Q2 2023 Regency Centers Corporation Earnings Call
Greetings and welcome to the Regency centers Corporation second quarter 2023 earnings call. At this time all participants are in a listen only mode. A brief 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 now.
A reminder, this conference is being recorded it is now my pleasure to introduce to you Kristina Cowboy Senior Vice President of capital markets. Thank you Christy. Please go ahead.
Good morning, and welcome to the Regency centers second quarter 2023 earnings Conference call.
Joining me today are Lisa Palmer, President and Chief Executive Officer, Mike Mas, Chief Financial Officer, Alan Ross E V. P National property operations in East region, President and Nick Wibbenmeyer, EVP and West region President.
As a reminder, today's discussion may contain forward looking statements about the company's future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties. It is possible that actual results may differ materially from those suggested by these forward.
These 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.
Our discussion today, we will also reference certain non-GAAP financial measures the comparable GAAP financial measures are included in this quarter's earnings materials, which are posted on our Investor Relations website. Please note that we have also posted a presentation on our website with additional information, including disclosures related to forward earnings guidance a caution on forward looking.
Payments also applies to these presentation materials today.
Today's discussion May also contain forward looking statements about the company's pending merger with ours that that'll including forward pro forma earnings accretion estimates and projected timing of the merger closed while we currently expect the transaction to close in mid to late August closing remains subject to shareholder approval and conditions being satisfied.
Or waves Lisa.
Thank you Christy and good morning, everyone. We appreciate you joining us.
We again had a really strong quarter in fact, one of the strongest and most active quarters and regency is history.
Our success came from all facets of the business, including leasing development starts and of course, the Earth that federal merger announcement in May.
<unk> said many times since we emerged from the pandemic that regency is so well positioned for sustained growth and that we're on our front foot ready to capitalize on opportunities our achievements in the second quarter reflect this they reflect the exceptional work of our team supported by the strength of our portfolio the current retail environment.
And our balance sheet position.
As we all know there is still uncertainty in the macro economic landscape, but at regency, we've not seen any signs of softening as evidenced by our results. The fundamentals of our business remain very healthy and operating trends are strong.
From a leasing perspective tenant demand is robust in the second quarter. It was one of our strongest quarters ever.
And it's supported by sustained momentum in our LOI and lease negotiation pipeline.
Tenant bankruptcies are playing out as we expected, but importantly, our exposure to these retailers they wanted it.
From a capital allocation perspective, most of you know that we have been acutely focused on ramping our development and redevelopment activity back to our strategic goal of a pace of $200 million to $250 million of average annual investment.
I'm really proud and gratified by the success demonstrated by such a strong second quarter for New project starts.
Nick will discuss our activity in more detail, but creating value through development and redevelopment has always been a core competency of regency and it is a competitive advantage for us that is often overlooked.
As I've said before I believe we have the best team and platform in the business and with ground up development. We can really move the needle in an environment, where new supply of high quality centers is lacking.
Even as we ramp our activity our pipeline will continue to be self funded on a leverage neutral basis with free cash flow driving accretion and a sustainable component of our earnings growth above and beyond the organic same property NOI growth that are high quality well located properties are generating.
With regard to our staff at all we're proud of this transaction and are excited to integrate both the shopping centers and many of their people into regency. These.
These centers align so well with our own and meaningfully expand our presence in these strong trade areas in the north East.
The teams on both sides are working hard to effect, an efficient and timely merger close.
As Mike will discuss we expect it to be immediately accretive to our core operating earnings and we also look forward to unlocking value within the combined portfolio under the umbrella of our leading national leasing and asset management platform.
Another highlight of the quarter was the release of our annual corporate responsibility report in late May. This report is a census, the census, the synthesis of our commitment to ESG and the many initiatives driving US forward. We are extremely proud of the progress that we continue to make toward achieving our long term goals.
The principles of our program are in body throughout our organization and are integral to achieving our strategic and financial objectives.
Before I turn it over to Alan I'll reiterate that regency is very well positioned in this environment given the strength of our assets.
Trade areas in which we operate supported by the solid fundamentals of the grocery anchored suburban shopping center business today.
Liquidity and balance sheet position will allow us to remain opportunistic driving sustainable cash flow growth going forward.
Thank you Lisa and good morning, everyone. We continue to benefit from a strong retail environment as demonstrated by another quarter of fantastic operating results, particularly on the leasing side.
New leasing volume year to date is 40% above our historical average and in the second quarter, we achieved our highest shop, new leasing volume in over 10 years.
As a result, we increased our shop lease rate by another 60 basis points sequentially to 92, 7%.
Our overall same property leased rate is up 10 basis points in the second quarter. Despite 60 basis points of occupancy loss due to bankruptcy further validating the strength and quality of our portfolio.
Exceptional second quarter leasing activity also came with strong cash rent spreads of 12% on a blended basis and nearly 30% on new leasing.
Our continued success with contractual rent steps is reflected in our GAAP rent spreads of 20% on a blended basis.
This strengthened our operating trends helped us drive another successful quarter for same property base rent and NOI growth.
Tenant demand is coming from a broad range of categories, including but not limited to grocers off price medical restaurants and pet services.
Are signed but not occupied pipeline represent over $30 million of annual incremental base rent and our same property occupancy spread remains wide at 250 basis points.
Even as executed leases commencing each quarter, we continue to replenish our S. N O pipeline with the execution of new deal.
As we look ahead, our leasing pipeline remains full with another 1 million square feet under LOI and lease negotiation.
Our second quarter activity did include a mix of larger space deals with longer lease terms, which resulted in elevated per square foot leasing capex, but importantly, net effective rents remain in line with our historical average.
With regard to back filling our former bed bath and beyond spaces, we are executing our vision and making excellent leasing progress.
You'll recall that our exposure at the time of the bankruptcy filing a quarter ago was 50 basis points of ABR.
Two of our locations were purchased at auction by Burlington, and Michael and we have fully executed leases on three additional spaces.
We have significant interest on the remaining spaces and our team is actively negotiating with multiple prospects, including the in process pursuit of redevelopment projects at a couple of the location.
Overall, we anticipate marking to market rents.
By approximately 20% to 25% on average for our former bed Bath stores.
As we've noted previously we feel confident in our ability to release, our high quality real estate when tenant bankruptcies occur often at higher rents and upgraded tenancy.
In closing, we recognize that our success in the second quarter is not only reflective of the current environment and the strength of our assets, but of the hard work of our best in class leasing and operating teams.
We see that momentum continuing as we work in the coming months to integrate Earth that biddle's people and high quality properties.
And create even more value through the combined portfolio.
Nick.
Thank you Alan Good morning, everyone, we had a very productive and gratifying quarter for development and redevelopment activity.
It's a real exciting new projects and made great progress on leasing and construction across our $400 million in process pipeline, while maintaining cost returns and timing consistent with our underwriting.
We also continue to build our future pipeline of projects and see meaningful opportunities for incremental investment.
In the second quarter, we started 12, new development and redevelopment projects totaling $175 million.
It is an impressive amount for regency and I'd like to thank our development teams for their efforts as these projects start to reflect years of hard work behind the scenes getting us ready to commence construction at these sites.
The first project I'd like to highlight it's not that the $90 million a whole foods anchored ground up development on long island that we spoke about last quarter.
He is in Holbrook, New York and located on the heavily trafficked east West artery of Sunrise Highway, which is the dominant retail corridor in the market.
Construction commenced on 170000 square foot center in May and we anticipate a whole foods opening in 2025.
We already have signed leases with Starbucks as well Citibank and has seen significant leasing interest for many other best in class retailers.
In the second quarter. We also started phase III of our redevelopment of Sarah Monte and Daly City. This project will allow us to transform the northeast quadrant of the property, including the redevelopment of the former Jcpenney space with a world class Asian food market as well as the development of two new small shop building adjacent to Macy's.
We continue to see significant demand throughout all components of this asset and look forward to even more value creation in the future.
We also commenced redevelopment a whole foods anchored Mandarin landing in Jacksonville, which will include a new 25000 square foot Baptist Health Medical Center additional shop space and a new two tenant pad building.
In addition to the development and redevelopment starts I'm appreciative and proud of the work our teams have done completing five projects during the second quarter, which will collectively contribute more than $5 million of annual incremental NOI.
The largest of these projects with a $55 million redevelopment of the crossing cleared in Arlington, Virginia, where our leasing and construction teams did an amazing job further solidifying the asset at the center of gravity in the Rosslyn Ballston corridor.
The project is now 100% leased with an incredible tenant mix, including a new state of the art flagship lifetime, which had a very successful opening a few weeks ago.
Looking ahead, our teams are laser focused on sourcing new investment opportunities.
These include redevelopment within our existing portfolio as well as new ground up development projects.
The three cornerstones of Regency's development strategy, our capabilities for our capital and our contacts are more relevant than ever in the current environment.
Our leading groceries continue to expand we are one of the few developers that have the ability to help them execute on their desire to locate with a new high quality shopping centers throughout the country.
We continue to build our pipeline to achieve our strategic objective of more than $1 billion of project starts over the next five years of expertise and our land longstanding relationships combined with our access to capital uniquely position us to capitalize on opportunities Mike.
Thanks, Nick and good morning, good morning, everyone.
Start with highlights from our second quarter results walk through a few changes to our current year earnings guidance.
Provide some estimates for accretion related to our pending earth that that'll merger and finish with some comments on our balance sheet position.
We grew same property NOI by three 6% in the second quarter.
After excluding the impact of Covid period reserve collections importantly.
Importantly, the largest driver of growth continues to be base rent.
Tribute and 380 basis points to the NOI growth rate in the quarter.
As we've continued to stressed on previous calls base rent growth is the most important indicator of our portfolio's performance and in Q2, our growth was driven by the combination of embedded rent steps positive re leasing spreads growth in occupancy and redevelopments coming online.
I'll refer you to the helpful detail on slides five through seven and our earnings presentation.
Driven by another strong quarter of leasing incredibly strong if I may add and greater clarity around the current operating environment and bankruptcy impact. We've raised the bottom end of our same property NOI growth range as well as our ranges for NAREIT <unk> and core operating earnings.
With more certainty at the margin we have eliminated some previous downside scenarios.
Our updated same property NOI growth range is now 3% to 3.5%.
While we've maintained our total credit loss assumption that 60 to 90 basis points.
Now expect a greater contribution from average commenced occupancy.
Benefiting from strong shop leasing through the first half of the year end.
And absorption more than offsetting the negative impact from bankruptcy closings.
Same property NOI is the primary driver of the ones that increase in the midpoint of our core operating earnings guidance range.
With the bed Bath auction behind this and the outcome of those stores now known.
We now have clarity on impacts from the acceleration of below market rents tied to those locations.
For the full year, we anticipate roughly $6 million accelerated below market rents within our noncash guidance.
About half of which has been recognized year to date.
Our full year noncash guidance also includes three and a half million dollars of expected impact from the reinstatement of straight line rent associated with the conversion of cash basis pass back to accrual ups.
Up slightly from a quarter ago.
As a result, we've raised our assumption for noncash items to plus or minus 37, and a half million dollars.
Positively impacted our neighborhood episode range the.
The midpoint of which is up two sets.
For those that are undoubtedly starting to think about 2024, we consider both of these items combining for $9 million to $10 million of noncash revenue this year to be nonrecurring in nature.
And speaking of nonrecurring items, our guidance for Covid period reserve collections for 2023 remains unchanged at $4 million.
As we thankfully reached the last of our collections on deferral agreements with only 5% of our tenants on a cash basis of accounting today.
We are not currently anticipating any material COVID-19 period collections to recur in 2024.
These updated guidance ranges and the details I just reviewed reman.
We remain on a regency standalone basis only.
And do not yet factor in any impacts from the ers that that'll transaction, which we expect to close by the end of this month.
We will provide updated current your guidance with more detailed assumptions on a pro forma basis. When we report our third quarter results so more to come.
But in the meantime, we are prepared to offer a high level outlook.
Our expectation is to deliver incremental per share core operating earnings accretion of a penny in 2020 three.
Reflecting about four months of impact.
And plus or minus one 5% accretion for the full year of 2024.
Which continues to include an estimated $9 million of annual G&A cost synergies.
Importantly, this accretion estimate is for core operating earnings not May read F. F. L. As it does not include any impact to noncash items.
The teams are making excellent progress with integrating into integration prep.
And we're all excited for the merger closing and the future prospects of the combined company.
I'll finish by highlighting the strength of our balance sheet, which is the foundation of our capital allocation strategy.
One of the strongest balance sheets in the overall REIT sector, our leverage remains at the low end of our targeted range of five to five five times debt to EBITDA.
And will remain so following the close of yours that that'll merger.
We are generating significant free cash flow expected to approach $150 million. This year self funding our growing investment pipeline that Nick highlighted previously.
And we have access to meaningful liquidity through our one point to $5 billion line of credit with less than 10% of our total debt maturing through the end of 'twenty 'twenty four.
I can't stress enough the importance of our balance sheet strength, and allowing us maximum flexibility throughout economic cycles.
Providing us an ability to remain opportunistic as the team executes on our investment strategy.
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, a confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be next.
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One moment, please while we poll for questions.
And the first question comes from the line of Craig Mailman with Citigroup. Please proceed with your question.
Hey, good morning, we used to just wanted to touch base on the transaction market clearly.
You guys have you'd be a in the pipeline here, but a lot of your peers have been talking about maybe a little bit of a thawing in the acquisition market and I'm just kind of curious what you guys are seeing if there's even an appetite to buy one off or if the focus now is just on redevelopment.
Within the portfolio and you know what you guys are going to bring into the portfolio. After the merger closes.
Yeah I appreciate the question a question Craig, but my first order of business is gonna be to toss that to Nick.
Good morning, Craig I appreciate the question as well. So yeah, you guys had been hearing and seeing a closed activity definitely still remains then but there's no question, we're seeing the pace of opportunities coming to market accelerating in that bid ask spread is tightening and so we are starting to see data points come up you know somewhere in the range of low six.
<unk> to sevens on a cap rate, but uncertain deals, we're seeing them definitely even dropped below six depending on the growth rate and the size and so we are actively pursuing these opportunities underwriting them understanding them and as always if we see an opportunity that we think is equal or accretive to our quality and growth rate or a cruise and accretive to our earnings.
We're ready to move forward as Mike just indicated we have the capacity to do so.
Great and then just shifting to leasing you guys had.
Some good absorption here in the shop portfolio I'm, just kind of curious you know just monitoring whether the begging issues have had any impact just are you guys seeing any particular vertical of tenants maybe backing off here or is the access to capital not the issue at all and its content.
Continues to be across the board the band for the shop space.
Yeah, Craig Good morning, it's Alan we have not seen any backing off just yet and so there's been no impact yet to your banking question at all in fact I would.
Take us to our pipeline, which we feel really good about where we have nearly a million square feet still in the pipeline that are that is an active negotiation right now so not nothing just yet.
Of that million square feet, how much of that would be shopping you know where could we see that lease rate.
Tickets you in the next couple of quarters.
It probably leans more towards shops on the pipeline side, Craig, but it's really across the board just in in both anchor and shops in terms of the activity I think there's a lot of.
Junior box retailers that just haven't had the ability to identify spaces, given limited supply and of course, the bed Bath and beyond cause I think open a bit of that so again I think it's really at its addressing the totality of the portfolio, but leaning towards shops.
Great. Thank you.
Yeah.
And the next question comes from the line of Sun Cat Agra Wall with Evercore ISI. Please proceed with your question.
Good morning team. Thanks for taking my question. So I just want I was just curious that on losing and you saw that moving activity picked up again in second quarter after being no influence quarter. So we just wanted to understand how are the leasing conversations that I'll put in as the modest spend starts taking off and then he took 94.
Can you just repeat the last part of that and have you seen an uptick in cat.
So basically leaving literally living I agree with you. We're all this quantum right. So we just wanted to know like what are the Andrews Martin spend for second half of this year N plus N equals 100 conversations on the amazing congregations on the ground today.
Okay.
So I'll go ahead and see if I can answer that question. So the leasing conversations on the ground still remain really positive. We're very proud of I think the certainly the spreads that we achieved in the second quarter and I guess you saw it was almost 30% on new leasing.
And I think really a lot of that was a function of the mix of our anchor and in shops, where we had a little bit more on the anchor front, but if you look at just the shop spreads for the coronary would take a few of those anchor deals that we were still in the mid teen which is it's really exceptional and I'd probably bring you also towards our GAAP rent spread.
Ads, which were <unk> 44 per cent again really outstanding AR for the quarter and I think I would bet that ties into the focus the team has an embedded rent steps in and really speaks to the strength of the market to your question.
And I'd come back to them just are you know our opening remarks or just the overall strength of our business and suburban especially grocery anchored shopping centers and anecdotally. We are hearing that with inflation abating, some or tenants are benefiting from that as well from a cost perspective and also theres.
Ben our improvements on the labor front, so with all of that again, that's the leasing conversations on the ground. We don't have any hard and fast evidence, but it is anecdotal and and we do have great relationships with our.
With our offices across the country and with our people really close to close to our centers. So again, we see continued strength at this point.
Okay, and I have final count.
These guys, especially in Florida.
Uh huh.
But it is accretion this quarter so.
Did you guys like Tony the defense and B is it an oh does that where does this portfolio has the bush is a young portfolio in similar markets. So what is the what is a guy that are high end how much you guys are trying to.
Why on that side as you would equal in that portfolio.
And I just bring you back to again that were really excited about integrating these properties.
Into our portfolio under our platform.
Yeah.
As you heard us say, when we announced the merger and as I think we just reiterate it today, we do believe that there is going to be some upside from leasing them and really capitalizing on bringing that into the regency leasing and asset management platforms.
Okay. Thank you.
And the next question comes from the line of keeping Kim with truly Securities. Please proceed with your question.
Thanks, Good morning.
Start off with a really boring question can you just help me go back to that below market rent a topic.
And how should.
You had a little bit more this quarter, how should that trend throughout the year I'm just curious if theres going to be a bigger burn off point or something at some point in 'twenty three or 'twenty four.
He'd been before Mike answers that there are no boring questions and there are no bad questions [laughter].
You bet I will limit my response to 'twenty three I mean, much more to come on 24, as we finish out the budgeting process like this.
This well, which will kick off later this summer and will offer more guidance later this year, but you bring up a good point I mentioned on the call there will be a burn off really.
Target it to the bed bath and beyond spaces in particular so.
We are anticipating losing another $1 million of noncash noncash income just simply related to them in the second half versus the first so you should plan for that as we think about our full year guidance.
Hopefully that helps you with what Youre looking for on that item plus my prepared remarks with respect to.
Reinstatement of of straight line rent as well not recurring.
Okay and.
The level you know, California is obviously your biggest market and I'm just curious if theres been any discernible trends in cargo traffic or spending patterns. When you compare California to your other markets any kind of.
Standouts.
Thanks.
Sure.
It's been a question this is Nick so.
Definitely not seeing any difference in California, and the rest of the country. We're seeing strong demand across the board and that is inclusive of California, and all aspects of California, and I would even point out even in the Bay area because again the majority of our properties are in the suburban markets that are still seeing significant demand and so we're very very poor.
With the activity the demand in the leasing velocity, we're seeing out west.
And if I could squeeze a quick third one here are the New York MSA occupancy dropped at 82% was that just the leasing for development or anything you can share on that.
Right.
Okay.
Keep in I think that's a that's that's the vacating of our grocery in Manhattan, the food Emporium deal. So.
We we have a we can't announce who that tenant is but we've already executed a lease to replace a majority of that space. So more to come in the next quarter.
Okay. Thank you.
And the next question comes from the line of Juan Sanabria with BMO capital markets. Please proceed with your question.
Hi, Good morning, it's Eric on for one I.
According to your prepared remarks, it sounded like you had 60 bps of occupancy loss relates to the bed Bath and beyond potentially other bankruptcies I was just kind of curious on your expectations for the third quarter and the remainder of the year.
Eric from a percent lease perspective, I mean, this has changed from last quarter last quarter. We were communicated an expectation that by year end per cent lease could be actually down modestly as a result of bed bath and beyond filing, but given the team's incredible leasing activity in the shop category in the second quarter word.
We're now anticipating being up modestly as a spot percent leased rate by year end. So super excited about that here at regency.
However from a commence perspective, we we are anticipating that that commenced spot rate at year end, that's going to be slightly down.
But you.
You know and that's the only a matter of time as we deliver the signed not occupied pipeline going into 'twenty. Four so really the seeds that were planted in the second quarter and the leasing.
That the team delivered from a leasing perspective, that's all going to pay dividends for us as we as we turned the calendar and move into 2024 not to mention the fact that we're making incredible progress on the re leasing of the of the vacated bed bath stores as well.
Okay. That's helpful. And then just following up on the snow pipeline that 30 million of a b or.
Could you just talk about little bit more about the commenced the timing of that commencement there in 'twenty three and then into 'twenty four.
Sure Yeah, you've got a 250 basis points about $31 million.
Rent, that's about 3% of our ABR and I'd say, it's roughly half by year end this year and all of it nearly all of it by the end of next.
Okay. That's helpful. And then last one for me just given the acceleration in the leasing spreads both on a cash and a rent base GAAP basis. I was wondering if you could just quantify the the.
The annual bumps.
In the second quarter and is that a new trend is that expected to be the floor there.
Any color on that would be very helpful.
What are we getting sorry, Alan what are we getting in from a leasing bumps perspective in our current activity Yeah No Eric.
Thank you for that question, we are getting 100% of our new deals I had steps this quarter. So very proud of that number and I appreciate that the team has embraced the importance.
Of embedded rent steps and I would say two thirds of those deals had escalators that are at 3% or more so we are seeing a pretty good shift Eric on that on that front.
And then from a impact perspective, Eric you know 140 basis points of our base rent growth is coming from rent steps and that's been pretty consistent for us for a long time now as the team has done an exceptional job of embedding growth into our leases. We are you know based on this momentum and we're pushing this every single day, we're hopeful to move that impact going forward.
Sure.
But it is a tough mountain to climb and if it is it at.
That moving that impact to same property growth.
North from where we are now we will take some time, but the teams are doing doing great work.
Alright, Thank you very much.
And the next question comes from the line of Greg Mcginniss with Scotiabank. Please proceed with your question.
Hello. This is to be provided here on me, Greg Mcginniss Ah I have a question on what does a typical leasing agreements look like now and how it has changed if at all during the last three months sometimes.
Got himself a confession escalators in G I.
Yeah Victor Thank you for the question I wouldn't say, it's certainly has shifted a bit and the landlord arena and I think as evidenced by some of the results that are that you're seeing.
But from a market perspective.
We're not seeing capital would go up just in terms of the market shifting that for us specifically in the quarter. It's gone up moderately because of just the mix of deals that we did this this quarter I'm leaning more towards the anchor side, but generally speaking as occupancies certainly rice, we feel pretty good about the quality of the port.
Folio, our ability to really choose the right retailers as we always intensely asset manage our portfolio.
And continue with what we perceive as as fair market terms.
Got it thank you very much.
Thank you Victor.
And the next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.
Hi, Good morning, a question on bad debt I think you kept your bad debt guidance at the same other semi some of your peers have reduced their bad debt guidance, given kind of the better than expected at progression. Here. You you were just lower than the others, but what are you seeing there on that front.
Hey, Anthony I appreciate the question Yeah, we we left our guidance range unchanged correct what.
What I would say there is actually let's let's get some some stats out here first 60 to 90 basis points of our credit loss Reserve remember I think we're all familiar with is by now, but that's coming from two different line items right. So youre, losing base rent from the bankruptcy impact, but you're also recording bad debt expense unrelated to the bankruptcies right. That's what it is.
The 60 to 90 basis points.
Two thirds of that guidance is from bankruptcy impact are the balance coming from traditional bad debt and I would say, we're about 30% of the way through that estimate at at the midyear. So it Jim.
Let me say this if nothing else were to happen from this point forward in the bankruptcy arena.
We'll probably end up closer to the 60 basis points out of that range and and it does feel as if the you know as we all have talked about in the past bankruptcies do tend to be seasonal it does feel like more of a first half of that in a second but.
We're in uncharted territories here, so, we're just being a little bit careful with that range.
But 90 basis points would be satisfactory to kind of capture any.
You know an unforeseen kind of negative impact that could happen in the back half of the year.
Got it thanks, and then maybe one more on development and it seems like the you know the sector is doing very well here are you being approached my yeah private equity firms or other developed weather.
Sources of capital to do more development Yeah. This is a.
Pretty strong fundamental sector and you guys have obviously been successful in developing so I'm curious what you're hearing there.
Yeah. Anthony this is Nick I appreciate the question. So there's no doubt right now the financial markets are a challenge for most developers we all talk about liquidity challenges that the tightest liquidity is in construction loans and so that is really an opportunity for us and as I said in our prepared remarks, our capabilities our cat.
But all of our contacts and we mean that are all very necessary to make deals happen right now, they're really tough to make developments happened for a plethora of reasons, but that's why we feel really bullish we're going to get more than our fair share of opportunities and so we have phones ringing from everyone in the business, whether it be capital interested whether it be.
Developers of new capital and.
The good news is we already have all the tools that our tool belts and were using those as appropriate and so.
Excited about obviously, bringing sunbelt online started construction this quarter and hope to announce future deals in the future.
And we again development has been an important part of our business model for as long as I've been at the company and it just enhances our earnings growth with $150 million of free cash flow and we can essentially leverage that remaining leverage neutral and invest that capital into.
Our development at it it really does move the needle with regards to enhancing our earnings growth.
Alright, thank you.
And the next question comes from the line of Ronald Camden with Morgan Stanley . Please proceed with your question.
Hey, just a couple quick ones so just starting on the.
The recurring.
Nonrecurring stuff this year versus versus next year, just trying to get my arms around that.
I mean, I think it sounds like the collections of passengers and certain noncash items is going to be the biggest sort of tough start to comp next year, but from a cash basis, whether its same store and a Y well. There's some of the occupancy gains is that fair that should be closer to sort of your long.
Sure I'm targets.
Yeah, I mean, hey, Ron it's Mike just maybe.
Catch some of the items, you're referring to we wanted and we tried to make it very clear in our remarks.
So theres $9 million to $10 million of noncash F. S O.
That that won't be recurring and I wouldn't plan on that recurring next year cause you know.
Driven by the straight.
Straight line rent reversals as well as the below market acceleration.
Another $4 million that we've guided to from a prior year collection perspective, and we're thankfully get into the bottom of that bucket. So.
Collectively you're you're in the $14 million range of nonrecurring <unk> items and and that's why we will continue to look through to core operating earnings to again removed the impact of those of that noncash component. So it's better reflection of what we think of SSO direction should be.
And then you know the prior year collections will take care of themselves.
Got it makes sense and then so I mean, I think going back to yeah. I think some of the comments you made about the Ub P merger.
Presumably you're not going to have any more of these head wins on the on.
On the same store NOI guide, so presumably I mean, I think 24, if you look past these noncash items I mean, it could be a pretty strong sort of year right. So what what are sort of the like.
Like the puts and takes right is it is it bad debt that we should be thinking about because everything else seems like it's gonna be pretty pretty strong.
Yeah.
I had I. Appreciate you you you mentioned and then I'm gonna be a little careful Ron and we're talking too much about 'twenty 'twenty four we're gonna give out as we customarily do a full suite of forward looking guidance later in the year. So I wanted to kind of be careful there, but from a rent steps perspective, as we just talked about we will continue to deliver positive impacts just from contractual rent increase.
We're having a great year, so far on rent spreads are in this year alone that that's an 80 basis point positive impact I wouldn't anticipate that rent spreads continue to positively impact us going forward commenced occupancy well, we still have room to run there was a question earlier today about the top end.
96% on total and 93% on shops is where I level is that would include the two be merged portfolio. Our first epidural, which you know there which will take some more time for us to achieve those levels there spot occupancy levels at about 200 basis points below ours today and that's what we're excited about.
Driving growth from that portfolio.
You didn't mention is the positive contribution from Redevelopments, we schedule that out in our supplement 70 basis points to 2023 of positive NOI contribution we brought online key projects at the abbot market common Clarendon and these are exciting large projects that we brought online and we've been talking about for it feels.
Like yours, now and they're finally coming into fruition through income those will continue to grow for us into next year as well and there will be you know the impact of bankruptcies as a negative impact in this year and we'll make an adjustment from a credit loss perspective looking into 'twenty, four but as you know or our exposure.
To these tenants just from a watch list perspective is pretty limited so.
That's about what I want to share today on 24 outlook and we'll give you much more to come both on the merger.
As well as on our on our base outlet for 24 later this year, but probably important to just to reiterate I know you mentioned the opportunity in increasing that commenced occupancy.
People are familiar but in case you missed the prepared remarks like did say that we expect one 5% cle accretion in 2024 from that merger.
Excellent. Thanks, so much super helpful.
And the next question comes from the line of Floris Van <unk> with Compass point. Please proceed with your question.
Oh, Hey, guys. Thanks for thanks for taking my question.
I had a you know.
You guys you know regency as you know your DNA historically has always been development Ah you're leaning into development now when nobody else can when demand is still you know sort of exceed supply. If you will so I think that bodes well for your future.
And I see that Youre doing a couple of different types of development, including you know repurposing, our former anchor box at a mall.
And you're doing some it looks like some some residential I don't believe you're doing the residential yourself at Westport or are you doing that could you remind us again, what's the how you look at residential and how you try to stick to your knitting and and you know typically you would you know, let others take the risk and in non.
Core property types.
I appreciate the question for US and also appreciate the comments and.
You are correct.
We are focused on the retail portion of developments. It is our it is our core competency. It is a competitive advantage. It is what we are really good at and yes, there are going to be a mix abuses them. When we are focusing on some of the highest quality pieces of property and land them oftentime there'll be demands.
For other types of uses them and when that is the case, we're certainly going to capitalize on that but it is not our specialty. So we will typically a partner with someone who that is a core competency and it may mean that we just invest the land it name in.
We invest a little bit of capital.
But we will always bring in the expertise that is needed to ensure that we have.
Fulsome project and optimizing the land.
And we have examples of that as you said west part is one.
One out in California, where Nick is where we've partnered with how long do the residential across the street from the boroughs wishes everyone. Everyone is familiar with it we've rebranded it to the Blum one third.
So absolutely appreciate the question for US and you are right. We are focused on the retail portion of high quality, mostly grocery anchored a suburban shopping centers.
And then I guess my my follow up here.
I I I wouldn't consider California market as the states. It has a couple of different markets in there, but new York clearly, it's going to be your biggest market, particularly post the U S that biddle mercury or is that is that correct.
Hi.
Yes, if you say markets and not a state that is correct.
I think it's really what we like are we like the portfolio the composition, our geographic diversity and the fact that we have offices across the United States and we're very focused on trade areas as you know not necessarily macro markets and we will continue to invest in the markets.
That we are already invested in them and we have the opportunity to add high quality.
Shopping centers to our portfolio.
Thanks Lisa.
Yeah.
And our next question comes from the line of Mike Mueller with JP Morgan. Please proceed with your question.
Yeah, Hi, thanks.
Spent a little bit more time, it seems like with the Earth that portfolio. Just curious how are you thinking about say the three year.
Same store NOI CAGR potential compared to the existing regency portfolio.
Yeah.
Mike sorry, I'm going to prevent the team for me you're asking the question more to come on the close we're not closed yet we have spent more time with it we're as excited as we have been since we announced the merger in since we started to look at it none of that has changed is the only accelerated been amplified as a matter of maybe disclosure guidance, we actually at this point.
I don't anticipate including it in the same property pool, we will we will likely treated as an asset acquisition. So you're the technical question, how will impact our same property growth isn't necessarily relevant but we were excited to talk about the portfolio. When it's time to do so.
Got it thanks.
Sure.
Okay.
The line of Wes Golladay with Baird. Please proceed with your question.
Hey, everyone I just wanted to look at a high level view of 2024, just trying to find any potential headwinds and more in particular for the Redevelopments are you gonna be deep leasing anything Oh.
Real size next year that you would know of at this point.
Hey, Wes.
I think I've talked to the headwinds, we Wanna talk about already and they're largely coming from the noncash area. So the $9 million to $10 million of nonrecurring.
Noncash impacts.
We've talked about the $4 million of prior year collections that also won't recur, that's where we're going to limit our conversation today the redevelopment impact I mentioned previously.
Just again directionality, we will continue to see that as a positive contributor going forward and the details of that are in the supplement you can map that out.
Okay Fair enough and then I guess more bigger picture Theres definitely a lot of developers struggling Super Sofer is with the pop a need for a development yield of its quite high yeah.
The retailer retailers coming to you, saying, Hey could you just step up your pipeline are you having those conversations are they willing to give you a higher yield could you take your pipeline up higher or you're governed by maybe your free cash flow capacity and what's the outlook for maybe accelerating the development pipeline.
Two it to a much higher level than it is today.
Sure Wes I appreciate the question this is Nick.
There is no question, we are in direct dialogue with our partner groceries around the country and the groceries want to continue to add stores. Their business has been very good over the last several years and they're excited about continuing to grow their topline and so there's no question, but there are challenges, making those deals pencil and.
There isn't one one solution to solve all of those challenges part of it is construction cost part of its entitlements part of it is a financing cost part of it is rent and so our job and our capabilities allow us to stand in the middle of all of those and make sure. We're pulling every single lever using every tool in our toolbox, which is.
Why I would tell you we're as excited as we've been in a long time about getting more than our fair share because we are one of the only companies in the country that have all of those tools have those capabilities have those relationships and have that knowledge and so.
We're bullish on on growing the development pipeline in the cycle right now Oh.
I'm sorry go ahead, sorry, I thought you were finished keep out.
Just kind of alluded to it is as Mike indicated we have plenty of capacity and as Lisa indicated we have free cash flows are prioritized for it and we have a balance sheet behind that to make sure we can.
Appropriately continue to lean into those opportunities as we put those pieces together.
Yeah, all of that was going to add is that we haven't been limited.
From from capital capital It has been a limitation on the opportunity set because we're really disciplined and I think it's important that we maintain that discipline and we will maintain that discipline as it gets to the end and Nick reminds me all the time, because I do I like to say my 200 to 250 million that it could be lumpy and there may be some years, where it's going to be.
More than that and there may be some years, when it's gonna be a little bit less if we can average the 1 billion to one and a quarter of million and over five years, that's our goal and if it gets to the point, where there is the opportunity set is growing we will certainly evaluate how we can meet that demand.
Great. Thanks, everyone for the time.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue. You May press star two to remove any questions in the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.
Hi, I think your retention ratio is historically around 75% and it's trending above that now are you getting.
Back to Peacock and occupancy are you about that.
Hey, Linda it's Alan we are hovering in that 70.
Yep.
Eccentric she she's just clarified or peak retention rate.
Excuse me [laughter], we are still a lot let me answer it let me get him let me go in reverse.
So in terms of are we back to where we think peak Occupancies are now we believe there is still runway.
We're making really good progress obviously some of the bankruptcies that we alluded to the 60 basis point impact did.
It did sort of pull it back a bit but you know despite the great success, we had on a lot of the shop leasing, but there's runway there we feel really good about our again as I said, the pipeline and where we're going and I.
I hope not only do we get back to historic highs, but we can get past us that's certainly where we're setting our eyes.
Only thing I'd add on retention is and we've talked about this and the pandemic really kind of heard some of the weaker operators and so as we emerge from that tenant.
We've done a great job of recovering our occupancy we continue to do that we continue to increase it and we feel better today about the strength and health of our operators I don't think we ever have in the past. So it does not surprise me that the retention rate continues to be strong and I would expect that it will continue to be to stay there if not improve.
And then when you look out to the next year or two how do you think about the ratio of organic versus external growth in terms of having the best opportunity sets.
Again $150 million in free cash flow we will.
Leverage that and invest that into our development and redevelopment.
Activity and so that's where you're going to see or I are external and as Nick said earlier, we will always be evaluating acquisition opportunities and to the extent that we can fund. It. So that it is accretive to earnings and if the opportunity itself is neutral or at least neutral or accretive to our quality and our future growth rate, we're going to act on them.
And so I think you can take our same property NOI and the team does a great job of that.
Of communicating that'd be our investor presentation as well as in meetings. If you take our same property NOI model. That's the base. That's the fundamental and then on top of that is going to be our investment activity and that will enhance that growth.
Thank you.
And the next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question My question relates to kind of to the balance between a new leasing and your ability to pay <unk> or tenants looking for greater T. I as I saw it stepped up in the quarter and you know just given the Max.
So environment, maybe other landlords don't have as much capital available to help their tenants. How does that is that is that helping you become a landlord of choice for certain types of tenants. Thanks.
Michael I. Appreciate the question look we will invest in great retailers that we now have a great track record that we've done a tremendous business with but when you talk about sort of the uptick that we've experienced for the quarter as I mentioned it really is a little bit more just in terms of the mix of anchor and shops.
We I mean as noted in our supplemental you'll see the weighted average length of term is also longer so I would bring you back to to how we're thinking about net effective rent as a percent of GAAP rents where were in the mid to high 80% range over the last five quarters and for this quarter were at 83%. So it's really still really in line with how we are.
<unk> managing our capital spend and you know we foresee it sticking in that similar range is as we go forward.
And just as a follow up related to small shop, clearly another big quarter.
Sequential step up of 60 basis points.
Is there an artificial cap on how high small shop occupancy can get historically its been lower than the anchor book, we've just seen such a strong movement lately. It sounds like you have a great pipeline. There. So you know.
Is there a point, where we just kind of reach a.
You know reach a moment, where it maybe we it just doesn't move that much higher than in our re approaching that.
Michael I would say for all of our leasing agents, who are listening to this call. There is no cap on.
Shop occupancy in the direction that we're going but yeah sure. We're gonna still obviously have some vacancy is even when we even when we meet those historic highs or get passes but again, it's it's historically been in the 93 ish percent range and as I said previously we feel pretty good about.
The direction that we're going with the pipeline that's in place right now.
Thank you very much good luck in the back half.
Thanks, Michael.
Ladies and gentlemen at this time there are no further questions I'd like to turn the floor back over to Lisa Palmer for any closing comments.
I just wanted to thank you all for joining us this morning and bearing with us through the end of this earnings cycle and have a great weekend. Thank you.
Ladies and gentlemen that does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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