Rithm Property Trust Inc. Common stock

Greetings and welcome to the RPT Realty second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Vin Chow. Thank you, Vin. You may begin.

Good morning and thank you for joining us for RPT's second 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 31, 2020, and in our earnings release for the second quarter of 2021. Certain of these statements made on today's call also involve non-GAAP financial measures. Listeners are directed to our second quarter press release and our first quarter 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 now like to turn the call over to President and CEO Brian Harper and CFO Mike DesMorris for their opening remarks, after which we'll open the call for questions.

Thank you, Ben. Good morning and thank you for joining our second quarter 2021 conference call. I hope you and your families are all well. Although the pandemic has created many challenges, we are seeing a resurgence in open-air shopping center demand as retailers gain a better understanding of the importance of a robust omnichannel distribution platform that includes well-located bricks-and-mortar retail. Similarly, investors have taken notice and have been allocating more capital towards open-air shopping centers. This is leading to compressing cap rates for certain retail segments in the private markets, unlocking M&A opportunities in the public markets, and recently culminated in the shopping sector's first IPO since 2013. At RPT, we spent the last three years thinking strategically and outside the box to reinvent, advance, and differentiate our company. This exercise led to the formation of our grocery anchored R2G joint venture and our groundbreaking net lease platform, RGMZ. Together with our wholly owned portfolio, we have created a powerful engine that will drive our business forward and unleash opportunities across multiple retail channels, which we expect will result in strong and sustainable growth. Within our investments platform, we have always used a rigorous underwriting methodology and acted with discipline and patience. Investments in our buy box must be accretive to portfolio quality, earnings, and the balance sheet, and be in our strategic markets. With these must-haves, RPT transformed on a scale and at a speed that exceeded our own expectations. And we are excited to share the considerable accomplishments of the reinvented RBT. During the depth of the pandemic in 2020, while we were working on RGMZ, we were also cultivating a significant investment pipeline. We took a thoughtful and analytical approach to curate our external growth in markets like Boston, Atlanta, Tampa and Nashville that are flourishing in today's modern landscape. Thankfully, our timing worked out very well. While each of our acquisition markets has its own unique set of economic drivers, we believe they will all experience strong growth over the long term, which should position the portfolio well in the coming years. Boston, for instance, is seeing a wave of demand centered around the life science industry, and our centers have significant adjacency advantages with 186 life science companies within a 10-mile radius of the four Boston properties that will soon be part of the portfolio. Once the remainder of our deals close and net of expected parcel sales, Boston will become our third largest market at just under 8% of ABR. This underscores our size advantage versus peers, as we can quickly reshape our portfolio, which is particularly important in today's rapidly evolving landscape. Let me give you a few highlights on our investments in Boston that will fit in nicely with our previously acquired Wegmans Anchored Northboro Crossings property and collectively boast a robust 148,000 household income within a three-mile radius. Bedford Marketplace in the Boston MSA is situated in a highly affluent suburb right outside the 128 Loop with a three-mile average household income of $193,000. This is a center where Whole Foods is doing over $1,000 per square foot and has a fresh, newly renewed 15-year lease term. Marshalls has been here since 1973 and is also doing extremely well. Shops at Canton. This is $133,000 household income within a three-mile radius. This is a top-volume Shaw's Anchored Center where the small shop demand is robust. The expected NOI CAGR on this asset is about 4%. Lastly, we are in negotiations on a true infill grocery anchored center inside the 128 loop with above average household incomes and population densities versus our portfolio averages with the potential for future densification opportunities given its size and proximity to Boston. In total, since our last call, we closed or are under contract on eight multi-tenant deals and are in advanced contract negotiations on a ninth asset with a gross value of $500 million, covering 2.6 million square feet, which will increase our AUM by over 20%. To put this in context, this level of activity equates to almost 50% of our equity market cap, which is quite remarkable. RPT's pro-rata share of all this activity and after expected parcel sales are complete will be around $285 million. We were only able to execute at this scale because of the power of the platforms that we put together over the last 18 months. As we discussed last quarter, Northboro is a $104 million deal we might not have pursued without RGMZ given the large ticket size. Our partnership with RGMZ also made Northboro a much more attractive use of capital, given the yield enhancement that we expect to generate upon the sale of certain parcels to RGMZ. In the Southeast region, we acquired a $115 million for-property portfolio that was split between all three platforms, RPT, R2G, and RGMZ. Let me give you a breakdown of this portfolio. Let's start with Eastlake in Tampa. This is another grocery anchored center that was added to the R2G portfolio. This center is anchored by a high volume Walmart neighborhood market and over 65% essential or investment grade tenancy. Noonan Pavilion. This is a community center in the Atlanta MSA with a strong lineup of Aldi, Home Depot, and Ross. We are selling the Home Depot and Longhorn to RGMZ, and RPT is left with an Aldi anchored center and an 8.6% yield with almost 80% essential or investment grade tenancy. On balance sheet, we bought Woodstock Square in suburban Atlanta. This center is shadow anchored by one of the highest volume super targets in the Atlanta MSA. The center is in the heart of the rapidly growing northwest corridor of Atlanta, and is adjacent to a luxury rental community owned by Graystar. We see great mark-to-market opportunities on both the small shop and junior boxes at the center. Woodstock has also demonstrated great stability over the years and has retained its original anchor tenants since it was developed in 2001. Another balance sheet deal is Bellevue Place in suburban Nashville. This center sits on incredible real estate, where we have conviction around a small redevelopment with a potential future grocer ad. To put everything we've done into context, R2G and RGMZ provided us with a lower cost of capital than we could have achieved even after the rally in our stock price since November. This lower cost of capital combined with the yield enhancements from fees and multi- to single-tenant arbitrage opportunities allowed us to lock in higher economic spreads on our capital than we could have otherwise have achieved in the public markets, thereby accelerating our earnings growth and our portfolio transformation. In summary, the power of our platforms is allowing us to grow earnings, and to advance our strategic objectives faster than we could do on our own. Given the level of acquisition activity, we put together an additional investor presentation that showcases our recent deals and provides insights into our market strategies. When time permits, please take a look. On the operational front, our second quarter results reflected RPT's reshaped portfolio and platform. We continue to rebound from the COVID-induced downturn with another strong leasing quarter. We signed 58 leases covering 442,000 square feet in the second quarter, which is 59% above the trailing 12-month quarterly average leasing volume we reported last quarter, highlighting the strong demand for our high-quality open-air centers. Demand has been particularly robust from the junior anchor category, and it's as high as I've ever seen in my career. Leasing highlights for the quarter was an REI deal at Town & Country in St. Louis that replaced the majority of a former Steinmart space and a Lululemon deal. Both of these new tenants will significantly improve the vibrancy of the centers, making them more attractive for both customers and retailers alike, while also improving the credit of the portfolio. Reflective of the strength of the off-price category, we signed two new Burlington deals this quarter. The first is at Winchester Center, where we are replacing our last Dymart box, and the second is at Shops at Lakeland, where we were replacing an office supply tenant. Our leasing pipeline is robust, as we are in negotiations with several grocers and wholesale clubs and are eager to announce those soon. Underpinning all of the accomplishments of the quarter is our belief that value creation lies in our ability to improve the quality, sustainability, and growth of our cash flows. Our success in replacing weaker tenants with stronger ones and our increased exposure to Boston and Atlanta speak to the improved quality and sustainability of our cash flows. Our increased guidance and the 60% increase in our quarterly dividend reflects our accelerated growth trajectory. With that, I'll turn the call over to Mike to discuss our financial and operational results and our updated guidance in more details. Mike?

Thanks, Brian, and good morning, everyone. Today I will discuss our second quarter results, provide an update on our balance sheet, and end with commentary on our improving guidance expectations for the second half of this year. Against the backdrop of an improving macro environment, second quarter operating FFO per share of $0.22 was up $0.03 from last quarter, driven by lower rent not probable collection and abatements of two pennies and the reversal of prior period straight line rent reserves of about one penny per share. The largest driver of the decline in our bad debt was a reduction in our reserves taken for our regal theaters. As expected, they have been open for over two months and have resumed rent payments accordingly. For some context, our rent not probable collection, including abatements, peaked at $5.9 million in the second quarter of 2020 and have fallen quickly to the $1.1 million we reported this quarter. We are down to just a handful of tenants for which we are still reserving and expect our bad debt will continue to be a tailwind to year-over-year growth in the second half of the year, which is in line with the expectations that we set out at the beginning of 2021. Our fundamentals remain strong. We continue to experience accelerating leasing demand with 1 million square feet signed year-to-date, which is just below the 1.2 million we completed for the entire year in 2019. Our positive leasing momentum resulted in sequential increases for our leased and occupancy rates of 50 and 40 basis points, respectively. This is in line with our expectations that the trough and occupancy is behind us as we continue to drive occupancy in our newly minted transformed portfolio. Blended releasing spreads on comparable leases signed in the quarter were 6.6%, including another strong new lease spread of 17.8%, reflecting, once again, the embedded mark-to-market opportunity in the portfolio. Over the past four quarters, our comparable new lease spread was 30%. Our powerful operating platform continues to drive leasing velocity, improve occupancy, and secure higher rents. Remerchandising projects remain our best risk-adjusted use of capital, and our pipeline of projects continue to grow. This quarter, we delivered three remerchandising and outlot projects, a ground lease with Wendy's at Coral Creek Shops, a ground lease with Chase Bank at West Broward, and the combination of the boxes for Aveda at Merchant Square. These projects were completed, and the average return on capital was 17%. We also started our new REI remerchandising project at Town & Country. and an expansion project for Burlington at the shops at Lakeland, where we expect returns of 9% to 13%. We added five new pipeline projects this quarter at North World Crossing, Deerfield Town Center, Southfield Plaza, River City Marketplace, and Providence Marketplace, highlighting the demand at our centers and future rent upside. We ended the second quarter with net debt to annualized adjusted EBITDA 7.0 times, down from 7.2 times last quarter. Leverage should fall towards our target range of 5.5 to 6.5 times as our bad debt reserve normalizes to pre-COVID levels and we restabilize occupancy. From a liquidity perspective, we ended the second quarter with a cash balance of $38 million and our fully unused $350 million unsecured line of credit. Subsequent to the end of the quarter, we drew down $135 million on the revolver to fund acquisitions, which we expect will be repaid by the end of the year as we close on parcel sales to our GMZ that are expected to generate roughly $142 million in proceeds. During the quarter, we repaid our $37 million private placement note with cash on hand. Looking ahead, we have no remaining debt maturing in 2021 and only $52 million maturing in 2022. Our refinancing options are plentiful, and we are exploring both secured and unsecured options. We will also continue to look beyond 2022 to refinance debt early to take advantage of the low interest rate environment while adding duration to our capital stack. And lastly, turning to guidance, we updated our operating FFO range to 88 to 92 cents, which is up 5 cents or 6% from last quarter's guidance and about 10% from our initial 21 guidance provided back in February. The primary driver of the upside is an increase in our acquisition forecast. We have closed on our under-contract or our advanced contract negotiation on 285 million of acquisitions at our share, which is above the 100 million of acquisitions that was embedded in our prior guidance. Also, given the strength in our core business and our creative acquisitions, our Board of Trustees has increased the dividend by 60%, to $0.12 per share quarterly. This rate allows us to maintain a low payout ratio, providing us flexibility to continue to allocate capital accretively, but also leaving room for additional dividend increases in the future as we grow earnings. And with that, I will turn the call back to the operator to open the line for questions.

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from Derek Johnston with Deutsche Bank. Please proceed with your question.

Hi, everyone. Good morning. So one thing that really stood out to us was the strongest leasing volumes in, in really over five years. And, and this is, you know, with a much smaller and refined portfolio, can you talk about the shifting drivers or dynamics really leading to such robust leasing, any tenant categories, geography strengths, or even new entrance or newness that stood out?

Yeah, Derek, it's, you know, as I've said repeatedly, um, it's as strong as I've seen in my career, particularly the junior boxes. That really got out of the gate the fastest in a post-pandemic world where it's been nice to see. The interesting thing about this quarter is the new deals were about 50% junior boxes and 50% small shop. That ranged from, call it, 35% of them were off-price with a very good high percentage of medical as well, with a large percentage of fast casual and QSAR. We mentioned the Lululemon deal. We mentioned the REI deal. And we, you know, even past this, we have a very good backlog of wholesale, home improvement, grocers. We're getting huge yields, and a lot of those are going into power centers or we like to say credit centers. So the leasing team is firing on all cylinders, boots on the ground in these markets. And I think a lot of this, too, is helpful of in 2018, we disposed of $200 million of assets in secondary markets that had an average IRR of 3.5. That was anchoring the portfolio down. That is gone. So we are mining the portfolio every inch and couldn't be prouder of our operations and team, both leasing and development.

Thank you, Brian. And for the second question, can you share what was so attractive about these six acquisitions you announced? I know you gave some details, but maybe a little more context. And really overall, the ones that you're also vetting today, And, you know, how do cap rates shake out, especially for the portions destined for RPT's balance sheet versus the parcels that are earmarked for JVs?

Yeah, so, Derek, the way we look at real estate, obviously, is IRR-driven, first and foremost. And then it comes down to the real estate credit profiles of tenants and math. So let's start with the math first. The total yield on the whole portfolio was a seven and a half cap. And the way I would look at that would be the following. You know, the property is blended to a mid-six. And the power of the two platforms increased it by 100 basis points. That's obviously arbitrage and fees. This is our target range and our competitive advantage. It's a moat, if you will, in this highly, highly competitive market. As I mentioned in my prepared remarks, we obviously had a lot of good timing, and we started on these assets in mid-2020 when we knew RGMZ was going to occur. We were highly focused on these selective MSAs, highly focused on them, and we're negotiating at a time when others weren't underwriting deals. This early jump allowed us to secure these assets you know, we believe at extremely attractive yields where they would be 75 basis points lower today. And a proven example of this is a deal recently traded in Provo, Utah, Walmart neighborhood anchored shopping center, similar cash flow, similar credit, similar wall. Provo, Utah is clearly not the number 18 Tampa MSA. That deal in Provo went for a sub five cap. So what I love about this specific asset, it's 80% grocer. The grocers that report are averaging $700 a square foot. This is a 5% CAGR, NOI CAGR, 60% IG, 125,000 household income with a high amount of small shop. And it really all comes down to the execution of how we could get this at this yield, at this quality. and accretive to our balance sheet is the power of the platforms. And this will be a unique weapon going forward in this highly competitive landscape while cap rates are compressing every day. And we are highly focused on our tier one markets of Boston, Atlanta, Tampa, Orlando, Miami, Nashville, and Austin, and really remain disciplined on future pipeline. you know, where it has to meet the three buckets of accretive in quality, accretive in earnings, and accretive in balance sheet. Thanks, Brian. Thanks, Derek.

Thank you. Our next question comes from Linda Tsai with Jefferies. Please proceed with your question.

Hi. Good morning. You still have a fair amount of capital to be deployed in RGMZ. How are you thinking about the pace of deployment for the remainder of the year? And then maybe just back to your earlier comments about how competition has increased a lot for the assets that you're looking at.

Yeah, let me start with the bucket. And Tyler Sorensen and his team on the triple net size is doing a phenomenal job and have a really full pipeline, Linda. The way we're looking at this is three buckets. First would be the arbitrage like we did with Northborough or Noonan. Second would be build-to-suit opportunities. We are now providing another service to our retail partners where we can build them, you know, reverse build the suits and obviously keep that spread on the yield as we dispose that to our GMZ. And then the third would be marketed and off-market deals. So the team is very focused, and we're seeing a lot of activity in that space. As a reminder, it's only 6.5% of RPT, so it's a very meaningless kind of number for end of the year for us. And, you know, your second question as it relates to the competitive landscape is, It's very competitive. And our head start on this $500 million of deals, we hit timing right. And we do have a nice pipeline behind that in these selective markets that with this platform, that 7.5% yield, is kind of our bogey. And we believe that this platform is really a moat that gives us a weapon and a differentiator that allows us to accretively deploy in an external world that's extremely competitive today.

And Linda, the only thing I would add to that is just as a reminder, as we've talked in the past, is we have three years to optimize this joint venture, which really allows us to be very, very, very disciplined and rigorous in our underwriting of these new investments, which is a great spot to be in.

Thanks. And then just to follow up for Mike, too, just you gave us some details on Regal. What were the overall collections from theaters this quarter? And just remind us what it was in one queue.

Yeah, in the first quarter, we collected 0% from our theaters. We collected about half or so in the second quarter. Total collections for the second quarter, we touched about 95%. 3% was deferred, get you to about 98%. And then 2% really represent our cash basis tenants that we reserve for. We continue to see... For the remaining part of the year, embedded within our guidance range is about a million per quarter for the second half of the year, which is very consistent with what we reported in the second quarter of this year.

Thanks.

You bet. Thanks, Lando.

Thank you. Our next question comes from Craig Schmidt with Bank of America. Please proceed with your question.

Thank you. As you pointed out, you beat the second quarter by a penny, and then you raised guidance on the midpoint by five cents. I wonder where this raised growth is coming from regarding, let's say, your RPT platform versus your R2G and RGMZ. I mean, a rough breakout.

Yeah, a rough breakout of the 285 million or so, Craig. About 123 million or so is going to come on our balance sheet. About 150 million or so is going to go in our R2G joint venture where we own 51.5%. And then the last 5 million or so is going to come through our GMZ again where we own just 6.5%. That totals to about 285 million. And as Brian noted, that was redeployed at about a 7.5% cap rate, and that gets you the 5 cents upswing that we had within our guidance this quarter. And the average acquisition date, you know, that I would model, Craig, is probably going to be likely at the end of the third quarter, beginning of the fourth.

Great. And then maybe touching on some of the earlier conversation about the increased leasing volume, How much of this is just new leasing volume emerging versus maybe taking market share from either private or less dominant players? So sort of is the pie growing or are you starting to get more of that pie?

It's both. I mean, we're getting a lot of new to market. We're getting a lot of relocations. We're getting a lot of mall tenants as, you know, the Lou Lemons and the Athletas and Sephoras of the world are very active. So, you know, we're very – We're very disciplined on increasing market share at the assets where we can increase them. And that's looking at the competitive landscape. That's looking at where we can pick off tenants from competing centers that's either open air or enclosed. So I was very, very pleased with the new to market and the relocations.

Great. Thank you.

Thank you. Thanks, Frank.

Thank you. Our next question comes from Wes Galladay with Baird. Please proceed with your question.

Hey, good morning, guys. I have a question on the net lease versus shopping centers. You do focus on IRRs. Can you tell us what do you think the difference is between the two asset types today?

Yeah, I mean, obviously, the triple nets, I mean, both, it's very frothy. And when you look at the triple nets, it's compressed significantly. They got a head start, obviously, on the shopping centers. We're seeing, you know, huge compression in the shopping center landscape as well. But I think the interesting thing, Wes, especially on the nets, it's a lot of these essential tenants that are really seeing the most compression, you know, from obviously your wholesale to home improvement to grocery and then even the QSRs. So it's a very, very liquid competitive market, you know, and then that's, you just have a wider pool just based on, you know, the liquidity and the smaller check size of each of those deals, as opposed to, you know, some of these centers and some of these centers we bought, Northborough, $104 million. You know, that buying pool is obviously not a lot, where the $2 million Chick-fil-A or the the $3 million Chipotle, that buying pool is quite wide. So it's certainly competitive on both sides, but obviously nets are trading much tighter than the shopping centers today.

Yeah, and one thing I would add there for our net lease platform, just as a reminder, Wes, we've talked about this in the past, is we can lever up to 60%, 65% to improve that IRR, which is unique to this platform relative to the public peer, so it gives a bit of an advantage there.

And I think, too, Wes, it's like why we're a differentiator for our investors, the arbitrage. We are seeding these assets at, you know, call it 50 basis points wider than the market. We are build to suit, you know, for tenants. You know, maybe that's an eight yield. Maybe that's a nine yield contributing that for investors. a five or six, right? And then looking at selectively, you know, maybe it's shorter-term duration where we have just excellent relationships with the retailers. We could do a blend and extend, you know, in DD where we can, you know, Mike touched upon patience, and over the three years, investors are patient, you know, so we don't have to deploy, and we could creatively bring IRR where I think a lot of the public nets can't.

Yeah, makes sense. And then can we go to the leasing? The TIs were, you know, elevated again, and last quarter you did the strategic leasing, and I imagine that this is going on now. I guess when we look to the next 12 months, how much strategic leasing is left in the portfolio?

Yeah, so, I mean, this really came down to this was a strategic deal. This was the REI deal at Town & Country. It was a vacant Steinmark box. We had four tenants interested in this. Three would have taken the box as is. REI and a multitude of other tenants had interest in the box. So we decided to divide it. So that's some of that cost right there. So if you combine REI with a new other tenant, which we'll announce soon, it's about a 15% yield. So we like that a lot, and we chose REI for the co-tenancy with Whole Foods, the niche it feels in the market, the greater market share we're going to have, and we just think that's a win-win. Winchester, where we had the other Steinmark box, it was just really we put Burlington in and didn't divide it. So it's going to be the pipeline in our supplemental shadow pipeline has increased tremendously And we really see great yields on those. So that has been hand-bicked. That has been hand-curated. That has a lot of the wholesale clubs. That has a lot of the grocers. That's a lot of the home improvements. That's a lot of new pads from Chick-fil-A's and Chipotle's and all that. That's what you're seeing there. And the yields are strong. So I think it's an asset-by-asset selection where Winchester, we decided to take the box and just – Burlington basically took it as is, whereas Town & Country, we decided to chop it up, just given the small shop demand and REI.

Yeah, and for this year, Wes, we're spending about $20 million or so on these discretionary items. type re-merchandising projects. And if we, based on the visibility that I had today, you know, within our cash flows and our business plans, you know, we'll probably spend about $10 to $20 million per year on these opportunities to improve the tenancy and the dynamic nature of our re-merchandising mix at our centers. And I think the cost is justified by these great national, you know, high-credit, high-investment-grade tenants, like Brian mentioned, between, you know, REI and these strong grocers that we hope to announce soon.

Got it. And then going to the private market, I guess, is that bid starting to widen? If you were to sell maybe the bottom 10% of your portfolio, is that bid starting to firm up and can you use that as a source of capital for future investments?

Yeah, I mean, again, I think we're seeing it frothy at all sectors. I mean, the debt markets are open and very frothy. And, you know, thankfully, as I said earlier in the call, we sold our bottom tier. You know, we're not actively, you know, our match funding out of certain non-strategic markets will be just that, match funding. We're not going to be diluting the company. But, you know, to sell into the froth, are we looking at certain strategic markets? Sure. That we can match fund into others and into these type of strategic markets? Absolutely. And we are seeing very, very good demand.

Got it. Thanks for taking the questions, guys.

Yeah, thank you.

Thank you. Our next question comes from Mike Mueller with J.P. Morgan. Please proceed with your question.

Yeah, hi. So, a couple questions. I guess first, What's an example of a center where you're comfortable carving out parcels for the net lease venture compared to one where you wouldn't, or does it not matter because you have an interest in both? And the second question is, in terms of the net lease venture, where do you see kind of the average cap rate levels that that entity will be paying for the carved out slices in today's market?

Yeah, so let me take your first question. It comes down to the real estate. It comes down to, you know, co-tenancy clauses. It comes down to where the pads are located in the centers. It comes down to does that real estate have future densification options? And it obviously comes down to, you know, the tenants and the credit. So we are very, very disciplined on looking at, you know, going through a rigorous process of what is true triple net, what could be parceled off, how hard is it to parcel off in the jurisdiction. In many cases, some are already parceled off. Then we look at co-tenancy. We look at, you know, use, right? And And I think like what Noonan provided is it was a Home Depot in the back of the center. A lot of centers in the country right now are already shadow anchored Home Depot. So Longhorn out in front, there were a number of pads along that area that were already shadow anchored. And we decided to... part with that. I think the others that we wouldn't would be more of the densification future opportunities. I would look at the new Boston assets that's like that, where we have Potential great future air rights and not really have had a major inbounds from some of the leading residential REITs on interest of if we would look at something like that. Or, you know, the Tampa assets, which I think one particularly in St. Pete, South Pasadena is right on the water and just has incredible demand for So we look at all that and then make a determination. I would say that cap rates run from, you know, fives to sixes, right? And it just depends, you know, what. It depends on duration and term and, you know, basically that's it. So fives and sixes.

Got it. That was it. Thank you.

Thank you.

Thank you. Our next question comes from Flores Van Dykem with Compass Point. Please proceed with your question.

Thanks. Good morning, guys. Good morning, Flores. So just one, I mean, obviously very active on the acquisitions front, increasing your exposure to these key markets. Could you tell us what percentage of the portfolio is currently in your target markets and and where do you want to get to? And also, in particular, referring to that, you know, I think 27% of your current portfolio still is in Detroit and in Cincinnati.

Yeah, we don't have a, you know, we don't play the math game of it has to be X percentage of X, Y, and Z in Austin or Nashville or Boston or Tampa or Orlando or Miami, right? You know, we obviously have a large exposure in Florida already. We will be getting larger in Boston. We will be getting larger in Nashville. And it comes down to IRR. And it comes down to, you know, real estate. It comes down to sales performance. So... I think people get caught where they have a number that they have to hit, you know, certain percentages of groceries, certain percentage of market share in X, Y, or Z. We want quality real estate in all these markets. You know, Detroit dropped to 15%. I could see that dropping, you know, much further in the near term just based on froth of the market and match funding. As I've said from day one, that's institutional quality real estate where we're doing a number of key grocery deals. So I want to harvest a lot of that out first and go from there. So we don't have goalposts of 20% Boston, 20% Atlanta, 20% Miami. It comes down to the real estate, and we're patient. So we'll hold out for the right deals.

Thanks, Brian. Maybe one of my other questions is you talk about the 6.5% cap rate on these transactions you've just announced. Obviously, you boost that through the JVs. Your returns are significantly higher. You also talked about the 5% CAGR on them. If you could explain that a little bit more, because 5% same-store NOI CAGR on those acquisitions seems really high, particularly, you know, I think the Southeast portfolio is 94% leased. Where's the upside? Is it in rents? There's no information on occupancy.

Yeah, so there's a 90% – there's a few centers that are lifting that CAGR up. Shops at Canton has a lot of small shops. It's like 70% small shop, and we have some vacancies there and already are working on negotiating deals. So that's a massive CAGR. The mark-to-market on some of those renewals, as I said to Woodstock, was – It's a lot of their original deals that were in the 2000 – you know, since 2001, original anchors. So some people are up for renewals, and there are some vacancies. And then Noonan has a number of – Potential for mark to market as well and then Northborough is you know, like an 8% CAGR just because of two new and potentially three new TGX concepts coming online. So really skewed higher with three or four of those centers.

Thanks. And then my last question, I guess, is maybe if you could put in – I mean, I've done the math. The little presentation you sent out, which I thought was quite slick, you talk about $4.9 million of potential ABR upside getting back to 19-level occupancies, which I think works out to around – additional 3% of NOI, somewhere in that range. Obviously, bigger impact on FFO because of leverage. Maybe if you can talk a little bit about when you think you see the company getting back to 19 levels of occupancy going forward.

Yeah, no, I think it's, if you look at our occupancy today, Flores, we ended the quarter right around 91%. We were up 40 basis points. We do think the trough is behind us as we've messaged over the last couple quarters. Won the year right around 91.5%, which puts us just about where we ended 2020 at. As we move forward, we do think the portfolio restabilizes in late 22, possibly early first half of 23, right back at that 93% level that we were at pre-COVID. And we absolutely think that this portfolio is a 95%. quality portfolio. We were well on our way there prior to the pandemic. So we think there's even additional upside beyond early 23 with occupancy.

Thanks, Mike. Appreciate it.

Thank you. Our next question comes from Todd Thomas with KeyBank Capital Markets. Please proceed with your question.

Hi, good morning. Brian, first question, the mall-based tenant demand that you mentioned, Lulu and others that are signing leases, are you seeing greater interest from them to expand outside of, I guess, some of the larger format lifestyle and sort of community centers where they've historically had interest? Are they expanding the types of space and types of centers that they'll entertain? Just curious if you have any thoughts and Maybe any examples of that to demonstrate some of the demand that you're seeing from some of the more traditionally mall-based retailers?

It runs the gamut. I mean, you have, you know, Claire's now, right, out with a whole open to buy outside the mall. You know, they're negotiating a deal up in Northboro. That's Wegmans and, you know, several TJs and Ulta. Sephora in several areas. I mean, Todd, almost everybody has an off-mall program now. Lulu and Anthropologie kind of led that many years ago, and those two are very robust. Sephora then followed through. Foot Locker is very active in their off-mall strategy. I can't think of one that doesn't have an off-mall strategy or at least not trying it. So I think with the exception of call it obviously the luxury tenants, which they'll stay in high street or luxury malls, there is every single one of those tenants has at least engaged in conversation and said they have an off-mall platform.

Okay. And as you sign leases with, you know, these retailers, obviously there are occupancy costs in sort of the open air arena, you know, are lower than they, you know, generally would be in sort of the mall based, in sort of the malls. You know, are you achieving, you know, sort of premium rents, premium economics from those retailers or, you know, are they generally consistent with market?

No, you're getting premium. I mean, you're absolutely getting premium. I say you're getting premium at most centers. You know, we obviously know occupancy costs and can calculate that, and that goes into our negotiations with them. Are they getting a reduction, and could they do equal or greater sales and being an open air and have, you know, greater, you know, four-wall EBITDA with a lower rent? Absolutely. So we are, you know, they're accretive in every single one of our deals from an ABR at the shopping center level.

It's typically in the mall, Todd, equity costs are between 13% and 15%. With open air, given the much lower common area cost, you're looking at seven to nine. So to back up Brian's point, there's absolutely a premium to be paid here in open air.

Okay. That's helpful. And then, Mike, so leverage, you know, it's inevitably going to bounce around a little bit while, you know, with all this investment activity, you're sort of warehousing, you know, certain assets before contributing them to the fund or certain parcels to the funds. And it seems like you're in that position today a little bit with some expected proceeds from parcel sales to come. You mentioned the five and a half to six times leverage target. How long until you're sort of within range and where do you expect to be at year end, I guess, pro forma, this sort of $500 million of transactions and all the activity being completed?

Yeah, look, I mean, we're, as you know, Todd, we're very focused on leverage and getting it back within our range, as you noted, five and a half to six and a half times Our recent investment grade rating is very indicative of our philosophy to be low levered. And look, we have three strategies to get there. One is growth through EBITDA. And we are well on our way there. I mean, our rents this quarter were only 3% off our pre-COVID levels. Secondly, as Brian mentioned earlier in the Q&A here, we will opportunistically invest you know sell non-core assets or see more of our existing portfolio to our gmz and and pay down you know could be high coupon debt we have an opportunity with our mortgage uh that comes due early next year or like brian said redeploy creatively into acquisitions and then the third thing which i think is the most powerful you know option here um and uh you know arrow that we have is to continue to optimize the power of the platforms um you know with the right mix of debt and equity we can absolutely creatively grow earnings and lower leverage at the same time. You have a whole lot of options when you can invest in yields at 7.5%. So we are very focused on getting it down as quickly as we possibly can. By the end of the year, we'll probably be a little bit north of 7%, all else equal, absent any of these other strategies that I mentioned being employed.

Okay, so a little bit north of where you sit today, just given all this activity, and then it should get down.

Yeah, all else equal.

Okay, and then, yeah, two more questions, I guess, on the model. So, you know, you mentioned the mortgage. I think that's Bridgewater Falls, right? So $52 million, 5.7%. What's the plan there as we turn the corner into 22?

Yeah, I think, you know, I think we're looking at, Many options. One is the unsecured market with private placement. Rates are between you know, three, three and a half percent on that front. We're also looking at the secured market, uh, possibly to, um, put some leverage on our assets with the RT2G joint venture, modest leverage. But again, those, those rates are sub three. Um, and then, like I said, you know, there could be an opportunity to, to sell non-core assets. So we're looking at all three right now. Uh, we'll have more color on, you know, what, what we pick, um, and likely in the third quarter call.

Okay. And just lastly, then, um, With the activity that's completed or expected to be completed by year end, can you comment on where recurring fee income, I guess how it's trending from here, but where it might be at the end of the year on sort of an annualized basis as we think about 22?

Yeah, I think if we get to the end of the fourth quarter, I think it's right about a half penny, about $400,000.

And that's from R2G and RGMZ combined?

Yeah, that's correct. And then it'll be a bit north of that if you include the preferred position we take in RGMZ. Like right now, we're forecasting about 200K in the fourth quarter for that. But that's going to be a bit more volatile.

All right, great. All right, thank you very much.

You bet. Thanks, Todd.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Brian Harper for any closing comments.

Thank you. Our results for the second quarter and so far the third quarter have clearly demonstrated our ability to create value for shareholders, both organically and through acquisitions. Not only are we rapidly increasing our cash flow, but we are also enhancing the sustainability of our cash flow by improving tenant credit, our market mix, the quality of our properties, and our continued focus on affluent first-ring infill suburbs. We also remain focused on advancing our ESG initiatives in order to further strengthen our business. With a company sized appropriately and repositioned for success in a rapidly evolving retail environment, we are confident in RPT's future. Thank you all for joining our call this morning. Have a wonderful day.