Tanger Inc. Q1 FY2024 Earnings Call

Good morning. I'm Ashley Curtis, Assistant Vice President of Investor Relations, and I would like to welcome you to Tanger Inc.'s First Quarter 2024 Conference Call. Yesterday evening we issued our earnings release as well as our supplemental information package and investor presentation. This information is available on our IR website, investors.tanger.com. Please note that this call may contain forward-looking statements that are subject to numerous risks and uncertainties, and actual results could differ materially from those projected. We direct you to our filings with the Securities and Exchange Commission for a detailed discussion of these risks and uncertainties. During the call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP measures to the most directly comparable GAAP financial measures are included in our earnings release and in our supplemental information. This call is being recorded for rebroadcast for a period of time in the future. As such, it is important to note that management's comments include time-sensitive information that may only be accurate as of today's date, May 1, 2024. On the call today will be Stephen Yalof, President and Chief Executive Officer; and Michael Bilerman, Executive Vice President, Chief Financial Officer and Chief Investment Officer. In addition, other members of our leadership team will be available for Q&A. I will now turn the call over to Stephen Yalof. Please go ahead.

Thank you and good morning. I'm pleased to announce another quarter of solid performance. Last year's positive momentum carried into our first quarter and we continue to successfully execute on our strategic initiatives of unlocking the embedded value in our portfolio through our leasing, operating, and marketing efforts, and selectively pursuing external growth. In the first quarter, Same Center NOI grew by 5.2% and core FFO per share by 13%, driven by the execution of our internal and external growth initiatives. Leasing volume and rent spreads are key indicators of our ability to reprice our space. And over the trailing 12 months, we leased more than 2.3 million square feet of GLA, representing nearly 20% of our portfolio, with an average increase of 13% on a comparable basis as reflected in our rent spreads. Rent spreads for the quarter were 36% for re-tenanted space and 11% for renewals. We are pleased with the demand for space in our portfolio as we maintain a robust pipeline of deals in progress with existing best-in-class brands and new retailers seeking to grow their business with us. As of March 31, our portfolio occupancy was 96.5%, flat to the prior year period for the total portfolio, with our same-center portfolio up 60 basis points. As we discussed last quarter, we continue to grow occupancy and create demand for space in our centers. To that end, we're focused on portfolio enhancement. Where appropriate, our leasing professionals are prioritizing re-tenanting and rightsizing over renewing selected stores in order to enhance the overall merchandising mix, utility, and shopper experience. Over the past few years, we have seen renewal rates greater than historical averages. Today, we see our increased pricing power as a catalyst for driving higher re-tenanting activity, which may result in renewal rates returning to our previous levels. Peripheral land has continued to be an important driver of incremental growth as we continue to activate and monetize our real estate with a variety of complementary uses and attractions, which adds to the diversity of experiences in our centers and drives both local and tourist trade. Additionally, the locations of our centers are benefiting from broader demographic, travel, and migration trends. We have the advantage of serving high tourist destinations, which are also the areas of the country that are experiencing elevated population and employment growth. This creates additional demand drivers for our centers and uniquely positions them to cater to both destination shoppers and more frequent local shoppers. These shoppers enjoy our mix of apparel and footwear retailers, as well as the new categories we've added, which include food and beverage, entertainment, and health and beauty users. Traffic in the quarter was up slightly from last year, as a challenging January was impacted by weather-related closures. However, this was offset as the quarter progressed with stronger February and March numbers due in part to the earlier timing of Easter. Sales led by family apparel, athletic, and footwear brands drove an increase in trailing 12-month total portfolio sales per square foot to $437, a sequential improvement over our year-end reported numbers. We are pleased with the integration of the three centers we added to the Tanger platform in the fourth quarter last year. Nashville continues to build momentum, benefiting from tourist shopper visits and the growing local population. As sales and traffic continue to grow, we've executed leases for most of the remaining space and look forward to welcoming these exciting retailers to Tanger Nashville. Both our Asheville and Huntsville centers have proven to be strong contributors and natural fits for our platform. We are executing against our strategic plans for each with new tenant announcements, food and beverage additions, and shopper amenities expected later this year. With our proven track record as operators and asset managers of open-air centers, we continue to see opportunities to selectively pursue expansion. Our solid balance sheet position and operational expertise have provided a wider addressable market as we consider additional acquisition opportunities. We will maintain a disciplined approach, incorporating leveraging our best-in-class leasing and operating platform as well as our retailer relationships to create value. I want to thank the Tanger team, our shoppers, retailer partners, and all of our stakeholders for their contributions and support toward our continued success. I'd now like to turn the call over to Michael.

Thank you, Steve. Today, I'm going to discuss our first quarter financial results, our balance sheet activity, and our increased guidance for the year. Overall, we continue to deliver strong financial results driven by both internal and external growth, backed by a solid balance sheet, which was further enhanced by the recent upsizing, extension, and reduced pricing on our unsecured lines of credit. In the first quarter, we delivered core FFO of $0.52 a share compared to $0.46 a share in the first quarter of the prior year, as we saw continued solid operating growth along with the contributions from the three new centers added in the fourth quarter. This growth was partially offset by increased interest expense from the new interest rate swaps, which became effective during the first quarter. Same Center NOI increased 5.2% in the first quarter, driven by the robust leasing and positive rent spreads that Steve talked about, which have led to higher rental revenues from increased base rent and higher expense recoveries. In addition, in the first quarter, we recognized certain expense refunds related to expenses from prior year periods, which were approximately $0.01 higher than we anticipated. This was partially offset by additional snow removal expenses compared to the milder winter in the prior year. Our balance sheet remains well-positioned to support our internal and external growth initiatives, with low leverage, a largely fixed rate balance sheet, minimal debt maturities into late 2026, and ample free cash flow after dividends. At quarter end, we had an equity market capitalization of $3.4 billion and had $1.6 billion of pro-rata net debt. Including the $325 million of interest rate swaps that went into effect in February of this year, approximately 93% of our total debt outstanding is at fixed rates. While our net debt to adjusted EBITDA was 5.7x at pro-rata share for the trailing 12-months ended March 31, 2024, pro forma for a full year of adjusted EBITDA for the three new centers that came online during the fourth quarter, we estimate that our leverage ratio would be between 5.2 and 5.3x on a trailing 12-month basis, still one of the lowest in the REIT sector. At quarter end, we had $474 million of availability on our unsecured lines of credit and $23 million of pro-rata cash and investments. Subsequent to quarter end, we were pleased to amend our lines of credit, which increased Tanger's liquidity, reduced our borrowing cost, and extended our maturity through 2029 with options, further enhancing our flexibility to pursue Tanger's growth initiatives. With the amendment, our borrowing capacity increased by $100 million to $620 million, with an accordion feature to increase that capacity to $1.2 billion, subject to lender approval. In addition, our pricing grid was improved, including a 15 basis point reduction at current levels, while all of our financial covenant thresholds were maintained. We were very pleased with the execution of our line recast, especially during a difficult real estate lending environment, and greatly appreciate the continued strong support from our overall lender group. Thank you for your confidence in Tanger, our growth, our credit, and our team. In April, our Board approved a 5.8% increase in our dividend to $1.10 per share on an annualized basis, which lifted our dividend yield by approximately 20 basis points with the shares yielding just under 4% today. Our quarterly cash dividend remains well covered with a continued low payout ratio that provides free cash flow to support our growth. In the first quarter, our dividend payout ratio was at 54%. Now turning to our increased guidance for 2024. We are increasing our core FFO per share expectations by $0.01 to a range of $2.03 to $2.11 or 4% to 8% growth over 2023. We have increased our Same Center NOI growth expectations by 25 basis points on both ends of the range to a new range of 2.25% to 4.25%, predominantly due to the better-than-expected expense refunds that I previously discussed. All the other expectations remain unchanged from the guidance that we provided on our year-end call. For additional details on our key assumptions, please see our release issued last night. We are greatly looking forward to seeing many of our financial stakeholders at upcoming industry events and property tours. The next stop on the Tanger tour will be at Tanger Outlet Savannah, which will take place on May 7, in conjunction with Wells Fargo's 27th Annual Real Estate Securities Conference, which takes place on May 8 and 9 in Florida. In addition, members of our management team will be hosting meetings at BMO's Conference in New York on May 8, the ICSC conference in Las Vegas on May 20 and 21, and NAREIT's REIT Week in New York on June 4 through the 6. With that, I would now like to open up the call for questions.

And our first question will come from Jeff Spector with Bank of America.

Congrats on the quarter. My first question, just thinking about enhancing the merchandising mix. I know we've discussed this, but if you can maybe talk a little bit more about that. Are these tenants that are in outlets already? Are these tenants that are in, let's just say, other outlets and not yours or maybe some are at Deer Park, but you're hoping to expand or maybe a combination?

Yes, it's a combination of all. We're doing a really good job of bringing in new brands and retailers that haven't been in the Tanger platform or haven't been in outlets before. We're quite proud when we're able to bring a new retailer into the outlet space. We've announced a number of those. We talked about Nashville, where 20% of the tenant mix in Nashville were either new to Tanger or new brands to the outlet space. We're also going after diversified uses, better restaurants, sit-down restaurants, moving away from food courts and moving more into a sit-down experience. We're also going after different brands for our peripheral land where we have a lot of traction, signed several deals that we're looking forward to announcing shortly. But again, adding brand-new brands, uses, and amenities to the portfolio to create a far more diverse experience because as we go after both that tourist customer and the local customer, we're looking for things for all of our shoppers to do when they come and visit.

As you've been working on this for the past year, I know it's a bigger focus in '24, but are you attracting different or new customers at some of the centers where you've introduced these new categories and tenants?

Absolutely. Go back to Hilton Head, South Carolina, where we added Nantucket's Meat and Fish. It's a great example of a grocery store opening up in one of our shopping centers that's anchored by H&M and Nike. We see a whole new set of people coming in, shopping more frequently, and staying for the brand's shopping as well. We're seeing our catchment area expanded as we add these new uses, and we're seeing our frequency of visit expand as well. I think the strategy for us is to improve the complement of uses when you come to one of our shopping centers. I think the customer is demanding a far wider range of experiences when they come to us, not just that traditional power shop that you get at the outlet centers of a generation ago. Our customers are looking for far more wide-ranging uses, amenities, services, and product categories, and that's what we're going after. Our customers are responding, and you can see it in the traffic numbers that they continue to build this quarter, you can see it in our sales numbers as they continue to build this quarter. A lot of that strength is coming through based on the work that our leasing team has done.

Our next questions come from the line of Craig Mailman with Citi.

Steve, I just want to go back to the commentary about, clearly, retention could be up and down this year as you guys are more purposeful about re-tenanting and remerchandising. It seemed like you emphasized that. Should we be expecting anything in the next quarter or two so that we're not surprised if retention drops or occupancy dips in the near term?

No, I don't think there'll be any surprises. But we guided to 2% to 4% Same Center NOI growth. We've grown that guidance to 2.25% to 4.25% Same Center NOI growth. So I think that those numbers are all contemplated in our guidance. Sorry, I said 2.5%, I mean 2.25% to 4.25%, Craig. But as far as we're concerned, I think strategically, what we're looking to do is retain 95% of our customer base on a renewal basis for the last 2 years. This year, we anticipate less renewal because we see some of that renewal base as an opportunity to re-tenant. We're getting over 30% spreads on our re-tenanting and close to 10% to 12% on our renewal, and it's a great trade for us if we can take some older retailers that we've been renewing over the past 10, 15, 20 years, rightsizing them in better locations inside our portfolio, and then replace some of that more visible space with far better retailers that are far more productive. That’s been the trend. That's what we've been doing. There's a number of retailers that are going to be brand new to our portfolio that we'll be announcing shortly as great examples of that strategy.

From a broader perspective, I understand that some of these initiatives are relatively new, but there has been significant progress on the digital front with the new app. Have there been any initial insights regarding customer usage? I'm curious if you're monitoring customer movement within the centers. Any information on this that could help inform how you're adjusting space pricing or reevaluating the value of different areas based on shopping behaviors?

We haven't been leveraging our internal digital footprint to assess the value of our real estate. I believe our centers are manageable in scale, allowing supply and demand to influence pricing. However, we are utilizing our digital footprint to enhance communication with our shoppers and customers. Operating in the discount sector enables us to promote everyday value and discounts in collaboration with our retailers to disseminate this information. For instance, full-price retailers that usually don't run sales cannot effectively drive customers to shopping centers. In contrast, we can do so in our sector. Thanks to our strong relationships with retail partners, we can quickly present new offers to our customers and attract shoppers to our centers.

That's helpful. Maybe one last question for you, Michael. Regarding Express, I know you lost one tenant there, and you've been clear in your responses at conferences and during last quarter's earnings. Considering the range of possible outcomes, there's a potential scenario that seems unlikely to be discussed. Is that range reflected in the low end? Could you elaborate on the range of outcomes for that specific tenant as you develop your guidance?

Craig, as you noted, we were ahead of this. We talked about this on the last quarter call. We contemplated a range of outcomes in our guidance based on what we know today. We continue to believe we'll be in that range. And it's a fluid process. If you step back from it, overall, the outlet business overall, when you go through different processes, these are usually the last stores to close. They also benefit from having generally low OCRs and pretty high productivity. So I think the outlet channel during this process has demonstrated a lot of the talking points that we've been communicating, certainly over the 40-year history of this company.

What do you think the OCRs are for that target, roughly?

We're not going to talk about specific tenant OCRs. Our OCR for the entire portfolio is at 9.3%. As you've seen, we've been able to lift that OCR as we've been driving our rents. This gives you an indication overall in our portfolio that we continue to believe that our rents are below market, and we get the extra tailwind as tenant sales continue to move forward.

Our next questions come from the line of Todd Thomas with KeyBanc Capital Markets.

Steve, I just wanted to go back to your comments around tenant retention and some of the potential re-tenanting activity that you anticipate being a headwind to Same-Store growth this year. What was the renewal rate in the first quarter? And any sense on how 2Q is trending? I would imagine you have a better line of sight 4 or 5 months into the year, particularly after the holiday season. With regard to some of that tenant churn that you're talking about and the potential headwind that it might have on Same-Store growth this year. I'm just curious if you can provide a little more detail.

Well, I don't think it's a headwind. Again, it's a strategy. It's easy to renew existing tenants. It's great to maintain occupancy; the tenants continue to pay rent, and we've been consistently getting nice growth. However, for our portfolio, if you have a 10,000 square foot tenant whose sales performance on a per square foot basis continues to slowly deteriorate, it’s incumbent on us as merchandisers of shopping centers to ensure that we put a more productive retailer in that particular location. More importantly, we want that retailer to be repositioned inside our center in a rightsized box that drives additional rent growth for us but also provides more productivity for that retailer. The narrative is merchandising centers for the future, ensuring we're putting in the most productive retailers and constantly reinventing both the footprint of our mall and the store itself. I think we've been strategic with our renewals for the past few years as we've exited COVID. Our rent spreads, particularly on the re-tenanting side, have given us confidence that we can command a higher price for our space. Our occupancy rates have now grown over the last year by 100 basis points, and we believe there is room to grow. We're a leasing company—that’s what we do—and we'll continue to do so. The retailers are responding. We're adding those new tenants and new uses that we've been discussing. A couple of examples include Huntsville, Alabama, where we're thrilled to welcome Warby Parker to the center. That's our first deal done with Warby Parker, thanks to our partnership with Centennial that has been leasing there for some time. Great partnership. These are new brands that we're bringing into our portfolio, and we're excited to expand those brands throughout our portfolio. That’s what our customers want, that’s what they’re shopping for, and that’s what’s going to keep them coming back.

What has the renewal rate started to normalize from around 95% down toward the mid- to low 80s, where it has historically been?

That's how we're thinking about it, and that's how we planned it.

And then I just wanted to follow up on Express and the range of outcomes for certain events this year. Just I think last quarter, you indicated that you had about 50 basis points of bad debt reserves embedded in the 2% to 4% Same-Store range, which I realize was lifted this quarter, 25 basis points, it sounds like due to expense refunds. But is there anything else on top of that for unexpected move-outs or bankruptcies? Because Michael, you mentioned sometimes these restructurings are fluid, and I'm curious whether you can provide a little more detail on what's budgeted and the confidence you have that they will emerge from bankruptcy, given that they're a top tenant with 170 basis points of ABR?

Sure, Todd. When we discussed our 4Q call and provided that 2% to 4% range, we referenced where our bad debt had historically been. You can see in the numbers from last year it was around 35 basis points. However, the range for bad debt, when you have a 2% to 4% range, contemplates different levels. What we've been trying to communicate is our original 2% to 4% guidance, which we've increased by 25 basis points due to the expense refunds in the quarter, is still manageable. We still feel comfortable with that range today with a variety of outcomes that could occur. We don't want to delve into different alternatives, Chapter 7, Chapter 11, or how those processes will transpire. What we know today, as is public, is that Express came out with the store closure list, and there was one Tanger store out of 30 stores on that list. Overall, only three outlet stores on that list highlighting the value of the outlet channel for brands and retailers.

Our next questions come from the line of Caitlin Burrows with Goldman Sachs.

Steve, I think earlier you commented on the volume of leasing you did in the last year. I think it was 2.3 million square feet, which is pretty impressive. So as you consider your pipeline today, the activity, the conversations, do you think that volume of leasing activity can be sustained? And I guess, why or why not?

I have my EVP of Leasing sitting next to me shaking his head, yes. We do because we think that there are many brands discovering the outlet channel. We also think, as we've started to allow brands that are not necessarily traditional outlet brands into our platform, they’re recognizing that our locations and our position within the communities we serve are where the customers want to shop. As we create this diverse mix of retailers in tourist-driven, local population-driven marketplaces that were traditionally reserved for outlets only, we’ve opened the floodgates to a whole new set of uses, and that’s why we're seeing such great velocity of retailers and other uses that want to join the mix.

And then just on the leasing spreads, you mentioned how they are impressive on the new leases, but at least this quarter, the TIs were pretty high too. I was wondering if you or someone else could talk about the TI trends, what type of tenants are asking for what and how you're deciding which to agree upon?

Caitlin, when you look at the supplemental, the tenant allowance is relatively flat sequentially, so it’s pretty consistent with the types of retailers that are coming into the space. If you think about the gross rent that we're getting, $47, the 68% of TA on 8.5 years of duration is a solid payback period. We think about that investment in real estate for productivity. In almost all cases, the tenant is putting substantial dollars in addition to our capital for their store build-outs. I know you've been to many of our centers, and you can see the build-outs of the re-tenanted spaces that are really strong.

Our next questions come from the line of Floris Van Dijkum with Compass Point.

A question on capital allocation. I was particularly interested in the Huntsville transaction you executed last year. I think you indicated you looked at over $7 billion of assets that you underwrote. As we look forward, maybe talk about the pipeline of what you're looking at and how many more of those lifestyle centers could be contemplated to be added to the portfolio over the next 18 months or so?

Sure, Floris. Stepping back to think about our size, we're a $5 billion company. We don't need a tremendous amount of transactions. We want to ensure that the transactions we pursue are value-enhancing, where we can leverage our operating, leasing, and marketing platforms. We're not a buy-and-hold company. If we're going to acquire something, it must fit our strategy where our platform can create value. It's crucial for us to look at everything, which is why we've considered many transactions so that when a Huntsville or Asheville opportunity arises, we can act quickly. Our balance sheet is well positioned with liquidity, availability, free cash flow, and low leverage levels, allowing us to be opportunistic when good opportunities arise. We have a clean balance sheet, enabling us to take over assets with secured debt, pursue joint ventures, and form partnerships. We want to maintain discipline, be prudent, and ensure we can create value, so when we announce transactions, we can articulate the growth we see as those opportunities come into our portfolio.

And so we should presume that you're constantly evaluating stuff, and you will make announcements as and when things get agreed. Is that the right interpretation?

We are an active organization looking at many opportunities, but they're going to have to be the right ones. Nothing is embedded in our guidance. We don't want to set a transaction amount. That's not the way we operate because if we find a deal, we have to look at that deal, finance it appropriately relative to the return we expect in the long term. We'll keep everyone informed as deals come through. We’re optimistic that the platform we've built has the ability to oversee and manage additional open-air retail centers that have lifestyle and outlet components.

Great. If I can follow up, I know this is a question I've asked in the past, but can you provide an update on your thoughts around getting more luxury-type tenants in your portfolio? Have you made any progress? Which centers are the most likely to receive some of that demand? And what impact would having more of these types of tenants in your portfolio have on your sales productivity and rental levels?

Yes, we continue to evaluate all tenants throughout our portfolio, asset by asset. We recently opened Lafayette 148 in our National Harbor asset. We've recently brought in Bash, a luxury tenant, at Riverhead, and Kate Spade recently opened in Charleston. We continue to penetrate that elevated market case-by-case, center-by-center, and we'll continue to chip away at that going forward.

Our next questions come from the line of Greg McGinniss with Scotiabank.

On the dividend yields, along with the payout ratio, they're one of the lowest among retail REITs. How are you thinking about additional dividend increases over the next few years?

Greg, well, the dividend yield is a function of stock price. We consider our dividend level, which is a board-level decision. We've been able to raise that dividend yield as our cash flow has been growing for the last number of years coming out of COVID. We've seen considerable FFO growth and shared that growth with our shareholders while maintaining a low payout ratio. So we recently raised the quarterly dividend to an annualized level of $1.10 a share. The payout ratio in the first quarter was 54%. This ratio may trend a bit higher based on the timing of CapEx relative to the first quarter. We will continue to evaluate how we can share in that cash flow growth and provide returns to our shareholders.

But the expectation is to maintain as much free cash flow as you can, understood. Could you provide a bit more color on what you saw regarding the increasing strength from consumers through quarter end? Has that trend continued into April? Is this a situation where trailing 12-month tenant sales may see greater sequential growth in Q2?

We're optimistic about the sales growth; many of the strategies we're employing that we talked about—replacing some older brands with those that show sales potential—will contribute to our sales growth. We're also enhancing our marketing efforts, balancing our approach to both touristic and localized marketing. We will continue to invest in local marketing at many of our centers. This paradigm has shifted, and we note the suburbanization of America, where many individuals are relocating to areas where our centers currently exist. This is why we're optimistic about sales going forward. As for the April run rate versus the March run rate, the Easter timing this year fell in March, so typically, retailers and developers blend our sales from March and April to provide fairer year-over-year comparisons.

And regarding the new concepts, are you seeing higher average tenant sales from those new offerings? Are there specific categories that are doing particularly well?

Yes. Health and Beauty is doing particularly well. We're pleasantly surprised by apparel, especially family apparel, like American Eagle and such brands that are performing exceptionally well. Our discipline in ensuring that stores are rightsized is crucial. The older outlets granted retailers as much space as they wanted, but as we learn about more efficient deliveries and improved floor sets, many of our retailers can be more productive on a per square foot basis in a smaller footprint. This is beneficial for everyone, allowing us to have more productive stores in a shopping center and providing varied options for shoppers.

At the risk of being chastised for asking too many questions. I do have one more. Given the strength of the balance sheet and the level of retailer demand with most assets in the high 90s occupancy, are there opportunities to add square footage to any of the centers? Is there any other redevelopment being considered at this time?

There are. Well, there are a couple of ways that we're adding square footage to our shopping centers. There are Phase 2 locations in several of our centers. In others, we’ve got peripheral land. We’ve really uncovered our peripheral land strategy a few years ago, and while it takes time for those spaces to start cash flowing, we've signed a number of deals. Arizona is a great example where we have a Texas Roadhouse opening shortly, which is not peripheral land; it’s adjacent to the shopping center. Demand for peripheral land close to our centers has heightened due to the regional draw of our locations. Brands that can’t be in-line want to be adjacent to where the cars in that geography are parked, and that’s in our Tanger centers.

Our next questions come from the line of Samir Khanal with Evercore ISI.

Michael, most of my questions have been answered, but regarding the modeling aspect, I'd like to discuss the other revenues in the income statement, which I believe come from ancillary income sponsorships that you've engaged in. I know you've worked with many assets, and I've noticed that this line has actually grown over time. However, it seems to be down year-over-year in this quarter. I'm trying to understand how much more potential there is for growth in that area from ancillary income sponsorships, and so on.

Sure. Stepping back to the first quarter last year, our center in Westgate and Phoenix is right beside where the Super Bowl was played, and we did significant marketing last year in the first quarter. That's affecting the year-over-year comp. If we step back and consider the full year, driving other incremental revenues at our centers remains a top priority. We think we'll continue to experience higher growth than the overall core portfolio, which will trend positively throughout the year as we drive our marketing partnerships and other income sources at our centers. Again, driven by what Steve discussed about being regional draws, we have many tenants eager to place themselves in front of those consumers every day.

It seems like you can still grow that line. I think last year you were up like 12%. Is that kind of the double-digit growth still a reasonable expectation?

Absolutely. We see a lot of potential. As we've outlined over recent years, we're focused on incremental revenue, including both sponsorship and media partnerships. We are committed to operational ancillary revenue streams as well. We see considerable ROI coming from our solar and EV charging initiatives. The line item reflects a culmination of all these strategic efforts made by our teams nationwide.

Last one for me, Michael, is the expense recovery ratio. I know that moves around a lot, and I think it was much higher this quarter. What's a long-term expectation for the business?

We project this year to be in the mid-80s, perhaps a bit higher. The first quarter benefited from expense refunds, lowering our OpEx. Therefore, the recovery rate is showing higher as the operating expense number decreased slightly. The recovery rate is quite seasonal. Having shifted largely to a fixed CAM structure, our recoveries generally remain flat during the year, barring spreads, while operating expenses vary based on controllable and uncontrollable factors. As discussed over the last quarters, the recovery rate is typically higher in the first half of the year and lower in the second half due to additional expenditure in the third and fourth quarters compared to the flat reimbursement level. We continue pushing the strategy of driving total rent growth through increased base rent and higher tenant reimbursements, which contributes to NOI. Does that help?

Yes. Yes, it is.

Our next questions come from the line of Vince Tibone with Green Street.

Renewal spreads turned positive during '22, while the average lease term was about 3 years. However, sales are currently down versus '22. I'm trying to understand as these leases begin rolling in '24, excuse me, '25, and '26, renewal spreads could be pressured and much lower than current levels unless sales really pick up. Am I thinking about this correctly? Can you share any thoughts on how we should consider renewal spreads after this year, once you begin anniversarying the first renewals the current team signed with tenants?

When we look at a 9.3% portfolio average, you're correct, there are different vintage and market discrepancies, but we still feel there is room throughout the portfolio for additional rental increases. We will continue to pursue those in situations where we feel there aren't as many rent growth opportunities—if the tenant is somewhat maxed in productivity. We are looking for re-merchandising opportunities, bringing in new tenants, creating vibrancy and additional traffic drivers; all the elements that Steve has discussed for the last few quarters.

Okay. That's fair. To follow up, I'm considering some basic OCR math. If sales increase 5% over 3 years, contractual bumps will likely be higher. Do you think you will be able to push OCRs further on many of these tenants? Given that new team implemented strategies, you've likely accomplished that already. I'm trying to determine how you could continue to ensure that renewal spreads could remain robust in upcoming years. I understand you have great re-merchandising opportunities on new leases, but on renewals, I'm trying to understand what leverage you could utilize to keep spreads attractive.

We've now demonstrated to our retailers that tenants with expiring leases must perform well to stay in the center. If a store isn't productive, we'll either request a repositioning, downsizing, rightsizing, or replacing them. The key lever for increasing rents on renewing tenants is the competition from new, productive retailers entering the shopping center.

That's fair. Makes sense. And one last question for me. How much do you think retailers' inventory strategies impact demand for outlet space? It seems like everyone is tightening inventory strategies today, but as this could shift, does it impact trends in new store openings? Curious to hear your thoughts.

A lot of brands utilize outlets to achieve various goals. It's often a channel to clear excess inventory; however, if immediate backlogs emerge, retailers may hesitate to sign a long-term, 10-year lease in an outlet to clear a year's worth of excess inventory. We're executing a pop-up strategy to allow many of our retailers to sell through that excess inventory, giving them insight into the outlet business. We have many direct-to-consumer brands within our portfolio as our fastest-growing brands. Additionally, many brands view outlets as an opportunity to engage customers who may not shop them in other channels but use outlets for their first interaction. They can eventually cultivate these customers and draw them into their larger ecosystems.

Our next questions come from the line of Mike Mueller with JPMorgan.

Just a quick follow-up on the peripheral land strategy. For clarification, is this land that you already own and are developing, or is it unused land next to a center that you don't own that you're trying to acquire and ultimately put something on? If it's land that you already own, how many centers do you have that ability at today?

Mike, it's Justin. Primarily, it’s land we already own. We’ve been actively activating and monetizing that peripheral land over the last 24 to 36 months. Steve mentioned some brands like Texas Roadhouse and West Gate. We’ve also executed a Planet Fitness at Savannah and a 7 Brew Coffee shop at our Myrtle Beach asset. We firmly believe in our peripheral land. There’s tremendous potential there. We recently added additional personnel to the team to focus on those opportunities, which underscores our belief in our peripheral land strategy. We estimate that there is likely potential for 50-60% of our assets.

Thank you. We have reached the end of our question-and-answer session. And with that, that does conclude today's teleconference. We appreciate your participation. You may disconnect at this time and enjoy the rest of your day.