Q3 2020 Site Centers Corp Earnings Call
Good day and welcome to the site centers third quarter 2020 operating results conference call.
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Now, let's turn the conference every spread and day of Investor Relations. Please go ahead.
Good morning, and thank you for joining us on today's call you will hear from Chief Executive Officer, David Lukes, and Chief Financial Officer Conor affinity.
Please be aware that certain of our statements today may constitute forward looking statements within the meaning of the federal Securities law.
These forward looking statements are subject to risk and uncertainty and actual results may differ materially from our forward looking statement.
Additional information about these risks and uncertainties may be found in our earnings press release issued this morning.
The documents that we file with the FTC, including our most recent reports on form 10-K and 10-Q.
In addition, we will be discussing non-GAAP financial measures on today's call, including Oh operating FFO and same store net operating income.
Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release.
That's really our quarterly financial supplement and accompanying slides may be found on the Investor Relations section of our website at <unk> Dot com.
This time it is my pleasure to introduce our Chief Executive Officer, David Lukes.
Good morning, Thank you for joining our third quarter earnings call.
Our results this quarter reflect continued progress in terms of tenant reopenings and collections, which is a function of the hard work from all of my colleagues at site centers there's.
But no shortage of personal and professional headwinds that we faced this year and despite that we've accomplished a great deal. So thank you to everyone in sight centers for the hard work and the hours and the contributions to date.
I'll start today with a summary of the events during the quarter, then give some thoughts on tenant activity and some trends that are building throughout our portfolio of well located suburban properties.
Consistent with the last two quarters, 100% of our properties remain open and operating as we continue to provide access and the necessary support to our tenants.
Over the course of the quarter Tennants made more progress reopening in accordance with state and local guidelines and as of this past Friday, 98% of our tenants are open which is up about 6% from three months ago.
Turning to collections as we've mentioned on prior calls we believed the trajectory of our collections wouldn't generally track our open rate, which in fact has turned out to be the case.
Collections continued to tick higher and unpaid rents continue to move lower.
As of Friday, we've collected 84% of third quarter and 90% of October rents.
We're also continuing to make progress on previous rent do and we've now collected 70% of the second quarter rent, which is up from 64% at the time of our second quarter call.
Unresolved monthly rent is now less than 8% and I would expect that we would resolve the majority of these balances through a combination of deferrals and payments by year end.
That said, we continue to take a methodical approach to resolving any unpaid rent and we're extremely pleased with the agreements executed today.
Specifically weve reached agreements with tenants to defer or 16% of second quarter ran an 8% third quarter rent.
As you recall, our strategy has been to provide deferrals, where appropriate of some or all rent for a few months in return for true financial benefit to our company such as options exercised lease terms extended or restrictive covenants loosen up to our benefit.
In exchange tenants have more time to get business operations on track and better match their cash flows.
Conor will provide additional detail on the dollars and the timing of our deferral program, but it's largely concentrated with our top tenants that make up the lion's share of our tenant roster.
We believe that these deferrals, which are essentially short term loans are well positioned for repayment since our large national tenants have demonstrated significant access to capital.
In fact over the past seven months 23 of our top 50 tenants have raised over $50 billion in debt and equity.
This access to capital as well as improving operations for many of our national tenants has begun to impact overall leasing activity and we're starting to see signs of a pick up in tenant interest and overall leasing demand.
In fact, our total leasing volume this quarter, it's higher than leasing activity was in the same quarter a year ago with total leasing of 803000 square feet up 4% versus the third quarter of last year we.
We signed three anchor leases in the third quarter with spreads on total new leases up 18% for the trailing 12 month period subs.
Subsequent to the quarter end, we signed an additional two anchors and a few others in the final stages.
Whether it's sporting goods Discounters quick service restaurants drive through bank branches warehouse clubs are grocery stores are national Tenda and see an opportunity to take market share in the future as a result of a change in distribution channels happening today.
Our portfolio offers access to high income suburban communities with strong co tenancy convenient access for parking or curbside pickup and much lower operating cost and malls or street retail.
As we look into the next year or so we are assuming a continued shift of our tenant base to include those tenants that are proving successful in the last mile of wealthy suburbs.
Total base rent from our inventory of signed but not opened tenants as of quarter end totals just under $11 million, which is roughly 3% of annualized third quarter base rent.
These leases along with the deals signed cup subsequent to quarter end will help drive future cash flow growth.
We're now eight months into a pandemic that has accelerated many trends in retail.
We continue to see some tenants struggled to adjust and close doors are filed bankruptcy and we're realistic that growth will not be linear given the increase in these closures that have been announced to date and future fallout that will occur as a result of the pandemic.
On the other hand, as we witnessed this quarter current leasing remains as strong as last year and retailers clearly value our open air format and they want to be in the communities, where we own properties.
And we feel confident that we have not only selected the right real estate, but we're making prudent capital allocation decisions to fund those leases that will inevitably strengthen our properties and future cash flow.
Moving to the dividend as previously announced the board suspended the second and the third quarter dividends.
The board continues to monitor our dividend policy and it's possible that the board will need to declare a dividend during the fourth quarter to satisfy 2020 taxable net income requirements.
If declared dividend would be paid in the first quarter of 2021, and we will provide additional details by year end.
Lastly, before turning the call over to Conor I wanted to address the decision to eliminate the chief operating officer position, which we disclosed in early September.
We have a very strong roster of leaders at our company, who have proven to work well as a team and make the right operational decisions for our properties give.
Given our size and the quality and the tenure of our executive team, we've chosen to structure the company without a CLL position. This.
This decision has given me much more direct visibility into operations and a chance to spend more time on property business plans with my colleagues.
I'd like to thank Mike Makinen for his tireless efforts at the company he's been a great friend and did a fabulous job setting up our operations for continued success.
And with that I'll turn it over to Conor. Thanks, David I'll comment first on quarterly earnings and moving pieces in the back half of the year discuss the Blackstone transaction and conclude with our balance sheet and liquidity.
Third quarter results were primarily impacted by uncollected rent lease modifications and reserves related to the pandemic.
Total uncollectable revenue outside share was $16 million or an eight cents per share hit to off AFFO.
This amount was effectively flat in dollar terms from the second quarter. However, almost 30% of the reported third quarter Uncollectable revenue relates to lease modifications in that scenario, where lease is eligible for this treatment cash base rent is offset any uncollectible line item to effectively zero out the cash contribution for the relevant piece.
Good.
Given the patient approach to addressing unpaid rents that David mentioned, there were significantly more modifications agreed to or executed and that was recorded in the third quarter compared to the second quarter.
Other than the write off of $3 million, a pro rata straight line rent, which was an additional two cents per share headwind there were no other material onetime items that impacted third quarter FFO.
Moving forward, we're not providing an updated outlook at this time. However, there are a few items to consider for the fourth quarter and 2021.
First included in third quarter results was $2.4 million of revenue or approximately 200 basis points of occupancy from tenants in bankruptcy.
The majority of this revenue is from tailored brands Tuesday morning, and the Sina and this balance includes leases that have not been rejected today.
Second based on announced asset sales to date RV I fee income in the first quarter of 2021 is expected to be no more than $4 million.
Third interest expense is expected to be higher in the fourth quarter due to the closing of the box on transactions, which includes the assumption of $197 million of debt with an average interest rate of 3.3%.
Fourth DNA is expect to be closer to the second quarter run rate in the fourth quarter as we benefited from a few timing related items this quarter.
Lastly, subsequent to quarter end $2 million of billed revenue related to the second and third quarter rents were paid reducing our total unpaid balance.
In terms of deferral agreements, including the receivables line item on our balance sheet at quarter end is approximately $22 million of cobot related revenue, we expect to collect in the future.
Details on the timing and composition of the bounce around outlined on page nine of our earnings slide deck to summarize almost 70% of this revenue is attributable to public tenants with an average market cap of $19.8 billion and 42% of the balance is from tenants with at least a triple B plus credit rating.
By category tenants operating in the discount sector account for half of our deferrals in dollars.
We expect to collect approximately 94% this revenue by year end 2021.
On Blackstone, we closed the first of the two joint ventures on October 15, and expect to close the Blackstone three joint venture by yearend based.
Based on balance sheets as of the third quarter, we expect to receive a 100% ownership of the nine properties properties as previously disclosed along with approximately $20 million of unrestricted and restricted cash.
And the third quarter management fees from the two Blackstone Joint ventures were just under $500000 and interest income from our preferred investments was $3.5 million. We will provide additional details on our plans for these properties once the second joint venture closes.
Turning to our balance sheet the company remains well positioned with no debt maturing in 2020, no unsecured maturities until 2023 and minimal future development commitments. Additionally, we have $795 million of availability on our lines of credit and $57 million of consolidated cash on hand at quarter end, we have no material usage at this time.
Lastly, as David mentioned based on our estimate of taxable net income today, we expect there'll be a need to declare a dividend in the fourth quarter. So that will be paid in 2021. This.
The suspension of the second and third quarter dividends provided almost $80 million of additional retained free cash flow through year end, which helps reduce net debt and position the company for future, where we continue to believe our financial strength will allow us to take advantage of opportunities to create stakeholder value with that I'll turn it back to David.
Thank you Connor operator, we're now ready to take questions.
And ladies and gentlemen at this time, we will begin the question and answer session. If you'd like to ask a question. Please press Star then one on your Touchtone phone.
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And our first question today will come from rich fill with Morgan Stanley. Please go ahead.
Oh, Hey, guys last time, a long time since I've had two first names.
And why.
[laughter], Hey, I want to just sort of chat about your negotiations with tenants recognize rent collections improved pretty pretty nicely and deferrals came down but I think a lot of us are trying to understand is the velocity of a recovery to normalization if you.
Well I.
I I recognize it's too early to get into a 2021 guide I'm not trying to go there, but you did mention you know a a steady increase in rent collections as as more stores open. So so long way of asking what's driving that 8% a rent deferral, what's driving the 2% that's just not being collected and.
And do you think that you know it starts to meaningfully increase over the next quarter to two quarters to three quarters or you know is it sort of maybe even at 22 event, which some of our channel checks suggest it might be.
Good morning Rich.
You know it it actually if you look on page eight of our slide deck that along with the presentation. There's a fairly clear line of a kind of a slow reduction in the unpaid rent and the unpaid portion you know went to two different buckets. It went partly to the cut.
Elected bucket and partly to the deferred buckets. So it it actually feels like it's a much more consistent pattern than I would have expected back in April I'm on our first quarter call at the beginning of this I think we were expressing patients was required.
Over the past couple of months I think what we on the landlord side and that and the tenants effectively on the borrowing side have figured out is that there is an elegant solution to this problem you know the leases require payment and I think that has been universally understood that it's.
The credit is it on the lease to pay the rent and the triple net on the other hand those leases also have restrictions on landlord land and land is a very important ingredient for convenience and so for us it's an opportunity to get control back and for the tenant it's been an opportunity to to had a little bit ahead.
But in terms of deferring that so I guess to answer your question right now it feels pretty good it feels like we're getting down to the final you know a group of tenants that we have to work through and there have been hundreds of negotiations and conversations from big tenants all the way down to small tenant that feels like we're getting down to the final group.
Some of them I would say that the temperament between landlord and tenant feels pretty positive and the only caveat I would put in there as you know the last week or two with respect to cobot has not been particularly good in the country and I think there is some risk that as we get into the winter months that we see some backslide.
In in deals that we've already agreed to and papered with tenants and we end up kind of going the other direction I think that's a possibility, but it doesn't seem dramatic right now yes.
Thank you and just one quick follow up question for me you mentioned that the lease and not being a contract in place are you seeing any tenants come back and ask for lease modifications not not in the form of former deferral, but but but truly hey look we need to have a lower rental rate than previously and maybe the question.
And I'm asking is how are you how are you thinking about occupancy versus rent negotiations at this point or is it just that tenants are negotiating or are honoring the lease and you're collecting upon that.
Well for the most part its been a a horse trade between you know will help with some deferrals will release, some restrictions will change some co tenancy clauses and.
And then the rent will get paid up and that's why you're seeing that the collections even from Twoq you still rising because we come to agreements, we shake hands, we pay for it and that point you know that the past due as paid there have been a couple of tenants that are in I think any recession in my career I'm kinda always come and say Oh, My gosh I things are terrible.
I need to reduce my rent by 50% and sign a new lease and the reality is there is no. There is no impetus for a landlord to do that and so I think true lease modifications really haven't happened. The only time, they're seriously considered I think is when a tenant and bankruptcy and you can look across the whole portfolio and make a better decision, but it just.
The rent modifications and you can see it by the amount of.
Rent that Weve abated, which has been extremely minimal we really just haven't seen modifications is be a very popular subject right now.
Got it that's very helpful. Thank you guys.
Yes.
And our next question will come from Katy Mcconnell with Citi. Please go ahead.
Great. Thanks, and good morning, everyone.
Just to get a better sense of the recovery timeline can you update us on your outlook for narrowing, though we cannot spread in this environment and do you expect it to gas out further before starting to now with the new leasing activity you're working on it.
Katy its car yeah, I would expect it to expand it and for two reasons one yes.
Leases were signing today or are not going to up until till next year and really till the back half of next year. That's the first point and the second point as you know as I mentioned in my prepared remarks, we have a couple of hundred basis points of tenants in bankruptcy.
I'll wait to see which leases get rejected in that and how that impacts our commence rate, but what I would expect our commence rate decline in the fourth quarter, but based off the velocity were seeing leasing side also expect to see or that gap kind of expand so so for those two reasons I would expect the gap to expand where that ends up or how that kind of trends over the course of next year TBD.
But I would expect at least in the fourth quarter, but I got to expand.
Okay, Great and then if you could talk a little bit more about the anchor rebasing progress during the quarter and how postings Association.
Dan covered have changed and then based on your back they'll demand that you're seeing for either fall are more partial box space are you expecting between capex to trend next year.
Hi, Katy it's David.
The quarter or.
It's hard not to feel positive about anchor leasing in the past couple of months I mean, I think that's been one of the biggest surprises for all of US is that in the past couple of years as we've been in.
Investing leasing capex to backfill spaces or split spaces, and we've had a lot of success in leasing anchor space in the last couple of years.
Right and then that in the last couple of months, we've definitely seen an increase in demand and I I found a little bit surprising, but there's been a number of new concepts that are starting to grow there has been a lot of national portfolio reviews by the stronger tenants looking to relocate into higher quality properties.
And for the most part the amount of box splits has been reduced in the amount of full leases on replacement boxes has increased and so I think that our our capex is going to remain elevated as long as we're we're leasing a box space, but it feels like the capex is starting to shift much more towards.
The entire box and not splitting the property if you know I'm, saying, yeah, and just from a dollars perspective can you remember our dollars for Capex were down this year have trended down excuse me this year as part of our negotiations and the horse trading that David talked about we have put some rent commencement dates as retailers are very focused on getting there they're kind of own house in order before they open new stores.
So from a pure dollars perspective, I would expect our Capex to go up next year I'm for it for that reason and then for the second reason as we talked about the last couple of quarters. It kind of growing tactical redevelopment pipeline and if you look at our our redevelopment page in our Sop I think that the dollars to spend went up 20 or $30 million, that's because of our kind of growing pipeline of smaller.
Scales site plan out at stations that you'll see more from us in the next couple of months and see some of those come online even in 2021.
Okay, great. Thanks.
And our next question will come from Samir Khanal with Evercore. Please go ahead.
Yeah. Good morning, everyone. Thank.
I guess, David or Conor on leasing spreads.
It's good to see their above 5% on a blended basis, but is there a way to kind of parse out what's kind of.
You know kind of pre cobot and covert time period to kind of assess how negotiations are going on on rents.
Sameer I was Ah I I had prep.
Perhaps the fact that you would ask that question Yeah, I wish we had a really elegant answer for you that the difficulty. We have is that our portfolio is skinny down to around 70 wholly owned properties.
In the in place prior tenant rent can be all over the map. So the leasing spreads I think if you kind of look in the long term trend that it tends to tell you a story, but when you're when you're looking at very short periods of time, it's not very easy to tell that story.
I can say that I don't believe that market rents are growing very fast, but I don't feel like they're shrinking either it feels like we're treading water with rents and what really is driving numbers is what the prior tenant was paying whether it was at market or below market.
Okay, and I guess on the segment for like Mom, and you know a mom and pop local tenants.
Hi, how are they kind of performing now what sort of the the burn off of the PPP loans and and all kinds of financial grants at this point.
Well I remember our exposure to local tenants is pretty low the I will say that I think that the most difficult category to be in right. Now I think I mentioned in my prepared remarks, the amount of debt and equity raised by national tenants has been so staggering that their balance sheets are in great position and even if you think of your own.
Life, you're driving around to different stores, you know the ones that have access to capital are the ones that have been able to reconfigure their store adapt their operations quickly retrain their staff and kind of get themselves back profitable I think the smaller tenants, particularly full service restaurants dry cleaners, you know tenants that were.
More reliant on the previous pre cobot workforce routine are really going to struggle and I think this winter is going to be very difficult for a lot of small local shop tenants.
Great. Thanks for the color. Thank you.
And our next question will come from Todd Thomas with Keybanc capital markets. Please go ahead.
Hi, Thanks, good morning.
First question, just following up on occupancy and lease rates, which decreased in the quarter a bit Conor I think you indicated that the commenced rates likely to decrease in the fourth quarter do you have a sense around how much occupancy loss you might sustain over the next few quarters and do you have visibility around.
The stabilization of occupancy at this point.
Yeah, Todd we certainly have visibility on what Weve leased which has been quite a bit I mean, you know 800000 square feet in the quarter, which is more than last year. At this quarter is a lot of square footage. So that the move in there quite easy for us to to pace out over the next four quarters. The difficulty of course is the move out and I think everyone. There.
In Ah at site centers, that's involved in leasing and and collections recognizes that.
You know this pandemic is not over a I don't think tenant fallout is over and so I think the back door is still open on tenants that are vacating I wish I had a better idea as to how to project that for you, but I think it has entirely to come down to how long the social distancing ER continues.
How the winter goes and you know whether somebody's tenants can hang on through the winter.
I did we just don't really have a great a view on that yeah, I'd just say Todd the only thing I think we you know to Echo Daves comments on the prior response and we feel really good about our national tenant roster I mean, they are extremely well positioned as a number of them to figure things out probably from the second quarter in terms of click and collect curbside pickup et cetera. So I would just say we feel really good about our national Expo.
Sure, but to my prepared remarks, we have a couple hundred basis points of tenant bankruptcy and and I would expect a number of those to close. So you know I think to David's point, we expected to be lower in the fourth quarter, but I would say on on average the tenants were signing for the tenants. The National times, we have still have open there, they're doing extremely well and well positioned.
Okay, and then in terms of leasing demand.
Yeah, David It sounds like demand fairly broad based navy for some of the larger boxes and you commented that you are anticipating fewer box splits what about the the less than 10000 square foot space you know, it's about a little over 30% of the portfolio.
Occupancy was a little bit more often than a greater than 10000 square foot space. This quarter, how is demand for the smaller shop spaces.
Fair.
I I you know what that's actually a really good point the demand for small shops in dominant centers still seems to be pretty good you know were signing leases were kind of maintaining occupancy they.
The demand for box spaces, and I would say, it's more like 15 2025, all the way up to 50000 square feet has been surprisingly strong it's the middle zone, where it's kind of eight to 12000 square feet, where there's not a lot of current concepts right now out there to take an eight to 10000 square foot space and so the demand in that in that middle zone is little bit less than.
We would like to see and unfortunately, it also matches with inventory from Pier, one and a couple of others and I guess, what you could expect is that.
A lack of demand in that middle zone is probably going to require you know adaptations of those buildings into either larger or smaller spaces to meet demand.
You know the good news from our perspective is that you strip shopping centers are extremely adaptable and pretty quick to adapt to their it's not complicated construction, it's not expensive construction and I think overtime you are going to continue to see the open air format be very very flexible to demand right. Now the demand is were really big spaces, and really small spaces and.
The 10000 square foot space is a little bit less so.
Okay got it thank you.
Our next question will come from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, good morning, good morning down there Alex Hey, how are you I had two questions first on the Blackstone transaction, which you guys outlined last quarter and this quarter you close.
Got another have to close at the end of the year, but when you look at the consideration and the debt load you know you're really taking on a lot of debt. There are some nominal consideration the perhaps but yes, there's a lot of debt that's coming on.
How how do you guys think about the debt versus equity in those centers and are these centers, where you know we could assume that there's probably going to be at that work out where the debt will be structured so something that right sizes with the centers.
If you could just comment because clearly what's going on in retail seems to be heavily driven a lot of the landlord you're dealing with the tenants, but the debt side of the equation.
With lenders seems to be the sticking points and maybe you can address that sure sure well, let me, let me give kind of a broad response that Alex and then I can you know a.
Conor can fill in the holes.
The way that we looked at this transaction and this is kind of going back a quarter or so is that you know this joint venture with structured over six years ago. It was as you remember significantly larger it's down to a size that really wasn't relevant or efficient for either party, either blackstone or or site centers and the capital stack was really three main.
And then there was a there was a a mortgage component right with a third party lender. There was a preferred component, which was quite large and that was site centers and then there is a common equity piece of which we were only 5%.
And over the past three and a half years as we've taken reserves on the preferred you can effectively see that the comment that little 5% piece that we owned was was was really not worth anything because the PRASK was being impacted so if you're talking about the impact of leverage on retail real estate.
What I would say that it really was our profit investment that was impacted not the mortgage debt in fact, the mortgage debt on these properties is not that significant right now I mean, if you if you back into the numbers that that's shown in our supplemental it's about on 11 debt yield.
So I wouldn't call that.
Wildly over Levered and the NOI on these properties is pretty stable. So I I really don't see any of these going to a workout situation. It's really a matter of us trading our preferred position, where we didnt have control over our own destiny for a common position, where we do have control and.
I think in the next six months, you will see us come out with more business plans as to how we want to invest in these properties and do things differently, but it was really just a shifting from preferred to common and picking up a concentration in these nine assets and picking up control.
Yes, the only thing to add is we talked about this last quarter, we expected about a quarter turn increase and debt to EBITDA as a result, the transaction. The other thing to fly has never there's 20 million of cash coming with these properties, which is fairly significant and the last thing is we talked about from a stabilization perspective, just to have long term a de minimis impact on or absolute leverage based off the business plan, So David alluded to.
So again Theres a couple of potent components of the press the cash piece and then obviously the leverage.
The pools are there's also a couple of different structures and pools that are worth considering as well between getting a greater detail. Once these all close so it's a long way of saying that kind of near term impact as a quarter turn but the long term impact we effectively are assumed to be net neutral.
And then second question is David you spoke about the heavy demand.
Yeah, it's very strong for the larger box size.
Clearly curbside online pickup curbside, ER, sorry online ordering curbside pickup.
<unk> has been a tremendous success are you seeing the the retailers the tenants sort of overhauled their strategies to focus more on integrating online curbside or were these trends already there and what cobot did was really allowed these trends to to show up whereas even creek.
But the retailers were already doing a lot of stuff I'm trying to understand how much kobin in the curbside has really changed the retailer strategy vis-a-vis their demand for open air Yeah. It's a great question I mean, I I I, even look in a you know around my own neighborhood I can think of retailers that were doing curbside and.
They had kind of figured out that strategy a year ago, but the customer adoption wasn't that strong.
And it feels like two things have have already come out of cobot number one is that the early are adopting companies.
We're very successful right off the bat because people like me that really hadn't spent much time doing a click and collect are suddenly doing a constantly so that was the first trend is it just seemed to accelerate the return on that retailers investment. The second is that the remaining retailers that did not have a curbside strategy had to get one pretty fast and.
It frankly, they seem to have looked at their neighbors and the centers and see how they're doing it and simply done.
Done a replication to the adaptation has been much faster I think than than many of us were expecting both from the customer and all these retailers I mean, it's pretty amazing that like I said, the local small shops I think are really struggling with it you know other than some of the food delivery options, they have but but the national tenants that have access to capital I mean, it's incredible how.
Fast they pivoted.
Thank you.
Okay.
And our next question will come from Ivan Kim with Truth. Please go ahead.
Thanks, and good morning out there.
I just wanted to go back to your comments about the rent scheme to uncollectible I think you mentioned that it was $16 million unchanged.
It looks like on a consolidated basis. It went up a little bit on your JV went down.
Can you just talk a little more behind that details I would I would have thought even with the lease modifications.
The improvement in your collection of wood.
Would imply that that number should have improved I have more so in threeq you.
Yeah Ki bin its Cotter I took a really good question. So just kind of three three things driving that one is you're absolutely right. The collection rate is up a decent amount from the second to the third quarter. The composition of that though is important in the sense that our cash basis tenants.
Were up only taught you know, 10% plus whereas obviously for the total portfolio is up more dramatically. So if you think about the biggest piece remains healthy uncle uncollectable revenue the offset for cash basis has they don't pay ramps up the first point. The second point as you know were seven months independent <unk> I would say we are still in reserve building mode. We're still learning about some tenants.
I would say based upon the David's comments and how close we are to <unk> agreement, we could see some reversals in the fourth quarter TBD, but I would just tell you remember settlements independent American and if we don't feel like it's the appropriate time to reverse the reserve those reserves as of now and then the third piece is that I referenced are modifications and this is a longer answer so apologies in advance but.
There's effectively two ways, where there's a number of ways, but two schools I think you're going to see in the third quarter of how people apply their lease modifications. The first potential path is you'll see it netted out of cash rental income right, you'll see a lower cash rental income we have not gone with that approach, but I think it's going to it's going to be difficult for people to figure out what the run rate is from a cash.
Rent income going forward, if you take that approach. The other way is to effects include modifications in your uncollectable revenues. So that the cash basis rental income is offset by at least modifications.
David's point, we've taken a very patient methodical approach on these agreements and so and we can't recognize that until we have an agreement or an executed agreement. So it's a long way of saying 30% of our Unquotable revenue. This quarter was related to modifications rents and recoveries, where we have deferred rent in exchange for the typical example would be an option being exercised would change.
As the leasing the duration. So those are the three big buckets I would expect all else equal if we had a higher contractual or payment writer collection rate stayed at this elevated level and we had no more material modifications, we would have a lower uncollectible reserve in the fourth quarter, but to David's point Thats TBD, you will see when we get there.
[music].
Okay. So it sounds like a denominator issue it.
Does the hoggard, just showing that on collection, yeah, what I, what I would say I would say, it's more of a geography issue. So you will see two people who are two different approaches one you would net out from Furmanite rental income and the other approaches. The one we've taken which is where you include your modifications and uncollectable revenue. So it's not necessarily a a I would say kind of a reserve, which is what I think people.
Generally think of a uncollectable revenue.
Okay.
And then just some higher level question as you sit here today are you seeing some pretty strong improvement in rents paid as far as the opening progress and sales activity.
What do you think about the chance as we get past the holiday season that you know there is that we take a step back and talk like the fundamentals across our business.
And its test yeah.
Hold off for the holidays, but maybe declare bankruptcy as we come into your like 2021.
[noise].
Ki bin its David.
I guess, we feel like right now things are are are chugging, along pretty good and it feels like the the pandemic is not getting any easier in the last couple of weeks and yet we're signing a lot of leases tenants are paying rent and they're doing business they've figured it out.
So I I'm, starting to think myself that there might be a bit of a departure between what happens in the next couple of months with the pandemic and what happens next couple of months with our tenants and I just don't see a situation, where we go into a repeat no because it just feels different than it was six months ago.
There are some categories that are I think are going to struggle like theaters and fitness and local restaurants, but if you look on page 13 of our deck, which is a repeat from a a couple of months ago at the chart. I mean, those are the three categories that I could see struggling through the winter and you know I I know on a combined basis, there's still not a dramatic.
Percentage of our NOI and so our IB ours I do feel pretty good about the operations right now.
Okay. Thank you guys. Thanks.
And our next question will come from.
And we'll take Jewish with Mizuho.
Please go ahead.
Hey, good morning, Thanks for taking my question.
So I wanted to get a I guess, a little bit of clarity first on the cash accounting question I guess I was more curious on how that that bucket. The you know the doubtful accounts is changed from second quarter and third quarter.
And then what.
And then for perhaps it's not 10, it's a sector.
Sectors last industry now accounts for accounted for that change.
Hey, Ki bin its Connor I would say on a tenant count perspective, it hasn't changed that dramatically, partly because a number of tenants on cash basis are gone I appear one and a couple others from a dollar perspective. It has gone up we're seven months independent mortgage each month that goes by we learn a bit more but.
You know there is no one category that we are now more worried about to David's point, we've circled theaters local restaurants and fitness for some time as the three we worry about are there other companies outside those sectors that worried about absolutely, but I would say, it's very company specific or idiosyncratic and not nature. So.
Got it we certainly added to our list from the third quarter, but I feel like we have to David's point, we had a really good sense today of kind of who is struggling and whose outperforming and it feels like we've got a pretty good on that right now.
Got it got her and it turned out that way so a second question.
Is going back to the.
The recollections forbid the 90% headline number certainly a positive in higher than we had many investors we speak with were expecting but.
But part of the problem that we have the most people's understanding whats going on within that figure with so many leases and big box being restructured the impact to validate its store closures and pending closures.
And the catch EPS, an unpaid rent. So I was hoping you could talk a bit more about the moving parts and their impact on third quarter collections here, how should we think of 90% of the new baseline for questions going forward or do some of the things that help during third quarter.
Perhaps won't help in fourth quarter like perhaps in the catch ups I suggested that that might be the ceiling or high watermark for well. Thank you.
<unk> as a number of things unpack there. So I guess on the first one from the denominator in a pool. We include everything out a denominator and that's a it's a really good question because I don't think theres perfect consistency across the sector on that so whether we abate or defer collect or whatever it is it's included in our denominator for every single month.
So that's the first point I would make and if you looked at our build base rent quarter over quarter, it's almost effectively unchanged, which I think helps support that point. So that's the first thing I'd say.
The second point coming back to the kind of high watermark, we're at 90% we've been there for two straight months, we're not going to go over our skis and commit to to the fact that this is the new this is the new normal. This is what we expect to close but I would just point you back to David's comments at the beginning of the call. You know we are still working through some of these agreements you know our collections. If you recall in April Thirtyth.
We're 50% for the month of April we're now 70% for the second quarter and we're still collecting second quarter rent. So I would point you to two things one I still think you're going to see a number a number of tenants pay as we come to agreements in the fourth quarter of second and third quarter rent and then for the fourth quarter to David's point, we're still working through some room, some very large tenants given how concentrated we are.
Those have a material basis or they can have a material impact on our collection rate. So it's a long way of saying, we're not going to commit to a number we expect to see over the fourth quarter, but there are agreements thoughts any or some tenants that are paying rent that could have a positive impact on collections. So TBD, but I think you know just kind of summarize I think we feel very good about our national tenants, how their physician, how they're performing and the latest couple.
A month and so we'll see how that trends over the fourth quarter.
That's helpful color. Thank you and if I could would you classify or maybe help me understand the impact of a catch up rents during the third quarter. The second quarter. So the rents that were due in second quarter that is getting paid in third quarter, what impact that had to the collections ticket sure. So so the collections figures are as of October 23rd size.
Last Friday, so if they're paid are collected you know, they're just included not that respective month in which their build so that's a long way of saying take a second quarter for the 16% deferrals for those tenants that start to pay that deferral, what you'll start to see as a collection rate go up and the deferral rate go down right about that would be impacted from just from our normal.
Toxins reporting from a balance sheet perspective, it's going to depend on whether it's the accrual or cash basis tenet is an accrual tenet you won't see it anywhere other than our cash balance and as if you take a look at our net debt quarter over quarter. It was down I think call it $30 million to $40 million part of that is retained cash flow from those tenants kind of paying out pass through rent if it's a cash basis 10.
But then the from an income statement perspective, it will be recorded in the quarter that they pay there wasn't a little bit of a benefit in the third quarter and I'm going off the top my head, which is dangerous I think it's about a million dollars here or there you could see a benefit in the fourth quarter as well to that but its not I don't think thats necessarily material thing if you're on a cost basis, you know a I would say we have a fairly costs.
Cautious outlook, so long way of saying when a tenant pays you will see that kind of fill up in the bucket that relates to from a monthly perspective, and then how that flows through the income statement just depends on whether to crew or cash basis.
Got it got it. Thank you I appreciate you're welcome.
And our next question will come from Tim Boating with Green Street Advisors. Please go ahead.
Hey, good morning.
I have a follow up on lease modifications can you just help me understand exactly what it was it does not trigger a lease modification per GAAP. For example, I would assume as a pure deferral does not but an abatement or lower ongoing rent was just any more color on this topic.
What's included what triggered this this gap rolling on would be helpful.
You got it so you're spot on vince's straight deferral with no other change the lease would not being put us modification what would be and could have a modification would be something like you just mentioned that material change the composition will evaluate whether it's the rent per square foot or turn whatever it might be to David's point from earlier, we've had very few kind of.
Restructuring of leases outside of bankruptcy, where we have seen the most frequent modification as a change to the duration of the term of the lease and so I'll give you. An example, where if we say that someone will defer your rent for the second or third quarter in exchange, you're hitting an option, which is a very common occurrence as part of kind of our horse trading that David alluded to then that would be a lot.
Vacation that rent would be excluded from same store NOI, Andy cash rent would effectively be neutralized by running through the kind of the cash basis that we would have built a normal kind of lease.
Through our uncollectible revenue line item. So the biggest piece on the modification front, that's would be deferrals with an option exercise and then the other component would be abatements as David mentioned, that's a smaller number so but those are kind of the two biggest buckets. It would fall in that modification.
So what I'm trying to just get out of almost like how much of that yeah. You said, 30% of the uncollectible revenue line item roughly was due to lease modifications like is there any forward looking implications of that let's say, 30% of that lease modification or the of the lease modifications, what I'm trying to get out.
It is.
Yeah. If there for example, lower rent going forward baked in it's kind of hard to extrapolate the onetime charge into what it would be or is there anything you can help me better understand what how to separate one time third quarter charges per GAAP rules to extrapolating.
What is the go forward run rate from some of the noise you got it. So I would just say generally the vast majority of our modifications and deferrals have related to the second and the third quarter and so in that scenario, where we don't have additional deferrals or maintenance for the fourth quarter. The base rental income number we report.
For the third quarter is a great run rate to use going forward, obviously need to adjust for bankruptcies or oxyfuel loss, but that's exactly why that kind of Genesis. Your question exactly why we ran the abatements and modifications through the uncollectible revenue line item as opposed to adjusting the topline. So it's a long way of saying all else equal if our collection rate was idea.
Nickel in the fourth quarter to the third quarter and we had no. Other deferrals are uncollectible revenue would drop by 30% quarter over quarter. So the only adjustment or kind of normalization need to think about is really the uncollectible revenue line as opposed to the top line, which should effectively be unchanged. The other pieces. There is as part of these modifications where the rent kind of done.
Show up on income statement is straight line rent coincidentally that kind of extra straight line rent we record for modifications. This quarter was almost entirely offset by straight line rent write offs related to adding cash basis tenants or adding new cash basis tenants to handles question. So from a from a run rate perspective, our topline is a very for the third quarter is it.
Very good run rate to use all else equal before you adjust for bankruptcy tenants.
Got it no that's really helpful color one more just quick clarification for me on the data point in your deck, where it's a material national bankruptcies to date represent 2% of FBR does that 2% include tenants. So just tier one in Athena that have already moved out or this 2% of your current run.
We are so that 2% as our quarter end occupancy so you're spot on there are a bunch of guys who left mid quarter, we're trying to get the occupancy number as of quarter end. The dollars them out. We also gave and I forget what that is I think is just over 2 million that is what it sort of so if someone closed mid quarter or whatever month or two months. They paid would be included.
Topline so it's giving you both ways the revenue impact Andy quarter end occupancy impact.
Perfect. Thank you welcome.
And our next question will come from Mike Mueller with JP Morgan. Please go ahead.
Yeah, Hi, just have a quick one.
Color on the lease modifications was great by the way, but for the Threeq huge referrals what are the categories, where you were seeing deferral requests coming from outside of say local restaurants theaters and fitness.
Like I would I would say for third quarter, it's not that the requests are coming in I would say, it's the tail end of the large bucket of request we had back in April.
Yeah, I mean, it's it's really been a dealing with the kind of Twoq you.
Problems early on when all these national tenants were trying to adapt to their store footprints to fit curbside pickup and they were trying to figure things out and they just needed. Some help we can only do so many per month and so I think that's why you're seeing a gradual reduction in the amount of unpaid is because we're just getting through the documentation that takes.
A long time, there really havent been any new requests that I'm aware of in the last couple of months.
Okay. That's that's helpful. Thank you that was thanks, Mike.
And our next question will come from for its food or did you come with Compass point. Please go ahead.
Hey, good morning, guys. Thanks for thanks for taking my question could you could you remind us again what the.
Your your collection rate excludes recoveries.
Correct and how much of an impact would it have if you were to include recoveries as a percentage of your collected.
Collected a rate.
Yes, you are correct our collections rate is base rent only we exclude recoveries. If we were to exclude recoveries. It would be a higher collection rate. If you think about a number of our deferrals or don't defer or triple net.
And so if you included deferrals in our collections there would be a higher percentage of collection I don't have the number off top Matt.
Okay.
Thanks. Thanks Cotter one other quick question for you I mean in terms of your 76 million Oh, Oh rights that you recognized in the third quarter I noticed your small shop occupancy dropped by 3%.
Hi, David.
David I think was alluding to there you expect potential more weakness in that particular segment of your business or how do you guys think about your billable rents as a percentage of your billable rents or can you give us some more color on that relative to the first quarter billable rent or.
Would you expect going forward.
I think for us I'm into my to my earlier comments, our billable around was almost unchanged quarter over quarter as a result of leases commencing offsetting banker times, leaving to your point. The bankruptcies to date has been mainly small shops, but but they've been mainly under that just under that 10000 square foot cut off for shoppers as anchors, which is a little arbitrary right and it's been that kind of <unk>.
The 10000 square foot spaces.
So in our run rate as as Vincent I, just talked about is about 200 basis points of additional bankruptcy a number of those maybe with the exception of Cymer are in these small shop space. So I would expect to see continued pressure on our lease rate for small shops small something under 10000 square feet and additional improvement potentially in our leased rate over time.
The square feet based off the momentum David and I have talked about from the anchors perspective.
Great. Thanks, that's hard you're welcome force.
And our next question will come from Katy Mcconnell with Citi. Please go ahead.
Hey, its Michael Bilerman here with Katie I'm, David I was wondering if you can go through if you look at sort of the lease role going forward, but also the the leases that you executed in the third quarter that 800000, and you had some opening commentary about how that's up relative to last year.
Can you.
Sort of talk about at what point, where those leases.
A lot of it was 80% was renewals when were those when would those discussions started pre coated versus post cove. It you know versus stuff that was already in progress that you just got to cross the goal line versus new discussions you had for those tenants to renew or signed a new lease [noise] and Michael that's a great question the last.
Last two earnings calls Weve I think we are told when the management tone, it's been a little bit more Ah Hey, let's all remember. These these these conversations started pre cove it and they were on a you know third base.
This quarter is a little different because the the leasing this quarter was really generated over the course of the summer spring and summer and I I know, it's somewhat surprising, but yeah I think what's really happening is.
Tenants that want to fill in the gap in certain high income suburbs are looking to properties, where they have the right co tenancy.
And when they want to be there they want to be there and so we've seen a lot of the national tenants, you know try and get into locations when they feel like they have an opportunity.
So these are these are recent deals I mean, they're not they're not they're not kind of leftovers from the pre cobot world.
Most of it is renewals do you have to give anything up in those to get the tenant to renew.
No I mean I think these are basically oh, it's a similar type of negotiation that you would have had pre coven there have been conversations and some tenants that have wanting to put language in about pandemics. There had been some tenants that want to help with renovation with T.I. packages.
As for renewals.
You know there have been some tenants that don't want to exercise an option, but they want to.
Renew flat.
There have also been a number of tenants that skip their option earlier in the summer and then by the end of the summer wish they hadn't and ended up paying more rent. So it's been a very interesting past couple of months and I think you're sensing a little bit of a change in tone, because this quarter I'm really feels like there's been some some tailwinds that I.
I haven't seen in a long time I personally think that.
The amount of the kind of work from home in white collar jobs in wealthier suburbs is having a somewhat dramatic impact.
And I think the tenants recognize that.
And when you look towards 21, and 22, right, where you got a million square feet next year a million seven a year. After one point I guess, where are you in those discussions with those tenants obviously, a significant amount of that lease role does have a renewal option for an extension options available.
So.
Just where to how how should we think about the cadence of putting those to that.
[noise] a at this point I would say that I I would look to the last couple of years and look at the renewal probability or the option is exercised probability and it. It I don't think its going to be better, but I don't think it's going to be significantly worse in other words, a lot of the delay in these deferral.
Conversations with larger anchor tenants is because we said hey, we'll talk about a deferral, but let's look at the next 18 to 24 months of your role and let's agree to options exercised.
In return for dealing with you know the spring a pandemic rent it was do big.
Because we also want like you. We also won some surety as to what's going to happen on a renewal and even if we end up not agreeing at least we get a window into how the tenant feels about that location.
And for the most part we've been pleasantly surprised I think where you're going to see that the struggle in the in our portfolio are the strip center space. In General is that you know there are a number of chains that are shrinking their footprint, whether its through bankruptcy or just naturally they want to shrink footprint instead of its a instead of four units in a city they want to go to three.
And it's in the city.
And in doing so I do think that the spaces have value and we're proving that there are backfill tenants there, but it's at a cost and that cost is downtime in capex right in it but it feels a lot like the last couple of years with respect to you know move outs and move ins.
It's just in the last quarter I feel like the move ins story has gotten significantly better.
Yeah Yeah.
Just two other quick ones you spent a lot of time talking about the horse trading you're doing with tenants being able to get something back in return for deferring their rent or having them pay some up front is.
Is there a way to sort of summarize what that aggregate debt that you got.
But others are right or is there a way that you can put it in totality actually each individual tenant is not material in enough itself, but perhaps when you aggregate. It. All this up you can give us some sense of hey, Michael let our 69 wholly owned centers, we've been able to get this must.
Space back or you know and things like that yes, that's and that's actually a very creative idea yeah. I mean, it's hard Michael I mean, it's.
It's funny on some things that it was a very modest debt, meaning you know we wrote some language in the lease are we allowed us to do at least in the future, which is difficult to kind of quantify but you're right for every single one of these modifications are agreements. We went tenant by tenant rent MTV pre and post and figured out what what was a value to US you know for some of them I alluded to actually.
Ladies question on on some some tactical read on projects, we have unlocked it was a building to a pad and you're absolutely right the value creation on those materials. So it's a it's a really good question something we should we should quantify but we've done it. It's just a sense of kind of adding it all right.
Well that would be helpful. And then I guess once once you're only doing one thing maybe you can do another which is [laughter] I think having [laughter] I think all of the you know the rent deferrals in collections and cash versus GAAP I do thing, having just a table as were moving quarter to quarter just to understand the cash flow impact.
Acts of these things and I recognize we can look at you know the net debt and see what happened sequentially.
A lot of other things going on right, you're not paying a dividend today. There is just a strip out really what's happening on the rental line yeah.
What was collected what was deferred when was that deferral actually paid actually having that each quarter too.
Allow us to compare okay. This is what it was in Twoq. This is how much has been recovered I think having that information would be very helpful to the investment community completely understand the point Michael I think the biggest challenge is going to be quarter end versus reporting day me now we report two weeks from now I guarantee you.
You are a collection rate will be higher than it is today and then thus the impact of the balance sheet in a post quarter end collections will be impact as well so completely understand the point as you know we are or hyper focused on disclosure and transparency. So as we kind of get into the meat of these deferrals and 2021 I think it's it's an excellent point. We are we are laser focused on figuring out the best way to suppose.
That's the investment community. Okay. Thank you so much thanks.
Thanks, Mike.
And our next question will come from with Linda Sorry with Jefferies. Please go ahead.
Hi, Thanks for taking my question terms agreed developments would you expect.
<unk> split between major in tactical in the post covered recovery <unk>.
Yeah. Good morning, Linda I think that you're going to see that a lot of the value that has been created from getting control back from some of the tenant leases is going to be tactical in nature, and so I think for our company. We're very focused on the highest return on capital at the lowest risk and the tactical.
Redevelopment for right now for US is the largest bucket of opportunity I don't see us engaging on large mixed use projects going vertical with a you know a lot of high density I think for US we're focused very very much on the blocking and tackling of small projects because there there faster and they're more accretive and and that's what we have.
Have inventory of because of a lot of these tenant negotiations in last couple of months.
Thanks that makes sense and then just a quick follow up on the store rationalization comment you know in terms of gap brands announcement to focus more.
I want to let out or maybe im looking to extend outside of miles within a few years.
Yes, 34 basis between your JV in Hawaii, and would you expect to be positively or negatively impact.
Actually it on that basis or is it just kind of too early to tell.
Yeah, I mean, if there was one story that makes a strip center landlord happy it was that story because I think it's a verification that the open air format achieves the same customers.
At a much less expensive build out and operational costs, then namal and our company is almost entirely.
Old Navy and I think that the sales were seeing there is strong the desire for that company to really focus on the open air format is going to be a big benefit to us and they're not the only ones. I mean, there are other mall tenants and frankly street retail tenants that are saying you know what the most.
An important feature for customers for the future is convenient.
And this asset class of suburban strip in high income areas is a 100% based on convenience. So I think it's a net benefit to us.
Thanks.
And our next question will come from Chris Lucas with capital one. Please go ahead.
Hey, Good morning, guys, just a couple of quick ones.
On the.
30% of the uncollectible rent that was in lease modifications I'm, assuming that those that triggered options show up in the leasing data you guys reported.
Hi, Chris the answer is yes, if they've been executed and just a just a small clarification just to 30% of our uncollectible revenue is related to modifications just wanted to clarify that.
Right, Okay, and then as it relates to the.
This would be a $22 million of deferrals does that is that the right number garner.
There's $22 million of accrued a in our receivables, there's $22 million or the crude or deferrals correct.
Okay, what is going to be somewhat maybe I'm.
Correct understanding of your deferrals.
Got back what is the cash component versus the year crude coupon in other words, what is the potential positive impact future results.
Based on the collection or deferrals, yes. So that's a great point sort of 20 million is just the accrual based tenants right cash basis has I don't have the number off top of my head.
Implicitly if we have them on cash basis, we're not expecting that to be paid I don't think Chris it's going to be kind of game changer for us from a cash flow perspective, we generally have not been a executing deferrals for cash basis tenants. There are some but typically these are tenants that you know we are we want to keep on a very tight leash and so.
Next instead of deferral, we might be looking for another alternative or kind of.
Inducement for lack of a better word so it's it's I don't have the number off top of my head I don't believe its material, but also implicitly we do not expect to receive it but something we can provide more disclosure on.
Okay and the last question for me just going back to the.
The percentage of the uncollectible rent related to lease modifications what was that for second quarter, just sort of a sort of comparative.
Plus or minus 10% I'm just over 10%.
Okay, great. Thanks.
And our next question will come from Katy Mcconnell with Citi. Please go ahead.
Hey, it's Michael Bilerman again, just wanted to quickly ask about external growth and what you're hearing from a capital partners. You, obviously did the four and a Chinese JV, but the Chinese investors.
It was about 18 months ago are you finding much appetite for partners to want to co invest in the sector today.
It feels like all like like speaking to common equity investors Theres a lot of curiosity.
And a lot of intrigue, because things appear to be better than they had thought it would be.
The yields are.
Seemingly strong.
But I think that you know in the middle of of this pandemic with no real end in sight I think it's hard for institutional investors to make that leap of faith, and so I would say that those that move from interest to hey, let's talk tend to be more opportunistic in nature and.
For a a partner like US you know, we really want institutional partners that the dilemma with with opportunistic of course is that.
It's just it's it's financially not as successful for us. So I think you'll you'll see us wait to form new joint ventures until we feel like we have a really strong institutional partner that has an alignment of interest with us in other words long term.
Right and then does Oh, I guess are you eager or is there anything to sell into this market place that you can continue to hone in on.
[noise] I explain I'm sorry.
I'm, sorry, I I mean, I guess, one hand is potentially on the buy but is there anything that you feel is the market at.
At all deep enough yet to be able to liquefy more assets.
I don't think meaningfully so in other words, you know that the net lease market is obviously very strong still 10 31 market but.
But when you when you really think about the labor required and does it really make a difference and what's left to I guess I feel like the transaction market is still really slow.
Right. Okay. Thank you yep.
Ladies and gentlemen, this will conclude our question and answer session I would like to turn the conference back over to David Lukes for any closing remarks. Thank you all very much and we'll speak you next quarter.
And ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. At this time you may now disconnect.