Greetings, and welcome to the Regency Centers Corporation fourth quarter 2019 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Laura Clark, Senior Vice President of Capital Markets. Please go ahead.
Good morning, and welcome to Regency's fourth quarter 2019 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. On today's call, we may discuss forward-looking statements. Such statements involve risk and uncertainties. Actual future performance, outcomes, and results may differ materially from those expressed in forward-looking statements. Please refer to our filings with the SEC, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. We will also reference certain non-GAAP financial measures. We have provided a reconciliation of these measures to their comparable GAAP measures in our earnings release and financial supplement, which can be found on our investor relations website.
Today, we will be utilizing a slide presentation for a portion of the call. You can view the slide presentation through the webcast link or in the presentation section of our investor relations website at regencycenters.com. Lisa?
Thanks, Laura. Good morning, everyone. I'll start with a recap of 2019 and a few thoughts on 2020 and the future outlook before Jim, Mac, and Mike walk you through in much more detail. Overall, in 2019, we had a good year. Specifically, some of the key accomplishments from our talented team for the year were: grew core operating earnings per share by 4.3%, which exceeded the top end of our initial guidance from a year ago. We ended the year at 95% leased. This represents the seventh consecutive year at 95% or better. Started over $250 million in developments and redevelopment projects. Completed several developments that are great adds to our portfolio. We made substantial progress on our in-process projects. We have clear visibility to our future pipeline.
Capitalized on unique acquisition opportunities, enhancing our portfolio quality through the additions of approximately $275 million of well-located, high-growth properties, most notably the Pruneyard. These acquisitions were funded in part by the sale of more than $200 million of lower-growth assets. We further improved Regency's already impressive balance sheet, solidifying our funding needs through 2020. We demonstrated our continued commitment to best-in-class environmental, social, and governance practices. The list of those accomplishments is way too long to list all here, but I'd like to highlight just a few. Earning the GRESB Green Star recognition for a fifth consecutive year. Being recognized as one of the leading organizations in the country for top employee engagement scores. Receiving the highest governance quality score from ISS.
Finally, being recognized in Newsweek's inaugural America's Most Responsible Companies 2020 list as one of the 10 most responsible companies in the real estate and housing sector. While we're really proud of these accomplishments, we acknowledge that, disappointingly, we did not exceed expectations in 2019, both ours and yours, specifically for same-property NOI growth. As we've discussed, leasing velocity in the first half of last year, as well as store closures and bankruptcies, drove us to the lower end of our same-property NOI growth range. It is really important to note that we finished the year strong with full-year leasing volumes that met our original expectations. Looking to the future, as we indicated last quarter, we expect flat to slightly positive same-property NOI and earnings growth for 2020.
However, we do believe this muted growth is temporary as despite the unique challenges of 2020, Regency is operating in a reasonably favorable environment for higher-quality neighborhood and community shopping centers. Better operators in many categories remain focused on the importance of physical locations that provide their customers with a combination of convenience, service, value, and experience. This is supported by sustained healthy demand for our centers with a deep leasing pipeline. We believe that the tenant demand we are experiencing from better retailers, restaurants, and service providers, together with the progress on our redevelopment pipeline, will translate into future NOI growth beyond 2020 in line with our strategic objectives. The bottom line is that 2020 is below our standards on both an absolute and relative basis.
As I look to 2021 and beyond, I'm confident that we will soon be meeting our objectives of 3%+ same-property NOI growth and 4%+ earnings growth. Regency's quality portfolio, value-add asset management and development capabilities, strong balance sheet, and exceptional team truly position us to achieve these objectives and return to performance that will again be among the sector leaders. Jim?
Thanks, Lisa. same-property NOI growth for the fourth quarter was in line with our expectations, allowing us to finish the full year at 2.1%. Leasing ended the year with a very strong finish that met expectations for the full year.
In fact, our Q4 new leasing production was the highest single-quarter activity in the past three years. We anticipate this positive leasing momentum to continue through 2020. Our same-property portfolio is 95% leased, with shops at over 91%. While Regency maintains one of the highest shop occupancy levels in the sector, we did experience a decline of 30 basis points in Q4, driven by the expected move-out of our remaining Dress Barn locations. Our teams have been diligently working on backfilling these locations and currently have active negotiations or signed leases on all the recaptured spaces. We achieved solid rent spreads of over 11% in the fourth quarter, which contribute to full-year spreads of 8.5%. Importantly, this solid rent growth was on top of the average annual rent steps of over 2% we achieved on more than 80% of leases we executed in 2019.
Even though we continue to experience healthy demand and deep leasing pipeline, weaker operators continue to struggle. In 2019, bankruptcies and store closures impacted same-property NOI growth by 80 basis points, with Sears Kmart accounting for roughly half of that result. While it creates short-term disruptions to NOI, it allows us the opportunity to upgrade and refresh our merchandising quality and generate opportunities for us to unlock value. In regards to our Barneys location in Manhattan, the tenant is still in possession of the space but has given notice that they will be vacating at the end of this month. As previously noted, this bankruptcy will have an impact of approximately 40 basis points on our 2020 same-property NOI growth.
Our team is focused on the plan that maximizes value as quickly as possible, whether that be selling the property, re-leasing the space, or redeveloping the asset. Moving to 2020, we anticipate a total same-property NOI impact up to 140 basis points from bankruptcies and store closures. This includes the atypical 60 basis points from Barneys, IPIC, and Sears, and up to an additional 80 basis points of known and unknown bankruptcy-related move-outs. Please also note that our bad debt is expected to remain in line with the past several years. While we realize store closures continue to earn a disproportionate number of headlines, we are excited to be working with thriving grocers and retailers around the country that are expanding in open-air shopping centers, including grocers such as Publix, Wegmans, H-E-B, and Trader Joe's, as well as an elevated number of retailers like Sephora, West Elm, and Athleta.
These prospering retailers recognize that our high-quality neighborhood and community centers provide what is critical for their success in today's retail landscape. Mac?
Thanks, Jim. During the year, we started more than $250 million of value-add developments and redevelopments as we continue to make substantial progress towards meeting our strategic objective to start and complete one and a quarter to one and a half billion of projects over the next five years. During the fourth quarter, we completed four impressive ground-up developments, including Ballard Blocks in Seattle, The Village at Riverstone in Houston, Pinecrest Place in Miami, and Mellody Farm in suburban Chicago. These four projects speak to our development breadth and are a reflection of our talented professionals on an unequaled platform. Returns on these projects are in line with projections. The centers are over 95% leased, and tenants are performing well, with many exceeding their initial sales projections. For the full year, we completed approximately $230 million of developments and redevelopments at a stabilized yield in excess of 7%.
Our major redevelopments are steadily advancing per plan, including our pipeline of future opportunities. I'd like to provide an update on several of these key projects. Let's start with our office building redevelopment at Market Common in Arlington. This transformative project is more than 30% constructed as steel framing is complete. We have an executed lease with a luxury fitness operator to take two floors of the building and are negotiating with several users for many of the remaining spaces. We anticipate construction completion later this year with the first tenants opening in 2021. Moving on to The Abbot, located in the heart of Harvard Square in Cambridge. This project started in 2019. Construction is progressing smoothly, we are approximately 20% complete. We have tremendous interest in our ground-floor retail space and are working with a variety of users for the upper floors as well.
We expect delivery late this year with the first tenants opening in 2021. Next is our Serramonte Center, located just three and a half miles south of San Francisco. We are excited to announce in the fourth quarter, we started on the first of our three-phase redevelopment. This first phase consists of the addition of a new Regal theater integrated with the interior of the mall, a relocated fitness club, several new out parcel restaurants, and a new hotel on a ground lease. The second phase of the project commenced in January and includes a long-overdue modernization of the mall's interior that should complete prior to this year's holiday season and is already enhancing our leasing velocity. The third phase is the redevelopment of the JCPenney box, which we get back in June, and is arguably our best space.
We're evaluating several scenarios to re-tenant and reconfigure the space, which is estimated to start in 2021. As we have discussed previously, approximately $1.5 million of NOI will be coming offline at Serramonte in 2020 as we execute this multi-phased redevelopment. Moving to some of our near-term redevelopments. First, Westbard Square, formerly known as Westwood, located in Bethesda. We anticipate starting the first phase of this compelling mixed-use project later this year. As we've previously disclosed, approximately $1 million of NOI will be coming offline in 2020 and an additional $2 million in subsequent years as we demo a portion of the current center in order to relocate our grocer. The project will also include 100,000 sq ft of retail, 200 apartments, 100 units of assisted living, and approximately 100 for-sale townhomes. We will be partnering and co-investing with several leading developers for the non-retail components of this project.
The new Giant Supermarket and phase I retail should open in 2022. The phase II multi-family ground floor retail should follow in 2023. Lastly, Costa Verde. This dense infill property is located in the vibrant UTC market of San Diego, across from Westfield's UTC Mall and a new trolley station opening in 2022. This mixed-use redevelopment will include new retail, office, and hospitality. We are in discussions to joint venture the endeavor with a best-in-class office suite. We anticipate starting the project in 2021. Accordingly, as we prepare for demolition, approximately $1 million of NOI is expected to come offline this year. An additional $3 million in 2021. Initial occupancy is projected to occur approximately three years after construction begins.
These are just a few of the exciting projects our teams intend to commence and deliver over the next several years that will support our long-term objective of 3%+ same-property NOI growth. Our eight major redevelopment projects, both in-process and near-term, are expected to generate approximately $45 million of incremental NOI in the years to come, representing almost $1 billion of incremental capitalized value. Look forward to providing you with further updates as these projects advance. Mike?
Thanks, Mac. Good morning, everyone. I'd like to focus my comments on our 2020 outlook by walking through our same-property NOI and earnings guidance. I think the visuals will help with this discussion, so let's start on slide one. I encourage those that can't follow the live presentation, to package on our website, as I'm sure you'll find the materials to be helpful. This first slide is a quick reminder of the components that make up our 3%+ same-property NOI long-term growth objective. First, our embedded contractual rent increases continue to generate about 1.25% of growth annually. Next, rental rate increases, where another 75- 100 basis points of growth comes from rent spreads in the mid to high single digits, which is consistent with our recent historical averages.
Lastly, we need to consider changes in rent paying occupancy, as this impacts base rent as well as recovery income, together with growth from our redevelopment activity, which has averaged a positive contribution of 75 basis points over the last several years. With that backdrop, I would like to walk through 2020 to better understand the outlook of flat to slightly positive same-property NOI growth that was previewed on our last call and confirmed with our formal guidance today. Let's move to slide two, which outlines how growth is impacted by certain key assumptions this year. Contractual embedded rent steps and the contribution from rent spreads are in line with our long-term objectives. This leaves changes in rent paying occupancy and expectations around redevelopment contributions as the key drivers of our flat or better guidance.
As we've discussed on past calls, rent paying occupancy is impacted by three key sets of assumptions. First, fallout from tenant bankruptcies or store closures. Second, timing expectations around our redevelopment activity. Lastly, our downtime estimates embedded in our forecast due to the timing and volume of leasing activity. First, from a bankruptcy perspective, we will certainly feel the impact of the unique material failures of Barneys, IPIC, and Sears. In addition, as we have in the past, we have included provisions for actual and potential bankruptcy activity to include tenants such as Dressbarn, Avenue, and Pier 1, as well as other unknowns. In total, these could cause a decline in rent paying occupancy of approximately 75 basis points, which translates to the drag on same property growth of up to 1.4%. Next to redevelopment.
As we have discussed on previous calls, we know that contributions to NOI growth can be uneven from year to year, especially given the size and character of our current projects. While we have been successful in completing projects and bringing incremental NOI online, at the same time, we are taking approximately $3.5 million of NOI offline in 2020, including at projects such as Serramonte and Westbard Square, to position those projects for future growth and value creation. As a result, we are essentially projecting a net zero contribution from redevelopment activity when you consider both the ins and the outs. The final component of rent paying occupancy is related to the timing and volume of leasing activity.
In 2020, outside of bankruptcy-driven move-outs and redevelopments, we are planning for up to a 15 basis point decline in average rent paying occupancy caused by the timing of our leasing activity, both execution and on-rent commencement, which translates into an approximate 30 basis point impact on growth. Lastly, we expect a drag of up to 30 basis points for other items, which include percentage rent and other property-level income and expenses. A couple of final comments on same-property growth. Thinking about the next couple of quarters, we are projecting a negative growth rate in the first half of 2020, driven by the timing of prior year bankruptcy closures. Second, and this is most important, as we look beyond 2020, we are encouraged by our strong leasing results and the progress we are making on our redevelopments.
As Lisa explained, this visibility gives us confidence in our ability to return to our strategic objective of 3% or better same-property NOI growth over the long term, including taking a big step toward that goal in 2021. Let's now move to slide three, which is a roll forward of our 2020 earnings guidance, where I'll touch on just a few items. Our 2020 Nareit FFO per share guidance range is $3.90-$3.93. The contribution from total NOI growth is expected to be minimal, with growth essentially only coming from ground-up development completions, offset by performance of our non-same-property assets. Quickly on our non-same-property pool.
Beginning in 2020, as indicated on a previous call, we have moved Costa Verde into our non-same-property pool due to the scale of the project and major disruption in NOI of $4 million that will occur over the next two years as we actively de-lease the asset. Transparency is an inherent value of Regency, in that spirit, we felt like this project, given its size, would materially distort the performance metrics of our remaining portfolio, both as NOI comes offline and also when NOI of $18 million comes back online following completion. You can find property-level information to appropriately model the impact of Costa Verde, together with additional disclosure around other changes in the property pools in our supplemental. Please also remember that we sold approximately $130 million of equity last September on a forward basis through our ATM.
We can settle this trade at any time through the third quarter, proceeds were targeted to fund our outsized development spend this year while keeping our leverage in check. Which is a good time to note that we are now providing guidance on development spend together with development starts and anticipate spend in the $300 million area this year. Finally, non-cash items, which primarily include straight line rent and above below market rent, are expected to decrease by approximately $7 million. As a reminder, in 2019, we recognized significant income related to the acceleration of below-market rent balances following move-outs of a few anchor leases. This has increased the rate of deceleration on this line item. Lastly, while we are only providing Nareit FFO guidance, we will continue to measure and report the performance of our business using core operating earnings, which eliminates certain non-recurring and non-cash items.
We anticipate core operating earnings growth per share to be flat to slightly positive in 2020, but remain confident in our ability to return to 4%+ earnings growth over the long term. As we look forward, the team is extremely focused on achieving our objectives, and we all remain confident in our ability to continue to deliver earnings growth, dividend growth, and in turn, total shareholder return that is at or near the top of the sector. That concludes our prepared remarks, and we now welcome your questions.
Thank you. We'll now be conducting a question and answer session. If you'd like to be placed into question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment please while we poll for questions. Our first question today is coming from Christy McElroy from Citigroup. Your line is now live.
Hi. Thanks. Good morning. Lisa and Mike, you both mentioned in your prepared remarks about commenting on sort of getting back to that 3% same-store NOI, 4% FFO growth in 2021 and beyond. I think a lot of us are sort of looking to 2021 now given the flattish growth expectations in 2020. Mike, you sort of laid out those components. I'm wondering if you could sort of help us bridge that gap from the flat in 2020 to a more elevated pace in same-store in 2021. You've got what's likely to be the 125 of contractual rent growth, the 75 basis point contribution from rent spreads. How should we be thinking about the redevelopment contribution in 2021 given all the moving pieces and also the recovery in rent-paying occupancy from the bankruptcies and move-outs that you're experiencing this year?
Hey, Christy, it's Lisa. Good morning. I think you just answered the question with your question.
Well, it's really more the breakout of those last two, right? The sort of occupancy versus redevelopment.
Yes, because the team has done a great job continuing to get contractual rent steps. Our leasing spreads are really healthy, right? We're starting at 2%. We do have a lot of visibility, as we've said in our prepared remarks, as you have heard us say prior, to the redevelopment contribution coming back in 2021, more like what it had been historically in that 75 basis point range. Perhaps even more. Certainly looking even better in 2022. I'm not giving formal 2021 guidance or certainly not 2022. We're going to execute on 2020 first and make sure that we meet those expectations. With regards to the rent-paying occupancy, that's always going to be an unknown. As we have said, 2020 really is, I think Hap's words last quarter were a rare confluence of events to have.
Two really large bankruptcies in Barneys and IPIC, add Sears on top of that. We just don't see that replicating in the future because of the magnitude of those spaces. Rent-paying occupancy is certainly an unknown more than 12 months from now. Is economic uncertainty. We feel really good about contractual rent steps, lease spreads, and redevelopment contributions.
Okay, then just as I think about sources and use of capital, you're looking at the $300 million of development and redevelopment spends, which we appreciate that guidance. You've got $170 million of free cash flow that you've talked about, which generally would fund most of that on a leverage-neutral basis. You're also sort of over-equitizing with $130 million of forward equity. I'm wondering why the sort of additional $125 million of net dispositions on top of that, which is causing a dilutive impact to your FFO. Sort of where does all that capital raising leave you from a leverage perspective at year-end?
Hey, Christy, it's Mike. Appreciate the question. The dispo guidance really is a carryover from 2019, this all in effect goes back to our funding plan for The Pruneyard acquisition. What I would say to balance out the sources and uses, which you nailed right there, is that we are planning to reduce our overall debt level in 2020 by about $100 million-$110 million.
Okay, that's sort of causing the lower interest expense guidance there.
Yeah, the lower interest is being driven by that, as well as some accretive refinancings we're going to do within the joint ventures in 2020, together with the accretive refinancings we executed on in 2019 through the bond market.
Okay. Thank you.
Thanks, Christy.
Thank you. Our next question is coming from Nick Yulico from Scotiabank. Your line is now live.
Hey, good morning. This is Greg on with Nick. I just want to talk about rent spreads a little bit. I mean, very strong in Q4, healthiest spreads we've seen this year in both new leases and renewals. Could you talk about some of the deals that you guys were able to complete this quarter to help boost those metrics and what you anticipate seeing from spreads in 2020?
Yeah, Greg, this is Jim. As you noted, we had a real strong fourth quarter, and it was really pretty heavy on the anchor side. Every quarter we look at the mix, and we were heavy on anchors this quarter. We had some really good, accretive, strong anchor deals. Publix, LA Fitness at Roosevelt, Edge Fitness back on Kmart, all very accretive deals and helped to increase that new percent leased or the spreads on new, as well as the King Kullen Grocery Market on the renewal side. That was pushing the spreads pretty strong this quarter. But overall, I think we still target that mid to high single digit, eight and a half. That meets our objective long term. That equates to about a 15.9% straight line rent growth, and both those metrics are where we'd like to be.
Great, thanks. Just hoping to grab some clarity on transactions as well. First on that is, do you count these incremental purchases of Town & Country into acquisition guidance? Basically not much less to do this year. On the dispositions, only $100 million at this point left.
Hey, Greg. Yeah, that is somewhat of a technicality in our guidance. We have been the initial entry into Town & Country, we did show as an acquisition. I think that was in 2018. We've staged some acquisitions of additional shares in the property throughout 2019, then this is in effect kind of our final piece. Hopefully not. Hopefully we find a way to buy even more of this asset. We are not including that in acquisitions guidance in 2020. It's in effect, I'm thinking about that as added development or redevelopment spend at Town & Country. We do have a project under contract in Southern California, actually, that we are excited about. Honestly, probably too early to talk about that deal. We look forward to making progress on our due diligence and potentially closing on that in the early part of 2020.
Okay, thanks. Just a quick follow-up on transactions. Can you just give us an update in terms of, obviously, there's that one that you're talking about there, but in terms of other product that you're seeing in the market right now, have increasing CapEx needs started to bring more, maybe high quality mom-and-pop owned assets to the market? What's the impact been on cap rates as well?
Greg, this is Mac. We're still seeing sort of very few of the types of properties that we typically buy on the market. That scarcity has really kept cap rates very low. Cap rates haven't moved in quite a while. The types of properties we're looking for are not only ones in the sub-markets and traders that we do well in and have long-term growth potential, but also where we can use our platform and our expertise to really, it's either core plus or value add or somewhere where we can really find some long-term growth beyond just a core acquisition. Not seeing a lot of those, but we are in the market all the time. Just by nature of our 22 markets, we see everything that comes to market.
Great. Thanks for the clarity.
Thank you. Our next question is coming from Derek Johnston from Deutsche Bank. Your line is now live.
Hi, good morning, everyone. The Barneys is unique, but you did lower the carry value closer to market. Has there been much interest in this space? I mean, are you evaluating it as a possible disposition, or are you committed to weather the downtime in CapEx? Is the associated redevelopment project baked into guidance?
Hi, Derek, this is Mac. I'd be happy to answer that. We're looking at really three scenarios. Definitely sale, we're considering that, and we're in the marketplace to see if that could transact looking to redevelop it in either a multi-tenant scenario or single-tenant scenario. We're in the marketplace too as well. All are very viable options. We're not going to limit ourselves to one of them. As we get more clarity, we'll be sure to communicate that.
I think that the most important thing as we're evaluating the options is how can we maximize value, really, and time matters as well when you're thinking about returns to us, as well as returns to our shareholders. How can we maximize value in really the shortest amount of time? That's how we're thinking about it.
Okay. Thank you. You mentioned the Market Common in Arlington. Just wondering how discussions with prospective tenants for the office component are progressing. Office tenants tend to make decisions relatively early. With yield compression being an issue that's being discussed out there, is the 9% yield still attainable on this project?
Derek, this is Mac again. We believe so. Having signed now Equinox, that's really a big boost to the product, and the tenant tours that we've had have gone very well, very favorable. That you can get actually up to the upper floors and see the tremendous views back there, which you couldn't until we got the frame completed, we've had great interest. It takes time to convert interest to LOIs into leases. We feel good about where we are on the prospects. We'll continue to communicate that as we start to absorb.
Okay, great. Just one real quickly on escalators. I think they were north of 2% towards the end of last year for new and renewed leases. Is this holding firm in the current environment on new leases that you guys are writing?
Yes, Derek. Jim, again. We continue to have very good success in embedding that 2% increase in over 80% of our leases. We feel like we can continue to follow that tack.
Okay. Thanks, everyone.
Thank you. Our next question is coming from Jeremy Metz from BMO Capital Markets. Your line is now live.
Good morning. This is Marissa on for Jeremy. I just wanted to go a little bit more in depth on acquisitions. Specifically, what sort of upside dynamics are you looking for to keep paying a mid 4% cap rate in the current environment? Off of that, how has the IRR you are underwriting changed, if at all, in the last 12- 18 months?
Hi, Marissa. It's Mac again here. Really the upside, we underwrite a 10-year term just like almost everyone else does. In order to get that IRR in the mid sixes, sometimes upper mid sixes, sometimes seven, depending on the product type, you need really strong compounded growth. We get that through contractual bumps. Sometimes there's mark-to-market leases, so they're under market today. Then often in the sort of the second 10-year period, there's even more upside scenarios. That could be through densification, it could be through an anchor lease that finally comes due that doesn't show up in our 10-year. Those are the kinds of things we look for. We also look for improving demographics, neighborhoods where demographics are trending up and in the right direction.
You might not see that in the leases that are signed today, but we think we can upgrade not only rents, but the merchandising and in the physical plant too as well. IRRs haven't changed materially for what we're looking for. We certainly scrutinize our underwriting very carefully, and we think that's obviously embedded in our underwritten IRR. Not a material change to that.
I think I just would add, if you think about, Mac's exactly right. If you think about where we have been successful in the properties that we've acquired, really over the last three to five years, it's where we're able to bring our talent and our expertise, whether it be very proactive asset management, as Mac mentioned, or even our redevelopment and development capabilities. That's when we're really able to compete with the other buyers that are out there in the market. If it's just a straight down the fairway core shopping center, we haven't been quite as successful. That's why we're able to turn these low to mid four cap rates into IRRs, sometimes north of seven, as Mac said.
Great. Thank you.
Thank you. Our next question is coming from Craig Schmidt from Bank of America. Your line is now live.
Thank you. I was wondering if you guys expect a pickup in small shop occupancy by year-end 2020, particularly given the strong anchor leasing you're able to do in the fourth quarter, which you can sort of leverage against some small shops.
Craig, Jim here. Yeah, I think with the momentum we're seeing, we feel like we can pick up some ground. We've talked about it. We've had a high, I think, at 93% leased at one point. I'm not saying we can get back there. I do think we've got some runway. I think we're going to pick up some ground this year.
Yeah. Let me add some color there, too. I completely agree with Jim. What we're seeing in our forecast is that we will make up some ground on a spot basis and anticipate percent leased at the end of the year potentially increasing from this point. Importantly, and as presented in the materials, we are anticipating our rent paying occupancy to be down in 2020. That's just representing that trough
In leasing, that is a result of all of our leasing activity, signing new leases, commencing new leases, as well as our move-out activity.
Okay, thank you. Assuming there isn't an outright sale, how long may the Barneys redevelopment to lease to different types of tenants, how long may that take?
Well, certainly if you went to a single tenant basis, it'd be relatively quick. A multi-tenant scenario, a reasonable estimate would be probably two and a half years.
Yeah, let me just add from a disclosure standpoint, Craig, as we refine that decision and move forward between sale and redevelopment, if redevelopment is the path we take, we'll certainly add that disclosure to our supplement, and you'll get a better picture of timing.
Okay, thank you.
Sure. Thank you. Our next question is coming from Richard Hill from Morgan Stanley. Your line is now live.
Hey, good morning, guys. We discussed last quarter timing of leases and move-out, and you sort of alluded to this at the beginning in the prepared remarks. I was wondering if you'd just give a little bit more updates on how move-outs have been trending so far.
From a volume perspective, 2019 and 2020, I'm going to limit these comments to what we're seeing in our shop space, because I think in the anchor spaces, it can be pretty volatile for the given reasons in those known identified tenants of Barneys and IPIC, et cetera. On shops, we're anticipating a c onsistent level of move-outs year-over-year, 2019 and 2020, and that number's in the 1 million sq ft range, ±. We don't see that kind of volume changing. If you think about that over a four, five, six-year period, that level of volume is up on the margin, we're replacing that with new leasing activity as well. We signed over 7 million sq ft of leases, that's obviously including anchors.
The pipelines as we look at our leasing activity remain full, and we're replacing the tenants that we're losing to move-outs. I would say we're upgrading the merchandising mix and the quality. While we already have a very high-quality tenant roster, we are making improvement on the meaningful margin, with every one of these new leasing transactions.
Got it. That's helpful. Lisa, just a thank you for the bridge on the NOI. That's very helpful. That's it for me.
Thank you.
I have to say, credit goes to Laura Clark on that. We find it to be a really helpful tool, and we appreciate that you all are finding it to be the same.
Thank you. Our next question is coming from Wes Golladay from RBC Capital Markets. Your line is now live.
Hey. Good morning, everyone. Just a quick question on dispositions. Every year, Regency has a strategy to shed the bottom tier of the portfolio. When I look at the five and a half cap rate this year for the planned dispositions, is that more opportunistic sales? Where are cap rates now for the bottom tier of your portfolio?
Wes, this is Mac here. A typical normal year is about a 6.5 cap rate. This year, 2020, we're guiding to a little bit lower. It's really because of two assets. There's two shopping centers that we're selling. One we've already sold. They're basically being sold to non-retail users. One is going to convert the property to a condominium development. That's the one in Florida. The other one is an office user that's going to buy the property and scrape it. We've whittled down the income in those properties, and that makes the cap rate go down. In general, a typical is sort of a 6.5 cap. That's typically what we're selling, and those are non-strategic assets in non-strategic markets, and typically have lower growth profiles.
Great. Thank you. Thanks for the disclosure.
Yes. I think generally, we're not changing the identified kind of disposition pool, if you will.
Got it. Thank you.
Thank you. Our next question is coming from Michael Mueller from JP Morgan. Your line is now live.
Yeah. Hi. A quick question. On the potential, the 75 basis points of occupancy headwind for 2020, how much of any of that was already reflected in the year-end 93% level?
In the percent commenced? Is that what you're getting at, Mike?
Yes. Is anything in there already, or is it that 75 basis points all incremental starting on January 1?
Some of it was in the percent commenced at year-end. For example, IPIC had already moved out. To get you a precise number, Mike, I'd have to come back to you offline. It's not all incremental to % commenced at year-end.
Okay.
Again, just for clarity, this is average rent-paying occupancy. The 75 basis points you're citing is average rent-paying occupancy year over year. There could be some tagover from year-end.
Okay. That's helpful. That was it. Thank you.
Thank you. Our next question is coming from Vince Tibone from Green Street Advisors. Your line is now live.
Hi, good morning. I have a few questions on the Serramonte redevelopment. I'm just curious, given the stabilized yields on the project are pretty skinny, and malls are obviously not your core property type, did you consider selling the asset over starting that project? I'd be curious to hear your thoughts on that.
Sure, Vince. I'll take this one. This is Mac. The yields are a little lower than what we typically see, and that's for a couple reasons. The first is, we elected to relocate the gym that operates there today. It's a very well-performing gym. Thought it was worth it to move them out to a pad and replace them with a new theater. That's also going to add extra energy and mall traffic to the interior of the mall. That'll help all tenants. We think the gym will operate even better, actually, on a standalone.
The yield also includes this modernization to the interior of the mall, which hasn't been done in a long time. The benefit we see over that actually takes a long time to realize, because we're very well leased. As tenants turn, we're already seeing better tenants offering better rent, and tenants that have always loved the location, but they were a little hesitant because the interior of the mall is a little outdated. This will really help to that. You'll start to see that benefit over the long term. The third phase is the JCPenney, which will take some time. We've got a lot of different options that we're still evaluating. We still are very bullish on the mall property. The location is terrific, and we're very comfortable operating it.
We have some history now to it, and we really like the prospects long term.
I would just reiterate that. It is a really high-quality shopping center. Yes, it's a mall. We don't own any other malls. There's still a lot of value to be harvested from it as well, we've got an exceptional team out there, and we're, again, applying our talents to that asset and really creating value. In some sense, I know you've had the opportunity to visit it almost is a community shopping center for Daly City. It's an exceptional asset.
No, that makes sense. That's really helpful. Just one quick follow-up on that. I'm just curious, did you have to pay JCPenney to recapture that box, or how did you end up getting control of that mid this year?
Yeah. We had to make a very small payment to JCPenney, and that's what was driving that kind of rapid increase in our write-off of non-cash below-market rents, starting last fourth quarter.
Got it. Okay.
JCPenney will be out, I think, end of May.
Right. Got it. You bought the lease, but you always own the box, just to make sure I clarify that.
That's right.
Okay, perfect. Thank you.
That entire property, we own everything. There's no separate pieces, we think that also gives you lots of optionality over the years.
Okay, great. Thank you.
Thank you. As a reminder, ladies and gentlemen, it's star one to be placed into question queue. Our next question today is coming from Ki Bin Kim from SunTrust. Your line is now live.
Thanks. Good morning. In the 2020 guidance, you have 140 basis points accounting for rent-paying occupancy declines. In your commentary there, you said 75 basis points from the no move-outs from Barneys, IPIC, Sears, and some others. Can I take that to mean that 65 basis points is for unknown future events?
I want to break down what you said there, Ki Bin, and just make sure we're all talking about the right numbers here, because I think we were crossing over between rent-paying occupancy declines and impact to same-property growth. We are forecasting 75 basis points of rent-paying and occupancy decline related to bankruptcy activity, and an additional 15 basis points of rent-paying and occupancy decline due to the timing of other leasing activity. That translates to an impact on same-property growth. That impact on same-property growth is 140 basis points from the bankruptcy category, right, and then another 30 basis points from the leasing activity category. Further breaking down that 140 same-property growth impact, there's two categories. We've kind of segmented these three tenants that are materially driving our numbers, Barneys, IPIC, and Sears, is 60 basis points, and then everything else is 80.
Let's keep digging in here, Ki Bin. It's a good question. We want to make sure we got through here. Of the 80 basis points, that compares historically to a range of, in recent history, 10- 80 basis points, so we're on the upper end of that. Roughly half of that is identified, that's the Pier 1s and the other tenants, Dressbarn, that we identified on the prepared remarks. The 30- 40 basis points would be more speculative, assumption-based, that we have in our plan. That is just supported by just looking at the environment that we're in, considering what we experienced in 2019, we thought it was an appropriate level to carry in the plan.
You think the 30 or 40, you feel comfortable with that, given what you have rolling over, what you know about your tenants?
Yeah. We feel comfortable with it, Ki Bin.
Okay. How often are you guys doing preemptive rent restructurings with some troubled tenants before they go BK?
Ki Bin, this is Jim. We're in dialogue. As you can imagine, in today's environment, we get a lot of knocks on the door from tenants asking the question. Our general position, I think I've said this in the past, our general position is we like our real estate. We feel very comfortable with our real estate. Sometimes sick tenants, it's better to take your real estate back and re-merchandise. We play a pretty hard game when it comes to rent reductions and those kind of requests. In some instances, we will evaluate and determine that working with a tenant on a short-term basis with a landlord recapture might make the most sense. In general, we play pretty hard on rent reduction.
Okay. Thank you.
I was going to say, the proactive asset management of upgrading the merchandising, we do that all the time. It's just part of the business. If I may say so myself, I'm not patting myself on the back, I'm patting the team on the back. They do a really good job of it, and have for a really long time.
Just to tag on that, we are very proactive. Take the Dressbarns, for instance. We have 10 locations
We just got them back Q4, and basically all 10 are spoken for. We're proactively leasing these things that we think have an opportunity to recapture. That's part of the reason we can be strong in the negotiation because we know the real estate, we know what our opportunity pool set looks like.
All right. Thank you.
Thank you. Our next question is coming from Linda Tsai from Jefferies. Your line is now live.
Thanks. Tenant allowances on new leases were up a little the past two quarters, $32 a foot in Q3 and $39 in Q4 versus $24-$25 the prior quarters. What's driving these increases, and will this remain elevated in the coming quarters?
Linda, it's Jim. As I indicated, the mix this quarter was really anchor driven, that was one of the reasons. Obviously, we continue to see increases in construction costs in general across the board. It was really mostly the mix. They were all LA Fitness, Talbots, Marshalls, Edge Fitness, great tenants, really good merchandising backfills. At the end of the day, when we step back and look at our capital spend, we think that number is somewhere between 10%-10.5% of NOI at the end of the day. Taking out the quarter-over-quarter movements, we think that we'll continue to operate in that 10%-10.5% NOI spend.
Thanks. Amazon's opening a low-cost grocery store format in 2020 as an alternative to Whole Foods and Amazon Go. Will your properties see any of these openings? If so, any store details you're comfortable sharing?
Just as we answered that question last quarter, we're unable to talk about anything at this point.
Thanks.
You're welcome.
Thank you. Our next question is coming from Chris Lucas from Capital One Securities. Your line is now live.
Good morning, everyone. Just a follow-up on Serramonte. Macy's had disclosed a store realignment program, so they're shrinking the footprint again. Have you guys had any conversations with them about your store there at Serramonte?
Chris, this is Mac. We talk to them all the time, and especially recently as part of this redevelopment. They've given us no indication that they're unhappy with the store or they haven't requested rent relief or anything like that. No new news on that front.
Any thoughts about being more proactive in terms of trying to buy them out?
We're always looking for opportunities just like that, just like we accomplished with JCPenney on that same property. That's always an option that we explore.
Okay. We've seen a couple of regional grocers file and/or close stores first part of this year, Fairway, Earth Fare, Lucky's. You've got a little bit of exposure to Earth Fare and Lucky's. Just curious as to how you're thinking about the sort of regional grocery player at this point in the cycle and how you're thinking about sort of your tenancy in that vein going forward.
Chris, we really haven't changed our point of view. Generally speaking, as you've heard us speak quarter after quarter, we really want to make sure that we're aligning ourselves with the better operators, with strong balance sheets, and with the ability to reinvest back in their business. Certainly, smaller operators, and especially those with higher leverage, are facing more of an uphill battle. No question. We continually are looking at that. It doesn't mean that all regional, smaller grocers are not going to be able to survive and thrive in this environment, but they have to have the ability to reinvest back in the business, in the in-store experience, as well as technology delivery, everything that's happening in the world of grocery. It's an ultra-competitive retail segment and has been for a really long time.
Those better operators that have the ability to be flexible, nimble, and actually innovate are the ones that are going to continue to succeed in the future. It's always disappointing to see any retailer fail. It impacts people's lives. It is part of the business, and it's something that we've dealt with for as long as we've been a retail shopping center company.
Great. Thank you. That's all I had this morning.
Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Lisa for any further or closing comments.
Just want to thank you all for your time. We'll see some of you, I think, in the next month or so, and a very quick happy birthday to Madison, Greg, and Amy. Thank you all.
Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. Thank you for your participation today.