SITE Centers Corp. (SITC) Q4 2022 Earnings Call Transcript

SITE Centers Corp. (NYSE:SITC) Q4 2022 Earnings Conference Call February 8, 2023 8:30 AM ET

Company Participants

Stephanie Ruys de Perez – Senior Director

David Lukes – Chief Executive Officer

Conor Fennerty – Chief Financial Officer

Conference Call Participants

Todd Thomas – KeyBanc Capital Markets

Craig Mailman – Citi

Haendel St. Juste – Mizuho

Samir Khanal – Evercore ISI

Floris Van Dijkum – Compass Point

Alexander Goldfarb – Piper Sandler

Ronald Kamdem – Morgan Stanley

Linda Tsai – Jefferies

Mike Mueller – JPMorgan

Operator

Good morning, and welcome to the SITE Centers Reports Fourth Quarter 2022 Operating Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded today.

I would now like to turn the conference over to Stephanie Ruys de Perez. Please go ahead.

Stephanie Ruys de Perez

Thank you, operator. Good morning, and welcome to SITE Centers’ fourth quarter 2022 earnings conference call. Joining me today are Chief Executive Officer, David Lukes; and Chief Financial Officer, Conor Fennerty. In addition to the press release distributed this morning, we have posted our quarterly financial supplement and slide presentation on our website at www.sitecenters.com, which are intended to support our prepared remarks during today’s call.

Please be aware that certain of our statements today may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from our forward-looking statements. Additional information may be found in our earnings press release and in our filings with the SEC, including our most recent report on Form 10-K and 10-Q.

In addition, we will be discussing non-GAAP financial measures on today’s call, including FFO, operating FFO and same-store net operating income. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today’s quarterly financial supplement.

At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes.

David Lukes

Good morning and thank you for joining our fourth quarter earnings call. The fourth quarter concluded a very productive year for SITE Centers with results ahead of budget, another quarter of elevated leasing volume despite having less available space, the opportunistic sale of three wholly-owned properties with pricing well inside of where we repurchased stock, and a balance sheet that remains in great shape with full availability on our line of credit, minimal near-term maturities and debt to EBITDA in the low 5s, which remains well ahead of the peer group and the sector overall.

I’ll start with detailed comments on leasing and then move to transaction activity before handing it over to Conor to give more details around the quarter and 2023 guidance. In the fall of 2020, we saw the early signs of an acceleration of demand from national retailers following a six-month COVID pause. The junior anchors were the first to accelerate followed by small shop and midsized users. The common theme behind their expansion plans and new concept growth was the desire for well-capitalized retailers to get into or closer to the wealthiest suburban communities in the country to take advantage of population growth, pandemic-induced work-from-home trends and the benefits of a store fleet that could be used for in-person, click and collect, or ship from store.

The unusual strength and speed at which leasing demand accelerated led us to quickly expand our leasing department and regionalize our leasing leadership to ensure that we were in front of our best relationships at the time when they needed space. John Thirkell was named Senior Vice President of Leasing at this time, and his team of five veteran regional vice presidents have used their relationships to our advantage to produce exceptional results for our company.

Ultimately, SITE Centers signed over 2 million square feet of new leases in 2021 and 2022 at a 20% spread, including 73 anchor boxes signed since the start of the pandemic, and increased our lease rate by almost 400 basis points.

I can’t thank the leasing team enough for their dedication and hard work. This congratulations also extends to our legal leasing department, led by Aaron Fair, who have also used their deep relationships to quickly respond to tenant demand and complete a very high volume of new leases in a short period of time.

Going forward, the trends and factors that allowed us to achieve these high leasing volumes are still firmly in place. Supply in our submarkets is extremely low and demand remains very strong from national retailers looking to expand their footprints in the wealthiest suburban markets where we operate.

Our execution of new leases to satisfy these retail tenant expansions, combined with high tenant retention, resulted in a 40 basis point sequential increase in our portfolio leased rate to over 95%, which achieved the target that we laid out over a year ago. The one change we have seen more recently is the return of post-holiday bankruptcy filings following a two-year hiatus. Specifically, as it relates to tenants, including Party City, and the widely publicized potential filing of Bed Bath & Beyond, I’ll spend some time on our strategy for both of these tenants.

For Party City, SITE had 12 wholly owned locations at year-end, excluding JVs and the franchise location with total exposure of about 90 basis points of base rent. Given the high sales productivity in our portfolio and the demand from other credit tenants for that space, we were not surprised that none of our locations were on the initial rejection list as part of the bankruptcy process. Tenants looking for space in this unit size include pOpshelf, Ulta, Five Below, Sephora, J. Crew and a variety of medical users, among others. As a reminder, the Party City unit size is similar to Pier 1, which liquidated early in COVID, and none of those units are available to lease in our portfolio today.

During any bankruptcy process, there are times when a landlord works with a weak tenant to restructure leases. This is not one of those times. We expect to pursue an aggressive recapture of space so that we have more inventory to satisfy demand from other high credit national tenants.

Shifting to Bed Bath & Beyond, which has been widely publicized, may file for bankruptcy. Given the possibility that we might eventually recapture all of their locations, our asset management team began working with our leasing team in the fall of last year to identify a strategy for each unit, along with potential backfill candidates and we feel very well prepared for a focused marketing cycle.

To date, we’ve recaptured one location at natural expirations, and that store has already been re-leased to Planet Fitness with a 2023 expected rent commencement date. Of the remaining 18 stores, which represent 1.9% of base rent, we are confident that there are single user backfill options for 17 of those locations. The last remaining space is slated for demolition to prepare for an asset sale for a multifamily redevelopment project in Washington, D.C., which we completed the requirement for rezoning almost two years ago.

As a result of these activities, I would expect that the majority of our stores will have executed leases this year should the company file, with rent commencements by year-end 2024.

Moving to the overall portfolio leasing for the quarter. As noted, demand and activity remained very high in the fourth quarter with over 800,000 square feet signed. In terms of new leasing, we had another quarter of almost 200,000 square feet of new deals with strength again from national shops as a standout. Our shop lease rate was up 120 basis points sequentially and 530 basis points from the fourth quarter last year. Quite a bit of this leasing was again in our tactical redevelopment pipeline with a specialty grocer signed post year-end at our Tanasbourne project in Portland, bringing the pipeline to over 85% leased. The projects broken out in our supplement started to deliver last year with the majority stabilizing by year-end 2023. Importantly, each of these projects are expected to be immediately accretive to earnings.

Looking forward, we have another 250,000 square feet at share in current lease negotiations, which excludes any of the activity on Bed Bath or Party City locations that I just outlined, with blended spreads above our trailing 12-month average. We expect this pipeline to be completed over the next two quarters, concentrated in the mix of national publicly traded tenants. That said, the absolute level of activity in the first quarter will moderate as we simply have less space to lease until we can take possession of some of the bankrupt tenant square footage outlined earlier.

Shifting to transaction activity. We had another very active quarter recycling capital, highlighted by the sale of three wholly-owned properties with total dispositions in the quarter of $158 million at share. Two of the three properties were sold, not marketed, but were the result of a 1031 investor that approached our team looking to reinvest proceeds at pricing, which we felt was attractive for our stakeholders.

Net proceeds were used to pay down debt, repurchase stock at roughly a 150 basis point spread to the cap rate on the deals and reinvest in convenience assets in the Mid-Atlantic and Denver. Specifically, we acquired two properties in Denver for almost $17 million and one property outside of D.C. for $15 million.

There will be a lag until we are able to reinvest all of the proceeds but we have an additional $75 million of convenience assets under contract or awarded as of today, which we would expect to close by the end of June. The assets acquired or under contract are in our core markets, including Denver, Atlanta, Phoenix and Washington, D.C. and have attributes similar to those assets bought in the third quarter and to date, including strong submarket demographics with top quartile incomes, a tenant lineup made up of services, financial services, quick-service restaurants and a majority with a drive-through unit. Underwritten five-year NOI CAGRs are roughly 3% with minimal CapEx, which is consistent with our existing convenience portfolio and one of the key attributes of our thesis.

In summary, we are extremely pleased with our portfolio positioning and future leasing prospects, our investments to date, which have increased our long-term growth profile and shifted our portfolio to the top submarkets in the country, and future investment prospects, which we believe will create stakeholder value while prudently managing our balance sheet. A special thank you to the entire SITE Centers team for another incredibly productive quarter and year.

And with that, I’ll turn it over to Conor.

Conor Fennerty

Thanks, David. I’ll comment first on quarterly results, discuss our 2023 guidance and some of the moving pieces embedded in guidance and then conclude with the balance sheet. Fourth quarter results were ahead of plan, as David mentioned, due to a number of operational factors, including earlier rent commencements and higher occupancy and higher overage and ancillary income. These operational factors totaled about $0.01 per share relative to budget. The quarter also included $300,000 of unbudgeted straight-line rent from the conversion of cash basis tenants and $800,000 from payments and settlements related to prior periods.

For the full year, we generated $1.18 per share, which compares to $1.17 in 2021 despite a $10 million headwind from prior period reversals and a $16 million headwind from lower RVI fees. This roughly $0.12 per share headwind in aggregate was offset by higher NOI as we transition the company to one with lower fees as a percentage of EBITDA and a higher quality property income stream.

In terms of operating metrics, trailing 12-month leasing spreads accelerated for both new leases and renewals with blended spreads for the year just under 9%. We continue to see strong leasing economics for the pipeline though quarter-over-quarter volumes and spreads will remain volatile given our denominator. The lease rate also had positive momentum and was up 40 basis points sequentially and 270 basis points year-over-year with our lease rate now at 95.4%, well above the company’s pre-COVID high watermark of 94.3% set back in 2017.

Highlighting our leasing volume and backlog, we had over 290,000 square feet of new leases commenced in the fourth quarter, representing over $6.4 million of annualized base rent. Despite that, the SNO pipeline was down only $3 million sequentially to $19 million as new leases partially offset the impact of commencements. These signed leases represent just under 5% of annualized fourth quarter base rent or over 5% if you also include leases in negotiation in our pipeline. We provided an updated schedule on the expected ramp-up of the pipeline on Page 6 of our earnings slides.

Same-store NOI grew 1.8% in the fourth quarter with the uncollectible revenue line item, a 110 basis point headwind to year-over-year growth. For the full year, same-store NOI was up 80 basis points or 4.6% after adjusting for 2021 uncollectable revenue with same property NOI for the portfolio for properties owned for the last four years, well above 2019 or pre-COVID levels.

Moving on to our outlook, we are introducing 2023 OFFO guidance with a range of $1.10 to $1.16 per share. Rent commencements, investment activity and potential tenant bankruptcies are the largest swing factors expected to impact where we end up in the full year range. I’ll start by breaking down the components of 2023, including tenants in or widely reported to be close to bankruptcy and then talk about the transition to the first quarter from fourth quarter results.

Starting with same-store NOI. We expect growth of 75 basis points at the midpoint of the range with prior period reversals of $3.4 million in 2022, a roughly 100 basis point headwind to growth. Included in same-store is a 250 basis point credit loss estimate at the midpoint that includes our annual bad debt reserve along with specific bankruptcy assumptions related to tenants that have filed for bankruptcy to date, along with other tenants with well-publicized liquidity concerns. We have three national tenants as of today, either in bankruptcy or widely publicized to be close to bankruptcy, and that includes Cineworld, Party City and Bed Bath & Beyond.

For Cineworld, we have three locations with total annualized base rent of $2.9 million as of December 31. None of the leases have been rejected to date. But based on initial conversations, we expect to execute short-term agreements at two locations, which allow us to maintain some income, but more importantly, control at potential multifamily locations in Washington, D.C. and Atlanta. The net result of these agreements is a $1.3 million impact to 2022 revenue – excuse me, from 2022 revenue.

For Party City and Bed Bath, outside of the three locations that were included on Bed Bath’s recently posted store closing list, there have been no rejections or closures to date. That said, as David mentioned, we intend to make sure we are maximizing the long-term value of our real estate, which means there are likely several locations where we will recapture to re-tenant with a more productive user at better economics. Specific to Bed Bath & Beyond, there is quite a bit of new news in the last 48 hours. The midpoint of guidance for both same-store and OFFO assumes that we recapture all of their Bed Bath stores in the second quarter. The top end of guidance assumes that they are in place for the entirety of the year.

In terms of 2023 fee guidance, we expect JV and RVI fees to total $5 million to $7 million with minimal contribution from RVI. This assumption reflects additional expected JV asset sales. G&A is expected to total about $48 million. And finally on transactions, we expect $100 million of net investments at the midpoint of the range, with the assets completed – asset sales completed in December, roughly $0.01 dilutive in year one given the reinvestment gap that David mentioned.

Moving to the first quarter of 2023. There are a few moving pieces to consider from the fourth quarter. First, as I previously mentioned, we had $300,000 of non-recurring straight-line rent and $800,000 of non-recurring uncollectible revenue in the fourth quarter. Second, the assets sold in December generated $1.6 million of NOI at share and $250,000 in JV fees in the fourth quarter, which implies total JVCs of about $1.7 million for the first quarter. A summary of these factors is on Page 11 of our earnings slides.

Finally, ending with the balance sheet. At year-end leverage was 5.1x, fixed charge remained over 4x and our unsecured debt yield was over 20%. In the fourth quarter, we repaid two maturing mortgages along with the balance outstanding on the line of credit with proceeds from asset sales improving upon our already sector-leading leverage levels. As a result, the company has just $87 million of debt maturing through year-end, full availability on the $950 million recast line of credit and 2% variable rate exposure.

To put this all in context, even at the low end of the guidance range, we expect debt to EBITDA to remain below 6x, the AFFO payout ratio to remain below 75% and to generate $35 million of retained cash flow. Additionally, this leverage profile and liquidity provides substantial investment capacity and optionality to fund the company’s business plan and take advantage of potential opportunities as they arise.

And with that, I’ll turn it back to David.

David Lukes

Thank you, Conor. Operator, we’re now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question here will come from Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Todd Thomas

Hi. Thanks. Good morning. I guess, first question, David, the leasing environment has been fairly favorable here for landlords. You discussed that and talked about your leasing activity in the quarter. And you talked about Bed Bath and Party City and loosely outlined some of the demand that you’re seeing there, but you have out signed leases and cannot, I guess, until you really recapture space to the extent that you do.

Do you see risk that the market loosens up a little bit from Bed Bath closures and maybe some space that’s being recaptured a little bit more broadly with vacancy having an impact on rents? Or do you still anticipate favorable leasing environment and demand remaining strong as you kind of work through some of these, sort of, challenges during the months ahead or quarters ahead?

David Lukes

Yes. It’s a really good question, Todd. I mean, first of all, I would say the leasing environment today is significantly better than favorable. It’s extremely robust. So the time to have space back is right now. Whether that continues, that’s a really good question. I mean we have not seen a decline in demand. You’re right that we’re not formally marketing spaces from tenants that have a legal right to be in that space, and they haven’t filed yet. But that doesn’t mean that tenants can’t send us LOIs in anticipation of that.

And the activity that we’re receiving from tenants on the Bed Bath and Party City spaces is for virtually all of those locations. So I feel very good about the demand right now, which is why if we get space back, I’d rather have it now, because we don’t know where the economy is going. We don’t know where tenant demand can go. And as you and I both know, when retailer demand stops, it stops fast. And right now, it’s still – the green light is on. So I prefer to have the space back sooner rather than later.

Todd Thomas

Okay. And you mentioned the Planet Fitness lease that you signed for one Bed Bath location that you recaptured. You mentioned that there’s – you think that there are 17 single-user backfills. Can you just – you talked about some of the Party City backfill opportunities that you’re seeing. Can you discuss the tenants that you would expect to take the Bed Bath space and maybe also talk about the replacement rents that you might be anticipating relative to Bed Bath’s and place rents today?

David Lukes

Sure. Well, Party City, I mean, let me start with that for a second, Party City, having some similarities to Pier 1, meaning some of them are in-line stores, some of them are outparcel pad stores. And so Party City has more to do with what’s the highest and best use. Is it a single tenant backfill? Is it a split into shops? How much rent can we drive from that? I would expect that the rent spreads on the Party City portfolio can range anywhere from 5% to 30%, depending on whether it’s an as backfill or a subdivision for shops. And the shop demands are so strong right now that we’re likely to tilt higher to that value creation.

On Bed Bath & Beyond, if you look back in the last two years of the anchor tenants we’ve been signing, it’s virtually the same as that inventory of prospective tenants. It’s any of the TJX concepts, the ROS concept, Dick’s Sporting Goods, all the cosmetics, any of the discount chains. So I think that those tenants that have been active for the last two years are still the ones that are active today in seeking out a Bed Bath location.

And the one thing I’ll point out is if you rewind back to 2017, you think of the inventory that we got back, specifically from Toys “R” Us and Babies “R” Us, the average unit size was a lot larger than our average unit size with Bed Bath. So the Bed Bath size fits a lot of concepts right now, which is why our confidence is pretty high that single-tenant backfills will be likely for the vast majority of them.

Todd Thomas

Okay. And then, Conor, I appreciate all the detail around the 2023 guidance. I just want to make sure I heard you correctly. So the high end of the guidance range assumes that all Party City, all Bed Bath & Beyond locations are in place and continue to pay rent. And the only adjustment that you’ve made in guidance is the $1.3 million expected impact from the two Cineworld locations. Is that correct?

Conor Fennerty

No. The midpoint of guidance assumes that Bed Bath, we recapture all the Bed Bath locations in the second quarter. And the high end assumes that Bed Bath is in for the entire year. Party City, we made an explicit assumption around each individual space where we expect to potentially recapture as we have conversations with them post-bankruptcy filing.

So I isolated my comments to Bed Bath just given the fluid situation, for lack of a better phrase, in the last 48 hours. But obviously, there’s a multitude of other factors. The budget or the midpoint also impacts or incorporates the Cineworld comments you mentioned as well. So again, we’re just trying to isolate Bed Bath for the top and the midpoint of the range.

Todd Thomas

Okay. Got it. Yes, that’s helpful. All right. Thank you.

Conor Fennerty

You’re welcome.

David Lukes

Thanks, Todd.

Operator

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

Craig Mailman

Hey guys. Good morning. Just following up on maybe just specifically, 250 basis points of credit loss in same-store. Kind of what does that translate to for FFO purposes? And could you break that out into maybe how much of that’s already on a cash basis accounting versus accrual?

Conor Fennerty

Craig, I’m struggling with the first part of the question, how that translates to FFO. I mean the simple way, if you took 250 basis points of our same-store run rate, I mean, the vast majority of our NOI is included in same-store. You’ll probably get a decent dollar amount. My guess is, just thinking about this off the top of my head, it’s probably $8 million to $10 million at the midpoint, somewhere around there in terms of total dollars. And then the second part of your question, I’m sorry, I don’t follow that one as well, the cash basis accrual question.

Craig Mailman

Are all the tenants on your watch list or Bed Bath, Party City, are they already being accounted for on a cash basis? Or are they – is there going to be a straight line that needs to be written off? I’m just trying to get a sense of the FFO impact if we see Bed Bath file from straight line versus just cash rents disappearing. And how – maybe what percent of your tenant base is on cash basis accounting today versus accrual?

Conor Fennerty

Yes. So we don’t specifically identify which tenants are not on a cash basis until – or if they have filed for bankruptcy. What I would just say to you, Craig, is every tenant I mentioned in my script, there’s no ARR on the balance sheet at year-end. So if any of the tenants that I mentioned file or continue on with their bankruptcy process, there’s no impact to us from straight line whatever it might be ARR on the balance sheet. So that’s the easy one.

In terms of percentage of cash basis, I can’t recall off the top of my head, the number of tenants is lower from the end of the year. As I mentioned in my prepared remarks, we had a $300,000 good guy in terms of the reversal from taking cash to tenants off cash basis, but I can’t recall off the top of my head with the percentage, but it’s lower by count from the end of the year.

Craig Mailman

Okay. Then I think in the presentation, you guys have said Party City didn’t pay rent for January. Is that – is that just a stub period following the bankruptcy announcement? And then that should – because they haven’t rejected any leases kind of that should come back on in February and beyond?

Conor Fennerty

Yes. So for Party City, they didn’t pay the majority of their locations rent in January. There were a couple of paid. It’s not rare to see that in a bankruptcy process, where some rents get paid as part of kind of some confusion ahead of the process. So the majority of rents were not paid. We obviously, to your point, called that out in our slides. They have paid February rent. And to your point, as long as they are in occupancy, they’re required to pay rent as well.

Bed Bath has not paid us February rent. They have not filed for bankruptcies. So that rent is required. So you should expect us to pursue that collection as prior leases or contracts. So again, it’s a fluid situation. But that is something to keep in mind. It’s a really good point to bring up, Craig, the kind of prolonged period of rent payments as part of the bankruptcy process. To your point, typically, there’s some rent unpaid the months or the months that the tenant is filing for bankruptcy.

But then they’re obligated to pay for the remainder of – until they reject the lease. If you recall back in 2020, Pier 1 actually occupied our space for as much as nine months for some locations. So the impact of 2022 might not – 2023, excuse me, might not be as significant for some tenants, depending on when they file when they reject leases. But obviously, we’ll – as that process unfolds, we’ll update folks over the course of the year.

Craig Mailman

Okay. That’s helpful. Then just one last one. As we think about kind of CapEx here with all these moving parts about maybe recapturing stores and the commencement timing maybe in 2024, how should we think about kind of CapEx spend here for 2023 and 2024 versus sort of a normalized run rate?

Conor Fennerty

Yes, it’s a good question. So 2023 versus 2022 should be very similar in terms of total dollars, Craig. And I mentioned in my remarks, even at the low end of the range, including that CapEx budget, you still have $35 million plus of retained cash flow. For 2024 and 2025, we’ll see how the Party City bankruptcy process plays out. We’ll see how the Bed Bath news over the last 48 hours plays out. But obviously, if we get fewer spaces back, I would expect a dramatic decline in CapEx. And if we get more spaces back, then I think that you’ll see kind of a steady state.

The other piece to keep in mind is, as David mentioned in his prepared remarks, we are buying more convenience assets, and convenience as a percentage of the portfolio is increasing. One of the key kind of pieces or tenants behind why we like that property type so much is the lack of CapEx. So I would imagine for the entire portfolio, CapEx as percentage of NOI will continue to decline just as convenience increase as a percentage of the overall portfolio market share. But again, the big dollars will depend over the next two years, really on what happens with a couple of tenants that we mentioned in our prepared remarks.

Craig Mailman

Great. Thank you.

Operator

Our next question will come from Haendel St. Juste with Mizuho. Please go ahead.

Haendel St. Juste

Hey, good morning. So I wanted to ask about capital allocation. I think you outlined $100 million of net investments as part of the guide. So I’m curious how you’re thinking about prioritizing that today. You’ve been actively buying back stock. You’re doing more convenience deals as you outlined. And you still have the outstanding preferred at 6 and 3, I believe. So I guess can you give us a sense of how you’re considering these various options on the menu? Thank you.

David Lukes

Sure, Haendel. I mean I think our strategy going forward at this point is similar to what you’ve seen in the last year or two, which is that all options are on the table. We’re actively in the market trying to find more convenience assets from sellers that are willing to sell at a price that we want. And we’re also keeping a pretty close eye on our share price. I mean those are the two activities that I think we’re most focused on. But I think that we can make a decision as we get through the year.

Haendel St. Juste

Fair enough. I think the follow-up I would have is regarding just transactions. I guess I’m curious what you’re seeing out there in the marketplace. You’ve been active buyer, seller, bid-ask spread. What do you think cap rates are for the type of centers you’re interested in? And then maybe some color on the cap rates for the assets you have under contract. Thanks.

David Lukes

Well, my – as you can imagine, we figured this would be an important topic for all of the management teams in the cycles, where cap rates and what’s happening. I think all of us that see debt costs rising had assumed that cap rates would follow. And I think at this point, the lack of volume of deals that are actually closing means that there’s still a pretty wide bid-ask spread.

So, on my summary simply that the sellers want to see pricing from six months ago, and the buyers want to see pricing for six months from now. And therefore, very few transactions are actually taking place. And we were able to sell three fairly sizable properties in the fourth quarter. But the buyers of those properties tended to be something unique.

It was a local person that always wanted it, it was a 1031 buyer that needed to shield proceeds. And on the buy side, we’ve made a number of offers to the buy assets that have been rejected. We’ve also made a number of assets that have been accepted. So I think the bid-ask spread is at least 100 basis points. And I would look to see that close a little bit tighter through the end of the year. That’s about all I can come up with, honestly, Haendel.

Haendel St. Juste

Fair enough. And I understand the market is pretty solid out there. Last one, if I could, just curious on the comments on the convenience assets you guys have been buying more of. Is there a thought here on the sizing of perhaps how large that could be as a part of the portfolio? Just curious how you’re initially thinking about the opportunity here in relation to your portfolio? Thanks.

David Lukes

Well, I think we’re very convinced about the thesis. We’ve seen good results from what we bought to date. And so as much as you’ve seen us recycling in the last year, I think we’ll continue to do so. As long as we see opportunity, that’s one of the key areas where we’d like to place capital.

Haendel St. Juste

Fair enough. Thank you.

Operator

And our next question will come from Samir Khanal with Evercore ISI. Please go ahead.

Samir Khanal

Good morning, everybody. I guess, David, on Bed Bath, you meant that there is a liquidation here. I mean how long do you think it would take to sort of backfill that space, given that even these days, it takes long to get permits, et cetera? I’m just trying to understand sort of the timing to get some of that rent back in due time.

David Lukes

Yes, Samir, it’s – if you look back at the last – the whole last cycle, the last 10 years, normally, you would expect 18 to 24 months of downtime before rent commences for larger box spaces. I think what’s different today is that the demand is so strong and the demand is primarily from single-tenant backfills. And the single tenant backfill significantly reduces the permit time and the construction time required to deliver that space.

So in my prepared remarks, one of the things that I mentioned that you could reference is that I would expect that almost all of the Bed Bath spaces if we get them back soon will be leased by the end of the year, which means that we would expect rent commencements to be sometime towards the end of next year. So maybe a little shorter than a traditional cycle, but in some cases, you can’t really shorten it tremendously.

Samir Khanal

Okay, got it. And then I guess my second question is, on the convenience in the unanchored centers as it relates to those. I mean, what’s the risk to these tenants in a downturn? Just trying to understand that a little bit more.

David Lukes

I think the risk in – I mean, any small shop is at risk of a recession just like a large tenant is. And that’s why credit becomes extremely important. So we tend to focus on convenience assets that don’t require some other anchor to draw traffic. They tend to be right up on the curve line. They tend to have high traffic counts and the credit, if you look at our tenant roster, it’s pretty much national chains. There’s always going to be some local shops. And in any recession, I would expect that we would lose some local shops.

The difference really is what’s the cost to replace that shop when the economy turns? And the reason the convenience assets are really intriguing to us is that the sheer volume of tenants that want to be in small shop space is up along the curb, don’t really take as much capital to replace as a larger tenant does, and they don’t change their square footage very frequently. So yes, I would still expect in a recession that the convenience assets would see a decline in occupancy. But I think the cost to bring that occupancy back up and the changing in the direction of the economy would be much less than it is in traditional anchored centers.

Conor Fennerty

And Samir, to David’s point, we have disclosure in our slides on the tenant roster, which you can see at Starbucks, Total Wine, JPMorgan, FedEx, et cetera. So each of the assets we’ve purchased to-date have had the vast majority of NOI from national tenants, which is consistent with the rest of the portfolio. So if you look at our – I know you’re focused on this, national local percentage of ABR, it really hasn’t moved much despite the fact that 10% of the portfolio is now in convenience. So the reason why, obviously, is because the vast majority of these are national anchored. So again, that helps mitigate some of the risk to David’s point, but obviously, not all the risk.

Samir Khanal

Thank you.

Operator

And our next question will come from Floris Van Dijkum with Compass Point. Please go ahead.

Floris Van Dijkum

Hi, thanks guys. This convenience center thing, which, I guess, maybe, David, you’ve been spending some time with Jeff Edison as well because, he’s telling some of the benefits of the small shop and the resiliency. That it’s very intriguing as you guys know, I’ve spent some time with you guys to understand it a little bit better as well. But I do think that it’s still such a small part of your portfolio.

At what point do you think we can call you a convenience center owner? And will you break down? Because I would imagine that your metrics for that portfolio are significantly better than your legacy portfolio in terms of same-store NOI growth and net effective rental growth and obviously, lower leasing costs as well.

When can we expect to see that portion of the portfolio broken down in some more granular detail just to get people more convinced that this is a viable and intriguing aspect of the shopping center space?

Conor Fennerty

Yes. Floris, there’s a lot to unpack there, and I’ll start with a couple of points. Look, it’s 10% of the portfolio. We’re still a $5 billion enterprise and it’s a small percentage relative. So we’re a long ways from, I would say, called segment reporting or providing additional detail.

What I will tell you, though to your point, it actually is dilutive to same-store for the first couple of years. And the reason why is the vast majority of these assets are very heavily leased and so I have to call it 2% to 3% NOI CAGRs, but that’s coming just from fixed bumps, renewals, et cetera. The larger kind of anchored properties, whether that’s our grocery portfolio, which is also a fairly significant wealth to enterprise, or our power center assets have significant occupancy upside. That’s what’s in the sign not open, the leased not occupied gap.

So it’s funny. And actually, the first couple of years in the model, it’s dilutive to same-store. But you’re right on other metrics, they’re net effective rents, whatever it might be, you do have better metrics. So again, it’s 10% of the portfolio. We really like the thesis. We’re investing in it, but we’re a ways off from providing additional disclosure around economics regardless of property type. Dave, I don’t know, if you’d add anything to it.

Floris Van Dijkum

And then maybe my follow-up, the cap rate on the $158 million of asset sales that occurred in the fourth quarter?

David Lukes

6 3/4 on in place.

Floris Van Dijkum

Thanks guys.

Conor Fennerty

Thanks Floris.

David Lukes

Thanks Floris.

Operator

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

Alexander Goldfarb

Hey, good morning. Two questions. First off, Conor. On the guidance, if I hear correctly, has been asked a lot several times, the midpoint assumes you get all the Bed Bath back in the second quarter. It already assumes the initial hit from Cineworld. You’re also including 250 bps of bad debt.

So it seems like the midpoint is baking in a lot of, call it, damage, if you will. So what would get you to the low end? Is the low end just a buffer in case bankruptcies or credit explodes? Because otherwise, it really seems like you guys have put a lot of stuff into the bucket to get to the midpoint, which then seems the low end is pretty draconian. I just wanted to understand if that’s the correct way to think about it.

Conor Fennerty

Yes, it’s a good question, Alex. So I’ll unpack it in a couple different ways. So the midpoint of guidance assumes that a specific assumption around Cineworld and Party City, i.e., recapture some locations, and we have the rent agreements with Cineworld. The 250 basis points includes the impact from Bed Bath over the course of the year. We don’t know exactly if or when we’ll recapture them. But it’s fair to assume the midpoint is essentially – we recapture all the stores in the second quarter.

What gets us to the bottom of the range is if there’s bankruptcies on top of the 250, so the reserve is not great enough. Also, look, investment volume and rent commencements for the other two factors I mentioned. So if we aren’t able to deploy capital at the returns that David mentioned that we’re targeting, and/or rent commencements flipped for whatever reason, we haven’t had that happen.

But it certainly is a risk given in all the moving pieces and permitting things that Samir mentioned and others have called out as well. So the bottom of the range is there for a reason. It’s if bankruptcies are greater than we budgeted and then if we can’t deploy capital or rent timing slip. But there’s nothing else I could say about it. It feels prudent in light of all the kind of ongoing conditions to date.

Alexander Goldfarb

And then the second question is, David, you mentioned right now the demand is hot, you want to strike, recapture space and take advantage of all the tenants who basically spoke or have spoken for all the potential available space that could come back.

What would cause you – or what signs would you have to see to have tenants cooling? And the reason I say that is – we’ve already endured significant inflation. We’ve endured the consumer dipping into their savings, gas prices. I mean, carton of eggs go down the list. And if none of that has this weighted tenants from remaining voracious for leasing, what do you think would cause them, the tenants, to deviate from their current trajectory to take space?

David Lukes

I mean from a – purely from a landlord’s perspective, the thing you always used to worry about is supply. But there is no new supply under construction. And so that really leaves the demand side. And the tenants today are so – have such an appetite for wealthy suburban communities because of all the things you mentioned. And you’re right, they’ve endured a lot and they’re still expanding and growing.

I think, Alex, if I had to put a name on it, I would just say sentiment. Because just like any other business, retailers, when they sign 10-year commitments to open stores, a lot of that is based on their confidence as a business. If sentiment changes somehow, leasing will slow down fast. It always starts with a trickle and it ends very quickly.

So I don’t see anything right now that’s stopping the tenant demand. We just had a long leasing call yesterday and went through all of our assets in all of our regions. And the demand is still very robust. I mean we’re getting LOIs from tenants on spaces that we don’t even control yet. We have tenants asking for 2024 and 2025 openings. So it feels to me like the demand is really strong. I agree with you that I don’t see anything today that’s going to slow that down. But sentiment is the one thing that can change quickly in retail.

Conor Fennerty

Yes. The only thing I’d add, Alex, remember, we own 101 wholly owned properties. We are this tiny little subset in the grand scheme of the national retail landscape. And so our comments are reflective of the assets we own, right. It might be a different story if you’re asking some with a larger footprint and it’s more of a kind of national proxy. But to David’s point, for our submarkets where we can very closely track supply, it feels like a very different conversation.

Alexander Goldfarb

Okay, thank you.

David Lukes

Thanks Alex.

Operator

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

Ronald Kamdem

Hey, just two quick ones. Just going back to the convenience center. Trying to get a better sense of just the secret sauce and how you’re thinking about it, because it seems like everybody could sort of figure out where the high demographics are on the demos. That’s clearly important. But is there sort of anything else that you guys look at or do differently? Or is the thought that you just have sort of a pretty good cost of capital and you could be opportunistic when things pop up?

David Lukes

Ronald, is this – I missed the first part. Is this on the convenience properties that we’ve been buying?

Ronald Kamdem

Correct. Correct.

David Lukes

Yes. The big change is mobile phone data. I mean four years ago, I don’t think convenience was really considered an asset class. When you bought small shops, you bought them based on the assumption that consumers are coming to an anchor. You can measure how the anchor is doing, and therefore, you can deduce how well the shops are going to do.

What’s really changed is the mobile phone data, which allows you to figure out where your customers are coming from, are they indeed crossing over to the anchors? Is the anchor really drawing that customer traffic? And so we’ve been using that data to focus on assets that are purely based on convenience.

It’s the traffic counts nearby. It’s the demographics, it’s the time of day, it’s a direction of travel. The easiest way to put it is if you’re buying a Starbucks with a drive-through, you want to be on the going to work side of the road. If you’re maybe a convenience restaurant, it’s the QSR, you might want to be on the going home side of the road.

But those are anecdotes pre data. Now the data is so robust, I think we can use it in a variety of ways to feel confident that we can buy assets from local owners that are not using that information, and it can help us when we re-lease space at higher rents. So that, I would say, is a lot of what we’re using to define our growth.

Conor Fennerty

Yes, I would expand on that and say it’s a lot more than just our cost of capital. And we’ve got now five years of experience buying these assets. There’s a lot that we’ve learned. So I’d say our transactions team has a huge competitive advantage there.

Obviously, David mentioned our Regional Vice President. So having boots on the ground and teams locally that we can source deals either from them or have them help and underwrite is a huge advantage as well. And then as Samir mentioned, that from a tenant perspective, these are tenants that we have across our assets with the grocery or [ power ] as well.

So having those existing relationships where we can call, ask about performance, ask about sales and make sure that they’re seeing what we own as well as another advantage. So I would say it’s a multitude of factors well in excess of just the cost of capital that allows us to really focus on this and expand it.

Ronald Kamdem

Great. And then my second one was just on the occupancy question. Just I’m looking at sort of – I think this is a small shop lease rate at sort of a 90, 90.3. Just trying to get a sense of demand is pretty robust, as you mentioned earlier. In your mind, how does that go from here?

Conor Fennerty

Yes, I’ll start with occupancy just for this year. I mean, based off our budget, we are expecting occupancy to decline in the first half of the year. Whether it’s from bankruptcies or just the return of seasonality, you think back the last two years, the commence rate has increased from the fourth quarter to the first quarter, that is atypical.

And so to David’s point, we were more aggressive in the fourth quarter and the first quarter for tenants that came to us and either wanted a flat rent or rent reduction, moving on and finding a better tenant. So occupancy in general, will decline in the first half of the year. Obviously, bankruptcies will have the biggest impact of that.

But you’ll just see a return of seasonality, Ron. We haven’t put out a target number for small shop lease rate. We’re over 90%. It’s a high watermark for the portfolio. We feel really good about it. It’s fair to assume we’re going to try to push that even higher. But at some point, you’re going to run into a kind of structural or frictional vacancy, and we’re probably only a couple of hundred basis points away from that.

Ronald Kamdem

Great, thank you.

Conor Fennerty

You’re welcome.

Operator

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

Linda Tsai

Hi, good morning. Just to clarify, the 250 basis point credit loss, is that only related to Bed Bath & Beyond, Party and Regal? Or are there other tenants factored in?

Conor Fennerty

No. So Party City and Regal are part of our budget. They’re not included in the 250 basis point. The 250 basis point accounts for our bad debt assumption for the course of the year that typically relates to shops. And then on top of that, as a bankruptcy assumption.

Tenants that have not filed for bankruptcy, including Bed Bath & Beyond, would be included in there. But it is important, Linda, to think through the timing and the impact over the course of the year. Meaning if someone filed today, they wouldn’t be out for two to three months and they’re required to pay rent over that time period. So the 250 includes tenants that have not filed to date. And so that would include potentially Bed Bath and others. But Party City and Cineworld are part of our budget and not included in that 250 basis point reserve.

Linda Tsai

Got it. And then did you see rent commencements slip in 2022 in the context of just a slower pace in terms of getting new tenants signed and open?

Conor Fennerty

No, I think it’s been a source of upside for us every single quarter over the course of the year, and been a pleasant surprise given all the difficulties. So kudos to our operational team to making sure it’s a tailwind and not a headwind for us.

Linda Tsai

And then just broadly, what does the rent upside look like on the boxes that you might get back for Bed Bath and Party City? And maybe you could just talk about the new lease spread strength in 4Q.

David Lukes

Linda, it’s David. If you look back at the 73 boxes we’ve leased in the last couple of years, which is a very high number, I think we’ve got very good data on the market spread. So I think from a Bed Bath & Beyond perspective, I would expect the market spreads to be about 20% plus.

On Party City, I think it’s a much wider range, as I mentioned earlier. It’s probably between 5% and 30% depending on where the box is. Is it in line? Is it on an outparcel? Should it be subdivided? Is the demand for rents higher from shops than it is a 10,000 square foot user? So for Bed Bath 20% plus, for Party City somewhere between 5% and 30% depending on whether we split it or do single-tenant backfills.

Linda Tsai

Thanks.

Conor Fennerty

Thanks Linda.

Operator

[Operator Instructions] Our next question here will come from Mike Mueller with JPMorgan. Please go ahead.

Mike Mueller

Hi, two quick ones here. First of all, David, when you were talking about convenience being 10% of the portfolio, what metric is that based on? Is that investment count, ABR, et cetera? And then maybe going back to occupancy. I know they’re obviously moving parts with Bed Bath and Party City and things like that. But if we’re looking at your 92.5% occupied rate, what’s embedded in guidance where that trends to by year-end? Is it simple as, I guess, going to Page 6 in your slide deck and tracking the ABR coming online there?

Conor Fennerty

Mike, it’s Conor. So the metric I mentioned, 10%, is on ABR. It’s – I think it’s like 9.4%, 9.5%. Just under 10% for our share of ABR is the convenience portfolio. And in terms of occupancy, to my earlier comments, I would expect a return to seasonality. So a modest decline just on kind of natural expirations in the first quarter.

And then depending on what happens with Party City and other tenants we mentioned, it could even move lower. Over the course of the year, to your point on Page 6, with rent commencements, I would expect it to come back up. And so the year-end number I would expect would end up pretty close to where we started, maybe marginally higher. And the net result is obviously putting us in the guidance range of same-store, call it, 75 basis points at the midpoint. So I don’t know if that helps, but I’m happy to expand on that offline.

Mike Mueller

Yes, got it. Thank you.

Operator

[Operator Instructions] Our next question is from Sunny Ali, pardon me. That will conclude our question-and-answer session. I’d like to turn the conference back over to David Lukes for any closing remarks.

David Lukes

Thank you all for joining our call, and we will speak with you next quarter.

Operator

The conference has now concluded. Thank you very much for attending today’s presentation. And you may now disconnect your lines.