Brixmor Property Group Inc

NYSE:BRX

Earnings Call Analysis

Increased Guidance on NOI Growth and FFO

The company has raised its 2023 guidance for same property Net Operating Income (NOI) growth to 3.5%-4%, a boost of 75 basis points at the midpoint, attributed to robust rent commencements and minimal tenant bankruptcies. Expected revenues deemed uncollectible have been adjusted down to 40-60 basis points from a previous estimate of 75-85 basis points of same property total revenues. Additionally, the projected 2023 NAREIT Funds From Operations (FFO) is now expected to be $2.02-$2.04 per diluted share.

Strong Leasing and Financial Outlook

The company has reported an impressive increase in their signed but not yet commenced leases, totaling 2.8 million square feet. This accrues to a significant $62 million of annualized base rent, reflecting a robust leasing activity that surpassed rent commencements. The expectation is for $13 million of leases to commence in Q4 and $36 million across 2024. Anchoring the financial outlook, 2023 same property NOI growth guidance has been revised upwards to 3.5% - 4%, attributed to robust rent commencements, minimal tenant bankruptcies, and substantial bad debt settlements. Furthermore, expected revenues deemed uncollectible have been reduced to 40-60 basis points, outperforming previous estimates and historical averages. The 2023 NAREIT FFO guidance has been updated to $2.02 - $2.04 per diluted share, presenting a positive development for current and potential investors.

Tenant and Space Reclamation Progress

The company is experiencing strong demand for spaces previously occupied by bankrupt tenants, especially Bed Bath & Beyond locations. Most re-lettings are single-tenant and are aligned with the company's historical cost structures. The net effective rents have hit a record at over $20 per foot, and the company's robust anchor leasing strategy has mitigated the impact of bankrupt gross leasable area (GLA). The reclamation of Rite Aid locations has been proactive, with most already allocated to new tenants expected to generate over 30% mark-to-market upside. Overall, Rite Aid's exposure is minimal, assuring investors of the company's effective risk management and asset value maximization.

Investment Criteria and Market Dynamics

The company is discerning in its investment choices, aiming for high single to low double-digit unlevered internal rate of return (IRR), factoring in conservative growth and reversion assumptions. This prudent approach ensures resilience against market fluctuations and underscores the company's commitment to long-term value creation. Observations in the market indicate price adjustments in reaction to shifts in the cost of capital, particularly for larger deals. The company believes that it is well-positioned to capitalize on any potential market dislocations that may arise【Search still in progress for exact quote】.

Retailer Demand Remains Strong Amid Economic Uncertainties

Despite potential economic disruptions, the company has not observed any downturn in demand from retailers, who continue to make lease commitments extending into 2025 and beyond. Retailers are increasingly leveraging data to inform their store opening strategies and assess potential market cannibalization, which bodes well for the company's leasing prospects. This sustained demand amidst a limited supply landscape enables the company to maintain a competitive edge and leverage opportunities arising from the scarcity of available retail spaces.

Earnings Call Transcript 2023-Q3

[Operator]

Greetings, and welcome to the Brixmor Property Group Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Stacy Staler, Senior Vice President of Investor Relations and Capital Markets. Thank you. You may begin.

[Stacy Slater, executive]

Thank you, operator, and thank you all for joining Brixmor's third quarter conference call. With me on the call today are Jim Taylor, Chief Executive Officer; Angela Aman, President and Chief Financial Officer; and Brian Finnegan, Senior Executive Vice President and Chief Operating Officer; Mark Horgan, Executive Vice President and Chief Investment Officer, will also 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 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 1 or 2 per person. If you have additional questions regarding the quarter, please requeue.

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

[James Taylor, executive]

Thanks, Stacy, and good morning, everyone. I'm very pleased to report another quarter of outperformance across every front. It's a quarter that once again demonstrates the cumulative momentum of our transformative value-added plan. The compelling returns and growth and cash flows that plan continues to produce. The outsized demand from vibrant retailers to be in our transformed centers and most importantly, the strength of our team.

As always, that outperformance begins with leasing, where we signed over 780,000 feet of new leases at an average comparable spread of 52.7%, a post-IPO record for this company and likely once again well above the sector. Importantly, as Brian will discuss further, we signed these new leases with tenants like Trader Joe's, Lululemon, Ulta and other leading retailers that demand to be in our well-located portfolio. Recent bankruptcies of weaker retailers have proven to be opportunities for us to bring in better tenants at better rents. As demonstrated by the spreads and rapid progress on leasing recaptured space.

The strength of proven tenant demand to be in center, while this does not only drive better intrinsic lease terms but also additional flexibility to drive even more value through reinvestment. As we renewed existing tenants and signed up new tenants at higher rents, we drove our average in-place ABR to $16.77 a foot, another record for the company, but one which leaves us plenty of room to continue to run. As we often say, rent basis matters if you want to drive growth in ROI and create value, particularly in a rising rate environment.

Our small shop results this quarter also demonstrate the cumulative impact of our portfolio transformation as our small shop occupancy grew to a record 89.8% at an average rent achieved on new and renewal leases of $29.12. Given the momentum from reinvestments underway, we have great visibility on growing small shop occupancy into the low 90s as we deliver those projects, which will have an outsized impact on our forward growth and cash flow.

From an operations standpoint, we commenced another $13 million of new ABR during the quarter, well ahead of our expectations as high and our regional teams work to get rents commenced earlier. We grew our NOI margin to 74.4% and achieved same-store NOI growth of 4.8%. For the year, as Angela will detail in a moment, we now expect to deliver same-store growth of 3.5% to 4%, despite year-over-year headwinds of declining prior period rent collections. In addition, we've raised our FFO outlook to $2.03 at the midpoint and have raised our dividend by 4.8%, all while maintaining a conservative payout ratio.

Looking forward into '24 and beyond, we expect continued NOI outperformance even as we expect tenant disruption to continue at more normalized levels. Our confidence and visibility are driven by our cumulative leasing activity, which drove our signed but not commenced pipeline to a record $62 million of ABR that will commence over the next several quarters as well as our robust forward leasing pipeline.

From a reinvestment perspective, Bill and team continue to deliver transformative projects at very attractive returns even in a higher rate environment. This year, we expect to exceed $160 million of reinvestment deliveries at a 9% incremental return. From an external growth perspective, Mark and team have widely been on hold the past several quarters as cap rates have begun to adjust to reflect the higher rate environment, particularly for larger opportunities.

Importantly, we've continued to hold capital recycled from dispositions as we expect opportunities will soon begin to hurdle our higher return expectations as private owners and operators face near-term maturities and other capital events. Of course, given the high level of growth we have embedded in the assets we own and control today, we can remain patient.

In summary, we are pleased with how our disciplined value-added execution continues to deliver. We are proud of how our results this quarter once again demonstrate not only our outperformance across every observable metric, but also our fundamental portfolio transformation. And we are excited by our unparalleled visibility on continued growth and outperformance in the future.

Before turning the call over, allow me to congratulate Angela and Brian on their well-deserved promotions, demonstrating the amazing depth that talent Brixmor enjoys as well as our commitment to growing our talent. With that, I'll turn the call over to Brian for a more detailed discussion of our leasing results. Brian?

[Brian Finnegan, executive]

Thanks, Jim, and good morning, everyone. As our results demonstrate during the quarter, our team continues to capitalize on a favorable retail leasing environment, attracting great tenants to our portfolio while quickly addressing recently recaptured bankrupt tenant space at much higher rents.

During the quarter, we executed on 368 new and renewal leases totaling 1.7 million square feet, including our most productive quarterly new leasing output of the year. The depth of demand was evident in the tenants we added to the portfolio during the quarter, with new leases executed with the likes of Trader Joe's, BJ's Wholesale Club, TJX, Ross Dress for Less, Burlington, Barnes & Noble, Five Below, Ulta and Lululemon.

In addition, our team is adding great restaurant tenants that are focused on growing their suburban footprint. As demonstrated by the first portfolio leases we added during the quarter with Cava, Torchy's Tacos and Urban Plates. This activity led to a 40 basis point sequential increase in small shop occupancy, our 11th consecutive quarter of sequential small shop occupancy growth, achieving another record of 89.8%, with more room to run as we continue to deliver our accretive reinvestments. And while we did see a drop in overall leased occupancy of 20 basis points to 93.9%, our robust leasing activity during the quarter offset a significant portion of the 70 basis points of occupancy drag we had from the recapture of the remaining Bed Bath, Tuesday Morning, David's Bridal and Christmas Tree Shop locations.

Our team is quickly addressing these spaces with better tenants at higher rents as our company record new lease spreads of 53% included a 76% increase on recaptured 2023 bankrupt tenant space. As Jim highlighted, our results demonstrate that this retailer disruption is creating an excellent opportunity to upgrade our tenancy, capture the embedded upside in the below-market rents of these leases and free up compelling opportunities for additional reinvestment. We expect the bulk of the income from these new tenants to start to come online in late 2024 and be fully realized in 2025.

Looking forward, we remain confident in the underlying fundamentals of our business plan to drive continued growth. Our centers are located where retailers want to be. New supply in our markets remains almost nonexistent, and we continue to add great tenants to our forward leasing pipeline as retailers are recognizing the success our team has had in completely transforming this portfolio.

With that, I'll hand the call over to Angela for a more detailed review of our financial results. Angela?

[Angela Aman, executive]

Thanks, Brian, and good morning. I'm pleased to report another quarter of strong execution and an improved forward outlook as we leverage our ongoing portfolio transformation to capitalize on the robust retailer demand environment.

NAREIT FFO was $0.50 per diluted share in the third quarter, driven by same-property NOI growth of 4.8%. Base rent growth contributed 400 basis points to same-property NOI growth this quarter despite a drag of approximately 120 basis points related to recent tenant bankruptcies. Net expense reimbursements, ancillary and other income and percentage rents contributed 70 basis points on a combined basis. While revenues deemed uncollectible contributed 10 basis points this quarter, primarily due to two large settlements received during the period, totaling approximately $1 million.

As Jim highlighted, our signed but not yet commenced pool now total 2.8 million square feet at a record $62 million of annualized base rent. The increase in the size of the pool this quarter was primarily due to exceptionally strong leasing activity, which added approximately $18 million of new leases to the pool, well outpacing significant rent commencements during the quarter of approximately $13 million. We now expect another $13 million of leases to commence in the fourth quarter of this year, and $36 million to commence during 2024, slightly weighted towards the first half of the year.

In terms of our forward outlook, we have increased our 2023 guidance for same-property NOI growth to a range of 3.5% to 4%, a 75-basis-point increase at the midpoint. The improved outlook has been driven by strong rent commencements, minimal additional tenant bankruptcy in the third and early fourth quarters, and the significant bad debt settlements that occurred during the period. We now expect revenues deemed uncollectible to represent 40 to 60 basis points of same-property total revenues for the full year versus the prior range of 75 to 85 basis points.

We've also increased our guidance for 2023 NAREIT FFO to a range of $2.02 to $2.04 per diluted share, reflecting the change in same-property NOI growth guidance and revised assumptions across a variety of other line items, including noncash GAAP rental adjustments.

Looking forward, we're encouraged by the magnitude of the signed but not yet commenced pool, which is $62 million is $9 million or 17% larger than it was at the same time last year. And we expect that $49 million or nearly 80% of the total pool will commence over the next 5 quarters, providing a very strong foundation for growth. And this -- that filed for bankruptcy in late 2022 and throughout 2023, are expected to attract just over 100 basis points of same-property NOI growth this year.

Given our progress in re-leasing recaptured space, as Brian highlighted, we expect that space impacted by 2023 bankruptcy activity will detract approximately 50 basis points from growth in 2024. We will establish our expectations around anticipated 2024 bankruptcy activity when we provide guidance in February.

As noted earlier, our 2023 guidance for revenues deemed uncollectible is now 40 to 60 basis points of total revenue versus our long-term historical run rate of 75 to 110 basis points. As a result, we do anticipate that revenues deemed uncollectible will likely be a negative contributor to growth next year as we continue to return to our historical run rate.

Our fully unencumbered balance sheet remains well positioned to support our balanced business plan, with debt-to-EBITDA of 6.1x and total liquidity of $1.3 billion. We're pleased with our proactive efforts over the last several years to extend the duration of our balance sheet have resulted in a well-laddered debt maturity schedule with only $300 million of debt maturing through year-end 2024. In addition, as previously disclosed, $300 million of interest rate swaps, related to a portion of our term loan debt, will expire in late July 2024. As always, we'll be opportunistic that given expectations that higher rates will persist through next year, we do anticipate that these items will have a meaningful impact from 2024 interest expense.

Although the macro environment is likely to remain extremely dynamic, the success of our value-enhancing reinvestment efforts at compelling returns, even in a higher rate environment, our outsized leasing productivity over the last several quarters and our strong forward leasing pipeline have put Brixmor in a strong position to navigate the months ahead, and we look forward to continuing to share details of our ongoing portfolio transformation with you.

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

[Operator]

[Operator Instructions] First question comes from Dori Kesten with Wells Fargo.

[Dori Kesten, analyst]

On your new and renewal lease spreads, are there certain markets where you've been surprised to the upside of late. Or would you more broadly say you're benefiting from a general strong leasing environment?

[Brian Finnegan, executive]

Dori, this is Brian. What's been really encouraging for us is this is incredibly broad based, whether that's within anchor, small shops, or regions across the country. And we particularly saw that with our bankrupt space during the quarter. We're driving strong renewal growth across the portfolio as well. And as we continue to invest in our centers, retailers are certainly recognizing it. They're recognizing the anchors that we put in, which are driving a significant amount of traffic. And the competition for space is really allowing us to drive rate higher. So we've been encouraged that the trend has been fairly broad-based.

[Dori Kesten, analyst]

Okay. And I'm wondering, what are your expectations for this holiday season? And if you think that there could be any sort of shift in the strength of the leasing environment looking into '24 kind of based on that?

[Brian Finnegan, executive]

Yes, it's a good question. The consumer remains incredibly resilient. I think you've heard Walmart talked about their expectations being strong for holiday. Retail spending was again up year-over-year. So we remain very encouraged. But thinking about retailer store opening plans, I mean they're planning for 2024 at our ICSC meetings in 2023. We're talking to them about 2025 deals today. So our leasing pipeline is not dependent on how holiday goes. Certainly, it's something that retailers are focused on. But as we think about the pipeline, we've been encouraged just broadly, and we don't expect a major impact from what we're seeing from a Christmas holiday season.

[James Taylor, executive]

And I would just add that, that has proven to be very durable demand given that the store is a profitable channel for these retailers, and they see white space for them to continue to grow their footprint. So we've been very encouraged.

[Operator]

Next question, Todd Thomas with KeyBanc Capital Markets.

[Todd Thomas, analyst]

Jim, I just wanted to touch on investments. I think last quarter, you talked about seeing some investment opportunities beginning to surface maybe deals that were on the market coming back at more favorable pricing. And since last quarter, the 10-year is up quite a bit. So borrowing costs are up. Has there been any further change in sellers' willingness to accept either lower prices today? Are there more price adjustments required before we start to see the company begin to get a little bit more opportunistic with regard to investments. And are you raising your return hurdles further for new acquisitions?

[James Taylor, executive]

Yes. I mean clearly, it's a higher cost of capital environment. So we have a higher hurdle as we evaluate external growth opportunities. And look, as I mentioned, what I find particularly compelling about our strategy is that we can drive top of the sector growth without relying on external growth. With that said, I think we're still seeing the market adjust to what's happened with rates. You've seen several deals get pulled as sellers have not been able to achieve expected pricing. And in the background, you have coming debt maturities and capital requirements that we think are going to bring folks to the table. So we're encouraged by some of what we see from an opportunity perspective, but we're patient.

[Todd Thomas, analyst]

Okay. And you've recycled capital over the years and sort of pruned the portfolio over time. Is there an opportunity at all to maybe accelerate dispositions today if there's sort of an opportunity to take advantage of somewhat favorable pricing on a one-off basis for assets in the market today?

[James Taylor, executive]

Well, we continue to prune the portfolio as we fix the assets and stabilize them to maximize value. We've sold over $2.5 billion over the last few years, and we've done it one asset at a time, which is harder to execute, but we think much, much more value accretive given the pricing and execution you get on single asset and sometimes partial asset transactions versus large portfolios. So having sold a substantial part of what we consider to be noncore, there's some that remains, but it's relatively modest in the context of our overall portfolio, and we'll be opportunistic and harvesting that value as we've maximized it.

[Operator]

Next question, Greg McGinniss with Scotiabank.

[Greg McGinniss, analyst]

Could you just talk about Bed Bath and anchor leasing in general, whether these are all direct backfills or the types of tenants, how much is left to work through from the bankruptcies or is in progress? And finally, the level of TIs and what that means for net effective rent growth versus the 76% rent spreads mentioned?

[Brian Finnegan, executive]

Greg, this is Brian. We've been encouraged by the demand for really all our bankruptcy spaces, particularly on the Bed Bath. We're down to a handful of boxes remaining. We've signed another one yesterday. All but two have been single tenant backfills with operators that are in the specialty grocery, home accessory off-price space. We expect that income, as I mentioned, to start to come back online late next year.

And from a cost perspective, you're going to see those costs in line with where we've been leasing anchor boxes over the last few quarters. I'd highlight that our net effective rents, we set another record this quarter at over $20 a foot. Thinking about anchor leasing in general, there remains a significant amount of competition for box space, considering we took 70 basis points back of bankrupt GLA and only lost 20 basis points in occupancy. We're continuing to see great demand for these boxes. And in terms of the rents, we're signing those leases at $15 a foot. We've got anchor spaces rolling at under $9 in the next 3 years. So we feel really confident in the team's ability to drive rate with better tenants and bring those spaces to market.

[Greg McGinniss, analyst]

Okay. And then could you give us some of the background on your Rite Aid exposure expected loss so far through bankruptcies? Maybe what you anticipate being rejected in the future? And then the size of those boxes and types of tenants you're looking to backfill there.

[Brian Finnegan, executive]

Yes, sure. It's another great example of our team really getting ahead of these spaces. We weren't obviously surprised by the announcement. In fact, we took back some Rite Aid spaces recently that we backfilled Ulta and with Trader Joe's. In regards to the bankruptcy announcement, 5 of our locations were rejected immediately. We have a new -- 2 more that are expected to close. All but one or that in line kind of former vintage. So we've got good rent basis on those. We expect to drive over 30% mark-to-market upside. We've got 4 of them already spoken for with operators in the off-price, general merchandise, home accessories space. So we've been pretty pleased with what we've seen thus far. But again, it's another great example of our team getting ahead of these boxes, so we can capitalize on them pretty quickly.

[Angela Aman, executive]

Yes. I'd just add, in total, the exposure as of 9/30 was only 20 basis points of GLA or ABR. So overall, this is just a very small exposure for us.

[Greg McGinniss, analyst]

Okay. And just, sorry, a quick follow-up. What were the commonalities on those Rite Aid boxes that caused those to be the selected one to close?

[Brian Finnegan, executive]

If you look at that business, Greg, it's not exactly real estate dependent. I think they're heavily dependent on how the scripts do in those markets. So I think that's a big consideration as you look at Rite Aid versus some other businesses. Our understanding is they're not going through a lease often process like you saw with Bed Bath. They're looking at marketing both the go-forward business as well as a recapitalization of the existing plan. As we look at it, we didn't really think anything of it in terms of the strength of real estate. In fact, we're happy we got them back because we're already seeing some great demand on those spaces out of the gate.

[Operator]

Next question, Jeff Spector with Bank of America.

[Jeffrey Spector, analyst]

Two-part question. Jim, if you can clarify your comment from the opening remarks on your latest same-store NOI guidance, I think you lift that to 3.5% to 4%. And what did you say about what you could achieve in 2024? And then I guess the second part would be, as we start to focus on '24, I guess, Angela, are there any onetime benefits? Or are there any benefits in '23, we should be thinking about in our models for '24 that may not reoccur.

[James Taylor, executive]

Jeff, I didn't comment on specific guidance for '24, but just look at the momentum that we continue to build and deliver. Look at that signed but not commenced pipeline. Look at how much we're commencing a quarter and how much we're signing. We feel very confident in our ability to continue to outperform given not only that signed but not commenced pipeline but also what we have in legal and LOI. So that activity continues.

And all the while, we're setting records as to spreads. We're setting records as to rate. We're being disciplined with capital. So we like how the plan sets us up to continue to outperform. And it comes back to, Jeff, as you know, rent basis matters, if you want to drive good fundamental growth. And so as Brian was alluding to, as we've recaptured these bankrupt tenants, it's given us a remarkable ability to bring in a better tenant at a better rent, not only drive growth through that, but drive better follow-on shop leasing. And you can see in our shop leasing, the occupancy records and the rate records that we're setting. So we feel pretty confident in our ability to continue to outperform, but we're not giving guidance yet. And I'll let Angela answer the second half.

[Angela Aman, executive]

Yes. I mean, I think Jim did a really good job of laying it out, and I tried to cover some of this in my prepared remarks. I wouldn't say that there's anything sort of onetime or nonrecurring in nature, but the things we really pointed to were, as Jim just highlighted, again, the signed but not commenced pool and how significant that is, obviously, it's a record high for the company right now, but it's substantially larger than it was at the same time last year, and that provides a really good foundation for growth as we get into 2024.

The things we did note are that the 2023 bankruptcies, obviously have a continued impact in 2024, and I quantified that as about 50 basis points related to the space, specifically associated with the 2023 bankruptcies. 2024, we do expect there's going to be some ongoing tenant disruption. And I mentioned that we'll sort of quantify our expectations for 2024 bankruptcy on our February call when we provide full year guidance.

The other thing I noted in my remarks is that revenues deemed uncollectible is detracting from growth in 2023, but not to the degree or the magnitude we had originally expected it to. We do -- we are -- our guidance for 2023 at this point is 40 to 60 basis points of total revenue, which is well below kind of a historical run rate of 75 to 110 basis points. So we do think that, that will be a negative contributor to growth as we get into 2024, just as we sort of revert to normalized levels, nothing unusual occurring there, just a reversion to where we've been historically.

So I think that mostly covers same property. On the FFO side, we did note just obviously, a debt maturity next year, also a swap that will be burning off in late July of 2024, that's going to create some additional pressure from an interest expense perspective. And the only other thing I would note that was a little bit more recurring or onetime in FFO was just a gain on debt extinguishment this year, of right around $0.015 almost $0.02 a share, but that really covers it.

[Operator]

Next question comes from Haendel St. Juste with Mizuho.

[Haendel St. Juste, analyst]

I did have a question on the same-store growth in the quarter, the 4.8%. I'm curious, Angela, if there's anything -- if you could help us maybe quantify the impact of potential below-market lease adjustments or earnings from terminated Bed Bath leases? And were there a few assets that were added to the same-store pool in the third quarter?

[Angela Aman, executive]

Yes. We give a reconciliation of the pool in the glossary, and there were some of the acquisitions that did come in 2020 -- I guess I think it would be 2022 acquisitions -- or 2021 acquisitions that came in -- I'm sorry, 2022 acquisitions that came into the quarterly pool for this year, but won't come into the annual pool until 2024. As it relates to below market, I would just highlight again, obviously, straight line and FAS 141 does not impact same property or the same property growth calculation. So the 4.8% was not impacted at all by any -- either the straight-line rent reversals in the quarter or any below market sort of acceleration from a FAS perspective. Nothing significant to note on the FAS acceleration side. We continue to -- there are small balances as you move through the year. But actually, on a net basis, I think it was pretty minimal during the quarter.

[Haendel St. Juste, analyst]

Got it. Got it. Do you have the impact of the 6 assets, I think they were to the third quarter results? And then maybe from an earnings perspective, was there an impact from the FAS 141?

[Angela Aman, executive]

I mean, it was well less than $0.005 a share on the FAS acceleration side. So I mean, really pretty de minimis during the quarter. I don't have broken out separately, it's the impact of just the acquisitions. Sorry, can you hear me, Haendel?

[James Taylor, executive]

Haendel, can you hear us?

[Haendel St. Juste, analyst]

Hello?

[James Taylor, executive]

Yes, Haendel, can you hear us? Operator, can you hear us?

[Operator]

I can.

[James Taylor, executive]

Haendel, I think the problem might be on your line. But to answer your question, the addition of the acquisition assets did not materially move our same-store wasn't big enough.

[Operator]

Next question, Mike Mueller with JPMorgan.

[Michael Mueller, analyst]

I guess looking at the pipeline, you have a strong in-place expected yields on that. When you're thinking about the starts that you're kind of looking at kicking off and say, 2024, how do the yield expectation compared to what we see in the supplemental for what's in process today?

[James Taylor, executive]

They continue to remain strong, and they're enhanced, frankly, by the growth in rent that we expect as we execute these projects. So we obviously work really hard to lease and price out and get a project ready to be launched. And in that way, Mike, we greatly mitigate our risk, right? We're not committing substantial capital until we understand what our gross and incremental returns are. So I like what we're seeing in that forward pipeline, and it's driven by the same factors that you're seeing driving the existing portfolio in terms of growth.

[Operator]

Next question, Anthony Powell with Barclays.

[Anthony Powell, analyst]

In terms of the tenant demand, are you seeing any new types of tenants or categories of tenants increase their activity in the portfolio? Or is it kind of the similar trends that we've seen in the past few quarters?

[Brian Finnegan, executive]

Yes, Anthony, this is Brian. It's something that we continue to be encouraged by, I noted in my opening remarks, the depth of the new operators that we're seeing in the restaurant space, real quality operators that have been focused on expanding their suburban footprint, operators like Mendocino Farms, Urban Plates, Cava. So we've seen a lot of depth of demand there. The mall side, we continue to see a significant number of tenants looking for off-mall, Sephora's upping their off-mall program. JD Sports, who we signed this quarter, in a former Tuesday Morning space, Lululemon is expanding as well. So we've been pretty encouraged in terms of the new tenant pipeline that we're seeing overall as well as our core tenants, which continue to add significant store counts like those in the off-price, general merchandise, home accessory sector. So the demand overall has been fairly broad-based, but we've been encouraged by what we're seeing on the new tenant front.

[Anthony Powell, analyst]

And maybe on revenues deemed uncollectible, as you noted, it was lower than expected this year. Why can't it be below that 70 to 100 basis points next year, given kind of the strong environment we're seeing?

[Angela Aman, executive]

Yes. I mean, look, we're incredibly encouraged by what we're seeing as it relates to collections across the portfolio. I think we are cognizant as we go into 2024. A very healthy, as Brian pointed out earlier, a very healthy and resilient consumer. But there are lots of pressures in the current environment, including interest expense and capital availability and other things that tell us next year probably looks pretty similar to a normalized run rate, and that's probably where we're going to start the year from an expectation perspective.

[Operator]

Next question Ari Klein with BMO Capital Markets.

[Juan Sanabria, analyst]

It's Juan, not Ari. Just a question on yields and what you'd be looking to underwrite for stabilized deals for grocery anchored or power centers in light of the increase in capital costs?

[James Taylor, executive]

It's a great question. And I think it's really a 2-part question. It's not only the going in yields, but what you see is the growth and upside in those yields. So thinking about it from an IRR perspective, you really need to see IRRs on an unlevered basis with great visibility on growth with conservative assumptions as it relates to reversion cap rates and values. You need to see those in the high single, low double-digit to clear, we think, where the cost of capital is.

[Juan Sanabria, analyst]

And then just a quick follow-up. Where do you think small shop occupancy can gravitates towards in your portfolio? And what's the drag that the redevelopments is having on kind of the latest stat for the third quarter?

[James Taylor, executive]

Yes. The redevelopment has a drag of 10, 20 basis points overall on the portfolio. We think that as you deliver those reinvestment projects that you will get higher small shop occupancy than where the portfolio average is. So we have a pretty clear view that, that small shop occupancy can go well into the low 90s.

[Operator]

Next question, Craig Mailman with Citi.

[Craig Mailman, analyst]

I just want to go back to the acquisition commentary. One of your peers has sold a significant amount of assets under contract, what they say is a 6.5. It seems like what's in the market today is kind of what's sellable. So I'm just kind of curious, from your standpoint, what do you think timing is going to be when some of these assets kind of breakthroughs that pricing starts to adjust to where maybe the public market is pricing market cap rates versus where the private markets kind of stuck out on, maybe some of the better quality deals that can be sold today.

[James Taylor, executive]

Mark?

[Mark Horgan, executive]

Well, I think I'd start with, we continue to believe that our patience and discipline here has been the right call because we're certainly seeing the market adjust almost real time in the last quarter to really react to where the cost of capital is on a debt perspective basis. We have seen over the years that the REITs do lead the private market. We think from a timing perspective, that's usually 6 months, where we've been in a very turbulent capital market environment over the last quarter or so, we saw rates rise to 100 basis points, and the market still digesting what that means for pricing and where sellers are just setting their expectations.

What I would say is you're kind of seeing a bit of bifurcated market. We've seen some very tight grocery-anchored -- simple gross anchored trades in Southeast Texas, California. But where you're clearly seeing the market adjust is the bigger deal market, say about $100 million. Sellers there, owners there have been more realistic as to where they would need to price assets to trade. And we think that's probably where the initial opportunities will come from a pricing perspective.

[Craig Mailman, analyst]

That's helpful. And then just on the leasing front, spreads have been good. Just looking at capital you guys are pulling out has been pretty tight. I'm kind of curious, the conversations going forward where the rates are and the cost of tenants to build out new space and buy inventory. Kind of what's the push and pull between kind of you guys funding capital versus then maybe paying for it with higher rents and so spreads look better in the near term? Or is it just net effectives have largely been unchanged and they're just continuing to be strong.

[Brian Finnegan, executive]

Yes. We've always been cognizant of the capital that we're putting into spaces, and it's one of the best practices that really came out of the pandemic when we were up against supply chain issues. Our operating teams, led by Haig, really partnered with tenants' construction teams to really be a lot more efficient in the space. And a lot of these tenants weren't necessarily doing this out of the goodness of their heart rate. They wanted to get stores open. So they figured out how to use the existing bathers, they figured out how to use the existing facades.

And so as we've seen more tenants be aggressive, say in the Bed Bath & Beyond and Tuesday Morning auctions, they've been able to utilize more existing spaces and be more efficient. So that's helped certainly on the cost side. And then on the rent side, the competition for space is really driving that rent higher. And we have had instances Certainly, we have been impacted by costs in certain circumstances. We've been able to push that back on tenants or ultimately revise some of those scopes. So it's something that our operating teams have really partnered with our leasing teams to focus on well and be as efficient as we can be. But costs are certainly always a consideration when we're looking at deals.

[James Taylor, executive]

One of the benefits of a larger platform like ours is that we're doing several deals a year with these tenants. So there's trust in terms of what we're going to deliver and that goes a long way in the negotiation of how much capital will be required.

[Craig Mailman, analyst]

Maybe if I could slip one more in for Angela. Do you anticipate re-upping the swaps or just going to burn off and let it flow?

[Angela Aman, executive]

We're evaluating the market opportunistically, continue to maybe keep an eye on where things are moving. We're obviously in an environment where there's been a fair amount of volatility. So we are hopeful that there'll be an opportunistic window where we can execute, but we'll continue to evaluate as we move forward.

[Operator]

Next question comes from Caitlin Burrows with Goldman Sachs.

[Caitlin Burrows, analyst]

Maybe just on tenant decision timing. We definitely hear in industrial and office set uncertainties causing companies to slow their decision-making. So I was just wondering if you're seeing that at all, like are your tenants taking a little bit longer to decide what they need in signed deals?

[James Taylor, executive]

We really haven't seen any deterioration in terms of demand or timing of demand or timing to execute. One of the things to appreciate about this retailer demand is its durability. I think everybody is expecting some type of economic disruption we've been expecting it for the last couple of years. And yet the retailers continue, as Brian was alluding to, to remain committed to their forward pipeline and they're actually making commitments now out into '25 and beyond.

So the other thing I would comment on about that demand is that retailers are using data as never before to really assess what the productivity of a new unit will be what it will cannibalize in terms of other competing stores. And so they're making as an informed decision as possible in terms of that decision to open a new store, and they see the white space. And if anything, as the recent bankruptcies have pointed out, there's not enough supply for them to achieve their new store opening plans, which we're leveraging from a competition standpoint.

[Caitlin Burrows, analyst]

Got it. Okay. And then maybe just along the -- following up on the swap discussion we just had. I know separately, you guys have in June bond maturities. So wondering just how soon you might look to get ahead of that or wait until closer? And do you think it would be of a similar size?

[Angela Aman, executive]

Yes. Caitlin, like I said, we're evaluating the market, both for the swap and for the 2024 bond maturity opportunistically. We'll look to -- as we usually do, we're hoping there'll be an opportunistic window for us to execute ahead of that. I would point out though, given that, that maturity is in June of next year, timing here is really important in terms of the impact ultimately on 2024 interest expense as well. So we'll continue to watch the market. And like I said, hopefully find a good window to execute earlier rather than later, but we'll continue to evaluate.

[Operator]

Next question, Connor Mitchell with Piper Sandler.

[Alexander Goldfarb, analyst]

It's actually Alex Goldfarb. So two quick questions. First, obviously, theft has been a big industry-wide issue. The retailers have all spoken about it. Sort of thinking about the relationship between the landlord and the tenant, are they asking you guys to help them more in trying to address this? Or apart from obviously parking lot safety, are there other initiatives that you guys are undertaking to help the tenants? Or are the tenants trying to really do this on their own, and the tenant-landlord relationship is more about the general asset versus what's going on inside the stores?

[James Taylor, executive]

That's an important aspect of the landlord-tenant relationship. The tenant needs to know that they have a good counterparty in the landlord. He's keeping the center well-lit, secure, safe for their customers. And that partnership is critical. I think it's a benefit, Alex, of a larger platform such as ours where we have great relationships with retailers, and we can be responsive to what their needs might be. It's a highly recoverable expense. So it's surprising to some degree that certain landlords, particularly smaller private landlords may not be as responsive. We see it as an opportunity for competitive differentiation. And it is a concern of the tenants. We're fortunate, Alex, in that we don't have a lot of high crime urban locations that are impacting retailers to the degree you've been reading about in the press. But it is important to be in front of it and to be a good partner with the tenant.

[Alexander Goldfarb, analyst]

Okay. And the next question is for -- maybe for Horgan. A number of years ago, you guys were buying a number of assets in the Carolinas along the coast. Hadn't seen -- yes, that seems to be a little quiet. So I don't know if the strategy did pan out maybe the way you saw it or it's just given the dearth of transactions, you're still hungry to expand in that area or other similar sort of snowbird-type areas, but maybe the transaction market has just been tough. So hence, not as much activity. So just looking for an update there.

[Mark Horgan, executive]

Look, we've been really pleased with how the acquisition that we bought have performed. We've outperformed underwriting, I think, on every deal that we've purchased. So I'd say, to answer your question, it's been more of where the transaction market is. We did make a choice 1.5 years ago to pause the acquisitions because we believe better opportunities will be coming from a IRR and yield perspective, and we think that's being proven out well today. So we're going to continue to find deals in the markets that we like as time moves on here, but the market has been slow and everyone want to do deals more than me, Alex. So we're going to continue to find them as we can.

[James Taylor, executive]

But those are very attractive markets to us. As Mark alluded to, our acquisitions that have done well. We think we can build upon the critical mass that we have in the coastal Carolinas and throughout Florida and the Southeast. And they've been great performers for us. So we'll continue to mine those markets for opportunity.

[Operator]

[Operator Instructions] Next question comes from Paulina Rojas with Green Street.

[Paulina Rojas Schmidt, analyst]

Are you seeing a stronger demand for certain store sites over others? Is there sort of a sweet spot today in the market?

[James Taylor, executive]

I'm sorry, Paulina, you broke up there a little bit. Are we -- you mean how does the rate relative to size...

[Brian Finnegan, executive]

Yes, size ranges, Paulina, in terms of where we're seeing the most demand?

[Paulina Rojas Schmidt, analyst]

Exactly, yes. Is there any sweet spot.

[Brian Finnegan, executive]

Yes, I'd point to a few of them, particularly in the kind of junior anchor space, that kind of 8,000 to 12,000 square foot range, you're seeing a lot of competition from the likes of Five Below and Skechers and Foot Locker and Ulta, pOpshelf, Boot Barn and another tenants. So that size range has been extremely competitive, and we saw that competition really play out on our Tuesday Morning spaces.

And then I'd just say from a category overall would be that outparcel space. We continue to have a significant amount of demand from outparcel tenants. If you look at Cava entering the fray is now competing against Starbucks and Chipotle medical uses that are filling out some multi-tenant outparcels. So I think within that space, we are seeing a lot of competition. And the benefits of some of what we're doing in terms of being aggressive on recapturing space earlier, we're freeing up a lot of those opportunities. So we've been encouraged on that front. But if you're calling out two size ranges, those would be the two that I'd highlight.

[Angela Aman, executive]

Yes, just to amplify what Brian is saying, the demand in that 8,000 to 12,000 square foot range lines up really well with the size of the Rite Aid boxes.

[Paulina Rojas Schmidt, analyst]

And then the other question is, Angela, I think you mentioned minimal bankruptcy in 3Q and early 4Q, just to make sure nobody is calling off my radar, Is there any retailer there outside of Rite Aid?

[Angela Aman, executive]

No. No, it was really just Rite Aid. And the impact from Rite Aid, given that our total exposure is only 20 basis points on an annualized basis, it's probably less than 5 basis points of impact to us in 2023.

[Operator]

Next question, Haendel St. Juste with Mizuho.

[Haendel St. Juste, analyst]

Sorry, I had some technical difficulties earlier. I'm not sure if you heard or answer the second part of my question, so I'm going to try again. So apologies if this is redundant. But I wanted to know if there are any below-market lease adjustments in your earnings or same-store NOI from the terminated Bed Bath leases?

[Angela Aman, executive]

Yes. Again, there's no FAS impact on same-store NOI. From an FFO perspective, the impact of bankruptcy really netted to 0 and sort of accretion of above below-market leases and tenant inducements. So no impact during the quarter. On a full year basis, we did pick up about $0.5 million related to bankruptcies year-to-date in FAS and tenant inducements, but that's really offset by about $1 million of net reversals on straight line. So between all of the noncash items together, you're looking at a negative about $500,000 adjustment year-to-date.

[Haendel St. Juste, analyst]

Got it. And if I could squeeze in a follow-up. So during your commentary earlier, I think you mentioned you expected cash flow from the Bed Bath and other bankruptcy backfill boxes to hit primarily in the back half of next year, early '24. I guess, I'm curious, is that time line being moved back a little bit, maybe I'm splitting hairs, but I thought you had previously outlined expectations to be -- at least to be primarily the second half of next year benefit.

[Brian Finnegan, executive]

Haendel, this is Brian. If you think about when retailers generally open their stores, right? They're opening them early in the spring or in the fall, particularly for national tenants. So the time line aligns with where we expected it to be. I mean we've been signing those leases here consistently over the last few months, and they're really lining up those store openings for late next year, particularly when you're converting Bed Bath box to say a Sprouts grocer. But it aligns with where we have been expecting it to come in. And like we said, expect them to fully come online in 2025, but those openings will start to commence in the back half of the year.

[Operator]

Next question, Linda Tsai with Jefferies.

[Linda Yu Tsai, analyst]

Any just general thoughts on how interest costs impact earnings next year?

[Angela Aman, executive]

Yes. Linda, I would say a couple of things and just sort of echoing my comments from earlier, we do have the $300 million bond maturity. That's a June maturity of next year. The rate on that is about 3.65%. And obviously, with the 10-year today right around 5% and then a spread on top of that, you're looking at a rate that probably almost doubles if we were to replace it today. So not only does the ultimate rate we realized on that refinancing matter, but the timing in terms of when we refinance that matters for 2024 interest expense as well.

And we're continuing to evaluate the market opportunistically, but don't have any firm view on when that refinancing is likely to happen between now and June. The other thing I mentioned in my prepared remarks is the expiration of a $300 million swap that happens in late July of 2024. SOFR on that has swapped at 2.59%, and current SOFR, or spot SOFR is well above that, as you would expect. So there's an impact with that, too. That's a little bit easier, certainly from a timing perspective to understand, but we -- as I mentioned earlier, we'll continue to evaluate the market as it relates to replacing that swap over the course of the next 9 months, and look to opportunistically lock in a rate when it makes sense to do so.

[James Taylor, executive]

Linda, we, as always, have tremendous flexibility so that we're not having to go into the market at any particular point in time as part of Angela and team strategy to refinance part of that '24 maturity last year. So we've got $1.3 billion of liquidity under the line of credit. And as Angela mentioned, we'll be opportunistic in terms of picking our window.

[Operator]

There are no further questions. I would like to turn the floor over to Stacy for closing remarks.

[Stacy Slater, executive]

Thank you, everyone, for joining us today. We look forward to seeing many of you at NAREIT.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.