Q4 2020 Regency Centers Corp Earnings Call
[music].
Greetings and welcome to Regency Centers Corporation fourth quarter 2020 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being reported.
I would now like to turn the conference over to your host Christine Mcelroy.
Good afternoon, and welcome to Regency centers fourth quarter 2020 earnings Conference call. Joining me today are Lisa Palmer, President and Chief Executive Officer, Mike Mas, Chief Financial Officer, Mac, Chandler, Chief Investment Officer, Jim Thompson, Chief operating Officer, and Chris Leavitt SVP and Treasurer.
Sure.
Reminder, today's discussion contains forward looking statements about the company's future business and financial performance as well as future market condition.
Based on management's current beliefs and expectations and are subject to various risks and uncertainties. It is possible actual results may differ materially from those suggested by the forward looking statements we may make.
Risks that could cause actual results to differ materially from these statements are included in our presentation today and in our filings with the SEC.
Today also contains non-GAAP financial measures.
GAAP financial measures are included in this quarter's earnings materials, all of which are posted on our Investor Relations website. Please note that we've again provided additional disclosures in this quarter's supplemental package.
With 19 and its impact on the company's business.
<unk> also posted a presentation on our website with additional information Lisa.
Thank you Christie.
Good afternoon, everyone.
Good morning for those of you out on the West Coast first I'd like to begin our call by again thanking the regency team, it's hard to believe that almost a year has passed.
Since the pandemic started to meaningfully impact our daily lives.
<unk> and individually.
We are presented with challenges and we continue to be that I don't think any of us could have ever imagined.
And in the face of that I'm. So proud of how our team has navigated this very different environment with a revised and even more demanding set of expectations.
We have worked harder than ever during this time to serve our tenants our customers our communities and our shareholders.
And while regency does enjoy the advantages of our size scale and national presence. It's the people in our 22 offices across the country.
It had been the keys to our resiliency.
Our local presence provides us close proximity to our properties.
Which enables us to act small and to take a personalized relationship driven approach with our tenants. So once again. Thank you all.
In the fourth quarter. Despite a rise in cases in most markets and increased restrictions in some we have been encouraged by continued improvement in our operating results and this is driven by further meaningful progress on rent collections.
The hardest hit categories, however, especially in the more restricted markets are still lagging.
Many entertainment.
Fitness.
Sit down restaurants.
And personal service tenants are still either not allowed to open.
We're operating with severe capacity restrictions.
This has had the greatest impact on our local small shop operators.
But even in these categories and end markets, we still see improvement in collection rates compared to where we were three months ago.
We also remain encouraged by momentum in our leasing efforts and execution volumes picked up in the fourth quarter and our pipelines continue to grow. This is a testament not only to a greater willingness among tenants to do new deals, but also to the strength of our locations our tenant relationships and our experienced team.
So despite the setback we solve the health crisis in certain markets in the fourth quarter Regency still moved forward.
We see green green shoots as well.
The vaccine and help to at least provide some light at the end of the tunnel and additional federal stimulus could help to support our local tenants and consumers at the margin.
The worst of the restrictions are hopefully behind us knock on wood as we've seen some of the most restrictive states like California start to ease up a bit.
But with that said, we still have reasons to be cautious given the meaningful uncertainty that remains well many businesses may technically be open the inability to operate at full capacity can be a major obstacle.
Things are definitely a positive but distribution will take time and the presence of additional variance is certainly a wildcard.
The ultimate impact of this on the consumer and in turn the resulting impact on tenant fallout remains unknown and on.
Our 2021 outlook reflects that uncertainty in fact, we've chosen to use a scenario approach rather than a traditional guidance framework and Michael will discuss that in more detail on just a bit.
In light of the current environment, we firmly believe.
That being careful and transparent as we always are is the most prudent approach to setting expectations.
Well, we do have a greater sense of optimism and that is inherent in our continued improvement scenario. It is still too early in the year to eliminate all reverse course scenario.
As we do move through the year, we will have a lot more clarity and visibility and we will refine our expectations accordingly.
Today, our team in the field continues to aggressively but thoughtfully pursue recovery of cash flows as I've discussed previously we've taken a targeted strategic approach with our tenants throughout the pandemic, especially for our local tenants.
Waiting until they are able to reopen and then working with them on a plan for the future.
We believe that this approach will help to ensure the long term success of our tenants, which should in turn put regency and the best positioned for recovery.
The quality and location of our assets have allowed us to choose our tenants over time to fill our portfolio with great operators, we've already vetted. These merchants and we still want most of them in our centers. When this is all over.
Same time, we're not afraid to get space back we have great space and we will re Lisa. This is what we do and we do it really well, but in many cases when factoring in the economics of re Kennedy.
Making the conscious decision to work through it with a proven business operator.
As is often the wisest choice.
We always have to keep them perspective that these are people just like us that we're working on.
And importantly, I also want to.
Reemphasize the strength of our balance sheet.
This will provide us with the financial flexibility to maintain our quarterly dividend throughout depends on it which we're really proud of given our long term commitment to driving total shareholder returns.
It is also enable us to continue committing capital to new investments as well as in operating and maintaining our existing centers.
Well, we know that we still have a long road ahead of us substantial progress that we've made toward recovery thus far.
It really has provided renewed energy among our team members.
As I reflect back on the last year my confidence in the longer term trajectory for regency is only solidified we are on the right side of a structural growth trends and strong suburban markets.
Our high quality well located geographically diverse portfolio of grocery anchored open air centers is well positioned to continue serving the essential needs of our communities Jim.
Thanks, Lisa and good afternoon all.
I'd like to Echo Lisa's comments and thank the regency team.
On the people who've worked tirelessly over the last year to maintain the lines of communication with our tenants.
We're doing everything we can to enable them to open and operate safely and successfully.
Proud of what we've accomplished during a very tough year.
Kind of how far we've come since last spring.
As of the end of January.
As majority of our tenants are open and operating.
And that Hasnt changed much from a quarter ago.
On a subset of our tenants are still operating under government mandated capacity restrictions and those restrictions increased in certain categories and markets during the fourth quarter given the rise in Covid cases.
Despite this our cash collections continued show improvement, reaching 92% in the fourth quarter and 89% in January as of Monday.
We're still receiving rent payments for January on the collection trajectory is tracking in line with prior months in fact as of today, it's already up to 90%.
Even in our West coast markets, despite the greater restrictions during the fourth quarter.
We still improved our collection rates from a quarter ago.
They still meaningfully lag or other regions, but we are encouraged to California appears to be easing. Some of these restrictions, which should help narrow that gap.
As we've seen in markets that are more opened less restrictive.
<unk> have returned to engaging with our retailers.
This is encouraging and is an opportunity for continued improvement.
Lisa just discussed our strategic approach with our tenants and we designed deferral plans that are realistic.
We expect the majority of our deferred rent to be collected in 2021.
Beyond those with deferral agreements tenants that are still it still uncollected generally fall into three categories.
Those we believe in but are still waiting to engage predominantly on the west coast markets operating under closure or capacity restrictions.
There are those we are aggressively pursuing for rent.
And there are those who are struggling pre pandemic that we see as closure risk.
We continued to see impact from tenant fallout in the fourth quarter and expect 2021 will likely remain challenged from a tenant fallout perspective.
The seasonal dip that we typically see in the first quarter could be more meaningful as a result.
Elevated tenant failures are factored into our guidance with the uncertainty around move outs contributing to the wider range.
I want to provide some added color on our leasing activity in the fourth quarter.
We are encouraged by the strength in our leasing volumes, which had continued to show improvement throughout the year.
The demand is real and retailers react.
You're seeing the greatest new leasing activity in the markets that are more open with the lease restrictions.
Our future deal pipeline is also strong with categories, including grocery off price.
Medical auto parts and service users, but also and most encouraging encouragingly fitness and restaurants.
Our tenants can operate leasing feels closer to normal.
Total rent growth for the quarter was slightly positive weighed down by renewal activity.
For our renewal deals volumes have remained consistent throughout the pandemic, but in the fourth quarter, we did see some pressure on renewal leasing spreads.
One third of our renewal leases signed during the quarter average 18 months of duration.
These deals had negative spreads averaging more than 5%.
A longer term renewal deals had positive spreads of over 2%.
Some other short term deals a rent relief negotiations with tenants in bankruptcy as well as others that have been significantly impacted by the pandemic.
Those deals primarily consists of shop tenants because.
Because conversely, we saw positive spreads of nearly 7% per anchor renewal deals on a quarter.
Importantly, our teams are managing this space on the right way, we're being thoughtful we're making leasing decisions with an eye towards the longer term.
We believe that rents for much of the space, we rightsize at higher levels post pandemic.
On a shorter term deals.
Another bite at the Apple in the near future.
Sum up we remain impressed by the resiliency and creativity of our tenants in this environment.
Willingness from consumers to adapt to the new normal and Reengage with our merchants most.
Most importantly, we are encouraged by the improving operating trends.
We continue to see a flight to quality.
Believe our portfolio is well positioned to benefit from this.
Okay.
Thanks, Tim and good afternoon.
Throughout 2020, we performed an in depth review of our in process development and redevelopment projects as well as our extensive future pipeline of value add opportunities to.
This evaluation included potential impacts to scope timing tenancy and return on investment in order to determine the best direction for each project to align with our long term growth objectives.
Following this process, which we have largely completed we made the decision not to pursue certain projects or components of projects as they no longer meet our return thresholds.
As a result, we wrote off development pursuit costs above our historic average in the fourth quarter.
The largest right off with that Sir Martin Center as we produced our scope, though the broader multi phase project is proceeding forward and we added it back into the in process pipeline in the fourth quarter. This roughly $55 million project will include several standalone restaurant pads, a new hotel on a ground lease the completion of the Marlin Cheerier renovation.
On the releasing of the former Jcpenney box.
While we have trimmed some of our activities due to COVID-19.
We continue to maintain a healthy pipeline of value add projects and in fact this process has given us for new confidence in the $300 million of developments and Redevelopments in process at the end of 2020.
In addition to restarting construction, Sir Martin we also commenced construction on a ground up publix anchor development in the Jacksonville market.
In the fourth quarter, we successfully completed the village at hunters like a sprouts anchored development in Tampa, Florida opened at 100% leased in the middle of a pandemic Hunter is generating an 8% return on a $21 million investment.
We continue to invest in our other large scale high value redevelopment projects that we expect to start in the near term for example, entitlements are finalized at west part squared Bethesda, Maryland, and we plan to commence with the first phase in 2021, we remain confident in the long term value creation opportunities available on our pipeline.
Moving to dispositions during the fourth quarter, we sold five shopping centers for a combined gross sales price of nearly $78 million, bringing our total dispositions for 2000 $20 million to $191 million at a five 7% cap rate. Additionally.
Additionally, we sold over $80 million of non income producing land and out parcels in 2020.
Our disposition activity is consistent with our strategy to our producing opportunistically sell non strategic low growth assets to improve portfolio quality and maintain balance sheet strength.
For 2021, we anticipate dispositions of approximately $150 million on an average cap rate of five five to six. This includes the sale of two assets that closed subsequent to year end.
We look forward to providing updates throughout 2021 on the progress of our development projects and our disposition plans.
Nick.
Thank you Mac happy Friday, everyone.
Great you joining us on what we know has been a very busy week.
I'll start by addressing fourth quarter results and our balance sheet position before moving to our framework for helping everyone understand what this new year may bring.
Fourth quarter NAREIT <unk> 76 per share includes a few one time charges that were communicated several weeks ago.
And were detailed again in our release last night.
These charges are in addition to a write off of straight line rent receivables of nearly $8 million or <unk> <unk> per share and uncollectible lease income of approximately $18 million or <unk> 10 per share.
<unk> recognized in the fourth quarter.
Uncollectable lease income remains the primary driver of the decline in same property NOI on the quarter.
As evidenced by the additional straight line rent write off in the fourth quarter, we did move some additional tenants to cash basis accounting.
This was predominantly the result of increased levels of operating restrictions imposed late last year and this bucket of tenants was concentrated in our west coast markets as well as across the more impacted tenant categories, including restaurants personal service providers and fitness operators.
However at the same time, we continue to see improved collections and our cash basis tenant pool. This.
This is clearly a gratifying trend.
In the fourth quarter, we recognized revenue equating to 94% of our pro rata billings that.
That is up from 90% in the first and the third quarter and 86% in the second.
We ask that you refer to our updated COVID-19 disclosures in the fourth quarter supplemental which provide a reconciliation to pro rata billings.
Just a few comments on our balance sheet.
We remain extremely well positioned.
Shortly after year end, we repaid our $265 million term loan, which we indicated we would do with positive trends continue which they have.
With this move we have completely redeployed the proceeds from a bond issuance last night and you'll notice this impact in our guidance for interest expense.
With ample access to low cost debt capital.
We no longer feel the need to maintain an outsized cash balance out of an abundance of caution.
Which was dilutive to our earnings in 2020.
We now have no significant debt maturities until 2024.
In addition earlier this week, we closed on a recast of our $1 25 billion revolving credit facility through.
Through which we have full availability.
Net terms and pricing consistent with pre COVID-19 levels.
We are very proud of this execution, reflecting the continued strong support of our lenders in this challenging environment.
Turning to 2021, we've provided an initial NAREIT <unk> range of $2 96 to.
To $3 14 per share a much wider range than you've historically offered.
Reflecting continued uncertainty.
We encourage you to refer to our guidance disclosure on our press release and on page 34 of our supplemental as well as our guidance roll forward on page 18 of our earnings slide deck.
Low forward should prove to be especially helpful.
As you would expect the widest per share variances in our is in our projection for net operating income.
Given that much more of our NOI potentially variable amid the uncertainty that remains in the environment, especially as it relates to uncollectible lease income and potential move out activity.
We believe a wide range is prudent.
We also feel that is important for us to communicate the framework for how we are thinking about the different scenarios that could play out this year.
And what our earnings could like look like under those scenarios.
So different from past years, our initial 2021 guidance is not driven off of simple deviations from our base case scenario instead.
Instead, the low end of todays range is representative of what we think our results could look like under a set of circumstances that is distinctly different from the assumptions supporting the high end of the range.
Each of these guideposts represent a unique set of potential outcomes.
We actually thought about not even call on the guidance and fed calling a scenario analysis.
Because for now and until we have a bit more clarity on the impacts of the evolving pandemic. This is how we are thinking about this framework internally.
From a big picture perspective, the low end, what we call a reverse course scenario is it environment in which the U S experiences elevated infection rates and in turn sees more shutdowns and increased restrictions.
In this scenario with the potentially backtrack on rent collections and full year 2021 could look a lot more like 2020.
Under this scenario, we see same property NOI declining another 100 basis points year over year in 2021.
The midpoint of our range represent the status quo scenario.
Our 2021 reflects a continuation of our fourth quarter results.
This scenario.
In this scenario same property NOI growth is slightly positive year over year, despite the tougher comp in the first quarter.
The high end represents what we've named our continued improvement scenario.
This is an environment with continued progress in vaccine rollout further lifting the state and local mandated restrictions on operators and added federal stimulus that helps support local businesses and consumers.
Under this scenario, we would experience a positive trajectory from Q4 results as we continue to increase rent paying occupancy as we have for the back half of 2020.
In this scenario same property NOI growth could increase by up to 250 basis points year over year in 2021.
We recognize the challenge that such a wide range of outcomes presents but at this point in time, there is simply too much uncertainty to rule out the downside.
At the same time, we also appreciate how difficult it can be to develop expectations without the benefit of the company's outlook.
We sincerely hope that this approach and added transparency is helpful in allowing the market to consider its own views of where we stand on the pandemic and then apply those assumptions to our scenarios.
We also expect debt with another quarter under our belt added clarity will allow us to refine our scenarios and <unk>.
Heightened our expectations.
I'll touch on a couple of other major drivers of the earnings changes in 2021, using the midpoint scenario as reference.
But we've given a lot of detail on the roll forward and much of it speaks for itself.
One item to note as lease termination income. This is net of expenses and first quarter 2021.
Will be impacted by a onetime lease termination expense of close to $2 million associated with the buyout of an anchor lease that Pleasanton Plaza.
And secondly, we expect higher net G&A in 2021.
I mean hiring activity and business travel starts to return to more normal levels. This year.
Okay as I spoke about on the last call. We are no longer assuming as much of an offset from development overhead capitalization as we had in 2019, given the delays and changes on our pipeline.
In closing we are very much encouraged by the progress that we've made and by where we stand today, but if there's anything we've learned in the last year aside from confirming how critically important it is to maintain a fortress balance sheet is how quickly and materially things can change.
As such we remain careful with our expectations.
With that we'd be happy to take your questions.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is on the question queue. You May press star two if you'd like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Please while we poll for questions.
Our first question comes from Katy Mcconnell with Citi. Please state your question.
Great. Thanks, and good afternoon, everyone.
On your same store NOI guidance can you provide some context around what you're expecting per one kjell and turns on the magnitude of occupancy fall out on bad debt just to get a sense for how steep the recovery could be on the back half 2021.
Yes.
Yeah.
Oh, one moment guys.
One more on Mckee.
Yes.
Okay.
Katy this is Mac in la they are having a little bit of technical difficulties just give us some moment here in Jacksonville, Okay.
Your balance.
Okay.
Hello Kitty.
<unk> it looks like.
The Jacksonville teams can switch conference rooms, so it'll be just a moment too but.
Okay.
Sounds good.
Hey, James can you hear me.
I can net.
Thank you.
The June meeting.
I think we're good.
We need to bring them up.
No we can handle on that caveat.
We apologize everyone can everyone hear us now.
Thank you Mary Anne.
Alright, great interest.
I don't know if you heard Mike, but we actually started to answer your question with.
From difficulty here.
So hopefully you can answer any of the on Sac.
So hopefully.
We will not get cut.
Got it.
This is Mike I'm going to go ahead and I think it's your question before we got cut off.
Hi will.
I think you were asking about the kind of cadence of NOI going into 'twenty, one given our guidance obviously.
Yeah.
Let me let.
Let me Michael My comments to maybe on a status quo scenario.
We'll talk about the other scenarios on that.
Obviously.
Q1 is going to be a difficult comp for us on status quo scenario, which as you recall.
Would be on our fourth quarter and affect replicating itself through that through the full year.
'twenty one.
So that would mean, we still have a pretty tough comp.
Our expectations in that area would it be similar to the gross numbers, we've been putting up in the back half.
2020.
And then if you think about the what could occur on the other scenario should they present themselves. Obviously that would reverse course, I would amplify that to the negative and obviously the other way.
Within our continued improvement scenario.
Yes.
Alright, great. Thanks on that analysis and second question can you update us on where the cash stays with tenet cool stands today as a percentage of total ABR on one of the collection rates from Mike.
Sure.
So we are we did add some tests of the cash basis pool as I indicated we're up to 29% of our ABR is on a cash basis.
However, there are some some really positive signs there our collection rate as I mentioned, 75%.
Of our of that of those tenants are paying their rents.
So and Thats up from 64% if you recall from the third quarter earnings call. So really good momentum in that area.
And that those numbers would then be reflected in both our status quo is that that number were to remain constant through 'twenty, one and then continued improvement.
Thats, where youre going to see the continued improvement right, it's going to come from our cash basis tenants and their ability to grow that revenue percentage.
Alright, Okay, Lisa Thanks, Tom.
Thanks, and sorry, sorry for the delay.
Alright perfect.
Perfect.
Yeah.
And our next question is from Derek Johnson with Deutsche Bank.
Okay.
Hi, everybody. Thank you.
Just sticking on small shop here for a second how do you envision re merchandising small shop vacancy.
With new relevant retailers are there any categories that stand out maybe more of a focus on more essential or hybrid versus entertainment health and beauty and fitness. How are you contemplating the mix going forward is as you look to re.
We let some of these spaces.
Derek This is Jim I'll take that.
I think our philosophy is consistent with how we've always thought.
<unk> dealt with with vacancy and merchandising.
Obviously I think there is.
Skewed towards healthy healthy lifestyle. So wellness is a great category that were seeing growth in.
Certainly a lot of the existing categories the better retailers are growing within the within the footprint that we have today.
I would also like to thank as an emerging category, what I'll call emerging category or some of the some of the typical mall type folks.
We mentioned I think our last call that we are seeing some of those people will support us well stay on Lulu lemon the.
The GAAP concepts that are interested in the open air centers from the standpoint on pricing as well as access visibility.
And merchandising mix so.
A little bit a little bit.
Business as usual from mix standpoint, but there are some categories that I just mentioned that I think we've got a particular on towards.
Okay. Okay, great. Thank you.
And then I guess I would ask what have you learned about traffic and demand specifically at centers within states that have less mandated restrictions are there some inspiring read throughs or positive takeaways from those states versus ones with tighter restrictions on California that you can pinpoint at wood.
Possibly lead to your high end continued improvement or frankly bulk case guidance.
Thank you.
Thanks, Sara I'll jump in on that one I mean, absolutely we continue and I know that we talked about this even in our prepared remarks continue to see really strong correlations with restrictions being lifted and foot traffic and then.
But traffic was collections.
And so the absolutely and we do we have the data that actually tracks that foot traffic and in the markets, where we've essentially fully recovered foot traffic. The collections are the highest and so expect as we continue on we did see some restrictions lift in California in the very recent past few weeks.
And absolutely believe that that should translate to more foot traffic into our centers, which should translate to upside in our collection numbers out in that market.
Yes.
Excellent. Thank you.
Yes.
And our next question is from Johnson umbrella with BMO capital markets.
Hi, good morning, Thanks for the time just following up on <unk> question could you give us any sense of where.
Where the rent collections are maybe comparing California to Florida.
The two opposite maybe.
Yes, absolutely one.
Actually I'll point, you to I'm looking for if you look at our.
Business update deck, we put out last night.
On page 11, and we did enhance this disclosure this quarter and I think it's really it shows the trend exactly as Lisa described that youll see quarter over quarter trends in collection rates by region that regency and Youll see that the southeast from the second quarter at 84% as an exam.
Full to the fourth at 96%.
Indicative of the foot traffic that trends.
Trends that at least is identifying together with the relax restrictions the Pacific coast or our west coast portfolio, Although we have improved our collection rates there the pace of that improvement.
From it has not been as great and there's a little bit of a sticky.
Small shop restaurant non.
Non essential categories that continue.
So just have a hard time performing in.
When you have these heavier restrictions and sometimes what's on your door, it's a challenge and thats evidenced in itself on our collection rate.
Take a lot of comfort in what we're seeing in other markets in the country and that replicating and eventually in our great shopping centers in these great markets on the Pacific Coast. So.
So we look forward to that post pandemic.
But that's just the point of our guidance, it's uncertain when that will happen.
And so that's why we've taken this approach as we have with Iraq with our guidance ranges.
That's fantastic and I apologize for not catching that earlier on.
And just one follow up on on the balance sheet.
You guys clearly have that as a position of strength and you talked about.
Feeling less.
Cautious and willing to carry.
Carrying so much cash.
So how do you think leverage looks from here either from a net debt to EBITDA perspective, or otherwise work.
Can that increase from here or are you kind of happy keeping kind of the current run rate in place.
Just given your historical defensiveness with regards to the balance sheet.
Yes.
We're not getting off of our a key tenet of key strategy here is to protect that balance sheet and to operate in the low five times area, That's where we started in 2019 and we as we define recovery that is a key portion of that definition wed like to return to those levels.
At six times, a year and with that much disruption I think thats, a very enviable enviable position I would imagine.
But we're not satisfied with that so we will continue to look to.
Through primarily EBITDA growth organically, just converting these spaces and these tenants back to rent paying well we will have on much of that if you think about our status quo scenario again just to baseline us.
And you go through Q1 towards the question that caveat, we could top out on a leverage ratio range and up six on a quarter plus or minus range is what we would see in that scenario and then obviously amplify that up or down depending on which scenario actually presents itself.
Very comfortable at those levels from a security standpoint, that's why we took down the term loan. That's why we continue to continue to pay our dividend.
We do have a lot of confidence confidence that our recovery will will get us back to that low five times ratio in due time.
I just wanted to add because we're really proud of it.
We obviously built the balance sheet intentionally.
To weather future storms, we've always talked about it and with maintaining our dividend, we still generate a free cash flow north of $50 million in 2020.
And we're really proud of that.
Thank you very much.
Yeah.
And our next question is from Craig Schmidt with Bank of America.
Great. Thank you good afternoon or good morning wherever.
One is.
It's clear through your business update debt portfolio is most impacted by the specific coast asset I was wondering what are you hearing from state and local regarding restrictions. It seems like it's more restrictions now than actual mandated closings.
And I was wondering.
Having these restrictions does that also impact on new leasing as retailers, Greg your feet to open stores in markets. They may appreciate from a longer term basis.
Hi.
Craig I think youre exactly right.
It's more of a.
It's not so much a closure now as it is just capacity basically capacity.
Seeing la they've reopened restaurants in.
We're hearing there is a pretty pretty solid pent up demand for folks to get back out in the outdoor setting anyway.
Certainly categories that have been most restricted are going to be the least perceptive at this point I believe to engage in new leasing the folks that have been open.
Our engaging are doing new leases I think when you look at our power when I look at our pipeline of activity as well as executed deals on the last quarter, we're seeing.
Across the country as summer.
Demand as well as executable deal so.
I don't want to beat up on the West Coast too Bad day, certainly there are categories. It really got.
We're hurt badly by I think mandated closures and capacity restrictions, but the folks that rope and are continuing to do business and grow their business out there as well.
Yeah.
Great and then.
I know you have an 18% exposure to restaurants, I guess 12, and kind of fast food and fixing finding casual I know that you have said that that's where you'd like the exposure to be perhaps you can comment.
What's your thinking I guess its longer term thinking about sticking close to that 18% exposure.
Yeah.
Yes.
I feel like that that ballpark numbers.
The right ratio and mix for restaurants, I think restaurants are certainly.
As they continue to morph and react to what consumer demands are.
Theres always going to be a place for restaurants.
<unk> have done very well of fast food folks who've done very well.
Even the full full service restaurants in markets that were more open.
GAAP did very well during this pandemic to bring on how to.
Curbside pickup delivery and basically they added a leg to their to their sales program.
Okay.
We just got cut off we still on.
Can you still Harris Craig.
Yes, I can hear you.
Somebody running.
Yes.
Yeah, sorry about that sorry about that.
So yes.
I believe that the restaurants in that range are that's right number they will morph they will change.
As retail changes.
Yes.
We are comfortable there.
I mean is it a factor of sort of competing against.
E Commerce, I mean, you want <unk>.
Physically need to pick up the food or.
Your dining the restaurant that brings traffic to the center.
And then in long term why you wanted to keep debt 18%.
I think I mean, just generally.
Just generally thinking about the neighborhood centers and for the most part right where grocery anchored neighborhood centers.
We believe that restaurants are is there a driver.
Just as much as Azure gross.
As their anchors are and that this trend to even more remote work and people spending more time at home is going to play to our favor.
As people are spending more time at home and not necessarily in the downtown CBD urban core.
They are still going to want to leave their homes and whether it is to pick up.
And go or if it's to dine in I think that we're going to we will benefit from that increased traffic at our shopping centers.
Okay. Thank you.
Thanks, Craig.
And our next question is from Rich Hill from Morgan Stanley.
Hey, Good morning, guys are sorry, good afternoon, it's Blair's day, so I can't even get my days right never mind My time.
First of all.
Thank you for what I think is best in class guidance Youre reconciliation across your three scenarios.
Does really really well done.
I just wanted to talk about those three scenarios not necessarily about your guidance, but maybe if you could just frame a little bit how the retailers are thinking about the outlook for 2021, what are they telling you about rent negotiations are deferrals coming back or abatements coming back are they looking for lower rents.
Are they look on percentage rents I know, that's a lot there, but I'm just really trying to frame the REIT the discussions youre, having with retailers within those three frameworks that you've provided.
Okay.
I think the discussion with retailers is.
For the most part.
<unk>.
Okay pre pandemic kind of conversations we're not seeing wholesale change on term negotiation or.
Big divergence on.
Historical rents on those kind of things I think the folks at.
Debt have done well on are doing well are continuing to try to grow their business. As there is there is opportunity in the marketplace today theyre going to take advantage of that.
We're seeing tenants that are more local in nature. They are finding opportunity in this in this environment to relocate.
And Fortunately, we are seeing and being the beneficiary from that relocation within a marketplace.
Under the scenarios.
The scenarios would be.
Probably more on.
On the low end reversal and would be more of the wait and see kind of attitude things got shut down youre going to have more of that I'm not sure what the future looks like so I'm not sure I can commit so you're going to you're going to be on that no man's land, where we quite frankly, we're at some of our categories in California in no man's land and.
Our our program has been once once we can see light at the end of the tunnel.
Then we engage and we structure programs that are win wins for our retailer and for us.
I think that'd be the probably the biggest change is if we go backwards.
Stymie some of those categories that have been again, the most impacted today.
I do think debt based on the volumes that we have already executed and on our pipeline you can see that.
There is some optimism and positivity amongst our retailers and.
All of our tenants.
To continue to grow and there is a flight to quality.
And we're positioned really well.
To take advantage of that.
Yes, Lisa I wanted to just follow up on that because you made a really important comment about about free cash flow and how you were able to be.
Really nicely positive in 2020, despite all the uncertainty that the world threw at us. So as we think about your cash flow going forward in the <unk> you create it.
2020, and the free cash flow you created it seems to me that that's a super high quality.
Cash flow stream and in fact, maybe it's.
Ill use my words, and you can push back on it but it's been derisked.
My view is that if you were able to generate that NOI on that free cash flow.
It's a pretty high quality cash flow. If it continues if it continues to be created in a pandemic.
What am I wrong on that and how would you respond to that.
I think that you said it perfectly.
Okay.
Going to add.
Absolutely. It's on me Christy didn't tell me to ask that question for what it's all day.
Absolutely.
This is why I'll say it again, but we're.
We're really proud of that and really proud of the fact that we were able to generate that much cash flow in the middle of the pandemic.
Okay, Great guys. That's helpful. That's it from me.
And our next question is from Greg Mcginniss with Scotia Bank.
Hey, good afternoon, everyone.
Mike I appreciate the context around the guidance there is laid out I just want to kind of confirm that the base case essentially assuming that you are continuing to recognize like 94% of rent and then what does that mean on the upside from that that rent recognition standpoint.
Yes, you have the assumption right again, the easiest way to think about this is status quo and I Wouldnt I don't want to call that our base case, but our status quo scenario.
Sure.
Todd we have a range is a Q4 replicating scenarios through 2021.
And then obviously that on a continuous should we see continued improvement that would accelerate from there.
If you kind of think about where we are at Q4, which again is I think it's important to normal sales and if you were to look through uncollectable lease income.
And just think about it is the effective rent paying occupancy, which is what we talk a lot about Charlie.
86, plus or minus percent so.
That.
That is what we're carrying through on the status quo scenario through that midpoint range through 'twenty one.
Let me and we will go ahead and say it is.
What we see today and what James articulated from a leasing activity perspective, and a little bit to Rich's question around what we're hearing and seeing from the retailers and the other in the service providers and interpreting how they what scenario day may be behavior under <unk>.
Our eyes are focused today on the status quo scenario.
Two the continued improvement scenario.
However, we've presented this reverse course scenario because it has its February it is early.
The vaccine has just began to rollout. There's these various we just can't rule out a reverse course scenario. It's just too soon to do that but I think it is important for you to hear that we're on.
Our focus is on the status quo.
And or the continued improvement scenario.
Alright, Thanks, Thats fair and then on the leasing.
Capex cost on new leases looked like they trended a bit higher in Q4 as a percentage rent per square foot starting to cost more to bring in tenants or are there. Some maybe some one time items in there that can explain the increase.
Yes, Craig Jim again.
Exactly right we had.
Two new anchor deals out outsize Ti associated with those and if you net those out we're right back at that $20 per square foot, which put us right in line with historical.
One was a Burlington backfill of a 30 year old office depot space. It finally turn termed out so we had some some excessive work on that one and then a national grocery backfill the vacant box in southern Cal. So both of those were little higher than normal ti costs, but excellent excellent replacement merchandising from.
Those two centers.
Okay, so purely on P&L.
Kind of when and where.
Yeah.
Sorry, Hello, Yes, yes.
Yes at the other day I don't expect I don't see I don't see a change into.
From where our historical averages have been and let me just add to that Greg for your benefit we did I think posted an 8% of NOI kind of all in Capex ratio for 2020, that's low.
That was intentionally on low.
On the pandemic.
We made some moves to preserve some capital pushed some capex projects.
Beyond 2020 into 'twenty, one we do anticipate returning to more normalized levels. So as as we recover and more normalized levels would be that 10% to 11% of NOI range.
Maybe even leaning on the upper end of that because we're going to have we will have more space to lease.
Is that and just to clarify is that 10% to 11% inclusive of development or you. Just mean in terms of those kind of regular maintenance capex and wasting capex.
Maintenance and leasing Capex only.
Thank you.
Yes.
And our next question is from Mike Mueller with JP Morgan.
Yes, hi.
Can you talk about three buckets for your uncollectible revenues I think it was tenants you really believe in those that were challenged beforehand, and then in the middle which what's the split that you see between those three buckets.
Yeah.
I would think.
The ones. We believe it is by far the majority and I think if you looked at the West Coast. That's that's where the majority of that bucket resides again as I mentioned when Theres clarity, we'll clean that up.
On the folks that.
Pre pandemic, we're struggling that's a very very small group of folks.
That will clean itself up in the course of business.
Got it and then one other question on the site.
No go ahead sorry.
Okay.
On the other one as far as pushing per rep that too is a very very small group of people at this point.
Just.
GAAP playing the game trying to take advantage, if I could manage on situation.
Will resolve itself relatively quickly as well I believe.
Got it and then just a quick one the five 5% to 6% disposition cap rate for this year.
It is with those cap rates have been similar pre pandemic.
Go ahead Mac.
Yes, Mike.
Absolutely it would have been similar that's what we're seeing we're seeing really solid pricing.
In.
The types of assets, we're selling and the strongest part of that market is small grocery anchored centers, particularly in the open states, where there's more transactions.
On the Triple net assets Theres tremendous pricing power, there and we'd be very pleased to being able to transact there is <unk>.
<unk> out there to have capital and they are typically local private buyers who have a lot of experience in other trade areas and markets.
Got it okay. Thank you that was it.
Thanks, Mike.
And on next question comes from Floris Van <unk> with Compass point.
Okay.
Hey, guys.
Thanks for taking my question good afternoon.
And good morning.
Wanted to by the way.
Loved the fact that you.
I know, it's not official guidance, but in your scenario analysis, the midpoint shows positive comp NOI.
But.
If you could walk us through what kind of reserves have you baked into that and maybe if you can talk about Mike. If you can compare that to two 2019.
<unk> of reserves.
Oh gosh.
There is no comparison.
So if you think again, let me comment on the status quo scenario just to center ourselves on that status quo mid point level.
Again going back to Q4, so 17 $18 million net charge in the Corp.
For reserves, that's down sequentially certainly from Q2, and then into Q3, I think we're 40% down from Q3.
And then that level, we would anticipate rep.
Replicating itself.
Through the year kind of repeated today.
As a very healthy level for us when you consider what our experience was in 2019 and before that one bad debt charges kind of historically or in the 50, plus or 50 basis points, plus or minus was normal and youre maxing out at the 100 basis point level.
It's just a completely different universe really.
Right. So I was trying to cause because one of the things that which is interesting to think about and you sort of alluded to some of your comments here about your 96% cash paying occupancy.
What is the potential here and you know pre pandemic, where you were probably at 94% on those levels or something along those lines. So.
It suggests there youre going to have not just one year, but a couple of years of pretty pretty decent sized earnings growth.
If I if I'm not mistaken.
Yes, let me refine some of those numbers. So first correct, it's 80 to 86.
86% effective rent paying occupancy being an effect to uncollectible lease income.
At the end of Q4 2020, and I think your point is this if you compare that to February pre pandemic, that's about a 700 basis point decline in effective rent paying occupancy.
That that we believe through our recovery will return.
Right.
Great well debt.
We expect we do expect that we will continue to have continued growth not just.
As you pointed out on the status quo scenario a positive in 2021, if we hit if we hit that but also for the next several years.
Yes.
That's exactly what I would say yes.
Knock on wood.
Yes.
And our next question is from Michael Gorman with BTG.
Yeah.
Yes, Thanks, I just wanted to spend a little bit on the development pipeline on the review process you went through and just kind of reconcile.
It sounds like a lot of positive demand trends in your market with with some of the review process and maybe understand.
Which the majority of projects that were impacted as this.
Mostly de risking the capex budget because of COVID-19 or were these projects that had different retail trends that made them no longer work or kind of any common themes that impacted this pipeline kind of in the context of what sounds like an improving leasing environment.
Matt.
Yes, absolutely.
A couple of themes there.
We did take our time to go through this through our projects.
As we mentioned in our prepared remarks.
Really it only cost us two two.
Six moving forward on a couple of projects.
One was what was the project that we had under contract and.
Unfortunately, with the pandemic the leasing didn't evolve as we thought and we dropped the contracts. So we had to write offs on pursuit costs.
Typical of any type cautious you can imagine.
But in the larger context of looking at our pipeline really the biggest impact just tie some of these projects have taken us longer to put together I'll.
I'll give an example of that town and country is a project that's been on our pipeline.
That project has been delayed about it by about a year, we've had trouble getting on IR.
Released by the city of Los Angeles, because they are impacted by Covid.
So happens this actual week. It was finally released so it's taken us some time the scope of the project really is very similar to how we planned it but we've had to push it out a year for that reason alone.
But when we're looking at other projects their share in locations that we very much believe in we really believe in the scope of course, we're going to challenge yourself to make sure that what we're proposing is still relevant in a post COVID-19 world. So I would say we've made some minor changes to them, but not significant.
No wholesale changes to them.
Because these projects we're pretty conservatively.
Scope to begin with so we need to make sure we have the right amount of shops convenience parking outdoor dining.
The right amount of non retail uses in those cases, where we have it and we believe that that's still the case so.
It was very important for us to do that.
Early in the pandemic, we were in a more of a capital preservation mode. Other things look more clear.
We are.
Getting ourselves prepared to start some of these projects.
Including our Bethesda project, which has now been entitled and I'll give you one more our Costa Verde project, which we've been working on for many years.
I was finally entitled It got approved in December.
Any appeal period, and that probably took an extra year longer than what we thought.
But we make it we made some really good progress and gives us a lot of confidence going forward to get these projects started when all the little ingredients came together, but the but the big ingredients are there.
No. That's helpful. Thank you and then Mike maybe just one last technical one on the guidance side of things.
You talked a bit about it in your prepared remarks, but can you just spend another minute talking about the G&A.
The 20% rise that's implied in guidance just kind of.
What's the what are the biggest drivers there.
I appreciate the question Mike It does deserve at least another minute.
The.
What we need what I'd ask everyone to do is really kind of break down G&A by years, and then we'll talk about at gross and net so first I think it's important to go back to 2019 walk through 'twenty and then into 'twenty, one and what Youll see is that the topline gross revenues, 19% to 20 came down.
In the pandemic there are material savings to the company those savings came in the form of TNA reduce travel expenditures across our entire platform conference attendance. So on and so forth. We also benefited.
We benefited from a financial perspective by having fewer seats filled as it was it was more challenging.
Higher and that type of environment.
And then and then variable compensation other compensation all went in line with that so what but what's happened in 'twenty as those savings have been master covered up by our development overhead capitalization and I spoke about this last quarter, probably my fault price should have spent a little bit more time on it.
That change in our development pipeline that Mac just articulated did result in changes to our overhead capitalization as a result, those changes are masking the savings in 'twenty.
So now fast forward to 'twenty, one and in our guidance guidance range, what Youre seeing there is a return on the top line. So those savings in 'twenty should the economy continue to reopen as we hope and suspect it will.
In a status quo slash continued improvement scenario.
Youll see those savings start to reverse.
And that will put pressure on the top line and then overhead capitalization.
I should however will take longer to recover with the development pipeline that has a longer lead time, which we had the same phenomenon occur with us in the GSE coming out of it coming out of that downturn as well last point on G&A on the topline and then if you come back and just think about topline gross G&A 19 versus 'twenty one.
It's essentially the same.
'twenty, one slightly higher and Thats, because we are spending a little bit more money on third party legal as we work through our tenant negotiations. This has more activity than we've ever had to do in a year.
But I think it is good to see that that top line is relatively consistent.
Okay.
Okay, great. Thank you.
And our next question is from <unk> bin Kim with Bruce.
Good afternoon.
Just wanted to ask a couple of quick questions on your lease spreads.
So this quarter it was roughly flat.
Obviously, the most important part is that youre doing leases than it was a good volume of it.
But my question was the half a percent of positive cash lease spreads.
Do those still have the traditional rent step ups that you had in the past so like the $1, two 5% or one 5% rent step ups.
Yeah.
Key Ben I appreciate you asking that.
Yes is the short answer is yes, we're running about on our local shops were about averaging 2% on say, 80% of our local deals still half the annual embedded rent steps.
And when you when you blend the anchors in as well, it's about one 5% on 80% of it yes.
Yes, we are.
We're kind of proud of that we've been we've been net programs in place for a long time and over time it's.
Very nice.
Extra if you will to long term NOI growth.
Okay, that's good to hear it because.
Getting those bumps or not really.
Really change your perception on what rent spreads are.
On my next question is.
What are some other things when you talk to the tenants that you think might have might permanently change going forward in terms of like what they're looking for I mean it was.
Pretty broad question, but maybe other types of assets or.
The store size or how they do business or anything that you think will have kind of a permanent lasting changes.
And.
Would that might pull you towards in terms of your business.
I would say lessons learned from the pandemic are.
Certainly the.
Curbside pickup.
On.
On that last mile delivery I think I think all retailers are struggling with this fulfillment issue.
And as that more so that's something we're certainly going to try to keep our finger on the pulse and make sure that we can react.
Create the environment that helps support our tenants as they are building as their business morphs.
Those kind of things I think are the biggest long term changes that I see in the business our lessons learned from pandemic.
Drive throughs, how critical they were the ability for a lot of these these restaurants for that outdoor space that's here to stay.
The ability to have easy access to.
For the Starbucks of the World, where they can people can can get in get out because it's more pick up it's more pickup than it is.
CIT and stay for a while so debt.
That whole shift in the business I think is something that we need to continue to morph and modify we're able we're able our centers to accomplish and accommodate some of those new changes.
Got it thank you very much.
Yes.
Yeah.
And as a reminder, if you'd like to ask a question press star one on your telephone keypad a confirmation total indicate that your question is in the question queue for a moment as we poll for further questions.
Yes.
Yeah.
And our next question is from Linda Tsai with Jefferies.
Hi can you hear me.
Yes.
Okay great.
Are you actively tracking the spread of retailer micro fulfillment across your properties I guess as a follow up to <unk> question. Just wondering if it creates pricing power down the road for centers that offer this or is it more the case that at some point all centers will have micro fulfillment.
If you can answer that question Linda you see there are a lot.
Thank you for your service.
It is certainly something that we.
<unk>.
We talk about every day.
And Jim just mentioned it but.
And how do we strategically position ourselves to really capitalize on and profit from the need for this micro fulfillment and last mile. Because we do I mean, we own 400, plus shopping centers close to the.
Consumers and absolutely believe that the future is the inventory if you will.
<unk> needs to be close to the customer.
And we are well positioned to play a part in that.
And we talk with our retailers.
We talk with other experts in the field and we continue to.
Do the things necessary to position ourselves for the future, but again, where that goes and how quickly. It goes no one really knows.
But I like where we all share.
And the overall kind of universe, if you will of the fulfillment of goods to customers.
Thanks, and sorry, if I missed this but just given some of the migration patterns to lower cost markets that were starting pre COVID-19, which accelerated during the pandemic does this change your view of which markets you'd want more or less exposure to.
Yes.
We really like the markets that we're in.
We are already pretty geographically diverse and.
On national portfolio, and there is even micro migration patterns.
Some of the higher cost markets. If you will and we believe that we're going to be able we will benefit from that as well.
Youre seeing perhaps some migration from the urban core to the suburbs. The first ring suburbs, where we are well positioned. So we will continue again like the canvas and we will continue to expand whether it's looking for opportunistic acquisitions or development in the markets that we're in.
Thanks.
Yes.
Okay.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to President and CEO, Lisa Palmer for closing remarks.
Okay.
Thank you all funds.
115, Eastern time on Friday, I know, it's been a really long lake apologize for the technical issues.
And have a great weekend go visit your local neighborhood shopping center and by Valentine's Day gift. Thanks, Bob.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Yes.