Curbline Properties - Earnings Call - Q1 2025

Transcript

Operator (participant)

Thank you for standing by. My name is Janice, and I will be your conference operator today. At this time, I would like to welcome everyone to the Curbline Properties First Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Stephanie Ruys de Perez, Vice President of Capital Markets. Please go ahead.

Stephanie Ruys de Perez (VP of Capital Markets)

Thank you. Good morning and welcome to Curbline Properties First Quarter 2025 Earnings Conference Call. Joining me today are Chief Executive Officer David Lukes and Chief Financial Officer Conor Fennerty. In addition to the press release distributed this morning, we have posted our quarterly financial supplement and slide presentation on our website at curbline.com, which are intended to support our prepared remarks during today's call. Please be aware that certain of our statements today may contain forward-looking statements within the meaning of federal securities laws. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from our forward-looking statements.

Additional information may be found in our earnings press release and in our filings with the SEC, including our annual report on Form 10-K. In addition, we'll be discussing non-GAAP financial measures on today's call, including FFO, operating FFO, and same property net operating income. Descriptions and reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's quarterly financial supplement and investor presentation. At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes.

David Lukes (CEO)

Good morning and welcome to Curbline Properties First Quarter 2025 Conference Call. I want to start by thanking our incredible team for not only completing our successful spinoff almost seven months ago, but also for completing our second quarter as a standalone public company and achieving results that prove the merits of our unique investment strategy. To that point, we are producing an increasing number of data points that highlight the fact that Curbline is a differentiated growth company capable of generating double-digit earnings and cash flow growth well above the REIT average for a number of years to come. This growth is underpinned by the economics of the convenience property type, which is our exclusive focus, the large opportunity set in front of us, and our unmatched balance sheet that is aligned with the company's business plan.

These ingredients clearly position Curbline to outperform in a variety of macro environments. I'll start the call by walking through the organic and external driver of Curbline's growth profile and business plan, and then conclude with some comments on operations and the balance sheet before turning it over to Conor to talk more specifically about the quarter and the increase in expectations for our 2025 outlook. We began investing in convenience assets now almost seven years ago, recognizing the strong financial performance of the small-format asset class both within the retail sector and the broader real estate industry. Tenant retention was high, credit was strong and diversified, and the Capex load was extremely low on a relative and absolute basis. Retail and service tenants recognize that a significant portion of consumer spending is not only shopping but running errands.

These quick trips to a local convenience center are highly profitable for the tenants but need to be, in fact, convenient. In other words, tenants are willing to pay a premium to secure a superior and convenient location that's more profitable, and that is driving demand for our simple and flexible spaces. Demand for the right locations and our property type has produced two noteworthy and differentiated outcomes. First, the capital efficiency of the business is superior to many other retail formats and is especially important as capital becomes more expensive and valuable. Desirable small-format space not only has high tenant retention rates driving high renewal rates but is also inexpensive to prepare for the next tenant in the event that there is vacancy. When compared to larger buildings that are generally purpose-built with longer construction periods, the capital efficiency of our simple business is unique.

In other words, less capital is needed to generate the same organic growth as the rest of the retail real estate industry and helps generate compounding cash flow growth for Curbline. To that point, in the first quarter, CapEx as a percentage of NOI for Curbline was under 5%, which led to almost $25 million of retained cash flow before distributions, despite the fact that NOI was just $28 million. As Curbline scales, this retained cash flow will increase, providing a durable source of capital that is outsized relative to the company's asset base, boosting earnings and cash flow. The second outcome is that our space is highly liquid due to the fact that the number of tenants that are willing to take a 1-2,000 sq ft shop unit is significantly higher than for purpose-built large-format units.

This liquidity allows the property type to keep up with inflation remarkably well, improves tenant diversification, reducing credit risk concentration and fallout, and provides an opportunity to drive rent growth as we seek to maximize rental income given the productivity of the unit size. The liquidity of our units was highlighted by the depth and the breadth of first-quarter leasing volume with almost 120,000 sq ft of new leases and renewals signed, including deals with AT&T, Verizon, Orangetheory, Darden, Five Guys, First Watch, and Sherwin-Williams, among others. In other words, this is a business where we can recapture growing market rents with little landlord capital or downtime since there is a shortage of high-quality convenience real estate in suburban communities and steady demand from a wide range of tenants.

All of these factors are evident in Curbline's operating metrics, with our lease rate up 50 basis points sequentially to 96%, among the highest in the sector, 27% blended straight-line leasing spreads, and our expectation that same property NOI growth will average greater than 3% for the three-year period ending in 2026. Shifting to the investment side, which is the second driver of Curbline's growth, the positive attributes of capital efficiency and strong top-line growth that I just described led us to explore the addressable market for convenience properties almost seven years ago. We now own the largest high-quality portfolio of convenience assets in the United States with over 3.3 million sq ft of inventory. Despite that fact, what we own today represents less than 1% of the 950 million sq ft of total U.S. inventory, according to ICSC, providing a significant runway to scale and grow Curbline.

In fact, the addressable market is so large that we see a long path of growth where we can stay focused on high-quality convenience centers without the need to broaden our simple and focused strategy. Not every asset we look at will be a fit for Curbline, but we believe there is a significant opportunity set of properties that share common characteristics with our existing portfolio, including excellent visibility, access, and compelling economics highlighted by a broad available tenant universe and limited capital needs. Importantly, that deal flow is less reliant on the health or status of the financing or capital markets, given a significant percentage of volume is driven by life events with demonstrated availability and liquidity through past cycles. For context, each week our team is reviewing hundreds of millions of dollars' worth of deals.

While those weekly volumes may rise and fall, the sheer size of the addressable market gives us confidence that there will always be a steady subset of opportunities that do indeed fit our investment criteria. To that point, our original guidance included $500 million of convenience acquisitions for the year, which equates to around $125 million per quarter. We've significantly exceeded that pace with over $475 million of acquisitions in the last nine months, and based on our current pipeline, this momentum is likely to continue in the near term. Specifically, our pipeline today is just over $500 million. This is on top of assets we have closed year to date and includes properties under contract or awarded with an executed LOI. The majority of these assets are expected to close late in the second quarter or early third quarter.

The acceleration in activity is a function of our marketing efforts, as we have seen a larger number of brokers and individual sellers proactively engage with us, a change from the pre-spend environment. The situation allows us to work directly with sellers on a timeline and a structure that works best for both parties and has increased the visibility of our future pipeline of investments. That was a key driver of the first quarter where we acquired 11 properties for just over $124 million, including our largest portfolio to date, a six-property portfolio in Jacksonville, Florida. Assets continue to be concentrated in the affluent markets that Curbline operates in, already including Phoenix, Houston, and Philadelphia.

However, like Jacksonville, we continue to make acquisitions in new wealthy sub-markets that share the key characteristics we seek, including our first property in Seattle, which we acquired subsequent to quarter end and where we hope to scale long-term. Average household incomes for the first quarter investments were nearly $110,000 and a weighted average lease rate of over 95%, highlighting our focus on acquiring properties where renewals and lease bumps drive growth without significant Capex. Moving to operations, as I previously mentioned, overall demand for available space remains very strong, driven by a mixture of existing retailers and service tenants expanding into key suburban markets, along with new concepts competing for that same space. Activity remains wide in terms of tenants seeking to lease space and includes numerous primarily national service tenants, banks, fitness operators, and quick-service restaurants.

We have not seen any changes since the start of April in terms of leasing appetite, but do recognize that changes in macroeconomic scenarios will likely have an impact on the type and the demand for space. However, the value proposition of small-format retail with close proximity to wealthy suburban customers remains attractive to a very wide variety of tenants, especially when considering that those businesses pay a relatively small annual occupancy cost due to the small size of the retail suite to have convenient access to those valuable customers. The economics of our business, a high return on leasing capital, and the widest pool of tenants to work with, along with significant national exposure, position Curbline for absolute and relative success throughout a cycle.

Before turning the call over to Conor, I want to highlight one of the key differentiating aspects of the Curbline spinoff, which is our balance sheet. The net cash position at quarter end matches the business plan with almost $600 million of cash and $1 billion of liquidity at quarter end. I could not be more optimistic about the opportunity ahead for Curbline and our ability to generate compelling stakeholder value. With that, I'll turn it over to Conor.

Conor Fennerty (CFO)

Thanks, David. I'll start with first quarter earnings and operations before shifting to the company's 2025 guidance phase and concluding with the balance sheet. First quarter results were ahead of budget due to higher than forecast occupancy, along with higher lease termination and other income. NOI was up almost 9% sequentially, driven by organic growth along with acquisitions. Outside of the quarterly operational outperformance, there were no other material surprises or callouts for the quarter, highlighting the simplicity of the Curbline income statement and business plan. In terms of operating metrics, as David called out, leasing volume in aggregate was extremely strong, even after adjusting for the growth in the portfolio. Given the current pipeline, we expect another strong quarter in Q2. However, as I noted last quarter, with this small but growing denominator, operating metrics will remain volatile and be heavily impacted by acquisitions.

That said, overall leasing activity remains elevated, and we remain encouraged by the depth of demand for space, which we expect to translate into trailing 12-month spreads over the course of the year, consistent with 2024. It is important to note that Curbline's leasing spreads include all units, including those that have been vacant for more than 12 months, with the only exclusions related to first-generation space and units vacant at the time of acquisition. Same property NOI was up 2.5% for the quarter, driven in part by better than forecast occupancy. Importantly, this growth was generated by limited capital expenditures, with first quarter Capex as a percentage of NOI of just under 5%. Moving to our outlook for 2025, we are raising OFFO guidance to a range between $0.99 and $1.02 per share.

The increase is driven by better than projected operations, along with the pacing and visibility on acquisitions that David mentioned, with the top end of the range assuming that deal volume exceeds our initial annual forecast, consistent with the pipeline that David outlined. Underpinning the midpoint of the range is approximately $500 million of full-year investments funded roughly 50/50 with debt and cash on hand, a 4% return on cash with interest income declining over the course of the year as cash is invested, and G&A of roughly $32 million, which includes fees paid to SITE Centers as part of the shared services agreement. You will note that in the first quarter of 2025, we recorded a gross up of $630,000 of additional non-cash G&A expense, which was offset by $630,000 of non-cash other income.

This gross up, which is a function of the shared service agreement, nets to zero net income, will continue as long as the agreement is in place and is excluded from the aforementioned G&A target. In terms of same property NOI, we continue to forecast growth of approximately 2.8% at the midpoint in 2025, but there are a few important things to call out. Similar to our leasing spreads, the pool is growing but small and is comping off of 2024's outperformance. Additionally, Curbline's same property pool is set annually, so it includes only assets owned for at least 12 months as of December 31, 2024. This results in a larger non-same property pool, which is roughly a third of first quarter NOI and is growing at a faster rate.

To highlight this point, the occupancy for the entire portfolio was 93.5% at quarter end versus the same property pool of 94.5%. We continue to expect this relative gap to compress in the first half of the year, delivering significant organic growth. Additional details on 2025 guidance and expectations can be found on page nine of the earnings slides. In terms of moving pieces between the first and the second quarter, interest expense is set to increase to about $2 million in the second quarter, and termination fees are expected to decline to fourth quarter levels. These two factors Curbline was spun off with a unique capital structure that positions the company to execute on its business plan and differentiates Curb from the largely private buyer universe acquiring convenience properties.

Specifically, at quarter end, the company had $594 million of cash on hand and full availability under its $400 million revolving credit facility. We did fund the $100 million term loan at the end of the first quarter, providing additional liquidity and remaining in a net cash position. The execution of the company's business plan, to David's point, is expected to lead to significant earnings and cash flow growth for a number of years well in excess of the REIT average. With that, I'll turn it back to David.

David Lukes (CEO)

Thank you, Conor. Operator, we're available for questions.

Operator (participant)

At this time, I would like to remind everyone in order to ask questions, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Craig Mailman with Citi. Please go ahead.

Craig Mailman (Equity Research Analyst)

Hey, good morning. Just on the acquisitions, congrats on getting that big of a pipeline here. It sounds like it'll largely close by the end of the third quarter. You have clearly enough cash to do this in line capacity. How are you guys thinking, though, about rebuilding the war chest here? I think in the past you said you can put an ATM in place around October. Just kind of thoughts on kind of funding sources, that cost of capital versus what you're seeing from a yield perspective in the market.

Conor Fennerty (CFO)

Hey, Craig. Good morning. It's Conor. I'll start with available liquidity. As I mentioned in my prepared remarks, we expect to fund investments over the course of the year 50/50 with cash and debt. The good news is we're entering the year with a position of balance sheet strength, right? Net cash position, completely unencumbered pool. We're looking at a variety of sources: the bank market, the bond market, the insurance market. It's fair to assume we've got advanced stages in all three kind of paths, and we'll pick the best approach as we get later in the year. Again, with that kind of balance sheet strength and the available cash on hand, we've got time, we've got optionality, and we'll take the best course of action.

Operator (participant)

Your next question comes from the line of Ronald Kamden, Morgan Stanley. Please go ahead.

Ronald Kamdem (Managing Director)

Back to sort of the acquisition pipeline. Obviously, this quarter, there was a larger deal in there. Maybe a little bit more call on the pipeline. Is it granular? Are there some big deals in there? And what kind of cap rates are we thinking?

David Lukes (CEO)

Hey, Ron and David, would you mind repeating that? We just lost the first couple of seconds.

Ronald Kamdem (Managing Director)

Sorry about that. The question was on the acquisition pipeline. You had a larger deal in 1Q25, just wondering if there are other larger deals in the pipeline and any thoughts on the cap rates that you're thinking.

David Lukes (CEO)

Yeah. Sure, Ron. Good morning. The amount of deal flow we look at is, as we mentioned in our remarks, pretty substantial, and the vast majority of it are single-asset sellers. There are typically regional owners that may own two, three, four, five, six assets at a time. In general, I would say our pipeline is usually going to be made up mostly of single-asset purchases and a handful of two or three packs. That seems to be the cadence.

It may be over time that we find a portfolio that is a little bit larger, but this asset class tends to be very, very granular. In terms of cap rates, we are still blending to around a six and a quarter. If you look at the past trailing couple of quarters, that can get pretty lumpy. When you get into individual assets, it can be in the mid-fives, and it can be upwards of seven, depending on whether there is vacancy and what the lease duration looks like on the rent roll, the amount of credit. In general, we are still blending to a low six.

Ronald Kamdem (Managing Director)

If I could just follow up just quickly on just a tariff question. Obviously, things have changed since April 2nd. Just curious if that changes your thinking on underwriting, what sectors you want more exposure to, less exposure to, just how does that business plan change since April 2nd? Thanks.

David Lukes (CEO)

Yeah. I would say that one of the non-changes is the fact that the vast majority of our tenants do not carry inventory. If you go back to what we have mentioned in our prepared remarks, where shopping centers are for shopping, and that usually involves stores that have inventory, large discounters or large-mass merchants, this business is more of a running errands business. There are some tenants that have inventory, but the vast majority are service tenants. Some of the ones we mentioned include banks and fitness operators, nail salons, UPS stores, Verizon Wireless. Those are the types of tenants that occupy these spaces because they want to have that quick access to convenience for running errands for the customer. In general, I would say that the idea that tariffs are causing an increase in inventory costs probably has a lesser impact.

I think a pressing question is your other one, which is, does it change our underwriting? I would say that we recognize that both debt and equity seem to be more expensive, and therefore we ought to respond by making sure that the investments we do make exceed that and make up for that cost of capital. That can show up in cap rates, where in some cases we might be less willing to pay a lower cap rate. On the other hand, market rents are still growing, and the suburban customer is still running errands. In many cases, we are seeing larger mark-to-markets on the in-place versus market rent, and that factors into the IRR as well.

Ronald Kamdem (Managing Director)

Thanks so much.

David Lukes (CEO)

Thanks, Ron.

Operator (participant)

Your next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Todd Thomas (Managing Director)

Hi, good morning. I just wanted to follow up a little bit on the deal flow and the $500 million under contract and LOI pipeline. Are you able to break out the pipeline between what's under agreement versus LOI? Can you share how the deal environment, just in general, has changed, if at all, since the start of April, whether you're seeing any change at all in conversations with sellers, terms of pricing, or willingness to transact, just given the market volatility more recently?

David Lukes (CEO)

Sure. Todd, I refrain from kind of breaking out the under contract versus LOI, and that's primarily for one reason. That is, even if a property is under contract, there's usually an out for diligence. In this business, because a lot of the assets are owned by smaller individual families, diligence is a real workflow for us. There's a lot to make sure that what we're buying is institutional quality. I think that, as we said on our last earnings call, a pipeline is always going to be fairly high, and there are some properties during that time that just don't make it through the diligence process. In general, I would say our closing rate is extremely high. The second half of your question, I just lost.

Todd Thomas (Managing Director)

Just whether or not there's any sort of change at all in sellers' willingness to transact or any pricing talk as you're kind of working through additional deals moving forward.

David Lukes (CEO)

Yeah. Willingness to sell, it's been a pretty firm no, and that is because almost everything we look at is a life event. Someone is at that point in life or beyond where they need to sell or would like to sell, and therefore they're not really timing the market as much as they are timing their point in life as to when they want to sell. The inventory seems to be fairly consistent. The pricing conversations have everything to do with who else is in the bidding tent.

If bidding tents stay large, then I think some of those pricing conversations may not change. There has been a lot more institutional interest in the asset class. We have seen more folks getting involved in the asset class, and so competition is still there. There have been recent conversations in the last month about what is the right valuation, but I wouldn't say it's been long enough to make any changes.

Todd Thomas (Managing Director)

Okay. That's helpful. Conor, if I could just ask a quick clarification. You mentioned, I think, that same-store growth in the quarter was driven primarily by better-than-expected occupancy, but same-store occupancy was down sequentially 60 basis points for the commenced rate, 80 basis points for the leased rate. Was that due to seasonality and still just better than what you had anticipated, or was that attributable to the change in the same-store pool or something else?

Conor Fennerty (CFO)

No, Todd, it's a good question. Higher-than-expected occupancy, meaning we renewed a couple of tenants over the course of the quarter that we did not expect to or had budget to renew. The problem is it's a small pool. A couple of tenants renewing is a big deal in terms of percentages. It was probably a 10-20 basis point pickup over the course of the year in that regard. In terms of the change quarter over quarter, you are correct. We did have a couple of tenants we did not renew. We had a couple of terminations, obviously higher termination income this quarter as well. I would attribute it to a lot of little things, but no kind of one answer I could say that was driving the quarter-over-quarter change.

Todd Thomas (Managing Director)

Okay. Got it. Thank you.

Conor Fennerty (CFO)

You're welcome.

Operator (participant)

Your next question comes from the line of Alexander Goldfarb with Piper Sandler. Please go ahead.

Alexander Goldfarb (Managing Director)

Hey. Good morning down there. Just a few questions. First, David, just going back to the acquisitions of, yeah, I know this has been asked, but if we think about volatile capital markets, there's a bid-ask spread that in normal times is always an art to arrive to, and certainly in a disrupted time, especially with increased capital costs or for sellers, their reinvestment options, everything's up in the air. You guys seem pretty confident that your ability to close the existing pipeline and find new deals to put under contract remains pretty much unchanged. I'm just sort of curious, just given all the disruption we've seen, how you guys are still that confident?

David Lukes (CEO)

Yeah. I guess two points. And good morning, Alex. Two points on the deal flow. One, I already mentioned that it's not like elephant hunting where you're waiting and waiting for some very large property to come to market, and a sophisticated institution is deciding when they list that. As you know, we've sold a lot in the last couple of years. We're pretty knowledgeable that there are times to sell a large asset, and there are times not to sell a large asset. If you look on our supplemental on page 16 and kind of look at the volume of what we've been buying the past couple of quarters, the average ticket size is somewhere in the $10 million-$15 million range.

These smaller properties owned by local investors, given the fact that there's often a change in death in the family, there's a change in the allocation of their resources, generational changes in desire for ownership, there seems to be much less focus on when is the right time to sell relative to capital markets and more to do with personal decisions. I do think the inventory is going to continue to be there. I think the important question you ask is about price discovery and whether the bid-ask spread is widening or not. I would certainly assume that if the economy starts to go into a negative position, you would see fundamentals change on occupancy levels or demand for space, and that would certainly help cause a widening of the bid-ask spread.

Right now, the operations and the fundamentals are fantastic, and leasing volumes are high, renewal rates are high. I think sellers and buyers do not see quite as much risk in the asset class, and that bid-ask spread is not that wide yet. That does not mean it will not change over the coming months, but I think in our business, we tend to focus on how fast information is getting out there about the economy, but when you are buying hard assets, that information does not necessarily flow into negotiations within a month.

Conor Fennerty (CFO)

Alex, just depending on the first part of David's response, as it relates to financing activity, to Craig's question, it feels like a very different playbook or scenario or outcome versus whether it's COVID or the GFC in terms of bank availability or liquidity in the sense that banks are open for business today. That could obviously change tomorrow, but I would say the IG market is a great indicator of the general health to date. Again, that could change next minute, next hour, whatever it might be. Again, it feels like maybe the GFC playbook is not appropriate in this scenario, and we'll see how it plays out.

Alexander Goldfarb (Managing Director)

Okay. David, forgive me, but it does sound like death and divorces are probably pretty good for your business to drum up transaction volume.

David Lukes (CEO)

Yeah. At the risk of saying yes, yes.

Alexander Goldfarb (Managing Director)

Second question is, you and some of your peers highlight high average household income. The portfolio you bought in Jacksonville, just over $110,000 in average household income. At the same time, some of the restaurants are reporting slowdown in traffic, and you see anecdotal evidence from different data points about people pulling back on shopping at all levels, absent, I guess, the Uber crowd. Even $110,000 is still being impacted. How do you guys feel confident that when you say, "Hey, we have an affluent portfolio, and yet we still see nationally that there is an impact in the consumer," they are pulling back on transactions that we thought used to be sort of for certain as people were trying to save money? How do you still feel confident in saying, "Hey, we have an affluent portfolio, and it's pretty bulletproof regardless"?

David Lukes (CEO)

Yeah. It's a really good point. I think that comes up a lot because we do highlight average household income, and I guess the real question is why. It's not because consumer spending is higher in high household incomes, and therefore the tenants pay higher rent or a portion of profits. As you know, ours are fixed rent leases. We really don't have much in terms of percentage rent. The sales volume of the retailers isn't really what we're angling for. The reason I personally am very focused on household income is more to do with zoning. When you get into wealthy suburban communities, and remember that zoning is local, not national or even by the state level, those local zoning boards are not very wild about entitling additional strip center retail.

It tends to be that the higher household suburbs, higher income suburbs tend to have less square footage per capita. That generally means that there is a scarcity value. Part of the thesis of this asset class is when you lose tenants, because you do lose tenants, when you lose them, it is less expensive and faster to backfill them. That gets compounded in these higher income suburbs because there is a scarcity value of real estate. To me, it is less about the gross sales volume of that specific retailer. It is much more about the scarcity value of how much real estate is available.

Conor Fennerty (CFO)

Alex, at the risk of stealing David's normal joke, I mean, our restaurant, our fine dining is Five Guys. It's a different restaurant exposure than white tablecloth fine dining.

Todd Thomas (Managing Director)

Yeah. I'm not talking fine dining. I'm talking like QSR, just some of the traffic trends here to date from some of the different operators. Yeah, I think we're talking the same thing. The zoning point is an interesting one, so thank you.

Operator (participant)

Your next question comes from the line of Michael Mueller. JPMorgan, please go ahead.

Michael Mueller (Executive Director)

Yeah. Hi. Just a quick one, sticking with acquisitions for a second. Just wondering, have you been thinking at all about changing, I guess, the guidance for the acquisition pace just because it seems like you are seeing a lot of transactions, a lot closing near term, or are you just really planning on sticking with the about $500 million a year for the next few years?

Conor Fennerty (CFO)

Hey, Mike. Good morning. It's Conor. In 2025, and I'll let David speak to how it years. In 2025, the midpoint of the range still assumes $500 million for the full year. That's an additional $360 million closing. The top end of the range assumes the pipeline that David alluded to, which is about a half billion dollars, closes over the course of the year. That would be an aggregate of about $640 million. You are correct. We've seen or we've demonstrated over the last two years that we can do north of a half billion dollars a year.

I think given this is our second quarter as a public company, we feel comfortable maintaining that current range. You're right. We're seeing enough deal flow, and we're demonstrating quarter after quarter that there's enough of an opportunity set for us to potentially see that over the longer term. I would just say for now, Mike, it feels like $500 million is a good base case to use, and David, I don't know if you'd expand on that.

David Lukes (CEO)

No, I agree. I think in two quarters into the business, it's probably prudent to stick with what our original targets were.

Michael Mueller (Executive Director)

Okay. Thank you.

David Lukes (CEO)

Thanks, Mike.

Conor Fennerty (CFO)

You're welcome.

Operator (participant)

Your next question comes from the line of Paulina Rojas with Green Street. Please go ahead.

Paulina Rojas (Head of Retail Research Team)

Good morning. You mentioned previously that your business would have or has quicker and less expensive re-tenanting, which is by itself a great advantage. Could you elaborate on how you believe your portfolio would perform in a recession or a period of slow growth relative to other strip center formats?

David Lukes (CEO)

Sure, Paulina. Good morning. If you look on page 13 of our supplemental, I think that's probably a pretty good example. You look at the bottom row, if you look at the trailing four quarters, our total leasing volume, which is new leases and renewals, and if you take the first year's base rent and then you look at it as a ratio with the total leasing Capex, our business is about five and a half months to pay back the costs of leasing. That includes both the renewals and the new leases. You'll also notice that renewals is about two and a half times the amount of new leases. My thought is that during a recessionary environment, you would start to see that shift.

Maybe you have more vacancy, and therefore your renewals are a little lower, and your new deals are a little higher. If the baseline is a ratio of two and a half to one and a five and a half month payback, you're going to end up with something that's still, call it 8, 9, 10, 12, 14 months. That's probably one-fifth or one-sixth of the payback period that we were experiencing in previous portfolios that had large format boxes that needed a tremendous amount of reconfiguring. I do think that these small fungible spaces that can change user types quickly and cheaply is a lot different than a business where you're buying credit in a purpose-built building.

Conor Fennerty (CFO)

Paulina, from a credit perspective, we started to have more credit events or bankruptcies, which we've had none in the last year plus. If you look on page 15 of the supplement, we only have nine tenants with greater than 1% ABR exposure. My guess is a year from now, we'll have two or three. And two or three years from now, we'll have one, our largest tenant, which is tough to avoid because they have great real estate.

From a risk perspective, the odds of one tenant impairing or impacting FFO growth over the course of the year is also materially lower for us versus other retail companies. To David's point, it's the economics of the business plus the diversification by tenant perspective that really makes us feel a lot better about the ability to grow the portfolio and grow cash flow over the course of the cycle.

Paulina Rojas (Head of Retail Research Team)

Thank you. My second question, you have mentioned the strong leasing activity, but have you seen any early signs of tenants experiencing a deterioration in their business or adopting a more cautious stance toward growth? If so, where are those news coming from?

David Lukes (CEO)

Yeah. Paulina, I would love to be very transparent. It's honestly been a matter of weeks. We just really haven't seen anecdotal information that's really worth talking about. There are a couple of conversations that I can see. We've had a couple of tenants that did have inventory, and their business relied on gaining inventory. Those conversations seem to flow, but they're just offset by service tenants that are looking to access the same small unit. I guess the amount of anecdotal information we have is pretty limited right now.

Paulina Rojas (Head of Retail Research Team)

Thank you.

David Lukes (CEO)

Thanks, Paulina.

Operator (participant)

Of Craig Mailman with Citi, please go ahead.

Craig Mailman (Equity Research Analyst)

Hey, guys. Thanks for getting me back on. I was going to follow up and just ask Conor the pricing differences between those three sources of debt that you were talking about. Kind of is there anything meaningful, or are they kind of all on top of each other?

David Lukes (CEO)

Hey, Craig. Good morning. Apologies for cutting you off there earlier. The pricing range, I mean, again, at the risk of reiterating my answer, it's changing by the minute, by the day. I think it's fair to assume, and this is going to depend on tenor or attachment point, depending on leverage for going to secure route, is pretty wide in the sense. It's probably low fives to high fives. There have been points in time over the last two weeks where it's been north of six. I would just come back to my original answer. We're coming into this with a position of strength or from a position of strength, excuse me. We've got a completely unencumbered asset base, and we're in a net cash position.

We can be patient, but I would just tell you, we do still expect to fund half of the 2025 investment volume with debt. From there, to your point, we do have access to the ATM and other sources of equity capital starting in October. Again, we're not reliant on equity capital. We've got a great balance sheet. We can be patient, but the kind of pricing or pricing quotes is all over the place in the last month, which is going to make us be patient and make sure that we get the right deal done. I do not know if that answers your question. I apologize.

Craig Mailman (Equity Research Analyst)

No, it does. I know it's tough to get into the basis point differences between the three as everything shifts. I guess if pricing was the same, what capital source would you guys be most interested in, right? Are you guys wanting to do private placements and then be an unsecured borrower longer term, or do you like the insurance market? Kind of what's the preference?

Conor Fennerty (CFO)

Yeah. It's a great question. Look, just as David mentioned, if our average ticket size is about $15 million, we are well suited for the unsecured market, which means likely a private placement start, and then you naturally graduate over time to potentially the public bond market. We have been a little unique in the sense that we have always liked to have some secured exposure on the balance sheet. Now, that's usually less than 5%, but there are periods in time where the secured market is more efficient than the unsecured market and vice versa.

We have always tried to maintain relationships with the Lifecos for that very reason. All that said, your question is, again, most likely it's private placement and with a natural kind of graduation over time or shift over time. Do not be surprised if we have some mortgage debt in the cap structure just because there are times of inefficiency between the two markets.

Okay. That's helpful. Apologies. I don't think anyone asked this, but if they did, you can just tell me. You guys are getting good cash run spreads. What kind of bumps are you guys pushing through, and has there been any kind of pushback on that side of the leasing equation?

David Lukes (CEO)

I would say, Craig, in general, the bump question when you're dealing with tenants is always combined with what is the starting base rent and how much capital is being put in. Net-net, all those conversations. In general, when we deal with small shop tenants, we're looking for 3% bumps. There are some new deals that are done with large national tenants that are still 10% every five. There might be reasons why that is acceptable to us. In general, the shop leases are done with 3% annual bumps.

Craig Mailman (Equity Research Analyst)

Are you guys trying to push to get closer to 4%? Is that possible? I'm just trying to think of part of the benefit of this asset class, the low CapEx, but also the potential for same store. You guys have said above 3%, but is there a way to differentiate yourself where you guys could put up 4-5% same store by changing the structure because you don't have to worry about, obviously, the low bumps of anchors?

David Lukes (CEO)

Yeah. I'll go back to the same comments before that the tenants, even local tenants, have Microsoft Excel. So when they do a net present value calculation and the bumps and the starting rent both calculate into that, sometimes if you're looking at a tenant that you think will grow over time in their sales, you might want to start with the lower rent and have a 5% annual bump. There have been situations like that. Generally, the higher credit sophisticated tenants, the purpose of that rent is to be a little bit higher than inflation, but start at a market rent that you think is achievable for them.

I would say that when we're talking about rent bumps, it's a relatively small number of leases relative to the entire portfolio. A lot of our growth over time is simply mark-to-market. One of the benefits of this business is that the weighted average lease term is lower, is smaller than in a large anchored portfolio. When you have a mark-to-market and a lower WALT, you're more likely to capture that mark-to-market. That's a big piece of what's going to drive the same store numbers.

Conor Fennerty (CFO)

Yeah. Craig, to that point, I mean, our 2024 number was 5.8%. This portfolio, to the genesis of your question, is very capable of doing north of 3%. The biggest piece that intrigues us, to David's point and multiple responses, though, is the capital needed to generate that. Even if we're doing a similar same store number to the peer group, the capital needed to generate that, in our view, is less than a third. That's the biggest differentiator. Yes, we can do north of 3%. Yes, we've proven that in 2024. That capital piece, I would just reiterate or flag for you, is the critical kind of differentiator for us versus the peers.

Craig Mailman (Equity Research Analyst)

That makes sense. Just one last housekeeping. Did you guys change the bad debt reserve embedded in guidance? I think it was 55 basis points last quarter.

Conor Fennerty (CFO)

No, we did not. Unchanged. To my earlier response, I think it was Paulina. We've had zero credit events year to date or last year either.

Craig Mailman (Equity Research Analyst)

Great. Thank you.

Conor Fennerty (CFO)

You're welcome. Sorry to cut you off earlier, Craig.

Craig Mailman (Equity Research Analyst)

I won't take offense. Appreciate it.

Conor Fennerty (CFO)

It wasn't personal.

Operator (participant)

Your next question comes from the line of Floris van Dijkum with Compass Point Research. Please go ahead.

Floris van Dijkum (Managing Director)

Thanks. Morning, guys. I know it's probably too early to talk about the tenants' impact regarding tariffs, as you've indicated. I think that's on everybody's minds and recession fears, etc. Presumably, there will be a slowdown at some point, but it's too early to say that at this point. I'm actually more curious on the competition that you're seeing for your acquisitions. I know we've spoken to a couple of your peers. Most of them have a portion of their portfolio in these kinds of assets. One of your peers has actually been acquiring about $100 million of these assets last year and is continuing to push that. Are you running into other well-capitalized REITs, or is this such a big market that it doesn't really impact your ability, or you're not really competing with those players?

David Lukes (CEO)

Good morning, Floris. It's David. The competition in the bidding tent is still primarily local private investors. There has been an increase in, I would say, institutional capital that has moved into private funds that are kind of looking at a similar strategy. We have not run into direct large institutions or direct competition against any public REITs.

Floris van Dijkum (Managing Director)

Great. Maybe a follow-up question. I know the Crow portfolio appears to be on the market again. I do not think it is going to be of interest to any REITs with the management contract in place. Maybe can you comment on what you think that is going to mean in terms of a marker for value, potentially? What do you think the appetite is there? Maybe also talk about, because I think you mentioned your portfolio is now the largest, how does that portfolio compare in size relative to what you now have assembled?

David Lukes (CEO)

Yeah. They're great questions, Floris. I mean, the reality is it is a private portfolio. It does not have published information. I hate to even speculate on size, quality, or outcome. I will say that what we're interested in is the simplicity of our business, which is we buy each building that we want to, and we ignore those that we don't. We want them to be simple. We prefer not to have a joint venture. We want to manage our own destiny and build a portfolio, construct a portfolio over time that we're really happy with.

That is one of the huge benefits of being able to handpick assets one or two or three at a time. There are other great portfolios out there in the country. They may or may not be targets for us. With 950 million sq ft of inventory in the U.S., it's a pretty deep pool to be shopping in. I don't think we're forced into looking at things that may not be a threat.

Floris van Dijkum (Managing Director)

Thanks, David.

David Lukes (CEO)

Thanks, Floris.

Operator (participant)

I will now turn the call back over to David Lukes, CEO, for closing remarks.

David Lukes (CEO)

Thank you all for taking the time to join our call, and we will speak to you next quarter.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.