SITE Centers Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2024

There are 14 speakers on the call.

Operator

Good day, and welcome to the SITE Centers' 2nd Quarter 2024 Operating Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Stephanie Royz De Perez, Vice President of Capital Markets.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to SITE Centers' Q2 2024 Earnings Conference Call. Joining me today are Chief Executive Officer, David Lukes and Chief Financial Officer, Conor Feinerty. In addition to the press release distributed this morning, we have posted our quarterly financial supplement and slide presentation on our website at www.sitecenters.com, which are 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 federal securities laws.

Speaker 1

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 report on Form 10 ks 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. Descriptions and reconciliations of these non GAAP financial measures to the most directly comparable GAAP measures can be found in today's quarterly financial supplement and investor presentation. At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes.

Speaker 2

Good morning. I'd like to start by thanking all of my colleagues at SITE Centers for their tremendous efforts over the past few quarters. The dedication, flexibility and thoughtful execution from the entire organization has been astounding. The results we announced today showcase the significant progress we've made on our strategic goals as we prepare for the planned spin off of the convenience portfolio from within site centers into a new and unique focused growth company called Curb Line Properties. Notably, we closed nearly $1,000,000,000 of transactions in the quarter, repurchased or retired over $50,000,000 of debt and reported 24% trailing 12 month new leasing spreads for the curb line portfolio.

Speaker 2

Each of these accomplishments mark additional progress on the dual path of growing our curb line portfolio through acquisitions and organic NOI growth and maximizing the value of the site centers portfolio through dispositions along with continued leasing and asset management. As we march closer to the spin off date expected in October, we've spent considerable time with the investment community and have consistently heard 2 main questions. 1st, what is the genesis of the curb line strategy and how big of an opportunity does it represent? And second, what will site centers look like at the time of the spin off and how do we plan on maximizing value for all stakeholders? So I'll start with those two questions, talk briefly about staffing and curb line acquisitions, then conclude with the Q2 operations before turning it over to Conor to talk in greater detail about results and the outlook for the second half of the year.

Speaker 2

Starting with curb line, we began investing in convenience assets over 5 years ago. As we witnessed the strong financial performance of the small format asset class, Retention was high, credit was strong and diversified and the CapEx load was extremely low. Importantly, mobile phone geolocation data also emerged during this period as a sophisticated and new tool that we could utilize to identify, underwrite and provide hard facts around our investment opportunities. The traditional real estate underwriting of boots on the ground market knowledge became supplemented by data analytics that allowed us a window in the tenant performance and customer utilization of the small format property sector. As we transition through the pandemic years, 2 outcomes became notable.

Speaker 2

1st, the capital efficiency of the business became increasingly important as capital itself became more expensive and valuable. In other words, the significantly higher conversion of top line rental income down to property cash flow helped to offset higher capital costs while also generating compounding cash flow growth. 2nd, the sector has kept up with inflation remarkably well. Lease duration in general in the curb line portfolio is shorter when compared with properties with a traditional anchor. This is certainly an opportunity as the increase of customers throughout the week with suburban communities due to population growth and flexible work mandates have steadily increased demand for convenience oriented real estate from tenants seeking to access those customers, resulting in higher tenant retention and higher rent growth.

Speaker 2

In other words, this is a renewals business where we can capture growing market rents with little landlord capital as most tenants are renewing leases since there is a shortage of high quality convenience real estate in suburban communities. To that point, same store NOI for the curb line portfolio is expected to average greater than 3% for the next 3 years when factoring in all of this. These combined attributes, capital efficiency and strong top line growth have led numerous investors to ask us about the addressable market for convenience properties. We now have 5 plus years of transactions data under our belts and arguably own the highest quality portfolio of convenience assets in the United States. Despite that fact, what we own today represents only 1 quarter of 1 percent of the 950,000,000 square feet of total U.

Speaker 2

S. Inventory according to ICSC. As of quarter end, the curb line portfolio included 72 wholly owned convenience properties or 2.4 1,000,000 square feet of real estate expected to generate about $84,000,000 of NOI. These assets share common characteristics, including excellent visibility, access and we believe compelling economics highlighted by limited CapEx needs. We continue to expect the spin off to be completed on October 1 this year with curb capitalized with no debt and $600,000,000 of cash.

Speaker 2

Given a substantial disposition activity to date and consistent with our commentary from last quarter, we now no longer expect curb to retain a preferred investment in SITE Centers, which is a good segue since proceeds from the sale of SITE Centers portfolio of anchored properties has been used to facilitate an unmatched balance sheet for curb line. As a result, I'll spend a moment on the expected strategy for site centers after the spin. As of last Friday, we have closed $951,000,000 of wholly owned property sales year to date with total closed dispositions since July 1, 2023 of just over $1,800,000,000 at a blended cap rate of 7.1%. As of Friday, the company has over $1,000,000,000 of additional real estate currently either under contract, in contract negotiation or with executed non binding LOIs at a blended cap rate in the mid-7s. Although we expect some of these transactions to close pre spin, others will close in the Q4 and some may fall out.

Speaker 2

As a result, we are not in a position today to quantify the SITE Centers portfolio at the time of the spin off and expect to update disclosure on the portfolio itself as we near the spin date. What we can say is that SITE Centers post spin will contain a diversified portfolio, including assets in major markets with strong tenant sales and we remain flexible and open to a variety of outcomes and the eventual path to creating value for our stakeholders. In terms of potential buyers and activity, the pool of interest remains deep and it remains an active and liquid market for our portfolio of open air shopping centers. Leasing momentum remains strong, market rents are growing and replacement costs remain elevated, factors we believe they're supporting strong buyer interest. In addition to considering further asset sales, we will continue to focus on leasing and asset management and listen to the signals from the public and private market with respect to valuation and expect to act on those signals as appropriate.

Speaker 2

Shifting to post spin staffing, both curb line and site centers will have their own leasing and property management teams along with dedicated accounting and legal leadership. Other departments and staff will remain within site centers and be utilized by both companies under a shared service agreement, including the accounting, legal and IT departments among others. The purpose of this agreement is to facilitate an orderly transition of our current resources and allow each company to pursue its business plan with as little G and A friction as possible. It's an elegant way to maintain historical portfolio knowledge, keep the talent on our team intact and allow flexibility to execute each business plan. More detail and clarity on the shared service agreement will be provided in the Form 10.

Speaker 2

Moving to acquisitions, we acquired 5 convenience properties in the 2nd quarter with total acquisitions at share of $65,000,000 including our partner's interest in Meadowmont Village in Chapel Hill, North Carolina. The convenience portion of this property is expected to be included in the Curb spin off. We closed another $27,000,000 of acquisitions in the Q3 to date and have over $200,000,000 of additional convenience assets awarded or under contract subject to our completion of diligence. Average household incomes for the 2nd quarter investments were over $117,000 with a weighted average lease rate of over 96 percent excluding Meadowmont, highlighting our focus on acquiring properties where renewals and lease bumps drive growth without significant CapEx. As I noted going forward, we remain encouraged by the unique opportunities in the convenient subsector, including the size of the opportunity itself and have plenty of room to grow.

Speaker 2

And combined with the balance sheet that is expected to have no outstanding debt and substantial liquidity, curb line properties has the opportunity to generate compelling and elevated relative growth and returns for stakeholders. Ending with operations, overall quarterly leasing volume was up sequentially again despite a materially smaller portfolio and less availability. Leasing demand continues to be steady from both existing retailers and service tenants expanding into key suburban markets along with new concepts competing for the same space. Despite the strength of execution from our leasing team, our leased rate was down 100 basis points sequentially in large part due to the sale of assets with an average leased rate of almost 97%. In terms of leasing spreads, we added new disclosure in the supplement this quarter breaking out activity for curb line.

Speaker 2

Leasing activity, velocity and economics continue to improve as we grow this portfolio highlighted by almost 50% straight line new leasing rent spreads for the trailing 12 month period. Recent new and renewal deals include a number of first to portfolio and recurring national tenants including Cava, Panda Express, Wells Fargo, the UPS Store, LensCrafters and Comcast. Before turning the call over to Conor, I want to thank again everyone at Sight Centers for their work these past few quarters. There is no shortage of individuals and teams across the company who have worked tirelessly to position both site and curb line for success, and I'm extremely grateful for all of their contributions. And with that, I'll turn it over to Conor.

Speaker 3

Thanks, David. I'll start with Q2 earnings and operations before concluding with updates to our 2024 outlook, including balance sheet moving pieces heading into the expected spin off date. 2nd quarter results were ahead of budget due to better than expected operations, including higher than forecast lease termination fees and a number of other smaller positive variances. In terms of operations, leasing volume was sequentially higher to David's point despite a smaller asset base. With this smaller denominator, operating metrics for both site and curb remain volatile, though based on the leasing pipeline at quarter end, overall leasing activity and economics remain elevated and we remain encouraged by the depth of demand for space.

Speaker 3

As David noted, we did break out curb line leasing activity and spreads in the supplement this quarter. It is important to note that curb's leasing spreads include all units, including those that have been vacant for more than 12 months, with the only exclusions related to 1st generation space and units vacant at the time of acquisition. Additionally, the curb lease rate was negatively impacted by the acquisition of vacant space at Meadowmont Village, which represented about half of the sequential change and the recapture of 2 vintage restaurant pads, which accounted for the remainder. Both pads, 1 in Phoenix and the other in Orlando, have an identified backfill user with an expected blended 75% mark to market on the new deals. Moving to our outlook for 2024.

Speaker 3

We are extremely excited to form and scale the 1st publicly traded REIT focused exclusively on convenience assets with an expected spin off date of October 1. And based on the site mortgage commitment announced in October, along with recent transaction and other financing activity, we have positioned both site and curb line with the balance sheets that they need to execute on their business plans. As a result of the plan spin off and significant expected transaction activity, we did not provide a formal 2024 FFO guidance range. We did provide projections though for total portfolio NOI for the site and curb portfolios, which have been updated reflect first half 2024 acquisitions and dispositions. For the curb portfolio, total NOI is now expected to be roughly $84,000,000 in 2024, up from $79,000,000 at the midpoint of the projected range before any additional acquisitions and same store NOI growth is expected to be between 3.5% and 5.5% for 2024.

Speaker 3

For the site portfolio, total NOI is now expected to be $201,000,000 at the midpoint of the projected range before any additional dispositions and includes only properties owned as of June 30. Details on the assumptions underpinning these ranges are in our press release and earnings slides. In terms of other line items, we continue to expect JV fees to be about $1,250,000 and G and A to be about $12,000,000 in the 3rd quarter. Given the significant cash balance on hand, interest income remains elevated at almost $9,000,000 for the quarter, though that figure will come down over the remainder of the year as we use the cash on hand to repay debt. On that point, in the Q2, we repurchased just under $27,000,000 of unsecured bonds at a discount resulting in a gain of approximately $300,000 Finally, transaction volume, particularly the timing of asset sales is expected to be the largest driver of quarterly FFO and the Q2 included $11,200,000 of NOI from assets sold in the quarter as detailed in the income statement.

Speaker 3

Moving to the balance sheet. In terms of leverage, at quarter end, debt to EBITDA was just over 3 times and cash on hand was over $1,100,000,000 We continue to expect to close the site center's mortgage facility subject to the satisfaction of closing conditions sometime in the middle of Q3 with proceeds along with cash on hand expected to be used to retire outstanding unsecured debt including all outstanding unsecured notes and the unsecured term loan. Details on the projected capital structures for both site and curb can be found on Page 11 of the earnings slides. For curb line properties, the company at this time at the time to spend is expected to have no debt and $600,000,000 of cash. As David noted, curb line is no longer expected to have a preferred investment in site centers.

Speaker 3

This highly liquid balance sheet will allow curb line to Curbline to focus on scaling its platform, while providing the capital to differentiate itself from the largely private buyer universe acquiring convenience properties. Finally, prior to the spin off, we expect to provide additional details on the portfolios, run rates and balance sheets of both site and curb line pro form a for 3rd quarter to date transactions. And with that, I'll turn it back to David.

Speaker 2

Thank you, Conor. Operator, we're ready for questions.

Operator

The first question comes from Dorey Kustin with Wells Fargo. Please go ahead.

Speaker 4

Thanks. Good morning. Can you remind us what the timing is for the Form 10?

Speaker 2

Sure, Dorey. I would expect it would come out sometime in September.

Speaker 4

Okay. And for the assets under contract or letter of intent currently, can you give us a sense of the type of bidders you're seeing and the level of competition and just how that compares to what you saw with your initial sales?

Speaker 2

Sure. I would say that the bidders, I think they have emerged over the past, what John, 6 or 9 months have kind of fit into 3 categories. There's the private buyers that generally are local families, family offices and they're usually been unlevered buyers. Then there's been the kind of traditional private equity funds that have raised capital and are looking at open air properties. And then the 3rd group have been the kind of traditional spread investors, which include a lot of the institutions.

Speaker 2

So those three groups make up the bulk of what we've seen from the bidding tent and the pricing can be quite wide between all three of those depending on which one's most active. And I think that story probably explains most of what the bidding has been looking like in the last 6 or 9 months, and I don't think it's really changed.

Speaker 4

Okay. And you did say what's under contract or LOI is in the mid-seven percent range? Yes. That's correct. And then last, regarding the 7% long term cap rate spend as a percentage of NOI, in the last few quarters, it's been a little bit higher than that, I guess closer to 10%.

Speaker 4

I guess, can you explain what that has to do with it? Is it the size of the space being sold? Is it about retention? Or is it the incoming tenant?

Speaker 3

Yes, Dory. It's a function of a couple of things. And I would just caution just as I noted, the pool is small or the Dominator is small. So just you have could have one deal move things positively or negatively. To your point, we've been trending below 10%, last couple of quarters tipped up, excuse me, and that is solely a function of just increased leasing activity.

Speaker 3

Similar to anchored portfolios coming out of COVID, there's just been a lot of demand. And so just overall volume has increased relative to historical standards. But I would just tell you our confidence in that number kind of remaining sub-ten percent over the long term is incredibly high, just given the property type and the site plans that we're buying.

Operator

Okay. Thank you.

Speaker 3

Welcome. Thanks, Doreen.

Operator

Our next question comes from Craig Mailman with Citi. Please go ahead.

Speaker 5

Hey, good morning. Conor, you noted that one asset that you bought and one kind of vacate moved the occupancy numbers here almost 120 basis points. I'm just kind of curious as you guys continue to build out curve kind of the plan on mixing in fully stabilized deals versus some deals with some level of vacancy as you guys put the occupancy and kind of timing of NOI commencements?

Speaker 2

Sure, Craig. Good morning. It's David. I'll start and then see if Conor can fill in what I've missed. But in general, this asset class is a highly leased asset class.

Speaker 2

There's not enough square footage for the demand right now from convenience tenants. As we look at our historical data, I think that remains true even through recessions and pandemics and so forth. So I would expect the occupancy volatility to be less than a traditional anchored property. And what that means is as we're buying, we're really not buying vacancy. We're buying stabilized assets.

Speaker 2

And the best way to describe that is we're buying and growing a renewals business where we expect to be capturing mark to market with low CapEx. Every now and then we're able to find a property that was under managed and may have some vacancy upside. But for the most part, we're buying stabilized properties that have mark to market opportunity.

Speaker 3

Yes. To David's point, Craig, I mean, I think our average lease rate on what we've acquired, excluding Meadowmont, is probably been north of 98%, 99%. Maybe there's one small vacancy to David's point that might be recently vacated and that's one of our upside opportunities. But in general, our confidence in this portfolio running between 96% 98% leased, which is consistent with the last 10 plus years is very high.

Speaker 5

Is there a significant or any kind of yield difference on taking that lease up risk from maybe a local owner versus buying something fully stabilized?

Speaker 2

Not really. And I mean, honestly, there's just not many assets for sale have vacancy. You might find one shop here and there, but honestly, the competition for this type of property is pretty strong from local investors and sellers are being paid for that vacancy. So if there is a vacancy, it's going to show up in the cap rate. So I think that when we look at the economics and we run our models to figure out what's the best risk adjusted return, buying existing tenants that have renewal upside is just a better risk adjusted return than paying extra for a vacancy and trying to generate a lot more growth.

Speaker 2

Especially at scale, if you think about the volume of assets we're buying, there's not that much vacancy in the country for the high quality properties in high income neighborhoods. So I think what we're looking for is strong credit, strong occupancy, but a big mark to market and hopefully a shorter weighted average lease term.

Speaker 5

That makes sense. And then you guys are 13% West Coast today. I don't know what the breakout of California is of that, but are you guys kind of less interested at this point given the minimum wage issues going on, because you guys do have a fair amount of probably fast food, fast casual in that portfolio that you're building?

Speaker 3

I think, Craig, we said we're focused on creating a really high quality diversified portfolio. There are times to your point where certain geographies might lag others. I think our confidence in high income metros throughout the country, whether the top 20, top 25, top 30, whatever it might be, is high. So, you're right, there might be some headwinds in California. There's no mandate internally to grow or avoid certain geographies outside of our goal of just having a well diversified portfolio.

Speaker 5

Well, then just one last quick one. I know the Form 10 isn't out yet, but as we think about kind of the final structure for site, is it going to be fairly clean from a change of control or other friction costs to make it more saleable, someone wants to come in just buy the rest of the assets without having to kind of pay a platform value for a company that's essentially liquidating?

Speaker 2

Yes. I would say that the cleanliness of site centers should be very high. And I think has a lot of different options for potential outcomes. I think the Board and the management team are open minded as to what those outcomes are. And we're trying to do everything we can to structure it so that it's a pretty simple business.

Speaker 5

Great. Thank you.

Speaker 2

Thanks, Greg.

Operator

Our next question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Speaker 6

Hi, thanks. Good morning. First question, appreciate the curb leasing activity breakout, pretty strong new lease spreads there in the quarter, almost 100%. David, you talked about high retention in the Convenience segment, it's a renewals business with lower CapEx. But I'm just curious if you see a little bit of a more significant opportunity to capitalize on better merchandising in the near term with better rent growth and mark to market opportunities and scenario where we could see higher turnover over the next maybe couple of years for the pro form a curve portfolio?

Speaker 2

Good morning, Todd. I think that's unlikely. I think if you look at the tenant roster, it's a pretty well diversified group of high credit tenants. Even when we buy local shops, we're making sure that we like the tenant credit. We feel like there's strength in the operations.

Speaker 2

We feel like the tenants have been in business for a long time. I think the risk adjusted returns to this asset class have more to do with finding successful businesses, successful tenants and increasing the rents along with their increased profitability as opposed to buying properties and effectively redeveloping or re tenanting. I think that's somewhat unnecessary because we're buying front row very convenient properties that usually have already attracted the best tenants. And so I just don't think it's necessary to do a whole lot of tenant recycling. And that point, Todd, I mean, think about our forecast for same store for

Speaker 3

the next 3 years, the kind of assumptions underpinning that don't require us to significantly turn over the asset base and to kind of tie that into Tore's question. That's why the CapEx percentage NOI is so low. This is a renewals business. We're pushing rents at maturity. It is not to re tenant or reemerge merchandize or change over the tenant roster of any of these properties.

Speaker 6

Okay. And then I guess like sticking with that a little bit, the capital efficiency segment within retail. You mentioned that you've looked at sort of a history of operations for these types of assets through the pandemic and the later cycle. I think you said about 5 years or so. But it's been a little while since we've gone through a traditional cycle, certainly more than 5 years.

Speaker 6

And I'm just curious how you think the portfolio would perform if the economy were to go through a cycle where some of the potential risk might be. You have about 30% of the portfolio occupied by non national tenants, the relatively high exposure of food and restaurant tenants. How are you thinking about that if we were to go through a little bit of a broader economic cycle?

Speaker 3

The 5 years that David referenced was just on transactions activity. We've been buying these assets for 5 years. To your point, we've gone back much further than that. And the carve out portfolio is a great proxy for how we think this portfolio will perform during recession. We will lose occupancy, right, in any recession similar to any property type in the real estate industry.

Speaker 3

Generally NOI growth is correlated GDP growth, the 2 quarter lag, right? That's not unique to this. But what's fascinating is if you look back for the last 15 years, including through the GFC, this portfolio actually had higher occupancy and higher lease rate than the anchor portfolio, meaning the carve out versus the rest of the property, which is a little counterintuitive to your point on shops and traditionally risk and associated risk of shops. But I think to David's point, we are solving for credit and generally tenants that operate on the curb line of major vehicular corridors are credit tenants, they're not the locals. Generally, the locals are back in line.

Speaker 3

The last thing I'd point to you is, you're right, we're 70% national. If you look how that compares to the rest of the peer group or kind of the broader retail property formats, that's at the very high end of that range. So, again, I feel like we're really well positioned. If there is a recession, this portfolio, like any portfolio, would lose occupancy, but there's a lot of risk mitigants we put in place. Some of those are structural like the property type, others are just how we solve for acquisitions and solving for credit.

Speaker 3

The last thing is where there's a local to David's point, we look for seasoning, how they've been through cycles, particularly if it's a local restaurant, whatever it might be. But, again, I do think there's a lot of risk mitigants in the portfolio that help cushion us in the event of any kind of shock to the system. I don't know if that answers your question, but

Speaker 6

Yes, that's helpful. All right. Thank you.

Speaker 3

Thanks, Todd.

Operator

Our next question comes from Samir Khanal with Evercore ISI. Please go ahead.

Speaker 7

Hey, David. Good morning. I guess just in terms of conversations picking up on the disposition side, have you seen any of that happen given what the 10 year yield or the interest rates have done over the last, let's call it 90 days since the last call? And I know you talked about the pipeline of about $1,000,000,000 Just trying to gauge a little bit more on how much you can potentially sell before the spin? Thanks.

Speaker 2

Yes. Good morning, Tamir. I mean I think if you're thinking about how much more there could be, I wouldn't look past what we've said we have awarded or under contract or under LOI. I mean that's a pretty current analysis of where the pipeline is today. Have we gotten more calls in the last couple of weeks?

Speaker 2

No. But I think the level of interest from buyers over the last 9 months has been so high that I don't really see a notable change in the temperament due to rates potentially going down. I mean one of the things that I've you and I have talked about in the past is, it's been very interesting. A lot of the buyers in the last 9 months have been unlevered buyers. A lot of family offices, local real estate investors and they look at open air shopping centers, they see what happened during the pandemic, they look at the collections rate and it really have not been all that dedicated to leverage.

Speaker 2

And so I'm not sure it's making a huge difference with what we've been selling lately.

Speaker 7

Okay, got it. And I guess on just the acquisitions, I don't know if you disclosed the cap rate on the curve line convenience items you're buying? What's been the cap rate on that?

Speaker 3

We've been kind of just around 6.5% from a GAAP perspective. There's not a material difference in GAAP and cash, but round numbers, we've been around 6.5, Samir.

Speaker 7

Okay. Thank you. You're welcome.

Operator

Our next question comes from florist van Dischamps with Compass Point. Please go ahead.

Speaker 8

Hey, guys. Thanks for taking my question. Good morning. Good morning. You guys are avoiding the trap that small cap REITs fall into, which is typically they have lots of leverage.

Speaker 8

Curb line is going to have 0 leverage and you're going to have a and cash with which you basically almost double the NOI from curb line before you have to go back to the market. So that's I mean to me that makes this a unique story besides some of the other things. I just have a question, a couple of questions, I guess. Number 1, how much is there a significant difference in OCR between your national and local tenants? I think you're around 28% local.

Speaker 8

And how concerned are you in the ability to push rents higher? And at what level does and to where to the extent you have that information, obviously, But to the what extent where

Speaker 9

do you is there going

Speaker 8

to be a ceiling in terms of where you can push your OCR to particularly for your local tenants?

Speaker 3

I'll let David handle that one for us. I mean it's funny actually I was looking at that data yesterday as part of our curve line of credit process. What's fascinating is the lowest occupancy cost ratios in the portfolio happen to be some of our local restaurants, which intuitively you think is probably one of the higher OCRs. So I guess to answer my question to Todd or echo back to my response to Todd, excuse me. Look, if sales dip, it's going to put pressure on OCRs.

Speaker 3

So I think this business is correlated to GDP growth, sales growth, etcetera. But I would just tell you, it's one factor we looked at upon many in terms of underwriting, and there's a pretty healthy cushion. David, I don't know if you responded differently to that. Yes.

Speaker 2

The only thing I'll add for us, what I find really interesting is that when you have small format spaces, 30 by 60, so it's an 1800 square foot unit. There's hundreds of businesses that can occupy that space close to the customer and up along the curb line. And you are right to a certain extent, on the positive side, if things are going really well, you might have a tenant that has an occupancy cost ratio that's kind of at their max and you can only get so much in a rent renewal, whereas a big national high credit tenant that has more sales might be able to pay more. And that has happened a number of times. It's particularly happening in Miami right now where when we have local tenants expiring, the nationals can simply pay significantly more.

Speaker 2

So we have been doing some tenant recycling when those local tenants run out of bandwidth to pay more rent and the market rents are higher. On the other hand, I do think that this type of business keeps up with inflation pretty well simply because most of these tenants are able to raise their sales along with inflation and we're able to keep up with the rents at the same time. So I guess I feel like there will be some recycling of tenants when we want to really push rents high. But on the other hand, I think we're very focused on the low CapEx nature of it and we're pretty dedicated to being renewals business. So we're trying to find tenants that we buy that have been in the property for a long time and have a proven track record.

Speaker 8

What is that renewal percentage today? And what is that average over the last 5 years?

Speaker 3

Yes. So for Nationals, it's mid-90s. This last quarter was 100% for Nationals. For Locals, it's been about mid-80s. So blended, over the last 7 years, it's called been depending on the quarter anywhere between 80% and 90% for us.

Speaker 8

Okay. Another question for you guys in terms of debt strategy for Curve going forward. And Conor, I guess that's more towards you, but you're not going to have any debt to begin with. Is your view that you want to build up a higher pool of unsecured assets and then tap the unsecured would you be relying on select mortgage as you make more acquisitions and you deploy some of that the $600,000,000 of cash?

Speaker 3

It's a great question. And the nice part is we've got a lot of flexibility and time to think about it. If you look back historically for the last 7 years at site centers, we have been an unsecured borrower. We like that market. We think it's really attractive.

Speaker 3

We've also maintained relationships with Lifeco's and other mortgage providers because we like to have kind of all the arrows in the quiver where there are times when the unsecured markets closed and it's great to have those secured relationships and vice versa. So I think it's fair to assume we'll operate a similar balance sheet strategy with, curb. To your point though, on day 1, we have a fully unencumbered pool, which provides a lot of flexibility and optionality. So, again, not to at the risk of reiterating what I just said, I think you'll see a little bit of both. But just given the size of properties, the unsecured market is definitely more

Speaker 5

efficient,

Speaker 3

for curb and it's likely we tilt that way similar to how site centers have operated the last 7 years.

Speaker 8

Great. Thanks, guys.

Speaker 2

You're welcome. Thanks, Lars.

Operator

Our next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Speaker 10

Hey, just a couple of quick ones. 1 on the sources and uses, I think I'm looking at $150,000,000 of acquisitions expected in 3Q, $446,000,000 of sales, I think expected in 3Q as well. Just on the acquisition front, is that are all those already sort of in the pipeline, under contract, how much of that is speculative and so forth?

Speaker 3

Good morning, Ron. So none of it is speculative. To David's point, we have $200,000,000 plus awarded to us. That figure is what we feel confident on closing prior to the spin off date.

Speaker 10

Great. And then look, my follow-up was just going to be on the is it fair to say that the transaction activity has been even sort of greater than you sort of anticipated when you started this process initially? Because now if you could do a sort of $100,000,000 of acquisitions plus or minus in the quarter, you're going to be able to do $300,000,000 $400,000,000 plus annually. Is that sort of the right way to think about it sort of post spin acquisition run rate on an annual basis for us to think about?

Speaker 2

Yes. Ron, I assume you're talking about have we been surprised on the transaction activity, meaning on the sales or on the buy?

Speaker 10

Both. But I was talking more on the sales, but I think you guys have been doing more on the buy as well.

Speaker 2

Yes. I think I mean, we've mentioned a number of people. In unprepared for the level of interest. And I think the sales activity has far exceeded our expectations in terms of PACE and pricing. On the acquisition side, that's actually been a little bit of a challenge, there's only so much time in the day with the transactions team and given how much has been sold in the last 9 months, it's just a time allocation of how much can you allocate towards the acquisitions front.

Speaker 2

But if you look at $200,000,000 that's been awarded to us, we feel pretty confident that we can support our previous statements that this business, we feel pretty confident we can buy about $500,000,000 a year. So that would be $125,000,000 a quarter. And I think that puts pretty well with what we have been awarded to us to date. So it feels like that run rate, our confidence level is pretty high.

Speaker 10

Great. That's it for me. Thanks so much.

Speaker 9

Thanks, Ron.

Operator

Our next question comes from Linda Tsai with Jefferies. Please go ahead.

Speaker 1

Yes.

Speaker 11

Hi. What's the average weighted lease term for Curb's current 72 centers? And what do you see as ideal for

Speaker 3

Connor. It's about 5 years right now, which I think is like 5.2 years as of June 30.

Speaker 2

Yes. I mean in terms of ideal, Linda, it's there's really no such thing as an ideal because when you're buying stabilized assets that have in place leases, I would say the WALT is going to be between 4 5.5 years consistently. It's hard to really see a portfolio grow that's not in that range.

Speaker 3

I think the variance is that Walt might not be dissimilar to an anchor property. The variance is there are very few leases that are out double digits, meaning there are no tenants that generally have control for 15, 20, 25 years that have the massive mark to market. And so you might have a fresh 10 year term in there, to David's point, a couple mid option tenants and that all is kind of blend to plus or minus 5 years, but it doesn't impact the liquidity or the ability to drive growth or rental growth in the near term.

Speaker 12

Thanks for that. And then the comment that the local tenants might run out of bandwidth to pay higher rents. Are there any other metrics besides OCR you're monitoring to assess that?

Speaker 2

Yes, the cell phone traffic data. I mean, that's been one of the primary tools to understand the we don't know basket size specifically, but we certainly can look at historical trends of customer visits. And that has been helpful in understanding when we would like to renew a tenant and when we think we can do better.

Speaker 12

Got it. And then the $1,000,000,000 under LOI or under contract in the mid-7s, would that pricing look any different 12 months ago?

Speaker 3

Just to clarify, we said over $1,000,000,000 under contract order or LOI.

Speaker 2

Would the pricing look different a year ago? That's a good question. I don't know. I know that's a really good question. It's hard to speculate.

Speaker 12

Okay. And then in terms I think you said it was like $950,000,000 of well, square feet from ICSC that kind of fits convenient centers. But how much of that do you think qualifies with the 117,000 HHI, good visibility, good economics like you were talking about earlier for what you're targeting for your portfolio?

Speaker 2

I would say, as we've been tracking all of these transactions for the past 5 years and we look at how many deals we've underwritten and what we have made offers on, it's been around 15%.

Speaker 3

And so if you

Speaker 2

take that as a proxy and say, well, 15% pass all of the hurdles and thresholds and underwriting standards. 15% of $950,000,000 is still a substantial growth opportunity and that to us feels like why our confidence level that this is a real growth story is pretty intact.

Speaker 12

Thanks.

Speaker 2

Thanks, Linda.

Operator

Our next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Speaker 13

Hey, good morning. Two questions here. First, just all this conversation on the efficiency of the convenience assets and that it's really a mark to market story, it's not necessarily a replacement story or a lease up story. Does this it sounds like from an efficiency, overall platform efficiency, curb should be I don't know how many points better, but it should be some material magnitude more efficient than site centers. Is that a fair assessment?

Speaker 13

And if that is, is there some metrics that you can provide on overall corporate efficiency? Like is this platform 500 basis points more efficient or how do we gauge that given all the positives that you said about managing the portfolio?

Speaker 3

Alex, it's Conor. The short answer is yes. The longer answer is what we said publicly is that we think curb can be as efficient as site once it's fully invested, which I think is a very good kind of proxy to use for the 1st couple of years. But then you're right, as you bolt on and grow to Forrest's point, a couple of other points around growth, you should run a much more efficient platform. There are also some real benefits of the spin off where we're looking at other efficiencies and ability to kind of boot up a kind of startup type mentality from a whole bunch of other perspectives from department wise IT, etcetera.

Speaker 3

So there's a lot of optionality. There's a lot of efficiencies in the business, but the short answer is yes.

Speaker 13

Okay. And then the second question is just going to that huge demand for your traditional assets, but it doesn't sound like you're facing the similar competitive pool for the convenience assets. So what's going on in the buyer base? I mean, or are you seeing the same amount of buyer interest in convenience assets that you're seeing when you sell the traditional assets? Just trying to understand because from what you're describing, it would seem like the convenience assets should be highly desirable equal to the assets that you're selling, but maybe you're going to say, hey, it's really a yield play for the private buyers.

Speaker 13

They'd rather buy stabilized mid-7s than buying a 6.5?

Speaker 2

Alex, good morning. It's David. I would say I don't want to give the impression that there has not been competition buying convenience assets. I mean there have been every situation has involved a lot of bidders going after the same properties. We just happen to have a couple of benefits.

Speaker 2

One is we're national, we're unlevered and we can do due diligence quickly and close quickly. So I think we've been a preferred buyer for sellers, but it is a very desirable asset class. It's historically owned by local private wealth within these secondary markets. And so we're usually one of the few institutions to show up looking at these types of properties, but it's definitely competitive. I mean cap rates are definitely competitive on the convenience side for sure.

Speaker 9

Okay. Thanks, David. Yes.

Operator

Our next question comes from Paulina Rojas with Green Street. Please go ahead.

Speaker 11

Good morning. You have a same property and like growth guidance for curb line of 3.5 percent to 5.5 percent. And how is the portfolio doing year to date? And the range feels a little wider. So I'm intrigued about the swing factors behind that guidance.

Speaker 3

Hey, Paulina. Good morning. It's Connor. You're right. The range is wide to my comments in our script.

Speaker 3

Look, it's a small denominator. So there could be some more volatility variability, a couple of $100,000 either way. But our confidence in that range is very high right now. We're running kind of midpoint to the higher end of it. And we haven't had any credit issues to date.

Speaker 3

So you think about the major bankruptcy headlines that have impacted some of the anchor properties, we haven't had any of those. To my earlier comment or response, retention has been very high. So, we feel really good about it. It's just a function of having really small denominator that is allowing us or pushing us to have a little bit wider range than normal.

Speaker 11

Okay. And then I think your expectation is for curb line, same property NOI to grow at more than 3%. Can you remind us of the different components behind the 3% plus 3%?

Speaker 3

Sure. So bumps plus national options gets to kind of low twos mark to market and some occupancy growth gets you to kind of mid to high threes and then some credit loss probably pushes you to low threes. Those components could change over time, right, just as occupancy gets higher in the portfolio. But generally, that's the math behind it.

Speaker 11

And regarding occupancy, I know you have mentioned a couple of times that you are acquiring stable assets. So is it fair to assume that your current lease rate is or that we shouldn't expect your lease rate to climb higher from where it is today or you see further occupancy gains from where we are?

Speaker 3

We see the commence rate we expect to be higher. So this portfolio generally, we think I think I made a comment earlier, can run kind of 95% to 98% leased. We're at the lower end of that range right now. We have a pretty decent sized S and O pipeline to push that back higher. So, yes, there is some occupancy upside in the portfolio today.

Speaker 11

Thank you.

Speaker 3

You're welcome. Thanks, Paulien.

Operator

Our last question comes from Ki Bin Kim with Truist. Please go ahead.

Speaker 9

Thanks. Good morning. Just a couple of follow ups. On the 6.5% GAAP cap rate on the acquisitions that you're looking at, does that include any lease mark to market upside?

Speaker 3

Yes. So the GAAP cap rate would, but to my point Ki Bin, the gap between cash and GAAP, no pun intended, is pretty skinny. It's not like you're buying an anchored property with a $2 rent that markets 10 and you got this 3 going and yield that becomes a 7. I bet you the cash yield is probably $6.35 and the GAAP yield is $6.5.

Speaker 7

Okay.

Speaker 9

And for curb longer term, is there a somewhat of an optimal mix for tenant mix or credit profile that you're looking at as you build this portfolio?

Speaker 2

I think tenant mix, not necessarily, but credit, yes. We've heavily tilted towards credit. I think that it's going to be a balancing act of measuring credit with growth and a lot of the growth comes from local shop tenants, but that also comes with some risk. So over time as we get the portfolio and larger and larger, we'll settle in that right ratio between credit and non credit. But I think the credit component is more important than the actual tenant roster mix.

Speaker 3

Yes. One of the things we like the most about this portfolio, Ki Bin, in this concept, if you look at Page 15 of our slides, our tenant concentration is incredibly low and should continue to improve. And so to my earlier response on credit and credit risk, one of the massive mitigants of this portfolio is that there are no kind of major tenants where if they have our bank proceeds to close stores, you see this dramatic sudden impact to earnings or NOI for a certain year and you have these kind of transition years that you've seen in other kind of anchor portfolios. To David's point, one of the credit mitigants is the fact that you've got this massive diversification from a tenant perspective that is, in our view, one of the strongest and most compelling aspects of the portfolio.

Speaker 9

Thanks for that. And just last quick one, what was the cap rate for the assets that you sold in the quarter?

Speaker 3

The asset we sold in the quarter, sorry, help me out.

Speaker 9

Yes, the dispositions in 2Q, what was the cap rate?

Speaker 3

I think it was a $7,100,000,000 or $7,050,000,000 And the blended to date on the $1,800,000,000 has been $7,100,000 And I think if you just do the math on the ranges, for NOI ranges, the variance quarter over quarter, I think it's a $7,100,000 But I can come back to that, Ki Bin. Okay.

Speaker 9

Thank you.

Speaker 3

You're welcome.

Operator

Our next question comes from Hong Zhang with JPMorgan. Please go ahead.

Speaker 2

Yes. Hey, guys. I guess, what would you what do you think would be the normal lease to occupy gap for the curved line portfolio compared to I think the 2 20 basis points today?

Speaker 3

Yes, it's a good question, Hong. I mean, my guess is closer to 100 basis points. One of the things we like about the property type is you're not there aren't dramatic redevelopment projects or repurposing or reimagining to use some of the words that have been used in the retail space in the last couple of years. It's just releasing. And so the odds of or the time line to backfill a shop with another shop to Dave point that's 30 by 60, it's pretty short.

Speaker 3

So that will lead to a tighter S and O pipeline or S and O GAAP versus other property types. So round numbers, I bet it's about 100 basis points.

Speaker 2

Got it. And I guess how do lease lease options differ in the current portfolio compared to, I guess, the site stand alone or it's more traditional anchored centers?

Speaker 3

They don't. I mean, national lease in the current portfolio is no different than in an anchored portfolio to 10 and 25. A local might have 1.5 or no options, but still 10 year initial term. So there's really no difference except for the fact that the number of options in a lease will be dramatically lower, meaning, I think I answered this in an earlier response, not going to see any tenants with control for 30 or 40 years with the $4 lease that you just can't get at. You're going to see at most two options on the back end.

Speaker 3

And to David's point, we generally are buying 100% leased or seasoned properties. So the number of tenants that have control past making this up 2,034 is really skinny and could probably count them on one hand.

Speaker 2

Got it.

Speaker 3

Perfect. Thanks. You're welcome, Owen.

Operator

This concludes our question and answer session. I would like to turn the conference back over to David Lukes, Chief Executive Officer, for any closing remarks.

Speaker 2

Thank you very much for joining our call.

Operator

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

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Earnings Conference Call
SITE Centers Q2 2024
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