Q4 2019 Earnings Call
[music].
Greetings and welcome to the Regency centers Corporation fourth quarter 20, Nike Inc. earnings Conference call at this time, because that's really listen only mode.
Question answer session will probably a formal presentation.
If anyone should require operator assistance during the conference. Please press star Zero Wonder telephone keypad.
As a reminder, this conference is being recorded.
So my pleasure to introduce your host for Clarke Senior Vice President of capital markets. Please go ahead.
Good morning, and welcome to Regency's fourth quarter 2019 earnings conference call joining.
Joining me today, our Lisa Palmer, President and Chief Executive Officer, Mike Myers, Chief Financial Officer, Mac, Chandler, Chief Investment Officer, Jim Thompson, Chief operating officer, and Chris why that SVP and treasurer.
They called me May discuss forward looking statements such statements involve risks 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 contain forward looking statements will also reference certain non-GAAP financial measures. We have provided a reconciliation of these measures to their comparable GAAP measures and our earnings release and financial supplement which can be found on our investor relations.
[music] today's will be utilizing a slide presentation for a portion of the call you can view the slide presentation through the webcast link or in the presentation section of our Investor Relations website at <unk> Dot Com Lisa.
Thanks, Laura good morning, everyone.
I'll start with a recap of 2019 and a few thoughts on 2020 of the future outlook before Jim I couldn't like walking through and much more detail.
Overall, the 19, we had a good year.
Typically some of the key accomplishments from our talented team for the year, where.
Sure core operating earnings per share by 4.3%, which exceeded the top end of our initial guidance from a year ago.
We ended the year, 95% leased.
This represents the seventh consecutive year at 95% or better.
Started over $250 million in development and redevelopment projects.
Completed several developments that are great adds to our portfolio.
We made substantial progress and are in process project.
We have clear visibility to our future pipeline.
Capitalized on unique acquisition opportunities enhancing our portfolio quality for the additions of approximately $275 million well located high growth properties, most notably the per yard.
These acquisitions were funded in part by the sale of more than $200 million of lower growth assets.
We further improved regency's already impressive balance sheet solidifying our funding needs through 2020.
We demonstrated our continued commitment to best in class environmental social and governance practices.
The list of those accomplishments it is way too long to list all here, but I'd like to highlight just a few.
Hurting the breast be green star recognition for our fifth consecutive year.
Being recognized as one of the leading organizations in the country for top employee engagement scores.
Proceeding the highest governments quality score for myself.
And finally being recognized the newsweek's inaugural America's most responsible companies 2021.
One of the 10, most responsible company.
In the real estate in housing sector.
Well, we're really proud of these accomplishments we acknowledge that.
Disappointingly, we did not exceed expectations in 2019, both hours and yours.
Specifically for same property NOI growth.
As we've discussed leasing velocity in the first half of last year, as well store closures and bankruptcies.
Robots to the lower end of our same property NOI growth range, but is really important to note that we finished the year strong with full year leasing volumes that met our original expectations.
Looking to the future as we indicated last quarter, we expect flat to slightly positive same property NOI and earnings growth for 2020.
However, we do believe this muted growth is temporary that's despite the unique challenges of 2020 regency is operating in a reasonably favorable environment for higher quality neighborhood and community shopping centers.
Better operators in many categories remains focused on the importance of physical locations that provides our customers with a combination of convenient.
Service value and experience.
This is supported by sustained healthy demand for our centers with a deep leasing pipeline.
We believe that the 10th Demandware experiencing for better retailers restaurants in service provider.
Together with the progress on our redevelopment pipeline will translate into future analyzed growth beyond 2020 in line with our strategic objectives.
The bottom line is that 2020 is below our standards, both in absolute and relative basis.
But as I looked at 2021 and beyond I'm confident that we will soon be meeting our objectives of 3% plus same property NOI growth.
And 4% plus earnings growth.
Regency's quality portfolio.
Value add asset management and development capabilities strong balance sheet.
Exceptional team truly position us to achieve these objectives and return to performance that will again be among the sector leaders Jim.
Thanks Lisa.
Same property you Gotta walk rose from the fourth quarter was in line with our expectations, while I guess to finish the full year, 2.1%.
We think ended the year with a very strong finish that met expectations for the full year.
Far our Q4, new lease you production was the highest single quarter activity in the past three years.
And we anticipate this positive leasing momentum to continue through 2020.
Our same property portfolio was 95% leased we shops at over 91%.
Well Regency made phase one of the highest shop occupancy occupancy levels in the sector. We did experience a decline of 30 basis points from Q4, driven by the expected move alcohol remaining dressbarn locations.
Our teams have been diligently working on back filling these locations and currently have active negotiations or sign leases on all the recaptured spaces.
We achieved solid rent spreads of over 11% in the fourth quarter, which contribute to full year spreads of 8.5%.
Importantly, this solid rent growth was on top of the average annual rent steps of over 2%, we achieved on more than 80% of leases we executed in 2019.
Even though we continue to experience healthy demand a deep leasing pipeline.
Weaker operators continue to struggle.
2019, bankruptcies and store closures impacted same property NOI growth by 80 basis points with Sears Kmart accounting for roughly half of that result.
We know the tenant failure has been and will always be a part of the retail business and while the create short term disruptions to analyze it allows us the opportunity to upgrade and refresh our merchandising quality and generate opportunities for us to unlock value.
He regardless our bodies location to Manhattan. The tenant is still in possession of the space, but just given notice that they will be vacating at the end of this month.
As previously noted just bankruptcy will have an impact of approximately 40 basis points are 2020 same property NOI growth.
Our team is focused on the plan that maximizes bell value as quickly as possible.
Whether that be selling the property released in the space or redevelop and yes Sir.
Moving to 2020, we anticipate a total same property NOI impact up to 140 basis points from bankruptcies and store closures.
This includes the a typical 60, bips barneys I pick and Sears and.
And up to an additional 80 basis points of known and unknown bankruptcy related move outs.
Please also note that our bad debt is expected to remain in line with the past several years.
Well, we realized store closures continue to earn a disproportionate number of headlines.
We're excited to be working with thriving brochures and retailers around the country that are expanding an open air shopping centers, including grocers, such as publics Wegmans H E B trader Joe's.
As well as an elevated number of retailers like Sapporo, West Elm and Atlanta.
These prospering retailers recognized that our high quality neighborhood community centers provide what is critical for their success in today's retail landscape.
Back.
Thanks, Jim during the year, we started more than 250 billion value add developments or redevelopment as we continued to make sips substantial progress switch media strategic objective just start incomplete.
One of the quarter to what are the house billion of projects over the next five years.
During the fourth quarter, we completed four impressive ground up developments, including valor blocks in Seattle, the village of Riverstone, Houston Pine crest place to Miami Melody farm in suburban Chicago.
For projects speak to our development, Brett Arab reflection of our talented professionals.
Equaled platform.
Returns on these projects are in line with projections centers are of a 95% leased tenets are performing well with many exceeding their initial sales projections.
For full year, we completed approximately 230 million of developments or redevelopment.
Stabilized yield in excess of 7%.
Our major redevelopment or steadily advancing per plan, including our pipeline of future opportunities.
I'd like to provide an update and several of these key projects.
Let's start with our office building redevelopment of market common and only to.
This transformative project is more than 30% constructed steel framing this complete.
We have an executed lease with a luxury fitness operator to take to force the building at our negotiating with several users for many of the remaining spaces.
We anticipate construction completion later this year with the first tenets opening 2021.
Moving onto the Abbott located in the heart of Harvard Square in Cambridge. This project started in 2019 construction is progressing smoothly, we were approximately 20% complete.
We have tremendous interest in our ground floor retail space and are working with a variety of users for the upper floors as well.
We expect delivery late this year with the first tenants opening in 2021.
Next is our Serramonte center, located just read a half miles south of San Francisco.
We are excited turned down through the fourth quarter. We started on the first three phased redevelopment. This first phase consists of the addition of a new Regal theater integrated with the ensure the ball or relocated fitness club several new l. personal restaurants, and a new hotel underground. Please.
The second phase of the project commenced in January includes a long overdue overdue modernization of the malls interior that should complete prior to this year's holiday season, and has already enhancing our leasing velocity.
The third phase three development of the J.C. Penney box, which we get back in June is arguably the best fish.
We are evaluating several scenarios to return to reconfigure the space, which is estimated to starting in 2021.
As we have discussed previously approximately 1.5 billion up at a wide will be coming offline at share Monday 2020, as we execute this multiphase redevelopment.
Moving to some of our near term redevelopment first Westford square firmly notice Westwood located in Bethesda.
Anticipate starting the first phase of this compelling mixed use project later this year.
We've previously disclosed approximately a million dollars about allied would be coming offline and 2020, an additional 2 million in subsequent years as we demo a portion of the current center in order to relocate our grocer.
The project loss include 100000 square feet of retail 200 apartments, 100 units of assisted living and approximately 104 sale townhomes.
We will be partnering and co investing several leading developers for the non retail component to this project.
The new giant supermarket phase one retail should open and 2022.
And the phase two multifamily ground floor retail should follow in 2023.
Lastly coaster agree.
Let's dance in film properties located in a vibrant UGC market of San Diego across from Westfields UGC ball at a neutrality station opening in 2022.
This mixed use redevelopment will include new retail office hospitality and we're in discussions to joint venture the endeavor, but the best in class Office suite.
Anticipates or any of the project in 2021.
Accordingly, as we prepare for demolition approximately a million square billion dollars that alive, it's expected to come off line this year and an additional 3 million to 2021.
Michelle occupancy is projected to occur approximately three years after construction begins.
These are just a few of the exciting projects our teams that tend to commence deliver over the next several years that will support our long term objective of 3% plus same property NOI growth.
Our eight major redevelopment projects both in process a near term are expected to generate approximately 45 million of incremental and a light years to kinda, representing almost a billion dollars of incremental capitalize value.
Look forward to providing you with further updates as these projects advance.
Mike.
Thanks, Mike and good morning, everyone.
I'd like to focus my comments on our 2020 outlook by walking through our same property and align earnings guidance I think the visuals will help with this discussion so let's start on slide one and I encourage those they can't follow the live presentation.
It's a package on our website as I'm sure you'll find a materials to be helpful.
This first slide as a quick reminder of the components that make up by 3% plus same property NOI long term growth objectives.
First our embedded contractual rent increases continue to generate about 1.25% of growth annually.
Next rental rate increases were another 75 to 100 basis points of growth comes from rent spreads in the mid to high single digits, which is consistent with our recent historical averages.
And lastly, we need to consider changes in rent paying occupancy as this impacts base rent as well as recovering come together with growth from our redevelopment activity, which has averaged a positive contribution of 75 basis points over the last separate several years.
With that backdrop, I would like to walk through 2020 to better understand the outlook a flat to slightly positive same property NOI growth that was previewed on our last call confirmed with our formal guidance today.
Let's move to slide two which outlines how growth is impacted by certain key assumptions this year.
Contractual embedded rent steps and the contribution from rent spreads are in line with our long term objectives.
This leads changes in rent paying occupancy and expectations around read at all that contributions as the key drivers of our flight or better guidance.
As we've discussed on past calls rent paying occupancy is impacted by three key set of assumptions first fall off from tenant bankruptcies or store closures second timing expectations around our redevelopment activity and lastly, our downtime estimates embedded in our forecast due to the timing and volume of leasing activity.
Yeah.
First from a bankruptcy perspective.
We will certainly feel the impacted the unique material failures of barneys I pick in Sears.
In addition, as we have in the past we have included provisions for actual and potential bankruptcy activity to include tenants such as Dressbarn Avenue and pure one as well as other unknowns.
In total these could cause a decline in rent paying occupancy of approximately 75 basis points, which translates to the drag on same property growth of up to 1.4%.
Next to redevelopment as we've discussed on previous calls we know the contributions to analyze growth can be uneven from year to year, especially given the size and character of our current projects.
Well, we have been successful and completing projects and bringing incremental NOI online at the same time, we're taking approximately three and a half million dollars I've been a why offline in 2020.
Including that projects, such as ceremony and west parts square to position those projects for future growth and value creation.
As a result, we're especially for the projecting a net zero contribution from redevelopment activity when you consider but the ends in house.
The final component of rent paying occupancy is related to the timing and volume of leasing activity.
In 2020 outside of bankruptcy driven move out some redevelopment.
We're planning for up to a 15 basis point decline in average rent paying occupancy caused by the timing of our leasing activity both execution and recommencement.
Which translates into an approximate 30 basis point impact on gross.
Lastly, we expect a drag about 30 basis points for other items, which include percentage rent and other property level impairment expenses.
A couple of final comments on same property growth.
First thinking about the next couple of quarters, we're projecting a negative growth rate in the first half of 2020, driven by the timing of prior year bankruptcy closures.
Okay and this is most important as we look beyond 2020, we're encouraged by our strong leasing results and the progress we're making it up on our redevelopment.
And as Lisa explain this visibility it gives us confidence in our ability to return to our strategic objective of 3% or better same property NOI growth over the long term.
Including taken a big step toward that goal 2021.
Let's now move to slide three which is the roll forward to roll forward of our 2020 earnings guidance. We're all just well I'll touch on just a few items.
Our 2020 married FFO per share guidance ranges 390 393.
The contribution from total until I growth is expected to be minimal with growth essentially only come in from ground up development completions offset by performance of our non same property assets.
And quickly on the honor announced same property pool, beginning in 2020 and as indicated on a previous call. We have moved coaster Brady into our non same property pool due to the scale of the project and major disruption and then ally of over $4 million that will occur over the next two years as we actively de lease the asset.
Transparency is an inherent value of regency and that spirit, we feel we felt like this project given its size would materially distort the performance metrics of our remaining portfolio.
At this kind of like comes offline.
And also went into why is about $18 million comes back online following completion.
You can find property level information to appropriately model the impact of close to better together with additional disclosure around other changes in the profit pools in our supplemental.
Please also remember that we sold approximately $139 of equity last September on a forward basis through our ATM.
We can settle this trade at any time through the third quarter and proceeds were targeted to fund our outsized development spend this year, while keeping our leverage in check.
Which is a good time to note that we are now providing guidance on development spend together with development starts and anticipate spending a 300 million dollar area. This year.
Finally, noncash items, which primarily includes straight line rent and above below market rents are expected to decreased by approximately $7 million.
As a reminder, and 29 to be recognized significant in income related to be acceleration at below market rent balances following move outs of a few anchor leases.
This is increased the rate of deceleration in this line.
And lastly, while we are only providing may read AFFO guidance, we will continue to measure and report the performance of our business using core operating earnings, which eliminates certain nonrecurring and noncash items.
We anticipate core operating earnings growth per share to be flat to slightly positive in 2020. So I remain confident our ability to return to 4% plus earnings growth over the long term.
As we look forward. The team is extremely focused on achieving our objectives and we we all remain confident our ability to continue to deliver earnings growth dividend growth and then turned total shareholder return that is at or near the top of the sector.
That concludes our prepared remarks, and we now welcome your questions.
Thank you will now begin ducking your question and answer session, if you'd like to be placed into question could you. Please press star one under telephone keypad, a confirmation TONBELLER indicate your line is in the question Q.
You May proceed start to if you'd like to move your question from the Q for participants using speaker equipment may be necessary to pick up your handset before pressing star one.
One moment, please what we pull for questions.
First question today is coming from Christy Mcelroy from Citigroup. Your line is now lives.
Hi, Thanks, Good morning, Lisa and Mike you. Both mentioned in your prepared remarks, you know about commenting on sort of getting back to that 3% seems churn of like 4% AFFO growth in 2021 and beyond I think you know a lot about their sort of looking to 2021 now given to flattish growth expectation then 2020.
And Mike you sort of laid out those components I'm wondering if you could sort of help us bridge that gap. It from a you know from that flat in 2020 to two or more elevated pace in same store in 2021, you've got you know the the <unk>, what's likely to be the 125 of contractual rent growth that's 75 basis.
Contribution from rent spreads, but then how does how should we be thinking about the redevelopment contribution.
In 2021, given all the moving pieces and also you know the recovery and rent paying off you can see from the bankruptcy then move outs that you're experiencing this year.
Hey, Christy its Lisa good morning, I think you just answered the question with your question.
Well, it's really more to break out of those lines right you just talked about.
[laughter] [laughter], yes, because it really so you start with the we do have the team has done a great job continuing to get contractual rent steps.
Leasing spreads are really healthy right. So there. So we're starting at 2% and then we do have a lot of visibility as we've said in our as we said our prepared remarks as you were as you've heard us say prior to the redevelopment contribution.
Back in 2021.
More or like what it had been historically and that 75 basis like range, perhaps even more certainly looking even better and 20.2, but I'm not giving formal 2021 guidance or certainly not quite funny to we're going to execute on 2021st and make sure that we make those expectations with regards to rent paying occupancy that's always going to be.
And I know, but as we have said 2020 really is up it was a rare I think hats words last quarter, where a rare confluence of events to have to really large bankruptcies and barneys and I can add seres on top of that we just don't see that replicating in the future because of the magnitude of the.
Spaces.
So rent paying occupancy is certainly not down more than 12 months from now says economic uncertainty, but we feel really good about contractual rent steps lease spreads and redevelopment contribution.
Okay, and then I'm just what they think about sources and uses of capital you know you're looking at the 300 million of development and redevelopment spend which we appreciate that guidance, you've got 170 million of free cash flow that you've talked about which generally would find most of that leverage neutral basis, but you're also sort of over equitizing.
And with 130 million of forward equity I'm wondering why the sort of additional hunter and 25 million of net dispositions on top of that you know, which is causing a dilutive impact tear SFL and sort of where does all that capital raising leave you from a leverage perspective at year end.
Hi, Chris It's Mike I.
I appreciate the question be the Dispo guidance really as a carryover from 19. So that's all in effect goes back to our funding plan for the pretty hard acquisition.
So what I would say the balance out the sources and uses would you nailed right. There is that we are planning to reduce our overall debt level in 2020 by about 100 $110 million.
Okay, and that's that's sort of causing the lower interest expense guidance there.
Yeah, the lower interest is being driven by that as well as some accretive refinancings, we're gonna do within the joint ventures, and 2020 together with the accretive refinancings, we executed on a 19.
Through the bond market.
Okay. Thank you.
Thanks, Christy. Thanks next question is coming from Nick Yulico from Scotiabank. Your line is not life.
Hey, Good morning, this is Greg on with Nick.
I just want to talk about rent spreads a little bit I mean, very strong in Q4 healthiest spreads we've seen this year in both new leases and renewals could you talk about some of the deals you guys were able to complete this quarter. The helped boost those metrics and what you anticipate seeing from spreads and 2020.
Oh, Yeah, Greg This is Jim.
As you noted we had a real strong fourth quarter and it was really pretty heavy on the anchor side. You know every every every quarter. We look at the mix and we were heavy on anchors. This core and we have some really good it pretty strong.
For deals publics Elie fitness Roosevelt.
Business back on Kmart, all very very accretive deals and helped to increase that new percent leased or the spreads on new as well as the king colon grocery mark to market on renewal side. So that was that was pushing the the spreads pretty strong this quarter.
But over overall I think the we still target that that mid to high single digit eight and a half.
That meets our objective long term net debt that equates to about a 15.9% straight line rent growth and both of these metrics are or where we'd like to be.
Great. Thanks, and then just hoping to grab some clarity on transactions as well. So first on that is do you count Muse incremental purchases a town and country into a acquisition guidance I'm. So basically not much less to do this year and then on the dispositions only 100 million at this point left.
Hi, Greg Yeah that is somewhat of a technicality in our guidance. So we have been the initial entry into town and country. We did show as an acquisition I think that was an 18 weve stage some acquisitions of additional shares in the property throughout 19 and then this is a in effect kind of our final.
Piece, hopefully not hopefully would find a way to buy me even more of this asset, but we are not including that in acquisitions guidance in 2020 its.
Effect on thinking about that as added development or redevelopment spend at town and country.
So we do have a product a project we have a project under contract and southern California actually that we are excited about <unk>.
Honestly, probably too early to talk about that deal, but we look forward to making progress on our due diligence and potentially closing on that Oh in a in the early part of 2020.
Hi, Thanks, and just a quick follow up on transactions can you just give us an update in terms of obviously, there's not one that you're talking about there but in terms of other product that you're seeing in the market right now have increasing capex needs started to bring more maybe high quality mom and pop out and assets in the market and then what's the impact been on cap rates as well.
Hi, Greg. This is this is Matt.
We're still seeing very sort of very few of the types of properties that we typically by on the market. So thats scarcity is really kept cap rates very low cap rates haven't moved in and quite a while other types types profits were looking for or not only ones in the sub markets and traders that we do well in.
And have long term growth potential, but also where we could use our platform on her expertise to really it's either core plus or value add or somewhere where you can really find some long term growth beyond just a core acquisition.
I think a lot of those but we're in the market all the time and.
Just by nature of our 22 markets, we see everything that comes to market.
Great Thanks to the clarity.
Thank you. My next question is coming from Derrick Johnson from Deutsche Bank. Your line is my life.
Hi, good morning, everyone.
So the barneys is unique but you did lower the carry value closer to market has there been much interest in this space. I mean are you evaluating it as a possible just disposition or are you committed to weather the downtime in Capex and is the associated redevelopment project baked into guidance.
Hi, Jeff This is Matt could be happy to answer that.
We're looking at really three stars definitely sale, we're we're considering that and.
When the market place to see if that is could transacted.
Well I'm looking to redevelop it and either a multi tenant scenario or single tenant scenario.
So we're in the marketplace too as well so all are very viable options and we're not going to limit ourselves to one of them and as we get more clarity will be a well be sure to communicate that think that the most important thing as we are evaluating the options is how can we maximize value really and time matters as well when you're thinking.
About returns to enhance return stuff as well as returns to our shareholders. So how can we maximize value and really the shortest downtime and that's how we're thinking about it.
Okay. Thank you and.
You know just you mentioned the market common in Arlington, you know just wondering gosh wins with prospective tenant for the office component are progressing office tenants tend to make decisions relatively early and you know with yield compression being an issue that's being discussed out there is the night.
<unk> percent.
Yields still attainable on this project.
Jeff This is back again, we believe so weve.
You know having side no equity Alex.
It's really a big boost to the product and.
The tenant tourists that we've had a gone very well very favorable now that you can get actually up to the upper floors and see the tremendous views back there, which you could until we got the frame completed a we've had great interest now takes time to convert interests to otherwise the leases.
But we feel good about where we are on the prospects and we.
We.
You know, we will continue to communicate that as we start to absorb.
Okay, Great and just one real quickly on escalators I think they were you know north of 2% towards the end of last year friend for new and renewed leases has this holding firm in the current environment on new leases that you guys are writing.
Oh, yes to jump again.
We continue to have very good success, and embedding that 2% increase over 80% of our leases so.
We we feel like we can continue to to to follow that tech.
Okay. Thanks, everyone.
Thank you. Our next question is coming from Jeremy Metz from BMO capital markets. Your line is no life.
Good morning. This is Michael on for Jeremy I, just wanted to go a little bit more in depth on acquisitions, specifically, what sort of upside dynamics are you looking for keeping in mid 4% cap rate and the Korean Biomet and also is that how is the IR youre underwriting changed if at all it in the last topic.
Matt.
[noise] hybris its back again here.
Really upside we underwrite a 10 year term just like almost everyone else does and in order to get that I or are in the mid sixs, sometimes upper mid sixs sometime seven depending the prototype you need really strong compounded growth and we get that through contractual bumps sometimes there's.
Mark to market leases are under market today.
And then also often in need sorry, the second 10 year period, there's even more upside scenarios that could be through densification. It could be through an anchor lease. It felt like had to do that doesn't show up in her tenure and those are the kinds of things. We look for we also look for improving demographics.
Neighborhoods, where.
Democrats are trending up and in the right direction. So you might not see that in the leases that are signed today, but we think we can upgrade that only rents, but merchandising and in the physical plant two as well.
[noise] Iris haven't changed materially you know for what what we're looking for.
We certainly are we scrutinize our underwriting very carefully and we think that's that's obviously embedded in our underwritten IR, so not a not a material change that.
I think I just would would add if you think about I mean, that's exactly right and if you think about where we have been successful and the.
Properties that we've acquired really over the last three to five years.
It's where we're able to bring our talent and our expertise whether it be very proactive asset management, as Matt mentioned or even our redevelopment and development capabilities. That's what we're really able to compete with the other buyers that are out there in the market if its justice straight down the fairway core.
Shot score shopping center, we haven't been quite a successful. So that's why we're able to turn these these low to mid four cap rates into I are ours, sometimes the north of seven its maxit.
And that's great. Thank you.
Thank you. My next question is coming from Craig Schmidt from Bank of America. Your line is not alive.
Thank you.
I was wondering if you guys expect a pickup in small shop occupancy by year end 20, particularly given the strong anchor leasing revenue in the fourth quarter, which you can sort of leverage against some small shops.
Craig Jim.
Here.
Yes, I I think with momentum were seeing we feel we feel like region, we can pick up some ground.
Talked about it when we kind of high I think a 93% leased to one point so.
By saying, we could get back there, but I do think we've got some runway and I think we're gonna pickups from Michigan.
Yeah, let me add some color there too I completely agree of Jamel were seen in our forecast is that we will make up some ground on a spot basis and anticipate percent leased at the end the year potentially increasing from this point, but importantly, and as presented in the materials. There we are anticipating a ramping inox maybe to be down in 2020.
And that's just representing that trough.
Leasing that that as a result of all of our leasing activity you know signing new leases commencing new leases as well as a move out activity.
Okay. Thank you and then I'm, assuming there isn't an outright sale how long lead the barneys.
Redevelopment.
At least a different types of tennis <unk>, maybe I mean, how long we make Beth you that tank.
Well if it certainly if you went to a single tenant basis would be relatively quick, but a multi tenant scenario a reasonable estimate would be probably two and half years.
Yeah, let me try it from a disclosure standpoint, Greg as we refine that decision and move forward and between sale and redevelopment if redevelopment as the past we take we'll certainly add that disclosure to our supplement and you'll get a better picture timing.
Okay. Thank you.
Sure. Thank you. My next question is coming from Rich Hill from Morgan Stanley. Your line is my wife.
Hey, good morning, guys.
We discussed last quarter or timing of leases and move out and you sort of alluded to this at the beginning in the prepared remarks I was wondering if you just get a little bit more updates on how move outs have been trending.
So far.
From a volume perspective, 19, and 20 and I'm going to limit these comments to that what we're seeing in our shop space because I think that is where some of this I think in the anchor spaces that can be pretty volatile for the getting reasons in those known I identified tenets of barneys and I pick et cetera, but on shops, where anticipate.
In a consistent level of move outs year over year.
19, and 20 and that numbers in a million square foot range plus or minus.
And we don't see that kind of volume changing if you think about that over a 456 year period.
That level of volume is up on the margin, but we're replacing that with new leasing activity as well we had a we signed over 7 million square feet of leases and that's obviously included anchors but.
But.
The pipelines as we look at our leasing activity remain full and we're replacing the tenants that were losing to move outs.
And I would say, we're upgrading the merchandising mix and <unk> mix in the quality and while we already have a very high quality tenant roster.
We are making <unk>, you know improvement on the meaningful margin, which with every one of these new leasing transactions.
Got it that's helpful.
At least the just the thank you for the bridge on a that they know why that's very very helpful. So that's it for me.
I have to say credit goes the Lora Clark on that.
We find it to be a really helpful tool and we appreciate that you all are finding it to be the same.
Thank you. My next question is coming from Wes Golladay from RBC capital markets. Your line is not alive.
Hey, good morning, everyone. I just quick question on dispositions you know every year reaches he has a strategy to shed the bottom tier of the portfolio, but when I look at the five and a half cap rate. This year for the planned dispositions or is that more opportunistic sales and where cap rates now for your the bottom tier your portfolio.
What's this is back here.
You know a typical normal year is about a six and a half cap rate. This year 2020 regarding to little bit lower it's really because of two assets. There's there's two shopping centers that were selling well we've already sold.
And there be basically being sold to non retail users one is going to convert the property to a condominium development. That's the one in Florida and the other one is a office users that's gonna by the property and scrape it so.
There isn't a weve whittled down the income in this properties and that's.
Makes cap rates go down.
But in general you know a typical is sort of a six and half cap. That's typically what were what we're selling and those are non strategic assets at nonstrategic markets and typically have lower growth profiles.
Great. Thank you and thankfully I just generally we're not we're not changing.
Kind of the the identified kind of disposition pool and fuel.
Got it thank you.
Thank you. My next question is coming from Mike Mueller from JP Morgan. Your line is my life.
Hi, a quick question on the potential the 75 basis points of occupancy headwind for 2020, how much if any of that was already reflected in the year in 93% level.
In the percent commenced.
Yeah.
As he is anything in there already or is it that 75 basis points all incremental starting on January one no. Some of it was in the percent come as of yearend like for example, I kick it already moved out so to answer your precise number Mike I'd have to come back to you offline.
But it's not all anyway, it's not all incremental 2% commence at year end.
Okay again, just for clarity. This is average rent paying occupancy the 75 basis points your sidings average rip and occupancy year over year. So there could be some came over from year end.
Okay. That's helpful.
But that was it thank you.
Thank you. My next question is coming from Vince T-bone from Green Street Advisors. Your line is that was.
Hi, Good morning, Ive, a few questions on the sentiment serramonte redevelopment I'm just curious given the stabilized yields are you on the project are pretty skinny and malls are obviously not your core property type did you consider selling the assets over starting that project and I'd be curious to hear your thoughts on that.
Sure events I'll take this when this is Mac or the yields are little lower than what we typically see and that's for a couple of reasons.
The first is is we elected to relocate to Jim that operates here today. So it's a very well performing Jim but thought it was worth it to move them out to a pad and replace them with the theater. That's also going to add extra energy the mall traffic to the interior them all that'll help all tenants and we think the Jim will operate even better actually.
On a standalone.
The yield also includes a this modernization to ensure the mall, which hasn't been done a long time and the benefit we see over that actually takes a long time to realize because we're very well leased but a tenants churn we're already seeing better tenants offering better rent and tennis I've always loved the location, but there were a little hesitant because each or the mall is.
Well I take it and this will really help to to that so you'll start to see that benefit over the long term ER and the third phases to JC Penney.
Oh, which will take some time, we've got a lot of different options that we're still evaluating.
[music].
You know, we still are very bullish on the mall property the location is terrific and.
We're very comfortable operating it we have some history now to it and.
We really like the prospects Walter we got that I'd, just reiterate that it's it's it is a really high quality shopping center, yes, It's a mall, we don't on any other malls, but.
But there's still a lot of value to be harvested from it as well and we can really apply we've got it and we've got an exceptional team out there and were again applying our talent that asset and really creating value and in some sense at all I know you've had the opportunity to visit it almost as a community shopping center for for Daly City, its an exceptional asset.
Well it makes sense a that's really helpful. There's one quick follow up on that I'm. Just curious do you have to pay JC Penney to recapture that box or how did you end up getting control that mid mid this year.
Yeah, we had to make Oh, that's a very small payment to JC Penney and that's what was driving that kind of rapid increase in our right off of noncash below market rents are starting last fourth quarter.
Okay. Okay, we'll be JC Penney will be out I think end of May.
Got it so you bought the lease but you always on the box just to make sure I clarify that that's right. That's right. Okay perfect. Thank you.
That entire property, we own everything there's nothing there is no separate pieces and we think that also gives you lots of optionality over the years.
Okay, great. Thank you.
Thank you as a reminder, ladies and gentlemen, a star one to be placing the question Q. Our next question to me is coming from Ki bin Kim from Suntrust. Your line is my life.
Thanks, and good morning.
So in the 2020 guidance you have <unk> hundred 40 basis points.
Accounting for rent paying occupancy decline is high and in your.
Commentary there you said 75 basis points from the no move outs from Barney light fixtures and some others.
So can I take that to mean that 65 basis points, it's for unknown future events.
I want to I want to break down what you said there Ki bin and just make sure. We're all talking about the right numbers here because I think we were crossing over between rent paying occupancy declines and impact of same property growth. So we are forecasting 75 basis points of rent paying an occupancy decline related to bankruptcy activity and an additional 15 basis for.
It's a ramping oxys declined due to the timing of other leasing activity.
That translates to an impact on same property growth that impact on same property growth is 130 40 basis points from the bankruptcy category right and then another 30 basis points from the leasing activity category.
So I think and then further breaking down that 140 same property growth impact. There's two categories that we've kinda segment. In these three tenants that are materially driving our numbers Barneys I pick and Sears is 60 basis points and then everything else is 80.
So let's keep digging in here key that's a good question, we want to make sure. We got through here of the 80 basis points and that compares historically to a range of in recent history tend to 80 basis points around the upper end of that.
Roughly half of that is identified and that's the pure ones and the other tenants dressbarn that we identified on the prepared remarks and the other the 30 to 40 basis points would be more speculative assumption based.
That we haven't our plan.
And that is just supported by our just looking at the environment that we're in considering what we experienced in 2019, we thought it was an appropriate level the carrying the plan.
And you think that 30 or 40, you feel comfortable with that given what's your half rolling over which nobody attendance.
Yeah, we feel comfortable of Akita.
Okay.
And.
How often are you guys doing a preemptive rent restructurings with some trouble tenants before they got before they go BK.
[noise] Keven as Jim.
We're in dialogue gives you can imagine in today's environment, where we get a lot of knocks on the dorfman from 10 to asking the question.
But but our general position I think I've said this in the past our general position is we like our real estate well, we feel very comfortable with their own real estate.
Sometimes six tenants.
It's better to take your real estate back and Remerchandise. So we play a pretty pretty hard game when it comes from rent reductions and those kind of request.
Summits is some instances, we will evaluate and and determined that.
Working with the tenant on short term basis, when the landlord recapture might make the most assets, but in general we we play pretty hard on on rent reduction.
Okay. Thank you.
Okay, and the proactive asset management of upgrading the merchandising we do that all the time I mean, it's as part of the business and we did and.
If I may say, so my so I'm not putting myself on the back I'm trying to take on the that they do a really good job of it and have the and have for it for a really long time.
We are just to tack on that we're very proactive take the Dressbarn for instance.
We have 10 locations and we just got them back Q4, and basically all 10 are spoken for so we were proactively leasing these things that we think have an opportunity to recapture so.
That's that's part of the reason we can we could be strong in the negotiation because we know the real estate, we know what our opportunity pulls that looks like.
Alright, thank you.
Thank you. Our next question is coming from Linda Tsai from Jefferies. Your line is now alive.
Thanks tenant allowances on new leases were up a little the past two quarters 32, a fight in Threeq and 39 in Fourq you versus 24 to 25 to prior quarters I'm, what's driving these increases in well this remain elevated in the coming quarters.
Oh lenders Jim.
As I indicated that the mix issue just this quarter was really anchor driven so that that was one of the reasons. Obviously, we continue to see.
Increases in construction costs.
In general across the board.
But it was really most mostly the mix.
And they were all like fitness Talbot's marshals.
Edge fitness great tenants.
Really good merchandising backfills, but at the end of the day, when we step back and look at our our capital spend.
We think that number somewhere between 10% to 10.5% event a lie at the end of the day and.
Taking out to the quarter over quarter movements.
We think that we'll continue to operate and that tend to tended to have.
Percent analyzed span.
Thanks, and then a amazon's opening a low cost grocery store format in 2020, there's an alternative whole foods and Amazon go will your property see any these openings and if so any store details you're comfortable sharing.
Just as.
We answered that question last quarter, we're we're unable to talk about anything at this point.
Thanks.
Thank you. My next question is coming from Chris Lucas from capital One Securities. Your line is not alive.
Good morning, everyone.
Just a follow up on Serramonte.
Macy's.
Disclosed a store realignment programs shrinking the footprint again have you guys had any conversations with them about your store there that's surmont two.
Hi, Chris This is Matt we talked them all the time in.
Especially recently as part of this redevelopment.
But they've given us no indication that there unhappy with the store or they haven't requested rent relief or anything like that.
So no no new news on that front.
Any thoughts about being more proactive in terms of.
Trying to buy them out.
We're always looking for opportunities just like that just like we accomplished with J.C. Penney on that same property. So that's.
That's always an option that we explore.
Okay and then.
We've seen a couple of regional grocers.
File or and were closed stores.
First part of the sheer fairway Earth fare lucky's, you've got a little bit of exposure to earth fare and lucky's.
Curious as to how you're thinking about.
The sort of regional grocery player at this point in the cycle and how you're thinking about sort of your tenancy in that vein going forward.
Oh, Chris we really haven't really haven't space our point of view.
Generally speaking as you as you've heard us.
Speak quarter after quarter, we really want to make sure that were aligning ourselves with a better operators.
With with the strong balance sheets and with the ability to reinvest back in their business certainly.
Smaller operators and especially those with higher leverage are facing more of an uphill battle no question and we continually are looking at that it doesn't mean that all regional smaller grocers are not going to be able to survive and thrive in this environment that they have had the ability to reinvest back in the business in the.
Store experience as well as technology delivery everything that's happening in the world of grocery and it's an ultra competitive retail segment and and has been for a really long time and those better operators that had the ability to be flexible and nimble and and actually innovate are the ones that are.
Going to continue to succeed in the future.
It's it's always disappointing to see any.
Any retailer or sell it impacts people's lives and but it is part of the business and it's something that weve.
Outlet for as long as we've been a retail shopping center company.
Great. Thank you that's all I have this morning.
Thank you we reach in about a question answer session. How they just from a flip back over to Lisa for any further or closing comments.
And just want to thank you all for your time and we'll see some of you I think in the next month or so in a very quick happy birthday to Madison, Greg and Amy. Thank you all.
Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation today.