Q2 2020 Retail Properties of America Inc Earnings Call
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At this time all participants are in listen only mode question answer session will follow.
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Please note that this conference is being recorded.
I will now turn cost over to your host Michael guidance, Vice President capital markets and Investor Relations. Thank you you may begin.
You operator, and welcome to the retail properties of America second quarter 2020 earnings Conference call.
In addition to the press release distributed last evening, we have posted a quarterly supplemental information package with additional details on our results in the Investor section on our website at Www Dot <unk> Dot com.
On today's call management's prepared remarks and answers to your questions may include statements that constitute forward looking statements under federal Securities laws. These statements are usually identified by the use of words, such as anticipates believes expects and variation from such words or similar expressions.
Actual results may differ materially from those described in any forward looking statements and will be affected by a variety of risks and factors that are beyond our control, including without limitation those set forth in our earnings release issued last night and the risk factors set forth in our most recent form 10-K, 10-Q and other FTC filings.
As a reminder, forward looking statements represent management's estimates as of today August 2020, and we assume no obligation to update publicly any forward looking statements, whether as a result of new information future events or otherwise. Additionally.
This conference call, we may refer to certain non-GAAP financial measures you can find a reconciliation of these non-GAAP financial measures for the most directly comparable GAAP numbers and definitions of these non-GAAP financial measures in our quarterly supplemental information package and our earnings release, which are available in the bus section of our website at <unk>.
W Dot RPK I dot com.
On today's call our speakers will be Steve Grimes, Chief Executive Officer, Julie Swinehart Executive Vice President Chief Financial Officer, and Treasurer, and Shane garrison, President and Chief operating Officer.
After their prepared remarks, well open up the Colts your questions with that I will now turn the call over to Steve Grimes.
Thank you, Mike and good morning, everyone. I appreciate you joining us today.
Our team stepped up once again in the second quarter, helping tenants reopened and adjust effectively to the current operating environment. Our team advanced negotiations to add visibility to our forward outlook on the impact coping is having on our business and our sequential increases in daily cash collections from May to June and to July which was all.
Ready at 71.4% as of July 27.
Okay. That's progress I remain deeply appreciated for all of our team's efforts to date.
And while acknowledging the challenges we continue to face and this unprecedented time, the strength of our asset footprint or capital positioning and our experienced team helped us deliver a number of positives in the quarter.
We kept steadily driven the reopening of our tenants temporarily closed due to the cobot 19 pandemic and now have 92% of our square footage open.
From a capital perspective helped by holding one of the lowest leverage positions and the peer group going into the second quarter and the pace of improving rent collections, we issued 100 million in public bonds in July at attractive terms that further solidify our already robust liquidity positioning.
Although second quarter cash flow performance in retail real estate largely will reflect any given portfolios mix of essential tenants intermediate to long term cash flows in our sector will continue to reflect the relevance of a portfolio to the broader needs of the community from a social status.
Events of the last several months have materially increase the demand for urban amenities and a suburban setting a balanced offering of density Walkability placemaking and community belonging.
Here are lifestyle in mix do you centers are poised to once again try with tailored merchandising right sidewalks green space and event centered on local residents.
These same retail centric demand also create and interdependent on multifamily and office offerings at these mixed use assets and we stand poised to cater to those demands when the time is right.
We believe the long term outlook continues to favor our strategic footprint and asset mix. However, the recovery from the impact of covert 19 will take on a more U shape recovery and further be reflected in the coming quarters.
In the near term our operational momentum is building and we continue to advance lease amendments with tenants a key step to further normalization of our cash flow profile that also helps us to gain and even deeper understanding of the drivers of our tenants business. It.
With went receipts above our approximate 60% breakeven level.
We hold much optionality for our capital structure as Julie will detail and as Shane will discuss we continue to realize positives from the rebalancing effects of the cobot related impact on much of retail real estate, including increased inquiry from all based tenants seeking a street presence as well its interest from current existing open air 10.
Seeking to migrate to higher quality locations.
Yeah, the broader macroeconomic backdrop remains hard to predict.
While mindful of the elevated unemployment rate, we've seen some evidence of stabilization and consumer confidence since April.
And strengthen the areas of the housing market encouraged by low mortgage rates should bring positives to many other parts of the consumer sector.
Informed by our experience and successfully navigating the 2008 in 2009 downturn, we took swift inappropriate action to respond to the cobot 19 pandemic during March April and May.
We drew in nearly fully on our 850 million revolver and halted plans for vertical construction at Caroline in March we continue to review our budget for areas a further saving some of which is evident in our lower DNA and other expense categories in Q2.
And in May as you know, we temporarily suspended the dividends.
We sense repaid substantial amounts on the revolver in June due to our growing visibility across multiple aspects of our business.
And our board will continue to evaluate our dividend quarterly being mindful of the importance of this mechanism to our equity holders as well as other factors like our current cost of capital our need to continually reinforce our strong balance sheet position in compliance with re tax requirements.
The strength of our governance and social responsibility practices have helped us successfully navigate various operational challenges presented by the cobot 19 pandemic.
We remain focused on enhancing our disclosure related to our corporate sustainability, social and governance successes. We are yes, GE micro site and are forthcoming corporate sustainability report, which we plan to publish in the second half of the year.
During the quarter, we implemented an energy management system, which allows our team to analyze historical energy water and waste records.
Our sustainability reporting data collection and validation tracks are all required benchmarking ordinances following G.R.I. reporting standards.
In the social category, we continue to support our communities by ensuring that local voices are heard while maintaining a safe experience for our guests and tenants.
And our offices, we continue to advocate for social change by adding June team as a paid company holiday and closing offices and observe it.
Additionally, we implemented a company match around the holiday or donations made to fiber one C charitable organization that support African American community.
More broadly I believe our results in action taken for the quarter as we will further detail for you here showcase our experience prudent and pragmatism and ensuring that not only do we recover from the effects of the pandemic, but emerge even stronger.
I continue to take solace in the strength of our hundred into curated operating at that aren't great investment grade balance sheet and our experience team that has seen tough sledding before they come out ahead, and the and and I know we will do the same once again.
With that I will turn the call over to Julie.
Thank you Steve This morning, I will review, our second quarter and year to date financial results.
Incremental cobot 19 related disclosure or rent collection progress and our capital structure positioning during the second quarter, we generated operating FFO per diluted share of 17 cents down 10 cents sequentially, a nine cents year over year as detailed in our press release and our related quarterly supplemental information package cobot 19 related.
Right I was reduced our second quarter lease income by $21.1 million or 10 cents per diluted share explaining this operating FFO decline.
This impact is composed of three main topics first we increased our allowance against the build accounts receivable by $12.4 million second we increased our allowance against straight line receivable by $1.6 million as we moved several additional tenants to cash basis during the quarter and third we recognized negative a job.
Men's to lease income of $7.1 million, which primarily represent uncollected amounts from cash basis tenants.
I also would like to highlight the we effectively offset or $2.3 million in sequentially higher interest expense for the second quarter, which was driven by our nearly fully drawn revolver position as of March thirtyth with savings from lower operating expenses and reduced DNA expense, which combined measure $3.1 million or 12% below year ago Love.
Hello.
Year to date through June Thirtyth, we generated operating FFO of 44 cents per diluted share, which also measures 10 cents below the 54 cents per diluted share we delivered in the first half of 2019.
The year to date decline in operating AFFO can be explained by the impact on lease income in Q2 from cobot 19 related items.
Same store NOI in the second quarter declined, 22.2% or $17.9 million compared to Q2, 2019 and year to date same store NOI fell 10.5% or $16.9 million eroding our Q1 same store NOI growth.
Like operating AFFO Cobot 19 related items also drove our I know I decline, which came despite year over year increases in occupancy up 130 basis points and an approximate 110 basis point expansion and base rent from contractual rent increases.
And well accounting topics hold a prominent position in our Q2 reporting I encourage you to review our many disclosures on this topic in our soon to be filed form 10-Q.
And in our quarterly supplemental information package, particularly pages 19, and 20, which contain detail on the interrelated concepts of cash collections billings and lease income.
I also want to emphasize that we're focused on collecting rents and recoverable expenses and I'm happy to report that we have sustained and accelerating pattern of cash receipts for rent starting with me increasing in June and increasing again in July we collected 68.4% of second quarter rents as a as of July 27 up 310.
Basis points from the second quarter collection statistically previously reported as of June thirtyth exceeding or 60% breakeven level, which is inclusive of interest expense and maintenance capex.
Further given the high correlation we realized between open status and rent payment among tenants in the second quarter I'm encouraged by our tenants continued reopening progress and the related potential positive implications on our cash flow outlook.
As we detailed in our quarterly supplemental on page 19, adding to the Q2 rent collection level of 68.4%, we applied existing tenants security deposits in certain instances, representing an additional 2.5%.
We have either signed lease amendments or have reached agreement in principle with certain tenants for another 15%, bringing us up to 85.9% addressed in terms of these 10 at work out arrangements. The majority involved deferrals for which we recorded revenue during the quarter and Shane will provide some additional context on these deferrals in just a few minutes.
Turning to our capital position recall that we ended Q1 with nearly the full amount drawn on our 850 million dollar unsecured revolving line of credit and $769 million in cash on hand, and as previously disclosed we repaid substantial amounts in our unsecured revolving line of credit NGL a decision that we made after observing.
Upward trajectory of cash collection, the ongoing reopening of our tenant base and the normalization in many parts of the financial markets during the second quarter.
We ended the second quarter with nearly $715 million available on our unsecured revolving line of credit and approximately $13 million of cash on hand for total available liquidity of more than $727 million.
With our cash collection rate for Q2, well in excess of our 60% break even threshold and with July levels, even higher at 71.4% or liquidity profile remains in check.
The suspension of our second quarter dividend and our collection levels above breakeven should collection levels remain consistent or improve we expect to be able to also funds tenant improvements in full and a good portion of anticipated development investment on a leverage neutral basis.
In the second quarter, we continued to sustain the balance sheet health, we have exhibited for years and during the trailing 12 month with 6.2 times net debt to adjusted EBITDA, Ari and we continue to enjoy wide headroom under our covenant requirements as demonstrated by our four times debt service coverage ratio.
I also would like to highlight that our credit metrics improved this quarter as a result of our substantial repayment of our unsecured revolving line of credit in June.
It's paydown activity also brought us back to the lowest level on our related leverage based pricing grid for our bank term debt and revolver saving a 15 basis points and related interest expense for the majority of our bank debt.
We further strengthened our healthy capital position in July when we Reengaged the public bond market for the first time in five years issuing an incremental $100 million in principle of our existing 4% senior unsecured notes due 2025.
This issuance added to the existing $250 million already outstanding for this note series.
The net proceeds from this debt offering brings our pro forma liquidity position to $824 million today.
We undertook this move trying to land a win win for both us and our public bond investors.
We benefited from the near five year term of this bond issuance, which I believe is the longest term obtained among are similarly sized appears year to date 2020.
Well as the additional liquidity for our balance sheet.
For our public bond investors by increasing the size of the issuance above $300 million. The notes are now index eligible again and the related potential for increased liquidity and tighter pricing of the notes is certainly a benefit we are encouraged by the early results from this effort as demonstrated in the trading activity in the 2025 notes series since our July.
Reopening both in terms of volume and price level.
We had not issued public bonds since early 2015, and I will say that it it's good to be back in this broad and deep market and I look forward to exploring additional opportunities that may arise now that we have reopened the door to this key funding source.
As Steve mentioned and as Shane will further detail given the fluidity of the current operating environment I take confidence in knowing that our abundant liquidity modest leverage and overwhelmingly unsecured debt position enable us to make operational and strategic decision that best suit. Our long term goal and now I will turn the call over to.
Shane.
Thank you Julie our second quarter performance reflects both the challenges of the current operating environment and the resilience of our platform.
As you we detailed although cobot 19 impacts drove our Q2 same store NOI materially lower we delivered a 130 basis point year over year gain in same store retail occupancy to 93.6%.
Reflecting the hard work of our team both in 2019 and year to date 2020.
Same store retail percentage leased increased by 10 basis points year over year to 94.8%.
Underscoring our ongoing efforts quality of our portfolio and focus on forward merchandising and deliveries.
Turning to our remaining expirations as a reminder, we entered 2020 with just 7.2% of our Hbr expiring down from 10.3% and 29 team and we hold just 2.9% of our hbr expiring over the back half year, enabling us to focus our near term efforts on other price.
I already.
Given this smaller opportunity set of expiring leases, we signed 52000 square feet of comparable new leases in the quarter up 58% from first quarter levels.
Our blended spreads of negative 17.9% on this limited group of new leases was driven by our execution of a 34000 square foot essential anchor.
To backfill the bankruptcy liquidation over non essential retailer upgrading credit quality and merchandising mix.
We continue to have a systematic approach to our leasing and merchandising blending situational awareness with stability and compressed downtime in this currently volatile market.
In the quarter, we also executed 194000 square feet of comparable renewals largely mashing Q1's total at a 5.6% com up from Q1's, 4.9% spreads.
In total for Q2, we completed 66, new and renewal leases for 323000 square feet up 13% from Q1's volume with a blended spread <unk>, 0.7%.
Importantly, we sign these new leases with average contractual rent increases 160 basis points inline with our results over the last few quarters.
Looking forward, we continue to expect elevated volatility in our release metrics for the next several quarters given the current macro economic disruption and it's a long duration effect on our leasing pipeline.
However, we maintain our expectation of tenant retention and renewal activity of approximately 80% for 2020 and have not experienced any significant rent commencement or delivery changes to date.
Also we continue our dual focus to leverage the strength of our platform and support tenants efforts to reopen and adapt successfully with 92% of our square footage open as of July 31st up from our previously reported 79% as of May 29, we continue to demonstrate the core.
All you our asset base, our ability to collaborate with tenants, who achieved mutually beneficial short and long term outcomes.
And to demonstrate our ability to acclimate to the present operating environment.
While working to ensure that our tenants can operate safely and effectively we're also focused on working to address tenant requests for lease amendments.
We are negotiating pragmatically on a tenant by tenant basis.
During this exercise with a quality not quantity bias.
Our progress to date reflects our goals to secure a near term cash collections increased our long term operational flexibility with the removal of certain lease restrictions and where appropriate provide a short term runway, where our tenants to adopt practices needed to succeed and the current environment.
Our experience in the last few months confirms that this broad scale effort will take sometime.
But will position the portfolio for the long term, what providing increased stability in the short term.
Results of our diligent approach can be seen in the 86% of our total rent addressed as of July 27.
We have signed agreements or come to an agreement in principle or amongst that represent 52% of rents not received in cash or security deposit application in the quarter.
And we continue to make weekly progress addressing the 14% remaining of our rent role while continuing to push for mix of deferrals with modest payback periods combined with good based payment of a percentage of accrued receivables.
These remaining outstanding rents fallen many categories hardest hit in 2020, and we have addressed more than two thirds of our movie theater and Jim tenants, who also saw dramatic impact to their business in Q2.
Our deal to date have tended toward deferrals, not abatements and some of these deferral agreements will distract from our third quarter cash receipts. However, with July collection levels ahead of any month in the second quarter.
I'm encouraged by the tangible progress we're seeing over a bunch of our portfolio.
At the same time cognizant of the relationship between opened status and rent payment ability, we are focusing on reopening the 8% remaining of our square footage in a safe and effective manner much of which remains closed due to local or regional governmental mandate and typically relate to our theater amusement and certain fitness.
Tenants.
While we are mindful of the still fluid public health backdrop, and the challenges faced and certain kind of use categories.
Our high quality operating footprint and talented team continued to shine wall Kogan 19 has accelerated the pace of retail bankruptcy filings in the last few months.
We've seen just seven retail move outs due to bankruptcies through July twentyth.
For example, we held two leases in our portfolio for each of Rio Bravo, and Tuesday morning, but none of those leases had been rejected during reorganization.
And of our 14 GNC leases only one has been rejected today.
Further starwood Tom has not rejected our one existing lease which sits at main street promenade in downtown Naperville, Despite rejecting nearby suburban locations and Northbrook Oak Brook and Barrington.
And while many tenants still face headwinds from the Kogut 19 pandemic. We believe we will benefit long term through increased retail rationalization, including growing reverse inquiry from historically mall based operators and open air tenants looking to upgrade from pending or now obsolete locations with growing Bacon storefront.
Turning to development our expansion projects continue to serve a vital strategic role and diversifying our rent roll and bringing our best assets their full potential to include multifamily units and additional office square footage.
At loud.
We continue to advance our progress on pads G and H.
Pleading frame construction on pad Gi and commencing wood frame construction work on pad age.
We also advanced our early marketing efforts of the suburban urban expansion through the newly announced branding MD office component of PEGI now named one Endicott.
We remain convinced of the merits of this expansion given the least rates of 96.1% in retail and 95.1% in office and the ongoing influx of technology investment and population growth in the region.
This multifamily center project typifies, the many opportunities for further diversification in our revenue sources across our existing portfolio.
That's circle East, we have resumed and advanced lease negotiations with inline tenants that were paused in March due to the accelerating impact of the cobot 19 pandemic at the time.
We also initiated the build out of shake shack during the quarter and plan to begin the build out of Ethan Allen space and Q3.
Deal pipeline continues to increase and we currently have approximately 15000 square feet of new leases and allied or at least.
Assuming we can convert this activity into fully execute leases the next few quarters.
Finished 2020 at approximately 30% leased.
With building momentum in this volatile environment.
While the anticipated stabilization date for the project has been pushed back several quarters.
Our projected returns are holding despite the implied incremental cost of Gerry which reinforces our continued enthusiasm for this redevelopment and the relative strengths of the suburban urban center to prospective tenants.
Our two smaller scale projects the redevelopment at quarter field and the pad development at South Lake are built 100% pre leased and remain on plan and on budget.
In summary, as we continue to experience the growing impact of cobot 19 on retail real estate we.
We remain well positioned to continue to drive fundamental progress in the coming quarters as the best platform and high quality real estate stand to showcase an increasing amount of headroom over less well position portfolios with that I will turn the call back over to Steve.
Thank you Shannon Julie for those updates I imagine you have many questions given the complexities of this quarter's reporting amid this evolving environment. So, let's just get right to it operator, please open up the lines for today. Thank you.
Thank you.
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My first question comes from Christy Mcelroy with Citigroup. Please state your question.
Hey, thanks.
Morning, guys I, Chile first questions for you I know that there are differences and have some companies account for a the uncollected Kashi sits right, but if I think about the amount of bell.
You did not recognize in the quarter you lay out there with piece, you're going to stop and that's the 19 and a half million, a which is comparable to what cannot be other companies our reserving for and so we're looking at that reserve relative to the total amount uncollected, which you provided that he and the disclosure on page 20 <unk> right.
But how should we thinking about the total uncollected them out for the recovery I guess it would be helpful to know that collection rate on the recovery that we came back and see that making Pete.
Sure Christine good morning, and and thanks for a acknowledging a the aggregation of a few concepts. There is as how we've laid out in the Sop you're right. We've got the bad debt component, which is the 12.4 million and then we also have a amounts that aggregate to 7.1 million a across kinda recoveries and base rent really relate.
Primarily to amounts that have not been collected for tenants that we moved to the cash basis of accounting, So you're right kind of all in lease income impact for the NOI components I'm, excluding the straight line piece, but for an ally is 19 and a half million a you're right. We have not disclosed collection levels pertaining to recoveries, but they've been on par.
Maybe just a touch below what we've seen on the rent side. So for Q2 definitely and 68% maybe 70, I'm, sorry, 60%, 67% range. So if I were to apply our Q2 rents collection levels more broadly. The 68.42, you know the rent base, which I'll call 90 million round three.
Recoveries, which is generally in the area of 25 million so call it 115 million.
Then I get just over just over 36 $37 million. So I would compare that numerator you mentioned, the 19 and a half million aggregate kind of bad debt and rent adjustments to that base of 36 37, they get little over half the little over half of the amounts that have not yet been collected that were built in the quarter are covered by those reserves.
Okay, great. Thank you and then just Shane just follow up on your comments I Circle you.
And pushing out the stabilization date to 2022 can you talk about what's driving that.
The way and then just how should we be thinking about B. I know I said over the next two years for this asphalt.
Hi, Christy good morning, I think what's driving it is just further elongated and delays a largely virus driven at this point.
We felt it was prudent to move it out I think we can certainly be you end up 22, but.
Certainly prudence dictated moving it out at this point velocity is really picked up again.
This quarter, specifically, obviously the last six weeks or so you know we talked about are I talked about my prepared remarks, possibly getting to 30% at your end I think that's a realistic expectation.
We have several mall tenants now wind up and that call. It 15000 square foot population, we're working through from leasing standpoint, right now so that.
That reverse inquiry and traffic is real but it's just going to take time on surprisingly at this point as far as an N.Y. cadence.
No I would expect you know for 30% at the end of this year, maybe you know up to 50% of it probably through 21 and a majority of it done in 22.
And that lease percentage or on sort of move back here I guess I'm just wondering should we expect the bulk of the move and sort of in the back half of 21 or not only 22.
Yeah, I would expect.
The majority of movements would be 22 weighted.
Okay. Thank you.
Our next question comes from Thomas with Keybanc Capital markets. Please state your question.
Yeah, Hi, Good morning, just first question on the reserve the 14 million and I guess, you know, including the straight line rent.
Came in below that the $15 million to $20 million range that was disclosed. The 8-K, you know <unk> mid July alongside the notes issuance and I was just wondering if you can just comment on the lower reserve.
Anything specific that drove that change relative to the expected range.
Over the last few weeks.
Oh, Thanks for that question tied you're right. We did put out an 8-K ahead of our public bond offering a you're right about mid July.
You know I think just we put out a range that we felt comfortable with at the time I think they came in you know within a stone's throw that range. After all of the the vetting and I can assure you the quarter had you know no shortage of collaboration interaction across line to the business to make sure that we were taking into account all information that we.
Add on all fronts and of course, you'd have the little bit of the benefit of additional cash collection in July I think you saw that in our press release that we put out July 60, we publish some.
June collection levels and at the time in those improved again by the time, we reported last night. So definitely saw positive trends in July in terms of collections as it related to Q2, which we've seen every time, we publish I think we published April numbers four times at this point, so had a little bit of benefit of hindsight with that concept and.
Again, I would just tell you with you know collection level certainly for us and appears far below any sort of normal there was a lot more involved and a lot of judgment went into the the entire process.
Okay, and the the $7.1 million of of lower lease income from from cafes tenants.
Can you share with the collection rate was for for attendance that you have on a cash basis today in the second quarter and how that's trended in July.
Oh sure. So for that population collections were certainly certainly below our average and I think that goes right in line with its with how we evaluate them and move them to the cash basis. So we were just I think just shy of of 30% collections in June and we've seen some improvement there I think were.
As high 37% collected for that population by July 27th there. There's a lot of detail as I mentioned in the supplemental, especially on 19 and 20 and there's some element of this concept that you can read you know you can you can glean in some of the footnotes on 20, where you can see that we we're careful to not.
Double count situations in the table, meaning you know for that cash basis adjustment that was there as of June Thirtyth, we did collect.
Additional rent from from tenants during July related to that so and as you know with cash basis, you know anything we collect beyond is certainly upside so that'll come in when it's paid going forward.
Okay and then.
The the $100 billion of notes.
They that you issued.
Last month.
The 2025. So we can you just comment on you know the decision to reopen that issue versus along a new longer term. It you know offering to prefund. The repayment of the $250 million of January notes and then based on your comments I'm should we assume that you might look to another issuance to take out the January notes and.
Capacity and availability on the line.
Oh sure I can I can answer that Todd as I mentioned, we're really happy to be back in the public bond market.
The 100 million tap into 2025 is very much felt like like the right moved to US you know just little background on the deal in early July we engaged in on a marketing exercise with fixed income investors. It's some of the same folks that we had met with previously in the year in an effort to re as you know reestablish relationships with them, we've not been in that market for quite some time.
Fine.
And so you know based on some of that marketing. We did we did get some reverse inquiries from certain investors. The pricing was attractive they were specific to I'm asking about the 2025. So it felt like to your point inappropriate first step after having been out of the market for five years. So again, so happy that it makes these.
2025, now index eligible to adding liquidity to that series of bonds.
We've seen some some nice trade since then so we're still evaluating all financing alternatives that are out there to repair 2021 maturities, but one of those options certainly as a standalone new issuance in the public bond market now that we're back so I'm really pleased with the execution in July and what it could mean for us going forward.
All right got it just last question for for Shane You know you mentioned some of the closures that you've experienced so far and sort of you know some of the limited fallout that I guess, you've experienced from GNC and a few others bankruptcy, but how much hbr exposure do you have across the portfolio to tenants that have filed bankruptcy and in 2020 in her.
In the process of reorganizing.
So Todd with the recent filing of Sina and tailored or in the past we call it where it a little over 300 basis points right now active I think we had one or two locations that were affirmed this week. So that's a little fluid.
But again we have.
So I look at that population a 75% of it is made up by a seen a tailored pier, one which is obviously a liquidation and a smaller piece.
And GNC, which has rejected one so about 300 basis points give or take and to date, we've had less than 10% of our current bankruptcy exposure or reject leases.
Okay, great. Thank you.
Our next question comes from Derrick Johnson with Deutsche Bank. Please state your question [noise].
Hi, everybody. Thank you.
Yeah, I definitely understand be pushed back and timing on circle least number chain and given the pandemic as you're speaking with prospective tenants, especially its circle east now how is demanding and frankly no net effective rent discussion shaking out has the virus.
That's a pre pandemic underwriting and development yields potentially at risk here.
Hi, Joe Good morning, a it's a great question I would tell you that the traction we have right now you know the tangible leasing velocity we have.
His or really Oh sourced from tenants in the court or if you will orin and at least in the market unfamiliar with the market that have proven sales they'd either do not want to be an closed environment anymore or just want to upgrade to have synergy with adjacent tenancy. You know that's that's a unique asset you've been there we've talked about it its.
Three blocks entertainment anchored but also has that suburban urban dynamic that we think is certainly forward thinking but also.
You know provides for.
Convenience, an experience and certainly brand awareness, but also kinda micrel film on if you will so I think it checks a lot of boxes on a long term basis.
But your point the velocity, we see now is really limited to those those tenants looking to upgrade location and or move for configuration reason.
Okay. No certainly understood. You know also just curious what are you guys see at your centers, where a Bible rates have been spiking, but you have some decent exposure in Texas, and Florida, and so any any anything you could share given the increase in case.
As and in those states.
Yeah, it's been a bit frustrating I think for all of us as operators, a Texas Oh. Despite the headlines you know we are I don't know mid Ninetys open I think San Antonio's about 80, that's just literally driven by one box that's a national retailer. It just hasn't opened but it's still paying rent so.
Texas has been unique as a contrast, the headlines I think Derrick I would just point you to really our renewal rates right now in our retention as as the best indicative you know, we obviously comped up higher than we did in Q1 round about a five six on on renewal comp 200.
Sales and fees. So it was it just decent population at least from a indicative standpoint.
But that in conjunction with just told many tenants are open there we really haven't seen any large collection issues in any diminishing as far as retention the portfolio still gonna run north of 80%. This year, we're on track there.
We've seen very little rejection on bankruptcy so.
The only activity or or impact we've seen have been on the handful I think we've got I don't know five or six bars in the entire portfolio.
And and those tenants are obviously close in addition to the theaters, which is kind of a national phenomenon. At this point. So Texas is holdup held up well, Arizona is actually held up extremely well were high Ninetys open their mid to high Ninetys as you know, we don't really having exposure in Florida. We had one center left there and we have to multi tenant centers on.
So.
As far as the flare ups go you're right, Texas said, you know almost 35 for certain of our rent was the biggest exposure at least for the current flare up but so far to data continues to hold up well.
Thank you everyone. That's all from it.
Thank you. Our next question comes from Floris Van Dyke them with.
Boenning and Scattergood. Please your question.
Hi, I'm actually.
But wanted to ER.
I ask you guys about.
Sure.
Yeah.
Collection rates were appear to be much higher on the on the small shop tenants on your.
Anchors.
I am I right I think.
First our heavily weighted towards your.
National tenants.
Thanks for the question floors, you know so there's some element of specific reserves within our reserves and there's there's also an element of a general reserve and we certainly quite a lot of lot of the pieces out there and they expanded disclose right and it certainly a lot to digest, but wanted to do that in a vein of.
Transparency as we always do.
So again to some element there is a general reserve a there's the cash basis tenants.
That or are you know different sizes I wouldn't say its anyone size tenant and then just to highlight Theres also a a component of the bad debt reserve, which we have footnoted on page 20 in the supplemental that is.
I guess, what I'll call, a little bit of deal hedge and it's I don't Wanna get to nuance with some of the accounting rules, but long story short if there's any element of abatement in a deal and I'm not saying, even just strict abatement, but if you defer or two months and abate maybe one month the accounting. Unfortunately does not allow you to recognize that deferral.
Like other deferrals that are kind of down the fairway. So there's an element of bad debt. That's specific to deals that weve signed that might involve lease modification again anything but the the straight narrow deferral.
That's disclosed in that components. So because it wasn't signed as of June 30, you can't apply the accounting and so we took the impact and align the corridor.
Knowing that it signed in July so.
Hopefully that gives you some pieces again, there's like I said, there's a lot out there a it it'll hangs together and fits but I'm happy to always you know offline as well there.
Thanks.
<unk>.
Hope will help us think about.
Going forward I know obviously.
Being.
But based on the the improving cash collections.
Do you see yourself and that's positioning where you might have to stage or pay part Oh.
As part of of <unk>.
The fourth quarter earnings.
Uh huh.
Hi, Floris this is Steve I'm <unk> all of the above its true as we talk with the board. Obviously this is a board level decision, we will be talking with them in the early part of September to understand what the balance of the year may look like in terms of required distribution from a tax perspective, certainly we need to take it from that angle.
So first and then take also into consideration you know any further liquidity preservation that we would like to keep for the balance of the year and then more specifically a really look at what we might be facing from a dividend perspective in 2021, all that being said, we have Q3 and essentially Q4 dividend too.
Deal with any sort of required pay out for 2020.
So while we will be talking in September about what the needs maybe for the year, it's possible that it could be Q3 or it could be a Q4 pulled back into 2020, so that will all be discussed in the coming quarter and you'll have clarity on that within the next month or so.
Thank you next day.
<unk>.
Our next question comes from Vince the bone with Green Street Advisors. Please state your question.
Hi, good morning.
Are you converting many tenants to short term percentage rent only deals and if so how is the flowing through your reported financials.
I'll I'll take the deal aspect and and asked you to finish the accounting.
We don't have a significant amount Vince I I think that on surprisingly some of our larger restaurants that have relatively thin credit you know one off locations. All that has been the extent really of deal, making where you would go to some form of short term percentage and Lou a and then tip.
We we are the structure would be to revert back to fixed rent at the beginning of 21, when Julie any accounting and yeah. I mean, I think percentage rent deals are treated differently than what I'm, calling kind of the down the fairway deferrals. So again, the downward down the fairway deferrals, where you basically record revenue, including leave the straight line component alone.
And it's one of three choices that the fast they actually offered for the same fact pattern, but if you choose lab, which I think many of appears as though as wells, we have straight down the fairway deferrals, there's really no impact you have a longer term accounts receivable somebody like percentage rent would take you kind of off the tracks. If you will similar to what I. Previously described is like a combo abatement and.
Deferral deal. So we are not in the practice of recognizing the analyzer.
That that would have been there instead of percentage rent in the quarter.
So basically it's like is it fair to say that almost like tax basis for a lot of the seven grant deals on a wide where you're only recognizing the revenue you're actually receiving for the cash there actually was even from a presented drought.
Correct.
Okay. Thank you and then maybe one more just on restaurant August roll service restaurant tenants do you have any sense of how sales are trending today, given the kobin related restrictions relative to before the pandemic and you know just also bigger picture like how are you supporting your restaurant tenants to try.
To get them to the other side of this crisis.
Yeah look I think that.
We have certain and I'm talking to each 10000 square foot.
Large format restaurants that are actually have sales above pre pre co bid and that's just another example of the basket better right. They figured out a nice blando very reduced menu. A in addition to reduce DNA, but also have maintain quality. In addition to partnering from third party delivery.
And and curbside et cetera, So we have that bucket and then we certainly have.
Oh the bucket at the other end of the spectrum that has continued to struggle. When it has tried to probably maintain status quo. If you will.
Whether it's a DNA issue or a menu issue or just a commodity you know kind of products. So there's a myriad of of outcomes here in process events I think that we strive to understand.
What what the tenant is doing and how to interact and what the possible short comings, our from our perspective to the extent that that we can help and they are willing to listen.
But a lot of that is flush up as you know in negotiations I think one of the more interesting parts as we go through this for for our portfolio is that almost 85% of our leases have some form of credit enhancement right. So when you think about either a corporate guarantee or parent.
Apparent on the lease or it's an S.P. with guarantor or Joern joint and several guarantors that credit enhancement is significant when you think about that relative to just a one off SP and and down Sterle performance, a and we take that into consideration as well.
Well, when we think about either afford collectability or modification of any lease, but really specifically as it relates to restaurants.
And you know I think that that Collectability, we'll we'll certainly provide some value going forward as we continue to fight through a the current issues.
That's helpful color. Thank you.
Our next question comes from Chris Lucas with capital One Securities. Please state your question.
Yeah, Hey, good morning, everybody Julie couple of questions for you as it relates to rent quitting the per quarter that was.
How much of that was from cash basis tenants.
How much of the rent that we collected so far in <unk> in sorry, Q2, or Q3 was for cash basis tenants.
Third quarter, so stuff that paid got even leave that would do in second quarter, but was from cash basis tenants. So it'll be applied.
Quarter Oh, it was it was fairly small it's and it's on our page 20 of the supplemental in footnote be a 343000 as of July 27th.
Great. Thanks, and then I.
Hi, good shame on the.
On in situations, where you really have you know no deferrals in place no amended leases have accepted rent.
But where do those scanned and when does litigation become you know one option for you in terms of pursuing your remedies there.
Hi, Chris Good morning.
I'd say look we're down to.
You know 14, 15% if you back out the current bankruptcies or 300 basis points give or take.
Let's say, it's 11, 12%.
And.
I want to be clear, there's not a high correlation between 11, and 12% outstanding as far as deal or no deal and the 8% that isn't open.
If you look at the 8% that is an open more than half of that square footage represents a gym and fitness tenants, where we have 72 thirds, 70% whatever it is worked out that's in the worked out group our deferred in general so.
I want to strip that away for a minute and just focused on the 11, presenting 11 or 12% remaining so we it's this has been very much a priority in quality exercise as we've talked about before so we really kind of ran a twofold initiative internally we were very clear in April that until we had some visibility around just how long and D.
This this event this virus was going to take we weren't really interested in negotiating until we understood. What we were negotiating for and May we picked up the cadence and we really just started started this two prong effort. So we.
Asset managers and leasing in this case, we're focused on the top 50 tenants wherein there was significant value from a lease modification standpoint onto the extent, we wanted to agree to one.
In regard to you know restrictions prohibited exclusive certainly co tenancy.
Out lot and other dense densification longer term strategic initiatives, we want it. So they took the time to understand lease by lease we wanted and focused top 50, all of our top 50 as dawn and we ended up with about 35% of the that population with some form of lease modification, but generally deferral, oh and traded for.
For one or more of the items I talked about.
Turning to the bottom 50.
Or bottom, 50%. If you will that has just been a 2030 tenants a week process. All that we continue to work our way through a you Sars security deposit application, which was really just a liquidity branch. If you will just some of our tenants that really like.
Any form of liquidity early on and I think you know looking back on that we would do that 10 times out of time, because a lot of those tenants.
Enabled them at least from a phase perspective to to kind of open back up.
And really they looked at their account and didn't didn't see a balance missile mentally I think it helped a lot and again.
I think we were very successful in that regard, it's really a deferral and by another name right. Most of those tenants have to replace the security policy going forward.
But you know for the remaining.
Again 11, 12% Chris were took in 20 or 30 off a week at this point and it's generally let's say they had to your point. They haven't paid there's four months outstanding. We're we're generally coming to 50% of the outstanding balance paid and 50% deferred a and B average of our deferrals are all.
Oh I'm being paid back in 2021, so we based on the current environment I would assume that that's that's the continued cadence right now and that's obviously barring any huge flare up in multiple am assays. So.
<unk> I would expect on that on that kind of run rate or cadence that we would we would continue to have more clarity around collections are certainly occupancy and expect to have this this wrapped up by by yearend.
Chris This is Steve I'm, a little bit there you just mentioned about when does this reach litigation just it's for obvious or to state. The obvious you know we're following the letter the lease the monetary default is required and any sort of preparation for what may become litigation were certainly executing on all fronts from our landlord white perspective.
But as Shane pointed out this is more of a value exercise going through making sure that we're not making short term decisions that have long term implication.
And as I had mentioned in my opening remarks, we essentially been through this dance the foreign 2008 in 2009, and we do feel patients and prudent as best as Shane alluded to getting to the thing a little bit later in the game not necessarily right away in April probably put us a little behind and appears in terms of what we've been able to negotiate and ultimately get side.
And but we feel it's best to understand the pull backdrop before we get into negotiations let alone execution and that's essentially why this timing I think is prudent for us, especially.
The fact that we have our pulse on the business with the hundred into very finite asset that we have local presence and local knowledge and more importantly, local people on the ground managing through the pandemic.
Okay. Thanks, that's even last question for me really just on the deferral agreements, which should we think about in terms of me whether it's the weighted average.
[laughter] duration or or you know when when should we think its hassle to.
We paid payback <unk>.
Some sense as to what that.
Deferral repayment schedule looks like.
Sure happy too and I can assure you we've got some very specific disclosure in the form 10-Q that we expect the file in the near term containing some of this disclosure, but on a weighted average basis. The deferral start six months from quarter end. So call. It beginning of 2021 and I believe the weighted average is about 11 months of repayments the wall.
And we expect them to be repaid by the end of 21.
Thanks, that's all I have.
Our next question comes from then does tie with Jefferies. Please state your question.
Hi, Thanks for taking my question in terms the mall tenants that are showing interest <unk> retail formats are they.
Hi, good morning <unk>.
Leisure I would say higher touch, but smaller format restaurants, a health and beauty still digitally native we've talked about that before.
And then obviously soft goods boutique and call. It medium size format. So that continues to be.
The large majority of the population and again this is.
This is typically you know existing sales are are compelling and the court order, but they want to to trade to more of an open air format for for not only the perceived safety, but I think just for the flexibility we've talked about on mixed use product water sidewalks and just a broader ability to.
Pull our restaurants as an example inside out and that is provided I think a lot of value in viability, especially for our full service and sit down restaurants, and I think you're seeing seeing the gravitational pull for that reason as well.
This is this trend has been happening for some time would you say the incremental demand is coming more so from the restaurants or is it just across the board in terms of.
Mentioned.
Well, it's a good question I think the restaurants are.
Or a bigger push a with more recency, but.
I think your broader point you know this initiative, we have felt it now for Odierno, probably two years, a and it continues to pick up.
Okay.
Got it.
Just one more in terms of the tenant retention rate of 80% in 2020.
Theres a bigger bump in lease expired expirations in 2021, how do you think about the retention rate for next year.
That's a great question I guess I would have to look back to give you at least.
Initial thoughts on.
You know somewhat nebulous 21 at this point and just rely on our platform and our quality you know we have run 80 plus for.
Multiple years at this point you know at the end of last year, we were at all time highs and occupancy I think we only had I don't know eight boxes on the anchor side. We're north of 99 were still pushing 98 leased on anchors in spite of two pretty tough quarters, given the cobot issues. So I think when you when you kind of look at at the quality.
Two different quantitative aspects of the portfolio look at the comps year to date on the renewals given its you know decent pod tangible population that kinda form an opinion and we're running you know a little north of a blended five we ran all time high comps and occupancy last year. So I think that look the best should continue to get better from here again, I think our assets.
Generally provide for profitability in awareness and certainly distribution all the things tenants look for when there when there I'm looking to either migrate upward from a a quality standpoint or obtain new space.
So without really understanding you know the full impact of what the virus effect continues to look like in 21, especially early in 21.
I would expect more with the same from this portfolio.
Thanks.
Thank you. Your next question comes from Hong Zang with JP Morgan. Please state your question.
Hi, I'm thinking like your line is open.
Oh I can you hear me.
Yes.
Hey, I was wondering if you could provide some more color on d. nature of the deferral agreements with your agenda in educating tenants just CTG eight is from your normal agreements chicken that they're not a fully open.
Yeah.
I think it depends you know our national gems.
Are generally a longer deferral period, but paid back call. It by the end of 21.
I think that entertainment I'm going to include theaters in there.
Theaters is again I don't know to 3% of a rent those have been a tough as an i. I would argue probably the most deeply affected given there have not had a shot at all to reopen and are literally at the mercy of third parties as far as product and your ability to really drive value to open.
Outside of government mandates. So are we have generally done to for deferral deals again paid back by the end of 21.
But for one theater, which had I don't know four to five years left remaining.
And we signed a new 15 year deal there and I think we did a five or six month abatement in conjunction with fee, but new 15 year terms, so a bit of a hybrid methodology, there, but I think it's what's the most interesting a part of that exercise is that the rent held during it during the.
The call it modified renewal, but that a theater Tennant has been closed for three or four once at this point was was willing to do a new 15 year term in the same location. So again it goes back to retention.
Even in a very constrained and volatile environment and and the indicative quality of the portfolio.
Got it and I guess of de two and a half percentage rent that your she's in second quarter from security deposits did those tenants moved back to paying branch and July or are they more and the deferral slush non tape buckets.
You know we can we can follow up with you I would tell you the tenants generally where we applied security deposits out having finite numbers in front of me on the again that was an initiative for short term liquidity and a and then a mom and pop environment right, where they were very constrained are heading on conceivably and.
That helped under push and open and buy back into the business. If you will Oh I think a significant portion of them are still open but we will we will follow up to you in true up on the outstanding Aer, Yeah. They had been calling out but also just pointing to our page 19 in the supplemental where we also include some detail for the July a time period and you see that we.
Not apply security deposits, there, but you do see an upward trend in cash collection and in fact across many categories and in particular non essential. So I think that's also indicative that we are I don't say one for one with the with the very small amount of security deposits that we applied a scene collections, but the general trend is positive and you see that in the July numbers.
Got it. Thank you final note on that on that one though are generally if security deposits are applied we would look to have those replenished as well that's just one point I'd like to make as well.
Got it thank you.
Yeah.
Thank you we have reached the end of the question and answer session I will now turn the call over to Steven grounds for closing remarks.
Well. Thank you all for your time today, we understand that the complexities of the covert 19 pandemic has put our sector our business and the financial reporting of its impacts are nothing short of mind numbing I to this and we recognize that many of you may have further questions as you hear from other peers and try to benchmark against those so we stand ready willing and able to clear.
Finance or any further questions you may have thanks again for your time today and have a good rest of the day.
Thank you. This concludes today's conference all parties may disconnect have a great that.