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Greetings. And welcome to the Regency Centers Corporation Second Quarter 2020 Earnings 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 is being recorded. I would now like to turn the conference over to your host, Ms. Laura Clark, Senior Vice President, Capital Markets for Regency Centers. Thank you. You may begin.
Good morning. And welcome to Regency’s second quarter 2020 earnings conference call. Joining me today are Lisa Palmer, President and Chief Executive Officer; Mike Mas, Chief Financial Officer; Mac Chandler, Chief Investment Officer; Jim Thompson, Chief Operating Officer; and Chris Leavitt, SVP and Treasurer.
As a reminder, today’s discussion contains forward-looking statements about the company’s future business and financial performance. These are based on management’s current expectations and are subject to risks and uncertainties. Factors and risks that could cause actual results to differ materially from these statements are included in our presentation today and on our filings with the SEC.
The discussion today also contains non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter’s earnings materials, all of which are posted on our Investor Relations website.
Please note that we have provided an additional COVID-19 disclosure in this quarter’s supplemental package and have also posted a presentation on our website with additional information regarding COVID-19 Business Updates and Impacts. Lisa?
Thank you, Laura. Good morning, everyone. I hope you’re all doing as well as possible. First, I just want to open and acknowledge and thank the amazing Regency team. I’m extremely proud and grateful for the dedication and commitment our team has demonstrated during this incredibly challenging time.
As we’ve continued to navigate through the last several months, the entire Regency team has prioritized the well being of their fellow team members, our tenants and the people and the communities that our property serve, while also making great progress in assisting tenants with successful re-openings, improved rent collections and rent deferral negotiations.
As states and markets have lifted restrictions over these last few months, we’ve been encouraged by the success that our tenants have experienced. Our base rent collections for the second quarter including executed deferral agreements was 77% and nearly 80% in July. We’ve seen firsthand that as tenants have been able to reopen, consumers are eager to return to some sense of what was once normal and that means resuming some of their prior shopping behaviors.
Despite the progress Regency and our tenants have made, we are keenly aware that there’s still a lot of uncertainty ahead. It is so difficult to predict the future and we know that this situation will continue to evolve and maybe more challenging as this disruption is even more prolonged.
We don’t know for how long the virus will continue to spread without an effective treatment or vaccine. We can’t predict how resilient consumers will be or how tenants will be able to adapt and innovate or some tenants will need additional support in order to survive.
But what we do know, as we look towards the future, we are certain of Regency’s combination of unequaled strategic advantages that we’ve worked to build over time. This combination affords us the opportunity to withstand this difficult time and I’m confident that we will emerge well-positioned for future success.
The quality of our geographically diverse portfolio comprised of necessity based retailers has never been more important than it is today. Our development program was a pipeline of exciting value add projects is structured to provide timing and financial flexibility. Our highly engaged team achieving great results while doing business the right way, and perhaps, most importantly, in today’s environment, a balance sheet and liquidity position that was rock solid entering the pandemic, enabling us to absorb the body blows that we’ve endured the past four months.
Given our strong balance sheet and belief that our rent collections will continue to improve over time, our Board again declared payment of our quarterly dividend at the same level. Our ability to continue the dividend at the current level is an output of a strong starting position of a very low payout ratio, combined with actual results that while certainly not up to our historic performance levels appear to not only have stabilized but to also be trending in a positive direction.
Working closely with our Board, we will monitor our financial metrics and projections in addition to economic and industry trends, and we will make future dividend decisions based on the facts and circumstances at that time.
Before handing over to Jim, I’d like to touch on Regency’s continued commitment to corporate responsibility. In addition to our strategic business advantages, Regency has always had a strong set of core values that have guided our business strategy since we were founded over 50 years ago.
Among those core values is a commitment to do what is right, for the environment, our people, our communities and our company. By doing what is right in each of these areas, we’re effectively managing risks and ensuring the success and sustainability of our business.
As I hope you saw in our recently published Annual Corporate Responsibility report, implementation of these initiatives occurs across all departments at Regency and is ingrained in our culture.
I’m confident that this commitment to do what is right along with the combination of our unequal strategic advantages will continue to position Regency to be a leader in the shopping center sector going forward. Jim?
Thanks, Lisa. Good morning. As Lisa said, our top priority remains the well being of our team, tenants and communities. As of the end of July, 95% of our tenants are open, compared to 75% two months ago. The majority of tenants that have reopened experienced better than anticipated initial success and had been encouraged by consumer reception.
Customers appreciate that retailers are taking extra precautions and measures to help them feel safe and welcomed in their stores. Regency is also working side by side with our tenants, including implementing increased safety and cleanliness procedures and installing enhanced signage and wayfinding. We will continue to make additional modifications and adjustments to help our tenants and their customers feel safe and comfortable.
As highlighted in our business update posted on our website, as of the end of July, we have collected 77% of base rent for Q2, including executed deferrals. Looking beyond quarter end, we have collected 79% of July base rent on that same basis. We are encouraged that July collections have trended ahead of April, May and June as at the same point in time for those respective months.
We have purposely taken a very deliberate approach to negotiating rent deferrals with our tenants. As tenants began opening or have visibility on when they would be able to open, we were in better position to understand their financial needs to open and operate successfully.
Just as important, Regency has been able to obtain certain non-monetary concessions in our deferral agreements, including waiving co-tenancy clauses, lifting use restrictions, extending terms or requiring enhanced sales reporting.
Even with tenants that are still limited on how they can operate due to government orders, such as full service, dining and fitness categories, we are seeing that the better operators are able to adapt to the circumstances and are creative in how they successfully operate their businesses during this time.
For example, we have many nail and hair salons that have extended their normal operating hours in order to accommodate more clients. restaurants that are creatively using additional outdoor areas for seating, such as sidewalks and even parking spaces, and fitness operators that are hosting outdoor classes and adding additional class times to accommodate customer’s modified work-from-home schedules.
At the same time, in certain markets that had reopened, but restrictions have since been put back in place, many tenants are unfortunately experienced a regression in the progress they have made over the last several months.
Just as we did during the initial shutdowns and impose restrictions in March, we will continue to work with these tenants to provide support and flexibility as they navigate the evolving environment.
While our operations teams have been primarily focused on providing support to our 8,000 in place tenants throughout the pandemic, we are also continuing to negotiate and execute new leases with retailers including grocers, off price, banks, home improvement, service users and restaurants.
We signed over 120,000 square feet of new leases this quarter, including a new anchor lease with a home improvement retailer in a former Kmart space in Florida with rent over -- rent growth over 55%.
Although, our net leasing volumes were down this quarter due to limited new leasing activity, it’s worthwhile to mention, that we renewed nearly 1.2 million square feet of leases with positive rent spreads.
While the more -- majority of new leases signed in Q2 or begun pre-COVID, we are seeing tenant interest falling and it terms similar to pre-COVID expectations, while there’s no questions our op team is keenly focused on collecting rents due and papering lease modifications. This hint of new lease interest is energizing to me and certainly our leasing teams. Mike?
Thanks, Jim, and good morning, everyone. As we know, Q2 results were meaningfully impacted by rent collections that remained the low pre-pandemic level. To better understand its impact, we’ve enhanced our disclosure in our supplemental and I strongly encourage you to reference those added pages, if you haven’t already.
I’m going to focus my comments on uncollected rents and specifically how those amounts are recognized in our results, both earnings and same property NOI. And I’ll finish with some comments on our balance sheet and liquidity position. Given continued uncertainty, we will not be providing forward looking guidance at this time.
Uncollected pro-rata rents and recoveries billed in the second quarter totaled over $84 million. Following an extensive collectability review, based on a multitude of factors including credit rating, location and chain performance, tenant category, tenant communications and a host of other relevant inputs, we deemed nearly 50% of these rents, even if contractually deferred as likely to be uncollectible.
To use a more common description, we’re accounting for these receivables on a cash basis. Meaning the income was not recognized in the quarter and will only be recognized as revenue when and if cash received.
The balance of the uncollected pro-rata rents and recoveries billed in the second quarter, approximately $44 million was from tenants with financial and operational attributes, warranting being accrued as revenue and carried as a receivable at quarter end. Again, this includes rents that were contractually deferred.
Importantly, when including accrued rents and recoveries, together with collected billings, Regency has recognized revenue in the second quarter, equating to 86% of total quarterly billings and other income.
The uncollectible lease income charged this quarter. Again, moving tenants to a cash basis of accounting also resulted in a reversal of previously recorded straight line rent. On a non-cash basis, this negatively impacted the second quarter by approximately $19 million. Together, current quarter uncollectible lease income charges are impacting NAREIT FFO by $0.35 per share.
Moving to the balance sheet, during the quarter we took additional measures to enhance our already strong liquidity position by issuing $600 million of 10-year bonds and repaying the defensive draw we made on our line of credit in Q1 bring in our line capacity back to a full $1.2 billion.
As of quarter end, we are carrying approximately $600 million of cash on hand. Together, with our earnings announcement, we also noticed our intent to redeem the entirety of our $300 million of bonds maturing in 2022.
The stronger than anticipated rent collection rates in the quarter, combined with the progress we are making on tenant negotiations, gives us confidence to use the material portion of our cash balances to retire this near-term debt and eliminate the added interest expense.
We continue to have a $265 million term loan outstanding maturing in 2022 and we will monitor our progress and the evolving retail landscape over the next several months before deciding to retire any additional near-term obligations.
With our line of credit fully available and our pro forma cash balances following the bond redemption, we remain very well-positioned with over $1.5 billion of liquidity more than covering development, redevelopment commitments and debt maturities through 2022.
Before we turn to your questions, there was one person deserving of a special mention this quarter. Laura Clark will be leaving Regency for an exceptional opportunity within REIT Land and we could not be happier for her. Laura’s contributions to Regency had been significant, as everyone on this call likely knows and while she will be missed, we are excited to watch your career continue to grow. Best of luck, Laura, and from your Regency team, thank you.
With that, we’d be happy to take your questions.
Thank you. [Operator Instructions] Our first question comes from the line of Christy McElroy with Citi. Please proceed with your question.
Hi. Good morning. Thank you. It looks like local tenants comprised 23% of your ABR but only about 16% of the deferrals that you’ve agreed on. Can you sort of discuss your approach to dealing with those local tenants and attempting to collect rent, maybe specifically restaurants. There’s been a lot of press reports about permanent restaurant closures. There’s obviously a lot of concerns that non-payment of rent potentially turns into vacancy. I’m just trying to get a sense for your strategy to both collect that rent, but also mitigate that potential occupancy loss within your own portfolio?
Sure. Hey, Christy. This is Mike. Let me start with a little bit on our disclosure and then I’m going to pass it on to Jim to more directly, I think, answer your question. We did highlight our local exposure and then we also highlighted our collection rates for local tenants both for the quarter, as well as in July one, and you see a decline in rate of collection there. I’d like to note, however, that we have found that the local payers have been later than our national tenants.
So measuring one month of local payment rates versus three months has been, I just want to make that distinction that, the local tenants have been paying a little bit later in this environment. In fact, if you were looking at our collection rates in July, at the same point in time as that of April, May and June by months, you’ll see that that local collection rate is actually increased sequentially for all four months and we feel like that momentum is pretty positive and consistent with the other directional changes that we’re seeing in our portfolio. With respect to the follow up, I’ll let Jim give you some color.
Yeah. Christy, what I’d say is, we’ve been very, very focused over the last eight years, 10 years, 12 years in our proactive asset management of merchandising and really enhancing the quality of our smaller shop tenants. So, as we look at that that group as a whole, that -- they’re really good entrepreneurs, the business is their livelihood, so they’re very invested. They’ve got significant skin in the game and they’re important players within the merchandising shopping center.
So, by and large, they’re nimble, they’ve reacted well to the changing environment, our -- as I said in the opening remarks, I think, our teams are actively engaged in deferral plans to assist these folks get back on their feet. We’re clearly going to have some fallout at the end of the day, but by and large, these retailers were doing well pre-pandemic and we want to do the best and everything we can do to help them survive and thrive post-pandemic.
And if I may just quickly address the restaurant closures, I don’t think that there’s any doubt that we’re going to see a lot of failures in the restaurant category. But I think that the numbers that you see and the news reports that you’re reading really are looking at America as a whole. And I like where we’re positioned, close to the neighborhoods, close to people’s homes.
And also from an exposure standpoint, we have a lot less in sort of that fine dining, if you will, which I think is going to be probably the hardest tip. But as more people continue to work-from-home, and perhaps, moving forward as people continue to work-from-home even in a permanent state, I do believe that having those options for people close to their homes, the neighborhood community shopping center, we’re still going to have restaurants as an important part of our merchandising mix that are -- at our really high quality portfolio going forward.
Okay. That’s helpful. And then just thinking about the broader, including national and regional tenants, and, Jim, you mentioned in your comments in the opening remarks, being thoughtful about future performance and thinking about future performance and doing those deferral deals, have you done any rent abatements to-date? And in terms of that, looking at that unresolved bucket overall, what is your desire to keep pushing for deferral agreements, so pushing that deferral percentage higher here versus going down the road of litigation eventually?
Christy, that’s a great question. And I’d like to answer that by kind of opening up our playbook on the whole deferral process and our approach to it. As I said last quarter, we started out being patient deliberate. We didn’t engage in the original on slot rent relief request back in March and April of that rather prestart tenants, we want them to get open and we’ll address their needs when there’s visibility.
And now that we moved from 59% of our retailers open at the end of April to 95% today, I think, we’re now in a more rational environment both tenant and landlord, we both have much better clarity and visibility as to needs. And we’re finding good common ground for fair trade offs between a repayment plan and non-monetary concessions to create win-win for both of us.
So as we kind of rewind early on in the process, we initially prioritized our top 300 tenants, which represents about 70% of our ABR and that was the first group we actively went out to work out agreements.
But as of today, as we sit here, we’re actively engaged with every one of our open retailers -- open and operating retailers, crafting modifications where needed and you can kind of see that priority strategy evidence in the 84% national and 16% local executed deferral agreements. So that mirrors exactly how we attacked the situation.
Obviously, the categories that are hardest hit theaters, entertainment, fitness uses, full service restaurants, child related services. We continue to be very patient with this group, as these uses in general are still closed or operating under limited levels of occupancy.
So, again, just to reiterate, we’ve been very delivered in the papering process, as evidenced by the 4% executed deferral that you might see that stat in the investor slide deck that we sent. But the majority of uncollected rent is from tenants that we have ongoing relationship and dialogue with today, but have yet to pay for the agreements. We believe we will continue to close the gap on this uncollected bucket, but each deal is individually in nature and it will continue to take time to resolve.
Thank you.
I will add the -- I will add one thing, I think, it’s important. Well, tracking these exact -- these deferral agreements is important. You really can’t lose sight that our existing leases are binding contracts and the deferrals are just modifications outlining payback programs. The collectability of the outstanding receivable is really the key to the success and really coming out the other side of this pandemic the way we want to see it.
Thanks so much for the color.
Thank you.
Thanks, Christy.
Our next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.
Hi, everybody. Thank you. When we look at the cadence of NOI going forward, it’s fair to say that you are now operating and growing for a lower -- from a lower base. Should we expect the lag and occupancy declines as you possibly move tenants out, as it seems occupancy held up better than the NOI decline indicates? How should we think about that in our models?
Derek, I mean, you are right. We have not been, as Jim just described in terms of the negotiations with our tenants, we certainly haven’t been evicting tenants. And there are going to be many that will fail and we know that. Even Laura’s last day, she would be given me the eye that I’m not allowed to provide any future NOI guidance, so I’m going to refrain from that. But, absolutely, do expect that we are going to see occupancy declines and the NOI is reflecting, the reserves are reflecting some of that today.
Okay. Actually, thank you. That’s helpful. And something a little more positive, feeling omnichannel now post-COVID is really emerging as the gold standard for navigating sales and wallet share for your tenants or retailers. How are you positioning Regency to capture the increasing demand trends of the omnichannel efforts and how are you facilitating bringing in tenants with the strategy and focus?
I’d ask -- we’ve been saying this for a long time now. What we like about our strategy. What we like about our portfolio is the fact that we really have -- we are close to the neighborhoods. And we have a really high quality portfolio as most publicly and even -- and prior to institutionally owned shopping centers are, there are 30,000 to 40,000 shopping centers in the U.S. and we are going to continue to see store closures. We know that.
But physical presence remains such a critical component in this omnichannel world, these retailers are going to keep those stores that are most productive, that have the highest quality, that can touch the most people and we’re really well-positioned to take advantage of that.
What this pandemic has done has really just accelerated that trend. To accelerate it for the retailers because they’ve been forced to really innovate and move faster. And we’re going to continue, Jim, even mentioned it in his prepared remarks, we’re going to continue to do all that we can to facilitate for that retailer, so that we can partner with them and best enable them to satisfy their customers, which are our customers as well our shoppers.
Okay. Great. And lastly, how are you thinking about the development and redevelopment projects? When do you anticipate returning back to offense and moving value enhancing projects forward at a more rapid rate?
Hi, Derek. This is Mac. We continue to evaluate these projects one at a time. Each one takes a lot of experience, a lot of discipline that we’ve always shown. And when we start a project is based on a lot of factors, some of its pre-leasing, some of it’s the format, some of it is the location, it’s really a risk adjusted return at the end of the day. And so we’re setting up projects that are ready to go and some that aren’t ready to go, but we’re continuing to advance entitlements to put ourselves in a position to start.
So that when we have visibility to a green light position, we’ll be in a position to start. So it’s tough to tell you exactly when each project is going to start today, but we have lots of experience in this and we’ll know on a case by case basis when to start projects. And I think we’ll be able to also take advantage of a declining construction costs which will help our yield as well.
And so we’re setting ourselves up well, having this platform of offices throughout the country where we have local sharpshooters and local teams ready to go. I think really gives us a distinct advantage. So we’re excited about that and the teams will be ready to start these projects when conditions present themselves.
Thank you.
Hey, Derek. This is Mike. Just -- I am going to follow-up on Mac’s comments, because I think, it is a balance, as well as Mac and team are preparing at the property level and tenant demand, and in fact, will probably drive much of that decision making. We’re also thinking about funding, right?
So we need to align both the opportunity with the development, with the opportunity on the funding side. And as you know, prior to the pandemic, with free cash flow being our primary funding source of our development pipeline, that may change, but we have access to multiple sources of capital, whether that be property sales of lower growth assets or potentially even new capital in the form of debt or equity. We’re preparing on that front as well.
Thanks, everybody.
Thank you.
Thank you. Our next question comes from line of Craig Schmidt with Bank of America. Please proceed with your question.
Thank you. Just some thoughts regarding your exposure by use, do you see as you go through the process of maybe decreasing your exposure to fine dining, fitness and possibly personal services, as some of those shakeout and maybe you’re not as quick to release to those uses again?
I’ll start with a couple comments and I think, Lisa or Jim will jump in as well. Number one, first on fine dining, we’re only 1% exposed to the category. So, although, it’s included in that line item on our disclosure, it’s a very small component of our rent roll.
And fitness being 4%, we actually still remain in the long run. We’re still pretty bullish on the category. We think fitness -- personal fitness and health is certainly a secular trend and I think this pandemic is probably even highlighting that even more. So we still like that idea going forward. Boutique fitness, we believe will continue to be a good use for our shopping centers.
On the personal service side, again, something that we still have a long view on in a positive fashion. So we think -- and we think our shopping centers provide that necessity to our consumers really well.
I mean, I think, Mike hit most of it, just thinking and reminding about kind of our property type. In that -- one thing that is certain is that it’s always available. For as long as we’ve -- I’ve been in the business, for as long as Jim’s been in the business, you’re continually seeing failures and then new concepts.
And I imagine that we will continue -- we will see innovation and new concepts from this disruption. And I don’t know what those are yet, but I expect that our future leasing will probably include leasing to some of those new concepts and we may have older concepts, if you will, that will fade away.
Okay. Thank you. And then just…
Rest you can model on…
Yeah.
… given the spike in California, Texas and Florida, I am wondering if you are seeing a reduction in terms of discretionary good spending in the last couple of weeks?
I think it’s too early to really tell. What I will, I mean, as we probably all do, gosh, I tried to read everything I can all the research report, falling mobility data and open table reservation. And we did see -- I think, we did see a very temporary drop in those exact spots that you mentioned, Craig, but then recovered again pretty quickly.
Whether there is any permanent kind of reduction in increased traffic. I think that’s too early to tell. But the consumer really has -- they’ve been resilient, which is been really encouraging to us. Any data tool that we’ve used to track foot traffic has been, honestly, positively surprising in some instances as to how much traffic has recovered.
Okay. Thank you.
Thank you. Our next question comes from line of Nick Yulico with Scotiabank. Please proceed with your question.
Hi. This is Greg McGinnis on with Nick. Lisa, you mentioned that the reserve reflects some of the expected occupancy decline. And I am wondering if you might be able to provide some more context on the expected short- versus long-term impact of uncollectable Q2 rents. So, basically, how much of that rent could we maybe strip out to create a run rate from what today, or maybe said differently, how much of the uncollectable rent is effectively a Q2 rent abatement, but the tenant is still viable and will survive to pay rent in Q3?
Okay. I’ll let Mike address that.
Great. I appreciate the question. I think you’ll appreciate the response. It’s very difficult to give you some of those directions that you’re looking for. Let me help you here. For the quarter, we -- at the end of quarter we effectively moved about 20% of our tenants to a cash basis of accounting. So that leaves 80% on accrual, right?
Collection rates within that cash basis bucket were at 40%, and in fact, when you pull the same data in July, they have trended to 50% collection rates. So I think that is a good element for you to consider as you look forward in our portfolio, how to think about that reserved rent effectively representing the 60% that was uncollected within that category.
From an accrual basis perspective, we collected 80% of that 80% of our exposure. But, obviously, because of how we feel about those tenants from an operational perspective, as well as a credit perspective, we’re accruing that rent.
And I think, bottomline, what we felt like was most important is that for the quarter, we recognize revenue equal to about 86% of our total potential rent and that’s where our eyes are focused on.
As Jim’s team continues to make progress with deferrals and bringing and modifying contracts as he articulated, we feel good about the collectability of that 86% of our rents either represented by actual cash collections or good visibility towards that.
Okay. Thank you. Appreciate this clarity on the disclosure. And I’m just curious how much, you said, that occupancy is still kind of trending down, you said [ph]. But I’m just curious how much of the uncollectible rent piece is actually due to tenant move out and bankruptcies at this point?
I will answer, very little. I mean, we’ve had a couple of questions here about abatements and there’s been effectively zero abatements to this point in time. But the reserve is there. Again, they’re on a cash basis with accounting, they’re only going to be recognized to the extent rents are received, basis point is completely true. To the extent there is any fallout it would be reflected by that reserve amount. It’s just too early to tell to give any changes in any occupancy levels not only for 2020 but certainly beyond.
All right. Thanks, Mike.
Thank you. Our next question comes from line of Brian Hawthorne with RBC Capital Markets. Please proceed with your question.
Hi. So within the categories that you’re signing leases, there are a couple of that have only paid with like two-thirds or three quarters of the rent. Are you negotiating leases with tenants that are not paying rent currently? Like negotiating new leases?
No. This is Jim, Brain. No. We’re not.
Okay. Good answer. Okay. And then, have you guys seen demand change for certain locations within shopping center. I mean kind of looking at pads. Is there a higher demand there?
I think the reality is that the pandemic brought about was certainly drive-throughs, everybody wants a drive-through today. So pad with a drive-through, I think, for the future is going to be a must, it’s going to be a very, very highly sought attribute.
But other than that, I think, the banks have been very active and their pad type of user. So pads are always seemed to be very resilient and the depth of tenant that like pad is generally pretty deep. So pads are pretty easy to work with.
Got it. Okay. Thank you.
Thank you.
Thank you. Our next question comes from line of Richard Hill with Morgan Stanley. Please proceed with your question.
Hi. You got Ron Kamdem on for Richard Hill. Just two quick one, going back to sort of the bad debt, and obviously, we’re not asking for guidance. But I think we’re all trying to figure out if there is another bad debt charge coming. So I guess the question really is, when I think about when we get to the end of 3Q and we’re looking at I think your report your July uncollected at 21%. Are you going to have to go through sort of the same exercise to try to figure out what’s uncollected and how much to reserve against it? And is there any reason to think that there’s something about this mix that’s either better or worse and it was in 2Q. So, again, not asking for guidance, maybe just high level color, how we should think about how that bad debt going forward a little bit?
Sure. Hey, Ron. First and foremost, you can’t reserve for rent that hasn’t been billed yet. So, you’re going -- to the extent you have cash basis tenants in your shopping centers that continue to occupy space, and you’re billing rent and they haven’t paid in the third quarter by way of an example, you would have reserved.
So it will come down to your thoughts, our thoughts, anyone’s individual thoughts around what percentage of that exposure will either start to pay rent or move out. To the extent they move out, you won’t have that debt expense, but you’ll have no income. So the impact would be the same.
So I hope that’s helpful and how we and how -- the idea that there will no longer be bad debt expense. I think it’s misleading. It really is the idea around what -- how should we think about the performance of our cash basis tenants?
So I hope the 80%, 20% be on cash basis is helpful. Again, 40% of those did collect rent -- did pay rent in the second quarter that is 50% as of July, I think, that’s a helpful statistic as well. Put in context of our opening percentages being materially higher than they were three months ago. At this point in time, that’s about the best we can give from a forward looking perspective.
Got it. That’s helpful. And if I could just ask the follow-up on that, just thinking about, is it -- if I thought about your 21% uncollected and put a 50% ratio based on what you did in 2Q for bad debt, I guess, what am I missing if I did that, right. Does that make sense?
It makes sense and that -- I mean, that can be an assumption. We can’t comment on…
Okay.
…whether that’s a…
Yeah.
…fair or unfair assumption.
Got it.
Well, what we don’t know is how many of those cash basis tenants that did not pay that we reserved for begin today? That’s what you don’t know and that’s what we don’t know.
Right.
Okay. That make a lot of sense and I appreciate you navigating that. The other question was just on, the straight line rent charge that was reversed in 2Q. Is sort of a similar the bad debt question, well is there -- should we be expecting sort of similar reversal or is there sort of an overlap something that can mitigate that in 3Q. I guess, how should we think about straight line rents going forward without giving up?
Yeah. This one is -- yeah. No. This is a good question. It is different. So that is the one-time decision to move a tenant from accrual to cash basis for the standard, that’s a one-time reversal of the balance of the straight line rent.
So to the extent those tenants remain as is the 80%, 20% split remains as is, you would anticipate less by way of straight line rent noise, so to speak in future quarters. But that’ll be dependent on how we assess collect -- assess tenancy going forward.
So there -- the 80%, 20% is not set in stone at this point in time. But I will say from a procedural perspective, you put a lot of time into this quarter and thinking about our tenants thinking about the pretty high level from a standard perspective, a 75% probability or better that they will meet the demand of their contract.
That’s a pretty high bar. And we -- so while I don’t anticipate a material amount of change from this point forward, we’re in a very unusual environment. A lot is changing month-to-month, quarter-over-quarter, so we will make that assessment again at the end of the third.
Got it. Very helpful. Thank you. That’s all I had.
Sure.
Thank you. Our next question comes from line of Mike Mueller with JP Morgan. Please proceed with your question.
Yeah. Hi. I guess, what does the Board sees the benefit of holding on to the dividend at the current level?
I will -- I’m going to -- I just want to remind you, one, that we intentionally strengthened the balance sheet to position ourselves to weather the next economic downturn. We never quite expected a storm quite like this one.
Yeah.
So I think it’s really important to remember that that the strength of our balance sheet and financial position coming into this, really it was a true differentiator for us. Our FFO payout ratio was in the low 60s. Our AFFO payout ratio was in the low 70s. That provided us with $150 million of free cash flow that Mike even alluded to earlier. We pulled back capital spend early. So we deferred that, essentially almost a like amount of $150 million capital spend. And this really provided a really big cushion for us.
And so with that backdrop and the fact that we continue to see what we believe to be an improvement in rent collections going forward, it allowed us to declare our full dividends. And our future projections essentially cover our dividend payments, which is really, which is the objective. And so that’s why we have paid it. That’s a fact. The dividend is an output. It’s not a decision just to hold it, just to hold it.
I’ll reiterate that our future decisions are going to be really deliberate. The payment this quarter doesn’t guarantee future payments. We have to continue to weigh all the facts and circumstances as they happen. But based on where we sit today, with the starting position and with what we are seeing with actual results, it makes sense to pay our dividend. As a REIT part of total return is the income return and that’s an important part of our total return.
Got it. Okay. And then, out of curiosity, the sequential small shop occupancy decline. Was that fairly broad based or was it concentrated? Can you just give us a little bit of color on that?
Mike, yeah, I think, that was basically wrapped up in BK. We add, gosh, 16 -- at this point in ‘20 we have 16 brands that have filed, of which we’ve got 150 individual store locations and out of that, we’ve got 40 that we expect either have rejected or will likely reject. So the decline is primarily BK at this point.
Got it. Okay. That was it. Thank you.
Thanks, Mike.
Thank you. Our next question comes from the line of Floris van Dijkum with Compass Point. Please proceed with your question.
Good morning, guys. Question for me is on, what you see is going on with cap rates. And also as you think about your valuation, obviously, there are two things that are involved in valuing assets. It’s the NOI and the cap rate. Do you see any movement in cap rates or -- and maybe comment on what you think is going on in the public markets and your view in terms of what -- where you think how sticky values are for your asset costs.
Hi, Floris. This is Mac. I’ll take the first half of the question and hand it back over to Mike. In terms of cap rates, you’re not seeing for starters, a whole lot of the A quality properties, the types of properties that our portfolio is representative.
Owners of these properties, I think, really recognize the long-term value and they’re not willing to sell them. There is really a scarcity of that product. But for those sellers that are willing to sell them, there is high demand for grocery-anchored neighborhood centers.
The ones that are holding up the best are a little bit smaller because of just the amount of capital that’s in the marketplace. But we’re seeing cap rates really hold tight. They’re really quite strong. There has been -- buyers are trying to figure out how best to underwrite forward cash flows. And they’re cautiously underwriting limited growth for the next couple years and then in year three, typically, they’re sort of back to historical norms.
So we have some properties that we have put on the market and we’re seeing a lot of demand. There is also demand for debt that’s allowing people to execute, 50% to 60% permanent loans are available at tremendous rates, better than we’ve seen a long, long time. So for our type of product, values are holding up really quite well. And I’ll let Mike talk about how that relates to our NAV.
I’ll actually jump. I’ll give Mike a break. Since I keep tossing all of the reserve questions, too, I think, Mac said it well, and this is something that we’ve been talking about quite a bit. There is still -- I think that, I said it in my prepared remarks as well, neighborhood community shopping centers and essential retail has never been more important than it is today. And I think that you’re seeing that with how cap rates are responding.
So they’re have -- while there is not much change in the applied cap rate, what’s really difficult to know is what is the NOI stream and also the cash stream even to recapture more NOI as we release. Because I do -- we do expect that there is going to be a significant amount of releasing that’s going to happen in the future that’s going to require TI spend.
So from a valuation perspective, I mean, I can’t -- we’ve provided all of the information that we could provide. It really does come down to where does NOI settle and we’re not -- we don’t know that yet. It’s still -- it’s -- there’s still too much uncertainty.
So where does that new kind of base settle and then from there, I do expect that we’ll have -- we will obviously have growth as it was pointed out earlier. We’re starting at a lower base. We’re going to continue to release and we’ll see probably above average same property NOI growth in our portfolio for a period of time. But it will take capital to do that.
So I know that I didn’t exactly answer your questions Floris, but everyone’s estimates are going to be different and we are -- we just need a little more clarity as to when this is really over and then we can start to recover from there.
Thanks, Lisa. That’s it for me.
Thank you. Our next question comes from the line of Michael Gorman with BTIG. Please proceed with your question.
Yeah. Thanks. Good morning. Lisa, if I could just go back to your comments earlier on omnichannel and maybe drill down a bit, especially on e-commerce grocery, can you maybe talk a little bit about conversations you’re having with tenants about their e-commerce trends on the grocery side and maybe the rollout of newer technologies like MSCs and maybe how they’re thinking about your portfolio where they have much higher productivity you have some of the top locations in each market and allocating space within those stores for MSCs or are they looking elsewhere and how they’re kind of just approaching the e-commerce -- how they’re approaching ecommerce strategy right now?
Sure. I would say, again, those conversations really haven’t changed much. The better operators were already focused on how can they best serve their customers in the most profitable manner. And they’re -- while they’re -- Kroger is focusing on the larger robotic automated warehouses partnerships with Walgreens. Ahold, I think, in Albertsons probably the most focused on the micro fulfilment centers.
All of them and then we all know what Amazon is doing with Whole Foods and then Amazon Go and the rumored and real traditional grocery stores that they’re opening. All of them are focused on how best to serve their customers in the most profitable way and there is still no argument that the most profitable way today, because that change in the future absolutely never say never.
But today it’s to bring the customer in the store. So they’re still all very focused on serving their customer in an omnichannel fashion, but to the extent possible the most profitable way, which is in sending them to come into the store.
With that said, again, you see that, you do see all the better operators are investing more in technology and spending more on the different means of that happening. And we continue to have the conversations. We continue to partner with them. We continue to help them where we can to facilitate that delivery of their goods. And I don’t mean literally, I mean, within our shopping centers.
It’s going to continue to evolve. We’re going to continue to see consolidation in the grocery. I think that scale matters. I think that having the cash flow and the money to invest and innovate and to invest in technology and invest in serving their customers, that’s where the winners will be.
That’s helpful. I guess just clarifying. I mean, when you speak to the grocers, the high productivity of their stores in your portfolio make them more likely to kind of leave those intact and look elsewhere for technological solutions in the market or is it -- is that not playing a role?
Well, clearly, it plays a role when they think about their most profitable stores. It’s about their profitability. And typically, the more productive stores are going to be more profitable. So that certainly plays a role as when they’re thinking about their network of stores and fulfilment centers. They are going to be very reluctant to close something that is profitable.
They could use that store as the core or the center of a little of a smaller network if you will and add micro fulfilment around it to continue to service the customers even out of that particular store. So it absolutely is an input and a variable.
Excellent. Thanks so much Lisa.
Thank you.
Thank you. Our next question comes from line of Ki Bin Kim with Truist Financial. Please proceed with your question.
Thanks. Good morning. So going back to the 14% of revenue reserves, how much of these rents from tenants for decently healthy pre-COVID? And how is this impacting the ways you’re thinking about helping these tenants? How?
Yes. I appreciate the question, Ki Bin. I think let me answer it this way. So our cash basis, the percentage of our ABR that we had on a cash basis pre-COVID was only 3%. Now, as I stated earlier, we’ve identified a collection of tenants that equates to about 20% of our rent roll is now on a cash basis.
So I think by extension and that 3% was primarily basically BK watch list tenants. So by extension, I would answer your question to say, the majority of them were healthy. But as Jim kind of spend some time on earlier from a local tenant perspective, at least, it -- this is a storm for them that is pretty challenging. And that it’s the severity of the circumstances, the inability to operate at all in some cases that has changed our perspective from a classification standpoint.
But again I can’t reiterate that’s not 40% of those tenants are still paying rent currently and that is actually 50% right now through July. I don’t know, Jim, if you want to answer -- add anything to that.
No. Thank you.
Got it.
Okay. And I appreciate the fact that your deferral arrangements are only 4%. I mean, basically deferral ranges are easy to give out and in some cases, when you worth the paper is written on. I’m just putting myself into perspective of tenants here for a second? Some of these -- lot of these local tenants are not built to pay a lump sum rents, right, just deferring it and paying it back in a year. And I would think maybe it’s a little bit of a ball on shackle to some of these local tenants. How are you thinking about that and if deferrals even make sense to a lot of your tenant base?
Ki Bin, that would be -- as we talk to these tenants and really understand their situation, their outlook for the future, their credit capabilities, all that goes into play. And we just take them one at a time and we’ll make the best decision we can. It’s -- part of it is if there are 15-year operators always done exactly what they said and they’re a great operator. I’m going to bend over backwards and try to figure out how to make that tenant successful. We got a lot of tools in the toolkit. We’ll employ them as we see fit. But we want to put our dollars where they can go the best to get the best result. That’s really all I can.
Yeah. I will say this for Jim, because he is told me many, many, many times, we’re not going to put a tenant into a deferral plan that puts them out of business.
Right.
And I think, Ki Bin, that’s the point you’re making. So we’ll be hit those tools. However, whatever they are either stretching payments out or maybe even sprinkling in a little bit of abatement.
We’re going to make the right decision for the right tenant and they’re all snowflakes. And we have the long-term in mind and setting ourselves up and our portfolio up for success after we emerge into some sort of normalcy.
Okay. Thank you.
Thank you. [Operator Instructions] Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.
Hi. Of the 16 brands that have filed in the 40 spaces have been rejected or likely to be rejected, when is the earliest you might expect to get those spaces back and any sense of whether you’d see more demands in the national brands or local tenants as backfill options?
Linda. This is Jim. We will be getting, I think, some of those rejections probably in the next 30 days or so. As far as demand, pre-COVID, we obviously had a lot of interest in, for instance, Tier 1. We are in dialogue with several of those. I think there’s still interest. I think the speed to market if you will of converting that interest into an executed document is slowed dramatically and I expect the same.
At the end of the day, Lisa said, we think we’ve got great real estate. The tenants within our portfolio have historically operated at very high levels. As we get space back, it’s a supply and demand business. We think we’re going to have good product in good centers, and if the market allows it, we’re going to get more than our fair share of returning opportunities.
Thanks a lot for that color. And then just one other, how are you thinking about dispositions in the post-COVID environment. How might parameters around low growth have changed pre- versus post-COVID?
Linda, I can take that to start with. When we consider properties that are being disposed, we do it like we have been historically. It’s a ground up basis. We look for properties that might be non-strategic, certainly, low growth, just non-core properties that we’re not going to miss so to speak.
So in today’s world, we’ll take a second look to make sure that we accurately forecast growth going forward. Will that change? Sure, certainly, I would think at some properties. So we’ll take it on a case by case, probably, a little too soon to have a perfect assessment of forward growth compared to pre-COVID times. But we’ll continue to look at that. But these are good properties to have as well. I don’t want to dismiss them. I think the buyers of our properties have done quite well and we wish them well. So I’ll let others update as needed.
Hey. Thanks, Mac. It’s Mike. I’ll go back to kind of our funding plan and one thing I’d like to make sure you hear is that we’ll be a very disciplined. To the exempt property sales are a lever in our funding plan and they most likely will be. We’re going to be a very disciplined on the valuation.
And I think Mac is exactly right. We’re going to have our own view of the forward NOI stream of these properties. And if the market is not giving us the value we believe we deserve. Well, we’re prepared to hold that asset and we will choose to hold that asset and we’ll make appropriate other funding decisions from that point.
We have a large portfolio, a diverse portfolio. We have a lot of optionality within that portfolio to fund what we plan to have as a vibrant -- again a vibrant redevelopment and development opportunities set going forward.
We’ve -- and we have always had a commitment to dispositions and, well, absolutely believe that we have a really high quality portfolio. Again, as I do -- as I believe most of the publicly owned companies do, everyone still has their lower quality and lower growth, even if we are in the top 10% of what’s owned in the U.S. And so we’ve always maintained that commitment to continually improve the quality of our portfolio and to continually fortify that future NOI growth rate. It’s an important part of our strategy.
Thanks. Good luck.
Yeah. Thank you.
Thank you. Our next question comes from the line of Chris Lucas with Capital One Securities. Please proceed with your question.
Hi. Good morning, everybody, or I guess afternoon now, sorry. Just a couple of quick ones, just as it relates to, I guess, rent collection particularly on the more challenged lines of business. Does geography play a role in that? And then, I guess, sort of on the same geography line of thought, when you guys were pursuing litigation, does geography drive that as well?
Chris. It’s Jim. As far as impact on collection rates, I think, certainly, there is really three things that come into play. You’ve got kind of the essential category mix, which will drive that recovery, obviously. Geography certainly comes into play. We’ve got as you’re well aware, we’ve got areas within the country that have higher mandated closure still. So that will have a big impact.
And then the local national mix, as I referred to earlier, in our strategy that local group is kind of the last group that we’re engaged with right now. So that will have impact on that same collection rate. Well, part two of the question was….
It’s related to litigation and geographies?
Oh! Litigation?
Yeah.
Chris, where we are in that is, if warranted, we’re taking legal action as tenants that have, number one, either have the ability to pay and have chosen not to or non-responsive or unreasonable tenants. In many cases, this approach of late has become pretty effective in bringing payments through the door or at least getting folks to the table for further discussion.
Okay. And then, Mike, I’m just curious, have you collected rent in, I guess, third quarter that was applicable to second quarter, just kind of curious how you’re dealing with that?
Yeah. I think what I call the crossover rents about $8 million. So if you -- that we collected in July that was owed on quarter two. So if you want to think about our reserve as a percent of billings that would move it from 47% to 52%, Chris.
Okay. And then, of the -- I guess, the $8, do you have a split between what was the on a cash basis accounting?
I don’t have that for. I’d have to follow-up with you on that one.
Okay. Okay. Great. Thank you. That’s all I have this morning.
Thanks, Chris.
Thanks Chris.
Thank you. [Operator Instructions] Thank you. Ladies and gentlemen that…
Okay. Thanks…
I’m sorry. I’ll turn it back to Lisa …
I was just going to jump in. Yeah. Thanks Lisa. Thank you all for your time today. Your continued interest in Regency, your support, I do hope that you all stay safe, wear a mask. And again, thank you to the Regency team. I really do appreciate this time that we’re living in is really hard for all of us. So thank you to everyone and good Laura. Thank you.
Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.