SITE Centers Corp.

Good day and welcome to the Site Center's Report Second Quarter 2022 Operating Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Monica Kukrasia, head of investor relations. Please go ahead, ma'am.

Thank you, operator. Good morning, and welcome to SightCenter's second quarter 2022 earnings conference call. Joining me today is Chief Executive Officer David Lukes and Chief Financial Officer Connor Fennerty. In addition to the press release distributed this morning, we have posted our quarterly financial supplement and slide presentation on our website at www.sightcenters.com which is intended to support our prepared remarks during today's call. Please be aware that certain of our statements today may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from our forward-looking statements. Additional information may be found in our earnings press release and in our filings with the SEC, including our most recent reports on Form 10-K and 10-Q. In addition, we will be discussing non-GAAP financial measures on today's call, including FFO, operating FFO, and same-store net operating income. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's quarterly financial supplement. At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes.

Good morning, and thank you for joining our second quarter earnings call. We had a very productive second quarter with results well ahead of budget. Leasing demand continued to be very strong from both existing retailers and service tenants expanding into key suburban markets, along with new concepts competing for the same space. The strength of execution from our leasing team resulted in a 120 basis points sequential increase of our portfolio lease rate. Additionally, we completed significant capital recycling as we continue to invest in our convenience thesis. And lastly, we closed a couple of key financings in the last few months, improving duration while keeping the balance sheet in great shape, with debt to EBITDA in the low fives at quarter end, which remains well ahead of the peer group and the sector overall. I'll start this morning discussing second quarter results, talk briefly about leasing, and then discuss our investments and transaction activity, which adds to our portfolio of assets in wealthy suburban communities. As I mentioned, second quarter OSFO was ahead of our budget primarily on better operations, which Connor will provide more detail on later. Our property operations team continued to do a great job getting tenants open for business ahead of schedule, which drove part of our outperformance this quarter and our improved guidance. Moving to leasing, tenant demand and activity remained elevated across the portfolio, and we built upon our momentum over the last two years to with another quarter of record volume relative to the last six years. There were no shortage of key deals this quarter, including the recapture and re-tenanting of a ground-leased restaurant in LA, the re-leasing of all four available units, including two anchors at one of our shopping centers in Charlotte, a deposit of 128% mark-to-market, multiple first-to-portfolio shop deals across a number of different assets, and continued progress on the lease-up of our tactical redevelopment pipeline. The volume and the quality of our leasing is a true testament to our people, our processes, and the quality of our focused portfolio of real estate in key suburban submarkets. Looking forward, we have another 250,000 square feet at share in lease negotiations, which we expect to be completed by year-end, with similar characteristics to the deals we've signed since the pandemic began, with a concentration on national publicly traded credit tenants. We continue to expect the commencement of our signed leases to be the material driver of our growth over the next several years. Shifting to transaction activity, we had a very active last four months recycling capital highlighted by the sale of Lenox Town Center and the Madison Pool A portfolio for a combined $464 million. Net proceeds, along with balance sheet capacity, were reinvested into convenience assets in Atlanta, San Francisco, Houston, and Washington, D.C. We are really pleased with the execution on both of these deals and the ability to reallocate capital into convenience properties. The largest investment this quarter was the acquisition of two properties in Lafayette, California, which is a sub-market I know well from my time living in the Bay Area. Lafayette Mercantile and La Fiesta Square offer all of the attributes that we are targeting in convenience properties, including barriers to entry, excellent demographics with trade area household incomes of $223,000 and average home prices of over $2 million, convenient access and parking, and site plans that offer a mix of simple, liquid, leased shops to a wide variety of national, regional, and local tenants, including Starbucks, Blue Mercury, and FedEx. While the Bay Area has had no shortage of headlines around CBD office utilization rates, and our property data highlights the benefits of dominant suburban convenience properties, customer traffic at these newly acquired properties are running ahead of comparable 2019 periods between 5% and 15%. With lease-ups and mark-to-market, the Lafayette assets have an underwritten five-year NOI CAGR of almost 4%, with limited CapEx providing compelling capital-adjusted growth. In the Washington, D.C. metro, we bought a three-property convenience portfolio with average incomes of over $150,000 and a tenant roster leased largely to a mix of national service and QSR users. These properties are located just two miles from our own Fairfax Town Center asset, providing us excellent visibility on market rents and tenant prospects. And moving to Atlanta, we bought two more convenience properties in our largest market, and are confident we can find more opportunities to grow our portfolio in this key MSA, given our presence on the ground. Going forward, we remain encouraged by our investments in convenience properties, and this compelling subsector in open-air shopping center remains a key area of focus for the company. We've assembled a portfolio of 20 properties now, with an average household income of $145,000 and weighted average TAP scores of 87%, and an underwritten five-year NOI CAGR of almost 4% with minimal CapEx. Each of these properties, all located in key markets for the company, including Miami, Scottsdale, D.C., San Francisco, and Atlanta, will be drivers of the company's long-term growth. Our transactions department, led by John Kattenaar, has done a fantastic job building local relationships within our core markets such that we're able to source and select the right opportunities for us to acquire. The convenience subsector is clearly benefiting from recent societal shifts favoring hybrid work, and our property data aggregated over the past few years is showing a distinct rise in customer traffic. The recent rise in construction costs is also creating scarcity in this retail format as new construction is low, even in the face of rising market rents. The addressable market in this convenience subsector is quite large, and we look forward to continuing our progress of deploying capital into this growth sector. Thank you to the entire site center's team for an excellent first half of the year. We've been hard at work for some time repositioning the company to outperform and remain excited about our focused portfolio. And with that, I'll turn it over to Connor.

Thanks, David. I'll comment first on quarterly results, discuss our revised 2022 guidance, and some of the moving pieces heading into the third quarter, and then conclude with the balance sheet. Second quarter results were ahead of plan, as David mentioned, due to a number of operational factors, including earlier rent commencements, higher-than-budgeted occupancy due to higher retention rates, and higher overage rent. These operational factors totaled over one cent per share relative to budget. The quarter also included $250,000 of unbudgeted straight-line rent from the conversion of cash basis tenants and $1.2 million from payments and settlements related to prior periods. Both of these non-recurring items totaled almost another one cent per share relative to budget. In terms of operating metrics, the lease rate for the portfolio was up 120 basis points sequentially and 260 basis points year-over-year, with our lease rate now at 94.4%. Leasing activity in the quarter was elevated across all unit sizes, and our lease rate is now above this company's pre-COVID high watermark of 94.3% back in 2017. Highlighting our leasing volume and backlog, the S&O pipeline increased to $22 million from $18 million last quarter. These signed leases now represent over 5% of annualized second quarter base rent or over 6% if you also include leases in negotiation in our pipeline. We provided an updated schedule on the expected ramp of the pipeline on page six of our earnings slides and expect almost 60% of the leases to commence by year end 2022. Same-store NOI was down 2.4% in the second quarter with decline almost entirely driven by the headwind of $6.7 million of prior period reversals in the second quarter of 2021. Adjusted for this, same-store NOI would have increased 4.8%. Moving on to our outlook, we're raising our 2022 OFFO guidance to a range of $1.13 to $1.16 per share. Rent commencements and uncollectible revenue are the largest swing factors expected to impact full-year results and where we end up in the revised range. We're also raising SAMHSA NLI guidance to a range of 3.5% to 4.75%, adjusting for the roughly $14 million impact of 2021 uncollectible revenue. Details on SAMHSA NLI are in our press release and earnings slides. In terms of additional assumptions for full-year 2022 guidance, RVI and JVP guidance ranges remain unchanged along with our assumption for roughly flat interest expense at site share versus 2021. In terms of investments, we continue to expect net investment activity of roughly $100 million for the full year. Given year-to-date net investment activity of $136 million, we are assuming fairly minimal transaction activity through year-end. For the third quarter of 2022, there are a few moving pieces to consider from the second quarter of 2022. First, as I previously mentioned, we had $1.2 million of non-recurring, uncollectible revenue and $250,000 of non-recurring straight-line rent in the second quarter. Second, we closed on the sale of Lenox Town Center on the last day of the second quarter and the Madison Pool A portfolio subsequent to quarter end. In addition to NOI, these assets generated almost $4 million in JV fees on an annual basis which implies third quarter total JV fees of about $1.8 million. Lastly, the second quarter included $2 million of lease termination income, which is about $1.5 million higher than our trailing two-year quarterly average. A summary of these factors is on page nine of our earnings slides. Ending with our balance sheet, at quarter end, leverage was 5.4 times, fixed charge remained over four times, and our unsecured debt yield was roughly 20%. In the second quarter, we recast the company's credit facility, extending the maturity of the line of credit and upsized term loan to 2027. We also extended the maturing Madison debt subsequent to quarter end with the Pool A portion of the debt repaid this month with the sale of the assets. Pro forma for these financings, the company has just $87 million of unsecured debt maturing through year-end 2023 and $825 million of availability on our newly recast line of credit. This capacity provides substantial liquidity and allows us to take advantage of potential future investment opportunities as they arise and to drive sustainable growth and create stakeholder value. With that, I'll turn it back to David. Thank you, Connor.

Operator, we're now ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assume our roster. And the first question will come from Adam Kramer with Morgan Stanley. Please go ahead.

Hey, guys. Good morning, and thanks for taking the question. I kind of wanted to, you know, looking at, you know, pretty significant portfolio activity in the quarter. And it looks like it was kind of similar dollar spent on acquisitions as was generated from dispositions. So I just kind of thinking more broadly, should we kind of think about, you know, increased amount of kind of asset trades is kind of going to be a larger part of the strip business and of your guys' business going forward. You know, recognizing that, you know, you can't, occupancy probably can't be pushed as much kind of, you know, nearing all-time marks here. So just, you know, are asset trades kind of going to be an increased part of the kind of business model going forward?

Hey, good morning, Adam. I think as we mentioned the last few quarters that once we achieved our transactions budget for the year that you'd expect quite a bit of the transactions, although not all of them, to be sourced from funds from dispositions. I think given the amount of leasing demand in our submarkets, it's kind of becoming obvious that some properties have a lot of growth left, and that's either from renewals or from recapturing space or from occupancy uplift. And other ones are kind of fully baked in terms of NOI growth. So I do think it's reasonable to assume that for us to grow the company, one of the ways to do that is to sell stable assets at a really compelling price and to take that capital and recycle it into properties that we think we can move the NOI significantly through leasing and renewals.

Yeah, and Adam, to the chance that's your question, we did have a lot of activity this quarter. It was larger than I would say is kind of normal. We typically have targets selling around $50 million of wholly owned properties per year. Obviously, this quarter was impacted by the joint ventures, which is a little unique and obviously not something that's able to occur or reoccur going forward. So I do think there's outside activity, but to David's point, it's always been part of our business plan to recycle a handful of assets on the wholly owned side each year.

Got it. That's really helpful, guys. Thanks. And just in terms of kind of, you know, cap rates on, you know, acquisitions and dispositions, I mean, any kind of color you can provide there, you know, again, be it cap rates or, you know, if you want to talk about unlevered IRRs and kind of the returns maybe and how that may be, you know, that may be different than, you know, call it three or six months ago, how things have changed.

Adam, I wish I could tell you that there's been a lot of data that's come out to let us know where cap rates have gone. I think certainly, you know, people are expecting and we're expecting that return expectations will go up as borrowing costs go up, but there just has not been that much activity. I mean, when you look at transactions that happened this quarter in the industry, it means that deals were agreed to three, four, five months ago. So I wouldn't say it's all that current of data. From our perspective, I do think that growth assets are very much favored. I mean, it is an inflation hedge if you can buy a growth asset. And so I would expect that the spread between a stable asset and a growth asset is also widening out a little bit. But again, there just hasn't been that much data for us to point to anything yet.

That's great, guys. Thanks again for the time and chat soon.

Thanks, Adam. The next question will come from Todd Thomas with KeyBank Capital Markets. Please go ahead.

Hi, thanks. Good morning. Just first, I just wanted to follow up, I guess, you know, in terms of, you know, investments going forward. And based on your comments, I mean, it sounds like we should expect capital recycling to continue within the wholly owned portfolio. You mentioned you're seeing a lot of convenience-oriented centers with strong NOI CAGRs. And, you know, it sounds like that would be funded with more stabilized asset sales. Is that the right read? And then if so, what's the sort of spread between I realize the difference between the cap rate and the IRRs on these assets, but what is the sort of spread delta between what you're looking to buy on the initial yield versus what you're maybe looking to sell?

Hey, Todd, it's Connor. I would phrase it maybe a little differently and come back to my response for Adam. We traditionally have sold $50 million plus or minus each year from the wholly owned portfolio. I think it's fair to assume that going forward. We have the balance sheet capacity to be a net acquirer, which if you look year-to-date, we're a net acquirer of $135 million. And we can do so because of our leverage profile, EBITDA growth, et cetera. So, I don't think it's fair to assume that every dollar we spend needs to be funded with dispositions. We have leverage capacity. Like I mentioned, we're at 5.4 times that EBITDA. We have $50 million a year of free cash flow. So, and we have significant EBITDA growth given our S&O pipeline. I think it's fair to assume we will be net acquirers if we find the opportunities. This quarter was unique in that, you know, consistent with what we mentioned last quarter, we match funded. But we don't need to match fund to grow going forward, and that is not the expectation of this company. David, I don't know if you have anything to add. Okay. Todd, I can't recall the second part of your question. I'm sorry. Okay.

No, that's – well, I was just curious on those transactions, what the spread looks like in general in terms of the pricing between some of the convenience-oriented centers and maybe the stabilized assets.

I think, Todd, you probably – you brought it up in your question, which is for us to recycle an asset and buy a different property, one would assume that we believe that the IRR is higher. I think the going and cap rates are a little bit less relevant. But I'll also bring it back to Connor's point that it's not like we have a large stable of assets that we would like to recycle out of. I think it's going to be a little bit more opportunistic. I think the spin of RBI is what took away most of our flat assets, and now we're kind of looking at a much smaller group of properties that we might recycle. And we're doing so because we think the IRR can be higher on acquisitions.

And, Todd, for specifics, for acquisitions, I think we mentioned last quarter our – going in yield was about a mid-five, and that's consistent with this year for kind of year-to-date for the 314 we required. And for dispositions, it was just under a six-and-a-half blended for the year.

Okay, that's helpful. And then I wanted to ask about the anchor leasing. You know, you're 97% leased, and I realize that's 10,000 square feet and higher, but How much availability do you have today, you know, for larger boxes, you know, say 35,000, 40,000 square foot plus? And curious what the demand is like today from tenants for larger spaces.

Well, I mean, you know, the challenge is the inventory is getting pretty low. We've leased 63 boxes more than 10,000 square feet in the last 24 months. And so that tells you where the demand is. The demand is clearly on the anchor side. Sometimes I don't think it's the available boxes as much as it is creating opportunities through not renewing tenants. Deanna Lally is sitting in the room today. She's the vice president of leasing in the southeast. And one of the deals this quarter that was just a stellar property is, you know, during the pandemic, Deanna was able to get control of an anchor box north of Charlotte. And she released it with two subdivisions with two credit tenants. So the credit quality went up. The spreads were over 100%, and the entire property's NOI went up 66%, pre-COVID versus post-COVID. So that was a box that was not vacant. It was one that we were able to recapture, and I think that probably is an indicator in certain submarkets what's happening with box rents. They're just significantly higher than they were pre-pandemic. So to the extent that you've got older tenants that are running on a term, you know, the VPs of our various regions have the ability to recapture some of that space and find better credit tenants.

Okay. And then just one last one on the net effective rent came down in the quarter on new leases. I was just wondering if that's a little bit of a mixed issue in the quarter or, you know, strategically, you know, are you trying to sort of button up, you know, vacant space or re-tenant space maybe a little bit more quickly in an effort to, you know, lock in deals, you know, just given the strength you're seeing in demand and fundamentals today?

Hey, Todd, it's Connor. It's purely a mixed issue. If you look on the right-hand side of that page, this is a larger percentage of the GLA was signed by anchors. Obviously, they're going to have a lower going-in rent and net effective rent. So it purely is a denominator issue. I would expect the trailing 12-month numbers next quarter to be consistent with the trailing 12-month numbers this quarter.

Okay. All right. Thank you.

The next question will come from Craig Mailman with Citi. Please go ahead.

Craig Mailman Good morning, guys. I just wanted to circle back to the commentary about kind of earlier commencements helping drive QQ results. As I was looking at the presentation, I know it's a little bit harder to compare quarter to quarter with, you know, the changes. But it looks like, you know, 3Q and 4Q commencements are definitely down relative to what was in the 1Q presentation. So I was just curious, can you guys run through, you know, how much of that benefit on a per share basis was in the TQ number and how much of the guidance bump was just a result of that earlier commencement?

Hey, Craig, it's Connor. Good morning. You're absolutely right. The reason the third quarter and the fourth quarter came down is because we were able to get some tenants open. In terms of specifics, I mentioned kind of operationally, the operationally driven beats were over a penny per share. That's rent commencements along with overage rent, so I don't have the exact breakdown. But my guess is probably a million dollars or so, so just over a half penny. And as David mentioned, we continue to have great success, thanks to our operational team, getting tenants open earlier, which is really exciting given how challenging the supply chain and kind of permitting issues have been throughout the country.

Great. I think Michael has a question, too. Hello. I had a quick question. Just as we think about the convenience side and these assets you're targeting, David, you talked about these opportunities with the tenants and knowing those marketplace and a lot of convenience factors. I think you mentioned 4% internal growth rate that you're going to see from some of these assets. How do you think about just sort of the overall size, obviously generally unanchored, you know, smaller lots. In terms of providing that future opportunity, you just talked about, you know, getting back that anchor space and splitting into two and driving that demand. How do you sort of see this portfolio that you're building up in convenience providing that long-term opportunity to, you know, do that? And does it present a risk if you're in these smaller assets that don't offer that same opportunity?

Absolutely. Well, to your point, if you think about the benefits of larger properties, it happens to be those once-in-a-decade chances to recycle a larger box and raise the rent significantly. As you well know, there's also densification opportunities with larger assets. I think what we've seen over time, particularly the last 15 years or so, is that getting large rent bumps out of boxes also takes a significant amount of capital, right? So if you look at the CapEx as a percentage of NOI for doing a lot of tenant recycling in larger properties, it can be very expensive. And secondly, densification has been a relatively small piece of the open-air puzzle, and I think that's really because the lease structures just don't allow it, and entitlements and zoning are difficult. It's not impossible, but it has not been a big driver of value. What I'm fascinated by with the unanchored or the convenience properties is that unlike street retail where there's no surface parking, you have a large lot relative to the square footage that you're leasing, and the spaces tend to be a pretty ubiquitous size. You know, they're 1,200 to 2,500 square feet on average, and there's 30 or 40 tenants that will take that space. So it just tends to be a much easier way to capture market rent growth at a capital cost that's much less than recycling larger spaces. And so for me, it has everything to do with hedging inflation and buying into the rent growth thesis, which is really happening because there's not that much supply growth, but doing so in a way that doesn't cost a whole lot. And so I think from an AFFO perspective, it's just superior.

And how should investors think about the portfolio transformation sort of three to five years out? Is there a target that you're looking at in terms of a mix of properties? Is it geographically focused? What is the ultimate goal, David, that you're sort of driving towards in terms of trying to build a portfolio and not just a collection of assets?

Yeah. Well, the easiest way to put it is financially. I mean, what I would love to see is our company could generate AFFO growth. And I would love to say that it's in one retail format, which is convenience, but we'd also have some properties that I don't ever see us selling. If you look at Midtown Miami, Michael, if you've been there, it's our second largest property. The rent growth there is so dramatic that I think that's the type of asset that a company should hold on to forever. but it doesn't mean you can't buy that same type of growth in smaller properties in the similar submarkets. So I'm a little less concerned about format, but I do think you should expect over a five-year period. You know, to the question earlier, we will be selling a couple of properties, a handful every year, and recycling them into something that has growth. At this point, the convenience thesis seems to have the best growth at the lowest cost.

And, Michael, geographically, there's no plan to kind of enter or exit new markets. I would just tell you we felt really comfortable with our top 20, which is 86%, 87% of our base random value, and it's likely you'll see us concentrate our investments in those markets.

Helpful call, I guess.

Thanks, Michael.

The next question will come from Hindle St. Just with Mizuho. Please go ahead.

Hi, good morning. This is Ravi Vedya on the line for Hondale St. Just. I hope you're all doing well. Over the last 12 months, shop leasing volume was up 72% versus 19%. Can you comment on how you're underwriting tenant credit in an inflationary environment, specifically for mom-and-pop stores? What's your target occupancy rate for the small shops?

Thanks for the question. It's Connor here. We don't have a target occupancy. As I mentioned, we're we're running our lease rate is now above this portfolio's kind of high watermark in 17. So there's no kind of target. We think we could be higher, but obviously to function the macro environment, the inflationary environment that you referenced. In terms of credit, I would just point you to, I think we're 87% national. We don't have a material kind of local or mom and pop exposure. I would say even post-GFC, it's not that the local tenant has disappeared, but you're seeing much more kind of franchisee or national tenant growth as opposed to kind of the mom and pops. So for us, the underwriting is easy because we're doing deals with the largest quick service restaurants or largest service users in the country, which all happen to be either national credit or publicly traded, which makes the underwriting a lot easier. So, again, I would kind of steer you away. It's not that we don't have local exposure, but the vast, vast majority of the small shop underwriting and small shop lease activity has been with national publicly traded QSR tenants and service tenants. Thank you.

Just one more here. How is your watch list trend recently? Are there any incremental concerns about large amounts of store closures or bankruptcies a quarter or two ago?

Yeah, so I would just say, I'm sorry to cut you off there. Implicitly, look, if we had the benefit of straight-line rent or higher straight-line rent from converting tenants from cash basis, that implies that our watch list has shrunk quarter over quarter. There's obviously some names that we're worried about, and I don't think it's a surprise who they'd be. But overall, I would say relative to pre-COVID levels and relative to last quarter, the watch list continues to shrink. And more importantly, to David's point, we feel really good when we get space back that we have demand for that space today. So, again, there's certainly some tenants we're all worried about. It's no surprise. But we feel really good about the fact that in our 99 assets, which have average household incomes over $110,000, that we'll backfill those tenants with even better and more productive tenants.

Thank you. Appreciate the call, Eric. The next question will come from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey, good morning. Apologies. I guess it's 10 a.m. So two questions for you. The first is going back to Billerman's question on the small shop and totally agree. You know, it seems like the CapEx, the lighter CapEx and faster NY growth of small shop unanchored is better than the big anchored dominant centers. But a question is you guys acquire and some of these parcels that you're buying are not contiguous. It's a site across the street or down the road. So it's not necessarily all connected. Are those assets as efficient and you get the same amount of growth? Or is there something that makes a center more efficient if you can get an unanchored center that's all literally in the same parking lot versus one that's you know, sort of around and, you know, up and down the street. I'm just trying to get a sense as you guys look for more unanchored infill centers.

Alex, you mean operating efficiency from a property management cost standpoint, or do you mean efficiency in terms of dealing with tenants and rent growth and so forth?

It's both. I mean, there's one, the operating efficiency, and then two, there's the co-tenancy, right? Like everyone wants to be near, you know, the cool, whatever the cool QSR is of the day or the cool gym or the cool whatever it is tenant, whereas if you all have all the tenants in a row, it's much easier. You have some tenants on one side of the street, some on the other. Maybe you lose some of that efficiency. So just sort of curious. Yeah.

Well, one of the challenges is operations. You know, if you buy one large property from a property management and leasing standpoint, you're focused on one asset. If you buy, you know, 10 of them in the same sub market and they're all in that community, I still think you have efficiency of operations, but you've seen us acquiring things basically in markets that we already have a presence, particularly leasing and property management presence. So I think the operations side is much easier to deal with. Buying them transactions-wise, it's a lot of work. I mean, it's a laborious process for John and his team to build a portfolio, particularly if you're buying some assets that are $5 and $10 and $15 million at a time. And that's why you've seen us focus a little bit more on some chunkier ones like Northern California and Delray Beach and Boca and Atlanta, where they've been $40 to $100 million properties. With respect to leasing and kind of tenants' adjacency and wanting to be connected to each other, I do think it is reasonable to say that tenants like to group together successful ones and the rents tend to be higher. But remember, the longer the strip becomes, the more middle space you have and the fewer end caps. So sometimes what we're finding is that the end caps, particularly the drive-thrus, have become so desirable from tenants that some of these smaller assets that have maybe two shops in the middle and two end caps with drive-thrus actually have the highest rent growth. So it really comes down to a property-by-property underwriting.

Okay. And then the second question is, you know, if you look at your shopping centers overall, and I asked this question on the Kimco call, Are you seeing the same level of demand from all shoppers, or is it that you're really seeing the core shoppers, if you think about the 80-20 rule, the core shoppers remaining vigilant while maybe some of the other shoppers fall off? And I'm thinking about rising fuel costs, rising credit card interest rate expense, and all this other stuff that's affecting the consumer, just trying to get a sense of if if the core shopper is really what's hanging in there, or if you're seeing, you know, the total shoppers remain, you know, just, you know, as active as ever at the centers?

Yeah, I do think that's a really interesting question. I don't know the answer. I mean, that would come from specific sales data per customer that the retailers have, and as you can imagine, they're not exactly sharing it. But it's a really interesting question. We have a couple of anecdotes of things that we've learned. One is that the amount of traffic that's coming to our properties and staying less than seven minutes is going up fast. And I think that's not surprising. That's coming from a lot of these click and collect fulfillment from store and also from some of the delivery services like Uber Eats and so forth. So it feels like who the final customer is of a product or a service is becoming a little bit more difficult to figure out, partly because there's so many of these services that are going back and forth to the properties for small durations of time. But that is resulting in a lot higher leasing demand because I do believe that the tenants have decided, whether there's a recession coming or we're in one or not, they've decided that they have to be close and proximate to the customers, and that's really what's driving a lot of the demand. Thank you. Thanks, Alex.

The next question will come from Ki Bin Kim with Truist. Please go ahead.

Thanks. Can you discuss how the mechanics of expense recoveries work in your leases in general? More specifically, I'm curious, usually, you know, a certain level of expenses are fully recovered, and I would imagine at some point there's a stop where inflationary costs above and beyond whatever was said is borne by the landlord. I'm not sure if that's the case and if you can just provide some more color on that.

Sure, Kevin. On a general sense, our leases, our goal is a triple net lease. We don't do fixed CAM leases. We do like full pass-throughs. So if you look at a shop tenant, the recovery of expenses, CAM insurance and taxes, is 100% plus administration fees to the landlord. So the recovery rate on small shop tenants tends to be somewhere between 100% and 103%. That also follows why we're fascinated by this convenience fees is because the recovery rates are north of 100% because they're paying CAM fees. The larger the tenant, the more dominant they are, the larger the square footage, the more negotiating power they have, the more there can be certain carve-outs in the CAM reimbursement. And that's rarely property tax or insurance, but it does sometimes mean that they have a cap on certain CAM items or they exclude certain expenses and maintenance expenses from the landlord. So when you wrap it all together, smaller tenants are 100% reimbursed. The larger tenants are a little bit less than 100%. And you can see that in our supplemental when you look at our recovery rates, which hover around 85%. Some of that is because of vacancy, where the landlord's paying the triple net, and some of that's because of CAM caps within some of the larger national tenant leases. But to kind of come to the conclusion of your question, with a net lease structure, taxes can go up, CAM can go up, It's still going to be passed through at the same recovery rate, so I don't see any issue with us maintaining our recovery rates. Unfortunately, what it does mean is that on a gross cost basis, the tenant is paying more to occupy that space. And so if there's a lot of expense recovery that's moving up with inflation, our recovery rate is going to be fine, but it will have a headwind against rent growth because they're allocating more capital to taxes or TAM or insurance.

Thank you for that. Just a quick question on your cash AFFO. You know, your FFO increased, guidance increased by a couple pennies. I'm just curious if your AFFO per share guidance, well, you don't have guidance, but if that trend is also increasing just because at least this quarter you seem to have a little bit more capex than we thought. It's good capex, but just curious.

yeah hey kevin that's connor the short answer is yes as i mentioned the second quarter effectively have to be was related to operational issues or operational benefits i should say you know early rents grant commencement over trend etc so clearly those fall through to the bottom line so the short answer is if we looked at kind of our retained cash flow forecast today versus three months ago it would be higher capex will continue to increase over the course of the year one there's some seasonality to that right tenants like to get open ahead of the holidays so you should assume will be higher in the back half of the year. But again, coming back to my initial response, it is higher than it was three months ago because of the operational kind of good guys we've had over the course of the year.

Okay. Thank you.

You're welcome.

The next question will come from Flores Van Dycom with Compass Point. Please go ahead. Hey, guys.

Thanks for taking my question. I just had a question. I mean, you touched upon it a little bit earlier, David, but maybe talk about your IRR targets. How much have they increased since the beginning of the year as borrowing costs have gone up and interest rates have gone up and obviously with inflation as well? And Presumably, you know, a lot of that, you know, would appear to be playing into your thesis for convenience where you're slightly more protected on an inflation perspective perhaps than some other property types. But I'm curious to see if your return expectations, your IRR expectations have also increased for that aspect of the business.

It's a very difficult question to answer because the last 60 days have been so volatile in terms of rates and particularly the credit markets. I think it's safe to say that our return expectations are higher. And the question is, is that higher going to come from higher cap rates at acquisition or is it going to come from higher renewal rates on market rents? And it seems to be a blend of the two. I wish I could give you a more specific target answer. Other than to say that we are underwriting higher market rents because we're witnessing them. And we're also assuming that cap rates will move up a little bit given the fact that our competition in the convenience sector does tend to be private levered buyers. So, our hope is that we're going to get the benefit of both.

And if I could follow up with, you know, I'm fascinated by this. cell phone data information. And obviously you guys have looked at this for for more than a year now. But I'm curious to see whether you'd be willing to share some of that with the investment community. Obviously, you're sharing with your tenants. What percentage of your centers rank in the top 10% in their local market or their MSA? And I would imagine a center like the downtown Miami one would rank near the top in Miami. But I'm curious to see how many You know, how widespread that is in the rest of your portfolio. And how relevant is that in your view? Because, obviously, traffic data, as you rightly alluded to, for Uber Eats drivers, I mean, they pick up stuff, but they're not buying anything in your center. So, you know, there's a lot of parsing you have to go through that data, presumably.

Yeah. Yeah. It is absolutely fascinating data. And, I mean, it really is. It's been four years since we've had access to cell phone data. And I think a lot of companies are becoming very, very intrigued because now we can have similar information that the retailers have had ever since credit cards. And so it does give the landlords a lot more benefit to understand specifically trade area and customer patterns. Floris, we've been trying at Navy conferences and so forth to give anecdotal information. We'll do like a deep dive study on a property to show some interesting facts. It has been a little difficult to turn it into global assumptions. And part of that's because we own 99 assets out of 30,000 in the U.S. And so it's hard to kind of turn something into a global assumption. But there are some very interesting data points as to how large trade areas really are. And they are much bigger than I think any of us thought, even those of us that have been in the sector for a long time. What's the frequency of the customer visit? How many times a week do they come? What's changed during the pandemic in terms of trips daily versus weekends? What percentage of people that linger between stores and cross shops versus the percentage that just come in and out for one store? All those data points at this point have been hard for us to explain to investors other than anecdotes, where it's been very helpful is in leasing, because we can ask a tenant, who is your customer? And if they say my customer is, you know, a woman with two children and a college degree between the ages of 30 and 42, we can tell them exactly how many of those customers came to the site on a Tuesday. So it really has helped leasing, and I think it's made the tenants a lot more confident with signing 10-year leases with rent-offs.

Thanks, David.

Appreciate it. Thanks, Loris. The next question will come from Mike Mueller with J.P. Morgan. Please go ahead.

Yeah, hi. Two quick questions. First, has the pace of product coming to market slowed, or is it still coming and you're just seeing more prevalent bid-ask pricing spreads? And the second question is, who are you typically buying the convenience assets from?

Mike, pace of product, you mean like assets coming to market? Yes.

Oh, Mike, I thought you meant pace of product, meaning, you know, lawn furniture. Okay, pace of market of assets coming to market has definitely slowed. I mean, John sitting right here, it's definitely slowed from 60 days ago. And that's not surprising. I think sellers are looking at cap rates in the last six months and buyers are hoping for different cap rates for the next six months. And so there's a little bit of a standoff. It's not non-existent, but with the debt markets where they are and kind of confusion over the longevity of inflation and cap rates, I do think the amount of assets that are coming to market is a little bit smaller than it was before.

Got it. And as it relates to the convenience assets, who are the typical sellers that you're buying from?

They tend to be local and regional sellers, families, private.

Got it. Okay.

That was it. Thank you. Thanks, Mike. The next question will come from Linda Tsai with Jefferies. Please go ahead.

Hi. Good morning. Just on the conversation with Keeban in terms of the reimbursements, it sounds like you're focusing on margin with the small shops and maybe trading that a little bit for, you know, trading that off with the stability associated with anchors. You know, should we assume that you're also looking at the credits of the small shops more carefully, you know, to protect yourself on the downside?

Hey, Linda, it's Connor. I would just say I can't recall who asked the question, but we feel really good about the credit quality of what we're buying. If you look at the top tenets that we disclose for the convenience assets, it's a number of banks, financial institutions, quick service restaurants that are all public. So I would say a couple things. One, we don't think we're going out the risk curve in terms of credit quality. These are kind of the tenants we operate in our existing shopping centers, whether they're grocery, power, lifestyle, whatever they might be. And the second point is we aren't focused on margin. We're just saying that's a benefit of the investment thesis, the convenience thesis. So, again, we're looking at kind of the bottom line, the flow-through of free cash flow from NOI, as David alluded to in a couple responses, but it's not a focus of ours. It's just a factor that we like as part of the investment thesis.

Got it. Thank you.

You're welcome.

And this concludes our question and answer session. I would like to turn the conference back over to Mr. David Lukes for any closing remarks. Please go ahead, sir.

Thank you, everyone, for joining our call. We'll speak to you next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.