Earnings Call Transcript - SITC Q3 2021

Operator, Operator

Good morning, and welcome to the SITE Center Reports Third Quarter 2021 Operating Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Steve Bakke, Senior Vice President of Capital Markets. Please go ahead.

Stephen Bakke, Senior Vice President of Capital Markets

Thank you, operator. Good morning and welcome to SITE Centers’ third quarter 2021 earnings conference call. Joining me today is Chief Executive Officer, David Lukes; and Chief Financial Officer, Conor Fennerty. In addition to the press release distributed this morning, we have posted our quarterly financial supplement and slide presentation on our website at www.sitecenters.com, which is intended to support our prepared remarks during today’s call. Please be aware that certain of our statements today may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from our forward-looking statements. Additional information may be found in our earnings press release and in our filings with the SEC including our most recent reports on Form 10-K and 10-Q. In addition, we will be discussing non-GAAP financial measures on today’s call, including FFO, operating FFO, and same-store net operating income. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today’s quarterly financial supplement. At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes.

David Lukes, CEO

Thank you, Steve. Good morning, and thank you for joining our third quarter earnings call. We had another strong quarter really across the board. OFFO was ahead of plan, new leasing volume was at its highest in a number of years, we exceeded our 2021 investment goals with the closing of Hammond Springs, and subsequent to quarter-end, RVI distributed $190 million to SITE Centers. Thank you to the entire SITE Centers team for working so hard to achieve these accomplishments, which position our company for sustainable growth going forward. I'll start this morning discussing third quarter results, talk briefly about leasing, and then discuss our investments and capital as we look to grow our portfolio of assets in wealthy suburban communities. As I mentioned, third quarter OFFO was ahead of our budget and higher-than-expected NOI and lower G&A expense. We collected 99% of our billed rent for the quarter. Looking back to 2020, we've now collected 96% of 2020 base rent, including $21 million of deferral repayments. Our tenant assistance program, which effectively ended in 2020, has now collected 98% of the deferred rent due, which is really a testament to the durability of our portfolio cash flow, the credit strength of our tenant base, and the quality of our team and our real estate. Moving to leasing, we had a truly outstanding quarter with over 1 million square feet leased, including 237,000 square feet of new leasing, which is our highest in two years, despite having a considerably smaller portfolio. We signed six anchors this past quarter, bringing our year-to-date anchors to 19. These 19 anchors signed year-to-date have a number of interesting characteristics that are indicative of the operational strength we're seeing. First off, 15 of the 19 anchors were signed with publicly traded companies, highlighting the credit quality of our primarily national portfolio. Second, 30% of the square footage is from new concepts that are sponsored by investment-grade parent companies, and were launched in the last 18 months. We have 13 more anchors in lease negotiation, which we expect to be completed by the first quarter of next year with similar characteristics to the deals signed to date. We expect this activity to be a material driver of our growth over the next several years, particularly since new anchors that have property usually drive shop demand in response. We've already seen some of this demand result in positive rental growth and an acceleration in executed shop leases, including over 50 new shop deals in this quarter alone with a number of exciting and well-capitalized new concepts. Shifting to investments. In September, we acquired Hammond Springs in Atlanta for $31 million, which pushes our year-to-date acquisitions to $80 million ahead of our $75 million goal for 2021. Atlanta is our largest market and we're very excited about the growth outlook for the city and for this property in particular with average household incomes in excess of $130,000 and incredible visibility in a high-traffic corridor. Similar to Delray and Charlottesville acquisitions, convenience is the anchor of this site as it does not have a traditional large format tenant. While box demand has been very strong, the advancements in geolocation data mean that we don't have to rely on the anchor as the assumed primary driver of traffic. This opens a compelling subsector in open-air shopping centers and has been the bulk of our acquisitions year-to-date. That said, going forward, I'd expect us to be active in both anchored and unanchored assets that fit our growth and submarket criteria. Our investment thesis is based on three clear facts that have emerged in the last year-and-a-half. One, there is now more money in wealthy suburbs; two, there are more frequent customer visits due to a more flexible work-from-home culture; and three, an increasing value and convenience from both tenants and customers alike. These facts are producing occupancy gains, but also rent growth. At a time when buying vacancy is becoming increasingly challenging, given the strength of operating fundamentals, we are heavily focused on finding the right properties in the right submarkets where rent growth is happening and we have an opportunity to re-tenant existing square footage with stronger credit tenants at higher rents. The foundation of our investments is our balance sheet and our access to capital. As was announced a few weeks ago, RVI declared and paid a distribution on Site's preferred investment in early October. In this distribution, SITE Centers received $190 million and does not expect to receive any additional distributions from RVI in the future on the account of its preferred investment. The payment, along with recently announced RVI asset sales and a common dividend declaration, leaves RVI with just three remaining properties and a clear path towards the conclusion. It also returns almost $700 million of capital to preferred and common stakeholders, which was part of the original thesis and the business plan for the formation of RVI. All of us at SITE Centers are incredibly proud of the thought and work that went into this innovative spin, and we are excited about future investment prospects for the return capital we received. And with that, I'll turn it over to Conor.

Conor Fennerty, CFO

Thanks, David. I'll comment first on quarterly results, discuss revisions to 2021 guidance and forward earnings considerations and conclude with our balance sheet. Third quarter results were ahead of plan as David mentioned on better operations and lower G&A expense. Total uncollectible revenue at SITE share included $1.6 million of income, or $0.01 per share from payments related to prior periods, primarily from cash basis tenants. Outside of this, there were no other material one-time items that impacted the quarter. In terms of operating metrics, the lease rate for the portfolio was up 50 basis points sequentially, which is on top of 40 basis points last quarter, and speaks to the strength of our leasing activity and minimal bankruptcies. Based on our current leasing pipeline that David outlined, we believe the lease rate will continue to increase into year-end. We provided an updated schedule on the expected ramp of our $12 million signed, but not open pipeline on Page 8 of our earnings slides. We had 300,000 square feet or $5.1 million of annualized base rent commencements in the third quarter, and the SNO pipeline now represents just over 3% of annualized third quarter base rent or over 4% if you also include the anchors in negotiation in our pipeline. Moving on to our outlook. We're increasing 2021 OFFO guidance to a range of $1.13 to $1.14 per share to incorporate reported results with outperformance driven by prior period reversals, earlier rent commencements, and higher retention. Rent commencements and uncollectible revenue remain the most volatile factors, which will impact fourth quarter results. We've also increased same-store NOI guidance to a range of 12.5% to 14%. The updated range reflects reported results and excludes any future prior period adjustments. It implies that 2021 same-store NOI is effectively running slightly ahead of 2019 levels, and that 2022 NOI for comparable assets would also be ahead of 2019 based on our leasing pipeline and initial budget forecasts as well. In terms of the fourth quarter, there are a few moving pieces to consider from the third quarter as outlined on Page 12 of our earnings slides. First, as I previously mentioned, we had $1.6 million of nonrecurring uncollectible revenue in the third quarter. Second, we are anticipating a handful of JV asset sales to close in the fourth quarter, which will impact our share of JV NOI and JV fees. Third, we expect RVI fees to be about $3.5 million in the fourth quarter, which is roughly flat from the third quarter. And fourth, G&A will increase from the year-to-date run rate as expenses pick up. These factors will all act as headwinds versus third quarter, partially offset by rent commencements and investment activity. A summary of these factors is on Page 10 of earnings slides. Moving to 2022 OFFO, we are not providing formal guidance at this time, but wanted to provide clarity on a few line items. First on RVI. Given that RVI now owns just three properties, it is fair to assume that RVI fees paid to site will be minimal in 2022 upon the fees resetting in January with the dilution from loss fees offset over time by the reinvestment of preferred proceeds into acquisitions. Second, interest expense at SITE share is expected to be roughly flat to 2021. And third, we would expect G&A to total around $52 million. And fourth, included in 2021 year-to-date results are $12.7 million or $0.06 per share of nonrecurring reserve reversals related to prior periods. Turning to our balance sheet. Including the receivables line item at quarter end, it's just under $2 million of net COVID related deferrals we expect to collect in the future as the deferral program winds down. Details on the timing and composition of the gross deferral balance are outlined on Pages 6 and 7 of our earnings slide deck. But with 84% of the total gross deferral balance repaid to date, the impact on earnings and future periods will be limited. Finally, wrapping up with liquidity and sources and uses, pro forma for the $190 million distribution from RVI and the early retirement of our $88 million January 2022 mortgage maturity, the company has just over $150 million of cash on hand and $25 million of common equity from forward sales under our ATM which is available for future settlement. This liquidity will allow us to take advantage of investment opportunities as they arise and to drive sustainable OFFO growth and create stakeholder value. And with that, I'll turn it back to David.

David Lukes, CEO

Thank you, Conor. Operator, we're now ready to take questions.

Richard Hill, Analyst

Hey, good morning, guys. I wanted to just maybe start with a nuts and bolts question. I appreciate the disclosure about the $12.7 million benefit in '21 to date. Can you maybe walk through how much of that $12.7 million was realized in 3Q? And maybe what we can expect in 4Q?

Conor Fennerty, CFO

Sure. Of the $12.7 million, $1.6 million was in the third quarter. We don't budget or include in our budget, excuse me, any future revisions. So if we had them in the fourth quarter, that $12.7 million, we would move higher.

Richard Hill, Analyst

Got it. Since we don't know what last year's same-store NOI would have been without that benefit, could you clarify that for us?

Conor Fennerty, CFO

Sure. Year-to-date, which only includes the first three quarters because there’s nothing in the fourth quarter, shows about a 530 basis point positive guidance for the year. So all of the 12.7 million is included in same-store.

Richard Hill, Analyst

Got it. Thank you very much. And then maybe a bigger picture question about the cadence of occupancy. If I go back to sort of your peak prior to COVID, not in 2019, but even prior to that, you were around 95%. Do you see a path to getting back to 95%, and what does that cadence look like?

David Lukes, CEO

Well, I mean, Rich, it’s David. Based on the past couple of quarters, I think the cadence looks pretty good. And from a portfolio perspective, the quality of the assets, given the spinoff of RVI is a lot higher than it was in the last cycle. So I don't see any reason why the portfolio can't be 95%, 96%.

Conor Fennerty, CFO

Rich, to add to that, before COVID, we had a few properties that we kept offline while considering some redevelopment projects and other opportunities. In recent quarters, we've noted that retail demand from tenants has been exceptionally strong. As a result, we've decided to take those properties out of redevelopment and expect them to be leased. Therefore, I believe our peak occupancy for this portfolio post-COVID could be higher than it was before the pandemic.

Richard Hill, Analyst

Okay, that's helpful, guys. Just to elaborate a bit, you added almost 50 basis points of sequential improvement in our numbers. Do you think that's a reasonable expectation, or should we anticipate more acceleration in that improvement?

Conor Fennerty, CFO

Yes, Rich, the challenge with percentages is that they can be tricky. However, if you refer to the SNL pipeline shown in the slides, you'll get an idea of the expected dollar amounts. Percentages can become a bit misleading based on GLA, so I would recommend focusing more on the dollar figures.

Richard Hill, Analyst

Okay, got it. I'm going to jump back in the queue. I'm sure I have a lot more questions, but I'll give some people some airtime. Thanks, guys.

David Lukes, CEO

Thanks, Rich.

Operator, Operator

Our next question comes from Katy McConnell from Citi. Please go ahead. Hello, Katy, is your line open?

Katy McConnell, Analyst

Hi, good morning. Sorry about that. I was wondering if you could just walk us through the increase that you saw on leasing CapEx per square foot this quarter. And to what extent was that driven by rising construction costs versus the mix of more anchor deals this quarter?

Conor Fennerty, CFO

Hi, Katy, it's Conor. If you look on Page 14 at our net effective rents slide on the right side, you can see the percentage of new deals we are doing that are anchors versus shops. We disclose this information because anchors have lower net effective rents by definition. For the third quarter, 57% of our deals were anchors, compared to only 34% last quarter. I'll turn it over to David for comments on construction costs, but this really is just a mix issue, as we have more anchors this quarter, and I expect that trend to continue in the fourth quarter as well.

David Lukes, CEO

Yes, on the construction side, Katy, there's no question that there's been some inflation, particularly in construction materials. We haven't really seen it yet in labor, but on the construction material side, there's definitely been a 10% to 15% increase in a number of categories. The issue is when you start to lump in those categories that have inflation, and you look at it as a part of the total cost of the deal, meaning landlord costs, TI and commissions, there hasn't really been that much impact yet that is meaningful. The big issue for us is really more the characterization of whether they’re shops versus anchors.

Katy McConnell, Analyst

Okay, thanks. And then as you look at the near-term lease expiration schedule, what are your expectations for recapturing space at this point and potential mark-to-market upside next year?

David Lukes, CEO

Yes. Well, I think the biggest issue for us is that the leasing demand is so strong, pretty much across the board. I mean, if you remember a year-and-a-half ago, it started in the outparcels and then it moved into anchors, and now it's moving into shops. I think what's really going to happen is we're going to start seeing a lot of properties move to a pretty high occupancy, which is going to put pressure on renewals from tenants because they won't have the choice to relocate. So our expectation is that renewals increase and the percentage of tenants that exercise their options increase, which means that the amount of available inventory we're going to have is going to stay a little bit low.

Katy McConnell, Analyst

Okay, great. Thank you.

David Lukes, CEO

Thanks, Katy.

Operator, Operator

Our next question comes from Alexander Goldfarb from Piper Sandler. Please go ahead.

Alexander Goldfarb, Analyst

Hey, good morning, gentlemen. So let me just continue on from Katy's question on leasing CapEx. Taken from a different angle, what are you guys seeing as far as labor and also delays in openings? Some of our recent site visits have shown some restaurants closing early because they don't have the labor, or some I think it's probably more on the F&B side. It's just tougher to open because of equipment shortages, or materials, or millwork and things like that. So curious what you guys are seeing?

David Lukes, CEO

Yes, I think, Alex, we're seeing the same thing. I mean, there's growing anecdotal evidence that supply chain problems are starting to have an impact on both costs and timing of construction projects. Today, there really hasn't been any economic impacts to us. And as we're signing leases, I think we're starting to see a little bit longer lead time for signature of lease to rent commencement. And so I think the landlords have had a chance to put that in their budgets because we're seeing it when we sign the lease. But there's no question that it's been a little more difficult to get permits, it's been harder to get materials, even if you stockpile certain materials and certain pieces of equipment, it's still just a little bit more difficult to get a tenant open. And it costs a little bit more than it has. I wouldn't say it's material yet, but we're certainly keeping our eye on it.

Alexander Goldfarb, Analyst

Okay. And then next question, as you guys look, I mean, you just spoken about market rent growth. I think, David, in the past, you mentioned that finally you're seeing actual market rent growth certainly 18% on new leases is impressive. But if you drill it down, would you say this is widespread across all tenants, all categories? Or is it really driven by certain parts of your portfolio? And then the flip question, what part of your portfolio are you still looking at rent roll downs?

David Lukes, CEO

Well, I think the easiest answer to that question is that, as of this quarter, I'm feeling very confident that rent growth is pretty much across the country. I mean, we've hit a high watermark in a number of states with respect to shop rents. I think you're starting to see anchor rents pick up. Anecdotally, a property just came for sale last week across the street from one of our larger assets and the in-place rents at that property for sale are in the mid-30s, we just signed four leases in the mid-50s, across the street. So, I think when you kind of turn to acquisitions, it's the same philosophy of finding value and looking for rent growth because it feels like a lot of rents are really moving up a little bit faster than I would have expected. In terms of mark-to-market, that's always a tough question, Alex, because it has everything to do with when a tenant decides not to exercise their option, or whether they decide to exercise. And it is very common when a large portfolio like this to have one or two roll downs every quarter or every other quarter because you're trying to figure out which tenants you want to keep long-term. But as you start to see occupancies get up to the fact that these tenants aren't going to find a place to go within the same trade area, then the renewal rates are probably going to increase from here, and I think we'll probably have fewer roll downs.

Alexander Goldfarb, Analyst

So bottom line, I mean, I know you wouldn't admit like, hey, we have trouble on 5,000 square foot tenant or trouble on X tenant or whatever. But bottom line is, as we head into next year, you're saying that either because of replacement demand, or just where rents have grown for that size box and that type of tenant, that there's no real area in your portfolio where you expect a material headwind. You look at everything as basically flat up as we head into '22.

David Lukes, CEO

That's correct.

Operator, Operator

The next question comes from Todd Thomas from KeyBanc Capital Markets. Please go ahead.

Todd Thomas, Analyst

Hi, thanks. Good morning. First question, just appreciate some of the earnings considerations for '22. Curious if you could provide some guideposts around investments. You talked about you’ve exceeded the $75 million target for '21. You were repaid the $190 million RVI pref. Just curious if you can talk about the timeline to reinvest that capital and what we might expect as we look ahead into '22?

David Lukes, CEO

Sure, Todd. Well, if you remember, when we set our goal for this year, we had leverage levels, we had some free cash flow. And I think we achieved those goals this quarter kind of barely moving past what our original budget for the year was. The difference, of course, as you know, is that now we have the repayment of the RVI pref. So the cash on hand is about $150 million, as Conor mentioned. And I would expect that we're going to be reinvesting that capital as soon as we find assets that we think fit well with the portfolio. So I think it's fair to assume that that's kind of our target at this point, to deploy that $150 million. Beyond that, I think it has everything to do with the opportunities because our leverage right now is at the low end of our kind of preferred debt to EBITDA range. So I think we do have a lot of capacity to grow if we find things that we want, but we're going to start with the cash on hand and then move from there.

Todd Thomas, Analyst

I have a follow-up on your comments about rent growth. There has been a significant increase in retail sales across most categories. I'm curious if you anticipate any changes in the model for setting rents and the occupancy costs that retailers can bear. Do you expect to benefit from the higher sales environment as leases expire, as you usually would, or are there other factors at play that might affect your ability to capture this in negotiations for new and renewal rents?

Conor Fennerty, CFO

No, I think, Todd, just come back to David's answer, I think you're spot on. I mean, you look at the factors that are driving rent growth, tenant sales are a big part of it, right. And so I think we would agree with you that as tenant sales continue to improve and are well above COVID levels, like our top 15 tenants, I think like 13 to 15 has sales for their portfolios above 2019 levels. That inures to our benefit as we renew them or as they look to sign new leases. So I think the short answer to your question is, yes, we do expect to participate in the sales growth in the form of either higher renewals or higher new leases, as we execute them over the next couple years.

Operator, Operator

Our next question comes from Samir Khanal from Evercore. Please go ahead.

Samir Khanal, Analyst

Hi, David. Can you provide a little bit more detail on the property you acquired in Atlanta, Georgia? What was the cap rate on the deal? Maybe broadly, what are you seeing for pricing for centers that are anchored and unanchored centers at this time?

David Lukes, CEO

Yes, good morning, Samir. We haven't shared cap rates for individual properties. I would describe the current situation by saying that deploying capital in a rent growth market is quite different from doing so in an occupancy growth market when it comes to acquisitions. It's currently challenging to find available vacancies because sellers are reluctant to sell them, given the strong operating fundamentals. We analyze recent leasing data to understand where market rents are headed, which tenants have demand, and how we can meet that demand. As for the specific property in Hammond Springs, it’s one we’ve been pursuing for the past couple of years, similar to Delray, where we’ve been actively negotiating with sellers. The property is situated at a very busy intersection and has near-term rollover opportunities with shop tenants who have no options, allowing us to achieve significant mark-to-market increases. We are particularly optimistic about the compound annual growth rate for this property. To some extent, this is reflected in the cap rates. Overall, we see that both anchored and unanchored properties, along with various formats like grocery or lifestyle, are experiencing a downward trend in the unlevered internal rate of return. The challenges of occupancy and tenant acquisition are being overshadowed by the prospects of raising rents for existing tenants. For the next year or two, the emphasis seems to be shifting toward renewals, which aligns well with our strategy of acquiring assets with leases poised for near-term rollover.

Samir Khanal, Analyst

Got it. Thanks for that insight. My next question is about the occupancy rates for the shop space. How long do you anticipate it will take to reach the 90% occupancy level for shop space, which I believe is the level we saw before COVID?

Conor Fennerty, CFO

Yes, Samir, we haven't yet released our multiyear target. It's something we are currently working on. However, in response to David's initial comments, we are starting to see a lot more momentum in that area. I believe shops will begin to improve alongside our anchors, but we haven't established a long-term target yet. Regarding Rich's question, it is reasonable to assume at the very least we'll return to pre-COVID levels. The only difference compared to the anchors is that while we kept anchor space offline, we did not keep shops offline. So, that is the only distinction, but otherwise, I think it's reasonable to expect shops to improve alongside our anchors, we just haven't provided that long-term target yet.

Samir Khanal, Analyst

That's it for me. Thanks, guys.

Conor Fennerty, CFO

Thanks, Samir.

Operator, Operator

Good morning, guys. Question. Obviously, saw the quarter, very strong balance sheets. Congrats, Conor on that. As you think out, how do you expect to be deploying your, call a $1.2 billion of liquidity potentially and as you think about acquisitions versus redevelopments versus ground up developments versus M&A, how would you rank those potential capital usages?

Conor Fennerty, CFO

Good morning, Floris. On a risk-adjusted basis, there's no question that the primary target right now is external acquisitions.

Floris van Dijkum, Analyst

If you are considering external acquisitions, your internal rates of return are becoming less favorable due to rising prices. At what point will that change? I notice your redevelopment pipeline is currently quite minimal, which appears to be a strategic choice. Do you anticipate that changing, and what conditions would prompt more activity on the acquisition front? How much improvement is necessary for unlevered internal rates of return before you feel confident in allocating more capital to redevelopment?

David Lukes, CEO

Yes. What's interesting is that I'm not personally convinced that the unlevered IRRs have decreased substantially. I think the difference is that the going-in cap rates have decreased. However, rent growth is starting to show significant improvement across many companies. So, if your going-in cap rate is lower, but your growth is higher and there's less CapEx because it's more renewals and less occupancy-driven, I believe you're maintaining an unlevered IRR that is similar to what it was six or nine months ago. To me, that's why external acquisitions currently offer the highest unlevered IRR at the lowest risk, since it’s becoming more of a renewals business rather than an occupancy or development business. Additionally, we shouldn't overlook the challenges associated with redevelopment, particularly the long timelines for entitlements and permits. There is good net asset value growth in a redevelopment pipeline, but it carries its own risks, especially with rising construction costs. This is why many retailers are focusing on securing as much square footage as they can in affluent submarkets, understanding that there will be a delay before new construction is completed.

Conor Fennerty, CFO

And unfortunately, only clarification just on the redevelopment side, we've got disclosed here it on Page 17 of our sub just the projects underway. We've got a number of other tactical projects, we're working on pads, out lots, etc. Some small scale expansions, but they just don't show up in our supplement until they're underway. So we've got a couple more that we're excited about and working on. It's not like we're shelving them to focus on acquisitions. But you're right relative to the enterprise, acquisitions would be more material relative to redevelopment.

Floris van Dijkum, Analyst

Thanks, guys. That's it for me.

Conor Fennerty, CFO

Thanks, Floris.

Operator, Operator

The next question comes from Linda Tsai from Jefferies. Please go ahead.

Linda Tsai, Analyst

Hi, good morning. In terms of your interest in non-anchor centers, you mentioned you have two locational data to get comfort with demand. What do you look for from a credit or merchandise mix perspective to be comfortable around the sustainability of that traffic since there isn't an anchor?

David Lukes, CEO

Yes, that's a great question, Linda. It starts with understanding who the customers are, which is crucial. You need to know if you're attracting them and if they're visiting the property. The next aspect is the credit profile. Looking at many unanchored properties in the U.S., you’ll find that they often feature a variety of credit tenants, especially in banking, wealth management, and restaurants. Their credit profile is similar to traditional anchored centers. We aim for the right balance between credit tenants, who usually have options and will stay for several years, and local tenants, who typically don’t have options and have more immediate lease expirations. Our strategy for the unanchored strips we've acquired is to assess the credit quality of existing tenants, recognizing that they are likely to remain due to customer traffic, while also seeking renewal or replacement opportunities for some local tenants to enhance the overall credit quality over time.

Linda Tsai, Analyst

Makes sense. And then how are you thinking about bad debt for 2022 since 2021 benefited from portfolio bankruptcies and 20 consumer strength, improving credit profiles, government support?

David Lukes, CEO

Yes, it's a good question, Linda. We haven't given any guidance on bad debt or uncollectible revenue, whichever bucket you kind of look at. I would just say, in terms of bankruptcies, there's nothing material we're tracking today that could quickly change, obviously, with the holiday season approaching. And again, I mean, as we talked about over the last couple of quarters since COVID started, if you look at our top tenants and the number who are public and how much capital they've accessed, they've materially changed their balance sheets from a capital structure perspective. And then coming back to I think it was Todd's question on the sales side, the sales have increased as well. So I would just say from a tenant credit perspective, we feel materially better about our tenants today than we did pre-COVID with maybe an exception or two around theaters, etc. But we'll see how the holiday shakes up and plays out and we will provide guidance in February as kind of explicit numbers for next year.

Linda Tsai, Analyst

Thanks. Just one last question. You mentioned that retention rates contributed positively to the quarter. How have those rates progressed over the past few quarters? Additionally, how does the third quarter compare to the historical average?

Conor Fennerty, CFO

The progression has not been easy. Looking back at 2020 and the impact of COVID, we saw a significant number of bankruptcies, which lowered those figures. I don't have the exact number right now, but typically we have seen retention rates around 90% for anchors and between 70% to 80% for shops. If those rates increase, we may observe a higher retention rate and likely upward pressure on rents for both anchors and shops. Historically, anchors have been in the 90% range and shops have been at 70% to 80%.

Linda Tsai, Analyst

Thank you.

Conor Fennerty, CFO

You're welcome.

Operator, Operator

Our next question comes from Mike Mueller from JPMorgan. Please go ahead.

Michael Mueller, Analyst

Yes. Hi. Two questions. First, David, can you talk a little bit about some of the new concepts that you're doing deals with that you mentioned in your intro comments? And then on when you're evaluating anchor versus unanchored shopping center acquisitions, I mean, what are the differences you're generally seeing in terms of escalators, embedded organic growth differences between the two?

David Lukes, CEO

Certainly. On the concept side, there are several new ideas being supported by major investment-grade companies. For instance, Dick's Sporting Goods has introduced Public Lands, which is an intriguing concept that aligns well with the growing interest in outdoor activities following the COVID pandemic. They have a promising future ahead. Another example is Dollar General's new unit called Popshelf, which we have been collaborating on. It's an interesting concept that fits well into the space that Pier 1 vacated a couple of years back, targeting a wealthier suburban demographic with a footprint of about 9,000 to 10,000 square feet. Additionally, we see notable restaurant brands like Cava and Sweetgreen entering the market and enhancing various properties. Recently, we've also observed capital raises and IPO filings for companies like First Watch, Portillo's, and Allbirds, indicating that some online retailers are transitioning into physical locations. In the last six months, new concepts have surprised us by focusing significantly on brick-and-mortar spaces. When it comes to acquisitions, regarding anchored versus unanchored properties, I've noted we are considering both types because the potential of individual properties and their renewal opportunities are where we see rent growth and greater internal rate of return. I haven't noticed a significant difference in escalators between shop leases for anchored or unanchored properties, as they generally fall within a similar range of 2.5% to 3.5%. What truly matters is understanding which tenants have options and which do not, as higher occupancy rates tend to compel tenants to exercise their options, reducing available inventory for others. That's our current perspective.

Michael Mueller, Analyst

Great. That was it. Thank you.

David Lukes, CEO

Thank you.

Operator, Operator

There are no more questions in the queue. This concludes our question-and-answer session. I'd like to turn the conference back over to David Lukes for any closing remarks.

David Lukes, CEO

Thank you all very much for attending. We'll talk to you next quarter.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.