Rithm Property Trust Inc. Common stock

Greetings and welcome to RPT Realty First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Vin Chow, Senior Vice President of Finance. Thank you, sir. You may begin.

Good morning and thank you for joining us for RPT's first quarter 2021 earnings conference call. At this time, management would like me to inform you that certain statements made during this conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Additionally, statements made during the call are made as of the date of this call. Listeners to any replay should understand that the passage of time by itself will diminish the quality of the statements made. Although we believe that the expectations reflected in any forward-looking statements are based on reasonable assumptions, factors and risks could cause actual results to differ from expectations. Certain of these factors are described as risk factors in our annual report on Form 10-K for the fiscal year ended December 31st, 2020, and in our earnings release for the first quarter of 2021. Certain of these statements made on today's call also involve non-GAAP financial measures. Listeners are directed to our first quarter press release, our first quarter supplement, and our fourth quarter 2020 press release, which include definitions of those non-GAAP measures and reconciliations to the nearest GAAP measures, and which are available on our website in the Investors section. I would like to now turn the call over to President and CEO Brian Harper and CFO Mike Fitzmaurice for their opening remarks, after which we will open the call for questions.

Good morning, and thank you for joining our first quarter 2021 conference call. I hope you and your families are all well. We are happy to have kicked off the new year in strong fashion. Our rent collections continue to tick higher. We continue to benefit from the multi-year mark-to-market opportunity and strong demand at our centers. We recently closed on our new net lease platform and are now under contract on our first property in the Boston market that we expect to allocate between RPT's balance sheet and the new platform. We believe we now have the capital and the platforms to generate strong external growth, as well as the portfolio quality and leasing demand to drive above-trend internal growth as we move past the pandemic. While the pandemic has created many hardships, it has also created opportunities that we have been able to capitalize on. For instance, COVID-19 has had a negative impact on many tenant categories, But unlike during the global financial crisis, this also had a positive impact on many other tenant categories like grocery, home improvement, electronics, wholesale clubs, general merchandise, and medical use. This also boosted some businesses that were struggling pre-pandemic like pets, office supply, and a hobby. Ironically, many of the big box tenants that were not in favor pre-pandemic have thrived since, enough so that we think credit center is a more apt description for the power center category. One of the biggest opportunities that we saw after the onset of COVID was an acceleration of the widening valuation gap between different segments of retail real estate. It soon became clear that there were numerous value creation opportunities to unlock if we could figure out a way to monetize the various dislocations between single versus multi-tenant properties, larger versus smaller footprints, and between essential and high credit, but non-essential tenant categories. Our solution was our new net lease retail real estate platform with our partners GIC, Zimmer, and Bonarch. that we are calling RGMZ until we rebrand later this year. Given the relationship with RPT and our existing operating and development capabilities, the new platform gets access to proprietary deal flow from multi-tenant assets, larger scale sale-leaseback transactions with national tenants, blended extends of shorter-term leases on strong real estate, re-merchandising of expiring leases, and build-to-suit opportunities. The NetLease platform and our R2G joint venture should allow us to grow AUM and expand and target markets faster than we could do on our own. Our joint ventures also add a new, sustainable, and diversified cash flow stream to RPT, and we believe will improve our FFO growth profile by enhancing our returns and increasing the economic spread on our deployed capital as we take advantage of the valuation dislocations I mentioned earlier. As we previously noted, the 151 million initial seed sale to RGMZ will close in tranches over the course of 2021. The first tranche of 13 parcels closed on March 5th for just over 36 million. I won't go into all the transactional details, but overall, we couldn't be more excited about the NetLease platform. More information is available in our press release announcing the deal and in a separate RGMZ investor presentation, which both are available on our website. Our Northborough Crossing deal on the Boston MSA that is currently under contract for $104 million is a perfect example of what we are trying to achieve with the NetLease platform. Here, we are buying a premier shopping center that, upon closed, will be accretive to RPT's earnings from day one. But by selling parcels to RGMZ, we have the opportunity to materially lower our basis and enhance our yield. Our expectations are that we could sell up to $75 million of the center to RGMZ, resulting in a significantly reduced basis for RPT. Consistent with our thesis regarding the value dislocation between multi-tenant and net lease properties, our effective acquisition yield on the retained multi-tenant asset could improve by up to 300 basis points after the acquisition and parcelization process is closed. There is real synergy between RPT and the new platform that benefits both sides in a way that is difficult to replicate. For RGMZ, they get access to high-quality tenants in a location with household incomes of about $148,000 that no other triple net investor has access to. For RPT, we gain entry into the attractive Boston MSA on a deal that we would likely have passed on without the potential parcel sales to RGMZ. Equally important is that at the NetLease Platforms Manager, RPT maintains equal control of the NetLease components of the center. This type of control is not available to multi-tenant owners that sell pads to unaffiliated entities. The synergies of the two platforms give us a unique opportunity that we believe will result in outsized future earnings growth. We look forward to providing more details on the Northboro and subsequent parcel sales over the next several weeks. Turning to our acquisition pipeline. Since we announced our net lease platform, we have engaged with many of you, and a consistent question that comes up is how quickly we can deploy the capital raised at both our RGMZ and R2G joint ventures. Keep in mind that while we only recently announced RGMZ, We have been working on the deal for almost a year and we're actively cultivating an investment pipeline throughout the pandemic. Our ability to go to contract on Northborough so quickly after closing the new JV is a testament to the strong groundwork that was laid over the past year. Additionally, we are in active contract negotiations on several other deals and have embedded a total of $100 million of net acquisitions at our ProReta share, and after parcel sales to RGMZ into our guidance. We remain optimistic that we will be able to deploy the vast majority of our current cash and future proceeds from the rest of the net lease platform seed sale by year-end, reflecting about $115 million of upside to what is currently reflected in our guidance range. We are currently tracking a diverse pipeline of over $2 billion in markets like Boston, Atlanta, Tampa, Nashville, Miami, Jacksonville, and Orlando. The pipeline consists of RPT, R2G, and RGNC deals and runs a gamut from single property locally owned deals to institutionally owned portfolios. The tie that binds each of these deals is the durability of underlying property cash flows and our ability to grow future NOI by buying under-market rents or properties with redevelopment opportunities. Tyler Sorensen, who is heading up acquisitions for the NetLease platform, brings a wealth of experience to RPT that we believe will further accelerate our NetLease acquisition program and our pipeline. Last quarter, we outlined 11 re-merchandising opportunities consisting of redemising, expansions, or combinations. While the exact lists will fluctuate as deals move into and out of the pipeline, these larger leasing deals continue to reflect the best risk-adjusted use of our capital, and we will allocate accordingly. We have made very good progress since last quarter, with the grocery deal at Troy Marketplace moving from the shadow pipeline to the active pipeline. Three other projects were also added this quarter, bringing the total in-progress pipeline to over 13 million, with expected returns in the high single digits. It's no secret that COVID-19 put pressure on certain experiential tenants. But as I noted earlier, this pressure has created opportunities, as was the case at our Troy Marketplace property outside of Detroit. Troy Marketplace is a dominant power center that has maintained a high level of occupancy throughout the pandemic, with 97% lease at quarter end. Because of COVID's impact on a recreation tenant, we were able to get the space back without a buyout and replace them with a new, premier first estate investment grade grocer. We were able to generate an 88% rent spread on the new lease. Although the incremental return on capital is tighter than our typical underwriting, we believe that attracting a premier grocer at this already strong center will create significant value via cap rate compression of almost 200 basis points and position the asset for success for years to come. As I previously said, we see a lot of value creation from the addition of a grocer component to these credit centers. They're looking forward to executing more of these. We also continue to see strong leasing demand from our former Stein Mart space in St. Louis and are now in lease negotiation with a leading retailer. At Winchester in Detroit, we are finalizing a lease with a quality national off-price tenant to take our only other Steinmar box. Florida has continued to be a robust leasing market for RPT. We are seeing great activity across the board at our centers within the state and are close to deals that will significantly upgrade the tenant credit at West Broward and shops at Lakeland. There is also strong demand at the marketplace of Del Rey, which is creating friction at this property that could result in a significant improvement in the tenant mix. Before I turn the call over to Mike, I wanted to touch on our development program. As we continue to move past the heart of the pandemic, we are again revisiting our development program we had put on hold pre-COVID-19. Although we are still not ready to put shovels in the ground just yet, we have reengaged with potential partners on a few of our properties that we previously flagged for potential residential use in Florida. We are seeing extremely strong demand for residential at both River City and Parkway shops in Jacksonville. As we've stated in the past, although the highest and best use of certain parts of our centers may not be retail, we will remain focused on our core retail competencies, and we'll look to monetize non-retail components through ground leases, land sales, or potentially even land contributions into partnerships with leading residential players to retain some future upside. With that, I'll turn the call over to Mike.

Thanks, Brian, and good morning, everyone. Today, we'll discuss our first quarter results, our strong balance sheet, and liquidity position, and end with commentary on our updated guidance. First quarter operating FFO per share of 19 cents was up one cent versus last quarter, driven by our improving rent collections as we experienced a decline in rent not probable collection and abatement, which totaled 3.2 million in the quarter, down from 4.4 million last quarter. Further, As disclosed on page 33 of our supplemental, our first quarter of rental income, excluding prior year amounts, has ticked up since last quarter and is now only down 5% from first quarter 2020, despite the continued nonpayment of our theater tenants who have remained closed since the onset of the pandemic. Our four regals are slated to open in late May and account for about 75% of our total theater exposure. Given Regal's reopening plans and recent liquidity infusions, we expect and are forecasting resumption of rent payments in the next few weeks. We continue to take a conservative stance with uncollected rent and have reserved nearly 80% of our uncollected first quarter recurring billings. Additionally, we effectively have no exposure to tenants in bankruptcy left in the portfolio. As of quarter end, $18 million of our recurring billings for the trailing 12 months remain outstanding, of which $12 million has been reserved with the majority of the $6 million balance expected to be repaid over the course of 2021 and 2022. Operationally, we continued to execute and put runs on the board. We started 2021 on a high note, signing 62 deals in the quarter, covering 556,000 square feet. This was the highest number of deals signed in a quarter in almost two years. Blended rent spreads were up 9% as we achieved a 51% comparable new lease spread, our best quarterly spread in almost three years, driven by our Troy Marketplace grocer deal that Brian previously noted. While the TI related to this deal is outside, it was more than offset by the value of nearly $20 million that was created by cap rate compression. Excluding this deal, our new lease spread would have been up 26%, highlighting the solid, broad-based demand and mark-to-market opportunities in our portfolio. Our renewal spreads also continue to improve, up 3.9%, making the third consecutive quarter of improving renewal spreads. Given our strong leasing activity, we ended the first quarter with a sign-not-open backlog of 3.3 million, the majority of which will come online over the next 12 months. We also have a full pipeline of deals with over 2 million of leases and advanced legal negotiations. Additionally, as Brian touched on, we've identified several re-merchandising deals that will generate well into double-digit return on cost in addition to cap rate compression across certain properties. In the spirit of transparency, we have outlined these active and pipeline re-merchandising opportunities on page 19 and 20 of our supplemental. Occupancy for the quarter was 90.6%, down 90 basis points sequentially, due primarily to the proactive and planned recapture of our space at our Troy Marketplace and West Broward properties that will facilitate new grocer deals. Given our lack of bankruptcy exposure in our portfolio, our signed non-open backlog, and our robust leasing pipeline, and our re-merchandising opportunities, we believe occupancy has cropped and expected to track upward over the next several quarters as we march towards restabilization of our portfolio. The closing of the first tranche of the initial seed sale to our net lease platform benefited both our leverage and liquidity levels in the quarter. We ended the first quarter with net debt to annualize a just EBITDA of 7.2 times, down from 7.6 times last quarter. Looking forward, we continue to target leverage in the 5.5 to 6.5 times range, which will be driven by the normalization of EBITDA as the impacts of COVID-19 reverse course in 2021 and 2022, the stabilization of our portfolio, and as future tranches of the RGMG see close in 2021. However, it is important to keep in mind that the timing of acquisitions and subsequent net lease parcel sales may have a temporary impact on reported quarterly leverage levels. From a liquidity perspective, we ended the first quarter with a cash balance of $143 million and our fully unused $350 million unsecured line of credit. Including the expected proceeds from the remaining RGMZ seed sales, our portfolio cash balance would be about $250 million. In short, we have a war chest of cash and a deep acquisition pipeline that we expect would generate strong external growth for our PT shareholders. Regarding our pending debt maturities through 2022, we have just one $37 million private placement note that matures in June and a $52 million mortgage that is prepayable starting in November and carries an above-market 5.7% interest rate. Based on positive feedback from our unsecured debt partners, we expect to refinance both these notes later this year. However, given our strong liquidity position and as an interim step, we may repay our $37 million private placement note due in June ahead of our expected refinancing. As with any debt issuance, we look to maintain a flat maturity ladder with the goal of having no more than 15% of our debt stack maturing in any given year. The last topic I want to touch on is our updated 2021 OFFO per share guidance of 81 to 89 cents, which is up 3 cents at the midpoint of our prior guidance range of 77 cents to 87 cents. Our updated range includes the impact from the sale of remaining tranches of initial RGMZ seed, also assumed in our forecast are 100 million of net acquisitions at our pro rata share. Included in this assumption is the gross purchase price of Northboro that is expected to close in the second quarter. However, it's important to again note that we expect to sell certain net lease parcels at Northboro to RGMZ in the fourth quarter that will lower our basis as Brian mentioned. The net impact of the initial seed sales and net acquisition activity of $100 million is expected to add two cents of upside relative to the midpoint of prior guidance. The other penny of upside stems from outperformance in the first quarter that we are now projecting in future periods. Like last quarter, the range around the midpoint of our updated guidance is largely driven by our performance on the bad debt front, particularly from our theaters. Also, it should be noted that our guidance does not include any assumptions of recovery for prior period bad debt or straight line rent reserves. And lastly, although we have $100 million of net acquisitions formally built into guidance, We believe we can deploy as much as $250 million into opportunistic acquisitions within our target markets that meet our disciplined underwriting standards representing upside to our guidance range. And with that, I'll turn the call back to the operator to open the line for questions.

Thank you. At this time, we will conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star 1 to ask a question at this time. One moment while we pull for our first question. Our first question comes from Derek Johnson with Dolce Bank. Please proceed with your question.

Hi, everybody. Good morning. Thanks for the details on the RGMZ in the opening. But Brian, you know, what's the criteria and how do you decide which basket or platform to utilize for acquisitions either on balance sheet or within a JV as you now have three strong partners? How do the mandates vary and how do you envision the mix unfolding?

Great. Hi, Derek, and good morning and thank you for that question. So really since December of 19, in equity basis alone, we've raised $800 million of committed capital for our investments. This was done to transform the footprint and portfolio of the company, and really for the following three points. One, diversify cash flow, investment grade, and growth. Two, increase AUM accretively. Three, deploy growth capital into higher growth assets. We did bring in, in early 2020, a data scientist that had set up a proprietary asset management scoring card model that will help us be disciplined in our acquisitions. So really, the way I would think about this is we have balance sheet, R2G, which is the GICJV, and a new net lease platform, all with very disciplined focus. And the way I would think about the cadence would be the two-to-one ratio between balance sheet and our JVs. And really, if you look at Northboro as a balance sheet and RGMZ deal as an example, we are roughly buying Northboro at a seven cap, day one accretive. We spend 75 million to RGMZ and RPT is left with a 10 yield once the two new 2GX concepts open. The center sits in a very high barrier to entry market with 148,000 household income. It was the first Wegmans in the state and now number one Wegmans in the Boston MSA. BJs and all the tenants do extremely well as well. Post-spin, we are left with 50% IG, four TJ concepts at a 10 yield. That is extremely compelling for our balance sheet and extremely compelling to our investors. R2G is focused on core grocery. As mentioned previously, the fees associated with this JV are roughly 50 bps, which obviously helps with the pricing. These are core grocery centers in our strategic markets with a top sovereign wealth as our partner. And then RGMZ, as I mentioned in our prepared remarks, in addition to being a complementary partner with the balance sheet, we are focused on build-a-suits, sale-leasebacks, blend-and-extends, and one-off buys. You blend all these platforms together, Derek, and it forms a consortium that can syndicate in a very, very unique way for a REIT. There will be one-off buys. And I wouldn't be surprised if you see several portfolio deals that could be syndicated to all three platforms. So we are focused on the three, but really see this as a two-to-one ratio for balance sheet versus our JVs.

Great, great, Collin. Thank you. Just two quick ones. The $140,000 basis point drop in small shop occupancy was pretty noticeable acceleration from previous quarters. I guess simply, what drove this decrease?

Yeah, Derek, this is Mike. What drove that decrease is we had a seasonal move out. This was mattering to tenants. And then number two, as we noted in the release, we did sell the first tranche with that initial fee of about $40 million of the triple net assets that we contributed to our net lease platform. That also contributed about 10 to 20 basis points of deceleration in the occupancy rate for small shops. But we do see that drop in this quarter, Derek, for small shop and total occupancy, and see it might really, you know, ticking up over the year as we continue to restabilize the portfolio.

Okay. Okay. Makes sense. And then just TIs came in, you know, pretty high at 124 per square foot. I mean, we're assuming it's a It's a big box transition to a grocer, but can you just let us know what the actual drivers behind this were?

Yeah, absolutely. You just alluded to it. You're spot on. It had to do with the grocer deal that we did in the Detroit market, the personal market, high-quality credit grocer that we can't name right now, but hopefully at some point we can name in the future. It was tied up with that deal. And whenever you're doing a lease transaction or you're taking a non-grocer space or to a grocer space or where you're redemising spaces or where you're combining spaces, you're going to have higher TI costs. But the great thing with this deal is, one, the rent spread was about 90% or so. And then, two, we increased the value of the property by about 200 basis points in terms of cap rate compression, which created about $20 million of value for that center. So great value creation for the company.

Yeah, Derek, we're excited to get the name out when we're allowed to. And really, this was, as I said in prepared remarks, I mean, this was – One of the positives of COVID of where since I've been here, I've been trying to get at this space, which was $8.30 gross. Two combined spaces creating roughly a 40,000 square foot flagship investment grade first estate grocer, which we are extremely excited about.

Excellent. Thank you, everyone.

Thanks, Derek. Thanks, Eric.

Our next question comes from Todd Thomas with KeyBank Capital. Please proceed with the question.

Hi, thanks. Good morning. First question, Mike, just a clarification around the guidance. You know, the one penny of outperformance for the quarter, I think that you outlined the guidance provision. I think you may have said that that's not recurring. What was that attributable to specifically, and can you just clarify that perhaps?

Yeah, it was primarily due to prior adjustments related to recovery billings associated with ORCAM tax billings.

Okay. Was there anything, I guess, sort of operationally that offset that? I guess the improved outlook to some extent. It sounds like, you know, the outlook has improved with leasing and demand and sort of the commentary around legal expected to begin paying rent, which I think is a little bit earlier than previously anticipated. I'm just curious if there's anything around, you know, either the recaptures or otherwise that was not previously anticipated.

I think the outlook is slightly better for bad debt. We did better than expected during the quarter relative to our own expectations. Plus, sign-on commence continues to take up a bit. We're going to have, probably relative to the first quarter, Todd, you'll have about $0.02. sign, not commence. And then based on our expectations today, again, relative to the first quarter run rate, you'll have about three pennies of upside in bad debt and more favorable bad debt and less abatement. That's really tied to the theaters. Our four regal theaters, as I mentioned in my prepared remarks, are going to be opening up in a few weeks. And it's our expectation, based on our discussions with them on the deal that we struck, that they're going to be paying contract rent in the second half of the year.

Okay, that's helpful. And then, Brian, in terms of the competition for, you know, some of these, you know, larger assets, perhaps, I guess, Northborough deal, for example, you know, there's been a lack of transaction activity in some of these centers over the last couple of years, really. Are you seeing any change in demand for these assets, or do you feel that you have, you know, with play, you know, properties and sort of execute without much outside competition.

Yeah, Todd, competition no doubt has picked up. You know, the debt markets have opened and competition's there. I think our advantage was we've been cultivating this pipeline since May of 20 when we knew and had an idea that this RGMZ platform was going to go into fruition. So this was a deal that was marketed pre-COVID and was purchased on an off-market deal. There's a lot of others in the pipeline that are true off-markets. You know, some are with institutions in larger portfolio deals where, you know, we could potentially syndicate between, you know, balance sheet, GIC platform, and RGMZ. And we're a credible buyer because of that. And I think that when we show up for an acquisition, we now have an arrow that no one else has, and that can help with pricing as well. So, you know, the way I look at Northborough, we're, you know, extremely high barrier to entry with, you know, top performing tenants in the MSA. you know, we have more of those in the pipeline. And the pipeline is becoming clearer every day. And as we said, we fully expect to be, you know, to surpass our guidance on the acquisitions.

Okay. Where do you think – I think you mentioned a 7% cap rate on horse burrows. Has that changed at all compared to where it would have been, you know, pre-pandemic, I guess?

You know, how do you think pricing compares? I think it hung around the rim. Obviously, you know, the movement in essential triple nets is ripping, you know, and that's a very, very competitive world right now. And when you look at the you know, attractive debt you can get on a lot of those assets, that's opened up a lot of, I mean, an unlimited supply of liquidity, that space. So I think the center kind of hung in, but definitely saw some cap rate compression in the essential guys. And I think, you know, our platform and the investors are getting it at, you know, a very, very attractive yield as well.

Okay, thank you.

Thank you.

Our next question comes from Craig Smith with Bank of America. Please proceed.

Great, thank you. I'm just wondering, do you think there's a good chance or probability that someone else will replicate your NetLease platform, or do you have some advantages that you don't think that you can replicate?

Yeah, I think – I mean, Craig, the interesting thing is this has been going on for 40 years, right, and in the private markets. I mean, when you look at, you know, developers and selling off to – the land off to Walmart or Target or the pads and building the small shop for the boxes – This has been going on in the private world for a while. What this does in the public space is gives investors that access and that availability to achieve very, very attractive yields. I think this certainly could be replicated. I think it would be difficult. I think the combination of GIC, Monarch, and Zimmer together is difficult to replicate. This was a year in the making, and this was something that took a long time, and our pipeline is large, and we've got off to a very, very quick start, which we knew and paid a lot of attention to as we were cultivating the deal in the first place.

Yeah, and the second thing I would add there is control, Craig. You know, we have 644% interest in this Netflix platform. We have equal voting rights on leasing, redevelopment, buying, selling. We have a ROFO on the net lease components. So we really control the value creation on the net lease side of the asset and also the multi-tenant side on our PTC balance sheet. So that's very unique, and I think it's also hard to replicate that you don't see with other REITs in our space.

Okay, thank you. And then just at River City Marketplace, I see you're attending a vacancy with a national fitness center. Maybe you can tell us, you know, what you've seen in that format that's gotten you comfortable to return to it.

Yeah, I mean, I think, I mean, it depends on the markets and it depends on the credit and the tax. I mean, personally, I'm pretty comfortable with your LA Fitnesses and some of the boutiques as well as Planet in certain markets. It depends. It's a case-by-case. It's understanding the competition in that market. We have seen, particularly in Florida, a good snapback with the health and fitness concepts, and they're seeing good levels of traffic. So we're seeing boots on the ground at all of our assets, good activity in certain parts of the country. That's in regards to fitness, thankfully.

Thank you.

Yes, thank you.

Our next question comes from Linda Tai with Jefferies. Please proceed.

Hi, good morning. It looks like net debts at EBITDA came down this quarter as, you know, EBITDA improved. How do you expect this to change as you continue to deploy cash proceeds, you know, your RGNZ tranches closed and future parcelizations? You know, how much could this metric bounce around over the next few quarters?

Sure. Good morning, Linda. Gary J. in the call. One, just to level set everybody that our long-term target range is five and a half to six and a half times. Also important to note, given the strategic joint venture that we completed over the last 15 months, the $250 million of war chest capital that we raised, the opportunity to redeploy this in a high single-digit cap rate, I have to really use it at that external level to get to the often around here. So that said, we are at 7.2 times today that you just noted, Linda. That will trend downward over time as we return to stabilization of the portfolio and we execute on our external choppy, you know, quarter to quarter. Northboro is a great example. You know, we're putting that on our balance sheet in the second quarter, just over $100 million or so. So you're going to see our leverage, you know, take out likely in the second quarter. But then once we sell those selected components of the center, you know, up to, you know, $75 million, as Brian noted in his prepared remarks, later in the year, leverage will take back down.

Thanks. And then just given the improving environment, do you have better visibility on when occupancy might cross?

Yeah, look, I think I think we're pretty close to that. You know, it's like my favorite remarks. You know, we we think it's dropped here in the first quarter and we think it'll it'll pick up overtime and end 2021 right where we started the year at about 91 and a half percent or so. And Linda, it's important to note that that's absent any transactions that we complete over the next call it nine months here. We are going to be a net acquirer, as we disclosed in our guidance, that we're going to be acquiring about $100 million or so. And then we are selling about $150 million or so within that lease platform. That was 98% occupied. So that's somewhat alluded to the occupancy. But all the assets that we're looking at within our pipeline, that Brian talked in great detail here in Q&A and prepared remarks, Those centers are 94, 95% occupied, so it's very creative to where we stand today. So that'll be a moving target that will impact occupancy. Organically, again, 91.5, 91.5 over the year.

Yeah, just organically, Linda, I've got pretty good visibility, very good visibility on the pipeline. And, I mean, the amount with brochure, medical, fast casual, and QSR restaurants, discount apparel wholesale has never been stronger since we've been here. And that is including, you know, when we put up the sector leading results in 20, I mean, in 2019 and spending, you know, really a lot of time with the essential tenants, home improvements, wholesale, And really, there's a lot of local and regional operators with the entrepreneurial spirit are showing up, and they're seeing this as a chance to expand their reach or, in some cases, start something new for more of the small shops. So we're seeing robust demand in all parts of our organization.

Thanks for that.

Yep. Thanks a lot.

Our next question comes from Flores Van Dychen with Compass Point. Please proceed.

Morning, guys. Thanks for taking my question. Obviously, you guys have been very innovative here in accessing capital through the various JVs that you've created. It does complicate things for investors a little bit, so I guess the onus will be on you to explain that very well. You've done a nice job so far. Just curious, though, Brian, maybe if you can, you know, it appears that some of the lower growth portions of your portfolio will go into some of these JVs. I'm thinking grocery anchors and certainly the net lease segments. As you look out five years, where do you see your small shop percentage as a percentage of the overall space in rpt will that go up significantly and and does that make your long-term growth rate obviously you know significantly higher than what it's been historically maybe if you can give some more color on on on how you see the company evolving over time yeah and this is this is part of the the recipe is to increase small shop and you know the battle ships of of huge credit

are parked in a battleship garage with our venture. And to give you kind of context, Northboro, pre-spin, if you will, 15% small shop. Post-spin, 35, 36% small shop. That 36% small shop has much more contractual rent increases So we see Flores a much more robust growth trajectory organically and obviously externally for the company. And this is simply syndicating really growth between the two platforms.

Yeah, I mean, today our small-shot percentage on the basis of ABR, Flores is low 40%. This will, over time, as we get on the strategy and continue to transform the portfolio and break these assets up into new platforms, that will get north of 50%. which will correlate into much, much better contractual rent increases as part of our growth profile as we move forward. Today, there are about 125 basis points contribution to our NOI growth profile. We see this based on trajectory in front of us and the assets that we're buying. We could get to 200 basis points over time. And then you layer on the market opportunity that, you know, we've been experiencing this portfolio for, gee, since we've been here since June of 2018, and that's another percent or Celsius well north of could be well north of 3% on an annual basis, which is, you know, outside relative to our peer set.

Thanks, guys. And then maybe just a follow-up on that particular, you know, why stop at 50% of ABR? Why would you not, you know, go to, you know, 70% or 80% of ABR? of ABR or, you know, 50% of your total space being small shop space down the road?

Yeah, look, I think it comes down to risk management. I think if you have too much small shop, which are short-term leases, you know, less national tenants, you might have disruption in your cash flow. So I think 50% at this point is a good target in terms of a risk-adjusted growth profile that we look to attain.

Floris, we're not managing to a number, though. I mean, this is going to be done asset by asset, over time, and building, you know, with growth in mind, balance with credit in mind, to put us on a long-term trajectory for what we believe will be sector-leading growth.

Thanks, Josh.

Thanks, Floris.

Our next question comes from Mike Mueller with JP Morgan. Please proceed.

Yeah, hi. I just wanted to touch on guidance here for a second. So I think you were talking about the theaters starting to pay again, and that's obviously a big portion of the reserve. So when you're looking at guidance, what's baked in there for, I guess, the reserves tied to the theaters that are going to start to pay rent later this month?

Yeah, if you look at what we experienced in that first quarter, Mike, like I said, we had about $3.2 million, which was $2.6 million of bad debt, another $600K of abatements. You know, 60% of that was tied to the feeders. And so our theater is going to be open up mid-May, so we'll have about a quarter and a half of some form of payment. So you're going to see a deceleration in the second quarter in the bad deadline item, and then a further, bigger deceleration in the second half of the year as they get to full rent. based on our expectation. And if you look at – another way to look at it too, Mike, is if you look at our quarterly, you know, run rate, you know, based on Q1, we'll have about a $0.03 pickup from bad debt over the course of the year.

Got it. Okay. So basically, as they start to pay, that bad debt is going to go away and hit the numbers. Okay.

Correct.

Got it. Okay. That was it. Thank you.

You bet.

Thank you. Our next question comes from RJ Milligan with Raymond James. Please proceed.

Hey, good morning, guys. I was wondering if you could give a little bit more detail on what exactly at Northborough you expect to parcel off and what the expected cap rate is or blended cap rate for the parcels you do expect to sell.

RJ, we'll provide more color after we close. Obviously, since we haven't closed, we just don't want to get into what cap rate is where and what tenant's going, staying, leaving. So we'll provide some more color in the next few weeks.

Yeah, and in terms of the impact, the guidance, relative to our midpoint that we provided our fourth quarter call down to now, it's about a four-penny pickup. But like I said, we're happy to, once we close the asset on the entire center and then we components to the platform, you know, we'll talk through, you know, obviously at that point what we sold and our thesis and our rationale on the – more rationale on the transaction.

Okay. And then maybe just thinking about longer term, after parceling off some of these, I guess, probably more investment grade or anchor type tenants, Can you talk about the value that you expect to be left with for the remaining property? How does that impact the desirability of potential future buyers? What kind of cap rate? So you mentioned getting to a 10 yield on the remaining. What do you think you could sell that for?

I mean, I think it actually cap rate compresses tremendously. We bought Austin, Lake Hills and Austin, December of 2019, shadow anchor target in one of the best intersections in the city for five and a half cap. You know, we didn't own the target box. It was a 4% NOI CAGR, 27 ABR in a $42 market. We are, what we would have left at Northboro still is over, you know, roughly 50% investment grade with four TJX concepts, Ulta, Small Shop, Old Navy. So we feel very bullish and we feel that it could be a great cap rate even compression just because of the more liquidity and high investment grade tenancy.

Okay, that's it for me. Thanks, Chris.

Thank you, RJ.

Our next question comes from Peter Herman with Baird. Please proceed.

Hey, everyone. How many more opportunities are there to capture spaces like you did in Detroit this quarter, and would the CAPEX requirements be as high as they were with these opportunities? Thank you.

Thanks. There's a lot, and, you know, some of those – A lot of these spaces were old, tired, neglected spaces that were, call it mid-single-digit rent. I'm staring at one in West Broward at $6.13. That's not going to be as high of a TA because that's a grocer taking one existing box. The elevated cost for the deal in Troy was really a lot of the combination of the two spaces, creating a 40,000 square foot flagship. Looking at another office supply store that we're looking at combining another space of which is currently vacancy, those combined spaces are 11 bucks. And we expect to get close to low 20s in rent from the new tenant. So we don't see, you know, this type of cost as high of cost, but we feel a lot of value upside on the rent and really cap rate compression of adding these brochures.

That's helpful. Thank you. Thank you.

There are no further questions in queue at this time. I would like to turn the call back over to Mr. Brian Harper for closing remarks.

Yeah, I just appreciate everybody's time. Thank you all for listening and looking forward to hopefully seeing many of you physically for the first time in quite some time. Thank you all.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation. Have a great day.