Q3 2019 Earnings Call
Greetings and welcome to Regency Centers Corporation third quarter 2019 earnings Conference call.
At this time all participants are in the listen only mode, Hey question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to turn the conference over to your host lower Clarke Senior Vice President of capital markets. Thank you you may begin.
Good morning, and welcome to Regency's third quarter 2019 earnings Conference call.
Joining me today, our Hap Stein, our chairman and CEO , Lisa Palmer President.
<unk> Chief Financial Officer, Mac, Chandler, Chief Investment Officer, Jim Thompson, Chief operating Officer increased love, It SVP and treasurer.
On today's call May discuss forward looking statements.
Such statements involve risk and uncertainties actual future performance outcomes and results may differ materially from those expressed in forward looking statements.
Please refer to our filings with the FCC, which identify important risk factors that could cause actual results to differ from those contained in the forward looking statement.
We will also reference certain non-GAAP financial measures. We've provided a reconciliation of these measures to their comparable GAAP measures in our earnings release, some financial supplement which can be found in our investor Relations website.
Before turning the call Liberty.
I would like the highly updates for development and redevelopment pages within our supplemental disclosure.
We've included additional information an effort to provide enhanced guidance around timing for initial rent commencement and stabilization as long as expectation for in Hawaii coming offline as we position pipeline projects first dark.
We hope you will find a few.
Oh.
Thanks, Laura.
Good morning, everyone.
We're pleased with our leasing activity pipeline are experiencing healthy kinda demand across multiple categories.
Retail environment continues to evolve as.
As grocers and retailers remain focused on the importance of high quality physical locations that provide shoppers with the best combination of convenience service and of experience.
Right and she will make the white decisions that will enable our shopping centers are made relevant and driving places for outstanding retailers to connect with the surrounding neighborhoods and communities.
In the top markets across the country.
As you'll hear from Lisa the team is intensely focused on addressing short term headwinds driven by what we believe is a rare conformance atypical bankruptcies together with the timing of larger redevelopment.
You should know that I share her confidence that we will soon returned to core earnings and dividend growth.
In total returns that will be among the sector leaders the regency's carbonation strategic advantages which include.
Our high quality portfolio community a neighborhood shopping centers anchored by high performing grocers located in the fluid that's trade areas.
Our experience development and redevelopment capabilities.
The pipeline.
Free cash flow after capital dividends that bonds, our developments and redevelopments or an extremely favorable.
Cost effective bases supported by our strong balance sheet.
And regency's exceptional team located in top markets across the country.
But industry, leading environmental social and governance practices.
Before turning the call over to lease up.
I'm happy to report to the executive succession plan that we announced last quarter is progressing well.
My kids seamlessly moved into the role of CFO .
And as you know Lisa it's fully prepared to be Regency CEO went out become executive chairman on January 1st.
I'm extremely confident.
Yeah, right and she will continue to progress on our journey from good to great under Lisa and our talented team Lisa.
Thank you have and good morning, everyone.
I want to reiterate how honored I am that you and Regency's Board of directors have been trust. It made a leader agency I'm excited about the opportunity and then looking forward to continue to continuing to work alongside you and what the rest of our exceptional team.
First on the call today I will provide some comments around our 2019 guidance.
2019 same property NOI guidance has been update at the 2%.
It's just taking the high end off the table.
You may recall last quarter, we stated that we did expect to finish the year at the low end of our previous range of 2% to 2.5%.
And I will remind you that a few factors that contributed to our same property NOI growth being below our strategic objective.
Including the bankruptcy impacts.
Typically are related to Sears Kmart.
Muted contribution from redevelopment.
And timing around leasing and move out in the first half of the year.
In spite of these headwinds it's notable that we expect 2019 core operating earnings growth.
Come in at the high end of our 3% to 4% range.
Looking ahead to 2020.
We will provide full year guidance with our fourth quarter earnings release.
However, we want to shared initial preview of our 2020 expectations.
Due to what we consider to be a unique set of circumstances.
Same property NOI and core operating earnings growth in 2020 is currently expected to be flat to slightly positive.
This temporary dip in growth is primarily be being driven by a couple of factors.
First and elevated impact from bankruptcies, including a 60 basis and that just from Barney plus additional known and potential move out.
For tenants, such as I pick Dressbarn and pier one.
And second an estimated $4 million with analyze that we are proactively taking off line next year for in processing plant redevelopment.
Well be offsetting the positive contribution from projects that were completed.
Well, it's just the general timing of starts in deliveries.
Beyond 2020, we do have conviction that we all are turned a 3% and allied growth and 4% plus earnings growth driven by a number of key components.
We believe that the elevated impact from bankruptcy is largely a result of our unique parties will return to a more normalized range and 2021.
While we are cognizant of the evolving retail environment and its challenges.
The quality of our portfolio are well located properties and top notch team give me confidence, but going forward and consistent with our experience in the past results. He will have relatively lower exposure to store rationalization.
In addition, we continue to see healthy kinda demand as evidenced by our active and fold leasing pipelines get any further confidence in the potential for upside and rent paying occupancy for both anchors and shops.
We continue to achieve annual embedded rent steps translating to build an approximate 130 basis points of growth.
Across the portfolio.
Growing rents in the 7% to 8% branch also translates to an additional 100 basis points of growth.
We're making great progress on our in process redevelopment projects and we have good visibility to contribution that will support our 3% same property growth objective in the future in fact over the next five years, our pipeline is positioned to generate approximately $45 million of incremental NOI from eight specifically.
Next including the Abbott market common Westwood and several markets to name a few that Michael talked about in just a bit.
While the contribution from redevelopment will be on even at times as we prepare for and start these more complex projects.
Over time these value, creating redevelopment will translate into a positive contribution that should average approximately 75 basis points of growth.
Even with these two years of mute a contribution.
Lastly, and perhaps most importantly, our team remained keenly focused on blocking and tackling executing our strategy to enable regency to return to sector, leading total retards Jim.
Thanks Lisa.
Same property NOI growth for the third quarter met our expectations a 2.1%.
I'm happy to report that Q3, the team executed most new shop leasing and nearly 11 quarters.
We continue to have success embedding contractual rent steps into our leases as evidenced by nearly 90% of our new shop leasing include average annual steps of 2.4%.
This translates into strong straight line rent spreads a 14%.
Due to <unk> robust pipeline, we expect the positive leasing momentum to continue.
At the same time as we discussed in the first half of the year.
Timing of leasing and move outs earlier this year caused the decline in rent paying occupancy and in turn lower same property NOI growth for 19.
In regards to tenant fallout, we're done with diligently monitoring watchlist retailers and focused on working with potential backfills for existing and future bike vacancies.
Putting or I pick theater, and dressbarn locations as well as tenants like Pier, one where we have 11 locations, representing 20 basis points of annual base rent.
More closures are part of the business and our teams are discerningly back filling these spaces upgrading the merchandising mix and more often than not at higher rents.
More importantly, as Lisa indicated we have every reason to believe given the uniqueness of barneys and our portfolio and the confluence of events that the elevated impact and 2020 is an anomaly.
In regard to the status of boys location in Manhattan.
Situation remains fluid.
While our store in Chelsea is one of the location that remains open for now.
It's likely that where we get the space back at year end and is a significant driver to our flat 2020 growth expectations.
We are evaluating pursuing alternative redevelopment plans and we feel good about the prospects for replacing the rep. At this high quality location, although this would certainly come with downtime and capital requirements.
It's important to keep in mind that we continue to execute on proactive asset management and center repositionings across the portfolio.
Remain we remain highly focused on making astute long term merchandising decisions, which sets up our centers for future success.
<unk>.
Thanks, Jim our development redevelopment opportunities remain significant and we're well positioned to meet the strategic objective of starting 1.25 billion value add development and redevelopment over the next five years.
As retail real estate evolves the nature of development and redevelopment is changing as well our focus on owning and operating premier shopping centers debts in filling a fluid trade areas positions us well to capitalize on increasing opportunities for horizontal and vertical mixed use projects.
At least you discussed redevelopment are a key component for regency to achieve 3% same property growth over the long term.
It's important to keep in mind that many of our occurred near term pipeline projects are larger in scale more complex and often include a mix of uses these projects typically take longer to complete it also require in Hawaii to come offline.
Once these projects stabilize stable at substantial incremental at Hawaii and value to our portfolio.
With that I'd like to provide updates and some of our larger in process near term redevelopment projects.
Redevelopment of a former office building at market common in Arlington, Virginia started in the fourth quarter 2080.
As a reminder, this outdated building was bake it when we purchased it and the adjacent retail.
The redevelopment jails configuring the three storey building essentially into a new forced to read mixed use office or retail building.
Construction is progressing smoothly the buildings topped out will be whether type a yearend.
Receptionist views of the National Cathedral, the executed lease with a leading luxury fitness operator in the second floor or very appealing features for a perspective office tenants.
Dissipate tends to begin coming online 2021, with an estimated incremental yield of nearly 9%.
Yeah. The redevelopment located at Harvard Square started this year with the entire 1.1 billion of property NOI coming offline in the first quarter.
Construction is progressing nicely, particularly now the Devil is complete footings are being prepared for ground up building.
Please see activity is positive we're in negotiations with several best in class retailers fitness concepts in restaurants.
We estimate initial occupancy to begin in 2021.
I would estimate at 9% incremental yield.
Moving now to some of our near term pipeline projects.
Sure I must say center located south of San Francisco, we expect to commence on the next phases of our redevelopment by year end.
This consists of three components that will be staggered over the next several years. The first project is the development of a new stated the art 16 screen theater.
As well as 145 room hotel ground lease several new Outparcel restaurants relocation of are successful crutch fitness.
Second part of the project is a renovation that'd be a charitable as well several new exterior entrances both projects will increase foot traffic supporting our productive inline tenants, which now averaged $620 per square foot and pay back away from new retail concepts, which we look forward to downstream next year.
Both projects are due to start in next quarter.
Third component is the redevelopment of the former JC Penney box, which benefits from tremendous visibility from interested to 80.
The 75000 square foot space sets up well for a variety of junior anchors, including specialty question.
Groundbreaking as anticipated 2021.
Westwood shopping center Bethesda, Maryland is another large scale redevelopment we plan to start in early 2020.
It will be converting a poorly configure giant anchored center into a vibrant mixed vertical center.
To include retail anchored by the giant 200 multifamily apartments, what hundred units of assisted living and approximately 84 sale town homes.
Consistent with our strategy, we're partnering with best in class co developers for the non retail components.
Phase one retail should open and 22.
Phase two apartment, it's a ground floor retail show up in a few years thereafter.
These are just some of our some of our exciting projects and get our near term pipeline will provide regular updates on these and other significant projects and future earnings calls and in our supplemental disclosure.
Like.
Thank you back.
Let me begin with some additional color around our third quarter earnings results updated 2019 memory AFFO guidance.
Third quarter neighborhood AFFO includes a net positive two cents per share impact from a combination of onetime items.
First a one cents per share negative impact from a swap breakage charge associated with the repayment of our term loan following our August bond offering and second and offsetting three cents per share positive non cash benefit from the accelerated amortization at below market rent triggered by our agreement to proactively Terminator lease with JC Penney.
Ceremony.
Under the termination agreement JC Penney will move out at the end of May 2020, which requires us to ratably amortized they're below market rent through this new termination date.
Therefore, we will recognize another $5 million a below market rent in Q4. This year. In addition to the $5 million recognized in Q3.
And yet another $8 million in 2020.
Our 2019, maybe that's AFFO guidance has the updated to reflect these impacts.
Items like these provide a good reminder of why we use core operating earnings as a metric to better measure performance as it eliminates certain nonrecurring and noncash items.
More closely reflecting cash earnings and our ability to grow the dividend.
As Lisa mentioned, we're confirming our core operating earnings growth range of 3% to 4% for 29 gene.
And expect to finish near the top that range.
Before wrapping up the call. Let me first highlight one of the most important differentiating aspects of our business plan.
Capital allocation and funding capabilities.
We're we're fortunate to have access to many attractive funding options and now hold a positive outlook rating by both S&P and Moody's.
And we are generating approximately $170 million of free cash flow annually, which funds our developments and redevelopments on a leverage neutral basis.
In addition, given the quality of the of our portfolio, we can be opportunistic and fortifying our 3% same property NOI growth objective through the sale of non strategic lower growth assets and deploying that capital into the acquisition of shopping centers with superior growth for us prospects.
To that end, we acquired two compelling assets this quarter and were able to take advantage of several attractive sources of capital.
In August we issued $425 million, a 10 year unsecured notes at a regency record low interest rate of 2.95%.
We used a portion of these proceeds to repay our 300 million dollar term loan with the balance partially funding the $212 million per yard acquisition.
Our disposition guidance incorporates funding the remainder of this acquisition through the sale of lower growth assets on a tax efficient earnings and leverage neutral basis.
In September we funded the circle Marine acquisition located in long Beach, California through a combination of secured debt and operating partnership units, which is yet another funding source in our playbook.
And lastly, we executed on our ATM program in September selling approximately $130 million in gross proceeds on a forward basis.
As Mike discussed our development redevelopment pipeline continues to grow and we are excited about the near term value add opportunities, we expect development redevelopment spend to exceed our leverage free cash flow in 2020 and proceeds from the forward ATM will be used to fund a portion of that span.
This is a compelling funding source when price correctly as it maintains our balance sheet strength and when compared to diluted property sales.
Our flexible funding strategy is one of the many factors that contributes to regency being well positioned to meet our strategic objectives over the long term, including starting 1.25 billion in value add developments and redevelopments over the next five years, averaging same property NOI growth of 3% core earnings growth of four per se.
Plus and with dividend growth total returns exceeding 8%.
I'll turn the call back to have for closing remarks.
Thank you Mike.
I'd like to take this opportunity on my last earnings call to think not only all the Beijing Regency 10 members.
Team members that I've worked with his last 40 years, but also to thank all the talented people in the investment community that I've interacted with throughout my career.
This includes many of you run the phone with us today, and with whom I will be able to meet with at the upcoming day rate.
Our constructive dialogues a truly made a contribution to regency success.
It has been not pleasure to work with all you all and an awesome honored to lead the special company to where it is today.
I'm looking forward to stepping into my new role as executive Chairman supporting Lisa and our exceptional team as they successfully achieve regency's goals.
That concludes our prepared remarks, and we now welcome your questions.
[noise]. Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad and confirmation tailwind to get your line is in the question Q You May Press Star too if you like to remove your question from the Q4 participants using speaker equipment, they may be necessary to pick.
Up your handset before pressing the star.
One moment, please what we poll for questions.
My first question comes from Nick Yulico with Scotia Bank. Please proceed with your question.
Hey, Good morning, this is Greg on with Nick.
Just one question for me today.
You know you seem committed to achieving this 3% same store NOI growth over the long term, but I'm wondering what the expected timing is on that goal or from just misunderstand. The gross number because if we assume.
2% same store growth in 2018, and 2019, and then I guess zero to to low single in 2020 does that mean, we should be assuming nearly 5% growth from their out.
Yes.
Hi, Greg its Lisa.
Just.
The answer your question will be getting full guidance for 2020, all the components of it and our fourth quarter earnings call and so at this time, we're not giving 2020 guns, which certainly not going to or certainly not going to dip our toe into 2021 or two things like two or 20 to 23, but what I can tell you is just to reiterate what I said on that.
Call, but we do have confidence that we will return to achieving our strategic objectives and do that over the long term a we have a lot of visibility to two great value, creating projects in our redevelopment pipeline. Some that are already in progress and those will that that value will be harvest.
The timelines they take all a little bit of time, but interestingly, we're talking about this earlier today, even just first retenanting some of our anchor boxes.
You creation as often as highly correlated to the amount of time that it's taking a complete these projects.
So we love our portfolio, we love our development platform, we love our balance sheet and I love our team. They may not all love me, but and we're really excited about future. We think we're really well position to continue.
To be a sector leading.
Owner, operator developer of shopping centers.
Okay. Thanks, but just just to clarify I'm. So the 3% growth is kind of an average expected per year, that's not necessarily like over a five year period, you'll be achieving that 3% growth.
It's over a long term I I you know it is an average of 3% over the long term I don't know how something that I have the exact number with me and learn they write it down 40, but I believed that our five year average right now is 3.4% and we had several years that we're north of four so.
I do believe it's achievable.
Okay, great. Thank you.
Hi, Greg.
Our next question comes from Christine Mcelroy with Citi. Please proceed with your question.
Hey, good morning I.
Just following up on that flat growth expectation for 2020, it's redevelopment expected to be a neutral or negative contribution and you know appreciate the detail on each of kind of a larger projects I'm wondering if you could update us on other for modeling purposes sort of those downtime impact I expect.
Patients for Westwood Serramonte cost of everyday as that Steve.
He sees comes offline I'm over the next two years.
Hey, Christy its Mike with respect to the specific question around 2020 of the impact for redevelopment.
Much more to come next quarter when they put out details were still refining our plan, but we did allude to $4 million or they don't lie coming offline at a two specific projects next year and maxed out some time talking through those I would also point to you to our new disclosure I think its page 19 or selling our supplement.
Teams done a great job of trying to provide a little bit more visibility into the impacts of downtime and more importantly timing around.
A little bit to Greg's question, when I know I will start to return for these projects that we're working through that Max took some time to stepped through going forward. We will continue to be very descriptive on these projects are on these quarterly calls and in between that with when meetings and we'll be very very short to.
Help help everyone understand that the in its about the ends in the outs.
I would say this we've averaged anywhere from 20 to 130 basis points with positive contributions. Obviously 29 team has been muted a and I would say that 2020 at this point in time, we anticipate to look a lot like 2019.
Okay seems like and and then just in terms of the forward equity raised you mentioned that a portion of that won't go to redevelopment spend is the balance going to acquisitions. How do you sort of think about you know kind of that the source of capital in terms of dispositions persons persons ATM issuance or you are you kind of a seller of additional echo.
Do you hear or it has all been kind of pre funded for 20 Twond sure.
So good question unfair it all starts with free cash flow and as we've talked about of about $170 million were generating free cash flow given our low payout ratio importantly, that's after capex that's after dividend payments.
And then we look into our capital plan for next year and and again that this pipeline that we're building of active developments and Redevelopments is leading us to a need to raise a little bit more capital than that leverage neutral free cash flow will provide.
So we we look at our portfolio.
And we assess whether we need to activate any pruning beyond our typical you know one per cent per year or so and when we looked at the price to you know any be isn't our I'm not a science, we like this price with respect to our capital plan I think if it if you think about consensus and I'd.
And maybe what that implied cap rate may be and you think about our use of proceeds into these developments and redevelopments, averaging about 7% returns, we like that trade and well that's how we think about managing our capital plan.
Importantly, we are committed to maintaining our balance sheet.
We are we closed the quarter at five and a half times, we like our ratings, we like the positive outlooks that were on with both Moody's S&P.
And we will work to preserve the strike that balance sheet as well.
Thank you.
Thank you Christine.
Our next question comes from Rich Hill with Morgan Stanley . Please proceed with your question.
Hey, good morning, guys leasing maybe maybe first for you just strategically would you changed anything with your redevelopment given what you know now about those conclusions.
Please [noise].
Absolutely not these are really great projects and [noise].
Now that we have some enhanced disclosure hopefully that you can see that as well and you can see why we're excited about some of these and I think Mac actually talking about them on the call in some of you have even had an opportunity and we didn't even touch on some others. Some of these had an opportunity to visit some of that some of these even our others like kind of country.
We're going to have an opportunity in Atlanta, and so there there's a lot of really exciting projects and it's this is it's a marathon, it's not a spread and we're focused on long term value creation for our shareholders.
Got it that's that's that's helpful and very reassuring.
I do have any follow up question I know, you're not looking to give guidance right now.
I think that a lot of just trying to get out almost say is the mix between maybe.
How much the redevelopment and versus the influence of bankruptcies is waiting on the flat growth.
Do you have any sense as to is it you know that 75% the bankruptcies and 25% redevelopment how should we think about that next.
A more [laughter], you're gonna here, there's a lot potentially today, but rich more to come obviously, but let's let's we can talk about some of the facts that are out there and you should should all be aware of from a bankruptcy perspective. Since 2015, we've averaged between 10 and 60 basis points of impact.
If you just think about barneys and I pick just as the unique bankruptcies that we're up against next year, that's 80 basis points alone and that into tablets. So that's far exceeding what we would call regular way business.
So I think keep that in mind as you think through the impacts for 2020, I think that the redevelopment contribution is what it is it's another year of given the ins and outs. So then ally another year of muted would contribution which will look a lot like 29 team.
Got it and that's it for me. Thank you for the disclosure on the assets one by one that that's really helpful from our perspective.
Thanks, Chris.
Our next question comes from Craig Schmidt with Bank of America. Please proceed with your question.
Oh, Yeah, I guess it thinking about.
Small shops, roughly on average how long how many months to take you to.
Go from a closed store to one that is open and paying rent.
[noise].
Craig I think we're probably in the.
Say eight month range, but I would say from lease execution to our C. D is probably closer to four.
Okay. That's helpful and then.
Oh, well you'd be doing any lease modifications in 2020.
And what what sense Craig.
Where are you.
<unk> fear in the store closing you made negotiate lower rent.
Right right reduction because they can price right releases.
We we obviously take every situation.
On its own every deal stands stands on its own where appropriate and I'd I'd suggest one of the the reasons you saw a slight tick a downturn on the renewal.
Rates was effectively we had in this particular quarter, we had a couple of deals that I would call.
Yes.
You know standing still retailers keeping in place to we'd get them back filled and you may you may take a little bit of a hit on a short term basis to keep the space build why you why you market. This space. So in general I think we're we've we've been pretty tough on rent reduction.
Generally what we want our space back if the 10 it doesn't want to.
Play.
Play Buzz rules, if you will.
And we have found good success unrelenting our space when we get it back and that's the exception rather than the rules, how does exception, but maybe if they happen.
But.
I took the if it happens it's generally very short term in nature.
Okay. Thank you that's helpful.
Our next question comes from Avanti soda with Deutsche Bank. Please proceed with your question Hi, Good morning, I'm switching to the private market side, we've heard from your peers.
<unk> markets, especially for the high quality assets, you're looking for is exceptionally tight right now. So if you could just comment on what you think is differentiating regency from the peer set in the bidding process.
Just given the higher volumes in the more accretive cap rates resting year to date versus the initial guidance.
Hi, This is Matt. Thanks for your question I do agree with that observation that in fact, the market is very tight there they're very few qualities of the type of quality that we're looking for we have a very high bar up and you're right. We have been successful buying properties off market not just this year, but ofer.
The last several years, we've got a track record for that and and I'll just use the print yard as an example of.
That was off market the seller came directly to us based on our reputation and our ability to close quickly and to get our arms wrapped around it.
I think it advantages is R 22 markets were in the market and we know these properties very well.
So welcome Arena is another example, where we own three centers within a half a mile and we've driven past. This center for many many years that's been our watch list and we simply approach the owner for many years have we find that came to terms with them. So it really gives us an advantage being out in the markets and having a reputation for being.
Able to close quickly into the shuttle at a price that that was a agreed upon.
Hi, Thanks for that color and then understanding that the residential isn't a huge part of their redevelopment at town and country Center, but have the <unk> recent changes do the right Paul It's in California changed how you're underwriting that or thinking about that project.
That particular, one is it's interesting in the sense that we have a 99 your ground lease with an apartment developer who is going to develop that add so they'll constructed a bill on it we have increases in that red.
So they have no hesitation on moving forward, but the project we've been working with them for about a year now we're into the city and we see no reason why that transaction were dot close and they would commence rent as agreed upon so we keep an eye it up but.
Certainly our partner in this case being ground, let's see is doesn't have any concerns.
Okay. Thanks.
Thank you.
Our next question comes from Jeremy Metz with BMO capital markets. Please proceed with your question.
Hey, good morning, I'm, just going back to the commentary on the investment activity.
Obviously, recognizing somewhat of a tight market, but you've also been pretty successful here you mentioned the market strategy and that's driving some additional deal flow. So beyond what you've closed already and once you outlined on the disposition Fron you have the 200 million close your guidance is 300 million do you have additional stuff either on the market for Shelby.
On that 300 million that we should be thinking about in hand on the buy is there anything that's really I'm kind of active in the pipeline that you're excited about that you know couldn't maybe come to fruition here early next year.
Sure. Jeremy This is back up you know what are the advantages of buying instead of like the proved yard is it gives us opportunity to.
Exchange of property that we sell that has an embedded tax gain and so.
We do have a couple of properties that we are looking to sell a where we would exchange that gain in park. It into the pruned yard. However, we don't feel that were under any pressure to to close that sale.
But we do have a couple of transactions that are out there you're right that makes up about the remaining 100 billion and if it works that's great but.
I said, we're under no pressure to consummate that's how we don't usually get into the exact transaction just you know details to it.
On the Buyside, we're always in the market. We're always looking for properties. That's how we've been successful the past into it if opportunities that are compelling and meet our high or high bar for quality and income growth come our way we'll.
Address those as they come.
All right so it doesn't sound like necessary anything imminent here.
And then lease Oh, thanks for the initial color on 2020.
I'm on the same store NOI expectations as we take into account the details your line impact from Bonnie just thinking about managing expectations here should we be thinking about earnings growth around a similar level or two that is there anything positive or negative that could srini higher or lower from there.
Again, we'll give a lot more detailed guidance and in a quarter, but as I said in the prepared remarks that we really we expect both to be in in a similar range.
Got it my name is that thanks.
Thanks, Jeremy.
Our next question comes from Samir Khanal with Evercore. Please proceed with your question.
Good morning, micro lease I guess on Barneys I'm, just trying to get a little bit more color. If you have that even if you were to get the space back I mean, how long do you think you get.
ER proper entitlements on that and then can get a tenant backend and also how should we think about the rent on that box I know, it's about 80 Bucks a foot there I mean.
Yeah, but how should we think about the economics.
Let me, let me start I'll kick it to Jim as to maybe provide a little bit more color on how he's thinking about the space, but somewhere as we said were effectively planning for borrowings to be down next year.
So much more to Tom as we rollout our guidance for 2020 and then we'll continue to report on this project as we have and enhanced our disclosure on the other projects will treat barneys very similar but some are laying give as much visibility as we can to the extent of the downtime the extended the capital and when we anticipate that rent coming back onboard but.
I'll, let Jim speak too.
What we have been doing to this point with our thoughts might be.
Yeah Weve. Thanks, Mike we were like the real estate and believe we will be able to replace that revenue.
Our team is actively engaged as we speak in evaluating the alternative scenarios and and.
Obviously, the different uses that may be available to us but.
As Mike said much more to come but we are.
Diligently pursuing all the avenues at this point.
Okay, and I guess, a follow up maybe a big picture question, Lisa sounds like you're a little you're being a little bit more active on a project sort of late in the cycle, whether it's that redevelopments or even in the development side, you know maybe taking space off line, even at Westwood I guess, how are you balancing that decision to do.
More projects with the potential server.
You know of of Oh, you know the overhang of a risk coming from an economic slowdown still down given that there's a lot of economic concern out there.
Yes.
If I knew when the next downturn was gonna be I might not be sitting at this table I might be somewhere else.
These <unk> these projects are.
Really generational projects in its especially the redevelopment, it's right real estate that we already own.
And really a high barrier markets infill neighborhoods.
And even in what was obviously right the second worst recession, and our country and Bakken in 2009. These types. This this quality real estate that we own still performed really well. So we don't have our heads in the sand. We know we realize that there's a lot of.
There's a lot of cloud is out there in terms of economic uncertainty, but these projects I believe well, even performed well and withstand a what the economic cycles that we know are coming.
And they'll go through the cycles and they will go through the cycles.
Okay. Thank you.
Our next question comes from Wes Golladay with RBC capital markets. Please proceed with your question.
Hey, good morning, everyone can give us give us an update on your tenant watch list I mean from last quarter. It sounds like it was a few percent, but now it sounds like your second through a few of those tenants. So did that come down and what is your remaining department store exposure.
Hey, West as Mike.
From a washes perspective, it really no change.
Quarter over quarter from what we've talked about in the past tenants as you had mentioned that's come off the list. So you know there's no longer impacts of Sears et cetera, and Barneys has now moved into a different class, but as we look forward you know obviously were Pfizer on tenants like pier one.
And others were taking care of JC Penney as we mentioned with the termination agreement, but I would say, it's essentially pretty neutral I go back to the bankruptcy history that weve incorporate that we've.
Absorbed into our analyze that figure since 2015, it's been in that tend to 60 basis point range.
For tenants that are outside of this barneys slash I pick situation that we're currently looking.
But.
Clarified where they on the list, though the the barneys the JC penney's, though the the pier one playing the drought.
Okay, so but that doesn't have anything with back to auto no.
No I mean, we're just generally in that same range I think historically, it's been our watchlist, maybe will walk through that we think about it and three categories.
Their financial from a bankruptcy risk perspective.
And then we really look at store closure risk and that's where you can have.
We we want our teams to be aware of the change that are looking to rationalize their fleets generally speaking regency does well in that regard, we typically own centers that perform in the upper half upper quartile of those change and rationalization scenario, we don't generally lose as much space as you otherwise would back.
And then lastly, we we'd like to include operators to retailers, who are may not be in financial distress or actively shrinking their fleet sizes, but maybe came through some operational changes that we just want to be aware of you put all that together.
It is probably a tick down because of the fact that we've moved fears through the list and we're going to move parties through the list, but it's about the same Wes.
And then what about the remaining department store exposure.
[noise] what does that it's my name is mainly Macy's at a very very low rent.
Sorry, Yeah, sorry ceremony.
Got it thank you.
Our next question comes some Vince Debone with Green Street Advisors. Please proceed with your question.
Hi, good morning.
What was the rationale for doing a forward equity offering versus just issuing equity through the ATM today.
Hey, this is Mike we've used forward sales before so we have a track record of.
Of that tool, we like that opportunity for us to best match fund our our needs. So as we look to add into our capital plan for 2020.
And we pointed this tour towards this building redevelopment pipeline that's in effect why we use the forward.
And is there is there more fees then just doing a normal offering just from my perspective trying to get a sense of you know I get the match funding or that helps a little bit with I guess earnings dilution in the near term, but are there more fees that accompany that forward.
On the extreme margin is a is that just a touch more fees, but it is negligible.
Economically the forward is better or else, we wouldn't choose to do it.
And just for and you're going to you can do this in multiple phases over the next 12 months or they don't want one period, you will get the full full equity raise or one date rather.
It's at our discretion Benson will be very clear.
Either in the guidance that we've rolled out next quarter or on subsequent calls on our timing as we have in the past when we've had outstanding forward issuances.
Got it that's really helpful and one more just shifting gears a little bit could you talk a little bit about the trends you're seeing the small soft small shop segment of your portfolio, specifically kind of I'm curious with retailers our merchandise categories are kind of moving in and out of those of the shot of the shop space and.
No.
[noise] ER.
Yeah. That's it this is Jim.
As evidenced I think by the the leasing progress. We've made this year I think you can see we feel with the the markets still strong our pipeline is robust.
Categories, It's really the same folks that we've been.
Been doing business with the off price the fitness.
Beauty medical.
Restaurants, obviously, but its really.
We're seeing good activity across all our regions and activity remains strong I think our fundamentals, we feel real good better fundamentals.
On the on the fall outside than just because of what leased occupancy has been flat throughout the year within jobs like were as follows been kind of just the result of bankruptcies are you seeing any weakness with mom and pop tenants. Just curious if you could elaborate a little bit more and where are you seeing the kind of drop out of you know shop tenants because those down does seem like the demand side still there, but you know.
You and others across the sector have had you know flat to negative.
Negative shop, I'm, obviously changes this year.
I'm going to how I'm going to lead Jim to the water Oliver I like to remind everyone that art shopped percent leased as you know, it's a it's at a pretty healthy level.
And I think 91 of the half first one six right 91, six or so I can we can we.
Increase that and add occupancy I think we can.
But I also believe that.
But those that have reported I think we're we might be the high watermark. So yeah. That's just part of the business and yeah, I would be where we recently did a market showcase in Raleigh and and I.
Reminded people that were there that right when we're buying a property and we do underwriting.
And we underwrite renewal rate, we essentially say one out of every four tenants I've done a fail. So that's that's our business and.
The way that we manage that is very proactively as Jim even alluded to earlier in terms of when people are coming up for renewal the ones that are kind of standing still we're really evaluating is this a tenant that we think's going to be able to survive and thrive and not to survive, but thrive and really drive traffic in energy to our centers.
And so I think that 91 and a half and.
Well I do believe that we could increase occupancy if we kept it flat I think that that would help meet our expectations.
No that's really helpful color. Thank you so I have.
Makes sense.
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Our next question comes from Michael Miller with JP Morgan. Please proceed with your question.
Yeah, Hi in terms of the flat same store NOI outlook for next year can you give us a sense as to how the timing of some of the bankruptcies as expected excuse me expected to play out because obviously the later that it hits in the year, the more kind of bleed over into 2021 as well.
Hey, Mike.
But more to come on timing of all of our expectation supporting that what I will clarify to be flat to slightly positive.
2020 expectation. However, we all know varnishes in bankruptcy, we all know I pick is in bankruptcy, so it'd be safe to assume that we're taking the full brunt of that in 2020.
Got it.
That that was it thank you.
Thanks, Mike.
Our next question comes from Linda say with Jefferies. Please proceed with your question.
Hi, good morning.
Taking into account your low payout ratio, especially compared to your peers, but acknowledging that you're using free cash for our developments and Redevelopments does this reduced the probability that you would raise your dividend more aggressively I'm you know maybe during this period, where same store is below your longer term growth target.
Before Mike answers, let me remind you that to that that free cash flow as it is after dividends correct.
Yeah.
And Linda we were committed to we're committed to increasing our dividend annually. A we've made that statement very clear I think we reinstituted the annual growth of around 2014, when we made the pivot from portfolio enhancement.
And then what we've also said as were be given that low payout ratio that our dividend growth rate would approximate our earnings growth rate.
I would say that flat to slightly positive should translate to a similar amount of dividend growth.
Although we do have the flexibility in the capacity to to be flex to be flexible there so more to come.
But we do anticipate that maintaining that commitment to annual dividend increases.
Thanks for that and then just broadly speaking I know, you're not giving guidance, but what's the general view in terms of the bounced between acquisitions and dispositions for next year.
Like I said I'll repeat we like our portfolio. We are at the same time, we're committed to continued recycling of a small amount, we think that that pays dividends going forward in our exposure to address tenets and and in our ability to meet our long term strategic objective.
Some growing and a lot at 3% or better.
So more to come but I wouldn't be surprised to see guidance that is a prime in the approximation of what we've done historically, which has been in that 1% ranch.
Thanks.
Thank you Linda.
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<unk>.
There are no further questions at this time at this point I'd like to turn the call back to Hap Stein for closing comments.
Yeah once again.
I want to fight all my friends in the investment community. It has been a real treat working with you and I look forward to assuming a number of you at the upcoming day rate everybody have a.
Great day enjoy Halloween with your family and <unk>, we can beyond that thank you very much.
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