Q1 2022 Regency Centers Corp Earnings Call
Greetings and welcome to Regency centers Corporation first quarter 2022 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Christine Mcelroy. Thank you you may begin.
Good morning, and welcome to Regency Centers' first quarter 2022 earnings Conference call. Joining me today are Lisa Palmer, President and Chief Executive Officer, Mike Mas, Chief Financial Officer, Jim Thompson, Chief Operating Officer, Chris Leavitt, SVP and Treasurer Alan Ross.
Senior managing director of the East region, and Nick with admire senior managing director of the West region.
As a reminder, today's discussion may contain forward looking statements about the company's views of future events 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's 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 discussions disclosures related to forward earnings guidance.
Our caution on forward looking statements also applies to these presentation materials Lisa.
Thank you Christie.
Good morning, everyone and thank you for joining us.
Had a great start to the year, our operating trends are healthy our investment pipelines are active in our balance sheet is strong.
With this even further strengthening of our core business and accretion from our transaction activity our outlook for 2022 has improved from quarter ago.
Our centers continue to benefit from positive structural tailwind, including.
The strength of the first ring suburban trade areas.
The greater amounts of time that people are spending near their homes as hybrid work becomes more permanent.
And the growing emphasis among retailers on the importance of brick and mortar locations as a key component to last mile distribution.
This vibrancy in the retail environment as evidenced by strong tenant sales and continued robust leasing activity and we're successful at pushing rents higher as we continue to make progress getting our portfolio back to historical high occupancy levels.
We do see and acknowledge the risks of inflation and continued supply chain challenges and labor shortages on our business, but so far we and importantly, our tenants have largely been able to mitigate the impacts Jim will discuss this in more detail in a few minutes.
We're full steam ahead on our value, creating development and redevelopment pipeline, which remains the best use of our free cash flow.
We're excited to have started a new ground up targeted and shop Rite anchored center during the first quarter and not only are we making great progress on this and our other in process projects, but we continue to build our future pipeline.
On the transaction front the assets that we've purchased over the last year are very indicative in very much like those that we already own high quality grocery anchored neighborhood and community centers and we will continue to look for opportunities to invest incremental capital Accretively and these types of centers.
We had a really successful and active first quarter doing just that and as a result, we've raised our full year 2022 acquisition guidance to $170 million.
And our largest acquisition so far this year just after quarter end, we purchased our partner's 75% interest in four centers in our JV with counters for approximately $90 million.
Similar to the buyout of our USAA joint venture last year, we saw another great opportunity to allocate capital on an accretive basis into high quality assets that we know well.
While higher interest rates could eventually have more of an impact on private market pricing to this point, we've continued to see significant capital chasing grocery anchored neighborhood and community shopping centers.
Perhaps even more telling on the acquisitions. We've completed in recent months are the other assets that we've seen trade at low to mid 4% cap rates for the type of high quality well located centers.
But we owe that remains a sizable disconnect between public and private market values for our asset class.
Before I turn it over to Jim I do want to acknowledge our recent organizational announcement that he will retire at the end of this year, there's simply no possible way to appropriately recognize him on this call or future calls for that matter is this is not his last we're grateful that he'll still be with us for the remainder of the year.
Many of you already know Alan and NEC, who will be stepping up next year to take on Jim's responsibilities. There both on the call with us today, and you'll see them at upcoming conferences and other events with Jim paving the way I'm confident this will be a seamless transition and I look forward to what the future brings Jim.
Thanks, Lisa and good morning, everyone.
I appreciate the comments and very much look forward to finishing my career here at Regency was strong 2022 results.
Q1 was a great way to start the year.
As Lisa mentioned in her remarks, the operating environment remains robust.
We continue to see healthy foot traffic and strong tenant sales trends, particularly among our groceries and restaurants.
New leasing volumes in the quarter were nearly 40% above the historical first quarter averages and we're seeing terrific demand across all unit sizes, both shop and anchor space and across our portfolio geographically with a flight to quality being the driver.
We were pleased Chicago, we were.
Were pleased that over the past quarter, our same property percent leased rate held firm at 94, 3%.
Our percent commenced rate was actually up 30 basis points sequentially, which is extremely positive in my view as we typically experience a seasonal occupancy decline in the first quarter of the year.
Year over year, our percent leased rate is up 170 basis points.
<unk> commenced rate is up 120 bps.
These positive trends really speak to the leasing progress we've made over the last year. In addition to the quality of our centers and the hard work of our team.
Not only are we making progress filling vacancies, but our renewal retention rate also remains ahead of our historical average.
Blended rent spreads in the first quarter averaged six 5%, which is reflective of the healthy demand for space across the portfolio.
We also remain judicious in our leasing capital spend as we continue to be successful in our efforts to embed solid rent steps into our leases, which gives us an opportunity to keep pace with market rent growth throughout the life of the lease.
This three pronged approach to growing rents.
Number one focusing on contractual steps.
Marking to market at exploration.
Limiting capital spend is reflected in both our GAAP and that rent net effective rent spreads which are both in the mid teens for leases executed in the first quarter.
The culmination of both our occupancy and rent growth trends is embedded in our same property base rent growth, which will be the most meaningful contributor to same property NOI growth in 2022 and going forward.
We do recognize the macroeconomic and geopolitical headwinds that persist, including inflation supply chain issues and labor shortages.
So far in the trade areas in which we operate most of our tenants have largely been able to pass increased cost through to consumers. So we so we have not seen a meaningful impact yet from a tenant perspective.
Permitting delays and the availability and cost of materials and labor.
Potential impacts if we continue to monitor.
But so far we haven't yet seen a material impact on rent commencement dates has been as we've been working hard to try to mitigate these impacts on our business.
Examples of this include helping our tenants coordinate permitting source supplies phasing some approval processes and ordering long lead time items and bulk.
In the context of our development and redevelopment projects and pipeline, we are diligently monitoring pricing trends and our conservative conservatively underwriting cost escalations into our estimated yields.
But that has not stopped us from moving forward and we're making great progress on our value creation pipeline currently with about $350 million of redevelopment and development projects in process.
At our East San Marco ground up development project here in North, Florida, we anticipate delivering the public store this summer with rent commencing later this year.
The project started just over a year ago and has an expected stabilized yield that at six 7%.
Even before delivering the anchor space, where nearly 100% leased today with only one shop space remaining.
This project is a great example of the leasing demand, we're seeing for new grocery anchored centers in top trade areas.
We were excited in Q1 to commence construction on another ground up development project called Glenwood Green with a pro rata cost of $40 million and an expected stabilized yield of 7%.
The project is located 30 miles South in New York City in Old Bridge, New Jersey, and will serve as the retail hub of a new 250 acre master planned community.
The 350000 square foot center will be anchored by shop right target.
And our single tenant medical building.
All three will be operated on a ground lease and then construct their own buildings, helping to mitigate our risk of cost escalations over the construction period.
Both of these ground up projects reflect our ability to continue sourcing and executing.
On value add projects at attractive yields in this current environment.
As we consider new development and redevelopment projects for our future pipeline. We're excited to continue to partner with best in class grocers.
Encourage as they continued to expand their footprints and top trade areas.
Overall, our team remains energized by the robust retail activity, we are seeing across all regions and categories and I look forward to sharing more details over the next several quarters.
Hi.
Thanks, Jim Good morning, everyone.
Start by addressing the first quarter and then walk through the primary changes in our 2022 revised guidance.
We are pleased to report strong first quarter results and operating trends supported by continued occupancy improvement rent growth and accretion from investment activity.
Additionally, we continue to collect previously reserved rents from cash basis tenants as uncollectible lease income was again positive in the quarter impacted by about $9 million or five cents per share prior year collections.
And given continuing improvement in underlying credit conditions, we also converted.
Converted more cash basis tenants back to accrual triggering the reversal of straight line rent reserves during the first quarter, which contributed close to $4 million or <unk> <unk> per share to NAREIT <unk>.
This conversion impact was not included in our prior guidance range.
We now have 14% of our ABR remaining on a cash basis of accounting and our rent collection rate was 93% in the first quarter for the smaller pool.
As we discussed on last quarter's call there remains significant noise in our year over year same property NOI comparisons that will certainly impact the cadence of our growth rate throughout the rest of this year.
In the first quarter, we had a relatively easy year over year comparison, primarily related to uncollectible lease income in the year ago period.
Conversely over the next three quarters, we were facing much tougher comps, especially in the second and third quarters as it relates to uncollectible lease income comparisons as well as an expense reconciliation adjustment that occurred in the second quarter of last year, all of which we have discussed previously.
Given this comparability issue the best indicator of what is truly driving our business. This year as same property base rent growth.
You will find that for the first quarter and underlying our guidance for the balance of 2022.
Base rent growth will be the primary contributor to our same property NOI and will most closely match our sustained growth trajectory.
We wish our classic metrics could be less complicated, but the reality of the accounting impacts, resulting from the pandemic will continue to affect year over year comparisons through year end.
Turning to 2022 guidance, we hope you've had a chance to review the details in our press release and business update slide deck, both both posted to our website.
On page six of the slide deck, we've added a column to show the drivers of the 11 cent per share increase from our previous midpoint.
With a new mid point of our NAREIT <unk> guidance range.
The drivers of the change that related to our operating fundamentals include it.
With recent positive impact from the 75 basis point upward revision to our same property NOI growth forecast.
The primary drivers include higher percentage rents in the first quarter, mainly from grocery and restaurant tenants as well as expectations for higher average commenced occupancy for the year.
Driven by more favorable lease up progress and lower move outs in Q1 than previously expected.
As Jim noted commenced occupancy was actually up sequentially in the first quarter of this year, where it's typically seasonally lower.
We also estimate an additional <unk> <unk> per share of accretion from transaction activity.
The net result of our incremental acquisition and disposition activity featuring the acquisition of our JV assets.
The remaining increase in our guidance at the midpoint is related to the cash basis accounting adjustments I mentioned earlier.
We increased our forecast for noncash revenues by <unk> <unk> per share primarily driven by the impact on straight line rent from the conversion of cash basis, that's back to accrual during the first quarter.
Recall that we only include these impacts in the results and guidance on an as converted basis.
Additionally, we raised our expectations for prior year collections to $18 million from the previous 13 million driving another <unk> <unk> per share of positive change to our guidance range at the midpoint.
From a funding perspective, we raised our acquisition guidance to $170 million for the full year. We also raised our disposition guidance to $210 million.
But as a reminder, $125 million of that is related to the sale of Costar data in January the <unk>.
Seeds from which we're already used to fund the purchase of a long island portfolio. We closed in late December .
The remaining $85 million of dispositions will in part fund our acquisition pipeline combined with cash on hand, and just over $60 million of net proceeds from the final settlement in April of our remaining forward ATM equity.
We also expect free cash flow after dividend payments and capital expenditures to be north of $140 million in 2022.
Which will be used to fund our development and redevelopment pipeline spend.
Finally, we are in great shape, with a sector, leading balance sheet and leverage profile.
And we remain well positioned to continue taking advantage of growth opportunities.
We ended the quarter with full capacity on our revolver and our leverages at the low end of our targeted range of five to five five times.
While the debt markets have been volatile and all in costs have risen sharply year to date with no unsecured maturities until 2024 regions, we can remain patient and opportunistic when accessing the debt markets in a meaningful way.
With that we look forward to taking 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.
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Our first question comes from Craig Schmidt with Bank of America. Please proceed with your question.
Oh great.
Interesting.
Our ground up development at Glenwood Green, maybe you could tell us a little more about the 250 acre Master plan community that surrounds it and also it sounds like.
The growth is still want to open a ground up centers. How are the municipalities are receiving that that request post pandemic.
Okay.
Craig Good morning, yes the.
Master plan has was.
Basically just took I think 19 years to get entitled So It was it was a good hard long slog, but the landowner has been working a long time.
Heavy residential be surrounding the the.
The retail hub that we're providing.
I think the community is very very excited to have the grocer in the target components.
As indicated our leasing activity has been extremely strong.
Having just broken ground.
Your.
Yes, LOI or lease negotiation with probably 30% of the shop space. So.
A lot of pent up demand is how I'd characterize it there wasn't a lot of retail growth in that marketplace or any kind of growth. So.
It's kind of that perfect dominant were offset.
Well too.
React to and pull off a really nice retail development.
Great and then just.
The cap rates for the neighborhood grocery anchored as well as the larger community centers do you see them as still compressing our stabilized or expanding.
Hi, Craig.
That I think we sit here.
I would say cap rates have cap rates had been had stabilize that.
As I said in my prepared remarks, right now low to mid fours for the neighborhood grocery even community grocery anchored shopping centers the types of centers that we want to own.
And they had been stabilized at that level for quite some time.
And as I again, as I I will reiterate what I said in the prepared remarks.
We are not seeing.
That move yet.
But with the continued because there continues to be a lot of significant capital.
Flowing into that our sector wanting to own high quality grocery anchored shopping centers.
But as we continue to see the pressures of the interest rates rise I would expect.
That there may be some pressure on valuations and you may have it's simply supply demand you may have the leveraged buyers exiting the market.
So with that nothing yet.
But certainly wouldn't be surprised if we if we see cap rates rise I just wouldn't expect it to go much I mean, 5%.
So it's still in the instead of low to mid fours, maybe youre in the mid to high force.
Great. Thank you.
Our next question comes from Michael Bilerman with Citi. Please proceed with your question.
Thanks Lisa.
Yeah, I'd say recency over its history has always been I think conservative realistic on the outlook.
Sort of grounded I'd say in reality.
Just given the macro environment today, how did you sort of way increasing guidance and benefiting from the core and all the leasing relative to the macro outlook would you sort of commented a little bit is uncertain. There is none of that eating into any of the data that youre seeing on the ground today.
And that's effectively why you had such good confidence to be able to publish guidance just sort of walk through that a little bit.
Sure and I appreciate the acknowledgement and you put it.
Conservative with realistic together and I think our approach always has been one of them.
Reasonably optimistic.
With the quality of our company the quality of our properties and the quality of our you know our people overall and so with that.
Youre absolutely correct I mean, we've been talking about it for several quarters now with regards to the.
The pressures that exist in the macro environment with labor shortages supply chain challenges in now and over the most recent quarters inflation.
Without with how we have built the company in our portfolio. However, we are positioned to perform well really through all cycles, whether it's an inflationary environment, whether it's a recession and that is.
Our properties are located in trade areas with really compelling demographics that we can benefit from.
Our customer base that is able to withstand some of those cycles and you've heard us talk about this in the past as well and it will take in recessionary environments, There's often a case, where consumers want to trade down and instead of going to higher and more luxury whether it's department stores or even restaurants. They go to their neighborhood community shopping centers.
For more value convenience.
Still wants to spend money, but back to close to their homes, so with that you've seen the strength in our in the operating.
Fundamentals really came through in the first quarter.
And that's with all of these macroeconomic environment and headwinds that were already facing that's what gives us the confidence it's the quality of our properties. That's what we're seeing on the ground with the demand for the leasing.
Our ability to.
Push rents in this environment, it's the ability for our tenants to continue to grow their sales and pass on price increases to their customers because of the trade areas that we operate in.
Did you did you have to sort of moderate any of your growth expectations because of the macro environment or is it just as you sort of seeing it today I guess did you baked in any sort of buffer effectively Mike.
Mike's, giving me the don't don't give too much guidance here, so I'm going to hand, it off to Mike I can take that one.
If you think about the quality of the context of that raise the 11th raise it's really coming from two buckets right core fundamental improvement and then what I'll characterize as prior year cash accounting impacts so on the prior year cash collections impact those are those are known items that under our belt.
We collected $9 million of of the now $18 million expectation that we have we did raise that expectation. So it may be in light of some.
Some of the comments Lisa maybe we still have confidence that we will have a little bit more success collecting rents that were previously reserve.
The noncash component, we're taking this day by day. It is we're doing this on an as converted basis. So we've converted two 5% of our AVR back to accrual accounting that came with $4 million of straight line rent reversal.
We will take that incrementally from this point forward, what we're most excited about and have a high degree of confidence on our the core fundamental improvements in the same property portfolio raising our commenced occupancy by 30 basis points in the first quarter.
I don't want to call that a surprise, but it was a very confident type of metric for us as we thought about our plan do.
Do we have buffers in the balance of the year, we do Michael but by this time Youre leasing plan is pretty known everything we're going to do from this point forward is going to be about 2023.
We're equally excited about that year as well and then lastly.
Bringing home some some of these accretive transactions there under our belts 100, we did raise our acquisitions guidance by $140 million. The large amount. It's all closed essentially we do have one property under contract in the northeast that we are working through due diligence and we're confident that we will bring into the fold, but really not a spec.
Not a lot of speculation there either and on the funding front.
Fully rounded with a combination of dispositions we settled our ATM, we assumed a mortgage with some of the property. So.
We feel good about the quality of that raise and the our ability to deliver.
That's very helpful. Just as a second topic just on the transaction market and you talked about this sizable disconnect between public and private.
You talked about all the capital that's out there and I recognize your joint venture partners are all you know everyone's got their own sort of timeline about when they want to sell but just sort of have hope reconcile a little bit you know I think you and your peers have been very active of buying venture partners out and also continuing on the acquisition.
Landscape.
Why not increase dispositions, even more and I recognize you've lifted to 10, but you're still in them.
You've narrowed your net disposition guidance rather than expanding it.
Disconnected, so why why not even more aggressive today.
At liquidating the bottom of your portfolio and I recognize you I've always told people publicly here.
Our portfolio, so there's less of it but.
Just sort of help walk through why not be more aggressive on the disposition side.
We are aggressive is the.
The word I would say because I do want to remind everyone that we have for them.
As long as I've been at the company 26 years, which is essentially modern era regency, we have remained committed to sell.
Selling one.
1% to 2% overtime of our portfolio annually.
Usually focusing on as you're now focusing on lower growth non strategic.
After the GSE.
We actually accelerated some of those sales.
And sold even or and since that time, the quality of our portfolio really has improved and the need to sell.
Up to that 2% just just wasn't there when we looked at what falls into the non strategic.
Lower growth bucket.
So we've been more in the 1% area.
And in some cases using that nonstrategic as a source of capital to trade into the types of centers that we do want to own long term.
So I mean it sounds.
I like it can't possibly be true, but we really like our portfolio.
And there are we.
We are looking to buy centers that looked like what we already own so.
When you get much above that 1% then we're starting to sell what we want to buy.
And we do want to grow we believe that there are real economies of scale in our business. Both from an operations perspective, and also a tenant relationships.
Alright, Thanks, a lot.
Yes.
Our next question is from one Santa Maria with BMO capital markets. Please proceed with your question.
Hi, good morning.
I was just hoping you could talk a little bit about the rent growth you are seeing in the markets you kind of touched on it a couple of times in the prepared remarks, and maybe if you could just benchmark that the increases you've seen.
<unk> 2019 pre corporate levels.
And maybe give us a sense of the variability in that growth in markets like south.
South Florida up to acts of what the northeast this off but just to get a sense of what markets are really hot and have and they've taken share if you will.
As a result of the pandemic.
Yes, Juan this is Jim.
I would say yes.
We're real pleased at the six 5%, where we ended up this year with 8% being attributed to the new new leases.
Quite frankly as a step back and look there really are no outliers this quarter that were driving that which was.
Impressive to me that it.
It felt like we were across the board in all regions.
Really hitting kind of a target growth number.
I think it's indicative of a healthy portfolio across the board.
And.
Really can't point.
I think as I look back over compared to 19, I think we're back to those same kind of rent growth that we experienced.
In pre pandemic times.
I would I would like to remind as we look at linked growth as a whole it's kind of that.
The three pronged approach I talked about is getting those embedded rent steps, which we've been very successful. This quarter, we had 80% of our deals have bumps in them.
And 90, 97% of new deals this quarter at <unk>.
Rent bumps.
Obviously, mark to market when we get the opportunity on expiring leases.
Judicious spend of capital all of those kind of combined to that net effective slashed GAAP rent that we that's probably when I look at more than anything because that's a more long term.
Real growth kind of metric and we're getting back to where we wanted to want to be in where we've historically operated.
In that 13% to 15% range right now.
Okay.
And then just on the leasing versus commenced.
Do you have a 230 basis point spread how should we think about that being captured over time, which truly additive.
From a.
Base rent perspective, as we think about the balance of the year.
Sure.
Juan it's Mike.
So you referenced the 230 basis point pre lease percentage.
Just throw some I'll throw some stats that you're in and then we can talk about how will we see absorption going through the year that.
That equates to about $33 million of rent when you include redevelopment.
We do disclose the amount the amount in the back of the supplement at $6 million for the quarter at a point that is without redevelopment so that when the $33 million would be all in through redevelopment from a timing perspective, we should get about two thirds of that by year end.
And the balance we were seeing coming online before the.
Within the first half of next year.
And then to give you some further context on that pre lease percentage, we are running higher than historical averages were.
We're in that plus or minus 175 basis point range. So we're very comfortably.
Leasing space.
And importantly, delivering space.
As we think about absorption for the balance of this year last quarter, we talked about 75 to 100 basis points of increased commenced occupancy supporting our plan I'd say now with a really successful first quarter under our belt, we've taken that 75 basis points off the table. So we're looking at a plus or minus 100 basis point rise in commenced occupancy.
Kopinski supporting our same property growth rate.
And then beyond that and not to dwell on 23 or any give a 'twenty three outlook at this point in time, but we're not at our peak occupancy levels, our eyes are on 96%.
We think we.
We've been there before the portfolios as good as it's ever been.
Absent a macro economic environment, we don't there's no one around this table that doesn't believe we can't get back to those levels, but that's a lot I just had a lot in one simple word apps in a macroeconomic environment.
There's a lot there is uncertainty out there we all are aware of it but the team is highly focused on leasing this portfolio to its maximum potential.
Yeah.
Thanks, very much great color.
Our next question comes from Rich Hill with Morgan Stanley . Please proceed with your question Hey, good morning.
As last tidbit about occupancy is really helpful just to expand upon it.
At the risk of asking for guidance.
What's sort of the cadence of getting back to 96%.
Is that a late 2023 thing is that in 2024 thing.
How do you think about that.
Sure I think I think it's pretty simple I mean, we're about 200 basis points from our top end is as we see it about in that area and we're looking back kind of post GSE rich, we've absorbed a 100 basis points and our best years come from a velocity standpoint. This feels like that type of environment, where leasing teams are busy the pipelines are full and we are in.
Teams are just putting a lot of ink to paper so about 100 basis points is.
How quickly we think we can absorb space on an annual basis, so that would put us in that end of 'twenty three early 'twenty four type of timeframe.
Got it that's helpful and so as you think about.
Getting back up to peak occupancy then this becomes a really stable attractive business based upon.
Renewals.
What do you think sort of the new normal is for renewals is this like a five to six 5% to seven or do you think theres some level in which we start to normalize back to.
I call it.
Something lower than that.
Okay.
I'm not sure rich I'm not sure we understand.
The five to six or five to seven.
Alright.
I am personally just throwing numbers out there based upon some I guess okay.
Okay, so rent spreads.
Renewal spreads okay, yes, yes.
Yes.
As I've always looked at this business.
Our rent spreads track our occupancy.
As we get closer to what Mike described is full occupancy at 95%, 96% range. If you look over our shoulder I think those those rental rates.
And expectations rise as that occupancy and that lack of available supply is there so.
I would see us.
As that curve goes up.
<unk>, you'll see our our reps try fat and rich don't forget that's cash leasing spreads on top of contractual rent increase that so most of our renewal activity will be in shop space were getting very high that's why we're getting the highest frequency of contractual increases so that's on top of.
2% to 3% annually.
That's helpful. And then one final question for me I appreciate the cap rate disclosure could you just walk through what Unlevered IRR look like at this point.
Those penciling out.
With regards to <unk>.
Again in my prepared remarks, I talked about some of the transactions that we observed have been ones that we didn't participate in our underwriting we saw we did see some.
A single asset portfolios trade in low five irr's and we've been.
We were.
Opportunistic and the acquisitions that we've closed and we've discussed and talked about on our underwriting.
We have been successful we've been north of a six.
And as we think about our cost of capital and a lot will depends on your underwriting assumptions and what's your terminal cap rate, but if you remain pretty steady with a kind of 50 basis points going over that over that going in.
The six unleveraged IRR had been sort of our hurdle given our existing cost of capital.
Do we expect that that's going to creep up it could creep up I mean, we've we're obviously seeing the cost of debt rising.
Got it. Thank you guys Thats helpful.
Our next question comes from Samir Honeywell with Evercore. Please proceed with your question.
Good morning, everybody.
Mike on percentage rents it came in a little bit higher than we thought in the quarter.
I guess, how is how are sales and traffic trending sort of post <unk> and maybe into may here as.
As we think about that line item just trying to see if there is sort of upside to that number.
Sure Hey.
Thanks Samir.
Well, let's start with maybe take some wind out of the sale generally it's a pretty small line item for us in the historically $8 million range in total that's less than 1% of our total revenues.
And interestingly, we get historically about half of that in the first quarter. So we've we had a great first quarter restaurant sales were featured component of our of RB internally on percentage rent grocers, where the other component.
We are.
<unk>.
The balance of the year. We will also have similar results throughout the portfolio, but that opportunity to significantly outperform our percentage rent I think has largely been taken in the first quarter.
Okay, and then and then I guess my next question is on this and.
The 18 million of prior year reserves, which you took up as part of guide can you remind us what that total bucket is at this point that you can sort of collect from and what percent of that.
Total bucket as tenants that are still active in your portfolio.
Yeah.
So we have that reserve balance on our page 34 of the supplement and Youll see it at quarter end, we were at $41 million. So that's that's your starting point, where your question is targeted.
But let's break that down at first and foremost we're guiding on the number so where our expectations are plus or minus $18 million. So please start with can.
Can we do better than that I think is the question.
About half of that $41 million reserve I would characterize as normal course, if you think about our reserve as a percentage of our open. They are historically, that's about normal course activity.
Balance of that I've put into two buckets a quarter of it is in our guide. We are we were expecting about $9 million and the balance of the year. So that's about a quarter of that reserve and then the other quarter Sameer. That's the wildcard quote unquote that I think you're looking for.
<unk>.
Again, we're guiding on the number because we want folks to be careful with our expectations, we are making a ton of progress and working through the resolution of receivables.
It's primarily a west coast ball game at this point in time.
Nick and the team out west are doing a great job working through the pile and we could have some more abatements in that number. So we are characterizing that as an unknown is a wildcard for that reason.
We could also experienced those collections in 2023.
Half of that 25% so about $5 million has already been agreed on with the tenants to defer into 2023.
So I think we're getting to the point, where the outperformance on that guided line item is certainly going to start to shrink and the opportunity will start to diminish from this point forward.
Got it that's very helpful and last one if I can and if I can take one more here.
I guess for Lisa.
Regency is one of the landlords to whole foods I guess, what is the real estate strategy for them at this point.
There's been some headlines about the closing a few stores not many but just curious as to what youre hearing from them.
Especially with Amazon, making the headlines recently.
Samir My my first advice to you would be that I think it might be better to get on a on a whole foods conference call and ask them. Their question what their real estate strategy is what I do know is that we.
We have a great relationship with whole foods and with Amazon as well.
And they are certainly as you know commit it to physical locations and growing their footprint in both brands and.
They like every other retailer are going to end.
Sure that they are operating the most productive stores and the most profitable stores.
We still have great.
Great confidence that we're going to continue to be able to grow our footprint with whole foods.
And also as Amazon grows their footprint with them as well.
Thanks for that.
Yeah.
Our next question comes from Michael Goldsmith with UBS. Please proceed with your question.
Good morning, Thanks for taking my question as Youre leasing momentum continues and it seems on track to return or exceed prior levels like how do you think about passing the baton to grow through acquisition development and redevelopment and does some of the announcements that you did with this quarter kind of reflect this forward looking.
Opportunistic view.
So let me start and I'll.
I'll open it up to to Mike or Jim if they if they want to to add to it when we think about our business model and how we think about.
Growing it starts with our free cash flow.
And we are.
We are estimating that to be in the neighborhood of $140 million. So if you just assume that we even add that to the extent that we remain leverage neutral.
We essentially can that that grows to over $200 million of capital that we can invest and grow the company.
We've said it numerous times I said it again today and the best use of that capital is into development.
And we I do believe that we have the best development.
Platform in the business.
We've got a successful track record and we're going to continue I mean, as we've talked about this quarter.
We started glenwood grain.
San Marcos.
Started just over a year ago in the middle of the pandemic. We continue to rebuild that pipeline. We did hit the pause button button. It was very brief but we continue to rebuild that pipeline and that will be the best use of our of our cash flow and especially when we are.
Looking at returns that are 200 to 250, and sometimes 300 basis points higher than acquisitions.
So we will continue to do that we also will invest back into our into our own shopping centers and Redevelopments. We've had a lot of success with acquisitions and when we will always be opportunistic with acquisitions as I've talked in the past it has to check really three boxes, it's gonna be.
Accretive to or at least looks very much like the quality of our portfolio accretive to our future growth rate accretive to earnings and then once we find those opportunities that we have presented to US we look at how can we fund it.
With our free cash flow going to two development and that's when we will then evaluate other sources of capital and you've seen us use dispositions, both low cap rate.
Dispositions monetizing assets that are non strategic.
And then also tapping the equity market when it makes sense.
We also.
Have positioned the balance sheet intentionally to be able to use it at times when we can't tap those other sources of capital and we need to lean in.
As Mike said in his remarks, we are.
Operating now at the low end of our target leverage. So we have capacity, we can continue to buy and buy accretively.
As always very helpful and my follow up is on kind of the evolution of trade areas depend.
<unk>.
Has generated some some population migration.
That's probably helped your suburban trade markets and then now we're at a period, where there is an elevated gas prices. So I was wondering as you look at your traffic data and where your customers are coming from to visit your centers has that changed since the increase in gas prices and if so what are the implications from that.
I don't know that there's enough data yet to really make any conclusions as to what increased gas prices have done to our traffic because we're not seeing any significant changes to that but it's still early.
But I'd like to see.
You you you asked that question in such a way that I'd like to just remind everyone what.
What we have seen.
Because I've not that that's like increased gas prices, but with pandemic related kind of structural trends.
But that's a tailwind it's been it's a tailwind for our first ring suburban trade areas. We continue to see people staying at home more often and staying close to their home.
I saw a research report for another company, that's a health system that I'm involved in people spend 90% of their time within just a few miles of their home.
So if their home more often that that number could even grow and then theyre going to.
Essentially visit our shopping centers for their needs for their values convenience and where we've actually seen those trends provide <unk>. The second thing is the renewed confidence with the retailers because if you go pre COVID-19 and we've talked about this before that there's still a lot of question marks about last mile distribution and how could they serve.
Our customers a lot of those questions have been answered the best way to do it is from locations close to the consumers' homes into the most profitable they really they knew they wanted the customers to walk in the door that is the most profitable, but a lot of them had a little bit of work to do to figure out their their overall systems and.
Fly changed so that they can service their customers from the stores and they've made great progress.
And that's also that as a significant tailwind for neighborhood community shopping centers.
Our next question comes from Derek Johnson with Deutsche Bank. Please proceed with your question.
Hi, good morning, everybody.
You executed more meaningful JV this quarter.
Four property portfolio and that follows the USAA JV last year.
Is this this strategy taking into account the macro backdrop and really the currently compressed cap rate spreads to the 10 year are you viewing JV acquisitions as more accretive and less risky.
<unk> traditional acquisitions, especially given private market cap rate question marks.
I'll take it Eric its Mike.
I would I would characterize our JV with acquisition opportunities as more circumstantial than strategic.
But I don't want to dismiss the strategic part of it we had two smallish JV entities in effect.
With they were.
They were long standing I think the reach calculator.
Or a 15 year.
Relationship between the two entities.
Given their size given.
To your point, maybe some of the backdrop.
Elements. It just became clear that monetizing and reallocating that capital was the best choice for our partners and then when that when that decision is made we're likely the best buyer for those assets. So.
Does it de risks our underwriting yeah, we've known these properties for a long time.
The properties in the USAA partnership although the partnership wasn't that long dated we've owned those properties for nearly 20 years. So we know them extraordinarily well it does make for an easier underwriting.
There is there is an end to this to the strategy, that's why I'm not calling it a strategy we have.
We have we still have remaining joint ventures, we have great partnerships with those partners long standing relationships. These are much bigger vehicles I think we've got about $4 billion in gross asset value across two primary structures.
One of which we just bought into.
Through the Naperville, Chicago transaction. So obviously two two partners who are dedicated to the space really like.
The partnership the service that regency's, providing really like the grocery anchored shopping center arena. So.
So I don't know that we see this these two circumstances extending much beyond what we've transact with today.
Okay. Thank you that's helpful and.
Can we take a second on leasing really where the demand is coming from what categories are leading and more so how does the pipeline differ between anchor and small shop demand right now are both firm or somewhat evolving and have you loosened underwriting standards for small shops.
Drive occupancy towards 96 at this time and the current demand Youre seeing does it really seem to have runway in your view through this year and beyond.
Okay.
Derek Yes, I think the.
The pipelines to start with your pipeline question. The pipelines are continued to be robust and in line with as we look over our shoulder the great leasing we've done year over year. The pipeline appears to support that continued.
Level.
Production.
It's it's equal in.
Shops, as well as anchors as we look at what our availability is where.
We've got good names associated with vacancies and targeted users.
Lease indicated the work from home has been.
I think as a structural change to our to our business.
Is really.
A driver to our demand I believe.
Users, it's the ones we've talked about in the past, it's health and wellness medical sector cosmetics like Sephora.
Restaurants, especially the fast casuals very very high demand pet uses.
Off price players and certainly as we've discussed our grocers.
And again I think I've mentioned it earlier, it's really across all regions, we're not seeing one market that's hotter than others.
Really good solid demand across the board and again the leasing production has been steady across the board. So.
It really feels right now it feels really.
Very strong the direction, we're going in and the level of production that we've experienced.
Thank you everyone.
Our next question is from Greg Mcginniss with Scotiabank. Please proceed with your question.
Hey, good morning.
You always give such comprehensive opening remarks and answers to questions. So I apologize if some of this has already been covered.
Regards to the increase same store NOI growth expectation is driven by increased occupancy.
Is that driven by greater than expected tenant retention. So far this year, where have you been able to get tenants in the space and it's faster than originally anticipated.
Anticipated.
I think it's hey, Greg.
Probably more the former than the latter.
You know that 30 basis points of sequential increase in commenced occupancy.
That was a really positive sign for what 2022 had offered to us and remember in the context of our opening initial guidance and it's hard to remember three months ago, you still have on omicron way of kind of rolling through Q1 is traditionally a weaker quarter from a volumes perspective, as well as a retention perspective.
But that's four consecutive quarters now of greater than average retention rates at regency.
So that really is what's underpinning that 75 basis point move up together.
With.
The previously discussed benefits from percentage rent.
Alright, okay. Thank you.
And then how are you mitigating the impact of supply chain delays and increased costs when preparing spaces for new tenants.
Yeah.
As I indicated in the remarks I think we.
We're trying to to use every lever we can find to.
Tried to expedite can help help our tenants will get kind of coordinators who've got expediter.
Where we're trying to get.
Get demo permits before anything else, we can get in there and make sure. We can stay ahead of the curve.
As much as we possibly can.
And it was the one thing about the pandemic everybody has learned.
To be quick on your feet to pivot and to make do with what you have and that's what we're seeing in this environment as well.
Retailers need to be open they're going to find a way to get opened we're gonna help them find that way as fast as we can we've got a we've got a real sharp eye on RCD dates.
It's kind of a viable. So we are we are trying to.
Do everything in our power to make sure. We can help expedite the best we can to make sure those tenants get open and start paying their rent.
And so far we've been successful we haven't.
Not saying, we're not seeing a slot.
Yeah.
Great. Thank you.
Yeah.
Our next question is from Linda Tsai with Jefferies. Please proceed with your question.
Hi.
A collection of prior period reserves is 18 million I assume there is a minimum amount of conversion to street tying back to accrual that's associated with the $18 million is there a rough guideline for how.
How much might not be baked into guidance.
Yeah, Linda Good question, let me, let me clear that up a little bit so the $18 million guidance as is cash collections on previously reserved rents so.
Nothing nothing to do with conversions of straight line rental income that is a separate line item. We are our guidance on that line item is effectively zero. We are on an as converted basis, we had $4 million in the first quarter I will offer as I did last quarter, a little bit of a heads up.
Head not as to what could potentially come through on straight line rent.
When we look through our yard lift through our receivables there is some visibility that maybe $2 million to $5 million.
Potential conversion impact on the noncash SSO line item.
From a cadence perspective, I can't necessarily predict which quarter that will occur, but we do have some level of comfort with that range that I would encourage you to think about that with respect to that as converted guidance that were offering.
Thanks for that and then in your February business update you should traffic being above 2019 levels, but having dipped in January .
Any color on how traffic has trended since at your centers.
It's essentially it's essentially flat.
We're not trying to take away any color and in fact, a lot of that data is pretty widely available to.
To the public at this point, but.
As Lisa indicated it earlier, we're not seeing any dramatic shifts in our traffic patterns and very comfortable with them having returned to 2019 levels.
Great. Thank you.
Our next question is from Mike Mueller with Jpmorgan. Please proceed with your question.
Yeah, Hi, just a quick one here I'm wondering are you seeing any significant differences in national versus local leasing dynamics and as you move your shop lease rate above 90% to $98 three right now I mean, how should we think about the mix of national versus local is driving that.
Yeah.
Mike are our mix is really.
Really the same as we've as we've always had.
We're seeing we're seeing good good local operators.
Is there kind of bread and butter for small shop space.
Space and we continue to see good entrepreneurial players in the marketplace.
That's their livelihood, that's the beauty of small local operators that is their livelihood national folks are certainly national regional or certainly.
Have a good open to buy demand as well and growing their footprint. So but our mix is really very very similar to what we're used to seeing.
No real change.
Got it okay.
That was it thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.
Our next question comes from Tammy <unk> with Wells Fargo. Please proceed with your question.
Thank you and congratulations Jim you mentioned, a flight to quality being a driver of leasing volumes I'm wondering if you're seeing your lease rates in your sub market outperforming other properties in those markets and then curious if youre seeing new demand coming from tenants that are moving locations or opening new stores.
There are any interesting trends to note there.
Well, thank you for the comment first.
Flight to quality.
It's hard to judge, but intuitively and what we're from a color standpoint.
Sure.
We.
We see people trying to upgrade.
Anytime there is there is any kind of.
Downturn in the business.
People like to take advantage of that and move towards quality you can see it in the office side retail side.
Matter.
As far as as as our ability to grow rents I think is evidence of what we've put out there, yes, we're seeing opportunities too.
To kind of grow rents as as those tenants moved towards our marketplace.
Yeah.
Yeah, and the only thing I would add Tim is if you I think you asked the question about comparable to other.
Either.
The competition, if you will.
If you were to layer historic regency's percent leased again against the market percent leased there.
We'll always be a pretty large gap.
And that's just based upon the quality of our portfolios. We are much more highly leased than the market generally and then and then through the cycles, Mike again I haven't done this but my guess is that when you look at cycles.
Because I can go back to the Dfc and I do remember that we lost the least amount of shop space and.
Versus our public peers that reported not everyone reported that at the time and so my guess is that in tougher economic times that gap actually widened and our percent leases is even higher.
Great. Thanks, and then Mike I know, it's not in guidance going forward, but maybe going back to the conversions.
To accrual and as we think about the 14% ABR on cash basis and can you just remind us how that compares with where you were pre COVID-19 and then the $2 million to $5 million. You. Just mentioned is that a number of forward this year or the total potential and then maybe just one more on that given the macro backdrop are you lie.
Lee to keep more tenants on a cash basis at this point.
Yeah.
The tax question there Tony.
Yeah, I think your third your first and third pieces of that kind of go together.
I appreciate the question what was your cash basis percentage pre COVID-19, it's a very good one that.
Part of the challenge here historically speaking, but the rules have changed the GAAP application has has changed over the course of the time too. So it is hard for me to look back at those numbers and think.
Of them as a comparable type of target so to speak but I will say it was in the it was in the mid single digit range from a percentage of ABR perspective, So 14 go into somewhere in that mid single digits.
What I would expect to happen.
Overtime.
The comments on the $2 million to $5 million.
Those could easily slip into 'twenty, three but I'm, giving that number with.
I mean, we're knowingly given that that outlook out there because we do think there's a potential for that to impact 2022, I wish I could give you more clear guidance on which quarter and.
Unfortunately, we just can't when those tenants meet the thresholds and the policies that we've embedded into.
Into our accounting infrastructure, they will convert to accrual and then the resulting impact will occur on the noncash side.
Okay. That's helpful. Thank you and then you have been.
We are acquiring.
From your JV partners and you also did some secured loan JV refinancing.
The quarter for other JV asset I mean, it sounds if you don't have a particular interest in acquiring additional partner assets at this time, but it does look like you have some additional maturities on the unconsolidated by next year or so I'm. Just wondering if you can talk about your discussion.
With those partners and if you expect to refinance those or will those be assets that will be sold.
Okay.
No I appreciate that yes, the expectation largely is that we would refinance those maturities when they when they do come due.
Let me give you an interesting point there with respect to <unk> tying that into our appetite for JV acquisitions. These these are single asset mortgages.
And there is permitted transfer language within those mortgages. So there is no.
From a partners perspective, our regency's perspective, there is no downside to placing that financing on the asset it doesn't inhibit either one of our ability to transact, they're just assumable by either party goes back to my comments before oftentimes Regency is the best buyer for these portfolios.
As one of the reasons why that is true.
There is.
The vast majority of our exposures in 'twenty, three 'twenty, two and I would say that.
There's good demand as there is on the equity side and buying shopping centers.
There continues to be good healthy demand for financing grocery anchored shopping centers, we fit the product type we fit the credit profile that many of the life companies are looking for on the secured mortgage side and we had success in Q1.
Don't see why we wouldn't have success refinancing those.
Charities when they occur.
Okay. Thank you very much.
Our next question is from Chris Lucas with capital One. Please proceed with your question.
Hi, Good morning, everybody just a couple of follow up questions as it relates to the cap rate commentary you said that you made earlier in the call just curious if there's any.
<unk> geographic differences in other words had the coastal gateway markets maintain their sort of lower cap rate.
Relative to the primary sunbelt markets or is that that gap is effectively gone away.
And it's still very much trade area driven.
If the if the trade areas look similar cap rates are going to look similar.
So there's really not much of a difference for the type of quality that we are.
We're looking to acquire.
Okay, and then you mentioned the strength of the tenant retention this quarter and trailing couple of quarters I guess, just curious from your long historical perspective there.
Has there been a better time for tenant retention. So what was that comparable periods, just kind of trying to figure out where we are relative to cycles.
Yeah.
I don't think there is.
On the margin it may have been.
A little higher.
I could see Jim or if you're adding back on his 40 years.
That's all that's a long time to think about it but I guess my experience what I would what I would suggest I think I think tenants are a little stickier in the last four quarters because of what we've been through.
Yeah.
As I look to the future I think that 75% as our has been our typical average.
I kind of look at that as a reversion to the.
Long term stabilized.
At least for our portfolio.
I think the way we asset manage the amount of internal redevelopment, we do theres always going to be a level of what also churn or churn within the portfolio that at 75% seems to be.
The right.
Right number from a retention standpoint.
So I'm happy to see that were a little above that today, because I think today's environment.
Really is appropriate for that.
As we.
As that supply goes away and we get back to that 96% leased level and we're doing the things we just.
Hello.
Proactive asset management perspective, like I said, I think the 75% probably a run rate I'd look at it.
Okay and then.
I guess, maybe this will be for Mike just on the percentage rent number and then just sort of the outlook and we've seen obviously food.
Food inflation in pretty high level restaurant inflation, particularly for Susana some.
Ken.
I guess when you look at your lease structures are there.
This persists and is that an opportunity for a meaningful increase in percentage rent collections over time or is that really just not part of the lease structures.
Is it impossible.
Component.
Our potential future revenue.
I'm going to I'm going to I'm not.
Turn that back to Jim I think it is probably more appropriate for him to respond percentage as a percentage ramp in light of the inflationary environment.
Becoming more of a discussion item from your perspective and your.
Lease negotiations.
Yes, I think I would say probably it is I think.
Quite frankly reporting sales in general is.
Rather the percent ramp, but just reporting sales in general what we've seen over the last 10 years has become more.
Prior Terry from anchors perspective.
It used to be a given in the grocery business.
But of late.
Tenants tenants don't want other people to know how they're doing.
So it's it's challenging so I think over time the percent rent, we still we still try to push it.
I think restaurants is still a probably a very good industry that we can we can get that.
But over time, I think that'll be calm and even less as Mike indicated it's not a big piece of our business today and I think that will continue to dwindle a little bit over time.
And the other thing that happens is.
We have an opportunity to redevelop or restructure and anchor deal and they were paying percentage rent, we rollout into new base rent and reset the bar so.
That also is another avenue that just continues to to reduce the amount of percentage rent that we can expect to get long term.
Okay. Thank you I appreciate it.
Yes.
We have reached the end of the question and answer session I'd like to turn the call back over to Lisa Palmer for closing comments.
I just want to thank you all for joining us today and I'm, so used to having a call on Friday, it's Wednesday, but I'm going to say it anyway, even though we're days away happy mother's day to all the mothers out there and enjoy your enjoy your weekend.
Thank you all.
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