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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings and welcome to Regency Centers Corporation First Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host, Christy McElroy, please. Thank you. You may begin.
Good morning, and welcome to Regency Centers' first quarter 2021 earnings conference call. Joining me today are Lisa Palmer, President and Chief Executive Officer; Mike Mas, Chief Financial Officer; Jim Thompson, Chief Operating Officer; and Chris Leavitt, SVP and Treasurer.
As a reminder, today's discussion may contain forward-looking statements about the company's views, future business, and financial performance including forward earnings guidance and future market condition. These are based on management's current belief and expectations and are subject to various risks and uncertainties. It is possible that actual results may differ materially from those suggested by the forward-looking statements we may make.
Factors and risks that could cause actual results to differ materially from these statements may be included in our presentation today and are descried in more detail in our filings with the SEC, specifically in our most recent 10-K.
In our discussion today we will also reference certain non-GAAP financial measures, the comparable GAAP financial measures are included in this quarter's earnings materials, which are posted on our Investor Relations website. Please note that we have also posted a presentation on our website with additional information including additional disclosures related to forward earnings guidance and the impact of COVID-19 on the company's business.
Lisa?
Thank you, Christy, and good morning everyone.
Thank you so much for joining us at the end of what I know has been a long week in earnings season. It's also been a long and oftentimes difficult past year. But as a company and an industry, we've really come so far.
First, as always, I'd like to thank the entire team here at Regency. I'm really proud and an appreciative of what we've been able to accomplish over the last year.
A quarter ago, when we spoke to you, we were facing rising restrictions in parts of the country, contributing to continued uncertainty about the future. We are gaining ground, but still playing defense. As I sit here today, I'm really pleased to report that we've turned the corner over the last three months. We are encouraged by continued improvement in the retail environment and in the health of our tenants. And you can see the evidence of that in our first quarter results, as well as in our revised forward earnings guidance.
We've seen a continued trend towards easing tenant restrictions, which is especially impactful for our California properties. Some categories and geographies still continue to lag. But overall, we are on an improving trajectory. These lifting restrictions that allow our tenants to open and operate are having the waterfall effect of improving foot traffic and tenant sales, as consumers are re-engaging when they're able to.
And in turn, we are collecting more rents and have seen an improving trend of rent collection. Michael will discuss this in greater detail, but the main drivers of our earnings guidance increase results from this improvement.
We expect higher collections on cash basis tenant, as well as some additional recovery of 2020 rent that we had previously reserved. And we're also encouraged by continued demand with regards to leasing.
Thinking a bit longer-term, we believe there are clear tailwinds for our company and our sector as the pandemic has shined a spotlight on our business in a positive way. As we all have experienced the world with e-commerce, retail sales spiking meaningfully, our tenants will clearly see and appreciate the value of the last mile distribution capabilities that their stores in our centers offer. And after spending months at home facing restrictions on interactions, consumers have a new appreciation for the environment and convenience of our open-air and neighborhood and community centers.
But all that said, our heads aren't here in the Jacksonville tents, we acknowledge and appreciate that real challenges in brick-and-mortar retail still exists, and that will continue to be shrinking of retail GLA in the U.S. But well located, well operated centers, like we own will still be a critical component of the retail ecosystem, meeting the demands of retailers, service providers and consumers. This renewed appreciation from both sides fortifies the long-term needs for physical locations close to consumers home.
And then, also the micro migration that's occurring with more people moving into the suburbs this should provide a long-term benefit to our suburban shopping center portfolio. As should a more permanent shift towards part time, remote work, increasing daytime population foot traffic close to the consumers' homes.
Finally, as the macro-economic and retail environment has shifted toward a definitive trajectory of improvement. As a company we have pivoted from defense to offense. We are on our front foot. We're focusing on growth, not just organically but putting capitals to work externally. We are well positioned to take advantage of opportunities. We continue to have one of the best balance sheets in the sector with low leverage, over revolver capacity and access to low cost capital. Additionally, as you know, I'd like to remind you, even with no reduction in our dividend throughout the pandemic, we are generating solid free cash flow, which we expect will only continue to grow with our revised outlook.
From this position of strength, we continue to focus on value creation within our development and redevelopment pipeline. Recall that we added two new ground up projects to our in-process pipeline a quarter ago, and in the near future, we expect to add a couple more.
With the success we've seen with phase 1 of Carytown, we plan to move forward with phase 2. We also plan to move our mixed use multi-phase Westbard project in Bethesda, Maryland into the in-process pipeline.
To finish up, we are still on the recovery path back to our 2019 NOI. But the pace on that path feels better. The environment is healthier and more certain today. And as a result, we have greater conviction and are more positive in our outlook. We are pivoting to office. We remain bullish on open-air grocery anchored neighborhood and community centers.
As I've heard several times over the past month or so, today is better than yesterday. And I'm confident that tomorrow will be better than today.
Jim?
Thanks, Lisa, and good morning everyone.
I echo Lisa's comments and thank our Regency team for the successes we've been able to achieve during this difficult period.
When the vaccine news was first announced last November, we began to see a light at the end of the tunnel in regards to the pandemic. As we sit here today, the tunnel is shorter, and the light is getting brighter. We're not completely out of the woods yet.
Governmental capacity restrictions remain in some of our markets, particularly on the West Coast. And just last week, we saw rollbacks. Rollbacks announced in Oregon and Washington in response to increasing levels of cases. But overall, we're moving in the right direction. As stay-at-home orders and restrictions have been lifting on the West Coast in recent months, we're seeing that translate into higher foot traffic and rent collection. This is similar to what we saw during 2020 in other markets across the country as they reopened.
Speaking of foot traffic as evidenced in the chart on Page 4 of our slide deck, foot traffic on our portfolio as a whole has recovered to 90% of 2019 levels in April, while in some regions it's close to 100%. Rent collections on current period billings have continued to improve at 93% in the first quarter and 94% for April. The West Region still lags on foot traffic and collections, but is gradually catching up to the other regions and remains our greatest opportunity to drive future upside.
As we've discussed on prior calls, we've taken a patient approach with deferral agreements, not pushing tenants into an agreement until they are open and operating. And that strategy has proved to be the right one financially, and created a lot of goodwill with our retailers. Our goal is and always has been to get our tenants back to rent paying status, and to avoid space turning into vacancy, which leads to downtime and capital leases back up.
As I've stated in the past, we liked our merchandising and tenant mix pre-pandemic and working with these savvy operators is the best and quickest way to get their spaces stabilized and generating revenue again at or near pandemic level -- pre-pandemic levels.
Turning to leasing, we're encouraged by the solid interest and activity that we're seeing. Active new leasing categories include grocers, medical, QSRs, health and beauty, fast food, home improvement, fitness, and personal services. We've also seen increased interest from traditional mall tenants moving to the open-air formats, including home concepts, especially athletic retailers, eyewear, and cosmetic retailers.
Our new leasing volume in the first quarter was higher compared to Q1 2020, and in fact was the highest first quarter new leasing volume we've seen in the last five years, due to greater economic optimism, as well as some likely pent-up demand from 2020.
Renewal leasing volumes have remained consistent throughout the pandemic. So the first quarter pace was also ahead of historical trends for both shop and acre space. Our leasing pipeline is healthy. And we're seeing this growth in retailer activity across all regions, providing confidence in the sustainability of deal volume.
Our recent spreads remained muted, a function of the current environment and the mix of leases we're signing today. We've continued to have success pushing rents higher on a central tenant and QSRs, but we're also making certain shorter-term concessions for non-essential tenants and table service restaurants to help bridge them through this more difficult period, putting pressure on our initial cash spreads. We don't see this the long-term reflective of the direction of market rents. Our properties have always been able to command market leading rents over time, and we don't see this changing.
Additionally, the strong embedded contractual rent growth that we've consistently achieved over the last several years generally brings our tenants rents closer to market ahead of lease expiration, compressing those initial spreads. Encouragingly, we're still having a lot of success negotiating rents depths in our leases consistent with historical averages.
Lastly, on occupancy, our commensurate is down 30 basis points sequentially. We normally see the seasonal occupancy decline in the first quarter, but move out or actually lower than we anticipated. Some of the tenant fallout that we had expected may still occur in coming quarters, but more tenants also renewed their leases than we expected.
In summary, while this past year has been one of the most difficult and challenging in my career, it has also been incredibly rewarding to see our team rise to the challenge and successfully navigate this unique environment. We're on a definite road to recovery, and our visibility and conviction levels have only improved as country continues to open back up.
Mike?
Thanks, Jim. Good morning, and Happy Friday, everyone.
I'll begin by addressing first quarter results, and then walk through the changes in our full year guidance. First quarter NAREIT FFO was $0.90 per share, uncollectible lease income was positive in the quarter, as reserves on current quarter billings of approximately $18 million were more than offset by the collection of over $20 million of prior period reserved revenues from cash basis tenants. Including those contractually defer, you can see the breakout of our uncollectable lease income on our COVID disclosure Page 32 of the supplemental, which also shows that excluding prior period collections, we recognize as revenue 94% of our first quarter billings.
Our cash basis tenant pool stands at 28% of ADR today. That compares to 29% a quarter ago, slightly lower due to move-out activity. We've not yet moved any tenants back to accrual basis accounting from cash basis at this stage of our recovery.
Our same property commenced occupancy rates declined 30 basis points sequentially. But more importantly, as we were able to collect more from our cash basis tenants, our net effective rent paying occupancy, which we've spoken about on previous calls was actually up over 50 basis points through the first quarter.
Same property NOI excluding lease termination fees declined 1.6% in the first quarter compared to prior year. As a reminder, the first quarter of 2021 is the last quarter that we will be up against the more difficult pre-COVID comparisons.
Our balance sheet remains in great shape. As mentioned the quarter ago in mid-January, we used cash on hand to pay down a term loan. And in early February, we recast our $1.25 billion line of credit, extending our term by another four years. We finished the quarter with a more normal cash balance and full revolver capacity, and have no meaningful unsecured debt maturities until 2024.
The secured mortgage lending markets, which were tough last year for retail in general have continued to open back up and show demand for high quality grocery anchored shopping centers, especially those owned have stronger sponsors. Subsequent to quarter end, we closed on a $200 million refinancing of a portfolio of secured mortgage loans on 10 assets held in one of our JVs. The blended rate was a very compelling 2.9%.
From a leverage perspective, our net debt to EBITDA remained at a very comfortable 5.9 times, even with the impacts of the pandemic on our trailing earnings. As we -- and we see a clear path back to the low-to-mid 5 times range as our NOI continues to recover.
Turning to guidance. We point you to Pages 13 through 16 of our earnings investor presentation. Recall that a quarter ago amid continued rollbacks and restrictions in certain markets, and general uncertainty in the overall environment, we provided our earnings guidance under three distinct macroeconomic scenarios: reverse course, status quo, and continued improvement.
From a macro perspective, we now feel comfortable and confident that we are firmly in a continued improvement environment. And as such, we feel that we can comfortably rule out the first two scenarios from our guidance analysis, which supported the lower and midpoint levels of our previous range.
We are moving to a more traditional guidance framework around that more positive outlook with a narrower range. There are three additional major drivers that bridges from our previous upper end of $3.14 per share for NAREIT FFO to a new range of $3.33 to $3.43 per share. The first two drivers directly impact same-property NOI and I’ll refer you to the visual on Slide 15 of the presentation to help articulate the change.
The first is higher collections of prior period reserve revenue. When we provided guidance back in February, we had already collected almost $9 million prior period revenues. As such, this amount was included in our previous guidance range, impacting our full year same-property NOI growth forecast by about 125 basis points. Our new guidance range now reflects an impact from prior period collections of about 425 basis points at the midpoint, of which we’ve already collected about 80% as through April. The remaining 20% is forecast to be collected through the balance of the year.
Secondly, we now expect a higher collection rate on current year billings from cash basis tenants. In other words, the conversion of more cash basis tenants from non-rent payment to rent paying. We saw our cash basis collection rate rise from January through April and roughly a third of our cash basis tenants are now current on rent, that's up from about 15% a quarter ago. This gives us added confidence in higher collection forecasts on current period going.
The third major driver is a reduction in G&A forecast, which we have guided lower for the full-year by approximately $5 million at the midpoint. With greater certainty, and firmer timing around the start at Westbard and the second phase at Carytown, we now expect higher overhead capitalization. Additionally, we've incorporated savings from the first quarter departure of Mac Chandler, a large portion of which was one-time in nature resulting from unwind previously expensed share variance.
To wrap it up, we are greatly encouraged by our first quarter results, and are pleased to be revising our outlook higher today. As we believe we've gained more visibility into the economic environment and the recovery of our cash flows. As we look ahead, our priorities continue to be first, converting non-paying cash basis tenants back to rent paying; second, backfilling space loss of vacancy; third, returning leverage to pre-pandemic levels through organic growth; and fourth, shifting back to an opportunistic mindset from a capital allocation perspective.
And with that, we'd be happy to take your questions.
Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions].
Our first question comes from Katy McConnell with Citi. Please proceed with your question.
Great, thanks. Good morning, everyone. Can you talk a little bit more about how cash basis collection levels trended this quarter and what's driving the improvement over 4Q? And then for the outstanding balance, how much more upside are you assuming in collections as opposed to potential occupancy fallout?
Hey Katy, it's Mike. I'll take that one. Appreciate the question. Maybe just -- let me color up some stats around on our cash basis pool on a collection rate. I think that'll get you where you need to go. So for the first quarter of 2021, we've collected 78% of rents from our cash basis tenants. That is up from 75% a quarter ago. Interestingly, recast the fourth quarter, we have now collected 79%, so kind of flat.
What's most interesting to us and what's driving a lot of improvement our guidance range is the trajectory in the current year. So let me just throw these as sequentially month-over-month. January cash pool 67% to February 73%, to March 77%, and in April, we're at 81%. So this -- it's this reality and the numbers that's not necessarily presenting itself in the Q1 report in the numbers, but it's what's giving us the confidence to increase our cash collection rate going forward. It's really that March and April success as compared to January and February. And last time, we spoke to everyone, early February; it was -- it wasn't the time for darker than they are today. We were experiencing more rollbacks on the West Coast, all of that has changed. And it's that the March and April performance that's given us the confidence to move our numbers forward.
As you think about our range on a same-property basis, it's really about uncollectible lease income more than it is about move-out activity. When you think about the fungibility of those two numbers, we can have move-outs, but it's already incorporated into our uncollectible lease income projections. So for us, we'd like to talk about net effective rent pay and occupancy. Right now we're in the mid, 86%, 87% range. And as I mentioned on the prepared remarks, that's up 50 basis points sequentially in the first quarter. So for us, we think from a net effective perspective, we've troughed in our occupancy rate, and we're starting to move forward we're converting tenants to cash basis from non-rent paying status. And that is again the tailwind behind that improvement.
As you think about the ends of the ranges, basically, the midpoint is we'll call for gradual improvement through the year from the first quarter. And then more or higher rates of collection on cash basis tenants supporting the upper end and lower percentage of cash basis as paying us on the bottom end. Just a little nugget, which I find helpful and I think you will, 1% collection rate on cash basis tenants is about $3 million of total revenues to Regency.
So when you think about the range of our same-property growth that's roughly $10 million up or down from the midpoint. So that that'll help you frame out that. Within our guidance range, we don't have to get to 100% collection to hit the upper end of our range. It's about a roughly a 3% tolerance on either end. So I threw a lot at you Katy. I hope that's helpful. If you have any follow-ups, I'd be happy to take them.
That's really helpful. Thanks so much for all that detail. And then just to switch topics given the outperformance in your shares year-to-date, what's your appetite to issue equity at this point? And is there anything embedded in guidance for that?
Katy, it's Lisa. I'll take that. We do not have anything embedded in guidance for an equity raise. We view equity, it's a -- it is a capital source to fund our growth. And to the extent that we are able to issue equity and put it to work accretively on a long-term earnings basis -- long-term earnings growth basis, we will do that. And I think we have a really great track record in doing so. So it's tied to opportunities. And opportunities, compelling opportunities, acquisition, free cash flow, still funding, our development pipeline, so always an arrow in the quiver, and one that we will use when we can use it accretively.
Our next question comes from Craig Schmidt with Bank of America. Please proceed with your question.
Great, thank you. As the country continues to open up, are you seeing more curbside BOPIS activity the same or less?
Craig, this is Jim. I'll take that. As you'd expect, we're seeing a lot more actually. In interesting anecdote, if you talk to -- as I talked to Kroger, they indicated their click and collect program is 4x of historical. We're seeing all the major brands look at some form of BOPIS for collection arrangement. So it's clearly here to stay, I think it's an additional leg of getting product to the consumer, driving traffic at the store is still obviously getting people in the store is the best method for a grocer. But second best is being able to have it picked up or delivered to the car at curbside. So I think it's definitely a trend that's here to stay.
And we like that Craig, right. I mean any additional traffic into our centers will benefit us. It's more eyes on our shop space. They may be different trips. But it still becomes the shopping center of choice and where the consumers that are close to their homes, look to go to when they need something right, whether it's goods, services, or food. We think that it really is a benefit to our shopping centers. And we like that we are in close proximity to people's home.
No, I agree. I see the benefit and thanks for the early confirmation that it is here to stay. I guess my follow-up question would be, what are the retailer's appetite for opening a new developments, and particularly beyond the grocers.
Jim again. I'll -- we're seeing as evidenced by our Q1 leasing, real strong activity out there. The 266,000 feet we did a new leasing in Q1 is highest in five years as indicated in the prepared remarks. Our pipelines are strong. Mike mentioned Cary, Phase 2 -- Carytown Phase 2. That's a current development that were 85% leased on Phase 1 took a pause during the pandemic and have very good pre-leasing and appetite for space. We're obviously diving into Phase 2 to get that product online. So we are seeing good activity in new leasing as well as existing portfolio.
And really focused on continuing to build that development pipeline so that we can get back to kind of pre-COVID levels in terms of our starts and spend on an annual basis.
Our next question is from Derek Johnston with Deutsche Bank. Please proceed with your question.
Hi, everybody. Good morning. Are you seeing changes in the lease structures given the pandemic, any changes like co-tenancy clauses? Anything related to the methodology for assessing percentage rent, especially since it seems hard to capture in omni channel sales? And the dedicated parking that you discussed for clicking collect is that an opportunity to push rents a bit?
Derek, good question, and I guess the short answer on changes to lease structure is not on the margin, but really no -- no real change. I think the one thing we are seeing from a leasing standpoint is the time from negotiation to RCD. I think permitting is taking longer, decision trees are taking longer, but other than that front-end time extension, deal terms are generally holding.
The percent rent is a tricky that used to be everybody's metric of how well a tenant is performing is based upon their sales and their ability to pay rent, et cetera. But that's become -- it's become very muddy with the internet sales. So each tenant does it differently. It's a place where data has become a really helpful tool for us to in addition to sales, compare trips to help us evaluate real volume and potential sales at least at a location.
We don't do a whole lot of percent rent work, it's generally in our groceries, which is a little cleaner or has been cleaner. But now with some of the online, I'm not sure how that is going to get reported. But we just don't -- we don't have that much exposure to percentage rent, but it is a tricky, that's a tricky area, I think going forward.
In dedicated parking, I think at this point, we're very accommodating to our tenants to help them distribute their product. So we're not looking at that as necessarily a rental stream impact as much as continuing to drive traffic and their ability to be as successful as they can as our anchor.
All right. Thank you. How about the Serramonte? Is it still expecting to deliver in the second half 2021 given the notal location and shutdowns, and it's a pretty large scale project? Can you give some color as to the buzz around leasing and excitement in the development?
I'll start with a disclosure and let Jim talk about the project. But Derek it's a multi-phase project. It's going to -- the phases will expand over multiple years for us. So I think what we'll see is that there is some visibility to delivering on the first phase of that project, which will include the large scale investment we're making into the interior portion them all together with the new pads we're building out on the exterior replacing some defunct previous retail sites. So that will we have a lot of confidence we'll finish and deliver in 2021. But the rest -- the multi-phased approach to the project will expand over multiple years from this point forward.
Yes, as far as leasing activity today within the mall, we've just executed a real high-end quality restaurant tour. We'd get good activity with some name brand recognizable. I will call them junior anchors, but larger interior mall tenants that I think will really enhance our merchandising mix. We continue to work on opportunity with the J.C. Penney box, more to come on that, but we are getting some good traction on that anchor space. So overall, we love the real estate. It's fantastic. It's -- we're very happy, we're open for business, the tenants and the consumers are happy that we're back at it. And there is -- there's definitely a buzz as that marketplace continues to regain some consumer confidence in getting back out in the environment.
Our next question comes from Rich Hill with Morgan Stanley. Please proceed with your question.
Hey, good morning, guys. Congrats on the nice quarter and thanks for the transparency in your various different numbers. They're very helpful. So look, as we think about this, it seems like can it help itself is a lot better than maybe you and we feared in 2020, as evidenced by the leasing volume and the cash collections. Moreover I'm trying to get my arms around is what does that mean for a new normal environment going forward? And so set some another way, not direct trying to straight line out the accounting reversals of some of the things that maybe should have been in 2020 if we had perfect knowledge. So two questions. One is just a factual question about same-store NOI? What same-store -- what would have same-store NOI have been in 1Q ex the cash collection benefit? And then, number two, could you maybe just talk us through the leasing environment? I have -- I fully appreciate how strong the leasing was. But if you can maybe give us an idea about what the rents look like, relative to 2020 and relative to the past five years, and how those negotiations are going, I think that would be helpful.
Sure. Really quickly on the impact of Q1 Rich and I'll hand it off to Jim. But prior period collections was a 950 basis point boost to our same-property growth rate in the quarter.
Thank you. That's, that's really helpful.
Sure.
Yes, Rich. As I indicated, I think leasing in general the terms and appetite, and types of uses, we're seeing really across the board. All of these is kind of coming back to the table, even the ones that have been impacted the most, which gives me comfort when you see the fitness and personal services folks coming back into the marketplace, when they have been the most impacted with new locations. It indicates to me that there is a place for them in the future. And there are obviously going to be failures, but there are people ready with new capital will step in those places.
So overall, again, we're seeing for essential, we're seeing really good activity as well as rent growth. I think in those more non-essential and more difficult challenge spaces, we're being more creative and selective in helping those folks build back their business without as far as overall rent spreads go. As you know, we're heavily dependent on the mix between anchor and shops and anchor releasing is generally where we have our biggest impact to mark-to-market opportunities. But in this particular quarter, we had an outlier anchor deal that was quite frankly had -- was driving some negative spreads. But having said that, give you a little color on that deal, it was well capitalized fitness franchisee who was moving down from the northeast, I think because of COVID and backfill the space in South Florida that had been vacant four plus years. It was previously occupied by an education facility. But we structured a low rent start to helping build his business with a 60%, kick and bump rent bump in year three, zero landlord capital for tier [ph] white box.
Long-term it's a great addition to this summer, because it's going to drive some traffic in that location. It's been vacant, like I said, for over four years. And the deal structure from our perspective is extremely appropriate for the long-term go to the center. So we really continue to maintain a very high conviction that our centers have always been able to combat market leading rents over time. And we'll see that changing. So that's kind of a long way around.
And if I may just add just a little bit bigger picture, I think if we spoke a year ago at Mary, we talked about what the impact we thought might be. And gosh, we were really, we had very little information at that time, so much uncertainty. And I know that I spoke to many of you about, we would expect that we would see some decline in market rents. I can sit here today and say we're not seeing that. And that is because number one, we all performed so much better I think that we all feared that we may have. And it also speaks to the tailwinds in our sector. And the fact that we own quality shopping centers close to consumers' homes and in where tenants -- where our retailers and our service providers know that they're going to have highly productive stores. They are willing to pay as Jim just said those market leading rents to be in the best locations. And we're really well-positioned to capture that. And there still remains limited new supply and limited new competitive supply. What I mean by that is supply that is equal in terms of the quality of what we offer. And so I like looking forward and believe that we will continue to demand those market leading rents and grow NOI from this point forward.
Yes. Hey Lisa, that's really helpful. And just one follow-up question, if you would have asked me three months ago, six months ago, certainly 12 months ago, I would have told you, I thought it was unlikely that tenants were going to be able to pay back rent and current rent. So I think that's a pretty bullish outlook for the future if they can pay double rent. So does that mean that you're getting rents that are above 1Q 2020 levels or similar to 1Q 2020 levels at this point? How should we think about that as I'm just thinking about modeling core growth?
Yes. I'd be a little bit careful with the ability to pay double rent, because a lot of that is being driven by a lot of the stimulus that is being provided by our government. Without that I'm not certain that many tenants would be able to pay double rents, because if they weren't then we weren't charging rents high enough. And I believe that we push rents to where we can. So I would think that again, I think about that we are returning to a healthy kind of pre-COVID environment with even more support and conviction that we own the right retail. We are in the right sector in terms of part of the retail offering for where tenants want to be in for where consumers want to shop.
Got it, helpful. Look, I'll reiterate, I said at the beginning, I think your disclosures best-in-class, so kudos to Christy, for making you guys do that.
Kudos to the whole team, and thank you all, thank you.
Our next question comes from Greg McGinnis with Scotiabank. Please proceed with your question.
Hey, everyone. So Lisa, I'm going to visit my mother this weekend who lives by Westbard. And I'm sure she'll be glad to hear that asset is finally getting a facelift. But I also think she'd want to know about potential NOI disruption there. And that the rest of the relevant development starts. So any details you can provide there would be appreciated.
Your mother sounds like she might want to come work for Regency, I'll let Jim and Mike talk to that on disruption and whatnot.
We do have, it's beyond Westbard, we have the -- to facilitate an active redevelopment pipeline, there's going to be some disruption in NOI, Greg, as you know, and we have about $2 million of decline baked into our plan for 2021. And then we would bring that back up starting in 2022 and beyond in the accretion from those redevelopments.
All right, thanks. And then, Jim, I had a couple questions touching on the rent spreads again. First, could you perhaps disclose what the spreads were if you exclude the non-essential tenants? We had to cut some deals or maybe excluding that fitness tension that -- fitness tenant that was mentioned? And second, when do you expect that you'll finish addressing leases from the more stressed tenants?
As far as addressing the lease is obviously that's a work -- that continues to be a work-in-progress primarily out West today, because if you look at the openings in foot traffic, most of the depressed product is still coming from the -- from the West Coast, we just now starting to really, really reopen. I'm sorry, the other question.
Excluding the --
Oh, excluding --
I don't think we have that number at our fingertips.
It's actually, Greg, I know this if we the lease that Jim talked about in the anchor side of a new renew rent at the fitness center. If you were to use the full rent at the end of year three, that basically wipes out the negative impact on the new lease spreads and brings us to flat. But generally, I think the mix this quarter is basically a flat type of story.
Our next question comes from Juan Sanabria with BMO Capital Markets. Please proceed with your question.
Hi, good morning. Just a question on the balance sheet and turning more opus which you touched on in your prepared remarks. Do you foresee that being more ramping up developments and redevelopments that we're maybe postponed as a result of COVID or are you seeing interesting external acquisitions? And if so, are those more for stabilized assets or redevelopment opportunities where maybe the yield is a bit use? You're kind of once you think about the long-term prospects for that asset?
Yes, yes, and yes which is more seriously, we still believe that the best use of our capital is on our redevelopment opportunities and development opportunities. And we will continue to try to rebuild that pipeline, if you will, and increase that spend. And then we're also -- we are canvassing the market for acquisition opportunities and we will pursue those that align well with our strategy. And we've typically been successful, where we have been able to leverage that same redevelopment or development expertise that allows us perhaps to underwrite slightly better growth or leasing or some value creation. So we are looking at all and we do have the capacity to do that. And we will, again, pivoting to grow from here.
And a question kind of following-up on a question, it's earlier one, and just to play devil's advocate. If traffic could be up, if people are just kind of going there opening their trunk and kind of driving out, it may not be so good for the non-anchor grocery tenants that are dominating both those activities. Do you have a sense of how much time people are spending at the center's kind of pre-COVID and any thoughts longer-term about just what opus does to the whole center or not just that one tenant?
We do not have the data to measure dwell time. We just have the visits, what we do; we are able to measure where the people that are visiting our center, what other centers are visiting. So we are able to do comparative measures for that. But again, I have said this, even pre-COVID that every shopper can essentially do what they need to do, really from their homes. The reason to come to the center is going to be value convenience. And then also for entertainment, if you will, our place, it's a place to go.
And I think that over the past 12 months. One thing again, that has really been solidified that that human beings generally are social beings, and they want interaction, and they want to get out of their homes and they want to shop they don't just want to buy. So I do believe the benefit of, if you have anchors that are very good at opus that offers the same shoppers the value and the convenience at the same time that becomes their neighborhood shopping center. And it is where they will then go when they do have other needs and other ones, if you will to shop. So that's the benefit. And I also believe the data will get better. And in time we will be measuring dwell time at our shopping centers. But we're not there yet.
I love going to my center. So I agree with you. Want to ask if we need more solid places in the Chicago suburbs.
Thank you.
Thanks for the time.
Our next question comes from Ki Bin Kim with Truist Securities. Please proceed with your question.
Thanks. So maybe a little bit more about open-ended question. But I thought was interesting that you guys made a pretty clear commitment to spend $175 million in development annually for the next five years. Obviously, that language wasn't in there last quarter. And it looks like you've even re-increased the scope of Serramonte. So, like I said, a little bit open-ended question. But this is pretty long-term commitment, I think carries a lot more weight. I'm not sure if I'm overreaching. But just help us walk through what you're seeing and thinking.
Yes. Hi Ki Bin. Let me start with a little bit of disclosure response, maybe and then I know Lisa will jump in from just a capital allocation perspective.
This -- we did make a change and a tweak to the Serramonte number really just to include the GLA of the entire center, as we do for all other re-developments. We had realized that we weren't including all the GLA on site. So that's not really a scope change. But we are -- we do remain bullish on that -- on that redevelopment project at Serramonte.
From a forward-looking perspective, you did pick up on that $175 million of forward capital spend. Really kind of just a placeholder and our intent has been pretty consistent. We would like to put to work anywhere from, plus or minus a billion dollars over the next five years. And we want to put that capital to work in the form of new development ground up, as well as redevelopment of our existing shopping centers. And we are looking forward to getting back on our front foot and making progress and building those pipelines from here, starting with Carytown Phase 2 and Westbard.
I don't know that how much to add, I think Mike said it really well. And just that we remain committed to development, it is -- it has been -- it is a core competency of Regency. I believe we have one of if not the best teams in the business, that development expertise benefits, our ability to maximize and optimize the value of our operating assets, in addition to ground up developments. And we are always looking to expand that and it enhances our future growth rate is with that $100 million of free cash flow that we're generating to the extent that we've put that to work in developments at approximately 7% returns that benefits all of us.
Okay. And switching topics we cover other sectors as well, obviously, and there's incredibly tight cap rates and lot of capital chasing returns and industrial and self-storage and even triple net, which is still retail, but I get to see that differently. Is there a scenario building where you're starting to see some private equity money finding renewed interest in retail?
As we've been speaking to you over the past year, cap rates remain pretty sticky for the neighborhood grocery anchored shopping centers, and that hasn't been they may have moved very marginally up. And I would say that's been that's been wiped out and they'd come back down to where they were.
We are seeing some new money coming into the sector, but they're -- it's chasing more of as you just said, chasing more yield versus the alternative investments, opportunities for them. I think that the capital flowing into the neighborhood grocery anchored shopping centers, there was already a pretty -- it was already pretty substantial. So that hasn't changed much. Where we are seeing the notable new capitals is more in the higher yield larger unconventional centers where there is distress. So that would be typically in areas where Regency really wouldn't play.
Our next question comes from Linda Tsai with Jefferies. Please proceed with your question.
Hi, thanks for taking my question. Given the year-to-date success of cash basis tenants paying back rents can you tell us about the process that's entailed in moving cash basis back on to accrual and maybe a sense of how much earnings could still benefit from straight line rent receivables coming back that had been written off?
Sure. The process we'll be very careful. We need, Linda it's much more -- the standard is much more of an assessment about the future rent paying ability than the past. And while the past is set as oftentimes reflective of that kind of ability to pay rent, it won't simply be a light switch where you've come current; therefore you're back to accrual basis. We're going to need -- we're going to need to build a track record, we're going to need to hit some thresholds on our ability to project the forward rent inability of those tenants. So that assessment likely isn't going to occur at Regency until later this year.
We have included no change on straight line rent into our guidance. And you'll see that in our revised ranges is still plus or minus $30 million. So we've incorporated no change in moving tenants back to accrual.
Got it. And then on Northborough Crossing realized you've entered into a purchase agreement. Why did it make sense to part with it and then maybe where it sits in your asset quality D&A of premier plus premier and quality core?
I'll take the beginning of that and I might turn it over to Mike for the D&A category. Northborough was came to us as part of -- it's an unwind of a JV that we inherited it with the Equity One merger. So that is part of the reason for the disposition. But also that when we look at that when we think about prioritizing assets for disposition, it's the lower growth, non-strategic assets and a strategic asset and that would fit in this category. I'm not sure I know exactly on which tier [ph].
It fits into the quality core so that's third tier Linda is what I'd grade it out.
So it is more about the future NOI growth potential of that asset.
Our next question is from Mike Mueller with JPMorgan. Please proceed with your question.
Yes, hi. Lisa, I know, you mentioned stimulus checks when you're talking about prior period collections. But are there any other, I guess category differences, regional versus local categories that we should think of in terms of where the collections have been coming from?
I'll take that. Stimulus did have a lot to do with it, we think. But the categories driving our prior period rent collections is it's the same that were driving our reserves last year, right. So local buyers, small shop buyers, West Coast buyers generally and when we think about categories, it's fitness, restaurants, personal services, entertainment. Those have been the more variable type of revenue streams, and that's what we're seeing coming to door now.
Our next question is from Wes Golladay with Baird. Please proceed with your question.
Hi, everyone, can you comment on why the reserves were $17 million largely comparable to the fourth quarter in the -- I guess against the backdrop of tenants paying more on a cash basis. And I guess could this be upside, an upside reversal later in the year?
Sure. So let me get a little bit technical to help and then we'll kind of bring it up bigger picture. But so the fourth quarter, it's a little bit apples and oranges a little bit, but we’re trying to make an apples-to-apples, fourth quarter had about a $500,000 positive impact from prior periods in that number. And then the first quarter of 2021 had about $1 million additives related to CAM reconciliations. So there's a bit of a seasonal component to it, right. So we build CAM recs with cash expensed [ph] so that amplifies the bad debt expense. So the apples-to-apples change is really about a $1.5 million of improvement. So you don't see that on the surface.
But then I kind of go back to my earlier comments. And really, we were seeing the improvement in our cash basis tenant, collection rate, so late in the quarter of March and then extending beyond the quarter of April. That's what's giving us the confidence to increase our outlook moving forward. And Wes, even, if you think about it, big picture collection rate on the top is basically unchanged, right quarter-over-quarter 93% plus or minus the same. That I think that helps frame out that sequential question you have.
Got you. And then I might have missed it. But did you talk about the, I guess for the balance of the year 2Q to 4Q, the amount of 2020 rent that you will, I guess expect to unreserve for that going forward?
Yes, no, I appreciate you asking because we didn't get to that point. So beyond just an increase in current year collection, rate, we have also included an increase in the collection with 2020 reserve rate. So we had 125 basis points in our original guidance, we now have 425 basis points positive impact in our guidance range. So that's an incremental 300 basis points, so think about that in dollars, that's roughly $30 million at the midpoint in our new range. And as you can see in the results, we've already collected $20 million of that, in fact, through April; we collected another $4 million. So we're 80% through our guidance range on 2020 reserved collections.
Got you. And then, Mike, can you just clarify, I think you said occupancy trough is that paying occupancy or the occupancy that you show on the statistics or maybe it's both?
It's a net effect of rent paying occupancy. So it's not a number that we report on it's basically commenced occupancy adjusted for uncollectible lease income. So that's in the 86% to 87% range today. We could trough -- we could lose more occupancy on a percent leased or commenced occupancy -- or commenced basis in the second, third quarters even but what we think matters financially is the convert, it's the fungibility again of move-out and uncollectible and we have increased our effective rent paying occupancy in the first quarter by about 50 basis points and we're moving in the right direction.
I think the leasing activity that Jim and the team did in the first quarter is again another kind of confidence builders, as we think about moving or moving occupancy forward through the balance of 2021.
Our next question comes from Floris Van Dijkum with Compass Point. Please proceed with your question.
Thanks for taking my question, guys. Lisa, maybe if you could, you guys have a lot of dry powder enviable balance sheets, obviously earnings are on the upswing, things are looking good. Maybe your thoughts on as you deploy, you've talked about the redevelopment, which is an attractive capital source or capital use and some of your ground up development opportunities as well. But as you look at acquisitions, as the pandemic changed your thinking in about what you want to acquire and buy and maybe talk about the types of assets and both in terms of types of assets, and maybe in terms of region and regional exposure as well?
I wouldn't say that the pandemic and isolation if you think about the impacts on tenants has necessarily changed, how we're thinking about where we may want to deploy capital. But some of perhaps the more permanent trends that were that may, that we're seeing from the pandemic have influenced, how we're thinking about where we may deploy capital.
What I mean by that is a lot of the migration trends in terms of potentially opening or widening the fairway for us with regards to markets where we may invest. And I don't necessarily mean that we're going to go to brand new markets. But if you take a market that we're in like Atlanta, for example, we've been very focused in Hawaii if you will, right, the first ring of Atlanta now with a more permanent, more remote work, people we're seeing migrations pattern of people moving a little bit further away from the city. And so that may open up more opportunities for us in markets that we already know, we're already in, we already have scale, we already have critical mass, where we may be able to kind of expand that that reach, if you will, that's probably the largest influence in terms of where we're looking to deploy capital.
But beyond that, our strategy has not changed. We still will develop, redevelop, acquire high quality, well located grocery anchored neighborhood, and community shopping centers.
Our next question comes from Paulina Rojas Schmidt with Green Street Advisors. Please proceed with your question.
Good morning. And how different is the interest today in the private market for smaller grocery anchored neighborhood centers versus your centers and with maybe one or two boxes in addition to a brochure. Also I think you said before that cap rates had not changed much versus [indiscernible]. And where are you referring to this two property types that I just described or just for the smaller neighborhood centers?
Thanks for the question. Again, I would say generally speaking, when for the past -- prior to the last three months where we've really seen the transaction market open up a lot more. Prior to that, the properties that we're trading and centers that we're trading were on a much smaller size. So really grocer anchored with small shops that were easier to underwrite, because of the essential tenants that were in the shopping centers, just a smaller bite size. With the improved environment, retail environment, the improvement just overall of our economy, we have seen the transaction market open more. So now there are properties and we are -- that are trading that wouldn't have even traded before. This goes back to what I said about new capital coming in, looking for higher yields. So those wouldn't even have traded. That's the larger, more unconventional more entertainment.
With regards to boxes, there's definitely a premium. So cap rates are higher for where there are additional boxes. And while in the short-term, you've seen higher collection rates because they're typically occupied by national tenants that are paying rents. There is still the risk that over the long-term as there continues to be shrinking GLA and consolidation especially with the impact from e-commerce. That is where we're going to see the greatest fallout and also what requires the greatest amount of capital to release. So there is a premium for higher cap rates for those types of centers.
Has that premium widened and or not?
I don't know that it's much different than it was pre-COVID, it's going to be depending on, it's always it depends in our sector, and in real estate generally, but more boxes in centers generally will push up cap rates due to the long-term risks anywhere from 50 basis points to 100 basis points, depending on what the market is in -- what market bps, shopping centers in. And that's really not that difference from pre-COVID. The difference is they weren't traded prior to the past three months.
Yes. And then I think you have mentioned before that you expected to return to pre-pandemic levels by 2023. Given your guidance raised and generally the more optimism there is it seems that this to be achieved earlier. I know I'm asking a lot. But do you think, what are the odds that you are back to pre-pandemic in 2022?
I'm going to pass that to Mike. So I don't get in trouble for providing 2022 or 2023 guidance.
Hey, following that really no change in what we said previously, late 2022, certainly on a full-year 2023 is what we're talking about internally as a recovery type of period. It's important to remember, there's a lot of crossover going on between 2020 and 2021, right. And then it's producing a lot of growth, quote-unquote in 2021. But we have lost 200 basis points that come as occupancy. And that recovery period will take longer, as it always has; finding the tenant, negotiating a lease, building out the space, commencing rent is a process. That's really what's going to at the end of the day result in when we end, where we end and how that relates to 2019 and how quickly we can get there.
What's happening with the uncollectible lease income between 2020 and 2021 is -- it's a shallower trough, but it's not necessarily changing the endpoint. That's where this vacancy number matters. And it all matters because it's all cash, but that vacancy number is going to influence where we end and how in relation to 2019.
[Operator Instructions].
Our next question comes from Tammi Fique with Wells Fargo. Please proceed with your question.
Hi. Thank you. I guess I'm curious, as you think about new developments starts are you at all concerned about the impact of a rising construction costs on yields relative to sort of historical yield?
Yes, Tammi. We historically have done really a pretty good job of embedding growth in our underwriting so that we don't get caught flat flooded. And looking over our shoulder we've done a pretty nice job of that in existing pipeline deals. So obviously, underwriting it's just a fact out there. Construction is a challenge pricings staff; deliverables are very difficult right now. So all of those factors would go into the mixer in our thought process as we look at our underwriting and pipeline.
Okay, thanks. And then maybe a bigger picture question, I guess with -- as with any downturn, there are obviously lessons learned that lead companies to better position for the next downturn. Taking the Great Financial Crisis the lesson was, how important liquidity and the leverage were, but curious in a year from now when you look back on this downturn what lessons do you think Regency and other owners retail real estate will have learned?
I think that, interestingly, the first thing that came in mind that you started to answer that is the same thing about liquidity and financial strength. And since we did learn that so well in past downturns, I would just have to say that it just -- it really, really solidifies how important it is to keep that balance sheet extremely strong and how you -- how you enter that downturn is so important. And that is what has enabled us to provide the support to our tenants that we're providing, it enabled us to maintain our dividends and it also coming out of it it's still strong enough that we're able to act on opportunities as they -- as we -- as they come to fruition. So that's the biggest lesson learned, remain true, remain disciplined, even when times are booming, and you will be in a position to take advantage of any disruption or distress when that downturn does happen.
[Indiscernible] for Mike, I'm sorry if I missed this, but what was the nature of the termination expense in the first quarter?
Sure, Tammi, we bought out a lease in connection with the sale of a former shopping center called Pleasanton. And so with the last lease remaining, we had to buy that out to deliver that site to the buyer. The buyer is building basically an office building and corporate headquarters.
Our next question is from Chris Lucas with CapitalOne Securities. Please proceed with your question.
Hey, good afternoon, everybody. Just a couple of quick ones on my end. I think there's when you guys were going through the pandemic, you had a number of projects that were sort of set to deliver or nearly ready to deliver, and you made accommodations with tenants with that, by allowing them to open up I'm thinking specifically about 0.50. But are you seeing tenants that maybe had gone through that negotiated sort of delayed openings, now pushing to accelerate those openings or is the timing pretty much set and that's just how they're going to be?
Chris, I think at this point, it's -- that's kind of behind us, the hesitation to open it's much like the foot traffic as people have come back and most of our assets that were in that predicament we're seeing, either the tenant that chose not to go-forward has been replaced by in a lot of cases, similar use because it's the right merchandising mix, it may have been partially built out along those line. So it was almost a natural that those same users get to backfill, but we're seeing people move forward with the opportunities today.
And maybe the flip of that question is I don't know if it's just in my neighborhood, but we're seeing more hours getting cut by shops and retailers based on lack of staff. Are you finding retailers hesitant to sign leases in low labor pool availability markets because of that, or is that not impacting the decision processes at this point?
I wouldn't say it's impacting decision process right now. But it certainly is it's a reality out in the workplace. We hear it from retailers, restaurant tours to soft goods to get across the gamut. It's a real issue, trying to find labor, so more to come. Hopefully, there'll be some changes from the legislative changes that may be impactful to get folks interested in coming back to work. But there's definitely a lack of supply from last year.
Yes, just last question for me. On the development, when I look at your redevelopment/development page today, it's overwhelmingly oriented to redevelopment. If I look at that page 18 months from now, does it still look overemphasized on the redevelopment or does development have a larger play in your outlook?
I'd say that there's always going to be, the mix of that's going to change because again, I'll just bring it back to the core competency, the best team in the business, the way that we are even structured regionally and proud versus functionally, right from the development team and an operations team, we bring that expertise to bear on our existing portfolio as well. And really maximizing the value of those properties is going to continue to be an important part of our strategy. At the same time, last quarter, we had two new starts; they're both ground up developments. So we're continuing to pursue and look for those opportunities also and I believe we'll have success in both.
Our next question is from Linda Tsai with Jefferies. Please proceed with your question.
Hi, sorry, thanks. Just one follow-up. On the 3Q call you noted that the Pacific Coast comprised nearly half of uncollected rent due to tighter lockdowns, is the escalated receipt of prior period rents in 1Q 2021 and from fiscal year 2020 weighted towards the West Coast?
Yes, it's nearly 40% West Coast on the prior period collection and about a third kind of in the Southeast.
And then is there any sense that the West Coast markets are more impaired now from a leasing activity, rents or kind of stability to pay or you just being more recovery overall?
Yes, the latter, recovery overall. It's been exciting to see the level of activity in amount we spend, very, very difficult to operate in over the last year. But we're seeing that same, same leasing activity in volume in the West Coast as we're across the country.
We've reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Lisa Palmer for closing comments.
Thank you again for the Regency team. But also thank you all for being on the call with us today and as I opened in my remarks, I know it's been a long week and a long earnings season and I appreciate you being with us on a Friday afternoon. Have a great weekend.
This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.