Good morning, and welcome to Phillips Edison & Company's first quarter 2022 results presentation. My name is Latif, and I will 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, quarterly financial supplement, and 10-Q were issued yesterday, May fifth, after market close. These documents and a replay of today's call can be accessed on the Investors section of the Phillips Edison & Company website at phillipsedison.com. I would now like to turn the call over to Stephanie Hout with Phillips Edison & Company.
Thank you, Operator. Good afternoon, everyone, and thank you for joining us. My name is Stephanie Hout, and I'm the Director 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 discuss our differentiated strategy and touch on the highlights for the quarter. Devin will discuss our first quarter operational results, and John will review our first quarter financial results, our recent capital markets activity, and discuss our guidance. Lastly, Jeff will return to provide an update on our investment activity and provide closing comments. Following our prepared remarks, we'll answer questions from the institutional analyst community.
Before we begin, I would like to remind our audience that statements made during today's call may be considered forward-looking, which are subject to various risks and uncertainties as described in our SEC filings. 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 is my pleasure to turn the call over to Jeff Edison, our Chief Executive Officer. Jeff?
Thank you, Stephanie. Good afternoon, everyone. We're encouraged by the activity we have seen since the start of the year, which is reflected in our Q1 results. The leasing environment continues to be strong, as evidenced by our robust leasing spreads, high retention rate, and resulting high occupancy level. There is continued demand in the market to be located at centers anchored by the number one or two grocer. These grocers and our necessity-based retailers drive high levels of foot traffic to our small shops. Our team has been able to leverage this demand and the pricing power that we have as a result of the high occupancy to produce exceptional new and renewal leasing spreads. Our strong retention rates and high level of collections are a testament to our strategy. Our neighborhood shopping centers and their formats drive results.
On the acquisition front, the market for grocery-anchored centers remains competitive. However, we believe a key differentiator for us is the markets we operate in. Our team continues to find value and drive returns in centers anchored by the number one or two grocer in our markets. We have successfully done this across multiple cycles for over 30 years, one asset at a time. We remain disciplined in our acquisition efforts and continue to target acquisition IRRs over 8%. When we review the assets we have acquired in 2021, they are all performing better than our underwriting, and we're very optimistic about our 2022 acquisitions. Yesterday, we announced we are reaffirming our 2022 guidance of net acquisitions of $300 million-$400 million this year. We are targeting unlevered IRRs of over 8%.
Our strong results for the quarter and the continued successful execution of our growth strategy by the team have allowed us to raise the lower end of our core FFO and same center NOI guidance for 2022. John will speak about this shortly. Now, I'd like to turn the call over to Devin, who will speak in more detail about our operating results for the quarter. Devin?
Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. First, I will review the operational and leasing highlights of the quarter. As of 3/31, our leased portfolio occupancy was 96.2% compared to 94.8% at 3/31/2021, an increase of 140 basis points. Anchor leased occupancy increased by 80 basis points from a year ago to 98.1%. Our in-line leased occupancy increased by 280 basis points over last year to 92.6%. Sequentially, our in-line leased occupancy decreased by 10 basis points from 12/31/2021 due to vacancy that we gained through acquisitions that we closed on in the quarter.
Our economic occupancy improved this quarter to 95.7%, and the spread between leased and economic occupancy tightened by 50 basis points, which brings this spread close to our historical level of approximately 60 basis points. The smaller size spaces in our centers allow us to move neighbors into the space quickly post-lease execution. During the quarter, we executed 92 new and 152 renewal leases and options totaling 776,000 sq ft. This total lease volume is consistent with our historical levels of leasing volume. Our expectation is that renewals will continue to make up a larger percentage of our leasing volume, given our high retention rates. We view our high retention rate as a strength since there is no downtime and less TI required for a renewal lease versus a new lease. Comparable new lease rent spreads were 34% this quarter.
Comparable renewal rent spreads were 14.7%. The total combined rent spread for the quarter, inclusive of new, renewal, and option leases, was 14.6%. We continue to see strong demand for space in our centers and executed leases this quarter with retailers such as Panera Bread, Jersey Mike's, and CenterWell Primary Care, a Humana company. As Jeff noted, we are encouraged by the continued success that our neighbors are enjoying at our centers. During the first quarter, we realized a retention rate of 89.7%. The leasing spreads that we are seeing, combined with our strong retention rate, is clear evidence of the continued high demand for space in our centers and the pricing power that we currently enjoy. Lastly, I will discuss the results we achieved through our development and redevelopment activities.
We continue to execute on our pipeline of ground-up and repositioning projects. Currently, we have 20 ground-up and redevelopment projects under active construction, which represent total investment of approximately $48 million. The average yield on these projects is estimated to be 10%-12% unlevered. We stabilized two of these projects in the first quarter. Both are fully leased and rent has commenced. In addition to the 20 active projects, we also have a pipeline of 10+ projects expected to begin construction throughout the balance of this year. This activity will keep us on pace to meet our target of $45 million-$50 million of total redevelopment spend for 2022, with yields of 10% unlevered. This concludes the summary of our operating results for the quarter.
I will now turn the call over to John for a discussion of our financial results, recent capital markets activity, and guidance. John?
Thank you, Devin, and good afternoon, everyone. First quarter 2022 Nareit FFO increased 49.1% to $67.1 million, or $0.52 per diluted share. This result was driven by an increase in rental income, an improvement in collections, as well as a reduction in non-cash expense as a result of the final settlement of the earnout liability with the issuance of 1.6 million operating partnership units in January of this year. Our first quarter FFO increased 14.2% to $72.6 million, driven by increased revenue at our properties from our higher occupancy levels and strong leasing spreads, our expanded portfolio, as well as lower interest expense from our lower leverage level versus a year ago.
On a per-share basis, core FFO decreased to $0.56 per diluted share as a result of the number of incremental shares we issued during our July 2021 underwritten IPO. Sequentially, our core FFO per share increased from $0.47 in the fourth quarter on higher revenues and lower property operating and G&A expenses. Our Q1 2022 same-center net operating income, or NOI, increased to $89.8 million, up 6.8% from a year ago. This improvement was primarily driven by higher occupancy, a 2.8% increase in average base rent per sq ft, and stronger collections compared to 2021. Turning to the balance sheet.
We continue to view our balance sheet as a strength, with our net debt to Adjusted EBITDA of 5.7 x as of March 31, 2022, compared to 5.6 x at December 31, 2021. At March 31, our debt had a weighted average interest rate of 3.2% and a weighted average maturity of 5.1 years. Approximately 96% of our debt was fixed rate. At the end of the period, we had approximately $462 million of total liquidity, comprised of $17 million of cash equivalents, and restricted cash, plus $445 million of borrowing capacity available on our $500 million credit facility. We intend to utilize our revolving credit facility to fund our acquisition plans.
With no significant debt maturities due until 2024, we continue to carefully evaluate and monitor the capital markets as we consider our future financing options. On February 10, we filed an automatically effective shelf registration statement and commenced a $250 million ATM equity offering program. This provides us with a useful tool to efficiently access the capital markets as opportunities arise. We have not utilized the ATM to date and will evaluate future use based on a combination of favorable market conditions, acquisition opportunities and identifying uses of proceeds that are earnings accretive. As we have previously communicated, we have an external growth target to buy $1 billion of assets over the three years post our July 2021 underwritten IPO.
While we do not need to issue equity to execute this plan, we will consider equity opportunities in the future as appropriate to allow us to maintain our strong balance sheet position. I want to reiterate that any proceeds raised in the equity or debt capital markets will be invested in a manner that we believe will be accretive to our per share financial metrics. As Jeff mentioned, we're pleased to raise the midpoint of our Nareit FFO and core FFO per share guidance based on our success in identifying assets early in the year and our favorable operating results year to date. Our new range for core FFO per share is $2.18-$2.24. We are also tightening the range and increasing the midpoint for our same center NOI guidance to 3.25%-4%.
We are reaffirming our net acquisition guidance of $300 million-$400 million for 2022. Jeff will be discussing our acquisitions during the period as well as our pipeline. The opportunity to reach our acquisition target ahead of schedule gives us confidence in our financial guidance for the year. We continue to evaluate all centers that fit our investment criteria as they come to market. As we look ahead, we will use our Quad Squad portfolio analysis to consider trades of additional acquisitions for lower growth assets in our existing portfolio. We believe this strategic exercise of match funding is prudent as we evaluate the impact of the debt capital markets and rising interest rates on the transaction market.
With that, I would like to turn the call back over to Jeff to expand on our investment activity for the quarter and recap our long-term growth strategy. Jeff?
Thank you, John. In the first quarter of 2022, we acquired 3 grocery-anchored shopping centers for approximately $100 million. Our acquisitions included Cascades Overlook in Sterling, Virginia, in the D.C. MSA. This center is in a trade area with very favorable income and population demographics. In addition to the vacancy we plan to lease at the center, we believe there is leasing upside at this asset through increasing occupancy and marking rents to market. We also purchased Oak Meadows in the Austin MSA. It is in a location where we expect to see continued growth as a result of planned and in-process developments in the surrounding trade area. We believe we can achieve growth by completing the leasing efforts as well as through existing contractual rent bumps. Our final purchase during the period was The Shops at Avalon, located in Spring Hill, Florida, near Tampa.
This center provides a unique opportunity for us. The purchase included multiple undeveloped land parcels where we believe we can deliver growth through various forms, including ground leases, ground-up development, and land sales. This is in addition to the growth we can achieve through the upside in leasing the existing vacant space. We are currently in the closing process of an additional grocery-anchored shopping center up for approximately $70 million, which should close this month. Additionally, we are in active negotiations on other centers that would bring us meaningfully closer to our acquisition target. We are confident we will meet our acquisition guidance. All these centers acquired or under contract would exceed our 8% unlevered IRR. We are excited at the opportunities our team has been able to identify and convert in this market.
Now, before we get to the Q&A section, I would like to quickly recap our quarter. The leasing environment continues to be strong as evidenced by our leasing spreads and retention rates. We are capitalizing on our ability to drive rents. Our team continues to find opportunities in the acquisition market that meet our required returns. As a result of this internal and external growth, we're able to tighten and improve our financial guidance ranges. Now with that, we will 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're more than welcome to rejoin the queue. To ask a question, press star one on your touchtone telephone. To remove your question, press the pound key. Our first question comes from Craig Schmidt of Bank of America. Your line is open.
Thank you. I'm wondering, you know, given the reduction in activity first quarter 2022 versus 2021, do you see that happening for the second, third and fourth quarter? Or was this just a pause and you might return to higher leasing values?
Craig, this is Jeff. Thank you for the question. I mean, if you look at the total volume of all of our leasing activity, it was quite in line during the first quarter. We just had a lot more retention than it was, you know, is normal, and our new leases were down slightly. Overall, I mean, I think our backlog going into the quarter is at a very strong level, very consistent with what we've been able to do historically, if not a little ahead of that.
Okay. I guess that kind of ties into the follow-up. You know, you had strong leasing, but particularly impressive was your strong leasing on renewals. Is there anything that that's driving your renewals better than some of your peers?
Devin, you wanna take that?
Sure. I mean, Craig, we've always enjoyed very high retention rates in our portfolio. You know, again, we believe this is one of the benefits of our business model. Our retention rate in the quarter was highly consistent with what our retention rate has been over time. We've over time enjoyed a retention rate in the high eighties, and the reason that we view that as a strength is the fact that, as you know, with a retention rate at that level, we're not incurring any downtime, and the amount of TI that we're having to put back into the space relative to what we have to put in on new leases is dramatically lower.
We just think it's a function of our format and a function that our neighbors are performing well in our centers and wanna stay in our centers. Therefore, you know, we're able to get the kind of re-leasing spreads we saw in the quarter, which on our renewals were in the mid-teens, which is again a very high level and compares very favorably to what that level has been historically, which has been circa 8%-10%. We enjoyed that. You know, we expect to see that continue because we continue to be the beneficiary of a number of the macro trends that our portfolio is benefiting from, which is the growth in the Sun Belt.
Over 50% of this portfolio sits in the Sun Belt, and it's 100% in the suburbs, and we benefit from the trend of suburbanization and the trend of working from home, which is creating incremental demand for our centers.
Okay. Thank you.
Thank you. Our next question comes from Caitlin Burrows of Goldman Sachs. Your line is open.
Hi. Good afternoon, everyone. Maybe just a follow-up on the leasing side, following this other question. It looks like you guys do have some good pricing power. There's good demand, but specifically looking at that lease versus occupied spread, it has narrowed. I'm wondering if you could give some commentary on how leasing activity has been progressing over the past six months, maybe how deep it is, types of tenants, and what's the outlook for continued occupancy increases. I know that's a lot, but also, have you noticed any potential tenants get more cautious due to the current macro situation?
Sure. Hi, Caitlin.
Caitlin, thanks for the question. Devin, you wanna take that?
Sure. Thanks, Caitlin. Good afternoon. Caitlin, the spread in the quarter actually is more consistent with our historical spread of circa 50 basis points. The spread that you saw in Q4 and Q3 last year of circa 100 basis points was wider than what we've typically seen. Again, one of the benefits of our format is that, you know, our average tenant, ex the grocer, is 2,500 sq ft, and we're able to get these tenants into the space very quickly once they sign a lease. You know, our average time from lease signature to rent commencement date is between four and five months. We don't have a lot of downtime between signing the lease and the tenant actually taking possession and beginning to pay rent, which is a real benefit to our format.
In terms of what we're seeing on leasing activity, Caitlin, the pipeline continues to be very strong. You know, we believe we can continue to grow our occupancy. You know, we believe we'll be able to hit inline occupancy of 95% by the end of 2023, which is, you know, another circa 250 basis points of occupancy upside, and we're confident we'll be able to hit that. We are not seeing tenants pull back yet. Obviously, it's something that, you know, we're very focused on and watch very carefully. We have not yet seen tenants pull back.
In fact, you know, when you look at the kind of occupancy gains we've had, the kind of leasing spreads we're getting, in addition to these very attractive leasing spreads, we're getting the tenants to sign up for rent CAGRs that are in the mid-twos. Not only are they agreeing to rent bumps on renewals in the mid-teens, but they're also signing up for CAGRs in the mid-twos. We just think that points to the continued strength of the leasing environment.
Got it. Yeah, I know that average time of 4-5 months is, I don't know, impressive or great, so good to hear that. Maybe follow up on the balance sheet side. John, I know you mentioned that you don't need to issue equity to meet your acquisition targets. With debt-to-EBITDA now at 5.7 x, could you comment just what range do you wanna stay within? Is lower necessarily better, or are you equally as comfortable at some higher number? If so, just wondering what that number range is.
Thanks, Caitlin. Yeah. We are at 5.7x, and we're very comfortable with that. You know, we do have our growth plans in front of us. You know, we would envision that we can take this to, you know, 6x. Given the macro uncertainty we've communicated previously and are still comfortable with the low 6x range. You know, I think that around 6x is what we're looking at. As I also mentioned on the call, in this time, we wanna have all options available to us so that we can seize opportunities as we see them. With our leverage at 5.7x, I think we're in a good position to continue to do that. Okay, thanks.
Thank you. Our next question comes from Richard Hill of Morgan Stanley. Please go ahead.
Hey, good afternoon. Maybe just unpacking Caitlin's questions, just a little bit deeper. 250 basis points above SOI on inline space. Sounds like anchor space is pretty good at 98.1. There's obviously some structural reasons that you might not be able to get higher than that. As we're thinking about total portfolio, does that mean total portfolio can maybe go up to around 97% or so?
Yes. That's correct, Rich. That's the right number.
Great. As we think about renewals, obviously, Craig highlighted how well your renewal spreads were in 1Q 2022. Is that the new normal given the amount of tenants you're able to capture? Or do you think we're gonna go back down to more of an 8%-9% level? By the way, those 8%-9% levels are still really strong as well. What I'm trying to unpack in my own mind is sort of like without asking you a guide, I'm trying to do it myself. What is, you know, same store NOI look like in 2023? If you have 100 basis points of uplift on occupancy, I get that.
should we be thinking about renewals in the 8%-9% range, or should we be thinking about renewals and more on the, call it the low double digits to maybe even the 14% range?
Rich, we haven't seen anything in the environment that leads us to believe that these spreads are going to be declining from where they are right now. I mean, as you know, we're in a very dynamic environment, with so many things going on between interest rates and war in Europe, et cetera, et cetera. You know, we're very hesitant to predict that, you know, we're gonna see long-term re-leasing spreads in the mid-teens, which is, you know, almost double what they've been historically. That being said, we haven't seen anything that leads us to believe that we're not gonna be able to continue to see these kind of spreads in the near term.
In terms of predicting a longer term trend, you know, as you know, re-leasing spreads in the high singles to low double digits is a very strong number, and we're confident with a number in that range. Speculating on a number that's almost 2x that number is something that, you know, we are not willing to, you know, be that aggressive at this point in time, given all the uncertainty out there in the environment.
Yeah. Devin, that's very helpful. Thank you for that. Maybe that just leads me to my final question here. At the risk of asking an obnoxious question, you know, your first quarter was really strong, and the outlook feels really good. Why not be, you know, more aggressive on the guide? I recognize that you're still a newly IPO'd company in the scheme of things. Is it just really taking a conservative approach, wanting to make sure you're meeting and exceeding expectations, especially against an uncertain backdrop?
Oh, Rich, it's Jeff. John, why don't you take the first and then I'll also wanna have a couple things to say.
Yeah. Thanks. Thanks, Jeff, and thanks, Richard. We did have a solid first quarter. We see strength for the remainder of the year.
John, you are on mute.
Sorry about that.
Is that better?
Yeah. All right. We had a solid first quarter, and we see strength for the remainder of the year, but there is uncertainty with both inflation and interest rates. In the first quarter, we did have a few higher items like, you know, I think, lease termination income was up a little, which is seasonally higher in the first quarter. Also our bad debt of approximately 60 basis points was a little lower than our historical level. As we look to the full year, we are kind of in that, you know, 60-90 basis points range on bad debt. Interest rates have risen since our initial guidance, and so that's also included in there. Our operating strength is allowing us to improve our guidance and estimates overall, but we still wanna be conservative as we look to the full year.
Hey, Rich, it's Jeff. The only other thing I would add there is, you know, we are in a battle between a really strong operating environment and an increasing interest rate environment. Early in the year, we are gonna take a generally conservative approach to how that battle will work its way out in the market. As Devin pointed out, you know, the operating environment, there's nothing in the operating environment from our perspective right now that there are big clouds, but we're watching it. In this kind of environment, we're gonna keep, you know, we'll be watching it closely and seeing where we can go.
I mean, honestly, we're very excited about the operating environment, as you can tell. You know, we continue to push hard for you know, the kind of results that we were able to get on the operating side the first quarter. You know, hopefully, we can continue that through the year and that the interest rate impact is not you know, too big. That's really why we took the approach that we did.
Great. Thank you, guys. Congrats on a really nice quarter.
Thanks, Rich.
Thanks, Rich.
Thank you. Our next question comes from Floris van Dijkum of Compass Point. Your line is open.
Hey, guys. Thanks for taking my question. Maybe if you can just, I know we've talked a little bit about occupancy, but what was your peak occupancy for both small shop and anchor? What gives you the confidence that you know of the 97% or maybe even going beyond that?
Yeah. Floris, we are at historically high occupancy levels, both overall and in line. The reason for that is that we have improved the quality of the portfolio over time, and the portfolio today is of a higher quality than it has been historically. Therefore, we're confident that we can take the occupancy levels up to the numbers we're speaking about. We also believe that when we look at the environment, that these are levels that others have achieved, and therefore, we're confident, you know, we'll be able to achieve them as well. Lastly, you know, given the environment that we're in and what the leasing team is telling us, that adds to our level of confidence. It's a combination of all those factors for us.
Thanks, Devin. Devin maybe ask one more question for me, which is, your average size of your assets about $20 million in terms of value on the low side relative to your public peers. The stuff that you've been buying is more in the $40 million center, although you bought a couple of smaller ones, you know, this quarter as well. How do you see that, how your portfolio transforming? And are you gonna be looking to buy larger assets than your typical asset that you currently own? And what are the benefits in your view of that?
What does that mean in terms of how the composition of your portfolio look like, you know, you know, three years from now?
Floris, this is Jeff. Great question. You know, as you know, our average center is 115,000 sq ft. It's got a 40,000-50,000 sq ft grocer in it. 34% of our income is coming from that grocer. You know, that dynamic as a whole will not change. There are selective opportunities that we're seeing in the market where we think we can get outsized returns with slightly bigger or slightly more big box concentration than what we have had historically. That is not where I mean. If you look at where what the core of our buying is, that is a by exception, not at the core.
You know, but as all buyers are, we've got to be opportunistic in this kind of environment to make sure we're taking advantage of certain circumstances where things are in our minds, slightly mispriced. That is. We will continue to do that, and you'll see that throughout the history of the company. We've always done that, where we've got, you know, things that where we are highly confident in what we can do with the centers and return that 8+ unlevered IRR with a, you know, with even a better risk profile just because of the unique situation. That's what I think you will see, as we go forward.
You know, we're actually very excited about the projects that we've got under contract, as well as working to get under contract, that have sort of some unique. You will notice there is a consistency of still having the number one or two grocer in them, which obviously is an important thing from our perspective.
Thanks, Jeff. Appreciate it.
Yeah, thanks, Floris.
Thank you. Our next question comes from Juan Sanabria of BMO Capital Markets. Your line is open.
Hey, guys. It's Eric on for Juan. Thanks for taking my question. Kind of switching gears on the development pipeline. Are you seeing any cost increase across your builds? How should we think about the numerator side of things, you know, as we think about your target yield of 10%-12%? Is there any risk embedded there?
Yeah, Eric.
Yeah. Oh, go ahead, Devin.
Eric, one of the benefits again of our format is that our redevelopment projects are small, and they have a shorter duration. We're able to build into our financial projections increases in costs that we're seeing real time. The numbers that we're quoting of 10%-12% are inclusive of the current environment from a cost perspective. Our view is that given the fact that these projects are typically delivered in 12, circa 12 months, that we're able to build into our financial models current costs. To date, we've been able to get the rents we need to continue to hold that 10%-12% return on cost.
Okay, got it. Thank you very much.
Yeah.
Thank you. Our next question comes from Mike Mueller of JP Morgan. Your question, please.
Yeah. Hi. I know you've been trying to increase your portfolio escalators over time, but has the magnitude of what you're asking for today stepped up over the past?
I don't know, several months, just given the backdrop, the macro backdrop.
Mike, it's a great question, and one that we are, you know, we're working on as, you know, in real time. The answer is that we are, what we're able to get today is bigger rent increases upfront, and our CAGR is staying in that, you know, mid-2% kinda range. Our target is to continue to keep that process going and to bump those the regular bumps, the CAGRs that we get in the leases that we're signing. You know, we've seen probably. I mean, this is one of the reasons we've, you know, had the results we have.
We've seen less pushback on bigger rent spreads upfront than we have on getting the CAGRs up to, you know, 3%, 4%, 5%, to match kind of where people are seeing inflation. I believe it will get there if inflation stays where, you know, as it is right now. Right now, we're seeing it in the rent spreads more than we are in the CAGRs. We'll continue to, you know, push that.
Got it. Okay. That was it. Thank you.
Thanks. Thanks, Mike.
Thank you. Our next question comes from Todd Thomas of KeyBanc Capital Markets. Please go ahead.
Hi. Thanks for taking the question. I wanted to circle back to investments real quick. You know, you're well on track toward achieving the $300 million-$400 million annual guidance. You talked about what's under contract. Sounds like the pipeline is pretty healthy. Leverage did tick up a little bit, and it sounds like from John's comments that the line will be used to fund investments going forward. You have room and capacity to continue acquiring before hitting that 6x range or low 6x leverage level. Just given the macro headwinds and the increase in borrowing costs, you know, does the thought process toward investments and increasing leverage a bit at the margin change just given the greater uncertainty today?
You know, Todd, it's a great question, and thanks for it. It's something we're in kind of constant discussion about. The thing that we're laying over this all of the outside noise is the strong performance we're having at the property level. If you match the strong performance at the property level on a go-forward basis, you know, a lot of the pricing that we're seeing in the market is not expensive if you can continue this kind of growth. I mean, as a risk reward, we're weighing off those two things of increasing interest rates and those costs against really strong operating results.
You know, we keep coming back to the tailwinds that are in our business today, that are driving more people to our centers more often. As long as that pace continues and those tailwinds continue, more people are working from home and more people are seeing the convenience of a shopping center, you know, three miles from their house, that, you know, we're gonna continue to make that bet and think that we're gonna be able to get better returns than even we underwrite, because of the, you know, the strong operating environment we're in. As you point out, there are headwinds as well as tailwinds, and we're always gonna have to be kind of weighing those two things off.
As we said at the IPO and continue to do, you know, we've got a plan for over three years buying $1 billion net of dispositions. At this point, we're not coming off of that guidance. We think that that's a prudent use of capital in the current environment.
Jeff, the only thing I'd add to that, Todd, to give you a little bit more perspective on what Jeff just said. When we look at the assets that we acquired in 2021, and as you know, we're targeting an 8% unlevered, and when we re-underwrite those assets given the strength of the operating environment, we believe that the unlevered IRR on those assets will be circa 100 basis points higher than what we underwrote. That reflects what Jeff just said in terms of we believe that there's a depth to the acquisition environment where we can continue to hit the returns we're targeting given the strength of the operating environment.
Okay. That's helpful. Appreciate that. Are you seeing any change in pricing at all, you know, maybe relative to the 5.8% cap rate on the 3 assets completed in the quarter? You know, are you expecting any change in pricing as you move forward to maybe compensate for some of the greater uncertainty? I mean, what's kind of the forward pipeline look like in terms of pricing here?
I would say that for us, on our example, the forward pricing is on a IRR basis better than what we have been able to buy in the past. It may appear on a cap rate basis to be more aggressive. When you look at the long-term returns, we think we've bounced up where there is significant upside. In the environment we're in, we think that's the right bet to be making.
You know, cap rate tells a little bit of the story, but certainly not the story that we believe, which is really gonna be driven by, you know, very strong IRRs in a strong operating environment with, you know, good amount of vacancy and ability to move property. That's sort of what we're seeing. You know, we do as always, we're paranoid about the market and, you know, because there are certainly headwinds to pricing. We are seeing no real letup in demand in real time. We do anticipate that there will be some as, you know, as the years progresses.
I mean, you certainly, the leveraged buyer, we think will be a much less effective competitor going forward than they have been historically over the last, you know, 18 months. So that part should be positive, but there's still a ton of less leveraged capital that's out there, and we don't see that getting used up quickly. So we'll continue to monitor it. You know, our, as I think we've talked about, Todd, one of our questions is, has the risk profile of, you know, grocery-anchored shopping centers relative to other real estate types, is that moving away from really the tough markets that we've been in over the last 3 years, where everything, you know, retail is coming to an end.
Are we seeing some repricing in terms of that risk profile as well? There's just an awful lot going on, and I don't think it's just one theme. I think it's all of these things sort of working their way out, which will drive, you know, which will determine where, you know, sort of values go, you know, over the next 12-18 months.
Okay, that's helpful. Just a last question for John, real quick. The interest rate swap with a notional value of $175 million that had an expiration of April 2022. What happened there, and what's the impact?
Yeah, Todd, we did let that expire, and the impact is that post effective for that, we would be 87% fixed at the end of April or where I sit today.
What's the change in interest expense related to that $175 million?
Oh. Oh, yeah. When we look at that, I actually think that it would have been, you know, close to where it is currently because those swaps were put in place at, you know, several years ago. I think it's neutral. As we look at that and as we look at the forward curve, I mean, we do see the interest rates higher, which we're taking effect into our guidance. I mean, I think that, you know, for the quarter, we were at 3.2%, and I wanna say it gets to, you know, 3.4%, 3.5% later this year.
Okay. Got it. All right. Thank you.
Thanks, Todd.
Thank you. Our next question comes from Tammi Fique of Wells Fargo Securities. Your line is open.
Thank you. Good afternoon. Maybe just following up on the acquisitions. I guess one, are you seeing, you know, more sellers come to the market in anticipation of, higher rates and sort of this risk of, you know, lower demand from leveraged buyers?
Tammi, this is Jeff. Yeah. We have seen that actually coming into the beginning of the year, and it has continued through the first, you know, this first quarter, that there is a fairly substantial increase in the volume of product. Now, part of that is just there was just no volume during the pandemic. You know, we started to see increases in the fall of last year. We continue to see that, and I think you know, the aggressive demand for grocery-anchored shopping centers has continued and continues to expand the number of centers that are on the market.
I would say, you know, on a regular investment committee meeting, we're seeing probably close to 25% more deals than we did, you know, in the fourth quarter last year. That's just a sort of guesstimate.
Okay, thank you. Sorry about this. Did you quantify the range of going-in cap rate on this next group of acquisitions that you're looking at today? I guess, just wanting to understand more about how you're still underwriting to the 8% IRRs and what might have changed in that calculation.
I don't think we have disclosed the cap rates on the new ones that are not closed yet. We just have not done that. I can tell you that you know the underwriting is very similar. I mean, we have not gotten more aggressive on our underwriting. Even though the environment is you know it is really strong, we stay fairly conservative on the underwriting of these new assets that we're buying. We have found a couple of unique. I mean, we believe we found a couple unique circumstances where we have more occupancy or more vacancy to create some upside than we have historically, and they just happen to be centers that fit that mode.
Okay, thanks. Then my last question is really just on dispositions. You did a couple in the quarter. Just wondering if you know, have anything under a contract right now or are looking to sell additional assets this year.
We've closed the things that we have in the market, and we're continuing to monitor our acquisition market so that we can start to match fund some of the dispositions in the second half of the year. Right now, you know, we're in the very early stages of looking at that. I would anticipate we will do additional dispositions as well as additional acquisitions, you know, through really the second, third, and fourth quarter. Again, with that number of $300 million-$400 million being a net number, and match funding the others.
Okay, thanks.
Does that answer your question?
Yes, that does. Thank you.
Great, yeah.
Thank you. This concludes our question and answer session. I would like to turn it back to Mr. Edison for some closing comments.
Great. Well, thanks, everybody for being on the call. You know, as we sort of think about the quarter, you know, some of our highlights are that, you know, we do think we're gonna generate almost $90 million of free cash flow this year from the company, which is again, a great growth engine for us. The operating environment's strong, which is, you know, augmented by our high level of occupancy. You know, we're you know, both leasing spreads and retention are at, you know, really strong levels. You know, as we talked about on the acquisition side, the demand for grocery-anchored remains strong. There's a lot of capital there, so we see and we don't see that going away.
We feel good about the fact that to date, our neighbors have been able to pass on most of their increasing costs to the customer, and they appear to be doing quite well and obviously the renewals and the leasing spreads, you know, are a testament to that. You know, we think that the macro trends that have been a helpful tailwind for us, you know, over the last 12 months continue to be positive. Obviously, there's some headwinds that are out there now that will, you know, we've gotta keep a close eye on. We think as a net that the tailwinds are helping us more than the headwinds are hitting us.
You know, we will continue to tell you that we think there's a value proposition in, you know, our format centers with a number one or two grocer. You know, we're not priced like others who are in that business, and we think we will be. We're gonna keep pushing you guys to get us there, but we think there's a value opportunity there. You know, with that, you know, we're really happy we were able to beat and raise our guidance for this quarter. You know, we're looking forward to, you know, continuing to push through the year and see really strong results. Thank you guys for your time. We appreciate it, and we'll talk to you probably before next quarter.
Hopefully, at the ICSC or at Nareit. Thanks, guys.
Thank you. You may now disconnect.