DJ Busch: Yes. Maybe I’ll just – I’ll start, and I’ll hand it over to Christy to talk a little bit on the discussions we’ve been having. But really, if you think about the quarter one, it was a more – and I think we mentioned in the prepared remarks, it was a more normalized kind of level of fallout for our portfolio. It was about 60,000 square feet of tenants to put. And you can see this in the changes between Economic and Leased Occupancy. We’ve already released 30% of that space. We have another 50% of that space already with replacements at spreads that are healthily in the double digits. And then we’re working on a de minimis amount of the space that’s left. So that’s why you saw a contraction between the kind of the Economic Leased Occupancy.
But to your point, we do expect if the leasing environment holds and because we are still seeing some really nice activity on the Small Shop side, even with the minimal amount of space, we do expect to kind of climb that to surpass our high watermark by the end of the year. Christy, do you want to talk about some categories that we’re seeing some activity in?
Christy David: Sure. I would just add that, in general, our Small Shop pipeline remains very healthy. We are actually taking opportunities where we do see some Small Shop failing or struggling be proactive in trying to release those with tenants that would add to the mix at our centers. And we’re primarily seeing the demand driven by the quick QSR category, personal health and services, of course, the full service [indiscernible], but those are the main drivers of what’s in our pipeline today.
Andrew Reale: Okay, great. Thank you.
Operator: [Operator Instructions] Our next question today is from the line of Paulina Rojas of Green Street. Please go ahead. Your line is open.
Paulina Rojas: Good morning. And DJ, this sector is today in a sweet spot, where supply is very limited, demand is strong and then you hear a lot of emphasis on your end. How bullish are you about the ability of landlords to push rents aggressively in the next 5 years? And in your answer, if you could somehow frame this level of enthusiasm, whether it’s talking about rent growth or NOI growth trend, something to help us compare for what is ahead.
DJ Busch: No, Paulina, it’s a great question. I think I tried to get to it anecdotally, and I think we have talked about several quarters that the lack of supply – there is very, very minimal new construction starts in retail because the construction cost to do – for new developments just remains much, much too high. But because of the long lead times in multi-tenant, open-air retail, the amount of time it takes to get many of these things built, 2 years, if not 3 years, at least, it sets up for strong fundamentals from our perspective for the next several years. Because even in the next 2 years or 3 years, unless we are in an environment where you can flip the development, switch back on and there are developers that are – that want to put shovels in the ground.
They just can’t. And we don’t see that changing in a material way anytime soon. So, the supply side, we are very bullish on. And it’s really the institutional quality supply is what is most limited. And we are not seeing tenants trade down for lower quality or we call it, B quality space. So, I think that’s why most of the folks are almost all folks in the institutional or public market, feel really strong about their portfolio positioning as it relates to the markets that they are operating in. Now, the one caveat to that is obviously inflation, where the economy is going and making sure that we are not pushing rents to set our tenants up for failure. I think that’s why InvenTrust and many of our peers have not shifted gears, but being much more careful with capital growing into the spaces, pushing rent appropriately, but then setting ourselves up for sustainable growth through better escalations, both on the base rent side and the CAM expense side.
So, those two pieces, I think set us up very well for sustained NOI growth. And then it’s just up to us. And so it’s really to an extent out of our control to make sure we are financing our businesses appropriately. But there are interest rate headwinds, at least on the short end of the curve, that will probably curtail cash flow growth a little bit, but I would expect same property NOI growth to remain more robust than what we have seen in the past in the space. And then the better companies to be able to pass that through our free cash flow growth as well.
Paulina Rojas: Okay. And how do you think about retailer cyclicality within this discussion about demand, because once – yes, demand is strong, but this business is cyclical. And in a way, normal tenant failure could take care of that lack of supply.
DJ Busch: It’s a good question. And I think that’s why we are always trying to perfect the merchandise mix, but that merchandise mix is always going to change. I do think the structural change in shopping habits are at 12x and frequency of visits in the open-air community center or grocery for tenant space has changed almost permanently because of COVID and because of the hybrid work environment. There are services that are doing better today than – and they will continue to do better in the years to come post-COVID than probably they ever would have done pre-COVID because of the amount of – the frequency of visits and the changing of habit for the consumers. And that specifically relates to QSR, full-service restaurants and the medical services and beauty.
Those particular categories had a structural change in how people are visiting because they are not going to the office 5x a week, in most cases, certainly in our markets. And it gives them more time and opportunity to spend time at our centers. So, no doubt, there is a cyclical nature of our business. There is no question that there is going to be tenants that fail, whether it’s because it’s a failed business model or whatever it may be. And we are always monitoring those tenants. But I do think there is categories that have structurally benefit and that should continue.
Paulina Rojas: And the last question. During the quarter, if I am right, I saw that you had a mature benefit from net expenses. And I think we were expecting some of that because of fixed CAM and – but it was more than we thought. Is there any expectation of this normalizing, any seasonality in these numbers that I am seeing?
