points at the midpoint of the range, which is in-line with what we delivered in 2022, with an additional 100 basis points of bankruptcy impact. So I think pulling that out, you can pretty clearly see we would have been sort of 5% or better, pretty much in-line with the fourth-quarter number you referenced.

Okay. What about some of the moving pieces there? Maybe if you could just in terms of like occupancy or tell us where sort of the average escalators are within the portfolio today? Just to help us get a sense for the contributions?

Sure. Yes, the escalator piece is somewhere between 110 and 120 basis points today. The impacts from positive re-leasing spreads is probably around 150 basis points, which leaves you with kind of 80 to 180 basis points for occupancy gain, other impacts in the portfolio offset by that bankruptcy impact. But the two pieces that are easiest to quantify for you today are the contractual bumps and the spreads.

Our next question comes from Juan Sanabria with BMO Capital. Please proceed.

Hi, thanks for the time. Just a little more detail to Todd's last question in terms of the occupancy cadence. Should we expect a seasonal decline in the first quarter, if you could just give us a sense of what's assumed in guidance? And I'm not sure if you can touch on kind of the range of expectations for year-end '23, but if you can that would be helpful.

Yes, again it's really tough for us as we move into next year. We feel like we've more than adequately captured the impact of potential bankruptcy activity in the NOI guidance we've given and importantly in the base rent guidance we've given. Exactly how that plays out from a trajectory standpoint, in terms of space recapture or other impacts of bankruptcy is harder to say. But I do think it's fair to expect that there is some seasonal decline as we move into the fourth quarter. From some of the announced bankruptcy activity we've already had, there are likely a few spaces that we're recapturing, as well as the four Bed Bath and Beyond spaces that Jim mentioned in his remarks. And I'll let Brian sort of touch on our enthusiasm about those recaptures.

Yes, as Jim mentioned in his opening remarks, we've been really encouraged by what we've seen so far, just from anchor demand in general, but particularly for these spaces. To have these effectively spoken for out of the gate with spreads close to 60% reflects significant demand for that size range, given the store opening plans for tenants like Burlington Stores, Ross, TJX, and all with over 100 store openings. There is a significant amount of demand for that space based on the traffic we anticipate. To Angela's point, we may see some occupancy headwinds at the start of the year, but based on what's already in the pipeline, plus the demand we have for this space, we feel good about the long-term trajectory.

And just a more macro question. I mean, there's questions as to where the macro direction is headed in the strength of the consumer or not? I was just curious if you've seen any diminution in demand from any pockets of retailers, not sure if it's more services or goods oriented or by geography at all, if everything is just humming along.

We continue to be impressed by the strength and resilience of the open-air format. We continue to see growth in average weekly traffic levels, both over the prior year and importantly over the pre-pandemic levels. From a tenant demand perspective, the breadth of demand continues to grow. So much so that we actually have tenants anticipating space recapture from weaker tenants and willing to expect the time and the dollars in the LOIs and leases should we be able to recapture the spaces. So it remains a pretty healthy environment for us from a demand perspective.

The next question comes from Ki Bin Kim with Truist. Please proceed.

Thanks, good morning. Going to your guidance, can you provide interest expense guidance and G&A?

Yes, on interest expense again, we mentioned, I mentioned in my prepared remarks, the utilization of the delayed-draw term loan. We believe we're going to probably be from an interest expense perspective, somewhere between $199 million and call it $201 million for the full year based on where curves are today and our expectation for revolver utilization during the year. In terms of G&A, we believe we're being very disciplined about G&A spend across the platform, continuing to look for additional opportunities for efficiencies and believe that we will be able to end 2023 with G&A relatively in-line with where we were in 2022, plus or minus.

Okay. And your development pipeline, as you've completed some projects, has come down a bit. Can you just talk about the prospects for the next round? And how you're thinking about the yield or upside characteristics as compared to the existing portfolio?

Yes, Ki Bin, it continues to be very robust and a good mix of projects. Both smaller anchor repositions, which frankly you should expect to see a pickup in as we recapture additional watchlist tenant exposure, as well as larger projects. I'm fairly confident we're going to remain in that $150 million to $200 million of annual deliveries and annual project starts that we see. Importantly, for the next several years, our shadow pipeline continues to grow; it currently sits at over $1 billion today, and the yields are frankly still very attractive because of where our rent basis is. So expect us to continue to deliver those projects in the high-single-digit, low-double-digit area.

Our next question comes from Greg McGinniss with Scotiabank. Please proceed.

Hi, good morning. Angela, just curious which watch-list tenants we should be paying attention to in order to understand whether there will be utilizing that potential 90 basis points of additional tenant disruption cushion?

Yes. I'm hesitant to call out any tenants specifically. I would say that this morning's announcement, a bankruptcy by Tuesday Morning, is a good example of how the environment continues to evolve. That 60 basis points of known events, just to be very clear about it, relate to the bankruptcies that have already occurred and rejections that have taken place. That would include Regal and just a couple of rejections we had out of Party City. Anything additional in terms of impact from those tenants that have already filed would be in the 90 basis points, in addition to our expectations around some tenants that have been widely reported to be considering a filing such as Bed Bath and Beyond.

Okay. So the 90 basis points seem to be names we've read about before. So nothing from like small tenant expectations, maybe a more difficult economic environment because of some closures?

The normal-course bad debt expense primarily for small-shop tenants is going to be embedded in that 75 to 110 basis points of revenues deemed uncollectible guidance we gave. The 150 basis-point drag associated with anticipated recently-announced bankruptcy activity is really hitting our base rent guidance and our net expense reimbursements guidance, and this is entirely national tenant situation-related. They are the names I just mentioned that have all been widely in the news. In addition to other impacts we've assumed for situations that may play out over the course of the year that I just wouldn't want to call out on today's call. But for the most part, it's names that we've all been talking about and we've assumed a wide range of potential impact as we move through the year. I just really underscore what I said in my prepared remarks, which is that I think we've got significant capacity embedded within the range to absorb a wide range of tenant disruption in our current guidance range.

The next question comes from Anthony Powell with Barclays. Please proceed.

Hi, good morning. Question on dispositions, you did about $200 million last year. What's your idea for further pruning of the portfolio? And if you don't acquire assets, what are the best uses of those proceeds?

The best use of proceeds in this business is reinvesting in well-located centers that have attractive rent bases, which drives a good part of our fundamental growth and value creation. We'll continue to find opportunities like that and I'm hopeful that we do find some opportunities for external growth from an acquisition standpoint that present the same reinvestment growth and value-add. That's really our sweet spot, and it's where we leverage our national platform against private owners who typically don't have the visibility on tenant demand or the access to liquidity that we have in our core markets. Expect us to be balanced; the rate of disposition activity will roughly follow what we see from external growth in terms of timing, it may be more front-end loaded or back-end loaded—time will tell. I'm very optimistic about seeing acquisition opportunities that help us continue to leverage our platform.

Thanks. And then the lease spreads have been very strong; any pushback from tenants as you discuss with them lease terms or lease spread escalators? How are tenants reacting to these conversations?

Well, that's the beauty of a low rent basis. Believe me, the tenants aren't going to want to pay anymore rent than they have to for a space; they're also much more sophisticated. In recent years, about what types of sales they can model in a space, and we work with them closely.

Yes, and it speaks to both the transformation of the portfolio as well as the leasing environment, which is incredibly supply-restricted. With all the work the team has done in this portfolio, you're seeing that come through in stronger rents, and you're seeing it come through in the highest retention rate we've had in the last 5.5 years. Particularly, looking at renewal spreads last year, we are really encouraged by spreads that are close to 11%, up 480 basis points over what it was a year ago. And then from a new lease perspective, we are seeing a significant amount of competition for space, driving rates higher. It's really a combination of strong leasing environment and the work that the team has done to position the portfolio to drive rates with great tenants across the country.

I appreciate the focus on those spreads; I don't think we get enough credit for them. Particularly when you view them in the context of the sector overall, we see several hundred basis points of outperformance quarter-in and quarter-out, which underscores the strength of the plan and the assets, and how great a job Brian and the team are doing capitalizing on tenant demand.

The next question is from Craig Mailman with Citi. Please proceed.

Hi, good morning. Not to dwell on Bed Bath in particular, but just curious about a couple of things here. Number one, you gave the 60% kind of mark-to-market on the four; could you give us what you think the broader mark-to-market is on your total exposure? And then, I know there's some discussion about whether to even file or what type of filing it is. Assuming a restructuring or non-bankruptcy filing, would you guys kind of come through your exposure to them? What percentage do you think is potentially at risk for them to give back versus kind of strong sales, good locations that you would consider them to keep?

Let me just make this point, if I may. We want every box back we can get. We've got tremendous demand for these spaces which have an average rent basis of $10.35. We have embedded within guidance what we expect, with some cushion in terms of timing. But the most important point is that when you look at our Bed Bath exposure in its entirety, it represents a significant opportunity for us to drive real growth and value. When you think about that $10.35 basis, we're signing replacement tenants in the mid-teens. So consistent with what we've already announced on the existing boxes, we have spreads that allow us to actually create value as we bring in better tenants into our centers. We get the follow-on benefit of that with additional small-shop leasing and an increase in rate. In terms of the timing of recapturing the space, I think Angela and the team have done an excellent job of going through and handicapping that to ensure we have cushion in our growth numbers to handle a wide array of outcomes. But let's not lose sight of the more important point, which is it's going to create an opportunity for us that could drive real-time value, while still delivering growth in '23, right, which is something that can be said by many in this sector.

No, that's helpful. As we consider the increasing spilled pipeline, taking back these boxes certainly introduces some disruption from a timing perspective. However, the SNO pipeline could continue to expand as a percentage of ABR, positioning us well for 2024 and beyond. Do you think there is a new normalized growth rate for the portfolio?

I think you're spot on and hats off to the leasing and national accounts team for continuing to grow that pipeline and address early recaptures. You're kind of seeing hints of it in our top-line numbers, that 4% reflects a meaningful drag from anticipated space recaptured during the year, which you saw in the fourth quarter, and as we talked a little bit about you see it in our numbers and expectations for '23. You make a good point, which is that SNO actually impacts us even more accretively in '24 as we get the benefit of a full year of those deliveries. We're excited about how we're positioned. We have more than a couple of hundred basis points of room to run. We currently sit at 89.2%. Over time, you can see that number grow into the low 90s. The point I'm making is that we're not managing to an occupancy level; we're managing to drive fundamental growth and ROI. The small-shop growth is a great lever for us to pull as the anchors in the broader reinvestment deliver.

Yes, when you look at sort of where we've been signing new small-shop leases over the trailing 12 months, it's over $25 per square foot. That's over 50% above our portfolio average. So every 100 basis points gain in small-shop occupancy translates to a little over 150 basis points of same-property NOI contribution.

And the next question comes from Alexander Goldfarb with Piper Sandler. Please proceed.

Good morning, Alex.

Our next question comes from Haendel St. Juste with Mizuho. Please proceed.

Good morning, guys. I guess first question, maybe some follow-up comment on the transaction market. Obviously, things are still pretty frozen out there, retail volumes were down I think 50% in the fourth quarter, with pretty wide bid-ask spreads. Can you talk about the cap rates and the type of assets that you'd like to own, what you're seeing out there? And then, given your cost-of-capital, what kind of new hurdle rate would need to be, basically we will get more interested in being more active here?

Our hurdle rate has absolutely gone up with the increase in the cost of capital. So we're remaining disciplined. Where we expect to find opportunities is in disruption and where we have the opportunity not only to get in at a good initial yield but where we have great visibility on being able to grow that. So we can get to those unlevered IRRs in the high single, low-double-digit area. And maybe, Mark, if you're on, you can comment a little bit on what we're seeing real-time in the transaction market from a volume and pricing standpoint.

Sure. In terms of the current market, it definitely started to flow as buyers and sellers have continued to adjust to the new rate environment. Trades have been limited again in Q1, but I'd say over the last few weeks, we're starting to see some more assets come to market, both from some institutional sellers implementing liquidity for redemption requests and probably more interesting, seeing some private owners come to market, who are struggling with that debt market. We like to buy from some of those private owners, as Jim mentioned earlier, our platform just has more liquidity, has better tenant access and that's where we see our opportunity to drive assets and get those higher unlevered IRRs we seek. In terms of pricing, it's hard to pinpoint where things are given the somewhat slower trading environment. What's clear is that what we're seeing on the look, where we're seeing the biggest price change is really on those lower cap-rate assets. It's clear that cap rates have moved from a low-point of 50 to 75 basis points. So we expect to see some better opportunities as the year progresses. That said, I think as Jim mentioned, I expect that to be a bit back-weighted. Our focus is on value-added deals where we can drive value and cash-flow.

Thanks. I appreciate that color and certainly the latter half of your response addressed my follow-up question about your focus including more of these acquisitions with occupancy upside and repositioning. That seems to be more of what you're inclined to do, where perhaps a greater opportunity exists. So it sounds like that's what you're focused on, but maybe a question on the balance sheet, Angela. I'm curious about your thoughts on target leverage in this type of environment. I understand the plan hasn't changed in terms of deleveraging, you are going to – as you realize your SNO rents, the leverage should come in. So help us understand what the target leverage is, when you think you'll get there and maybe some timing for the SNO this year and next year?

Sure, thanks, Haendel. Yes, our expectations in terms of target leverage haven't changed. We're continuing to work our way to about 6 times debt-to-EBITDA. A big reason why we feel like that's the right level for this company and this portfolio is due to the below-market rent basis in the portfolio. On a look-through basis, we're well below that, actually a touch below six times now. You're right that continued contribution from the signed but not commenced pipeline and how that comes in over the next year or two, is a meaningful contributor to helping us get there. But I would also sort of pull back from that a little bit and just note that we've got $115 million to $120 million a year of free cash flow that we're using to invest in the value-enhancing reinvestment program, and funding it with free cash flow is fundamentally deleveraging as well. The continued execution of the strategy continues to set up well to meet those targets. In terms of the signed but not commenced timing, we do provide it in the supplemental on NAR page. When looking at that, about 76% of that $55 million comes online by the end of 2023. I would note that the contributions between the first half and the second half are roughly equal as we move through '23.

Our next question comes from Alexander Goldfarb with Piper Sandler. Please proceed.

So quickly, two questions. First Angela, on the potential to the prior question or you didn't want to talk about specific future tenant issues. The future potential tenant issues that you guys are contemplating in that generic bad debt guidance, do those tenants also have similar re-leasing upside that we're seeing from Bed Bath and some of the other tenants that are 40% plus percent of the problems and 60% on Bed Bath? Or that future potential pool of tenants have re-leasing spreads that would be lower than that?

Alex, hi, this is Brian. Well, just if you think about the Tuesday Morning filing that Angela highlighted, we look at a space we took back in suburban Cincinnati, we effectively doubled the rent. We've been signing leases on that size space in the high-teens with the likes of Five Below and Skechers and Boot Barn. So we're feeling pretty good overall about the upside; is every space going to be 60%? No, but we do think that these spaces are going to be in-line with where we've been driving rents across the portfolio, and we’ve been encouraged by.

Okay, the second question, Brian. One of the big issues out there just seems to be, it's not the demand to backfill, it's actually the time to reopen tenants. So what are ways, one I guess, are any tenants willing to take space as-is? And if not, are there any ways to sort of accelerate the downtime to minimize that, or is it just what it is between getting the permits, building out the space, et cetera?

I'm really glad you asked the question because our operating teams, led by high, which Jim mentioned, have done a fantastic job in terms of partnering with the operating teams on the tenant side. I point you to an example last year: we just opened two Altar locations in Metro New York, and we got those stores open in less than six months. We have seen tenants, from when we sign a lease, to have tenants take space as-is, but as we've mentioned on prior calls, what has come out of the pandemic as a best practice has been retailers utilizing existing conditions. They're figuring out how to change their prototypes so they can keep the bathrooms where they are, they're figuring out how they can utilize the existing HVAC units. They're doing that because we're radically aligned in terms of getting them opened as quickly as possible. Our folks and representatives have been in this space to understand the plans, so when we ultimately get those spaces back, we're already ahead of the game, and the team has done a fantastic job overall in partnering with our tenants.

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

Thanks for taking my question, guys. I just wanted to make sure I understand this correctly. One of the things, Jim, capital allocation, is how management provides value to shareholders, and you've done a very nice job in terms of self-funding your business and generating significant amounts of free cash. One of the things I'm curious about, to make sure I understand correctly here, is one of the ancillary benefits of this reinvestment in your portfolio is that your small-shop occupancy has increased quite sharply. But there appears to be significantly more room to go here. Am I correct that every 100 basis points of small shop occupancy is 150 basis points of NOI growth? And would that imply that if you get your small-shop occupancy to another 300 basis points higher, which I think is where it's trending based on your redevelopments, is that another 600 basis points of upside potential?

Yes, I think over time, when you think about what a powerful contributor the small-shop occupancy pickup is. When you're bringing that space online, not at portfolio average of $16, and not even at what the signed but not commenced overall pool is today at over $19 per square foot, but at $25 per square foot, you can truly see how significant the upside is and how much of a driver that is of growth as we move forward. We still have some remaining upside opportunity in anchor; we’re about 100 basis points below record anchor occupancy for the portfolio. So there's still additional opportunity there, but most of the growth over the next several years for anchor size is going to come from continuing to roll those rents to-market, primarily through our reinvestment program and recapturing proactive spaces from struggling tenants we’ve talked about. So that's still a contributor to growth, but there's no question that the follow-on benefit and momentum in small-shop occupancy and the outsized potential of those rents is significant for growth over the next several years.

Before you leave, you're hitting on the flywheel effect we've discussed before, which is as we deliver these reinvestments at attractive returns. We're fully anticipating follow-on benefit in rate and occupancy, particularly in the small shops of the centers impacted. It's part of why we don't manage the business to a particular occupancy target; we manage the business for growth.

Thanks. One of the other things I presume your fixed rent bumps in your small-shop are higher as one, and they mark-to-market more often than your anchor rents. What's one of the other benefits of getting that occupancy up?

We're seeing solid demand for those spaces from categories that are fundamentally aligned with our tenant base. I believe the combination of mid-tail or medical users allows us to capture these spaces very efficiently, and frankly, the diversity of our tenant mix creates an opportunity for us to capitalize on those new users.

Yes, Jim, you hit on both points well. The operators in the medical space have been active. They often have very strong credit profiles backed by large insurance companies. We've signed two leases this quarter in Southeast Florida backed by UnitedHealthcare, witnessing great activity from dental front, reflecting well on our overall portfolio health.

Thank you for your questions. I would like to turn the floor back over to Stacy Slater for closing comments.

Thank you everyone, and have a great week.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.