Q2 2020 Regency Centers Corp Earnings Call
[music].
Greetings and welcome to the Regency centers Corporation second quarter 2020 earnings call.
At this time all participants are in listen only mode. A question answer session will follow the formal presentation. If anyone should require further assistance during the conference. Please press star zero and your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Ms., Lori Clarke Senior Vice President capital markets for Regency centers.
Thank you you may begin.
And welcome to Regency's second quarter 2020 earnings Conference call.
Joining me today, our Lisa Palmer, President and Chief Executive Officer, Mike Moore, Chief Financial Officer, Mac, Chandler, Chief Investment Officer, Jim Thompson, Chief operating Officer, and Chris <unk>, SVP and Treasurer.
As a reminder, today's discussion contains forward looking statements about the company's future business and financial performance.
These are based on management's current expectations and are subject to risks and uncertainties factors and risks that could cause actual results could differ materially from these statements are included in our presentation today in our filings with the FCC.
The discussion today also contains non-GAAP financial measures that comparable GAAP financial measures are included in this quarter's earnings materials, all with what you are posted on our Investor Relations website.
Please note that we have provided additional cobot 19 disclosure and this quarter supplemental package and have also posted a presentation on our website with additional information regarding regarding Kobe 19 business updates and Lisa.
Thank you Laura good morning, everyone Hope, you're all doing is as well as possible.
First I just want to open.
And acknowledge and thank the amazing regency team.
I'm extremely proud and grateful for the dedication and commitment our team has demonstrated during this incredibly challenging time.
As we continue to navigate through the last several months.
The entire regency team has prioritized the wellbeing of their fellow team members.
And the people in the communities that are property served.
While also making great progress and assisting tenants with successful reopening improved improved right collections and rent the final negotiations.
Estates in markets have looked at restrictions over these last few months, we've been encouraged by the success that are kind of set experienced our base recollections for the second quarter, including execute a deferral agreements with 77% nearly 80% in July.
We've seen first hand that as tenants have been able to reopen consumers are eager to return to some sense of what was once normal and that means resuming some of their prior shopping behaviors.
Like the progress regency in our tenants have made we're we're keenly aware that there's still a lot of uncertainty ahead. It is so difficult to predict the future and we know that this situation will continue to evolve and maybe more challenging as this disruption is even more prolonged.
We don't know for how long the virus will continue to spread without an effective treatment. Our vaccine we can't predict how resilient consumers will be or help tenets, we'll be able to to adapt and innovate.
Or some tenants will need additional support in order to survive.
But what we do know.
We look towards the future we are certain regions. These combination of unequaled strategic advantages that we've worked to build overtime.
This combination affords us the opportunity to withstand this difficult time and I'm confident that we will emerge well positioned for future success.
The quality of our geographically diverse portfolio comprised of necessity based retailers has never been more important than it is today.
Our development program with a pipeline of exciting value add projects the structure to provide timing and financial flexibility.
Our highly engaged team achieving great results, while doing business the right way.
Perhaps most importantly in today's environment, a balance sheet and liquidity position that was rock solid entering the pandemic, enabling us to absorb the body blows that weve endorsed the past four months.
Given our strong balance sheet and belief that our REIT collections will continue to prove improve overtime. Our board again declared payment our quarterly dividend at the same level.
Our ability to continue the dividend at the current level is an output of a strong starting to that's another very low payout ratio combined with the actual results that well certainly not up to our historic performance levels appear to not only have stabilized but to also be trending in a positive direction.
Working closely with our board, we will monitor our financial metrics and projections. In addition to economic and industry trends and we will make few future dividend decisions based on the facts and circumstances at that time.
Before handing over to Jim I'd like to touch on Regency's continued commitment to corporate responsibility.
In addition to our strategic business advantages Regency is always had a strong set of core values that have guided our business strategy since were founded over 50 years ago.
Among those core values as a commitment to do what is right.
For the environment, our people our communities and our company.
By doing what is right in each of these areas, where effectively managing risks and ensuring the success and sustainability of our business.
As I Hope you saw in our recently published annual corporate responsibility report implementation of these initiatives the cars across all departments that regency and its ingrained in our culture.
I'm confident that this commitment to do what is right along with the combination of or unequaled strategic advantages will continue to position regency to be a leader in the shopping center sector going forward Jim.
Thanks, Lisa good morning.
As Lisa said, our top priority remains well being of our game tenants and communities.
After the end of July 95% of our tenants open compared to 75% two months ago.
The majority of tenants that have reopened experience better than anticipated initial success and had been encouraged by consumer reception.
Customers appreciate that retailers are taking extra precautions and badgers, Dell and feel safe and welcome in their stores.
Regency is also working side by side with our tenants, including implementing increased safety and cleanliness procedures and installing enhanced signage and way finding.
We will continue to make additional modifications and adjustments to help our tenants in their customers feel safe and comfortable.
As highlighted in our business update posted on our website as at the end of July we've collected 77% a base rent for Q2.
Floating executed deferrals.
Looking beyond quarter end, we've collected 79% of July base rent on that same basis.
We are encouraged to July collections have trended ahead of April may and June as is the same point in time for those respective months.
We're purposely taking a very deliberate approach to negotiate unwritten referrals Miller tenants.
As tenants began opening or had visibility is visibility on when they would be able to.
We were better position to understand their financial needs to open and operate successfully.
Just as important region regency has been able to obtain certain non monetary concessions in order for all agreements, including waving co tenancy clauses lifting use restrictions extending terms or requiring enhanced sales reporting.
Even with tenants that are still limited on how they can operate due to government orders such as full service dining fitness categories.
We were seeing that the better operators are able to adapt to the circumstances and our creative and how they successfully operate their businesses. During this time.
For example, we have many nail on hair salons that have extended their normal operating hours in order to comedy more clients.
Restaurants that are creatively using additional outdoor areas for seating such as sidewalks and even parking spaces.
And fitness operators that are hosting outdoor classes and adding additional class times to accommodate customer modified work from home schedules.
At the same time in certain markets that had reopened but restriction. So that's been put back in place. Many tenants are unfortunately experience and regression in the progress they had made over the last several months.
Just as we did during the initial shutdowns and impose restrictions in March we will continue to work with these tenants to provide support and flexibility as they navigate the evolving environment.
Well our operations teams have been primarily focused on providing support to 8000 in place tenants throughout the pandemic.
We're also continuing to negotiate and execute new leases with retailers, including grocers off price bikes home improvement service users and restaurants.
We signed over 120000 square feet, a new leases this quarter, including a new anchor lease with the home improvement retailers in a former Kmart space in Florida.
Brent over read growth over 55%.
Although not leasing volumes were down this quarter due to limited new leasing activity. It's worthwhile dimension that we renewed nearly 1.2 million square feet of leases with positive.
Rent spreads.
Well the more majority of new leases signed in Q2 will be gone pretty common.
See tenant interest thawing in it terms summer to pre cobot expectations.
Well. There's no question are all team is keenly focused on collecting rents due papering lease modifications.
Had a new lease interest is energizing to me and certainly are leasing teams.
<unk>.
Thanks, Jim and good morning, everyone.
As we know Q2 results were meaningfully impacted by rent collections that remain below pre pandemic level.
To better understand its impact we've enhanced our disclosure in our supplemental and I strongly encourage you to reference those added pages, if you haven't already.
Going to focus my comments on uncollected rats.
Specifically, how those amounts are recognized in our results both earnings and same property NOI.
And I'll finish with some comments on our balance sheet liquidity position.
Given continued uncertainty we will not be providing forward looking guidance at this time.
Uncollected pro rata rents and recoveries build in the second quarter totaled over $84 million.
Following an extensive collectability reviewed based on a multitude of factors, including credit rating location and chain performance tenant category tenant communications and a host of other relevant inputs, we deemed nearly 50% of these routes even its contractually deferred that's likely to be uncollectible.
To use a more common description where accounting for these receivables on a cash basis, meaning the income was not recognized in the quarter and will only be recognized as revenue when and if cashes received.
The balance of the uncollected pro rata rents and recoveries build in the second quarter, approximately $44 million, what's from tenants with financial and operational attributes warranty being accrued as revenue.
And carried as a receivable at quarter end.
Again this includes rents that were contractually deferred.
Importantly, when including accrued rents and recoveries together with collected billings Regency is recognized revenue in the second quarter equating to 86% of total core quarterly billing and other income.
The uncollectible lease income charge this quarter again, moving tenants to a cash basis of accounting.
Also resulted in a reversal of previously recorded straight line rent.
On a non cash basis this negatively impacted the second quarter by approximately $19 million.
Together current quarter uncollectible lease income charges are impacting may read I fell by 35 cents for sure.
Moving to the balance sheet.
During the quarter, we took additional measures to enhance our our already strong liquidity position.
I used to in $600 million, a 10 year bond and repaying the defensive draw we made on our line of credit in Q1, bringing our line capacity back to a full $1.2 billion.
As of quarter end, we're carrying approximately $600 million with cash on hand.
Together with our earnings announcement, we also noticed our intent to redeem the entirety of our $300 million the bonds maturing in 2022.
The stronger than anticipated recollection rates in the quarter combined with the progress we're making on tenant negotiations gives us confidence to use a material portion of our cash balances to retire this near term debt and eliminate the added interest expense.
We continue to have a 265 million dollar term loan outstanding maturing in 2022, and we'll monitor our progress and evolving retail landscape over the next several months before deciding to retire any additional near term obligations.
With our line of credit fully available and our pro forma cash balances. Following the bond redemption, we remain very well positioned with over $1.5 billion with liquidity more than covering development redevelopment commitments and debt maturities through 2022.
Before we turn to your questions. There was one person deserving a special mentioned this quarter.
Floor Clark will be leaving regency for an exceptional opportunity within <unk> land and we could not be happier for.
Floors contribution to regions you had been significant as every not everyone on this call likely knows and while she will be missed we're excited to watch your career continue to grow.
Best of luck, Laura and from your Regency team. Thank you.
With that we'd be happy to take your question.
Thank you at this time will be conducting a question and answer session. If you'd like to ask the question. Please press star one I'm your telephone keypad a confirmation tunnel indicate your line is in the question Q.
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First question comes from the line of Christy Mcelroy with Citi. Please proceed with your question.
Hi, good morning, Thank you.
It looks like local tenants comprised 23% of your hbr, but only about 16% of the deferrals that youve added that you've agreed on can you sort of discuss your approach to dealing with those local tenants and attempting to collect rent maybe specifically restaurants theres been a lot of press reports about permanent restaurant closures, there's obviously a lot.
I have concerns that nonpayment of rent potentially turns into vacancy and I'm just trying to get a sense for your strategy to both collect that rent, but also mitigate that potential occupancy loss within your own portfolio.
Sure.
Hey, Chris you. This is Mike let me start with a little bit on our disclosure and I'm going to pass it on a gem to more directly I think answer your question.
We did we did highlight our local our local exposure and then we also highlighted our collection rates for local tenants both for the quarter.
Well as into July one and you see a declining rate of collection there I'd like to note however that so.
We have found that the local players have been later than our national pets. So.
Measuring a one month of local payment rates.
Versus three months has been I, just want to make that distinction that the local local tenants have been paying a little bit later in this environment. In fact, if you were looking at our collection rates in July at the same point in time as that of April may and June by month, you'll see that that local collection rate is actually increased six.
Actually for all four months, we feel like that momentum is pretty positive and consistent with the other directional changes that were seen in our portfolio.
With respect to the follow up I'll, let Jim given give you some color.
Yeah.
As to what I'd say as you know we've we've been very very focused over the last 810 12 years in our proactive asset management.
Of.
Merchandising and really enhancing the quality of our side shop tenants.
So as we look at that that group as a whole.
<unk>.
There are really good entrepreneurs the business is their livelihood, so they're very invested.
They've got significant skin in the game and they're important they're important players within the merchandising and shopping center.
So by and large their nimble they reacted welton changing environment.
Our AR is that as I said that the opening remarks I think our teams are are actively engaged in deferral plans to assist these folks get back on their feet.
We're clearly going to have some fall out at the end of the day, but by and large these retailers, we're doing well pre pandemic.
And we want to do the best and everything we can do to help them survive and thrive post pandemic.
If I may just quickly address the the restaurant closures.
I don't think that there's any doubt that we're going to see a lot of failures in the restaurant category, but I think that.
The numbers that you see and then news reports that you're reading really are looking at America is a whole and I like where where position.
I'm close to the neighborhoods close to be built homes.
And also from an exposure standpoint, we have a lot less and sort of that fine dining if you will which I think is gonna be I'm, probably the hardest hit.
But as more people continue to work at home and perhaps moving forward as people continue to work from home even in a permanent state.
I do believe that having those options for people close to their homes. The neighborhood community shopping center, we're still gonna have restaurants as an important part of our merchandising mix that are at our really high quality portfolio going forward.
Okay. That's helpful. And then just you know thinking about the the broader a including national and regional Pattinson, Ken You mentioned your comments in the opening remarks being thoughtful about you know feature performance I'm thinking about future performance in doing those deferral deals have you done any rent abatements to date and in terms of that you know look.
Yeah that unresolved bucket overall, what is your desire to keep pushing off for a deferral agreement so pushing that deferral percentage higher here, you know out <unk> versus going down the road of litigation eventually.
[noise] Christy that's great.
Great question, not and I'd like I'd like to answer that by by kind of opening up our playbook on hold referral process.
And our approach to it.
As I said last quarter, we we started out being patient deliberate.
We didnt engage in the original onslaught of rent relief request back in March and April, but rather preach to our tenants. We wanted to get opened and we'll address or needs when there's visibility.
And now that we moved from 59% of our retailers.
Opened at the end of April to 95% today.
I think we're now in a more rational environment.
Both tenant and lower we both have much better clarity and visibility as to needs.
And we're finding good common ground for fair trade offs between a repayment plan and non monetary concessions to create win win for both of us.
So as as as we kind of re one early on in the process. We initially prioritized our top 300.
Tenants, which represents about 70% of or Hbr.
And that was the first group, we actively went out to workout agreements.
But as of today as we sit here we're actively engage with every one of our open retailers open and operating retailers crafting modifications were needed.
And you can kind of see that priority strategy evidenced in the 84% national and 16% local execute a deferral agreements.
So that that mirrors exactly how we attack.
The situation.
Obviously, the big categories that are hardest hit theaters entertainment business uses a full service restaurants.
Chow related services.
We continue to be very patient with this group.
As these uses in general are still closed or operating under a limited levels of occupancy.
So again, just reiterate we've been very deliberate in the papering process as evidenced by the 4% executed deferral that you you might see that stat of investor slide deck that we set.
But the majority of uncollected rent is from tenants that we have ongoing relationship and dialogue with today, but have yet to paper the agreements.
We believe we'll continue to close the gap on its uncollected bucket.
But each deal is individual nature.
And it will continue to take time to resolve.
Great. Thank you I will add though.
I will add one thing I think it's important.
Well tracking these exact these deferral agreement is important.
You really can't lose sight at our existing leases are binding contracts.
And the deferrals or just modifications outlining a payback program.
The Collectability the outstanding receivable is really the cheats its success.
And really coming out the other side as pandemic the way we want to see.
Thanks, so much of the color.
Our next question comes from the line after Johnson with Deutsche Bank. Please proceed with your question.
Hi, everybody. Thank you.
When we look at the cadence of and Allied going forward. It's fair to say that you are now operating in growing for a lower from a lower base should we expect a lag and occupancy declines as you, possibly move tenants out as it seems occupancy held up better than <unk> and Allied decline indicates how should we think.
About that in our models.
Derrick I mean, that's you're you're right we have not been.
Hi, Jim just described in terms of the negotiations with our tenants, we certainly haven't been addicting tennis and there are going to be many that will fail and and we know that.
Even larger his last day, she would be given media either I'm not allowed to provide any future I know I didn't so I'm going to refrain from that but absolutely do expect that we're going to see occupancy decline and the analyze reflecting the reserves are reflecting some of that today.
Okay actually thank you that's helpful and and something a little more positive no feeling you know omni channel you know now post coded is really emerging as the gold standard for navigating sales and wallet share for your tenants are retailers. How are you positioning regency to capture the.
Increasing demand trends up the omni channel efforts and how are you facilitating bringing in tenants with with this strategy and focus.
Yes.
We've been saying that's fair for a long time now.
What we like about our strategy, what we liked about our portfolio is the fact that we really have we are close to the neighborhoods, we haven't really high quality portfolio as most publicly and even the end the private institutionally own shopping centers are there are 30 to 40000 shopping centers in the U.S. and we're going to continue.
To see store closures, we know that but a physical presence remain such a critical component and this omni channel world. These retailers are going to keep those stores that are most productive that had the highest quality that can touch that most people and we're really well positioned to take advantage of that what this pandemic has done has really just accelerate.
At that trends accelerated it for the retailers because they've been forced to really innovate and moved faster and we're going to continue Jim even mentioned in his prepared remarks, we're going to continue to do all that we can to facilitate for that retailers that we can partner with them and best enable them to satisfy their customers, which are our cost.
Mrs Wahler shoppers.
Okay, Great and lastly, you know how are you thinking about the development and redevelopment projects. When do you anticipate returning back off that incident.
Moving value enhancing projects for data more rapid rate.
Hi, Jerry this is Matt.
We continue to evaluate these projects one at a time.
Each one takes.
A lot of experienced a lot of discipline a that we've always show and when we started project is based a lot of factors some of its pre leasing some of its the format. Some of it is to location, it's really a risk adjusted return at the end of the day and show we're setting up.
Projects that are ready to go and some that aren't ready to go but we're continuing to advance seem title much to put ourselves in a position to start so that when we.
We have visibility to a greenlight position will be in a position to start so it's tough to tell you exactly when each project is going to start today, but we have lots of experience in this and we'll know on a case by case basis. When just start projects and I think we'll be able to also take advantage of a declining construction costs, which will help or yield as well.
So we're setting ourselves up well.
Having that.
Platform of offices throughout the country, where we have local sharpshooters and local team starting to go I think really gives us a distinct advantage. So we're excited about that and the teams will be ready to start these projects when the when conditions present themselves.
Hey, Derek I was just Mike just.
Going to follow up on Max comment because I think it is a balance as well as Mac and team are preparing at the property level and kinda demand in fact will probably drive much of that decision making.
We're also thinking about funding right. So.
We need to align both the opportunity with the development with the opportunity on the funding side and as you know prior to the pandemic with free cash flow being our primary funding source of our development pipeline.
That may change, but we have access to multiple sources of capital.
Whether that be property sales of lower growth assets or potentially even new capital in the form of better equity we're preparing on that front.
Well.
Thanks, everybody.
Thank you.
Thank you. Our next question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.
Thank you I'm, just some thoughts regarding your exposure by use.
Do you see as she goes to the process of maybe decreasing your exposure to fine dining fitness and possibly personal services.
Some of those shake out and maybe or not as quick to release to those uses again.
I'll start with a couple of comments I think lease or Jim will jump in as well number one first on fine dining that were only 1% exposed to the category. So although it's included in that line item on our disclosure at the very small component of our rent roll and fitness being 4%.
We actually are.
Still rain in the long run we're still pretty bullish on the category. We think we think fitness personal fitness and health.
It's certainly a secular trend and then and I.
I think this pandemic is probably didn't highlight in that even more so we still like that idea going forward.
Boutique fitness, we believe we'll continue to be a a good use for our shopping centers.
On the personal service to side again or something that we still have a long view on in a positive fashion.
So we think we think our shopping centers.
Provide that that necessity to our consumers really well.
I mean, I think Mike had most of it just the just thinking and reminding about kind of our property type and that one thing that is.
Certain is that it's always evolving for as long as we've I've been in the business or as long as Jim has been in the business you are continually saying failures and then new concepts and I imagine that.
We will consider we will see innovation and new concepts from Miss disruption and I don't know what those are yet, but I expect that our future leasing will probably include.
Leasing to some of those new concepts that we may have.
Older concepts, if you will that will fade away.
Okay drastically and then yeah, given the spike in.
California, Texas, and Florida, I'm wondering if you're seeing a reduction in terms of discretionary good spending in the last couple of weeks.
I think it's too early to really terrible so really tell what I will I mean, as we probably all do gosh I try to read everything I can all the research reports falling mobility data and open table reservations and we did see I think we did see a very temporary drop.
And in those exact a spot that you mentioned Craig.
But then recovered again pretty quickly.
Whether there's any permanent kind of reduction in.
Increased traffic I'm I'm I think that's too early to tell but the consumer really has it they've been resilient, which is it really encouraging to us a any any.
Data tool that weve used to track foot traffic has been.
Honestly, yes positively surprising and some in some instances as to how much traffic has recovered.
Okay. Thank you.
Thank you. Our next question comes online as Nick Yulico with Scotia Bank. Please proceed with your question.
Hi, This is Chris Mcginnis on with Nick.
Lisa you mentioned that the reserve reflects some of the expected occupancy decline.
We're wondering if you might be able to provide more context on the expected short list as long term impact of uncollectable Q2 brands to basically how much that when could we maybe strip out to create a run rate from what you know today, maybe said differently how much of the Uncollectable then is effectively a Q2 rent abatement.
But the tenant is still viable and will survive the payment in Q3.
Okay I'll, let me, let Mike address that Greg I. Appreciate the question I I think you'll appreciate the response, it's very difficult to give you some of those directions that you're you're looking for.
Let me, let me help you here.
For the quarter.
We are we at the end of quarter, we affectionately moved about 20% of our tenants to a cash purchase accounting.
So that leaves 80% on accrual right collection rates within that cash basis bucket, we're at 40% and in fact, when you pull the same data in July they have trended to 50% collection rates.
So I think that as a good element for you to consider as you as you look forward in our portfolio how to how to think about.
That Rick that reserved rat effectively representing the 60% that was on collected within that category.
From an accrual basis perspective, we collect at 80% of that 80% of our exposure.
But obviously because of how we feel about those tenants from an operational perspective as well as a credit perspective were occurring that right and I think bottom line. What we felt like what's most important is that for the quarter, we recognize revenue equal to about 86% of our total potential.
And that's where our eyes are focused on as Jim's team continues to make progress with deferrals, and bringing and modifying contracts as he actually articulated.
We feel good about the collectability of that 86% of our of our rents even represented by actual cash collections or good visibility towards that.
Okay. Thank you appreciate this clarity on the disclosure.
I'm just curious how much yeah.
He said that occupancy is still kind of trending down anything but I'm just curious how much of yet uncollectable then piece is actually into two tenant move outs and bankruptcies at this point.
Oh, it's a very little I mean.
I had a couple of questions here about abatements and there's been.
Actively zero abatements to this point in time.
But the reserve is there again, there on especially the counting they're only going to be recognized to the extent rents are received this is point is completely true.
The extent there is any fallout it would be reflected by that reserve now. It's just too early to tell the give any changes in any occupancy levels. This not only for 2020, but certainly beyond.
All right. Thanks, Mike.
<unk>.
Thank you. Our next question comes from the line have Brian Hoffman with RBC capital markets. Please proceed with your question.
Hi, I'm so within the categories. That's your side of the leases. There are couple that have only paid me about two thirds to three quarters of there what are your negotiating leases with tenants that are not paying right currently.
Hi, negotiating new leases.
Oh no.
This is Jim but no we're not.
Okay.
Good answer [laughter], Okay, and then have you guys seem demand change where certain locations within our shopping center I mean kind of looking at pads. So is there a higher demand there.
I think the reality is that a the pandemic.
Brought about was.
Certainly drive throughs, everybody wants to drive through today, So a pad with the drive true I think.
For the future is it is going to be a bus is can be very very highly soc attribute.
But other than that I think the banks the banks have been been very active and.
They're pad type of users so.
Pads are always seem to be very resilient and the depth of tenet that like pads is generally pretty deep.
So pads or or are pretty easy to work with.
Got it okay. Thank you.
Thank you.
Thank you. Our next question comes from the line of Richard Hill with Morgan Stanley. Please proceed with your question.
[noise] K., you got Ron Camden, Richard Hill, or just two quick one going back to sort of the bad that and obviously, we're not we're not asking for guidance, but I think we're all trying to figure out at Theres. Another bad debt charge coming so I guess the question really is.
When I when they think about when we get to the end to three Q.
And we're looking at you know you I think you report your July uncollected at 21% are you going to have to go through sort of the same exercise to try to figure out what uncollected and how much reserve against it and is there any reason to.
I think that you know, there's something about this mix that either better or worse and it wasn't to Q. So again not asking for guidance, maybe just just high level color. How we should think about that bad debt going going forward.
Sure Hey, Ron.
First and foremost we.
You can't reserve for rent there hasn't been filled yet so.
You're going to the extent you have cash basis type thing or shopping centers.
That continue to occupy space and your billing right and they haven't paid in the third quarter by way of an example, you would have reserve.
So it will come down to.
Hmm your thoughts our thoughts and warmed individual thoughts around what percentage of that exposure will either start to pay rent.
Or move out to extent they move out you won't have bad debt expense, but you'll hell no income so the impact would be to say.
So I hope that's helpful and how we and how.
The idea that there will no longer be bad debt expense I think is misleading.
It really is the idea around.
What how should we think about the performance of our cash basis pellets.
So I hope the 80%, 20% beyond cash basis is helpful.
Again, 40% of those do collect rent did pay rent in the second quarter that is 50% as of July I think that's an helped us a helpful statistic as well.
Put it put in context of our opening percentages being materially higher than they were three months ago.
At this point in time, that's about the best we can give from a forward looking perspective.
Got it.
That's helpful and if I could if I could just ask a follow up on that I'm just thinking about is that if I thought about 21% uncollected and put a 50% ratio based on what you did into Q for bad debt I guess what.
What am I missing if I did that right does that does that make sense.
But it makes sense and that I mean that can be an assumption I mean, we can't comment on whether that's the welfare, okay, well got what well, yes, what we don't know is how many of those cash basis tenets that did not pay that we were therefore begins today, that's what you don't know.
And that's what we don't know right.
Okay, I got that make I make lot ascent Ben I appreciate your navigating that at the other question was just on.
You know the straight line rent charge.
I was reversed into Q in sort of the symbolize the bad that question well is there so we'd be expecting sort of similar reversal or is there sort of an overlap.
Something that can mitigate that three Q I guess, how should we think about straight line rents going forward.
Given this one is.
Yeah now that's a good question it is.
It is different so that as the onetime decision to move a tenant from accrual to cash basis for the standard that's a onetime reversal of the balance of the straight line rent so to the extent those tenants remain as is if the 80 20 split remains as you would anticipate less by way of straight line rent noise, so to speak and fuel.
Sure quarters, but that will be dependent on how we assess collect assess tenancy going forward.
So there that.
The 80 20 is not set in stone at this point in time.
But I will say from a pursuit procedural perspective.
A lot of time into this quarter and thinking about.
Our tennis thinking about you know the pretty high level from a standard perspective of 75% probability or better that they will meet the demands of their contract.
That's a pretty high bar and Weve so.
While I don't anticipate a material amount of change from this point forward. We're in a very unusual environment, a lot is changing month to month quarter over quarter.
So we will make that well, we'll make that assessment again at the end of the third.
Very helpful. Thank you that's all I had.
Sure.
Thank you. Our next question comes from line of my with JP Morgan. Please proceed with your question.
Yes, hi.
I guess whats the support sees the benefit of holding onto the dividend that's current level.
I'm going to I, just want to remind you.
One that we intentionally strengthened the balance sheet to position ourselves to weather.
The next economic downturn, and we never quite an expected a storm quite like this one or so I think it's really important to remember that that strength of our balance sheet and financial position coming into this really it was a true differentiator for us our asset they'll pay out ratio is in the low sixtys.
Our AFFO payout ratios in the low seventys that provided us with $150 million the free cash flow that Mike even alluded to earlier.
We we pulled back capital spend early and so we defer that essentially almost a like amount of that $150 million capital spend.
And this really provided a a really big cushion for us and so with that backdrop.
And the fact that we continue to see what we believed to be an improvement and right collections going forward. It allowed us to declare a full dividends and are you know our future projections essentially cover our dividend payment, which is really which is the objective and so that.
Why we have paid it that's the fact the dividend is an output it's not at this isn't just a that's to hold it just to hold it.
Okay, I'll reiterate that our future decisions are going to be really deliberate the payment this quarter doesn't guarantee future payments, we have to continue to weigh all the facts and circumstances as they happen, but based on where we sit today with that that starting position and with what we're seeing with actual results. It makes sense.
They are definitely <unk> rate part of total return is the income return and that's an important part of our total return.
Got it Okay, and then out of curiosity this sequential small shop occupancy decline.
With that fairly broad based there was a concentrated can you just give us a little bit color on that.
Mikey I think that was that was basically wrapped up in the PK.
We had.
Gosh.
If we back 16.
Thanks, and 20-F, 16, 16 brands that have filed which we've got a 150 individual store locations and out of that we've got a 40 that we expect.
Either have rejected or will likely rejects so.
The decline is primarily BK at this point.
Got it okay that was it thank you.
Thanks, Mike.
Thank you. Our next question comes from the line of Florida spend taken with Compass point. Please proceed with your question.
Morning, guys a.
Question for me is on a what you see is going on.
With cap rates.
And also as you think about your valuation obviously there are two things that are involved in valuing assets, it's the and a lie in the and the cap rate do you see any movement in cap rates, you know or or and maybe comment on what you think is.
Going on in the public markets and and your view in terms of where you think how sticky values are for for your asset costs.
Oh, Hi for assistance Mac I'll I'll take the first half. The question then hand, it back over to Mike.
Yep.
In terms of cap rates, you're not seeing.
For starters, a whole lot of the a quality properties to the types of properties that are portfolio is representative.
Owners are those properties.
I think really recognize the long term value and they're not willing to sell them. There's there's really a scarcity of that product.
But for those sellers that are willing to sell them. There's there's high demand for grocery anchored neighborhood centers.
The ones that.
Are holding up the best or little bit smaller because of just the amount of capital that's in the marketplace.
But we're seeing we're seeing cap rates really really hold tight there, they're really quite strong theres been.
Buyers are trying to figure out how best to underwrite forward cash flows.
And there they are cautiously underwriting limited growth for the next couple of years and then in year, three typically they're sort of back to historical norms. So.
We are we have some properties that we have put on the market and we're seeing a lot of demand Theres Theres also demand for debt, that's allowing people to execute 50% to 60% permanent loans are available at tremendous rates better than we've seen a long long time, so for art type of product values are holding up.
Quite well and I'll, let Mike talk about how that relates to our abbey.
I I I'll actually John I'll get I'll give my could break since I keep talking all the the reserve questions too [laughter].
I think Mack said, it well and yeah. This is something that we've been talking about quite a bit they're still did I think that I said it in my prepared remarks, as well you know neighborhood community shopping center for the Central retails never been more important than it is today and I think that you're seeing that.
What how cap rates are responding so there how well there while there's not much change in the implied cap rate, what's really difficult to to know is what is the NOI stream and also the cash stream even to to recapture more ally as we release because I do we do expect that there's going to be a significant amount of released.
Thats going to happen in the future that's going to require on T. I spend so from a valuation perspective, I mean I can't yeah. We've provided all the information that we could provide and it really does come down to where does that NOI settle and we're not we don't know that yet it's still it's there's it's still too much uncertainty, so where does that new kind of.
They settle and then from there I do expect that well have we will obviously have grown as was pointed out earlier, we're starting at a lower base, we're going to continue to release and we'll see probably above average same property NOI growth in our portfolio for a period of time, but it will take capital do that so I know that I didn't exactly answer your question. Please.
But everyone. A estimates are gonna be different and we we just need a little more clarity as to when this when this is really over and then we can start to recover from there.
Oh thanks.
That's it for me.
Thank you. Our next question comes from the line of Michael Gorman with BTG. Please proceed with your question.
Yeah. Thanks, good morning at least if I could just go back to your comments earlier on omni channel and maybe drill down a bit, especially on E commerce grocery.
Can you maybe talk a little bit about conversations you're having with tenants about their ecommerce trends on the grocery side and maybe the rollout of newer technologies like M.S. season, and maybe you know how they're thinking about your portfolio, where they have much higher productivity you have some of the top locations in each market and allocating space within those two.
Source for MSC is are they looking elsewhere and how they're kind of just approaching the E commerce, Heather approaching ecommerce strategy right now.
Sure I would say again those conversations really haven't changed much the better operators were already focused on how can they best serve their customers in the most profitable manner.
And there while they're Kroger is focusing on yeah. The larger wrote robotic automated warehouses partnerships with Walgreens.
I'll hold I think in Albertsons, probably the most focused on the micro fulfillment centers and all of them and then we all know what Amazon is doing with whole foods and then Amazon go in that Ah that that the rumored and real a traditional grocery stores that they're opening all of them are focused on how best to serve their customers and the most profit.
The way and there's still no argument that the most profitable way today could that change in the future absolutely never say never but today, it's to bring the customer in the store. So they're still all very focused on serving their customer.
And that in African an omni channel fashion, but to the extent possible. The most profitable way, which is incenting them to come into the store.
With that said again and you see that you do see all the better operators are investing more in technology and spending more on the different means of that happening and we continue to have the conversations we continue to partner with them. We continue to help them, where we can to facilitate and that delivery of their goods and I don't mean.
Literally I mean within art within our shopping centers.
It's going to continue to evolve we're going to continue to see consolidation in the grocery I think that scale matters think that having the cash flow and the money to invest in it to innovate and to invest in technology and invest in serving their customers, that's where the winners will be.
That's helpful. I guess, just just clarifying I mean, when you speak to the grocers does that the high productivity of their stores in your portfolio make them more likely to kind of leave those intact and look elsewhere for technological solutions in the market or is it does that not playing a role.
Well clearly it plays a role when they think about they're both profitable stores, it's about their profitability and typically the more productive stores are gonna be more profitable. So that certainly plays a role I just wonder thinking about their network of stores and fulfillment centers.
They are going to being very reluctant to close something that is profitable they could use that store as at the core or the center of a little of a smaller network. If you will an AD micro fulfillment around that to continue to service the customers even out of that particular store. So it absolutely is it's an input and the variable.
Excellent. Thanks, so much Lisa.
Thank you.
Thank you. Our next question comes from line of Ki bin Kim with Truebeam Truest financial. Please proceed with your question.
Thanks, Good morning.
So going back to the 14% of reserves.
How much of these rents from tenants for decently healthy pre called it and how is this an packed into ways, we're thinking about helping these kind of how.
[laughter] I appreciate the question Keith.
I think let me answer it this way so.
Our cash basis, the percentage of Arabia that we had on a cash basis pretty kind of it was only 3%.
Now as I stated earlier, we've identified a collection of tenants that equates to about 20% of our rent roll is not on a cash basis. So I.
I think by extension and that 3% was primarily basically B.K. watch list today, so by extension I.
I would answer your question to say a majority of them or were health.
But as Jim I spent some time on earlier from a local tenant perspective at least.
You know this is a storm for them that is pretty challenging.
And that it's the it's the severity of the circumstances <unk> inability to operate at all in some cases.
That has changed our perspective from a classification standpoint.
But again again I can't really that's not 40% of those tenants are still paying rent currently and that is actually 50%.
Right now through July.
I don't know Jim if you wanted to answer add anything to that.
Got it.
Okay and I. Appreciate the fact that are due for arrangements are only 4% I mean, basically differentials are easy to give out and in some cases on your worth up you know the papers written on.
You know I'm, just putting myself into perspective of tenants here for a second.
You know somebody's a lot of these look what kind of are not built to pay lump sum brands right just deferring it and paying it back you know your.
And I would think maybe it's a little of up on shackled to somebody local tenants. How are you thinking about that and if deferrals, even make sense to laundry tenant base.
Even though.
As we talked to these tenants and really understand their situation there outlook for the future.
Their credit capabilities, all that goes into play and we.
We just take them wanting thought we might well make the best decision we can it.
Part of it is if there a 15 year operators always done exactly what they said, they're great operator, I want to bend over backwards and trying to figure out how to make make that tenant successful.
We got a lot of we've got a lot of tools into twoq at a will employ them as we see fit.
But we want to we want our we want to put our.
Our dollars where they can they can go the best.
To to get the best result.
Okay. That's great all I can yeah, I'll say this for Jim because his told me. Many many many times, we're not going to put a tenant entered into a deferral plan that puts amount of business.
And I think key than most of the point, you're making so we'll be hit those tools <unk>.
Or whatever they already are stretching payments out or maybe in sprinkling in a little bit of abatement.
We're going to make the right right decision for the right tenet and they're all snowflakes and we have the long term in mind.
And setting ourselves up in our portfolio up for success.
After we emerge into some slipped some sort of normalcy.
Okay. Thank you.
Thank you, ladies and gentlemen, as a reminder, if he'd like to during the question can you. Please press star one on your telephone keypad. Our next question comes from the line.
Endocyte with Jefferies. Please proceed with your question.
Hi, I'm 16 brands that have filed in 40 space has been rejected are likely to be rejected let's say early so maybe I could get those spaces back and any sense of what do you see more demand from the national brands are local tenants as backfill option.
HM.
Oh.
Lenders Jim.
We'll be getting I think some of those rejection is probably the next 30 30 days or so.
As far as demand.
Pre covered we we obviously had a lot of interest in.
For instance, peer once we're in we're dialogue with several of those I think theres still interest I think the speed speed to market. If you will have of converting that interest into an executed documented slowed dramatically.
And and I expect the same.
At the end of dilution set it.
We think we've got great real estate the tenants within our portfolio have historically operated at very high levels.
As we get space back into supply and demand business.
We think we're gonna have good product in good centers and if the market allows it we're we're gonna give more their fair share of re tenanting opportunities.
Thanks, a lot for that color and then just one other how are you thinking about dispositions in the post covered environment, how my grandmother's around low growth have changed pre versus post cobot.
Hi, Linda I can I can take that to start with.
When we consider properties that are being disposed, we do it like we have been historically, it's a it's a ground up basis, we look for properties that might be non strategic.
Certainly low gross.
Just noncore properties that were not going to miss so to speak.
So.
In today's world will take a second look to make sure that we accurately forecast growth going forward.
Well that change shirt, certainly I would think of some properties. So we'll take on the case by case, probably a little too soon to to have a perfect assessment of forward growth compared to pre cobot times, but we'll continue to look at that but these are these are good properties took us well I don't want to dismiss them I think.
The buyers of our properties have done quite well and we wish them well so.
I'll, let others jump as needed.
Hey, Thanks back to Mike <unk>.
I'll go back to kind of our funding plan and one thing I'd like to make sure you here.
Is that we'd be very disciplined to the extent property sales are up a lever in our funding plan and they most likely will be we're gonna be very disciplined on the valuation I think Max exactly right, we're going to have our own view of the forward and all our stream of these properties and if the market is not giving us the value we believe we deserve.
Sure.
Well you know we're prepared to hold that asset and we will choose to all that asset.
I'll make appropriate other funding decisions from that point, we haven't we have a big we have a large portfolio diverse portfolio, we have a lot optionality within that portfolio a two to fund.
What we what we plan to have as a as a vibrant again, a vibrant redevelopment and development opportunities that going forward, we've all and we've always had a commitment to disposition.
And well I, absolutely believe that we have a really high quality portfolio again as I do as I believe most of the publicly owned companies do everyone still has everyone still has their lower quality and lower growth. Even if we are in the top 10% of what's what's assumed in the U.S. and so we've always maintained that.
Commitment to continually improve the quality of our portfolio and to continually fortify that future analyte growth right. It's an important part of our strategy.
Thanks, Good luck.
Thank you.
Thank you. Our next question comes from the line of Chris Lucas with capital One Securities. Please proceed with your question.
Hi, good morning, everybody or good afternoon, I'm, sorry, I'm just a couple of quick one relates to I guess.
Brent collection really on the more crown lines of businesses Rogerson, playing a role in that and then I guess I'm sort of on the from geography, you might have thought when you guys are pursuing litigation.
This geography drives that as well.
Chris It's Jim as far as impact on collection right I think certainly there's really three things to come into play you've got kind of the essential category mix.
Which will drive that recovery obviously.
Hi, Griffey certainly comes into play we've got as you're well aware, we got areas within the country that have higher.
Mandated closure still so that will that we'll have a big big impact and then the local national mixes that is as I referred to earlier in our strategy that local group is causing.
The last group that were.
We're engaged with right now so that will have impact on on that same collection rate.
Well part to the question was.
Related to litigation and geography litigation.
You know.
Chris where we are on that is if warranted.
We're taking legal action is tenants that have number one he was a had the ability to pay and have chosen not to.
Or non unresponsive or unreasonable tenants.
In many cases this approach of lake has become pretty effective in bringing payment through the door or at least getting folks to the table for further discussion.
Okay, and then Mike I'm, just curious to have you collected grant in I guess third quarter that was applicable to second quarter EPS kind of curious how your how you're dealing with that.
Yeah I.
I think a what I call the crossover Rams about $8 million. So if you.
We collected in the in July that what was owed on quarter too so.
If you want to think about our reserve as a percent of billings that would move it from 47% to 52% Chris.
Okay, and then of the.
I guess the peak.
You have a split between what was your arm [laughter] basis accounting.
I don't have that far out up to follow up with you on that model okay.
Okay, great. Thank you that's all I have this morning.
Thanks, Thanks, Chris.
Thank you once again, ladies and gentlemen, if you'd like to ask a question at this time. Please press star one I your telephone keypad, well pause a moment off or any other questions.
Thank you ladies and takes effect.
Sorry, I'll turn it back I was just going to jump in yeah [laughter].
Thanks, Melissa Thank you offer your free or time today your.
Continued interest in Regency your sport I do hope that you all I stay safe.
Where mask.
And again, thank you to the to the Regency team.
I really do appreciate this this time that we're living in is really hard.
For all of US so thank you to everyone and good luck LER. Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.