Q3 2020 Retail Properties of America Inc Earnings Call
[music].
Greetings and welcome to retail properties of America third quarter 2020 earnings conference call at.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host Mike Gaiden, Vice President of capital markets and Investor Relations.
Thank you you may begin.
Thank you operator, and welcome to the retail properties of America third 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 variations of 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 SEC filings.
As a reminder, forward looking statements represent managements estimates as of today November 3rd 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 on this conference call. We may refer to certain non-GAAP financial measures you can.
Find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers.
Definitions of these non-GAAP financial measures in our quarterly supplemental information package and earnings release for the fourth quarter 2019, first quarter 2020, and second quarter 2020, all of which are available in the investor section of our website at Www Dot RP IDE Dot com.
On todays call our speakers will be Steve Grimes, Chief Executive Officer, Julie Swinehart Executive Vice President CFO, and Treasurer, and Shane garrison, President and Chief operating officer. After their prepared remarks, we will open up the call to 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 the call today, given the developments in the broader macroeconomic environment. Since early this year. The third quarter of 2020 published a unique set of circumstances for us to address and I'm proud to report that our teams delivery across every aspect of our business made the third quarter a success on many.
Different measures.
As noted in our Q2 call, we took a patient and pragmatic approach to addressing the rent relief requests of our tenants and if some of you would observe had a tougher hill to climb given our mix of assets and therefore, a higher concentration of non essential tenants proving the quality of our assets our team and the concentration of our asset base we took.
Frank collections up from 74% rate and the second quarter to 84% in the third quarter with September finishing at approximately 89%.
Non essential categories, which moved from 58% collected in Q2 to 78% collected in Q3 catalyzed this portfolio wide improvement.
Drilling down further into specific use type offers even more telling statistics collections in apparel, our largest non essential use category rose from 46% in Q2 to 82% in Q3.
Services moved from 65% last quarter to 85% in the current quarter.
And of course, the dramatic improvement in our collection statistics wasn't no small part due to the efforts across our platform.
Finally, with open and operating portfolio, a b are at 95% up from 90% as of July 31st we have seen these collective trends continue into October for which we are 87% collected as of October 26.
Continued normalization in consumer behavior as well as broad based adaptations to the current operating environment from retailers in the quarter brought rising topline trends to retail overall and our tenant improvement initiatives magnified the impact of these improving trends are focused marketing efforts like our picnics ago campaign.
At Southlake town square added incremental revenue for our tenants there helped by integrated social media initiatives.
Our drive in movie Theater showings at one Loudon for which we partnered with Alamo Drafthouse right not only incremental ticket receipts to our theater tenant, but additional fee income to us an extra orders to our restaurant tenants at the property.
Outdoor exercise events and open air exhibitions at Plaza del Lago increased foot traffic for all of our tenants there.
These property specific events were additive to our existing portfolio wide efforts related to dedicated curbside pickup social media campaigns enhance signage and other similar initiatives.
And the substantial exposure our portfolio to warmer climates in the southwest and southeast continues to provide for welcome operational flexibility at the property level as we head into the fall and winter months.
Later in our prepared remarks, Shane will be detailing the specifics behind our rent address statistics, which stand at 94% for the second quarter and 93% in the third quarter.
Furthermore, he will detail specifics on our highest leasing volumes in the last four quarters that included addressing a number of bankruptcy back filled my tenant negotiations that bring incremental visibility to our broader outlook for our company.
On the redevelopment and expansion front, we signed a leading national Salon at circle leased during the quarter that advances our ability to merchandise the rest of the asset following the earlier anchor leases with shake Shack and Ethan Allen.
We delivered the grocery space at the reconfigured shops, a quarter field in October in time for this anchor tenant to open before Thanksgiving.
And we remain on schedule with expansions of one loud enough pads gnh as well as south like pad development. These.
These high visibility de risked densification opportunities remain a key differentiator in our long term growth plan and commitment to prudent capital allocation that will in turn drive value for our shareholders.
We also continue to maximize the elements within our control, but from a financial and capital allocation perspective, demonstrating additional prudence and discipline.
And the first nine months of 2020, our maintenance and tenant related Capex is down nearly 11 million year over year, and we have trimmed our property level operating expenses by 4 million in March we announced the health of our Carolina redevelopment, which reduce started redevelopment outlay expectations for 2020 by 75 to 100 million.
Thanks to our successful issuance of 500 million in public bonds during the third quarter and related payment of existing debt. We now hold no maturities coming due until 2022, and 877 million and total available liquidity.
The broad initiatives undertaken year to date helped to strengthen all aspects of our business, enabling us to reinstate our quarterly dividend in September we.
We understand the importance of this action to our equity Investor base and this move further signals our confidence in both the short and long term outlook for our company.
Our board will continue to monitor our financial performance and related minimum taxable distribution requirement and we look forward to making progress on our goal to grow our quarterly payout amount and time as conditions for other warrants.
Well focused on these many key tactical deliverables. We also have kept an eye firmly on other items of long term importance, most notably we published our inaugural corporate sustainability report last week.
Document serves to reinforce and advance our long standing framework of responsible stewardship.
The board of directors and I look forward to delivering further progress on the many key environmental social and governance topic as detailed in our CSR during the coming years, including our commitment to green initiatives, and our expansions and redevelopment as well as our diversity goals.
And all the body of work is complex over the last 90 days here at RPC I once again highlights the strength of our platform and our people. Moreover, these results serve to underscore the merits of our strategy and asset base.
Well no doubt more twists and turns lie ahead and the current consumer environment My already high confidence level in our battle tested team has only increased with the results we have delivered in the last quarter.
I will now turn the call over to Julie.
Thank you Steve This morning, I will review, our third quarter and year to date financial results, including some updated disclosure items, our rent collection and tenant negotiation progress and our capital structure positioning during the third quarter, we generated operating FFO per diluted share of 21 cents down six cents year over year and import.
And Lee up four cents sequentially underscoring the positive momentum in our business quarter over quarter. The impact of the pandemic is evident in our third quarter year over year lease income decline of $12.4 million or six cents per diluted share explaining or operating episode decline.
This 12.4 million dollar year over year Delta improved by $9.2 million or 43% from the second quarter's comparable amount of $21.6 million.
We provided as much detail in our supplemental information package again this quarter to facilitate analysis, but I'll break down the key components of the year over year change and lease income for purposes of this call.
First we executed certain tenant lease concessions and third in the third quarter that directly decreased base rent by $6.1 million easily.
These lease concessions did not qualify for deferral accounting treatment.
As shown on page 20 of our supplemental a substantial portion of this amount $4 million was already recorded within bad debt in Q2 as these concessions were agreed in principle, but not yet signed by June Thirtyth. So there is no impact to Q3's results as the previously recorded bad debt was reversed during Q3.
Second we increased our net allowance for uncollectible lease income by four and a half million dollars year over year as base rent collection levels improved in the quarter, but remained below historic averages.
The net uncollectible lease income amount recorded in Q3 reflects the unwinding of the aggregate $4 million I, just mentioned and therefore is lower by that amount.
And third net straight line rental income decreased by $900000, primarily driven by changes in our assessment of Collectability of certain straight line rent receivables as we now have approximately 10% of our tenants in terms of baby are accounted for on the cash basis.
These components make up the vast majority of the 12.4 million dollar year over year decline in lease income.
Year to date through September Thirtyth, we generated operating FFO of 65 cents per diluted share, which measures a 15 cents below the 80 cents per diluted share we delivered through the first nine months of 2019.
The year to date decline in operating FFO can be explained by the decline in lease income in Q2 and Q3.
Same store NOI in the third quarter declined, 12.4% or $10.1 million compared to Q3 2019.
Year to date same store NOI decreased 11.1% or $27 million as declines in Q2 in Q3 more than offset our Q1 same store NOI growth as well as our base rent expansion from contractual rent increases.
In an effort to provide additional clarity this quarter, we have combined to concepts previously shown separately into one renamed caption uncollectible lease income that our effort, which also enhances comparability across several peers combines what we historically have called bad debt with cash basis tenant adjustments.
That were previously shown as direct reductions to base rent and tenant recoveries for Q3, 2020 that uncollectable lease income was $5 million.
The recast figure for Q2, 2020 is 19 and a half million dollars, which is an amount we discussed on last quarter's call.
However, we continue to capture adjustments to base rent that relate to certain types of tenant concessions, including abatements deferrals with modest term extensions combination deals containing both abatement and deferral and concessions accounted for at least modification as direct reductions to base rent.
These are the concession types that do not qualify for deferral accounting treatment.
Like last quarter, we have disclosed these amounts in the supplemental.
When aggregated with uncollectible lease income these figures total $11.1 million for Q3, and 19 and a half million dollars for Q2.
This quarter over quarter improvement of $8.4 million goes hand in hand, with our four cents sequential increase in operating FFO, driven by our higher collection level, which accelerated in each month of the third quarter, culminating in our September base rent collection of 89%.
Our essential and office tenant categories continue to lead our collection stats, but I'm pleased to highlight that both restaurant and non essential category collections increased each month of the third quarter.
Importantly, not only did collections improve but our progress in executing tenant concessions, what's significant offering more clarity around amounts billed but not yet collected.
We will provide additional color around these third quarter success isn't just a few minutes.
Given the current prominence of cash collection, and investor thinking and the likely diversity in practice as to how that metric is computed I wanted to take a moment to outline how we calculate our collection statistics.
The numerator is solely composed of cash receipts from tenants paying base rent that applies specifically to the month for which it was built regardless of when received.
The denominator represents the base rent originally built for the given month and include amounts due from tenants that have signed or are negotiating concession agreements that relate to that month.
We do not reduce the denominator for signed or anticipated agreement.
Whether they contain deferrals or abatement, nor do we reduce the denominator for tenants in bankruptcy unless the tenant has moved out during the relevant quarter.
As additional context collection rate for tenant recoveries for Q3 are in line with our base rent collection level and I mentioned on last quarter's call that the Q2 tenant recovery levels were only slightly lower than our reported base rent collection level.
Given our monthly cash breakeven level of approximately 60% are improving collection rates have provided rising headroom to fund both a reduced level of development expenditures anticipated for the year and our third quarter reinstated dividend.
Turning to our balance sheet positioning I'm proud to report that we delivered material positives from a capital structure standpoint, the third quarter through two underwritten public bond offering.
First as we discussed last quarter, we successfully raised $100 million in July through a reopening of our 4% unsecured notes due 2025, our p. eyes first public bond offering since 2015.
We undertook this transaction not only to bolster our balance sheet standing, but also to reestablish the 2025 notes series as index eligible in an aim to improve liquidity and tightened spreads.
Trading in those bonds subsequent to that reopening has validated that thesis.
Then in August we harness the momentum of that successful reopening to raise another $400 million through new issuance of 4.75% senior unsecured 10 year notes due 2030.
These two transactions have reopened the door to the public bond market for our PPI, bringing access to a wide and deep pool of capital.
We have been pleased with the improvement we continue to see in spreads in the trading of these bonds validating our decision to turn to this capital source.
Now that we have reestablished our <unk> as a market participant we look forward to returning to the public bond market in the coming years.
We utilized the substantial majority of the nearly $500 million raised to further strengthen our capital position as we repaid a full $135 million outstanding on our unsecured revolving line of credit.
A $250 million term loan that was coming due in January 2021, and a 100 million dollar private placement maturing in June 2021.
Now we hold no debt coming due until 2022 and no unsecured debt maturing until the tail end of 2023, along with an undrawn $850 million revolving line of credit.
Our aggregate debt obligations now hold a 4.17% weighted average interest rate and 6.1 weighted average years to maturity and extension of two years, resulting from the issuance of these bonds and the related extinguishment of shorter term debt maturities.
Our ongoing progress on the operating side of the business.
Actuated by our accelerating collection trends in each month of the third quarter and growing progress on tenant negotiations has further complemented our balance sheet health reinforcing my confidence that we remain positioned to deliver growing value for our stakeholders and now I will turn the call over to Shane.
Thank you Julie our third quarter progress reflects our deliberate and comprehensive approach to balancing collections and leasing progress across our platform and the current operating environment or.
Our pragmatic plan for supporting our tenants and incremental mindset to addressing tenant negotiations drove base rent collection steadily higher through the quarter and into October as Julie outline.
Our collection gains and non essential and restaurants some of the categories hit hardest due to cope with 19 piece the base rent collection improvement in our portfolio overall.
The contrast, and sales performance and rent payment willingness between essential and non essential continue to compress from pattern seen in April and May as our portfolio Hbr is now approximately 95% open.
A testament to the quality of our properties the viability of our tenants and the strength of our communities and team.
Our methodical patient and balanced approach also.
Also helped us to reach agreements with tenants to bring our total addressed rent to over 93% in Q3, while modifying leases for a long term strategic flexibility.
These modifications include co tenancy removal or reduction prohibited use modification exclusive use removal and situationally removal out lot restrictions, including the ability to add drive through lanes on certain not laws as well as reducing parking count mandates, which now provide for future flexibility and rugs.
Aren't the Densification and curbside pickup.
For the remaining 7% of the Unaddressed Q3 base rent pool, 1%, our active bankruptcy filings that are unresolved.
And within our remaining 6% on a dress to base rent for the quarter just over half is composed of tenants in the hardest hit categories of restaurants health clubs and theaters and the balance composed of a mix of local tenants and Conversely national tenants that are current on certain locations.
And have not become current on others.
Continued progress at reaching agreements with these tenants brings needed incremental visibility specific to occupancy and cash flow going into 2021 as well as further flexibility as we look to remerchandise and situationally redevelop and future months and years.
Notably these negotiations also served as a key component in our accelerating leasing velocity, which measure our highest level since the third quarter of 2019 at 810000 square feet across 105 transactions.
Signed a ton of concession and extension agreements account for 35 out of 74 or 47% of our total renewal leases in Q3.
And while bankruptcies drove 120 basis points of our 140 basis points sequential decline in retail occupancy to 92.2%.
Bankruptcy backfills represent 26% of the new leases signed in the quarter. These.
These new leases are indicative of the ongoing demand for great real estate as well as our demonstrated ability to upgrade tenancy and cash flow stability, while improving the merchandising mix and experience with patrons in the communities we serve.
Well cobot hastens the need for retailers to continue to adopt measurable business models.
Howard Dexterity, we'll continue to prove a key strength in the coming quarters.
Looking into next year, our meaningful leasing progress and focus has now reduced our pending 2021 hbr exploration by 16%.
We achieved this velocity with a blended positive re leasing spread of 2.6%.
Excluding one larger flat theatre renewal Werent incremental 14 year term for the quarter.
Our spread would blend to a positive 3.5% importantly, our comparable new leases signed during the quarter include an average 200 basis points of contractual rent growth that add to our effort to drive recurring topline expansion in an accretive fashion over the long term.
Looking at asset segments.
While we generated positive leasing spreads across all three of our property types.
Our lifestyle mixed use assets outpaced both neighborhood community and power with a positive 6.4% spread for the quarter.
This result serves to reinforce our confidence in this asset class. Despite some of the challenges presented by the pandemic.
Turning to development and expansions at circle East we.
We continued incremental leasing progress with a signed lease for in line space with a national Salon and subsequent to quarter end, we executed one additional small shop lease.
With retail construction complete but for tenant specific build outs.
Circle lease velocity continues to expand rapidly towards stabilization as many retailers and uses focus on those spaces with more street presence profitability and brand value and we now have approximately 50% of the space in the project leased under LOI or in negotiation.
Turning to our significant residential densification at Loudon.
Construction continues on plan for pads Gnh with B multifamily portion of the project on track for a spring openings.
In many ways the events since spring that have strengthened many aspects of the technology sector and overall residential demand drivers for the suburban urban project.
Reinforced our decision to continue with our largest project to date.
Further our perseverance on this expansion project through the many unknowns of this year enabled us to avoid substantial increases in lumber costs and continues to position this asset for significant growth in the not too distant future.
At the shops at quarter field, we delivered space to the small format grocer that anchors the site in October and we remain on schedule for the pad development in Salt Lake.
That will serve to further activate and already dynamic asset we.
We also updated the range of returns for this two to two and a half million dollar project in the supplemental to better reflect the previously disclosed range of costs all.
All in well certain elements of the Covidien narrative still pose challenges to a finite outlook.
Our execution this quarter reinforces our ability to navigate the changes taking place in the consumer landscape.
While positioning for future success.
Our well located assets with exposure to compelling demographics will continue to drive interest from retailers, who have placed growing emphasis on those locations that provide for distribution visibility and profitability in the ever evolving landscape and with that I will turn the call back to Steve.
Thank you Shane and Julie for your reports as usual our prepared remarks contain a significant amount of information about our quarterly and year to date performance showcasing our commitment and perseverance to delivering solid results and transparency. Among these unprecedented times, we look forward to your questions. Operator, I will now turn it back to you.
The poll for questions.
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Our first question comes from Todd Thomas with Keybanc Capital markets. Please proceed with your question.
Yes.
Hi, Thanks. Good morning first question. So in terms of the tenants that youre not collecting rent from.
Where it's not been addressed so so 6.7% in the quarter, where do you where do you stand on the timeline to either recapture space or pursue legal remedies and then.
Do you have a sense around how much of that space may ultimately turned over.
Hi, good morning.
So just to go back and probably stratify I guess a bit. So Q3, you know, we're a little over 93% addressed.
We've got another 100 basis points or so and bankruptcy so that remains fluid.
And then we have 50.
50 to 100 basis points of what I'll call Brinkmanship and that national tenants are paying and one I must say and not paying and another and that is really just due to kind of local law as it relates to so we have tenants that pay in Texas and have not paid in New York as an example.
So we intend to if we haven't already initiated breach of contract on a one off basis situationally and that bucket.
And we fully expect to to recover that rent longer term, so now you're down to.
Four and a half 5% remaining and that again is.
A few of our theaters I'm certainly the.
The gyms as Wallace restaurants smaller.
Smaller format restaurants in general generally dine in.
ER as well as a few of our entertainment center, so as far as when this turns over I think where we again like we have a in the last quarter or pushing now that we're down to those last 5% or so for pretty rapid resolution whatever that resolution may be a we're just looking for some finale.
On a better feel are floating under us as we go into winter around what our stabilized occupancy is and continuing to compress our collections.
And and really went out to the the space between collections and that finite occupancy numbers. So very rapid progress in the quarter and will continue into the fourth quarter.
Okay, and and Julie I think you said that roughly 10% of build base rent is related to tenants on a cash basis.
No. There is a lot of detail here on page 20, which is helpful. But what's the collection rate like for those tenants and how is that trended.
From from sort of Twoq to Threeq.
Good good morning, Todd the Q2, we had about little over 8% of our tenants on the cash basis and you're right now we've got 10.2, we've got that footnoted in the supplemental early on in the deck I think last quarter, we talked a little bit about cash basis tenant collection levels being at just a.
Smidge under 30% as of June 30, I think it climbed a bit maybe 35.
Not quite 40% as time went on so we did see some recovery of I'd say, a very modest amount of cash basis tenant revenue that was of course recorded in the third quarter because of the nature of it being cash basis. When I look at the population so that 10% population that's as of September Thirtyth, we did collect more in the <unk>.
Third quarter, but.
Only about a 50, 354% so improving but you can see why we have them on the cash basis. So hopefully that's helpful context.
Okay, Yeah and then.
Sort of a technical question I guess on the security deposits you applied deposits last quarter, a little bit more this quarter against the bill base rent.
You know it sounded like that was sort of a liquidity measure for those tenants to I guess bridge from sort of pointing to point B are.
Are those tenants now expected the true up their deposit accounts and is that happening and.
You know are you or are you starting to see.
Higher rate of Vacates from from that bucket of tenants now.
Yeah, I think generally were expected expecting tenants to repay those probably over say 12 months or so.
Okay all.
All right and just one last question about the sort of segmentation around the portfolio just given the exposure that you have to make.
Mixed use and some live work play properties.
Are you approaching you know the non payment and tenant merchandising differently at those assets that have a focus on.
So sort of food fitness and entertainment tenants, which are challenged today I guess, how are you thinking about balancing the near term and long term risks that those tenants pose with the importance that those tenants have to those types of properties and in the long run I guess are you sort of more patients are willing to work with those tenants then.
You would and other community or traditional strips I'm, just curious how you're thinking about that.
But it's a good question Todd I think that very situationally.
Well, we've seen again said.
Occupancy come down quarter to quarter as expected.
We still obviously, we'll work with tenants to the extent, we feel that not only financially but emotionally at this point they are willing or able to understand kind of the new environment from an operating perspective right. We're not interested in just leaving a light on outside of a space to portray occupancy at this point regard.
So center type what it's been interesting and I would just go back and say that I think one of the most compelling aspects in our business has been what you've seen in the last 90 to 120 days.
If you think about the macro environment and the economy more broadly opened but generally at 50% occupancy restriction right across United States and look at just our portfolio loans your point with.
Heavy exposure to mixed use and we started at what low Seventys a quarter ago. We're now 93 plus percent address just quarter to quarter with a fairly de minimis fallout and an occupancy you can see how quickly sentiment and overall collections and.
Call. It functionality has recovered again, what 50% occupancy restriction so.
On that in the quarter lifestyle as an example in our portfolio, which just to stratify our rents lifestyle on average is low to mid thirtys of foot our community and neighborhood is call. It mid Twentys and power as you know 13 to $14 foot on average so when you think about that stratification our life.
So I'll put up the highest comps in the quarter and also had an ordinance demand and restaurants and service. So yes. The collections have been challenged when you look at kind of the second quarter, but again overall in the third quarter, we saw a significant ramp across the portfolio not only in new demand, but also.
Obviously leasing velocity and collections and in the interim directly to your point, we'll continue to work with with tenants again that that show the durability financially and emotionally to kind of get to the other side whatever that that point, maybe it remains fluid, but again we are.
We certainly feel that the environment has changed dramatically quarter to quarter and if you look out on the horizon and thank.
Think about the prospect of a vaccine or whatever the resolution is generally next year at some point I think is the expectation I think that the the ramp across almost all categories should be significant and when you think of in an environment with less viable retail overall, Oh, I think that those companies that have great.
Balance sheet teams in real estate.
We'll have an ordinance success and we think we'll be part of that.
Okay. Thank you.
Our next question comes from Katy Mcconnell with Citigroup. Please proceed with your question.
<unk>.
Good morning, everyone.
Well, let me update us on your total exposure to bankrupt tenants at this point and about 120 basis point occupancy impacts from bottom to retail can you provide some color on progress made so far looking really sat space or from leases being I'd say talbot's guidance.
So Matt.
Potential timing.
Yeah.
Good morning, Katy I'll start off with responding to your question regarding bankruptcy exposure I think we talked about on last quarter's call, 3% to 3.5% I think it's 3.5% bankruptcy exposure in terms of Hbr that has come down as you would expect with a the move outs that we did that we described in the release so we're down to about two point.
6% of our Hbr at this point and for color on and thoughts on Backfills I'll turn it to Shane sure good.
Good morning.
You know our look our anchors are still 97% leased we havent seen.
Other than the last quarter, which was 120 basis points of that occupancy solution was directly bankruptcy related.
It was was really three or four times, we haven't really seen a large impact on our anchors today.
In line has taken most of the impacts bankruptcy and not to be honest, but I think that the velocity in the quarter, which is highest it's been in four quarters at over 800000 square feet over 50% of that volume has been in renewals. So I think it's indicative of again broader sense.
And occupancy trends just in a quarter a dramatic turn.
And almost 30% of our new volume was was very short order bankruptcy backfills call. It two or three quarters on average so there are tenants.
Generally that are at this point looking to upgrade space, whether they're they're in centers that are just not viable or do not have the ideal.
Configuration or co tenancy.
Or they're looking to kind of increase or reconfigure market spacing. So that's that's a dynamic that continues and again, it's what you would expect in a volatile environment with.
Asset attrition, which will continue for the foreseeable future even on the other side of Covance. So long story short again I go back to quality balance sheet team and we expect again fairly rapid progress on bankruptcy backfills given generally the the tightness in the market of anchor space.
For quality Sir.
Okay, Great and then just a quick follow up can you give us some where bank collection level for now.
First year anchors.
[noise] collection levels for small shop versus anchor yet so last quarter. We did include some additional disclosure on page 19 of the supplemental and frankly, we were running out of room. This quarter in hopes that the bifurcation of our deals between deferral accounting treatment and the.
Non would be helpful to that to the investor, but you know what we saw last quarter and small shop local small shop. In fact was ahead of our Q2 collection average and you know at Q3 local small shop is just a pretty much on par with the 84.2% collection.
So what we saw last quarter was mid tier being the laggard and we see that again with Q3 stats, it's more of the mid tier mid tier size space, but it's a much more.
Narrow gap so mid tier has improved relative to the rest of the portfolio since Q2.
Okay great.
Our next question comes from Gerrick Johnson with Deutsche Bank. Please proceed with your question.
Hi, everybody good morning.
Lease growth was 2.6% in Threeq. Two is this a level we should expect given the tug of war between occupancy and rent growth is occupancy more important in this environment as you kind of look to stabilize post the pandemic and then resumed growth from a lower base.
Hi, Jerry good morning.
You know, it's a balanced your point when to push.
Rents and wanted to pull on occupancy I think situationally as the best answer I can give you.
And we've we've really just continue to think about it strategically in a very [noise].
Dramatic and volatile environment, we've talked about.
Continuing to bid physician for the future and those kind of give you some context here.
We very again, we were very vocal on the front end of those that we view this as an opportunity we were slower out of the gate being more mindful I think in purposeful on trying to understand what the scope and depth of this was a you know beginning of Q2 or end of Q1, and then being mindful of of taking it as an opera.
Attunitys really position.
Our leases that really were kind of 10 years looking in reverse right. When you think about restrictions and in some cases prohibited uses.
And really exclusives.
And taking that opportunity to the extent that we were going to modify and extend deferrals or really invest any additional capital tenant by tenant and modifying those leases to better reflect the next 10 years. So that will certainly involved temporary co tenancy waivers, which in general have ever.
Just call. It 12 to 24 months for modifications, but that's an interim bridge stuff to get together side I think that more purposeful and the longer term focus was really specific to prohibited uses.
That better reflect tomorrow exclusivity rights removal of exclusivity and our ability to lease too redundant uses.
And just broader flexibility again in an environment that we think has just markedly less viable high quality centers.
In pretty short order is even more important than it was a year ago and then when we kind of thought about and looked at the leases and really the dynamic, which we think is has relative stickiness or certain certainly permanency.
Patio space open space and caps, the ability to walk up windows, and really reduce parking flexibility and out lot height was a big focus and then additionally, because of.
Our overall model, which is longer term densification, removing any restrictions that were non retail related so.
We're very happy with that I think that by end of the year Derek will have some kind of a tally as to what that looks like and how successful we were and what that relates to or or looks like from a incremental value creation standpoint, but the long winded answer or the end of it is that we are we're still trying to balance it.
But I think we are our position much better than we ever have then as it relates to all of those efforts when we come out of this again hopefully next year.
But in the interim again, you've continued to see collections now are addressed as you know 93, plus and we're now at 92% occupancy so the spread in dollars relative to to what it was at the beginning of Q2 is probably 30% of that number now so.
Mark Good progress we are at Middleby down to that last 5% or so that again are the tenants and John as I've talked about that are a bit tougher and those are the tenants assuming that they are economically viable and are willing to kind of co invest in that up or we are more likely to push on occupancy.
And try to bridge to the other side.
And Derek just to just to highlight you had mentioned the 2.6% which is the stated metric we did feel it was worthwhile to highlight.
The significant impact that one singular lease was having on that metric I think Shane alluded to it in his prepared remarks, a 14 year theatre renewal. So we do have some footnotes on page 17 of our supplemental that Recasts that 2.6 figure 235, and then that also improves the renewal from the stated rate of 3.2.
Up to 4.4, so just wanted to flag that for you.
Okay, no. Thank you and and look a bright spot this quarter was strong leasing volume and that shouldn't be over looked at over 800000 square feet. So can you give some further specifics on where demand is fast and how leasing traction is continuing into year end and then the second part would would be.
Given the cobot related disruption other tenants looking to renew or extend early in hopes of gaining favorable terms now versus later thanks.
Thank you from a from a segment standpoint again, we're 97% leased in the anchors. So we'll still have fairly tight inventory I guess, that's all at a first class problem at this point, but.
The extent, we did three or four anchor deals in the quarter and again its fairly typical of what we've seen a discount softgoods discounters in general and I would say.
Home related as well as as grocery those content continue to be at least in our portfolio. The the biggest anchor drivers.
But we are.
And again going back to sentiment how quickly recovered at that basically 50% occupancy restrictions the in line activity the.
The pipeline is the best it's been in at least three quarters.
And again Theres restaurant, a significant focus on QSR.
Lastly for again any end cap space or space that has the ability whether its wider sidewalks or or adjacent parking that the tenant can conceivably stretch into opener.
Eating.
Health and beauty and just services in general has been very robust in the last quarter. So.
Anything home related boutique.
Cable leading internet profit.
Local regionals that have kind of a showroom concept now whether its infinity here or or spectrum in Texas has been very busy and up against smaller format home furnishings design. So that has been kind of the broad based anchor in line demand.
And again I think that while it will be volatile here for a while as sentiment comes and goes it recovers quickly and though we expect that demand to continue on the other side.
Thank you everyone.
Our next question comes from Linda Tsai with Jefferies. Please proceed with your question.
Yes, hi, good morning, I'm, just 15% a baby are up for renewal in 2021, how much of that has been addressed.
Well, we are down to 10% now we had a very robust.
Quarter. Some of it was options I think we indicated that.
Almost half of our renewal activity was in conjunction with a lease modifications.
So.
Acted to Derek other question.
We see a willingness for tenants and I guess in this case, a mutual willingness to extend those tenants that have shown the ability to be successful in this environment and still pay what we think is market rent on a stabilized basis and that was a significant initial.
Initiative and achievement in the quarter.
Thanks, and then in terms of the lower maintenance Capex is implemented this year, how would you think about that for next year.
I think that it's it's.
Malleable at this point situationally diamonds.
Demonstrating situational awareness and understanding the extent we've had when we bought it at the beginning of the year kind of unintended vacancies and I'll just use ropes as an example.
In that Capex number we've pulled gross where we now have vacancy because we obviously don't want to rule a anchor where we will literally have to go back in and put up a new roofing system for tenants. So.
As just pulling back where it makes sense and that that is not just related to real split just broad based capex. So.
We're obviously running you know 11 million under this year, we'll see what it looks like next year, but generally we have invested in our centers I'm on a very kind of stabilized recurring basis and because of that we can pull back for multiple periods, if we need to.
Thank you.
Our next question comes from Chris Lucas with capital One Securities. Please proceed with your question.
Hey, good morning, everybody.
She is a couple of questions for you I guess as you guys think about the.
The match up the current quarter kind of demand and some of the vacate the sizes of the boxes should we be thinking about the the re leasing of that space as being back filled as.
As the space size or will there be some requirements to cut box space.
Space is up at this point do you have a sense as to where if there is a mismatch in the demand relative to the box.
Sure Good morning, Chris I.
I think that you know that the 20 to 30000 square footers, which we have very low inventory and at this point.
Have generally been single tenant backfills and that continued in the quarter I think the toughest space.
As it relates to just a single tenant backfill is really call it.
10000 feet or so those we just took back on nine peers in the quarter, a we did turn one of those.
Instantly in the quarter and that was single, but generally I think that that space at least from our lens. Chris is the toughest at $10 and I think that Luckily generally for us that 10000, though from configuration standpoint, as more of a rectangle and less of a square. So we don't have depth as use their so to the.
We supported two or three.
Even looking at.
Bifurcation costs anti when you split it I think the rents are up consider when its still pencils, but obviously takes a little more time to fill.
Thank you for that and then I guess just from.
Thinking about the lease to commence spread and that sort of trajectory of that should we assume that that's going to.
Build for a little while before it starts to come down or is that or do you expect it to sort of stay at this current level.
Oh, the lease to commence spread of 100 160 basis points today correct.
I think occupancy is tough to call Oh, and obviously, we you straight on top of that it's tough to call, but I would expect.
Unsurprisingly occupancy to tail off through at least the end of the year.
And I think that looking at the pipeline we still have.
Fairly favorable activity or even at this point of the year. So.
I would expect directly to your point, Chris that we would expand to that.
That spread at least through the end of this year if not in the first quarter.
Okay. Thanks for that and then last question I don't know whether you have it available, but I'm just curious as to what Youre.
Non option renewal spreads look like.
I don't have that in front of me we can okay. We can follow up though.
Okay, great. Thanks, that's all I had this morning.
Thank you.
Our next question comes from Mike Mueller with JP Morgan. Please proceed with your question.
Yes, hi.
Thanks, guys just touched on this before but we've looked at it I guess collections for apparel and then quick service restaurants out of curiosity why do you think collections are lagging they're in the low eightys, especially for the quick service where people are just taking it out day to day.
Hi, Mike Good morning <unk>.
I think functionally operationally as a segment.
More of those tenants are and the mom and pop category right at least in our portfolio. So you're.
1500 square feet 1800 square feet and I think that.
Generally those tenants have had a lower access to liquidity in some cases, just dysfunction from an operational standpoint.
So we do have a clearer picture quarter to quarter, but yes, that's in that.
That last some of those tenants or that was 5.5% that I referenced earlier and we continue to push through the.
And make this a fairly I would also just point out that our <unk>, if you're referring to our October column and on page 19, that's as of October 26, and you know September obviously has the benefit of being through October 26, as well what you can't see is our yet although it will.
It will be in our 10-Q at least in total the September 30 collection staff. There as of September 30 for apparel were lower than the 86.8, they were lower than the 83 that we show as of October. So apparel is actually ahead of the September pace when I look at October and when I look at restaurants in total or the 77.7%.
Tracked hellebores pretty much on pace with September. So just wanted to point out that those are as we mentioned two of the categories that seem to be taking a little longer and have a little longer tail on collection.
Okay, and then I guess on the next page actually for the Uncollectible reserve looking at the two components for deep basin combinations modifications for 2 million in Q3, and the 4 billion in prior quarters, how should we think about those two items, specifically trending as you kind of move into Q4.
Does anything notable kind of burn off and headwinds subside, so where is it just the they're going to persist, but theyre going to the clinic grind down based on cash collections I mean, how should we think about that over the near term.
Oh, Thanks for the question, Mike. So we put we put a lot of granularity and in the supplemental we enhance disclosure expanded disclosure on the page 20, you referred to also on 19, we've got some additional footnotes earlier on page four for example.
What you see there and the 2 million and the 4 million where are these are deals that do not qualify for deferral accounting treatment. So you know some of them I felt full lease modifications, where there's a little bit of benefit in straight line in the quarter when they're processed some of them are abatements I would tell you that there's.
Probably too.
20% or so of that figure is odd deferrals that didnt count for deferral accounting treatment. So there is some potential good news when those get repaid in the future.
So those amounts were reserved in bad debt last quarter. So we're trying to be or I'm, sorry, not those amounts, but the Q. The Q2, one outlier. So we're trying to.
Help explain what some of the tables here that there is no current quarter impact on that Q2 figure you're asking a little bit about what else you can expect going forward and similarly, we've reserved for additional amounts within bad debt and I think the easiest place to point you to to to see what we know today or what were expecting today.
He is back on page 19 in the kind of caught second to bottom row.
In the Q2 and Q3 tables, you see in process lease amendments for abatements combinations and modifications to the 3.3% for Q2 and the 1.1% for Q3.
These are currently reserved for in uncollectible lease income and the mechanics of the accounting as you can't record them as presented on page 20 of the top there until they're signed so again. These are not yet executed as of quarter end and we have reserved for them within uncollectible lease income minutes.
Essentially the figure on page 20, that's labeled estimated impact of lease concession agreements that have not yet been executed and it's $4.5 million. So I can point you to those pieces again, it's a little bit of a puzzle, but all the components are there to tell you what we expect today.
For going forward for that concept I know that was a lotta always happy to follow up on the phone to it if that's helpful. Afterwards, yeah.
Yeah that was helpful that was it thank you.
Our next question is from Floris Van Dyke dike him with Compass point. Please proceed with your question.
Great. Thank you for taking my question guys.
Joel I noticed your your recoveries in your same store are actually up.
HM.
What was behind that and what if you I know your collection rates or are based on rents. What if you included the recoveries how would that change anything.
Oh, Thanks for the question Floris I mentioned in my prepared remarks, I trying to address the recoveries component verbally earlier that it's on par for Q3 with the rent collection paced and that's for our collection on what I call, our our escrow billings.
We have to we have you know real estate tax billings that happen at certain points do they during the year Q3 is one of those and those collections tend to be much higher they're usually that what we call. The annual payers for taxes. So the bigger boxes, who just pay pay at that point, you mentioned, the recovery thing being up to or higher than you'd expect I think it's always tricky to look at.
Singular quarter, because you're always truing up or truing down on a year to date basis, but if I look at the nine within the same store.
I see were recovering about 74.4% versus 75.9 in the 2019 comparative period, so down about 1.5% you know similar to to the occupancy change I guess when I look higher on the table. So we feel comfortable with what we show there and any at any given time, there can be a little bit of a mix.
Issue with the certain operating expenses that are more recoverable than others that can that can drive it in a in a way that's not necessarily intuitive, but that's what I can share on that topic with you for now.
Thanks, Joe I appreciate that one other question, which I have.
If we were to look at your recurring revenues for the third quarter relative to your first quarter, what would the delta would be.
Recurring revenues I mean, I think I would look at FBR as the best indicator 80, our as of March 30, Onest was just over $366 million and now were just under 300 or about 358 million. So the pandemic declined the six month decline is about 2.3%.
And.
But is the right way to then look at it okay. So, but what did you actually gets you collected a 100% of your first quarter and.
Now you're collecting is that would that be the right way to look at it as you're collecting manual you're dressing 93% of that okay that lower number does that is that the right way to think about it.
I think that's the right way to think about it and just to be.
[noise] clear on page 19 of our supplemental which is consistent with or its showing the detail behind our reported collection statistics, we make some notes.
Add some disclosure at the top of the page to to acknowledge that we are always choosing an anchor point for that for those reports for those stats and it's always quarter end hbr. So.
Quarter end SVR that 358 million that I mentioned is the anchoring point for the Q3 call as well as the September August and July columns.
Different way of saying you don't but the bankruptcies that moved out so pier one they are not in any of the July August or September columns are Q3, because they didnt make the cut because they weren't they weren't in on the last day of.
The quarter, but.
But I think you know and I think you've got a lot of pieces, there and I think you're hitting on the right way to look at what Hbr is there at the end of the quarter and what the collection levels where.
Great. One last question, maybe for maybe for Shane a screen. If you can give us a little bit of a update it at one block where the residential rents what has happened in that markets.
As a result of co goods and or are you still feeling pretty good about.
The lease up pace a once once the project gets completed.
Hi, Floris good morning.
Well, let me let me just go back I guess, just kind of a macro allowed at this point.
That the.
[noise] cord or continues to be largely tech driven as you are aware.
When we deliver we will be the only a plus product.
In the quarter or from a timing delivery standpoint, and that we will have the only.
Multifamily adjacent to what we think is the best or retail amenity in the quarter or so I think that's pretty powerful combination I think as it relates to rents we feel very comfortable with where we where we originally budgeted we still anticipate 50% to 20 units a month once we start delivering.
And from a timing and budget perspective right now.
We are on budget I'm very happy with color on the ground they've done a phenomenal job in conjunction with our team.
And expect to deliver two to maybe four weeks certainly at this point, so everything's gone very well today and again I think the macro sets up well all things considered when we started to deliver and then.
Just while we're talking about it we still have about 70000 feet give or take and retail and office with office, making up half of that call. It 35000 feet.
Again, the suburban urban, especially with again, our retail amenity driving interest in value longer term is still a very real dynamic and just in the quarter.
Or actually post quarter, we now have a wise for about 75% of the office space.
Loudon so.
Again, all things considered I think we're very happy with with where the asset is going and the development overall and are excited to deliver it on time and if not earlier next year.
Thanks, Jay that's it for me.
Yes.
Ladies and gentlemen, we've reached the end of the question and answer session. At this time I'd like to turn the call back over to Steven Grimes for closing comments.
Well. Thank you all for your time today, we understood today was probably going to be a whole host of questions that are very much focused on kind of modeling for the quarter and the end of the year. So we appreciate your time and your detailed questions and we also understand there are some other newsworthy events going on today. So we truly appreciate your time and attention on.
As always and as Julie alluded to if there. After you had time to digest this information and whether it's been published you know through the transcript or otherwise we certainly welcome any follow up questions that to the extent that you need any further clarification, so take care and be while everyone.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
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