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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, and welcome to Regency Centers Corporation Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Christy McElroy.
Good afternoon, and welcome to Regency Centers' fourth 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 as well as future market condition. These are based on management's current belief and expectations and are subject to various risks and uncertainties. It is possible actual results may differ materially from those suggested by the forward-looking statements we may make.
Factors and risks that could cause actual results to differ materially from these statements are included in our presentation today and in 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 again provided additional disclosures in this quarter's supplemental package related to COVID-19, and its impact on the company's business and have also posted a presentation on our website with additional information. Lisa?
Thank you, Christy. Good afternoon, everyone. And good morning for those of you out in the West Coast. First, I'd like to begin our call by again thanking the Regency team. It's hard to believe that almost a year has passed. Since this pandemic started to meaningfully impact our daily lives. Collectively, and individually, we're presented with challenges and we continue to be that I don't think any of us could have ever imagined.
And in the face of that I'm so proud of how our team has navigated this very different environment, with a revised and even more demanding set of expectations. We have worked harder than ever during this time to serve our tenants, our customers, our communities, and our shareholders. And while Regency does enjoy the advantages of our size, scale and national presence, it's the people in our 22 offices across the country that have been the keys to our resiliency.
Our local presence provides us close proximity to our properties, which enables us to act small and to take a personalized, relationship driven approach with our tenants. So once again, thank you all.
In the fourth quarter, despite a rise in cases in most markets, and increased restrictions in some, we have been encouraged by continued improvement in our operating results. And this is driven by further meaningful progress on rent collections. The hardest hit categories however, especially in the more restricted markets are still lagging. Many entertainment, fitness, sit down restaurant, and personal service centers are still either not allowed to open or are operating with severe capacity restrictions. This has had the greatest impact on our local small shop operators. But even in these categories and end markets, we've still seen improvement in collection rates compared to where we were three months ago.
We also remain encouraged by momentum in our leasing efforts, as execution volumes picked up in the fourth quarter, and our pipelines continue to grow. This is a testament not only to a greater willingness among tenants to do new deals, but also to the strength of our locations, our tenant relationships and our experienced team. So, despite the setback, we saw the health crisis in certain markets in the fourth quarter, Regency still moved forward, and we see green shoots as well. The vaccines helped to at least provide some light at the end of the tunnel, and additional federal stimulus could help to support our local tenants and consumers at the margin.
The worst of the restrictions are hopefully behind us, knock on wood, as we've seen, some of the most restrictive states like California start to ease up a bit.
But with that said, we still have reasons to be cautious given the meaningful uncertainty that remains. While many businesses may technically be open, the inability to operate at full capacity can be a major obstacle. The vaccines are definitely a positive, but distribution will take time and the presence of additional variants is certainly a wild card. The ultimate impact of this on the consumer and in turn, the resulting impact on tenant fallout, remains unknown. And our 2021 outlook reflects that uncertainty. In fact, we've chosen to use a scenario approach rather than a traditional guidance framework. And Mike will discuss that in more detail in just a bit.
In light of the current environment, we firmly believe that being careful and transparent as we always are, is the most prudent approach to setting expectations. While we do have a greater sense of optimism, and that is inherent in our continued improvement scenario, it is still too early in the year to eliminate our reverse course scenario.
As we move through the year, we will have a lot more clarity and visibility and we will refine our expectations accordingly.
Today, our team in the field continues to aggressively but thoughtfully pursue recovery of cash flows. As I've discussed previously, we've taken a targeted strategic approach with our tenants throughout the pandemic, especially for our local tenants, waiting until they are able to reopen, and then working with them on a plan for the future.
We believe that this approach will help to ensure the long term success of our tenants, which should in turn put Regency in the best position for recovery. The quality and locations of our assets have allowed us to choose our tenants over time to fill our portfolio with great operators. We've already vetted these merchants, and we still want most of them in our centers when this is all over.
Same time, we're not afraid to get space back. We have great space, and we will release it. This is what we do, and we do it really well. But in many cases when factoring in the economics of re-tenanting, making this conscious decision to work through with a proven business operator, is often the wisest choice. We always have to keep in perspective that these are people just like us that we're working with.
And importantly, I also want to re-emphasize the strength of our balance sheet. This has provided us with the financial flexibility to maintain our quarterly dividend throughout the pandemic, which we are really proud of given our long-term commitment to driving total shareholder returns. It has also enabled us to continue committing capital to new investments, as well as in operating and maintaining our existing centers.
While we know that we still have a long road ahead of us, substantial progress that we made with recovery this far, really has provided renewed energy among our team members. As I reflect back on the last year, my confidence in the longer term trajectory for Regency has only solidified. We are on the right side of a structural growth trend in strong suburban markets. Our high quality, well located, geographically diverse portfolio of grocery anchored, open air centers, is well positioned to continue serving the essential needs of our communities. Jim?
Thanks, Lisa, and good afternoon, all. I would like to echo Lisa's comments and thank the Regency team. Our people who've worked tirelessly over the last year to maintain lines of communication with our tenants. We're doing everything we can to enable them to open and operate safely and successfully. I'm proud of what we've accomplished during a very tough year, and how far we've come since last spring.
As of the end of January, the vast majority of our tenants are open and operating. And that hasn't changed much from a quarter ago. But a subset of our tenants are still operating under government mandated capacity restrictions. And those restrictions increased in certain categories and markets during the fourth quarter, given the rise in COVID cases.
Despite this, our cash collections continued show improvement, reaching 92% in the fourth quarter, and 89% in January as of Monday. We're still receiving rent payments for January and the collection trajectory is tracking in line with prior months. In fact, as of today, it's already up to 90%.
Even in our West Coast markets, despite the greater restrictions during the fourth quarter, we still improved our collection rates from a quarter ago. They still meaningfully lag or other regions, but we are encouraged that California appears to be easing some of these restrictions, which should help narrow that gap.
As we've seen in markets that are more open and less restrictive, consumers have returned to engaging with our retailers. This is encouraging and is an opportunity for continued improvement.
Lisa just discussed our strategic approach with our tenants and we designed deferral plans that are realistic. We expect the majority of our deferred rent to be collected in 2021. Beyond those with deferral agreements, tenants are still uncollected generally fall into three categories. There are those we believe in, but are still waiting to engage, predominantly in the West Coast markets operating under closure or capacity restrictions.
There are those we are aggressively pursuing for rent. And there are those who are struggling pre-pandemic that we see as closure risk. We continued to see impact from tenant fallout in the fourth quarter, and expect 2021 will likely remain challenged from its tenant fallout perspective. The seasonal dip that we typically see in the first quarter could be more meaningful as a result. Elevated tenant failures are factored into our guidance with the uncertainty around move outs contributing to the wider range.
I want to provide some added color on our leasing activity in the fourth quarter. We are encouraged by the strength in our leasing volumes, which I continue to show improvement throughout the year. The demand is real and the retailers are active.
We are seeing the greatest new leasing activity in the markets that are more open with the least restriction. Our future deal pipeline is also strong, with categories including grocery, off-price, banks, medical, auto parts and service users, but also and most encouragingly, fitness and restaurants. So where our tenants can operate, leasing feels closer to normal.
Total rent growth for the quarter was slightly positive, weighed down by renewal activity. For our renewal deals, volumes have remained consistent throughout the pandemic. But in the fourth quarter, we did see some pressure on our renewal leasing spreads. One-third of our renewal leases signed during the quarter averaged 18 months in duration. And these deals had negative spreads averaging more than 5%.
Our longer term renewal deals had positive spreads of over 2%. Some of the short-term deals or rent relief negotiations with tenants in bankruptcy, as well as others that have been significantly impacted by the pandemic. Those deals primarily consist of shop tenants, because conversely, we saw positive spreads nearly 7% per anchored renewal deals in the quarter.
Importantly, our teams are managing this space in the right way. We're being thoughtful when making leasing decisions with an eye towards longer term. We believe that rents for much of this space we right size at higher levels post pandemic. And by signing shorter term deals, we'll have another bite at the apple in the near future.
To sum up, we remain impressed by the resiliency and creativity of our tenants in this environment, and the willingness of consumers to adapt to the new normal and reengage with our merchants. Most importantly, we're encouraged by the improving operating trends, as we continue to see a flight to quality and believe our portfolio is well positioned to benefit from this. Mac?
Thanks, Jim, and good afternoon. Throughout 2020, we performed an in-depth review of our in process development and redevelopment projects, as well as our extensive future pipeline of value add opportunities. This evaluation included potential impacts to scope, timing, tenancy and return on investment in order to determine the best direction for each project to align with our long-term growth objectives.
Following this process, which we've largely completed, we made the decision not to pursue certain projects or components of projects, as they no longer meet our return thresholds. As a result, we wrote-off development pursuit costs above our historic average in the fourth quarter. The largest write-off was at Serramonte Center as we produced our scope. Though the broader multi-phase project is proceeding forward, and we added it back into the in-process pipeline in the fourth quarter.
This roughly $55 million project will include several standalone restaurant pads, a new hotel and a ground lease to completion of the mall interior renovation, and the releasing of the former J. C. Penney box.
While, we have trimmed some of our activities due to COVID, we continue to maintain a healthy pipeline of value add projects, and in fact, this process has given us renewed confidence, the $300 million of development to redevelopment in process at the end of 2020. In addition to restarting construction at Serramonte, we also commenced construction on a ground up Publix anchored development in the Jacksonville market.
In the fourth quarter, we successfully completed The Village at Hunter's Lake, a Sprouts anchored development in Tampa, Florida, and opened at 100% leased in the middle of a pandemic. Hunter's generating an 8% return on a $21 million investment. We continue to invest in our other large scale high value redevelopment projects that we expect to start in the near-term.
For example, entitlements are finalized at Westbard Square, Bethesda, Maryland. And we plan to commence with the first phase in 2021. We remain confident in the long-term value creation opportunities available in our pipeline.
Moving to dispositions, during the fourth quarter we sold five shopping centers for a combined gross sales price of nearly $78 million, bringing our total dispositions for 2020 to $191 million and a 5.7% cap rate.
Additionally, we sold over $80 million of non-income producing land and outparcels in 2020. Our disposition activity is consistent with our strategy to opportunistically sell non-strategic, low growth assets to improve portfolio quality and maintain balance sheet strength.
For 2021, we anticipate dispositions of approximately $150 million at an average cap rate of 5.5 to 6. This includes the sale to assets that close subsequent to year-end. We look forward to providing updates throughout 2021 on the progress of our development projects and our disposition plans. Mike?
Thank you, Mac. Happy Friday, everyone. I appreciate you joining us on what we know has been a very busy week. I'll start by addressing fourth quarter results and our balance sheet position before moving to our framework for helping everyone understand what this New Year may bring.
Fourth quarter NAREIT FFO of $0.76 per share includes a few one-time charges that were communicated several weeks ago, and were detailed again in our release last night. These charges are in addition to a write-off a straight line rent receivables of nearly $8 million or $0.04 per share, and uncollectible lease income of approximately $18 million or $0.10 per share recognized in the fourth quarter.
Uncollectible lease income remains the primary driver of the decline in same property NOI in the quarter. As evidenced by the additional straight line rent write-off in the fourth quarter, we did move some additional tenants to cash basis accounting. This was predominantly the result of increased levels of operating restrictions imposed late last year, and this bucket of tenants was concentrated in our West Coast markets, as well as across the more impacted tenant categories, including restaurants, personal service providers and fitness operators.
However, at the same time, we continue to see improved collections in our cash basis tenant pool. This is clearly a gratifying trend. In the fourth quarter, we’ve recognized revenue equating to 94% of our pro rata billings that is up from 90% in the third quarter and 86% in the second. We ask that you refer to our updated COVID-19 disclosures in the fourth quarter supplemental, which provide a reconciliation to pro-rata billings.
Just a few comments on our balance sheet, where we remain extremely well-positioned. Shortly after year-end, we repaid our $265 million term loan, which we indicated we would do if positive trends continued, which they have. With this move, we have completely redeployed the proceeds from our bond issuance last May, and you'll notice this impact in our guidance for interest expense. With ample access to low cost capital, we no longer feel the need to maintain an outsized cash balance out of an abundance of caution, which was dilutive to our earnings in 2020. We now have no significant debt maturities until 2024.
In addition, earlier this week, we closed on a recast of our $1.25 billion revolving credit facility, through which we have full availability, at terms and pricing consistent with pre-COVID levels. We are very proud of this execution, reflecting the continued strong support of our lenders in this challenging environment.
Turning to 2021, we’ve provided an additional NAREIT FFO range of $2.96 to $3.14 per share, a much wider range than we’ve historically offered, reflecting continued uncertainty. We encourage you to refer to our guidance disclosure in our press release and on Page 34, of the supplemental, as well as our guidance roll forward on Page 18 of our earnings slide deck. The roll forward should prove to be especially helpful.
As you would expect, the widest per share variance is in our projection for net operating income. Given that much more of our NOI is potentially variable amid the uncertainty that remains in the environment, especially as it relates to uncollectible lease income and potential move out activity, we believe a wide range is prudent.
We also feel that is important for us to communicate a framework for how we are thinking about the different scenarios that could play out this year. And what our earnings could look like under those scenarios. So different from past years, our initial 2021 guidance is not driven off of simple deviations from a base case scenario. Instead, the low end of today's range is representative of what we think our results could look like under a set of circumstances that is distinctly different from the assumptions supporting the high end of the range.
Each of these guideposts represent a unique set of potential outcomes. We actually thought about not even calling it guidance and instead calling it scenario analysis, because for now and until we have a bit more clarity on the impacts of the evolving pandemic, this is how we are thinking about this framework internally.
From a big picture perspective, the low end, what we call our reverse course scenario, is an environment in which the U.S. experiences elevated infection rates, and in turn sees more shutdowns and increased restrictions. In this scenario, with the potentially backtrack on rent collections and full year 2021could look a lot more like 2020.
Under this scenario, we see same property NOI property declining another 100 basis points year-over-year in 2021. The midpoint of our range represent the status quo scenario, where 2021 reflects a continuation of our fourth quarter results. In this scenario, same property NOI growth is slightly positive year-over-year, despite the tougher comp in the first quarter.
The high end represents what we've named our continued improvement scenario. This is an environment with continued progress in vaccine rollout, further listing of state and local mandated restrictions on operators and added federal stimulus that helps support local businesses and consumers. Under this scenario, we would experience a positive trajectory from Q4 results, as we continue to increase rent paying occupancy, as we had for the back half of 2020. In this scenario, same property NOI growth could increase by up to 250 basis points year-over-year in 2021.
We recognize the challenge that such a wide range of outcomes presents, but at this point in time, there's simply too much uncertainty to rule out the downside. At the same time, we also appreciate how difficult it can be to develop expectation without the benefit of a company's outlook.
We sincerely hope that this approach, and added transparency is helpful in allowing the market to consider its own views of where we stand in the pandemic, and then apply those assumptions to our scenario. We also expect that with another quarter under our belts, added clarity will allow us to refine our scenarios and tighten our expectations.
I'll touch on a couple of the major drivers of their earnings changes in 2021, using the midpoint scenario as reference, but we've given a lot of detail on the roll forward, and much of it speaks for itself.
One item to note is lease termination income. This is net of expenses, and first quarter 2021 will be impacted by a onetime lease termination expense of close to $2 million associated with a buyout of an anchor lease at Pleasanton Plaza.
And secondly, we expect higher net G&A in 2021, assuming hiring activity and business travel starts to return to more normal levels this year. As I spoke about on the last call, we are no longer assuming as much of an offset from development overhead capitalization, as we had in 2019, given the delays and changes in our pipelines.
In closing, we are very much encouraged by the progress that we've made and by where we stand today. But if there's anything we've learned in the last year, aside from confirming how critically important it is to maintain a fortress balance sheet, it's how quickly and materially things can change. As such, we remain careful with our expectations.
With that, we'd be happy to take your questions.
At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Katy McConnell with Citi. Please state your question.
Great. Thanks and good afternoon, everyone. So, within your same-store NOI guidance, can you provide some context around what you're expecting for 1Q, in terms of the magnitude of occupancy fallout or bad debt? Just to give us a sense for how steep the recovery could be in the back half of 2021?
One moment, guys. One moment, Katy.
Katie, this is Mac in LA. They are having a little bit of technical difficulty, so just give us a moment here.
Okay. No problem.
Katy, it looks like the Jacksonville team is going to switch conference rooms. So it'll be just a moment or two.
Hey, Katie, can you hear me?
I can. Yes.
We apologize, everyone. Can everyone hear us now?
Yes. I can hear you.
You missed -- I don't know if you heard Mike at all. But he actually started to answer your question while, we're having some difficulties here. Okay, so hopefully we start with relocated, we will not get cut off again.
So, hey, Katie, this is Mike. I'm going to go ahead. I did get your question before we got cut off. I think you were asking about the kind of cadence of NOI going into '21 given our guidance.
Yes, exactly.
Let me limit my comments to maybe our status quo scenario. And we'll talk about the other scenarios off of that. Obviously Q1 is going to be a difficult comp for us and that status quo scenario, which as you recall would be our fourth quarter in effect replicating itself through the full year of '21. So that would mean we still have a pretty tough comp, expectations in that area would be similar to the growth numbers we've been putting up in the back half of 2020.
And then if you think about the what could occur in the other scenario, should they present themselves, obviously that would in a reverse course, that would amplify that to the negative and obviously the other way, within a continued improvement scenario.
All right, great. Thanks. And then the second question, can you update us on where the cash basis tenant pool stands today, as a percentage of total ADR? And what are the collection rates have been like so far?
Sure. So we did add some tenants to the cash basis pool, as I indicated. We're up to 29% of our ADR is on a cash basis. However, there are some really positive signs. There our collection rate, as I mentioned, 75%, of those tenants are paying their rent. And that's up from 64%, if you recall from the third quarter earnings call, so really good momentum in that area. And those numbers would then be reflected in both our status quo as is that that number were to remain constant through '21, and then continued improvement that's where you're going to see the continued improvement. It's going to come from our cash basis tenants, and their ability to grow that rent paying percentage.
Okay. Makes sense. Thanks, all.
Thank you. Sorry for the delay.
No worries. We can hear you perfect now.
And our next question is from Derek Johnston with the Deutsche Bank.
Hi, everybody. Thank you. Just sticking on small shop here for a second. How do you envision remerchandising small shop vacancies with new relevant retailers? Are there any categories that stand out maybe more of a focus on more essential or hybrid versus entertainment health or beauty or fitness? How are you contemplating the mix going forward as you look to relate some of these faces?
Derek this is Jim, I'll take that. I think our philosophy is consistent with how we've always dealt with vacancy and merchandising. Obviously, I think there is a SKU towards healthy lifestyle. So wellness is a great category that we're seeing growth in. Certainly a lot of the existing categories, the better retailers are growing within the footprint that we have today.
I'd also like to think as an emerging category, what I call emerging category are some of the typical mall type folks, we mentioned, I think on our last call that we're seeing some of those people that support us West Town [ph], Lululemon, The Gap concepts that are interested in the open air center from the standpoint of pricing, as well as access visibility and merchandising mix. So a little bit business as usual from a mix standpoint, but there are some categories that I just mentioned, I think we've got a particular eye towards.
Okay, okay. Great. Thank you. And then I guess I would ask, what have you learned about traffic and demand, specifically at centers within states that have less mandated restrictions? Are there some inspiring read-throughs or positive takeaways from those states versus ones with tighter restrictions in California, that you can pinpoint and would possibly lead to your high end continued improvement, or frankly full case guidance? Thank you.
Thanks, Derek. I'll jump in on that one. I mean, absolutely, we continue and I know that we've talked about this, even in our prepared remarks continue to see really strong correlations, with restrictions being lifted, and foot traffic, and then foot traffic with collections. And so absolutely, we have the data that actually tracks that foot traffic. And in the markets where we've essentially fully recovered foot traffic, the collections are the highest.
And so expect as we continue we did see some restrictions lift in California, in the very recent past few weeks, and absolutely believe that that should translate to more foot traffic into our centers, which would translate to upside in our collection numbers out in that market.
Excellent. Thank you.
Thank you.
And our next question is from Juan Sanabria with BMO Capital Markets.
Hi, good morning. Thanks for the time. Just following up on Derek's question. Could you give us any sense of where the rent collections are maybe comparing California to Florida, kind of the two opposites maybe?
Yes, absolutely. Actually, I'll point you to I'm looking for it, if you look at our as a business update deck we put out last night, it's on Page 11. And we did enhance this disclosure this quarter. And I think really it shows the trend exactly as Lisa described it. You'll see quarter-over-quarter trends in collection rates by region at Regency. And you'll see that the Southeast from the second quarter at 84%, as an example to the fourth that 96%. And that's indicative of the foot traffic and that translate Lisa's identifying together with the relaxed restrictions.
The Pacific Coast or West Coast portfolio, although we have improved our collection rate there, the pace of that improvement from it has not been as great and there's a little bit of a sticky, small shop, restaurant, non-essential categories that continue to just have a hard time performing. And when you have these heavy restrictions and sometimes locks on your door, it's a challenge. And that's evidence in itself in our collection rates, we take a lot of comfort in what we're seeing in other markets in the country. And that replicating eventually in our great shopping centers in these great markets on the Pacific Coast. So, we look forward to that post-pandemic.
But that's just the point of our guidance. It's uncertain when that will happen. And so that's why we've taken this approach, as we have with our guidance ranges.
That's fantastic. And apologies for not catching that earlier.
No worries.
Just one follow-up on the balance sheet. You guys clearly have that as a position of strength and you talked about maybe feeling less cautious and willing to not carry so much cash. So, how do you think leverage looks from here either from a net debt to EBITDA perspective or otherwise? Can that increase from here? Are you kind of happy keeping kind of a current run rate in place just giving your historical defensiveness with regards to the balance sheet?
Yes, we're not getting off of our key tenant and key strategy here is to protect that balance sheet and to operate in the low 5 times area. That's where we started in 2019. And, as we define recovery, that is a key portion of that definition, we'd like to return to those levels. We're at 6 times, at year-end, with that much disruption, I think that's a very enviable position, I would imagine.
But we're not satisfied with that. So we will continue to look through primarily EBITDA growth organically, and just converting these spaces in these tenants back to rent paying. We'll handle much of that.
If you think about our status quo scenario again, just to baseline us, and you go through Q1 towards the question that Katie asked, we could top out on a leverage ratio range in the 6.25 plus or minus range, is what we would see in that scenario, and then obviously amplify that up or down, depending on which scenario actually presents itself. Very comfortable at those levels from a security standpoint, that's why we took down the term loan, that's why we continue to pay our dividend. And we do have a lot of confidence that our recovery will get us back to that low 5 times ratio in due time.
And I just want to add, because we're really proud of it. We obviously built the balance sheet intentionally to weather future storms. We've always talked about it. And with maintaining our dividend, we still generate a free cash flow north of $50 million in 2020. And we're really proud of that.
Thanks very much.
And our next question is from Craig Schmidt with Bank of America.
Great, thank you. Good afternoon, or good morning, where everyone is. It's clear through your business update that your portfolio is most impacted by the Pacific Coast asset. I was wondering, what are you hearing from state and local regarding restrictions? It seems like it's more restrictions now than actual mandate closings.
And I was wondering, having these restrictions does that also impact new leasing, as retailers drag their feet to open stores in markets they may appreciate from a longer term basis?
Craig, I think you're exactly right. It's more of a -- it's not so much a closure now as it is just basically capacity we're seeing in LA, they've reopened the restaurants, and we're hitting. There's a pretty solid pent up demand for folks to get back out in the outdoor setting anyway.
Certainly, categories that have been most restricted are going to be the least perceptive at this point I believe to engage in new leasing. The folks that have been open are engaging, are doing new leases. I think when you look at our pipeline of activity as well as executed deals in the last quarter, we're seeing across the country of similar demand as well as executable deal.
So, I don't want to beat up on the West Coast too bad. Certainly there are categories that really were hurt badly by I think these mandated closures and capacity restrictions. But the folks that were open are continuing to do business and grow their business out there as well.
Great. And then I know that you have an 18% exposure to restaurants, I guess 12 in kind of fast food and six in dine and casual. I know that you have said that, that's where you'd like the exposure to be, perhaps you can comment, what you're thinking? And I guess its longer term thinking about sticking close to that 18% exposure?
Yes. I feel like that ballpark numbers is the right ratio and mix for restaurants. I think restaurants are certainly as they continue to morph and react to what consumer demands are, there's always going to be a place for restaurants. The QSRs have done very well, the fast food folks have done very well. And even the full service restaurants in markets that were more open adapted very well during this pandemic to figuring out how to curbside pickup delivery and basically they added a leg to their sales program.
Can you still hear us?
Yes, I can hear you.
Somebody run and say that they couldn't hear. Yes, sorry about that.
Sorry about that. So yes, I believe that the restaurants in that range are that's right number they will move, they will change as retail changes, but we're comfortable there.
Isn't it factor of sort of competing against e-commerce? I mean, you physically need to either pick up the food or dine in the restaurant that brings traffic to the center. I'm wondering if that enters into the long-term. Why you want to keep that 18%?
I think, I mean just generally thinking about the neighborhood centers. And for the most part, right, where grocery anchored neighborhood centers. I actually believe that restaurants are their driver, just as much as your growth with their anchors are. And that this trend to even more remote work and people spending more time at home is going to play to our favor.
As people are spending more time at home and not necessarily in the downtown CBDs or urban core, they're still going to want to leave their homes. And whether it is to pick up and go or if it's to dine in. I think that we will benefit from that increased traffic at our shopping centers.
Okay. Thank you.
Thanks, Craig.
And our next question is from Rich Hill with Morgan Stanley.
Hey, good morning, guys. Sorry, good afternoon, it's blurs day [ph]. So I can't even get my days right. Never mind my time. First of all, thank you for what I think is best in class guidance. Your reconciliation across your three scenarios was really, really well done.
I did want to talk about those three scenarios, not necessarily about your guidance but maybe if you could just frame a little bit how the retailers are thinking about the outlook for 2021. What are they telling you about rent negotiations? Are deferrals coming back are abatements coming back? Are they looking for lower rents? Are they looking for percentage rents?
I know that's a lot there. But I'm just really trying to frame the discussions you're having with retailers within those three frameworks that you provided?
I think the discussion with retailers is, for the most part, pre-pandemic kind of conversations. We're not seeing wholesale change on term negotiation or big divergence on historical rents and those kind of things. But I think the folks that have done well and are doing well, are continuing to try to grow their business as there's opportunity in the marketplace today, they're going to take advantage of that.
We're seeing tenants that are more local in nature, that are finding opportunity in this environment to relocate. And fortunately, we are seeing and being the beneficiary of some of that relocation within a marketplace. Under the scenarios, I think the scenarios would be probably more on the low end reversal and would be more of the wait and see kind of attitude. Things got shutdown, you're going to have more of that. I'm not sure what the future looks like. So I'm not sure I can comment.
So again you're going to be in that no man's land. Quite frankly, we're at some of our categories in California, no man's land. And our program has been once we can see light at the end of the tunnel, then we engage and we structure programs that are win-win for our retailer and for us. So I think that'd be the probably the biggest change is if we go backwards, it'll probably stymie some of those categories that have been, again, the most impacted today.
I do think that based on the volumes that we have already executed and on our pipeline, you can see that there's some optimism and positivity amongst our retailers and all of our tenants to continue to grow. And there's a flight to quality and we're positioned really well to take advantage of that.
Lisa, I wanted to just follow-up on that, because you made a really important comment about free cash flow and how you were able to be really nicely positive in 2020, despite all the uncertainty that the world threw at us. So as we think about your cash flow going forward and the FFO you created in 2020, and the free cash flow you created, it seems to me that that's a super high quality cash flow stream. And in fact, maybe it's -- I'll use my words and you can push back on it, but it's been de-risked.
My view is that if you were able to generate that NOI in that free cash flow, that's a pretty high quality cash flow, if it continued to be created in a pandemic. One, am I wrong on that? And how would you respond to that?
I think that you said it perfectly. I don't know that I have anything to add. Absolutely.
Christy didn't tell me to ask that question for what it's worth.
Absolutely, which is why I'll say it again, that we're really proud of that and really proud of the fact that we were able to generate that much cash flow in the middle of a pandemic.
Okay, great guys. That's helpful, that's it for me.
And our next question is from Greg McGinnis with Scotiabank.
Hey, good afternoon, everyone. Mike, I appreciate the context around the guidance that is laid out. Just want to kind of confirm what the base case is, maybe essentially assuming that you're continuing to recognize like 94% of rent. And then what does that mean on the upside from that rent recognition standpoint?
Yes, you have the assumption, right. Again, the easiest way to think about this is status quo. And I wouldn't -- I don't want to call out our base case, but our status quo scenario, which is top of our range, is a Q4 replicating scenario through 2021. And then obviously that and a continuous -- should we see continued improvement that would accelerate from there.
If you kind of think about where we are at Q4, which again is I think it's important to grow more sales. And if you were to look through uncollectible lease income, and just think about it as effective rent paying occupancy, which is what we talk a lot about internally. We're at 86% plus or minus. So that is what we're carrying during the status quo scenario, through that midpoint range through 2021.
And we'll go ahead and say this, what we see today and what Jim's articulated from a leasing activity perspective and a little bit to Rich's question around, what we're hearing and seeing from the retailers and the other and the service providers and interpreting what scenario they may be behaving under. Our eyes are focused today on the status quo scenario to the continued improvement scenario.
However, we presented this reverse course scenario because it's February, it is early. The vaccine is just beginning to roll out. There's these variants. We just can't rule out a reverse course scenario. It's just too soon to do that. But I think it is important for you to hear that where our eyes are focused, it's on the status quo and/or the continued improvement scenario.
All right, thanks. That's fair. And then on the leasing to CapEx costs on new leases look like they trended a bit higher in Q4, as a percent of the rent per square foot. Is this starting to cost more to bring in tenants? Or there's some maybe some one-time items in there that can explain the increase?
Yes. Greg, Jim, again. Exactly right. We had two new anchor deals outsize TIs associated with those. And if you netted those out, we were right back in the $20 square foot, which put us right in line with historical. One was a Burlington back fill of a 30 year old Office Depot space. It finally termed out, so we had some excessive work on that one. And then a national grocer back filled it vacant box in southern Cal. So both of those were little higher than normal TI cost, but excellent replacement merchandising for those two centers.
Okay. So purely a function of, who when and where versus...
Yes. At the end of the day, I don't expect -- I don't see a change into from where our historical averages have been.
And let me just add to that, Greg, for your benefit. We did, I think, post an 8% of NOI kind of all in CapEx ratio for 2020. That's low. That was intentionally low. When the pandemic hit, we made some moves to preserve some capital, pushed some CapEx projects beyond 2020 into 2021. We do anticipate returning to more normalized levels.
So as we recover and more normalized levels would be that 10% to 11% of NOI range, maybe even leaning on the upper end of that, because we will have more space to lease.
And just to clarify, is that 10% to 11% inclusive of development? Or are you just I mean in terms of those kind of regular maintenance CapEx and leasing CapEx?
Maintenance and leasing CapEx only.
Thank you.
And our next question is from Mike Mueller with JPMorgan.
Hi. You talked about three buckets for your uncollectable revenues. I think it was tenants you really believe in those that were challenged beforehand and then in the middle. What's the split that you see between those three buckets?
I would think the ones we believe in is by far the majority. And I think, if you looked at the West Coast, that's where the majority of that bucket resides. Again, as I mentioned, when there's clarity, we'll clean that up. The folks that pre-pandemic were struggling, that's a very, very small group of folks. And that'll clean itself up in the course of business.
Got it. And then one other question on the -- go ahead, sorry.
I was just saying on the other ones are pushing for rent, that too is a very, very small group of people at this point that just are playing the game.
Trying to take advantage of the situation?
Take the advantage of the situation and that will resolve itself relatively quickly as well, I believe.
Got it. And then just a quick one, the 5.5% to 6% disposition cap rate for this year. Would those cap rates have been similar pre-pandemic?
Go ahead, Mac.
Yes, Mike. Definitely they would have been similar. That's what we're seeing. We're seeing really solid pricing in the types of assets we're selling. And the strongest part of that market is small grocery anchored centers, particularly in the open states where there's more transactions, certainly triple net assets, there's tremendous pricing power there. And we've been very pleased at being able to transact. There's buyers out there, they have capital, and they're typically local private buyers who have a lot of experience and know the trade areas and markets.
Got it. Okay. Thank you. That was it.
Thanks, Mike.
And our next question comes from Floris Van Dijkum with Compass Point.
Hey, guys, thanks for taking my question. Good afternoon, and good morning. I wanted to, by the way, love the fact that you, I know it's not official guidance, but in your scenario analysis, the midpoint shows positive comp NOI.
But if you can walk us through what kind of reserves have you baked into that? And maybe if you can talk about Mike, if you can compare that to 2019 levels of reserves?
Oh, gosh, there is no comparison. So, if you think again, let me comment on the status quo scenario just to center ourselves in that status quo midpoint level. Again, going back to Q4, so $17 million, $18 million net charge in the quarter for reserves, that's down sequentially, certainly from Q2 and then into Q3, I think we're 40% down from Q3. And then that level, we would anticipate replicating itself through the year as I've kind of repeated today. That's a very healthy level for us, when you consider what our experience was in 2019. And before that, when bad debt charges kind of historically, are in the 50 plus or 50 basis points plus or minus was normal. And you're maxing out at 100 basis point level. So, it's just a completely different universe really.
Right. So, I was trying to -- because one of the things that which is interesting to think about, and you sort of alluded to some of your comments here about your 96% cash paying occupancy. What is the potential here? And pre-pandemic, you were probably at 94% on those levels or something along those lines. So, it suggests you're going to have not just one year but a couple of years of pretty, pretty decent sized earnings growth, if I'm not mistaken?
Yes, let me refine some of those numbers.
First, correct it. Its 86%.
Its 86% effective rent paying occupancy as being effect to uncollectible lease income at the end of Q4, 2020. And I think your point is this, if you compare that to February, pre-pandemic, that's about a 700 basis point decline in effective rent paying occupancy that we believe through our recovery will return.
Right. That's great.
We do expect that we will continue to have continued growth, not just as you pointed out in the status quo scenario positive in 2021, if we hit that, but also for the next several years.
Yes. Thanks for that, Lisa. That's exactly what I was saying. Yes, knock on wood.
And our next question is from Michael Gorman with BTIG.
Yes, thanks. I just wanted to spend a little bit on the development pipeline and the review process you went through and just kind of reconcile what sounds like a lot of positive demand trends in your market with some of the review process. And maybe understand, which the majority of projects that were impacted. Is this mostly derisking the CapEx budget because of COVID-19? Or were these projects that had different retail trends that made them no longer work? Or kind of any common themes that impacted this pipeline kind of in the context of what sounds like an improving leasing environment?
Yes, absolutely. I guess a couple of themes there. We did take our time to go through our projects as we mentioned in our prepared remarks. Really, it only cost us to cease moving forward on a couple of projects. One was the project that we had under contract. And, unfortunately, with the pandemic, the leasing didn't evolve as we thought and we dropped the contract. So we had to write-off some pursue costs, typical any type costs you can imagine.
But in the larger context of looking at our pipeline, really the biggest impact is time. Some of these projects have taken us longer to put together. I'll give an example of that, Town and Country is a project that's been in our pipeline. That project has been delayed by about a year. We've had trouble getting our EIR released by the City of Los Angeles, because they're impacted by COVID, just so happens this actual week, it was finally released.
So it's taken us some time. The scope of the project, really is very similar to how we planned it, but we've had to push it out a year for that reason alone.
But we are looking at other projects, they're in locations that we very much believe in. We really believe in the scope. Of course we're going to challenge ourselves to make sure that what we're proposing is still relevant in a post-COVID world. So I would say we made some minor changes to them, but not significant wholesale changes to them. Because these projects were pretty conservatively scoped to begin with. So we need to make sure we have the right amount of shops, convenience, parking, outdoor dining, the right amount of non-retail uses in those cases where we have it. And we believe that that's still the case.
So it was very important for us to do that early in the pandemic. We were in a more of a capital preservation mode. Now that things look more clear we are getting ourselves prepared to start some of these projects, including our Bethesda project, which has now been entitled. And I'll give you one more. Our Costa Verde project, which we've been working on for many years, was finally entitled. They got approved in December without any appeal period. And that probably took an extra year longer than what we thought.
But we've made some really good progress and gives us a lot of confidence going forward to get these projects started, when all the little ingredients come together. But the big ingredients are there.
No, that's helpful. Thank you. And then Mike, maybe just one last technical one on the guidance side of things. I know you talked a bit about it in your prepared remarks, but can you spend another minute talking about the G&A, the 20% rise that's implied in guidance. Just kind of what are the biggest drivers there?
I appreciate the question, Mike. It does deserve at least another minute. The way what we need -- what I'd asked everyone to do is really kind of break down G&A by years, and then was talk about gross and then we'll just talk about gross and net.
So, first, I think it's important to go back to 2019, walk through '20, and then into '21. And what you'll see is that the top line gross revenues '19 to '20 came down, in the pandemic, there were material savings to the company, those savings came in the form of T&E, reduced travel expenditures across our entire platform, conference attended, so on and so forth.
We also benefited, I guess, we benefited from a financial perspective by having fewer seats filled, as it was more challenging to hire in that type of environment. And then variable compensation, other compensation all went in line with that.
But what's happened in '20, is those savings have been masked or covered up by our development overhead capitalization. And I spoke about this last quarter, probably my fall price should have spent a little bit more time on it. That change in our development pipeline that Mac just articulated, did result in changes to our overhead capitalization as a result. Those changes are masking the savings in '20.
So now, fast forward to '21, and in our guidance range, what you're seeing there is a return on the top line. So, those savings in '20 should the economy continue to reopen as we hope and suspect it will, in a status quo/continuing improvement scenario, you'll see those savings start to reverse. And that'll put pressure on the top line. And then overhead capitalization, however, will take longer to recover with the development pipeline that is a longer lead time. We have the same phenomenon occur with us in the GFC coming out of that downturn as well.
Last point on G&A on the top line, then if you come back and just think about top line gross G&A '19 versus '21, it's essentially the same. '21 slightly higher, and that's because we are spending a little bit more money on third-party legal, as we work through our tenant negotiations. This is more activity than we've ever had to do in a year. But I think it's good to see that that top line is relatively consistent.
Okay, great. Thank you.
And our next question is from Ki Bin Kim with Truist.
Good afternoon. Just want to ask a couple quick questions on your lease spreads. So, this quarter, it was roughly flat. Obviously, the most important part is that you're doing leases and there was a good volume of it. But my question was the half a percent of positive cash lease spreads. Do those still have the traditional rent step-ups that you've had in the past? So, like the 1.25%, or 1.5% rent step ups?
Ki Bin, I appreciate you asking that. The short answer is yes. We're running about on our local shops, we're about averaging 2% on say 80% of our local deals still have the annual embedded rent steps. And when you blend the anchors in as well, it's about 1.5% on 80% of it. So, yes, we're kind of proud of that. We've been -- that program is in place for a long time and over time, it's a very nice extra bump, if you will to long term NOI growth.
Okay. And that's good to hear, because getting those bumps or not, it really changes the perception of what rent spreads are.
My next question is, what are some of the things when you talk to tenants that you think might permanently change going forward in terms of like what they're looking for. It's a pretty broad question, but maybe the types of assets or the store size or how they do business or anything that you think will have kind of permanent lasting changes and where that might pull you towards in terms of your business?
I would say lessons learned from the pandemic are certainly the curbside pickup, the last mile delivery. I think all retailers are struggling with this fulfillment issue. And as that morphs, that's something we're certainly going to try to keep our finger on the pulse and make sure that we can react and create the environment that helps support our tenants as they're building, as their business morphs.
But those kind of things I think are the biggest long term changes that I see in the business are lessons learned and pandemic, I think, drive throughs how critical they were, the ability for a lot of these restaurants for that outdoor space that's here to stay, the ability to have easy access for the Starbucks of the world where they can people can get in, get out because it's more pick up than it is sit and stay for a while.
So that whole shift in the business, I think is something that we need to continue to morph and modify. Where we're able, our centers to accomplish and accommodate some of those new changes.
Got it. Thank you very much.
[Operator Instructions] And our next question is from Linda Tsai with Jefferies.
Hi, can you hear me?
Yes.
Okay, great. Are you actively tracking the spread of retailer micro fulfillment across your properties, I guess, as a follow up to Ki Bin's question? Just wondering if it creates pricing power down the road for centers that offer this? Or is it more the case that at some point all centers will have micro fulfillment?
If you can answer that question, Linda, I meant there are a lot of people that would pay for your services. It is certainly something that we talk about every day. And Jim just mentioned it, how do we strategically position ourselves to really capitalize on and profit from the need for this micro fulfillment and last mile. Because we do I mean, we own 400 plus shopping centers close to the consumers. And I absolutely believe that the future is the inventory, if you will, of goods needs to be close to the customer. And we are well positioned to play a part in that.
And we talk with our retailers. We talk to the other experts in the field, and we continue to do the things necessary to position ourselves for the future.
But again, where that goes and how quickly it goes, no one really knows. But I like where we are in the overall kind of universe, if you will, of the fulfillment of goods to customers.
Thanks. And sorry if I missed this, but just given some of the migration patterns to lower cost markets that we're starting pre-COVID, which accelerated during the pandemic. Does this change your view of which markets you'd want more or less exposure to?
I mean, we really like the markets that we are in. We are already pretty geographically diverse and a national portfolio. And there is even micro migration patterns in some of the higher cost markets, if you will. And we believe that we're going to be able -- we will benefit from that as well, where you're seeing perhaps some migration from the urban core to the suburbs, the first ring suburbs where we are well positioned.
So, we will continue. We again like the canvas and we will continue to expand whether it's looking for opportunistic acquisitions or developments in the markets that we are in.
Thanks.
Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back over to President and CEO, Lisa Palmer, for your closing remarks.
Thank you all. 1:15 Eastern Time on a Friday, I know it's been a really long week. Apologize for the technical issues and have a great weekend. Go visit your local neighborhood shopping center and buy a Valentine's Day gift. Thanks all.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.