Rithm Property Trust Inc. Q3 FY2021 Earnings Call

Greetings, and welcome to the RPT Realty Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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, Vin Chao, Senior Vice President of Finance. Thank you. Please go ahead.

Good morning, and thanks for joining us for RPT's Third Quarter 2021 Earnings Conference Call. At this time, management would like me to inform you that certain statements made during this conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Additionally, statements made during the call are made as of the date of this call. Listeners to any replay should understand that the passage of time by itself will diminish the quality of the statements made. Although we believe that the expectations reflected in any forward-looking statements are based on reasonable assumptions, factors and risks could cause actual results to differ from expectations. Certain of these factors are described as risk factors in our annual report on Form 10-K for the fiscal year ended December 31, 2020, and in our earnings release for the third quarter 2021. Certain of these statements made on today's call also involve non-GAAP financial measures. Listeners are directed to our third quarter 2021 and second quarter 2021 press releases, which include definitions of those non-GAAP measures and reconciliations to the nearest GAAP measures and which are available on our website in the Investors section. I would now like to turn the call over to President and CEO, Brian Harper; and CFO, Mike Fitzmaurice, for their opening remarks, after which, we will open the call for questions.

Thank you, Vin, and good morning, and thank you for joining our call today. We had another very strong quarter, resulting in another raise in our 2021 operating FFO guidance. We experienced balanced success across all our disciplines as we continue to refresh our portfolio, tenant mix, liquidity, and balance sheet, all of which position us to deliver on future earnings growth. We closed on several high-quality acquisitions across all three of our strategic investment platforms, bringing our gross acquisition volume to $500 million in 2021. We continue to see strong demand for space in our centers and signed a number of key leases with well-capitalized tenants, driving our accelerated signed not opened balance to almost $4 million. And lastly, we raised or received commitments on $670 million of capital from our equity, debt, and joint venture partners, strengthening our liquidity profile and balance sheet. Starting off with our capital-raising efforts. I am very pleased with GIC's recent commitment of an additional $500 million to our core grocery-anchored R2G platform, positioning that platform to scale up to $1.7 billion. We believe this is an endorsement of RPT and our ability to create value. We are grateful to be in the company of top-tier REITs, like Ventas, Boston Properties, Equinix, and others that have partnered with GIC. The new commitment provides us with the firepower to further accelerate our portfolio transformation while enhancing our management fee income stream. We also recently obtained commitments for $130 million in the debt private placement market and received another $40 million through our ATM, demonstrating our ability to access multiple sources of capital to accretively fund our growth plans. Turning to investments. The size of our portfolio is an advantage as it allows us to rapidly reshape our geographic exposures towards higher-growth and more durable markets like Boston, which is now our third-largest market. We also increased our exposure to Atlanta and Tampa while reducing our concentrations in Detroit, Cincinnati, and Chicago. This real-time shift in our mix not only improves our geographic diversification but also increases our visibility with retailers, brokers, and other stakeholders, which is leading to increased deal flow on both the leasing and acquisition fronts. To support our data-driven investment decisions, we have an in-house data scientist who developed a proprietary asset scoring model that combines advanced data analytics with the collective knowledge and experience of our investments, leasing, property management, and portfolio management teams. With this dynamic tool, we can continually assess our existing and potential future properties in real-time to inform our capital allocation decisions. Our scoring model was a key advantage for us as we underwrote our recent acquisitions and will continue to be used as we assess our future acquisitions and dispositions through the lens of quality, balance sheet, and earnings accretion. Regarding the acquisition environment, we are currently experiencing a very competitive landscape to acquire high-quality shopping centers, where cap rates for grocery-anchored centers in top U.S. metros are down approximately 50 basis points over the past few months. As a result, we believe the $500 million of acquisitions that we closed on so far could be up as much as 10% relative to our transacted prices. Despite the recent cap rate compression, our three investment platforms provide us a competitive advantage to acquire at higher returns, allowing us to remain active on the acquisition front in our target markets. We continue to work tirelessly, sourcing additional acquisitions, focusing primarily on off-market, relationship-driven opportunities and expect 2022 to be another active year. We continue to see a healthy pipeline of deals for grocery-anchored centers, smaller strips, and wealthy infill suburbs in our core communities and larger high-quality centers over $70 million, where we can allocate the real estate between our platforms. We also see unique opportunities to acquire value-add or opportunistic centers, where we can utilize our tenant relationships to create significant value after the purchase. For example, we are currently under negotiation to buy an asset in the Southeast that has an empty anchor box related to a recent tenant bankruptcy. We are in lease negotiations with a premier investment-grade grocer to take that space, which will drive the occupancy to about 99%, resulting in an estimated stabilized yield on cost of 7% in a 5% cap rate market. On the other side of the coin, current market demand is also creating opportunities for us to monetize assets at attractive yields in non-core markets. Earlier this week, we closed on the sale of Market Plaza in the Chicago market for $30 million. We received 11 offers and sold the property at a high 5% buyer's cap rate. Chicago is not a market that we are looking to expand in due to the less-than-business-friendly political environment. We are also exploring other opportunities to further reduce our exposure to nonstrategic markets and take advantage of the current frothiness in the private markets. Now turning to operations. We continue to drive rent and sign leases with high-credit essential tenancy. This quarter, we signed a lease with a new investment-grade grocer at our Crofton Centre in Baltimore, which is replacing a Shoppers Food Warehouse. In October, we signed an expansion lease with Publix at The Crossroads in Palm Beach. This will be a brand-new flagship prototype store, demonstrating Publix's commitment to the center and cementing the anchor tenancy for years to come. In both cases, we locked in strong credit anchors, thereby enhancing the durability of the cash flows at these centers. We also signed a new medical tenant, Piedmont Urgent Care, that replaces a sit-down restaurant at Promenade at Pleasant Hill just outside of Atlanta, swapping a high-COVID-risk tenant for an essential tenant at a mid-20% spread to the old brand. Not only were we able to reduce tenant risk, but we were able to do so at attractive economics. Lastly, we signed a new deal for a Ferguson gallery showroom at Providence Marketplace in the Nashville market. This will be Ferguson's first showroom in Nashville, which we think will be a premier destination for residents to access the latest concepts in quality home fixtures and appliances. With only five to six Ferguson showroom openings in a typical year, we think this deal is a testament to the strength of our center. For those of you that are not familiar with Ferguson, they are a $34 billion market cap, BBB+-rated credit, and the largest U.S. distributor of plumbing and the second-largest distributor of industrial products. We think they will be an attractive regional draw for the property based on the strong demographic match between the center and the Ferguson customer profile. Looking forward, our leasing team remains active with a solid pipeline of deals lined up for the fourth quarter. Notably, we are seeing strong demand in Florida, Boston, and Detroit, where we are in negotiations on a number of major box deals, ranging from grocer to off-price retail, as well as several national small shop deals. Notably, we have seen a major pickup in demand in Detroit over the past few quarters and are in negotiations on over half a dozen grocery deals and another 8 to 10 box leases with discount apparel, pet, outdoor recreation, and home goods retailers. And with that, I'll turn the call over to Mike.

Thanks, Brian, and good morning, everyone. Today, I'll discuss our third quarter results, provide an update on our balance sheet, and end with commentary on our increased guidance. Third quarter operating FFO per share of $0.27 was up $0.05 over last quarter, primarily due to about $0.04 of higher NOI from acquisitions, $0.01 from lower rent not probable of collection, and about $0.01 from higher lease termination fees, partially offset by lower straight-line rent. The better-than-expected rent not probable of collection was primarily driven by the reversal of a prior period reserve following an unplanned payment from a theater tenant. As we look ahead, we expect bad debt to continue to moderate as our collection rate tracks toward pre-COVID levels. Notably, our collection rate for the third quarter was 98% as of the end of October. As Brian mentioned, our operational performance in the quarter remained strong. We signed 52 leases totaling 280,000 square feet at a blended comparable re-leasing spread of 8.2%, including a 5.2% renewal and 16% new lease spread. Our renewal spread is the highest level it's been in over a year, and along with the continued strength of our new leasing spreads, is reflective of the increasing demand for our centers and the embedded mark-to-market opportunity within our portfolio. These spreads are on a cash basis. They don't capture future contractual rent steps, which were 160 basis points for the leases signed during the quarter. Leasing activity in the third quarter pushed our signed not opened balance to $3.8 million, up 19% over last quarter's $3.2 million backlog, which we expect to open over the next 15 months. On the remerchandising and outlet front, we delivered two projects totaling $3.3 million during the quarter at almost a 12% yield, which was ahead of budget. We also added one new project, Ferguson gallery showroom at Providence Marketplace in Nashville, totaling $1.3 million at an expected yield in the 20% to 22% range. This brings the active remerchandising and outlet project total to $14 million with expected yields in the 10% to 12% range. We are in active negotiations on a number of other pipeline deals totaling about $30 million with strong box demand in Boston, Florida, and Detroit. Turning to the balance sheet. We ended the third quarter with net debt to annualized adjusted EBITDA of 6.8x, down from 7x last quarter. This is a bit better than expected as a result of the $40 million raised through our ATM and due to better NOI performance. We continue to expect our leverage to fall towards our target range of 5.5 to 6.5x as bad debt and occupancy normalize to pre-COVID levels. Despite the heavy level of acquisition activity in the quarter, our liquidity remains strong. We ended the third quarter with a cash balance of approximately $10 million and have $295 million available on our unsecured line of credit. We expect to repay the vast majority of the outstanding balance on the line of credit by the end of the year or shortly thereafter. One of the core tenets of our balance sheet strategy, in addition to managing overall leverage, is to proactively address our pending debt maturities. During the fourth quarter, we expect to refinance $177 million of debt. Included in this amount are all of our private placement notes that mature in 2023 and 2024 and our Bridgewater mortgage that matures in 2022. We expect to use proceeds from our recent private placement of unsecured notes totaling $130 million, our share of expected proceeds from mortgages placed on R2G assets that we locked rate on totaling $15 million and proceeds from the sale of Market Plaza totaling $30 million to fund these debt repayments. Following all this activity, we will have reduced debt maturities through 2024 to just 16% of our debt stack. Over the next two quarters, we also expect to generate $96 million in disposition proceeds from parcel sales to RGMZ, including sales from our recently acquired Northborough and Newnan Pavilion assets and the remaining seed portfolio sales. These proceeds will effectively be used to fund our share of the debt acquisition of $68 million and to repay amounts outstanding on our revolving line of credit. Moving to our increased guidance for 2021. We initiated a new range for operating FFO of $0.90 to $0.94 per share, which is up $0.02 or 2% over prior guidance. The primary drivers of the upside were $0.01 from a prior period bad debt reversal and about another $0.01 of lease termination fees recognized in the third quarter. The key factors that would drive results to the high or low end of the range are the timing of closing of the net lease parcel sales and bad debt reserves. In addition, our incentive compensation is not finalized until the fourth quarter, which could result in an uptick in G&A expense, similar to what we experienced in late 2019. As is our normal practice, we will be providing initial 2022 guidance with next quarter's earnings release. But I wanted to provide insight into a couple of items as you start to establish your quarterly run rate for 2022. Our third quarter operating FFO per share of $0.27 benefited from $0.02 related to nonrecurring items, including a prior period favorable bad debt adjustment and a one-time lease termination fee. In addition, relative to our third quarter results, 2022 G&A is expected to increase by approximately $0.01 per quarter related to an uptick in travel-related expenses, similar to 2019 levels, and continued investments in talent to support our growth platforms. Before I turn it over to the operator for Q&A, I would like to touch upon our strategic thinking around future acquisitions. Our framework can be summarized with three questions. Does the property improve our overall portfolio quality? How much future value-creation potential is there? And can we fund the acquisition in a way that's both accretive to earnings and pushes us closer to our target leverage range of 5.5 to 6.5x? No deal is as simple as this. And each has its own unique set of circumstances. But we think it is important to understand our framework as you build out your own forecast. Also, as a reminder, it is our normal practice not to include speculative acquisitions unless we have a strong line of sight on a potential close. And with that, I will turn the call back to the operator to open the line for questions.

Our first question is coming from Todd Thomas of KeyBanc Capital Markets.

First question, Brian, so you talked about the competition for investments. I was just wondering if you could just talk more generally about the pipeline today. And I'm curious if you can speak to the additional $500 million commitment from GIC for the R2G venture, what the timeline is like to deploy that capital.

I’ll start with the pipeline. We’ve been active in the market since early May 2020 and are optimistic about unlocking valuable assets through our investment platform. Our deal pipeline is very active, particularly with the $500 million commitment from GIC, which has a three-year timeline. This provides opportunities for larger portfolios, though we are being selective and focused on our growth communities. We are taking a proactive and targeted approach in each of our core areas rather than relying on brokerage or market availability. We recognize significant value in various communities, and as noted in my remarks, we acquired a high-quality property in a densely populated, high-income area in the Southeast, where a large retail space was vacant. We are currently negotiating a lease with a reputable investment-grade grocer at a projected stabilized yield of 7%. This property could be valued at a mid-4% cap rate. It's important to emphasize that our acquisitions vary widely. One case study presented in our investor deck involves our Lakehills acquisition in Austin, Texas, a non-grocery-anchored center that has performed exceptionally for us. The local demographic includes households earning $110,000 within a three-mile radius, a density of 117,000, an average rent escalation of 4%, and a projected 14% CAGR over three years. We see a diverse range of opportunities, including grocery stores and strip centers, as well as larger developments over $70 million, like Northborough, which we can utilize across our three platforms. We are confident in our ability to deploy capital in a way that adds value.

Okay. Has the IRR hurdle or threshold for returns changed at all for R2G? And are you seeing better pricing for one-off deals or some larger packs or portfolios?

The IRR hurdle for R2G remains unchanged. While cap rates have decreased, the unlevered IRRs have largely stayed consistent, primarily because of rental growth and the lack of new supply entering the market. Owning premium real estate, especially in prime locations, allows us to significantly increase rent. Our focused investment strategy has resulted in $500 million in acquisitions over recent months, much of which came from off-market opportunities. We believe this reflects our capability as a decentralized team in identifying valuable deals within our core communities, such as the 25,000 square foot vacant box.

Okay. All right. That's helpful. And then Mike, can you just clarify, you went through some of the detail for 2022 with regards to G&A. Can you just clarify your comments there? I think you said that you'd expect G&A to be up $0.01 per share per quarter. So is that $0.04 on the year relative to '21? I wasn't sure exactly what you meant. I'm just hoping you could clarify that further.

Yes. Sure, Todd. If you look at our run rate for the quarter, it was about $7.3 million. So if you round up there, it's about $7.5 million as we look ahead. So it's about $0.01 higher than that, which is about $1 million or so per quarter. And to give you a bit more color around that increase, look, during the pandemic, we put a freeze on all salaries and hiring even amidst building our third investment platform with GIC and then Monarch. And we've clearly demonstrated that the platforms can't produce growth and bolster really hard growth profile as we move into the future. And really in order to optimize those platforms, we need to invest in talent. And quite frankly, we need the people to power the platforms. In addition to that, we also have a material increase in travel as well as there's basically zero travel in '20 and in most of '21. So we'll return to 2019 levels there. So that's really what's contributed to the increase on a quarterly basis, about $1 million or so.

Okay. So you're looking at about $8.5 million per quarter run rate in '22?

Yes.

Our next question is coming from Derek Johnston of Deutsche Bank.

Brian, how do you see your occupancy growth trajectory unfolding? Clearly, we're not looking for guidance, just perhaps how you see occupancy trending into 4Q. And then where you think you should be able to drive occupancy over 2022 and really beyond it, to 2023?

Yes, I think our current occupancy is in the mid- to high 90s and is stable with a clear path forward. Next year, we're expecting to take back four spaces, which will vary over time. Of those four, three are wholesale or grocery stores and one is a T.J. Maxx concept. Collectively, these will contribute $0.03 to future earnings. These are beneficial, accretive deals. We anticipate some fluctuations in occupancy next year, but overall, I believe we will maintain strong occupancy levels, with small shops in the high 80s to low 90s and overall occupancy in the mid-90s.

Yes. If I can give a little more detail around that, the four leases that we're recapturing next year, we look to recapture those in the first half of the year. It's about 200,000 square feet. And we'll have about 15 months on average downtime. And you'll see most of those come back online in late '23, early '24.

Okay. Great. And then Mike, some of your ending commentary in the prepared remarks, could we talk a little more about the private markets and cap rate trends overall certainly compressing? And when you're viewing capital deployment in the current environment, whether it's on balance sheet or your JVs, can you really continue to acquire accretively with the cap rate and the compression that is taking place? And how do you envision doing that?

I do, Derek. It's definitely compressed significantly. However, what we have here, particularly with the RGMZ vehicle, is a substantial advantage. This advantage enables us to achieve higher returns for our shareholders. We certainly didn't anticipate this level of compression, but we believe it actually gives us a stronger position compared to our competitors. We have many examples demonstrating that we can make accretive acquisitions using our three platforms, similar to what we have done in the past. We also see opportunities like the one I mentioned in my prepared remarks, where we can leverage long-standing relationships with grocery chains, wholesalers, home improvement stores, or off-price retailers like TJX to acquire value-add centers in key metropolitan areas with affluent, densely populated regions. We may even address vacancies during the due diligence phase and stabilize those properties to achieve returns of 7% or higher. Therefore, expect a diverse mix of opportunities that will enhance our earnings, giving us the flexibility to optimize our debt and equity mix, and effectively target improvements in leverage, portfolio quality, and earnings.

Yes. And Derek, just a few additional thoughts on the funding side of the core. I mean, like we demonstrated during the quarter, we did have broad access to debt and equity and obviously enhanced the relationship greatly with GIC. But from the debt side, after we repay our last bit of the revolver down, we'll have full use of now, which is about $350 million. And from a long-term debt perspective, we have strong access to the bank and the private placement and the secured market. Notably, we did raise $130 million of notes during the fourth quarter. We could have raised 3x that amount based on the demand from those noteholders. And we'll continue to be opportunistic on the ATM side as well and utilizing that tool. We were able to raise $40 million there. But to Brian's point, you combine these great options and have access to these different sources of capital with our platform, that's what really sets us apart and allows us to invest at those higher yields.

Our next question is coming from Haendel St. Juste of Mizuho.

I wanted to revisit the GIC joint venture you've mentioned. I'm interested in your thoughts on why GIC is increasing its investment in the JV at this time. I understand there's a greater demand for shopping centers, but given the changes in cap rates and the fierce competition, I'm curious about your insights from discussions with them. Do you see the possibility for further expansion of the JV? Also, are you looking at any new markets?

I believe that both Blackstone and GIC, along with our performance in the original joint venture, show a strong belief in the sector. We are grateful and humbled by GIC's significant increase in their investment in our platform and the results we've delivered. This opportunity can definitely be expanded, and it represents another growth capital avenue for us, alongside a valued partner capable of handling larger deals. GIC's involvement brings a reliable income stream, which contributes to fee income and supports cap rates. We are enthusiastic about this increase, especially as we approach the conclusion of the original joint venture, and we collectively decided that $500 million would be our initial target.

Okay. Fair enough. Is there any consideration of entering new markets?

Right now, no. We're being very focused, and I think to the benefit of having people in these markets that we've identified. Could there be future markets on a larger strategic deal? Certainly. But right now, we're really focused on the markets we've identified.

Got it. And maybe on the triple-net JV, maybe you could talk about the opportunity set or what you're seeing in the market there. I've heard lots of talk of increased competition on that side, new entrants, public and private. So curious if you have any observations on that JV.

Yes, we're very enthusiastic about that platform as well. It's very dynamic. Cap rates have tightened, similar to the multi-tenant segment. However, we still have a substantial pipeline and are pursuing diverse opportunities. We view this initiative through four main areas of focus. First, we're looking at the potential to enhance a center by separating out pads for larger grocery stores and wholesale clubs. For instance, we have a grocery-anchored deal under contract that includes a Lowe's, with those two tenants representing 95% of the annual base rent. Once we finalize the acquisition, we will subdivide those properties and might even achieve yields that are significantly better than what they would command in the private market. The second area of focus is build-to-suits for tenants, aiming to achieve returns in the range of eight or even nine, while strategically adding to that platform. This also serves as an opportunity to engage with tenant communities for potential partnerships. The third area involves pre-takeout scenarios with developers or providing funding to them, allowing us to benefit from those arrangements. Finally, we're interested in off-market transactions as well as selectively marketed deals. What sets us apart from many public REITs is our in-house leasing and development expertise, which empowers us to take on term risk and either renew or replace tenants when we have confidence in the underlying real estate. Our underwriting process is thorough, and our partners have added substantial value. We are eager to move forward, and you can expect to see increased deal activity from this initiative in the upcoming quarters.

Great. That's helpful. And last one on the lease rate, small shop has been steady around 84% of last year. But the spread between leased and physical occupancy has widened here, which I guess we could see as an opportunity. So maybe you could discuss some of the widening, how we should expect that spread to track near term, the leased versus physical. You mentioned, I think, $4 million of signed but not opened ABR. So I'm assuming that, that should help narrow to a degree, but perhaps there's offsetting factors. So how should we think about that spread? And is mid-80s at a high-water mark for small shops?

Sure. No, I would pay attention more to the dollars versus the spread. But we do expect our total dollars of about $4 million or so of signed not commenced to remain pretty consistent over the next several quarters. As we kind of noted in our prepared remarks, we do expect that $4 million to come online over the next 15 months or so. We'll have about $1 million come online in the fourth quarter of this year, another $1 million in the first and second quarter of next year, and then the remaining $800,000 by the end of next year, which is tied to our grocery deal that we did at one of our Michigan assets up in Oakland County, Michigan. As it relates to the small shop space, yes, we continue to see good traction there. As we head into the end of the year, we do expect occupancy to be up sequentially in the fourth quarter for small shop. And you may have some seasonal fallout in the first quarter of next year, but we expect that to continue to rise over the long term as we march back towards 90%. Because pre COVID, Haendel, we were about 88% leased or so on that space. And we have a much better portfolio today, given all the acquisitions that we've done over the summer. So I fully expect that number to get back up over time above 90%. And Haendel, $2.1 million of that signed not opened is small shop.

Our next question is coming from Craig Schmidt of Bank of America.

I just wanted to talk about the target markets. So far, you've had concentrations in Boston, Tampa, and Atlanta. I'm just wondering about Austin, Charlotte, Phoenix, Minneapolis. I assume you're still looking in those markets. And do you think they'll be entering the acquisition pipeline soon?

Our main focus is on cities like Boston, Austin, Nashville, Atlanta, Tampa, Jacksonville, Orlando, and Miami. Phoenix and Salt Lake fall into our Tier 2 category, particularly in Denver, where we would only enter if we see a chance for scalability. We won't pursue just one location; our goal is to establish larger centers similar to what we did in Boston, which was not a one-time effort but laid the groundwork for multiple assets. If there's potential for growth in any of these cities, identified by our data science and market research teams, we will consider them. However, there must be a clear path for growth.

Okay. And was Boston a result of your targeted analysis pushing harder there? Or did this opportunity open up in Boston and made them more...

No, our focused analysis really took off in May 2020 in Boston. We examined a center, similar to the one we purchased in Bedford, which features a new Whole Foods generating over $1,100 per square foot. We acquired that property at approximately a 5.6% cap rate for $350 per square foot. In comparison, Charlotte is at $900 per square foot with similar cash flow. I view Boston, with its life sciences, biotech, education, and technology sectors, as one of the leading gateway cities globally. Our data-driven approach provided an initial advantage, although the market has since become quite active. While many shifted their focus to the Southeast, we used that time to invest in Boston in a substantial way.

Great. And then just on the $96 million disposition, can we expect the cap rate similar to Chicago, or it might be somewhat elevated from that?

I think it's too early to tell. This might be a bit elevated around the edges. However, this is not going to be a dilutive process. We expect it to be programmatic and, hopefully, earnings accretive. We sold off all the underperforming assets, totaling $200 million in 2018, with 98% of those being tertiary and an average internal rate of return of 3.5%. There’s no urgency to sell; this could be an opportunistic move, allowing us to shift cash flow from certain geographic areas to new ones, like the seven markets I’ve mentioned.

Yes. Craig, the $96 million of dispositions that we referenced in the prepared remarks, that is done at a cap rate of about 6%. That's all the triple-net stuff that we seeded to the RGMZ net lease platform.

Our next question is coming from Tayo Okusanya of Credit Suisse.

So just a quick question on overall leverage and moving towards your target leverage from where you are today. As we start to think about 2022 and hopefully a more normalized retail backdrop, kind of improving occupancy and things of that sort, I mean, do you envision being able to get back to that target leverage in a 12-month time frame? Or do you kind of think it's going to take a longer period than that?

Look, Tayo, one, we're very focused on leverage and getting back to that midpoint of our range of about 6x. We ended the quarter at 6.8x. And when you layer in that signed not commenced ABR, about $4 million, you're touching the top end of our range. So we're getting there. And I think organically, could we get there by the end of the year? '22 perhaps. But what I think what can accelerate us there is really just the power of the platform to where we can ultimately be in position to over-equitize an acquisition to get the leverage down, similar to kind of what we did this past quarter with the equity raise. But we're very, very focused on it. And we'll use all the tools in our chest internally and externally to get down to that midpoint as quickly as possible.

Got you. That's helpful. And then the second question, again you gained about $0.01 this quarter from just the reversal of some of the uncollectible rent. Could you talk a little bit about just how we kind of think about that heading into '22 as well, whether there are probably some more opportunities to kind of see some of the written-off rent come back as the health of some retailers begins to improve?

Not at this point, I don't think so. I believe we took a conservative but realistic approach with our bad debt reserves in 2020 and 2021. To date, we have only experienced about $0.02 of favorable bad debt reversal. Therefore, we do not expect any favorable adjustments as we move into the fourth quarter or even into next year.

Our next question is coming from Mike Mueller of JPMorgan.

I have a quick clarification question. When you're talking about taking the four leases back next year, I thought I heard about $0.03 of rent. And I wasn't sure if that was going to be the near-term impact. In which case, we need to take that $0.24 run rate and kind of tweak it a little bit for that or if that was a comment about future upside from repositioning the boxes. Just wondering if you can run over...

Yes. Sure. Thanks for the question, Mike. Yes. No, that $0.03 is related to the upside that we expect once we have the four spaces re-leased to those tenants that Brian described in his answer.

Okay. So in that pro forma run rate, you were talking about that short-term fallout essentially baked in there?

It's not baked in there. We do expect to take back the four spaces in the first half of 2022 and then re-lease them back up within about 12 to 15 months or so into '23, early '24. So from a quarter perspective, Mike, it's about $625,000 or so.

Our next question is coming from Linda Tsai of Jefferies.

You sort of touched on this with the Whole Foods anchored center in Boston. How has data analytics shifted your analysis of how you're evaluating the quality of a grocery-anchored center?

I think more than anything, especially with the froth of today, data analytics is more important than ever. I mean, I say often, data is the new oil here. And while real estate is finance and, in some way, data is the foundation of every decision we make as it relates to our capital allocation. So really, Linda, this is just another tool that we have at our disposal to make sound business decisions. So we looked at comparing, for example, that asset in Boston versus an asset in Charlotte with similar cash flow. And the scoring model was significantly higher in Boston for a number of reasons: the three-mile demographics; the future growth population; the adjacency to employment, such as life science, education levels; the higher barrier to entry of grocery stores, the existing grocery stores, are you the number one or number two grocery store in the market. We go through a very rigorous, continual retooling of that scoring model. And that is something that will always be refined but is extremely critical, especially in a very competitive environment, where we don't want to be seen or we don't ever want to be making a bad investment, certainly buying investments that don't achieve the IRR which we're looking for.

And then for my second question, with high cap rate compression in grocery-anchored centers, are you seeing any of that demand spill over to power centers? Or is the key variable having a grocery anchor in terms of value?

No, I think we're seeing significant compression in cap rates on power in certain areas across the sector. In the top 40 MSAs, this trend is less pronounced than in secondary or tertiary markets. Looking at the credit mix and profile of around 60% of the cash flows from retailers like TJX, Burlington, and Nordstrom Rack, along with a few pads, it represents a solid business. The credit quality of these tenants is similar to what you find in the triple-net space. We've also been placing grocers in some of these power centers, which leads to further cap rate compression and enhances the IRR. Absolutely, we are experiencing cap rate compression across the board.

There are no additional questions in queue at this time. I'd like to turn the floor back over to Mr. Harper for closing comments.

Thank you, operator. 2021 has been a year of refreshment for RPT. We are refreshing our portfolio through our acquisition program, and we are refreshing our cash flows through our strong leasing activity. This is resulting in better market diversification, a higher-quality portfolio, higher credit tenancy, and most importantly, more durable cash flows. We also refreshed our liquidity by assessing joint venture, disposition, debt, and equity capital to allow us to continue to reshape our portfolio in 2022 and beyond. Thank you all for joining our call this morning. Have a wonderful day.

Ladies and gentlemen, thank you for your participation and interest in RPT Realty. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.