Q2 2020 Brixmor Property Group Inc Earnings Call
Greetings and welcome to the bricks more property group second quarter 2020 earnings Conference call.
This time, all participants are listen only mode. A question answer session will follow the formal presentation.
If anyone should require upper assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your hosts Stacy Slater. Please go ahead Stacy.
Thank you operator, and thank you all for joining bricks more second quarter conference call with me on the call today, our Jim Taylor, Chief Executive Officer, and President <unk>.
Executive Vice President and Chief Financial Officer.
Well, Mark, Oregon, Executive Vice President and Chief Investment Officer, and Brian Finnegan Executive Vice President and Chief revenue Officer, who will be available for acuity.
Before we begin let me remind everyone that some of our comments today may contain forward looking statements that are based on certain assumptions.
They are subject to inherent risks and uncertainties as described in our SVP filing an actual future results may differ materially we assume no obligation to update any forward looking oh.
So we will start today to certain non-GAAP financial measure it further information regarding our use of these measures reconciliations are these budgets to our GAAP results are available in the earnings release on supplemental disclosures on the Investor relations portion of our website.
Given the number [laughter] on the call. We kindly ask that you limit your questions to one or two per person. If you have additional questions regarding the quota we recap at this time, it's my pleasure to introduce Jim Taylor.
Thanks, Stacy and thanks to each of you for joining our second quarter call I Trust that each of you in your families are safe and well let me begin my remarks by stating how pleased I understand durability resilience of both our portfolio and our team as is evident in our response and performance. During this code that 90.
Craig.
At the height of the regional closure orders in mid April more than 40% of our tendency by revenue was closed and we saw similar drop in traffic levels. Yet our teams had already jump into action in early March with targeted reductions at 15% Tam to alleviate had an expense burdens without sacrificing service.
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Additional signage and curbside pickup there is for tenants it remained open.
Relief in terms of deferment for those kind of sports to close and assistance and accessing PPP and other government programs. We've received universally positive feedback from our tenants for the partnership approach. We took today approximately 94% of our tenants are open and we've seen a corresponding recovery and try.
I think levels versus last year.
Tenets that do remain closed are heavily concentrated in categories, such as bars restaurants and entertainment news.
Some of which had been a impacted by re closure orders and jurisdictions like California.
For those tenants that have reopened we're getting largely positive feedback, including reports of larger basket sizes and higher conversion rates versus last year for Jim. Many memberships happen kept on hold following <unk>, but did you have operators are also see unexpectedly positive trends and new membership.
For restaurants that have drive-thru pick up or outdoor dining business is recovering well. While this was endorsed feeding dining are seeing reduced levels due to capacity restrictions.
As of July 29 last week, we collected 76.6% for a second quarter route and have entered into a deferral agreements or a day that's for another 9.8% of right for the quarter.
That we've limited a payments to only $1 million or 40 basis points a base right.
The majority of those abatements for granted in connection with extensions in terms of.
In other words, we've had dropped over 86% of our second quarter base round of last week.
Hi, Matt I'm also proved out in July where we've collected 79.7% of our base ran as just last week and deferred or a paid at another 4.2%.
From a collectability standpoint during the quarter, we took a reserve on base round of 22 million, which equates to 39% recognized in uncollected right as of June 30.
Angela will provide more color on our reserve or approach and our recent collections and a few minutes, but we believe that given our collection rates and tenant performance upon reopening that we've been appropriate and balanced.
I believe our collection statistics, which compare favorably favorably to the broader industry underscore the quality of our community centered portfolio, but they only tell part of the story our balance business plan continues to deliver even during the crisis.
Excluding revenue is deemed uncollectible, our same store NOI would have been 3.5% in line with point.
We also signed over 400000 square feet of new leases this quarter at an average cash on cash spread of 19%.
Have over 39 million of leases that are signed but not commenced and have generated a pipeline of new leases with vibrant tenets that as it is at its highest level in the last several years at 1.3 million square feet and 23 million of new <unk>, New baby are at an average rent of over $18 per se.
Yes.
During this crisis as the crisis abate switch it well, we're poised for a strong recovery with a business model that capitalizes on this disruption.
Of course for all of US questions per says about the duration of the crisis and its economic impact.
Well movie theaters ever recover what will be the fall out of restaurant tenants that have been ports to re close where will the overall occupancy rates I'd be in terms of Penetralia, which had been relatively modest read this point of the crisis.
The truth is no one knows the answer is cities questions and responsible management teams must prepare themselves for a wide range of potential outcome and scenarios, but there are some immutable TRID said this crisis as reveal that underscore our confidence in our balanced business plan and how brixmor its position to continue.
To outperform not just in spite of this disruption, but rather because of it.
First as you've heard me say before rent basis matters, while we expect spreads to moderate a bit from historical levels, we still benefit from significantly below market rents rolling over the next three to five years in fact, the average rent on our anchor space Rolling over the next three years is $9 well below the average anchor Rad.
We've been signing over the last 12 month and through this crisis.
Yeah as tenants are of course increasingly focused on store profitability occupancy cost is a key focus we have the basis to compete for these tenants and still make money.
Second successful tenants as I've said before are increasingly willing to relocate to get to the appropriate size and prototypes that their store models a ball. This crisis, it's only accelerated that evolution. We again are well positioned given our national platform and low rent basis to compete for this demand.
Third there's a growing number of retail tenants fleet obsolete product types in favor of the lower occupancy cost superior visibility and proximity to the customer that are open air centers provide.
We've been struck by how many retailers who two years ago would not consider open air formats are now coming to watch on sauce.
Fourth tenants are realizing the importance of having products within the last mildly consumer.
We're finding that bopis incurred side pick up our profitable and convenient ways to serve their customer we expect that much of that shifts towards these models during coded will persist after kind of it and we have the parking lots and flexibility in our well located Saturday to accommodate multiple tana using these channel.
Yeah, because if the importance of being within the last mile. The consumer. We're also seeing a convergence of micro fulfillment retail for which we have ample flexibility to accommodate NR Saturday.
Six having inappropriate mix essential hybrid and honest central time.
Not only drives irrelevant to the center to the community insert it provides the broadest possible final funnel, a tenant demand and enhances the durability and resilience of cash flow as disruption inevitably occurs within retail cycles.
Finally, we are seeing all of these underlying strength impacting our business right now, particularly as reflected in our forward leasing pipeline, which again is that it separately several year high the spike of it and we believe that these very same strikes well be durable drivers of our business going forward.
Looking forward, we do expect the rate of tenant failures to increase opening up space for better or more relevant concepts. We believe weve adequately reflected these expectations I'm increase tenant failures in the reserves taken year to date and the number of tenants, we've taken to a cash versus accrual basis.
Accordingly, this second quarter should represent a low point from an income standpoint.
While the reduced FFO, we've reported due primarily to the reserves taken and the loss on debt extinguishment. This quarter, it's still adequate to cover our dividend we remain focused on ensuring that we have adequate growth capital as we emerge on the other side of this crisis.
Our decision with respect to the suspension of the third quarter dividends allows us to ensure that next year's reinvestment pipeline is fully funded on leverage neutral basis.
Allows us to capitalize on favorable tax deductions allowable this year and it puts us in the best position the reinstate our dividend in the fourth quarter as fully as possible.
As mentioned last quarter, we don't want to be in a position to have to raise external equity at a time when growth opportunities. We believe will be most compelling.
I'd like to conclude my comments by thanking the entire Brixmor team good quarter after quarter through crisis and beyond continue to outperform.
Your actions drive us towards our purpose of being the center of the communities. We serve thank you Angela.
Thanks, Jim and good morning, our results for the second quarter underscore the measurable strengths of this portfolio, including the granularity.
Its proximity to customers and its significant geographic diversification when coupled with attractive rent basis. We believe the result, it's a platform uniquely positioned to navigate the current environment.
To illustrate the impact of Cobot 19 on our second quarter financial statements. We have provided additional disclosure on page 11 of our supplemental package, which buckets based ran into its component parts.
Collection and deferral agreement executed as of June Thirtyth.
You will see we've separated deferral agreement based on their accounting treatment consistent with the lease modification really provided by the happy.
All the base as well it deferral agreements that are accounted for at least modification generally due to a concurrent extensional lease term are not accrued for recognizing the income statement during the current period.
Other deferral agreement are afraid floor and recognizing base rent during that period.
To summarize the new disclosure as it relates to our total portfolio, our second quarter build base rent was $212 million.
Just $1 million was subject to deferral and to be an agreement that were not accrued for during the quarter, resulting in a crude base rent flowing through the income statement of $211 million.
Cash rent collections totaled $155 million were 73.2% base rent as of June thirtyth, leaving $56 million accrued, but uncollected, which $12.6 million was subject to deferral agreement executed as of June Thirtyth and $43.3 million was on a draft and under negotiation.
Subsequent to quarter end $7.3 million of additional cash was collected and $7.2 million of additional deferral and abatement agreements were executed reducing the $43.3 million unaddressed at June thirtyth to $28.8 million.
Only 13.6% build the base rent as of July 29.
During the quarter, we recognized a total of $27.8 million of revenues seemed uncollectable comprise $22 million related to current period based.
And approximately $6 million related to recovery in prior periods our balance.
Jim highlighted the 22 million related to base rent represents 39% the total amount recognized uncollected.
Yes.
The 22% reserve unannounced deferred and a 44% reserve on an eye uncollected unaddressed or under negotiation.
Based on the cash collections and deferral agreement executed subsequent to quarter at the reserve represent 44% over 60% of the $28.8 million of uncollected and unaddressed right.
In addition, our analysis and Collectability also resulted in the reversal of $11.5 million previously accrued straight line rental revenue.
As a reminder, revenues deemed uncollectible and straight line rental rehearsals were also taken in the first quarter to acknowledge the impact of cobot 19, I'm certain non essential watch list.
On a year to date basis revenues deemed uncollectible totaled approximately 600 basis points of total revenue.
Justin and straight line rental income or personal totaled $19.4 million.
They read up that's all in the second quarter was 32 cents per share and same property NOI growth was negative 9%.
I just got married FFO reflects nine cents per share of revenues seemed uncollectible and four cents per share straight line rental income or so in addition to four cents per share of loss on debt extinguishment related to the repurchased $183 million of unsecured notes during the quarter and once that Pershare litigation and other non routine legal expenses.
Same property NOI growth reflects the 1260 basis points attraction from revenues seemed uncollectible, which outweighed 290 basis point contribution from base rent at 150 basis point contribution from that recovery.
We have proactively cut back on discretionary operating expenses and adjusted service levels across the portfolio.
Man, it's not recovery not recovery leakage for the company and less than the expense burden on many impacted tenants.
Turning to the balance sheet, we raised $500 million, a 10 year unsecured bonds during the second quarter and use of proceeds an existing cash on hand to repay 500 million under our revolver and repurchased $183 million of 2022 unsecured notes.
As a result that these transactions are total liquidity improved by $200 million during the quarter.
To $1.4 billion.
Comprised of over $300 million, a cash on hand at $1.1 billion of availability under our revolver. This liquidity profile is particularly significant in light of the fact that we have no doubt maturities until 2022.
Based on current rent collection levels and the adjustments we have made an operating and capital expenditures are fully funding the recurring operations our platform without utilizing any of the substantial available liquidity, our breakeven cash collection rate, it's approximately 50% before capex or approximately 60% or normal course maintenance and leasing capex.
Well below the 76.6 person and 79.7% collection rate realized in the second quarter and July respectively as of July 29.
Well, we are pleased to be in such a strong liquidity position with ample capacity to navigate the challenge its inherent in the current environment. We're also mindful of the money unknown for which we must remain fully prepared.
The board of Directors had continued the temporary suspension of art.
In order to ensure we emerged from this crisis stronger and better platform.
We believe our long term business plan, which focuses on accretive leave reinvesting in our portfolio of well located neighborhood and community shopping center with strong retailer productivity and low in place rents has and will continue to demonstrate measurable success.
We believe that it is Steve portfolio attribute that will define the best position platform post crisis and with that I will turn the call over to the operator for Tonight.
Thank you. So 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 confirmation tumble indicate that your line is in the question Q. You May proceed start to if you'd like to remove your question from the Q.
Participants using speaker equipment it making this the Sir you pick up your handset before pressing the star keys.
<unk>, please while we pull for questions.
Of course first question is from Christy Mcelroy Citibank. Please go ahead.
Hi, Good morning, guys. Thank you just in regard to the new leases you're executing today can you talk about where a new demand is coming from in terms of categories or specific retailers that you would call out sort of in this environment and how should we think about leasing volume you know in Q3 relative to Q2.
I guess it would be helpful to sort of understand the cadence of activity as we've gone through the lock down stir today.
Hi, Chris the I'll, let Brian give you a flavor of some of the tenants that were signing deals with but I. Appreciate the question because it it highlights that we continue to sign accretive new leases at pretty significant volumes tough for us to predict what next quarter, we'll bring versus this quarter, but we certainly have lot of confidence over the next several quarters.
Given the size of the forward leasing pipeline that we have and frankly the quality of tenants that are Ah Brian.
Yeah. Thanks, Jim Christie in terms of categories. We saw some teams during the quarter relative to tenants that perform have performed well during the crisis first off in grocery we signed two grocer leases in the northeast during the quarter. We have three more in the legal pipeline right now that that were just added a jury.
In the period enough and more behind that the we're expecting to come through in terms of specific tenants, we signed leases with dollar tree five below a AAA Chase bank can be a day again, many tenants who have continued to be active a new have large growth pans haven't really slowed down in terms of lease negotiations during the.
Crisis and more importantly, if you look at our leasing pipeline, we actually attitude as Jim mentioned in his opening remarks, it's up 25% from the end of year at 1.3 million square feet in terms of what we expect to get signed during the quarter. Many of those negate negotiations had slowed and we are starting to see that shake out a bit but definitely hard to predict.
We expected to be down from where we are historically, but considering the circumstances were really pleased with what the team was able to execute on during the quarter and I think it demonstrates the continued demand to be in our shopping centers.
And then just in thinking about your liquidity and capital position I know, it's still early theres a lot of uncertainty, but how do you think about the potential for dislocation in the transaction markets and your ability and your willingness to take advantage of that are you in a position to buy today.
Well, it's part of why were being so careful with capital it would give as part of the tough decisions. They continue to spend the dividend.
And Angela referred to the liquidity that we do have and importantly, the fact that were covering today from a cash flow perspective, even with some of these reserves.
So as we look forward, we do expect significant dislocation in the property market, but we're going to be patient and pick our points Mark.
Yeah, I think you said it well I mean, we're seeing.
Pretty slow transaction market today, and I assume the case started and dynamic that's pretty early to camp cap rate to comment on the comment on cap rates today given that the main issue is really trying to figure out where I know I said between the buyer and seller, but we are seeing some green shoots in terms of liquidity with smaller assets and triple net leases.
So while it's going to be lumpy I think we'll see what the liquidity trying to improve overtime with the grocery anchored centers showing the strongest liquidity as they normally do.
And I agree Jim with what you said I think over the next couple of years, what's interesting from our perspective is that we're going to see better opportunity for acquisitions. We did over the past couple of years I think that's really exciting swanson grid off that's where it can drive outperformance.
And Chris the I think whats really important in this environment as the national platform that we have because there is a lot of disruption. So the insights that we have into our core tenancy I think give us a competitive advantage.
In a market that still by a lot of one off owners.
Thanks, so much that.
You bet.
Next question is from Todd Thomas Raymond James. Please go ahead Sir.
I'd say keep bank that's fine I'm.
Good morning, first first question, you talked about Jim being at or about 86% I think for the combination of collection and deferrals in July.
A sense for how long that metric.
It might take to recover to a more normalized level and then you've talk now about the strength of the forward leasing pipeline. When do you get to a point when you begin to recapture space and and churn you know the non rent paying tenants or those that have not reopened.
At this point, yet will you know that have had the ability to reopen.
Well, it's interesting because you haven't seen a lot of tenant failures, yet we well see some in the timing and that will likely play out over the next couple of quarters in terms of our collection strength.
Yeah, we're real pleased.
We're seeing that number subsequent to quarter and beginning to approach, 90%. When we have 94% of our tenants open and as you could imagine this the differential is related to those tenants who may be open, but aren't yet fully up and and we had they want to see.
Other businesses.
Ms through this part of the crisis to determine how we're going to negotiate but I you know in terms of specific timing I think it's going to take a couple of quarters to play out and what makes that so important Todd I think this is such an important question as.
That dislocation is going to happen and every portfolio and then the question is how are you position to recover well you make money through this disruption or not and that's again, where I think that rent basis that we benefit from is an extraordinarily powerful thing because tenants don't want to.
Give up the space for when they do you know we have Ah, we believe are healthy and substantial demand behind them typically at rents that are in excess of what we haven't place.
Okay, I don't know if I missed it in the comments are you able to comment at all on on on where you're at for August in terms of collections and how you expect that to to trend relative to July.
We're not commenting on that now, but you know I think we're going to be pretty pretty much in line.
Okay, and then one last one Jim your comments you mentioned on micro fulfillment.
I'm not sure if that was directed at grocery and particular or just retail you know maybe more broadly but can you describe.
How tenants or are implementing micro fulfillment across breaks Morse portfolio, how much exposure, you have and sort of whats in the pipeline today.
Yeah I appreciate the question and you know as we think about micro fulfillment, it's really how the tenants are changing how they're using their boxes.
And how they are dedicating the space within their box. In addition to certain tenants looking at adjacent sees as a way to serve or some of that curbside pickup or delivery business that they're currently doing and you know I think that that is an incremental driver of demand at our centers.
It's early but we're already in discussion with a number of our larger tenants around helping them to fill that strategy as of the last mile and you know.
Wherever we're doing it is really across the country, but it's early still and I did the reason I highlighted it is because I think what this crisis has shown is the need for retailers to have goods positioned within the last mile at the consumer.
The fully E Commerce model didn't work there was a lot of frustration a lot of unmet demand.
The retailers, who have a bricks and mortar presence had a competitive advantage and so they're thinking more and more creatively about how to use their footprint a more efficiently, but also a adjacent season other parts of shopping centers.
Serve their customers as they want to be served.
And you know you imagine grocery that's obviously, a big driver of it but we're expecting to see it more broadly and we think it's a competitive advantage as we compete for new tenants the ability to offer tenants that additional channel or channels I think it's a pretty powerful thing.
Okay. Thank you.
Uh huh.
Next question is for Samir Khanal Evercore ISI. Please go ahead Sir.
Hi, Good morning, everyone, Jim I just.
With that sort of the virus second wave you're seeing in areas like Florida, Texas, California.
Have you seen any sort of differences and foot traffic or collections and your son.
We haven't yet, but it's something that we're monitoring real closely you know it's difficult for business to close once it's even harder for them to close again and so you know we're watching it we want to make sure that were successful in bringing some of those tenants to the other side of this crisis, but it's early yet to see.
He any dramatic impacts as it relates to traffic.
Or other measures you know that's part of though semi or even in those jurisdictions, where some of tenants have been forced to re close our centers are still largely open as they have a lot of.
Essential uses of course that remain open as well as hybrid uses that have demonstrated that they can operate safely through the pandemic and I think that's the key point because you know what we're talking about now on the margin is a much smaller segment of the portfolio. We're concerned about it we're focused on it.
But it's a little early at the determine.
You know the tenant to re closed what impacts are all day.
I guess as a follow up here or Brian or Angela where do we stand on rent commencement dates today for later in the year or tenants go looking to open up stores in time for the holidays.
As we think about sort of that these courses are depressed spread that you have or should we assume most of their rent commencement dates have been pushed out into next year at this point.
Angela do you want to.
Yeah, Hi, somewhere that 39 million that that Jim referenced which is makes up that that spread between our leased in Belgrade today between 40, and 50% of that we expect the command I'm. During the course of 2020 with the remainder in in 2021, and a small piece, probably about 5% of it and <unk>.
2022, so we do expect significant rent commencements over the course of the year those expectations do reflect a number of leases that we have worked with tenants that move into 2021 based on what's best for them and on that decisions. We've made as it relates to capital spending this year, but as I said, a significant portion of that time, but not commenced to come online.
During the course of 2020.
Thanks, so much.
The next question is from Craig Schmidt Bank of America. Please go ahead Sir.
Thank you know I mean, you had a very good resilience in terms of.
Lease occupancy, but given the the increase in score close its permanent store closings do you expect occupancy will be lower by year end than where you are here at the end of second quarter.
Craig We do and you know I made the comment my remarks that we haven't yet seen or the full wave attendance failures that will result from this crisis.
And what's interesting is even those tenants.
That have declared bankruptcy our portfolios been a minimally impacted in terms of actual store closures or but I do think it's a rational to expect a that there'll be certain levels of tenets failures in different parts of the country.
Which is something that we're prepared for and we think we're in a good position to capitalize on.
Great and then.
Related leasing spread topically had been trending down by quarter. When do you think we hit an inflection point and they could start increasing again.
You know I I want Brian to comment on this a little bit but.
Of course during the crisis as you're negotiating renewals and other things keep some of those tenants in place you're willing to cut maybe tighter deals than you would and a more normal environment.
And I expect that you know we will continue to have leasing spreads that lead that sector, albeit perhaps not at the 30% new lease spreads that we had over the last several quarters importantly, we still do have a lot of room.
To make money Brian.
Yes, Jim you covered most of it I would just said Craig you mentioned in his opening remarks about 1.3 million illegal pipeline. The rents are above 18 Bucks. So we're we're already in the low twentys in terms of new lease growth over our in place rents and we could see renewals moderate a bit here as Jim mentioned.
We are strategically keeping some of those renewals short term. Many are part of deferral agreement. So I'd expect that number to moderate a bit but long term, we're very confident in the ability to drive the remedies is higher in the portfolio and you can really see that in leasing pipeline. The rents that we've been able to attracting those new leases even through this.
Thank you thank you for that.
We have a question from Kevin Kim Truest [noise].
Thanks, Good morning, Alright.
Good Thanks, Tim.
So does low rent matter as much in this type of environment, where there's going to be more supply coming available in high RIN locations on lower rent locations and I'm, just kind of thinking out loud here, but if I'm a retailer I don't know and saving a couple of bucks the scrip when a rent really matters that much when I have a lot of option.
Well I think location always matters and look I think we demonstrated the locations of our assets quarter in a quarter out with our sector, leading leasing volumes and as we look forward you know and historically high forward leasing pipeline, but yeah rent basis does matter, if you want to make money right.
If you're looking forward and you're saying $25 rack going to 18 box and you've got to put capital to work to get the 80 Bucks, it's going to be a painful several quarters, if not longer as you work through that you know I believe that we're going to continue to capitalize on great located.
Patients that given the history of this portfolio have had lower rents and I think we're going to continue to capitalize on that spread which you can see as you look at the numbers. This quarter in fact, so or you know I do think that tenants are going to be even talk.
Offer and the environment going forward and they're not just kinda signed any rent.
They're going to they're going to want to know with their improved forecasting models can they be profitable and the sales driven by that particular store.
And rent is going to be a key part of that consideration.
Okay. Thanks.
And your expenses dropped a little bit year over year I'm, just curious how much of that it's sustainable versus expenses, maybe reflecting and lower run rate just because the reality of being shut down for a couple of months.
Well you know I'm really proud of I mentioned it in the remarks, I'm really proud of the job that high in the operations. He did immediately.
Modeling back expense levels at the property changing service levels changing scopes to make sure that the tenants, particularly those that were close.
Had lower Cam expense burden. So you know we've reduced that across the board by 15 to in some instances, 20% as the traffic picks up back at the centers as you see the tenants reopening it. They have we do expect that expense savings to a base if you well.
As we continue to bring the assets up to their normal service level. So the year over year decline was very intentional and part of our response to making sure that the tenants had a is low and expense burden as possible.
Hey, thanks.
You bet.
We have a question from Shibani sued Deutsche Bank. Please go ahead.
Hi, Good morning, Jimmy mentioned several times now that you expect <unk> failure to remain elevated so just curious how you're incorporating that your norm into leases signed or how that's changed the teams underwriting with regard to new leases, especially for thought.
You know it it really makes you highly highly focused on underlying credit, but also the that you're bringing in the type of tenant that you expect is going to be successful and you know our approach as a company is to always try to bring in tenets that help that center connect with the community.
He it serves and we're getting smarter and smarter about it you know, there's more and more data the traffic data that we use that Brian's team.
Capitalizes on with David spot is highly insightful in terms of what types of tenants are going to draw traffic what types of tenants are going to do well and so while this it won't be disruption and we won't see higher levels of tenant failure. We're not wondering how we're going to backfill space, we're not concerned about.
The bride, the or the broad funnel a potential uses that would work well and our shopping center. So yeah. That's the approach that we're taking we're obviously being more and more discipline in terms of capital that we're putting to work make sure that.
You know the credit is going to be there.
And then in terms of that your disposition liquid or can you remind us where those in progress because it.
One of them was and one of them was an opportunistic sale of a highly vacant shopping center.
Where we had a bid that was in line with some of the bids that we had seen pretty kind of it.
Thanks for that Guy.
You bet.
Next question is from Caitlin Burrows Goldman Sachs. Please go ahead.
Yeah, Hey, this June when he went on for Caitlin.
<unk>.
So first I get small shop leased occupancy increased 10 basis points sequentially and only declined about 10 bips year over year, which I think is better than than people feared I get that surprised you are and what is kind of your outlook for the trajectory of small shop on occupancy.
The going forward.
You know it doesn't doesn't surprise us and then party goods to the point Julian I was making earlier around tenant failures, Oh, we haven't seen a huge number attended failures, yet, but they will calm and you know Brian maybe you could just comment in terms of how we're thinking about the backfill demand.
Yeah joined as we talked about early many of the uses that or tenants that I had mentioned, we're able to sign leases with one I didn't we signed four leases with spectrum during the quarter, but it really goes to Jim's point, we haven't seen those tenant failures come through yet we do expect that to happen as we go through the year. So I'd expect to see that number.
I wouldn't be surprising if it came down but in terms of demand behind it we continue to see active tenants in the quick serve fast food restaurant category I mentioned spectrum and other consumer electronics cellphone uses a content uses that work were.
We're actively in negotiation with tobacco. So the demand is there, but we do expect that to moderate as tenant failures come through.
Got it and so I guess it sounds like your expectation pretended failures is probably going to be more concentrated in the small shop tenants.
I think it I wouldn't be.
Both large and small format.
I think what you're seeing this crisis it from a high level perspective is accelerated the demise concept that were already losing relevance before the crisis.
And we're going to see that plays through both with small shop tenants and a large anchored tenants.
Net that for US we believe that's a good thing as we can bring in better or more relevant uses but to your earlier question about occupancy.
We haven't seen that and you know it just takes a while the work its way through the portfolio.
Got it thank you somewhat.
You bet.
With a question from Mike Mueller JP Morgan. Please go ahead Sir.
Yeah, Hi, Jim you talked about second quarter being low earnings we quarter.
Do you think that comment would still hold true view toward the second quarter debt charges and the big screen like write off.
Yeah, I'm really was referring to both the straight line rent write off as well as the reserves that we've taken and remember that we not only to reserves in the second quarter, but we also took.
So and the first quarter adds the crisis became.
More apparent and you know we've taken a number of tenants as well to a cash basis.
ER, which you know, we'll see what the failure rates ultimately end up being but I do think with the combination of those things excluding that charge.
We think this is going to be a low point Angela.
Yeah, I think that I think that's.
Looking at all things considered.
Talked earlier about the signed but not command and continuing to some good momentum on that topline base rent contribution I continued I think you know measured approach to operating income over the course of the error. So I do think that recovery.
Contributor.
And then you know as we move forward into the third quarter and ultimately the fourth quarter, you know where that revenues deemed uncollectible number ultimately lance is going to depend heavily on where recollection plan overall.
So so that's what would be keeping an eye on.
Got it okay. That's it thank you.
Thanks, Mike.
We have a question from Wes Golladay RBC capital. Please go ahead.
Yeah. Good morning, everyone I'm curious, if you're seeing more demand for your outparcels and it more tenets are willing to be on an out parcel that they drive through capabilities.
We are Brian.
Ah, Yes, and you saw it again as I mentioned a few of those tenants. We continue to have very active dialogue with with the banks chase. The they have been very active chipotle. It's been very active so our outparcel program, we expect to accelerate that and it's one of the things that in terms of the deferral agreements that.
We've been able to unlock even more outparcel opportunities in those discussion. So we've seen the demand continue in Ics, we expect to be able to push that forward.
Because of what we've been able to unlock in many of these conversations.
Got it and then just looking at things 16% of on the dress July July rent no idea about an approximation of the split between tenants that are just being opportunistic and you're doing longer negotiations with versus those that are actually struggling and then maybe parlay that into or you actually still signing new leases with some of the tenants that are not paying.
Right.
Yeah. If you if you look at the 16% number just with deals that we have out basically handshake agreements that were expecting to get signed here during the month of pushes that number basically to 90% and then the remaining 10% that's out there it's primarily the tenants in the fitness sit down restaurant Entertainment category.
The frankly don't have clarity on reopening yet many in new Jersey, and in California, where some of these restrictions have still been in place and what we've seen so far is that when there is clarity on reopening it brings many of those tenants to the table and it's certainly a challenge for their businesses were in touch with them, we're working with them but.
As as they have more clarity on reopening their businesses, we think we'll be able to bring those to resolution. That's the bulk of really what's out there in that 10%.
Got it but so there could be some do we said you're doing you're doing new business was some people, though it turned out yeah in terms in terms of new business, we have not to be clear, we have not signed any new leases with tenants that have not been paying or right.
Great. Thank you very much.
We have a question from floors spending.
This pain points. Please go ahead.
Hi, good morning, guys.
Question.
Jim I guess on they're not many transactions in the market right now, but what is going on in your view in cap rates for Oh for your type of assets or are they moving up or are they staying stable or or do you see cap rates for somebody else, it's declining love to get your.
Your commentary on that and and also when you.
Do go on all fronts, Oh, what are the things that you would be looking for.
You know I want mark to comment, but I think much more than an issue of where cap rates are right now, it's an issue underwritten and why and what level is it out I think that.
That disconnect is actually going to be a huge a source of potential opportunity for us given our national platform and given the visibility we have on underlying tenant demand. So you know, it's really an environment I think going forward. We're gonna have certain platforms that are unable to capitalize on.
On the tenant failures in states that they get back but adds for cap rate versus and why level Mark maybe you can give some more color.
I'm sure. Thank Jim you know as we said earlier that the marketplace has been pretty slow up I do think it's a bit early to comment on cap rate direction.
As I said, it works where things in Green shoots I think it because those little early so put some more color than a couple of quarters.
As far as what we're going to be looking forward to in the acquisition market, it's going to be very similar to what we look for on the path where can we find assets that we can take advantage of our platform to drive value. If you look at some of the deals we've done over the last couple of years like the one Sacramento, the one down and Dennis where we really had true value add opportunities I think we'll see more though because we go forward into the into this new.
Environment.
And maybe a.
A follow up question for me.
It anyway, you can quantify some of the modification benefits.
That you've been able to achieve as a result of Oh those modifications.
It's a great question and Brian and team have done a phenomenal job in every circumstance, where we were granting deferral, making sure that we were getting value in terms of lifted restrictions outparcels et cetera that far exceeded the time value. If you all of that deferral or the additional.
Credit risk, we are taking on as part of that Brian.
Yeah of course, we don't have an aggregate number but if you think about the value of Chase Bank Outparcel. If you think about the value of a five year extension that's in place and were able to do that really across the portfolio a with a number of these tenants it's.
It's even more than we had talked to our principal from the beginning is that the value that we were getting was justifying the cost of the deferral agreement and we're really proud of the team at part of these discussions and coming to win win agreements with a number of our retailers and you can see it and you will see it in terms of the deals that were able to strike.
With new tenants, new new read a outparcel opportunities that come out of the so we've been we've been very pleased and it's it's almost in every agreement that we're doing we're getting we're getting this type of value.
Thanks, guys.
Thank you.
The next questions from Vince the bone.
Green Street Advisors. Please go ahead.
Hi, Good morning, I, what I have one more question for Mark can you just share a little color on secured debt availability today, maybe how low in terms of changed since the pandemic hit.
Well, we were really not a user of secured mortgage debt. So it's really not a place where we're experts in that market, but what I would say if it's what we're hearing is that the market continues to be slow for the majority of retail with with bridge, where the where the bright line on grocery anchored we're seeing deals get done.
In some financing that isn't quite as aggressive as you looked at six months ago, but still but still pretty strong, but again, we're not we don't believe that product very often but not where or experts.
No about more because trying to read through to potential cap rate or value moves I mean, I know a lot of your your buyers you secured debt. So just is there any like more thing even quantifying firms LTV being down for maybe.
The percent before co bid too.
50% or 40% today or is it still to kind of too dark to provide any more definitive read through on lcvs.
You know I still think it's pretty it's pretty I guess dark as the where do you use to look at it but you know you're going to see it very somewhere to what you normally see in this market, where you get the most the most attractive financing in grocery anchor deals and when you get down the road spectrum, that's where the Olympic become become more conservative, but I think its little early to exactly common on.
Where we're seeing.
Overall leverage labor rates, one and land pardon me.
Yes, okay, but I do think it I do you think it's fair to point out that lenders are gonna take a more conservative view of lease up and other types of risk and that's environment than they did before which may impact LTV, but it gets back to what is the NOI ultimately being underwritten.
Right.
So it makes sense I appreciate that color one more quick one for me can you just discussed the typical structure and payback period of the deferral agreements you have reached with tenant Costar [noise].
[noise] Angela.
Yeah sure in terms of the deferrals on average they've done between two and three nine.
The time period over which you might see that impact the financial saving in some cases, it's a little bit longer because some of the deferral unstructured Ed as an example to mind you know over a spread over a four month period, so where tenants are continuing to pay 50%.
<unk> for four months, but on average the total deferred time period has Dan I two to three mines and we expect that substantially all of the deferrals will they pay back by the end of 2021.
Perfect. That's a fair to say most of the cash from the deferrals getting paid back within 2021, not 20, some focusing more on a cash cash uses for cash more likely is that it will likely show up in 2021 I think that's there.
Great. Thanks.
Thanks.
We have a question from Greg Louganis Scotiabank. Please go ahead Sir.
Hey, good morning.
Hi, Jim you mentioned switching tenants, a cash based accounting given the aspect to higher levels and failures.
Looking into that comment a bit right and I apologize. This is a multi partner, but what percent of ramp has been shifted to cash accounting since the beginning of the year. What is the total level contractual rent some cash basis tenants and then how much of that meant reserve is related to cash basis tenants now.
Finally, what percent of rent from cash based attendance was actually paid in Q2 in July I can go right again it was 92.
It feels like a bar exam question, most part I need to break out my little Blue book and make sure I got all the point you know for the reserves that we took in the quarter. Obviously does related to tenants that we took to a cash basis I don't think we're prepared to provide detail on what percentage of.
Our overall tenancy is on a cash basis, but what's important is the accounting provide that where you don't see.
It probable that you will collect 97% of the ramp over the balance.
The lease term you take that had into a cash basis. So you know I'm real proud of the effort that Angela and team led across the entire platform, where we went tenant by tenant.
And made those types of assessments, we detailed liquidity analyses et cetera to make sure that we were getting an accurate inappropriate a view as to.
Where are the reserves needed to be taken is it possible that we take additional reserves and if future quarter of course and that can move either way when you account for things as we do on a specific I'd basis Angela.
I mean, just a couple of.
Questions embedded in there Craig I would point to the company disclosure, we added to the supplemental this quarter on page 11, footnote five which talk specifically about the reserve does break out the component of the reserve taken against space.
Attributable to cash basis tenants, so the 22 million.
We have taken against base rent for the total portfolio 20.1 million related to the cash basis.
So substantially substantially all of that in terms of the rent collection levels attributable to the cash basis tenants. It was just a little over 20% for the second quarter and not almost double dart more than doubled actually for July so you're up closer to 43% in terms of rent collections from cash basis tenants in July.
Okay. Thanks to the clarity on that.
I'm just a quick follow up you know talking about setting their reserves.
So with the increased collection in Q2 from when you set the reserve since closing the books. There I'm just curious if that reserve seems more or less conservative than maybe you need to be.
Yeah, I mean I went to say you know we tried as we went through this exercise Jim sort of describe the process. It's a lease by lease analysis across the entire portfolio and we've really worked hard to make sure that we brought in all of the knowledge all of these tenants across the organization into that process to make sure that we were it's completely accurate if we could.
In terms of funding not reserve.
Based on not you know not the comments I made and in my prepared remarks. The fact that we're now based on that cash collections that have occurred subsequent to quarter end and the additional preferred amount. We're now 60% reserved on unlike outstanding you know I think I think again feel pretty appropriate and downlink based on the current environment.
But certainly that's a significant reserve around this amount so I still pending.
Yeah, Great that's six zero, 60%.
Right. Thank you.
Uh huh.
Oh good question from limit site Jefferies. Please go ahead.
Hi, I'm any sense of how much PPP loans have helped your local tenants and the degree to which the sole source of funds for rental payments going forward.
You know I think it it was meaningful across our small shop tenancy in particular, we don't have specific statistics in terms of how many of our tenants actually received that we had been tracking though of course has tended to have in the first thing they do is.
Concurrent Onrad, which we've seen I don't think it's going to be huge source of rental income, though going forward I think the biggest source of rental income going forward is going to be these businesses reopen. So you know, we said at 94% reopened and as Brian alluded.
Two in his remarks.
The amount that we have yet to clocked are substantially or related to those businesses that haven't fully reopened.
Thanks, and then just one free Angela when you do start feeling better about I know your outlook in reinstate the dividend what level would you target as a percentage of normalized and so and then also how would that ratio look if you factored in the impacts of them you know deferrals and.
Yeah.
If you factored in impacted deferrals.
Yeah.
Yeah, I mean things like I think ultimately this is this is a board level decision and it.
Going to depend on a number of different factors, including some of the things you point out in terms of I've deferrals in terms of our cash collections and importantly, as we talked a lot about on this call.
The level of tenant failures across the portfolio when we determine what the right level that I'm not prepared at this point to share specific target ratio in terms of how the board will think about that but you know I think certainly.
You know, we're encouraged by the strength and resiliency of this portfolio and as Jim said in his prepared remarks, we're doing everything we can to put ourselves in a position to emerge from the crisis, a stronger and better platform and be able to reinstate the deboning fully it's all based on all those factors.
Thanks.
Ladies and gentlemen, we reached the end of the question answer session and I would like to turn the call back to Stacy Slater for closing remarks Stacey.
Thanks, everyone, we'll talk to everyone thing.
This concludes todays conference you may disconnect your lines at this time. Thank you for your participation.
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