Greetings, and welcome to Regency Centers Corporation first quarter 2022 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 anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Christy McElroy. Thank you. You may begin.
Good morning, and welcome to Regency Centers first quarter 2022 earnings conference call. Joining me today are Lisa Palmer, President and Chief Executive Officer, Mike Mas, Chief Financial Officer, Jim Thompson, Chief Operating Officer, Chris Leavitt, SVP and Treasurer, Alan Roth, Senior Managing Director of the East Region, and Nick Wibbenmeyer, Senior Managing Director of the West Region. As a reminder, today's discussion may contain forward-looking statements about the company's views of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties. It's possible that actual results may differ materially from those suggested by the forward-looking statements we may make.
Factors and risks that could cause actual results to differ materially from these statements may be included in our presentation today and are described in more detail in our filings with the SEC, specifically in our most recent Form 10-K and 10-Q filings. In our discussion today, we will also reference certain non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials, which are posted on our investor relations website. Please note that we have also posted a presentation on our website with additional information, including disclosures related to forward earnings guidance. Our caution on forward-looking statements also applies to these presentation materials. Lisa?
Thank you, Christy. Good morning, everyone, and thank you for joining us. We've had a great start to the year. Our operating trends are healthy, our investment pipelines are active, and our balance sheet is strong. With this even further strengthening our core business and accretion from our transaction activity, our outlook for 2022 has improved from a quarter ago. Our centers continue to benefit from positive structural tailwinds, including the strength of first-ring suburban trade areas, the greater amounts of time that people are spending near their homes as hybrid work becomes more permanent, and the growing emphasis among retailers on the importance of brick-and-mortar locations as a key component to last mile distribution.
This vibrancy in the retail environment is evidenced by strong tenant sales and continued robust leasing activity, and we're successfully pushing rents higher as we continue to make progress getting our portfolio back to historical high occupancy levels. We do see and acknowledge the risks of inflation and continued supply chain challenges and labor shortages on our business. So far, we, and importantly our tenants, have largely been able to mitigate the impacts. Jim will discuss this in more detail in a few minutes. We're full steam ahead on our value-creating development and redevelopment pipeline, which remains the best use of our free cash flow. We're excited to have started a new ground-up Target and ShopRite anchored center during the first quarter. Not only are we making great progress on this and our other in-process projects, but we continue to build our future pipeline.
On the transaction front, the assets that we've purchased over the last year are very indicative and very much like those that we already own, high-quality, grocery-anchored neighborhood and community centers. We will continue to look for opportunities to invest incremental capital accretively in these types of centers. We had a really successful and active first quarter doing just that. As a result, we've raised our full-year 2022 acquisition guidance to $170 million. In our largest acquisition so far this year, just after quarter end, we purchased our partner's 75% interest in four centers in our JV with CalSTRS for approximately $90 million. Similar to the buyout of our USAA joint venture last year, we saw another great opportunity to allocate capital on an accretive basis into high-quality assets that we know well.
While higher interest rates could eventually have more of an impact on private market pricing, to this point, we've continued to see significant capital chasing grocery-anchored neighborhood and community shopping centers. Perhaps even more telling than the acquisitions we've completed in recent months are the other assets that we've seen trade at low- to mid-4% cap rates for the type of high-quality, well-located centers that we own. There remains a sizable disconnect between public and private market values for our asset class. Before I turn it over to Jim, I do want to acknowledge our recent organizational announcement that he will retire at the end of this year. There's simply no possible way to appropriately recognize him on this call or future calls for that matter, as this is not his last.
We are grateful that he'll still be with us for the remainder of the year. Many of you already know Alan and Nick, who will be stepping up next year to take on Jim's responsibilities. They're both on the call with us today, and you will see them at upcoming conferences and other events. With Jim paving the way, I'm confident this will be a seamless transition, and I look forward to what the future brings. Jim?
Thanks, Lisa, and good morning, everyone. I appreciate the comments and very much look forward to finishing my career here at Regency with strong 2022 results, and Q1 was a great way to start the year. As Lisa mentioned in her remarks, the operating environment remains robust. We continue to see healthy foot traffic and strong tenant sales trends, particularly among our grocers and restaurants.
New leasing volumes in the quarter were nearly 40% above the historical first quarter averages, and we are seeing terrific demand across all unit sizes, both shop and anchor space, and across our portfolio geographically, with the flight to quality being the driver. We were pleased that over the past quarter, our same property percent leased rate held firm at 94.3%, and our percent commenced rate was actually up 30 basis points sequentially, which is extremely positive in my view, as we typically experience a seasonal occupancy decline in the first quarter of the year. Year-over-year, our percent leased rate is up 170 basis points, and percent commenced rate is up 120 basis points.
These positive trends really speak to the leasing progress we've made over the last year in addition to the quality of our centers and the hard work of our team. Not only are we making progress filling vacancies, but our renewal retention rate also remains ahead of our historical average. Blended rent spreads in the first quarter averaged 6.5%, which is reflective of the healthy demand for space across the portfolio. We also remain judicious in our leasing capital spend as we continue to be successful in our efforts to embed solid rent steps into our leases, which gives us an opportunity to keep pace with market rent growth throughout the life of the lease.
This three-pronged approach to growing rents, number one, focusing on contractual steps, marking the market at expiration, and limiting capital spend, is reflected in both our GAAP and net effective rent spreads, which are both in the mid-teens for leases executed in the first quarter. The culmination of both our occupancy and rent growth trends is embedded in our same-property base rent growth, which will be the most meaningful contributor to same-property NOI growth in 2022 and going forward. We do recognize the macroeconomic and geopolitical headwinds that persist, including inflation, supply chain issues, and labor shortages. So far, in the trade areas in which we operate, most of our tenants have largely been able to pass increased costs through to consumers, so we have not seen a meaningful impact yet from the tenant perspective.
Permitting delays and the availability and cost of materials and labor are potential impacts that we continue to monitor. So far, we haven't yet seen a material impact on rent commencement dates, as we've been working hard to try to mitigate these impacts on our business. Examples of this include helping our tenants coordinate permitting, source supplies, phasing some approval processes, and ordering long lead time items in bulk. In the context of our development and redevelopment projects and pipeline, we are diligently monitoring pricing trends and are conservatively underwriting cost escalations into our estimated yields. That has not stopped us from moving forward, and we're making great progress on our value creation pipeline, currently with about $350 million of redevelopment and development projects in process.
At our East San Marco ground-up development project here in North Florida, we anticipate delivering the Publix store this summer with rent commencing later this year. The project started just over a year ago and has an expected stabilized yield that exceeds 7%. Even before delivering the anchor space, we are nearly 100% leased today with only one shop space remaining. This project is a great example of the leasing demand we are seeing for new grocery-anchored centers in top trade areas. We were excited in Q1 to commence construction on another ground-up development project called Glenwood Green with a pro rata cost of $40 million and an expected stabilized yield of 7%. The project is located 30 mi south of New York City in Old Bridge, New Jersey, and will serve as the retail hub of a new 250-acre master-planned community.
The 350,000 sq ft center will be anchored by ShopRite, Target, and a single-tenant medical building. All three will be operated on a ground lease and construct their own buildings, helping to mitigate our risk of cost escalations over the construction period. Both of these ground-up projects reflect our ability to continue sourcing and executing on value add projects at attractive yields in this current environment. As we consider new development and redevelopment projects for our future pipeline, we are excited to continue partnering with best-in-class grocers and are encouraged as they continue to expand their footprints in top trade areas. Overall, our team remains energized by the robust retail activity we are seeing across all regions and categories, and I look forward to sharing more details over the next several quarters. Mike?
Thanks, Jim. Good morning, everyone. I'll start by addressing the first quarter and then walk through the primary changes in our 2022 revised guidance. We are pleased to report strong first quarter results and operating trends, supported by continued occupancy improvement, rent growth, and accretion from investment activity. Additionally, we continued to collect previously reserved rents from cash basis tenants as uncollectible lease income was again positive in the quarter, impacted by about $9 million or 5 cents per share of prior year collections. Given continuing improvement in underlying credit conditions, we also converted more cash-based tenants back to accrual, triggering the reversal of straight-line rent reserves during the first quarter, which contributed close to $4 million or 2 cents per share to Nareit FFO. This conversion impact was not included in our prior guidance range.
We now have 14% of our ABR remaining on a cash basis of accounting, and our rent collection rate was 93% in the first quarter for this smaller pool. As we discussed on last quarter's call, there remains significant noise in our year-over-year same property NOI comparisons that will certainly impact the cadence of our growth rate throughout the rest of this year. In the first quarter, we had a relatively easy year-over-year comparison, primarily related to uncollectible lease income in the year ago period. Conversely, over the next three quarters, we are facing much tougher comps, especially in the second and third quarters, as it relates to uncollectible lease income comparisons, as well as an expense reconciliation adjustment that occurred in the second quarter of last year, all of which we have discussed previously.
Given this comparability issue, the best indicator of what is truly driving our business this year is same property base rent growth. You will find that for the first quarter and underlying our guidance for the balance of 2022, base rent growth will be the primary contributor to our same property NOI and will most closely match our sustained growth trajectory. We wish our classic metrics could be less complicated, but the reality of the accounting impacts resulting from the pandemic will continue to affect year-over-year comparisons through year-end. Turning to 2022 guidance, we hope you've had a chance to review the details in our press release and business update slide deck, both posted to our website.
On page six of the slide deck, we've added a column to show the drivers of the $0.11 per share increase from our previous midpoint to the new midpoint of our Nareit FFO guidance range. The drivers of the change that related to our operating fundamentals include a $0.03 positive impact from the 75 basis points upward revision to our same property NOI growth forecast. The primary drivers include higher percentage rents in the first quarter, mainly from grocery and restaurant tenants, as well as expectations for higher average commenced occupancy for the year, driven by more favorable lease-up progress and lower move outs in Q1 than previously expected. As Jim noted, commenced occupancy was actually up sequentially in the first quarter of this year, where it's typically seasonally lower.
We also estimated an additional 2 cents per share of accretion from transaction activity, reflecting the net result of our incremental acquisition and disposition activity featuring the acquisition of our JV assets. The remaining increase in our guidance at the midpoint is related to the cash basis accounting adjustments I mentioned earlier. We increased our forecast for non-cash revenues by 3 cents per share, primarily driven by the impact on straight line rent from the conversion of cash basis tenants back to accrual during the first quarter. Recall that we only include these impacts in results and guidance on an as converted basis. Additionally, we raised our expectations for prior collections to $18 million from the previous $13 million, driving another 3 cents per share of positive change to our guidance range at the midpoint.
From a funding perspective, we raised our acquisition guidance to $170 million for the full year. We also raised our disposition guidance to $210 million. As a reminder, $125 million of that is related to the sale of Costa Verde in January, the proceeds from which were already used to fund the purchase of the Long Island portfolio we closed in late December. The remaining $85 million of dispositions will in part fund our acquisition pipeline, combined with cash on hand and just over $60 million of net proceeds from the final settlement in April of our remaining forward ATM equity. We also expect free cash flow after dividend payments and capital expenditures to be north of $140 million in 2022, which will be used to fund our development, redevelopment pipeline spend.
Finally, we're in great shape with our sector leading balance sheet and leverage profile, and remain well positioned to continue taking advantage of growth opportunities. We ended the quarter with full capacity on our revolver, and our leverage is at the low end of our targeted range of 5x-5.5 x. While the debt markets have been volatile and all-in costs have risen sharply year -to- date, with no unsecured maturities until 2024, Regency can remain patient and opportunistic when accessing the debt markets in a meaningful way. With that, we look forward to taking your questions.
Thank you. At this time, we'll be conducting a question -and- answer session. If you'd 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'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 the star keys. One moment please, while we poll for questions. Our first question comes from Craig Schmidt with Bank of America. Please proceed with your question.
Great. I was interested to see your ground up development at Glenwood Green. Maybe you could tell us a little more about the 250-acre master planned community that surrounds it. Also, it sounds like the grocers still want to open in ground up centers. How are the municipalities receiving that request post-pandemic?
Craig, good morning. Master plan basically took, I think, 19 years to get entitled. It was a good, hard, long slog. The landowner has been working a long time. Heavy residential will be surrounding the retail hub that we're providing. I think the community is very excited to have the grocer and the Target components. As indicated, our leasing activity has been extremely strong. Having just broken ground, we're at LOI or lease negotiation with probably 30% of the shop space. A lot of pent-up demand is how I'd characterize it. There wasn't a lot of retail growth in that marketplace or any kind of growth.
It's kind of that perfect diamond in the rough that we're able to react to and pull off a really nice retail development.
Great. Just cap rates for the neighborhood grocery anchored as well as the larger community centers, do you see them as still compressing or stabilized or expanding?
Craig, I'll take that. I think you know it's Lisa here. I would say cap rates had been stabilized at, as I said in my prepared remarks, you know, low to mid fours for the neighborhood grocery, even community grocery anchored shopping centers, the type of shopping centers that we want to own. They had been stabilized at that level for quite some time. As I again will reiterate what I said in the prepared remarks, we are not seeing that move yet, but because there continues to be a lot of significant capital flowing into that, our sector, wanting to own high quality grocery anchored shopping centers.
As we continue to see the pressures, the interest rates rise, I would expect that there may be some pressure on valuations, and you may have the leveraged buyers exiting the market. It's simply supply and demand. With that, nothing yet, certainly wouldn't be surprised if we see cap rates rise. I just wouldn't expect it to go much. I mean, you know, 5%. Still in the fours instead of low to mid fours, maybe you're in the mid to high fours.
Great. Thank you.
Our next question comes from Michael Bilerman with Citi. Please proceed with your question.
Thanks. Lisa, you know, I'd say Regency over its history has always been, I think, conservative, realistic, on the outlook, sort of grounded, I'd say, in reality. I guess given the macro environment today, how did you sort of weigh increasing guidance and benefiting from the core and all the leasing relative to the macro outlook, which you sort of commented a little bit is uncertain? Is none of that feeding into any of the data that you're seeing on the ground today, and that's effectively why you had such good confidence to be able to lift guidance? Just sort of walk through that a little bit.
Sure. I appreciate the acknowledgment. You put conservative with realistic together. I think our approach always has been one of reasonably optimistic with the quality of our company, the quality of our properties, and the quality of our you know our people overall. With that, you're absolutely correct. I mean, we've been talking about it for several quarters now with regards to the pressures that exist in the macro environment with labor shortages, supply chain challenges, and now you know over the most recent quarters, inflation.
With how we have built the company and our portfolio, however, we are positioned to perform well really through all cycles, whether it's an inflationary environment, whether it's recession, and that is our properties are located in trade areas with really compelling demographics that we can benefit from, a customer base that is able to withstand some of those cycles. You've heard us talk about this in the past as well. In recessionary environments, there's often a case where consumers want to trade down, and instead of going to higher end, more luxury, you know, whether it's department stores or even restaurants, they go to their neighborhood community shopping centers for more value, convenience, still want to spend money, but back to close to their homes.
With that, you've seen the strength in our operating fundamentals really came through in the first quarter. That's with all of these macroeconomic environment headwinds that we're already facing. That's what gives us the confidence. It's the quality of our properties. It's what we're seeing on the ground with the demand for the leasing. It's our ability to push rents in this environment. It's the ability for our tenants to continue to grow their sales and pass on price increases to their customers because of the trade areas that we operate in.
Did you have to sort of moderate any of your growth expectations because of the macro environment, or is it just as you're sort of seeing it today? I guess, did you bake in any sort of buffer effectively?
Mike's given me the, "Don't give too much guidance here, Lisa." I'm gonna hand it off to Mike.
Yeah, I can take that one.
If you think about the quality or the context of the raise, the $0.11 raise, it's really coming from two buckets, right? Core fundamental improvement, and then what all characterize as prior year cash accounting impacts. On the prior year cash collections impact, you know, those are known items. They're under our belt. You know, we collected $9 million of the now $18 million expectation that we had. We did raise that expectation. Maybe in light of some of the comments Lisa made, we still have confidence that we'll have a little bit more success collecting the rents that were previously reserved. The non-cash component, we're taking this day by day. It is just. We're doing this on an as converted basis. We've converted 2.5% of our ABR back to accrual accounting.
That came with $4 million of straight line rent reversal. We will take that incrementally from this point forward. What we're most excited about and have a high degree of confidence on are the core fundamental improvements in the same property portfolio. Raising our commenced occupancy by 30 basis points in the first quarter. I don't wanna call that a surprise, but it was a very confident type of metric for us as we thought about our plan.
Right.
Do we have buffers in the balance of the year? We do, Michael, but by this time, your leasing plan is pretty known. Everything we're gonna do from this point forward is gonna be about 2023, and we're equally excited about that year as well. Lastly, bringing home some of these accretive transactions. They're under our belt. We did raise our acquisitions guidance by $140 million, a large amount. It's all closed, essentially. We do have one property under contract in the Northeast that we are working through due diligence, and we're confident that we will bring into the fold, but really not a lot of speculation there either. On the funding front,
Right.
Fully funded with a combination of dispositions. We settled our ATM. We assumed a mortgage with some of the properties. We feel good about the quality of that raise and our ability to deliver.
That's very helpful. Just as a second topic, Lisa, just on the transaction market, and you talked about this sizable disconnect between public and private. You talked about all the capital that's out there, and I recognize your joint venture partners are all, you know, everyone's got their own sort of timeline about when they wanna sell. Just sort of help reconcile a little bit, you know, I think you and your peers have been very active in buying venture partners out and also continuing in the acquisition landscape. Why not increase dispositions even more? I recognize you've lifted it to $210 million, but you're still in an, you know. You've narrowed your net disposition guidance rather than expanding it.
If this disconnect is so wide, why not be even more aggressive today at liquidating the bottom of your portfolio? I recognize you have only sold the bottom of your portfolio, so there's less of it. You know, just sort of help walk through why not be more aggressive on the disposition side.
Aggressive is the word I would say, because I do want to remind everyone that we have, for as long as I've been at the company, that's 26 years, which is essentially modern era Regency, we have remained committed to selling 1%-2% over time of our portfolio annually.
Yep.
It's usually focusing on, as you know, focusing on lower growth, non-strategic. After the GFC, we actually accelerated some of those sales and sold even more. Since that time, the quality of our portfolio really has improved, and the need to sell up to that 2% just wasn't there when we looked at what falls into the non-strategic lower growth bucket. We've been more in the 1% area and in some cases, using that non-strategic as a source of capital to trade into the types of centers that we do want to own long-term. I mean, it sounds like it can't possibly be true, but we really like our portfolio. We are looking to buy centers that look like what we already own.
When we get much above that 1%, then we're starting to sell what we wanna buy, and we do wanna grow. We believe that there are real economies of scale in our business, both from an operations perspective and also with tenant relationships.
All right. Thanks a lot, Lisa.
Our next question is from Juan Sanabria with BMO Capital Markets. Please proceed with your question.
Hi, good morning. I was just hoping you could talk a little bit about the rent growth you are seeing in the markets. You kind of touched on it a couple of times in the prepared remarks, and maybe if you could just benchmark the increases you've seen versus 2019 pre-COVID levels and maybe give us a sense of the variability in that growth in markets. Like, is South Florida up 2x of what the Northeast is up? Just to get a sense of what markets are really hot and have taken share, if you will, as a result of the pande-
Yeah. Juan, this is Jim. I'd say, yeah, we're real pleased that the 6.5% where we ended up this year with 8% being attributed to the new leases. Quite frankly, as I step back and look, there really are no outliers this quarter that were driving that, which was impressive to me that it felt like we were across the board in all regions really hitting kind of a target growth number.
I think it's indicative of a healthy portfolio across the board, and really can't point. I think as I look back over compared to 2019, I think we're back to those same kind of rent growths that we experienced in pre-pandemic times. I would like to remind, as we look at rent growth as a whole, it's kind of that the three-pronged approach I talked about. It's getting those embedded rent steps, which we've been very successful. This quarter, we had 80% of our deals had bumps in them, and 97% of new deals this quarter had embedded rent bumps. Obviously mark-to-market when we get the opportunity on expiring leases. Judicious spend of capital.
All of those kind of combine to that net effective slash GAAP rent that's probably what I look at more than anything, is that's a more long-term real growth kind of metric, and we're getting back to where we wanna be and where we've historically operated and in that 13%-15% range right now.
Just on the leasing versus commenced, you have a 230 basis point spread. How should we think about that being captured over time, and what's truly additive from a kind of base rent perspective as we think about the balance of the year?
Sure. Hey, Juan, it's Mike. You referenced the 230 basis point pre-lease percentage. I'll throw some stats at you, and then we can talk about how we see absorption going through the year. That equates to about $33 million of rent when you include redevelopments. We do disclose the amount in the back of a supplement at $6 million for the quarter. As a point, that is without redevelopment. The $33 million would be all in through redevelopment. From a timing perspective, we should get about 2/3 of that by year-end. The balance we are seeing coming online before, you know, within the first half of next year.
To give you some further context on that pre-lease percentage, we are running higher than historical averages, where we're in a ±175 basis point range. We're very comfortably leasing space, and importantly, delivering space. As we think about absorption for the balance of this year, last quarter, we talked about 75 - 100 basis points of increased commenced occupancy supporting our plan. I'd say now, with a really successful first quarter under our belt, we've taken that 75 basis points off the table, so we're looking at a ±100 basis point rise in commenced occupancy, supporting our same property growth rate.
Beyond that, not to dwell on 2023 or anything to give a 2023 outlook at this point in time, but we're not at our peak occupancy levels. You know, our eyes are on 96%, and we think we've been there before. The portfolio's as good as it's ever been. Absent a macroeconomic environment, there's no one around this table that doesn't believe we can't get back to those levels. That's a lot. I just said a lot in one simple word, absent a macroeconomic environment. There's a lot. There is uncertainty out there. We're all aware of it, but the team is highly focused on leasing this portfolio to its maximum potential.
Thanks very much. Great color.
Our next question comes from Richard Hill with Morgan Stanley. Please proceed with your question.
Hey, good morning. That last tidbit about occupancy is really helpful. Just to expand upon it, at the risk of asking for guidance, what's sort of the cadence of getting back to 96%? You know, is that a late 2023 thing? Is that a 2024 thing? You know, how do you think about that?
Sure. I think I think it's pretty simple. I mean, we're about 200 basis points from our top end as we see it, about in that area. Looking back kind of post-GFC, Rich, we've absorbed 100 basis points in our best years, kind of from a velocity standpoint. This feels like that type of environment. We're leasing. The teams are busy, the pipelines are full, and the teams are just, you know, putting a lot of ink to paper. About 100 basis points is how quickly we think we can absorb space on an annual basis. That would put us in that end of 2023, early 2024 type of timeframe.
Got it. That’s helpful. As you think about getting back up to peak occupancy, then this becomes a really stable, attractive business based upon renewals. What do you think sort of the new normal is for renewals? Is this like a 5-6, 5-7, or do you think there’s some level in which we start to normalize back to, you know, call it a you know something lower than that?
I'm not sure. Rich, I'm not sure we understand the 5-6 or 5-7.
Yeah, I'm personally just throwing numbers out there based upon some commentary that
Rent spreads. You
Yeah.
Not renewal rent spreads. Okay.
Yes. Yes.
Yeah. I think as I've always looked at this business, our rent spreads track our occupancy. As we get closer to what Mike described as full occupancy in that 95%-96% range, if you look over our shoulder, I think those rental rates and expectations rise as that occupancy and that lack of available supply is there. I would see us as that curve goes up.
I believe you'll see our reps track that.
Rich, don't forget, that's cash leasing spreads on top of contractual rent increases.
Right.
Most of our renewal activity will be in shop space. We're getting very high. That's where we're getting the highest frequency of contractual increases. That's on top of three, you know, 2%-3% annually.
That's helpful. One final question from me. I appreciate the cap rate disclosure. Could you just walk through what unlevered IRRs look like at this point? Where are those penciling out?
With regards to, you know, again, in my prepared remarks, I talked about some of the transactions that we observed happen, ones that we didn't participate in. On our underwriting, we did see some single asset portfolios trade in low five IRRs. We were opportunistic in the acquisitions that we've closed, and we've discussed and talked about on our underwriting where we have been successful, we've been north of a six. As we think about our cost of capital, you know, and a lot will depends on your underwriting assumptions and what's your terminal cap rate. If you remain pretty steady with a, you know, kind of 50 basis points going over the going in, a six unleveraged IRR had been our hurdle given our existing cost of capital.
Do we expect that that's gonna creep up? It could creep up. I mean, we're obviously seeing the cost of debt rising.
Got it. Thank you, guys. That's helpful.
Our next question comes from Samir Khanal with Evercore. Please proceed with your question.
Good morning, everybody. Hey, Mike, on percentage rents, it came in a little bit higher than we thought in the quarter. I guess how are sales and traffic trending sort of post- Q1 and maybe into May here as we think about that line item? Just trying to see if there's sort of upside to that number.
Sure. Hey, Sameer. We'll start with maybe take some wind out of the sail. Generally, it's a pretty small line item for us. It's historically in the $8 million range in total, that's less than 1% of our total revenues. Interestingly, we get historically about half of that in the first quarter. We've had a great first quarter. Restaurant sales were a featured component of our beat internally on percentage rent. Groceries were the other component. We are optimistic that the balance of the year will also have similar results throughout the portfolio, but that opportunity to significantly outperform on percentage rent, I think, has largely been taken in the first quarter.
Okay. I guess my next question is on this, the $18 million of prior year reserves, which you took up as part of guide. Can you remind us what that total bucket is at this point that you can sort of collect from, and what percentaqge of that total bucket is tenants that are still active in your portfolio?
Yeah, we have that reserve balance on our page 34 of the supplement, and you'll see it at quarter-end. We were at $41 million. That's your starting point where your question is targeted. Let's break that down. First and foremost, we're guiding on the number. Our expectations are ±$18 million. Please start with that. Can we do better than that, I think is the question. About half of that $41 million reserve, I would characterize as normal course. If you think about our reserve as a percentage of our open AR historically, that's about normal course activity. The balance of that I put into two buckets. A quarter of it is in our guide.
We are expecting about $9 million in the balance of the year. That's about a quarter of that reserve. The other quarter, Samir, that's the wild card, quote-unquote, that I think you're looking for. You know, again, we're guiding on the number because we want folks to be careful with their expectations. We are making a ton of progress in working through the resolution of receivables. It's primarily a West Coast ballgame at this point in time. Nick and the team out west are doing a great job working through the pile, and we could have some more abatements in that number. We are characterizing that as an unknown, as a wild card for that reason. We could also experience those collections in 2023.
Half of that 25%, so about $5 million, has already been agreed on with the tenants to defer into 2023. I think we're getting to the point where the outperformance on that guided line item is certainly gonna start to shrink, and the opportunity will start to diminish from this point forward.
Got it. That's very helpful. Last one, if I can take one more here. I guess for Lisa. You know, Regency is one of the landlords to Whole Foods. I guess, what is the real estate strategy for them at this point? You know, there's been some headlines about them closing a few stores, not many, but just curious as to what you're hearing from them, especially with Amazon making the headlines recently.
Samir, my first advice to you would be that I think it might be better to get on a Whole Foods conference call and ask them their question what their real estate strategy is. What I do know is that we have a great relationship with Whole Foods and with Amazon as well. They are certainly, as you know, committed to physical locations and growing their footprint in both brands. They, like every other retailer, are going to, you know, ensure that they are operating the most productive stores and the most profitable stores. We still have great confidence that we're gonna continue to be able to grow our footprint with Whole Foods, and also as Amazon grows their footprint with them as well. Thanks for that.
Our next question comes from Michael Goldsmith with UBS. Please proceed with your question.
Good morning. Thanks a lot for taking my question. As your leasing momentum continues and seems on track to return or, you know, exceed prior levels, like how do you think about passing the baton to grow through acquisition development or redevelopment? Do some of the announcements that you did with this quarter kind of reflect this forward-looking opportunistic view?
Let me start, and I'll open it up to Mike or Jim if they want to add to it. When we think about our business model and how we think about growing, it starts with our free cash flow. We are estimating that to be in the neighborhood of $140 million. If you just assume that we even add debt to the extent that we remain leverage neutral, we essentially can, you know, that grows to over $200 million of capital that we can invest and grow the company. We've said it numerous times, I said it again today, the best use of that capital is into developments. I do believe that we have the best development platform in the business.
We've got a successful track record, and we're gonna continue. I mean, as we talked about this quarter, we started Glenwood Green, East San Marco, that, you know, started just over a year ago in the middle of the pandemic. We continue to rebuild that pipeline. We did hit the pause button. It was very brief, but we continue to rebuild that pipeline, and that will be the best use of our cash flow. Especially when we're looking at returns that with our, you know, 200-250 and sometimes 300 basis points higher than acquisitions. We will continue to do that. We also will invest back into our own shopping centers and redevelopments. We've had a lot of success with acquisitions.
We will always be opportunistic with acquisitions, as I've talked in the past. It has to check really three boxes. It's gonna be accretive to, or at least looks very much like the quality of our portfolio, accretive to our future growth rate, accretive to earnings. Once we find those opportunities, we have those presented to us, we look at how can we fund it with our free cash flow going to development, and that's when we will then evaluate other sources of capital. You've seen us use dispositions, both low cap rate dispositions, monetizing assets that are non-strategic, and then also tapping the equity market when it makes sense.
We also have positioned the balance sheet intentionally to be able to use it at times when we can't tap those other sources of capital, and we need to lean in. As Mike said in his remarks, we are operating now at the low end of our target leverage. We have capacity. We can continue to buy and buy accretively.
That is always very helpful. My follow-up is on kind of the evolution of trade areas. You know, the pandemic has generated some population migration, and you know that's probably helped your suburban trade markets. Now we're at a period where there's been elevated gas prices. I was wondering, you know, as you look at your traffic data and where your customers are coming from to visit your centers, has that changed since the increase in gas prices? If so, what are the implications from that?
I don't know that there's enough data yet to really make any conclusions as to what increased gas prices have done to our traffic, because we're not seeing any significant changes. It's still early. I'd like to. You asked that question in such a way that I'd like to just remind everyone what we have seen because of not necessarily increased gas prices but with pandemic-related kind of structural trends, that's a tailwind. It's a tailwind for our first-ring suburban trade areas. We continue to see people staying at home more often and staying close to their home. I saw a research report for another company. It's a health system that I'm involved in. People spend 90% of their time within just a few miles of their home.
If they're home more often, that number could even grow, and then they're gonna essentially visit our shopping centers for their needs, for their value, convenience, and we've actually seen those trends provide tailwinds. The second thing is the renewed confidence with the retailers. Because if you go pre-COVID, and we've talked about this before, there were still a lot of question marks about last mile distribution and how could they service their customers. A lot of those questions have been answered. The best way to do it is from locations close to the consumer's homes. It's the most profitable. They knew they wanted the customers to walk in the door. That is the most profitable.
A lot of them had a little bit of work to do to figure out their overall systems and supply chain so that they could service their customers from the stores, and they've made great progress. That's also, that is, a significant tailwind for neighborhood community shopping centers.
Our next question comes from Derek Johnston with Deutsche Bank. Please proceed with your question.
Hi. Good morning, everybody. You executed more meaningful JVs this quarter, you know, for property portfolio, and that follows the USAA JV last year. Is this strategy taking into account the macro backdrop and really the currently compressed cap rate spreads to the ten-year? Are you viewing JV acquisitions as more accretive and less risky versus traditional acquisitions, especially given private market cap rate question marks?
I'll take it. Hey, Derek, it's Mike. I would characterize our JV acquisition opportunities as more circumstantial than strategic, but I don't wanna dismiss the strategic part of it. We had two smallish JV entities in effect with that were long-standing. I think the RegCal JV, this is over a 15-year relationship between the two entities. When given their size, given to your point, maybe some of the backdrop elements, it just became clear that monetizing and reallocating that capital was the best choice for our partners. When that decision is made, we're likely the best buyer for those assets. Does it de-risk our underwriting? Yeah. We've known these properties for a long time.
In fact, the properties in the USA partnership, although the partnership wasn't that long dated, we've owned those properties for nearly 20 years, so we know them extraordinarily well. It does make for an easier underwriting. There is an end to this strategy. That's why I'm not calling it a strategy. We still have remaining joint ventures. We have great partnerships with those partners, long-standing relationships. These are much bigger vehicles. I think we've got about $4 billion in gross asset value across two primary structures, one of which we just bought into, through the Naperville Chicago transaction. Obviously two partners who are dedicated to the space, really like the partnership, the service that Regency is providing, really like the grocery-anchored shopping center arena.
I don't know that we see these two circumstances extending much beyond what we've transacted today.
Thank you. That's helpful. Can we take a second on leasing, really where the demand is coming from, what categories are leading? More so, how does the pipeline differ between anchor and small shop demand right now? Are both firm or somewhat evolving? Have you loosened underwriting standards for small shops to drive occupancy towards 96% at this time? The current demand you're seeing, does it really seem to have, you know, runway in your view, through this year and beyond?
Derek, yeah. I think the pipelines. To start with your pipeline question, the pipelines continue to be robust and in line with, as we look over our shoulder, the great leasing we've done year over year, the pipeline appears to support that continued level of production. It's equal in shops as well as anchors. As we look at what our availability is, we've got good names associated with the vacancies and targeted uses. Leases indicate the work from home has been, I think a structural change to our business and has really been a driver to our demand, I believe. Uses, it's the ones we've talked about in the past.
It's health and wellness, the medical sector, cosmetics, like the Sephora, restaurants, especially the fast casual. It's very, very high demand. Pet uses, off-price players and certainly as we discussed, our grocers. Again, I think I mentioned it earlier, it's really across all regions. We're not seeing one market that's hotter than others. There's really good solid demand across the board. Again, the leasing production has been steady across the board. It really feels right now, feels really very strong, the direction we're going and the level of production that we've experienced.
Thank you, everyone.
Our next question is from Greg McGinniss with Scotiabank. Please proceed with your question.
Hey, good morning. You always give such comprehensive opening remarks and answers to questions, so I apologize if some of this has already been covered. In regards to the increasing store NOI growth expectation as driven by increased commenced occupancy, was that driven by greater than expected tenant retention so far this year, or have you been able to get tenants in the spaces faster than originally anticipated?
Hey, Greg. Probably more of the former than the latter. You know, that 30 basis points of sequential increase in commenced occupancy, that was a really positive sign for what 2022 had to offer to us. Remember, in the context of our opening initial guidance, and it's hard to remember, you know, three months ago, you still had an Omicron wave kind of rolling through. Q1 is traditionally a weaker quarter from a volumes perspective as well as a retention perspective. That's four consecutive quarters now of greater than average retention rates at Regency. That really is what's underpinning that 75 basis point move up together with, you know, what the previously discussed benefits from percentage rent. Right. Okay. Thank you.
How are you mitigating the impact of supply chain delays and increased costs when preparing spaces for new tenants?
As I indicated in remarks, I think we're trying to use every lever we can find to try to expedite and help our tenants. We've got tenant coordinators, we've got expediters. We're trying to get demo permits before anything else. We can get in there and make sure we can stay ahead of the curve as much as we possibly can. One thing about the pandemic, everybody has learned to be quick on your feet, to pivot, and to make do with what you have. That's what we're seeing in this environment as well, that retailers need to be open. They're gonna find a way to get open. We're gonna help them find that way as fast as we can. We've got a real sharp eye on our CD dates.
That's kind of our Bible. We are trying to do everything in our power to make sure we can help expedite the best we can to make sure those tenants get open and start paying their rent. So far, we've been successful.
Okay.
We're not seeing a slide.
Great. Thank you.
Our next question is from Linda Tsai with Jefferies. Please proceed with your question.
Hi. The collection of prior period reserves is $18 million. I assume there's a minimum amount of conversion to straight line back to accrual that's associated with the $18 million. Is there a rough guideline for how much might not be baked into guidance?
Yeah. Linda, a good question. Let me clear that up a little bit. The $18 million guidance is cash collections on previously reserved rents. Nothing to do with conversions of straight line rental income. That is a separate line item. Our guidance on that line item is effectively zero. We are on an as-converted basis. We had $4 million in the first quarter. I will offer, as I did last quarter, a little bit of a heads up or a head nod as to what could potentially come through on straight line rent. As when we look through our AR and look through our receivables, there's some visibility of maybe $2 million-$5 million of potential conversion impact on the non-cash FFO line item.
From a cadence perspective, I can't necessarily predict which quarter that will occur in, but we do have some level of comfort that with that range that I would encourage you to think about that, with respect to that as converted guidance that we're offering.
Thanks for that. Then, in your February business update, you showed traffic being above 2019 levels, but having dipped in January. Any color on how traffic has trended since at your centers?
It's essentially flat. We, you know, we're not trying to take away any color, and in fact, a lot of that data is pretty widely available to the public at this point. Our, as Lisa indicated it earlier, we're not seeing any dramatic shifts in our traffic patterns, and very comfortable with them having returned to 2019 levels.
Great. Thank you.
Our next question is from Michael Mueller with JP Morgan. Please proceed with your question.
Yeah. Hi. Just a quick one here. Wondering, are you seeing any significant differences in national versus local leasing dynamics? As you move your shop lease rate above 90%, I think it's 90.3 right now, I mean, how should we think about the mix of national versus locals driving that?
Mike, our mix is really the same as we've always had. We're seeing good local operators. They're kind of bread and butter for small shop space, and we continue to see good entrepreneurial players in the marketplace that are really, that's their livelihood. That's the beauty of small local operators. That is their livelihood. National folks are certainly national and regional are certainly have a good open to buy demand as well in growing their footprint. Our mix is really very similar to what we're used to seeing. No real change.
Got it. Okay. That was it. Thank you.
As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment, please, while we poll for questions. Our next question comes from Tamara Fique with Wells Fargo. Please proceed with your question.
Thank you. Congratulations, Jim. You mentioned a flight to quality being a driver of leasing volumes. I'm wondering if you are seeing your lease rates in your sub-markets outperforming other properties in those markets. Curious if you are seeing new demand coming from tenants that are moving locations or opening new stores, and if there are any interesting trends to note there.
Well, thank you for the comment first. Flight to quality, it you know, it's hard to judge, but that intuitively and what we're from a color standpoint, we see people trying to upgrade. At any time there's any kind of downturn in the business, I think people like to take advantage of that and move towards quality. We see it in the office side, retail side, it really doesn't matter.
As far as our ability to grow rents, I think as evidenced in what we put out there, yes, we're seeing opportunities to kind of grow rents as those tenants move towards our marketplace.
Yeah. The only thing I would add, Tamara Fique, is when you I think you asked the question about comparable to other kind of the competition, if you will. If you were to layer historic Regency's percent leased against the market percent leased, there will always be a pretty large gap. That's just based upon the quality of our portfolios. We are much more highly leased than the market generally. Then through the cycles, again, I haven't done this, but my guess is that when you look at cycles, 'cause I can go back to the GFC, I do remember that we lost the least amount of shop space versus our public peers that report it, not everyone reported that at the time.
My guess is that in tougher economic times, that gap actually widens and our percent leased is even higher.
Great. Thanks. Then Mike, I know it's not in guidance going forward, but maybe going back to the conversions to accrual. As we think about the 14% ABR on cash basis, can you just remind us how that compares with where you were pre-COVID? Then the $2 million-$5 million you just mentioned, I mean, is that a number forward this year or the total potential? Then maybe just one more on that, given the macro backdrop, are you likely to keep more tenants on a cash basis at this point?
Yeah. That's a packed question there, Tamara, but a very good one. I, you know, I think your first and third pieces of that kind of go together. I appreciate the question, what was your cash basis percentage pre-COVID? It's a very good one. Part of the challenge here, historically speaking, the rules have changed. The GAAP application has changed over the course of time, too. It is hard for me to look back at those numbers and think of them as a comparable type of target, so to speak. I will say it was in the mid-single digit range from a percentage of ABR perspective. 14 going to somewhere in that mid-single digits is what I would expect to happen over time.
The comments on the $2 million-$5 million, those could easily slip into 2023, but, you know, I'm giving that number with... I mean, we're knowingly giving that outlook out there because we do think there's a potential for that to impact 2022. I wish I could give you more clear guidance on which quarter. Unfortunately, we just can't. When those tenants meet the threshold and the policies that we've embedded into our accounting infrastructure, they will convert to accrual, and then the resulting impact will occur on the non-cash side.
Okay. That's helpful. Thank you. Then you have been obviously acquiring you know interest from your JV partners, and you also did some secured loan JV refinancing in the quarter for other JV assets. I mean, it sounds like you don't have a particular interest in acquiring additional partner assets at this time, but it does look like you have some additional maturities on the unconsolidated side next year. I'm just wondering if you can talk about your discussions with those partners and if you expect to refinance those or will those be assets that will be sold? Thanks.
No, I appreciate that. Yeah, the expectation largely is that we would refinance those maturities when they do come due. Let me give you an interesting point. With respect to you tying that into our appetite for JV acquisitions, these are single asset mortgages, and there is permitted transfer language within those mortgages. So there is no, from a partner's perspective or Regency's perspective, there's no downside to placing that financing on the asset. It doesn't inhibit either one of our ability to transact. They're just assumable by either party. It goes back to my comments before, oftentimes Regency is the best buyer for these portfolios. Well, that is one of the reasons why that's true. The vast majority of our exposure is in 2023, not 2022.
I would say that there's good demand, as there is on the equity side in buying shopping centers. There continues to be good, healthy demand for financing grocery anchored shopping centers. We fit the product type. We fit the credit profile that many of the life companies are looking for on the secured mortgage side. We had success in Q1. I don't see why we wouldn't have success refinancing those maturities when they occur.
Okay. Thank you very much.
Our next question is from Chris Lucas with Capital One. Please proceed with your question.
Hi, good morning, everybody. Just a couple of follow-up questions. As it relates to the cap rate commentary, Lisa, that you made early in the call, just curious if there's any geographic differences. In other words, have the Coastal Gateway markets maintained their sort of lower cap rate bent relative to the primary Sunbelt markets, or has that gap effectively gone away?
It's still very much trade area driven. If the trade areas look similar, cap rates are gonna look similar. There's really not much of a difference for the type of quality that we're looking to acquire.
Okay. You mentioned the strength of the tenant retention this quarter and trailing couple of quarters. I guess, just curious from your long historical perspective there, has there been a better time for tenant retention? If so, what was that comparable period? Just kind of trying to figure out where we are relative to cycles.
I don't think there's on the margin, it may have been a little higher. I could see Jim reflecting back on his 41 years. May have been. That's a lot. That's a long time to think about. I guess in my experience, what I would suggest, I think tenants are a little stickier in the last four quarters because of what we've been through. As I look to the future, I think that 75% has been our typical average. I kind of look at that as a reversion to the long-term stabilized at least for our portfolio.
I think the way we asset manage, the amount of internal redevelopment we do, there's always gonna be a level of what I'll say churn or turn within the portfolio that 75% seems to be the right number from a retention standpoint. So I'm happy to see that we're a little above that today because I think today's environment really is appropriate for that. As that supply goes away and we get back to that 96% lease level and we're doing the things we typically proactive asset management perspective, like I said, I think the 75% is probably a runway that I'd look at.
Okay. I guess maybe this will be for Mike. Just on the percentage rent number, and then just sort of the outlook. I mean, we've seen obviously food inflation and pretty high level of restaurant inflation, particularly for sit down has been significant. I guess when you look at your lease structures, if this persists, is that an opportunity for, you know, a meaningful increase in percentage rent collections over time, or is that really just not part of the lease structure that is an impactful component of potential future revenue?
I'm gonna turn that back to Jim. I think it is probably more appropriate for him to respond. Percentage is percentage rent, in light of the inflationary environment pre-becoming more of a discussion item from your perspective in your lease negotiations? Yeah, I think I would say probably it is. I think, quite frankly, reporting sales in general is rather than percent rent, but just reporting sales in general is what we've seen over the last 10 years has become more proprietary from anchor's perspective. It used to be a given in the grocery business, but of late, tenants don't want other people to know how they're doing. It's challenging. I think over time, the percent rent, we still try to push it.
I think restaurants, it's still probably a very good industry that we can get that. Over time, I think that'll become even less, as Mike indicated. It's not a big piece of our business today, and I think that'll continue to dwindle a little bit over time. The other thing that happens is, as we have an opportunity to redevelop or restructure an anchor deal and they were paying percent rent, we roll that into new base rent and reset the bar. That also is another avenue that just continues to reduce the amount of percentage rent that we can expect to get long term.
Okay. Thank you. Appreciate it.
Uh-huh.
We have reached the end of the question-and- answer session. I'd like to turn the call back over to Lisa Palmer for closing comments.
I just wanna thank you all for joining us today. I'm so used to having a call on Friday, it's Wednesday, but I'm gonna say it anyway, even though we're days away. Happy Mother's Day to all the mothers out there and enjoy your weekend. Thank you all.
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.