Good afternoon, and welcome to Phillips Edison & Company's Fourth Quarter 2021 Results Presentation. My name is Carmen, and I'll be your conference call operator today. Before we begin, I would like to remind our listeners that today's presentation is being recorded and simultaneously webcast. The company's earnings release and quarterly financial supplement were issued yesterday, February 10, after market close. These documents and a replay of today's presentation can be accessed on the investor section of the Phillips Edison & Company website at phillipsedison.com. I would now like to turn the call over to Michael Koehler with Phillips Edison & Company. Sir, please proceed.
Thank you, operator. Good afternoon, everyone, and thank you for joining us. I am Michael Koehler, Vice President of Investor Relations with Phillips Edison & Company. Joining me on today's call are our Chairman and Chief Executive Officer, Jeff Edison, our President, Devin Murphy, and our Chief Financial Officer, John Caulfield. During today's presentation, Jeff will provide a brief overview of Phillips Edison & Company, discuss our differentiated strategy and touch on the highlights of the quarter. Devin will discuss our fourth quarter operational results. John will review our fourth quarter financial results and discuss our 2022 financial guidance. Lastly, Jeff will return to provide an update on our acquisition and disposition activity and give our 2022 acquisitions guidance and provide some closing comments. Following our prepared remarks, we will answer questions from the institutional analyst community.
Before we begin, I would like to remind our audience that during the course of this call, management may make forward-looking statements within the meaning of federal securities law. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Such forward-looking statements are made only as of today and will not be updated as actual events unfold. Please refer to yesterday's earnings release and our filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statement made today. In addition, we will also refer to certain non-GAAP financial measures.
Information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in our earnings release and supplemental disclosure issued yesterday, which are on our website. With that, it's my pleasure to turn the call over to Jeff Edison, our Chief Executive Officer. Jeff?
Thank you, Michael. Good afternoon, everyone, and thank you for being on the call. Phillips Edison & Company is exclusively focused on owning and operating neighborhood grocery-anchored omni-channel shopping centers. We are one of our nation's largest owners of this type of center. As we speak today, you will notice that we call our tenants our neighbors. We do this because we work hard to create community at our centers, and we treat our retailers as neighbors in that community. We also prioritize customer service and believe that this nomenclature reminds our team to treat our tenants like we would our neighbors. When it comes to our centers, we believe that format drives results and also facilitates attractive long-term growth. Our average center is 115,000 sq ft, which is among the smallest average size in the REIT universe.
We believe our smaller centers allow for better growth because of our average tenant space of 2,300 sq ft aligns well with leasing demand. Approximately 70% of leases in strip centers are executed in spaces smaller than 2,500 sq ft. This demand drives higher retention rates, higher re-leasing spreads, and overall positive leasing dynamics for PECO. Higher retention rates result in less downtime, lower TI costs, and higher NOI growth. When it comes to our properties, our strategy is simple. We focus on owning centers with the number one or two grocer in the market. Our centers have an omni-channel neighbor base, where the grocer and the center have both delivery and buy online and pick up in the store or BOPIS capabilities. Our centers have a high exposure to neighbors selling necessity-based goods and services.
In fact, 72% of our rent comes from neighbors offering both necessity goods and services. We focus on owning centers in trade areas with favorable demographics where our neighbors can be successful. Looking forward, we believe we are well-positioned for long-term growth. Our long-term growth includes both strong external and internal growth. We improved our balance sheet with the capital we raised during our underwritten IPO last July. Subsequently, we executed our debut $350 million public bond offering as our investment grade issuer. With our leverage currently at 5.6x debt to EBITDA, our goal is to execute $1 billion of acquisitions, net of dispositions, over three years. Our strategy creates significant opportunity for acquisitions, which I'll discuss later. This external growth will complement our strong internal growth over the long term.
The key drivers of our internal growth include growing rents through new and renewal leasing spreads, executing leases with annual fixed rental increases, leasing vacant space to new neighbors, and executing redevelopment opportunities, which are primarily single tenant ground up out parcel developments and tear down and rebuild opportunities for our grocer anchors. We believe our strategy has historically and will continue to prospectively generate superior risk-adjusted returns. We do believe that format drives results. Our differentiated strategy allows us to realize higher initial yields on acquisitions plus higher NOI growth plus lower CapEx. This leads to superior economic returns. Our results in the fourth quarter were no exception. The fourth quarter continued the momentum we have seen through 2021. For the full year, we exceeded our annual core FFO per share and same center NOI guidance. The key components of our results are as follows.
The operating environment remains as strong as we have seen it in our 30 years in the business. Our rent collections are at pre-pandemic levels. We enjoyed continued high demand for retail space in our well-located small format centers. We realized strong internal growth. Leased occupancy reached an all-time high of 96.3%. Comparable new and renewal rent spreads were healthy at 18.3% and 7.8% respectively. On average, our new and renewal inline leases executed in the fourth quarter had annual contractual rent bumps of 2.4%. We also realized strong external growth. We continued to execute our goal of acquiring $1 billion of real estate by June 2024.
Since our IPO in July, we acquired $350 million of assets, which we believe meet our internal return requirement of an 8% unlevered IRR. Looking forward, we believe the strong operating environment enhances our ability to execute our internal and external growth plans. It positions us for meaningful long-term growth. John will provide more details on our outlook in a few moments during our 2020 guidance discussion. Now I'd like to turn it over to Devin, who will speak in more detail about our operating results for the quarter. Devin?
Thank you, Jeff. Good afternoon, everyone, and thank you for joining us today. Our differentiated strategy of owning and operating small format centers anchored by the number one or number two grocer continues to generate strong results and resulted in positive results for the fourth quarter. At the end of the fourth quarter, lease portfolio occupancy totaled 96.3% compared to 94.7% at December 31, 2020. Occupancy reached an all-time high in the quarter. Anchor lease occupancy increased to 98.1%. Inline lease occupancy increased to 92.7%. Our lease occupancy to economic occupancy spread was 100 basis points for the quarter, primarily as a result of our anchor leasing activity. Our inline spread compressed to 80 basis points this quarter.
We believe that we can increase inline occupancy to 95% over time, which will add approximately 70 basis points to our total occupancy rate. During the quarter, we executed 121 new leases and 132 renewal and option leases totaling 1.4 million sq ft of space. We have leased approximately 1.4 million sq ft now for four consecutive quarters, illustrating the continued strong demand from retailers for space at our centers. Comparable new lease rent spreads were 18.3%, and comparable renewal lease rent spreads were 7.8%. Our in-house leasing team has been busy executing new inline leases with neighbors, including Sport Clips, Dunkin' Donuts, and retailers from many different lines of necessity retail. Demand for our retail space is coming from retailers in many different businesses.
A growing trend that we have seen is national retailers such as Chipotle, Starbucks, and Humana looking to expand their footprints in our suburban markets. Additionally, we have a dedicated renewals team focused exclusively on keeping our existing neighbors in our centers. We enjoyed a retention rate of 86% for the quarter, which is just shy of our full-year retention rate of 88% and in line with our 2017-2020 average retention rate of 87%. We believe our retention rates are market leading. These high retention rates are important because we suffer no downtime and have to invest less tenant improvement dollars into the space. In Q4, our average TI for renewals was only $1.29 per sq ft, and for the year averaged $0.95 per sq ft. No downtime and lower TIs results in better cash flow growth.
These solid retention rates are evidence that our retail space is a great place for our neighbors to successfully operate their businesses. An important part of our internal growth story is redevelopment. During the quarter, we stabilized two ground-up out parcel developments, one at Plaza 23 in the Newark, New Jersey MSA, and one at Alameda Crossing in the Phoenix MSA. This additional GLA of 7,300 sq ft is fully leased, and the neighbors took possession of the space during the quarter. We have 17 additional redevelopment projects that we began during 2021. The total projected cost for these ground-up redevelopment projects is $45 million. We currently expect incremental underwritten yields on these projects to be between 10% and 12% unlevered. Our pipeline currently includes eight additional projects in 2022, which represents an additional $23 million of investment.
We expect this pipeline of redevelopment opportunities to grow throughout the year. For full year 2022, we expect to invest approximately $45 million-$50 million in ground up and redevelopment opportunities. In addition, we expect to spend $50 million-$55 million on capital improvements, tenant improvements, and leasing commissions at our centers. The results that I just reviewed exhibit the strong operating environment that we currently enjoy and believe we'll continue to enjoy through 2022. I will now turn the call over to John for a discussion of our financial results, our recent capital markets activities, and our 2022 financial guidance. John?
Thank you, Devin, and good afternoon, everyone. Fourth quarter 2021 NAREIT FFO increased 7.3% to $49.4 million or $0.39 per diluted share. Fourth quarter core FFO increased 24.5% to $60.8 million or $0.47 per diluted share. The increase in both NAREIT and core FFO for the fourth quarter of 2021 was driven by increased revenue at our properties and improved collections. Further driving the increase was a reduction in interest expense versus the fourth quarter of 2020.
We had a non-cash charge of $7.4 million for our earn out liability in Q4 2021 impacting our NAREIT FFO, and we expect an additional charge in the first quarter of 2022 totaling $1.8 million to cover the final settlement of the earn out in January 2022. Approximately 1.6 million operating partnership units were delivered in January, marking the end of the earn out period. As we look at the fourth quarter, our general and administrative expenses were higher than other quarters, primarily due to performance-based compensation on our short and long-term incentive programs realized in the quarter. We anticipate our full year 2022 G&A to be in line with our full year 2021 G&A, which was $48.8 million.
Also in the quarter, our capital expenditures were higher on a run rate basis than other quarters due to timing and increased tenant improvement dollars spent in the quarter, driven by the high volume of leasing activity. Compared to 2020, our NAREIT and core FFO per share results were impacted by a 15% increase in our weighted average share count as a result of issuing 19.55 million shares during our July 2021 IPO. For the full year, our core FFO per share of $2.19 exceeded the high end of our guidance of $2.14-$2.18. Several things lined up for us during the quarter, which pushed our results above the top end of our guidance.
We had a number of acquisitions in the pipeline that we were able to close before the end of the year. Our occupancy increase exceeded expectations. Our neighbors began paying rent more quickly than anticipated, and our prior period collections were higher than expected. We still have a little over $3 million outstanding on payment plans with our neighbors. We will continue to be conservative in our estimates for collections at the midpoint of our guidance range for 2022, which I will get to shortly. Our fourth quarter 2021 same center NOI improved to $88.8 million, up 15.2% from a year ago.
This improvement was primarily driven by a 2.4% increase in average base rent per sq ft, stronger collections compared to 2020, and out of period collections for the quarter of $2.3 million. When comparing our results to the quarter ended December 31, 2019, our same center NOI increased 3.9%. We believe this is a true indicator that we are experiencing growth in our same center portfolio above and beyond the COVID recovery. As of December 31, 2021, we had approximately $604 million of total liquidity, comprised of $116 million of cash equivalents and restricted cash, plus $489 million of borrowing capacity available on our $500 million credit facility.
As of December 31, 2021, our net debt to adjusted EBITDA was 5.6x, compared to 7.3x at December 31, 2020. At December 31, 2021, our debt had a weighted average interest rate of 3.3% and a weighted average maturity of 5.2 years. Approximately 99% of our debt is fixed rate. Our debt ratios and maturities have improved as a result of our IPO in July and debut public debt offering that closed in the fourth quarter. The $350 million 2.625% coupon 10-year notes significantly extended our debt maturity profile while also diversifying our capital sources. Given our growth plans and maturity profile, we believe we can become a serial issuer in this market.
On February 10, we filed a shelf registration statement and a $250 million ATM equity offering program. Following our July IPO, this is the logical next step for us and allows us to efficiently access the capital markets as opportunities arise. We have no immediate plans to utilize the ATM program, but wanted to have this option available to us as we continue to evaluate market conditions and capital needs. Yesterday, on February 10, 2022, we issued our 2022 full year guidance in our earnings release. For 2022, our same center NOI growth guidance is between 3% and 4%. This is consistent with the growth we have delivered on a historical basis and what we believe we can continue to deliver going forward.
Our NOI growth will be one of the core drivers for our core FFO growth. Additionally, we expect to see a reduction in interest expense due to less debt on our balance sheet. For 2022, our core FFO guidance range is between $2.16 and $2.24. When compared to 2021, we expect total core FFO to increase by approximately 11% to $282 million using the midpoint of our guidance. With that, I would like to turn the call back over to Jeff to discuss our recent portfolio activity, provide our 2022 acquisition guidance, and recap our long-term growth strategy. Jeff?
Thanks, John. Following our IPO in July 2021 through December 31, 2021, we acquired seven grocery-anchored centers and two outparcels for $267.4 million. This was at the high end of our guidance range. So far in 2022, we've acquired two additional grocery-anchored shopping centers for $82.9 million and have an additional center under contract for $17.5 million. Our 2022 acquisitions included Cascades Overlook in Arlington, Virginia, a suburb of Washington, D.C. This 151,000 sq ft center is anchored by Harris Teeter, a Kroger banner. Oak Meadows Marketplace in Georgetown, Texas, which is an Austin suburb. This 79,000 sq ft center is anchored by Randalls and Albertsons banner.
We believe the centers we have acquired since our IPO will meet or exceed our unlevered IRR target of 8%. Our acquisition pipeline is healthy. For 2022, we are guiding to acquire between $300 million and $400 million of assets, net of disposition activity. As we have discussed in the past, we identified 5,800 grocery-anchored shopping centers in the United States that fit our strategy. These centers are all anchored by the number one or two grocer in their respective markets and meet our demographic requirements. We are focused on the 3-mile area around each center. We believe this strategy presents a wider and deeper pool of assets to choose from versus a strategy strictly focused on a limited number of markets.
To meet our stated goal of $1 billion of net acquisitions by June 2024, we need to acquire approximately 15 assets per year. This represents approximately 2% of our targeted shopping centers that trade each year. We are well on our way to meeting our billion-dollar goal. To optimize our internal growth, we will continue to selectively recycle assets. These proceeds will be deployed into higher quality, higher growth assets. Since our IPO, we have disposed of 11 wholly owned centers, two outparcels, and one land parcel, totaling approximately 1.1 million sq ft for $91.7 million. This was slightly below the low end of the guidance range of $95 million-$105 million, which we gave on our third quarter earnings call. Now, before we get to the Q&A section, I would like to quickly recap our quarter.
The operating environment remains strong. We realized strong internal growth. We also realized strong external growth. Our differentiated strategy produced strong results for the quarter and have set high expectations for 2022. With that, we'll begin the Q&A portion of our call. Operator?
Thank you. To maintain an efficient Q&A session, you may ask a question with an additional follow-up. If you have additional questions, you are more than welcome to rejoin the queue. To ask a question, simply press star one on your telephone. To withdraw the question, press the hash key or the pound key. Please stand by while we compile the Q&A roster. Your first question comes from Rich Hill at Morgan Stanley. Your line is open.
Hey, guys. First of all, congrats on a really nice quarter. I wanted to talk through the guide. It is very strong on an absolute and relative basis compared to your peers. You know, I want to maybe just understand and unpack a little bit more if there's something differentiated about your portfolio. Many of your peers talked about bad debt being a headwind in 2022. I think back to your portfolio already being above 2019 levels on the same store NOI basis.
I guess that's a long way of saying, is there something different about your portfolio? Do you not have as much bad debt, or is this really about your portfolio just holding up and bouncing back a little bit better than peers, which is leading to, you know, a guide that looks really strong?
Yeah. Rich, thanks for the question and being on today. You know, as you know, we really do believe that our format drives results, and we do think that our format of having the grocery store with the necessity-based goods has performed well during the pandemic and will continue to do that going forward. I would say that we are optimistic about the year. We also you know, we've taken a really hard look and you know, we think these are achievable goals for us and we wouldn't have them there if we didn't believe that.
I would say that, you know, overall, it is, you know, the format that we've got that I think is driving these results. But John, do you wanna give or Devin a little more detail on that?
Sure. Thanks, Jeff, and thanks for the question, Rich. As we look at it, the biggest component to the core FFO growth is really the NOI growth. Our peers have talked about, you know, the bad debt impact. Ultimately, because our impact in 2021 was not as significant, you know, as we go to 2022, we've got a base of stability. We've been communicating and our properties have been operating in a new world, a post-COVID world. Ultimately, it's a combination of the organic growth that we're driving, as well as the, you know, the acquisitions that we've been able to to make and that we're projected to make.
Just to get ahead of the question that I'm sure I'll be asked, the impact on the quarter specifically of out-of-period collections is about $2.3 million. That's the quarter. That was, you know, kind of the bad debt reversal in the quarter. As we look to the next year, we only have $3 million of payment plans outstanding left. As we looked at our guidance on a same-store basis and on an FFO, we do anticipate collecting that, and it is accounted for in the upper end of our guidance.
Got it. Thank you. If I may, just one more question. I know you guys focus on unlevered IRRs when you're acquiring properties, so forgive a sell side question here. Could you maybe give a little bit of guidance on what the cap rates for your acquisitions would be in 2022?
Sure.
Hey, Rich. Thanks for being on the call this morning. Where we are acquiring assets, Rich, today in the market is between a low of 5.75% and up to 6.75%. It's in that range that we are acquiring assets. You'll note that for full year 2021, the weighted average cap 6.4% on acquisitions. In the first quarter, the cap rate was almost 6%, just under 6%. It's in that range, and that's where we expect it to stay going forward.
Okay. Somewhere between 6% and 6.4% for 2022, maybe as tight as 5.75%. Okay, I got it. Thank you, guys. Congrats on a good quarter again.
Thanks.
Thanks, Rich.
Your next question comes from Caitlin Burrows with Goldman Sachs. Your question, please.
Hi. Good afternoon, everyone. Maybe one on occupancy. You guys had some meaningful increases in occupancy in the third quarter and again in the fourth quarter. Devin, I think you mentioned that you think in-line occupancy could get to 95%, increasing occupancy 70 basis points overall. I was just wondering if you could give some more detail on your expectations for 2022, and given the strong operating environment, how much additional increase is realistic near term?
Yeah. Thanks, Caitlin. As you saw, both in the fourth quarter and through full year 2021, we were successful in increasing our occupancy to the level that we're currently reporting. We guided on that occupancy increase to occur over the next two years. We believe that we will get that in-line occupancy up to 95% over the next 24 months. How much of that we're gonna get in 2022 is hard to know. Based on how strong the pipeline is currently, we will probably get a meaningful component of that in calendar year 2022.
Got it. Okay. Maybe just one on development. You guys have a number of development and redevelopment projects, and it looks like a few had either the stabilization quarter pushed out a little or a little change in cost. Just wondering if you could give some detail or background on the trends you're seeing in time to complete projects and also on the cost side and the impact that has on PECO?
Sure. On our redevelopment, Caitlin, you know that they are smaller redevelopments, and therefore, they have shorter cycle times. That makes it a little bit easier for us to anticipate when they're gonna come online. We have seen increases in costs, and we have included those increases in costs in our budgeted numbers, and the returns that we've articulated include the increases that we're seeing on costs. Where we're seeing delays is in the permitting process, and then in some instances, in terms of the availability of the necessary goods. All of that is built into our expectations, and therefore, the numbers that we gave in our earnings release, we're confident we will deliver on, and we continue to be very happy with the kind of returns we're able to generate on this activity.
Caitlin, we continue to see really strong demand for these particular outlet. You know, I would say we're optimistic that we will continue to have that strong demand from the retailers looking to expand into these locations. We're not seeing anything on the leasing side. You know, there is some stuff on the permitting side, and as you point out, the cost side. But in terms of tenant demand, it is extremely high for these locations. They do, you know, they do have drive-throughs, and they do have the conveniences that a lot of the retailers are focused on right now.
Yeah, that makes sense. Thank you.
Our next question comes from Craig Schmidt with Bank of America. Please go ahead.
Yes, thank you. I guess, you know, throughout the fourth quarter earnings, we've been hearing about a transaction market that's getting much more competitive and seeing compressing cap rates. I'm just wondering, given your, you know, different approach to sourcing acquisitions, are you seeing that same challenge, or are you able to circumvent it?
Craig, it's a great question, and the answer is, yeah, we are seeing more competition for the properties that we're buying than we have historically. We are starting to see we think a fairly significant increase in volume of product that's coming onto the market. It's early days, but it does look like we are starting to see more, a lot more product on the market. The major competition's coming on the portfolio side. As you know, I mean, there's some really aggressive pricing happening on the portfolio side.
On the individual asset, you know, where we're buying, you know, in that, you know, smaller size, sort of bite, smaller bite size, we are, you know, again, we are seeing increased competition, but in terms of, dramatic pricing changes, no, certainly not what we're seeing on the, on the portfolio side. You know, I think there's been, you know, probably 50 basis points of compression, in our markets, 25 to 50, and we think that will continue. We, you know, we've, as we said earlier with Rich's question, you know, we're seeing that 5.75%-6.25% as the range on the cap rates.
you know, again, you know, we continue to selectively find the assets where we can get that 8% on levered IRR and, you know, that part, you know, we continue to be optimistic about.
Great. Just as a follow-up, store closings were unusually low in 2021, and they have remained so heading into 2022. What are your expectations for store closings the rest of the year, and what does your watch list look like?
I would say we're optimistic this year about store closures. We don't think there's gonna be a spike. We're not hearing anything that would give us a spike in store closures in the second half of this year. You know, we've had a lot of fallout over the last couple of years. You know, we think a lot of our retailers are on pretty stable ground right now. The ones that we have been most concerned about, you know, have stabilized to a big degree.
You know, we are fortunate in not having much exposure to, you know, that second anchor, and our grocers who are, you know, who make up 34% of our income, they're doing really well. You know, they're working through the inflation and supply chain issues in a way that, you know, we think is really positive and certainly are seeing, you know, really good results on the ground in terms of their sales. You know, the other areas, you know, we'll, you know, the non-grocery, non-necessity based, you're always watching those and how the consumer's gonna be affected by that.
Jeff, the only thing I would add to that is, Craig, on our watch list, you know, the largest tenants on our watch list are in fitness, pet supplies, office supplies, those categories. But the top five tenants on our watch list represent less than 2.5% of our total ADR, so it's not a meaningful exposure. As we come out of the pandemic, a lot of these retailers' businesses are improving, particularly fitness. So again, it's something we watch closely, but the beauty of our business model is we are highly diversified in terms of our exposure to tenants, and therefore, the watch list exposure is well diversified.
Thank you.
Thank you. Our next question comes from Juan Sanabria with BMO Capital Markets. Your line is open.
Hi. Thanks for the time. Just a big picture question for me. Do you have a sense of the latest trends across your portfolio from a consumer perspective, just given some of the inflationary pressures? We had a headline consumer confidence today take a ding. People are clearly feeling a little worse off given the rise in prices. But just curious what you guys are seeing on the ground from your pockets of consumers.
Yeah. It's a great question, and we are watching it in real time. You know, we continue to see strong use of our centers. You know, if you look at the stats, you know, we have more customers visiting our centers today than 2019. That part. That continues to happen in real time. We're optimistic about that, and you know, looking at it sort of closely, you know, for any kind of potential changes in that. Certainly, you're hearing a lot about inflation, and it is affecting specific retailers more than others. But I would say overall, our view of the consumer is that.
Again, you know, we're in the necessity part of the business, so we're not as vulnerable to some of retail as others are. In our space, you know, we would say that, you know, we're very positive about the environment that we're in right now. We're not seeing the consumer really pulling back, particularly on the necessity side. If anything, you know, we're seeing really solid growth, and our retailers are seeing solid growth as well. I don't know, Devin, if you have any other thoughts on that, but that's been our
No.
Yeah.
I think you nailed it, Jeff. I mean, the thing that protects us to a degree is the fact that 73% of our rents are coming from necessity-based goods, necessity retailers. Obviously, the consumer has less discretion in terms of necessity goods than they do in non-necessity goods. We have not seen the current environment yet become a meaningful headwind. Again, it's something that we're concerned about and are watching closely.
Thanks. Just a follow-up on the balance sheet, recognizing the ATM is maybe more just best practice and gives you optionality. Any rethinking of leverage targets to maybe keep it lower for longer and use your strong cost of capital, you guys have performed well since the IPO to kind of match fund on an equity perspective rather than using up the dry powder-
Yeah.
with the billion-dollar target for acquisitions?
You know, we continue to be committed to the fact that if we can find projects that we can get an 8% unlevered IRR on a consistent basis with our strict underwriting criteria, and we're buying the number one or two grocer in a market that has really strong potential. If we can do that, we're gonna continue on our acquisition strategy. The market will drive us to reduce that. You know, we will. Again, you know, we are, as we made the big jump at the IPO, we are committed to keeping our balance sheet at investment grade.
In, you know, could we get up to the low sixes in terms of debt to EBITDA? Yes. That is, you know, that's a possibility that we will, you know, that the market will drive us to. That, that's our strategy. We continue to believe there are strong opportunities to buy selectively. And at that pace of $350 million, we're not, you know, we're at a very, you know, cadenced acquisition pace, that's not putting pressure on us to get money out, but giving us the opportunity to get the right amount out. And we'll stay, you know, disciplined on it, and that will, you know.
if we're getting 8% unlevered IRRs with the, you know, with our criteria for the grocer, we think that's a really strong gonna give us really strong returns and be able to, you know, outpace our peers, we hope, on in terms of results.
Thank you.
Thanks.
Your next question comes from Haendel St. Juste with Mizuho. Your line is open.
Hey. Good afternoon, I suppose. First question is on the leasing spreads. I know they can be lumpy, especially on the new side. With that in mind, I guess can you discuss the jump in new lease rates in the fourth quarter? Is that more an anomaly, maybe perhaps due to mix? How would you assess the near-term outlook for spreads as you look at your expiring rents here over the next year or two versus market rents?
Yeah, Haendel, if you look at our new leasing spreads over time and you take the pandemic year of 2020 out of the picture, and you go back to 2017 and look at 2017, 2018, 2019, and 2021. The average new leasing spread for us was 14.9%. You know, the metric that we put up in 2021 of 15.7% is in line with what we've been able to do historically. We don't tend to see the volatility in leasing spreads. I mean, if you look at that four-year window, you know, the low was 13.3% in 2019, and the high was 15.9% in 2017, with an average of 14.9%.
That's helpful, Devin. I suppose that's perhaps more due to having less big box space in the mix. Is that part of the consensus spread?
Yeah. I mean, again, it's no Haendel. One of the things that, you know, we think really differentiates us is the fact that our average center is 115,000 sq ft, and our average tenant is less than 2,500 sq ft, and we have less exposure to the big box retailer. You know, that's one of the reasons why there's less volatility in our leasing spreads than there may be in others.
Fair. Got it. I think I heard, maybe it was John who mentioned this in his comments that TI dollars for leasing in the fourth quarter were higher. Can you talk about that a bit more? Was that a bit of an anomaly, something to do with some specific space that might have been, I don't know, for some reason, perhaps more difficult to lease? How we should think about those, that level of spend, into 2022? Thanks.
Sure.
John, you wanna take this?
Haendel, you did hear that. In the fourth quarter, they were higher dollars. I wouldn't say it was any space in particular. Absolutely, the kind of cost per space does vary by the use and the size. I would say in terms of the timing, it was higher when you look at the quarter individually. On both the TI and the capital side, the capital improvements, if you look at the supplement, you know, almost 2/3 of our capital improvements were spent in the fourth quarter. TI is really a function of we've had increased leasing volumes. I would say that is, you know, that will carry into 2022.
I believe it was in Devin's remarks, we provided some comments that it would be, you know, approximately $50 million-$55 million for that lump sum for the full year is what we're expecting. That would be CI, TI, as well as leasing commissions.
Got it. Very helpful. If I could just one follow-up on an earlier comment. I think it was Craig was asking about redevelopment. I know your project is a bit more bite-sized, but I guess I'm curious how you're thinking about the sizing of the overall pipeline here. Obviously, cap rates are compressing. There's strong demand for space. I guess, how much of a capacity or maybe a desire to make this a more meaningful contributor to earnings? I know you're adding a few more projects this year, but you know, it's not moving the needle too dramatically. I guess I'm curious, in light of what's going on around it, why not expand it more?
Haendel, it's a great question, and the answer is we'd do more if we could. We are working really hard to build that up. We have a really disciplined view of what we wanna do on the development side, and it's primarily single tenant and small multi-tenant spaces adjacent to our centers, and then some of the tear down and rebuilds we do for the grocers that we get good economics on. If we could do a bigger volume, we would. We just don't, you know, given the timing it takes to get these up and running and the volume they're in. You know, they're 1 million-3 million kind of bites. You know, it just takes a lot of...
It takes a lot of time and effort to get those in. That's why, you know, we do it. At the kind of returns that we're getting, you know, in that 9%-10% return on that investment, it's a really great vehicle. If we could get it bigger, we would. We will continue to work on ways to do that. For the foreseeable future, I think looking at it as about a $50 million-a-year business, I think that's a good way of looking at it.
That's great color, and good luck to the Bengals.
Yeah. Who dey?
Who dey? Thank you.
Our next question comes from Mike Mueller with JPMorgan. Please go ahead.
Yeah. Hi. So $0.47 in the fourth quarter. If we back out the couple of cents of prior period, you're at $0.45, annualize this to about $1.80. I guess, you know, the average quarterly number to get $2.20 is about $0.55. Can you help us bridge the gap in terms of the ramp from $0.45 to that average of $0.55 or, you know, the higher at the end of the year?
Yeah.
'Cause it seems like you get a couple of cents from or a few cents from core growth. Is the rest just acquisitions?
Hey, Mike, thanks for the question. On the quarter, the $0.47, one thing I would say is that, yes, there was the prior period collections, but we did have higher expenses going through that NOI number because of the corporate, kind of what we call corporate property operating. We mentioned that on the G&A side that we had higher performance compensation, and that also is true for those that run our properties because they had an amazing year as well. I think those two kind of neutralize, they kind of offset each other.
So when you take that, you add in the same center growth, the acquisitions that we made in 2021, and then the net acquisitions that we are looking at for 2022, it's really when you look at the jump. It's the core is at NOI. I also, in my prepared remarks, I had mentioned that, you know, on a cost level, G&A actually will be, you know, pretty constant. It'll be in line at about that number, and then interest will be a little less than it was in 2021 because of the lower debt load.
Got it. Okay. Just thinking about your escalators, can you talk about what you were getting on 2021 leases in terms of bumps versus the in-place for the portfolio?
Certainly.
And I-
Go ahead.
John, go ahead. I wasn't sure with Mike's question if he was asking about what the built-in rent CAGR is on new leases. Was that your question, Mike?
Yeah. Yeah.
Okay.
Basically, you know, what's your average in place today? In terms of the 2021 lease signings, how do those bumps on the new leases compare to what's in place?
John, go ahead.
Sure. Okay. Yeah, I'll go ahead and take that. You know, we continue to push and add in our new leasing and our renewal leasing, you know, embedded rent bumps that I would say are in the 2%-2.5% range. I would say in the embedded base in the portfolio today that comes through in NOI at about 60-70 basis points. Again, that's because the 2% is primarily on our inline neighbors. When you consider that's about half of our rent, that would be 100 basis points, but then it's, you know, in our portfolio, it weights to about, you know, 70 basis points.
Got it. Okay. That was it. Thank you.
Great. Thanks, Mike.
Our next question comes from Tammi Fique with Wells Fargo Securities. Your line is open.
Great. Thank you. Just a question on guidance. I'm just wondering if you can maybe help us, and you answered this a little bit just a moment ago about the 70 basis points of contractual bumps embedded in the portfolio. But, you know, what are the other components of 2022 same-store NOI growth guidance to just maybe help us frame that up beyond the 70 basis points from the rent bumps? Thank you.
Sure. I'll go ahead and take that one. Thanks, Tammi. In our 3%-4% same store NOI guidance, I did just mention that the rent bumps piece we would say is, you know, 60-70 basis points from the embedded portfolio. I would say new leasing spreads are, you know, and again, this is for 2022, 70-80 basis points. I would also say that redevelopment is 70-80 basis points. That's the outparcel projects that we've been discussing previously. The big lift is in occupancy. You know, we have meaningfully increased occupancy, and that will continue to carry income into 2022 as well as our projections. That's 200-250 basis points of our growth.
The math is actually similar to what I just said. We have about, you know, call it 80 basis points assumed of a loss in same center NOI related to bad debt. In the 2022 year, we are anticipating that our bad debt will return to historical levels, which is between 60 and 80 basis points of revenue. That range, you know, is what's giving us the 3%-4%.
Perfect. That's really helpful. I appreciate the comments around the consistency in re-leasing spreads. Given, you know, currently high occupancy and expectations for continued growth there, I mean, should we be thinking about, you know, bigger re-leasing spreads going forward if you can sustain that occupancy level? Do you feel like you're, you know, putting tenants up against, you know, kind of higher occupancy costs at this point?
Tammy, it's a great question, and it's one that we, you know, you're balancing as we get to the, you know, to improve the occupancy and you're at levels where you have more pricing power than you have than we've had historically. Can we realize that in higher rent spreads? The answer is we have not assumed that in our assumptions, but we do think that there is that opportunity. We're and we're going to be, you know, we're gonna be testing that this year to see if we can if we can do that.
That's. I'd say it's early in terms of whether we're gonna be able to go above those numbers, on a go-forward basis, but we are, you know, we are in about as good of an operating environment as we've ever been. We're hopeful that we can push those a bit.
Jeff, just to add on to that, Tammi, the second part of your question was whether you know the pressure that we're putting on our neighbors. You know, I would first say that you know our rent-to-sales ratio we reported was 2.4%. Really those are very long leases, so that's not really where the pressure will be applied. When we look at our inline neighbors you know from a ratio standpoint we're you know our estimates are we're about 10% of their sales and that varies based on the usage. As we look at the growth that they're realizing, given the necessity-based nature and their ability to push those costs you know we believe we can achieve these and maintain that relationship without putting excess pressure on our neighbors.
Oh, go ahead, Dan.
The last piece is, we don't believe that our inline tenants are feeling pressure because as you note in our retention rate at 88%, nine out of every 10 tenants are renewing, and they're renewing at these kind of spreads that we've been talking about. The evidence is clear that the tenants do not feel pressured. You know, their businesses are
Thriving in our centers, and therefore they wanna stay in our centers, and the retention rate is reflective of that, dynamic.
Tammy, one thing that I would add in is, as well is when you think about inflation, I mean, we've been getting these kind of spreads in a 2% inflation environment. If we were to move to 3%-5% inflation, that would also. We believe that would give us additional impetus to be able to grow our rental spreads. But we'll see. I mean, again, that is, you know, to be seen as we progress through the year.
Okay. Appreciate that. Then maybe just one last question, just as we think about dispositions in 2022, curious if you have anything teed up there and maybe what you're expecting for the year in total, and just if you can give us a sense for, you know, cap rates on the pool of assets that you're looking to sell.
As we talked about, we do know, like, the $350 million is a net number. Our dispositions will be on top of that. Our acquisitions would be higher by whatever that number is. And that range we've given of $300 million-$400 million, we think there'll be, you know. We haven't given guidance in terms of what our dispositions are. I mean, historically, they've been $100 million-$125 million a year. I think you know, as we think about it, we're probably thinking in that kind of a frame.
Again, we're really focused on making sure that we get the incremental growth from the net acquisitions.
Great. Thank you.
Our next question comes from Todd Thomas with KeyBanc. Your line is open.
Hi. Thanks. Just first question, I just wanted to follow up on investments and the strategy. You know, there does seem to be a bit of product coming to the market. Is there any appetite for sort of a small or mid-sized portfolio, or should we generally expect the one-offs primarily? Would there be a scenario where it might make sense to grow the joint venture and asset management platform?
Todd, thanks for being on. It's a great question. Yes, there is additional product coming on the market. Yes, we are looking at every portfolio that is for sale, and have looked at, obviously, all the ones that have either transacted or been committed to date. I would not anticipate us getting involved in a portfolio in the current environment where there is a large premium paid. We believe there's a portfolio premium paid. If that continues to be the case, then we would anticipate, you know, continuing to grow through individual acquisitions.
Again, you know, if we can find something that meets our 8 unlevered IRR in a portfolio basis where we think we're getting market, not a premium to market, we would be very, we'd love to look at that, and we'd love to, you know, to buy that if we can. Again, it's gonna be driven by, you know, can we underwrite it to an eight unlevered IRR, and do we think we're buying it at a more of a market rate than a portfolio premium type of rate? That's how we're kind of thinking about it. We do...
You know, we look at basically everything that comes on the market because that's. You know, we've been doing this for a long time. We have the relationships, and we're on the top of the list of anybody who's selling open-air centers to talk to us. We will continue to review those and try and find the best opportunities. I don't know, Devin, if you had any other thoughts on that.
Yeah. The only thing I would add, Todd, is, as you know, we built this portfolio over time, asset by asset. You know, the reason we haven't been successful in buying a lot of portfolios is because we believe that there is a portfolio premium that's typically paid, and that makes it more difficult for us to hit our return objectives. That would be the answer on that part of your question then. Then on the second part of your question regarding the asset management business, you know, we are constantly approached by institutional investors to partner with them so that they can get the benefit of our operating platform, for their investment dollars.
You know, it's something that we will continue to look closely at, and if we can find, you know, the right partner that allows us to meet our objectives for our own balance sheet growth, et cetera, we would entertain it.
Okay. Then, in terms of some of the acquisitions that you completed here in the quarter and also what's in the pipeline, you know, I was wondering if you could speak to Arapahoe, both Arapahoe and maybe Town & Country, about 200,000 sq ft or a little bit more. You know, not out of bounds. You have, you know, a number of centers that are, you know, a little bit larger in size, but they are typically larger than what the company owns today, with-
Yep.
You know, a bunch more boxes. You know, should we expect to see some, you know, investments going forward be a little bit larger, a little bit boxier in nature, or is it just, you know, sort of mixed in the quarter?
I would say it's mixed in the quarter. I mean, the two centers, Arapahoe and Town & Country. Town & Country is a very specific case, which it is larger, but it does have two grocery anchors. It operates as two different centers, and it's a physical issue you gotta look at, but it's almost like we bought two different centers. In that case, they are not large. It's not a large property acquisition when you think of it as two centers. Arapahoe was a very unique situation where we felt a part of the center operated as a grocery anchored shopping center, and the majority of that.
We had two boxes that we had to buy in order to get that. Those two boxes were long-term, you know, good credit properties that we felt like, okay, that we'll take that in order to get what we really wanted, which was the grocery anchored shopping center part of the center. You know, fortunately, it's to date, it's worked out extremely well, both of them, from a new leasing and our ability to grow rents at both of those locations really early on, obviously, in their acquisition or our ownership process. We're very happy with sort of the progress we've made on those centers in a very short time.
Okay. If I could real quick, John, two questions related to the guidance and the quarter here. You know, first, was there any benefit to straight-line rent realized in the quarter that we should think about moving forward? Or is the roughly $2 million of straight-line rent in the quarter a good run rate to think about for 2022? Also in the core FFO reconciliation, I think there's the $0.07-$0.08 for transaction costs and other. What is that exactly, and where does that show up in the income statement?
Sure. In terms of straight-line rent, I would say that for the quarter, I would think that as I look to 2022, the fourth quarter is a little higher. I would say, you know, kind of $2 million-$2.5 million is a good estimate for straight-line rent specifically. Then, to your question on transaction costs and transaction activity, at this time, I believe those are actually going to go through on our income statement. I think we have a caption right now, and I'm pulling it up. That actually is. It's gonna be in the other expense and income net line on our income statement.
In our reconciliations, they'll come through as that transaction and acquisition expenses, which we have as an add back to core FFO, but it does impact NAREIT FFO.
Right. What is that exactly? The transaction, how much of it is related to, you know, sort of abandoned or, you know, I guess acquisition costs versus other?
Those are. It's more transactional on the corporate side. It would be some of it is failed transaction costs or failed acquisitions, but other components are just expenses that we had related to the IPO that we are paying. It's actually some of it is non-cash expenses that we're recording going forward. I would expect it to be at this level in 2022 and then kind of tapering from there.
Okay. All right, great. Thank you.
Thank you.
Thanks, Todd.
This concludes our Q&A, answer session. I would like to turn it back to Mr. Edison for some closing comments.
Thank you. Thanks, everybody, for being on the call and for your questions. You know, we had a really nice quarter, as we enter 2022, I think, in a really good position. We're excited about some of the opportunities it's gonna create for us. As you know, again, we appreciate your questions and obviously are here to answer them as we go forward. You know, we'll root for the Bengals this weekend, because we have to because they're, you know, we got our Cincinnati base. For you guys, we thank you for your time today and look forward to hopefully having a really good 2022.
It, you know, it's certainly starting off really well. Let's keep our fingers crossed. Thanks, guys. Appreciate it.
You may now disconnect.