Brixmor Property Group Inc

NYSE:BRX

Earnings Call Transcript 2021-Q2

[Operator]

Greetings, and welcome to the Brixmor Property Group Inc. Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Stacy Slater, Senior Vice President, Investor Relations and Capital Markets. Please go ahead.

[Stacy Slater, SVP, IR and Capital Markets]

Thank you, operator, and thank you all for joining Brixmor's second quarter conference call. With me on the call today are Jim Taylor, Chief Executive Officer and President; and Angela Aman, Executive Vice President and Chief Financial Officer; as well as Mark Horgan, Executive Vice President and Chief Investment Officer; and Brian Finnegan, Executive Vice President, Chief Revenue Officer, who will be available for Q&A.

Before we begin, let me remind everyone that some of our comments today may contain forward-looking statements that are based on certain assumptions and are subject to inherent risks and uncertainties as described in our SEC filings, and actual future results may differ materially. We assume no obligation to update any forward-looking statements.

Also, we will refer today to certain non-GAAP financial measures. Further information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in the earnings release and supplemental disclosure on the Investor Relations portion of our website. Given the number of participants on the call, we kindly ask that you limit your questions to one or two per person. If you have additional questions regarding the quarter, please re-queue.

At this time, it's my pleasure to introduce Jim Taylor.

[Jim Taylor, CEO and President]

Thank you, Stacy, and good morning, everyone. We are very pleased to report yet another quarter that reflects the strength of our team, our well-located portfolio and our value-added execution. Execution that not only delivered sector-leading performance going into and through the pandemic, but also provides us with the momentum to outperform again as we emerge this year and into 2022 and beyond. In a few minutes, Angela will provide additional color on our results and our raise to guidance, as well as our continued growth in cash flow, liquidity and balance sheet strength.

As you dig into our results this quarter, even after adjusting for the recovery of prior period billings, which continue to accelerate, you'll observe that our base NOI is nearly fully recovered to 2019 pre-pandemic levels, and our traffic levels at our centers now exceed where they were in 2019. That recovery is truly striking, and it demonstrates the quality and resiliency of our open-air retail portfolio. But that recovery is not the most important takeaway. Rather, the key takeaway is how we will grow from here. In other words, how the very same momentum that drove our experience of the lowest negative impact from the pandemic will also drive our continued growth and outperformance, especially through a dynamic and evolving retail environment.

I'd like to shed some additional light on the combination of factors unique to Brixmor that we believe will continue to drive our outperformance for years to come. Those factors begin with rent basis. As you've probably heard me say before, if you're looking to drive growth in ROI and thereby deliver value, rent basis matters. We benefit from a portfolio of established, well-located and highly trafficked shopping centers that attract the very best national, regional and local tenants, tenants who drive healthy sales volumes and enjoy reasonable cost of occupancy. In fact, our grocers enjoy an average cost of occupancy of 1.5%.

For us, this focus on rent basis is foundational. We've harvested those assets where we see limited upside in rents and have focused our investments where we see an opportunity to drive growth. That upside in rents is most evident in our new leasing spreads, which were 19.8% for the quarter, which I believe will lead the peer group, and they were 19.3% for the trailing 12 months, again, likely well ahead of the pack even through the height of the pandemic. If you look at our expiring anchor rents over the next 3 years, the average expiring rent is $8.78 a foot, which is significantly below the average new anchor rent we've signed of $12.60 a foot over the trailing 12 months, that again included the height of the pandemic. That's a cash spread of 44%.

The upside in our portfolio has clearly been battle tested over the last year, and it will be even more striking as the economy continues to improve. Two additional factors driving our visibility on growth are executed leasing volumes and our forward leasing pipeline. Under Brian's leadership, during the quarter, we signed another 700,000 square feet of new leases at a record rent of $19.48 a foot. And with renewals, we signed a total of 1.6 million square feet of deals. We grew our leased occupancy another 30 basis points on a sequential basis and grew the balance of signed but not commenced rent at the end of the quarter to $42 million. Additionally, our forward leasing pipeline, that is deals and legal and underway is comprised of another 2.5 million square feet or another $44 million of base rent. That's unparalleled visibility on our forward growth.

What's also very exciting to me is the continued improvement in tenancy, including within the Grocery segment as we've capitalized on the disruption caused by the pandemic, to bring in better tenants at better rents. Brian will cover that in a bit more detail during our Q&A session.

This very same leasing activity has also driven our highly accretive reinvestment pipeline, a fourth key factor driving our growth, which now stands at $433 million of investment at an average incremental return of 9%. During the quarter, we delivered another $20 million of reinvestment projects at an average incremental return of 18%. To provide some perspective, at those yields, these deliveries create as much value as over $200 million of ground-up development at much lower risk. We expect our total deliveries this year to be between $175 million to $200 million at a very attractive average incremental return of approximately 10%. I'm really pleased here with the continued execution under Bill and Haig of our redevelopment and construction team.

I'm also excited about how this reinvestment activity not only drives great ROI, and as I've talked about on previous calls, compression in cap rates for the centers impacted, but also for how it drives our momentum in our fifth key growth factor, the lease-up of our small shops. During the quarter, we drove an additional 60 basis point sequential increase in our small shop occupancy and set a post-IPO record average small shop rent of $25.15 on comparable new space. As we improve our centers through our reinvestment program and our enhanced operations, we see clear follow-on benefit in both rate and tenant quality and the lease-up of our small shop spaces, where we believe we have several hundred basis points of growth potential.

From a capital recycling standpoint, we are seeing attractive opportunities for external growth, or to use an analogy, more fuel for our value-added BRX engine, such as the acquisitions of Bonita Springs and Champlin, which we closed this quarter. We're focusing our acquisition efforts on those opportunities for us to leverage our platform strength for additional growth in ROI. Mark will provide additional color on our pipeline and acquisition market overall in the Q&A session.

As always, expect us to remain disciplined in the allocation of capital as we always strive to be across all facets of our business. While the acquisition market has gotten increasingly competitive, we do believe there will be significant and attractive opportunities for us to leverage our platform for external growth. And as Angela will cover in a moment, we have over $400 million of cash and an additional $1.2 billion of availability under our line of credit as well as growing free cash flow to fund those opportunities.

In closing, I'd like to express my deep gratitude and appreciation for the entire Brixmor team, which is the best in the business for their continued commitment and amazing execution across all facets of our business, from leasing, to operations, to revelopment, to construction, to investments, to finance and accounting to legal; and finally and importantly, to talent. Your performance over these last 18 months has truly been phenomenal. Our first cultural tenant as a company is that great real estate matters but great people matter far more. You prove that tenant each and every day. Well done.

Angela?

[Angela Aman, EVP and CFO]

Thanks, Jim, and good morning. As Jim highlighted, the recovery continued to gain momentum across our portfolio in the second quarter with further improvements in collections levels, sequential growth in build occupancy and robust leasing productivity driven by sustained broad-based tenant demand for open-air centers. NAREIT FFO was $0.46 per share in the second quarter and same property NOI growth was 13.9%. Same-property NOI growth was driven most significantly by revenues deemed uncollectible due to continued improvements in collections trends.

During the second quarter, we collected over $7 million of previously reserved base rent or over $10 million of previously reserved base rent and expense reimbursement income, outpacing the reserve required for current period billings due to the ongoing improvement in cash basis tenant collections. Ancillary and other revenues and percentage rents were also positive contributors to same-property NOI growth this quarter. Base rent and net expense reimbursements were negatively impacted by a year-over-year decline in build occupancy. And with respect to net expense reimbursements, a year-over-year increase in operating costs as we have reverted to normalized service levels across the portfolio as tenants have reopened.

While the strength of the current leasing environment has contributed to a sequential increase in leased occupancy over the last 2 quarters, significant rent commencements drove an increase in build occupancy this quarter for the first time since the beginning of the pandemic. During the second quarter, we commenced leases representing nearly $13 million of annualized base rents, while backfilling the signed but not commenced pool with new leases representing over $14 million of annualized base rents. As a result, the signed but not commenced pool now totals 2.4 million square feet, representing nearly $42 million of contractually obligated revenue, approximately 50% of which is expected to come online during the second half of 2021.

As highlighted earlier, we are encouraged by the consistent and sustained improvement we are seeing in collections level with overall second quarter cash collections totaling 96.5% as of July 27. Importantly, second quarter collections from cash basis tenants, which represent 15% of our annualized base rents, exceeded 79% as of July 27, which represents an increase of nearly 1,100 basis points from the first quarter cash basis collections rate at the time of our last call. While we are not yet back to full collection levels across the portfolio, we are seeing significant resiliency demonstrated by some of the most impacted segments of our tenancy.

We have updated our 2021 FFO expectations to a range of $1.70 to $1.76 per share, based on an improved same-property NOI growth range of 4.5% to 6%. Our current expectations reflect our strong performance in the first half of the year and the positive trends we are seeing across the portfolio, while also remaining appropriately balanced given potential uncertainties related to the Delta variant. Consistent with our methodology last quarter, the low end of our range assumes no additional recoveries of previously reserved amounts, and no additional improvement in cash basis collections. The high end of the range primarily reflects a further improvement in cash basis collections, but depending on magnitude, may also reflect a moderate amount of recoveries of previously reserved amounts.

Importantly, the high end of the range is achievable with no recoveries of previously reserved amounts and with some continued shortfall in collections from our cash basis tenants. In addition, I would underscore that our revised guidance range does not contemplate the conversion of any tenants to or from cash basis accounting during the remainder of the year, which could result in significant volatility in GAAP straight-line rental income.

As always, our guidance range does contemplate additional expected transaction activity, but does not contemplate any items that may impact FFO comparability in future periods, including litigation and non-routine legal expenses, loss on debt extinguishment or any onetime items.

Turning to the balance sheet. At quarter end, we had $1.7 billion of total liquidity, representing our undrawn $1.25 billion revolving credit facility and over $400 million of cash on hand. We have no debt maturities in 2021, only $250 million of maturities in 2022 and debt-to-EBITDA on a current quarter annualized basis is now at 6.3x, in line with our pre-pandemic level. As a result, we are well positioned to continue to capitalize on the recovery and execute on our long-term balanced business plan.

And with that, I'll turn the call over to the operator for Q&A.

[Operator]

[Operator Instructions]. Our first question is from Jeff Spector with Bank of America.

[Jeffrey Spector, Bank of America]

I'd like to focus the first question on small shop occupancy, Jim. That was one of the key points you mentioned in your opening remarks. I saw that grew this past quarter. And you talked about diversity of tenants and -- better tenants on the small shop side. Can you discuss that a little bit further, please?

[Jim Taylor, CEO and President]

Absolutely. Since we began now a little over 5 years ago, one of the things that we saw was an opportunity to improve the operations of the assets, bring them to the proudly owned by bricks and mortar standard, but also importantly, accretively reinvest capital in those shopping centers. The centers look better, they perform better. And as part of that, we're seeing real follow-on momentum in our small shop leasing. And you're seeing it not only in the sequential improvement we saw quarter-over-quarter, but you're also seeing it in terms of the rents we achieved, as I highlighted, we're setting record small shop rents since post IPO of $25.15. But also importantly, the quality of the tenants. And in fact, during this disruption, we've seen many local and regional and national tenants capitalizing on the availability of space in our centers, and we're bringing in much better tenants. Brian?

[Brian Finnegan, EVP and CRO]

Yes. I would just add, I mean, the categories that we're signing leases with and the tenants have been those are fairly broad-based. If you look at the QSR restaurants, medical, financial institutions, we've been able to capitalize on that demand. And the team has done a really nice job, as Jim mentioned, capitalizing on the improved operations at our centers and the reinvestments that we're making. And then just to touch on QSR restaurants, Jim mentioned the higher quality of tenant. One of the things we're starting to see is tenants that were primarily in central business metrics and downtown areas really start to go to the suburbs, and we had an example of that. This quarter, we signed our first lease with CHOP at our village new town redevelopment and consumers are just demanding more for the suburbs. And as we look at our centers, there are attractive opportunities to come out and get new locations. We're in a number of discussions around the portfolio with tenants like that. So we've been really pleased with what we're seeing so far as well as what's in the pipeline going forward.

[Jim Taylor, CEO and President]

And importantly, Jeff, as we deliver those reinvestments, we'll see that improvement continue to accelerate because as you're taking down an anchor, as you're reconfiguring a shopping center, you're going to have more vacancy. And we see that by several hundred basis points in our reinvestment pipeline. So we're really excited about how we're positioned to drive that, that sets important growth lever.

[Jeffrey Spector, Bank of America]

Very helpful. Second question would be turning to external growth. Can you talk a little bit more what you're seeing we continue to hear, I think you mentioned cap rate compression, lots of money now chasing shopping centers, in particular, grocery anchored shopping centers. Can you discuss that a little bit more? And maybe the markets you're really focused on.

[Jim Taylor, CEO and President]

I'd be happy to, and I'll have Mark chime in with a little bit more granular detail. But -- as a general matter, we have seen a real return of institutional demand for this product type, particularly given how it performed through the pandemic. And a lot of institutional investors who had red line, the asset class are now coming back in. And they're getting some pretty impressive values for particularly fully leased shopping centers. I think our opportunities as we demonstrated in Bonita Springs and Champlin are going to be those assets where we can leverage our platform, our leasing, our reinvestment to get to appropriate returns. But we're also capitalizing on that bid on the other side in terms of some of our capital recycling. But we see a number of very attractive opportunities. We see more product coming out into the market. And we're quite bullish on what the prospects for external growth are going to be. Mark?

[Mark Horgan, EVP and CIO]

Yes. As far as where we're seeing opportunities, it's really consistent with what we've been doing over the past 5 years. We're looking to redeploy capital in markets where we can leverage our platform and drive value. So we're always looking at both one-off and portfolio deals in our market. But it is important to remain focused and disciplined on finding deals where we can drive value with assets versus simply hitting the bid on a marketed deal. From a cap rate perspective, early, we've seen cap rate compression, particularly over the last quarter, we've seen multiple deals for grocery-anchored assets into the low 5s and even into the mid-4s for certain assets. And we're clearly hearing inbounds from institutional investors who are telling us that they're seeing value in open-air shopping centers, particularly relative to some of the lower cap rate assets like industrial or multifamily, as Jim kind of mentioned, what's most interesting about the cap rate compression we're seeing is that it's really occurring across most open-air asset types. So we're seeing it in secondary markets, core markets and tertiary markets. And we're also importantly seeing significant capital formation around power center type assets, are seeing more liquidity there as well.

[Operator]

Our next question is from Katy McConnell with Citi.

[Katy McConnell, Citigroup]

So in the context of the improvement you saw in net effective rents this quarter and relative to premium levels. Can you talk about how lease negotiations are evolving as tenant pop improves? And would you expect to see further upside from here?

[Brian Finnegan, EVP and CRO]

Katy, this is Brian. The team has done a really nice job, as you pointed out, continuing to hold costs in line. We haven't seen a material uptick. And as Jim mentioned, we signed rents at the highest that we ever have across the portfolio. In terms of lease negotiations, tenants still want the best deal that they can get. That hasn't changed. We haven't seen a material shift, though, in terms of asking for new clauses or anything really different outside of what we had seen previously, except from our perspective, I think we're finding that tenants are much more flexible in terms of the type of uses that they're allowing us to bring into shopping centers. We talked to an anchor tenant recently who said to us, "Look, as I look at a Panera pad or a Starbucks pad, that's the type of customer that I -- that's the type of traffic that we want at the center." So we've been able to add that flexibility more in those leases and tenants are much more receptive to that, upfront than they would have been, say, 3 to 5 years ago. But other than that, we haven't seen a material shift in negotiations.

And you see it not only in net effective rents, but you see it in terms of the average embedded rent growth, you see it in terms of the average term. And we're real pleased with the breadth of demand, which obviously helps us drive those terms.

[Katy McConnell, Citigroup]

Okay. Great. And then can you provide some more color around the 50 basis points of GLA that you expect to make in the near term? And just to get a better sense for how build occupancy could trend from here, your updated thoughts on the rent commencement timing for the pipeline overall?

[Angela Aman, EVP and CFO]

Yes, Katy, this is Angela. I would say that number is a pretty consistent number and kind of represents just frictional vacancy in the portfolio based on retention level that's been pretty consistent over the last few years. So nothing really to note there.

In terms of the outlook for occupancy, obviously, we're very encouraged to see a sequential increase in not just the lease rate this quarter, but also the build rate. We've continued to commence a significant number of leases out of the signed but not commenced pool over the last several quarters, and you saw that really, really turn the build rate positive this quarter for the first time since the beginning of the pandemic. There's still areas of the tenancy we're watching, particularly those cash basis tenants that make up those collection shortfall today. But we're really encouraged with the growth we've seen in that part of the tenancy over the last quarter and are working very closely with them to return them to full rent paying and keep them in occupancy.

[Jim Taylor, CEO and President]

And you'll continue to see the benefit of that signed but not commenced coming into our numbers over the next couple of quarters, as Angela said in her prepared remarks, about half of it will commence this year, balance over the succeeding quarters. And then importantly, behind that is what we have in our legal pipeline, which is another $40-plus million of deals with great tenants that we're excited about, not only the quality of that tenancy, but also the additional reinvestment projects that they will lead to accretive reinvestments beyond the $430-plus million that we have underway today.

[Operator]

Our next question is from Todd Thomas with Keybanc Capital Markets.

[Todd Thomas, KeyBanc Capital Markets]

I just wanted to follow up a little bit on the leasing environment. Jim, you discussed the rent for new anchor lease deals in the quarter, about 44% above expiring rents over the next few years, I think you said and also mentioned the portfolio's health ratio of 1.5% for grocers. You're at roughly 20% new lease spreads now for 3 quarters in a row, which is pretty solid at this point in the recovery. You were above 30% for many quarters prior to the pandemic. So I'm just wondering 40%, is that achievable over the next several quarters as we move forward, just given the shop rent and anchor rents that you're achieving?

[Jim Taylor, CEO and President]

It's a great question. That 44% represents the spread over what we've signed from a new deal perspective, not just this quarter, but over the trailing 12 months versus what we have coming due over the next 3 years. And it is 44% on a cash basis. Obviously, that's the anchor piece of our forward pipeline, and we'll have some small shop rollover too, but we think we have some good spreads there. And we believe that we'll be in a position to continue to realize and harvest that mark-to-market over the next several years.

[Brian Finnegan, EVP and CRO]

Yes. And Todd, I would just comment on the comparison you made of the 20% versus 30% previously. We have had a higher percentage this year of small shop leases. So that comp basis is going to be much higher than what we saw previously. And we're signing leases like we had said earlier, at the highest rents that we ever have. So we're really pleased with what the team has done there. We also, from an anchor perspective, this is the most anchored deals we signed this quarter tied for the most since the start of the pandemic. And as we look at the anchor pipeline, we feel really good about the depth of the tenancy there, particularly in the Grocery segment. We signed 11 grocery deals since the start of last year. We've got another 21 in the pipeline across the ethnic, traditional, specialty categories. And if you look at that pipeline, if we were to -- when we sign all those, we'll take our percent of grocer ABR from around 70% to 77%. So we feel really good overall about the depth of the tenancy in the anchor space, but particularly in that grocery segment.

[Todd Thomas, KeyBanc Capital Markets]

Okay. And then I think there was a comment -- I think, Jim, you may have made a comment around the lease negotiations and how those discussions are strengthening around the average embedded rent growth that you're achieving in new leases. What is that like on new lease deals that you're signing today? And how does that compare to the average annual escalators or the escalators that are embedded in the portfolio overall today?

[Jim Taylor, CEO and President]

Yes. We're still achieving close to 2% on new deals, which compares to a portfolio that's in the low 1% range and climbing every quarter that we put new leases into the pool. So we've been real pleased with that. And obviously, we're getting higher annual bumps in the small shop leasing, which is another thing we're excited about as we continue our momentum there.

[Operator]

Our next question is from Alexander Goldfarb with Piper Sandler.

[Alexander Goldfarb, Piper Sandler]

So 2 questions. First, Angela, as you guys get paid back on rent, obviously, a great thing for people to make up what's in arrears. How is it going relative to your original underwriting? So last year, you guys assessed the portfolio, you took reserves against tenants who you thought would be questionable. There were others who you thought would be money good. In general, how do you think that underwriting is going so far? Is it pretty much on plan? Or are you better than you thought? Or maybe there are some tenants that surprised?

[Angela Aman, EVP and CFO]

Well, look, I think we've been very encouraged over the last several quarters by the extent to which we've seen recoveries of previously reserved amounts. I would say the new lease guidance really requires you to look at tenants kind of holistically and not reserve just specific balances, but look at the broader context of the tenant and what might happen over the duration of the lease term. So the exercise is a little bit different than I think the way you laid it out. But nonetheless, as we did move a significant number of tenants to cash basis last year, and I mentioned in my remarks, we have 15% of our ABR on a cash basis at this point, we've been really very pleased with the recovery we've seen in those tenants, particularly over the last quarter with collections from cash basis tenants now reaching just under 80%.

[Alexander Goldfarb, Piper Sandler]

Okay. And then the second question is for Jim. Jim, a number of years ago when you took over as CEO, you mentioned the sort of commitment as a public company to grow cash flows grow the dividend. And then obviously, you guys went through an asset transformation, portfolio overhaul, and then we had COVID. Now that things are back on track, now that especially the new win that retail has gotten the newfound respect tenant demand, et cetera. As you sit and look at the portfolio overall and the company overall, do you feel like you can return to that mantra of delivering consistent earnings cash flow growth year in, year out? Or -- are there still either it's legacy COVID issues that you need to resolve or maybe at some portfolio tweaks or something like that, that you still want to achieve before you feel comfortable to return to that original comment that you made when you joined a number of years ago?

[Jim Taylor, CEO and President]

I think we're really well positioned for growth, Alex, on really all fronts. And look at our underlying cash flows, you're seeing those grow significantly as well. I think we cash flow better than many in the sector. And I think that has to do a lot with our operating discipline, our discipline with capital. And I think we've done all the necessary predicate steps to harvest those assets that have lower growth potential and really position ourselves for sustainable growth. Obviously, the pandemic through everybody a curve ball. And we -- I think we're appropriately cautious with our capital during that, but we sit today with tremendous liquidity and enhanced and strengthened balance sheet. And I think really all the levers we need, whether it's rent basis, continued strength in leasing, actual deliveries of our reinvestment and, of course, the potential for accretive external growth opportunities to deliver, I think, on what the promise and opportunity of this company is.

[Alexander Goldfarb, Piper Sandler]

Okay. So basically, any redevelopments that you undertake or anything like that, none of that would really be materially disruptive to your ability to grow and grow cash flows, correct?

[Jim Taylor, CEO and President]

Absolutely. That's the beauty -- I appreciate that question. That's the beauty of the granularity and short duration of our reinvestment pipeline. We did have, as we highlighted, gosh, at our Investor Day in 2017, a ramp-up, but we also began delivering on time in 2019 on a more steady-state basis, those reinvestment deliveries, which are at very attractive yields. They're granular. The average duration of one of our projects is probably 6 to 8 quarters. So you see that coming in every quarter. And I just, again, invite you to look at what we're delivering. As I mentioned in my remarks, this quarter, we delivered $20 million, which doesn't sound like a lot, but that was in an 18% incremental return, as I highlighted in my remarks, that's over $200 million of ground-up development value creation.

So as we continue to deliver close to $200 million out of [TAM] this year with another $250 million underway today with more projects coming into the pipeline, we're at a nice run rate, Alex, of taking assets down for reinvestment and delivering so that, that allows us to continue to grow rather than saying, "Hey, wait a minute, let us ramp all this stuff up and then we'll deliver." We're delivering now.

[Operator]

Our next question is from Juan Sanabria with BMO Capital Markets.

[Juan Sanabria, BMO Capital Markets]

Just to start a numeric question on guidance, the implied second half quarterly FFO run rate is a bit lower than the second quarter number ex the kind of the one-times you called out in the press release, which is about $0.01. So just hoping you could give us some of the piece parts to get us to that midpoint of the implied second half guidance? Or if you could comment on maybe some elements of conservatism that are built into the numbers?

[Angela Aman, EVP and CFO]

Sure. I'm happy to answer that. The $0.01, I think, you're referring to is the total amount of bad debt we recognized in the quarter. which was positive $2 million, which is about $0.01. I called out in my prepared remarks within that $2 million positive number was actually around $10 million of benefit from prior period recoveries, which is actually $0.03 to $0.04. On top of that, we did have about $0.01 of lease termination income recognized during the quarter as well. That is really setting up 2 different strategic remerchandising plays across the portfolio. So those were the main factors that sort of provide the variance from the $0.46 of FFO recognized during the quarter, so the run rate implied in guidance for the next 2 quarters. As I mentioned, in my conversation about guidance, we don't include really, especially at the low end of the range, any recoveries of previously reserved amounts in that number.

[Juan Sanabria, BMO Capital Markets]

Great. And then for the small shop occupancy, so you're just a tick below 85% as of the end of the second quarter. Where do you think that can get to in -- I think the pre-pandemic level was 86%. Do you see that as kind of the high watermark? Or do you think you can get higher than that based on the demand you're seeing? And any sense of the time line to get there?

[Jim Taylor, CEO and President]

It's a great question. We actually see potential above where we were pre pandemic, in part because of what we're doing with the portfolio, the better operations, the reinvestment. So we expect to be a few hundred basis points above where we were at the peak prior to the pandemic, high 80% range, maybe 90%. And we'll get there, not this year, but we'll get there over the next few years as we deliver these reinvestments, and we lease-up around the strength of the new anchors.

[Operator]

Our next question is from Caitlin Burrows with Goldman Sachs.

[Caitlin Burrows, Goldman Sachs]

Jim, I think you've talked before about how creating competition for space and how that supports higher rent. So I was wondering if you could give more of your latest views on just that leasing demand and to what extent you are able to create this competition for space at various centers?

[Jim Taylor, CEO and President]

Yes. I'll have Brian comment a little bit here. But what we're really encouraged by is the breadth of demand from both our core tenancy as well as new to the portfolio type tenants, really in all space categories, so that it does put us in a position to generate competition and deliver the results that we have been.

[Brian Finnegan, EVP and CRO]

Yes. Caitlin, I would just add, if you look at the tenants who we signed leases with this quarter within that core tenancy, we signed leases with Burlington, Ulta, Chipotle, Starbucks, all tenants that we signed multiple leases with this year and then some new tenants to the portfolio, like -- or with our first deal with Dollar General's pop shelf. And a mix of these new entrants as well as the strength of our core categories is driving that competition for space. And you can really see that in the rents we were able to achieve this quarter, again, the highest rents that we've ever signed. The rents in our pipeline are the highest that we've ever had. And we're getting that through competition that we're driving for space, whether that's in the anchor or the small shop space. So our team has done a really nice job of both creating that competition for tenants that are looking for infill locations as well as those that are looking into new markets and have large open to buys for next year. So we've been really pleased with how our team has been capitalizing on the demand and creating that competition to drive the highest rate.

[Caitlin Burrows, Goldman Sachs]

Got it. And then maybe just on the acquisition side. I was wondering if you could give some of the details on what made the Champlin Marketplace, an attractive acquisition? And more broadly, Jim, I think it was you earlier in the commentary, talked about how you think there are acquisitions to be made, but it's -- you got to pick exactly the right one. So just wondering if you can give some more commentary on kind of what that opportunity is? And how Brixmor can differentiate when there is so much capital that's interested in shopping centers?

[Jim Taylor, CEO and President]

Yes. I think our big competitive advantage is the platform that we have and scale and the relationship that we have with tenants, particularly our national account tenants to understand where they're likely to open new stores, relocate existing stores or even closed stores. And those insights, along with the relationships help us, I think, more actively evaluate the potential of acquisitions. And we're focused on acquisitions that are in our existing markets like Minneapolis and Champlin where we see great upside in the rents, particularly in the small shop rents in that center with a little bit better operations and focus or what we saw in Bonita Springs with anchor box rents well below market. We believe we're in a unique position to kind of assess those opportunities to add value through better leasing, better operations and reinvestment and drive returns. And I'll let Mark comment, but we're real pleased with the volume of product that we're beginning to see come to the market. Not all of it's going to be a fit for us because some of it may have more risk of downside than upside. But within that volume of deals that we're underwriting, we think we'll find great places to pick our spots.

[Mark Horgan, EVP and CIO]

Yes. What I would add is that it all comes back to the strategy we've been following for 5 years. We've been building a target asset list. We know the markets where we can drive value. And those are the assets we will lean into to try to want really want to find those assets where we can drive value with the platform. And that's why we spend a lot of time in the market looking for assets where we see under management or we see reinvestment opportunities and really try to drive towards those ones like of Bonita Springs or like a Champlin that we just closed on.

[Jim Taylor, CEO and President]

We really take, Caitlin, the approach of trying to be a value-added investor. We believe that, that's where our strength is.

[Operator]

Our next question is from Ki Bin Kim with Truist Securities.

[Ki Bin Kim, Truist Securities]

Just a couple of questions on your redevelopment pipeline. First, a simple one, what is the percent leased or pre-leased?

[Jim Taylor, CEO and President]

It's well over 85%. I don't have the exact number, but we'll get that for you.

[Ki Bin Kim, Truist Securities]

Okay. I mean that's a very strong positive. I mean it's pretty much derisked.

[Jim Taylor, CEO and President]

Yes. And it's pretty granular, Ki Bin, as you can tell. We're not taking a lot of speculative risk here.

[Angela Aman, EVP and CFO]

Yes. Ki Bin, I would just add that things don't really get added to the in-process pipeline or reported externally until we have. The anchor is kind of committed and signed up, which is what drives that number high. I think we're actually kind of around -- right around 90%, maybe a touch over from a lease perspective at this point.

[Ki Bin Kim, Truist Securities]

Okay. And in your supplemental, you show your shadow pipeline of about 30 projects. I'm just curious, high level, like how has your confidence level changed over the past year on these projects? And how viable they can be near term?

[Jim Taylor, CEO and President]

It's increased and -- it's really increased in 2 ways. First of all, we're seeing more and more robust demand for many of those deals in our shadow pipeline from a lot of our core tenant categories as well as some of the new categories that Brian mentioned, which are allowing us to increasingly pull some of those projects into the active. And you can see it when you look at it quarter-over-quarter. But the other interesting thing has been how this disruption has allowed us to get after more opportunity earlier than we otherwise might have thought where we, for example, how did [gym] go bankrupt in Long Island, and we were able to replace that with a great compelling specialty grocer. That was not a transaction that was in our forward pipeline, but something more importantly, that we opportunistically were able to capitalize on. And I'm really -- I'm really encouraged not only by what we're identifying as our shadow pipeline, but by how we're responding and creating value to this disruption. And really bringing in better tenants that allow us to then accretively reinvest and allow us to drive great follow-on growth through small shop leasing.

[Ki Bin Kim, Truist Securities]

And just roughly, like what does the shadow pipeline represent in terms of investable dollars?

[Jim Taylor, CEO and President]

It's over $1 billion.

[Operator]

Our next question is with Greg McGinniss with Scotiabank.

[Greg McGinniss, Scotiabank]

So our analysis of the tenant watch list, it appears to be much improved compared to the last few years with weaker tenants washing out, others are able to refinance debt or experience financial benefit from essential retailer status. Just curious what your current view is on your watch list or the ABR exposure to higher-risk tenants today? And how local tenants, especially on the personal services side fit into that framework?

[Angela Aman, EVP and CFO]

Yes. I would start with just some comments on the national tenant landscape, where I would say we very much agree with kind of how you framed it up and laid it out. We had tenants on our watch list pre-pandemic that have really benefited from some tailwinds during the pandemic, either operationally from a sales perspective, some of which have been able to raise capital and really recapitalized during this period of time as well. So there have been some really, I think, positive developments with respect to our larger national tenants. When you look at kind of the collection data we provide, as you point out, other personal services and restaurants are 2 of really the 3 categories that still continue to slightly lag the rest of the portfolio. Those are very granular tenant bases in both of those categories. And our kind of guiding principle throughout the pandemic has been to get as many tenants as possible to the other side and really work with good operators to make sure that they're able to kind of benefit from the recovery as well. And that continues to be how we're approaching a lot of that tenancy.

Our leasing teams, our collections team have done a fantastic job in terms of staying in touch with those tenants really understanding at a granular level what their specific challenges are. And I think they've done a great job of working with them through this period of time to get them to the other side. And we're encouraged that, that last segment of tenancy will revert to cash payments over the next couple of quarters.

[Jim Taylor, CEO and President]

Yes. And I might just highlight there, particularly relative to an earlier question, we've been very pleasantly surprised by the progress on the watch list in terms of tenants that we were previously concerned about, as Angela stated recapitalizing, being better sales, better improvement. So it's a very encouraging trend that we continue to see.

[Greg McGinniss, Scotiabank]

Okay. Great. Second question here, it seems like there's the potential for a fairly remarkable portfolio evolution by signing those grocery leases and maybe hitting that 77% exposure. I'm just curious what spaces those grocers are taking or backfilling in the centers? And then to what level you could see further expansion of grocery exposure in the portfolio?

[Jim Taylor, CEO and President]

I really appreciate the question because I think it highlights something that we've been doing for a number of years, which is transforming the assets. It's been a very granular execution, space by space, center by center. You see it working its way through our reinvestment pipeline. You can track all that we're doing. And you can see it at the centers themselves, and we're really pleased with how they're responding. These grocers are backfilling gyms, are backfilling portions of larger boxes. In some cases, they're taking over entire boxes. It really runs the gamut. But in the process of putting in a grocery use and as Brian alluded to in his remarks, pro forma will be closing in on 80%. It's a use that we're able to draw more energy around, draw more traffic. But we're seeing that not just in the Grocery segment, but in all the other segments that we're doing these anchor repositioning deals with. So it is a transformation of the portfolio. It is happening. And it's happening across hundreds of our assets, not just a couple.

[Operator]

Our next question is from Derek Johnston with Deutsche Bank.

[Derek Johnston, Deutsche Bank]

Yes, most of my questions were answered, but it’s certainly nice to say hi. Hey, how many big box vacancies do you still have in the portfolio?

[Jim Taylor, CEO and President]

Derek, it's over -- about over 100 that we would have. I think big prospect continues across the portfolio right now, the exact number, but that's about where it's trending.

[Derek Johnston, Deutsche Bank]

Okay. And just sticking on anchors, I guess. How do you feel about the oversaturation of off-price retailing? Certainly seems to be one of the healthiest segments so far. But from a merch mix perspective, any new categories you'd like, not grocers or you're liking right now to keep centers fresh? Any newness to sort of call out?

[Jim Taylor, CEO and President]

Yes. I mean really almost in every segment, including value. What's interesting over the last couple of years is I think what a number of retailers have recognized is the value of having an open-air format near where the consumer lives. Brian alluded to it in the small shop space, where we see a lot of QSR restaurants coming out of more urban markets and into suburban assets. You're seeing it in value as you're seeing some interesting new concepts. You're seeing it in grocery. But the kind of unifying theme is particularly with these multichannel distribution models is get close to the customer, and that's something that our shopping centers offer retailers from a key advantage standpoint.

[Brian Finnegan, EVP and CRO]

What's exciting about the off-price category is there continues to be share for those operators to take is there's department store closures across the country, that apparel spend is going to these off-price operators. They continue to carry better brands within their stores. Their stores continue to evolve in terms of the size of the prototype. And there are certainly new markets with some of these off-price operators are not in yet to create more competition. And you have -- and the best thing about them is the treasure hunt aspect of the off-price category where you can put a number of operators together in the same shopping center and their sales are going to get better. So we continue to see growth in the segment. They're driving a ton of traffic to our shopping centers, and they've been great retail partners for us as we continue to reinvest in our assets.

[Operator]

Our next question is from Floris Van Dijkum with Compass Point.

[Floris Van Dijkum, Compass Point]

I apologize for everybody else on the call. But if [UVA] were a nation, it would be, I think, 16th in the Olympics in the metal counts? Just though I would highlight it.

[Jim Taylor, CEO and President]

Who's keeping track? Who's keeping?

[Floris Van Dijkum, Compass Point]

Right. Exactly, exactly. So I just wanted to follow up on the -- your investments, and you've taken a differentiated approach. You're not buying another company. You are investing in your own portfolio. The little video you guys put together on marine, I thought was quite sharp. But a lot of questions have sort of touched upon this, but it would be great if you guys -- you have a lot of data because you spent close to $1 billion already in your 5-year history on assets in your portfolio during that period. If you could give us an example or a more granular data in terms of the increase that you've seen on that capital invested in your small shop occupancy in those centers. Also what has happened to your same-store NOI in those centers that you have touched relative to your own portfolio, how they performed presumable they've done better? And also, in your view, what has happened to cap rates? And how much of a cap rate compression do you think you've been able to achieve? And you can presumably cite some of the assets that you sold relative to where you carried them at before as well. If you could sort of -- I think it would be really useful for investors to get a better sense of that simply to -- because you've got another $1 billion in the pipeline as you rightly point out. So obviously, past performance might not be predictor of the future, but certainly, it would help.

[Jim Taylor, CEO and President]

Floris, I think it's a great point, and we need to continue to shed light on all the value that's being created at the assets. I would tell you, it's reflected in our bottom line results. And the reinvestment activity that we've been generating is a significant contributor to our sector-leading same-store performance, both going into the pandemic. And then check it out, stack what the impact was in the pandemic and then just see how we're positioned coming out. We really stand apart and that has been driven in large measure by our disciplined use of capital. We're driving occupancy gains in the assets that we focus as we've alluded to in the past, and we can continue to provide this data of several hundred basis points. We're driving record rents, right? And you can see that in our rents each and every quarter, and that is a direct consequence of the reinvestments and the better operations that we're bringing to these centers.

And then also, as we've talked about on prior calls, it's not just the high single, low double-digit incremental returns that we're driving, and we give you all the projects in the supplement. It is, as you highlighted, the impact on cap rates for the assets that have been impacted. And oftentimes, that can be 100-, 200-plus basis point compression in cap rate. So appreciate the thoughts and we'll continue to focus on ways to better highlight what's happening. And admittedly, what is a pretty granular execution. We can't point to a single massive project and say, look, at all this value we're creating. We're creating it across a couple of hundred, everything from an outparcel to a complete redevelopment of a shopping center. So really appreciate the thoughts. And we are trying to show you along the way every quarter, what we're delivering, the yields that we're getting. And through the activity itself, you can see how we're improving the centers.

[Floris Van Dijkum, Compass Point]

And maybe a further question in terms of your view on cap rates in the markets, the -- obviously, there's been some bigger transactions recently in the private markets as well. And then what that means for your own portfolio?

[Jim Taylor, CEO and President]

Mark?

[Mark Horgan, EVP and CIO]

As far as cap rates, I think the easiest way to look at it is that over the past, I'd say, a quarter, 4 months, we've probably seen a 50 basis points, 75 basis point compression in cap rates. And I think that's really across asset types in the open-air sector. So when you look at -- I think our portfolio would be pretty similar, in fact, over the last couple of quarters.

[Operator]

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back over to Stacy Slater for closing remarks.

[Stacy Slater, SVP, IR and Capital Markets]

Thanks, everyone, for joining us today.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.