Regency Centers - Earnings Call - Q3 2018
October 26, 2018
Transcript
Speaker 0
Greetings and welcome to the Regency Centers Corporation Third Quarter twenty eighteen Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Laura Clark, Vice President, Capital Markets.
Thank you. You may begin.
Speaker 1
Good morning, and welcome to Regency's third quarter twenty eighteen earnings conference call. Joining me today are Hap Stein, our Chairman and CEO Lisa Palmer, our President and CFO Matt Chandler, EVP of Investments Jim Thompson, EVP of Operations Mike Moss, Managing Director of Finance and Chris Leavitt, SVP and Treasurer. I would like to begin by stating that we may discuss forward looking statements on this call. Such statements involve risks 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 forward looking statements. On today's call, we will also reference certain non GAAP financial measures. We provided a reconciliation of these measures to their comparable GAAP measures in our earnings release and financial supplement, which can be found on our Investor Relations website. Before turning the call over to Hap, I would like to thank those of you who participated in our investor perception study. We are grateful for your candor and appreciate the feedback.
Hap?
Speaker 2
Thanks, Laura. Good morning, everyone. In our evolving business, we continue to see the rise of retailers that have identified what it takes to remain relevant and evolve in the fall of those that have not. As we all know, Sears was once a successful brand. But in the ebb and flow of the retail industry, their declining performance over the last decade, further hindered by excessive debt, illustrates how critical it is for retailers to keep the pulse on consumer preferences and expectations.
Sears' failure, along with the success of numerous winning retailers, also demonstrates the importance of having the capital to invest in the betterment of the store, customer service and experience, well as a technology platform that supports multichannel retailing. The best in class retailers, including Amazon, Whole Foods, Kroger, Target, Publix, and TJX, just to name a few, continue to make sizable investments in their bricks and mortar footprints. Based upon our many conversations that we've had with key retailers, it is clear that physical stores remain a very critical component of a multichannel strategy. It's really apparent in how retailers are investing in their physical footprints and providing a seamless and differentiated shopping experience to meet the evolving needs of their customers. Kroger is not only enhancing their technology and delivery platform, but investing in their store through the Restock Kroger initiative, which focuses on customer experience, value and talent development.
Safeway Albertsons, while partnering with Instacart and rolling out Drive Up, is also remerchandising 400 of their stores. Publix continues to heavily invest in both new and existing locations with plans to redevelop over 130 stores this year as part of their $1,500,000,000 capital plan. Publix has also demonstrated a real point of differentiation with their commitment to exceptional customer service. Going above and beyond offering aid in communities that were impacted by recent catastrophic storms is yet another example of the many ways that grocers are able to effectively connect to their shoppers and communities. Target has expressed their commitment to bricks and mortar and indicated that the store is the central part of their strategy.
They plan to remodel all stores by 2020, continue to open their very successful small format store, and are investing in their team as well as pickup and delivery service. In addition, Amazon has announced an aggressive rollout of bricks and mortar locations, And this is in addition to the large investment in Whole Foods. These and other best in class retailers are benefiting from the proactive investments and producing solid results. Publix reported strong comparable sales and generated an impressive nearly 1,000,000,000 in free cash flow in the first half of the year. TJX's comparable store sales rose 6% last quarter, and Target reported their largest quarterly sales growth in thirteen years.
Our well conceived and well merchandised shopping centers located in trade areas with substantial purchasing power appeal to these and other outstanding retailers and restaurants. Regency's proven strategy, which our team has successfully executed with astute capital allocation and intense asset management, has been distinguished by sector leading NOI growth over the last six years. We do spend a significant amount of time ensuring that Regency is staying relevant and employing our unequal strategic advantages to achieve our objectives. First, owning a high quality portfolio that sustains sector leading same property NOI growth. Second, creating substantial value through our national development and redevelopment platform.
Third, maintaining a very conservative balance sheet and fourth, engaging a team that is the best in the shopping center business, is guided by Regency's special culture, and operates efficiently with industry leading systems. And finally, earnings and dividend growth, and in turn, total shareholder return that is consistently at or near the top of the shopping center sector. JT? Thanks, Hap. Core fundamentals within Regency's premier portfolio remain extremely healthy.
As Hap said, retailers continue to see value in locating in higher quality shopping centers and staying close to their customer. This is evident as occupancy climbed to nearly 96% this quarter. Move outs were the lowest they have been in two years and bad debt remains very healthy. The strong fundamentals across our portfolio translated into another solid quarter of same property NOI growth, driven by base rent growth of 3.8%. As I noted on our prior call, rent spreads in any given quarter can vary based on the mix of leasing.
This quarter, we executed on several opportunities to bring valuable anchor spaces to market, resulting in new rent spreads at 35% and total rent spreads of 10%. I'd like to take a moment and highlight our SHOP space performance that clearly demonstrates the quality and resilience of our portfolio. Our shop space percent leased has been 92% plus for the last six quarters. We are seeing demand for space across all categories from many thriving tenants. We've been successful executing increases in starting rents and in addition are achieving contractual rent steps for shop space that averaged 2.5% while judiciously managing capital commitments, all leading to strong net effective rent growth for the last five years.
I'd like to touch on recent retailer bankruptcies before turning it over to Mac, and I'll start with a Toys R Us update. Of the five locations originally in the portfolio, one of
Speaker 3
the locations was re leased and the center has been sold. One location was assumed by another retailer at auction where we experienced zero downtime.
Speaker 2
One has been re leased and has already rent commenced. And the remaining two locations that we most recently acquired at auction, we're in active negotiations with a specialty grocer and a fitness user. Next, we have 25 Mattress Firm locations in our portfolio. Only five of these leases have been formally rejected at this time. Most importantly, we are confident that with the quality of our real estate, we will have the opportunity to upgrade merchandising as we backfill any closures.
And finally, Sears, where we have two Kmarts and one Sears location. Two of these locations were included on the initial closure list, both of which are redevelopment opportunities that we are excited to finally unlock. All three are located in grocery anchored shopping centers where grocery sales average over $950 per square foot, demonstrating the draw of our real estate as well as the opportunity and our ability to substantially upgrade the anchor. Average rents on these locations are less than $8 per square foot. Though these bankruptcies will certainly impact near term results, more importantly, the remerchandising and redevelopment opportunities triggered by recapturing this real estate will positively impact our shopping centers over the long term.
Speaker 4
Mac? Thank you, Tim. The healthy fundamentals we are experiencing in our operating portfolio are also evident in our investment activity. We continue to find compelling ways to astutely invest our capital and build both our new development and redevelopment pipeline. Our in process development and redevelopment projects are performing very well with strong leasing interest and economics in line with underwriting.
For example, this quarter, our Melody Farm development in Greater Chicago celebrated its grand opening with all five acres, including Whole Foods, REI and Nordstrom Rack open for business. All have reported impressive sales, exceeding expectations. In regards to our pipeline, we continue to make progress on our development and redevelopment opportunities and are positioned to achieve our five year goal of $1,250,000,000 to $1,500,000,000 in starts and deliveries. Our local teams are pursuing new opportunities in our target markets, including L. A, D.
C. And Houston. We are also making meaningful progress on our pipeline of infill redevelopments. We are especially excited to start the redevelopment of the office building at Market Common Clarendon and The Abbott in Cambridge, which should start in Q4 and Q1, respectively. Further, our entitlements are progressing positively in Bethesda, which should allow our Westwood Shopping Center redevelopment to commence next year.
And while we are in the early stages from a timing standpoint, we are making great strides to unlock the value creation opportunities at several premier properties, such as Costa Verde in San Diego, Town and Country in Los Angeles and Piedmont Peachtree in Atlanta's preeminent Buckhead market. These larger scale pipeline opportunities and others, especially those that are mixed use with non retail components, take tremendous discipline, expertise and persistence. Proudly, our platform possesses these qualities. And as we've said in the past, if we decide to co invest in a compelling non retail component that will complement our retail, we will only partner with best in class, well capitalized developers. Moreover, we continue to unlock value through redevelopments that are more tactical in nature.
This is a focus where we have enjoyed great success over the years and is an integral part of our proactive asset management and fresh look merchandising and placemaking philosophy.
Speaker 3
Current
Speaker 4
examples include Bloomingdale Square, a $19,000,000 redevelopment started this quarter where we are relocating and expanding a Publix into a former Walmart space and adding HomeCentric and LA Fitness to the shopping center. At Gateway at Aventura, we proactively acquired the former Toys R Us box at auction and are now in anchor negotiations to greatly enhance the value and drawing power of this excellent property. Lastly, at Point fifty in Fairfax, Virginia, we are completely repositioning the center by building a new Whole Foods three sixty five as well as several new shop buildings. Now turning to transactions. Similar to last quarter, there's a limited availability of institutional grade shopping centers on the market.
Demand and pricing for these high quality centers continues to be strong. On the selling side, the momentum we reported last quarter is coming to fruition. The buyers for these centers that we are selling are still discerning. The market has improved as debt markets have solidified and deals are getting done. We have more visibility into expected sales volume for late twenty eighteen and early twenty nineteen and have accordingly increased our disposition guidance.
The upward revision to our disposition cap rate is a reflection of the pool of properties we expect to close and not a change in pricing expectations. As a reminder, our strategy is to sell approximately 1% to two percent of our asset base annually. We invest these proceeds, along with free cash flow, into value add developments and redevelopments, high growth acquisitions or our own stock when pricing is compelling. This quarter, we co invested in Ridgewood Shopping Center located inside Raleigh's BeltLine and anchored by a highly productive Whole Foods. This center has been owned by the same family for nearly seventy years, and our local presence and deep market knowledge gave us an inside track to acquire our fourteenth shopping center in the Raleigh market.
Lisa?
Speaker 5
Thank you, Mac, and good morning, everyone. As Jim stated, we had another solid quarter as our high quality portfolio continues to perform. Year to date same property NOI growth of 3.8% has been driven entirely by base rent growth. But as we mentioned on our prior call and as our full year guidance indicates, while we are still projecting strong base rent growth in the fourth quarter, we do expect a deceleration in overall same property NOI growth as this strong base rent growth will be offset by three main drivers. First, as expected, our real estate tax reassessments in California triggered by our merger with Equity One have started to come in and are retroactive to the date of acquisition.
So essentially, this equates it actually is two years of real estate tax expense. While the vast majority of real estate taxes are recoverable from our tenants, we will experience a drag from the non recoverable portion of these reassessments. Next, we are also up against a tough comp in base rent from redevelopments that came online in the fourth quarter of last year, specifically from two much larger projects, Cerro Monte and Aventura. And lastly, as Jim discussed, the recent retailer bankruptcies will create opportunities to remerchandise and reposition our real estate in the future. These will have near term impacts.
So although the timing related to the Sears bankruptcy could moderately swing us one way or the other, we have incorporated reasonable assumptions on their move out dates into our revised 2018 same property NOI growth guidance of plus or minus 3.25%. Turning to earnings, both married FFO and operating FFO for the full year were revised upward by $01 at the low end, incorporating slightly better performance in same property NOI. Before we turn the call over for questions and reminding you that we won't provide formal guidance for 2019 until early next year, I still would like to give you some insight into our same property NOI growth expectations as we do look to next year. Let me start with a reminder of our roadmap to our same property NOI growth objective. First, embedded in the portfolio is 1.3% growth coming from contractual rent increases.
Then another one to 1.2% comes from new and renewal leasing rent spreads. Combined, these provide about 2.5% growth. Finally, the contribution from redevelopments is expected to add another 50 to 100 basis points of annual growth. Together, absent any changes in rent paying occupancy, these components equate to our strategic objective of 3% plus average annual same property NOI growth. However, our initial look into 2019 includes a couple of short term impacts to this road map.
First, while timing is still very uncertain, the downtime associated with our three Sears boxes could impact same property NOI growth by up to 50 basis points. Next, the redevelopment contribution has been and will continue to be uneven at times. Over the past five years, including year to date 2018, the annual contribution has ranged from 40 basis points to 170 basis points, averaging a 75 basis points positive contribution, thus the 50 to 100 basis point range in our road map. In 2019, the contribution is expected to be minimal as NOI is taken offline at some of our larger, more transformational redevelopment projects. So while the contribution from redevelopments to our NOI growth can be uneven, and I want to reiterate that, we still remain extremely excited about our expanding pipeline and the contributions to growth that will come in 2020 and beyond.
The difficult to predict Sears bankruptcy and the atypical contribution from redevelopments is likely to result in a more muted 2019 same property NOI growth in the low to mid-two percent range. That said, there's much more to come as we close out the year before issuing formal guidance. But most importantly, given our very high quality portfolio and our active redevelopment pipeline, we continue to expect our same property NOI growth to return to 3% or greater over the long term. We are extremely pleased with our results this quarter and the position of our high quality portfolio and fortress balance sheet, all of which support our ability to grow earnings and dividends, which in turn expect total shareholder return to be consistently at or near the top of the shopping center sector. That concludes our prepared remarks.
We now welcome your questions.
Speaker 0
Thank you. We will now be conducting a question and answer session. 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.
Speaker 6
Thank
Speaker 0
you. Our first question comes from the line of Nick Yulico with Scotiabank. Please proceed with your question.
Speaker 7
Hey, good morning. This is Greg McGinnisson with Nick. I was just hoping you could provide some details on those new anchor lease signings. Just trying to understand if this is a repeatable situation. You know, of those 88 new leases, how much were actually above that 35% mark?
Speaker 2
Greg, I'm not sure I can bifurcate that for you. But bottom line in that we had strong anchor growth of 85%, really driven by Publix and LA Fitness at our Bloomingdale redevelopment. Those were the real leaders. As I said in my opening statement, the mix on a quarter to quarter basis is hard to predict and hard to try to analyze or bifurcate. But overall, we're really excited.
12.7% of that new growth rent was in shop space. So the combination of 35% is really kind of across the board. On the renewal side, I will say that we're somewhat muted on a very large target at Saramonte renewal, which was flat. So overall, we're real happy with the rent growth and like the track we're on and the fact that we're on. Over time, as we've indicated in the past, we're going to have Greg, we're going to have a number of legacy leases that will repeat the benefit we received from the Publix and LA Fitness leases and other leases that JT just mentioned.
It won't be all the time, but over time we're going to see more of that and less of that.
Speaker 7
Okay, great. Appreciate the insight there. And then I appreciate the details on the same store NOI growth guidance as well, but I'm just trying to understand a bit more here. So 3Q came in stronger than originally expected. So I'm just curious what changed there?
If this was the full reason that guidance was raised and any of that impact that you were expecting is part of what got pushed into 2019?
Speaker 5
Primarily, it is the reason why, one, that we raised the low end of our earnings guidance and additionally took off the low end of our same property NOI guidance. And it's just a matter of as you know and as we all know, the most difficult thing to predict are move outs. And we always incorporate a reason what we believe to be a reasonable assumption, and that came in better than expected for the quarter. So we had fewer move outs than we anticipated.
Speaker 0
Our next question comes from the line of Christy McElroy with Citi. Please proceed with your question.
Speaker 6
Hi, good morning, everyone. Lisa, just following up on the again, the topic of the same store NOI into 2019. Just with regard to the California reassessment, the portion of that that's onetime, are we looking at another three more quarters of drag there to the recovery rate? And then in terms of the redevelopment, just to clarify, are you talking about so inherent in the low to mid-two percent range, is that zero contribution? Or is that a drag from redevelopment?
Speaker 5
First, the real estate tax reassessments. We would expect that just the fourth quarter should be the last of the onetime impact. And next year, as in any typical year, as in other states properties are reassessed at certain intervals, we're expecting potentially up to like a 5% increase in real estate taxes next year. But remember that we do recover about 90% of that. So that it would be a minimal bleed for that.
And so the recovery rate going forward for all recoveries, we would expect is right about where we are year to date, assuming no change in occupancy. So in the 82% to 83% range. And then with regards to redevelopment contribution for next year, again, it's pretty early, as you know, and we need to have a little bit more visibility as to when leases come online and as we finish projects. So I don't know that we can give you any specifics, and we will do that in early next year. But we'd expect it to be somewhere in the zero to 50% range of a positive contribution.
Speaker 6
Okay. And then just with regards to the accounting change, the $06 to $07 moving into G and A in 2019, I understand that, that also includes the leasing costs that previously would have been capitalized into the basis of your in process development projects. How much of the estimated $06 to $07 would have been attributed to sort of normal recurring CapEx versus sort of that development, redevelopment bucket? Just geographically thinking from a modeling perspective, where those where that would have gone through.
Speaker 5
Christy, I'm not sure I understood. You're asking how much of our internal leasing costs are No, no, no. Because with regards to just difference is all of
Speaker 6
splitting out the $0.06 0 to $07 with what would have gone through recurring CapEx versus what would have been through development, redevelopment spend, the leasing cost. Because it would have been it would have shown up in your in your development schedule, right, in the in the total cost attributed to each development project. So I'm wondering if that gets adjusted.
Speaker 5
It's still but in our disclosure, when we give leasing capitalization costs, it's still our we'll have to get off line on that. We'll come back to you.
Speaker 6
Thanks so much.
Speaker 0
Our next question comes from the line of Craig Schmidt with Bank of America Merrill Lynch. Please proceed with your question.
Speaker 3
Thank you. On the three boxes from Sears Holding, does Regency have control of these boxes?
Speaker 2
Craig, at this point we do not. All we know is we have two boxes that were on the initial 142 store closure list. We've not heard any more than that. We obviously have been awaiting this day for a long time. Our teams have been focused on redevelopment plans.
We feel like we're in great shape and eager to recover our real estate so that we can move forward and enhance our centers by backfilling these tired old Sears and Kmart boxes with more dynamic retailers today. So more to come, obviously, but no news other than it's showing up on a closure list. And we are prepared when it comes back to take those two. And in addition, as Jim indicated earlier in the prepared remarks, the inbound comments and interest in the space has been very, very encouraging.
Speaker 3
And is there a broader acreage of land that comes with the stores?
Speaker 2
In the SEERs specific, we have a tire battery, auto, and probably some excess parking area that we believe we can probably do some padoutbuildings on. So beyond the box, we think there's some external redevelopment opportunity as well.
Speaker 3
Okay. And was October rent paid on these boxes? Yes. Great. Okay, thank you.
Speaker 2
Thanks Greg.
Speaker 0
Our next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.
Speaker 8
Hi, good morning. We've discussed the real estate tax assessment and how it relates to the EQI portfolio. But in relation to the Prop 13 bill in California, can you give us an update on the weighted average age of the legacy Regency assets there? Have you begun to assess that potential impact?
Speaker 5
Yes. And it is just the legacy Regency, obviously, as essentially those that are being reassessed, the age is zero, if you will. So of the remaining, which is about 20% of our asset base, it's thirteen years.
Speaker 8
Thanks. And just switching over to the omnichannel repositioning that you discussed at the beginning, What efforts and the roles of the local strip anchored grocers are you seeing? Which are best positioned to address online delivery, online pickup growth segments? And, you know, what actual investments are you seeing on the ground? And what can you guys do to expedite the adoption?
Speaker 2
We're facilitating the adoption of the pickup and delivery. And we're seeing a keen focus on the part of pretty much all of the grocers. I think the key thing and that's all important. Technology is important in the store, and they're all investing heavily in that. But it's also the shopping experience and the service that is really the point of differentiation.
And I think that's critically important to remember and to keep that in mind. And that's the reason why we think that our grocer sales are as high as they are, both on an aggregate basis of $32,500,000 and $650 per square foot.
Speaker 8
Great, thanks.
Speaker 4
Thank you.
Speaker 0
Our next question comes from the line of Jeremy Metz with BMO. Please proceed with your question.
Speaker 9
Hey, good morning. Going back to the Sears and Kmart topic, assuming you can get control of those boxes, do any of those represent an opportunity to kick off bigger densifications of those sites, just given how big this year's NKMR boxes presumably were? And then it sounds like you've more or less been ready for this, as most have been. So any rough capital investment that this could potentially represent?
Speaker 2
Jeremy, to answer the first question, we studied the densification and believe our best avenue today is to replace with like retail. So the densification, I think, will be just higher, better use, better quality retail.
Speaker 4
And I'm sorry, what was
Speaker 2
the second? About capitals. It's early It's really too early. As Hap indicated, we've got a lot of interest from a lot of different players. And until we can spend some more time and really understand when are we going to get back and those kind of things, we're really not in a position today to talk about returns.
But we are obviously, we continue to target the 7% to 9% when we get our hands back on a redevelopment. That's kind of our goal.
Speaker 5
Yes. I think it's just to add a little bit of color, Jim, two of the three are Kmart boxes. They're not Sears boxes. So they're they're just typical legacy Kmarts, and there's a reason we still own them. Right.
Because it's really strong real estate, and we do believe that it'll be an opportunity to upgrade the merchandising and then potentially also grow NOI at those centers.
Speaker 2
The teams are extremely excited about the opportunity.
Speaker 9
Yes. No, that's fair. Question for Mac in terms of acquisitions. The Ridgewood Center that you did anchor by Whole Foods, was this sourced by your partner? Or why not put that one on balance sheet just given that it seems like down the fairway for Regency?
And then I guess sticking with acquisitions, one of your peers mentioned the move in rates causing some sellers to pull back. I know you guys have been active. But maybe you can talk about what you're seeing and hearing out there from an acquisition standpoint.
Speaker 4
Sure thing, Jeremy. You're right that, Richard, it is right down the alley for us. It's a terrific center. And we look forward to working with Whole Foods as their lease does expire sometime in the next ten years. Our partner that we acquired the property with actually had some internal recycling.
So they were selling a center that we owned with them, and this was part of their internal capital recycling. They were up in the rotation, and we worked with them on that. And that's the reason for that. In terms of just overall perception, buyers are closing. Mean, we mentioned this last quarter.
There is just a firmer footing underground for sellers, debt markets for cooperating. And it seems like the market has firmed up. And we've noticed that in the transactions we've closed to date. And we have another $60,000,000 under contract with scheduled closings by year end and then another $65,000,000 more when negotiating purchase agreements. But in those cases, buyers have already begun their due diligence.
So they may not all close by the of the year. Some could roll to next year and some could drop out. But we are seeing buyers feeling measurably better about things than they were six months ago, we're seeing that in the transaction market.
Speaker 9
Yes. So I guess I was also trying to wonder just from an acquisition standpoint, as you're out there, are you seeing not you guys, but other sellers in the market pull back a little bit here? Or has there been any change in the cadence of deals that are out there that you're seeing?
Speaker 4
I tell you what makes it hard to measure is there is very little property of the caliber that we're looking for that's on the market. And you've seen very, very few transactions out there. So there are definitely institutional buyers and advisors who are out there looking for the Class A product that we are, a product that has a strong ten year CAGR. But unfortunately, there's a pretty select few properties out there that are transacting, because buyers owners are reluctant to put their properties in the market because it's hard to find a replacement property. There's so little Class A on the market.
Speaker 9
Okay, fair enough. Last one for me. Hap, you mentioned the importance of investing in the store and the customer experience. As you think about your increasing role in that, the landlord needing to play a bigger part in creating that overall environment, are you committing more capital or looking to commit more capital along this front, which may not necessarily be able to immediately attribute a return to, but longer term, it's going to benefit the center and therefore, ability to both retain and source new tenants as you need?
Speaker 2
Well, number one, as part of obviously our large scale redevelopments and even our tactical redevelopments, our fresh look philosophy, where there's a tremendous emphasis on merchandising and on place making, they're going to distinguish appeal of those shopping centers to the communities and neighborhoods that they serve. So I think that's important. But we've got an ongoing maintenance program. And in that ongoing maintenance program, we're very focused on placemaking and our ongoing leasing. And merchandising is critical to that.
So that's a part of the way we do our business each and every day. And we feel really good about the way our shopping centers are distinguished, and we'll continue to focus on how to keep them relevant. And we're also, I think our view is that we've spent between 1011% of NOI from a tenant improvement, white box, ongoing business building improvements standpoint, and think that that number is still good. And together with the redevelopments, both tactical and major, will keep our shopping centers looking fresh and relevant to our communities. Thanks for the time.
Thank you.
Speaker 0
Our next question comes from the line of Ki Bin Kim with SunTrust. Please proceed with your question.
Speaker 8
Thanks. So you have an interesting dynamic that's going on in your development pipeline. You might have about $280,000,000 of pipeline but if I look at the percent leased and think about the dollars at risk there's really not much because a lot of it has been leased pretty well. It kind of clears up your pipeline or your development capability for next year. You also mentioned a lot of these other bigger projects in your opening remarks.
So I'm just trying to get a sense of how much do you think you will start next year?
Speaker 4
Sure. I'm happy to take that. This is Mac. Well, we haven't given formal guidance yet on our development starts for next year, and we will be doing that in the near future. But you are right.
The developments that we have that are underway are performing very well at 80% leased. We're very happy with those. And it allows us to use our expertise to work on some of these longer term redevelopments. And I touched upon several of those in our opening remarks. I'll just give you an example.
Westwood Shopping Center, which is a center that came over with Equity One, in about a year's time, we should be ready to start that project. And that is very promising. It's a mixed use project with retail. It's got approximately 200 apartments and some townhomes to it. And these are complicated projects, and not every company is capable of doing this.
But we think we have the team and the expertise and the market knowledge to take this on. So we're bullish about that. We'll eventually give guidance on where we think we'll be. But over a long term, which is really the right way to measure our contribution, it's not a year to year business. It's always going to be lumpy.
But we think we're on track to hit our five year target at 1,250,000,000.00 to 1,500,000,000.0 in starts. And then deliveries would come with that too as well. So hopefully that answers your question.
Speaker 8
Yes, I mean it does. I mean I think about the Bethesda project, that by itself is probably very sizable. You guys started about $200,000,000 this year. I mean I guess just directionally, it does feel like it could be a lot more in the next year or so. Is that am I thinking about it correctly?
Speaker 4
I think directionally, you will see us do more redevelopments as a percentage of our total investment than we have in the years past. Some years, it was more ground up as compared to redevelopments. And I think that's switching. And we're agnostic to the two. In fact, we like the flexibility and optionality that redevelopment's given us.
And so I I wouldn't say more, but I would say the mix between ground up and redevelopment is shifting more towards redevelopment. And we're very pleased with that. And these are largely properties that we own. And then Town and Country is sort of the one new one to that. And we're coming into a partnership on that property, which is a terrific property located across the street from The Grove.
We've mentioned that before. But that allows us to bring our expertise to a family, to enter into a family partnership, and to add some density to that. And ultimately, that will be one of our marquee properties across the country. We're very pleased with that.
Speaker 8
Okay. And just last question.
Speaker 4
Go ahead.
Speaker 8
So the last question, on the Sears Kmart, I realize you don't have much direct exposure, but how do you think about the tangential exposure just from the amount of shadow supply that might hit the market and how that impacts your portfolio?
Speaker 2
In general, space is space, and it has an impact. But we think and we feel real good about our locations, about our anchor tenants, about the team's focus. And we have re leased virtually all the space that's coming back to us, the anchor space it has. I think that's indicative to say it doesn't have any impact. But we believe that, as Lisa said, that we can generate, in effect, 2.5% from an underlying NOI growth standpoint before redevelopments.
And we think over time that redevelopments are going to contribute an additional 50 to 100 basis points. And we've got the team in place, the commitment. Let me just say, in regard to the redevelopments, it's kind of become the topic du jour. And this has been an integral part of our business historically. And we've got the team in place in the markets to make these projects happen.
As Max said, they can be complicated, they can be difficult. We don't even view the tactical ones, like as I indicated earlier, as just an opportunity to refill a box, etcetera. It's an opportunity to further distinguish the liquor of our shopping centers for the long term. And just to reiterate what Mac said, I think we're very well positioned to achieve the 1,250,000,000.00 to $1,500,000,000 of development starts and to average, as Lisa said, 3% same property NOI growth even in a market where there's going to be additional store closings.
Speaker 8
Okay, thank you.
Speaker 0
Our next question comes from the line of Rich Hill with Morgan Stanley. Please proceed with your question.
Speaker 10
Hey, good morning everyone. I wanted to maybe go back to the properties that you're buying and selling. Maybe we can talk about the properties you're selling first. Could you provide any more color as to what's maybe making those less attractive and trade at wider cap rates? Is it location?
Is it the type of grocery store there? Is it their overall tenant mix? What is making that less attractive to you? Or maybe you want to rotate into something that's so called higher quality?
Speaker 4
Sure thing, Rich. Yeah, sure thing, Rich. This is Mac. If you just look at page 15 of our supplemental, you can start to pick up some themes here from the set of properties. It's a Winn Dixie anchored.
It's a Beals anchored center. It's a theater anchored center. There's two larger projects that are really big box centers. The one in Indio is unanchored, shadow anchored by Home Depot and WinCo. So it's not the typical Class A infill grocery anchored centers that we own.
And we feel that these properties were ready to be sold. These were prioritized dispositions for us. They were ready to be sold. They were widely marketed, and they cleared. And it's the type of center that I mentioned, sort of the tenants that are there.
But it's also the location, too. These are smaller markets. And if you dug into the demographics, they're lighter than our typical property. They're on the low end. And they're typically lower growth.
And people are paying for growth. So all those characteristics contribute to the pricing, and we feel that the pricing was correct. These are really outliers in many ways.
Speaker 10
Got it. And so it looks like your buys and sells have been fairly similar this year, at least in terms of number. But you also mentioned it's hard to find the high quality properties that you want to own. Do you think there's more low quality properties to go for you to sell? Or as you just mentioned, is it really just an outlier?
Or I guess what I'm asking, do you think there's more opportunity to see more portfolio location at this point in time? Or is it becoming harder just given the availability of higher quality properties?
Speaker 2
That's being able to go
Speaker 10
ahead, Matt.
Speaker 5
Go ahead, Matt. Go ahead.
Speaker 2
Being able to find good uses of capital is an issue. Being able to do transactions on a tax efficient basis is also important. But the other key thing is we don't have to sell properties. We're in a position where those properties that kind of have the characteristics that Mac just described are meaningfully less than 5% of our portfolio. So we're in a position to sell when it makes sense to sell and when we have the appropriate reuse of funds.
And we can do it on a tax efficient basis.
Speaker 10
Got it. And just one more follow-up question, if I will. Are there any examples where you can take a so called sevennine property and put money into it and make it a 4.9% property? I mean, does that exist? Is that just not a good use of your funds, in your opinion?
Speaker 2
Where we have an opportunity to do that, we do that each and every day. That's a key part of our business. And we've been doing that for years. And these redevelopments represent a lot of those where we're transforming the properties that we have.
Speaker 10
Got it. Thank you, guys. That's really helpful.
Speaker 0
Our next question comes from the line of Michael Mueller with JPMorgan. Please proceed with your question.
Speaker 11
Hey, good morning. I thought I got out of the queue. My question was the prior question on about how much of the 7.5% ACAP properties are left in the portfolio. I think
Speaker 5
I don't know that we actually answered the question. So I will point you to our investor presentation and where we have about 2% that we consider kind of noncore. And think about, again, remind you of our funding strategy. So free cash flow is going to fund our development spend. To the extent that we are short, we are going to we're and do not have access to the equity market because it's not a compelling price at the time.
We will use dispositions for that, and it will come from that 2% bucket. And if you do it to give a little bit more color on Page 15 in the supplemental, if you look at those, there's not a single one on here that we went out and bought individually. It either came as in a package of portfolio acquisition and a couple of them were legacy developments when we were building much larger power centers back in the late
Speaker 2
From a merchant development standpoint.
Speaker 5
From merchant development standpoint, which we do not do today.
Speaker 11
So basically, if that 2% of portfolio was gone and we're looking at the supplemental, the disposition cap rates wouldn't be 7.5% or higher?
Speaker 5
I think that's a fair assumption.
Speaker 11
Got it. Okay. That was it. Thank you.
Speaker 0
Our next question comes from the line of Chris Lucas with Capital One. Please proceed with your question.
Speaker 3
Good morning everybody. Hey just a couple of quick ones. Lisa on the implied guidance for fourth quarter, you know, zero three spread between 91 and $94 is there any one item that sort of causes that spread? Or is it just a myriad of factors that you're unsure about going in?
Speaker 5
It's you know, same property NOI is a big driver, obviously. Although our guidance is three and a quarter plus or minus, there's it can be plus or it can be minus. And Sears is a big driver of that as well, depending upon when if we get November and December rent. And that is one of the largest drivers.
Speaker 3
Okay. And then just kind of following up on that topic. The mattress firms you've had rejected, given the likely scenario, the plans that are going to come out, I think they want to get out of bankruptcy this year. You'll get paid what for those rejected leases?
Speaker 5
Well, it's still I'm a little hesitant to say that I'm certain what's going to happen. So our understanding at this point is we are going to get paid for them for up to a year. Again, I think A year from when they file. A year from when they file. But I think that it's more to come.
But right now that is the assumption.
Speaker 2
The bankruptcy is an uncertain process, and we've incorporated that into our projections.
Speaker 3
Right. So so, Kav, just so I'm clear, you're saying that you could get up to a year but it would be a year from now that you would get paid or when they come I out?
Speaker 5
Don't know that we really know when and that's part of the uncertainty as well. But the early indication is that we will get REPRESENTATIVE:] up to a year's worth of rent.
Speaker 2
Whether that's from when they file or that's from when they come out, we still don't know.
Speaker 3
Okay. And then as it relates to Sears in terms of the guidance you provided earlier and the drag to same store NOI from next year, does that matter as to whether that's a seven or an 11, you know, liquidation or just a reorg? And what are you guys assuming?
Speaker 5
No, I mean that won't matter. What matters is whether or not we actually whether someone assumes and buys the lease or if we get it back.
Speaker 3
Okay, great. Thank you. Appreciate it.
Speaker 4
Thank you, Chris.
Speaker 0
Our next question comes from the line of Sameer Kunal with Evercore. Please proceed with your question.
Speaker 12
Yes, good morning. Just had a question on the leasing spreads for new deals. Mean it was up 35% but it didn't look like you put in a lot of CapEx. Certainly, if you look at the CapEx per term in the quarter versus maybe the trailing 12%, it actually fell. So I just want to know what was kind of going on there.
Speaker 2
Samir, yes, it was interesting that it fell with the volumes. And what that represents is really the driver there was Publix at Bloomingdale redevelopment. That particular deal is a teardown rebuild. So what you had was less what we call TI and white box, and it's really rebuilding a building. So that artificially dampened that number.
If you took Publix out on that, we would normalize at $30 which is right in line.
Speaker 12
Okay, got it. And I guess my second question is just regarding your NOI guidepost to that low to mid 2% range for 2019. I mean how are you guys thinking about sort of credit loss reserves for 2019 versus this year? How much cushion do you have sort of built in for maybe other distressed retailers besides sort of the Sears and Mattress Firm of about sort of a 90 basis point excuse me, a 50 basis points downtime?
Speaker 5
Again, that's not formal guidance. So we will come back to you in the early part of next year with more formal guidance. But Sears is obviously incorporated in there, as indicated in my remarks, up to 50 basis points.
Speaker 12
So at this point, beyond Sears, you're not incorporating any other
Speaker 5
Sameer, we always yes. Of course, we always do. And even though bad debt expense doesn't exactly translate to how much we're incorporating into kind of a credit collection loss, if you own typical underwriting. We've been kind of around the 45 the 40 to 50 basis points range in bad debt expense. So I think indication that we've had a pretty normal and steady rate of move outs, if you will, and bankruptcies and store closures.
And we would expect something similar next year. Top of Sears.
Speaker 2
We're incorporating our current thinking is incorporating our normal amount of issues. But at the same time, we're also incorporating that the underlying business is good, leasing spreads will remain healthy. We're seeing strong demand for space. So we feel good about the underlying fundamentals of the business. And our ability to continue to take the Sears bankruptcy aside, the 2.5 underlying same property NOI growth that Lisa described earlier.
Speaker 5
And I think my prepared remarks directly hit that. And also, there's even some it's also implied. If you go back to the road map again of 1.3% contractual rent steps and then another 1.2 from rent lease spreads, that gets you to 2.5%. And I just told you that we're expecting and incorporating up to 50 basis points of Sears, we're still saying we're going be in the 2% to 2.5% range. Yes.
Speaker 12
Okay, thanks.
Speaker 0
Our next question comes from the line of Vince Tibone with Green Street. Please proceed with your question.
Speaker 2
Good morning. I have a clarification question on the Sears closures. Are you going have to bid for those leases at bankruptcy auction?
Speaker 5
I mean, Jim, whatever.
Speaker 2
At this point, we don't know. We're on a closure list, but there's no telling how Sears will whether they'll try to sell their leases before they reject. We just don't know at this point. We are obviously, in our planning, we are preparing to defend our real estate. Got it.
Okay. But at this point, they're still paying rent and the lease is still in place until further notice. That's helpful. Thank you. Can you just talk maybe a little more broadly about the pros and cons of buying a lease in bankruptcy auction versus letting a new tenant purchase a below market lease?
Well, obviously, evaluate every aspect. And I would say during the toys, we evaluated a deal in Chicago where it was at auction. We were prepared to bid if needed. We did our homework, understood who was interested in the space, and felt comfortable with that user, and felt the economics of no downtime, protecting rent was a good alternative to us jumping in and protecting the real estate. So it's a one off thing.
We evaluate on every space that's in play. And Mac, you might just review kind of what we did with Hagen because it was a combination of working with replacements to Hagen, buying leases, and letting some of them go and coming back to us on that basis.
Speaker 5
Before Mac does individual examples, mean, biggest thing is the pro is it gives us control of the real estate, allows us to control the merchandising, and in often cases, which Mac is going to talk about, allows us to unlock a lot of value.
Speaker 8
Is that just through the lease clauses?
Speaker 4
The replacement Well, you may change the use, Vince, and upgrade the use. But you also, by wiping out that former lease, you may get rid of some restrictions that have to do with competing uses, exclusives, co tenancy, parking requirements. Sometimes these older leases are just outdated with how the market works. So you get a fresh start. And there's generally, at a reasonable price, the pros heavily outweigh the cons.
And you take some leasing risk, you're not going to have it pre leased. But we're in that business anyway. And we have a good feel for that, and we factor that into our pricing. So net net, it's usually advantageous for us to buy a lease back.
Speaker 2
That's really helpful color. Thank you. That's all I have.
Speaker 4
Thank you, guys.
Speaker 0
Our next question comes from the line of Linda Tsai with Barclays. Please proceed with your question.
Speaker 1
Hi, yes. Does having a Kmart Fox versus having a Sears give you
Speaker 2
more flexibility?
Speaker 5
Linda, we can't hear you. We can't hear you. Oh, sorry about that. Having a Kmart Fox versus having a Sears give you more flexibility given the size, maybe in terms of backfilling more easily with the tenant versus having to redevelop?
Speaker 11
I can
Speaker 2
get you, Ken.
Speaker 4
Going to
Speaker 5
be Ben. The reason I comment specifically that they were Kmart's versus Sears was to be exactly that, the size of the box. They're in your typical neighborhood community shopping centers, so there's not a whole lot of densification opportunities at those. Okay. And then in terms of the 35% increase in new leases, can you give us a sense of what percentage of your anchor leases are considered legacy?
Speaker 4
Linda, we can't give you that percentage. This is Mike. But we do have, as we indicated at our Investor Day, there are 40 leases that we call legacy leases that are available to us in the upcoming, say, five plus years. And those are the leases that are going to really drive this top line rent growth metric.
Speaker 5
And even it's pretty interesting. Even in a portfolio of our size, it doesn't take much for it to really move the needle because there are such large increases with these legacy anchor leases.
Speaker 2
And they control space for a significant amount of time. The key thing as far as the health of the portfolio and the relative strength and the sustainability of the portfolio, I think, is the same store rent spreads that we're experiencing, 12 on their shop space.
Speaker 5
Thanks. And then a lot of your peers are using technology and data to better understand shopping habits and help tenants make location decisions. To what extent are you engaging in these initiatives too?
Speaker 4
Linda, I'm happy Lisa, to answer do you want take
Speaker 5
it? This
Speaker 4
is not a new thing for us. We've actually been at the forefront of using technology to help us with merchandising, to target actual customers by using massive mobile data to track where our customers are coming from. And we've actually been piloting probably over a dozen different technologies over the years, and actually have helped companies create the technology by working with them closely. So we're using it for better merchandising. We've been able to convince tenants that our sites make sense by showing them where their customers are coming from and using technology that they don't have in house.
And it's been eye opening for them, And that's really helped us. And then the future really is using this technology to actually target customers coming onto our property through advertisements, through mobile phones. And that's in the early stages of it. But we're spending a fair bit of time on this. And the industry still has years to grow up.
But it's not a new thing to us. We've been following this for many, many years.
Speaker 0
Thanks.
Speaker 4
Thanks, Linda.
Speaker 0
Our next question is from Christy McElroy with Citi. Please proceed with your question.
Speaker 6
Hey, thanks for taking the follow-up. Just on Mattress Firm, I know that there's the initial closure list. It's all very fluid. There's more that's potentially coming. Just you've got five closing, 20 remaining.
On the 20, is are they as they sort of work through the process and potentially emerge here, are they trying to negotiate rent relief on those 20 remaining? Or is it still sort of up in the air?
Speaker 2
Christie, as any good bankrupt tenant will do, they will absolutely ask on every location, which they did here. We've been firm in our responses. I think the average ABR is $33 on ours. I think they're located in centers that are 96% leased. They generally took very good real estate, high visibility, high access.
So that's where we felt very good about being strong, about recapturing our real estate. When asked, we said no. And the five may turn into seven or eight, but at the end of the day, we will proactively release those boxes with a smaller face. Just say no.
Speaker 6
Okay. And then just following up on some of Ki Bin's questions. You guys were talking about Westwood a bit. Any sort of early estimates you can give us in terms of the potential for a capital commitment on this project? Is this something that you would be maybe working with partners on any nonretail components?
And would this project stay in the same store pool?
Speaker 4
So I could touch on the first part of that. Plus or minus $75,000,000 is what we circled for our investment in that. And we would own all of the retail. We are negotiating with a partner where we would take half of the apartments, 50% interest, and that's included in the 75,000,000 There's also approximately 75 townhomes, which are a for sale product, and we're going to provide some of the capital for that. But that's not a long term hold, as I mentioned.
So at least I can talk to you about sort of the big picture of what's in and out of that. But we're excited about that project. It should have a return of zero in the high sixes, is what our stabilized return is. And it's going to be a dynamite project for us.
Speaker 2
And just in both cases, the townhome and multifamily developer that we're negotiating with, both are best in class, and both will have a meaningful amount of capital invested on their share of those portions of the development.
Speaker 5
At this point in time, and with the earlier head nod of the 2% to 2.5%, we are assuming that Westwood stays in our same property pool. But it's a great question as we really do have larger projects that we're beginning to work on beyond a scale beyond what we've had in the past. We've got another one that's in our pipeline in San Diego in Costa Verde. It's over $5,000,000 of NOI. And we may essentially take that to zero as we redevelop it.
So it's something that we're evaluating, and we'll have more clarity on how we will handle those large projects in the future. But for now, Westwood is assumed to be staying in the same property pool.
Speaker 6
Okay. And then is Giant staying at the project? Has that been resolved?
Speaker 4
Is staying. We're Sorry to relocate to interrupt. Zion is planning to stay. We're going to relocate them and put them into a brand new store in a podium format with parking below them.
Speaker 0
Okay. Thank you.
Speaker 2
Thank you, Christie.
Speaker 0
Thank you. It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.
Speaker 2
Really appreciate your time, interest in Regency, and wish that you all have a wonderful weekend. Thank you very much.
Speaker 0
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.