Q4 2022 Regency Centers Corp Earnings Call
Yeah.
In our business you went on the meaningful margin by making solid operating and investment decisions every day that generate steady and sustainable growth.
It's how we create value for our shareholders and this is reflected in regency's long track record of outperformance and cash flow and dividend growth Alan.
Thank you Lisa and good morning, everyone. The retail operating environment remains healthy and we ended the year with another strong quarter I'm really proud of our 2022 results we.
We had an exceptional year in leasing helping to drive strong occupancy gains with our leased rate up 80 basis points and our commenced rate up 110 basis points over level one year ago.
Notably our year end 2022 same property leased rate is back to our 2019 level of 95, 1%.
But make no mistake, we still have room to run and we aim to ultimately get back closer to peak levels of 96% or higher.
The primary driver was a record year for shop space leasing ending the year up 200 basis points with our shop lease rate now 70 basis points above 2019.
I am, especially proud of the shop occupancy recovery considering the many challenges we faced during the pandemic.
Our tenant retention rate remained above historical averages bad debt as a percent of revenues is back to pre COVID-19 levels and importantly, our GAAP and net effective rent spreads were in the mid teens for the year due to our team's accomplishments of achieving initial cash rent spreads north of 7% embedding.
Contractual rent steps and the majority of our leases and maintaining our track record of judicious leasing capital spend.
All of these positive trends and the progress we've made contributed to another strong year of same property NOI growth of six 3%, excluding COVID-19 related reserve collections and term fees.
At year end are signed but not occupied pipeline of 230 basis points represents more than $34 million of annual base rent, giving us positive momentum into 2023.
Importantly, as leases commence we continue to replenish the pipeline with the newly executed leases.
We have seen strong tenant demand continuing in the new year and our LOI in lease negotiation pipelines remain full.
Our most active categories include restaurants health and wellness veterinary grocers in off price. We are hearing from top national retailers that their appetite to expand outpaces the quality inventory available today, which bodes well for regency's high quality portfolio.
As we all know from recent headlines tenant bankruptcies and early store closures will be more impactful as we think about move outs in 2023 among.
Among retailers that have recently filed for bankruptcy Party city comprises only 20 basis points of ABR over six stores and we have only one regal cinema, which is less than 10 basis points of ABR.
In the context of bed Bath and beyond as recently announced store closures at year end, we had 11 stores comprising 60 basis points of ABR. We had one of those expire naturally in January and of the closures announced last week, we had five locations on the list.
Within our 2023 guidance range, we've embedded assumptions for credit loss associated with these bankruptcy filings and store closure announcements, which Mike will discuss in more detail.
But all of that said, we believe our overall exposure to at risk tenants is relatively limited our.
Our current tenant base is healthier than ever as a result of being intentional in the centers that we own and thoughtful in our merchandising process.
And whatever the outcome of the at risk tenants, we feel really good about the quality of our real estate.
Tenant bankruptcies are a normal part of our business and to the extent, we get stores back from underperforming retailers, we have opportunities to mark to market rents and upgrade the merchandising mix at our centers.
To that end our teams are already negotiating with replacement tenants at higher rents for all of the known closures.
In summary, our strong Q4 results and the trends we are experiencing today provide positive momentum into 2023.
Nick.
Thank you Alan good morning, everyone.
Last year, we successfully executed on our development and redevelopment strategy, even with pressures from rising construction costs. We continue to achieve solid returns on our investments that will provide earnings accretion in years to come.
To that end, we completed more than $120 million of projects with over 100 million of those completions in the fourth quarter. These include east San Marco or Publix anchored ground up development here in Jacksonville. The property is 100% leased and outperformed original expectations on all metrics, including timing cost and rents.
Cary Towne exchange in Richmond, Virginia is another publix anchored ground up development. We split this project into two phases during the pandemic and recently completed construction on the second phase we've had great leasing success of Cary town with tenants such as torches tacos, Jenny's ice cream Burton's grill and Starbucks.
Preston Oaks is the redevelopment of an HEB anchored center in Dallas, we were able to significantly upgrade the center and the merchandising mix by adding vibrant new shop tenants, including Mendocino farms heyday, and every body and the property is now 100% leased out.
Out of Terra Monte Center, we completed the first two phases of our redevelopment project during the fourth quarter. These phases included the interior mall renovation as well as the addition of Chick Fil, a and Starbucks out parcels future phases of this project, including the addition of two exterior buildings and the redevelopment of the former Jcpenney space are expected to start in the second half of 2023.
In addition to our completions. We've also made great progress on our in process development, and Redevelopments, which totaled 300 million at year end highlights include our whole foods anchored town and country redevelopment in Los Angeles, We discussed this project in detail a quarter ago, but construction has commenced in the fourth quarter and demolition of the former Kmart building is nearly.
Please.
Additionally, at our ground up Greenwood Glenwood Green development in Old Bridge, New Jersey construction is on schedule with targets anticipated opening later this year and we expect shop right to open in early 2024.
The team continues to do an excellent job of managing cost and keeping our projects on time and on budget.
In total we believe our accretive development and redevelopment program remains on track to deliver $15 million of incremental NOI in 2023 and 2024.
Beyond our in process projects I'm really encouraged by the progress, we're making growing our shadow pipeline. We're focused on building our pipelines through sourcing new ground up development projects, new redevelopment projects through value add acquisitions as well as continuing to unlock redevelopment opportunities in our existing portfolio. We also continue to engage meaningfully with developers that are.
Facing financing challenges, which could create additional joint venture opportunities.
In totality, we have the key ingredients necessary to grow our program, including robust tenant demand long standing retailer relationships and experienced development teams in top markets around the country.
Importantly, we have the ability to self fund this growth with free cash flow. We believe the combination of these capabilities are unequaled and we look forward to sharing additional details and we advanced these opportunities Mike.
Thank you Nick and good morning, everyone.
I'll take you through some highlights from our Q4 and full year results, then walk through our 2023 guidance and assumptions before ending with some color on our balance sheet position.
Our strong performance last year was underpinned by growth in NOI and more specifically from base rent growth, excluding the collection of 'twenty, 2020 'twenty, one reserves, which I'll what I'll refer to today as Covid collections, we delivered same property NOI growth of five 8% in the fourth quarter and six 3% for the <unk>.
Full year.
Again, most importantly, we saw a three 6% contribution from base rent growth in 2022 accelerated to four 8% in the fourth quarter.
This growth in base rent over the last year has been driven by contractual rent steps mark to market on re leasing increases in occupancy and commencement of rent from redevelopment projects.
As Alan mentioned, our leased occupancy rate is now back to pre pandemic levels, but our eyes are set even higher.
Covid collections were about $2 million in the fourth quarter and totaled $20 million for the year, that's down from $46 million in 2021.
During the fourth quarter, we converted another 2% of our tenants back to an accrual basis of accounting from cash and as a result recognized nearly $5 million of noncash income from the reversal of straight line rent reserves.
We ended the year with 7% of our tenants remaining on a cash basis of accounting.
For Uncollectable lease income in 2022, we were close to our historical average of 50 basis points on current year billings.
By nearly all metrics, but for some limited exposure to high higher profile potential bankruptcies are in place tenancy is about as strong as it's ever been.
Looking ahead to 2023 and after excluding Covid collections, we are guiding to core operating earnings per share growth of close to 4% year over year at the midpoint.
We'd like to point you to slides five through eight in our earnings presentation, which I'm certain you'll find extraordinarily helpful. As you worked through our outlook.
We expect same property NOI growth, excluding Toby collections of 2% to 3%, which is the largest positive driver of earnings into 2023.
The primary contributor continues to be base rent growth driven by embedded rent steps rent growth from new leasing and shop space commencement as well as with the delivery of completed redevelopment projects.
Importantly, our same property NOI guidance range also assumes credit loss impact of roughly 75 to 100 basis points from anticipated tenant bankruptcies and early store closures, including.
Including from those tenants that Alan discussed.
This credit loss impact includes an assumption that current your uncollectable lease income will be modestly above our pre pandemic average of 50 basis points as well as the potential for occupancy to end the year flat to lower should bankruptcy driven move outs occur.
Again this range excludes any impact from Covid collections, which I'll discuss in a minute.
As you think about reconciling NAREIT F F O $4 10 last year to our guided midpoint of four O seven in 2023.
Remember that this metric continues to be significantly impacted by Covid era accounting adjustments, including the collection of rents previously reserved as well as the impact on noncash revenues from converting tenants from cash to accrual.
Our operating fundamentals continue to strengthen as they have in 2022 and as they are expected to continue this year and these pandemic related items can mask, our true growth in cash earnings.
It's important to take this a step further this morning as these two items meaningfully impact year over year comparability first we are anticipating lower Kobe collections of $3 million in 2023 compared to $20 million last year and second we are also anticipating lower noncash revenues of 36.
At the midpoint in 2023 compared to $47 million in 2022.
Please note that we increased our full year noncash revenue guidance from $30 million a quarter ago to account for new information, including an assumption that we will continue converting tenants to accrual accounting in 2023 as.
As well as the the likelihood that we will recognize accelerated below market rent amortization triggered by the potential for bankruptcy related store closures.
This is why we focus on core operating earnings which strips out the noncash adjustments and also why we provide same property NOI, excluding Kobe collections.
With this added transparency you can better see the underlying positive growth again.
I encourage you to use the materials and our earnings presentation as I'm certain you'll find it very helpful and evaluating these impacts.
The good news is that we are fast approaching the point, where these COVID-19 related impacts will no longer create meaningful noise in our reported results.
To finish and to pivot from guidance, we feel great about how we're positioned from a balance sheet perspective with one of the strongest in the REIT sector at a time when it matters most.
Our leverage is at the lower end of our targeted range of five to five five times debt to EBITDA.
And we expect to generate free cash flow north of $140 million. This year self funding our development and redevelopment commitments.
While the financing markets have moved in our favor over the last three months, we have no need to access the capital markets. This year.
Our revolving credit line was undrawn at year end, and we have no unsecured debt maturities until mid 2024.
Our liquidity liquidity position and maturity profile provide us the ability to remain patient and act when we need and want to win.
With that we look forward to taking your questions.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Okay.
Okay.
Yes.
Yeah.
Thank you. Our first question is from Michael Goldsmith with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question do you have this nice chart in your presentation, where you outlined the factors that drive your long term organic same property NOI growth algorithm of 2.5% to 3% to your 2023 guidance of same property NOI growth without termination fees are collections of reserved them too.
The 3% was generally consistent with that so maybe you can reconcile your long term algorithm with what you're expecting this year, where are the moving pieces and just does that mean that 2023 is setting up as a regency average year. Thanks.
Good question, Michael Thank you for that.
Let me, let me color that up and I think you'll you'll find that the algorithm still is intact. We are anticipating north of 3% growth this year.
Also important base rent line item.
And that's largely being driven by the tremendous activity that the leasing team delivered and we highlighted on the call. It 200 basis points of same.
Percent lease coming out of the small shop Arena total 110 basis points of commence occupancy increases really driving good solid base rent growth.
Steps are playing a contribution there rent spreads from 2022 into 2023 redevelopment contribution so all of those elements as you highlighted in our algorithm are there.
That being said there are some some items that are dragging us down in 2023.
One of which is <unk>.
Our credit loss reserve, so it's a touch higher on a sequential basis 2023 over 2022 spoke to that in the prepared remarks.
We are accounting for and providing for the potential for bankruptcies, which would be in excess of what we experienced last year and then there is a slight drag coming from the net recoveries line item as well you may have noticed that that spiked in the fourth quarter, it's been a little bit elevated for the year.
And some of that won't recur going into next year or so.
On balance I feel like the algorithm is still in place Regency has set up extraordinarily well to deliver upon that growth profile.
And we still have room to run from a leasing perspective, and seeing that north of 3% base rent growth in 'twenty three is a real positive identifier.
And my follow up is on the pipeline.
Are you able to quantify how much is in there and it.
Is that going to be realized by the end of 2023 or is that a 2024.
Yeah.
Let me start.
And if Alan wants to provide any color he'll jump in.
It's roughly $35 million of ABR.
You can call it 4% of our in place rents.
So that's I'm speaking to the 230 basis points of S. M. S N out from a timing perspective Michael.
<unk>, 75% to 80% of that should be online by the third quarter of this year and nearly all of it in fact by by year end I think we are in the 90% area for year end.
Got it. Thank you very much good luck in 2020.
Thank you.
Thank you. Our next question is from <unk> bin Kim with Truth. Please proceed with your question.
Thanks, Good morning.
So when you look at the inventory of space that is left to lease or across your portfolio. How would you describe the quality or a lethal ability compared to what is currently occupied meaning there's always typically space and every center, that's always harder to lease.
I'm, just trying to calibrate our expectations going forward.
Keybanc good morning, it's Alan I would look to our pipeline to answer that question and tell you that it's still full with a tremendous amount of activity. That's following on the heels of a really strong 2022 year so by.
By and large as we said at 95, 1% leased we're setting our is higher and we believe we can and we will get back to 96 plus percent.
Quality space that remains will certainly allow that allow us to do that coupled with the great merchandising activity that remains in our pipeline.
And as you've reached 95% and on your way to 96 like you mentioned.
What do you think that means for lease spreads going forward I know, it's not always linear meaning the more your occupied the higher spreads it yet, but just trying to understand that dynamic a little better.
Yes, I think what we're shooting for high single digits is kind of how we look at that key Ben.
Phil again really confident in doing that but as you know there's a lot of levers that also go into that cash rent spread and that includes embedded rent steps as well as our approach to how we spend our capital and so collectively.
Again, I think we feel confident with that trajectory and the path that we're going down.
Okay. Thank you.
Okay.
Thank you. Our next question is from Greg Mcginniss with Scotiabank. Please proceed with your question.
Hey, good morning.
I realize it's it hasn't been that long since the.
Bed Bath store closure announcements, but I'm, hoping you might have a few points of clarification. One is on you discussed higher rents just curious how much higher.
And then.
How many do you break that tells you you're looking at versus the mining and what type of downtime should we expect on those.
Yeah, Greg good morning.
No fun to be talking about bankruptcies again, but.
We have 10 stores that do remain that represent 50 basis points of ABR. We have five stores that were on the closure list and again, we feel really good not only about those five stores, but but the totality of whatever may come of the bed Bath.
Portfolio from a mark to market perspective, we think we are in the 15% to 20% range and I think when you think about bankruptcies that have happened in the past such as sports Authority toys R. US Stein Mart those were 40 to 45000 square foot stores and the bed Bath stores are generally in the 30000 square foot range and so that really provides a much wider pool.
All of interested users that.
For the most part will not require downsizes or splits, which again I think will play a part in your capital question.
We are negotiating deals for all of our known closures and in some instances.
Were even running what I'll call an RFP in the interest of appropriately managing.
Demand in relationships, but time will tell you know they obviously just recently announced that equity raise so we're staying close to it and we're staying active and aggressive on all of our spaces.
Okay, Thanks, and one follow up on you.
And you mentioned the.
Developers facing financing challenges in those might end up doing deals with I'm, just curious kind of yeah.
How big of an investment are you looking at on some of those assets.
And how close are you to getting any of those deals done.
Good morning, Great question. This is Nick.
You know as you can imagine it's a wide range of investment.
As you guys have seen the capital markets, especially for construction debt for local developers.
Effectively frozen and so we are very well situated as I mentioned in our prepared remarks with our retailer relationships combined with our impressive team around the country and clearly our available capital and so we are I would say moving from coffee conversations that started 90 days ago and to a real dialogue and real negotiations and analysis.
Of these these opportunities and so I.
I do feel like it's the early stages, but the early stages are very important to growing a meaningful pipeline and <unk>.
Some of these projects that you could appreciate when you look at our historical development program of scale. So excited about it.
Okay. Thank you for your time.
Thank you. Our next question is from Floris Van <unk> with Compass point. Please proceed with your question.
Yeah.
Good morning, guys. Thanks for taking my question maybe.
I've got two for you number one maybe if we can get a little bit more detail on the.
The 'twenty one.
Non revenue mark to market and presumably some of that is related to some of your troubled retailers.
Give us a little bit more color on that and also in particular, what sort of you know.
Mark to market opportunities would you have if you get some of this space back and I'm, particularly thinking about properties such as Buckhead station.
South Beach University corn some of your some of your properties that have some of this bed bath exposure.
Sure Floris.
I think you were asking about the accelerated below market rent associated with the potential to get back anchor spaces.
So we do we have incorporated a touch of that income into our expectations. It is a fluid situation as you know and those that those while we have incorporated into our guidance is call it roughly $3 million or so of anticipated accelerated amortization those would be tied to what we believe to.
B the potential.
For the bed Bath and beyond scenario to play itself out.
In which we may get back those spaces.
And to Allen's point, I mean, it's really a direct reflection of Alan's point that there's about a 15% mark to market opportunity on those on those units, which that below market rent would would indicate exists and again those original.
Original amounts were put up at the time of acquisition of the shopping centers.
And time will tell on the on the true economics, where we ended up.
Great and then maybe a follow up a little bit more obviously, you're not all space is created equal your small shop rents are double your anchor rents typically.
I note that your small shop occupancy leased occupancy went up 60 basis points. If you can talk about your physical.
Physical occupancy a little bit and also maybe talk about where you see I know you've mentioned total occupancy in the portfolio. It gets to 96% work in small shop occupancy goal and where was the peak in the past.
Before Alan answers. This question I feel like I have to jump in and say I. Appreciate that you recognize that all spaces not equal and I would say, it's not just small shop and anchor.
All retail is not created equally and high quality space actually it is very different and commands a much different rents than those of lesser quality. So I. Appreciate you, making that recognition Floris I'll, let Allen answer your question more specifically, yes, really well said Lisa I think the only thing left to answer there Floris as is where is the peak occupancy in that.
It's at 93% historically and so we are at 92% on a shop occupancy perspective, right now and again as I said, we feel really good about kind of where our pipeline is and what remains and our ability to not only get there, but hopefully we can exceed that.
Thanks.
Okay.
Thank you. Our next question is from Lindsay Deutsche <unk> with Bank of America. Please proceed with your question.
Good morning, Thanks for taking my question.
I was wondering if you could walk through the assumptions behind base rent growth in that.
The primary driver of 23 same store NOI guidance.
What exactly are you assuming for contractual rent bumps in place rents.
Rent from redevelopment.
If you could just talk about your strategy.
How you're balancing the story.
Sure I'll walk through the components.
Lisa or Alan May may provide some color from a strategy perspective, north of 3% base rent growth you've got it right and we're excited about that opportunity in 2023.
Coming from a combination of several things as I talked about earlier with Michael's question.
With respect to our NOI growth algorithm, so rent steps, that's the bread and butter of our growth profile, it's been up.
The positive contribution has been in the 140 basis point range for a long time.
And we are we're try them.
With every lease to move that needle as we continue to embed.
Higher and higher contractual rent increases.
Rent spreads continue to be.
A positive contribution.
<unk> seven plus percent.
Outcome in 2022 that will translate to growth in 'twenty three.
That'll be in that call it 75 basis point area.
It depends on timing from that perspective on rent commencement from a delivery perspective.
What we're really excited about is now that we're starting to contribute from a redevelopment perspective, we've talked about this $50 million $15 million of NOI, that's coming online from our redevelopment and development pipeline a lot of that is from the redevelopment pipeline. It will come through our same property NOI growth line item, we strategically try to deliver 25 to 75.
Basis points of impact to NOI growth.
I will say with this pipeline that we are delivering at this point in time, we should be at the upper end of that range.
And then I made some comments in the remarks around our outlook for occupancy we've made tremendous strides in moving that commenced rate in 2022, we will continue to deliver our SNL pipeline.
Hopefully, maybe even a little sooner in 2023, but now we're getting into the impact of the credit loss and the BK reserve, so that could be a bit of a dampening impact depending on how the bankruptcies play out over the course of 'twenty three those would be the contributing factors to base rent growth.
Great. Thank you and have a.
Follow up I was wondering like what is included in your assumptions for the $65 million disposition bank within guidance.
It's 7% cap rate is this just based on what youre seeing in the market.
You need them.
Just an allocation.
Okay.
It's it's specifically identified projects, they're actually a collection of assets coming from one of our larger JV portfolios. So that's.
We've long been a.
We belong believed in kind of calling the bottom of our portfolio, whether it's wholly owned assets or JV properties.
It's one of the reasons why our exposure to risk is so minimal just regency's active commitment to choline on a limited basis.
Lower quality non strategic lower growth assets. So this this number $65 million is just that specifically identified projects.
The timing expectations, there are an assumption that could move around.
But it's just a placeholder for now on those identified projects.
And I'll just add I appreciate mikes comments about that we really we really do believe that.
A year like 2023, and they really shine a spotlight on that in terms of making sure that we are proactively managing the quality of our portfolio and we believe that that really does fortify sustainable.
Sustainable NOI growth over the long term, so while that disposition guidance did come with a 7% cap rate that as Mike said that as a placeholder and we.
Looked at last year's transactions, and just add a little bit of perhaps market movement to that but.
More to come and we'll have more clarity as we as we move through the year with regards to to that market, but again, it's an important part of our strategy and one that we remain committed to and I believe.
Has enabled us to deliver same property NOI growth.
But the higher end of.
Of the industry.
Okay.
Thank you. Our next question is from Craig Mailman with Citi. Please proceed with your question.
Good morning.
Just wanted to follow up on the the transition of tenants back to accrual accounting from cash.
And I'm just kind of curious is as we sit here.
Today, I mean could you just give a little bit of color on what types of tenants.
Move back either in the fourth quarter and of the 7%.
Maybe what's the probability of moving more and where do you think that 7% to move to by the end of the year or what's the more normalized level.
Sure Hey, Craig.
So we're at 7% at year end as I mentioned in the remarks, and Thats down significantly I think the high watermark at the peak of 2020 was 27% of our ABR.
So the answer to your question of who is that and what is that it's largely just the.
A reflection of who was it originally.
And that is small shop tenants more local credit.
Personal services.
It actually has a bit of a west coast bias to it.
Now because those are the tenants who are who kind of came out of the impacts from Covid later.
And they're being very specific requirements that we have set up internally to cohort.
To qualify for conversion so current on all no deferred billings.
And have been current for a period of time, you know around nine months or so is what we anticipate so theyre meeting pretty strict hurdles and I mentioned on the call were extraordinarily satisfied with the quality and health of our tenancy at this point in time.
To your point on 2023, we have included.
Two and a half million dollars of conversion forecast into our expectations that is worth about 2% of ABR so too.
Another 2% brings us down to the 5% area.
That is probably in the in the ZIP code of where we think we settle out from a.
Cash basis tenancy perspective.
It's a touch higher than if you were to look over our shoulders years ago, It's a touch higher than that but I think 5% given the new standard with respect to the accounting for that impact is about and the ZIP code of where we'll be.
That's helpful and then separately.
Separately, maybe you should go back to your commentary of better visibility today than.
Three months ago could you just give a little bit of color.
What aspects of the business you feel like you have more visibility on today, whether it's leasing you talked about the transaction market a bit tenant credit and also I'm just kind of curious if you were forced to give guidance three months ago versus today.
What.
Directionally kind of where do we sit today versus three months ago.
And answering your first its all of the above it's actually everything that you pointed to it's another three months of building the leasing pipeline.
It's another three months of seeing how our tenants are performing.
And with sales continuing to rise.
At our restaurants, and our grocery stores, it's three months of.
Three months ago, we were seeing.
Literally no activity in the transaction markets and those are starting to source and we're seeing high quality properties come to the market and as I mentioned in my prepared remarks competitive bidding situations.
For the types of properties that we want to own. So it's really all of the above and that is just giving us that confidence.
Christie and like to make sure that I can answer. This question. If I was forced to give guidance three months ago I would say it would be similar to what we just did I just have a lot more confidence and conviction today than I did three months ago because of all the all the reasons that I just stated.
Great. Thank you.
Thank you. Our next question is from <unk> <unk> with BMO capital markets. Please proceed with your question.
Hi, Thank you.
Maybe a question for Mike I was just hoping you could.
Maybe delve a little bit into the expense recoveries that you noted were elevated in the fourth quarter and for the year and how that.
Changes are morphing into.
<unk> to 'twenty three.
Sure.
Yeah, and you can see the impact in the supplemental and I. Appreciate you asking the question in pointing that out its about 160 basis point positive impact in the quarter alone. It is diluted down for the full year to 30 bps.
So there is some seasonality actually in that line item in.
In the fourth quarter, we do the billings from a from a recovery perspective in that quarter tend to be on the higher end of the recovery ratio side. You can think of expenses like snow removal like real estate taxes that just have a bit of a higher collection rate.
Another component and it's really a lot of little things, one and I'm going to go through some of them, but one of the larger drivers is also a bit unique.
Going going back to the equity one merger and prop 13 impacts.
It took remarkably long for the further the municipality to get through the supplemental tax billings.
And those billings ultimately were expensed as incurred but then collected later and now you are bringing in some cash basis tenants the impacts here as well, so thankfully and gratefully, we've collected all of it in 2022.
Some of that being accelerated into the fourth quarter, so that's causing a bit of a bump as well.
So it's really a combination of those two things driving that outsized impact in the fourth quarter feel.
I feel really good about our collection rate you know where in that 85 plus percent area from a recovery rate perspective, I would anticipate that holding steady into 2023 as you think about your model.
Great. Thanks, and then.
Just a.
Maybe a sensitive question, but on <unk>.
Amazon what are you guys seeing from them across whole foods in their other brick and mortar concepts with regards to <unk>.
Man for space appetite for new stores or lack thereof.
And how they're using their space and is there any signs of weakness there with regards to our port traffic versus other grocery concepts.
Okay.
One I appreciate the question.
So look they're still performing really strong in our portfolio.
We have a great relationship given the abundance of whole foods stores that that we have in the portfolio.
You know theyre expanding as maybe Nick can touch on a bit in terms of his discussions on new stores and how they're looking at that with our conversations but.
Foot traffic certainly coming back with them.
And you know they remain a great retail area that we really love merchandising around.
In terms of the totality of our assets.
Yeah, why don't I would just add as Alan alluded to there's just there's a lot of demand from a lot of our groceries right now to continue to expand.
Around the country and so that's a lot of what's driving our excitement about future development opportunities is key grocers such as whole foods do.
Want to expand they are performing really well and we're excited about continuing to grow our portfolio with them and others.
Thank you.
Thank you. Our next question is from Anthony Powell with Barclays. Please proceed with your question.
Hi, Good morning, I guess, a question on the bad debt assumptions for the year, how much of the 75 100 basis points attributed to known situations like bed Bath beyond and how much more question is there in that number.
Sure Hey, Anthony it's Mike.
Let's talk through maybe scenarios is how I'd like to think about it from a midpoint low end and high end.
And also when we think about credit loss reserve I think it's important to.
To remind everyone that is a combination of uncollectable lease income our bad debt expense.
Together with the impact on base rent that could come from a rejection of a lease in the bankruptcy. So it's a combination of base rent and acts as well as the expense line item.
From a scenario standpoint, the start with the mid point and go from there we are anticipating what I would call more of a classic reorganization scenario at the midpoint of our range. So in the middle of that 75 to 100 basis points and by the way that 75 to 100 is really encapsulated in the top to bottom.
So a classic reorganization Alan gave us some intel and some clarity on what stores have been identified for closure at least that does not mean that they'd been identified for rejection nothing's happened at this point, but that scenario would be in the mid point.
You can also be certain to know that a full liquidation scenario of this name would have would be captured by the low end of our guidance.
So we're very comfortable that even with a relatively soon.
Soon to follow a filing if that were to if that were to happen.
In a relatively.
Quick.
Quickly paced liquidation process, we are pretty comfortable here that the low end of our range with capture of that scenario.
And then and then I'd say I'd actually extend that midpoint scenario into the upper end so.
What may be an unlikely scenario that a lot of good happens in bed Bath is if there are no closures at all in.
And as they continue as a going concern.
Frankly that would be a little bit of an upside to our to our guided range. Now also recall, it's credit loss. So there is bad debt expense.
Mentioned in the call we are a little bit of increase with respect to 2023 outlook versus 2020 to actual performance. So just a little bit more cushion in the plan from a classic bad debt expense perspective.
And we will see how the year progresses I feel really good again about our tenancy feel really good about the quality of our merchandising.
But we all are aware of what potential headwinds there may be out there.
Yeah.
Thanks for that detail and maybe one more on acquisitions I think Lisa you mentioned that you're seeing more bidding processes play out.
How do you view your potential to be an acquirer this year of assets, given what you're seeing cap rates transaction volume your own cost of capital.
I'll just point to our balance sheet and the fact that we're generating $145 million of free cash flow. We do have development spend but even we are able to access we are able to access the debt markets and to the extent that we leverage that cash flow, even staying leverage neutral within our strategic net debt to EBITDA targets that <unk>.
Gives us.
Investment potential north of $200 million.
We are positioned to be active and it has to be the right opportunity.
And.
You all probably get tired of hearing me say this right if it checks the three boxes, we will be active if it's accretive to earnings accretive to our future growth rate and accretive to our quality.
We're poised to we're poised to act.
Alright, thank you.
Thank you. Our next question is from Mike Mueller with Jpmorgan. Please proceed with your call.
Yeah, Hi in your slides you talked about five redevelopments that could start over the next 12 for 12 to 18 months I'm just wondering how should returns on those look compared to what's already under process already in process today.
Thank you for the question Mike.
The simple answer is very similar to what we've seen historically and so our target returns on redevelopments have not changed materially and so when you look at are ones that we've recently completed and are ones that are in process. We're targeting similar returns for our future Redevelopments.
Got it Okay, and then Mike I know there are a lot of moving parts with the ins and outs of occupancy, but what does guidance assume for the year and commenced occupancy level.
So I like to think about it in two layers Mike.
It all it all kind of some.
I'll summarize as to what I said in the call that it's flat to slightly negative. If you if the bankruptcies were to appear but when I think about our lease our base leasing plan and again.
If you think about the.
The <unk> pipeline and the fact that we're going to deliver that pipeline.
A rising level of percent commenced and that is what's driving that billable base rent line item. However, when you layer in the the possibility of bankruptcies.
That could lead us and my midpoint scenario to a flat to maybe slightly negative outlook, 4% leased.
So theres a lot of good news in that occupancy outlook, but theres also the potential for some some vacancy to come back our way not afraid of it to Alan's comments really excited and are actively working on re leasing that space today.
But that would be the best.
The outlook on occupancy.
So the mid point, we should think of it as roughly flattish.
Including the scenario I outlined with respect to a reorganization scenario of the of the tenant.
Question right got it okay. Okay. That's helpful. Thank you.
Okay.
Thank you. Our next question is from Tayo Okusanya with Credit Suisse. Please proceed with your question.
Hi, Yes, good morning, everyone.
Thanks for your comments around how you're thinking about acquisition.
You guys also made some comments about the redevelopment pipeline I'm, just curious just kind of given fresh.
<unk> cost of capital today, how how do you guys kind of think about prioritizing all accelerating one versus the other acquisition development redevelopment and as well as share repurchases.
That prioritization has not changed and the best use of our capital has been and will continue to be the developments and redevelopments.
They get the best returns.
We have a really successful track record of delivering.
Our underwriting and the underwriting returns that we that we disclosed to you which are clearly a premium over competitive bidding acquisition market.
At the same time, we do have the capital to invest as I just as I just stated and if we are able to check those boxes are accretive to earnings accretive to quality and accretive to our future growth rate then we will invest in high quality.
Shopping centers as well.
We've been successful with that we had quite an active and really the past two years, we've been successful in closing.
On.
Shopping centers that check all three of those boxes, some off market and.
One or two that were actually competitive bidding as well.
And share repurchases, we have had the opportunity to take advantage of what we believe to be a significant dislocation in the market a few times in the history of Regency, and we will continue to use that arrow in our quiver when the when the opportunity presents itself.
Great. Thank you.
Thank you. Our next question is from Paulina Roadhouse with Green Street. Please proceed with your question.
Good morning.
So construction forest I'm hunting every school in pricing.
But we're still hungry.
Yes.
Hum.
Exchanging hands. So what is your assessment of how pricing for your product has changed.
Let's say the peak.
Last year.
I'm going to.
And I'm going to let I'll, let Nick handle this just says he's again, we haven't been active as you have seen from the results.
As I said the market is stalling.
Transaction activity is still pretty thin.
But next team is the one along with Barry Argos I really kind of farming those opportunities I'll, let I'll, let Nick address that I. Appreciate it. Thank you for the question Pollyanna.
I don't have a lot to add as Lisa said, there just arent specific data points, we can point to yet. However, we do expect here in the next 60 to 90 days as some of these transactions that have come to market and we are seeing real competition for them. There is solid demand for our type of asset high quality grocery anchored assets around the country.
Can continue to be in demand from investors and so we do expect to have some specific data points here in the next I'd call. It 60 to 90 days with some of these deals close.
But where we're expecting those to be.
To highlight the quality of our assets.
Can you characterize at.
A specific segment of investors.
Right.
Back on the table and that how do we gain confidence.
We also hear often that al and.
Institutional investors that are full product subpar today.
Can you characterize the demand.
Okay.
And you are seeing coming back.
Again, great question and again as these deals close we'll be able to point to specifically, who the buyers were but what we're seeing and hearing as these as our team continues to.
Underwrite and talk about specific transactions is it's really broad based and so it's institutional investors around the country and so as much as we're seeing broad based and the sellers were seeing broad based and the buyers and so.
I can't point to a single.
Institution, that's that's the buyer or the seller right now it is broad based in both respects.
And if I can and last one I hope hopefully short where do you think that the.
This MBS market needs for grocery anchored centers today.
Hey, Paul it's Mike.
Hard for us to tell we're not really a <unk> user so I'm not as.
Close to are familiar with that market a day to day.
For our product grocery anchored neighborhood shopping centers that are very resilient have great quality rent rolls with under writable tenant credit I would imagine that that market would be available to us I don't know that I would appreciate the pricing of that product, but as with most of the credit markets, especially.
It's it's limited.
Borrowers have little.
Less access to debt capital today, but borrowers like regency.
With great.
Mutations in the credit market with scale with quality.
We will have and we've got great relationships, we will have more access than most.
Thank you.
Thank you. Our next question is from Linda Tsai with Jefferies. Please proceed with your question.
Hi, just one quick one with.
With treasuries reversing course, and inflation is starting to abate a little bit just showing up in terms of more traffic or transactions at your centers.
Linda were basically flat to 2019, and so we feel really good about the traffic. That's there right now again necessity based.
Retail and they are performing really well our restaurants are performing exceptionally well as as are others. So I think we're back to a pretty steady state right now.
From a traffic perspective.
Thanks, that's it for me.
Thank you. Our next question is from Ronald Camden.
Morgan Stanley . Please proceed with your question.
Hey, just two quick ones from me just going.
Going back to the 96% potential.
Leasing targets just curious what do we need to see for that to happen is that just the current run rate of leasing limit limit sort of move outs, just trying to figure out.
The building blocks to bread crumbs to get to that 96, and how achievable that is.
Well, we know it's achievable as we look over our shoulder at our past and we feel even better about the quality of the assets we own today than when the last time, we achieved that level. So that's how that's how we know it's achievable and where our targets are you outlined the bread crumbs with the third element I would give us time.
We've talked on previous calls about our ability to lease space at pretty meaningful rates and we delivered on that in 2022, we added 100 basis points of commenced occupancy I mentioned, the 200 bps of Saint <unk>.
Percent leased is coming from the small shops. So time continued effort by the leasing team.
Bankruptcies of a material sense will put.
Kind of holes in the bucket that we all need to work our way through and again that that will only be a matter of time.
If we can lease that space, but really win.
It's not you know Ron we're not anticipating that achieving that level and I will just say in 2023.
Going to be more time than 12 months ahead of us to achieve that but we'll get there in due time and I would just add in.
Setting the bar high as I expect that our team would deliver that if not for those bankruptcies as Alan talked about our leasing pipeline is really strong we have a lot of momentum and my expectation. If we didn't have the hole in the bucket from those store closures and bankruptcies that we know are coming we have visibility to it.
We'd be able to increase occupancy.
In 2023.
Great and if I could just sneak in a quick one because I haven't heard it just any updated thoughts on this.
The Kroger Albertsons, how you guys are thinking about the deal and as it relates to regency.
Yeah, I mean, not not much has changed I know that there was a report this morning, where they I think they publicly stated that they were looking to sell 250 to 300 stores, but that's actually not any different it's just more narrow than what they had said.
When they first announced the transaction so.
We are we're just going to we are in a wait and see what happens we've got great relationships with both of them.
They are not allowed to give us any non public material information, though so we know what you know, but what we do know is we feel really good about the quality of our real estate and our grocery stores that have Kroger and albertsons. They are both leading grocers and we believe the combination of the two would be good.
We think that that would provide them more scale more ability to invest in both their physical bricks and mortar as well as in technology and if for some reason it gets blocked we still feel really good about our real estate and we have two of the leading grocers anchoring our centers.
Great. Thanks again also appreciate the disclosures.
Thank you.
Thank you there are no further questions at this time I would like to turn the floor back over to Lisa Palmer for any closing comments.
Just want to thank you all for being with US. This morning, and I also want to once again, thank the regency team for a really good 2022, and we look forward to further conversations and great results. This year. Thank you all.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.