Greetings, welcome to the Regency Centers' first quarter 2019 earnings conference call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If you would like to ask a question today, you may press star one on your telephone keypad. 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 is now my pleasure to introduce our host, Laura Clark, Senior Vice President, Capital Markets. Thank you. You may begin.
Good morning, welcome to Regency's first quarter 2019 earnings conference call. Joining me today are Hap Stein, our Chairman and CEO; Lisa Palmer, our President and CFO; Mac Chandler, EVP of Investments; Jim Thompson, EVP of Operations; Mike Mas, Managing Director of Finance; 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've 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 want to touch on the earnings and accounting disclosure changes effective this quarter. These include updates to Nareit FFO and the treatment of gains on sale and impairments of land, as well as accounting changes from the adoption of the new leasing standard and are summarized in our earnings release and quarterly supplemental. We hope that these details will facilitate this accounting and reporting transition. Hap?
Thanks, Laura. Good morning, everyone. As you'll hear from Jim, Mac, and Lisa, we feel good about this quarter's performance, operating fundamentals, the outlook for the business. We remain confident that Regency is extremely well-positioned to successfully navigate threats and prosper from opportunities by intensely managing and leasing our high-quality portfolio, by executing on our value-add development and redevelopment program, self-funding capital allocation strategy, all while maintaining our strong and conservative balance sheet. Before turning it over to Jim, I'd like to touch on why we really like having grocers in 80% of our centers. This begins with the fact that the grocers in our portfolio include the top operators in the country and are producing sales that average $650 per square foot and benefit from low occupancy cost.
At the same time, the grocery business has always been highly competitive and is evolving at an even more accelerated pace. Still, having a physical store located close to the customer in the best centers has and remains the centerpiece of their business model. Importantly, it is the store that provides the best opportunity for the grocer to win the customer through a compelling combination of service, experience, and value. Several examples include Publix's impressive top and bottom-line growth results from their focus on the paramount importance of their employees, who are critical to creating a pleasant shopping experience. Opening new stores and renovating existing ones remains a critical component of their strategy. It is also worth noting that Publix continues to be one of the top buyers of shopping centers.
Kroger has a heightened focus on integrating technology and strategic partnerships to better service their existing customers and create new ones. Their ClickList, Restock Kroger, and alliances with Ocado and Walgreens are among their more notable initiatives. Grocers like Whole Foods, Trader Joe's, Sprouts, H-E-B, and Wegmans achieve extremely high levels of in-store sales as a result of the compelling and often unique shopping experiences. Each is expanding their store base with no change to the size of their store footprints. Albertsons-Safeway is investing well over $1 billion annually in their core business. They are likewise focused on the customer experience, including re-merchandising with more organic and gourmet offerings, as well as using technology to support multi-channel customer satisfaction. Importantly, Albertsons again experienced improved financial performance in 2018, with consecutive sales and EBITDA growth, better margins, and a $1.5 billion reduction in debt.
Furthermore, Regency's Albertsons locations are in highly desirable trade areas where the center benefits from its competitive position. The majority are in West Coast markets where the Albertsons-Safeway banner is the market leader. The bottom line is that our grocery anchors are proven operators that are evolving for their customers and generating significant daily traffic to our centers, including the added convenience of buy online, pick up in store. Jim?
Thanks, Hap. Performance and operating fundamentals were solid in the first quarter, with nearly 3% NOI growth in the same-property portfolio driven entirely by base rent. Our tenants are healthy, demonstrated by historically high collection rates, which translates into very low bad debt. Rent growth has stabilized in the high single digits, and we continue to have a lot of success incorporating midterm rent steps into our leases, which is a key component of our strategic objective to average 3% same-property NOI growth. Our same-property portfolio still sits at a strong 95% leased. The sequential decline this quarter was primarily due by the closure of two Sears locations. But we are very excited about the redevelopment opportunities to upgrade the merchandising mix and overall appeal of these centers. Our shop space is 91.5% leased, which I want to note, is among the highest in the sector.
This quarter, shop occupancy was impacted by a couple of things. First, an expected seasonal trend of slightly higher move-outs, as is typical in the first quarter. Second, lease execution timing is taking longer as tenants remain discerning and deliberate in their leasing decisions. Lastly, we've continued to execute on our proactive asset management and center repositioning, which includes recapture shop space in conjunction with our redevelopment assets, which is causing a negative impact of 50 basis points to our shop space percent leased this quarter. We continue to take an aggressive approach to upgrade the quality of the merchandising, especially at those properties acquired in the merger. All that said, many successful local, regional, and national retailers continue to look for new locations in high-quality centers, and the depth and velocity of our leasing pipeline remains healthy.
We feel good about the level of tenant interest, where we are seeing demand across all regions within expanding categories like off-price, fitness, restaurants, entertainment, and grocery users for both anchor and side shop spaces. We believe tenants are making thoughtful business decisions as they commit to opening new stores. Looking forward, we believe as the year progresses, occupancy will increase as our team executes on our redevelopments and reanchoring opportunities, supported by this robust pipeline of tenant interest. Mac?
Thanks, Jim. We had another successful quarter executing on our capital allocation strategy. This starts with $170 million of annual free cash flow after capital and dividends, enabling us to fully fund our development and redevelopments on an extremely favorable and cost-effective basis. This clearly differentiates Regency's business model. The inherent quality of our portfolio and our free cash flow allows us to be selective with capital recycling as we identify compelling investment opportunities that can be executed on a basis that is tax efficient and mitigates adverse impacts to earnings. In the first quarter, we sold seven shopping centers for a total of $137 million. As we previously communicated, this sales activity funded prior year share repurchases, as well as investments into high-growth premier acquisitions. A prime example is Melrose Market, an exceptional center near downtown Seattle, acquired in the first quarter with excellent growth prospects.
Also during the quarter, we acquired an additional interest in Town & Country in Los Angeles. Our total interest is now approximately 20%, and we have the opportunity to increase this to 35% and possibly even more. We could not be more excited about the value creation opportunities at this shopping center, anchored by Whole Foods and CVS, and located across from one of the top-performing malls in the country, The Grove. Redevelopment of this asset, which is expected to start in late 2020 or early 2021, will include 80,000 sq ft of new retail in place of a former Kmart box, plus 325 mid-rise apartments to be developed by Holland Partner Group on a 99-year ground lease. The vibrancy, tenancy, and density of this site is an incredibly attractive addition to our portfolio.
This quarter, to provide more visibility into these types of future opportunities, we have added new supplemental disclosure regarding select operating properties with near-term redevelopment opportunities. This includes The Abbot in Cambridge, which started subsequent to quarter end, Westwood in Bethesda, and Costa Verde in San Diego. We hope this new disclosure provides more transparency into the depth of our pipeline and the incremental value that will be generated as we execute our plan. Our developments and redevelopments are performing well, at nearly 90% leased with strong leasing momentum and yielding a blended 7.5% return at margins that remain well above cap rates for comparable high-quality shopping centers. On top of our in-process projects, we have a pipeline of future development and redevelopment opportunities that should enable us to meet our objective of $1.25 billion in starts and deliveries over the next five years and create significant value. Lisa?
Thank you, Mac, and good morning, everyone. 2019 is off to another good start with first quarter results in line with our expectations. I would like to begin with additional color around our same-property NOI and earnings guidance. We are maintaining same-property NOI guidance in the range of 2%-2.5%. While we do not provide quarterly guidance, I think it is important to note that we expect next quarter to come in below 2%, primarily due to the two Sears closures and timing of reconciliations. As we have previously communicated, our 2019 same-property guidance range does fall below our 3% strategic objective due to the closure of these Sears locations, as well as a muted contribution from redevelopment.
We feel confident in our ability to achieve our 3% objective over the long term. Turning to earnings, we had two non-recurring items in the first quarter, resulting in a negative $0.03 per share impact to Nareit FFO. The first item was an early redemption charge of $0.06 per share related to the prepayment of our 2021 bonds following a successful 30-year bond offering executed during the quarter. This offering further enhanced our financial flexibility and increased the duration of our average maturities to over 10 years while maintaining our weighted average interest rate. In addition, we incurred a positive non-cash impact of $0.03 per share related to the recognition of below-market rent intangibles for two anchor boxes that we got back during the quarter, where we are upgrading both spaces at a much higher rate.
With these two impacts, we have updated our FFO and non-cash guidance accordingly. Excluding these impacts, the midpoint of our FFO guidance is unchanged. Importantly, in the first quarter, we grew core operating earnings by 3.4% when adjusted for the lease accounting change, and we continue to expect growth for 2019 to be in the 2%-4% range. As a reminder, core operating earnings eliminates certain non-recurring and non-cash items. We believe this is a better measure of the performance of our business as it more closely reflects cash earnings and our ability to grow the dividend. Before turning the call over for questions, I would like to reiterate the team's continued execution on our proven strategy through the combination of our strategic advantages. Our high-quality portfolio and intense asset management combine to position Regency to average same-property NOI growth of 3% over the long term.
Second, our experienced development and redevelopment capabilities will enable us to deliver over $1.25 billion in value-add developments and redevelopments over the next five years. Finally, our blue-chip capital structure, which benefits from twin pillars, a conservative and strong balance sheet, and $170 million of free cash flow, supporting a self-funding model and low payout ratio. These unequal combination of strategic advantages will support our core earnings and dividend growth objectives to average 4%-6% over the long term, generating total shareholder returns in the 8%-10% range. That concludes our prepared remarks. We now welcome your questions.
Thank you. The floor is now open for questions. If you would like to ask a question, 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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star one to register questions at this time. Our first question is coming from Christy McElroy of Citi. Please go ahead.
Hi. Good morning, everyone. Just with regard to same-store NOI. It seemed like base rent growth was driving much of that overall same-store growth in Q1. Just with occupancy down year-over-year, outside of the usual contractual rent growth, could you maybe just sort of walk us through the main drivers of that base rent growth and how you see that trending through the balance of the year?
Yeah, Christy. This is Lisa. The model that we always share, really, that was also as part of our initial earnings guidance in the beginning of the year, is still an accurate reflection of that. 1.3% growth will come from contractual rent steps, that is obviously in that base rent line item. You have another piece of that is coming from rent spreads, that's been in the high single digits. That will add another, call it 100 basis points. That gets you to the 2.3%. The Sears impact, we did get two months of Sears income in the first quarter, that's actually also in that line item. Going through the rest of the year, that's going to become more of a drag.
Right. Okay.
While we had $0.028 for quarter one, that is actually going to decline through the rest of the year.
Got it. Then Jim, I just wanted to follow up on your comment about lease execution timing taking longer. Is this sort of more of the same of what we've been seeing in recent years, or is this sort of a more recent change that you've observed? If it is more recent, what do you think is driving that?
Christy, I think it's a continuation of the theme we've talked about. I think as retailers mature, especially side-shop retailers, the survivors are very astute business people. They're very cautious and deliberate about what they do. As they make those kind of commitments, they're being very deliberate. We are seeing more of that time to execution. It's becoming more apparent, I think, than maybe we used to see it, but it's been out there.
Okay. Just wanted to make sure this wasn't something new. Thank you.
Yeah, it's not a sea change, but it's kind of insidious change. Incremental.
Thank you. Our next-
Incremental.
Thank you. Our next question is coming from Rich Hill of Morgan Stanley. Please go ahead.
Hey, good morning, guys. Lisa, maybe this is a follow-up question for you on modeling. It looked like two line items that we were focused on, other rental income, was maybe a little bit lower than we were expecting on annualized basis, and then ground rent expense was maybe a little bit higher than we were expecting. I know these things can be lumpy, but I'm curious if this is just timing related, or if there's anything that we should be thinking about going forward.
No. If we think about the full year for the remainder, the projections for the remainder of the year, the primary line item that's going to drive same-property annual growth is base rent. There is going to be timing impacts from reconciliations from other income, from all of those other line items. At the end of the year, when you look at the individual line items, the driver will be base rent. As I said to Christy, while it was 2.9% on my numbers, I know you have 2.8%. While it was 2.9% growth in the first quarter, we're going to see Sears continue to drag. Sears was only a 10 basis point impact in the first quarter. That's going to be growing to 40 basis points for the full year.
Just as we talked about in the beginning of the year, as we talk about in the beginning of every year, the most uncertain part of our business are unplanned move-outs, and they are also immediately impactful. You saw from our numbers that we had move-outs in the first quarter, which is very typical as Jim mentioned, from a seasonal perspective. We did not have those, though, in the past two years, so we were able to raise that kind of low end after the first quarter, which we're not able to do this year because we did actually experience those move-outs.
Okay. That's helpful. Thank you, guys. I appreciate it.
Thanks, Rich.
Thank you. Our next question is coming from Craig Schmidt of Bank of America. Please go ahead.
Thank you. Just given the higher and earlier pace of dispositions, I'm wondering if the intention is to slow the disposition process for the rest of the year, or may you raise the target going forward?
Mac and I are looking at each other, we're arguing who's going to answer it. I'll take it from a guidance perspective, and Mac can add color in terms of the market in general. Just a reminder that these early dispositions are really funding last year's share buyback. I'll let Mac take it from there, but again, just a reminder that the early dispositions are funding the share buyback, and when you look at our guidance, you can see what we're expecting for the remainder of the year. However, we're always potentially going to be opportunistic. With that, I'll hand it over to Mac.
I don't have a whole lot to add at that point. I would say that we have executed in accordance with our expectations. We are meeting our prices. Cap rates are stable for these assets. I'd say that the buyer pool, a little bit deeper than maybe we've seen in the last quarter or two. We feel confident about our ability to meet our plans for the rest of the year.
Okay, great. Just a follow-up on, I wondered how the push on contractual rents. I know you're right around 1.3 and you're targeting 1.5. How are the retailers reacting to slightly higher contractual bumps?
We continue, Craig, to have really good success in implementing those embedded steps. I think 90% of our shop space are running about 2.5% average annual rent step. You combine that with our rent growth at 8.8. As Lisa outlined, that's kind of our key to the bedrock of our sustainable NOI growth.
Is it the quality of the portfolio that's allowing you to push this, or is it just something else?
No, I think certainly the quality. It's just a match where we fight hard for in the field. We have continued to have good success in doing that.
Okay, thank you.
I think part of the timing issue is that we are selective on who we're leasing to. Even though you may be getting pushback from the tenants, we're negotiating hard to achieve the kind of tenants that we want and the terms that we want.
Great. Thank you.
Thank you, Craig.
Thank you. Our next question is coming from Samir Khanal of Evercore ISI. Please go ahead with your question.
Good morning, everybody. I guess, Lisa, can you remind us how much cushion you have left to account for unexpected vacancies at this time as part of guidance? I think, correct me if I'm wrong, please, but I think initially it was about 100 basis points of credit loss reserve.
I'll give you some of the facts first.
Yeah.
We have the significant known bankruptcies impacting 2019 are Sears and Toys R Us. The impact in the first quarter was 30 basis points, and the full year impact is going to be 60 basis points. I don't like to think of cushion, if you will, with regards to bankruptcies. Again, I'd bring it back to the most uncertain part of the business going forward are the move-outs. We have a great leasing pipeline that we have a lot of visibility to. We certainly have full visibility to all the redevelopments that are in process and managing that really well. What we don't know are the unplanned move-outs. With that, our guidance of 2 to 2.5% is incorporating what we believe to be a prudent level of move-outs that's really consistent with prior years.
Okay, thanks. I guess, one for Hap. You've done a great job on the leasing front on the shop space over the last few years, but that's a segment that did have an impact for you and your peers as well, sort of in the last downturn. I guess, how do we think about that segment? If we do go on a slowdown, let's say, in the future, whether it's 24 months or 18 months, that sort of timeframe, what steps are you taking to minimize the impact as you continue to lease space in that segment?
Well, I would say a couple things. Number one, and this has continued to happen, is there's been kind of a self-policing or self-rationalization in that the tenants today that survived the downturn in 2008 and 2009 are better operators, and that's continued to be the case. In addition to that, we are much more selective through our Fresh Look initiative, through credit analysis and trying to get the best local, regional, and national operators in there, and we feel very good about our lineup of side shop retailers. Does that mean we're going to be totally immune to the next downturn when it occurs? No. I think we're much better positioned going into whatever the economic conditions that we may face in the future.
Okay, thanks.
Thank you. Our next question is coming from Derek Johnston of Deutsche Bank. Please go ahead with your question.
Good morning, and thanks. Given your free cash flow, it does enable a healthy pipeline of redevelopment opportunities, I believe around $1.2 billion-$1.5 billion has been discussed over the next 5 years. The question is, how do you think about your development pipeline versus your redevelopment pipeline in terms of priority with capital spend? Is it more of a when, where, the municipal entitlement shakeout or something else?
Hi, Derek. This is Mac. We look at both opportunities really equally in many ways. They're different in the sense that a development is a ground-up development opportunity, comes out of the ground, it's new income for the very first time. We continue to look for those, with our unique platform, we've been successful at finding those opportunities. For redevelopment, what we like about them is they're in locations where we already know the trade area, we know it extremely well, we can time those redevelopments to start when market conditions give us the green light. The returns are pretty similar these days, we like both sets of opportunities. I wouldn't say one is a priority over the other. We're agnostic, our teams are very much engaged to find both types of opportunities.
To us, they're investments, they have strong returns, whether they're incremental returns in a redevelopment or just straight-up returns from the ground up.
As you mentioned, I think the key thing is, as you go through the math, $170 million of free cash flow on essentially a leverage-neutral basis can fund $250 million to $300 million of annual development starts and deliveries. We're very well positioned to fund those developments and redevelopments, which are very compelling on an extremely favorable basis.
Thank you. Helpful. Just secondly, are you seeing increased traction and true proof of concept at this point from digitally native and multi-channel focused retailers? Are we at the point where we can firmly say this isn't a fad or a beta test and the demand uptake should ramp over the next several years?
I'm happy to take that one. I don't think it's a fad. I think you're clearly seeing those tenants who have begun to engage more in bricks and mortar who came out of a digitally native background, and you're seeing it more and more. I guess the question will be over time is, what's the depth of their store count? How broad will they go nationally, and how many stores will they do per market? That strategy is playing itself out, and we'll continue to monitor that. One advantage of these digitally native platforms is they really know their trade areas well through their data and through their research. They actually have told us in many ways they have greater reliability in a new store than a traditional bricks and mortar store.
As a result, often they can pay more rent because of their probability of success. Anyway, we see that happening, and the depth of it is what's to be determined.
I think that something else, just to remind ourselves, everybody on the call is, if Amazon paid $40 million plus a door for Whole Foods, Warby Parker, a very successful native digital retailer, is expanding very aggressively from a bricks and mortar standpoint. I think that is happening, I think that these native digital retailers are finding the importance of physical locations.
Because this is something we talk about so often, I think it's important to remember and note that, one, there's no debate among any of the retailers, whether they're digitally native or whether they're bricks and mortar native, that the most profitable way to get their goods to their customers is to have the customers walk in the store. Two, the new customer acquisition costs are much lower, also with bricks and mortar than they are just digitally. They've all acknowledged that and recognized that, I think their strategies are reflecting that as well.
Thank you so much. Helpful.
Once again, ladies and gentlemen, if you would like to ask a question, you may do so by pressing star one on your telephone keypad. Our next question is coming from Jeff Donnelly of Wells Fargo. Please proceed with your question.
Good morning, folks. Maybe this branches off that earlier question, but concerning grocery and your underwriting process there, I'm just curious how you guys are informing yourself on how that landscape is going to evolve in the coming years, and what do you feel are going to be the key points of differentiation? Is it a decision that runs more to the site, the physical real estate, than the retailer, or is it a little more nuanced than that?
The answer to you is the answer is yes. The retailer matters and the site matters. Going back to the site is what you want to have is a location, where if bad news happens, and you hope it doesn't, that it becomes good news from a merchandising and from a placement standpoint and from a rent standpoint. I think today, the good retailers want to be in the better sites, and good retailers, including the better grocers, want to be in the better sites where they're going to generate significant traffic. I think it's kind of a self-rationalization process.
I think that we want to do, as indicated, we have and been part of our history and our track record of working and partnering with the best-in-class operators that get it, that have strong balance sheets and ability to invest in their business, and in effect, pay the rent that we like to get in the better locations. You look at whether it's Whole Foods or Publix, or H-E-B or Kroger, Sprouts, these are all strong retailers that are continuing to evolve. They know how to provide customer experience. They know how to differentiate themselves. I think all those factors are critically important to us because what we want to do is if we have the right retailer in there, the right grocery anchor, then we're going to be able to attract the better side shop retailers, which is also critical to our business model.
Maybe just as a follow-up on that, do you think it's become clear that a lot of the changes or a lot of the concepts that people are exploring, like bigger formats, smaller formats, online order and pickup in store, that you've seen a better model emerge? Or is that sort of yet to be determined, do you think?
Here's what's so interesting is that Kroger's ideal format is 100,000 square feet. H-E-B's is 110,000-120,000 square feet. Publix is in the 50,000 square foot range. Whole Foods ranges from 40,000-60,000 square feet. Trader Joe's is in the 15,000-foot range. It varies, and I think they've all been able to, in effect, continue to perfect their model. I think it's an evolutionary process, one of the more interesting things that we've noted is their formats have not really shrunk, other than to fit into infill locations. I think they've all adopted, they've all got strategies from a formatting standpoint, Jeff, that they think make sense, and the proof has been in the pudding with their performance.
If I could, maybe just a question for you, Lisa. Maybe a more conceptual question, I guess, on leverage. There's some property sectors out there, not retail, that have seen their acceptable levels of leverage shift lower in the last 10-20 years as these companies who are public, the fixed income and equity investors become less tolerant of volatility or severity. Regency clearly has a great balance sheet, retail's had its challenges, and we've seen leverage shift lower. It's also happened during a time where the economy has been relatively resilient. We haven't really faced a recession. I guess, how do you think about where leverage could go in the future to the extent we have a recession and that adds more pressure? Do you foresee a time where sort of leverage in retail could actually continue to shift lower than it is today?
First, we're really comfortable with our balance sheet today. We're not just comfortable, we're really proud of it. We've made significant progress on improving and strengthening the balance sheet, whether it be just with the level of debt that we have and also with the tenor of the debt that we have. With that said, we've been pretty transparent that our target level of net debt to EBITDA today is five times, and we're slightly above that. We're going to continue to try to drive that down through organic growth and opportunistic actions when they're available to us.
We are always monitoring our capacity levels, our commitments to developments, to acquisitions, and we ensure that if we ever were to go into the crisis that we had in 2009 when there was zero access to the capital markets for a period of time, that we can actually survive, not just that was for about four months. We could actually survive for in excess of one year. We're going to continue to maintain that and really focus on that. At the same time, I don't like to think of it as pressure in a recession. I like to think that we've positioned ourselves to take advantage of opportunities because that is the one thing that in hindsight's 2020.
Had we been in the position then that we are today, there are opportunities that were presented to us that we were not able to capitalize on, today we'll be able to capitalize on those. Oftentimes, and I've heard Hap say this, when the blood is in the water is when we want to be able to pounce.
Great. Okay. Thank you very much.
Thank you, Jeff.
Thank you. Our next question is coming from Wes Golladay of RBC Capital Markets. Please go ahead with your question.
Hi, good morning, everyone. Can you just comment on the tenant interest from the retail side to be part of these mixed-use projects, the live, work, play? Is it growing? Any particular category stand out, and do they have a preference for being next to residential or office?
I'm happy to answer that one. This is Mac here. We're definitely seeing tenants who are interested in these mixed-use locations, and in part, because of the quality of the locations. These tend to have higher densities, better incomes, better access to transit. The office component is a very powerful one, and our restaurant tenants really react positively to office. Doesn't necessarily have to be in our project, but if it's across the street or within a quarter of a mile where people can walk, that really is a big boost to restaurant lunch traffic and also evening traffic and just having people on site. Apartments help too as well. Certainly helps with just active foot count in the evenings. One apartment is not enough to make a big difference. You need a sizable amount of density within a walking distance.
It's also the placemaking that you often find more in a mixed-use environment than you do in a very traditional environment. That is something else that the retailers resonate to. They want environment where the customers choose this location over other ones because it's an opportunity to shop and to dine, to linger, to patronize, and we all know that the longer a customer spends on site, the more they are likely to spend. There's definitely an interest there, and we're seeing that more and more.
Okay. Thank you very much.
Thank you.
Once again, ladies and gentlemen excuse me, that is star one to register a question at this time. Our next question is coming from Michael Mueller of JPMorgan. Please go ahead.
Hi. Good morning. Looking at the past four quarters, it looks like your renewal spreads have increased each quarter. At the same time, the new leasing spreads have gone down each quarter. I know the new spreads will bounce around more, but is there anything we should be looking into as a trend as it relates to the renewal spreads increasing?
Mike, it's primarily just related to mix. We feel that we've really settled in actually, in terms of a stabilized level of rent spreads on both renewals, and you're absolutely right on new. We could have one transaction that can really drive that. If you have a 40-year lease, essentially that rolls and expires, that can have a significant impact on the percentage.
Got it. Okay. That was it. Thank you.
Thank you. Our next question is coming from Ki Bin Kim of SunTrust Robinson Humphrey. Please go ahead.
Thanks. Good morning, out there. I wanted to ask you about how you guys balance and how you think about merchandising mix versus rent. Obviously, you're underwriting businesses all the time, but is there a change in that, where it's not just underwriting the business to see if it's a good business and if it's internet resistant, but trying to even gauge if the management teams at those retailers are forward-thinking enough, dynamic in their thinking enough, where they can be relevant and viable for 10 years down the road. How do you think about all those things?
Ki Bin, that kind of goes to the core of our Fresh Look philosophy. We are really looking for retailers who get it, who do make a difference, do create that special vibe, that can drive traffic, can help their neighbor tenants. It's a key ingredient to the way we look at our business and the future of the leasing. We think we do a pretty good job of that, and it is kind of an interesting struggle that you always have on rent versus use, versus credit, and that whole mix has to come together, and you make a decision on who you think is going to add the most value to your shopping center. That's kind of how we go about it.
You made a comment earlier that retailers are maybe taking a little bit longer to decide where to go. On the flip side, do you think landlords like yourselves are also thinking about a little bit more about who you bring into your centers, and is that a bigger consideration?
I'm not sure I understood that.
Yeah. In terms of us being more selective, is that really the question?
Yeah. Basically, yeah.
Jim mentioned it when he first opened the last answer with Fresh Look. It's actually nothing new for us. We've been really focused on it for more than several years now because as the retail environment has been changing and with that pace of change really accelerating, we've tried to get in front of it. We understand that people have so many choices today, and they don't have to come to our shopping centers. We need to ensure that we're making our shopping centers a place where they want to come and want to shop. It's convenient, and not only is it convenient, but Jim used the word vibe. It's placemaking. It has to be a good experience. Our retailers, Hap mentioned it about grocers, are focusing on the same thing. Once they're inside of the four walls, it has to be a good experience.
Because if it's not, they're not going to come. We began focusing on that several years ago and being much more selective with the merchandising mix and the retailers and tenants that we're leasing to.
All right. Thank you.
Thank you, Ki Bin.
Thank you. Our next question is coming from Chris Lucas of Capital One Securities. Please go ahead.
Good morning, everybody. Just a quick one. On tenant fallout for the quarter, was that in line with expectations, better or worse?
I'll repeat the earlier answer. Every year, we come into the year, we do expect to have a seasonal decline in occupancy. I've been in the business for 23 years, I think for maybe three of those, we haven't had it. It was in line with our assumptions. We were kind of hoping that maybe we'd outperform that, we didn't. We're still really comfortable with our guidance of 2%-2.5%, we essentially still have the same assumptions moving forward for the rest of the year in terms of having a consistent level of move-outs, similar to what we've experienced in the past two to three years.
Lisa, on that move-out rate, any themes this year versus prior years that maybe differentiated this year's outcome?
I'm sorry, Chris, you were a little muffled.
Themes on move-out. I'm sorry.
No. No, it is obviously something that we looked at really closely. Not only just this year, but we also even looked at kind of what's the mix of our tenants that are in our centers and also that are moving out of our centers and what we're leasing to. Amazingly, it is consistent. We still have the same percentage of restaurants, soft goods, service. It was actually a little bit surprising to me when we looked at it.
Excellent. Okay, great. Thank you. Appreciate it.
Thank you. At this time, I'd like to turn the floor back over to Mr. Stein for closing comments.
We appreciate your time and interest in Regency and hope that you guys have a wonderful weekend. Thank you very much.
Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.