Brixmor Property Group Inc. (NYSE:BRX) Q4 2022 Earnings Conference Call February 14, 2023 9:30 AM ET
Company Participants
Stacy Slater – SVP-IR and Capital Markets
Jim Taylor – CEO and President
Angela Aman – EVP and CFO
Mark Horgan – EVP and CIO
Brian Finnegan – EVP and CRO
Conference Call Participants
Craig Schmidt – Bank of America
Todd Thomas – KeyBanc Capital
Juan Sanabria – BMO Capital
Ki Bin Kim – Truist
Greg McGinniss – Scotiabank
Anthony Powell – Barclays
Craig Mailman – Citi
Haendel St Juste – Mizuho
Alexander Goldfarb – Piper Sandler
Floris van Dijkum – Compass Point
Mike Mueller – JPMorgan
Tayo Okusanya – Credit Suisse
Linda Tsai – Jefferies
Operator
Greetings and welcome to Brixmor Property Group Incorporated Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference being recorded.
It is now my pleasure to introduce your host, Stacy Slater, Senior Vice President, Investor Relations and Capital Markets. Thank you, you may begin.
Stacy Slater
Thank you, operator and thank you all for joining Brixmor’s fourth 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. [Operator Instructions]
At this time, it’s my pleasure to introduce Jim Taylor.
Jim Taylor
Thanks, Stacy and good morning, everyone.
Our results this quarter once again demonstrate the strength of our value add plan. The quality of our team and portfolio and importantly the transformative impacts, our execution continues to deliver. Consider for example that during the quarter we signed another 954,000 square feet of new leases at an average cash spread of 44%. Bringing our total new ABR for the year to a record $62 million at an average spread of 37%, in a record new lease average rent per foot of $19.08.
We achieved a record total leased occupancy of 93.8% for the portfolio, which does reflect a 360 basis points spread to build occupancy and which also reflects a drag of a 130 basis points associated with our reinvestment activity. Both of these reflect powerful tailwinds, as we commence billing those leases and deliver those reinvestment projects.
We also achieved a record small shop leased occupancy for the portfolio of 89.2%, which has more room to run as we execute our value add strategy, and we drove our overall ABR per foot to a portfolio record of $16.19, demonstrating our continued progress, but also our continued opportunity for growth given that attractive basis.
And we continue to drive leading market share of new store openings throughout ’22 with core tenants like Burlington, HomeGoods, Ulta, Five Below, Fresh Market, Ross, AAA, and Starbucks will also bringing new to the portfolio of concepts that drive traffic to our centers like Bark Social, Yardbird, Freepeople.
From a revenue perspective, bottom-line, our team once again delivered with top of the sector same store NOI growth and FFO growth is 7.3% and 6.5% respectively. Simply phenomenal job by Brian and leasing teams capitalizing on the strong tenant demand for our well located centers. Importantly, we’ve also leveraged this tenant demand recapture space from watchlist tenants at accretive returns. Where we can capitalize on our low rent pays to bring-in better tenants at better rents.
This is a critical point. Our low rent basis and the demand from thriving retailers to be in our well located centers, positions us to outperform in ’23 and beyond, while also delivering substantial value creation.
Let me pause here, am I coming through. Okay. For example, we expect 8 Bed Bath anchor boxes in two Harmon small-shop locations to close. We already have control of 4 of the 8 Bed Bath anchor boxes and our at least or LOI on all 4 with best-in class specialty grocery off-price and HomeGoods retailers at average spreads of close to 60%.
Our remaining Bed Bath and buybuy Baby anchor boxes have an average in-place rent of $10.35 per-foot, which compares very favorably to the mid-teens rents we expect to achieve, as we take control of them. Looking-forward, we have $54.7 million in signed ABR that will commence as Angela will detail, over the next several quarters and an additional $34 million of annual base rent in our forward new leasing pipeline. These pipelines provide us tremendous visibility on robust revenue growth in ’23 and beyond, even after the assumed bankruptcy impacts embedded in our revenue guidance that Angela will discuss further.
Importantly, this top-line momentum will allow us to continue to grow NOI and FFO at a strong pace for the sector, even with the headwinds of naturally declining collections in prior-period rents, which top $23 million in ’22 and more normalized levels of bad debt. Simply put, we are well-positioned to continue to be at the top of the sector from an NOI and FFO growth perspective, all while continuing to create long-term value as we recapture space.
From a reinvestment standpoint, Billhigh and our redev construction teams delivered another 12 projects during the quarter, bringing our total stabilizations during the year to $179 million at an average incremental return of 10%. We are creating tremendous value here with the additional follow-on benefits of higher rates and occupancy as we do follow-on leasing at the centers impacted.
Importantly, we have another $343 million of reinvestment, pre-leased and underway at an incremental return of 9%, creating value even in a higher-rate environment. In a forward pipeline of over $1 billion in projects that importantly exists in assets that we own and control today. We are excited that this year will be bringing great projects online, like the shops at Palm Lakes outside of Miami, Market Town Center in Naples, Florida and Vail Ranch Center in Riverside, California.
From a capital recycling standpoint, Mark and team continue to execute well, even in disrupted capital markets environment. Closing in ’22 on $287 million of dispositions at attractive cap rates, which included the highly profitable sale of Campus Village shops in College Park to a student housing developer.
We redeployed that capital into $411 million of acquisitions with upside in our core markets. In addition to upside in rents versus market, these acquisitions also feed our forward reinvestment pipeline, as we execute our value-add strategy and leverage the strength of our platform.
Under Angela’s leadership, we continue to enjoy maximum flexibility from a balance sheet perspective to continue to grow – excuse me, to continue to fund our growth strategy without reliance on the volatile capital markets, all while benefiting from our earlier decisions, the pre-pay ’22 and ’23 maturities. From an external growth perspective, we do expect to see some attractive acquisition opportunities in our core markets, as private owners face debt maturities and re-tenanting requirements.
Expect us to remain disciplined however, as we are able to continue to drive outperformance in growth and value-creation for the next several years through opportunities that we own and control today.
With that, I’ll turn the call over to Angela for a more detailed discussion of our results, our balance sheet and our outlook. Angela?
Angela Aman
Thanks, Jim and good morning.
I’m pleased to report on a very strong conclusion to 2022, as we continue to deliver on our value-enhancing reinvestment program and set the stage for long-term growth and value-creation. NAREIT FFO was $0.49 per share in the fourth-quarter, driven by same-property NOI growth of 7.3%. Base rent growth continues to accelerate, contributing 510 basis-points to same-property NOI growth this quarter.
Excluding the impact of lease modifications and rent abatements, base rent growth contributed 490 basis-points, representing a 50 basis-point acceleration from last quarter, driven by growth in build occupancy and significant positive re-leasing spreads. Ancillary and other income and percentage rents contributed 80 basis-points on a combined basis, while net expense reimbursements contributed 240 basis-points, due to improvements in build occupancy and a strong recoverability of certain fourth-quarter expenses.
Revenues deemed uncollectible detracted 100 basis-points from same-property NOI growth, primarily due to the ongoing moderation of out-of-period collections of previously reserved amounts.
Our operational metrics continue to reflect the strength of the current leasing environment, despite macro headwinds and the continuing successful transformation of our portfolio. Build occupancy was up 60 basis-points sequentially to 90.2%, while leased occupancy was up 50 basis-points sequentially to 93.8%, a record-high for our portfolio.
The anchor leased rate was up 50 basis-points sequentially to 95.9%, while the small-shop leased rate was up 40 basis-points sequentially or 250 basis-points year-over-year to 89.2%, reflecting another new portfolio of record.
The spread between lease and build occupancy ended the period at 360 basis-points and the total sign but not yet commenced pool, which includes an additional 70 basis-points of GLA related to space that will soon be vacated by existing tenants totaled $55 million. The size of the pool is up approximately $2 million since last quarter, despite the commencement of leases representing approximately $16 million of annualized base rent this quarter.
As we’ve highlighted in the past, one of the strongest indicators of forward growth is a persistently widespread between lease and build occupancy, while both build and lease occupancy are increasing.
In addition, the blended annualized base rent per square-foot on the sign but not yet commenced pool, remains above $19, approximately 20% above our portfolio average, reflecting the broad-based impact of our granular reinvestment initiatives.
In terms of our forward outlook, we have introduced guidance for 2023 same-property NOI growth at a range of 1.5% to 3.5%, comprised of 350 to 450 basis point contribution from base rents, offset by a significant detraction from revenues deemed uncollectible.
We estimate that the amount of revenues deemed uncollectible recognized during 2023 will total 75 basis points to 210 basis-points of total revenues, which is in-line with our historical run-rate. This assumption reflects the modest amount of out-of-period collections we expect to realize during the year.
The normalization of this line-item in 2023 will result in a 200 basis-point detraction from same-property NOI growth at the low-end of the range or 150 basis-point detraction at the high-end of the range. As the income associated with revenues deemed uncollectible in 2022, once again becomes expense in 2023.
In addition to our assumptions for revenues deemed uncollectible, which primarily address normal-course credit issues across the portfolio, the midpoint of our same-property guidance range also reflects approximately 150 basis-points of drag related to recently-announced or anticipated bankruptcy activity, which is reflected in our expectations for base rent and net expense reimbursements.
Of this amount, 60 basis-points relates to known events, including lease rejections that have occurred to date and the impact of locations that we are proactively recapturing from struggling retailers ahead of a likely filing. While the remaining 90 basis-points relates to assumptions about potential future events, providing us with significant capacity to absorb additional tenant disruption within our range.
Our ability to deliver a 350 to 450 basis-point contribution from base rent growth in a year with over 100 basis points of base rent impact from bankruptcy activity, underscores the success of our portfolio transformation and the importance of our signed but not yet commenced pipeline, as a source of forward growth and momentum.
We have also introduced guidance for 2023, NAREIT FFO at a range of $1.95 to $2.03 per diluted share. Our guidance assumes a utilization of our $200 million delayed-draw term-loan at the end of April to continue to extend the duration of the balance sheet.
In early February, we entered into a forward-starting swap related to the delay draw term-loan, which fixes so-far at a rate of 3.59% from May 1 2023 through July 26, 2027, the maturity of the term-loan, resulting in a fixed-rate for this loan of 4.88%. As of December 31, we had total liquidity of $1.3 billion, a weighted-average maturity of 4.9 years and no debt maturities until June 2024.
And with that, I’ll turn the call over to the operator for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Craig Schmidt with Bank of America. Please proceed.
Craig Schmidt
What are your expectations for transactions in 2023? I know you didn’t acquire anything in the fourth-quarter and how long do you think it’s going to take before we find the new normal cap rates are for opening centers?
Jim Taylor
I think it’s going to take a while, and I think what’s going to transactional activity. As I mentioned in my remarks are really two things, one is the disruption and re-tenanting capital that will be an opportunity for platforms like ours and then refinancing requirements with higher interest rates. So I think that, that’s going to raise the level of overall transactional activity, certainly above what we saw at the end of 2022.
And we’re going to be opportunistic, as I highlighted in my remarks, the great thing about our business plan is, it doesn’t require external growth to drive outperformance. So that allows us to remain very disciplined. We certainly have the flexibility in the capital capacity to be acquisitive. But we’re going to pick our spots and I am hopeful that as we move into this part of the cycle, there will be attractive value-add opportunities for us.
Craig Schmidt
Great. And then just as a follow-up question. I mean, your leasing activity actually picked-up in the fourth-quarter. How do you feel about that leasing activity as you head into 2023 relative to 2022?
Jim Taylor
Yes, any quarter can fluctuate a little bit, but I think we’re continuing to see great strength in demand and Brian and team capitalize on it. Brian?
Brian Finnegan
Yes, Craig, we’re really encouraged by what we saw in the fourth-quarter was actually our most productive quarter of the year from a GLA perspective. We had a nice uptick in anchor activity, but also you continue to see small shops come through. And as Jim mentioned, and he highlighted a number of the retailers that we signed leases with during the quarter. So pretty exciting, so what’s more encouraging is, if you look at that pipeline at the end-of-the year from a legal perspective leases that are out, it’s actually up from where it was a year-ago at the end of 2021.
So it gives us good visibility in terms of demand for this year, demand that we are seeing for some of the troubled tenant space from core tenants and a lot of new ones that we’ve been able to attract to the portfolio, because of all the work the team has done. So we are really encouraged by what we saw in the fourth-quarter and what we continue to see at the start of the year.
Operator
And our next question comes from Todd Thomas with KeyBanc Capital. Please proceed.
Todd Thomas
Yes, hi, thanks. Hi, good morning. First I just wanted to clarify with regard to the guidance, Angela. So the 350 to 450 basis-points of base rent growth that includes a 150 basis-point drag that takes into account. I think you said 60 basis-points from known events, so move-outs lease rejections and an additional budgeting of 90 basis-points plus a normalized level of uncollectible revenue, that’s the 75 to 110 basis-points on-top of that. Is that right or am I double counting with the 75 to a 110 basis-points on-top of the comment you made around the 150 basis-point drag?
Angela Aman
No, you’re right that the 75 to 110 basis-points is separate and apart, from the 150 basis-points of bankruptcy impact I made – I referenced in my prepared remarks. The only clarification I would make is, that the 150 is on NOI. So while the majority of that, the vast majority of that is in base rent. There was a small piece, probably about 35 basis-points of that, which is embedded in our expectations for net expense reimbursement.
Todd Thomas
Okay, got it. That’s helpful. And then in terms of the minimum rent growth that you’re forecasting again the 350 to 450 basis-points. I’m just curious, I guess two things, it’s obviously, it was elevated in the quarter at 4.9%. Is this quarter sort of the peak or do you see that maybe continuing to improve a little bit in the near-term? And then, can you break that out in terms of sort of the contribution or what you’re anticipating within that from occupancy, escalators and sort of lease rollover throughout the year? Just a little bit more detail there would be helpful?
Jim Taylor
Now let me hit that generally and I’ll let Angela get more specific, but it is not a peak. The momentum in terms of top-line growth continues, as Angela reflected that assumption for 2023 is net of space we expect to and frankly hope to recapture during the year. So that’s coming in the top-line expectation.
Angela Aman
Yes. I think just to follow-up on Jim’s point, sort of the range for the year given what a significant amount of impact we’ve embedded within that base rent, expectation of 350 to 450 from bankruptcy activity, the timing of that bankruptcy activity and exactly kind of how that bankruptcy activity plays out over the course of the year is going to matter a lot from a trajectory perspective.
What I would very much emphasize though is, if you step-back and think about the pieces I gave, the guidance we gave is 400 basis-points at the midpoint of the range. That number is in-line with what we delivered in 2022, with an additional 100 basis-points of bankruptcy impact.
So I think pulling that out, you can pretty clearly see, we would have been sort of 5% or better, pretty much in-line with the fourth-quarter number you referenced. It is hard to give trajectory on that line-item, I think as we move through the year. But as I think both Jim and Brian have highlighted, we feel really good about the space that we’re recapturing and the ability to start 2024 and even 2025 up for even better long-term growth.
Todd Thomas
Okay. What about some of the moving pieces there? Maybe, if you could just in terms of like occupancy or tell us where sort of the average escalators are within the portfolio today? Just to help us get a sense for the contributions?
Angela Aman
Sure. Yes, the escalator pieces is somewhere between 110 and 120 basis-points today. The impacts from positive re-leasing spreads is probably in and around 150 basis-points, which leaves you with kind of 80 to 180 basis-points for occupancy gain, other impacts in the portfolio offset by that bankruptcy impact. But the two pieces that are easiest to quantify for you today are the contractual bumps and the spreads.
Operator
Our next question comes from Juan Sanabria with BMO Capital. Please proceed.
Juan Sanabria
Hi, thanks for the time. Just a little more details to Todd’s kind of last question in terms of the occupancy cadence. Should we expect a seasonal decline in the first-quarter, if you could just give us a sense of what’s assumed in guidance? And I’m not sure, if you can hit on kind of the range of expectations for year-end ’23, but if you can that would be helpful.
Angela Aman
Yes, again it’s really tough I think for us as we move into next year. We feel like we’ve more than adequately capture the impact of potential bankruptcy activity in the NOI guidance we’ve given and importantly in that base rent guidance we’ve given. Exactly how that plays out from a trajectory standpoint, in terms of space recapture or other impacts of bankruptcy is a little bit harder to say.
But I do think it’s fair to expect that there is some seasonal decline as we move into the fourth-quarter. From some of the announced bankruptcy activity we’ve already had there’s likely a few spaces that we’re recapturing, as well as the for Bed Bath and Beyond spaces that Jim mentioned in his remarks. And I’ll let Brian sort of touch on our enthusiasm about those recaptures.
Brian Finnegan
Yes, as Jim mentioned in his opening remarks, we’ve been really encouraged by what we’ve seen so-far, just from anchor demand in general, but particularly for these spaces. I mean to have for these effectively spoken for, out-of-the gate that spreads are close to 60%. You’re seeing in that size range just a significant amount of demand, if you think about just the store opening plans for tenants in that size range, you look at Burlington Stores, Ross, TJX, all with over 100 store openings, the likes of all the Sprouts also with significant open to buys.
And then, even if you split some of that space with the Five Below, PopShelf, Skechers the World, there’s just a significant amount of demand for that space. And to Angela’s point, we may see some occupancy headwinds in the start of the year, but based off of what’s already in the pipeline plus the demand that we have for this space, we feel-good about the long-term trajectory.
Juan Sanabria
Thanks. And then just a more macro question. I mean, there’s questions as to where the macro direction headed in the strength of the consumer or not? I was just curious, if you’ve seen any diminution in any demand from any pockets of retailers, not sure if it’s more services or goods oriented or by geography to 0.2 at all, for if everything is just at a humming along and then really nothing to report in terms of a potential slowdown.
Jim Taylor
We continue to be impressed by the strength and resilience of the open-air format. And we continue to see growth in average weekly traffic levels, both over the prior year as well importantly over the pre pandemic levels. And from a tenant demand perspective, the breadth of demand continues to grow.
And so much so that, we actually have tenants anticipating space recapture from weaker tenants and willing to expect the time and the dollars then are in the LOIs and leases, should we be able to recapture the spaces.
So it remains a pretty healthy environment for us from a demand perspective and real-time, we continue to see good traffic and as I mentioned, growing breadth of demand from categories of retailers.
Operator
The next question comes from Ki Bin Kim with Truist. Please proceed.
Ki Bin Kim
Thanks, good morning. Going to your guidance, can you – are you able to provide interest expense guidance and G&A?
Angela Aman
Yes, on interest expense again we mentioned – I mentioned in my prepared remarks, the utilization of the delayed-draw term loan. And with that we believe, we’re going to probably be from an interest expense perspective, somewhere between $199 million and call it $201 million for the full-year based on sort of where curves are today and our expectation for revolver utilization during the year.
In terms of G&A, we believe, we’re being very disciplined about G&A spend across the platform, continuing to look for additional opportunities for efficiencies and believe that will be able to end 2023 with G&A relatively in-line to where we were in 2022, plus or minus.
Ki Bin Kim
Okay. And your development pipeline as you’ve completed some projects has come down a little bit. Can you just talk about the prospects for the next round? And how you’re thinking about the yield or upside characteristics, as it compares to the existing portfolio? I mean, existing development portfolio?
Jim Taylor
Yes, Ki Bin, it continues to be very robust and a good mix of projects. Both smaller anchor repositions, which frankly you should expect to see a pickup and as we recapture additional watchlist tenant exposure, as well as larger projects that where – I’m fairly confident we’re going to remain in that 150 million to 200 million of annual deliveries and annual project starts that we see.
Importantly, for the next several years. In fact, I mentioned it in my remarks, but our shadow pipeline continues to grow, it sits at over $1 billion today. And the yields are frankly still very attractive, because of where our rent basis is. So expect us to continue to deliver those projects in the high-single-digit, low-double-digit area.
Operator
Our next question comes from Greg McGinniss with Scotiabank. Please proceed.
Greg McGinniss
Hi, good morning. Angela, just curious which watch-list tenants, I mean, we should be paying attention to in order to understand whether there’ll be utilizing that potential nine needs, basis-points of additional tenant disruption cushion?
Angela Aman
Yes. I’m hesitant to obviously call any tenants out specifically. I would say that this morning’s announcement, a bankruptcy by Tuesday morning is a good example of how their environment continues to evolve. That 60 basis-points of known events, just to be very clear about it relates to the bankruptcies that have already occurred and rejection so that have taken place. That would include Regal and just a couple of rejections we had out of Party City.
Anything additional in terms of impact from those tenants that have already filed would be in the 90 basis-points. In addition to our expectations for Tuesday morning, which filed this morning. And all of our expectations around some tenants that have been widely reported to be considering a filing such as Bed Bath and Beyond.
Greg McGinniss
Okay. So the 90 basis-points and seem to be names we’ve read about before. So nothing from like a small tenant expectations, maybe a more difficult economic environment because of some closures on that side of thing?
Angela Aman
The normal-course bad debt expense primarily for small-shop tenants is going to be really embedded in that 75 to a 110 basis-points of revenues deemed uncollectible guidance we gave. The 150 basis-point drag associated with – anticipated were recently-announced bankruptcy activity that’s really hitting our base rent guidance and our net expense reimbursements guidance, is entirely national tenant situation related. They are the names I just mentioned that have all been sort of widely in the news.
In addition to other impacts we’ve assumed for situations that may play-out over the course of the year that I just wouldn’t call-out on today’s call. And that will continue to evolve as we move through the year. But for the most part, it’s names that we’ve all been talking about and we’ve assumed a wide range of potential impact as we move through the year. I just really underscore what I said in my prepared remarks, which is that I think we’ve got significant capacity embedded within the range to absorb a wide range of tenant disruption in our current guidance range.
Operator
The next question comes from Anthony Powell with Barclays. Please proceed.
Anthony Powell
Hi, good morning. Question on dispositions, you did about $200 million last year, what’s your idea for further pruning of the portfolio? And if you don’t acquire assets, what are the best uses of those proceeds?
Jim Taylor
The best use of proceeds in this business is reinvesting in well-located centers that have attractive rent basis, which is what drives a good part of our fundamental growth and value-creation.
So we’ll continue to find opportunities like that and I’m hopeful that we do find some opportunities from an external growth, our acquisition standpoint that present the same reinvestment growth and value-add. That’s really are our sweet-spot and it’s really where we can leverage our national platform, vis-a-vis private owners who typically don’t have the visibility on tenant demand or the access to liquidity that we have in our core markets, so we’ll see how that plays out.
Expect us to be balanced and by that I mean, expect that the rate of disposition activity will roughly follow what we see from an external growth standpoint. The timing may be some more front-end loaded, some more back-end loaded, we’ll see. But I’m very optimistic about seeing some acquisition opportunities that help us continue to leverage our platform. But importantly, we don’t have to and that’s a point I keep hammering, which is, we have tremendous growth embedded in what we own and control today, which is a good position to be in and allows us to be disciplined as we continue to deliver growth at the top of the sector.
Anthony Powell
Thanks. And then the lease spreads have been very strong, any pushback from tenants as you discuss with them lease terms or lease spreads escalators, how are tenants reacting to these conversation?
Jim Taylor
Well, that’s the beauty of low rent basis. And believe me, the tenants aren’t going to want to pay anymore rent and they have to for a space, they’re also much more sophisticated. In recent years, about what types of sales that they can model in a space and we work with them very closely.
Brian Finnegan
Yes, and it speaks to the both the transformation of the portfolio as well as the leasing environment, which is incredibly supply restricted. And with all the work the team has done in this portfolio, you’re seeing that come through in stronger rents, you’re seeing it come through in the highest retention rate that we’ve had in the last 5.5 years.
So particularly, as you look at those renewal spreads last year, we are really encouraged by spreads that are close to 11%, which is up 480 basis-points over it was a year-ago. And then from a new lease perspective, we are seeing a significant amount of competition for space which is driving rate higher. So it’s really a combination of strong leasing environment, but also the work that the team has done to put the portfolio in a position to really drive rate with great tenants across the country.
Jim Taylor
And I appreciate the focus on those spreads, I don’t think we get enough credit for them. Particularly when you view them in the context of the sector overall, several 100 basis-points of outperformance quarter-in and quarter-out, which just simply underscores the strength of the plan and the strength of the assets and how great a job, Brian and team are doing capitalizing on tenant demand.
Operator
The next question is from Craig Mailman with Citi. Please proceed.
Craig Mailman
Hi, good morning. Not to dwell on Bed Bath in particular, but just kind of curious on a couple of things here. Number-one, you guys gave the 60 basis – or the 60% kind of mark-to-market on the four. Could you just give us sort of what you think the broader mark-to-market is on your total exposure? And then, I know there’s some discussion out there, whether even file or what type of filing it is. Assuming maybe a restructuring or non-bankruptcy filing, would you guys kind of come through your exposure to them? What percentage do you think is potentially at-risk for them to give back versus kind of strong sales, good locations that you would consider them to keep?
Jim Taylor
Well, let me just make this point if I may. We want every box back we can get. We’ve got tremendous demand for these spaces which have an average rent basis of $10.35. Now we’ve embedded within guidance, while we expect with some cushion in terms of timing. But I think the most important point is that, when you look at our Bed Bath exposure in its entirety, it represents a significant opportunity for us to drive real value, real growth and real value.
And so when you think about that $10.35 of basis, we’re signing replacement tenants in the mid-teens. So consistent with what we’ve already announced on the existing boxes, but importantly spreads that allow us to actually create value as we bring in better tenants into our centers. And then we get the follow-on benefit from their, of additional small-shop leasing and increase in rate.
So in terms of the timing of when we recapture the space, I think Angela and team have done an excellent job of going through and handicapping that and making sure we have cushion in our growth numbers to handle a wide array of potential outcomes. But let’s not lose sight of the more important point, which is, it’s going to create an opportunity for us that could drive real-time value.
By the way and still deliver growth in ’23, right, which is something that can be said by many in this sector. So Bed Bath is just one example, there are other tenants where we hope to get the space back and I can assure you, we’re leasing ahead and by that I mean, we’re driving activity ahead of recapturing this space.
Craig Mailman
No, that’s helpful. I guess, as we think about the spill pipeline continues to kind of increase here. While from a timing perspective, taking back these boxes obviously create some disruption. I mean that SNO pipeline could continue to grow as a percent of ABR, which kind of sets you up for ’24 and beyond from kind of – do you think there is like a new normalized growth rate for the portfolio as you can kind of —
Jim Taylor
I think you’re spot-on and hats off to the leasing and national accounts team for continuing to grow that pipeline and address early recaptures. But I think you’re kind of seeing hence of it in our top-line numbers, right. That 4% which reflects a meaningful drag from anticipated space recaptured during the year, but you saw it in the fourth-quarter and as we talked a little bit about you see it in our numbers and expectations for ’23. And you make a really good point, which is that SNO actually impacts us even more accretively in ’24. Right. As we get the benefit of a full-year of those deliveries. So we’re excited about how we’re positioned.
Craig Mailman
And just one more quick one on the shop, you guys are at kind of record leased occupancy there. How much more – given what’s in the pipeline that you guys are seeing? Net of maybe some of the cushion from potential bad debt that you’re kind of baking in. What’s the – maybe, year-end target on that small-shop and from a dollar perspective, I know those are more impactful. So how should we think about the longer-term run-rate of that portfolio versus maybe some of the near-term impact of bad debt?
Jim Taylor
We have more than a couple of 100 basis-points of room to run. We’ve got drag in our reinvestment pipeline, we currently sit at 89.2%. Over-time, you can see that number grow into the low 90s. And you make the right point, Angela will hit on in terms of what its impact is. But that’s part of the follow-on benefit of our reinvestment. And as we deliver those new anchors, we get better rate and better occupancy in the small shops or the centers impacted.
And the reason I’m making that point is, that we’re not managing to an occupancy level. We’re managing to drive fundamental growth and ROI. And the small-shop growth is a great lever for us to pull as the anchors in the broader reinvestment had delivered. And you’re right, there is a leverage impact on that number.
Angela Aman
Yes, when you look at sort of where we’ve been signing new small-shop leases over the trailing 12 months, its over $25 per square-foot. That’s over 50% above our portfolio average. So every 100 basis-point gain in small-shop occupancy translates into something a little over 150 basis-points of same-property NOI contribution.
Operator
And the next question comes from Alexander Goldfarb with Piper Sandler. Please proceed.
Jim Taylor
Good morning, Alex.
Operator
Our next question comes from Haendel St. Juste with Mizuho. Please proceed.
Haendel St. Juste
Good morning, guys. I guess first question, maybe some follow-up comment on the transaction market. Obviously things are still pretty frozen out there, retail volumes were down I think 50% of fourth-quarter, pretty wide bid-ask spreads. But maybe can you talk about the cap rates and the type of assets that you’d like to own, what you’re seeing out there. And then given your cost-of-capital, what kind of a new hurdle rate would need to be, basically we’re assets we need to be price we will get more interested in more active here? Thanks.
Jim Taylor
Our hurdle rate is absolutely gone up with the increase in the cost-of-capital. So we’re – hand out here, the latter part of your question. We’re remaining disciplined, where we expect to find opportunities is, where there has been disruption and where we have the opportunity not only to get-in at a good initial yield, but where we have great visibility on being able to grow that. So that, we can get to those unlevered IRRs in the high single, low-double-digit area. And maybe, Mark, if you’re on, you can comment a little bit on what we’re seeing real-time in the transaction market from a volume and pricing standpoint.
Mark Horgan
Sure. Again, in terms of the current market, it’s definitely started flow as buyers and sellers have continued to adjust to the new rate environment. Trades have been limited again in Q1, but I’d say over the last few weeks, we’re starting to see some more assets come to-market, both from some of those institutional sellers implementing some liquidity for redemption requests.
And probably more interesting, is seeing some private owners come to-market, who are struggling with that debt market. We do like to buy from some of those private owners, as Jim mentioned earlier, our platform just as more liquidity, has more asset the tenants and that’s where we see our opportunity to drive assets and get those higher unlevered IRRs that we seek.
I’d say in terms of pricing, it’s hard to exactly pinpoint where things are given the somewhat slower trading environment. But what’s clear is that, what we’re seeing on that look, where we’re seeing the biggest price change – pardon me, it’s really on those lower cap-rate assets where it’s clear that cap rates have moved there from a low-point 50 to 75 basis-points. So we do think we’ll be seeing some better opportunities as the year progresses. I think, as Jim mentioned, I do expect that to be a bit back-weighted.
And I think I’d add, just on the acquisitions, as Jim and Angela and Brian mentioned, we focus on value-added deals where we can drive value and cash-flow. And that’s really well-suited for this type of environment and I think you can see that some of our past acquisitions like Brea, worry about last year we released about 200% and we’ve got out parcels and progress or Ravinia, where we moved occupancy from low 80s to the low 90s in our first year of ownership. So we’re excited about opportunities you’ll see this year, but do you think it’ll be a slow start to the year.
Haendel St. Juste
Thanks. I appreciate that color and certainly the latter half of your response to address my follow-up question was going to be on, if your focus is going to include more of these acquisitions with occupancy upside, more repositioning that’s kind of more of what you’re inclined to do or perhaps a greater opportunity.
So it sounds like a that’s what you’re focused on, but maybe a question on the balance sheet Angela, leveraged – I understand, no near-term or very little near-term debt maturities, but you are sitting here mid-60s. I guess, I’m curious on your thoughts on-target leverage in this type of environment. I’m assuming the plan hasn’t changed in terms of deleveraging, you are going to – as you realize your SNO rents, the leverage should come in. So help us understand kind of what the target leverage is, when do you think you’ll get there and maybe some timing for the SNO this year and next year? Thanks.
Angela Aman
Sure, thanks, Haendel. Yes, our expectations in terms of target leverage haven’t changed. We’re continuing to work our way to about 6 times debt-to-EBITDA, a big reason why we feel like that’s the right level for this company and this portfolio, is due to the below-market rent basis in the portfolio. On a look-through basis, we’re clearly well below that. Well below six times, once we achieve that level and actually a touch below six times now.
You’re right that continued contribution from the sign but not commenced pipeline and how that comes in over the course of the next year or two is a meaningful contributor to helping us get there.
But I would also sort of pull-back from that a little bit and just note that we’ve got $115 million to $120 million a year of free-cash flow that we’re using to invest in the value-enhancing reinvestment program and funding it with free-cash flow in that way is just fundamentally deleveraging as well. So just the continued execution of the strategy continues to set-up well to – the glide path well to meet those target.
In terms of the sign but not commenced timing, we do provide it in the supplemental on NAR page, you’ll see when looking at that about 76% of that $55 million comes online by the end of 2023. And I would just note that the contributions between first-half and second-half are roughly radiable as we move through ’23.
Operator
Our next question comes from Alexander Goldfarb with Piper Sandler. Please proceed.
Alexander Goldfarb
So quickly two questions. First Angela, on the potential to the prior question or you didn’t want to talk about specific future tenant issues. I guess, let me ask it from this perspective. The future potential tenant issues that you guys are contemplating in that generic bad debt guidance, do those tenants also have similar re-leasing upside that we are seeing from Bed Bath and some of the other tenants that 40% plus percent of single problem and 60% on Bed Bath or that future potential pool have re-leasing spreads that would be lower than that?
Brian Finnegan
Alex. Hi, this is Brian. Well, just if you think about the Tuesday Morning today which Angela highlighted. You look at what we’ve signed during the quarter, we took a space back-in suburban Cincinnati, we’ve doubled the rent. We’ve been signing leases on that size space in the high-teens with the likes of Five Below and Skechers and Boot Barn. So for those certainly and I’d say across-the-board, we benefit from low rent basis and we benefit from low rent basis in particular with these tenants.
So we feel pretty good overall about the upside, is every space going to be 60%, no but we do think that that these spaces are going to be in-line with where we’ve been driving rents across the portfolio and we’ve been pretty encouraged by.
Alexander Goldfarb
Okay, the second question, Brian. One of the big issues out there just seems to be, it’s not the demand to backfill, it’s actually the time to reopen tenants. So what are ways, one I guess, are any tenants willing to take space as-is and if not, are there any ways to sort of accelerate the downtime to minimize that or it is what it is between getting the permits, building out the space, et-cetera?
Brian Finnegan
I’m really glad that you asked the question because our operating teams, led by high which Jim mentioned have done a fantastic job in terms of partnering with the operating teams on the tenant side. I point you an example last year, we just opened two alters in Metro New York and we got those stores open in less than six months and we have seen tenants from when we sign a lease.
And so we have seen tenants take space as-is, but I think as we’ve mentioned on prior calls, what’s come out-of-the pandemic as a best practice has been retailers utilization of more existing conditions, right? They’re figuring out how to change their prototypes, so they can keep the bathrooms where they are, they’re figuring out how they can utilize the existing HVAC units.
And so they’re not – they’re doing that because we’re radically aligned in terms of getting them opened as quickly as possible. So we have done some work that has taken some time on the front-end, from a lease negotiation standpoint, but it certainly cut-down on the time from a buildout perspective.
And the other thing is, a lot of these particularly on the spaces that we’ve been in front of. I mean, we’ve had our folks in this space had tenants representatives in this space to be able to understand plan, so that when we ultimately get those spaces back we’re already ahead of the game.
So the team has done a fantastic job, really across-the-board and partnering with our tenants. I think some of the things that have come out-of-the last few years are going to remain going-forward in terms of the flexibility of how they’re able to utilize the spaces.
Operator
The next question comes from Floris van Dijkum with Compass Point. Please proceed.
Floris van Dijkum
Thanks for taking my question guys. I just wanted to make sure, I understand this correctly. And one of the things that I mean, Jim capital allocation is how management provides value to shareholders and you’ve done a very nice job in terms of self-funding your business and generating significant amount of free-cash. One of the things I’m am curious to make sure I understand correctly here. The – one of the ancillary benefits of this reinvestment in your portfolio, is that your small-shop occupancy has increased quite sharply. But there appears to be significant more room to go here. Am I correct that every 100 basis-points of small shop occupancy is 150 basis-points of NOI growth. And would that – does that imply that, if you get your small-shop occupancy to another 300 basis-points higher, which I think is where it’s trending based on your redevelopments. Is that another 600 basis-points of upsides potential?
Angela Aman
Yes. I think over-time, right. I mean, I think when you just think about what a powerful contributor the small-shop occupancy pickup is, when you’re bringing that space online not at portfolio average of 16. And not even at sort of where the sign but not commence overall pool is today at over $19 per square-foot, but at $25 per square-foot, you can really sort of get your arms around how significant the upside and one important driver that is of growth as we move forward.
We still have some, remaining upside opportunity in anchor, we’re about 100 basis-points below kind of record anchor occupancy for the portfolio. So there’s still additional opportunity there, but most of the growth over-time, over the next call it three, four, five years on the anchor size, going to be from continuing to roll those rents to-market, as we’ve talked about primarily through reinvestment program and recapture proactive recapture space like we’ve been talking about today from some of those struggling tenants.
So that’s still a contributor to growth, but there’s no question that the follow-on benefit and the momentum we’re seeing in small-shop occupancy and the outsized potential of those rents is going to be a very significant driver of growth over the next several years.
Jim Taylor
Yes, Before, you’re hitting on the flywheel effect, we’ve talked about before which is, as we deliver these reinvestments at attractive returns, we’re fully anticipating follow-on benefit in rate and occupancy, particularly in the small shops of the centers impacted. And it’s part of why we don’t manage the business to a particular occupancy target, we manage the business for growth.
Floris van Dijkum
Thanks. One of the other things I presume your fixed rent bumps in your small-shop or higher as one and they mark-to-market more often than your anchor rents of one of the other benefits of getting that occupancy up. Maybe, if you can talk a little bit about one of the things that we’ve been hearing a lot more about in terms of tenant demand is this mid tail or medical users in your end portfolios and I think you mentioned something like that as well. It’s hard for us to understand what – how did those tenants think about occupancy costs and their ability to pay rents? Can you guys provide a little bit more color into the demand that you’re seeing there and why you feel-good about that portion of your portfolio?
Jim Taylor
Well. I think the – Brian to comment on this, but I think as I mentioned many times, we’re seeing that funnel of potential users continue to broaden really nicely and it includes medical users, it includes health and beauty, wellness and many other categories that are basically realizing that there is a real benefit in having a storefront presence near where the customer lives.
One that’s convenient, one it gives them good visibility and frankly one that allows them to benefit from the other traffic daily needs that center generates. So we’re – we continue to be excited and impressed by the breadth of new users and it’s important to understand that just creates more competition, which allows us to drive more rate.
Brian Finnegan
Yes, Jim, you hit on it before us. I’d also add, this has become a really complementary use in our centers. If you think about the operators in the med tail space have been really active, they are often – I often have very strong credit profiles backed by large insurance companies, we signed two leases this quarter and Southeast Florida back buy, UnitedHealthcare, we’re seeing really good activity on the Dennis front.
And then if you think about just the merchandising mix of our centers, right, chiropractic, massage, acupuncture that kind of wellness med-tail goes very well with fitness users with apparel operators that are selling fitness type apparel, so we think it’s very complementary.
The other thing I would say is, we’ve been freeing a lot of those type of uses up in our centers, going our leases going-forward. We do have some older leases and where you see that this has become kind of part of the normal tenant mix, is our national tenants where we have older leases where some of these users are restricted had been very accommodating to allowing them, because it does go with just another traffic driver into Jim’s point, just the range of users that are looking for space in the center. So overall, we’ve been pleased with what’s happening in that space and again, it’s just creating more competition for that space.
Operator
Our next question comes from Mike Mueller with JPMorgan. Please proceed.
Mike Mueller
Yes. Hi, I guess people always talk about the calendar shifting and things changing. And I’m just curious with this one that just happened. Are you seeing anything different in terms of the volume of product coming to-market or on the financing front, maybe the financing availability for smaller owners?
Jim Taylor
We do expect more product coming in-market, kind of alluded to it in terms of what we’re hearing in the pre pipelines of many of the brokers and others that represent these private owners. So we do expect it to be more back-end weighted, it takes a while for these processes to roll-through. But It’s really what we see driving the activity are two things. One, the tenant disruption, right? As private landlords may not have the capital or the leasing wherewithal to backfill some of these spaces, as well as refinance requirements.
As these private owners can still get financing, but the interest-rate environment is much more different, which impacts their cash distributions to ownership. So we do expect those two underlying market forces to drive more product.
Operator
The next question comes from Tayo Okusanya with Credit Suisse. Please proceed.
Tayo Okusanya
Good morning, everyone. Going back to the question around the watch-list tenants and why you’re not specifically talking about any names? Could you talk about any particular retail categories where maybe on the margin, you may be expecting a little bit more activity versus last year?
Jim Taylor
Entertain us.
Tayo Okusanya
Regards to – sorry, that’s entertainment?
Jim Taylor
Yes, certainly. But there is no real surprises. The weaker and struggling retailers are known to all, you can see their issues coming well in advance, part of why Brian and the team are way ahead of that and working with tenants to pre-lease a lot of this space that we expect to get back. But there is no kind of persistent categories, it’s really more retailers who had persistent problems. And the great merchants continue to thrive and not only are they thriving, but they are putting more-and-more importance on the central role of the store plays in a multi-channel format. So it’s less category driven other than perhaps movie theaters and much more participants driven.
Operator
The next question comes from Linda Tsai with Jefferies. Please proceed. Linda, your line is live.
Linda Tsai
Sorry about that. What’s your view on TIs in ’23 and versus ’22?
Jim Taylor
We’re going to stay disciplined. I mean, look at our net effective rents, we’re going to use that tenant competition to not only drive rate, but to drive lower TI. So that’s been our approach and we do actually disclosed here, what the net effective rents have been, which sum down. But I think that, that’s important and you can see, there’ll be a quarter or two of movement, some looks high, some looks low, but when you look at it over several quarters, you can see that we’re holding pretty firm there.
Linda Tsai
Got it and then on grocers with Amazon closing some fresh and go stores, will you see any impact and then to the extent, Kroger and Albertson’s sell 250, 300 stores. What’s the read-through for your portfolio?
Brian Finnegan
Linda, Hey, this is Brian. So I just on Amazon, they’ve been a great partner of ours and we were really excited. In the fourth-quarter, we were able to add and we announced our WholeFoods in suburban Philadelphia, we’re seeing great leasing traction on the WholeFoods locations that we purchased in Houston and Chicago. Last year, they’re a great operator, they drive a tonne of traffic.
On the fresh side, look Amazon has publicly announced a pause, which we think is prudent for them to get it right, they did open this chain in the middle of the pandemic. But overall, we’re really pleased with the partnership that we have with both Amazon and WholeFoods. And then as it relates to Kroger Albertsons, look, there’s not much new to report.
I know there was a media report out there regarding a number of store closures, there was always going to be a certain number of divestitures as part of this. But I’ll just remind everybody is, even Kroger and Albertson’s said this is going to be a long regulatory process, they said in the initial announcement it’s going to be early 2024.
And we feel-good about our fleet of stores no matter what the outcome is, if you look at our Kroger and Albertson’s fleets across the portfolio, we’ve got great locations in places like Atlanta and Denver and Dallas, Southern California, Cincinnati, just a great fleet and both fleets have been significantly reinvested in over the years. So we think a merger would be good for both companies will allow them to continue to reinvest in those stores. But again, we feel pretty good about our fleet no matter what the outcome is.
Operator
Thank you. At this time I would like to turn the floor back over to Stacy Slater for closing comments.
Stacy Slater
Thank you everyone and have a great week.
Operator
This concludes today’s teleconference. You may disconnect your lines at this time. And thank you for your participation and have a great day.
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