Rithm Property Trust Inc. Common stock

Greetings and welcome to the RPT Realty Third Quarter 2021 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Vin Chow. Senior Vice President of Finance. Thank you. Please go ahead.

Good morning, and thank you for joining us for RPT's third 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 third quarter of 2021. Certain of these statements made on today's call also involve non-GAAP financial measures Listeners are directed to our third quarter 2021 and second quarter 2021 press releases, 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 Fitzmaurice for their opening remarks, after which we will open the call for questions.

Thank you, Ben, and good morning, and thank you for joining our call today. We had another very strong quarter, resulting in another raise in our 2021 operating FFO guidance. We experienced balanced success across all our disciplines as we continue to refresh our portfolio, tenant mix, liquidity, and balance sheet, all of which position us to deliver on future earnings growth. We closed on several high-quality acquisitions across all three of our strategic investment platforms, bringing our gross acquisition volume to $500 million in 2021. We continue to see strong demand for space in our centers and signed a number of key leases with well-capitalized tenants, driving our accelerated sign-not-open balance to almost $4 million. And lastly, We raised or received commitments on $670 million of capital from our equity, debt, and joint venture partners, strengthening our liquidity profile and balance sheet. Starting off with our capital-raising efforts, I'm very pleased with GIC's recent commitment of an additional $500 million to our core grocery-anchored R2G platform, positioning that platform to scale up to $1.7 billion. We believe this is an endorsement of RPT and our ability to create value. We are grateful to be in the company of top-tier REITs like Ventas, Boston Properties, Equinix, and others that have partnered with GIC. The new commitment provides us with the firepower to further accelerate our portfolio transformation while enhancing our management fee income stream. We also recently obtained commitments for $130 million in the debt private placement market and received another $40 million through our ATM, demonstrating our ability to access multiple sources of capital to accretively fund our growth plans. Turning to investments, the size of our portfolio is an advantage as it allows us to rapidly reshape our geographic exposures towards higher growth and more durable markets like Boston. which is now our third largest market. We also increased our exposure to Atlanta and Tampa while reducing our concentrations in Detroit, Cincy, and Chicago. This real-time shift in our mix not only improves our geographic diversification, but also increases our visibility with retailers, brokers, and other stakeholders, which is leading to increased deal flow on both the leasing and acquisition fronts. To support our data-driven investment decisions, we have an in-house data scientist who developed a proprietary asset scoring model that combines advanced data analytics with the collective knowledge and experience of our investments, leasing, property management, and portfolio management teams. With this dynamic tool, we can continually assess our existing and and potential future properties in real time to inform our capital allocation decisions. Our scoring model was a key advantage for us as we underwrote our recent acquisitions and will continue to be used as we assess our future acquisitions and end dispositions through the lens of quality, balance sheet, and earnings accretion. Regarding the acquisition environment, we are currently experiencing a very competitive landscape to acquire high-quality shopping centers, where cap rates for grocery anchorage centers and top U.S. metros are down approximately 50 basis points over the past few months. As a result, we believe the 500 million of acquisitions that we closed on so far could be up as much as 10% relative to our transacted prices. Despite the recent cap rate compression, our three investment platforms provide us a competitive advantage to acquire at higher returns, allowing us to remain active on the acquisition front in our target markets. We continue to work tirelessly, sourcing additional acquisitions, focusing primarily on off-market relationship-driven opportunities, and expect 2022 to be another active year. We continue to see a healthy pipeline of deals for grocery anchored centers, smaller strips and wealthy infill suburbs in our core communities, and larger high quality centers over 70 million where we can allocate the real estate between our platforms. We also see unique opportunities to acquire value add or opportunistic centers where we can utilize our tenant relationships to create significant value after the purchase. For example, we are currently under negotiation to buy an asset in the Southeast that has an empty anchor box related to a recent tenant bankruptcy. We are in lease negotiation with a premier investment grade grocer to take that space, which will drive the occupancy to about 99%, resulting in an estimated stabilized yield on cost of 7% in a five cap rate market. On the other side of the coin, current market demand is also creating opportunities for us to monetize assets at attractive yields in non-core markets. Earlier this week, we closed on the sale of Market Plaza in the Chicago market for $30 million. We received 11 offers and sold the property at a high five buyer's cap rate. Chicago is not a market that we are looking to expand in due to the less than business-friendly political environment. We are also exploring other opportunities to further reduce our exposure to non-strategic markets and take advantage of the current frothiness in the private markets. Now turning to operations, we continue to drive rent and sign leases with high credit essential tenancy. This quarter, we signed a lease with a new investment grade grocer at our Crofton Center in Baltimore, which is replacing a shopper's food warehouse. In October, we signed an expansion lease with Publix at the Crossroads in Palm Beach. This will be a brand new flagship prototype store, demonstrating Publix's commitment to the center and cementing the anchor tenancy for years to come. In both cases, we locked in strong credit anchors, thereby enhancing the durability of the cash flows at these centers. We also signed a new medical tenant, Piedmont Urgent Care, that replaces a sit-down restaurant at Promenade at Pleasant Hill, just outside of Atlanta, swapping a high COVID risk tenant for an essential tenant at a mid-20% spread to the old rent. Not only were we able to reduce tenant risk, but we were able to do so at Attractive Economics. Lastly, we signed a new deal for a Ferguson Gallery showroom at Providence Marketplace in the Nashville market. This will be Ferguson's first showroom in Nashville, which we think will be a premier destination for residents to access the latest concepts in quality home fixtures and appliances. With only five to six Ferguson showroom openings in a typical year, we think this deal is a testament to the strength of our center. For those of you that are not familiar with Ferguson, they are a $34 billion market cap triple B plus rated credit, and the largest U.S. distributor of plumbing and second largest distributor of industrial products. We think there will be an attractive regional draw for the property based on the strong demographic match between the center and the Ferguson customer profile. Looking forward, our leasing team remains active with a solid pipeline of deals lined up for the fourth quarter. Notably, we are seeing strong demand in Florida, Boston, and Detroit, where we are in negotiations on a number of major box deals, ranging from grocer to off-price retail, as well as several national small shop deals. Notably, we have seen a major pickup in demand in Detroit over the past few quarters and are in negotiations on over a half a dozen grocer deals and another eight to 10 box leases with discount apparel, pet, outdoor recreation, and home good retailers. With that, I'll turn the call over to Mike.

Thanks, Brian, and good morning, everyone. Today, I will discuss our third quarter results, provide an update on our balance sheet, and end with commentary on our increased guidance. Third quarter operating FFO per share of 27 cents was up 5 cents over last quarter, primarily due to about 4 cents of higher NOI from acquisitions, 1 cent from lower rent not probable of collection, and about one cent from higher lease termination fees, partially offset by lower straight-line rent. The better-than-expected rent-not-probable of collection was primarily driven by the reversal of a prior period reserve following an unplanned payment from a theater tenant. As we look ahead, we expect bad debt to continue to moderate as our collection rate tracks toward pre-COVID levels. Notably, our collection rate for the third quarter was 98% as of the end of October. As Brian mentioned, our operational performance in the quarter remains strong. We signed 52 leases totaling 280,000 square feet at a blended comparable releasing spread of 8.2%, including a 5.2% renewal and 16% new lease spread. Our renewal spread is the highest level it's been in over a year, and along with the continued strength of our new leasing spreads is reflective of the increasing demand for our centers and embedded mark-to-market opportunity within our portfolio. These spreads are on a cash basis. They don't capture future contractual run steps, which were 160 basis points for the leases signed during the quarter. Leasing activity in third quarter pushed our sign at open balance $3.8 million, up 19% over last quarter's $3.2 million backlog, which we expect to open over the next 15 months. On the re-merchandising and outlet front, we delivered two projects totaling $3.3 million during the quarter and almost a 12% yield, which was ahead of budget. We also added one new project, Ferguson Gallery Showroom at Providence Marketplace in Nashville, totaling $1.3 million and an expected yield in the 20% to 22% range. This brings the active re-merchandising and outlet project total to $14 million with expected yields in the 10% to 12% range. We are in active negotiations on a number of other pipeline deals totaling about $30 million with strong box demand in Boston, Florida, and Detroit. Turning to the balance sheet, we ended the third quarter with net debt to annualize adjusted EBITDA of 6.8 times, down from seven times last quarter. This is a bit better than expected as a result of the $40 million raised through our ATM and due to better NOI performance. We continue to expect our leverage to fall towards our target range of 5.5 to 6.5 times as bad debt and occupancy normalized at pre-COVID levels. Despite the heavy level of acquisition activity in the quarter, our liquidity remains strong. We entered the third quarter with a cash balance of approximately $10 million and a $295 million available on our unsecured line of credit. We expect to repay the vast majority of the outstanding balance on the line of credit by the end of the year or shortly thereafter. One of the core tenets of our balance sheet strategy, in addition to managing overall leverage, is to proactively address our pending debt maturities. During the fourth quarter, we expect to refinance $177 million of debt Included in this amount are all of our private placement notes that mature in 2023 and 2024 and our Bridgewater mortgage that matures in 2022. We expect to use proceeds from our recent private placement of unsecured notes totaling $130 million, our share of expected proceeds from mortgages placed on R2G assets that we locked right on totaling $15 million, and proceeds from the sale of Market Plaza totaling $30 million to fund these debt repayments. Following all this activity, we will have reduced debt maturities through 2024 to just 16% of our debt stack. Over the next two quarters, we also expect to generate $96 million in disposition proceeds from parcel sales to RGMZ, including sales from our recently acquired Northboro and Noonan Pavilion assets and the remaining seed portfolio sales. These proceeds will effectively be used to fund our share of the debt on acquisition of $68 million and to repay amounts outstanding on our evolving line of credit. Moving to our increased guidance for 2021, we initiated a new range for operating FFO of 90 to 94 cents per share, which is up 2 cents or 2% over prior guidance. The primary drivers of the upside were one penny from a prior period bad debt reversal and about another penny of lease termination fees recognized in the third quarter. The key factors that would drive results to the high or low end of the range are the timing of closing of the net lease parcel sales and bad debt reserves. In addition, Our incentive compensation is not finalized until the fourth quarter, which could result in an uptick in G&A expense similar to what we experienced in late 2019. As is our normal practice, we will be providing initial 2022 guidance with next quarter's earnings release, but I wanted to provide insight into a couple items as you start to establish your quarterly run rates for 2022. Our third quarter operating FFO per share of 27 cents benefited from two cents related to non-recurring items, including a prior period favorable bad debt adjustment and a one-time lease termination fee. In addition, relative to our third quarter results, 2022 G&A is expected to increase by approximately one penny per quarter related to an uptick in travel-related expenses similar to 2019 levels and continued investments in talent to support our growth platforms. Before I turn it over to the operator for Q&A, I would like to touch upon our strategic thinking around future acquisitions. Our framework can be summarized with three questions. Does the property improve our overall portfolio quality? How much future value creation potential is there? And can we fund the acquisition in a way that is both accretive to earnings and pushes us closer to our target leverage range of 5.5 to 6.5 times? No deal is as simple as this, and each has its own unique set of circumstances. but we think it is important to understand our framework as you build out your own forecast. Also, as a reminder, it is our normal practice not to include speculative acquisitions unless we have a strong light of sight on a potential close. And with that, I will turn the call back to the operator to open the line for questions.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. 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 register a question at this time. Our first question is coming from Todd Thomas of KeyBank Capital Markets. Please go ahead.

Hi, thanks. Good morning. First question, Brian. So, you know, you talked about the competition for investments. I was just wondering if you could just talk more generally about the pipeline today. And I'm curious, you know, if you can speak to the additional $500 million commitment from GIC for the R2G venture, you know, what the timeline is like to deploy that capital.

Sure. Good morning, Todd. I'll start with the pipeline first. So we've been in the market for, really since early May of 2020. We feel really good about unlocking some great assets and feel that we can do this in an accretive matter by way of our investment platform and the power of the platforms. Deal pipeline is extremely active, especially with the $500 million upsize with GIC. which we do have a three-year horizon on that. That opens up avenues that are larger portfolios, but where we're being very selective and rigorous and staying true to our growth communities, which I've outlined previously. You know, I would say we're not relying on brokerage or whatever comes to market. We're very proactive with a targeted approach in each of our core communities. we see a lot of value-add communities. And the acquisition I mentioned in my prepared remarks, you know, this is a, you know, high-quality, incredible, dense, high-income area in one of our core communities in the Southeast where there is a 25 to 30,000-square-foot box vacant. We're in lease negotiations with a top-tier investment-grade grocer, you know, call it a stabilized seven, yield when all things are done, and that could be sold for a mid-four cap. So really, too, Todd, I just want to stress the acquisitions comes in all shapes and sizes. You know, we did an example on a case study in our investor deck, if you can go there, where we pointed out our deal in Austin, Texas, Lake Hills acquisition. the non-grocery anchored center that has done pretty incredible for our platform. We're talking, you know, 110,000 household income in a three-mile, 117,000 density, 4% average rent escalator, 7% only NOI, CapEx of NOI from 2021 to 2024, and a 14% three-year CAGR. I like that business a lot. So this is grocer, this is strips, this could be, you know, other larger centers over $70 million like the North Boroughs that we can divide up between the three platforms. And we feel very confident that we'll be able to deploy and deploy in an accretive manner.

Okay. Has the IRR hurdle or threshold for returns changed at all for R2G? And are you seeing better pricing for one-off deals or – or some larger PACs or portfolios?

Yeah, I mean, the IRR hurdle hasn't changed for R2G. And let me just step into that a little bit further. While cap rates have compressed, the unlevered IRRs have stayed pretty the same just due to the rental growth, due to no other supply coming online. And if you own the best real estate in that market, particularly on the best corner, we're able to drive rent pretty substantially. So that's pretty held up. And I think, yeah, I mean, the sniper shot approach of what we are doing and what we have done, which led to that $500 million acquisitions over this past few months, a lot of that was off market. So, you know, obviously we think, you know, this is a skill set of being a decentralized team in these markets, and that surfaced this deal in our – you know, core community, which was the 25,000 square foot on anchor or vacant box.

Okay. All right. That's helpful. And then, Mike, can you just clarify, you went through some of the detail, you know, for 2022 with regards to G&A. Can you just clarify your comments there? I think you said that you'd expect G&A to be up a penny per share per quarter. So is that four cents on the year relative to 21? I wasn't sure exactly what you meant. Just hoping you could clarify that further.

Yeah, if you look at our run rate for the quarter, it's about $7.3 million. So if you round up there, it's about $7.5 million as we look ahead. So it's about a penny higher than that, which is about a million or so per quarter. And to give you a bit more color around that increase, look, during the pandemic, we put a freeze in all salaries and hiring, even amidst building our third investment platform with GIC, Zim, and Monarch. And we've clearly demonstrated that the platforms can produce growth and bolster really our growth profile as we move into the future. And really, in order to optimize those platforms, we need to invest in talent. And quite frankly, we need the people to power the platforms. In addition to that, we also have – a material increase in travel as well as there's basically zero travel in 20 and most of 21. So we'll return to 2019 levels there. So that's really what's contributed to the increase on a quarterly basis of about a million or so.

Okay. So you're looking at about $8.5 million per quarter run rate in 22?

Yep. Okay.

Got it. All right. That's helpful. Thank you. Thank you, Todd. You're welcome.

Thank you. Our next question is coming from Derek Johnston of Deutsche Bank. Please go ahead.

Hi, everybody. Good morning. Brian, how do you see your occupancy growth trajectory unfolding? Clearly, we're not looking for guidance, just perhaps how you see occupancy trending into 4Q. And then where you think you should be able to drive occupancy over 2022 and really beyond it to 2023?

Yeah, I mean, I think occupancy is where we stand today. You know, we really see overall occupancy in that, you know, mid to high 90s stabilized and see a clear path. Now, you know, we are taking four spaces back next year. that will ebb and flow, but those four spaces back, I think three are wholesale or grocers, and one is a TJ Maxx concept, all four. equate to three pennies of future earnings. So they're very good accretive deals. So we'll see some ebb and flow next year on occupancy. But I think the drive for occupancy, both in small shop and overall, in that mid-90s level, was small shop in the high 80s, low 90s.

Yeah, just to give you a little more detail around the four leases that we're recapturing next year. We looked to recapture those in the first half of the year. It's about 200,000 square feet, and we'll have about 15, 15 months on average downtime, and you'll see most of those come back online in late 23, early, early 24.

Okay, great. And then, Mike, some of your ending commentary and the prepared remarks are Could we talk a little more about the private markets and cap rate trends overall, you know, certainly compressing? And when you're viewing capital deployment in the current environment, whether it's on balance sheet or your JVs, you know, can you really continue to acquire accretively with the cap rate and compression that is taking place? And how do you envision doing that?

I do, Derek. And, you know, it's definitely compressed greatly. But what we have here, especially with the RGMZ vehicle, is a very large moat. And that moat allows us to extract, you know, enhance yield for our shareholders. We think this was – certainly we never knew that this was going to compress like this, but we think this is actually even a bigger weapon than compared to our peer sets. So in a lot of examples, we're seeing we could acquire in an accretive manner using the three platforms like we did previously. We also see other deals like this deal I talked about in my prepared remarks where we can go in with longstanding relationships whether it's grocery or wholesale or home improvement or maybe some off-price tenants such as TJX in our back pocket and buy some value-add centers in core MSAs with high-dense, high-income trade areas and replace that vacancy, maybe even in due diligence, and stabilize at seven or north. So it's going to be a mix of You'll see a mix of a lot of, I think, variety, but variety that will be accretive to earnings, variety that will be accretive to our existing portfolio, and a variety that will be, you know, at least neutral or accretive to our balance sheet.

Yeah, and Derek has a few comments. Additional thoughts on the funding side of the coin. Like we've demonstrated during the quarter, we did have broad access to debt and equity and obviously enhanced the relationship greatly with GIC. But from the debt side, after we repay our last bit of the revolver down, we'll have full use on that, which is about $350 million. And from a long-term debt perspective, we have a strong access to the to the bank and in the private placement and the secured market, you know, notably, you know, we did raise 130 million of notes during the fourth quarter. We could have raised three times that amount, you know, based on the demand from those, those note holders. And we'll continue to be opportunistic on the, on the, uh, ATM side as well. And utilizing that tool, we were able to raise 40 million there. Uh, but the Brian's point, you know, you combine these, these, these great options and have, and have access to these different sources of capital. With our platform, that's really what sets us apart, allows us to really invest at those higher yields, providing us flexibility to get the right mix of debt and equity, to Brian's point, to really redeploy it in a creative manner, to really check the buy box for us, which is enhancing leverage, portfolio quality, and earnings. Thank you, guys. Thank you.

Thank you. Our next question is coming from Handel St. Just of Mizuho. Please go ahead.

Hey, good morning. Thanks for taking my question. So I wanted to go back to the GIC JV that you expanded here. I guess I'm curious why you've picked up or thoughts on why GIC is putting more capital into the JV now. Certainly I understand shopping centers being more in demand, but cap rates have moved. Competition is pretty fierce. So I'm curious on what you're picking up in the conversations with them and if you think that JV could be expanded even further and And would you or are you considering any new markets?

I mean, I think as you see with Blackstone and GIC and our performance with our original JV, there's high conviction by both us and GIC and the sector. Obviously, high conviction with this sizable upsize by GIC to RPT and our platform and our results that we've proved. so that we're honored and humbled by their upsizing. This can certainly be enlarged. This can certainly be looked at as a bucket that we could look at for larger portfolios. This is another growth capital bucket that we have at our disposal with a partner that we extremely value that could look at larger size deals. And with that GIC comes a very durable income stream that, you know, allows us 50 bps, you know, of fee income, which obviously helps with the cap rates as well. So we're excited about the upsize, and it's coming now. We're just, you know, it was that time of kind of running to our completion of the original JV. So we decided collectively that $500 million was the initial target.

Okay, fair enough. Is there any contemplation of entering any new markets?

Right now, no. We're being very focused, and I think to the benefit of having people in these markets that we've identified. Could there be future markets on a larger strategic deal? Certainly, but right now we're really focused on the markets we've identified.

Got it. Thanks for that. And maybe on the triple net, JV, maybe you could talk about the opportunity center, what you're seeing in the market there. I've heard lots of talk of increased competition on that side, new entrants, public and private. So curious on any observations on that, JV. Thanks.

Yeah, no, we're, again, really excited about that platform as well. It's very frothy. Cap rates have compressed, as it has in the multi-tenant side, but we still have a significant pipeline, and we're buying wide. We look at this as four buckets of areas we're focused on for that JV. It's really, number one, the arb of a center and peeling off pads. That could be larger grocer or wholesale clubs. There's an example where we have under contract, it's grocery anchored with a Lowe's. Those two tenants make up 95% of the ABR. So once we acquire that, we'll parcel those off. And, you know, we could be 150 basis points wide, maybe even higher than where they would trade on the private market. Second bucket we're very focused on is build-to-suits for tenants. building to an eight or even a nine and acceding accretively to that platform. It's also another spoke for when we sit down with the tenant communities of another area that we could partner with them on. Third bucket is pre-takeout with developers or funding for developers where we can have some ARP on that. And the fourth and final is off-market deals but selective marketed deals We have what a lot of the public REITs don't have of the net side is in-house leasing and development where we can even take term risk and renew the tenant or replace the tenant if we have conviction on that real estate. So we have a very rigorous underwriting process, and the partners have been very, very value-added to us as well. So we're excited, and you'll be seeing a lot more deal production from that platform. in the near quarters.

Great. That's helpful. And last one on the lease rate. Small shops did steady around 84% of last year, but the spread between leased and physical occupancies widened here, which I guess we could see as an opportunity. So maybe you could discuss some of the widening, how we should expect that spread to track near term, the lease versus physical. You mentioned, I think, $4 million of signed but not opened ABR. So I'm assuming that's That should help narrow to a degree, but perhaps there's offsetting factors. So how should we think about that spread? And mid-80s is a high watermark for small shops. Thanks.

Sure, sure. No, I would pay attention more to the dollars versus the spread. But we do expect our total dollars of about $4 million or so to remain pretty consistent over the next year. several quarters, you know, as we kind of noted in our prepared remarks, we do expect that $4 million to come out of line over the next 15 months or so. We'll have about a million come out of line the first quarter, the fourth quarter of this year, another million in the first and second quarter of next year, and then the remaining $800,000 by the end of next year, which is tied to our grocery deal that we did with one of our Michigan assets up in Oakland County, Michigan. As it relates to the small shop space, yeah, we continue to see good traction there as we head into the end of the year. We do expect documents to be up sequentially in the fourth quarter for small shop. And you may have some seasonal fallout in the first quarter of next year, but we expect that to continue to rise over the long term as we march back towards 90%. Because pre-COVID handout, we were about 88% at least or so. on that space, and we have a much better portfolio today given all the acquisitions that we've done over the summer. So I fully expect that number to get back up over time above 90%.

And, Hendel, $2.1 million of that sign that opens is small shop.

Got it. All right. Well, thank you, guys. Appreciate that. Thank you.

Thank you. Our next question is coming from Craig Schmidt of Bank of America. Please go ahead.

Yeah, thank you. I just wanted to talk about the target markets. So far, you've had concentrations in Boston, Tampa, and Atlanta. I'm just wondering about Austin, Charlotte, Phoenix, Minneapolis. I assume you're still looking in those markets, and do you think they'll be entering the acquisition pipeline soon?

Yeah, our Tier 1, Craig, is really Boston, as you said, Austin, Nashville. Atlanta, Tampa, Jacksonville, Orlando, Miami, Phoenix, Salt Lake, kind of that tier two in Denver where we would only go if we have a path for scale. It would be very – we wouldn't go for just a one-off. We would have to go for larger centers like we did in Boston. Boston was not done on a one-off. There was a path for four assets. So if there's a path for certain of those cities, which our data science team and market research team help us identify, and all this is really data is the foundation that is driving us to these cities, we'll look there. But it has to be a path for growth.

And was Boston a result of your targeted analysis? pushing harder there, or did just opportunities opened up in Boston that made them more active?

No, it's our targeted analysis and really hitting in May of 2020 in Boston and really looking at, you know, a center like we did bought in Bedford with a 15-year new Whole Foods program. doing over 1,100 bucks a square foot, you know, and buying that at, call it a 5-6 cap for 350 bucks a square foot, and comparing that to, let's say, Charlotte at 900 bucks a square foot with similar cash flow, I look at Boston with the life science, biotech, education, and really tech as one of the top gateway cities in the world. So, yes, our data science led to that and got us a jump start, where now, obviously, it's extremely frothy. But we really, while others were shifting to the southeast, we took that time to go to Boston and buy at a great size.

Great. And then just on the 96 million disposition, can we expect a cap rate similar to Chicago's? or it might be somewhat elevated from that.

I think, I mean, it's too early to tell. This will be, I mean, maybe a little bit elevated on some where around the edges. But again, this is not going to be a dilutive process. This is going to be programmatic. And what we hope to be, again, the earnings accretive. We sold all the bad. You know, we sold $200 million in 2018 of assets that were 98% of them are all tertiary with an average IRR of three and a half. So there's no urgency to sell. This could be opportunistic where we can move cash flow from certain geographic exposures to new geographic exposures like those seven markets I've identified.

Yeah, Craig, the 96 million dispositions that we referenced in the prepared remarks, that is done at a cap rate of about 6%. That's all the triple net stuff that we ceded to the RGMZ net lease platform. Okay. Thank you. You're welcome.

Thank you. Our next question is coming from Teo Okusanya of Credit Suisse. Please go ahead.

Hi, yes. Good morning, everyone. So just a quick question on overall leverage and moving towards your target leverage from where you are today. As we start to think about 2022 and hopefully a more normalized retail backdrop, kind of improving occupancy and things of that sort. Do you envision being able to get back to that target leverage in a 12-month time frame, or do you kind of think it's going to take a longer period than that?

Look, I tell you, good morning. It's great to hear from you. One, you know, we're very focused on leveraging and getting back to that midpoint of our range of about six times. You know, we enter the quarter at $6. 0.8 times. And when you layer in a sign that commenced ABR about 4 million, you're touching the top end of our range. So we're getting there. And I think organically, we get there by the end of the year, you know, 22 perhaps. But what I think what can accelerate us there is really just the power of the platform to where we can ultimately be in positions to over-equitize an acquisition to get the leverage down, similar to kind of what we did this past quarter with the with the equity raise, but we're very, very focused on it and we'll use all the tools in our, in our chest internally and externally to get down to that midpoint as quickly as possible.

Gotcha. Cause that's helpful. And then the second question, uh, again, you, you gained about a penny this quarter from just the reversal of some of the uncollectible rent. Uh, could you talk a little bit about just how we kind of think about that heading into 22 as well, whether there's probably still more opportunities to kind of see. some of the written off rent come back as the health of some retailers begin to improve?

Not at this point. I don't think so. I think, you know, we took a very, very, you know, I think a reality, you know, a conservative but realistic approach with our bad debt reserves in 20 and 21. And we really have only experienced about two pennies to date of favorable bad debt reversals. So we don't at this point in time, expect any favorable adjustments as we move into the fourth quarter or even into next year. Okay. Thank you very much. You're welcome.

Thank you. Our next question is coming from Mike Mueller of JPMorgan. Please go ahead.

Yeah, hi. I have a quick clarification question. When you're talking about taking the four leases back next year, I thought I heard about $0.03 of rent, and I wasn't sure if that was going to be the near-term impact, in which case we need to take that $0.24 run rate and kind of tweak it a little bit for that, or if that was a comment about future upside from repositioning the boxes. Just wondering if you could run over to that.

Sure. Thanks for the question, Mike. That $0.03 is related to the upside that we expect once we have the four spaces released to those tenants that Brian described in his answer.

Okay. So in that pro forma room you were talking about, that short-term fallout is essentially baked in there?

It's not baked in there. We do expect to take back the four spaces in the first half of 2022 and then release them back up within about 12 to 15 months or so in the early 2024. So from a corridor perspective, Mike, it's about 625 grand or so.

Got it. Okay. That was it. Thank you. You're welcome. Thanks.

Thank you. Our next question is coming from Linda Sy of Jefferies. Please go ahead.

Hi. Good morning. You sort of touched on this with the Whole Foods Anchored Center in Boston. How has data analytics shifted your analysis of how you're evaluating the quality of a grocery anchored center?

I think more than anything, you know, especially with the froth of today, data analytics is more important than ever. I mean, I say often data is the new oil here. And while real estate is finance and in some way gut, data is the foundation of every decision we make, you know, as it relates to our capital allocation. So, really, this is just another tool that we have at our disposal to make sound business decisions. So, we looked at comparing, for example, that asset in Boston versus an asset in Charlotte with similar cash flow. And the scoring model, you know, was significantly higher, you know, in Boston for a number of reasons, the three-mile gap. demographics, the future growth population, the adjacency to employment such as life science, the education levels, the higher barrier to entry of grocery stores, the existing grocery stores. Are you the number one or number two grocery store in the market? We go through a very rigorous continual retooling of that scoring model. And that is something that will always be refined, but is extremely critical, especially in a very competitive environment where we don't want to be seen or we don't ever want to be making a bad investment, certainly buying investments that don't achieve the IRR, which we're looking for.

Thanks. And then for my second question, with high cap rate compression in grocery anchored centers, are you seeing any of that demand spill over the power centers or Is a key variable having a grocery anchor in terms of value?

No, I think we're seeing – I mean, it's across the sector. We're seeing significant compression in cap rates on power in certain areas. I think you're seeing a more in – and thankfully we have top 40 MSAs. You're not seeing them as much in secondary or tertiary areas. as you are with the higher MSAs. But, you know, again, you look at the credit mix and profile of maybe 60% of the cash flows, TJX and Burlington or Nordstrom Rack or, you know, and have a few pads, you know, that's a pretty good business. And what I like about that business is, I mean, they're almost the credit of those tenants. You're almost playing in the triple net space. And what we've been doing a lot of is putting grocers in some of these power centers. So that's even further cap rate compression, which heightens the IRR. But absolutely, we're seeing cap rate compression across the board.

Thanks.

Once again, ladies and gentlemen, that is star 1 to register a question at this time. We'll pause for a moment for any additional questions. No additional questions in queue at this time. I'd like to turn the floor back over to Mr. Harper for closing comments.

Thank you, operator. 2021 has been a year of refreshment for RPT. We are refreshing our portfolio through our acquisition program, and we are refreshing our cash flows through our strong leasing activity. This is resulting in better market diversification, a higher quality portfolio, higher credit tenancy, and most importantly, more durable cash flows. We also refreshed our liquidity by assessing joint venture, disposition, debt, and equity capital to allow us to continue to reshape our portfolio in 2022 and beyond. Thank you all for joining our call this morning. Have a wonderful day.

Ladies and gentlemen, thank you for your participation and interest in RPT Realty. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.