Q1 2021 Regency Centers Corp Earnings Call
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Greetings and welcome to Regency centers Corporation first quarter 2021 earnings conference call.
At this time all participants are on 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 call is being recorded I would now like to turn the conference over to your host Christine Mcelroy. Please. Thank you you may begin.
And welcome to Regency centers first quarter 2021 earnings Conference call. Joining me today are Lisa Palmer, President and Chief Executive Officer, Mike Mas, Chief Financial Officer, Jim Thompson, Chief operating Officer, and Chris Leavitt SVP and Treasurer as a reminder, today's discussion may contain forward looking statements about the company's views a few.
Sure.
On this on financial performance, including forward earnings guidance on future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties. It is possible that actual results may differ materially from those suggested by the forward looking statements we may make.
Actors and risks that could cause the actual results to differ materially from these statements may be included in our presentation. Today and are described in more detail on our filings with the SEC specifically in our most recent 10-K.
In our discussion today, we will also reference certain non-GAAP financial measures the comparable GAAP financial measures are included in this quarter's earnings materials, which are posted on our Investor Relations website. Please note. We have also posted a presentation on our website additional information, including additional disclosures related to forward earnings guidance on the impact of COVID-19.
19 on the company's business Lisa.
Thank you Christy and good morning, everyone. Thank you so much for joining us at the end of what I know, there's been a long weekend, earning season. It's also been a long and oftentimes difficult past year, but as a company.
And in industry.
We've really come so far.
First as always I'd like to thank the entire team here at Regency, I'm really proud and appreciative of what we've been able to accomplish over the last year.
A quarter ago. When we spoke to you we were facing rising restrictions and in parts of the country.
Repeating to continued uncertainty about the future.
We're gaining ground, but still playing defense.
As I sit here today I'm really pleased to report that we've turned a corner over the last three months. We are encouraged by continued improvement in the retail environment and the health of our tenants.
And you can see the evidence of that in our first quarter results as well as in our revised forward earnings guidance.
We've seen a continued trend towards easing tenant restrictions.
Which is especially impactful to our California properties.
Some categories and geographies are still continue to lag, but overall, we are on an improving trajectory.
These lifting restrictions that allow our tenants to open and operate or having the waterfall effect of improving foot traffic and tenant sales as consumers are re engaging when they are able to.
And in turn we are collecting more rent and have seen on improving trends of rent collection.
Michael just discuss this in greater detail, but the main drivers of our earnings guidance increase results from this improvement.
We expect higher collections on cash based incentives.
As well as some additional recovery of 'twenty 'twenty rent that we had previously reserved.
We were also encouraged by the continued demand with regards to leasing.
Thinking a bit longer term.
We believe there are clear tailwind for our company in our sector as the pandemic has shined a spotlight on our business in a positive way.
As we all have experienced the world with E Commerce retail sales spiking minute meaningfully our tenants were clearly see and appreciate the value of the last mile distribution capability that their stores and our centers offer.
And after spending months at home facing restrictions on interaction consumers have a new appreciation for the environment and convenience of our open air neighborhood and community centers.
But all that said our heads aren't here in the Jacksonville sand, we acknowledge and appreciate that real challenges in brick and mortar retail still exist and there will continue to be shrinking of retail GLA in the U S, but well located well operated centers like we own will still be a critical component of the retail ecosystem.
Meeting the demands of retailers and service providers and consumers.
This renewed appreciation from both sides fortifies, the long term need for physical location close to consumers' homes.
And then also the micro might get micro migration, that's occurring with more people moving into the suburbs. This should provide a long term benefit to our suburban shopping center portfolio.
I showed a more permanent shift toward part time remote work, increasing daytime population foot traffic close to the consumer. So finally, as the macroeconomic and retail environment has shifted toward a defendant definitive trajectory of improvement.
As a company we have pivoted from defense to offense.
We are on our front book, we're focusing on growth not just organically, but putting capital to work externally.
We are well positioned to take advantage of opportunities. We continue to have one of the best balance sheets in the sector with low leverage full revolver capacity and access to low cost capital.
Additionally.
As you know I like to remind you.
Even with no reduction in our dividend throughout depends on it we are generating solid free cash flow, which we expect will only continue to grow with our revised outlook.
From this position of strength, we continue to focus on value creation within our development and redevelopment pipeline recall that we added two new ground up projects to our in process pipeline a quarter ago and in the near future. We expect to add a couple more.
With the success, we've seen with phase one of Cary Towne, we plan to move forward with phase two we also plan to move our mixed use multi phase Westwood project in Bethesda, Maryland into the in process pipeline.
To finish up.
We are still on the recovery path back to our 2019, NOI, but the pace on that path feels better.
Environment is healthier and more certain today and as a result, we have greater conviction in our more positive in our outlook.
We are pivoting to offense.
We remain bullish on open air grocery anchored neighborhood and community centers.
As I've heard several times over the past month or so today is better than yesterday.
And I'm confident that tomorrow will be better than today.
Jim.
Thanks, Lisa and good morning, everyone.
I Echo <unk> comments and thank our regency team from the successes, we've been able to achieve during this difficult period.
It was a vaccine news was first announced last November we began to see a light at the end of the tunnel regards to depend on it.
As we sit here today the tunnel is shorter and the light is getting brighter.
We're not completely out of the woods yet.
Government capacity restrictions remain in some of our markets, particularly on the West coast.
And just last week, we saw rollbacks rollbacks announced in Oregon and Washington.
Response to increasing levels of cases.
But overall, we're moving in the right direction.
And stay at home orders and restrictions have been lifting on the west coast in recent months.
You're seeing that translate into higher foot traffic and rent collection.
This is similar to what we saw during 2020 and other markets across the country as they reopen.
Speaking of foot traffic as evidenced in the chart on page four of our slide deck.
Foot traffic on our portfolio as a whole has recovered to 90 per cent of 2019 levels in April.
Well in some regions, it's close to 100 per cent.
Rent collections on current true billings or continue to improve at 93% in the first quarter and 94 per cent for April.
The West region still lags on foot traffic in collections, but is gradually catching up to the other regions.
Our greatest opportunity to drive future upside.
As we've discussed on prior calls we've taken a patient approach with deferral agreements not pushing tenants into an agreement until they are open and operating.
And that strategy has proved to be the right one financially.
And created a lot of goodwill with our retailers.
Our goal is and always has been to get our tenants back to rent paying status.
And to avoid.
Space, turning into vacancy, which leads to downtime and capital lease it back up.
As I stated in the past, we liked our merchandising and tenant mix pre pandemic and working with these savvy operators is the best and quickest way to get their spaces stabilized generating revenue revenue again at or near pandemic low pre pandemic levels.
Turning to leasing we are encouraged by the solid interest and activity that we're seeing.
Active new leasing categories include grocers medical U S ours health and beauty fast food home improvement fitness and personal services.
We've also seen increased interest interest from traditional mall tenants moving into the open air formats, including home concepts, especially athletic retailers eyewear cosmetic retailers.
Our new leasing volume in the first quarter was higher compared to Q1 2020 and in fact was the highest first quarter new leasing volume we've seen in the last five years.
Due to greater economic optimism as well as from likely pent up demand from 2020.
Renewal leasing volumes have remained consistent throughout the pandemic with the first quarter pace was also ahead of historical trends per boat shop and anchor space.
Our leasing pipeline is healthy and well.
We're seeing this growth in retailer activity across all regions.
<unk> confidence in the sustainability of deal volume.
Our recent spreads remained muted a function of the current environment and the mix of leases we're signing today.
Continue to have success pushing rents higher on a central tendency U S ours.
But we're also making certain shorter term concessions for nonessential tenants and table service restaurants to help bridge them through this more difficult period, putting pressure on our initial cash spreads.
We don't see this as a long term or reflective of the direction of market rents our properties have always been able to command market, leading rents over time, and we don't see this changing.
Additionally, the strong embedded contractual rent growth that we consistently achieved over the last several years generally brings our tenants rents closer to market ahead of lease expiration.
Pressing those initial spreads.
Currently we are still having a lot of success negotiating rent steps on our leases consistent with historical averages.
Lastly on occupancy our commenced rate is down 30 basis points sequentially.
We normally see this seasonal occupancy decline in the first quarter, but move outs were actually lower than we anticipated.
Some of the tenant fallout that we had expected may still occur in coming quarters, but more tenants also renewed their leases than we expected.
In summary, while this past year has been one of the most difficult and challenging in my career.
It has also been incredibly rewarding to see our T rise to the challenge and successfully navigate this unique environment.
We're on a definite road to recovery and our visibility and conviction levels have only improved as can.
The country continues to open back up.
Okay.
Thanks, Jim.
Good morning, and happy Friday, everyone I'll.
I'll begin by addressing first quarter results.
And then walk through the changes in our full year guidance.
First quarter NAREIT <unk> was <unk> 90 per share on.
Collectible Lisa income was positive in the quarter as reserves on current quarter billings of approximately $18 million were more than offset by the collection of over $20 million.
<unk> reserved revenues from cash basis.
Including those contractually deferred you.
You can see the breakout of our uncollectible lease income on our COVID-19 disclosure page 32 of the supplemental which also shows that excluding prior period collections.
Recognized as revenue 94 per cent of our first quarter billings.
Our cash based on tenant tenant pool stands at 28 per cent of ABR today.
That compares to 29 per cent a quarter ago.
We lowered it to move out activity.
We've not yet moved any tenants back to accrual basis accounting from cash basis at this stage of our recovery.
Our same property commenced occupancy rate declined 30 basis points sequentially, but more importantly, as we were able to collect.
We were able to collect more from our cash basis stuff.
Our net effective rent paying occupancy, which we've spoken about on previous calls was actually up over 50 basis points through the first quarter.
Same property NOI, excluding lease termination fees declined one 6% in the first quarter compared to prior year.
As a reminder, the first quarter of 2021 is the last quarter that we will be up against the more difficult pre COVID-19 comparisons.
Our balance sheet remains in great shape.
As mentioned a quarter ago in mid January we used cash on hand to pay down our term loans.
And in early February we recast our one point to $5 billion line of credit extending our term by another four years, we finished the quarter with a more normal cash balance in full revolver capacity and have no meaningful unsecured debt maturities until 2024.
The secured mortgage lending markets, which were tough last year for retail in general have continued to open back up and show demand for high quality grocery anchored shopping centers, especially those anchored those on a stronger sponsors.
Look at the quarter end, we closed on a $200 million refinancing of a portfolio of secured mortgage loans on 10 assets in held held on one of our J D.
The blended rate was a very compelling two 9%.
From a leverage perspective, our net debt to EBITDA remains at a very comfortable five nine times, even with the impacts of the pandemic on our trailing earnings.
And we see a clear path back to the low to mid five times range as our NOI continues to recover.
Turning to guidance, we point you to pages 13 through 15 of our earnings Investor presentation.
Recall that a quarter ago amid continued rollbacks and restrictions in certain markets and general uncertainty in the overall environment, we provided our earnings guidance under three distinct macroeconomic scenarios.
Reverse course status quo and continued improvement.
From a macro perspective, we now feel comfortable and confident that we're firmly on a continued improvement environment and as such we feel that we can comfortably rollout. The first two scenarios from our guidance analysis.
Which supported the lower and mid point levels of our previous range.
We are moving to a more traditional guidance framework around that more positive outlook with a narrow range.
There are three additional there are three additional major major drivers that bridge us from our previous upper end of $3.14 per share for NAREIT <unk> to a new range of $3 33 to $3 43 per share.
The first two drivers directly impact same property NOI and I refer you to the visual on slide 15 of the presentation.
To help articulate the change.
The first is higher collections of prior period reserve revenue.
When we provided guidance back in February we had already collected almost $9 million of prior period revenue.
Such this amount was included in our previous guidance range impacting our full year same property NOI growth forecast forecast by about 125 basis points.
Our new guidance range now reflects an impact from prior period collections of about 425 basis points at the midpoint.
Of which we've already collected about 80% of it through April.
The remaining 20 per cent is forecast to be collected through the balance of the year.
Secondly, we now expect a higher collection rate on current year billings from cash basis tenants and.
In other words, the conversion of more cash basis tenants from non rent paying to rent paying.
We saw our cash basis collection rate rise from January through April and roughly a third of our cash basis tenants are not current on rent.
That's up from about 15 per cent a quarter ago.
This gives us added confidence in higher collection forecast on current period balance.
The third major driver as a reduction in G&A forecast, which we have guided lower for the full year by approximately $5 million at the midpoint.
With greater and with greater certainty on firmer timing around the starts at west part and the second phase of Cary Towne.
We now expect higher overhead capitalization.
Additionally, we've incorporated savings from the first quarter departure of Mac Chandler a.
A large portion of a portion of which was onetime in nature, resulting from the unwind of previously expense share grants.
To wrap it up we are greatly encouraged by our first quarter results and are pleased to be revising our outlook higher today.
We believe we've gained more visibility into the economic environment and the recovery of our cash flows.
As we look ahead.
<unk> continues to be.
First converting non paying cash basis sense back to rent paying.
Okay.
Filling space loss to vacancy.
Third returning leveraged to prepay debt pre pandemic levels through organic growth and four shifting back to an opportunistic mindset from a capital allocation perspective.
And with that we'd be happy to take your questions.
Thank you 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 in the question queue. You May Press Star two if you like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Katy Mcconnell with Citi. Please proceed with your question.
Great. Thanks. Good morning, everyone can you talk on a bit more about how cash basis collection levels trended this quarter on what's driving the improvement of our force Yeah, and then for the outstanding balance how much more upside on you're assuming in collections as opposed to a potential occupancy powerhouse.
Hey, it's Michael I'll take that one I appreciate the question.
Just let me color of some stats around on a cash basis pull on our collection rate I think that'll get you where you need to go.
So for the first quarter of 'twenty, one we collected 78 per cent of rents from our cash based on stance.
That is up from 75 per cent a quarter ago Interestingly, if you recast the fourth quarter. We have now collected 79% so kind of flat, what's most interesting to us and what's driving a lot of the improvement in our guidance range as the trajectory on the current year. So let me just throw these out how cheap sequentially month over month.
January cash pool, 67% to February of 73 to March 77, and in April we're at 81%. So it's this.
It's this reality in the numbers, that's not necessarily presenting itself in the Q1 report and the numbers, but it's what's giving us the confidence to increase our cash collection rate going forward, it's really that March and April success.
As compared to January and February and the last time, we spoke to everyone.
Early February it was.
It wasn't the time from a darker than they are today, we were experiencing more rollbacks on the west coast all of that has changed and it's that the March and April performance, that's given us the confidence to move on numbers forward.
As you think about our range on a same property basis.
It's really about uncollectible lease income more than it is about move out activity.
When when you think about the Fungibility of those two numbers, we can have move outs, but it's already incorporated into our uncollectible lease income projections. So it.
For us we like to talk about net effective rent paying occupancy.
Right now we're in the mid 80 687 per cent range and as I mentioned on the prepared remarks, that's up 50 basis points sequentially in the first quarter. So for US we think from a net effective perspective, we've we've trough then our occupancy rate and we're starting to move forward, we're converting tennis to cash basis from.
Non rent paying status.
And that is again the tailwind behind that.
Improvement as you think about the the the ends of the ranges.
Basically the mid point is we'll call for gradual improvement through the year from the first quarter, and then and then more or higher rates of collection on cash basis tenants supporting the upper end and lower.
Percentage of cash basis, just paying us on the bottom end just.
Just a little nugget, which I find helpful and I think you will.
1% collection rate on cash basis tenants, there's about $3 million of total revenues to regency. So when you think about the range of our same property growth, that's roughly $10 million up or down from the midpoint. So that that'll help you frame out that.
Within our guidance range, we don't have to get to 100 per cent collection to hit the upper end of our range. It's about roughly a three per cent tolerance on either and so I threw a lot of educating I hope that's helpful.
If you have any follow ups I'd be happy to take them.
That's really helpful. Thanks, so much for all that detail.
And then just to switch topics given the outperformance and your shares year to day, what's your appetite to issue equity at this point and is there anything embedded in guidance for that.
Ah, Okay, Lisa I'll take that.
We do not have anything embedded in guidance for an equity raise we view equity. It's a it is a capital source to fund our growth and to the extent that we are able to issue equity and put it to work Accretively on.
Long term earnings basis long term earnings growth basis, we will do that and I think we have a really great track record in doing so so it's tied to our opportunities and opportunities compelling opportunities acquisition on free cash flow is still funding our development.
Our development pipeline so.
Always an arrow in the quiver and one that we will use when we can use it accretively.
Okay, great. Thanks, everyone.
Our next question comes from Craig Schmidt with Bank of America. Please proceed with your question.
Great. Thank you as the country continues to open up are you seeing more curbside bonus activity the same or less.
Craig This is Jim I'll take that.
As you'd expect we're seeing a lot more actually.
And an interesting anecdote if you talk to our as I've talked to Kroger. They indicated there their click and collect program is forex.
Historical.
We're seeing all the major brands look at some form of focus or collection arrangement.
So it's clearly here to stay I think it's a it's an additional leg of getting product to the consumer driving traffic at the stores still obviously getting people into the store is the best method for from a grocer.
Second best is being able to have picked up on them delivered to the car at curbside. So I think it's definitely a trend that's here to stay on.
And and and we liked that Craig right I mean, any any additional traffic into our centers.
It will benefit us and it's more eyes on our shop space. They may be different trips, but it still becomes the shopping center of choice and where the consumers that are close to their homes.
Look to go to when they need something right, whether its goods services or food.
And we think that it really is a benefit to to our shopping centers and we like that we are in close proximity.
On to People's homes.
No I agree I see the benefit and thanks for the early confirmation that it is you have to stay on.
I guess my follow up question would be what.
What are the retailers' appetite for opening and new developments.
<unk>, you know, particularly beyond the grocers.
Jim again.
We're seeing as evidenced by our Q1 leasing.
Real strong activity out there that the 260.
<unk> 6000 feet, we did a new leasing in Q1 is.
Highest in five years as I indicated in the prepared remarks, our pipelines are strong.
Mike mentioned carry phase two Cary Towne phase two that's.
That's a current development that we're 85% leased on phase one took a pause during during the pandemic and have very good pre leasing and appetite for space, where we're obviously diving into phase III two to get that product online. So we are.
We're seeing we're seeing good activity in new leasing as well as our existing portfolio and really focused on continuing to build that development pipeline.
So that we can get back to kind of pre COVID-19 levels in terms of our starts and spend on an annual basis.
Great. Thank you.
Yeah.
Our next question is from Derek Johnston with Deutsche Bank. Please proceed with your question.
Hi, everybody good morning.
Are you seeing changes in the lease structures given the pandemic any changes like co tenancy clauses.
Anything related to the methodology for assessing percentage rent, especially since it seems hard to capture in the omni channel sales and the dedicated parking that you discussed per click and collect is that an opportunity to push rents a bit.
Okay.
Jerry Good question and I guess, the short answer on changes to lease structure is not.
On the margin, but really no no real change.
I think the one thing we are seeing from a leasing standpoint is the time.
From from negotiation to our C. D. I think permitting is taking longer decision trees are taking longer but on the other than that front end time extension.
Deal terms are generally holding.
The percent rent is a tricky one you know that used to be that used to be everybody's metric.
How well a tenant is performing is based upon their sales and their ability to pay rent et cetera, but that that's become it's become very body with with the with the internet sales. So each tenant does it differently.
Placer data has become a really helpful tool for us to in addition to sales compare trips to to help us evaluate real volume in and.
Sales at least 10 on location, we don't do a whole lot of per.
Per cent Rep work, it's generally in our grocery switches is a little cleaner for has been clear, but now with some of the online I'm not sure how that is going to get reported.
We just don't we don't have that much exposure to percentage rent, but it is a tricky that's a tricky area I think going forward.
Dedicated parking I think at this point, we're very.
We were very accommodating to our tenants to help them distribute their product. So we're not looking at that as necessarily a.
Our rental stream impact as much as continuing to drive traffic and their ability to be a successful as I can as our anchor.
Alright, Thank you Hum.
How about this Sarah Monterrey is is it still expected to deliver in the second half 'twenty one given the no-cal.
Location and shut downs and it's a pretty large scale project can you give some color as to the buzz around leasing and an excitement in the development.
I'll start with a disclosure and let Jim talk about the project, but Derek it's a multi phase project, that's going on the phases will expand over multiple years for us.
So I think what we'll see is that there is some visibility to delivering on the first phase of that project, which will include.
The large scale investment, we're making into the anterior portion of the mall together with the.
New pads, we're building out on the exterior, replacing some defunct previous retail sites. So that will we have a lot of confidence we'll finish it and deliver on 'twenty, one, but the rest of the multi phased approach to the project will expand will span over multiple years from this point forward.
Yeah as far as as far as leasing activity today within the mall.
<unk> executed a real real high.
Hi, and quality restaurant tours.
We've got good activity with some some some name brand.
Recognizable I won't call on junior anchors, but but larger interior mall tenants that I think will really.
Hence our merchandising mix.
We continue to work on opportunity with the J C. Penney box more to come on that but we are getting some good traction on that.
That anchor space So Laura.
We love the real estate.
It's it's fantastic. It's we're very happy we are open for business the tenants and the consumers are happier we're back at it and there is there's definitely a buzz.
S as that marketplace continues to.
Regain consumer confidence in getting back out in the environment.
Thanks, a lot guys.
Thank you.
Our next question comes from Rich Hill with Morgan Stanley. Please proceed with your question.
Hey, good morning, guys.
Congrats on a nice quarter and thanks for the transparency.
And your various different numbers there they're very helpful.
Look as we think about this it seems like tenant health itself is a lot better than maybe you and and we feared in 2020 as evidenced by the leasing volume and net the cash collections and Laura I'm trying to get my arms around is what does that mean for a new normal environment.
Going forward.
And so said another way not trying to straight line out the.
The.
Accounting.
Reversals on some of the things that maybe should have been in 2020, if we had perfect.
Knowledge. So two questions. One is just a factual question about same store NOI, what same what would've say same store NOI had been in <unk>.
Ex the cash collection benefit and then number two could you maybe just talk us through the leasing environment.
You know I fully appreciate how strong the leasing was but if you can maybe give us an idea about what the rents look like relative to 2020 on relative to the past five years and how those negotiations are going I think that would be helpful.
Sure really quickly on the impact of Q1, rich and I'll hand, it off to Jim.
Our prior period collections was a 950 basis point boost to our same property growth rate in the quarter.
Thank you that's that's that's really helpful.
Sure.
Yes rich.
As I indicated I think I think leasing in general the terms and appetite and types of uses we're seeing really across the board.
All you just kind of coming back to the table, even the ones that have been impacted the most which which gives me comfort when you see the fitness and personal services folks.
Coming back into the marketplace when they have been the most impacted with new locations.
It indicates to me that there.
There is a place for them in the future and.
There are obviously going to be failures, but there are people ready with new capital to step in in those places so.
Overall.
Again, we're seeing.
Hum.
For essential we're seeing.
Really good activity as well as as rent growth I think in those more non essential and more difficult challenge spaces, we're being more creative in selecting and.
Helping those folks build back their business withheld.
As far as overall rent spreads go.
As you know we're heavily dependent on the mix between anchor and shop and anchor releasing is generally where we have our biggest.
Impact to mark to market opportunities.
But in this particular quarter, we had an outlier anchor deal that was quite frankly, whats driving some negative spreads.
But having said that gives you a little color on that deal. It was well capitalized fitness franchisee who's moving down from the northeast I think because of COVID-19.
And backfill the space in South, Florida that had been vacant a four plus years. He was previously occupied by on education facility.
But we structured a low rent start to help you build this business with a 60 per cent Jackson.
Bob rent bump in year three.
Zero landlord capital for T Iron White box.
Long term is a great addition to the center because it's going on it's going to drive some on traffic.
In that location has been been vacant like I said from over four years.
And the deal structure from our perspective is extremely appropriate for the long term go to the center.
So.
We really can.
<unk> to maintain a very high conviction that our centers have always been able to come out market leading rents overtime.
And you don't see that changing so.
That's kind of a long way around.
And if I may just add just and it's just a little bit bigger picture. When I think if we spoke a year ago at NAREIT, we talked about what the impact we thought might be and gasoline were really yeah. We had said we had very little information at that time, so much uncertainty and I know that I spoke to many of you about.
We would expect that we would see some decline in market rents I can sit here today and say, we're not seeing that.
And that is because number one we all performed so much better I think than we all fear that we may have.
And it also speaks to the tailwind in our sector and the fact that we own quality shopping centers close to consumers' homes and in where tenants, where our retailers and our service providers know that theyre going to have highly productive stores. They are willing to pay as much as Jim just said those market leading rents to be in.
The best locations, and we're really well positioned to capture that and there still remains limited new supply.
And limited new competitive supply I'm on it what I mean by that is supplier that is equal in terms of the quality of what we offer and so I I like looking forward and believe that we will continue to command is market, leading rents and grow NOI from this point forward.
Hey, Lisa that that's really helpful and just one follow up question.
If you would've asked me three months ago six months ago, certainly 12 months ago I would've told you I thought it was unlikely that tenants were going to be able to pay back rent and current rent.
And so I think that's a pretty bullish on health.
Look for the future if they can pay double rent. So does that mean that youre getting rents that are above <unk> 20 levels are similar to one in Q 'twenty levels at this point, how should we how should we think about that as I'm just thinking about modeling core growth.
Yeah, I'd be I'd be a.
A little bit careful with the ability to pay double rent them.
Because a lot of that is being driven by a lot of the stimulus that is being provided by our government without that I'm not certain that many tenants would be able to pay double right because if they werent, we werent charging rents high enough and I believe that we you know we push rents to where we can so I would think that again I think about that we are returning to.
<unk>.
A healthy kind of pre COVID-19 environment with even more support.
And our conviction that we on the right retail where in the we are in the REIT sector in terms of the retail offering them for where tenants want a day and for what consumers want to shop.
Got it helpful and look I'll reiterate I said at the beginning.
Your disclosure is best in class, So kudos to Christi from making you guys do that.
Kudos to the whole team and thank you all.
Thanks, guys.
Thanks.
Our next question comes from Greg Mcginniss with Scotiabank. Please proceed with your question.
Hey, everyone.
So Lisa I'm going to visit my my mother, this weekend, who lives by West Bard and I'm sure she'll be glad to hear that asset is finally, getting a face lift but I also think she want to know about potential NOI disruption there and that the rest of the relevant development starts. So any details you can provide there would be appreciated.
Does your your mother's sounds like she might want to come work for Regency I'll, let James.
That said, we do have it beyond west Bard, we have you know.
Two two to facilitate an active redevelopment pipeline theres going to be some disruption in NOI, Greg as you know I think we have about $2 million of debt.
Decline baked into our plan for 'twenty one.
And then we would bring that back up starting in 'twenty two and beyond.
The accretion from those Redevelopments.
Alright, Thanks, and then Jim I had a couple of questions touching on the rent spreads again.
First could you.
Perhaps disclose what the spreads were too if you exclude the non essential tenants, where you had to cut some deals or maybe excluding net fitness tension that fitness tenant that was mentioned.
And second when do you expect that Youll have finished addressing leases from the the more stress tenants.
As far as dressing the leases obviously, that's the work that continues to be a work in progress primarily on west today, because if you. If you look at the openings in foot traffic. Most most of the depressed product is still.
Coming from the from the West Coast, where they're just now starting to really really get reopened.
I'm sorry.
<unk> the only negative deal.
I don't think we have that number at our fingertips on it back to you Greg I know this if we lease that Jim talked about on the anchor side of the new renew rate with the fitness Center. If you were to use the the full rent at the end of year three.
That basically wipes out the negative impact on the new recently spreads that brings us to flat.
But generally I think the mix this quarter is basically a flat type of store.
Okay. Thank you very much.
Our next question comes from one Santa Maria with.
BMO capital markets. Please proceed with your question.
Hi, Good morning, just a question on the balance sheet and turning more offensive, which you touched on in your prepared remarks.
Do you foresee that being more ramping up developments and Redevelopments that were maybe postponed as a result of COVID-19 or are you seeing interesting extra.
External acquisitions and if so are those more for stabilized.
Assets or.
Redevelopment opportunities, where maybe the yield is a bit choosier on when do you think about the long term prospects for that asset.
Yes, yes, and yes.
But more seriously we still believe that the best use of our capital is on our redevelopment opportunities and development opportunities and we will continue to.
To try to rebuild that pipeline, if you will and increase that spent and then we're also we are canvassing the market for acquisition opportunities and we will pursue those that align well with our strategy and we have typically been successful where we have been able to leverage that.
Same redevelopment or development expertise that allows us perhaps to underwrite slightly better growth or at least there are some value creation and so we are we are looking at all and we do have the capacity to do that and.
Bill.
Again pivoting to grow from here.
And a question kind of following up on Craig Smith earlier, one and just to play Devil's advocate.
If traffic could be up but if people are just kind of going they're opening their truck and kind of driving out.
It may not be so good for the non anchor grocery tenants that are dominating the focus activity do you have a sense of how much time people are spending at the at the centers kind of pre COVID-19 and.
Any thoughts longer term about.
I'm just from a purpose does too that there's a whole centers not just that one tenant.
We do not have the data to measure dwell time, we just have the visits and what we do we are able to measure where the people that are visiting our center what other centers, they're visiting so we are able to do a comparative measures for that.
But but again.
I have said this even pre COVID-19.
But every shopper can can essentially do what they need to do really from their homes.
The reason to come to the centers can be value convenience.
And then also for entertainment if you will our place its a place to go and I think that over the past 12 months. One thing again that has really been solidified that human beings generally are social beings and they want interaction and they want to get out of their homes and they want they want to shop. They don't just want to buy.
So I I I do believe the benefit of if you have anchors that are are are very good at both the that offers day same shoppers the value and the convenience at the same time it becomes there their neighborhood shopping center and it is where they will then go when they do have other needs.
And other once if you will to shop, so that that's the benefit and I also believe the data will get better and in time, we will be measuring dwell time at our shopping centers, but we are not there yet.
I love going on my centers so I.
Agree with you want to ask is maybe more a more solid places in the Chicago suburbs.
[laughter]. Thank you thanks for the time.
Our next question comes from Kevin Kim with true with Securities. Please proceed with your question.
Thanks So.
So maybe a little bit more of an open ended question, but I thought it was interesting that you guys made it pretty clear commitment to spend on $775 million from development annually for the next five years.
I mean, obviously that language wasn't in there last quarter.
And it looks like you've even we increased the scope of Ferro Monte So like I said, a little bit of open ended question, but yeah. This is pretty long term commitment I think carries a lot more weight I'm not sure if I'm overreaching, but just help us walk through.
What you're seeing and thinking.
Yeah, Hey, keep it let me start with a little bit of disclosure response, maybe and then I know Lisa will jump in from just a cash.
Capital allocation perspective.
We did make a change and a tweak to the share monthly number really just to include the GLA of the entire center as we do for all other Redevelopments, we had realized that we werent, we werent, including all the GLA on site. So that's not really a scope change.
But we are we do remain bullish on the on the redevelopment project that Sam on it from a forward looking perspective, you did pick up on the on them $75 million of forward capital spend really kind of just a placeholder.
Our intent has been pretty consistent we would like to put to work.
Anywhere from you know plus or minus $1 billion over the next five years.
And we wanted to put that capital to work in the form of new development ground up as well as redevelopment of our existing shopping centers and we are we are looking forward to getting back on our front foot and making progress on building those pipelines from here starting with carriage on phase two and west part.
I don't know that I have much ads I think like Mike said, it really well just that we remain committed to development. It is it has been it is a core competency of regency I believe we have one of if not the best teams in the business and that development expertise benefits, our ability to maximize and optimize the value of our operating assets. In addition to.
A ground up developments.
And we are always looking to expand that and it enhances our future growth rate. It is would that <unk> hundred million dollars of free cash flow that we're generating to the extent that we've put that to work in developments at approximately 7% returns.
That benefits all of us.
Okay and switching topics.
Alright.
Cover other sectors as well, obviously and you know there's.
Incredibly tight cap rates on a lot of capital chasing returns in industrial on self storage and even triple net which is still retail, but I guess Peter differently.
Is there a scenario building, where you you were starting to see from private equity money finding a renewed interest in retail.
As we've been speaking to you over the past year cap rates remained pretty sticky for the neighborhood grocery anchored shopping centers and and that hasn't you know they may have moved very marginally.
On up and I would say that's been that's been wiped out and they've come back down to.
Where are they where.
We are seeing some new money coming into the sector, but there is it's it's chasing more of as you just said chasing more yield versus the alternative investments opportunities for them and I think that the capital flowing into the neighborhood grocery anchored shopping centers. There was already a pretty it was already a pretty substantial so that hasn't changed much where are we.
We've seen a notable new capital is more in the higher yield.
On a larger unconventional centers, but we're.
There is distress so.
So that would be typically in areas, where we're regency really wouldn't play.
Got it okay. Thank you.
Our next question comes from Linda Tsai with Jefferies. Please proceed with your question.
Hi, Thanks for taking my question.
Given the year to date success of cash basis tenants paying back rents can you tell us about the process. That's entailed in moving cash basis back onto accrual and maybe a sense of how much earnings could still benefit from straight line rent receivables coming back that had been written off.
Sure.
The process will be very careful.
We need Linda it's much more the standard is much more of an assessment about the future rent paying ability than the past and while the past is.
As oftentimes reflective of that tenant's ability to pay rent it won't simply be a light switch where you used to come current therefore, you're back to accrual basis were.
We're going to need we're going to need to build a track record we're going to need to hit some thresholds on the on our ability to project forward.
Rent paying ability of those tenants so that assessment likely isn't going to occur at regency until later this year.
We haven't included no change on straight line rent.
Our guidance and you'll see that in our in our revised range is still plus or minus $30 million. So we've incorporated no change in moving to non spectrum accrual.
Got it and then northborough crossing realize you've entered into a purchase agreement why did it make sense to part with it and then you know maybe where it fits in your asset quality quality DNA of Premier plus Premier and quality Corp.
I'll take the beginning of that right.
On it over to Mike for the DNA category Northborough. It was came to us as part of our it's an unwind of a JV that we inherited with the equity one merger and so that is.
Part of the reason for the for the disposition, but also that when we when we look at that when we think about.
Prioritizing assets for disposition at the lower growth non strategic assets and strategic asset and that would fit in this category I'm not sure I know exactly on it because it fits into the quality core so that third tier Linda.
Great It out.
So it is more about the future NOI growth potential of that asset.
Okay.
Thank you.
Okay.
Our next question is from Mike Mueller with Jpmorgan. Please proceed with your question.
Yeah, Hi, Lisa I know you mentioned stimulus checks when you were talking about prior period collections, but are there any other you know.
I guess category differences regional versus local.
Categories that we should think of in terms of where the collections have been coming from.
Yeah.
I'll take that.
It did have a lot to do with it we think but the categories driving our prior period recollections. It's you know it's the same that we're driving our reserve last year right. So local bias.
Small shop by Us West coast bias generally.
And when you think about categories. It's you know fitness restaurants personal services entertainment.
Those have been the more variable.
Type of revenue streams, and that's what we're seeing.
Come in come in the door now.
Got it okay that was it thank you.
Thanks, Mike.
Our next question is from Wes Golladay with Baird. Please proceed with your question.
Hi, everyone can you comment on why the reserves were $17 million largely comparable to the fourth quarter in the I guess against the backdrop of tenants paying more on a cash basis and I guess could this be upside.
Alright, and upset reversal later in the year.
Sure.
So let me get a little bit.
Technical to help and then will kind of bring it up bigger picture, okay, but.
So the fourth quarter, it's a little bit apples and oranges.
Try to make it apples to apples fourth quarter had about a $500000 positive impact from prior period in that number and then the first quarter of 'twenty, one had about $1 million additive related to camera reconciliations so there's a bit of a seasonal component to it.
Right. So we build camera extra cash basis tenants of that.
Amplifies the bad debt expense, so the apples to apples change was really about a million a half dollars of improvement. So you don't see that on the surface, but then I kind of go back to my earlier comments and really we were seeing the improvement in our cash basis tenants collection rates. So late in the quarter.
March and then extending beyond the quarter a day April that's what's giving us the confidence to increase our outlook moving forward.
Even if you think about it just big picture collection rate on the top it's basically unchanged quarter over quarter rough you know, 92% plus or minus the same so that.
I think that helps frame out that sequential question yeah.
Got you and then.
I might have missed it but did you talk about the I guess for the balance of the year of <unk> three <unk>. The amount of 2020 right that you will I guess expect to on reserve for going.
Going forward, yes.
I appreciate you asking because we didn't get to that point.
So beyond just an increase in current your collection rate. We have also included an increase and the collections of 2020 reserve right. So we had a 125 basis points in our original guidance. We now have 425 basis points positive impact in our guidance range.
So that's on an incremental 300 basis points. So let's think about that $1. That's roughly 30 $30 million at the midpoint, our new range and as you can see on the results. We've already collected 20 of that in fact through April we collect on another 4 million. So we're 80% through our guidance range on 2020.
Reserved collections.
Yes.
Got you and then Mike can you just clarify I think you said occupancy trough is that hanging on occupancy of the occupancy that you show on the statistics work from me as well.
It's a net effective rent paying occupancy so it's not a number that we report on its basically commenced occupancy adjusted for uncollectable lease income. So that's in the 80 687 per cent range to that.
We could we could lose more occupancy on a per cent leased or commenced occupancy or commenced basis in the second third quarters, either but what we think matters financially is the convert it's it's the fungibility again on move outs and uncollectible.
We have increased our effective rent paying occupancy in the first quarter by probably about 50 basis points on we're moving into that direction I think the leasing activity that Jim and the team.
In the first quarter is again, another kind of confidence builders, we think about moving or move.
Moving occupancy forward through.
Through the balance of 'twenty one.
Yeah that makes sense, thanks a lot.
Sure.
Our next question comes from Floris Van <unk> with Compass point. Please proceed with your question.
Thanks for taking my question guys.
Lisa maybe if you could but you guys have a lot of dry powder.
Enviable balance sheets, obviously earnings are on the upswing you know things are looking good.
Maybe your thoughts on as you deploy you've talked about the redevelopment, which is an attractive capital source or capital use and some of your ground up development opportunities as well, but as you look at acquisitions.
As the pandemic changed your thinking about what you want to want to acquire.
And by and maybe talk about the types of assets or.
Both in terms of types of asset and median in terms of region and regional exposure as well.
Yeah.
Well I wouldn't say that the pet.
The pandemic in isolation, if you think about the impacts on tenants has necessarily changed how we're thinking about where we may want to deploy capital.
But some of perhaps the the more permanent trends that where that may that we are seeing from the pandemic have any.
Influenced how we're thinking about where are we made to play capital what I mean by that is a lot of the migration trends are in terms of potentially opening or widening the fairway for us with regards to markets, where we may.
Where we may invest and I don't necessarily mean that we're going to go to a brand new market, but if you take a market that we're in like Atlanta. For example, we have been very focused in the Y. If you will like the first string of Atlanta now with a more permanent.
More remote work people on fire.
We're seeing migrations pattern, if people moving a little bit further away from the city and so that may open up more opportunities for us in markets that we already know we are already in we already have scale. We already have critical mass, where we may be able to kind of expand that that reach if you will that's probably the largest influence in terms of where we're looking to.
To deploy capital.
They'll be on beyond that our strategy has not changed we still are.
Or will develop.
Redevelop acquire high quality, well located grocery anchored neighborhood and community shopping centers.
Thanks Lisa.
Yeah.
Our next question comes from Paul in a rural Hospital Schmidt with Green Street Advisors. Please proceed with your question.
Good morning.
Hum.
This price.
Interest today in the private market.
The smaller grocery anchored neighborhood centers prices.
Our centers and with maybe one or two boxes. In addition to that poster.
And also I think you said before that the cap rates have not changed much versus pre pandemic and where are you referring to this two property Thompson I. Just described on just for the smaller at neighborhood centers.
Thanks for the question again, I would say that generally speaking when after the past prior to the last three months, where we've really seen the transaction market open up a lot a lot more prior to that.
The properties that we're trading in centers that were trading well, but on a much smaller size, so really grocer anchor with small shops.
That work easier to underwrite because of the essential tenants that were in the shopping centers just a smaller bite size with the the improved environment retail environment. The improvement just over all of our economy. We have seen the transaction market open more so now there are there.
Our properties and we are that are trading that wouldn't have even trade. It before this goes back to what I said about new capital coming in looking for higher yields so those wouldn't even if trade it that's the larger.
More unconventional more entertainment.
With regards to boxes theirs.
There is definitely a premiums low cap rates are higher for where there are additional boxes.
And while in the short term you've seen higher collection rates because they're typically are occupied by national tenants that are paying rents. There is still the risk that over the long term as there continues to be shrinking GLA and consolidation, especially with the impact from E. Commerce that is where we're going to see the greatest fallout and also also.
It requires the greatest amount of free of capital to release. So there is a premium or higher cap rates for those types of centers.
But that has that premium widened and.
All right or not.
I don't know that it's much different than it was.
Pre COVID-19, it's gonna be depending on it's always it depends on in our sector and real estate generally but more boxes in centers generally will push up cap rates due to the long term risks anywhere from 50 to 100 basis points, depending on what the market is in what market that shopping centers and and that's really not that different from from pre COVID-19.
The difference is they weren't trading prior to the past three months.
Yes.
And then I think you had mentioned before that you expect it to return to pre pandemic levels by 2023.
Given your guidance and raise and generally more optimism. There is it seems that this can be achieved.
I know I'm, asking a lot, but do you think.
And to US that you are back to pre pandemic in 2022.
I'm gonna toss that to Mike So I don't I don't get in trouble from providing 2022 or 2023 guidance.
Paulina really no change from what we said previously you know late 'twenty two certainly on a full year 'twenty. Three is what we're talking about internally is a recovery type of period, it's important to remember theres a lot of crossover going on between 2020 one right.
Producing a lot of growth quote unquote in 'twenty, one, but we've lost 200, we have lost 200 basis points of commenced occupancy and that recovery period will take longer as it always has.
Finding the tenant negotiating the lease building out the space commencing rent is a process.
That that that's really what's going on at the end of the day result, and when we and where we end and how that relates to 19 and how quickly we can get there what's happening with the uncollectible lease income between 2020. One is is.
It's it's a shallower trough.
But it's not necessarily changing the endpoint.
That's where this vacancy number matters.
And it all matters, because it's all cash but without vacancy number is going to influence where we end and how it in relation to 2019.
Yeah.
Thank you very much.
Sure.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad My mom would please while we poll for questions.
Our next question comes from Tammy <unk> with Wells Fargo. Please proceed with your question.
Great. Thank you.
I guess I'm curious as you think about new development starts.
Are you at all concerned about the impact of rising construction costs on on yields relative to sort of historical yields.
Yes Tammy.
We historically have done.
Really a pretty good job of getting.
Growth in our underwriting so that we don't get caught.
Caught flat footed and looking over our shoulder we've done we've done a pretty nice job of that in an existing pipeline deals. So obviously.
Underwriting it's a fact out their construction is a challenged pricing is tough deliverables on very.
Difficult right now so all of those factors would go into the to the mixture.
<unk> process as we look at our underwriting and pipeline.
Okay. Thanks, and then maybe a bigger pickup picture question.
As with any downturn there are.
Obviously lessons learned that lead companies to better position for the next downturn I think in the great financial crisis. The lesson was how important liquidity and low leverage where but curious in a year from now when you look back on this downturn what lessons do you think regency and other on our retail real estate will have learned.
I think that interestingly. The first thing that came to mind that you started to answer that is the same thing about liquidity and financial strength.
And since we did learn that so well and in past downturns I would just have to say that it just it just.
It really really solidifies how important it is.
Two to keep that balance sheet extremely strong and and how you. How you enter that downturn is so important and that is what has enabled us to provide the support to our tenants that we're providing and enabled us to maintain our dividend.
And it also coming out of it it's still strong enough that we're able to act.
Act on opportunities as they as we as they come to fruition.
So that's the biggest lesson learned remained true remain disciplined.
Even when times are booming and you'll be in a position to take advantage of any disruption or distress when that downturn does happen.
Sure Mike.
And sorry, if I missed this but what was the nature of the termination expense from the first quarter.
Sure Jeremy we bought out a lease in connection with the sale of the.
Former shopping center called Pleasanton.
So it was the last lease remaining we had to buy that out to deliver that site to the buyer. The buyer is building a basically an office building on corporate headquarters.
Okay. Thank you.
Sure.
Our next question is from Chris Lucas with capital One Securities. Please proceed with your question.
Oh, Hey, good afternoon, everybody just a couple of quick ones on my end.
I think it's.
When you guys were going were going through the pandemic.
Projects that were sort of set to deliver or nearly ready to deliver and you made a combinations with tenants for that buyer.
Allowing them to open up I'm thinking specifically about <unk> 50, but.
Are you seeing tenants that maybe had gone through that negotiated sort of the.
Delayed openings now pushing to accelerate those openings or was the timing pretty much set and that's just how they are now they're gonna be.
Chris I think at this point.
That's kind of behind us.
The hesitation to open.
It's much like the foot traffic.
As people have come back in.
And most of our assets that were in that predicament.
We're seeing either.
Tenants that chose not to go forward has been replaced by a lot of cases similar use because.
Right merchandising mix it might have been partially built out along those lines. So it was it was almost a natural that those those same usage kind of backfill, but we're seeing people move forward with the with the opportunities today.
And then maybe the flip of that question is on.
I don't know if it's just in my neighborhood, but.
We're seeing more hours getting cut.
Shops as retailers based on a lack of staff.
Are you finding retailers hesitant to sign leases in la.
Low labor pool availability markets.
Because of that or is that not impact from their decision processes at this point.
I Wouldnt say its impacting decision process right now.
But it certainly is it's a reality out in the world workplace, we hear it from.
Retailers restaurant tours to two soft goods to just across the gamut, it's a real issue trying to find labor.
So.
More to come hopefully there'll be some some some changes from the <unk>.
Legislative changes that may be impactful to get folks interested in coming back to work, but there's definitely on.
A lack of supply from Alaska.
Just last question from me on.
On the development and when I look at your redevelopment development page today, it's overwhelmingly oriented to redevelopment if I look at that page 18 months from now.
Does it still look over and over.
Hum emphasized on our redevelopment or development, how the larger.
Play in your outlook.
I think that there's always going to be the mix of that is going to change because again I'll just bring it back to the.
That is the core competency the team the best team on the business. The way that we are even structured regionally rather at vs. Functionally right. It's not a development team and operations team, we bring that expertise to bear on our existing portfolio as well and really maximizing the value of those properties is going on.
Continue to be an important part of our strategy at the same time.
You know last quarter, we had two day starts they're both ground up developments.
And so we are continuing to pursue and look for those opportunities also and I believe we will have success on both.
Thank you.
Our next question is from Linda Tsai with Jefferies. Please proceed with your question.
Hi, sorry, Thanks, just one follow up.
On the <unk> call you noted that the Pacific coast comprised nearly half of uncollected rent due to tighter lockdowns is the escalated receipt of prior period rents in <unk> 'twenty, one and from fiscal year 'twenty weighted towards the West coast.
Yeah.
It's a nearly 40% west coast on the prior period collections and about a third coming from the South East.
And then is there any sense that the west coast markets are more impaired now from a leasing activity rents or tenants' ability to pay or are you just seeing more recovery overall.
The latter recovery overall, it's been it's been exciting to see the level of activity in a market that's been.
Very very difficult to operate in over the last year.
We're seeing that same same leasing activity in volume in the west coast as we are across the country.
Yeah.
Thanks for taking my follow up.
Sure. Thanks Linda.
We have reached the end of the question and answer session. At this time I'd like to turn the call back over to Lisa Palmer for closing comments.
Thank you again to the regency team, but also thank you all for being on the call with US day and as I as I opened in my remarks, I know, it's been on a long weekend and a long earnings season, and appreciate you being with US on a Friday afternoon and have a great have a great weekend.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Today's conference call has ended please disconnect your lines at this time. Thank you.
Okay.