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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, and welcome to the Regency Centers' Fourth Quarter 2017 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'd like to turn the conference over to your host Laura Clark. Thank you. You may begin.
Good morning and welcome to Regency’s fourth quarter 2017 earnings conference call.
I would like to begin by stating that we may discuss forward-looking statements on this call. Such statements involve risks and uncertainties. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements. Please refer to our filings with the SEC, which identify important risk factors that could cause actual results to differ from those contained in forward-looking statements.
On today’s call, we will also reference certain non-GAAP financial measures. We provided a reconciliation of these measures to their comparable GAAP measures in our earnings release and financial supplements, which can be found on our Investor Relations website.
Joining me today are Hap Stein, our Chairman and CEO; Lisa Palmer, our President and CFO; Mac Chandler, EVP of Investments; Jim Thompson, EVP of Operations; Mike Mas, Managing Director of Finance; and Chris Leavitt, SVP and Treasurer.
It was great seeing many of you in New York at our 2018 Investor Day and we sincerely appreciate the time you spent with us. Since not much has changed since then, we'll be brief today. For those of you that were not able to attend or listen to the live webcast, please reference the replay and presentation on our website.
I will now turn the call over to Hap.
Thanks, Laura. 2017 was truly a remarkable year for Regency, as our people continue to demonstrate that they are the best professionals in the business. I'm extremely proud of Regency's 2017 accomplishments and how well-positioned we are to continue to achieve our strategic objectives.
To begin, in spite of the challenges in retail real estate, the team was able to push the same property portfolio to an impressive 96.3% leased and achieved same property NOI growth of 3.6%, which was the sixth consecutive year of about 3.5%.
This places Regency at the top of the shopping center sector for both of these metrics. Even though store closures accelerated and expansions of some retailers were more deliberate, we are continuing to experience healthy demand from successful operators.
During the year, our team continued to identify and start outstanding developments and redevelopments at compelling yields, bringing our in-process projects to over $0.5 billion. We also further fortified Regency's financial position and in times of market volatility like today, this is a very poignant reminder of why your strong balance sheet remains a critical component of our strategy.
In addition, we successfully completed the merger with Equity One, which has met or exceeded our expectations. The merger not only made us a larger company, but a better company and that's the most important thing.
To further enhance the quality and NOI growth of our portfolio, we sold a number of lower growth assets and purchased premier centers with superior NOI growth prospects some of which were highlighted at Investor Day.
It is worth noting that given the existing quality of our portfolio, Regency's capital recycling strategy is flexible and very modest at an average of 1% to 2% of asset footings. Yesterday we announced the implementation of a share repurchase program. This provides further flexibility to execute our capital recycling plan when pricing is compelling.
The impact on leverage should be essentially neutral due to the modest size of the program and similar to acquisitions we will be finding the share repurchases with the sale of lower growth assets.
Regency's combination of accomplishments was truly unequaled as evidenced by our superior shareholder returns over the last one, three and five-year periods. As you can imagine, our successes in 2017 in over the last five years had been extremely gratifying.
That said, given the ever-changing and challenging environment in which we operate, we fully realize that we can't afford to rest on our laurels. Our commitment to staying relevant and to being best in class will enable our deep and talented team to continue to capitalize on our unequaled combination of strategic advantages to execute our strategy and to grow shareholder value. Lisa?
Thank you, Hap and good morning, everyone. I want to start by echoing Laura's comments on Investor Day. Thank you, all for taking the time to join us whether in person or through the webcast. We are thankful for your support of Regency and hope you found the time spend valuable.
2017 demonstrated another strong year of performance as Hap said. Full year results were driven by strong base rent growth of 3.5%, a testament to our premier portfolio. And looking at 2018, there have been no changes to the previously provided NAREIT FFO and operating FFO guidance ranges.
As a reminder from Investor Day, operating FFO eliminates nonrecurring items as well as certain non-cash accounting adjustments. In our view, this metric better reflects the operating performance of our business and demonstrates our ability to grow cash earnings.
While we will continue to discuss operating FFO with you, we do feel it is important to emphasize that NAREIT FFO is currently the better metric for comparability across the REIT sector, given the standard definition. Therefore, we are asking the analysts community to report NAREIT FFO for consensus purposes going forward.
As we've discussed, we believe our unequaled combination of strategic advantages will enable us to consistently deliver same property NOI growth of 3% and operating FFO growth of 5% to 7% over the long-term. With 2017 operating FFO growth of 9% and our projecting growth this year, our two-year compounded earnings growth will meet this objective.
Our 2018 same property NOI growth guidance also remains unchanged. At Investor Day, I mentioned that this guidance incorporates some kind of fallout from move outs, store closures and bankruptcies. Since that time, there have been several store closure announcements including Toys are Us and our exposure continues to be minimal. Announcements to-date were incorporated in our guidance.
I would like to reiterate that given what we know today, we still expect to finish in the upper half of our 2.25% to 3.25% range, which would represent maintaining occupancy in the 96% area.
With Regency’s prospects to grow operating FFO and free cash flow and given our low payout ratio, we increased our dividend, which would represent nearly 6% growth for the full year.
As Hap said, 2017 was a remarkable year for Regency with the successful merger and integration of Equity One and another year of impressive results. I can't say it enough; how proud I am of our team over this past year.
That concludes our prepared remarks and we now welcome your questions.
Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instruction] Our first question is from Ki Bin Kim from SunTrust Robinson Humphrey. Please go ahead.
Thanks. Good morning, everyone. Could you -- in your press release, you guys mentioned some of the heavier anchor leasing driving some volatility in TIs and perhaps rent spreads. Could you provide little more color on that? And if there's anything -- anymore similar items like that in the horizon?
Ki, this is Jim. I'll answer that. As you mentioned, Q4 was relatively small sample size to begin with, but we did have high anchor activity, 6% of that activity was in the anchor side, which is about double what we normally expect to see.
That equates really to nine transactions on the anchor side. And just to kind of give you a flavor for the quality of those transactions we had to HomeGoods, [Addicts], Ultra and a Michael's.
We did have one outlier in Louisiana, which was a negative 59% rent growth. Backfilling a very difficult space and the best news in all of that is that, that asset is now ready for disposition. On spreads, when I step back and look at full year -- in the full year context, we were 8% overall. If you breakdown new deals from shop space, it was a 10% growth and new deal anchor was 12%.
When you net out the Hobby Lobby deal from early in the year, we talked about in the Backfill Sports Authority. So, in general, I think rent spreads look pretty good overall. Looking at moderating TI, again driven primarily due to that high anchor leasing activity. Anchors typically require a little higher TI. But in this particular subset, we had some interesting white box work that needed to be performed as well.
But overall, I would tell you that the quality of the re-tenanting is first and foremost in our minds and we will continue to deploy capital astutely to ensure we get the best-in-class retailers to re-merchandise our centers.
Just to add a little bit of color, our outlook hasn’t changed. You've heard us say this when we announced the merger at Investor Day that one of the compelling factors in the Equity One merger was a lot of the inherent mark-to-market of near term expiring anchor leases. And we still -- we still see that over the next two to three years.
And if you combine those with the contractual rent increases that we’re being able to generate as Lisa said, I think that we’re well positioned to achieve our strategic objective of 3% plus same property NOI growth over the long term.
Okay. And the second question, I appreciate the share repurchase announcement. But if the environment -- the cost of capital environment kind of stays this way, does that change your thinking about underwriting at all or buying anything at all? Even though it’s along your $50 million, does that change at all at a sub 5 cap?
I would say, like the start of capital allocation and recycling plan is as follows; and we've been real consistent about this. We start with free cash flow. We sell 1% to 2% of lower growth centers and we reinvest that capital into compelling and outstanding development opportunities and acquisitions with superior NOI growth prospects.
And we've added what we think is the flexibility to invest with the stock buyback announcement, another compelling investment opportunity and that is to potentially buyback our stock and when it makes sense to invest in stock and repurchase shares in the stock, we'll do that.
It could be a very compelling investment opportunity and we're going to do all this in a way that's going to essentially be leverage neutral because I think more than anything else, in a volatile environment, maintaining a strong balance sheet is critically important.
And I'd just emphasize and Hap started with this in terms of being very consistent about our capital recycling strategy. It is an important part of our strategy and we do believe that our outperformance and our operating metrics and our NOI isn’t by accident.
And it is important for us to fortify that NOI growth to continually enhance our portfolio. It's something we've done for the past 21 years and we will continue to do that.
And we've done it on an incremental basis to where we don't have to do it on a significant basis. And on that incremental basis, it's paid dividends from NOI growth standpoint and from a portfolio quality standpoint.
Okay. Thank you.
Our next question is from Christy McElroy from Citigroup. Please go ahead.
Good morning. This is Katy McConnell on for Christy. Given many of your peers are pulling back on acquisitions in this environment, can you talk a little bit about your willingness to continue to be a buyer today? And can you also talk about any changes you're seeing in market pricing and the buyer pools that are coming to the table today?
I will start with the cap allocation. As I said, I think we've been pretty clear about this, is when it makes sense to sell our assets and reinvest those proceeds into acquisitions, we'll do that. But we now have the flexibility of rather than doing that it may be more compelling investment to buy our shopping centers.
If you look at our implied cap rate today, somewhere north of 6% of the quality of our portfolio, that seems very, very interesting to us. And that's part of the reason that we decided to put in place a stock buyback program and I'll turn it over to Mac to respond to what may be happening in the market for shopping centers.
Sure thing. Really what we're seeing is, starting with the A quality centers, the types of centers that we're looking to acquire are still tremendous amount of demand for centers in -- with productive dominant grocers in the best markets.
And in part there is really very little supply coming to the market in that we saw that in '17 and probably we'll see that again in '18. So that scarcity is also driving the demand there for the highest quality centers.
In the B category, sort of the B shopping centers, transactions are still clearing, but buyers are little more skeptical and little bit of softening there in pricing. Buyers are pricing in some risk, whether that's real or perceived more so than a year ago.
And then further down the scale, when you get down to power centers, some further softening there and I'd say fewer buyers in that product type out there.
Okay. Great. Thank you.
Our next question is from Jeremy Metz from BMO Capital Markets. Please go ahead.
Good morning, Mac. Just following up on your comments on the shifting pricing environment, especially for the non-core low growth stuff. Any chance you can better quantify how much it's really moved in the past call it 60 to 90 days?
Jeremy, it's always a tough question to answer because it's so dependent on the grocer, the market even down to the intersection. And I think, what I would say is as you get -- as you get closer to the larger centers $50 million and above, probably the gap is more so than the smaller less than $50 million centers.
So, I don't have a very specific answer but 50 to 75 basis points over not 60 to 90 days, but over say six months, but it's one of those questions that tough to be very specific, we see different shades of demand and transactions in different markets.
No, that's helpful. And then you guys mentioned getting a couple of those toys leases back. Once you get those back, would you look to release those as there is possibly great time, and then just once the mark-to-market on those today in your current configuration?
Jeremy, we expect to get all our five toys. We expect to get two of them back. Quite frankly toys reached out for a reduction, which we declined and we rather control our real estate and upgrade our merchandising. On one of those locations, we are engaged with a attendant for reletting.
The other asset is in Boston, well merchandised center, so we'll look at breaking boxes up. I think the Boston space is a pretty good size box. So, we'll look at all opportunities. What we're looking for is again best-in-class merchants and we'll do we think an astute job of trying to select that backfill opportunity at the right market rate.
Thanks. Probably it's pretty significant mark-to-market out there?
As you can expect the three-week -- the three we didn't get back, we think there's a significant opportunity the ones that they rejected were the higher rent deals. I think we're 1450 up like 1438 in rent. So, I suspect there may be a little moderation, but it depends on how we end up breaking up boxes or going full refill.
Okay. And last question for me Hap. I know we're only about a month removed from your Investor Day, so not a lot of time has obviously passed. I was wondering if you feel any different today with regards to the retail environment close tax reform? Are you feeling more encouraged today or it is generally same as you did a few weeks ago.
I think it's too early to tell. Obviously, what we've seen is the way the tax reform is I think it feels like there's more growth in the economy, but we're also saying more volatility in the capital markets, now it's going to play out, remains to be seen, but we continue to see robust demand from the better operators, which I think is good.
We didn't say the demand has picked up. It certainly has slackened off. We're 96.3% leased, almost 92.5% in shop space. So, we're starting from a pretty strong position and so underlying fundamentals of the business appear to be extremely healthy.
Thanks for the time.
Thank you, Jeremy.
Our next question is from Craig Schmidt from Bank of America. Please go ahead.
Hi this is Jeff [Benton] for Craig this morning. Just wanted to go back to market transactions for a second. If you look at the Cap rate that you have in your guidance assumptions of 7.25% can you give us an indication of how wide that range could be?
Mac, you want to answer that question?
Sure thing. Jeff, some of it really depends on an asset-by-asset selection. I'll give you an example, when you look at what we sold in 2017, what affected our aggregate cap rate greatly was Westwood Towers and that was really an apartment building tower within our Westwood project in which the lessee had a fixed option to buy the property at a fixed price and so that cap rate actually skewed quite a bit the aggregate just cap rate there.
So, when it comes to 2018 it will depend so much -- somewhat on the product mix. So probably too soon to say exactly what the range is going to be but we're seeing good activity on these -- on the properties that we want to sell. It did shift a little bit.
As the year goes on, we constantly are adjusting to what we take to market and what clears. So, can't get much more clear at this point. It really is an asset-by-asset selection and they eventual all roll up and that's why we give that plus or minus guidance there.
No, that's fair. And can you remind us which geographical regions you want to remain in and growing versus shrink?
Sure, and Mac can follow back up on this, but we went through over this at Investor Day in detail and you might -- it might be worthwhile to go back, but we did a -- we worked with Costar to do an extensive market study to look at underlying demographics in the various markets to look at supply constraints and to look at opportunities to have a meaningful platform.
And the good news is that 95% of our capital is now deployed in the markets where we want to be long-term and that includes gateway markets, that includes stem markets, that includes growth markets and its a in our mind, it's an 18-hour setting like Atlanta and Dallas.
So we've got a wonderful canvas on which to invest in. We did identify, we have identified two markets where it may make sense for us to add a presence too. We're going to be evaluating that in the months to come, but we've got -- the target markets we're in right now where we have a presence where had enough to say grace over if we can find opportunities and ability to build a platform in those other two markets, great. If not, we're going to be fine.
And the other 5% isn't necessarily concentrated in any one market that we're going to be exiting the market per se. When we talk about our capital recycling strategy and our property sale as Hap mentioned, we're targeting our lower growth assets. So, it's an asset by asset selection rather than a market selection.
Correct, and again it's important to note because a number of those 5% that are in outside of what you might call are core markets, many of those are still really good shopping centers. I think offhand a public center in Tallahassee Florida where public performance is extraordinary and the center is close to 100% leased and we have a number of assets like that, that we can still effectively manage and are still good long-term assets, but they're not in the markets that we identify from a target standpoint.
Is there anything you want to that Mac?
No, I think that covers it. We haven't made any public announcement of us exiting one specific market, nothing like that. It's really an asset by asset selection as mentioned.
All right. Thank you. And congrats on a great year.
Thank you very much. Appreciate it.
Our next question is from Brian [Kaufman] from RBC Capital Markets. Please go ahead.
Hi. So just kind of building on the geographical analysis, can you talk about where you're seeing the most demand by region? And then also can you talk about the hardest space to lease whether it's by geography, size or location in the center?
Jim?
We're seeing good solid demand really across the country. I couldn’t really rifle shot any particular weakness or outstanding performance, but across the Board I would say, our demand is there. Within the shopping center there's always -- there's always boxes that are unusual in size and that's when we get creative and create the right box whether we tear down the back portion to create a box that is relevant in today's perspective.
But generally, I think we can get pretty creative to make sure that we create the right size boxes for what the market demands today. The other part of our which we went over at Investor Day which we call our DNA analysis and where we had a market study that identified the markets we want to be in.
We also did a study of what are the -- where are the corners that we want to be in the trade areas that have the right demographics, right purchasing power average household income, plus population density, the right education level, those factors and supply constraints. And so, our capital is deployed in premier shopping centers that are in great locations throughout the country.
That's it for me. Thanks for taking my questions.
Thank you.
Our next question is from Nick Yulico from UBS. Please go ahead.
Good afternoon. This is Gary Jameson with Nick. Just looking at the Hewlett Crossing purchased a bit smaller than usual, but in very dense areas. Should we expect redevelopment opportunity there also with expensive pricing for A quality assets, are acquisitions generally going to centered around redevelopment opportunities?
Mac?
Yeah happy to take that one. In that particular Hewlett project, we're expecting a modest redevelopment that it's not a large scale one that the property and performance work very today. It's needs a little bit of a refresh but not a full blown, one by any stretch.
It is a smaller asset, but we like it. It's got great growth. It's in the neighborhood. We think it's got great competitive advantages over the long term. It's very little product in that market. It's got parking, which other street retail doesn’t have. So, we like that a lot.
I'd also say that, we love acquisitions where there is a major redevelopment component on it because we compete really well. Some of the institutions don't have the platform that we have and even our peers don’t have the platform that we do.
So, we love opportunities like that. Town and country that we discussed at Investor Day is a great example of that and that's where the family that owns it really recognized our platform and our ability to transform the property and that was a significant factor for them when they brought us into their partnership. So, we relish those opportunities to use our platform to our advantage.
And reiterating on that is from an investment in capital allocation standpoint, priority one, our value add redevelopments and developments and then outstanding acquisitions with superior NOI growth prospects. But value add redevelopments and developments are priority one from where we're going to prioritize the investment of capital.
You mentioned Town and Country, is that still looking like it's probably going to be a year out from now?
Yes, still hoping with that schedule.
Okay. And during the Investor Day you highlighted Toys and Sears as the potential occupancy risks and were the two toys rejected in line with your expectations and what are your thoughts on potential closures from the five Sears and Kmart leases?
I'll just take that from just -- higher level and how it's incorporated into our guidance. And Jim is welcome to add some specific color if he’d like. But just reiterating again, the 100-basis point range in our same property NOI guidance of 2.25 to 3.25 does incorporate store closures, move outs, bankruptcies.
And the fact that we say that we're comfortable with, we're still comfortable with the high end -- the upper end of that range, which equates to about 96% leased and the fact that we’ve already, we know we've gotten two toys boxes, we’d tell you that yes that was incorporated into our guidance.
And the lower end of the range we think is reasonably conservative, but not necessarily what we're expecting in terms of how many of those we might get back. And again, so it's incorporated. In 2017 bankruptcies impacted our same property NOI growth by 20 basis points and our guidance for 2018 incorporates more than that.
Thank you, Lisa, appreciate that. Just final question for me, regarding the potential buyback, is this more likely that if you dispose $150 million in assets and there's not an equivalent level of acquisitions that might be funded or is if there's the potential for more disposition sales than that money might be spent on the buyback?
I don't want to keep giving you the same answer but I will, is that our plan is free cash flow of about $160 million. Dispositions to enhance the quality of the portfolio and our NOI growth rate of 1%, 2% of lower quality asset a year and then we'll reinvest that capital in development first and secondly acquisitions.
And now we have the flexibility to substitute in investments in a great portfolio of great NOI growth prospects at compelling pricing and that's Regency’s start and having that flexibility does remind me of a book that one of our Directors, Dave O'Connor mentioned recently that he wants to write at some point in his life which is optionality, is the key to life.
And I think that applies -- that flexibility and optionality applies and we have that optionality now. And I think that's important given the volatility in the market and it could be a compelling use of our capital.
Great. Thank you and I agree with the optionality comment as well.
Our next question is from Vince Tibone from Green Street Advisors. Please go ahead.
Hey guys. I was hoping to drill down a little bit more on the occupancy guidance, are you able to provide a little bit more color between anchor and small shop in terms of where you think some of the bankruptcy and store closure risk reside, is it all in the anchor space or is there -- do you see occupancy maybe falling a little bit on the shop side as well?
Move outs and store closure happen across all the spectrum -- the full spectrum of store sizes. And don't expect it to be much different than what we've experienced in the past.
So, it really is -- it is almost kind of pro-rata and how you think about what makes up our portfolio. So, we are projecting that lower end of that occupancy guidance is a combination of shop loss as well as some anchor loss.
But it's important to note as Lisa said earlier in answer to a question, that in the prepared remarks that we hope and we think there's a reasonably good chance we could end the year in the 96% leased standpoint, which would mean we maintain occupancy across the spectrum of anchors and shop space.
Okay. Great thanks. And then one more just on, I know it's early, but any specific change in tenant behavior you've noticed since the passage of the Tax Reform Bill?
This is Jim. I would say no. You read different articles about some excitement from small business owners, but really, I've not seen any indication of that at this point.
Okay. Thanks. That’s all I have.
Thank you.
[Operator Instruction] And our next question comes from Steve Sakwa from Evercore ISI. Please go ahead.
Thanks. Good morning. Obviously with bond yields up and stock prices down, cost of capital has changed. And I'm just curious, if you guys have changed your unlevered IRR hurdles for kind of both acquisitions and developments?
In a sense yes, but number one from a development standpoint, our returns on invested capital and our IRR returns are well in excess of whatever kind of cost of capital that you might attribute to that. So that's number one.
And secondly, I think it does start with you got a $160 million of free cash flow. We're going to sell 1% to 2% of assets to enhance on a long-term basis the quality of the portfolio and NOI growth and its where do you reinvest that capital?
You can reinvest that capital in acquisitions with superior NOI growth prospects or now do you reinvest that capital into buying in our stock? And I think what we're saying is, is we see some visibility to where it may make compelling sense rather than buying acquisitions to buy -- to repurchase our shares.
I guess it makes sense that the unlevered IRR on the stock is better than an unlevered IRR on a Class A asset I guess, you can find in the market today.
I think there's a good chance that, that might be the case.
But do want to remind you also that, it doesn't appear that we're contradicting what we're saying. We do have an asset under contract and we will on -- we're excited about that opportunity.
And the other thing that I think we need to keep in mind is that you cannot continue to be in the market. We may be in a situation where we don't buy because we reinvesting the available capital. And as I’ve said, key thing is we're going to essentially do this on a leverage neutral basis.
We may be in the market and we’ll stay in the market because it is a volatile market and that may change also. So, we're going to take the capital from the sales and invest that as astutely as it makes sense.
And the acquisition that we have on the contract is the northeast opportunity that we've talked about that we also sell our forward equity offering in December to fund that.
And that was $70 plus per share.
Okay. And then I guess Lisa I mean you sort of touched on this a bit, so as it relates to just kind of your tenant watch list and things that have fallen out, I realize there's still a little bit of time until maybe the bankruptcy at least early window in the year maybe closes or we get a little bit more finality on that.
But just how are you feeling about the things that were on your shadow pipeline or shadow close list or kind of watch list today versus say a month or six weeks ago?
Our outlook really hasn't changed since then. Toys did happen and it was within our expectations, which is why we still feel really comfortable at the upper end of our range for both same property NOI as well as occupancy.
And obviously there’s others that will come this year and we're expecting that some will come this year. And our outlook has not changed from a month ago.
But as you said Steve, it's still early. Sports Authority did surprise a lot of people with the fact that they gave all of them back. And their best surprise could happen which is why we have incorporated more conservatism into the lower end of our range.
And I would say Steve, it's a timing issue because long term we're going to be able to refill the boxes even the ones that we haven't closed, whatever the flag may be and more often than not, it will be to a better retailer at better rents not all the time.
But more often that will be those things and long-term because of the quality of the portfolio, because of the embedded mark-to-market opportunities and the contractual rent growth that we're getting, we expect to be able to generate 3% plus NOI growth and that is part of our strategic plan.
That mean it's guarantee, that mean there may not be little bit of short term pain if some of the stuff accelerates from a timing standpoint, but those tenants that are on the watch list have been on the watch list and if it happens, it's more spread out, we'll be at the upper end of the range this year, but long term that growth rate will be in the 3% percent range.
And if I may reiterate one more time because I enjoy saying it, our exposure is low and that is not an accident. And we really do believe that is a result of our strategy and the consistent discipline that we have exercised in executing that strategy with a very modest amount of sales annually that enables us to keep that NOI growth a very quality NOI stream.
A cumulative impact is meaningful and if I can follow on, it's also worth noting that we have released well over 95% of the recent bankruptcy spaces that we've gotten back in store closures that we've gone back, which speaks to the quality of the portfolio.
And if can say it....
Okay. Thanks. That's it for me.
I wish we could say that was it for us. Thank you, Steve.
And our next question Collin Mings from Raymond James. Please go ahead.
Thanks. Good morning. Just one question for me, just as far as development and redevelopment activities and the platform you touched on, just as you continue to bring additional projects into the mix, can you maybe just update us on what you’re seeing on the cost side?
Again, we’re obviously seeing some labor pressure in terms of wages things like that. And just how that's impacting maybe which projects are moving forward with us at this point.
Sure, Collin. I would be happy to answer that. We're seeing the same cost increases that you mentioned, pretty much everyone is. I think we budgeted for them accordingly. So, we haven't been -- haven't had any tremendous surprises. And if you look at our pipeline that's in process, we've really been able to manage your costs and our returns very well.
As you look further down the pipeline, you may see some returns drop a little bit, but when we evaluate whether we want to go forward with those, we look at long term growth, we look at quality and we look at the very encouraging spreads to our development returns versus acquisitions.
So, every project stands on its own. Are we going to get let a small reduction in return? Teller project that we believe in long term, probably not, but we're going to let --- we look very hard at every one of those.
So, you'll see as we have more starts throughout the year, our returns in aggregate are pretty consistent with past years. What you will see is probably a bigger shift in the mix between redevelopments versus developments.
It's probably closer to 50/50 this year. And in past years, it's been more maybe 70/30 development to redevelopment. So that's one of the compelling reasons why we like the Equity One merger this embedded pipeline of redevelopment opportunities and we're very encouraged over the next five years plus as we start some of these projects.
Okay. Appreciate the color. Thanks.
Thanks.
[Operator Instruction] And our next question comes from Chris Lucas from Capital One Securities. Please go ahead.
Good morning, everybody. Just two quick ones for me I think. On the Toys, on the three remaining toys that you have, were there any changes to the lease terms as it relates to either lease duration, rents or expense reimbursements?
No, we did not enter into any dialogue on modification leases. And as I indicated, we would cherish to get our real estate back on the other three.
Okay. Thank you. And then I guess maybe more -- a bigger picture context question, I think maybe three years ago on one of your calls, the tenant fallout was essentially historically low.
And I guess I'm trying to understand, in the current environment how would you rate the level of tenant fall out compared to a longer timeframe? Or is this a normalized level? Is this an elevated level? Or is this below average over a 20-year period?
If I look really long term, it's still below the long-term average. But over the --with this increased closures and bankruptcies over the past year, it did tick up a little bit. And we are again forecasting it to be slightly higher than last year's levels in terms of as a percentage of your GLA.
But long term, at least for Regency that trend was declining and it stayed low and has stayed low and I think that that is a result of the quality of our portfolio. And the fact that we really have, I mean if you go back to mid-2000s and compare that portfolio what we own then to what we own today, we've significantly enhanced the quality of our portfolio and the quality of our tenant and merchandising mix.
Just further little bit color on that. We are not immune to the disruptions in the store closures that are out there and we don't want to -- anything we say is, so we're not going to be immune to that.
We do think that the quality of portfolio and the focus of our accounts and operations team and is reinforced by the recycling, further insulates us from some of that that's occurring out there -- that will continue to occur. And that's what our expectation is, is the normal part of the business
Great. Thank you. Appreciate your time this morning.
Thank you very much, Chris.
Thank you. This concludes the question-and-answer session. I would like to turn the floor back over to management for any closing comments.
We appreciate your time this morning and your interest in Regency and wish that you have a wonderful weekend. Thank you very much.
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