David Lukes: Well, the year one yield for these two is somewhere in the mid sixes. I will say, remember that I don’t really think year one yield is all that exemplary of an investment in convenience when the business is a renewal business. So, when you take the year one yield, but then you factor in a shorter Walt than a higher market-to-market, I think, the unlevered IRR is probably a better way to analyze a property like this.
Ki Bin Kim: Okay, thank you.
Operator: Our next question will come from Floris Van Dijkum with Compass Point. You may now go ahead.
Floris Van Dijkum: Thanks. Good morning guys. Couple of questions. Obviously look you’ve done a really nice job, Conor, with the balance sheet, de-risked the company. You talk about the fact that you have got interest rate caps on all of your floating rate debt. Maybe you can talk a little bit about the maturity profile of those caps and sort of as you are thinking about higher rates, what are the things that you worry about right now?
Conor Fennerty: Hey, good morning, Floris. I worry about quite a bit right now to our commentary…
David Lukes: But that’s like throwing .
Conor Fennerty: Yes, that’s – you are talking the right person about concerns. Look, I mean, there is quite a bit to your point. We are worried about a rising rate environment. I know the forward curve shows a lower benchmark rate environment three, six, nine months from now. I just think we generally operate the business, assuming rates are being higher. It is not our job to predict interest rates and as a result, we generally have looked to hedge a hundred percent of our capital structure or debt structure. So, for us, as I mentioned in my prepared remarks, we do have the May unsecured maturity to stub bond coming up. Our plan is to pay that off with cash on hand in the line. And as a result of that higher line balance, we entered into a interest rate cap in the first quarter to cap so for at 5% the next year.
That gives us the optionality and ability to wait for a window to term out that debt. To your point, to mitigate some of that future interest rate risk. And so whether that’s an unsecured offering, a secured offering, we don’t know, we have the flexibility to go either direction. But you’re right, we are intently focused and acutely focused on making sure we have minimal interest rate risk and as much duration as possible. The good news is just given the company of our size one offering, whether that’s secured or unsecured has a dramatic impact on our duration. And so, as you know, for the first couple of years we are here, we focus one on reducing leverage, but two, we are even more focused on pushing out our duration. And so again it’s an acute focus of ours, one or two transactions can have a dramatic impact, but we’ve been, I would say, overly cautious to making sure that our interest rate risk and duration risk are minimal over the last six years we’ve been here.
Floris Van Dijkum: Thanks. And maybe one other question to your convenience thesis, you said okay, the cap rate might not be the right way to look at the latest transactions. You got 3% fixed rent bumps, presumably there’s a 20% to 30% increase in on renewals as well on top of that, does that get you into the sort of the low-double digit total returns? Is that how you guys think about that?
David Lukes: Yes. I think, well, the factors you just mentioned, I mean, you certainly have fixed 3% bumps, but you’ve also got when we’re buying properties, we’re looking for tenants that have had long-term and aging properties, but they’re running out of options. So they’re naked renewals as opposed to fixed rent bumps. And so that’s what drives a lot higher. I mean I would say that on an unlevered IRR perspective, we like to see it be double digits. But it’s difficult to be competitive if you expect it to be mid-teens simply because there’s lots of other people that also see that same growth.
Conor Fennerty: Yes. And then the fourth – the fulcrum piece is the CapEx component. I mean that’s what is most intriguing to us where we are very aware of the cap rate the initial yield. What intrigues us on the economics of the business and why David’s alluding to the fact that the cap rate is not telling the whole story is the lack of CapEx. So 6.5% for an asset we’re buying, the convenience space might not be equivalent to a grocery anchor or lifestyle or power center asset at the equivalent yield.
Floris Van Dijkum: Right. Maybe you guys mentioned something about when the economy has negative GDP, you tend to see small shop contraction. How does that play into your convenience thesis? Because would they get – would your convenience portfolio get impacted disproportionately in such a scenario?
Conor Fennerty: I don’t think it’d be disproportionately impacted, but of course, it would be impacted. I mean these are small shop tenants where we feel like there’s mitigants from a risk perspective is the submarkets we’re operating in the availability in those markets where there is limited optionality. And the second piece is our national credit roster. This is not – there are cases where we buy 100% local assets, but the majority is still national to 70/30 national local mix. And so yes, it has exposure to all those factors we mentioned. Everything we own is economically sensitive, but there are quite a few mitigants that make us feel very confident in the investments we’ve made to date and the investments we’ll make in the future.
Floris Van Dijkum: Yes, that’s useful. And how does that 70/30 mix national local compare to your other is centers that you have? Is it similar or is it a little bit higher national?
Conor Fennerty: It’s – we’re 88/12. We disclose it. I think it’s on Page 2 of the supp, Floris, for the entire portfolio. So implicitly probably the rest of the portfolio, the non-convenience is 90/10, low-90s, high-single digits, something like that.
Floris Van Dijkum: And that’s for the – and that’s for small shop as well or that’s just…
Conor Fennerty: That’s the whole portfolio. That’s the whole portfolio. I bet you small shops is probably a similar, I mean, for a larger regional center, you’re just not going to get a lot of local mom and pops. For our grocery anchored portfolio, we’ve got a mixture of national locals, but again, it’s not that different of a number between the two.
Floris Van Dijkum: Okay. Thanks, guys.
Conor Fennerty: You’re welcome.
David Lukes: Thanks, Floris.
Operator: Our next question will come from Samir Khanal with Evercore ISI. You may now go ahead.
Samir Khanal: Hey good morning, everyone. I’m sorry, Conor, just want to make sure on the G&A front. Did you say that it was going to be – thought it was going to be $46 million for the year because I know you guided for $40 million.
Conor Fennerty: Yes. Sorry to cut you out there, Samir. Yes, so I think the last quarter we said was closer to $48 million. This is closer to $46 million and we’re trending modestly ahead. There will be a sequential increase in G&A from this – from the first quarter to the second quarter, but we’re running a little bit ahead of plan. Again, it’s April 25, we feel a little bit better about the number, but nothing material change wise.
Samir Khanal: Got it. And then looking at net effective rents, I mean it was up a lot in the quarter. Was that just sort of a mix thing or like shops versus anchors or was there something else going on there?
Conor Fennerty: Yes. So on that page Samir, I always point people to the percentage GLA from shops and anchors and you’re exactly right, we have more shops, shops have a hire net effective rent. As we get control of these Bed Bath locations, I would expect that number to come down because that, that GLA attributed to anchors will increase. So again, the factors that Floris and Alex asked about from in terms of rent growth, they’re positively impacting net effect of rent growth. But for this quarter in particular, it really is just a mixed issue.
Samir Khanal: Got it. And then I guess my final question, I guess upon David, you talked about sort of the 17 locations for Bed Bath, maybe 16 sort of single users. Can you provide a little bit more color on sort of economics or rent upside you can see in these locations based on the interest? Now I’m not asking for specifics, but generally, what sort of upside do you think based on sort of the negotiation power you have here?
David Lukes: Yes. I mean, based on what we know today, we think the blended mark-to-market is somewhere to 25% to 30%.
Samir Khanal: Got it. Okay. Thanks guys.
David Lukes: Thanks, Samir.
Operator: Our next question will come from Ronald Kamdem with Morgan Stanley. You may now go ahead.
