Greetings, and welcome to the Regency Centers Corporation Second Quarter 2020 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms.
Laura Clark, Senior Vice President, Capital Markets for Regency Centers. Thank you. You may begin.
Good morning, and welcome to Regency's Q2 2020 earnings conference call. Joining me today are Lisa Palmer, President and Chief Executive Officer Mike Moss, Chief Financial Officer Mac Chandler, Chief Investment Officer Jim Thompson, Chief Operating Officer and Chris Leavitt, SVP and Treasurer. As a reminder, today's discussion contains forward looking statements about the company's future business and financial performance. These are based on management's current expectations and are subject to risks and uncertainties. Factors and risks that could cause actual results to differ materially from these statements are included in our presentation today and 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 provided additional COVID-nineteen disclosure in this quarter's supplemental package and have also posted a presentation on our website with additional information regarding COVID-nineteen business updates and impacts. Lisa?
Thank you, Lara. Good morning, everyone. I hope you're all doing as well as possible. First, I just want to open and acknowledge and thank the amazing Regency team. I'm extremely proud and grateful for the dedication and commitment our team has demonstrated during this incredibly challenging time.
As we've continued to navigate through the last several months, the entire Regency team has prioritized the well-being of their fellow team members, our tenants and the people in the communities that our properties serve, while also making great progress in assisting tenants with successful reopenings, improved rent collections and rent deferral negotiations. As states and markets have lifted restrictions over these last few months, we've been encouraged by the success that our tenants have experienced. Our base rent collections for the Q2, including executed deferral agreements, was 77% and nearly 80% in July. We've seen firsthand that as tenants have been able to reopen, consumers are eager to return to some sense of what was once normal, and that means resuming some of their prior shopping behaviors. Despite the progress Regency and our tenants have made, we are keenly aware that there's still a lot of uncertainty ahead.
It is so difficult to predict the future and we know that this situation will continue to evolve and maybe more challenging as this disruption is even more prolonged. We don't know for how long the virus will continue to spread without an effective treatment or vaccine. We can't predict how resilient consumers will be or how tenants will be able to adapt and innovate or some tenants will need additional support in order to survive. But what we do know, as we look towards the future, we are certain of Regency's combination of unequaled strategic advantages that we have worked to build over time. This combination affords us the opportunity to withstand this difficult time and I'm confident that we will emerge well positioned for future success.
The quality of our geographically diverse portfolio comprised of necessity based retailers has never been more important than it is today. Our development program with a pipeline of exciting value add projects is structured to provide timing and financial flexibility. Our highly engaged team achieving great results while doing business the right way and perhaps most importantly in today's environment, a balance sheet and liquidity position that was rock solid entering the pandemic, enabling us to absorb the body blows that we've endured the past 4 months. Given our strong balance sheet and belief that our rent collections will continue to improve over time, our Board again declared payment of our quarterly dividend at the same level. Our ability to continue the dividend at the current level is an output of a strong starting position of a very low payout ratio combined with actual results that are certainly not up to our historic performance levels appear to not only have stabilized, but to also be trending in a positive direction.
Working closely with our Board, we will monitor our financial metrics and projections in addition to economic and industry trends, and we will make future dividend decisions based on the facts and circumstances at that time. Before handing over to Jim, I'd like to touch on Regency's continued commitment to corporate responsibility. In addition to our strategic business advantages, Regency has always had a strong set of core values that have guided our business strategy since we were founded over 50 years ago. Among those core values is a commitment to do what is right for the environment, our people, our communities and our company. By doing what is right in each of these areas, we are effectively managing risks and ensuring the success and sustainability of our business.
As I hope you saw in our recently published annual corporate responsibility report, implementation of these initiatives occurs across all departments at Regency and is ingrained in our culture. I'm confident that this commitment to do what is right, along with the combination of our unequaled strategic advantages, we'll continue to position Regency to
be a leader in the shopping center sector going forward. Jim? Thanks, Lisa, and good morning. As Lisa said, our top priority remains the well-being of our team, tenants and communities. As of the end of July, 95% of our tenants are open compared to 75% 2 months ago.
The majority of tenants that have reopened experienced better than anticipated initial success and have been encouraged by consumer reception. Customers appreciate that retailers are taking extra precautions and measures to help them feel safe and welcomed in their stores. Regency is also working side by side with our tenants, including implementing increased safety procedures and installing enhanced signage and wayfinding. We will continue to make additional modifications and adjustments to help our tenants and their customers feel safe and comfortable. As highlighted in our business update posted on our website, as of the end of July, we have collected 77% of base rent for Q2, including executed deferrals.
Looking beyond quarter end, we have collected 79% of July based rent on that same basis. We are encouraged that July collections have trended ahead of April, May June as of the same point in time for those respective months. We have purposely taken a very deliberate approach to negotiating rent deferrals with our tenants. As tenants began opening or had visibility on when they would be able to open, we were in better position to understand their financial needs to open and operate successfully. Just as important, Regency has been able to obtain certain non monetary concessions in our deferral agreements, including waiving co tenancy clauses, lifting use restrictions, extending terms or requiring enhanced sales reporting.
Even with tenants that are still limited on how they can operate due to government orders, such as full service dining and fitness categories, we are seeing that the better operators are able to adapt to the circumstances and are creative in how they successfully operate their businesses during this time. For example, we have many nail and hair salons that have extended their normal operating hours in order to accommodate more clients, restaurants that are creatively using additional outdoor areas for seating such as sidewalks and even parking spaces, and fitness operators that are hosting outdoor classes and adding additional class times to accommodate customers' modified work from home schedules. At the same time, in certain markets that had reopened, but restrictions have since been put back in place, many tenants are unfortunately experiencing a regression in the progress they have made over the last several months. Just as we did during the initial shutdowns and imposed restrictions in March, we will continue to work with these tenants to provide support While our operations teams have been primarily focused on providing support to our 8,000 in place tenants throughout the pandemic, we are also continuing to negotiate and execute new leases with retailers including grocers, off price, banks, home improvement, service users and restaurants.
We signed over 120,000 square feet of new leases this quarter, including a new anchor lease with a home improvement retailer in a former Kmart space in Florida with rent growth over 55%. Although our net leasing volumes were down this quarter due to limited new leasing activity, it's worthwhile to mention that we renewed nearly 1,200,000 square feet of leases with positive rent spreads. While the majority of new leases signed in Q2 were begun pre COVID, we are seeing tenant interest thawing and it turns similar to pre COVID expectations. While there is no questions, our op team is keenly focused on collecting rents due and and
Thanks, Jim, and good morning, everyone. As we know, Q2 results were meaningfully impacted by rent collections that remained below pre pandemic levels. To better understand this impact, we've enhanced our disclosure in our supplemental and I strongly encourage you to reference those added pages if you haven't already. I'm going to focus my comments on uncollected rents and specifically how those amounts are recognized in our results, both earnings and same property NOI. And I'll finish with some comments on our balance sheet and liquidity position.
Given continued uncertainty, we will not be providing forward looking guidance at this time. Uncollected pro rata rents and recoveries billed in the Q2 totaled over $84,000,000 Following an extensive collectability review based on a multitude of factors including credit rating, location and chain performance, tenant category, tenant communications and a host of other relevant inputs, we deemed nearly 50% of these rents even if contractually deferred, as likely to be uncollectible. To use a more common description, we're accounting for these receivables on a cash basis, meaning the income was not recognized in the quarter and will only be recognized as revenue when and if cash is received. The balance of the uncollected pro rata rents and recoveries billed in the 2nd quarter approximately $44,000,000 was from tenants with financial and operational attributes warranting being accrued as revenue and carried as a receivable at quarter end. Again, this includes rents that were contractually deferred.
Importantly, when including accrued rents and recoveries, together with collective billings, Regency has recognized revenue in the 2nd quarter equating to 80 6% of total quarterly billings and other income. The uncollectible lease income charge this quarter, again moving tenants to a cash basis of accounting, also resulted in a reversal of previously recorded straight line rent. On a non cash basis, this negatively impacted the 2nd quarter by approximately $19,000,000 Together, current quarter uncollectible lease income charges are impacting NAREIT FFO by $0.35 per share. Moving to the balance sheet. During the quarter, we took additional measures to enhance our already strong liquidity position by issuing $600,000,000 of 10 year bonds and repaying the defensive draw we made on our line of credit in Q1, bringing our line capacity back to a full $1,200,000,000 As of quarter end, we are carrying approximately $600,000,000 of cash on hand.
Together with our earnings announcement, we also noticed our intent to redeem the entirety of our $300,000,000 of bonds maturing in 2022. The stronger than anticipated rent collection rates in the quarter combined with the progress we are making on tenant negotiations gives us confidence to use a material portion of our cash balances to retire this near term debt and eliminate the added interest expense. We continue to have a $265,000,000 term loan outstanding maturing in 2022 and we'll monitor our progress in the evolving retail landscape over the next several months before deciding to retire any additional near term obligations. With our line of credit fully available and our pro form a cash balances following the bond redemption, we remain very well positioned with over $1,500,000,000 of liquidity more than covering development and redevelopment commitments and debt maturities through 2022. Before we turn to your questions, there is one person deserving of a special mention this quarter.
Laura Clark will be leaving Regency for an exceptional opportunity within Wheatland And while she will be missed, we are excited to watch her career continue to grow. Best of luck, Laura, and from your Regency team, thank you. With that, we'd be happy to take your questions.
Thank you. At this time, we'll be conducting a question and answer session. Our first question comes from the line of Christy McElroy with Citi. Please proceed with your question.
Hi, good morning. Thank you. It looks like local tenants comprise 23% of your ABR, but only about 16% of the deferrals that you've agreed on. Can you sort of discuss your approach to dealing with those local tenants in attempting to collect rent, maybe specifically restaurants? There's been a lot of press reports about permanent restaurant closures.
There's obviously a lot of concerns that non payment of rent potentially turns into vacancy. I'm just trying to get a sense for your strategy to both collect that rent, but also mitigate that potential occupancy loss within your own portfolio?
Sure. Hey, Christy, this is Mike. Let me start with a little bit on our disclosure and then I'm going to pass it on to Jim to more directly, I think, answer your question. We did highlight our local exposure and then we also highlighted our collection rates for local tenants both for the quarter as well as into July. And you see a decline in rate of collection there.
I'd like to note, however, that we have found that the local payers have been later than our national tenants. So measuring 1 month of local payment rates versus 3 months has been I just want to make that distinction that the local tenants have been paying a little bit later in this environment. In fact, if you were to look at our collection rates in July at the same point in time as that of April, May June by month, you'll see that that local collection rate has actually increased sequentially for all 4 months. And we feel like that momentum is pretty positive and consistent with the other directional changes that we're seeing in our portfolio. With respect to the follow-up, I'll let Jim give you some color.
Yes. Christy, what I'd say is, we've been very, very focused over the last 8, 10, 12 years in our proactive asset management of merchandising and really enhancing the quality of our side shop tenants. So as we look at that group as a whole, they're really good entrepreneurs. The business is their livelihood. So they're very invested.
They've got significant skin in the game. And they're important players within the merchandising and shopping center. So by and large, they're nimble. They've reacted our teams are actively engaged in deferral plans to assist these folks to get back on their feet. We're clearly going to have some fallout at the end of the day, but by and large, these retailers were doing well pre pandemic and we want to do the best and everything we can do to help them survive and thrive post pandemic.
And if I may just quickly address the restaurant closures. I don't think that there's any doubt that we're going to see a lot of failures in the restaurant category. But I think that the numbers that you see and the news reports that you're reading really are looking at America as a whole. And I like where we're positioned, close to the neighborhoods, close to people's homes. And also from an exposure standpoint, we have a lot less in sort of that fine dining, if you will, which I think is going to be probably the hardest hit.
But as more as people continue to work from home and perhaps moving forward as people continue to work from home even in a permanent state, I do believe that having those for people close to their homes, the neighborhood community shopping center, we're still going to have restaurants as an important part of our merchandising mix at our really high quality portfolio going forward.
Okay. That's helpful. And then just thinking about the broader, including national and regional tenants. And Jim, you mentioned in your comments in the opening remarks being thoughtful about future performance and thinking about future performance and doing those deferral deals, have you done any rent abatements to date? And in terms of that, looking at that versus going down the road of litigation, is that versus going down the road of litigation eventually?
Christy, that's a great question. And I'd like to answer that by kind of opening up our playbook on the whole deferral process and our approach to it. As I said last quarter, we started out being patient deliberate. We didn't engage in the original onslaught of rent relief request back in March April, but rather pre start tenants. We want them to get opened and we'll address needs when there's visibility.
And now that we've moved from 59% of our retailers opened at the end of April to 95% today, I think we're now in a more rational environment, both tenant and loan lower. We both have much better clarity and visibility as to needs. And we're finding good common ground for fair trade offs between a repayment plan and non monetary concessions to create win win for both of us. So as we kind of rewind early on in the process, we initially prioritized our top 300 tenants, which represents about 70% of our ABR. And that was the first group we actively went out to work out agreements.
But as of today, as we sit here, we're actively engaged with every one of our open retailers open and operating retailers, crafting modifications where needed. And you can kind of see that priority strategy evidenced in the 84% national and 16% local executed deferral agreements. So that mirrors exactly how we attack the situation. Obviously, the categories that are hardest hit, theaters, entertainment, fitness uses, full service restaurants, child related services. We continue to be very patient with this group as these uses in general are still closed or operating under limited levels of occupancy.
So again, just to reiterate, we've been very deliberate in the papering process as evidenced by the 4% executed deferral that you might see that stat in the investor slide deck that we sent. But the majority of uncollected rent is from tenants that we have ongoing relationship and dialogue with today, but have yet to pay for the agreements. We believe we'll continue to close the gap on this uncollected bucket, but each deal is individual in nature and it will continue to take time to resolve.
Great. Thank you.
I will add one thing I think is important. While tracking these deferral agreements is important, you really can't lose sight that our existing leases are binding contracts. And the deferrals are just modifications outlining a payback program. The collectability of the outstanding receivable is really the key to its success and really coming out the other side of this pandemic the way we want to see it.
Thanks so much for the color.
Thank you. Our next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.
Hi, everybody. Thank you. When we look at the cadence of NOI going forward, it's fair to say that you are now operating and growing from a lower base. Should we expect a lag in occupancy declines as you possibly move tenants out as it seems occupancy held up better than the NOI decline indicates? How should we think about that in our models?
Derek, I mean, that's you're right. We have not been as Jim just described in terms of the negotiations with our tenants, we certainly haven't been evicting tenants. And there are going to be many that will fail and we know that. Even Lara's last day, she would be giving me the eye that I'm not allowed to provide any future NOI guidance. So I'm going to refrain from that.
But absolutely do expect that we are going to see, occupancy decline. And the NOI is reflecting the reserves are reflecting some of that today.
Okay. Actually, thank you. That's helpful. And something a little more positive. Feeling omni channel now post COVID is really emerging as the gold standard for navigating sales and wallet share for your tenants or retailers.
How are you positioning Regency to capture the increasing demand trends of the omnichannel efforts and how are you facilitating bringing in tenants with this strategy and focus?
I mean, we've been saying this for a long time now. What we like about our strategy, what we like about our portfolio is the fact that we really have we are close to the neighborhoods. We have a really high quality portfolio as most publicly and even and the private institutionally owned shopping centers are. There are, 30,000 to 40000 shopping centers in the U. S.
And we are going to continue to see store closures. We know that. But a physical presence remains such a critical component in this omnichannel world. These retailers are going to keep those stores that are most productive, that have the highest quality, that can touch the most people and we're really well positioned to take advantage of that. What this pandemic has done has really just accelerated that trend.
It's accelerated it for the retailers because they've been forced to really innovate and move faster. And we're going to continue, Jim even mentioned it in his prepared remarks, we're going to continue to do all that we can to facilitate for that retailer so that we can partner with them and best enable them to satisfy their customers, which are our customers as well, our shoppers.
Okay, great. And lastly, how are you thinking about the development and redevelopment projects? When do you anticipate returning back to offense and moving value enhancing projects forward at a more rapid rate?
Hi, Derek. This is Mac. We continue to evaluate these projects, 1 at a time. Each one takes a lot of experience, a lot of discipline, that we've always shown. And when we start a project, it's based on a lot of factors.
Some of it's pre leasing, some of it's the format, some of it is the location. It's really a risk adjusted return at the end of the day. And so we're setting up projects that are ready to go and some that aren't ready to go, but we're continuing to advance the entitlements to put ourselves in a position to start. So that when we have visibility to a green light position, we'll be in a position to start. So it's tough to tell you exactly when each project is going to start today, but we have lots of experience in this and we'll know on a case by case basis when to start projects.
And I think we'll be able to also take advantage of a decline in construction costs, which will help our yield as well. And so we're setting ourselves up well, having this platform of offices throughout the country where we have local sharpshooters and local teams ready to go, I think really gives us a distinct advantage. So we're excited about that and the teams will be ready to start these projects when conditions present themselves.
Hey, Derek, this is Mike. Just I want to follow-up on Mac's comments because I think it is a balance as well as Mac and team are preparing at the property level and tenant demand in fact will probably drive much of that decision making. We're also thinking about funding, right? So, we need to align both the opportunity with the development with the opportunity on the funding side. And as you know, prior to the pandemic, with free cash flow being our primary funding source of our development pipeline, that may change, but we have access to multiple sources of capital, whether that be property sales of lower growth assets or potentially even new capital in the form of debt or equity, we are preparing on that front as well.
Thanks everybody. Thank you.
Thank you. Our next question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.
Thank you. I have just some thoughts regarding your exposure by use. Do you see as you go through the process of maybe decreasing your exposure to fine dining, fitness and possibly personal services as some of those shake out and maybe you're not as quick to release to those uses again?
I'll start with a couple of comments and I think Lisa or Jim will jump in as well. Number 1, first on fine dining, we're only 1% exposed the category. So although it's included in that line item, on our disclosure, it's a very small component of our rent roll. And fitness being 4%, we actually still remain in the long run, we're still pretty bullish on the category. We think fitness personal fitness and health is certainly a secular trend and I think this pandemic is probably even highlighting that even more.
So we still like that idea going forward. Boutique fitness, we believe will continue to be a good use for our shopping centers. On the personal services side, again, something that we still have a long view on in a positive fashion. So we think and we think our shopping centers provide that necessity to our consumers really well.
I mean, I think Mike hit most of it. Just thinking and reminding about kind of our property type, in that one thing that is certain is that it's always evolving for as long as we've I've been in the business for as long as Jim's been in the business, you're continually seeing failures and then new concepts. And I imagine that we will see innovation and new concepts from this disruption. And I don't know what those are yet, but I expect that our future leasing will probably include leasing to some of those new concepts and we may have older concepts, if you will, that will fade away.
Okay. And then just given the spike in California, Texas and Florida, I'm wondering if you're seeing a reduction in terms of discretionary good spending in the last couple of weeks?
I think it's too early to really tell. What I will I mean, as we probably all do, gosh, I try to read everything I can, all the research reports, following mobility data and open table reservations. And we did see I think we did see a very temporary drop in those exact spots that you mentioned, Craig, but then recovered again pretty quickly. Whether there's any permanent kind of reduction in increased traffic, I think that's too early to tell. But the consumer really has they've been resilient, which has been really encouraging to us.
Any data tool that we've used to track foot traffic has been honestly positively surprising in some instances as to how much traffic has recovered.
Okay. Thank you.
Thank you. Our next question comes from the line of Nick Yulico with Scotiabank. Please proceed with your question.
Hi, this is Greg McGinnis on with Nick. Lisa, you mentioned that the reserve reflects some of the expected occupancy decline. And we were wondering if you might be able to provide some more context on the expected short versus long term impact of uncollectible Q2 rents. So basically, how much of that rent could we maybe strip out to create a run rate from what you know today? And maybe said differently, how much of the uncollectible rent is effectively a Q2 rent abatement, but the tenant is still viable and will survive to
pay rent in Q3?
I'm good. I'll let Mike address that.
Greg, I appreciate the question. I think you'll appreciate the response. It's very difficult to give you some of those directions that you're looking for. Let me help you here. For the quarter, we at the end of the quarter, we effectively moved about 20% of our tenants to a cash basis of accounting.
So that leaves 80% on accrual, right? Collection rates within that cash basis bucket were at 40%. And in fact, when you pull the same data in July, they have trended to 50% collection rates. So I think that is a good element for you to consider as you look forward in our portfolio, how to think about that reserved rent effectively representing the 60% that was uncollected within that category. From an accrual basis perspective, we collected 80% of that 80% of our exposure.
But obviously, because of how we feel about those tenants from an operational perspective as well as a credit perspective, we're accruing that rent. And I think bottom line, what we felt like was most important is that for the quarter, we recognized revenue equal to about 86% of our total potential rent. And that's where our eyes are focused on. As Jim's team continues to make progress with deferrals and bringing and modifying contracts as he articulated, we feel good about the collectability of that 86% of our rents either represented by actual cash collections or good visibility towards that.
Okay. Thank you. Appreciate the clarity on the disclosure. And I'm just curious how much you said that occupancy is still kind of trending down, Neeson. But I'm just curious how much of the uncollectible rent piece is actually due to tenant move out from
bankruptcies at this point?
It very little. I mean, we've had a couple of questions here about abatements and there's been effectively 0 abatements to this point in time. But the reserve is there. Again, they're on a cash basis with accounting. They're only going to be recognized to the extent rents are received.
Basis point is completely true. To the extent there is any fallout, it would be reflected by that reserve amount. It's just too early to tell to give any changes in any occupancy levels, not only for 2020, but certainly beyond.
All right. Thanks, Mike.
Thank you. Our next question comes from the line of Brian Hawthorne with RBC Capital Markets. Please proceed with your question.
Hi. So within the categories that you're signing leases, there are a couple that have only paid maybe like 2 thirds to 3 quarters of the rent. Are you negotiating leases with tenants that are not paying rent currently? Like negotiating new leases?
No. This is Jim, Brian. No, we're not. Okay.
Good answer.
Okay. And then, have you guys seen demand change for certain locations within a shopping center? I mean, kind of looking at pads, is there a higher demand there?
I think the reality that the pandemic brought about was certainly drive thrus. Everybody wants a drive thru today. So a pad with a drive thru, I think, for the future is going to be a must. It's going to be a very, very highly sought attribute. But other than that, I think the banks have been very active and they're pad type of users.
So pads are always seem to be very resilient and the depth of tenant that like pads is generally pretty deep. So pads are pretty easy to work with.
Got it. Okay. Thank you.
Thank you.
Thank you. Our next question comes from the line of Richard Hill with Morgan Stanley.
You've got Ron Kamdem on for Richard Hill. Just two quick ones. Going back to sort of the bad debt, and obviously, we're not asking for guidance, but I think we're all trying to figure out if there's another bad debt charge coming. So I guess the question really is when I think about when we get to the end of 3Q and we're looking at I think you reported your July uncollected to 21%. Are you going to have to go through sort of the same exercise to try to figure out what's uncollected and how much to reserve against it?
And is there any reason to think that there's something about this mix that's either better or worse than it was in 2Q? So again, not asking for guidance, maybe just high level color how we should think about that bad debt going forward a little bit?
Sure. Hey, Ron. 1st and foremost, you can't reserve for rent that hasn't been filled yet. So you're going to the extent you have cash basis tenants in your shopping centers, that continue to occupy space and you're billing rent and they haven't paid in the Q3 by way of an example, you would have reserve. So it will come down to your thoughts, our thoughts, anyone's individual thoughts around what percentage of that exposure will either start to pay rent or move out.
To the extent they move out, you won't have bad debt expense, but you'll have no income. So the impact would be the same. So I hope that's helpful in how we and how the idea that there will no longer be bad debt expense, I think, is misleading. It really is the idea around what how should we think about the performance of our cash basis tenants. So, I hope the 80%, 20% beyond cash basis is helpful.
Again, 40% of those did collect rent did pay rent in the second quarter. That is 50% as of July. I think that's a helpful statistic as well. Put it in context of our opening percentages being materially higher than they were 3 months ago. At this point in time, that's about the best we can give from a forward looking perspective.
Got it. That's helpful. And if I could just ask a follow-up on that. Just thinking about, is it if I thought about your 21% uncollected and put a 50% ratio based on what you did in 2Q for bad debt. I guess, what am I missing if I did that right?
Does that make sense?
It makes sense and that I mean that can be an assumption. We can't comment on whether that's a fair or unfair assumption.
Well, I got it. What we don't know is how many of those cash basis tenants that did not pay that we reserved for begin to pay. That's what you don't know and that's what we don't know.
Right. Okay. That makes a lot of sense and I appreciate you navigating that. The other question was just on the straight line rent charge that was reversed in 2Q. Is sort of a similar to bad debt question.
Well, is there should we be expecting sort of similar reversal? Or is
there sort of an
overlap, something that can mitigate that in 3Q? I guess, how should we think about straight line rents going forward without giving up?
This one is yes, no, that's a good question. It is different. So that is the one time decision to move a tenant from accrual to cash basis for the standard. That's a one time reversal of the balance of the straight line rent. So to the extent those tenants remain as is, if the eightytwenty split remains as is, you would anticipate less by way of straight line rent noise, so to speak, in future quarters.
But that will be dependent on how we assess collect assess tenancy going forward. So there the eightytwenty is not set in stone at this point in time. But I will say from a procedural perspective, we put a lot of time into this quarter and thinking about our tenants, thinking about the pretty high level from a standard perspective, it's 75% probability or better that they will meet the demand of their contract. That's a pretty high bar. And we so while I don't anticipate a material amount of change from this point forward, we're in a very unusual environment.
A lot is changing month to month, quarter over quarter. So we will make that assessment again at the end of 3rd.
Got it. Very helpful. Thank you. That's all I had.
Sure.
Thank you. Our next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question.
Yes, hi. I guess, what does the Board see as the benefit of holding on to the dividend at the current level?
I'm going to I just want to remind you, 1, that we intentionally strengthened the balance sheet, to position ourselves to weather the next economic downturn. We never quite expected a storm quite like this one. So I think it's really important to remember that, that the strength of our balance sheet and financial position coming into this, really it was a true differentiator for us. Our FFO payout ratio was in the low 60s. Our AFFO payout ratio was in the low 70s.
That provided us with $150,000,000 of free cash flow that Mike even alluded to earlier. We pulled back capital spend early. So we deferred that essentially almost the like amount of that $150,000,000 capital spend. And this really provided a really big cushion for us. So with that backdrop and the fact that we continue to see what we believe to be an improvement in rent collections going forward, it allowed us to declare our full dividend.
Our future projections essentially cover our dividend payment, which is really which is the objective. And so that's why we have paid it. That's the fact the dividend is an output. It's not a decision just to hold it, just to hold it. I'll reiterate that our future decisions are going to be really deliberate.
The payment this quarter doesn't guarantee future payments. We have to continue to weigh all the facts and circumstances as they happen. But based on where we sit today with the starting position and with what we are seeing with actual results, it makes sense to pay our dividend. As a REIT, part of total return is the income return and that's an important part of our total return.
Got it. Okay. And then, out
of curiosity, the sequential small shop occupancy decline, was that fairly broad based or was concentrated? Can you just give us a little
bit of color on that?
Mike, yes, I think that was basically wrapped up in BK. We had,
gosh,
I
think we had 16 at this point in 'twenty one, 16 brands that have filed, of which we've got 150 individual store locations. And out of that, we've got 40 that we expect either have rejected or will likely reject. So the decline is primarily BK at this point.
Got it. Okay. That was it. Thank you.
Thanks, Mike.
Thank you. Our next question comes from the line of Floris Van Dijken with Compass Point. Please proceed with your question.
Good morning, guys. Question for me is on what you see is going on with cap rates? And also as you think about your valuation, obviously, there are 2 things that are involved in valuing assets. It's the NOI and the cap rate. Do you see any movement in cap rates?
Or and maybe comment on what you think is going on in the public markets and your view in terms of what where you think how sticky values are for your asset costs?
Hi, Flores. This is Mac. I'll take the first half of the question and then hand it back over to Mike. In terms of cap rates, you're not seeing, for starters, a whole lot of the A quality properties, the types of properties that our portfolio is representative. Owners of those properties, I think, really recognize the long term value and they're not willing to sell them.
There's really a scarcity of that product. But for those sellers that are willing to sell them, is high demand for grocery anchored neighborhood centers. The ones that are holding up the best are a little bit smaller because of just the amount of capital that's in the marketplace. But we're seeing cap rates really hold tight. They're really quite strong.
There's been buyers are trying to figure out how best to underwrite forward cash flows. And they're cautiously underwriting limited growth for the next couple of years. And then in year 3, typically, they're sort of back to historical norms. So we are we have some properties that we have put on the market and we're seeing a lot of demand. There's also demand for debt that's allowing people to execute.
50% to 60% permanent loans are available at tremendous rates, better than we've seen in a long, long time. So for our type of product, values are holding up really quite well. And I'll let Mike talk about how that relates to our NAV.
I'll actually I'll give Mike a break since I keep tossing all the reserve questions to him. I think Mac said it well and this is something that we've been talking about quite a bit. There's still I think that I said in my prepared remarks as well, neighborhood community shopping centers with essential retail has never been more important than it is today. And I think that you're seeing that with how cap rates are responding. So there while there's not much change in the applied cap rate, what's really difficult to know is what is the NOI stream, and also the cash stream even to recapture more NOI as we release, because I do we do expect that there's going to be a significant amount of releasing that's going to happen in the future that's going to require TI spend.
So from a valuation perspective, I mean, I can't we've provided all the information that we could provide. It really does come down to where does NOI settle, and we're not we don't know that yet. It's still there's just still too much uncertainty. So where does that new kind of base settle? And then from there, I do expect that we'll have we will obviously have growth as it was pointed out earlier.
We're starting at a lower base. We're going to continue to re lease and we'll see probably above average same property NOI growth in our portfolio for a period of time. But it will take capital
to do that. So I know
that I didn't exactly answer your question, Polaris, but everyone's estimates are going to be different and we just need a little more clarity as to when this is really over and then we can start to recover from there.
Thanks, Lisa. That's it for me.
Thank you. Our next question comes from the line of Michael Gorman with BTIG. Please proceed with your question.
Yes, thanks. Good morning. Lisa, if I could just go back to your comments earlier on omni channel and maybe drill down a bit, especially on e commerce grocery. Can you maybe talk a little bit about conversations you're having with tenants about their e commerce trends on the grocery side and maybe the rollout of newer technologies like MSCs and maybe how they're thinking about your portfolio where they have much higher productivity, you have some of the top locations in each market and allocating space within those stores for MFCs or are they looking elsewhere and how they're kind of just approaching the e commerce how they're approaching e commerce strategy right now?
Sure. I would say again, those conversations really haven't changed much. The better operators were already focused on how can they best serve their customers in the most profitable manner. And while Kroger is focusing on the larger robotic automated warehouses, partnerships with Walgreens, Ahold, I think, and Albertsons probably the most focused on the micro fulfillment centers. All of them and then we all know what Amazon is doing with Whole Foods and then Amazon Go and the rumored and real traditional grocery stores that they're opening.
All of them are focused on how best to serve their customers in the most profitable way and there's still no argument that the most profitable way today, could that change in the future? Absolutely, never say never. But today, it's to bring the customer in the store. So they're still all very focused on serving their customer in an omnichannel fashion, but to the extent possible, the most profitable way, which is in sending them to come into the store. With that said, again, you see that you do see all the better operators are investing more in technology and spending more on the different means of that happening.
And we continue to have the conversations. We continue to partner with them. We continue to help them where we can to facilitate, that delivery of their goods. And I don't mean literally, I mean within our shopping centers. It's going to continue to evolve.
We're going to continue to see consolidation in the grocery. I think that scale matters. I think that having the cash flow and the money to invest and to innovate and to invest in technology and invest in serving their customers. That's where the winners will be.
That's helpful. And I guess just clarifying, I mean, when you speak to the grocers, does the high productivity of their stores in your portfolio make them more likely to kind of leave those intact and look elsewhere for technological solutions in the market? Or is it does that not playing a role?
Well, clearly it plays a role when they think about their most profitable stores. It's about their profitability. And typically, the more productive stores are going to be more profitable. So that certainly plays a role as when they're thinking about their network of stores and fulfillment centers, they are going to be very reluctant to close something that is profitable. They could use that store as the core or the center of a little of a smaller network, if you will, and add micro fulfillment around it to continue to service the customers even out of that particular store.
So it absolutely is it's an input and a variable.
Excellent. Thanks so much, Lisa.
Thank you.
Thank you. Our next question comes from the line of Ki Bin Kim with Truist Financial. Please proceed with your question.
Thanks. Good morning. So going back to the 14% of rent reserves, how much of these rents from tenants were decently healthy pre COVID? And how is this impacting the ways you're thinking about helping these tenants out?
I appreciate the question, Ki Bin. I think let me answer it this way. So our cash basis the percentage of our ABR that we had on a cash basis pre COVID was only 3%. Now as I stated earlier, we've identified a collection of tenants that equates to about 20% of our rent roll is now on a cash basis. So I think by extension and that 3% was primarily basically BK watch list tenants.
So by extension, I would answer your question to say the majority of them were helping. But as Jim kind of spent some time on earlier from a local tenant perspective at least, This is a storm for them that is pretty challenging. And that it's the severity of the circumstances, the inability to operate at all in some cases that has changed our perspective from a classification standpoint. But again, I can't reiterate enough. 40% of those tenants are still paying rent currently and that is actually 50% right now through July.
I don't know if Jim, if you wanted to answer, add anything to that.
No, thank you.
Okay. And I appreciate the fact that your deferral arrangements are only 4%. I mean, basically deferral arrangements are easy to give out and in some cases only worth the paper that's written on. I'm just putting myself in the perspective of tenants here for a second. Some of these a lot of these local tenants are not built to pay lump sum rents, right, just deferring it and paying it back in a year.
And I would think maybe it's a little bit of a ball and shackle to some of these local tenants. How are you thinking about that? And if deferrals even make sense to larger tenant base?
Ki Bin, that would be as we talk to these tenants and really understand their situation, their outlook for the future, their credit capabilities, all that goes into play. And we just take them 1 at a time and we'll make the best decision we can. It's part of it is, if there are 15 year operators, it's always done exactly what they said and they're a great operator, I'm going to bend over backwards and try to figure out how to make that tenant successful. We got a lot of tools in the toolkit. We'll employ them as we see fit, but we want to put our dollars where they can go the best to get the best result.
That's really all I can Yes.
I'll say this for Jim, because he's told me many, many, many times. We're not going to put a tenant into a deferral plan that puts them out of business. Right. And I think Ki Bin, that's the point you're making. So we'll be hit those tools, however, whatever they are, you're stretching payments out or maybe even sprinkling in a little bit of abatement.
We're going to make the right decision for the right tenant and they're all snowflakes and we have the long term in mind and setting ourselves up and our portfolio up for success after we emerge into some sort of normalcy.
Okay. Thank
you. Thank you. Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.
Hi. Of the 16 brands that have filed in the 40 spaces have been rejected or likely to be rejected, when is the earliest you might expect to get those spaces back? And any sense of whether you'd see more demand from the national brands or local tenants as backfill options?
Linda, this is Jim. We'll be getting, I think, some of those rejections probably in the next 30 days or so. As far as demand, pre COVID, we obviously had a lot of interest in, for instance, Pier 1s. We are in dialogue with several of those. I think there's still interest.
I think the speed to market, if you will, of converting that interest into an executed document has slowed dramatically. And I expect the same.
At the end of the
day, Lisa said it, we think we've got great real estate. The tenants within our portfolio have historically operated at very high levels. As we get space back, it's a supply and demand business. We think we're going to have good product in good centers. And if the market allows it, we're going to get more than our fair share of re tenanting
opportunities. Thanks a lot for that color. And then just one other, how are you thinking about dispositions in the post COVID environment? How might parameters around low growth have changed pre versus post COVID?
Linda, I can take that to start with. When we consider properties that are being disposed, we do it like we have been historically. It's a ground up basis. We look for properties that might be non strategic, certainly low growth, just non core properties that we're not going to miss, so to speak. So in today's world, we'll take a second look to make sure that we accurately forecast growth going forward.
Will that change? Sure. Certainly, I would think in some properties. So we'll take it on a case by case, probably a little too soon to have a perfect assessment of forward growth compared to pre COVID times, but we'll continue to look at that. But these are good properties too as well.
I don't want to dismiss them. I think the buyers of our properties have done quite well and we wish them well. So I'll let others jump in as needed.
Hey, thanks, Mac.
It's Mike. I'll go back to kind of our funding plan. And one thing I'd like to make sure you hear is that we'll be very disciplined to the extent property sales are a lever in our funding plan and they most likely will be. We're going to be very disciplined on the valuation. And I think Mac is exactly right.
We're going to have our own view of the forward NOI stream of these properties. And if the market is not giving us the value we believe we deserve, we're prepared to hold that asset and we will choose to hold that asset and we'll make appropriate other funding decisions from that point. We have a large portfolio, a diverse portfolio. We have a lot of optionality within that portfolio to fund what we plan to have as a vibrant again, a vibrant redevelopment and development opportunity set going forward.
We've always had a commitment to dispositions. And while absolutely, believe that we have a really high quality portfolio, again, as I do as I believe most of the publicly owned companies do, everyone still has their lower quality and lower growth even if we are in the top 10% of what's owned in the U. S. And so we've always maintained that commitment to continually improve the quality of our portfolio and to continually fortify that future NOI growth rate. It's an important part of our strategy.
Thanks. Good luck.
Yes. Thank you.
Thank you. Our next question comes from the line of Chris Lucas with Capital One Securities. Please proceed with your question.
Hey, good morning everybody or I guess afternoon now, sorry. Just a couple of quick ones. Just as it relates to, I guess, rent collection, particularly on the more challenged lines of business. Does geography play a role in that? And then I guess, sort of on the same geography line of thought, when you guys are pursuing litigation, does geography drive that as well?
Chris, it's Jim. As far as impact on collection rates, I think certainly there's really 3 things that come into play. You've got kind of the essential category mix, which will drive that recovery, obviously. Geography certainly comes into play. We've got as you're well aware, we've got areas within the country that have higher mandated closure still.
So that will have a big impact. And then the local national mix, as I referred to earlier, in our strategy, that local group is kind of the last group that we're engaged with right now. So that will have impact on that same collection rate. Part 2 of the question was?
It's related to litigation and geographies.
Oh, litigation. Chris, where we are in that is, if warranted, we're taking legal action as tenants that have, number 1, either have the ability to pay and have chosen not to or non responsive or unreasonable tenants. In many cases, this approach of late has become pretty effective in bringing payment through the door or at least getting folks to the table for further discussion.
Okay. And then Mike, I'm just curious, have you collected rent in, I guess, Q3 that was applicable to Q2? I'm just kind of curious how you're dealing with that.
Yes. I think what I call the crossover rent was about $8,000,000 So if you that we collected in July that was owed on quarter 2. So if you want to think about our reserve as a percent of billings, that would move it from 47% to 52%, Chris.
Okay. And then of the, I guess, the 8%, do you have a split between what was on a cash basis accounting?
I don't have that. I'd have to follow-up with you on that one. Okay.
Okay, great. Thank you. That's all I had this morning.
Thanks, Chris.
Thanks, Chris.
Thank you. Thank you. Ladies and gentlemen, I'm sorry. I'll turn it back
over to Melissa. I was just going to jump in. Yes. Thanks, Melissa. Thank you all for your time today, your continued interest in Regency, your support.
I do hope that you all stay safe, wear a mask. And again, thank you to the Regency team. I really do appreciate this time that we're living in is really hard for all of us. So thank you to everyone and good luck Laura. Thank you.
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.