4/24/2025

speaker
Janice
Conference Operator

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 Current Blind Properties Core First Quarter 2025 Earnings Conference Call. Our 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 questions 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 Rice de Perez, Vice President of Capital Market. Please go ahead.

speaker
Stephanie Rice de Perez
Vice President 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 Rooks and Chief Financial Officer Connor 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 some 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 infirmities, 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 of the SEC, including our annual report on Form 10-K. In addition, we will be discussing non-GAAP financial measures on today's call, including FFO, operating FFO, and same-property net operating income. Descriptions and reconciliations 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 Lopes.

speaker
David Rooks
Chief Executive Officer

Good morning, and welcome to CurbLine Properties' first quarter of 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 stand-alone 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-digits 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 Connor 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 a 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's a 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 Curb 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 to 2,000 square foot 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 square feet of new leases and renewals signed, including deals with AT&T, Verizon, Orange Theory, 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 CurveLine'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 square feet of inventory. Despite that fact, what we own today represents less than 1% of the 950 million square feet of total U.S. inventory, according to ICSC, providing a significant runway to scale and grow Kirkland. 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. And 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. This 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 submarkets that share the key characteristics we see including our first property in Seattle, which were 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, business 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 Connor, I want to highlight one of the key differentiating aspects of the CurbLine spinoff, which is our balance sheet. The net cash position of quarter N matches the business plan with almost $600 million of cash and $1 billion of liquidity quarter N. I couldn't be more optimistic about the opportunity it has for CurbLine and our ability to generate compelling stakeholder value. And with that, I'll turn it over to Connor.

speaker
Connor Fennerty
Chief Financial Officer

Thanks, David. I'll start with first quarter earnings and operations before shifting to the company's 2025 guidance raise 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 call-outs for the quarter, highlighting the simplicity of the curb line 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. And given the current pipeline, we expect another strong quarter in 2Q. However, as I noted last quarter, with a 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 CURB'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 percent 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 percent. Moving to our outlook for 2025, we are raising OFFO guidance to a range between 99 cents 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 agreements. 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, next 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 percent 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 coughing off of 2024's outperformance. Additionally, Curb Line's copy 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 NY, 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 9 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 larger private buyer universe, acquiring communist 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 net cash positions. 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 re-average. With that, I'll turn it back to David. Thank you, Connor.

speaker
David Rooks
Chief Executive Officer

Operator, we're available for questions.

speaker
Janice
Conference Operator

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.

speaker
Connor Fennerty
Chief Financial Officer

Hey, good morning. Just on the acquisitions, congrats on getting that big of a pipeline here. It sounds like it will 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, you know, rebuilding the war chest here? I think in the past you said you could put an ATM in place around October. Just kind of thoughts on kind of funding sources that cost the capital versus what you're seeing from a yield perspective in the market. Hey, Greg. Good morning. It's Connor. 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. And the good news is we're entering the year with a position of balance sheet strength, right? Net cash position, completely unencumbered pool. So we're looking at a variety of sources, the bank market, the bond market, the insurance market. And it's fair to assume we've got, you know, advanced stages in all three kind of paths. And we'll take the best approach as we get later in the year. But, you know, 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 action.

speaker
Janice
Conference Operator

Your next question comes from the line of Ronald Camden, Morgan Sandy. Please go ahead.

speaker
David Rooks
Chief Executive Officer

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 just sort of what kind of cap rates are we thinking? Hey, Ron, it's David. Would you mind repeating that? We just lost the first couple of seconds. Sorry about that. So the question was on the acquisition pipeline. You had a larger deal in 1Q25, so just wondering if there are other larger deals in the pipeline and any thoughts on the cap rates that you're thinking. Yeah, sure, Ron, and 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, but in general, I would say our pipeline is usually going to be made up mostly of single asset purchases at a handful of two or three packs. That seems to be the case. It may be over time that we find a portfolio that's a little bit larger, but this asset class tends to be very, very granular. In terms of cap rates, we're still blending to around a six and a quarter. If you look at the past couple of quarters, that can get pretty lumpy. When you get individual assets, it can be in the mid-fives, and it can be upwards of seven, depending on whether there's vacancy and what the lease duration looks like on the rent roll, the amount of credit. But in general, we're still blending to a low six. And then if I could just follow up just quickly on just a tariff question. You know, obviously things have changed since April 2nd. Just curious if that changes your thinking on underwriting, you know, what sectors you want more exposure to, less exposure to. Just how does that business plan change, you know, since April 2nd? Thanks. Yeah, I would say that one of the non-changes is the fact that the vast majority of our tenants don't carry inventory. And so if you go back to what we've mentioned in our preparative remarks where shopping centers are for shopping, and that usually involves stores that have inventory, large discounters or large-map merchants, this business is more of a running errands business. And there are some tenants that have inventory, but the vast majority are service tenants. Some of the ones we mentioned include banks and business 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. So 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 pressure I would say that, you know, 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, you know, exceed that and make up for that cost of capital. That can show up in cap rates where, you know, in some cases we might be less willing to pay in lower cap rates. On the other hand, market rents are still growing, and the suburban customer is still running errands. And so in many cases, we're seeing larger market markets on the in-place versus market rent, and that factors into the IRR as well. Thanks so much. Thanks, Ron.

speaker
Janice
Conference Operator

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

speaker
Todd Thomas
Analyst, KeyBank Capital Markets

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? And can you share how the deal environment, you know, just in general has changed, if at all, since the start of April, whether you're seeing any change at all in conversations with suppliers? Terps are pressing your willingness to transact, just given the market volatility more recently.

speaker
David Rooks
Chief Executive Officer

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. And 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. And so 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. But in general, I'd say our closing rate is extremely high. The second half of your question, I just lost.

speaker
Todd Thomas
Analyst, KeyBank Capital Markets

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.

speaker
David Rooks
Chief Executive Officer

Yeah, willingness to sell, it's been a pretty firm no, and that is because, you know, almost everything we look at is a life event. You know, 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. So the inventory seems to be fairly consistent. The pricing conversations have everything to do with who else is in the bidding tent. And, you know, 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. So, you know, there have been... in 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.

speaker
Todd Thomas
Analyst, KeyBank Capital Markets

Okay, that's helpful. Connor, 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? No, that's a good question.

speaker
Connor Fennerty
Chief Financial Officer

So 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. So the problem is it's a small pool. A couple of tenants renewing is a big deal in terms of percentages. And so it was probably, you know, 10, 20 base point pickup. over the course of the year in that regard. In terms of the change for the quarter, you are correct. We did have a couple of tenants we did not renew. We had a couple of terminations, obviously a higher termination income this quarter as well. So 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.

speaker
Todd Thomas
Analyst, KeyBank Capital Markets

Okay, got it. Thank you.

speaker
Janice
Conference Operator

Your next question comes from the line of Alexander Goldfarb with Piper Sander.

speaker
Alexander Goldfarb
Analyst, Piper Sandler

Please go ahead. Good morning down there. Just a few questions. First, David, just going back to the acquisitions, I know it's 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. And I'm just sort of curious, just given all the disruption we've seen, how you guys are still that confident? Yeah.

speaker
David Rooks
Chief Executive Officer

Well, I guess 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. And 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. on our supplemental on page 16 and you 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 to $15 million range. And so 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. So 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. But right now, the operations and the fundamentals are fantastic. And leasing volumes are high. Renewal rates are high. And so I think, you know, sellers and buyers don't see quite as much risk in the asset classes. So that bid-ask spread is not that wide yet. That doesn't mean it won't change over the coming months. But I think in our business, you know, we tend to focus on how fast information is getting out there about the economy. But when you're buying hard assets, that information doesn't necessarily flow into negotiations. And I was just planning on the first part of Dave's response.

speaker
Connor Fennerty
Chief Financial Officer

As it relates to financing activities, 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. But again, it feels like maybe the GFC playbook is not appropriate in this scenario, and we'll see how it plays out.

speaker
Alexander Goldfarb
Analyst, Piper Sandler

So, David, forgive me, but it does sound like death and divorces are probably pretty good for your business to drum up transaction volume. At the risk of saying yes, yes. So second question is, you know, you and some of your peers highlight high average household income, the portfolio you bought in Jacksonville, you know, just over $110,000 in average household income. At the same time, you know, some of the restaurants are reporting, you know, slowdown in traffic, and you see anecdotal evidence in, you know, from different data points about people pulling back on shopping. at all, you know, levels, you know, absent, I guess, the Uber crowd. So even 110 is still, you know, being impacted. Have 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, you know, transactions that, you know, we thought were used to be sort of for certain as people are trying to save money. How do you still feel confident in saying, hey, we have an affluent portfolio and it's pretty bulletproof regardless?

speaker
David Rooks
Chief Executive Officer

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 and higher 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... you know, much in terms of percentage rent, so that 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, you know, not national or even by the state level, those local zoning boards are not very wild about entitling additional strip center retail. And so it tends to be that the higher household suburbs, higher income suburbs, tend to have less work footage per capita. And that generally means that there's a scarcity value. And 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. And that gets compounded in these higher income suburbs. suburbs because there is a scarcity value of real estate. So to me, it's less about the gross sales volume of that specific retailer. It's much more about the scarcity value of how much real estate is available.

speaker
Connor Fennerty
Chief Financial Officer

And Alex, at the risk of Stone Davis' normal joke, I mean, our restaurant, our fine dining is five guys. It's a different restaurant exposure than White Table Cross fine dining.

speaker
Alexander Goldfarb
Analyst, Piper Sandler

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. So, yeah, I think we're talking the same thing, but the zoning point is an interesting one. So, thank you.

speaker
Janice
Conference Operator

The next question comes from the line of Michael Muller. JP Morgan, please go ahead.

speaker
Michael Muller
Analyst, JP Morgan

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, you know, a lot of transactions, you know, a lot closing near term, or, you know, are you just really planning on sticking with the about $500 million a year for the next few years? Hey, Mike.

speaker
Connor Fennerty
Chief Financial Officer

Good morning. It's Connor. So, in 2025, I don't know if David would speak to yours. In 2025, the midpoint of the range still assumes $500 million for the full year. So, that's an additional $360 million closing. The top end of the range assumes the pipeline that David alluded to, which is about $500 million, closes over the course of the year. So, 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, you know, north of $1.5 billion a year. I think given this is our second quarter as a public company, we feel comfortable maintaining that current range. But 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 exceed that over the longer term. I would just say for now, Mike, it feels like $500 million is a good base case to use.

speaker
David Rooks
Chief Executive Officer

I agree. I think two quarters into the business, it's probably... prudent to stick with what our original targets were. Okay.

speaker
Connor Fennerty
Chief Financial Officer

Thank you. Thanks, Mike. You're welcome.

speaker
Janice
Conference Operator

Your next question comes from the line of Polina Raz with Green Street. Please go ahead.

speaker
Polina Raz
Analyst, Green Street

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

speaker
David Rooks
Chief Executive Officer

Sure, Paulina, and good morning. So if you look on page 13 of our supplemental, I think that's probably a pretty good example, and you looked at the bottom row. If you look at the trailing four quarters, our total leasing volume, which is new leases and renewals, 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 cost of leasing. That includes both the renewals and the new leases. Now, you'll also notice that renewals is about two and a half times the amount of new leases. So 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. But if the baseline is a ratio of 2.5 to 1 and a 5.5-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. So 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.

speaker
Connor Fennerty
Chief Financial Officer

And Paulina, from a credit perspective, if 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, you know, we only have nine tenants with greater than 1% ADR 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. So from a risk perspective, the odds of one tenant impairing or impacting FFO growth over the course of the year is also material for us versus other retail companies. So 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.

speaker
Polina Raz
Analyst, Green Street

Thank you. And then 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? And if so, where are those news coming from?

speaker
David Rooks
Chief Executive Officer

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

speaker
Polina Raz
Analyst, Green Street

Thank you.

speaker
Janice
Conference Operator

of Craig Bandlin with Citi. Please go ahead.

speaker
Connor Fennerty
Chief Financial Officer

Hey, guys. Thanks for getting me back on. I was going to follow up and just ask, Connor, the pricing differences between those three sources of debt that you were talking about. Kind of what's the... Is there anything meaningful or are they kind of all on top of each other? Hey, Craig. Good morning. Apologies for cutting you off there earlier. The pricing range, I mean, again, at the risk of... You know, 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 points, depending on leverage for the secure route, is pretty wide in the sense it's probably low fives to high fives. And there have been points in time over the last two weeks where it's been north of six. So, again, 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 in that cash position. So we can be patient. But I would just tell you, we do still expect to fund half of the 25 investment volume with debt. And then from there, to your point, we do have access to the ATM and other sources of equity capital starting in October. So, 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 we get the right deal done. I don't know if that answers your question. I apologize. No, it does. I know it's tough to get into the basis point differences between the three if 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 in an unsecured borrower longer term, or do you like the insurance market? Kind of what's the preference? Yeah, it's a great question. Look, just as David mentioned, if our average ticket size is about $50 million, we are well-suited for the unsecured market, which means likely a private placement start, and then you naturally graduate over time to 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. And so we've always tried to maintain relationships with the life coach for that very reason. All that said, your question is, again, most likely it's private placement with a natural kind of graduation over time or shift over time. But don't 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 is there any kind of pushback on that side of the leasing equation?

speaker
David Rooks
Chief Executive Officer

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 has been put in. So 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, and there might be reasons why that is acceptable to us. But in general, the shop leases are done with 3% annual bonds.

speaker
Connor Fennerty
Chief Financial Officer

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

speaker
David Rooks
Chief Executive Officer

Yeah, I'll go back to the same comments before that, you know, the tenants, even local tenants have Microsoft Excel. So when they do a net present value calculation and the bumps in 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 a lower rent and have a 5% annual bump. And there have been situations like that. But 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. And one of the benefits of this business is that the weighted average lease term is lower, is smaller than in a large-anchored portfolio. So when you have a mark-to-market and a lower wall, you're more likely to capture that mark-to-market, and that's a big piece of what's going to drive the same store numbers.

speaker
Connor Fennerty
Chief Financial Officer

To that point, our 2024 number was 5.8%. This portfolio, to the genesis of your question, is very capable of doing more than 3%. And the biggest piece that intrigues us, to David's point, in multiple responses, though, is the capital needed to generate that. So 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. So, yes, we can do north of 3%. Yes, we've proven that in 2024. But that capital piece I would just reiterate or flag for you is a critical kind of differentiator for us versus peers. That makes sense. This one, last housekeeping. Did you guys change the bad debt reserve embedded in guidance? I think it was 55 basis points last quarter. No, we did not. So unchanged. And to my earlier response, I think it's following that we've had zero credit events year to date or last year either. Thank you. You're welcome. Sorry to cut you off, Brother Craig. I won't take offense. Appreciate it. It wasn't personal.

speaker
Janice
Conference Operator

The next question comes from the line of Flores Van Dusen with Compass Point Research. Please go ahead.

speaker
Flores Van Dusen
Analyst, Compass Point Research

Thanks. Morning, guys. I know it's probably too early to talk about, you know, the tenant's impact for the, you know, regarding tariffs, as you've indicated. I think that's on everybody's minds and recession fears, et cetera. 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 on 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? Good morning, Floris.

speaker
David Rooks
Chief Executive Officer

This is David. So far, the competition in the bidding pen 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.

speaker
Flores Van Dusen
Analyst, Compass Point Research

Great. And maybe a follow-up question. I know the Crow portfolio appears to be on the market again. I don't think it's going to be of interest to any REITs with the management contracts in place. But maybe can you comment on what do you think that's going to mean in terms of a marker for value potentially? And what do you think the appetite is there? And 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?

speaker
David Rooks
Chief Executive Officer

Yeah, they're great questions for us. I mean, the reality is it is a private portfolio. It does not have published information. And so 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, and that is one of the huge benefits of being able to handpick assets one or two or three at a time. But there are other great portfolios out there in the country. They may or may not be targets for us, but With 950 million square feet of inventory in the U.S., it's a pretty deep pool to be shopping in, so I don't think we're forced into looking at things that may not be a fit. Thanks, David.

speaker
Connor Fennerty
Chief Financial Officer

Thanks, Boris.

speaker
Janice
Conference Operator

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

speaker
David Rooks
Chief Executive Officer

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

speaker
Janice
Conference Operator

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

Disclaimer

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