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spk01: Good afternoon and welcome to Phillips Edison and Company's fourth quarter 2021 results presentation. My name is Carmen. I'll be your conference call operator today. Before we begin, I would like to remind our listeners that today's presentation is being recorded and simultaneously webcast. The company's earnings release and quarterly financial supplement were issued yesterday, February 10th, after market closed. These documents and a replay of today's presentation can be accessed on the investor section of the Phillips Edison & Company website at phillipsedison.com. I would now like to turn the call over to Michael Keller with Phillips Edison & Company. Sir, please proceed.
spk00: Thank you, Operator.
spk06: Good afternoon, everyone, and thank you for joining us. I am Michael Kaler, Vice President of Investor Relations with Phillips Edison & Company. Joining me on today's call are our Chairman and Chief Executive Officer, Jeff Edison, our President, Devin Murphy, and our Chief Financial Officer, John Caulfield. During today's presentation, Jeff will provide a brief overview of Phillips Edison & Company, discuss our differentiated strategy, and touch on the highlights of the quarter. Devin will discuss our fourth quarter operational results. John will review our fourth quarter financial results and discuss our 2022 financial guidance. Lastly, Jeff will return to provide an update on our acquisition and disposition activity and give our 2022 acquisitions guidance and provide some closing comments. Following our prepared remarks, we will answer questions from the institutional analyst community. Before we begin, I would like to remind our audience that during the course of this call, management may make forward-looking statements within the meaning of federal securities law. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Such forward-looking statements are made only as of today and will not be updated as actual events unfold. Please refer to yesterday's earnings release and our filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statement made today. In addition, we will also refer to certain non-GAAP financial measures. Information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in our earnings release and supplemental disclosure issued yesterday, which are on our website. With that, it's my pleasure to turn the call over to Jeff Edison, our Chief Executive Officer. Jeff?
spk08: Thank you, Michael. Good afternoon, everyone, and thank you for being on the call. Bill's Edison Company is exclusively focused on owning and operating neighborhood, gross-rankered, omni-channel shopping centers. We are one of our nation's largest owners of this type of center. As we speak today, you will notice that we call our tenants our neighbors. We do this because we work hard to create community at our centers, and we treat our retailers as neighbors in that community. We also prioritize customer service and believe that this nomenclature reminds our team to treat our tenants like we would our neighbors. When it comes to our centers, we believe that format drives results and also facilitates attractive long-term growth. Our average center is 115,000 square feet, which is among the smallest average size in the REIT universe. We believe our smaller centers allow for better growth because our average tenant space of 2,300 square feet aligns well with leasing demand. Approximately 70% of leases in strip centers are executed in spaces smaller than 2,500 square feet. This demand drives higher retention rates, higher releasing spreads, and overall positive leasing dynamics for PECO. Higher retention rates result in less downtime, lower TI costs, and higher NOI growth. When it comes to our properties, our strategy is simple. We focus on owning centers with the number one or two grocer in the market. Our centers have an omnichannel neighbor base where the grocer and the center have both delivery and buy online and pick up in the store or BOPUS capabilities. Our centers have a high exposure to neighbors selling necessity-based goods and services. In fact, 72% of our rent comes from neighbors offering both necessity goods and services. We focus on owning centers in trade areas with favorable demographics where our neighbors can be successful. Looking forward, we believe we are well-positioned for long-term growth. Our long-term growth includes both strong external and internal growth. We improved our balance sheet with the capital we raised during our underwritten IPO last July. Subsequently, we executed our debut $350 million public bond offering as our investment grade issuer. With our leverage currently at 5.6 times debt to EBITDA, our goal is to execute a billion dollars of acquisitions net of dispositions over three years. Our strategy creates significant opportunity for acquisitions, which I'll discuss later. This external growth will complement our strong internal growth over the long term. The key drivers of our internal growth include growing rents through new and renewal leasing spreads, executing leases with annual fixed rental increases, leasing vacant space to new neighbors, and executing redevelopment opportunities, which are primarily single-tenant, ground-up, out-parcel developments, and tear-down and rebuild opportunities for our grocer anchors. We believe our strategy has historically and will continue to prospectively generate superior risk-adjusted returns. We do believe that format drives results. Our differentiated strategy allows us to realize higher initial yields on acquisitions, plus higher NOI growth, plus lower CapEx. This leads to superior economic returns. Our results in the fourth quarter were no exception. The fourth quarter continued the momentum we have seen through 2021. For the full year, we exceeded our annual core FFO per share and same center NOI guidance. The key components of our results are as follows. The operating environment remains as strong as we've seen it in our 30 years in the business. Our rent collections are at pre-pandemic levels. We enjoyed continued high demand for retail space in our well-located small format centers. We realized strong internal growth. Leased occupancy reached an all-time high of 96.3%. Comparable new and renewal rent spreads were healthy at 18.3% and 7.8%, respectively. On average, our new and renewal inline leases executed in the fourth quarter had annual contractual rent bumps of 2.4%. We also realized strong external growth. we continue to execute our goal of acquiring a billion dollars of real estate by June of 2024. Since our IPO in July, we acquired $350 million of assets, which we believe meet our internal return requirement of an 8% unlevered IRR. Looking forward, we believe the strong operating environment enhances our ability to execute our internal and external growth plans. It positions us for meaningful long-term growth. John will provide more details on our outlook in a few moments during our 2020 guidance discussion. Now, I'd like to turn it over to Devin, who will speak in more detail about our operating results for the quarter. Devin?
spk10: Thank you, Jeff. Good afternoon, everyone, and thank you for joining us today. Our differentiated strategy of owning and operating small format centers anchored by the number one or number two grocer, continues to generate strong results and resulted in positive results for the fourth quarter. At the end of the fourth quarter, lease portfolio occupancy totaled 96.3 percent compared to 94.7 percent at December 31, 2020. Occupancy reached an all-time high in the quarter. Anchor leased occupancy increased to 98.1 percent. Inline leased occupancy increased to 92.7 percent. Our leased occupancy to economic occupancy spread was 100 basis points for the quarter, primarily as a result of our anchor leasing activity. Our inline spread compressed to 80 basis points this quarter. We believe that we can increase inline occupancy to 95 percent over time, which will add approximately 70 basis points to our total occupancy rate. During the quarter, we executed 121 new leases and 132 renewal and option leases, totaling 1.4 million square feet of space. We have leased approximately 1.4 million square feet now for four consecutive quarters. illustrating the continued strong demand from retailers for space at our centers. Comparable new lease rent spreads were 18.3 percent, and comparable renewal lease rent spreads were 7.8 percent. Our in-house leasing team has been busy executing new inline leases with neighbors, including Sports Clips, Dunkin' Donuts, and retailers from many different lines of necessity retail. Demand for our retail space is coming from retailers in many different businesses. A growing trend that we have seen is national retailers such as Chipotle, Starbucks, and Humana looking to expand their footprints in our suburban markets. Additionally, we have a dedicated renewals team focused exclusively on keeping our existing neighbors in our centers. We enjoyed a retention rate of 86 percent for the quarter, which is just shy of our full-year retention rate of 88 percent, and in line with our 2017 to 2020 average retention rate of 87 percent. We believe our retention rates are market-leading. These high retention rates are important because we suffer no downtime and have to invest less tenant improvement dollars into the space. In Q4, our average TI for renewals was only $1.29 per square foot, and for the year averaged 95 cents per square foot. No downtime and lower TI results in better cash flow growth. These solid retention rates are evident that our retail space is a great place for our neighbors to successfully operate their businesses. An important part of our internal growth story is redevelopment. During the quarter, we stabilized two ground-up Alparsa developments, one at Plaza 23 in the Newark, New Jersey MSA, and one at Alameda Crossing in the Phoenix MSA. This additional GLA of 7,300 square feet is fully leased, and the neighbors took possession of the space during the quarter. We have 17 additional redevelopment projects that we began during 2021. The total projected cost for these ground-up redevelopment projects is $45 million. We currently expect incremental underwritten yields on these projects to be between 10 and 12 percent unlevered. Our pipeline currently includes eight additional projects in 2022, which represent an additional $23 million of investment. We expect this pipeline of redevelopment opportunities to grow throughout the year. For full year 2022, we expect to invest approximately $45 to $50 million in ground-up and redevelopment opportunities. In addition, we expect to spend $50 to $55 million on capital improvements, tenant improvements, and leasing commissions at our centers. The results that I just reviewed exhibit the strong operating environment that we currently enjoy and believe we'll continue to enjoy through 2022. I will now turn the call over to John for a discussion of our financial results, our recent capital markets activity, and our 2022 financial guidance. John?
spk03: Thank you, Devin, and good afternoon, everyone. Fourth quarter 2021, NAREIT FFO increased 7.3 percent to $49.4 million, or 39 cents per diluted share. Fourth quarter core FFO increased 24.5 percent to $60.8 million, or 47 cents per diluted share. The increase in both NAREIT and Core FFO for the fourth quarter of 2021 was driven by increased revenue at our properties and improved collections. Further driving the increase was a reduction in interest expense versus the fourth quarter of 2020. We had a non-cash charge of $7.4 million for our earn-out liability in Q4 2021, impacting our NAREIT FFO, and we expect an additional charge in the first quarter of 2022 totaling $1.8 million, to cover the final settlement of the earn-out in January 2022. Approximately 1.6 million operating partnership units were delivered in January, marking the end of the earn-out period. As we look at the fourth quarter, our general and administrative expenses were higher than other quarters, primarily due to performance-based compensation on our short and long-term incentive programs realized in the quarter. we anticipate our full year 2022 GNA to be in line with our full year 2021 GNA, which was $48.8 million. Also in the quarter, our capital expenditures were higher on a run rate basis than other quarters due to timing and increased tenant improvement dollars spent in the quarter driven by the high volume of leasing activity. Compared to 2020, our NAREIT and core FFO per share results were impacted by a 15% increase in our weighted average share count as a result of issuing 19.55 million shares during our July 2021 IPO. For the full year, our core FFO per share of $2.19 exceeded the high end of our guidance of $2.14 to $2.18. Several things lined up for us during the quarter which pushed our results above the top end of our guidance. We had a number of acquisitions in the pipeline that we were able to close before the end of the year. Our occupancy increased exceeded expectations. Our neighbors began paying rent more quickly than anticipated and our prior period collections were higher than expected. We still have a little over $3 million outstanding on payment plans with our neighbors. We will continue to be conservative in our estimates for collections at the midpoint of our guidance range for 2022, which I will get to shortly. Our fourth quarter 2021 same center NOI improved to $88.8 million, up 15.2% from a year ago. This improvement was primarily driven by a 2.4% increase in average base rent per square foot, stronger collections compared to 2020, and out-of-period collections for the quarter of $2.3 million. When comparing our results to the quarter ended December 31, 2019, our Same Center NOI increased 3.9%. We believe this is a true indicator that we are experiencing growth in our Same Center portfolio above and beyond the COVID recovery. As of December 31, 2021, we had approximately $604 million of total liquidity comprised of $116 million of cash, cash equivalents and restricted cash, plus $489 million of borrowing capacity available on our $500 million credit facility. As of December 31, 2021, our net debt to adjusted EBITDA was 5.6 times, compared to 7.3 times at December 31, 2020. At December 31, 2021, our debt had a weighted average interest rate of 3.3%, and a weighted average maturity of 5.2 years. Approximately 99% of our debt is fixed rate. Our debt ratios and maturities have improved as a result of our IPO in July and debut public debt offering that closed in the fourth quarter. The $350 million, 2.625% coupon 10-year notes significantly extended our debt maturity profile while also diversifying our capital sources. Given our growth plans and maturity profile, we believe we can become a serial issuer in this market. On February 10th, we filed a shelf registration statement and a $250 million ATM equity offering program. Following our July IPO, this is the logical next step for us and allows us to efficiently access the capital markets as opportunities arise. We have no immediate plans to utilize the ATM program, but wanted to have this option available to us as we continue to evaluate market conditions and capital needs. Yesterday, on February 10th, 2022, we issued our 2022 full year guidance in our earnings release. For 2022, our same center NOI growth guidance is between 3% and 4%. This is consistent with the growth we have delivered on a historical basis and what we believe we can continue to deliver going forward. Our NOI growth will be one of the core drivers for our core FFO growth. Additionally, we expect to see a reduction in interest expense due to less debt on our balance sheet. For 2022, our core FFO guidance range is between $2.16 and $2.24. When compared to 2021, we expect total core FFO to increase by approximately 11% to $282 million using the midpoint of our guidance. With that, I would like to turn the call back over to Jeff to discuss our recent portfolio activity, provide our 2022 acquisition guidance, and recap our long-term growth strategy. Jeff?
spk08: Thanks, John. Following our IPO in July of 2021 through December 31st of 2021, we acquired seven gross-ranked centers and two out-parcels for $267.4 million. This was at the high end of our guidance range. So far, in 2022, we've acquired two additional grocery-anchored shopping centers for $82.9 million and have an additional center under contract for $17.5 million. Our 2022 acquisitions included Cascades Overlook in Arlington, Virginia, a suburb of Washington, D.C. This 151,000-square-foot center is anchored by Harris Teeter, a Kroger banner. And Oak Meadows Marketplace in Georgetown, Texas, which is an Austin suburb. The 79,000-square-foot center is anchored by Randall's and Albertson's banner. We believe the centers we have acquired since our IPO will meet or exceed our unlevered IRR target of 8%. Our acquisition pipeline is healthy. For 2022, we are guiding to acquire between $300 and $400 million of assets, net of disposition activity. As we have discussed in the past, we identified 5,800 grocery-anchored shopping centers in the United States that fit our strategy. These centers are all anchored by the number one or two grocer in their respective markets and meet our demographic requirements. We are focused on the three-mile area around each center. We believe this strategy presents a wider and deeper pool of assets to choose from versus a strategy strictly focused on a limited number of markets. To meet our stated goal of $1 billion of net acquisitions by June of 2024, we need to acquire approximately 15 assets per year. This represents approximately 2% of our targeted shopping centers that trade each year. We are well on our way to meeting our billion-dollar goal. To optimize our internal growth, we will continue to selectively recycle assets. These proceeds will be deployed into higher quality, higher growth assets. Since our IPO, we have disposed of 11 wholly owned centers, two out parcels, and one land parcel, totaling approximately 1.1 million square feet for $91.7 million. This was slightly below the low end of the guidance range of $95 to $105 million, which we gave on our third quarter earnings call. Now, before we get to the Q&A section, I would like to quickly recap our quarter. The operating environment remains strong. We realized strong internal growth. We also realized strong external growth. Our differentiated strategy produced strong results for the quarter and have set high expectations for 2022. With that, we'll begin the Q&A portion of our call. Operator?
spk01: Thank you. And to maintain an efficient Q&A session, you may ask a question with an additional follow-up. If you have additional questions, you're more than welcome to rejoin the queue. To ask a question, simply press star 1 on your telephone. To withdraw the question, press the hash key or the pound key. Please stand by while we compile the Q&A roster. Your first question comes from Rich Hill at Morgan Stanley. Your line is open.
spk12: Hey, guys. First of all, congrats on a really nice quarter. I wanted to talk through the guide. It is very strong on an absolute and relative basis compared to your peers. And I want to maybe just understand and unpack a little bit more if there's something differentiated about your portfolio here. Many of your peers talked about bad debt being a headwind in 2022. And I think back to your portfolio already being above 2019 levels on the same story on a Y basis. So I guess that's a long way of saying, is there something different about your portfolio? Do you not have as much bad debt? Or is this really about your portfolio just holding up and bouncing back a little bit better than peers, which is leading to a guy that looks really strong?
spk08: Yes. Rich, thanks for the question and being on today. You know, we do, as you know, we really do believe that our format drives results, and we do think that our format of having the grocery store with the necessity-based goods has performed well during the pandemic and will continue to do that going forward. So, I would say that we are optimistic about the year. But we also, you know, we've taken a really hard look, and, you know, we think these are achievable goals for us, and we wouldn't have them there if we didn't believe that. So I would say that, you know, overall it is, you know, the format that we've got that I think is driving these results. But, John, do you want to give our devs a little more detail on that?
spk03: Sure. Thanks, Jeff, and thanks for the question, Rich. So as we look at it, the biggest component to the core of a full growth is really the NOI growth. And so our peers have talked about the bad debt impact. And ultimately, because our impact in 21 was not as significant, as we go to 22, we've got a base of stability. So we've been communicating and our properties have been operating in a new world of post-COVID world. And ultimately, it's a combination of the organic growth that we're driving and as well as the acquisitions that we've been able to make and that we're projected to make. And so just to get ahead of the question that I'm sure I'll be asked, the impact on the quarter specifically of out-of-period collections is about $2.3 million. So that's the quarter. That was kind of the bad debt reversal in the quarter. And as we look to the next year, we only have $3 million of payment plans outstanding left. And so as we looked at our guidance on the same store basis and on an XO, we do anticipate collecting that, and it is accounted for in the upper end of our guidance.
spk12: Got it. Thank you. And if I may, just one more question. I know you guys focus on unlevered IRRs when you're acquiring properties, so forgive a sell-side question here, but could you maybe give a little bit of guidance on what the cap rates for your acquisitions would be in 2022? Sure.
spk10: Go ahead, Jeff.
spk08: Go ahead, Deb. Go ahead.
spk10: Hey, Rich. Thanks for being on the call this morning. Where we are acquiring assets, Rich, today in the market is between a low of five and three quarters and up to six and three quarters. So it's in that range that we are acquiring assets. And you'll note that for full year 21, the weighted average cap was 6.4 on acquisitions. And in the first quarter, the cap rate was almost six, just under six. So it's in that range, and that's where we expect it to stay on a go forward. Okay.
spk12: So somewhere between 6 and 6.4 for 2022, maybe as tight as 5.75. Okay, I got it. Thank you, guys. Congrats on a good quarter again.
spk08: Thanks, Rick.
spk01: Your next question comes from Caitlin Borrows with Goldman Sachs. Your question, please.
spk04: Hi, good afternoon, everyone. Maybe one on occupancy. You guys had some meaningful increases in occupancy recently. in the third quarter. And again, in the fourth quarter, Devin, I think you mentioned that you think inline occupancy could get to 95% increasing occupancy, 70 basis points overall. So I was just wondering if you could give some more detail on your expectations for 2022 and given the strong operating environment, how much additional increases realistic near term.
spk10: Yeah. Uh, thanks Caitlin. Um, as you saw, um, both in the fourth quarter and through full year 21, we were successful in increasing our occupancy to the level that we're currently reporting. We guided on that occupancy increase to occur over the next two years. So we believe that we will get that inline occupancy up to 95% over the next 24 months. And how much of that we're going to get in 22 is hard to know. But based on how strong the pipeline is currently, we will probably get a meaningful component of that in calendar year 22. Got it.
spk04: Okay. And then maybe just one on development. You guys have a number of development and redevelopment projects, and it looks like a few had either the stabilization quarter pushed out a little or a little change in cost. So just wondering if you could give some detail or background on the trends you're seeing in time to complete projects and also on the cost side and the impact that has on PECO.
spk10: Sure. So on our redevelopment, Caitlin, you know that they are smaller redevelopments and therefore they have shorter cycle times. And so that makes it a little bit easier for us to anticipate when they're going to come online. We have seen increases in costs, and we have included those increases in costs in our budgeted numbers. And the returns that we've articulated include the increases that we're seeing on costs. Where we're seeing delays is in the permitting process, and then in some instances in terms of the availability of the necessary goods. But all of that is built into our expectations And therefore, the numbers that we gave in our earnings release, we're confident we will deliver on, and we continue to be very happy with the kind of returns we're able to generate on this activity.
spk08: And, Caitlin, we continue to see really strong demand for these particular outlets, so we're I would say we're optimistic that we will continue to have that strong demand from the retailers looking to expand into these locations. We're not seeing anything on the leasing side. There is some stuff on the permitting side, and as you point out, the cost side, but in terms of tenant demand, it is extremely high for these locations. They do have drive-thrus, and they do have the conveniences that a lot of the retailers are focused on right now.
spk04: Yeah, that makes sense. Thank you.
spk01: Our next question comes from Craig Schmidt with Bank of America. Please go ahead.
spk07: Yes, thank you. I guess, you know, throughout the fourth quarter earnings we've been hearing about a transaction market that's getting much more competitive and seeing cap compressing cap rates. I'm just wondering, given your different approach to surfacing acquisitions, are you seeing that same challenge, or are you able to circumvent it?
spk08: Greg, it's a great question. And the answer is, yeah, we are seeing more competition for the properties that we're buying than we have historically. We are starting to see, we think, a fairly significant increase in volume of product that's coming onto the market. It's early days, but it does look like we are starting to see a lot more product on the market. The major competition is coming on the portfolio side. As you know, I mean, there's some really aggressive pricing happening on the portfolio side. On the individual asset, you know, which is what we're buying, you know, in that, you know, smaller size, sort of smaller bite size, we are, you know, again, we are seeing increased competition. But in terms of dramatic pricing changes, no, certainly not what we're seeing on the on the portfolio side. I think there's been probably 50 basis points of compression in our markets, 25 to 50, and we think that will continue. As we said earlier with Rich's question, we're seeing that five and three quarters to six and a quarter as the range on the cap rates. But, again, we continue to selectively find the assets where we can get that 8% on levered IRR, and that part we continue to be optimistic about.
spk07: Great. And then just as a follow-up, store closings were unusually low in 2021, and they have remained so heading into 2022. What are your expectations for store closings the rest of the year and what does your watch list look like?
spk08: I would say we're optimistic this year about store closures. We don't think there's going to be a spike. We're not hearing anything that would give us a spike in store closures in the second half of this year. You know, we did have, we've had a lot of fallout over the last couple of years, and I, you know, we think a lot of our retailers are on pretty stable ground right now, and the ones that we have been most concerned about, you know, have stabilized to a big degree. You know, we are fortunate in not having much exposure to, you know, that second anchor, and our grocers who are, you know, who make up, 34% of our income, they're doing really well. And they're working through the inflation and supply chain issues in a way that we think is really positive and certainly are seeing really good results on the ground in terms of their sales. The other areas, the non-grocery, non-necessity-based areas, You're always watching those and how the consumer is going to be affected by that.
spk10: Jeff, the only thing I would add to that is, Craig, on our watch list, you know, the largest tenants in our watch list are in fitness, pet supplies, office supplies, those categories. But the top five tenants on our watch list represent less than 2.5% of our total ABR. So it's not a meaningful exposure. And as we come out of the pandemic, a lot of these retailers' businesses are improving, particularly fitness. So, again, it's something we watch closely. But the beauty of our business model is we are highly diversified in terms of our exposure to tenants, and therefore the watch list exposure is well diversified.
spk07: Thank you.
spk01: Thank you. Our next question comes from Juan Sanabria with BMO Capital Markets. Your line is open.
spk02: Hi, thanks for the time. Just a big picture question for me. Do you have a sense of the latest trends across your portfolio from a consumer perspective, just given some of the inflationary pressures? We had a headline consumer confidence today, take a ding. People are clearly feeling a little worse off given the rise in prices, but just curious what you guys are seeing on the ground from your pockets of consumers.
spk08: Yeah, it's a great question, and we are watching it in real time. You know, we continue to see strong use of our centers, and, you know, if you look at the the stats, you know, we have more customers visiting our centers today than 19. So that part, and that continues to work, you know, in happening in real time. So we're optimistic about that. And, you know, looking at it sort of closely, you know, for any kind of potential changes in that. But, you know, certainly you're hearing a lot about inflation. and it is affecting specific retailers more than others. But I would say overall our view of the consumer is that, and again, you know, we're in the necessity part of the business, so we're not as variable to some of retail as others are. In our space, you know, we would say that, you know, We're very positive about the environment that we're in right now, and we're not seeing the consumer really pulling back, particularly on the necessity side. If anything, we're seeing really solid growth, and our retailers are seeing solid growth as well. I don't know, Devin, if you have any other thoughts on that, but that's been our –
spk10: I think you nailed it, Jeff. I mean, the thing that protects us to a degree is the fact that 73% of our rents are coming from necessity-based goods, necessity retailers, and obviously the consumer has less discretion in terms of necessity goods than they do in non-necessity goods. And so we have not seen the current environment yet become a meaningful headwind. But again, it's something that we're concerned about and are watching closely.
spk02: Thanks. And then just a follow-up on the balance sheet. Recognizing the ATM is maybe more just best practice and gives you optionality, but any rethinking of leveraged targets to maybe keep it lower for longer and and use your strong cost of capital you guys have performed well since the IPO to kind of match on an equity perspective rather than using up the dry powder with the billion-dollar target for acquisitions?
spk08: We continue to be committed to the fact that if we can find projects that we can get an 8% unlevered IRR on a consistent basis with our strict underwriting criteria, and we'll buy them the number one or two grocer in a market that has really strong potential. So, if we can do that, we're going to continue on our acquisition strategy. The market will drive us to reduce that. We, you know, we will, but again, you know, we are As we made the big jump at the IPO, we are committed to keeping our balance sheet at investment grade. Could we get up to the low sixes in terms of debt to EBITDA? Yes. That's a possibility that the market will drive us to. That's our strategy. We continue to believe there are strong opportunities to buy selectively. And at that pace of $350 million, we're at a very, you know, cadenced stage. acquisition pace that's not putting pressure on us to get money out, but giving us the opportunity to get the right amount out. And we'll stay disciplined on it. But if we're getting 8% on levered IRRs with our criteria for the grocery, we think that's going to give us really strong returns and be able to outpace our peers, we hope, in terms of results.
spk02: Thank you.
spk08: Thanks.
spk01: Your next question comes from . Your line is open.
spk11: Hey. Good afternoon, I suppose. First question is on the lease . I know they can be lumpy, especially on the new side. But with that in mind, I guess can you discuss the jump in new lease rates in the fourth quarter? Is that more an anomaly, maybe perhaps due to mix? And then how would you assess the near-term outlook for spreads if you look at your expiring rents here over the next year or two versus market rents?
spk10: Yeah, Handel, if you look at our new leasing spreads over time and you take the pandemic year of 2020 out of the picture and you go back to 2017 and look at 2017, 2018, 2019, and 2021, the average new leasing spread for us was 14.9%. And so, you know, the metric that we put up in 2021 of 15.7 is in line with what we've been able to do historically. So we don't tend to see the volatility in leasing spreads. I mean, if you look at that four-year window, you know, the low was 13.3 and 19, and the high was 15.9 and 17 with an average of 14.9. That's helpful, Devin. I suppose that's...
spk11: perhaps more due to having less big box space in the mix? Is that part of the consensus?
spk10: I mean, again, it's no hand out. One of the things that, you know, we think really differentiates us is the fact that our average center is 115,000 square feet and that extra grocer, our average tenant is less than 2,500 square feet. And we have less exposure to the B box, uh, retailer. And, you know, that's one of the reasons why there's less volatility in our leasing spread than there may be in others.
spk11: Got it, got it. I think I heard, maybe it was John who mentioned this in his comments, that TI dollars for leasing in the fourth quarter were higher. Can you talk about that a bit more? Was that a bit of an anomaly, something to do with some specific space that might have been, I don't know, for some reason perhaps more difficult to lease, and how we should think about those? that level of spend into 2022. Thanks. Sure. John, do you want to take this?
spk03: Yeah. So, Handa, you did hear that. So, in the fourth quarter, they were higher dollars. And I wouldn't say it was any space in particular. Absolutely, the kind of cost per space does vary by the use and the size. But I would say in terms of the timings, it was higher when you look at the quarter individually. On both the TI and the capital side, just the capital improvements, if you look at the supplement, almost two-thirds of our capital improvements were spent in the fourth quarter. So TI is really a function of we've had increased leasing volumes, and I would say that that will carry into 2022. I believe it was in Devin's remarks, we provided some comments that it would be approximately $50 to $55 million for that lump sum for the full year is what we're expecting, and that would be CITI as well as leasing commissions.
spk11: Got it. Very helpful. And then if I could, just one follow-up on an earlier comment. I think it was Craig who was asking about redevelopment. I know your project is a bit more bite-sized, but I guess I'm curious how you're thinking about the sizing of the overall pipeline here. Obviously, cap rates are compressing. There's strong demand for space. I guess how much of a capacity or maybe a desire to make this a more meaningful contributor to earnings? I know you're adding a few more projects this year, but, you know, not moving the needle too dramatically. So I guess I'm curious, in light of what's going on around it, why not expand it more?
spk08: It's a great question, and the answer is we'd do more if we could. We are working really hard to build that up. We have a really disciplined view of what we want to do on the development side. and it's primarily single-tenant and small multi-tenant spaces adjacent to our centers, and then some of the teardown and rebuilds we do for the grocers that we get good economics on. If we could do a bigger volume, we would. We just don't, you know, given the timing it takes to get these up and running and the You know, the volume they're in, you know, they're a million to three million kind of bytes. You know, it just takes a lot of time and effort to get those in, and that's why, you know, we do it. But at the kind of returns that we're getting, you know, in that nine to ten return on that investment, it's a really – it is a great vehicle, and if we could get it bigger, we would. And we will continue to work on ways to do that. But for the foreseeable future, I think looking at it as about a $50 million a year business, I think that's a good way of looking at it.
spk11: That's great color. And good luck to the Bengals.
spk08: Yeah. Hootay.
spk00: Hootay. Thank you.
spk01: Our next question comes from Mike Mueller with JP Morgan. Please go ahead.
spk13: Yeah, hi. So, so 47 cents in the fourth quarter, if we back out the couple of cents of prior period, you're at 45 annualized is still about 180. The, I guess, you know, the average annual, the average quarterly number to get to 20 is about 55 cents. Can you help us bridge the gap in terms of the ramp from 45 to that average of 55 or, you know, the higher at the end of the year? Cause it seems like you get a couple of cents from, or a few cents from core growth. And is the rest just acquisitions?
spk03: So, hey, Mike, thanks for the question. On the quarter, the 47 cents, one thing I would say is that, yes, there was the prior period collections, but we did have higher expenses going through that goes through that NOI number because of the corporate kind of what we call corporate property operating. We mentioned that on the G&A side that we had higher performance computation, and that also is true for those that run our properties because they had an amazing year as well. So I think those two kind of neutralize, they kind of offset each other. And then, so when you take that, you add in the same center growth, the acquisitions that we made in 2021, and then the net acquisitions that we are looking at for 2022. It's really, when you look at the jump, the core is at NOI. I also, in my prepared remarks, I had mentioned that you know, on a cost level, G&A actually will be, you know, pretty constant. It'll be in line at about that number. And then interest will be a little less than it was in 2021 because of the lower debt load.
spk13: Got it. Okay. And then just thinking about your escalators, can you talk about what you were getting on 2021 leases in terms of bumps versus the in place for the portfolio? Certainly.
spk10: John, go ahead. I wasn't sure if Mike's question, if he was asking about what the built-in rent tager is on new leases. Was that your question, Mike?
spk13: Yeah, yeah. Basically, you know, what's your average in place today? And in terms of the 2021 lease signings, how do those bumps on the new leases compare to what's in place?
spk03: Sean, go ahead. Sure. Okay. Yeah, I'll go ahead and take that. So, you know, we continue to, our new leasing and our renewal leasing, we continue to push and add, you know, embedded rent bumps that I would say are in the 2% to 2.5% range. I would say in the embedded base in the portfolio today, that comes through in NOI at about 60 to 70 basis points. And, again, that's because the 2% is primarily on our inline neighbors. And then when you consider that's about half of our rent, that would be 100 basis points. But then it's, you know, in our portfolio, it weights to about, you know, 70 basis points.
spk13: Got it. Okay. That was it. Thank you.
spk03: Great. Thanks, Mark.
spk01: Our next question comes from Tammy Fick with Wells Fargo Securities. Your line is open.
spk05: Great. Thank you. Just a question on guidance. I'm just wondering if you can maybe help us answer this a little bit just a moment ago about the 70 basis points of contractual bumps embedded in the portfolio. But, you know, what are the other components of 2022 same-store NOI growth guidance to just maybe help us frame that up beyond the 70 basis points from the rent bumps? Thank you.
spk03: Sure. I'll go ahead and take that one. Thanks, Tammy. So in our 3% to 4% same-store NOI guidance, I did just mention that the rent bumps piece we would say is, you know, 60 to 70 basis points from the embedded portfolio. I would say new leasing spreads are, you know, and again, this is for 22, 70 to 80 basis points. I would also say that redevelopment is 70 to 80 basis points. That's the out-parcel projects that we've been discussing previously. The big lift is in occupancy. You know, we, we, you know, have meaningfully increased occupancy and that will continue to carry income into 2022 as well as our projections. And so that's 200 to 250 basis points of our growth. And then the math is actually similar to what is that we have about, you know, call it 80 basis points assumed of a loss in same center related to bad debt. So in the, In the 2022 year, we are anticipating that our bad debt will return to historical levels, which is between 60 and 80 basis points of revenue. And that range, you know, is what's giving us the 3 to 4%. Perfect.
spk05: That's really helpful. And then I appreciate the comments around the consistency in releasing spreads. But given, you know, currently high occupancy and expectations for continued growth there, I mean, should we be thinking about, you know, bigger releasing spreads going forward if you can sustain that occupancy level? Or do you feel like you're, you know, putting tenants up against, you know, kind of higher occupancy costs at this point?
spk08: Kim, it's a great question, and it's one that we, you know, you're balancing as we get to the, you know, to improve the occupancy and you're at levels where you have more pricing power than you have, that we've had historically, can we realize that in higher rent spreads? The answer is we have not assumed that in our assumptions, but we do think that there is that opportunity, and we're going to be testing that this year to see if we can do that. I'd say it's early in terms of whether we're going to be able to go above those numbers on a go-forward basis. But we are in about as good of an operating environment as we've ever been. So we're hopeful that we can push those a bit.
spk03: And, Jeff, just to add on to that, Tammy, the second part of your question was whether, you know, the pressure that we're putting on our neighbors. You know, I would first say that, you know, our grocery health ratio we reported was 2.4%. And really, those are very long leases, so that's not really where the pressure will be applied. When we look at our in-line neighbors, you know, from a ratio standpoint, we're, you know, our estimates are we're about 10% of their cost, and that varies based on the usage. And so, as we look at the growth that they're realizing, given the necessity-based nature and their ability to push those costs, you know, we believe we can achieve these and maintain that relationship without putting excess pressure on our neighbors.
spk10: And Tammy, the last piece is we don't believe that our in-line tenants are feeling pressure because as you note in our retention rate at 88%, nine out of every 10 tenants are renewing and they're renewing at these kind of spreads that we've been talking about. So the evidence is clear that the tenants do not feel pressured. You know, their businesses are, thriving in our centers, and therefore they want to stay in our centers, and the retention rate is reflective of that dynamic.
spk08: Yeah, and Tammy, one thing that I would add in as well is when you think about inflation, I mean, we've been getting these kind of spreads in a 2% inflation environment. If we were to move to 3% to 5% inflation, we believe that would give us additional impetus to be able to grow our rental spreads. But we'll see. I mean, again, that is to be seen as we progress through the year.
spk05: Okay, I appreciate that. And then maybe just one last question. Just as we think about dispositions in 2022, curious if you have anything teed up there and maybe what you're expecting for the year in total. And just if you can give us a sense for, you know, cap rates on the pool of assets that you're looking to sell.
spk08: So as we talked about, we do know like we are, the $350 million is a net number. So our dispos will be on top of that, so our acquisitions would be higher by whatever that number is. And that range we've given of 300 to 400, we think there'll be, you know, in a, we haven't given guidance in terms of what our dispos are. I mean, historically, they've been 100 to 125 million a year. And I think, you know, as As we think about it, we're probably thinking in that kind of a frame. But, again, we're really focused on making sure that we get the incremental growth from the net acquisitions.
spk05: Great. Thank you.
spk01: Our next question comes from Todd Thomas with KeyBank. Your line is open.
spk09: Hi. Thanks. Just first question, I just wanted to follow up on investments and the strategy. You know, there does seem to be a bit of product coming to the market. Is there any appetite for sort of a smaller mid-sized portfolio or should we generally expect the one-offs primarily? And would there be a scenario where it might make sense to grow the joint venture and asset management platform?
spk08: Todd, thanks for being on. It's a great question. Yes, there is additional product coming on the market. Yes, we are looking at every portfolio that is for sale and have obviously looked at all the ones that have either transacted or been committed to date. I would not anticipate us getting involved in a portfolio in the current environment where there is a large premium paid. We believe there's a portfolio premium paid. If that continues to be the case, then we would anticipate, you know, continuing to grow through individual acquisitions. But again, you know, if we can find something that meets our eight unlevered IRR in a portfolio basis that we think we're getting market, not a, you know, a premium to market, We obviously, we would be very, we'd love to look at that and we'd love to, you know, to buy that if that, if we can. So it's, but again, it's going to be driven by, you know, can we underwrite it to an eight unlevered IRR and do we think we're buying it at a, you know, at more of a market rate than a portfolio premium type of rate. So that's how I, that's how we're kind of thinking about it. We do, you know, we look at, basically everything that comes on the market because that's, you know, we've been doing this for a long time. We have the relationships, and we're on the top of the list of anybody who's selling open-air centers to talk to us. And so we will continue to review those and try to find the best opportunities. I don't know, Kevin, if you had any other thoughts on that.
spk10: Yeah, the only thing I would add, Todd, is, as you know, we built this portfolio over time asset by asset. And, you know, the reason we haven't been successful in buying a lot of portfolios is because we believe that there is a portfolio premium that's typically paid. And that makes it more difficult for us to hit our return objectives. And that would be the answer on that part of your question. And then on the second part of your question regarding the asset management business, you know, we are constantly approached by institutional investors to partner with them so that they can get the benefit of our operating platform for their investment dollars. You know, it's something that we will continue to look closely at. And if we can find, you know, the right partner that allows us to meet our objectives for our arm balance sheet growth, et cetera, we would entertain it.
spk09: Okay. And then in terms of some of the acquisitions that you completed, here in the quarter and also what's in the pipeline. You know, I was wondering if you could speak to Arapahoe, both Arapahoe and maybe in town and country, about 200,000 square feet or a little bit more. You know, not out of bounds. You have, you know, a number of centers that are, you know, a little bit larger in size, but they are typically larger than what the company owns today with, you know, a bunch more boxes. You know, should we expect to see some you know, investments going forward be a little bit larger, a little bit boxier in nature, or is it just, you know, sort of mixed in the quarter?
spk08: I would say it's mixed in the quarter. And the two, I mean, the two centers, Arapahoe and Town & Country, Town & Country is a very specific case, which it does, it is larger, but it does have two gross rankers. It operates as two different centers, and you It's a physical issue you've got to look at, but it's almost like we bought two different centers. And in that case, it's not a large property acquisition when you think of it as two centers. Arapahoe was a very unique situation where we felt a part of the center operated as a grocery anchored shopping center, and the majority of that And we had two boxes that we had to buy in order to get that. And those two boxes were long-term, you know, good credit properties that we felt like, okay, we will take that in order to get what we really wanted, which was the Grocer Anchor Shopping Center part of the center. And, you know, fortunately, to date it's worked out extremely well, both of them. from a new leasing and our ability to grow rents at both of those locations really early on, obviously, in their acquisition or our ownership process. So we're very happy with sort of the progress we've made on those centers in a very short time.
spk09: Okay. And then if I could, real quick, John, two questions related to the guidance and the corridor here. First, was there any benefit to straight-line rent realized in the quarter that we should think about moving forward, or is the roughly $2 million of straight-line rent in the quarter, is that a good run rate to think about for 22? And then also, in the core FFO reconciliation, I think there's the 7 to 8 cents for transaction costs and other What is that exactly and where does that show up in the income statement? Sure.
spk03: So in terms of straight-line rent, I would say that for the quarter, I would think that as I look to 2022, the fourth quarter is a little higher. I would say, you know, kind of $2 to $2.5 million is a good estimate for straight-line rent specifically. And then to your question on transaction costs and transaction activity, at this time I believe those are actually going to go through on our income statement. I think we have a caption right now and I'm pulling it up. That actually is, it's going to be in the other expense and income net line on our income statement. And then in our reconciliations, they'll come through as that transaction and acquisition expenses. which we have as an add back to core FFO, but it does impact may read FFO.
spk09: Right. And, and, and so what is that exactly? The transaction, how, how much of it is related to you know, sort of abandoned or, or you know, I guess acquisition costs versus versus other.
spk03: So those are it's, it's more transaction over on the corporate side. So it would be, some of it is failed to transaction cut or failed, acquisitions, but other components are just expenses that we had related to the IPO that we are paying. And it's actually some of it is non-cash expenses that we're recording going forward. So I would expect it to be at this level in 2022 and then kind of tapering from there.
spk09: Okay. All right. Great. Thank you.
spk01: Thank you. Thanks, Doug. And this concludes our Q&A answer session. I would like to turn it back to Mr. Edison for some closing comments.
spk08: Thank you. Thanks, everybody, for being on the call and for your questions. We had a really nice quarter. We enter 2022, I think, in a really good position. We're excited about some of the opportunities it's going to uh, great for us. And, uh, as you know, we, again, we, we appreciate your, your questions and, uh, obviously are here to answer them as we, as we go forward. Uh, you know, we'll, we will, uh, we'll root for the Bengals this weekend, um, because we have to, because there are, you know, we, we, we're, we got our Cincinnati base. Um, and, uh, um, but, but for you guys, we thank you for your, your time today and, uh, look forward to hopefully having a really good, uh, 2022, uh, It's certainly starting off really well. So let's keep our fingers crossed. Thanks, guys. Appreciate it.
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