SITE Centers Corp.SITCNYSE
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Operator: Good day and welcome to the SITE Centers' Second Quarter 2024 Operating Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Stephanie Ruys de Perez, Vice President of Capital Markets. Please go ahead.
Stephanie Ruys de Perez: Thank you. Good morning and welcome to SITE Centers' second quarter 2024 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 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. Descriptions and reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's quarterly financial supplement and investor presentation. At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes.
David Lukes: Good morning. I'd like to start by thanking all of my colleagues at SITE Centers for their tremendous efforts over the past few quarters. The dedication, flexibility and thoughtful execution from the entire organization has been astounding. The results we announced today showcase the significant progress we've made on our strategic goals as we prepare for the planned spin-off of the Convenience portfolio from within SITE Centers into a new and unique focused growth company called Curbline Properties. Notably, we closed nearly $1 billion of transactions in the quarter, repurchased or retired over $50 million in debt, and reported 24% trailing 12-month new leasing spreads for the Curbline portfolio. Each of these accomplishments mark additional progress on the dual path of growing our Curbline portfolio through acquisitions and organic NOI growth and maximizing the value of the SITE Centers' portfolio through dispositions along with continued leasing and asset management. As we march closer to the spin-off date expected in October, we've spent considerable time with the investment community and have consistently heard two main questions. First, what is the genesis of the Curbline strategy and how big of an opportunity does it represent? And second, what will SITE Centers look like at the time of the spin-off and how do we plan on maximizing value for all stakeholders? So I'll start with those two questions, talk briefly about staffing and Curbline acquisitions, and then conclude with the second quarter operations before turning it over to Conor to talk in greater detail about results and the outlook for the second half of the year. Starting with Curbline, we began investing in Convenience assets over five years ago as we witnessed the strong financial performance of the small format asset class. Retention was high, credit was strong and diversified, and the CapEx load was extremely low. Importantly, mobile phone geolocation data also emerged during this period as a sophisticated and new tool that we could utilize to identify, underwrite and provide hard facts around our investment opportunities. The traditional real estate underwriting of boots on the ground market knowledge became supplemented by data analytics that allowed us a window into tenant performance and customer utilization of the small format property sector. As we transitioned through the pandemic years, two outcomes became notable. First, the capital efficiency of the business became increasingly important as capital itself became more expensive and valuable. In other words, the significantly higher conversion of top-line rental income down to property cash flow help to offset higher capital costs while also generating compounding cash flow growth. Second, the sector has kept up with inflation remarkably well. Lease duration in general in the Curbline portfolio is shorter when compared with properties with a traditional anchor. This is certainly an opportunity as the increase of customers throughout the week with suburban communities due to population growth and flexible work mandates have steadily increased demand for Convenience oriented real estate from tenants seeking to access those customers, resulting in higher tenant retention and higher rent growth. In other words, this is a renewals business where we can capture growing market rents with little landlord capital as most tenants are renewing leases since there is a shortage of high quality Convenience real estate in suburban communities. To that point, same-store NOI for the Curbline portfolio is expected to average greater than 3% for the next three years when factoring in all of this. These combined attributes, capital efficiency and strong top-line growth, have led numerous investors to ask us about the addressable market for Convenience properties. We now have five plus years of transactions data under our belts and arguably own the highest quality portfolio of Convenience assets in the United States. Despite that fact, what we own today represents only one quarter of 1% of the 950 million square feet of total U.S. inventory according to ICSC. As of quarter end, the Curbline portfolio included 72 wholly-owned convenience properties or 2.4 million square feet of real estate, expected to generate about $84 million of NOI. These assets share common characteristics, including excellent visibility, access and, we believe, compelling economics highlighted by limited CapEx needs. We continue to expect the spin-off to be completed on October 1 of this year with Curb capitalized with no debt and $600 million of cash. Given a substantial disposition activity to date, and consistent with our commentary from last quarter, we now no longer expect Curb to retain a preferred investment in SITE Centers, which is a good segue since proceeds from the sale of SITE Centers’ portfolio of anchored properties has been used to facilitate an unmatched balance sheet for Curbline. As a result, I will spend a moment on the expected strategy for SITE Centers after the spin. As of last Friday, we have closed $951 million of wholly-owned property sales year-to-date with total closed dispositions since July 1, 2023 of just over $1.8 billion at a blended cap rate of 7.1%. As of Friday, the company has over $1 billion of additional real estate currently either under contract, in contract negotiation or with executed nonbinding LOIs at a blended cap rate in the mid-7s. Although we expect some of these transactions to close pre-spin, others will close in the fourth quarter and some may fall out. As a result, we are not in a position today to quantify the SITE Centers’ portfolio at the time of the spin-off and expect to update disclosure on the portfolio itself as we near the spin date. What we can say is that SITE Centers’ post-spin will contain a diversified portfolio, including assets in major markets with strong tenant sales, and we remain flexible and open to a variety of outcomes and the eventual path to creating value for our stakeholders. In terms of potential buyers and activity, the pool of interest remains deep and remains active and liquid market for our portfolio of open-air shopping centers. Leasing momentum remains strong, market rents are growing and replacement costs remain elevated, factors we believe that are supporting strong buyer interest. In addition to considering further asset sales, we will continue to focus on leasing and asset management and listen to the signals from the public and private market with respect to valuation, and expect to act on those signals as appropriate. Shifting to post-spin staffing both Curbline and SITE Centers will have their own leasing and property management teams, along with dedicated accounting and legal leadership. Other departments and staff will remain within SITE Centers and be utilized by both companies under a shared-service agreement, including the accounting, legal and IT departments, among others. The purpose of this agreement is to facilitate an orderly transition of our current resources and allow each company to pursue its business plan with as little G&A friction as possible. It’s an elegant way to maintain historical portfolio knowledge, keep the talent on our team intact, and allow flexibility to execute each business plan. More detail and clarity on the shared-service agreement will be provided in the Form 10. Moving to acquisitions we acquired five convenience properties in the second quarter with total acquisitions at share of $65 million, including our partner’s interest in Meadowmont Village in Chapel Hill, North Carolina. The convenience portion of this property is expected to be included in the CURB spin-off. We closed another $27 million of acquisitions in the third quarter to date and have over $200 million of additional convenience assets awarded or under contract, subject to our completion of diligence. Average household incomes for the second quarter investments were over $117,000 with a weighted average lease rate of over 96%, excluding Meadowmont, highlighting our focus on acquiring properties where renewals and lease bumps drive growth without significant CapEx. As I noted, going forward, we remain encouraged by the unique opportunities in the convenience subsector, including the size of the opportunity itself, and have plenty of room to grow. And combined with a balance sheet that is expected to have no outstanding debt and substantial liquidity, Curbline properties has the opportunity to generate compelling and elevated relative growth and returns for stakeholders. Ending with operations, overall, quarterly leasing volume was up sequentially again despite a materially smaller portfolio and less availability. Leasing demand continues to be steady from both existing retailers and service tenants expanding into key suburban markets along with new concepts competing for the same space. Despite the strength of execution from our leasing team, our leased rate was down 100 basis points sequentially, in large part due to the sale of assets with an average leased rate of almost 97%. In terms of leasing spreads, we added new disclosure in the supplement this quarter, breaking out activity for Curbline. Leasing activity, velocity and economics continue to improve as we grow this portfolio, highlighted by almost 50% straight line, new leasing rent spreads for the trailing 12-month period. Recent, new and renewal deals include a number of first to portfolio and recurring national tenants including Cava, Panda Express, Wells Fargo, the UPS Store, LensCrafters and Comcast. Before turning the call over to Conor, I want to thank again everyone at SITE Centers for their work these past few quarters. There is no shortage of individuals and teams across the company who have worked tirelessly to position both SITE and Curbline for success. And I am extremely grateful for all of their contributions And with that I’ll turn it over to Conor.
Conor Fennerty: Thanks, David. I'll start with second quarter earnings and operations before concluding with updates to our 2024 outlook, including balance sheet moving pieces heading into the expected spin-off date. Second quarter results were ahead of budget due to better-than-expected operations, including higher-than-forecast lease termination fees and a number of other smaller positive variances. In terms of operations, leasing volume was sequentially higher to David's point, despite a smaller asset base. With this smaller denominator, operating metrics for both SITE and Curb remain volatile, though based on the leasing pipeline at quarter-end, overall leasing activity and economics remain elevated, and we remain encouraged by the depth of demand for space. As David noted, we did break out Curbline leasing activity and spreads in the supplement this quarter. It is important to note that Curb's leasing spreads include all units, including those that have been vacant for more than 12 months, with the only exclusions related to first generation space and units vacant at the time of acquisition. Additionally, the Curb lease rate was negatively impacted by the acquisition of vacant space at Meadowmont Village, which represented about half of the sequential change and the recapture of two vintage restaurant pads, which accounted for the remainder. Both pads one in Phoenix and the other in Orlando have an identified backfill user with an expected blended 75% mark-to-market on the new deals. Moving to our outlook for 2024; we are extremely excited to form and scale the first publicly traded REIT focused exclusively on Convenience assets with an expected spin-off date of October 1. And based on the SITE mortgage commitment announced in October, along with recent transaction and other financing activity, we have positioned both SITE and Curbline with the balance sheets that they need to execute on their business plans. As a result of the planned spin-off and significant expected transaction activity, we did not provide a formal 2024 FFO guidance range. We did provide projections though for total portfolio NOI for the SITE and Curb portfolios, which have been updated to reflect first half 2024 acquisitions and dispositions. For the Curb portfolio, total NOI is now expected to be roughly $84 million in 2024, up from $79 million at the midpoint of the projected range before any additional acquisitions and same-store NOI growth is expected to be between 3.5% and 5.5% for 2024. For the SITE portfolio, total NOI is now expected to be $201 million at the midpoint of the projected range before any additional dispositions and includes only properties owned as of June 30. Details on the assumptions underpinning these ranges are in our press release and earnings slides. In terms of other line items, we continue to expect JV fees to be about $1.25 million and G&A to be about $12 million in the third quarter. Given the significant cash balance on hand, interest income remains elevated at almost $9 million for the quarter, though that figure will come down over the remainder of the year as we use the cash on hand to repay debt. On that point, in the second quarter, we repurchased just under $27 million of unsecured bonds at a discount, resulting in a gain of approximately $300,000. Finally, transaction volume, particularly the timing of asset sales is expected to be the largest driver of quarterly FFO and the second quarter included $11.2 million of NOI from assets sold in the quarter as detailed in the income statement. Moving to the balance sheet; in terms of leverage, at quarter-end, debt-to-EBITDA was just over 3x and cash on hand was over $1.1 billion. We continue to expect to close the SITE Centers mortgage facility, subject to the satisfaction of closing conditions, sometime in the middle of the third quarter, with proceeds along with cash on hand expected to be used to retire outstanding unsecured debt, including all outstanding unsecured notes and the unsecured term loan. Details on the projected capital structures for both SITE and Curb can be found on Page 11 of the earnings slides. For Curbline Properties, the company at this time – at the time of the spin is expected to have no debt and $600 million of cash. As David noted, Curbline is no longer expected to have a preferred investment in SITE Centers. This highly liquid balance sheet will allow Curbline to focus on scaling its platform while providing the capital to differentiate itself from the largely private buyer universe acquiring Convenience Properties. Finally, prior to the spin-off, we expect to provide additional details on the portfolios, run rates and balance sheets of both SITE and Curbline pro forma for third quarter to-date transactions. And with that, I'll turn it back to David.
David Lukes: Thank you, Conor. Operator, we're ready for questions.
Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Dori Kesten with Wells Fargo. Please go ahead.
Dori Kesten: Thanks. Good morning. Can you remind us what the timing is for those Form 10?
David Lukes: Sure, Dori. I would expect it would come out sometime in September.
Dori Kesten: Okay. And so the assets under contract or letter of intent currently, can you give us a sense of the type of bidders you’re seeing and the level of competition and just how that compares to what you saw with your initial sales?
David Lukes: Sure. I would say that the bidders, I think that have emerged over the past, what, John, six months or nine months have kind of fit into three categories. There’s the private buyers that generally are local families, family offices and they’re – they’ve usually been unlevered buyers. Then there’s been the kind of traditional private equity funds that have raised capital and are looking at open-air properties. And then the third group have been the kind of traditional spread investors, which include a lot of the institutions. So those three groups make up the bulk of what we’ve seen from the bidding 10 and the pricing can be quite wide between all three of those, depending on which one is most active. And I think that Dori probably explains most of what the bidding has been looking like in the last six months or nine months. And I don’t think it’s really changed.
Dori Kesten: Okay. And you did say what’s under contract or LOI is in the mid-7% right?
David Lukes: Yes. That’s correct.
Dori Kesten: Okay. And then last, regarding the 7% long-term cap rate spend and as a percentage of NOI in the last few quarters, it’s been a little bit higher than that, I guess, closer to 10%. I guess, can you explain what that has to do with? Is it the size of the space being still [ph]? Is it about retention or is it the incoming tenants?
Conor Fennerty: Yes, Dori, it’s a function of a couple of things. And I would just caution just as I noted, the pool is small, the dominator is small. So just you have – you could have one deal move things positively or negatively. To your point, we’ve been trending below 10% last couple of quarters have tipped up – excuse me, and that is solely a function of just increased leasing activity. Similar to anchored portfolios coming out of COVID, there’s just been a lot of demand and so just the overall volume has increased relative to historical standards. But I would just tell you our confidence in that number kind of remaining sub-10% over the long-term is incredibly high, just given the property type and the SITE plans that we’re buying.
Dori Kesten: Okay. Thank you.
David Lukes: You’re welcome.
Conor Fennerty: Thanks, Dori.
Operator: Our next question comes from Craig Mailman with Citi. Please go ahead.
Craig Mailman: Hey, good morning. Conor, you noted that one asset that you bought and one kind of vacate move the occupancy numbers here, almost 120 basis points. I’m just kind of curious, as you guys continue to build out Curb kind of the plan on mixing in fully stabilized deals versus some deals with some level of vacancy as you guys put the portfolio together just as we can think about kind of that – it’s a smaller portfolio growing the variability in occupancy and kind of timing of NOI commencements.
David Lukes: Sure, Craig, good morning, it’s David. I’ll start and then see if Conor can fill in what I’ve missed. But in general, this asset class is a highly leased asset class. There’s not enough square footage for the demand right now from Convenience tenants. And as we look at our historical data, I think that remains true even through recessions and the pandemics and so forth. So I would expect the occupancy volatility to be less than a traditional anchored property. And what that means is, as we’re buying, we’re really not buying vacancy. We’re buying stabilized assets. And the best way to describe that is we’re buying and growing a renewals business where we expect to be capturing mark-to-market with low CapEx. Every now and then, we’re able to find a property that was under managed and may have some vacancy upside. But for the most part, we’re buying stabilized properties that have mark-to-market opportunity.
Conor Fennerty: Yes. To David’s point, Craig, I mean, I think our average lease rate on what we’ve acquired, excluding Meadowmont’s probably been north of 98%, 99%. Maybe there’s one small vacancy to David’s point that might be recently vacated, and that’s one of our upside opportunities. But in general, our confidence in this portfolio running between 96% and 98% leased, which is consistent with the last 10-plus years is very high.
Craig Mailman: Is there a significant or any kind of yield difference on taking that lease-up risk from maybe a local owner versus buying something fully stabilized?
David Lukes: Not really. And I mean, honestly there’s just not many assets for sale that have vacancy. You might find one shop here and there. But honestly, the competition for this type of property is pretty strong from local investors and sellers are being paid for that vacancy. So if there is a vacancy, it’s going to show up in the cap rate. So I think that when we look at the economics and we run our models to figure out what’s the best risk-adjusted return, buying existing tenants that have renewal upside is just a better risk-adjusted return than paying extra for a vacancy and trying to generate a lot more growth. Especially at scale, if you think about the volume of assets we're buying, there's not that much vacancy in the country for the high-quality properties in high-income neighborhoods. So I think what we're looking for is strong credit, strong occupancy, but a big mark-to-market and hopefully a shorter weighted average lease term.
Craig Mailman: That makes sense. And then you guys are 13% West Coast today. I don't know what the breakout of California is of that. But are you guys kind of less interested at this point given the minimum wage issues going on because you guys do have a fair amount of probably a fast food, fast casual in that portfolio that you're building?
Conor Fennerty: I think, Craig, we said we're focused on creating a really high-quality diversified portfolio. There are times, to your point, where certain geographies might lag others. I think our confidence in high income metros throughout the country, whether the top 20, top 25, top 30, whatever it might be, is high. So you're right, there might be some headwinds in California. There's no mandate internally to grow or avoid certain geographies outside of our goal, just having a well diversified portfolio.
Craig Mailman: Well, then, just one last quick one. I know the Form 10 isn't out yet, but as we think about kind of the final structure for SITE. Is it going to be fairly clean from a change of control or other friction costs to make it more saleable – someone wants to come in, just buy the rest of the assets without having to kind of pay a platform value for a company that's essentially liquidating?
David Lukes: Yes. I would say that the cleanliness of SITE Centers should be very high, and I think it has a lot of different options for potential outcomes. I think the board and the management team are open minded as to what those outcomes are, and we're trying to do everything we can to structure it so that it's a pretty simple business
Craig Mailman: Great. Thank you.
David Lukes: Thanks, Craig.
Operator: Our next question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.
Todd Thomas: Hi, thanks. Good morning. First question, appreciate the Curb leasing activity breakout, pretty strong new lease spreads there in the quarter, almost 100%. David, you talked about high retention in the convenience segment, it's a renewals business with business with lower CapEx. But I'm just curious if you see a little bit of a more significant opportunity to capitalize on better merchandising in the near-term with better rent growth and mark to market opportunities, and a scenario where we could see higher turnover over the next maybe couple of years for the pro forma curve portfolio.
David Lukes: Good morning, Todd. I think that's unlikely. I think if you look at the tenant roster, it's a pretty well diversified group of high credit tenants. Even when we buy local shops, we're making sure that we like the tenant credit. We feel like there's strength in the operations. We feel like the tenants have been in business for a long time. I think the risk adjusted returns for this asset class have more to do with finding successful businesses, successful tenants, and increasing the rents along with their increased profitability, as opposed to buying properties and effectively redeveloping or retenanting. I think that's somewhat unnecessary, because we're buying front row, very convenient properties that usually have already attracted the best tenants. And so I just don't think it's necessary to do a whole lot of tenant recycling.
Conor Fennerty: And to that point, Todd, I mean, you think about our forecast for same-store for the next three years, the kind of assumptions underpinning that don't require us to significantly turn over the asset base and to kind of tie that into Dori's question. That's why the CapEx percentage NOI so low. This is a renewals business. We're pushing rent at maturity. It is not to retenant or remerchandise or change over the tenant roster of any of these properties.
Todd Thomas: Okay. And then, I guess, like sticking with that a little bit, the capital efficiency of this segment within retail. You mentioned that you've looked at sort of a history of operations for these types of assets through the pandemic in the later cycle. I think you said about five years or so, but it's been a little while since we've gone through a traditional cycle, certainly more than five years. And I'm just curious how you think the portfolio would perform if the economy were to go through a cycle where some of the potential risk might be. You have about 30% of the portfolio occupied by non-national tenants, the relatively high exposure of food and restaurant tenants, how are you thinking about that if we were to go through a little bit of a broader economic cycle?
Conor Fennerty: Yes, Todd, it’s Conor. The five years a day of reference was just on transactions activity. We’ve been buying these assets for five years. To your point, we’ve gone back much further than that. And the carve-out portfolio is a great proxy for how we think this portfolio will perform during recession. We will lose occupancy, right, any reception similar to any property type in the real estate industry, generally, NOI growth is correlated to GDP growth, the two-quarter lag, right? That’s not unique to this. But what’s fascinating is if you look back for the last 15 years and including through the GFC, this portfolio actually had higher occupancy and higher lease rates than the anchor portfolio, meaning the carve-out versus the rest of the property, which is a little counterintuitive to your point on shops and traditional risk and associated risk of shops. But I think to David’s point, we are solving for credit and generally, tenants that operate on the Curbline of major vehicular corridors are credit tenants. They’re not the locals. Generally, the locals are back in line. The last thing I’d point to you is you’re right, we’re 70% national. If you look at how that compares to the rest of the peer group or kind of the broader retail property formats, that’s at the very high end of that range. So again, I feel like we’re really well-positioned. If there is a recession, this portfolio like any portfolio will lose occupancy, but there’s a lot of kind of risk mitigants we put in place. Some of those are structural like the property type. Others are just how we solve for acquisitions and solving for credit. The last thing is where there’s a local to David’s point, we look for seasoning, how they’ve been through cycles, particularly if it’s a local restaurant, whatever it might be. But again, I do think there’s a lot of risk mitigants in the portfolio that help cushion us in the event of any kind of shock to the system. I don’t know if that answers your question, but…
Todd Thomas: Yes. That’s helpful. All right. Thank you.
Conor Fennerty: Thanks so much.
Operator: Our next question comes from Samir Khanal with Evercore ISI. Please go ahead.
Samir Khanal: David, good morning. I guess just in terms of conversations picking up on the disposition side, have you seen any of that happen given what the 10-year yield or the interest rates have done over the last, let’s call it, 90 days since the last call. I mean, I know you talked about the pipeline of about $1 billion. Just trying to gauge a little bit more on how much you can potentially sell before the spin? Thanks.
David Lukes: Good morning , Samir. I mean, I think if you’re thinking about how much more there could be, I wouldn’t look past what we’ve said we have awarded or under contract or under LOI. I mean that’s a pretty current analysis of where the pipeline is today. Have we gotten more calls in the last couple of weeks? No. But I think the level of interest from buyers over the last nine months has been so high that I don’t really see – I don’t really see a notable change in the temperament due to rates potentially going down. I mean, one of the things that you and I have talked about in the past is it’s been very interesting. A lot of the buyers in the last nine months have been unlevered buyers, a lot of family offices, local real estate investors, and they look at open-air shopping centers. They see what happened during the pandemic. They look at the collections rate and really have not been all that dedicated to leverage. And so I’m not sure it’s making a huge difference with what we’ve been selling lately.
Samir Khanal: Okay, got it. And I guess on just the acquisitions, I don’t know if you disclosed the cap rate on the Curbline convenience items you’re buying? What’s been the cap rate on that?
Conor Fennerty: Well, we’ve been kind of just around 6.5% from a GAAP perspective. There’s not a material difference in GAAP and cash. But round numbers, we’ve been around 6.5%, Samir.
Samir Khanal: Okay. Thank you.
Conor Fennerty: You’re welcome.
Operator: Our next question comes from Floris van Dijkum with Compass Point. Please go ahead.
Floris van Dijkum: Hey, guys. Thanks for taking my question. You guys are avoiding the trap that small cap REITs fall into, which is typically they have lots of leverage. Curbline is going to have zero leverage and you’re going to have a – and cash with which you basically almost double the NOI from Curbline before you have to go back to the market. So that’s – I mean, to me, that makes this a unique story besides some of the other things. I just have a question – a couple of questions, I guess. Number one, how much – is there a significant difference in OCR between your national and local tenants? I think you’re around 28% local? And how concerned are you in the ability to push rents higher? And at what level does and to where to the extent you have that information, obviously, but to what extent were you – is there going to be a ceiling in terms of where you can push your OCR to, particularly for your local tenants?
Conor Fennerty: I'll let David handle that one, Floris. I mean, it's funny. I actually was looking at that data yesterday as part of our Curbline of credit process. What's fascinating is the lowest occupancy cost ratios in the portfolio happen to be some of our local restaurants, which intuitively you think is probably one of the higher OCRs. So, I guess to answer my question to Todd or I go back to my response to Todd, excuse me. Look, if sales dip, it's going to put pressure on OCRs. So I think this business is correlated to GDP growth, sales growth, et cetera. But I would just tell you, it's one factor we look at upon many in terms of underwriting. And there's a pretty healthy cushion. David, I don't know if you'd respond any differently?
David Lukes: Yes, the only thing that I'll add Floris, what I find really interesting is that when you have small format spaces, 30 by 60. So it's an 1,800 square foot unit. There's hundreds of businesses that can occupy that space close to the customer and up along the Curbline. And you are right, to a certain extent on the positive side, if things are going really well you might have a tenant that has an occupancy cost ratio that's kind of at their max and you can only get so much in a rent renewal, whereas a big national high credit tenant that has more sales might be able to pay more. And that has happened a number of times. It's particularly happening in Miami right now, where when we have local tenants expiring, the nationals can simply pay significantly more. So we have been doing some tenant recycling when those local tenants run out of bandwidth to pay more rent and the market rents are higher. On the other hand, I do think that this type of business keeps up with inflation pretty well simply because most of these tenants are able to raise their sales along with inflation, and we're – be able to keep up with the rents at the same time. So I guess I feel like there will be some recycling of tenants when we want to really push rents high. But on the other hand, I think we're very focused on the low CapEx nature of it, and we're pretty dedicated to being renewals business. So we're trying to find tenants that we buy that have been in the property for a long time and have a proven track record.
Floris van Dijkum: What is that renewal percentage today? And what is that average over the last five years?
David Lukes: Yes. So for nationals, it's mid-90s. This last quarter, it was 100% for nationals. For locals, it's been about mid-80s. So blended over the last seven years, it's called – depending on the quarter, anywhere between 80% and 90%, Floris.
Floris van Dijkum: Wow. Okay. Another question for you guys in terms of debt strategy for Curb going forward. And Conor, I guess that's more towards you, but you're not going to have any debt to begin with. Is your view that you want to build up a higher pool of unsecured assets and then tap the unsecured markets or would you be relying on select mortgage as you make more acquisitions and you deploy some of that – the $600 million of cash?
Conor Fennerty: Floris, it's a great question. And the nice part is, we've got a lot of flexibility and time to think about it. If you look back historically for the last seven years at SITE Centers, we have been an unsecured borrower. We like that market. We think it's really attractive. We've also maintained relationships with LifeCos and other mortgage providers because we like to have kind of all the arrows in the quiver where there are times when the unsecured markets closed and it's great to have those secure relationships and vice versa. So I think it's fair to assume we'll operate a similar balance sheet strategy with Curb. To your point, though, on day one, we have a fully unencumbered pool, which provides a lot of flexibility and optionality. So again, not at the risk of reiterating what you just said, I think you'll see a little bit of both. But just given the size of the properties, the unsecured market is definitely more efficient for Curb and it's likely we tilt that way, somewhat of how SITE Centers has operated the last seven years.
Floris van Dijkum: Great, thanks guys.
Conor Fennerty: You’re welcome.
David Lukes: Thanks, Floris.
Operator: Our next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.
Ronald Kamdem: Hey just a couple of quick ones. One on the sources and uses. I think I'm looking at $150 million of acquisitions expected in 3Q, $446 million of sales, I think, expected in 3Q as well. Just on the acquisition front, is that – are all those already sort of in the pipeline under contract, how much of that is speculative and so forth.
Conor Fennerty: Good morning Ron. So none of it is speculative. To David's point, we have $200 million plus awarded to us. That figure is what we feel confident in closing prior to the spin-off date.
Ronald Kamdem: Great. And then look, my follow-up was just going to be on the – is it fair to say that the transaction activity has been even sort of greater than you sort of anticipated when you started this process initially? Because now if you could do sort of $100 million of acquisitions, plus or minus in the quarter, you’re going to be able to do $300 million, $400 million plus annually. Is that sort of the right way to think about it sort of post-spin acquisition run rate on an annual basis for us to think about?
David Lukes: Yes. Ron, I assume you’re talking about – have we been surprised on the transaction activity, meaning on the sales or on the buy.
Ronald Kamdem: Both. But I was talking more on the sales. But I think you guys have been doing more on the buy as well.
David Lukes: Yes. I think – I mean, we’ve mentioned a number of people in retrospect that we had a high degree of confidence that we could sell high-quality assets, but we were unprepared for the level of interest. And I think the sales activity has far exceeded our expectations in terms of pace [ph] and pricing. On the acquisition side, that’s actually been a little bit of a challenge because there’s only so much time in the day with the transactions team, and given how much has been sold in the last nine months, it’s just a time allocation of how much can you allocate towards the acquisitions front. But if you look at $200 million that’s been awarded to us, we feel pretty confident that we can support our previous statements that this business, we feel pretty confident we can buy about $500 million a year. So that would be $125 million a quarter. And I think that fits pretty well with what we have been awarded to us to-date. So it feels like that run rate, our confidence level is pretty high.
Ronald Kamdem: Great. That’s it for me. Thanks so much.
David Lukes: Thanks, Ron.
Operator: Our next question comes from Linda Tsai with Jefferies. Please go ahead.
Linda Tsai: Yes, hi. What’s the average weighted lease term for CURB’s current 72 centers? And what do you see as ideal for balancing risk and reward?
Conor Fennerty: Hey Linda, it’s Conor. It’s about five years right now, which I think it’s like 5.2 years as of June 30.
David Lukes: Yes. I mean in terms of ideal, Linda, there’s really no such thing as an ideal because when you’re buying stabilized assets that have in-place leases, I would say the Walt [ph] is going to be between four years and 5.5 years consistently. It’s hard to really see a portfolio growth that’s not in that range.
Conor Fennerty: I think the variance is that Walt might not be dissimilar to an anchor property. The variance is there are very few leases that are out double digits, meaning there are no tenants that generally have control for 15, 20, 25 years to have them asset mark-to-market. And so you might have a fresh 10-year term in there, to David’s point, a couple of mid option tenants and then always kind of blend a plus or minus five years, but it doesn’t impact the liquidity or the ability to drive growth or rental growth in the near-term.
Linda Tsai: Thanks for that. And then the comment that the local tenants might run out of bandwidth to pay higher rents. Are there any other metrics besides OCR, you’re monitoring to assess that?
David Lukes: Yes. The cell phone traffic data. I mean that’s been one of the primary tools to understand the – we don’t know basket size specifically, but we certainly can look at historical trends of customer visits. And that has been helpful in understanding when we would like to renew a tenant and when we think we can do better.
Linda Tsai: Got it. And then the $1 billion under LOI or under contract in the mid-7s, would that pricing look any different 12 months ago?
Conor Fennerty: Just to clarify, we said over a $1 billion under contract order or is there LOI.
David Lukes: But the pricing looked different a year ago. That’s a good question. I don’t know, Linda. That’s a really good question. It’s hard to speculate.
Linda Tsai: Okay. And then in terms – I think you said it was like $950 million of – well, square feet from ICSC that kind of fits convenience centers, but how much of that do you think qualifies with the 117,000 HHI, good visibility, good economics like you were talking about earlier for what you’re targeting for your portfolio?
David Lukes: I would say, as we’ve been tracking all of these transactions for the past five years, and we look at how many deals we’ve underwritten and what we have made offers on. It’s been around 15%. And so if you take that as a proxy and say, well, 15% pass all of the hurdles and thresholds and underwriting standards, 15% of $950 million is still a substantial growth opportunity. And that to us feels like why our confidence level that this is a real growth story is pretty intact.
Linda Tsai: Thanks.
David Lukes: Thanks, Linda.
Operator: Our next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
Alexander Goldfarb: Hey, good morning. Two questions here. First, just all this conversation on the efficiency of the convenience assets and that it's really a mark-to-market story. It's not necessarily a replacement story or a lease-up story. Does this – it sounds like from an efficiency, overall platform efficiency Curb should be, I don't know how many points better, but I don't know – but it should be some material magnitude more efficient than SITE Centers. Is that a fair assessment? And if that is, is there some metrics that you can provide on overall corporate efficiency? Like is this platform 500 basis points more efficient or how do we gauge that given all the positives that you said about managing the portfolio?
Conor Fennerty: Alex, its Conor. The short answer is yes. The longer answer is what we said publicly is that we think Curb can be as efficient as SITE once it's fully invested, which I think is a very good kind of proxy to use for the first couple of years. But then you're right, as you bolt-on and grow to Floris' point, a couple of other points around growth, you should run a much more efficient platform. There are also some real benefits of the spin-off where we're looking at other efficiencies and ability to kind of boot-up kind of start-up-type mentality from a whole host of other perspectives from departmentalized IT, et cetera. So there's a lot of optionality, there's a lot of efficiencies in the business, but the short answer is yes.
Alexander Goldfarb: Okay. And then the second question is just going to that huge demand for your traditional assets but it doesn't sound like you're facing the – a similar competitive pool for the Convenience assets. So what's going on in the buyer base? I mean or are you seeing the same amount of buyer interest in Convenience assets that you're seeing when you sell the traditional assets? Just trying to understand because from what you're describing, it would seem like the Convenience assets should be highly desirable, equal to the assets that you're selling, but maybe you're going to say, hey, it's really a yield play for the private buyers, they'd rather buy stabilized mid-7s than buying a 6.5%.
David Lukes: Alex, good morning, it's David. I would say I don't want to give the impression that there has not been competition buying Convenience assets. I mean there have been – every situation has involved a lot of bidders going after the same properties. We just happen to have a couple of benefits. One is we're national, we're unlevered and we can do diligence quickly and close quickly. So I think we've been a preferred buyer for sellers, but it is a very desirable asset class. It's historically owned by local private wealth within these secondary markets. And so we're usually one of the few institutions to show up looking at these types of properties, but it's definitely competitive. I mean cap rates are definitely competitive on the Convenience side for sure.
Alexander Goldfarb: Okay. Thanks, David.
David Lukes: Yes.
Operator: Our next question comes from Paulina Rojas with Green Street. Please go ahead.
Paulina Rojas: Good morning. And you have a same property NOI growth guidance for Curbline of 3.5% to 5.5%. And how is the portfolio doing year-to-date? And the range feels a little wide. So I'm intrigued about the string factors behind that guidance?
Conor Fennerty: Hey Paulina. Good morning, it’s Conor. You're right the range is wide, to my comments in our script look, it's a small denominator, so there could be some more volatility, variability, a couple of hundred thousand dollars either way. But our confidence in that range is very high right now. We're running kind of the midpoint to the higher end of it. And we haven't had any credit issues to-date. So you think about the major bankruptcy headlines have impacted some of the anchor properties. We haven't had any of those. To my earlier comment or response retention has been very high. So we feel really good about it. It's just a function of having a really small denominator that is allowing us or pushing us to have a little bit wider range than normal.
Paulina Rojas: Okay. And then I think your expectation is for Curbline same-property NOI to grow at more than 3%. Can you remind us of the different components behind the 3% – plus 3%?
Conor Fennerty: Sure. So bumps plus national options get to kind of low-2s mark-to-market and some occupancy growth gets you to kind of mid- to high-3s and then some credit loss probably pushes you to low-3s. Those components could change over time, right, just as occupancy gets higher in the portfolio. But generally, that's the math behind it.
Paulina Rojas: And regarding occupancy, I know you have mentioned a couple of times that you are acquiring stable assets. So is it fair to assume that your current lease rate is – or then we shouldn't expect and lease rate to climb higher from where it is today or you see further occupancy gains from where we are?
Conor Fennerty: We see – the commensurate we expect to be higher. So this portfolio, generally, we think – I think I made a comment earlier, it can run kind of 95% to 98% leased. We're at the lower end of that range right now. We have a pretty decent sized SNO pipeline to push that back higher. So yes, there is some occupancy upside in the portfolio today.
Paulina Rojas: Thank you.
Conor Fennerty: You’re welcome.
David Lukes: Thanks, Paulina.
Operator: Our last question comes from Ki Bin Kim with Truist. Please go ahead
Ki Bin Kim: Thanks, good morning. Just a couple of follow-ups. On the 6.5% GAAP cap rate on the acquisitions that you're looking at, does that include any lease mark-to-market upside?
Conor Fennerty: Yes. So the cap rate would. But to my point, Ki Bin, the gap between cash and GAAP, no pun intended, it's pretty skinny. It's not like you're buying an anchored property with a $2 rent, that market is $10 and you've got this $3 going in yield that becomes a $7. I bet you the cash yield is probably 6.35 [ph] and the GAAP yield, 6.5 [ph].
Ki Bin Kim: Okay. And for Curb longer term, is there somewhat of an optimal mix for tenant mix or credit profile that you're looking at as you build this portfolio?
David Lukes: I think tenant mix, not necessarily but credit, yes. We've heavily tilted towards credit. I think that it's going to be a balancing act of measuring credit with growth and a lot of the growth comes from local shop tenants, but that also comes with some risk. So over time, as we get the portfolio larger and larger, we'll settle in the right ratio between credit and noncredit but I think the credit component is more important than the actual tenant roster mix.
Conor Fennerty: Yes. One of the things we like the most about this portfolio, Ki Bin in this concept. If you look at Page 15 of our slides, our tenant concentration is incredibly low and it should continue to improve. And so to my earlier response on credit and credit risk, one of the massive mitigants of this portfolio is that there are no kind of major tenants where if they file for bankruptcy to close stores, you see this dramatic sudden impact to earnings or NOI for a certain year, and you have these kind of “transition years” that you've seen in other kind of anchored portfolios. So to David's point, one of the credit mitigants is the fact that you've got this massive diversification from a tenant perspective that is, in our view, one of the strongest and most compelling aspects of the portfolio.
Ki Bin Kim: Thanks for that. And just last quick one. What was the cap rate for the assets that you sold in the quarter?
Conor Fennerty: The asset we sold end of quarter, sorry, help me out?
Ki Bin Kim: Yes, dispositions in 2Q. What was the cap rate?
Conor Fennerty: I think it was a 7.1% or 7.05%. And the blended to date on the $1.8 billion has been 7.1%. And I think if you just do the math on the ranges for NOI ranges the variance quarter-over-quarter, I think it's a 7.1%, but I can come back to that, Ki Bin.
Ki Bin Kim: Okay, thank you.
Conor Fennerty: You’re welcome.
Operator: Our next question comes from Jianfeng Wang with JPMorgan. Please go ahead
Jianfeng Wang: Yes. Hey guys. I guess what would you – what do you think would be the normal lease to occupied gap for the Curbline portfolio compared to, I think, the 220 basis points today?
Conor Fennerty: Yes, it's a good question, Jung. I mean my guess is closer to 100 basis points. One of the things we like about the property type is you're not – there aren't dramatic redevelopment projects or repurposing or reimagining to use some of the words have been used in the retail space last couple of years. It's just releasing. And so the odds of or the timeline to backfill a shop with another shop to David's point, that's 30 by 60, is pretty short. So that will lead to a tighter SNO pipeline or SNO GAAP versus other property types. So round numbers, I bet it's about 100 basis points.
Jianfeng Wang: Got it. And I guess, how do lease options differ in the Curb portfolio compared to, I guess, the SITE stand-alone or it's more traditional anchored centers?
Conor Fennerty: They don't. I mean a national lease in the Curb portfolio is no different than in an anchored portfolio. It's a 10 and 2.5. A local might have 1.5 or no options, but still a 10-year initial term. So there's really no difference, except for the fact that the number of options in at least will be dramatically lower, meaning I think I answered this in an earlier response, you're not going to see any tenants with control for 30 or 40 years with the $4 lease that you just can't get at. You're going to see at most two options on the back end. And to David's point, we generally are buying 100% leased or seasoned properties. So the number of tenants that have control past making itself 2034 is really skinny and could probably count them on one hand.
Jianfeng Wang: Got it. Perfect. Thanks.
Conor Fennerty: You’re welcome.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to David Lukes, Chief Executive Officer for any closing remarks.
David Lukes: Thank you very much for joining our call.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.