Greetings. Welcome to Regency Centers Corporation's 2nd Quarter 2019 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. Please note this conference is being recorded.
I will now turn the conference over to Laura Clark. Ms. Clark, you may now begin.
Good morning, and welcome to Regency's Q2 2019 earnings conference call. Joining me today are Hat Stein, our Chairman and CEO Lisa Palmer, our President and CFO Matt Chandler, EVP of Investments Jim Thompson, EVP of Operations Mike Mas, Managing Director of Finance and Chris Levitt, SVP and Treasurer. On today's call, we may discuss forward looking statements. Such statements involve risks and uncertainties. Actual future performance, outcomes and results may differ materially from those expressed in the 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 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. Before turning the call over to Hap, I wanted to mention our upcoming Raleigh market showcase event in early October. This event will feature our high quality properties, including recent development, redevelopment and acquisitions, as well as our local market team.
We hope that many of you will be able to join us, and I'm happy to provide more details to those of you who would like to attend. Hap?
Thanks, Laura.
Good morning, everyone. Before discussing our results and outlook for the remainder of the year and for the future, I'd like to highlight the executive changes we announced yesterday. I am extremely excited that Lisa Palmer will become President and Chief Executive Officer effective January 1, 2020. And at that time, I will transition to Executive Chairman. On August 12, Mike Moss will become Executive Vice President and Chief Financial Officer.
In addition, Jim Thompson and Mac Chandler will be appointed Chief Operating Officer and Chief Investment Officer to better recognize their roles within the company. This succession is a result of a well considered plan that Regency has been crafting for the last several years, and I have no hesitation that this transition will be seamless. I am deeply gratified to work with the best professionals in
the business. Regency's
people are the cornerstone of the company and our values and they have worked together to build a truly wonderful company. Lisa is the embodiment of Regency's culture and success. Over the last several years, Lisa and I have been partners in the direction of Regency, making decisions together every step of the way through Regency's vision, strategy and consistent execution. And it's through this partnership I know that our understanding of our business, our ability to execute on our strategy, her experience in the capital markets, as well as her devotion to our special culture position her to continue to build on Regency's past success. And with the support of this executive team and of our people, we'll continue our focus on being the preeminent national owner, operator and developer of shopping centers.
Now to the quarter. Lisa, Jim, Mac and Mike will discuss in more detail how we are operating in, what in our view is a reasonably favorable environment, which is reflected in the underlying fundamentals. This includes a portfolio that is over 95% leased, rent growth in high single digits and bad debt at prior year's healthy levels. That said, the delayed timing of new leasing in the first half of the year as well as not exceeding our assumptions for move outs resulted in a decline in rent paying occupancy. This has impacted the second quarter as well as the back half of the year.
As a result, we now expect to finish towards the lower end of our same property NOI growth range, which doesn't meet our high expectations. However, in spite of moderately lower NOI growth in 2019, this year we continue to generate substantial free cash flow translating into meaningful growth in core earnings and AFFO. Most important of all, I am confident in our unequal combination of strategic advantages, including the quality of our portfolio, our development capabilities, the strength of our balance sheet and our highly engaged team has and will continue to position Regency to be a leader in the shopping center sector and generate total returns of 8% to 10%. Now I'll turn the call over to Regency's future Chief Executive Officer, Lisa Palmer.
Thank you, Hap, and good morning, everyone. I want to thank Hap and the Board for this tremendous opportunity. We are truly fortunate to have had such an impactful leader of our company and for our employees. Hap and our senior leadership team with the guidance of an exceptional Board have positioned the company for a seamless transition. As Hap said, we've worked so closely together along with Mike, Jim and Mac and our entire team is ready and excited to continue to build on Regency's past success and move the company forward as we realize our vision and achieve our key objectives.
Moving to the quarter, I'd like to highlight a few things as our team continued to execute on our strategy. Our high quality portfolio remains at a healthy 95% leased and our leasing pipeline is deep. We started exciting new development and redevelopment projects including Culver City Market and The Abbott, which Mac will talk about in just a little bit. We further enhanced the quality of our portfolio through the acquisition of a premier shopping center in Silicon Valley. And with our balance sheet strength, we are able to fund the acquisition on an essentially non dilutive leverage neutral basis.
Our conservative balance sheet and approximately $170,000,000 of free cash flow, which is after capitals and dividends, continue to provide substantial financial flexibility and access to capital through future cycles. We recently published our annual corporate responsibility report, which highlights our commitment to our people, our communities, our best in class ethics and corporate governance and environmental stewardship. And importantly, we now expect core operating earnings to grow 3% to 4% for the year and AFFO by over 6%. Our portfolio continues to benefit from the successful retailers that are expanding their physical presence. Our high volume grocers are driving substantial foot traffic as brick and mortar locations remain a critical component to their strategy and at the center of their success.
These best in class grocers are attracting desirable shop retailers and restaurants as they continue to commit resources to customer service, the store experience, value and technology initiatives. And in spite of the well publicized headwinds in the retail sector, we remain confident that our high quality portfolio will outperform over the long term and meet our strategic objective to average same property NOI growth of 3%, which is supported by organic growth as well as positive contributions from our attractive pipeline of redevelopment opportunities. The continued execution of our proven strategy has positioned Regency extremely well to achieve these objectives. Mac? Sorry, I'm going to hand it over to Jim.
Thanks, Lisa. Same property NOI growth in the first half of the of 2.1% was supported by base rent growth of 2.5%. The quality, appearance and location of our properties as well as our fresh look merchandising continued to elicit good demand. This is evidenced by new and renewal leasing volumes in the first half of this year, which exceeded the first half in twenty eighteen. Move outs and bad debt that remain near prior year levels are both indicative of a healthy tenant base.
We
are astutely managing our leasing capitals and achieving high single digit leasing spreads and executing on embedded rent increases, both of which are contributing to straight line rent growth of 16% for the trailing 4 quarters. That said, relevant retailers as well as Regency continue to be diligent and deliberate in lease negotiations as well as site and merchandising selection, which contributed to delays in lease timing in the first half of the year. In addition, timing associated with permitting and the construction process in markets where the retail environment is thriving continue to cause delays. We're also executing on our proactive asset management to fortify our merchandising mix as well as our same property NOI growth over the long term. I'd like to share a few notable examples that occurred this quarter.
At our Riverside Square Center in Chicago, we proactively recaptured a space from a regional gym operator and upgraded that merchandising with Blink Fitness, a premium quality, value based fitness concept that is a subsidiary of Equinox. Blink took a total of 15,000 square feet at a rent that was over 20% accretive to the former operator. Also at Sheridan Plaza in South Florida, we declined Bed Bath and Beyond's request to renew at a reduced rent, recaptured that space and are executing a new lease with Burlington at a 130% rent spread. These examples as well as many others demonstrate that we are being thoughtful and making the right long term decisions even when resulting in downtime. In regards to potential future bankruptcy filings and store rationalization, we are diligently monitoring watch list retailers.
Our local teams have been actively marketing many of these spaces and given the desirability of our real estate, there are a number of backfill prospects we are working with. Should we get these spaces back, we expect to upgrade the merchandising often at higher rents. The recent news around the potential for Barneys to file bankruptcy was new information and there's much uncertainty around the eventual outcome. Importantly, despite their corporate struggles, we feel good about the long term prospects of this unique location in Chelsea. All that said, while the bankruptcies and store closures continue to dominate the headlines, expanding categories like off price, fitness, restaurants, entertainment and grocery users are making up for these closures and presenting merchandising upgrades and redevelopment opportunities, leaving us feeling good about the state of our business.
Matt?
Thanks, Jim. Our capital allocation strategy, which clearly differentiates Regency's business model, starts with $170,000,000 of annual free cash flow after on an extremely favorable and cost effective basis. In the Q2, we started a terrific ground up development in Culver City, arguably the most sought aftermarket in Southern California. This dense infill project will be anchored by Urban Space, one of the leading market hall operators, as well as several local restaurants and retailers. The trade area of Copeland Marketplace is extremely compelling.
With more than 275,000 people with average household incomes of over 125,000. Dollars We also started 4 redevelopments this quarter, the largest being our mixed use project in Cambridge, known as the Abbott. We're extremely excited about this exceptional opportunity and its value creation. The Abbott is the most prominent location in Harvard Square, benefits from tremendous foot traffic and world class demographics. Our in process developments and redevelopments are performing well.
The projects are nearly 90% leased and committed with expected yields that remain comfortably well above cap rates for comparable Class A properties. Our in process redevelopments as well as select future redevelopment opportunities are on track to contribute over $40,000,000 of incremental NOI. One such example is our Westwood Shopping Center in Bethesda. Now that we have secured our entitlements, we continue to advance our plans and look forward to discussing more details later this year. As we have previously communicated, a key component of our investment strategy is portfolio quality enhancement through the acquisition of Premier Assets.
On July 1, we did just this with our acquisition of The Pruneyard, a 258,000 square foot center in the heart of Silicon Valley. This iconic center, anchored by Trader Joe's and Marshalls, sits in close proximity to the West Valley's most affluent neighborhoods and technology employers and is merchandised to superb local retailers and restaurants. Adjacent to the Pruneyard are 3 office towers and a hotel, which were not part of the transaction, but do contribute to our significant foot traffic. The Pruneyard is expected to generate a 3.5% NOI CAGR and an IRR in excess of 6.5%. It is yet another example of a strategic acquisition that serves to fortify our NOI growth.
Consistent with our capital allocation strategy, we plan to fund the transaction with lower growth dispositions combined with debt in the unsecured market, both of which are reflected in our guidance updates. Mike?
Thank you, Mac. I'd like
to provide some color around our reaffirmed same property NOI growth and updated earnings guidance. First, we are maintaining our initial 2019 same property NOI growth guidance range of 2% to 2.5%, which is centered around varying degrees of new, renewal and move out activity. As we've discussed this morning, net leasing activity that occurred over the first half of the year and more importantly, the timing of that activity has led to our current expectation for same property NOI growth to end the year closer to the lower end of this range. And for added clarity, please also note that our reaffirm range does not incorporate any potential lost rent from Barney's as that situation remains very fluid. And as Jim mentioned, there is much uncertainty around the eventual outcome.
Our annual rent exposure to Barney's is approximately $4,900,000 meaning same property NOI growth could be impacted by up to a maximum of 25 basis points this year. As we have previously communicated coming into this year, our 2019 same property NOI growth range falls below our 3% strategic objective, primarily due to the long awaited Sears bankruptcy, together with a muted contribution from redevelopment deliveries. However, as we consider the high quality of our portfolio and look forward to the visible redevelopment opportunities in our pipeline, we remain confident in our ability to achieve our objective to average same property growth of 3% over the next 5 years. Turning to FFO, the Barnage credit situation resulted in an unexpected non cash expense of approximately $0.02 per share from the reserve of the tenant's straight line rent receivable. This non cash charge will be offset by a number of other positive impacts for the full year, including more favorable G and A and a slight push in timing of our planned dispositions, which in total allowed us to tighten our FFO range while keeping the midpoint constant at $3.83 per share.
As a reminder, we like to use core operating earnings as a better metric to measure performance per Regency as it eliminates certain non recurring and non cash items and more closely reflects cash earnings and our ability to grow the dividend. In the Q2, we grew core operating earnings per share by 4.6% after adjusting for the lease accounting change. And given the positive impacts of lower G and A and new disposition timing, we now expect to grow core operating earnings per share for the full year by 3% to 4%. You may recall that this range wider with a floor of 2% when we initially offered guidance. That concludes our prepared remarks, and we now welcome your questions.
Thank you. At this time, we'll be conducting a question and answer Thank you. Our first question is from the line of Christine McElroy with Citi. Please proceed with your questions.
Hey, good morning, everyone. Just first, Michael and Katie and I just wanted to offer congratulations to Lisa and the rest of the team. Obviously, part of the longer term plan, but well deserved. And Hap will definitely miss you in the fray, but we know you'll still be around. Just to follow-up, Mike, on some of the Barney stuff.
I know it's not in the same store range yet for 2019, but does this potentially derail, I know it's only 30 basis points, but you have a plan to sort of get back to that 3 percent same store NOI growth rate by 2020. Does that does this and sort of the timing issues of 2019 potentially impact that? And with regard to that specific store, it's not a normal holding for you. I know the focus for them has been more on their midtown store rent, but how would you feel about having to release that space versus where market is today?
Thank you, Christy. I appreciate the question. I'll leave the re tenanting to Jim, but let me first address your question around our NOI growth and I think what you're asking the future profile. I'm not going to give 2020 guidance at this point in time, we're just not prepared for that. But I would say that, listen, Barney's, Sears, toys before that, this is part of the business, always has been.
We're going to have retailers who fail and we'll continue to have retailers that fail. This is a large rent for us and a quarter of a point impact to this year and under a lot of assumptions maybe a quarter of a point next year as well. That being said, it's a 2.25 to 2.5 business organically, again, assuming that we're going to have tenant fallout. And that and then we the real reason we're at these levels this year is the lack of and the needed contribution from redevelopment deliveries. And we've been very vocal and have communicated that in the past.
The exciting part is we see our redevelopment pipeline continue to make progress, and Matt can add color to that. You saw us start the Abbott. You saw us we're making great progress on Westwood. Market Common is underway. All of these are why we believe our future and why it was very clear that our 5 year average from this point forward will be back in that 3% range, which is consistent with our objective.
With respect to borrowings, I'll let Jim comment on the release.
Chris, you're right that it is a bit of a unique property for our portfolio. But ever since the merger, we felt that that underlying real estate and Chelsea address had really long term potential for future opportunity.
That's backed up a little bit by
the fact we had unsolicited offers to buy this asset in the past. The trade area continues to improve. And at the end of the day, yes, we think there is a value at play should we get the real estate back. Obviously, there's tremendous amount of uncertainty as to what will happen during this discussion of bankruptcy. But our team is evaluating options as we speak.
So more to come as we learn more.
Okay, thanks. And then understanding you raised your disposition expectations to help fund Pruneyard, but do you have anything under contract for sale today? Sorry if I missed that, Mac, in your comments. And was the downward revision to the disposition cap rate a function of the mix of what you're selling or just sort of better execution than what you expected?
Thanks, Christy. Nothing under contract, although we're negotiating 3 different purchase contracts to have identified the buyer. And then we have 3 other properties that we've taken out to market, so they're officially on the street. So initial interest on those look really good. So we feel good about it.
And the reason we've lowered our cap rate on the dispositions is we've gotten a little bit better pricing than we expected. And if you look at what we've sold to date, keep in mind too, we've had about a third of those assets are Louisiana properties that sold for roughly 10 caps. So when you average that in there, it gives you a good indication of the quality of our properties and the pricing that we've been able to realize.
Thanks so much.
Thank you, Christy. Appreciate your nice comments. Greatly appreciate it.
Our next question is from the line of Jeremy Metz with BMO Capital Markets. Please proceed with your questions.
Hey, good morning and again congrats on all the appointments. I echo Christy's comments there.
You mentioned thank you. I didn't have the chance to jump me. So Jeremy, thank you.
So in the opening remarks, you mentioned
the low end of the same store NOI range and the delay in timing for some rent payments. I'm just wondering any more color you can give on that in terms of what's driving some of that relative to the expectations? I mean, you did mention the permitting and the construction built into expectations, but any more color on that? Yes, I think, I think, we're built into expectation, but any more color on that?
Let me start and again, I think Jim will clean up for me
a little bit here. But
again, I appreciate you bringing it up. So we are focused and our team's eyes are pointing towards the lower end of the range right now. And it's really due primarily to timing of our net leasing activity that we experienced over the 1st 6 months. So the way I'd like to describe it, in other words, is we're expecting our average rent paying occupancy to be a little bit lower for a little bit longer this year. And that is lower than what we had hoped for.
However, it is more consistent with the assumptions that we had in place supporting the lower end of our range. So it wasn't out of the question as we looked at the year. Importantly, we remain very comfortable with the assumptions on both ends at this point in time, although our eyes are pointed toward the bottom. At this point in time in the year, it is more about move out assumptions, obviously. And with respect to that, more positive results on that front as well as maybe an increase in timing on rent commencements is what could get us to outperform.
We're focused on that. But again, it's really timing. Tenant demand is healthy, and Jim will speak to that. Our volumes have been very good. They're roughly in line with our expectations and they're roughly in line with prior years.
Yes, Jeremy, I'd just piggyback Mike a little bit on that. The volumes have been strong, pipeline is solid. When you look at our shops, we've consistently we're at 91.5% on the small shop space today. We've consistently been in the 91% to 93% range, which has been quite frankly at or near the top of our sector. So we're still optimistic and bullish on the tenant demand.
We think the continued execution on our redevelopment and remerchandising opportunities and efforts will continue to keep us in that 91% to 93% range. And personally, I'm bullish that we can move towards the higher end of that range as we execute on these redevelopments and remerchandising.
Helpful. Thanks. And then second for me, just in terms of the Premier acquisition, should we think about this just more of the stabilized type of acquisition? Or is there any value add or notable upside potential there that you could be sitting on? And then just sticking with anything further in the pipeline on the acquisition front that you think can maybe get to the goal line here?
Sure, Jeremy. This is Mac. I think in the short term, you can expect this
to be, as we've discussed,
very solid property with great CAGR. It's got a 3.5% 10 year CAGR. It is going to pick up kind of quickly because there about 5 tenants that are in build out that haven't commenced rent that should happen over the next 9 months. Further out, maybe more than 10 years out, there's a couple of boxes that will roll the market and there could be some really interesting opportunities here. The sports basement box sets itself up.
You could do a lot of different things with that. Don't want to get ahead of ourselves, but it is one of the reasons we like the property long term. There's tremendous demand for office, multifamily and retail, just the kind of demand that we look for. As to other acquisitions, we only guide on what we're getting real close on. There are a couple of properties that we are looking at that are acquisitions that would have a redevelopment focus and we really prefer those properties that use our team, our platform and our capital.
And there's 2 sort of midsize projects that hopefully we can give you a little bit more color on next quarter.
Thanks. Appreciate it.
Our next question is from the line of Richard Hill with Morgan Stanley. Please proceed with your
question.
Hey, good morning guys. Lisa or Mike, I want to come back to Pruneyard and think about how much of a benefit it was to FFO, recognize you kept the FFO guide consistent at a tighter range despite the $0.02 onetime non cash straight line rent charge. So does that mean we should think about Pruneyard as maybe a $0.02 benefit that offset that?
Rich, in my prepared remarks, I think I commented that we were doing this essentially on a non dilutive, although I didn't say accretive, but it's essentially earnings neutral with the fact that going in cap rate in the mid-4s and we're going to be funding that partially with dispositions and you've seen our dispositions guidance. We're able to offset the cost of that dispositions with lower cost debt. So it's essentially earnings neutral. You have to if you just we'll remind everyone just strategically why these acquisitions make sense. It's an important part of our capital allocation strategy to continue to fortify that NOI growth to acquire Premier Assets.
And we've talked about it in the past, right? It's no accident that we've been able to maintain and lead our sector with above average same property NOI growth. And we think the continual enhancement of the quality of the portfolio, we don't need to, but we're very opportunistic in doing so. We think that that's an important part of our strategy.
That makes perfect sense. Thanks, go ahead.
Hey, Rich, real quickly on FFO. The offset to that non cash charge was as we indicated in the call, better G and A expectations as well as a slight timing enhancement to our dispositions. Got it, Got it.
Okay. That's all it
for me. Congrats to everyone on the call as well.
Thanks, Rich.
Our next question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.
Yes. Also, I'd like to jump on and give congratulations to all those promoters and the developed within the company. So again, congratulations. I wondered if we could discuss just a little bit, the allocation of capital of redevelopments versus acquisitions? And maybe talk about what was the more compelling reason to buy Pruneyard?
Was it its assets quality or its upside opportunity?
I think that the number one use of our capital, the $170,000,000 of free cash flow is to fund our development and redevelopment program. And the majority of those investments today are redevelopments. And then I would say then the second priority becomes value add acquisitions like the 2 that Mac and Plaid that we're looking at right now where there's a meaningful amount of upside. And then the 3rd category would be core acquisitions, high quality acquisitions with superior growth prospects like the Pruneyard at 3.5% projected NOI growth, plus some potential upside beyond that. And we're funding those through the sale of assets.
And as Lisa mentioned, given our plan right now, we think that we can do it on essentially earnings and balance sheet neutral basis with superior NOI growth going forward and or value add opportunities going forward.
Great. Thank you.
Thank you, Craig.
The next question is from the line of Samir Khanal with Evercore. Please proceed with your question.
Good morning, everyone. So just switching gears a little bit on grocers. I know I'm just curious to get your views on Albertsons. It sounds like they're starting to move in the right direction. They're addressing leverage.
Curious as to see what you're seeing on the ground given the exposure they have? Thanks.
I'll take that one, Samir. Just for the past couple of years really, we 3 years potentially even, we have seen continual improvement in the actual store operations of Albertsons, better sales, sometimes only anecdotally if they're not reporting, but generally better operations. And they went through some management changes, and we know their management pretty well, especially their last CEO. And under that very short period of time, right after that kind of failed Rite Aid merger, they really pivoted on improving their balance sheet as well. And they've made tremendous improvements in their balance sheet and further improvements in their operations and even their margins.
If you were to go read some research reports, you'll see that Albertsons actually has some of the healthiest EBITDA margins in the sector. So that's Albertsons and that's how so we're comfortable with the direction in which they are headed. But even more importantly, the quality we really like our real estate and the quality of the grocers, the individual stores of Albertsons that we have in our centers are above average and the real estate itself is well above average. So we like our position with Albertsons, but we do recognize the potential risks that are there.
Great. Thanks for the color.
Thanks, Jay.
Thank you. The next question is from the line of Brian Hawthorne with RBC Capital Markets. Please proceed with your question.
Hi. Equity 1 had mentioned a big uplift from anchor expirations. How much of that is left to go?
We appreciate the question, Brian. And you'll recall from our last Investor Day, we cited 40, what we call legacy leases and that's those are a combination
of both legacy portfolios of
anchor leases that are coming due. A lot of that remains, and that will all be supportive of this 5 year plan that we feel good about and our ability to generate organic NOI growth in that 2.25 to 2.5 range and then supplementing that with redevelopment opportunities. Some of those legacy leases are what trigger these redevelopment opportunities.
Okay. And then on Melody Farm, it's like 90% lease. When did those tenants start paying rent? And I guess when do you kind of get to that stabilized yield? Or what do you expect to get there?
Sure, Brian. This is Mac. We're up to 93% leased and committed. And in this last quarter, we at least more than 35,000 square feet, including deal to West Elm, which we thought was really one of our last sort of pivotal spaces. Most of the tenants are open, operating, doing well, reporting sales in excess of their projections.
So I think by year end, we should be at a stabilized lease basis. But if you get a chance, we encourage you to get out there and take a look at it. It's doing well and we're very pleased with that asset.
The center looks fabulous. And I think also not only the place making there, but also the merchandising is exceptional.
When you say by year end reach the stabilized yield, that means like by December or do you mean by Q4 you'll be at the 6.8 yield? I think that's what the supplement said.
Well, the difference between December and Q4 is pretty finite. What I would just assume by year end at this point.
Okay.
All right.
Thanks so much
for asking
for promotion.
The next question is from the line of Vince Tibone with Green Street. Please proceed with your question.
First off, congratulations from me as well. My first question is, how do you think about your cost of capital today? Based on guidance changes, it appears you prefer dispositions over issuing equity to fund acquisitions. I'm just curious, is there like a certain stock price where you consider issuing equity to fund external growth?
Well, number 1, as we've said before, we start with $170,000,000 of free cash flow after dividends, after CapEx and the number one priority on that is to fund developments and redevelopments. And then beyond that, we look at how we can make a trade, whether it's we're selling property to buy back stock that we've done in the past or selling property to fund acquisitions as we're doing with the prune yard, sometimes using debt. And at times in the past, when we thought the trade made sense, we've issued equity.
Got it. That makes sense. My next is kind of on your acquisition strategy going forward. I mean, do you think Regency could buy more large ticket items since there seems to be significantly fewer potential buyers, let's say, dollars 100 plus 1,000,000 centers versus small dollar centers? And then I was just curious, are there any markets or regions that you think are particularly attractive today and you're actively looking to increase your exposure?
I'll let Matt add color on the markets. But I'd just reiterate what Hap said in terms of the use of our capital in the fact that we are opportunistic and to the extent that we're able to identify and have the ability to acquire shopping centers with a value add component or with above average growth and we're able to fund it on an essentially leverage neutral basis and an earnings efficient basis, we'll continue to do that. We think it's an important part of our strategy, but I'd also reiterate, we don't need to. When we talk about our organic business model, it's same property NOI growth, it's our developments and redevelopments that are funded by the $170,000,000 of free cash flow and it's the strength of our balance sheet and our talented team. Acquisitions are generally additive to that.
Yes. I'd only add we're we are always in the market looking for really compelling opportunities. You could see what we bought in the past and we've been buying in the coast. We bought a great center in Florida a number of years ago. We bought a great center in Raleigh.
So it's dependent on obviously the dynamics of the market, the intersection, the demographics and in the health of the tenants. We look at carefully that rent load as compared to sales. So could we buy another large acquisition again? I would say it just depends, but we're going to have to be compelling and we'd look at all these factors that we've discussed.
Great. Thank you.
Thanks, guys.
Thank you. The next question is from the line of Michael Mueller with JPMorgan. Please proceed with your question.
Thanks. And obviously congratulations from our whole team here as well. So I guess first for the Pruneyard higher same store NOI growth CAGR. Can you talk a little bit about what the mark to market is or is it coming from outsized bumps, a combination of it? And are the bumps comparable to your portfolio or even above those levels?
Sure, Michael. Much of the growth in there is due to embedded rent steps. And the tenants that the leases that were inheriting have very strong bumps, a little bit better than what we have been able to get compared to our overall portfolio. But it's not surprising given the strength of the center and the strength of the market and the demographics. So tenants have signed up for higher bumps because they expect to fully realize higher profits over time, given the tremendous trade area.
So there's a little bit of rollover, a little bit of mark
to market. There is in
every center, but there isn't, for example, one big box that's coming back in year 6 that's driving the model. It's not one of those situations. It's very much lease to lease.
Got it. Okay. And then, I know the watch list was brought up earlier. What portion of your AVR does the current watch list makeup in aggregate?
It's a good question. I'll give you a longish answer. We use a pretty extensive watch list internally and we like beef it up. We like the team to be aware of where we see issues, which can be financial. So that's more of the traditional bankruptcy risk that you see.
That list, frankly, has absent Barneys has put them aside, has actually shrunk over time really from Sears and actual realized bankruptcies occurring. The second part of the list we use is just a store closure, store rationalization list. And this is where we'll include concepts that we feel may be oversaturated. Importantly, in that environment, Regency historically performs better. We find that when fleets are rationalized, it is very often that their locations within our centers are higher performers, upper tier, upper half of their portfolios and we just do better in that regard.
And then lastly, we like to include otherwise healthy financially risk financially tenants that for whatever reason are maybe stubbed their toe and a good example of that would have been Chipotle in the past with the food quality issue that they came across. So we do include them on our internal list. The percent of our overall rents is in the it's well under 2%, probably in that 1.5 percent range, and that's really across those 3 categories, Mike. So it's that's pretty broad.
Okay. That was it. Thank you.
Thanks, Mike.
Thank you. Our next question is from the line of Linda Tsai with Barclays. Please proceed with your question.
Hi. Let me add my congratulations to everyone. Lisa and Mike, you guys make a great team. I know Sears had a 40 basis point impact on the same property in the quarter. What kind of impact do you expect in 3Q and 4Q?
And then maybe just an update on the releasing of those boxes?
Sure. Let me take that let me take the impact question and Jim will handle the re leasing. We're expecting all bankruptcies included in the second half of the year, it's in that 30 basis point range as an impact to same property growth, primarily through base rent.
I'll then jump in on our Hancock Center, which is where our largest Sears is. That's a very good center that we own there. And it's in Austin. It's a terrific market just north of the city. Also anchored by an HEB that does over $100,000,000 in sales.
So it's got great tenant performance and great foot traffic. The existing box has great bones, great structural integrity, great ceiling heights, great column layouts and it really sets itself up well for an adaptive reuse. So we've been setting these plans. We haven't picked a definitive angle that we're going, but I would say the likely approach is we're going to convert it into creative office. There's strong demand for tenants looking for spaces just like that.
It's going to take a little bit of time, but because we'd be using the existing box, it doesn't take any discretionary entitlements. So more to come on that one, but I would say we would be able to start that construction next year and deliver to tenants about 12 months following the commencement of construction. Thanks for
that, Tom.
The last Kmart we have is in Gainesville, Florida and we are at LI with the market leading grocer for that particular box and I would suspect that we will have a little more clarity in the next 6 months on the direction of that and probably an 18 to 24 month deliverable.
And then maybe just addressing the comment that retailers that are closing stores tends to happen less at Regency given your higher quality centers. In terms of Dressbarns and GNC, how much exposure do you have there? And then how do you feel about those rents versus market?
Our exposure for Dressbarn, we only have 8 locations. It's about 10 basis points, Linda. And then GNC is in the 20 basis point range. Jim can comment further. This is kind of regular way business for us, but we feel really good about retaining opportunities.
Yes. There's nothing unique there that
we're happy to get our space back. We've been watching obviously both of them for a while and we really like I said, I think we've got an opportunity to upgrade
our merchandising at the end of the day.
Thanks.
Thank you, Linda.
Thank you. At this time, I will turn the floor back to Hap Sime for closing remarks.
Once again, we thank every one of you for your interest in Regency and
give me one more call.
And I look forward to that and have really enjoyed the relationships with the investment community. It's been special and we've had a because I get to work with a good team, it's been extremely successful. More often than not, the story is easy to tell. So but thank you all very much and everybody have a great weekend. Bye bye.
Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.