Brixmor Property Group - Q2 2023

Transcript

Operator (participant)

Greetings. Welcome to the Brixmor Property Group Second Quarter 2023 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stacy Slater. Thank you. You may begin.

Stacy Slater (SVP of Investor Relations)

Thank you, operator, and thank you all for joining Brixmor's Second Quarter Conference Call. With me on the call today are Jim Taylor, Chief Executive Officer and President; Angela Aman, Executive Vice President and Chief Financial Officer; and Brian Finnegan, Executive Vice President, Chief Revenue Officer. Mark Horgan, Executive Vice President and Chief Investment Officer, will also be available for Q&A. Before we begin, let me remind everyone that some of our comments today may contain forward-looking statements that are based on certain assumptions and are subject to inherent risks and uncertainties as described in our SEC filings. Actual future results may differ materially. We assume no obligation to update any forward-looking statements. Also, we will refer today to certain non-GAAP financial measures.

Further information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in the earnings release and supplemental disclosure on the investor relations portion of our website. Given the number of participants on the call, we kindly ask that you limit your questions to one or two per person. If you have additional questions regarding the quarter, please re-queue. At this time, it's my pleasure to introduce Jim Taylor.

Jim Taylor (CEO and President)

Thank you, Stacy. Good morning, everyone. Our results this quarter once again demonstrate that platform and rent basis matter, as this long-awaited tenant disruption is providing us the opportunity to bring in better tenants at better rents, continuing to drive our transformational value-added plan and importantly, setting us up for future outperformance. Consider that in a quarter where we recaptured nearly 300,000 sq ft of space associated with tenant failures, we still grew overall in small shop occupancy to platform records. We realized new leasing spreads of 22.4% and set an all-time high new lease rate of $24.30 a foot, bringing our average in-place rent to $16.60 a foot, up 4.4% on a year-over-year basis.

As our record high net effective rents once again demonstrate, we continue to be disciplined with capital as we drive this high ROI activity. Importantly, we're not only leveraging this disruption to drive growth in rents and returns, we are also bringing in more vibrant uses to our well-located centers in the segments of grocery, specialty grocery, value apparel, quick serve restaurants, health, beauty, and home. We can see the follow-on impacts in terms of not only traffic, which continues to trend very well, but also in our small shop demand. As we drive attractive ROI, we are also substantially improving the value of the centers impacted in terms of applied cap rates.

In fact, when you consider our forward leasing pipeline, we expect our ABR from centers with a grocery anchor to increase over 80% as we sign deals for new stores with tenants like Publix, Whole Foods, Sprouts, Trader Joe's, Aldi, and others. Speaking of our forward leasing pipeline, it continues to rapidly build, as Brian will discuss. That pipeline continues to convert into our pool of signed but not commenced leases, which at quarter end stood at $56.7 million of ABR that will rent commence, as Angela will discuss in a minute. Those rent commencements will allow us to continue to deliver top-line growth at the top of the sector, just as we did this quarter with base rent contributing 520 basis points.

During the quarter, we continued to deliver highly accretive reinvestments, bringing our total since we began to over $890 million at an incremental 11% return. We also grew our in-process reinvestment pipeline with $77 million in new projects, including adding specialty grocers at Roosevelt Mall in Philadelphia and Middletown Plaza in New Jersey. Importantly, as we've demonstrated, these reinvestment projects also have a flywheel effect on our returns through growth and follow-on occupancy and rate at the centers impacted. Beyond that, our shadow pipeline includes over $900 million of additional investment that will allow us to continue to drive attractive ROI and growth in cash flows for the next several years, even in a rising rate environment. Remember, our plan is self-funded through free cash flow and importantly, driven by opportunities we own and control.

From an external growth perspective, we've remained disciplined, holding on acquisitions and continuing to build dry powder through opportunistically harvesting non-core assets and through retained free cash flow. I believe that discipline will begin to pay off in the coming quarters, as we are now seeing acquisition opportunities coming back to us at pricing meaningfully less than those same assets were priced as recently as 18 months ago. Importantly, these are assets where we can leverage our value-added platform and tenant relationships to deliver compelling returns. More to come there. Finally, I'd like to give a shout-out to the Brixmor team, who across all fronts, continues to exceed expectations, delivering exceptional value to our stakeholders, and in so doing, continuing to drive us towards our purpose of creating and owning centers that truly are the center of the community they serve.

Now, I'll turn the call over to Brian, who'll provide additional color on the strength of tenant demand to be in our centers. Brian?

Brian Finnegan (EVP and CRO)

Thanks, Jim. Good morning, everyone. As Jim highlighted, the broad depth of tenant demand to be in our centers is not only evident in our results during the quarter, but in our forward leasing pipeline, as we continue to attract best-in-class operators at the highest rents we've ever achieved.

This quarter, we executed on 375 new and renewal leases totaling 1.4 million sq ft, the highest number of new and renewal leases executed in the past year. Included within this activity were new leases with the top tenants in open-air retail, such as Burlington, TJX, Ross, Chick-fil-A, and Five Below. In addition, we added several exciting new tenants to the portfolio during the quarter, including the company's first new lease with Tesla, backfilling a 64,000 sq ft box in the Houston suburbs for Tesla's showroom and repair center concept. Our team also continued to capture the upside embedded in our below-market leases with this activity as well, with new and renewal spreads of 15.4%.

New lease spreads were at 22.4%, reflecting a larger mix of small shop leasing during the quarter and the 8th consecutive quarter of new lease spreads over 20%, with our record new lease ABR of $24.30 per square foot, representing a 46% increase versus our in-place ABR. The strength of the overall leasing environment and the desire for tenants to remain in the Brixmor portfolio was also demonstrated in our renewal spreads, which at 13.6%, is 200 basis points above our trailing 12-month average. The consistent execution in driving rate higher is a testament to our team and how they have capitalized on the transformation of this portfolio.

We continue to make progress on our bankrupt tenant space as well, out leasing the vacancy we took back during the quarter to continue to grow portfolio occupancy to new heights, specifically on Bed Bath, where either leased, assumed, or at leased on approximately two-thirds of our Bed Bath space, with the top operators in the open-air space at rent spreads that are consistent with the 30%-40% we communicated last quarter. We expect the majority of this income to come back online in 2024, as we are primarily negotiating with single tenant users for these spaces. This expected tenant disruption provides us a great opportunity to lease to better tenants at much higher rents.

Looking forward, we are encouraged by the resiliency of the leasing environment, with more anchor leases currently being negotiated than we've had in over three years, and more new rent in our legal pipeline than we've ever had. The forward pipeline, along with the lack of new supply and a completely transformed Brixmor portfolio, put us in an excellent position to drive long-term sustainable growth. With that, I'll hand the call over to Angela.

Angela Aman (EVP and CFO)

Thanks, Brian. Good morning. I'm pleased to report another quarter of continued execution as we quickly and accretively capitalize on the strength of the current environment to address recent tenant disruption. Nareit FFO is $0.52 per diluted share in the second quarter, driven by Same-Property NOI growth of 2.7%. Base rent growth contributed 520 basis points to Same-Property NOI growth this quarter, despite a drag of approximately 50 basis points related to recent tenant bankruptcies. In addition, net expense reimbursements, ancillary and other income, and percentage rents contributed 80 basis points on a combined basis. As anticipated, revenues deemed uncollectible detracted 330 basis points from Same-Property NOI growth, primarily due to the ongoing moderation of out-of-period collections of previously reserved amounts.

As highlighted last quarter, out-of-period collections in the 2Q 2022 were materially higher than in any other quarter during the year, creating the most difficult comparison period during 2023. We remain pleased with the significant velocity we continue to experience within our signed but not yet commenced pool. During the 2Q, we added newly executed leases representing approximately $16 million of annualized base rent, while commencing leases representing nearly $15 million from the pool. As a result, at June 30th, the signed but not yet commenced pool totaled 2.7 million sq ft, or a record high $57 million of annualized base rent, of which we expect 1.3 million sq ft, or $25 million of annualized base rent to commence during the remainder of this year.

These commencements will more than offset an additional 440,000 sq ft of occupancy loss expected from Bed Bath & Beyond, Christmas Tree Shops, Tuesday Morning, and David's Bridal in the second half of the year, as we harvest the below-market rent basis embedded in our portfolio. Our fully unencumbered balance sheet remains well positioned to support our balanced business plan, with debt-to-EBITDA of 6.1 times, 100% fixed rate debt, total liquidity of $1.3 billion, and only $300 million of debt maturities through year-end 2024. In terms of our forward outlook, we have raised our 2023 guidance for Same-Property NOI growth to a range of 2.5%-3.5%, reflecting improved expectations for base rent and revenues deemed uncollectible at the lower end of the range.

Our assumptions for revenues deemed uncollectible have been modified to a range of 75-85 basis points of same-property total revenues for the full year versus the prior range of 75-110 basis points. In addition, the midpoint of our Same-Property NOI guidance range now reflects approximately 125 basis points of year-over-year impact related to lost rent and recovery income from recently announced or anticipated bankruptcy activity. Approximately 100 of the 125 basis points is related to store closures or lease rejections that have occurred or been announced to date, while the remainder will accommodate additional disruption that may be experienced during 2023. We have also raised our guidance for 2023 Nareit FFO to a range of $1.99-$2.04 per diluted share.

As the $0.01 gain on extinguishment of debt this quarter was factored into our guidance raise last quarter, this quarter's $0.02 FFO increase at the low end reflects the change in Same-Property NOI growth guidance and revised assumptions across a variety of other line items, including non-cash GAAP, rental adjustments, G&A, and interest expense. With that, I'll turn the call over to the operator for Q&A.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. First question, Todd Thomas with KeyBanc Capital Markets, please go ahead.

Todd Thomas (Managing Director and Senior Equity Research Analyst)

Hi. Thanks. Good morning. Morning, Jim. First question, I just wanted to ask about the investment environment a little bit in light of your comments around, you know, assets coming back to the market at more favorable pricing. What's the company's appetite like today, to deploy capital and new investments? Can you talk about what that change in pricing, you know, equates to in terms of, you know, either higher yields or IRRs that you're underwriting today with, some of this new product coming back to the market?

Jim Taylor (CEO and President)

Yeah. You know, I'll let Mark comment a little bit, but maybe just to set the table, it's going to be driven by the returns that we see available on the assets that are coming back. You know, we are really focused on those assets where we can drive outsized IRRs through lease-up density, better tenanting, leveraging our national relationships to basically take what will typically be privately held assets and, and drive returns. You know, in terms of the pricing move, they're starting to move to a place where we believe that we can, even in this higher rate environment, higher cost to capital, acquire them accretively. It's going to be driven, Todd, solely by where those assets ultimately price. We'll You know, expect us to remain disciplined.

We just are encouraged by what we're seeing in terms of the movement in price, some of which is being occasioned by, you know, the lack of asset level financing or the constrained credit environment, as well as tenant, capital requirements as we see tenants moving out. Mark?

Mark Horgan (EVP and Chief Investment Officer)

Yeah. What I'd add is volumes continue to be somewhat low, I'd say real time, we're starting to see more sellers willing to meet the market. As Jim mentioned, from a value perspective, we're seeing assets settle out at pricing. That starts to make more sense from our perspective, and you're seeing probably the biggest hit to value on those assets from, or really deemed as core the last few years, we're really seeing those show the, the biggest hit to value. You asked a bit about, about IRR. We, we think we can underwrite deals into the high single-digit, low double-digit unlevered IRRs for what we're seeing today, given the yields and growth that we expect to see in assets that we'll be acquiring.

The other, the other piece I would add is, you know, we're starting to see more interesting yield opportunities in, in larger deals, say, about $50 million-$60 million. We think there's, kind of a pocket of opportunity there in those larger deals that'll show some higher yields and, and some good growth opportunities from here. Some more to come, hopefully in the next quarter or so.

Todd Thomas (Managing Director and Senior Equity Research Analyst)

Okay, that's helpful. Then, are these, you know, one-off assets that you're seeing? Or, you know, is there anything of size, any portfolios that you might expect to sort of transact? Then separately, you know, you increased your redevelopment or, and value enhancement pipeline spend during the quarter. Are you seeing more opportunities to accelerate projects there, given, you know, maybe the lack of available space and, you know, pretty good leasing demand that you're seeing? You know, and should we expect to see that pipeline continue to build further, you know, vis-a-vis what sounds like a better environment for acquisitions?

Jim Taylor (CEO and President)

Yeah. You know, we're seeing obviously the most compelling returns still within opportunities that we own and control within our redevelopment pipeline. Part of what's accelerating some of those opportunities is, frankly, the recapture of some of this bankrupt space, where, you know, with 30%-40% spreads, for example, on the Bed Bath boxes, we can drive some highly re- accretive, not only in terms of ROI projects, but as I highlighted in my comments, the cap rate that would otherwise be applied when you backfill a Bed Bath with a specialty grocer or with a more vibrant, soft goods retailer. In terms of the transaction market, most of what we're seeing and where we think the opportunities are going to be is single larger assets. We are seeing some small portfolios too.

You know, it's really going to be driven by the opportunity and the type of returns that we think we can deliver, because importantly, we do have a lot of great opportunity in what we own and control. As we weigh our capital allocation decisions, you know, I, I think the good news for us is we're not wanting for opportunities. As we think about external growth, it really has to make sense in light of what we own and control.

Todd Thomas (Managing Director and Senior Equity Research Analyst)

Okay. Thank you.

Jim Taylor (CEO and President)

You bet.

Operator (participant)

Next question, Juan Sanabria with BMO Capital Markets, please go ahead.

Juan Sanabria (Analyst)

Hi, good morning. Maybe a question for Angela. On the bad debt assumptions that you've improved here, given the results to date, how should we think about that flowing through to occupancy for the second half? How much space is kind of coming back vacant temporarily? Is that the main driver for the implied decel in FFO from the second quarter run rate, stripping out that $0.01 from the debt gain?

Angela Aman (EVP and CFO)

Yeah, thanks, Juan. As I mentioned in my remarks, we're expecting something like 440,000 sq ft to come back in, mostly the third quarter, but a little bit into the fourth quarter from the, the currently announced bankruptcy activity. Bed Bath, Christmas Tree Shops, Tuesday Morning, and then David's Bridal. We do have in the signed but not commenced pipeline, about 1.3 million sq ft that's expected to commence over the, the second half of the year as well. Even with, you know, some, some natural sort of attrition from normal course lease expirations, we're in a good position, we think, to grow occupancy through the second half of the year as well. We feel good about that.

In terms of the FFO deceleration, I'd note a couple of things, as it relates to the second quarter. One is the gain on debt extinguishment. That was a component of the $0.52. That's about $0.015 per share. We also had some straight line rental income reestablishments that were, again, just under $0.01 a share. Those two things together were about $0.025 in the second quarter, stripping those out and using that to annualize for the second half of the year, plus first half actuals, gets you to about the midpoint of our range.

From there, you know, whether we, we come out at the low end or the high end is very much gonna be dependent on the bankruptcy activity we just talked about, as well as any unanticipated tenant disruption we might see in the second half of the year.

Jim Taylor (CEO and President)

Timing of rent commencements. You know, something that we're continually focused on is bringing that signed but not commenced pool into occupancy and rent paying. We've done a pretty good job, as Angela highlighted in her remarks, getting it rent commenced.

Juan Sanabria (Analyst)

My second question, just curious on what you guys are hearing or seeing from some of the pharmacies? You've seen Walgreens kinda cut headcount. CVS came out today and said it was gonna cut some corporate headcounts. Just curious on latest discussions with the pharmacies and space usage and, and kinda just how you're feeling about that business and changes that we might expect going forward?

Brian Finnegan (EVP and CRO)

Yeah, Juan, hey, this is Brian. I think if you look at the pharmacy real estate that we have across the portfolio, we've got some very attractive upside, particularly on some of those like older Rite Aid locations or older CVS locations that might have been in line. We backfilled one of them with Ulta recently. You have seen some of the pharmacies look for smaller units, too, so we executed a couple of Walgreens locations in Texas for their smaller concept. I think if you look at some of the pad locations that they have, that they were really focused on kind of in the early 2000s of expanding, those are some of the most high-profile out parcels that we have across the portfolio.

To the extent there would be a few closures, which we did experience after Walgreens purchased some of the Rite Aid boxes, we feel really good about the demand for those overall. Certainly changing dynamics in terms of how they're thinking about their real estate, but as we said, overall, we feel like we have some pretty good attractive upside in our pharmacy space.

Juan Sanabria (Analyst)

Thank you very much.

Brian Finnegan (EVP and CRO)

Thank you for that.

Operator (participant)

Next question, Ki Bin Kim with Truist Securities. Please go ahead.

Ki Bin Kim (Equity Research Analyst)

Thanks. Just going back to the bad debt reserve, can you just remind us, what that reserve was? I think it was like 75-110 basis points, not including the known budgeted move-outs, how that's, you know, evolved by 2Q and, you know, what your projections are for the remainder of the year. Right. Yeah, so our current guidance for revenue deemed uncollectible is 75-85 basis points. The prior guidance for that was 75-110 basis points. That's pretty much in line with our longer-term historical average when you take out some of the disruptions, you know, during the pandemic. So we do think on a net basis for this year, we're gonna come out kind of in line with the historical average for that number.

Angela Aman (EVP and CFO)

On a year-to-date basis, we're running a little bit below that. We're about 50 basis points within the same store pool year to date. We were closer to the low end of that range at about 70 basis points in the second quarter. That does imply a slightly higher run rate in the second half of the year, but feel good that we're gonna, you know, be within and actually towards the lower end based on the revised guidance of where we've been historically. Great. Just a high-level question.

Ki Bin Kim (Equity Research Analyst)

When you look at some of the at-risk tenants like JOANN, Michaels, or Big Lots, any high-level commentary you can share on what the potential upside or challenges might look like compared to the current slate of bankruptcies that you had to deal with, such as Bed Bath, Party City, and so forth?

Brian Finnegan (EVP and CRO)

Yeah, Ki Bin, hey, this is Brian. I mean, not to get into individual tenants- tenant names, but as we've talked about on prior calls, we keep a watch list. Many of the names that you would think would be on there are, are on there. I think over the years, our team has done a fantastic job of proactively addressing this space. We're talking about Bed Bath today. We went ahead and took back 4 Bed Bath spaces. As we look ahead of the bankruptcy and we've seen very attractive leasing, we've gotten ahead of those. We got ahead of the Tuesday Mornings as well. As we look out, we are certainly looking at those opportunities. We have been aggressive in terms of recapturing space where we have the availability to do so.

In terms of the rents, overall, I mean, we feel pretty good. I think those rents are in line with the $9 and change rents that are expiring here over the next three years, and we've been signing those leases between $14 and $15 a foot. You look at the upside there, and it's, it's pretty much what we see in some of that watchlist tenancy as well. The other thing I'd point out is you've just seen how tight the box environment is today in terms of what you saw at the auction for Bed Bath, with retailers bidding on space, competition for our box space across the portfolio.

We feel pretty confident to the extent we do get a few of those boxes back for the names that are on the watchlist here, in backfilling them quickly with better tenants at higher rents.

Ki Bin Kim (Equity Research Analyst)

Okay, thank you.

Operator (participant)

Next question, Caitlin Burrows with Goldman Sachs. Please go ahead.

Caitlin Burrows (Analyst)

Hi, good morning, everyone. Maybe on small shops lease occupancy, it's at a record 89.4%. When you consider that 10%+ of availability, can you give any description of that vacancy? Kinda what's frictional in process to be replaced quickly, maybe what's been vacant longer, and what that kinda means for the path for small shop occupancy and ultimately overall occupancy over time?

Jim Taylor (CEO and President)

Yeah, I really appreciate the question. You're highlighting on an important growth lever for this platform, in particular. In part, because within our active reinvestment pipeline, we have a couple of 100 basis points of drag on occupancy for assets where we're replacing anchors or doing facades or doing larger reinvestments, that we fully expect that we'll lease those spaces as we deliver the reinvestments. In fact, our experience has been that we pick up our small shop occupancy and reinvestment projects by several 100 basis points. It's not only the pickup in occupancy, but the growth in rate can be 20%, 30%, 50% in the small shop spaces when we've substantially improved the center. We have that growth, if you will, in reserve.

The other thing to think about is as we continue to transform this portfolio, we'll continue to set new records in terms of small shop occupancy. We see we have more than a couple hundred basis points to run there. It is an important growth lever. As I mentioned in my remarks, it's somewhat of a flywheel growth effect to, you know, you replace a tired anchor with a vibrant soft goods or specialty grocery use, you see the benefit throughout the property, even those spaces that you don't impact directly. It is something we're very focused on. We're managing our portfolio for growth, not occupancy. I wanna highlight that. Our strategy of keeping spaces vacant, reinvestment projects speaks to that.

Caitlin Burrows (Analyst)

Got it. Makes sense. Maybe just back to the acquisition topic. When we look at the leverages now 6.1 times, to the extent you were to identify an opportunity, I guess, how would you think about funding that maybe up until a certain size, just retained cash, but over a certain amount, like debt dispositions, or how are you thinking about that?

Jim Taylor (CEO and President)

Well, you know, obviously, free cash flow first, asset dispositions as we continue to harvest some non-core assets, and then we'll look at the investment opportunity relative to what our, you know, overall cost of capital is, as we always do, to make a decision to responsibly fund it. We're not going to lever up. We're gonna continue to be disciplined from a capital standpoint and mind our balance sheet.

Caitlin Burrows (Analyst)

Thanks.

Jim Taylor (CEO and President)

You bet.

Operator (participant)

Next question, Craig Mailman with Citi. Please go ahead.

Craig Mailman (Research Analyst)

Hey, guys. I just wanted to follow up on the acquisition piece a little bit. I know, Jim, you and Mark kind of went through the yields there, but I'm just kind of curious, as you guys are, are evaluating opportunities, how much weight you're putting on that current going in yield versus the longer-term opportunity on the IRR side and kind of balancing the accretion versus cost of capital, near versus long term?

Jim Taylor (CEO and President)

It's a great question, and we're focused on that going in yield. That's the in-place cash flow, right? We're also looking for opportunities where we can grow that, and importantly, very visible opportunities. In other words, we're not really having to spec a lot because of our understanding of tenant demand to be in that particular center, our understanding, because we are in the markets where market rent is, and our understanding of how we can densify the site, add out parcels and other uses to drive returns. Really, it's a focus on that going in return, yes, but also within very highly visible growth opportunities within the first three to five years. If you look much past that, I think it becomes anybody's guess.

As you overlay that sort of thinking and you think about what we've done historically, you'll see our pattern has been very consistent. Acquisitions like Granada Shoppes or Bonita, or out in California, in Brea, you know, where we have actually exceeded our underwriting in terms of rents achieved, and overall growth and returns. Think about it as more fuel for our value-added furnace. If we don't see the opportunity, it's not evident, we're, we're just not gonna be as competitive. One of the things that we find encouraging is that in this environment, we are seeing the pricing, and you speak to that upfront yield, moving to a place where it becomes logical for us to consider it. Stay tuned, we'll see, but, you know, expect us to remain disciplined.

Craig Mailman (Research Analyst)

That's helpful. Switching gears, I know, Brian was talking about the anchor pipeline that you guys have, and I'm just kind of curious, given just the limited supply, there's clearly more people looking than there are spaces, but how you balance kinda getting that last dollar of rent versus just portfolio diversification between the off-price, retailers themselves or other kind of verticals. How are you guys looking at, you know, given some of the, the anchor troubles that pop up every five to 10 years, just how to manage that risk going forward?

Jim Taylor (CEO and President)

It's a great question and something we're laser-focused on as we think about tenants going forward that we wanna do more business with. We obviously have a very diversified tenant base, one of the most diversified in the sector. We don't have any tenants constituting really any significant part of our rent. We do think about tenant diversification and credit quality as we make those decisions. so that we're not just making a decision about growth, which you see in our results, but also the stability of the tenants and their creditworthiness as we make those decisions. We do a lot of credit underwriting led by Angela and team, but we're also really using data more than we've ever done before to understand how productive a tenant is gonna be in a particular location.

Because it's not just the credit quality of the tenant, it's also how successful are they going to be? Are they going to drive good sales? Do you have a high likelihood that they're going to renew, and they're going to renew at a higher rate? Those are the types of things that we think about. If you just look at our top tenancy over a long time series, you can see the continued improvement in the credit quality. It's part of why we outperformed through the shock of the pandemic, it's also, I think, going to be a crucial part of our outperformance going forward.

Craig Mailman (Research Analyst)

Great. Thank you.

Jim Taylor (CEO and President)

You bet.

Operator (participant)

Next question, Greg McGinniss with Scotiabank. Please go ahead.

Greg McGinniss (Equity Research Analyst)

Hey, good morning. Could you just provide some more color on the outcome of the Bed Bath bankruptcy process, including number of leases assumed and specific tenants that won those leases at auction, or tenants that are signing new leases and LOIs?

Brian Finnegan (EVP and CRO)

Sure, Greg, this is Brian. We had nine boxes remaining at the end of the quarter. We're taking six back here in the third quarter. two were assumed by Cost Plus, one was assumed by Burlington. We also took back one box in the Northeast as well. Just to piggyback on what Jim was just talking about, I mean, the depth of demand that we're seeing overall for boxes has been very encouraging. We signed a lease on one of the boxes last week with one of the top operators in the off-price space. We've been seeing specialty grocery, home, fitness, and I think outside of that, you see operators in the sporting goods sector, you see operators in the wellness sector. We mentioned our first deal with Tesla this quarter, operators like that, that are competing for box space.

Overall, we're very encouraged about what we see so far on the Bed Bath space and really all the bankrupt space that we took back. I mean, the team's done a fantastic job quickly addressing the Tuesday Morning with the likes of Five Below and JD Sports and Ulta. As, as we proactively have taken and we're getting some of this space back, overall, we've been pretty encouraged with the depth of demand, and you'll see us continue to communicate on the types of tenants that we're able to bring into the portfolio.

Greg McGinniss (Equity Research Analyst)

Great, thanks. Thinking about potential for occupancy loss as opposed to, to credit concerns or, or bad debt, aside from Sally Beauty Holdings, are there any other tenants pursuing store optimization plans that might be a headwind over the next 12 months? To clarify 1 point, when you mentioned growing occupancy in the back half of the year, is that both in place and leased occupancy?

Brian Finnegan (EVP and CRO)

Great. I can take the first part. I mean, again, not to get into individual tenants, but we're constantly monitoring tenants. Our, our watch list is not just credit. Our watch list is also tenants that are looking at pulling back on some of their store openings. What we've seen, though, particularly in the small shop space, is just an incredible depth of demand. We hit on some of the anchors, but if you look at boutique fitness, if you look at QSR restaurants, if you look at all the mall-native retailers that we're attracting to the portfolio, there's a significant depth of demand that's there to backfill any closures that we may get back.

As Jim mentioned, as we continue to bring more anchors in, as we continue to reinvest in the portfolio, we still see occupancy on the small shop side getting into the low nineties. I mean, look, in terms of occupancy declines, as Angela hit on, we are facing some potential occupancy headwinds here in the third quarter from those bankrupt tenants. With the pipeline that we have, we feel long term, in a good trajectory to grow occupancy by year-end.

Angela Aman (EVP and CFO)

Yeah, I think that's right. The comments I made were specifically about build occupancy and the flow through to the same property NOI growth. As Brian highlighted, we feel very strong about the pipeline, about the continued transformation of this portfolio and our ability to continue to push both build and leased occupancy higher over the near term.

Greg McGinniss (Equity Research Analyst)

Great. Thanks for the time.

Brian Finnegan (EVP and CRO)

Yeah.

Operator (participant)

Next question, Jeff Spector with Bank of America. Please go ahead.

Jeffrey Spector (Analyst)

Great, thank you. Maybe just quick follow-up on the earlier conversation on anchor space and, you know, anchor space for a small shop. I know it almost feels like every few years it changes on, on the mix. I guess, Jim, to confirm, you know, I guess from your analyses, are, are you saying that, you know, is there a certain, you know, right mix between small and, and anchors? Have small shops basically held up a lot better over the years than expected, that you would want to shift a bit more to small shops?

Jim Taylor (CEO and President)

You know, it really depends on the center. It's a great question, and also the other follow-on question of what's needed in that particular submarket. We like that our centers generally have a great mix of anchors, junior anchors, and small shops to allow us to drive the best growth. You know, you get more consistent annual embedded rent bumps in the small shops, both national and regional, in terms of the intrinsic growth, but you also need the anchors. It's really a asset by asset decision. When you look at the portfolio overall, I think we have a great mix. You know, we'll make decisions to downsize junior anchors into small shops.

We'll similarly, in a particular market and asset, based on demand and based on returns, consolidate small shop space into a junior anchor. It's one of the great flexibilities of our asset class, which I really like. You know, it's basically a simple industrial building with a pretty facade, where you've got the HVAC on the roof, power comes in the back, so you have the ability to optimize the center to serve a particular community and get the mix right.

Jeffrey Spector (Analyst)

Okay, thank you. Then, second, I mean, there's clearly some concern today, let's say, over some slowing, and I'm just, again, thinking about all the remarks on leasing and the bankruptcies. Just to clarify, on the BKs for the year, are they in line with your expectations, let's say, if we go back to December, a bit higher? Maybe more important is, you know, as we think about the next year, again, is it still kind of in line? Again, are you flagging it's a bit worse or higher than expected?

Angela Aman (EVP and CFO)

Yeah, I mean, I think, you know, we've given really explicit guidance as it relates to the impact on, on the portfolio and on Same-Property NOI growth from bankruptcy activity over the course of this year, and that number's clearly improved. Our original guidance was a drag on a year-over-year basis of 150 basis points. We've tightened that into 125 basis points this quarter. I think the names we're talking about that make up sort of that known bucket, which include Bed Bath & Beyond, and Christmas Tree Shops, and Tuesday Morning, and David's Bridal are bankruptcy situations we've, you know, been following or monitoring for some time. Not a lot of surprises within that pool.

We haven't seen, you know, additional filings, though we have continued to, to recognize that there's a, a potential for those in the second half of the year, but nothing's really materialized over the last quarter. Overall, guidance has clearly improved on the bankruptcy front.

Jeffrey Spector (Analyst)

Okay, great. Just wanted to confirm. Then last, if I could just confirm on commencements. You know, are commencements happening on schedule? You know, how does it compare to, let's say, 6 months ago or 1 year ago? How are you thinking about commencements over the next six to 12 months?

Angela Aman (EVP and CFO)

Yeah, I mean, we're really pleased with the degree to which we've been able to continue to not just commence, the leases we have coming online, you know, on time, but actually continue to accelerate some of those commencements into earlier periods, which we did in the second quarter as well. I think we outperformed our expectations on commencements by $2.5 million-$3 million, just pulling forward some leases that weren't expected to commence until the third and into the fourth quarter of this year. That's a pretty stable trend and has been over the last couple of years as we really work to sort of optimize the process and recognize efficiencies in order to get tenants open and operating more quickly.

As I mentioned in my prepared remarks, we've got about $25 million of ABR coming online in the second half of the year. It's 1.3 million sq ft, and we will continue to focus on getting those tenants not just open on time, but continuing to accelerate some of those commencements and even commencements expected in the first part of 2024.

Jeffrey Spector (Analyst)

Great. Thank you.

Jim Taylor (CEO and President)

Thanks.

Operator (participant)

Next question, Dori Kesten with Wells Fargo. Please go ahead.

Dori Kesten (Executive Director and Senior Equity Analyst)

Thanks. Good morning. Have you seen any notable improvements or slowing within the timing of rent collections within small shop of late?

Angela Aman (EVP and CFO)

Ye- we really have not. The collections rates, you know, across our portfolio, looking at different merchandise categories, looking at anchor versus small shop, have stayed very consistent over the last six to eight quarters. We're really pleased to see that trend continuing to hold up and can't point to any deterioration. I'd always also point to my earlier comments, when you look at the total amount of revenue deemed uncollectible, that we've, we've recognized in the portfolio on a year-to-date basis, it's about 50 basis points, which was below the low, below the low end of the guidance we had given and allowed us to really tighten in our expectations for the full year.

Dori Kesten (Executive Director and Senior Equity Analyst)

Okay. Then on your, I think you said $900 million shadow pipeline, can you compare these developments to, to your existing pipeline, maybe just return expectations, time to completion, any, I don't know, regional leanings?

Jim Taylor (CEO and President)

You know, the returns are equally compelling. The reason it's our shadow pipeline is we have these pesky things called leases that are in place today. If you look at our rolling lease expiries and the mark that we have of over 50% between where those anchor leases are rolling and where we're signing rents today, it gives you a very clear view of our path to be able to continue to tap into that opportunity as it ripens, as it comes due. You know, one of the other things that I think is important to appreciate is that we're not committing substantial capital until we've got those projects largely pre-leased. As you think about the, you know, coming economic environment, whatever it might be, it's really an all-weather strategy. We're, we're really not taking substantial risk.

We've identified the opportunities, we're working towards them, and it really represents several years of a forward pipeline, driven in part by when the leases expire and when we can take control of the space. Things like Bed Bath, you know, allow us to pull some of that forward, and we added a couple of projects into the pipeline this quarter that reflect some of that. You know, it truly is a very visible pipeline for us, and you can see it based on the marks that are embedded in our anchor rents.

Dori Kesten (Executive Director and Senior Equity Analyst)

Okay, thanks.

Operator (participant)

Next question, Anthony Powell with Barclays. Please go ahead.

Anthony Powell (Analyst)

Hi, good morning. A question on lease spreads. They're strong in the quarter, but I guess they were down sequentially on the new side, especially. Is there anything to be aware of in terms of either a mix shift or comps on a lease spread in the quarter?

Brian Finnegan (EVP and CRO)

Anthony, hey, this is Brian. Yeah, I talked about it in my opening remarks that that was really a mix issue. We had a higher percentage of small shop leasing during the quarter. We did sign leases at the highest rents that we ever have, 46% ahead of our in-place ABR. We still feel very good long term about our team's ability to bring leases to market. As we've highlighted a couple times on this call, as we look out three years, we've got anchor leases expiring in the high single digits, just over $9, and we've been signing those between $14 and $15. Long term, we feel good about our ability to continue to drive new lease growth. You may see some fluctuations in a given quarter, but really, this quarter it was due to the mix.

Anthony Powell (Analyst)

Yeah, thanks. Maybe one more on the base rent growth, 520 basis points year-over-year, that's pretty strong. What's the split between occupancy and rent growth there? Do you think that number could stay above 5% the next few quarters as you deal with these, you know, tenant bankruptcies and re-leasing?

Angela Aman (EVP and CFO)

Yeah, I mean, if you look at our, our full year guide, for base rent, sort of at the midpoint of the range, is probably about 425 basis points. We are expecting deceleration as you get into the back half of the year. I would say that's driven by two things. One is, as you pointed out, the impact of some of that vacancy that's coming back to us, through some of these, these, the bankruptcy situations, which really didn't have really any impact in the first quarter and a more muted impact on the second quarter. That's certainly part of it. The other factor I would just point out when you think about that as a year-over-year contribution, is the ramp we had in base rent between the third and fourth quarter of 2022.

There was substantial growth there. Some of it's just a more challenging comparison period. That gets you, you know, sort of to, again, at the midpoint of the range, more like a 425 basis point contribution from base rent. I would say on a net basis, within that 425 basis point contribution, it's about 100 basis points, give or take, that relates to occupancy growth, outside of or on a net basis for the bankruptcy activity. Clearly, the degree to which we're increasing build occupancy is definitely driving some of that outsized performance over the course of the full year. The rest is really rent growth.

Anthony Powell (Analyst)

Thank you.

Jim Taylor (CEO and President)

You bet.

Operator (participant)

Next question, Haendel St. Juste with Mizuho. Please go ahead.

Haendel St. Juste (Managing Director and Senior Equity Research Analyst)

Hey, good morning.

Jim Taylor (CEO and President)

Good morning.

Haendel St. Juste (Managing Director and Senior Equity Research Analyst)

First question, maybe for you, Angela. I appreciate the color on the expected ABR in the back half of the year. I think you mentioned $25.3 million. But I was hoping we could get a bit more color on a good starting point for quarterly ABR as we start thinking about the portfolio's growth potential near term, in light of the recent BKs, and if there's any impact from FAS 141 and 142 we need to be making in there. Thanks.

Angela Aman (EVP and CFO)

Yeah, nothing really to note at this point in terms of FAS 141 impact related to the bankruptcies. You know, I think, you know, we provide some, some disclosure in the 10-Q that kind of gives you a sense of what to expect in terms of FAS 141 for the balance of the year, but no real outliers from that perspective. You know, on a quarterly basis, I can say, if you look at all the bankrupt space we had that we expect to come back, that ties back to that 440,000 sq ft number, I gave earlier in terms of occupancy loss expected in the third quarter related to the bankruptcy situation. That translates into about $1.5 million of quarterly ABR that would have been recognized in the second quarter.

That'll be lost as we get into Q3 and, and on a full quarter basis in Q4.

Haendel St. Juste (Managing Director and Senior Equity Research Analyst)

Appreciate that. One more, perhaps on, on, on CapEx. Certainly the CapEx as an absolute and percent of NOI has barely grown in the industry in the last, last couple of years. I'm curious if and when the recent leasing velocity, the higher occupancy, less big boxes to fill, and improved centers that you outlined will start helping that line item. Maybe some thoughts on how we should be thinking about CapEx or your expectations near term. Thanks.

Jim Taylor (CEO and President)

You know, an opportunity we saw when we came in was to make the centers better, look better. You certainly saw us increasing in earlier years, the CapEx per foot. As we get through this program, and we're already seeing it, we expect the CapEx on a recurring basis to decline, given the improvements we've made to the centers. The other area where I think we continue to show discipline is within net effective rents. We actually show you our net effective rents, which is not common practice. I think it should be, because to really understand how much ROI we're driving, you've got to look at not just the spreads, but you've got to look at what, what you're, what you're giving in terms of TAs and other capital.

You know, I feel really good about our ability to continue to drive high ROI in this environment, given our rent basis and given the discipline that we've approached that capital question with.

Haendel St. Juste (Managing Director and Senior Equity Research Analyst)

That's it for me. Thank you.

Operator (participant)

Next question, Mike Mueller with JPMorgan. Please go ahead.

Mike Mueller (Senior Equity Research Analyst)

Yeah, hi. I'm curious, how do the return expectations on the $900 million shadow reinvestment pipeline compare to the current returns? If you're looking within that pipeline, are there any larger scale projects in it, like Pointe Orlando or Roosevelt in it, or is it just more smaller scale?

Jim Taylor (CEO and President)

It's a mix. You know, we do have some larger projects. The returns are, you know, high single digit, low double digit, incremental returns, Mike, and I think that's important because not everybody's showing you what their incremental returns are. You know, with some of the larger projects, we continue to phase them to manage our, our capital at risk, and frankly, we find through phasing that we drive even better rents in subsequent phases. There are some larger projects in there, many of which we've already started initial phases, like Pointe Orlando.

Angela Aman (EVP and CFO)

Yeah, just to note, Mike, we do provide some disclosure in the supplemental that, that lists by project, you know, the projects that make up that, you know, $900 million-$950 million of future redevelopment pipeline, and we break that down between major redevelopment projects and minor redevelopment projects. While we haven't given specific expected dollar amounts by project, I think you can get a sense of where some of the larger opportunities in the portfolio are from that disclosure.

Mike Mueller (Senior Equity Research Analyst)

Got it. Okay, thank you.

Operator (participant)

Next question, Floris van Dijkum with Compass Point. Please go ahead.

Jim Taylor (CEO and President)

Hey, Floris.

Floris van Dijkum (Analyst)

Hey, Jim, a question, getting back to the small shop opportunity, because to me, that's one of the more exciting things that you guys have, historically, lower occupancy. Remind us again what your average occupancy is in your shop, once assets have been redeveloped, and a significant portion of your portfolio is now redeveloped, so it should be a meaningful indication for where you can take your shop occupancy going forward.

Jim Taylor (CEO and President)

It's low to mid-90s, typically within a few years of the project delivering. You know, we see typically, we'll let some of the small shop go vacant as we execute upon the redevelopment. We see several hundred basis points of improvement as we deliver the anchors and deliver the overall reinvestment.

Floris van Dijkum (Analyst)

That, that implies a load of if I take 92.5%, 93%, I mean, it's, you know, 250, 300 basis points, potential upside still left in your, in your shop. Is that the right way to read about or, or think about it?

Jim Taylor (CEO and President)

Yeah, we're not going to be so precise, but we think it's in that range.

Angela Aman (EVP and CFO)

Yeah, I would just also note, Floris, you know, when the math you just did sort of compares a build occupancy number that Jim's talking about in some of the stabilized redevelopment projects, versus, you know, where we stand from a leased occupancy perspective today. The build occupancy in small shop is actually 84.6. You know, I would note that there's a lot of opportunity relative to where we stand on, on, on build occupancy within the small shop pool today.

Floris van Dijkum (Analyst)

Thanks. Then maybe, I noticed, acouple of, big-- you know, your biggest projects or biggest, most valuable properties like Roosevelt Field. Obviously, you're getting a, a Sprouts now that will become grocery anchored, and that should be very positive. I mean, that-- if I recall, I mean, the, the average rents in place in that property are still relatively low, although the shop, you know, some of the shop rents are in the $60s or higher. That's potentially, an exciting growth opportunity on a, on a large site.

You know, I guess maybe if you can expand a little bit on, on some of these larger assets and the growth, you know, opportunities that you see, and also talk about the residential components at Mira Mesa, and would you look to offload that or partner with a local developer?

Jim Taylor (CEO and President)

Well, let me take the last part of that question first. We have several opportunities like Mira Mesa across the portfolio, where we could add additional uses, additional density, and we're working to get that entitled. You know, whether or not we would pursue that directly, my instincts are that in most circumstances, as we did in College Park, Maryland, we'll harvest the entitled land value and let somebody else build it to a 6-type development return. I think that's the way to, you know, for us to maximize value. In terms of larger projects, you mentioned Roosevelt. We're, we're launching the first phase, which includes Sprouts. We have some exciting additional densification opportunities there that we're rapidly leasing and getting ready to launch. You know, big value creation, both in terms of density, but also rate, as you mentioned.

Projects like Wynwood, outside of Dallas, a large site where we're bringing in a Target, we're bringing in other great uses into a very well located, older, older shopping center, or Davis, UC Davis, where we have the opportunity to add a really compelling lineup to an existing Trader Joe's. We, we have several projects like that across the portfolio, where, as I mentioned earlier, typically we'll deliver them and execute them in phases, leveraging the leasing momentum, the upgrade in tenancy, the ability to add density. As it relates to complementary uses, we'll work to get those entitled. Typically, you know, when you do the math, it may make sense to harvest that value versus taking the capital risk of, of development.

Floris van Dijkum (Analyst)

Thanks, Jim.

Jim Taylor (CEO and President)

You bet.

Operator (participant)

Next question, Connor Mitchell with Piper Sandler. Please go ahead.

Speaker 19

Hey, it's, it's actually Alex. I'm pulling a Billerman, so, asking for Connor. Two questions. First off, on insurance, obviously, we're all well known of the, the property insurance issues. From a tenant business insurance perspective, are there similar issues on the business operation insurance or insurance that tenants will get? Or are the issues that we're reading about with insurance rates solely property and is not affecting tenants ability to get their own, you know, business type insurance?

Brian Finnegan (EVP and CRO)

Alex, hey, this is Brian. We haven't heard any tenants talk about ability to access insurance. I think some rates have gone up, particularly in some parts of the country. You think about Florida, but it really hasn't impacted in terms of the availability of, of getting insurance. Look, we look at our insurance from a, from a platform perspective, and, you know, our team is well ahead of that and understanding what some of those increases could be on the property side, but it hasn't really come up from a tenant standpoint yet.

Speaker 19

Okay, going back to Haendel's question on, you know, cash margins. You know, let me ask the question this way: As the portfolio leases up and gets near full occupancy, do you see that your cash flow will naturally increase, or is it because you're always going after under market space and doing the small scale redevelopments that, you know, that cash, whatever cash you save by the occupancy getting up near full, is going to be used for reinvestment so that way, net cash flow that the company is generating really won't increase? It's just a matter that it gets redeployed.

Jim Taylor (CEO and President)

No, the net cash flow should continue to increase as we're investing that at high single digits, low double-digit incremental returns. We're actually delivering those projects, and we're recommencing them sooner than what we have budgeted. You see the follow-on impact to our cash flows. You know, I'm very pleased that our cash flows off of a portfolio of 370 assets are in line with what 520 or 530 were, really reflecting that discipline with capital. You know, what I was referring to also is the recurring capital that occurs at the center. Your recovery rates obviously improve upon that as you drive occupancy, in addition to our reinvestment program brings down that recurring CapEx load.

You know, all three of those things continue to contribute to growth in our net cash flow.

Speaker 19

Okay. Thank you, Jim.

Jim Taylor (CEO and President)

Yeah.

Operator (participant)

Next question, Linda Tsai with Jefferies, please go ahead.

Linda Tsai (Senior Analyst)

Hi. I think historically, the industry might have seen more retailer closures than bad debt in the first half of the year versus the second half. While you improved your overall bad debt guidance, guidance implies more bad debt in the second half. Do you see this as a function of building of, you know, closures building as we head into next year? Or was there anything specific to the first half, second half cadence this year?

Angela Aman (EVP and CFO)

I mean, I think if you look back over the last couple of bankruptcy cycles, that, that, historical, concentration of bankruptcy activity right after the holidays has really evened out over the, the course of the year. We've seen more filings, you know, in the late summer and fall as tenants work to build inventory for back-to-school or holiday periods. You have seen more later in the year bankruptcies than you would have 10 or 15 years ago. You know, I think given, you know, the complexities of the environment these days, including, you know, interest costs and, you know, all, all kinds of stress on lots of different businesses across lots of different sectors, you know, we're maintaining, I think, a thoughtful approach as we look at guidance for bad debt in the second half of the year.

As you pointed out, we are running a little bit below that, the low end of that level, year-to-date.

Linda Tsai (Senior Analyst)

In terms of the depth of demand across small shops, is there a particular space size where you're seeing more demand?

Brian Finnegan (EVP and CRO)

Yeah. Linda, this is Brian. I would say just from a category, it's outparcel space for sure. I mean, in that kind of 2,000-3,000 sq ft QSR restaurant, that probably is a little bit smaller. If you look at the inline, 1,000-2,000 sq ft from whether that's health and wellness, smaller boutique fitness operators, specialty desserts like Crumbl Cookies. They've been a really exciting tenant we've added across the portfolio in a number of locations. Overall, I think we've been pretty pleased. If you're thinking of a specific size range, I'd say it's in that 2,000-3,000 for outparcels in the small shops, and then 1,000-2,000 as well for inline.

Linda Tsai (Senior Analyst)

Thanks.

Operator (participant)

Thank you. There are no further questions. I would like to turn the floor over to Stacy Slater for closing remarks.

Stacy Slater (SVP of Investor Relations)

Thanks, everyone. Enjoy the rest of your summer.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.