Earnings Call Transcript - RPT Q4 2022

Operator, Operator

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, Craig Benigno, Senior Analyst, Investor Relations. Thank you, sir. You may begin.

Craig Benigno, Senior Analyst, Investor Relations

Good morning and thank you for joining us for RPT's fourth quarter 2022 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, 2022, that will be filed later today and in our earnings release for the fourth quarter 2022. Certain of these statements made on today's call also involve non-GAAP financial measures. Listeners are directed to our fourth quarter 2022 press release, which includes 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.

Brian Harper, President and CEO

Thank you, Craig. Good morning and thank you for joining our call today. At the start of 2022, uncertainty around the economic environment, specifically inflation, began to take shape. It was only a matter of time before inflation took over the headlines. As I often say to the team: control the controllables, act with urgency, and turn risk into opportunity. Simply put, play offense. We leaned into our playbook and focused on five areas: lease, lease, lease; strengthen and diversify our cash flows through our three differentiated investment platforms; increase our assets under management; add duration to the balance sheet; and lastly, reduce short and long-term floating rate risk. Our team quickly became aligned, leading us to execute with excellence across all business units. We finished the year on a great note with top and bottom-line growth in addition to another dividend raise. 2022 same-property NOI growth was 4.3%, and operating FFO per share growth was 9.5%. Given the high level of visibility into our growth trajectory over the next few years, we raised our first quarter dividend by 8%. Over the last two years, we have experienced not only an acceleration of our portfolio transformation into wealthy and growing markets, such as Boston and Miami, but we have also seen a re-acceleration of demand from retailers due to a very low-supply environment coupled with our well-located and affluent open-air shopping center locations. We had another banner year across all operational metrics. Our leasing team remained locked in as we ended the year signing 69 leases covering 500,000 square feet during the fourth quarter, culminating in full-year activity of 2.2 million square feet, the highest annual leasing volume achieved since 2014. This activity pushed our leased rate to 93.8%, up 70 basis points year-over-year and putting us near our pre-pandemic levels. Embedded in our lease rate is about 390 basis points of occupancy growth, one of the highest levels in our peer set, which translates to over $11 million of rent and recovery income that has yet to come online. We also continue to drive rent, increase annual escalators, and retain our tenant base. Over the trailing 12 months, we produced a new comparable releasing spread of 43% and annual escalators of nearly 200 basis points for the new leases signed during the year. Retention was 88% in 2022 as we are seeing retailers pay a premium to remain within our revamped portfolio, which is predominantly located in the top 40 MSAs as they face limited new supply and increased move-out costs. A significant portion of our leasing activity is related to our value-enhancing remerchandising, redevelopment, and outlook expansion pipeline, where we have built a track record of replacing struggling retailers with more creditworthy tenants at double-digit returns. In the fourth quarter, we delivered three projects totaling $11 million and an average return on cost of 11%. Today, our active value-enhancing pipeline totals $45 million at blended returns of 9% to 11% with top-tier retailers, including Publix, Marshalls, HomeGoods, Ulta, BJ's Wholesale, Baptist Health, and Sephora. Regarding our redevelopment pipeline, we expect to share more details later this year in connection with projects at Hunter Square asset in Oakland County, Michigan, and Marketplace at Delray in the Miami market. We are in discussions with high-credit national and essential tenants for both sites. As we look ahead, demand across the portfolio remains very strong from national retailers looking to expand their footprints in high-quality locations. We continue to see the most demand from discount apparel, club stores, grocers, restaurants, wellness, and medical tenants. Given this demand, our new leasing pipeline remains robust, totaling over $7 million. This activity will be a key driver of occupancy growth as we stabilize our portfolio to our targeted occupancy level of 95%-plus over the long term. In fact, we expect to eclipse nearly 2 million square feet of lease commencements in 2023 for the second year in a row. And while bankruptcies have been in the headlines of late, tenant fallout is a natural part of the retail environment and nothing new for experienced landlords such as us. Our ability to recapture space provides us with the opportunity to showcase the quality of our portfolio and our operating platform as we anticipate re-leasing these spaces with significantly better tenant credit on an earnings-accretive basis. At the end of the year, we had eight Bed Bath concepts and four buybuy BABYs. While their situation remains fluid, it is not a surprise. We have been preparing for this situation internally for several years and have put a strategy in motion to create meaningful value through the remerchandising of these sites. Our leasing team has been cultivating a pipeline of replacement tenants, and our very low embedded rents of about $11.50 per square foot provide us with an opportunity to drive rents into the mid-teens range, favorably positioning us to aggressively recapture our location. While we already have significant interest in all Bed Bath and buybuy locations, we are in advanced negotiations on four of them, which we maintain control of. We are at lease with a leading off-price retailer to backfill one at a 40% re-leasing spread, with the location set to open in the fourth quarter of this year. For the three remaining locations, we are out for lease with top national retailers at Winchester Center and Hunter Square in Oakland County, Michigan, and we are in negotiations for a lease for another. Average rents for these locations were $10.50, with new rents being discussed in the $15 to $16 range with minimal expected downtime of 12 months on these four deals. Of the remaining locations, it's important to note that four are buybuy concepts. However, if we were to get the opportunity to recapture all of them, we would expect downtime to range between 12 to 18 months at re-leasing spreads of 20%. We have multiple backfill options for these locations that are in various stages of negotiations with categories including discount, grocer, medical, health and beauty, and liquor stores, to name a few. Regarding Regal, we have three locations in the portfolio, and none are on the closure list and each is current on rent payments. At this point, we believe all three locations will be assumed by the surviving entity based on advanced negotiations. We had another strong year on the investment front. We finished within the top quartile of U.S. open-air shopping center buyers in 2022, completing $375 million of acquisitions across all three investment platforms, bringing our two-year acquisition volume to $921 million. At year-end, our assets under management were $3.6 billion, up 57% since 2018. During the fourth quarter, we closed on the contributions of two core stabilized Midwest assets, Shops at Lane in Columbus and Troy Marketplace in Detroit. These were contributed to our grocery-anchored joint venture platform, which provided the funding for our share of the acquisition of Mary Brickell Village. Although we curtailed our investment activities in the second half of the year as we wait for markets to adjust to the new rate environment, we continue to actively scour our target markets for potential acquisitions. The good news is that we have excellent liquidity between cash and revolver availability and no debt maturities for the next two years, which puts us in a great position to quickly respond to changing market conditions. Also, our joint ventures remain a competitive advantage that provides us with long-term capital and allows us to generate above-market returns while also expanding the breadth of opportunities that we can pursue. Let's touch on Mary Brickell. The asset continues to exceed our expectations. Today, occupancy is 83%, up 5% since we closed on the asset last summer, and we expect it to exceed 90% by the end of 2023. Street-level rents are currently in the $150 to $200 range versus our in-place average rent per square foot in the mid-40s. We have multiple opportunities to recapture leases on both the east and west side of Miami Avenue that will help us deliver a best-in-class, iconic property and capture the growing mark-to-market opportunity over the next few years. Beyond this, we continue to evaluate long-term densification plans that will potentially unlock tremendous value for shareholders as we capitalize on the flexible zoning at the site that allows for up to 4.1 million square feet of residential, office, or hotel use in the heart of Miami's Brickell neighborhood. Finally, we initiated operating FFO per diluted share guidance of $0.97 to $1.01, which includes our expectation of same-property NOI growth of 1.5% to 3.25%. Included in our outlook is a prudent level of bad debt considering the current situation with a few at-risk tenants. Mike will provide more details on how we are thinking about bad debt and our overall outlook for 2023 in his prepared remarks.

Mike Fitzmaurice, CFO

Thanks, Brian, and good morning, everyone. Today, I'll discuss our fourth quarter 2022 operating and financial results in more detail, provide an overview of our financing activities completed during the year and end with commentary to help everyone understand the business expectations embedded in our 2023 earnings outlook. Fourth quarter operating FFO per share of $0.24 was ahead of our internal plan for the quarter, but down $0.03 from last quarter primarily due to the impact of contributions of our Shops on Lane and Troy Marketplace properties into our grocery-anchored joint venture and higher G&A expense. Same-property NOI growth for the quarter came in ahead of plan at 1.1%, driving full-year same-property NOI growth of 4.3%, just above the high end of our expected range. Our stronger-than-expected performance for the year was fueled by 2% base rent growth after adjusting for some offsetting accounting movements between base rent and bad debt as we regained occupancy, drove rent, and pushed our annual escalators. Our signed not commenced backlog remains elevated at $11.2 million, or about 7% of annualized fourth quarter NOI, providing us visibility on future earnings growth. We also continue to open tenants on time and on schedule despite the challenges facing the construction market. This quarter, we commenced leases covering over $4 million of rent. As a result of the high level of rent commencements during the fourth quarter, our occupancy rate increased 100 basis points sequentially as we continue to stabilize the portfolio toward our target of 95%-plus over the long-term. Our signed not commenced backlog will continue to provide earnings tailwind through 2025 with the total incremental benefit to operating FFO expected to be about $0.12 per share. We expect the cadence to be $0.05 in 2023, $0.06 in 2024, and $0.01 in 2025. I was very pleased with our balance sheet management in 2022. We prudently and opportunistically accessed the debt, equity, and derivative markets to keep leverage in check, improve duration, and reduce floating rate risk. Ahead of the disruption in the capital markets, we refinanced and upsized our credit facility and paid off all near-term debt maturities. In December, after inflation started to show signs of easing, coupled with a highly inverted yield curve, we entered into forward-starting swaps that lock in the rate on all of our term loans through their respective maturities. And earlier this week, Fitch reaffirmed our BBB- investment credit-grade rating with a stable outlook. Today, we have over $470 million of liquidity, no debt maturing until 2025, and only 5% floating rate debt exposure. We entered the fourth quarter with net debt to annualized adjusted EBITDA of 6.9 times, down from 7.0 times last quarter. Including our signed not commenced backlog, our leverage would be 6.3 times, giving us confidence that we will be near our long-term target of 6.0 times in the next couple of years. Moving on to our initial 2023 outlook. We are establishing an operating FFO per diluted share guidance range of $0.97 to $1.01. Embedded in this range is an expectation of same-property NOI growth of 1.5% to 3.25%. With about 75% of our 2023 leasing plan already completed and a healthy signed not commenced backlog, we start the year on great footing. The wildcard will be the impact of retail bankruptcies. The midpoint of our operating FFO guidance assumes lost rent totaling 300 basis points of NOI, which is comprised of our typical bad debt reserve of 75 basis points as well as an additional 225 basis points tied to Regal, Bed Bath & Beyond, Party City, and Tuesday Morning, which covers the impact of both lost rent from recently recaptured spaces as well as additional forecasted lease rejections and rent reductions. To get to the high end of our operating FFO per diluted share range, we would need to have a more favorable outcome on lease rejections and rent reductions. The low end of the range assumes that we recapture all eight of our Bed Bath concepts, all five of our Party City leases, and both Tuesday Morning locations in the second quarter of this year. As you think about the bridge from the $1.04 per share we reported in 2022 to the $0.99 midpoint of our 2023 operating FFO per diluted share guidance, keep in mind the following timing and one-time headwinds. We realized a $0.01 benefit in 2022 from the reversal of straight-line rent reserves and termination income that we do not project in forward periods and $0.04 due to the timing of net investment activity in 2022 as we front-loaded acquisitions and backloaded dispositions. In addition, we have $0.03 from NOI coming offline from properties that are being prepared for redevelopment, notably Hunter Square in Oakland County, Michigan, and Marketplace at Delray in the Miami market. These headwinds are partially offset by expected same-property NOI growth that adds about $0.03 despite the elevated levels of bad debt embedded in our outlook. G&A net of management fee income is expected to be roughly flat year-over-year as inflationary pressures on G&A are largely offset by rising management fee income from our joint ventures. And with that, I will turn the call back to the operator to open the line for questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Todd Thomas, Analyst

Hi, thanks, good morning. First, appreciate the detail around the guidance and what's embedded in the guidance for the reserve. And I realize some of the potential disruption may impact occupancy. But Mike, Brian, you both mentioned the targeted occupancy rate of 95% for the portfolio. It's a little more than 500 basis points of upside. What's sort of embedded in the guidance for occupancy throughout the year? And where do you expect to maybe be at year-end just given the potential near-term disruption that you discussed? And if you could just share some details there, just trying to get a sense of that and maybe how long you would expect to achieve that occupancy rate.

Mike Fitzmaurice, CFO

Sure. Good morning, Todd. And thanks for the question. We have a very healthy signed not commenced pipeline of $11 million, which is coming online over the next couple of years, which is really going to push our occupancy towards that 95% over the long term. But we ended the year just south of 90% at 89.9%. We do expect it to end the year right between 91.5% and 92.5%, despite the potential disruption that we could experience for our at-risk tenants, three of which are in bankruptcy.

Brian Harper, President and CEO

And Todd, I would just add, outside of the $11 million SNO, we have about $7 million in legal and more even in advanced negotiations behind that in NOI. And these are iconic, game-changing assets, more grocers, more wholesale, more off-price, more restaurants, more wellness, where really, they bring a halo effect. But they're occupying either vacant or underutilized space today. So that's going to help bring this occupancy up as well. And those pretty much are going to be hitting ‘24, ‘25.

Mike Fitzmaurice, CFO

Yes. Another point to mention, Todd, is regarding the small shop segment. We finished the year with an occupancy rate of approximately 83.5%. About half of the signed but not commenced portion of $11.2 million is related to small shops. Therefore, we should anticipate that the small shop occupancy will increase throughout the year to between 86% and 87%.

Todd Thomas, Analyst

Alright. That's helpful. And then what's driving the relatively faster backfills? I realize leasing demand is strong. But for some of these larger boxes, 12 to 18 months seems relatively fast, 12 months in particular. There's obviously been delays around permitting and equipment deliveries and things of that nature. I'm just wondering why you think 12 months at the low-end of the range there is achievable. Again, seems a little fast for the cycle.

Mike Fitzmaurice, CFO

So Todd, a couple of things. We’ve been treating all these spaces as vacant since before COVID, similar to our approach with GAAP, Ascena, and Pier 1. I believe we have been one of the quickest in backfilling those three concepts. We have been negotiating leases even when we didn’t control the Bed Bath space. Currently, four of our eight Bed Bath stores are about to close and will be replaced by tenants with better credit and sales per square foot profiles. I mentioned the 43% re-leasing spread for an off-price tenant opening later this year. That leaves us with really four tenants. We have been actively seeking out tenants for these locations for a long time, so we are well-prepared. That’s what I hope to achieve within the next 12 months. We have tenants in place and working on plans. So this wasn't just waiting for recapture; it was proactive asset management.

Todd Thomas, Analyst

Okay. That's helpful. And then just lastly, Brian, moving over to investments. I was just wondering if you could talk a little bit about what you're seeing out there if deal flow is starting to pick up, how we should think about investments during the year across the platform and also how we should think about funding investments in the current environment today?

Brian Harper, President and CEO

Sure. So we really haven't given guidance on investments prior. What I will say on that note, over the last two years, we've bought almost $1 billion across our platforms. While their internal remerch, redevelopment deals serving up double-digit spreads, that's our best use of capital. We are still scouring our markets for all three platforms. Let me start with RGMZ. I expect to deploy a lot of capital this year. We have been very patient. There's not been much cap rate expansion in the triple-net sector. But what I can see us buying are these larger centers where we can chop up the triple-net components and seed them into the fund and then sell the remaining center at a later date. That's creating alpha for those investors. Our R2G, that's really straight down the fairway core grocery. Our partner gives us an edge, as well as an enhanced yield that we are looking for. With that being said, you saw what we did with Troy and Lane. Could there be more of that like an accordion feature, where we can deploy assets and buy accretively, potentially. And then RPT, I really see RPT benefiting from all platforms working together similar to what we did up in Northborough in COVID, where we seeded four parcels and were left with double-digit yields. And really after now, that's even expanded further just due to our leasing platform where we'd have now five TJX concepts at the center, only one in the country that has all five TJX brands. Essentially, that center serves as a TJX bond for our shareholders. So I see more Northboroughs for RPT, certainly, but we'll give more updated guidance at first quarter.

Todd Thomas, Analyst

Okay, alright. Thank you.

Brian Harper, President and CEO

Thank you.

Operator, Operator

Our next question is from Wes Golladay with Baird. Please proceed with your question.

Wes Golladay, Analyst

Oh, hey. Good morning to everyone. I mean, how do you balance playing offense in sites like Mary Brickell and Delray versus having to allocate resources and capital to backfilling the potential vacancies you cited with Bed Bath and Regal and Tuesday Morning?

Brian Harper, President and CEO

It's a balance. It's about returns. We are expecting to announce some deals soon in Delray that involve very low capital expenditures and sizable ground lease numbers that require minimal investment from us. In Brickell, the strong demand compared to supply is driving prices and increasing restaurant volumes, with three of the top U.S. restaurants set to open in the Brickell neighborhood next year. This situation means that we are likely to achieve lower total assets than we initially projected, with rents potentially reaching almost twice what we had underwritten. When considering locations like Bed Bath, we are securing very attractive yields. The average rent for the four properties we control is $10.46, with blended spreads of 43.3%. We also have a deal in Michigan where we are negotiating a $14 to $15 rent with a tenant who will generate sales volumes significantly higher than those of Bed Bath. The focus here is on capital allocation and maximizing internal returns as much as possible.

Mike Fitzmaurice, CFO

And Wes, I'll just add this, I mean to Brian's point earlier from Todd's question is we've been working on these Bed Bath recaptures and re-leasing for quite some time. So it's not really incremental work for the company. And then the second thing I would comment on is we hired a highly, highly talented individual in the Miami market to focus solely on Mary Brickell. So we have the right talent and the right focus on not only our new assets like Mary Brickell but also the re-lease of our at-risk locations.

Wes Golladay, Analyst

Got it. Looking at the Marketplace of Delray, you're implementing this approach in many of your centers, where you replace the anchor tenant and significantly change the dynamics of that center. The area appears to be quite active, with nearby local centers also undergoing redevelopment. It seems you could potentially refresh the tenant base within the next year or possibly two. How long does it typically take to activate the rest of the center after securing a new anchor?

Brian Harper, President and CEO

It's about 12 months. Currently, especially in a place like Delray Beach, people are looking for locations. We have a deal at $14 ABR in a $40 market, particularly after a few anchor deals that we will announce soon. Many are eager to secure space in advance of those tenants opening. While this isn't universal, it is likely to occur in Delray Beach. Therefore, we are very confident that we can lease simultaneously even before the anchors open.

Wes Golladay, Analyst

Got it. That makes sense. And then you talked about the additional zoning at Mary Brickell. Do you think you have announcements this year? Or is it going to be a multiyear process? What are your expectations there?

Brian Harper, President and CEO

We’re really focused on the western parcel, really, the Publix and up to Moxie and North. That’s kind of our – leaving that as iconic, trophy retail. We’re doing a lot of deals with wellness and F&B. But for the most part, that will be a modernization of what’s currently there. The eastern portion is really where we could maximize the GLA and really where the tenants have the least amount of WALT. So I think this is a multiyear approach, Wes. We’re laser-focused on making this a place where people flock in an oasis in the urban jungle. And just the demand, as I said in my prepared remarks, is unlike anything I’ve ever seen in my career.

Wes Golladay, Analyst

Got it. Thanks for the time, everyone.

Brian Harper, President and CEO

Of course. Thank you.

Operator, Operator

Our next question comes from Derek Johnston with Deutsche Bank. Please proceed with your question.

Conor Peaks, Analyst

Hi, thank you. This is Conor Peaks on with Derek. On the leasing environment and given 2022 was at record levels, since the new year, have you seen any change in tenant demand behavior? Any change in TI conversation or forward indicators? Thanks.

Brian Harper, President and CEO

No, it's as healthy as what we've seen, and that may be attributed to a new portfolio. It's as healthy as 2022. In fact, some of the tenant improvement requests have decreased because we have multiple tenants competing for a single space. I believe it's important to create tension in the market to drive prices up and capital expenditures down. We have adopted a proactive mindset, assuming these spaces will eventually be vacant, and we've chosen to be proactive in increasing rent when the factors are in our favor.

Mike Fitzmaurice, CFO

And Conor, one of the metrics that we monitor very, very closely within our four walls here is retention, right? In ‘21, it was high 80s. In ‘22, it was high 80s. We expect the same result in ‘23, ‘24, ‘25 based on our projections today. As Brian said in his opening remarks, tenants are willing to pay the premium to stay where they're at within our portfolio because it's much more costly to move somewhere else given the rise in construction cost.

Conor Peaks, Analyst

Thank you. And then on private market liquidity, we touched on it a little bit earlier, but are you seeing any standout regional differences in either market depth or cap rate expansion? Thanks.

Brian Harper, President and CEO

Not really. The core grocery segment has remained stable. I mentioned that it's been consistently reliable. The core power sector has also shown stability, particularly with cash flow from stable tenants like TJX and Ross. There hasn’t been much variation geographically. Florida is a unique case on its own. In some respects, we might even observe some compression. However, apart from that, there hasn’t been any noticeable change in geographic concentration.

Conor Peaks, Analyst

Thank you.

Operator, Operator

Our next question comes from R.J. Milligan with Raymond James. Please proceed with your question.

R.J. Milligan, Analyst

Hey, good morning, guys. In your prepared remarks, you mentioned you were in advanced discussions with Regal, and you expected those leases to get affirmed through bankruptcy. I'm just curious if there's any associated or anticipated rent cuts with those properties.

Mike Fitzmaurice, CFO

Good morning, R.J. So we have three locations: one in Ohio, one in Nashville, and then one in the Boston market. All three are very well-performing locations. On two of the three, we expect to take a slight haircut on rent that will effectuate sometime late second quarter into the third quarter.

R.J. Milligan, Analyst

And so one of the three you expect to get assumed at full rent. And can you quantify that rent reduction on the two?

Mike Fitzmaurice, CFO

In terms of the rent reduction on the two, you're looking at right around $500,000 on an annualized basis.

R.J. Milligan, Analyst

Okay. And then you guys increased the dividends. At a time when CapEx spend is pretty significant just given all the leasing that's been done and some of the repositioning, I'm curious where you anticipate your AFFO payout ratio ending the year.

Mike Fitzmaurice, CFO

Yes, I believe this year will see a slight increase as most of the capital is related to our signed leases that have not yet commenced, with a remaining balance of around $11 million. We're planning to invest approximately $40 million to $50 million in leasing capital expenditures, and 75% of that is associated with our signed leases that have not commenced. While this will make our AFFO payout ratio higher this year, we anticipate it will be in the mid-80s next year and drop to the mid-70s in 2025. We have strong visibility from the signed leases that have not yet commenced, indicating the AFFO payout ratio will decrease. This was a key factor in the dividend increase we announced last night.

R.J. Milligan, Analyst

That’s helpful. Thanks, guys.

Brian Harper, President and CEO

Yes. Thank you.

Operator, Operator

Our next question comes from Hong Zhang with JPMorgan. Please proceed with your question.

Hong Zhang, Analyst

Yes. Hey guys. I think you mentioned $0.03 of redevelopment drag when you take Hunter Square and Marketplace at Delray offline. Roughly when in the year that would happen?

Mike Fitzmaurice, CFO

Yes. It's early in the year. So we've recaptured a few locations at Hunter Square, and we've already recaptured the former grocer, Winn-Dixie, at Delray.

Hong Zhang, Analyst

Got it. And I guess out of curiosity, so if I think about the three categories where you make acquisitions, your wholly owned, your R2G, and your RGMZ platforms, I guess, which one would you expect activity to pick up the fastest?

Brian Harper, President and CEO

I think it's too early to say. I mean, I think we've been very patient buyers. We are scouring daily. And out of the retail ecosystem of these three platforms where they reside, I can't answer which one is going to pick up. I mean, the ball could bounce to R2G tomorrow, and that could pick up, but it could bump to RPT too. I think the beauty of this is all three are complementary and all three give us a competitive edge in the marketplace.

Hong Zhang, Analyst

Got it. Thank you.

Brian Harper, President and CEO

Thank you.

Operator, Operator

Our next question comes from Floris Van Dijkum with Compass Point. Please proceed with your question.

Floris Gerbrand van Dijkum, Analyst

Thank you. I have two questions. First, you mentioned that your shop occupancy is 86.8% for leased space, with 330 basis points of SNO. What gives you confidence that you can improve that, and do you have a specific target for your shop occupancy?

Mike Fitzmaurice, CFO

We do have a long-term target of 91% to 92%. Since about half of our signed but not commenced pipeline, approximately $5 million to $6 million, is related to our small shop space, we finished the year with an occupancy level around 83.5%. We anticipate that will increase to between 86% and 87% by the year-end, which should provide a clear path toward reaching our long-term goal of 91% to 92%.

Brian Harper, President and CEO

And then the $7 million that's in leases, I think it's like 30%, 35%, 40% of the small shop. So add that in. And then there's another several million even of LOIs that we think will be in legal here in the next month and about 50% small shop.

Floris Gerbrand van Dijkum, Analyst

I noticed that you mentioned Mary Brickell was 83% leased. However, when looking at your overall Miami exposure, it also stands at 83% leased. This appears to be the lowest occupancy in your overall portfolio and among all markets. Can you elaborate on what’s happening in Miami specifically? I would assume that Mary Brickell plays a significant role in this, so please share your perspective on the potential for growth in that area.

Brian Harper, President and CEO

So Brickell is certainly 83%. Delray, we've been buying out tenants to effectuate our redevelopment with two iconic anchor tenants and new small shop space and potentially even some resi, which a partner would do or maybe that's a contribution like we did in Jacksonville, where we contributed our land and became a 50% owner of 375 units, and we're going through entitlements on that. But the large driver on that is Delray.

Floris Gerbrand van Dijkum, Analyst

Got it. In terms of Austin, I noticed you have occupancy below 90% for that single asset. I remember you were quite optimistic about that acquisition about a year and a half ago. Could you share what's happening in Austin?

Brian Harper, President and CEO

Yes, in 2019, we completed that acquisition at a 5.5 cap rate. We've made significant expansions, with a 30% to 40% increase in NOI. We've regained a couple of tenants, doubling their rents. This is reflected in the current occupancy of 89%, which we expect to grow to at least 98% in the next few quarters.

Floris Gerbrand van Dijkum, Analyst

Thanks, Brian.

Brian Harper, President and CEO

Yes. Thank you.

Operator, Operator

Our next question comes from Linda Tsai with Jefferies. Please proceed with your question.

Linda Tsai, Analyst

Yes, hi. Is at-home part of your bad debt forecast?

Mike Fitzmaurice, CFO

It is not. We don't assume any disruption there, and we only have two at-homes, Linda.

Linda Tsai, Analyst

Okay. And then just on the earlier comment, why would the buybuy BABYs take 12 to 18 months to backfill versus the Bed Bath taking less time?

Brian Harper, President and CEO

Well, I think there are a couple of factors to consider. Each site is unique, and the buybuy BABYs have different complexities at those specific locations. For instance, one might be merging spaces, while another might be dividing spaces. Not all of them are the same as the Bed Bath locations, which are generally taking the space as it is. These nuances may require a bit more time for buybuy BABYs compared to the Bed Bath deals.

Linda Tsai, Analyst

Got it. And then just on the earlier comment that it's important to create tension in the market to get multiple parties interested in this space. Is your view that leasing CapEx or TIs goes down this year?

Brian Harper, President and CEO

Certainly, on selective deals, in previous box deals where multiple parties compete for a space, the pricing would decrease. In situations where we are combining spaces, the pricing could increase. The focus is on creating market tension, which helps drive rents up and CapEx down.

Linda Tsai, Analyst

And then just the last one, just on the Bed Bath & Beyond boxes. Is your view that more of those go to single tenants or the space gets divided up?

Brian Harper, President and CEO

Single tenants. Yes, the four we have recaptured. Every single one is going to a single tenant.

Linda Tsai, Analyst

Got it. Thank you.

Brian Harper, President and CEO

Thank you.

Operator, Operator

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

Lizzy Doykan, Analyst

Hi, good morning. This is Lizzy Doykan on for Craig. I kind of wanted to go back to the questions around small shops. And I totally understand the outlook and the target for 86%, 87% and then being online for 91%, 92% long-term. I was just hoping to get additional color around the decline in both the leased and occupied rates in the fourth quarter. Just seeing if there's specific markets or tenants that drove this, whereas most of your peers saw a gain in this. Thank you.

Brian Harper, President and CEO

Yes. In Lake Hills, Austin, we proactively moved out a 10,000 square foot tenant and doubled the rent, which is what contributed to this quarter's performance.

Mike Fitzmaurice, CFO

Yes. You've got to remember the small denominator we have with the small shop, too, Lizzy. So when you have a deal like that upside of 9,000 to 10,000 square feet, it's going to move the number.

Brian Harper, President and CEO

It's tough to focus on quarter-to-quarter.

Lizzy Doykan, Analyst

Got it. Thanks. On your net debt to EBITDA of 6.9 times, that decreased slightly from last quarter. I'm curious about the priorities this year regarding this trend, considering you have no debt maturities until '25 and have fixed several components on all outstanding term loan debt. What are the priorities this year?

Mike Fitzmaurice, CFO

Sure. We've done a wonderful job on the balance sheet, clearing up maturities for the next couple of years. So we can fully focus on growth in EBITDA, which is all tied to signed not commenced as we alluded to in our prepared remarks and a few questions today. So short answer is get net debt to EBITDA down. We want to get within our range of 5.5 times and 6.5 times. And based on our projections at the midpoint of our range, we're really pretty close to that top end of the range, around 6.5 times. And then from there, we do believe in ‘24 and ‘25 we’ll be well within our range at the midpoint of 6.0 times. So it's a metric and a focus for the company, and we will get it down.

Lizzy Doykan, Analyst

Great. Is there any update or change in thoughts regarding Kroger and Albertsons considering the recent news about expected store closings? If you could remind us of your overall stance on this.

Mike Fitzmaurice, CFO

We have zero overlap at all. So it's really no point for RPT, thankfully.

Lizzy Doykan, Analyst

Okay, got it. Thanks.

Brian Harper, President and CEO

Yes. Thank you.

Operator, Operator

It appears that there are no further questions at this time. I would now like to turn the floor back over to Brian Harper for closing comments.

Brian Harper, President and CEO

Thank you, operator. We relentlessly pursued excellence in 2022 and are ready to do the same in 2023. Although the current retail environment presents some near-term uncertainties, we enter the new year on very solid footing. Leasing momentum remains robust. Our balance sheet and liquidity are in great shape. Our investment platforms give us competitive advantages with regard to potential acquisition opportunities. It's times like these when we believe the significant improvements we made to our portfolio over the past several years will prove themselves out as we continue to build more durable cash flows, and we expect to deliver very solid results. We look forward to seeing many of you at upcoming conferences and hope you all have a great day.

Operator, Operator

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.