Q3 2021 Regency Centers Corp Earnings Call
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Greetings and welcome to the Regency centers Corporation third quarter 2021 earnings 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. Please note. This conference is being recorded.
Now I'll turn the conference over to your host Christine Mcelroy Senior Vice President capital markets you may begin.
Good morning, and welcome to Regency Centers' third quarter 2021 earnings Conference call joining me today or at least the Palmer President and Chief Executive Officer, Mike <unk>, 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 companys views of future business and financial performance, including forward earnings guidance and 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.
Factors and risks that could cause actual results to differ materially from these statements may be included in our presentation. Today and are described in more detail in our filings with the SEC specifically in our most recent Form 10-K and 10-Q filings.
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 that we have also posted a presentation on our website with additional information, including disclosures related to forward earnings guidance and the impact of COVID-19 on the company's business. Our caution on forward looking statements also apply these presentation materials Lisa.
Thank you Christie and good morning, everyone. Thank you so much for joining us.
We feel really good about the progress that we've made toward recovery and also with the improvement we're seeing in our operating trends our third quarter results are reflective of a healthy environment for open air grocery anchored shopping centers and not only are we feeling closer to normal but we're excited about what the future holds.
I'm also really pleased to report that despite the recent concerned about potential impacts from the Delta area. We've continued to make meaningful progress on our rent collections narrowing the gap further as nearly all of our tenants are in a position to pay us volkert right.
That'd be retailer demand is driving strong leasing activity, which combined with reduced tenant move outs has moved the needle in occupancy.
We've also had success maintaining leverage in our lease negotiations driving through contractual rent growth and remaining prudent on capex, while further improving our rent spreads. Our team has been working really hard to drive deals that will lead to long term growth in the value of our assets.
As a result of these positive trends and an increased pace of improvement, we're again raising full year guidance for 2021.
In recent quarters, we've discussed that we believe the recovery of NOI back to 2019 levels would likely occur in the second half of 2022 on an annualized basis.
But given the rate of progress we've seen in recent months. We are now pulling that forward to the first half of 'twenty to 'twenty two.
We've also increased our dividend by 5% a reflection of our confidence in a return to sustained growth over the long term youll recall.
And I know, you're probably sick of this but I can't possibly remind you enough that we never cut our dividend during the pandemic.
We are committed to growing our dividend, while also accretively investing our sector, leading free cash flow to drive solid total returns for our shareholders.
And that's a good segue into our investment and capital allocation strategy, where we remain on our front foot.
The private transaction markets are competitive they remain competitive and we've continued to see downward pressure on cap rates as more buyers have emerged for high quality well located grocery anchored centers.
But our strong balance sheet and access to low cost capital provide a competitive advantage that allows us to be opportunistic.
And we do have a long track record of investing with discipline on a leverage neutral and earnings accretive basis.
Our pipeline is active and we continue to see good opportunities.
With that we just announced that we're under contract to acquire Blakeney shopping center, a dominant grocery anchored community town center in South Charlotte.
This is a high quality well leased center with strong demographics and tenant mix that fits well with our strategy our.
Our south East team is excited to bring this exceptional asset into the regency portfolio and we expect the transaction to close this month.
The addition of high quality centers like Blakeney, along with our development and redevelopment program are important to portfolio enhancement.
At the same time, we remain committed to selling centers that are lower growth or non strategic or when it's clear to us that maximizing the value of our property involves a predominantly non retail use.
For example, our recent sale of a former Sears box Ajay.
Adjacent to our Hancock Center in Austin was in that last bucket, where we determined that its highest and best use was medical office.
The addition of this office component.
And the traffic that it will generate to our site will enhance the value of this well leased center, where HEB is currently expanding its highly productive store, but our best risk reward proposition is to invest capital into strong grocery anchored neighborhood and community retail, which is the bread and butter of regency strategy.
This commitment to portfolio enhancement has proven to and will continue to fortify our future NOI growth.
In closing our shopping centers are well positioned.
To benefit from long term migration and flexible work trends that favor suburban trade areas.
And we are actively positioning our portfolio to thrive today and into the future.
If the industry has learned anything over the last 18 months during which we saw hyper accelerated digital commerce and fulfillment and distribution challenges, it's that having brick and mortar locations close to where consumers live is critical to retailers success Jim.
Thanks, Lisa and good morning, everyone.
We remain encouraged by the continued improvement in our portfolio operating trends accelerated by the reopening of the West Coast. This summer.
Our tenants are generally fully open and operating in all markets.
With the lifting of restrictions translating into higher rent collections.
Strong leasing activity.
Portfolio of foot traffic rebounded back to a 100% of 2019 foot traffic levels as of late October.
Despite the slight dip in September related to the Delta variant.
Many of our tenants are experiencing positive sales trends in 2021 with grocers holding their gains from 2020, and many restaurants reporting record high productivity.
We continue to see further sequential improvement in rent collections with Q3 collections at 98%.
Notably our collection rate for deferrals remains high at over 95% year to date.
Translation.
Mr honoring their commitments.
Our leased occupancy rate is up 50 basis points over the second quarter.
After adjusting for the sale of a vacant former Sears building at the Hancock Center, Lisa just mentioned.
These gains were driven by strong leasing activity and fewer tenant move outs.
Most importantly, our net effective rent paying occupancy also rose this quarter and is now over 90%.
As we've noted previously this metric is the best indicator of a recovery progress.
As noted leasing activity continues to be robust and we remain encouraged by the strength of our pipelines.
Q3, total leasing volumes were 125% of 2019 quarterly averages.
Shop renewal rates were 80% elevated over historical trends.
Rent spreads continued to improve to a blended rate of over 5%, while our GAAP rent spreads also continued to get closer to pre COVID-19 levels at over 12%.
We are maintaining contractual rent growth on leasing activity in line with recent years with embedded rent steps on more than 80% of our leases executed this quarter.
Additionally, our weighted average lease term for deals has risen back above pre COVID-19 levels.
So to summarize our leasing trends are moving in the right direction.
<unk> us to maximize NOI growth for the long term.
All of that said, we are fully aware and acknowledged that retailers today are facing challenges related to labor shortages cost inflation supply chain disruptions and permitting backlogs.
These issues are impacting build out cost and tenant rent commencement timing. So far this has only been on the margin for regency.
That said, we will continue to monitor these issues and we will work closely with our tenants to help them manage through them, where we can.
Moving to development activity, we continue to make good progress on our in process ground up and redevelopment projects and we completed a $21 million Bloomingdale square redevelopment in Tampa This quarter.
We re imagine and modernized the center by Repurposing of former Walmart box to.
Right and expansion and relocation of a highly productive existing publix and backfill the former grocery box with a new la fitness, we added more visible and functional shop space and made enhancements in renovations to the remaining portions of the center.
This successful project helped to submit this centers relevancy and dominance in its trade area, while generating a return of over 8%.
Construction cost inflation and labor shortages are real and are creating some pressures, but are not materially impacting the current yields and costs in our in process projects.
We are keeping our finger on the pulse on these trends and are being very thoughtful in our cost projections and delivery timing when underwriting new and potential pipeline projects.
In summary, we are very pleased with the positive momentum that we continue to experience in our operating portfolio and in our value creation pipeline driving us closer to full recovery and supporting our future growth.
Thanks.
Thanks, Jim Good morning, everyone.
I'll provide some color around third quarter results walk through the changes to full year 2021 guidance and offer some helpful reminders when thinking about next year.
Third quarter NAREIT <unk> of $1 12 per share was helped by several items.
Collectible lease income was a positive $10 million in the quarter the details of which we've broken out on page 33 of our supplemental.
We reserved over $4 million on third quarter, billings, which is down from over $10 million a quarter ago associated with uncollected revenues from cash basis tenants.
This was more than offset by the collection of nearly $6 million of amounts reserved during the first half of 2021 as.
As well as the collection of close to $9 million of revenues that were originally reserved in 2020.
Our full year 'twenty, one guidance calls for a $46 million positive impact from the collection of 2020 reserves.
Of which we have recognized $41 million through the third quarter.
We also recognized close to $14 million of one time promote income in the third quarter related to the USAA JV transaction.
Which positively impacted NAREIT <unk>, but it is not included in our core operating earnings metric.
Finally straight line rent in the third quarter benefited from the reversal of reserves triggered by the conversion of some cash basis tenants back to accrual accounting.
As reflected in uncollectible straight line rent at a positive $4 million.
This is a noncash accounting impact that contributes to NAREIT <unk>, but again did not impact our core operating earnings.
Following these conversions, which represent about 5% of ABR, we now have 22% of our ABR remaining on a cash basis of accounting.
For the smaller pool, our cash basis collection rate was 91% in the third quarter.
700 basis point increase from a quarter ago.
The collection rate on the old pool before the conversion was 93% in the third quarter up from the 86% in the second quarter that we disclosed on the last call.
As Jim mentioned, our net effective rent paying occupancy now exceeds 90% as we've continued to narrow the spread between rent pain and are commenced occupancy rate.
Due to the progress we've made increasing collections on a cash basis tenants.
We remain in a great position from a balance sheet perspective, as cash flows continued to recover and leverage even after excluding prior year reserve collections has returned to pre pandemic levels.
We ended the quarter with full capacity on our revolver and we have no unsecured debt maturities until 2024.
Youll recall that we issued about $150 million of equity in Q2 through our ATM program on a forward basis.
We settled a portion of that during the third quarter to fund the USAA transaction generating $83 million of net proceeds.
The remainder is unsettled, which we view as capacity for future investment opportunities and we have until June of 2022 to issue. The shares we did not raise any additional equity capital during the third quarter.
Turning to guidance, we point you to the detail on our business update slide deck posted to our website.
A big driver of the 12% increase in the midpoint of our core operating earnings range comes from a higher same property NOI growth forecast as.
As we increased the range by 150 basis points at the midpoint.
This increase was driven almost entirely by core improvement, including a higher cash basis collection rate on current year billings and lower move out activity.
As I mentioned, our forecast for the collection of prior year 2020 reserves is up only slightly at $46 million.
Other drivers of the increase to full year core operating earnings expectations include.
Higher lease termination fees and lower G&A.
Our NAREIT <unk> range has increased by an additional five sets at the mid point on top of the change I just described.
Primarily driven by the increase in straight line rent associated with the conversion of tenants back to accrual from cash basis during the third quarter.
While it's possible that we may convert additional tenants back to accrual during the fourth quarter, our guidance does not assume any additional reversal of straight line rent reserves.
I'd like to point out that these noncash accounting impacts are a big reason why we provide and guide to core operating earnings.
In addition to NAREIT <unk> this.
This metric excludes noncash amounts such as straight line rent mark to market adjustments and can provide a much cleaner picture of our earnings trajectory.
We will provide 2022 guidance with Q4 results in February as we normally do.
But we wanted to remind everyone of some of the bigger nonrecurring moving pieces that have been disclosed and discussed throughout the year when thinking about modeling for next year.
First our $46 million guidance for collection of 2020 reserves as a prior period adjustment not associated with 2021 billings.
Second we recognize abnormally high expense recoveries of about $3 $5 million net of reserves in the second quarter related to the 2020 expense reconciliation process.
Third G&A during the first quarter benefited by about $2 million from the forfeiture of previously expense share grants related to the departure of our CIO earlier this year.
And lastly, although not impacting core operating earnings we recognize close to $14 million of promote income in the third quarter.
We look forward to discussing our 2022 outlook in more detail together with next quarter's results.
As Lisa mentioned, given the pace of improvement we have experienced to this point of the year. We now expect the recovery of our NOI back to 2019 levels will occur on an annualized basis at some point during the first half of next year.
That's about six months earlier than we had previously expected.
With that we look forward to taking your questions.
Thank you and at this time, we will 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.
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Please while we poll for questions.
Our first question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question your third quarter benefited from the strengthening of the core business in conjunction with collecting some of the past right. So presumably and is your guidance suggests.
Recovery of prior reserves is going to decrease in the future.
And as that why its down can you talk about the.
Youre going to be passing from collection of pasteurized to continued growth of the core business. So can you talk about the trajectories of those those two pieces and whether that means in <unk> acceleration in the future.
Sure Hey, Michael Good morning, I appreciate it.
You bring up a good 0.1st the deceleration in the implied guidance for the fourth quarter. So I just want to make sure we kind of get that out there.
And explain some of the pieces here about.
As you have you've done the math, it's about <unk> <unk> per share at the midpoint about a third of that and again I'm speaking to core operating earnings not NAREIT SSO about third of that is going to be as you. As you mentioned a result of 2020, our prior year collections decelerating. So that the trajectory there as you can see has gone from $20 million over <unk>.
$1 million in the first quarter to roughly $9 million in the third.
We have guided to that number being about $5 million in the fourth.
About a third of that deceleration in the fourth quarter comes from other what I would call other NOI line items.
Percentage rent settlement income, we did have a bit of a frothy third quarter. So that should decelerate in the fourth and then we do it as you look at the G&A guidance Youll see that in the fourth quarter from a run rate perspective will be slightly higher than the third. So those are the drivers kind of decelerating into the end of this year.
As we think about next.
Uncollectable lease income is going to continue to be a story of accelerating our earnings growth path.
We're at about 250 basis points on current year collections through the third quarter as a bad debt charge or an uncollectible lease income charge. If you think about how we finished the year, we were anticipating on a cash basis, Tennessee continues to climb from a collection rate perspective.
I think we might end the year in the plus or minus 170 basis point range as a bad debt expense charge on current year billings.
And remember our historical run rates in the 50 basis point range. So we see a tremendous amount of opportunity to continue to close that gap Thats why we keep talking about net effective rent paying occupancy we increased that by 200 basis points this quarter.
We anticipate that to continue to grind higher into 2020 too much more to come on 'twenty two guidance I do want to hold that back to February I.
I don't know that we will get back to our 50 basis point historical run rate by the end of next year, but we do feel pretty confident that we'll just continue to close that gap from that 170, where we think we'll end up in the current year and Michael I like how you ask the questions.
And with all of those there is a lot of numbers and a lot of facts, there and a lot of moving pieces.
What I want to make sure. It doesn't get lost is the really vast improvement in the demand.
For leasing and for space in our properties, because we did lose occupancy.
And what is going to drive the acceleration is going to be our continued ability to re lease that space.
And that's really important and we're seeing that demand come through.
Incredibly helpful.
Just as a follow up in your guidance the expected cap rate for dispositions fell from five 5% to 6% last quarter to five to five 5%. This period. In addition to your acquisition cap rate decreased from 55 to five one is it fair to say that industry cap rates have compressed 40 to 50 basis points since last quarter and how does that make you.
Change how does that make you think about doing acquisitions dispositions development and redevelopment going forward.
<unk>.
I don't believe that the cap rates haven't necessarily compressed by 50 basis points quarter over quarter.
Our guidance as a result of the mix.
So we did we did announce the acquisition of Blakeney.
Which is an exceptional asset.
And that obviously the negotiation of that was even prior to last quarter. So the cap rates were already there.
And with the Blakeney acquisition. We are also if you will match funding that with very low cap rate dispositions nonstrategic in the fourth quarter and Thats what drove the increased guidance for dispositions with that lower cap rate for that so it's a mix of properties.
On both the acquisition side on the disposition side specific to our agency cap rates have compressed all year long and as I said quarter over quarter I don't think that theres been much of a change, but there's no question, that's where the type of property that we already own and therefore are looking to add into our portfolio. It is going to be in the five four and a half to five cap rate range.
And that's high quality grocery anchored shopping center pricing today.
It does not change how we think about acquiring and how we think about adding as I've mentioned in my prepared remarks portfolio enhancement has always been a really important part of our strategy and we do believe that continuing to grow with with Premier high quality assets likely already own will help fortify our future NOI growth as we dispose.
Of those that perhaps may have a lower growth profile than our average or may be non strategic.
Thanks, again and good luck in the fourth quarter.
Thanks, Michael.
And our next question comes from the line of Katy Mcconnell with Citi. Please proceed with your question.
Thanks, Good morning, everyone. So on the Carolina, India can you provide some more background on how the deal sorry, what you're underwriting for upside opportunities at the property.
And then lastly, just wondering how dispositions funding.
Funding plans.
Okay.
There is so much in that question I think it's going to take three of us to answer it.
I'll start and then I'll pass to Jim and then Mike May tap into the funding.
It was a marketed deal.
However.
We've talked about this in the past there is no question that we typically have had more success when we're able to get in front of marketed deals and do things off market use our relationships.
But there are a select number of assets that do come to the market that are market that we also have success and when we're able to leverage really leverage our local teams.
I am a little biased here.
I believe that it is.
It's not the best we're certainly really close to the best in the business and we have an exceptional south east team. We have assets that look a lot like blakeney already in the portfolio and we had a lot of conviction around the quality of this asset and then from the funding piece that Mike's going to talk about that allows us to add this to our portfolio.
On accretive basis.
So we're adding an exceptional asset that is going to have a growth rate that's above our average.
On an accretive to earnings basis.
That to me that that is why we were able to be aggressive on a marketed deal.
I'll look to Jim to talk specifically about how we think about the growth rate here, yes.
Haiti.
I can't I can't overstate, how excited our team is about this asset.
It's truly a center of gravity for retail and restaurant offerings in the affluent.
Charlotte market.
But as we look at it.
We have a lot of respect for the current ownership.
The asset for good long haul him have done a really nice job in merchandising but.
We believe we see a great opportunity to really apply our asset management skill set an eye towards <unk>.
Fresh remarketing re merchandising and.
Fresh.
Look if you will on the center to really drive.
We would believe are are higher than normal NOI growth out of that asset.
That's the bottom line, we looked at that is.
As an opportunity to get into a great center and have outsized earnings opportunity before Mike gets into the funding I don't want to Miss the opportunity to.
We very affectionately call the asset of <unk> as we're nearing the months' of Thanksgiving.
That came that was tab that laid by our.
Our investments officer in our Carolina market.
And for those of you that don't know what a <unk> is Turkey chicken and duck and this asset really as Jim said as a center of gravity and it offers.
There is a target piece of more of a community center feel Theres a neighborhood center with Harris Teeter anchoring that and then there is a main street retail.
You can you can choose how you what you think is the Turkey, the chicken or the deck, but it truly is a center of gravity is an exceptional asset.
Hey, Katy just following up on the clean that up from a funding standpoint.
Youre right.
It was a little bit to Michaels question as well when you think about recycling you typically think about dilution.
And we're not familiar with that we had some dilutive recycling in our history.
We're in a unique period of time, where what we're adding to our disposition pipeline is actually low cap.
At the same time low growth nonstrategic assets and if you click through and just look at our dispositions on the year you see Pleasanton Plaza you see Hancock series pad non income producing assets. Obviously this is an ability to put that capital back to work.
You see gateway 101, two basically two boxes very low cap very low growth if any it's flat as a board and then we were recently able to sell the Parnassus Heights Medical Center again highly sought after asset class not consistent with regency strategy low cap rate, we're adding a couple more to dispose guidance and what that <unk>.
<unk> capital provides us is actually an opportunity to invest that accretively into a property like blakeney with Amit, which has a headline and on the surface looks to be quite an aggressive cap rate and it is but region regency. At this unique period of time is able to make sense of that economically.
It's just as a follow up its Michael Bilerman. Good morning, Lisa you've used institutional capital for us.
Very very long time, I can remember sitting down with you almost 25 years ago. When you were running.
The fund platform with Bruce can.
Can you talk a little bit about sort of where institutional capital is in partnering with you for further acquisitions I assume youre looking at a lot of stuff right now or whether you'd want to do it wholly owned.
And Conversely, whether you would sell more into a JV or institutional capital.
Talk a little bit about the appetite just given your deep history and relationships with that capital.
Of course, thank you, Mike Glenn and I think I do remember that made in 25 years ago.
Yeah.
We have spoken.
With many investors.
About this over the past few years, especially in light of some of the buy end of the USAA and <unk> and some other dispositions.
Back 25 years ago, we really utilize third party capital as we always said, there's three reasons right access to capital access to opportunities and access to expertise and three years ago. It was a combination of access to capital and access to opportunities. We were much smaller company than today as we think about it.
I just said I believe that if we don't have the best we certainly I really darn close to the best of the team in the business. So we don't necessarily need access to expertise and.
And the capital markets can be a little volatile.
We haven't had the need for access to capital we don't have it we don't have that need today.
But never say never so.
Maintaining good relationships with our partners is still an important objective for us and we continue to do that.
However, at this time that the access to opportunity would really be the biggest checkmark for us in terms of where we would need to.
Access third party capital. So that's how we're thinking about it today, we have great partners really appreciate our partners. We appreciate the relationships with our partners and we will continue to to sit side by side with them, but for new capital at this point, it's not necessarily high on our priority list.
Alright, thank you.
And our next question comes from the line of key bin Kim with Truest. Please proceed with your question.
Thank you good morning.
So you guys have been able to achieve a high level of leasing velocity I'm, just curious about how deep that demand is and as the velocity at which the top of the funnel is being fed with additional.
Additional pipeline.
Is that how is that looking compared to the number of deals you've been signing to date.
Yes, Keith this is Jim.
Yes, the velocity has been really good and as I look at it I think it's a combination of.
Basically a renewed confidence in the brick and mortar business from retailers.
Certainly pent up demand for it.
From a year and a half of really not a lot of activity.
That's opening up.
And obviously, we continue to see a nice migration to quality, which we believe we are that we are that answered to migration.
But.
The categories that we're seeing.
Are the ones, we've merchandise to for the last 20 years.
We're doing a lot of medical deals pet deals restaurant fast casual.
<unk> personal service.
Sure.
If the demand is really across all regions.
It's really.
It's almost.
Imperceptible.
Where there is more demand than others, because it's coming from everywhere.
As I said the pipeline as we look at our existing pipeline into the into the 90 day future. If you will.
It continues to look very robust. So we have we have more vacancy than we've had in a long time so.
So we have product we have availability and there appears to be good solid retailer demand for that and so I'm cautiously optimistic we stay on a nice trajectory.
Great.
<unk>.
Wanted to ask about your leasing spreads new lease spreads were essentially flat.
But you are using less capex than many of your peers as a percent of rental value or just total dollars.
Just help us better understand this dynamic of choices behind it.
Yes, Jim again I'll take that.
I appreciate you recognizing that.
The blended spreads up to for this quarter was five 1%. So we're on a we're on a nice trajectory there.
But in addition to those initial spreads I think it's important which is obviously an important metric.
I'd like to step back and kind of take a broader look at what really.
Is going on long term to create long term sustainable NOI.
I think one of the components contractual rent steps and our ability to manage expense recovery ratios are key contributors.
I think appropriate and prudent leasing capex, which you would you touched on that's a major factor I think in long term earnings growth.
Tenant selection really making sure we're picking the right mix to drive synergy and traffic at our centers, but also having a mind coming out of this pandemic.
Environment make sure we have an eye towards relevancy and survivability of the folks were dealing with we want people that are going to be here with us we don't like to churn space.
And all these things matter.
And in combination with what we're seeing from a GAAP and net effective rent growth at the 12% number I referenced in the remarks.
I am confident that our overall results have us have us on a very good vector towards the long term NOI and earnings growth objectives that we're looking forward.
Okay. Thank you.
Okay.
Our next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.
Hi, everybody. Thank you.
In this environment, which is more attractive development at tighter yields or strategic acquisitions like Blakeney AG compressing cap rates and just given the competitive backdrop, which do you feel as regency's wiser capital allocation call.
Derek I actually don't view, it as an either or.
Choice.
We like all and we are not.
Fortunately the position that we're in as I just.
As I just responded to Michael not in a position where capital is scarce for us. So we are trying and continued to make progress on rebuilding our ground up development pipeline, we are making progress on our redevelopment pipeline and we are in the market and see a good pipeline of opportunities for acquisitions.
As long as we're able to invest accretively and grow the company's future trajectory for NOI growth and earnings growth, that's the box that needs to be checked.
Got it got it and thank you and maybe back to GM or I know, where everyone wants to talk about demand how is small shop demand stacking up so just looking at small shop leasing pipeline now versus pre pandemic and really how does it compare and if youre seeing.
<unk> outside demand is it providing the flexibility to bring in the right Regency style merchandising mix of course, given the center or are you feeling the need with the occupancy hole.
To be a little more flexible on concept or maybe <unk> going forward, we haven't seen it yet but just looking ahead. Thank you.
Yes Derrick.
I think as I previously mentioned I think the demand is there we continue to asset manage no different today than we did pre pandemic we are always looking.
To get the right merchant at the right price to make sure. They are successful and in turn drive sales and make us successful.
So.
Again, we right now the demand seems to be pretty deep.
But we continue to be selective.
We are generally never happen and don't intend to be.
Fill it up with anything and hope they stick we are very very.
Specific in our merchandising mix and really try to make good long term decisions.
Thank you.
And our next question comes from the line of Craig Smith with Bank of America. Please proceed with your question.
Thank you.
And I was wondering if I could get an update on that.
Sarah Monte Center.
<unk> with Jcpenney space.
And then the crossing cleared.
Okay.
Craig we're going to have I'm going to have job Jim addressed both I think yes.
Yes, Sir.
Sarah Montana with the Jcpenney space, where we are investigating.
Several.
Different redevelopment opportunities. So we're early in the process and trying to identify the best direction for that.
Replacement box.
And as far as.
It was a project pricing clarity yes.
Really in great shape, there are retail ground floor space is.
Fully spoken for either at lease or in lease negotiation.
As we mentioned.
Last quarter I believe the lifetime fitness deal was executed.
We are waiting on a.
Our use waiver, which we expect to get in the next 30 days, which will clear all contingencies.
And.
By year end, we should be posting over 90%.
Lisa.
We are it's come together nicely.
<unk>.
Cited over the lifetime over another.
I knew I wouldn't be able to help myself from jumping and those are both tremendous assets and we are as Jim mentioned, we're continuing to harvest value from those and grow NOI and both of those assets are going to have.
Our outsized NOI growth in the near future.
That's good over a third of the year.
Development dollars so.
Yes.
Uh huh.
The other question I had I loved.
Sure.
I think for Dunkin'.
And yeah I was when I was examining the center at our time, putting it all together, but you guys did it adds up.
Thank you anyway.
Yes.
The G&A costs I'm, just wondering I mean should we expect a pretty decent increase in 2022 with increased travel or have you guys been relatively active.
Throughout 2021 that.
It's.
Not going to have a cigna.
A significant pickup.
I lost my.
Status on Bill does that mean.
So.
We are we are anticipating a significant increase you know kind of all joking aside I. Appreciate you asking the question. It does give us the opportunity to put this out there.
2021 run rate on a quarterly basis is in the $19 million range or so.
And again I'll refer to my remarks.
Recall that we are benefiting this year from that $2 million.
Forfeiture.
Benefit upon Max departure.
Next year's run rate is probably going to be closer to the $21 million range on a quarterly basis.
What we're capturing in that number as compensation increases together with filling open positions. Some of the some of the benefit we have been occurring in 'twenty, one as we've been running a little bit lighter from a head count plan perspective.
Increases to <unk> as you mentioned the entire company is we're starting to get back on the road and Theres, some more conferences being held businesses being businesses being conducted more more in person then zoom going forward and so we're planning for that to return to pre pandemic levels.
And then.
The last the last point I'd make is development overhead.
Probably going to be in the flat range 21.
As we continue to build our pipelines we have the development spend.
Will look a lot in 2012.
2022 like it did in 'twenty, one and then we anticipate growing that ability to capitalized.
'twenty three and beyond.
Great. That's helpful. Thank you.
Thank you Craig.
And our next question comes from the line of Rich Hill with Morgan Stanley. Please proceed with your question.
Hey, Good morning, guys first of all thank you for being strategic on when Youre hosting this call. This is the first call I've had in a while where I'm not double and triple booked so thank you very much.
I have one sort of wonky question about <unk> and then one sort of bigger picture question on <unk> can you maybe provide us any thoughts on.
On brents, becoming straight line and how that will look in <unk> I noted that moving tenants from cash basis to accrual accounting was around <unk> <unk>. So any thoughts on what that might look like in <unk>.
Rich, we don't we don't guide on it.
I would say.
As we look at we have a very strict policy, we want and we want it that way.
Bringing tenants back to accrual accounting is going to take them to prove to us that the credit is there to meet that GAAP standard rate. So the bar is relatively high.
You've got to be current on your rent.
For extended period of time, and then I would add to that there is an overlay of what business are you in and I'll be Frank.
Some of the labor concerns that we're looking at today.
Impacting how we think about bringing <unk> back to accrual accounting.
As I look at our at our <unk> and our open they are and think about what tenants may or may not qualify it could be in the 5% of ABR range in the fourth quarter that converts I don't have a precise number for you on what that could mean from a straight line rent perspective.
But generally speaking.
It kind of works pro rata. So every percentage point that we converted is about worth on a pound for pound basis the same.
I hope that helps we're going to have to take these as they come rich Unfortunately, and I do look forward to being back to normal when we have everyone near.
Nearly everyone back on accrual accounting firm.
From your lips to God's ears, I completely agree with you on the complaint.
It's hard.
So bigger picture question occupancy.
You've noted in the past and very correctly that occupancy is the key to getting back to normal.
To have really good leasing trends can you maybe talk about where you feel occupancy is going to get back to normal is that a year two years three years.
Recognize I'm asking you the shake your Crystal ball here in my Crystal ball is not great right now so hopefully yours is a little bit better than mine.
At.
We haven't given guidance on occupancy I think.
But one of the best sort of metrics or measures is when we expect to get back to kind of 2019 annualized levels and that is now in the first half of 2022. So we are getting the benefit of some contractual rents along the way, which may offset a little bit of the occupancy but.
I don't want to get I don't want to get out and travel with any future guidance, but I think next year and into 2023, and we should continue to see some occupancy lift.
So maybe sometime in 2023.
Yes, that's great lease I'm, sorry, I wasn't trying to get you to talk about 'twenty.
Yes.
Yes, Mike the whole time, I answered that rich to make sure I wasn't getting in any trouble.
You're really just talking about the cadence of.
Occupancy returning to normal not not yet to comment for 2022 will benefit from some of the redevelopment NOI growth that we talked about and contractual rent steps that are already embedded so while we'll be we'll be back to that 2019. It doesn't necessarily mean that occupancy is I'll, let back at that time, which is which is a good thing because that means we still have.
More room to grow.
Got it and look at someone that grew up in the South I certainly know what it is so.
Thanks, guys congrats on a nice quarter. Thanks, guys.
And our next question comes from the line of Mike Mueller with Jpmorgan. Please proceed with your question.
Yeah, Hi, Lisa I think you talked about cap rates on high quality centers being four five to five looking at your disposal. This year five 5% to 6% I guess, how much of that five five plus cap rate product do you still have.
And the company.
So I think we updated our guidance to be 5% to five and a half.
On dispositions Mike.
To make sure that that's clear because.
Generally speaking as I said, when we think about portfolio enhancement and the centers that we are selling they are going to typically have a lower growth profile.
<unk> non strategic and so you would expect that especially with the lower growth profile that cap rates would be a little bit higher than the four five to five.
Because we along with everyone out there it looks at total returns.
Whether it be going in cap plus growth or Unlevered IRR.
So that's why you'd see a little bit of that discrepancy.
I think for the five to five and a half that's when we as Mike talked about our funding.
That really that works for us if you will from a portfolio enhancement standpoint, and a detailed actually it doesn't include the non income producing land that we're selling are effective earnings based cap rate is.
Yeah and the.
<unk> range.
The second half of your question.
Okay.
And then maybe just switch gears for a second here do you see any other JV wind downs or buyouts over the next few years.
I think building on the comment I made earlier to Michael Bilerman question.
Sure.
There is nothing to count on there, we like our partners a lot and they've been good to us for a long period of time.
It's been a very symbiotic relationship.
So we.
I don't know, Mike that I would count on our ability to do a trade like the USAA transaction.
But never say never and we can't predict what their plans are from a retail exposure perspective, and there may be an opportunity that regency's presented with to consider buying in a JV partnership.
And we will do that.
We like the assets equally that are in those portfolios. There is no fundamental kind of qualitative difference between the assets and our JV portfolios and what's on balance sheet.
So.
We will take it kind of a day to day and quarter to quarter, but it would take a shift in our partners' mentality right now today. Our partners are committed to this space very specifically to the grocery anchored neighborhood shopping center sector.
Got it okay.
Thank you.
Thanks, Mike.
And our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.
Hi, good morning.
<unk> base rent collections two.
Two laggards or personal service of fitness, but we're seeing some pretty big improvements in activity in those sectors of real time. So I'm just curious could you see an improvement in those two categories really by the first half of next year do you think.
Yes, I would.
I would say the answer to that is yes.
And really the lag that you are seeing.
<unk> is predominantly west coast.
They were they were the most impacted.
So the last to recover and with some certain masked mandates.
Covid requirements that has still.
Robley impacted those two categories.
In the west coast more than anywhere else.
They are basically on the rise large format fitness has bounced back very nicely. It is really more than smaller boutique folks that have been with limits.
And again predominantly west coast.
But we see strong strong growth in that sector and fully expect them to bounce back.
Got it thanks, and how much of the strong leasing demand has been driven by retailers trying to expand their last mile distribution capabilities. We've heard some of your peers talk about that and it seems like a pretty strong secular tailwind for the industry. So what are you seeing on that front.
Yeah.
Lets rewind back to pre pandemic.
And you would have heard us speaking about.
Retail headwinds and.
But that we were confident that retailers.
Placed a very high value on the right real estate on the REIT bricks and mortar locations and that the.
If you are on the if you are in the right trade area in the right market.
Retailers would be willing to essentially pay full market rents.
For that real estate and what I would say is what's happened over the past 20 months with the disruption with the hyper accelerate it did.
Digital commerce, that's only been validated even further that it is really important to be close to consumers' homes and quality real estate.
So I do believe that there has been an increase in demand maybe a little bit pent up as people are we're a little cautious as to how the pandemic would play out but now with hindsight being 2020, the retailers have even more confidence and the importance of being close to the consumer because they do need to be more intentional.
About last mile distribution, and the quality of that real estate matters and I think that that is there is no question that is what is driving increased healthy demand to regency shopping centers.
Alright, thank you.
Thank you.
Okay.
Our next question comes from the line of Linda <unk>.
Jefferies. Please proceed with your question.
Hi.
Point in the cycle would you consider slightly higher leverage to generate higher returns given your low leverage the positive retail environment and access to capital.
It's a great question, Linda we want to operate where we are.
We want to operate in that band of five to five five were in the low five times area now let me just make a point that.
We use trailing 12 months.
The $46 million of prior period collection is in that number it's worth about a quarter return not material. So we're still in the very healthy in the band.
This is a big point for us moving forward in our growth trajectory, we have with our free cash flow and our balance sheet position, we're going to have and growing into EBITDA recall, we're at the low point of this we are coming out we're going to start growing EBITDA. We believe that a more accelerated rate, we're going to have the opportunity to use a little bit of leverage to that free cash flow.
To acquire shopping centers or build shopping centers are redeveloped shopping centers to amplify and accelerate our growth rate in the near term going forward, all while not putting our balance sheet at any more risk than it is today and operating within that.
The low end, we think of that band, where we want to be so.
It's a we are in we're perfectly positioned we believe to remain as we said on our front foot.