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Regency Centers Corp
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Greetings, and welcome to Regency Centers Corporation Second Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] And please note that this conference is being recorded.
I would now like to turn the conference over to Christy McElroy, Senior Vice President, Capital Markets. Thank you. You may begin.
Good morning, and welcome to Regency Centers' second 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 applied to these presentation materials.
Lisa?
Thank you. Christy. Good morning everyone and thank you for joining us today.
We are pleased to report strong second quarter results, reflecting a still healthy operating environment. Leasing demand continues to be strong and tenant move-outs remain light driving occupancy and rent growth higher We acknowledge the increasing macroeconomic headwinds and in our view that makes our results all the more notable.
We know that we're not immune to the adverse impacts of inflation, interest rate increases and recessionary risks, all of which could have implications for us. But we very much believe that we are extremely well positioned to weather any economic storm. For the remainder of this year as a result of that we are very confident in our forecast as reflected in our guidance increase and looking beyond 2022 Regency's portfolio and balance sheet were built for times of greater uncertainty.
Everything we've done over the last decade and every decision we've made positions the company not only to play offense and drive growth when times are good, but to successfully navigate challenging macroeconomic environments we are designed to outperform through cycles evident most recently in the resiliency of our performance through the pandemic and how quickly we were able to pivot back to offense and return to pre-pandemic levels of NOI, earnings per share and leverage.
Importantly, in the context of the current environment, the demographic profile of our trade areas is supportive of a consumer that has more cushion to absorb pressures from inflation and economic softness. And in times when tenant bankruptcies may be elevated, our locations tend to be among the best performing limiting occupancy decline. Additionally, current positive momentum is a source of tailwinds into 2023 and beyond.
First and foremost is our strong pipeline of leases both execute and those in negotiation. Also next year we will see an even greater benefit from development and redevelopment NOI coming online. And finally, as we've been saying our dense suburban neighborhoods and communities continue to benefit from structural tailwinds stemming from post pandemic migration and hybrid work.
Where we have begun to see some impact from the current environment is in the capital markets, but again we are extremely well positioned. The strength of our balance sheet and our low leverage afford us the luxury of not needing to raise capital when it's not advantageous to do so.
And our dry powder and ready access to capital, gives us a competitive advantage should opportunities arise. A prime example of that was the execution of our share repurchases in the second half of June. We saw a window of opportunity to essentially buy our own high quality properties in a mid-6% implied cap rate range, a meaningfully more attractive price than what we would pay for anything comparable in the private market today.
We were uniquely positioned to take advantage of that dislocation given our balance sheet strength and liquidity position. We can't control the macro environment, but we can control our response to it.
As we sit here today, we remain confident in our operational strategy and our balance sheet strength, regardless of the macro backdrop. Closing out, I'd like to comment briefly on ESG as many of you know that have been covering Regency for a while. We take pride in having best in class sector-leading, environmental, social and governance programs across which we continue to meet or exceed our goals.
We did publish our Annual Corporate Responsibility Report in late May and also announced an interim 2030 target for reducing absolute Scope 1 and 2 greenhouse gas emissions which was endorsed by the Science Based Targets initiative. We also set a long-term net zero target of 2050. We don't take these commitments lightly. These targets were established after extensive work by our team to identify and analyze the impact of specific initiatives that will help us reach these goals, which includes further improvements in common area, energy efficiency and continued growth in our on-site solar program.
Corporate responsibility is a foundational strategy for Regency and it has been for many years. It's part of our culture and is as fundamental to what we do as is our commitment to portfolio, quality and balance sheet strength. Jim?
Thanks, Lisa, and good morning everyone.
While we are keeping a close eye on the increasing economic pressures in the US today, the operating environment for our open-air retail centers currently remains healthy and active. We had a great second quarter of operating results, leading us to further increase our 2022 same property NOI guidance by 100 basis points to 5.25% at the midpoint, excluding prior year collections.
This confidence in our outlook is driven by continued positive vectors in our key metrics first continued robust tenant demand with new leasing volumes up 20% year-to-date versus the historical average. Increasing occupancy both on leased and commenced spaces especially on shop space as we backfill space vacated during the pandemic.
Our tenants are paying rent and we're nearly back to more customary levels of current period bad debt. Retention rates remained above historical average. Cash spreads for nearly 9% in the second quarter and we're embedding contractual rent steps and close to 90% of our executed leases especially important in this inflationary environment contributing to GAAP rent spreads of 17%.
Strong tenant sales reports again contributing to higher percentage rent and we're maintaining low levels of leasing CapEx with net effective rent growth also in the mid-teens. Our success and momentum relating to all these key drivers of our business, gives us continued confidence in the strength of our core operating outlook.
As Lisa discussed, we do acknowledge the heightened risk of softer economic environment including the potential for an uptick in tenant failures. We're not seeing that yet as tenant move-out activity has remained light and we believe that is a result of the purge of weaker operators that occurred during the pandemic.
Our tenants are healthy as they've ever been, especially our shop tenants who went through the ringer two years ago and emerged stronger and smart. So if we do see bankruptcies materialize, we feel like we're in a good relative position.
Turning to development, we now have nearly $390 million of development and redevelopment projects in process at yields in the 7% to 8% range. Despite construction cost increases over the last couple of years, we remain on track and on budget with our current in-process projects. Additionally, we continue to source new opportunities supported by strong tenant demand at yields who are holding steady despite cost increases we're seeing in our underwriting.
During the second quarter, we started Phase 2 of our ground-up Baybrook development in Houston. You may recall that we completed Phase 1 of this project late last year in the H-E-B anchor, which opened in December is already one of the top performing grocers in the Houston market.
This new phase of the project will include roughly 50,000 square feet of shops and outparcels adjacent to the new H-E-B store. We have already signed or committed leases on the nearly 75% of new space, and anticipate the first tenants opening in about a year from now.
We also started the major redevelopment this quarter at our Buckhead landing property in Atlanta, formerly known as the Piedmont Peachtree. With total cost of around $25 million we will redevelop the 150,000 square-foot center and replace the existing grocery with a new public's anchor. Our team is really excited to start this much anticipated transformation of this irreplaceable location in the heart of Buckhead.
Our consistent track record and successful execution within our development and redevelopment program is a testament to the depth and perseverance of our experienced teams across the country. This avenue for investment is a core competency for Regency and this is where we have the ability to create value and drive incremental growth in upcoming quarters. We look forward to sharing further details on additional projects as we plan to start over the next 12 to 18 months.
In summary even in a more volatile macro environment we remain encouraged by continued strength in tenant sales, foot traffic and demand for space. Supporting continued same property NOI growth and reflective of the resiliency and quality of our locations and tenant base. Beyond that are self-funded value creation pipeline provides an additional layer of accretion and growth.
Mike?
Thanks, Jim. Good morning, everyone.
I'll start by addressing second quarter results, walk through key changes in our 2022 revised guidance and touch base on our balance sheet. First would like to point out some new disclosure on page 8 of our supplemental, where we now summarize the contributing elements of our same-property NOI growth.
Last quarter, we spent time describing the noise that exists in the quarterly cadence of our NOI growth rate throughout 2022 driven primarily by the collection of prior year reserves as well as an expense recovery adjustment that occurred in the second quarter of last year. Due to the continued significant impact of these items, we stress that base rent growth is the best indicator of what is truly driving our business and is the best representation of our continued growth trajectory.
You should find that this new disclosure is helpful in making these things more clear and as you can see in the table, the largest positive contributors to second quarter performance where growth in base rent and improvement in current year uncollectible lease income which together added the total 450 basis points to our NOI growth rate while the offsetting factors include the tougher year-over-year comparisons related to prior year reserve collections and expense recoveries detracting a total of 380 basis points from our results.
We've also had a gap more straight-line rent spreads to our supplemental on Page 19 as a complement to our historically reported cash spreads. GAAP spreads have always been an important metric for us internally given our strong focus on embedding contractual rent growth into our leases and we believe this metric helps provide an even more fulsome picture of the primary drivers of our base rent growth over time.
Notably, as of the second quarter even after removing the positive impact of prior year collections. Our core operating earnings per share has returned to pre-pandemic 2019 levels. This achievement is a testament to our portfolio's quality and resiliency. We also converted more cash basis tenants back to accrual in the second quarter continuing a trend over the last year following improvement in both collections and underlying tenant credit.
The resulting reversal of straight-line rent reserves contributed $3.5 million or $0.02 per share to Nareit FFO which was not included in prior guidance. We now have about 12% of our ABR remaining on a cash basis of accounting. Turning to our updated current year guidance we refer you to page 6 of our second quarter earnings presentation, specifically the column indicating the drivers of the increase in our Nareit FFO range at the midpoint.
The biggest change was to our same property NOI growth forecast of 100 basis points of the midpoint positively impacting our Nareit FFO per share outlook by about $0.06. All the positive operating trends we are seeing that Jim outlined and that impacted our second quarter results are supportive of the 100 basis point increase for the full year.
The primary drivers include higher average commenced occupancy benefiting both base rent and expense recoveries and better collections on cash basis tenants leading to decreasing levels of uncollectible lease income. Another driver of the increase is non-cash revenues up $0.03 per share at the midpoint primarily driven by the impact on the straight-line rent from the conversion of cash basis tenants back to accrual during the second quarter. Recall that we only include these impacts and results and guidance on an as-converted basis.
Our balance sheet remains in excellent condition and in the quarter, with full capacity on our revolver with total leverage at the bottom end of our targeted range of five to 5.5 times net debt to EBITDA. This strong balance sheet position enabled us to take advantage of an opportunity to repurchase our shares in the second half of June.
We bought back 1.3 million shares for about $75 million representing an average price of $58.25 per share. As Lisa mentioned this price implied a cap rate in the a price at which we would happily buy assets that match Regency's quality and growth profile. Notably, the share repurchase was about a penny accretive to 2022 earnings.
The debt markets have remained volatile and the movement in both treasuries and spreads has impacted our cost of debt capital. But, with no unsecured maturities until 2024 we have the luxury to remain patient waiting for more opportunistic windows. We are also reminded that during periods of dislocation in the capital markets, the importance of our significant level of free cash flow was highlighted which at north of a $130 million annually, allows us to continue investing accretively.
Looking ahead from an operational perspective, inflationary impacts on the consumer combined with a softer economic backdrop introduces some uncertainty into our outlook beyond 2022. But as we reflect on our resiliency throughout the pandemic the impacts from which could be described as indiscriminate towards property location and tenant quality. We believe Regency's portfolio is well positioned ahead of a more traditional economic recession with greater bifurcation in performance across the quality spectrums of trade area locations, property formats and tenant exposures.
As Lisa indicated, you won't hear us say we're immune to the impacts of a downturn but the good news is that we are starting from a position of strength. Our leasing pipelines are very active, feature in a healthy mix tenant demand across all markets, categories and sizes with retention rates that continue to be above historical averages. One silver lining of the pandemic, is that the less resilient operators were called out during 2020 and our tenant base has emerged even stronger providing stable footing in our occupancy.
We also have a strong value creation pipeline fully funded with free cash flow with visibility to more meaningful NOI contributions in 2023 and 2024 and maybe most importantly as we consider the rising economic uncertainties. We have one of the strongest balance sheets in the sector allowing us the ability to remain on offense and create value through investment should opportunities arise.
With that, we look forward to taking your questions.
[Operator Instructions] Our first question comes from the line of Greg McGinniss with Scotiabank. Please proceed with your question.
Hi, good morning. So Regency, GLA was down from prior quarters at 1.3 million square feet, is that just a function of more limited anchor leasing because obviously the number of leases was quite good. Or how should we be interpreting that result?
Greg, this is Jim. Great question. And be happy to kind of explain what's going on there. Basically, the total number of transactions was right in line with trailing 12 months as the new leasing volumes and quite frankly rent spreads were very solid as well, but overall the GLA leased, was slightly down for the quarter due to the renewals and it's really the mix between anchors and shops, typically we're about 50-50 mix. This particular quarter, it was 70-30 heavy on shops, which basically smaller square footage averages. It also relates to that ABR of $34.43, which is a little higher than the average.
So as I looked at that and don't tell anybody but I looked at the July numbers, from a renewal standpoint is to satisfy my own curiosity, July numbers are significantly on the renewal side, significantly higher than our average monthly rates and the mix is back where the anchors should be. So, I think the anomaly will be sorted out prior to year-end. So I'm not too worried about that. In addition, I just mentioned that the overall renewal retention rate is over to right at 80%, which is again higher than our typical average.
Okay. So it sounds like it's just a timing issue then.
It really is.
Okay. Great. And second question from me is with the post pandemic migration to sub-cost sourcing suburbs and hybrid work from home seemingly here to stay. How does that impacts foot traffic you're seeing at the centers and decisions around merchandising?
Greg, I think the, foot traffic for traffic we're seeing is really back to where we've seen it before. In general our demand is very strong, really across the board, across regions as well as product type, categories are doing exceptionally well. I think are very active our grocery value, apparel, the QSRs, restaurants obviously, we're seeing a lot of good strong demand in the health fitness medical and also the Pet categories.
The mix between locals and nationals for the shop space is really relatively the same as what we've seen and really from an overall demand standpoint, I'd say just to give you a flavor on the anchors, we've got 39 available spaces today, 24 of those are either LOI or at lease. So again I think that's what the likes of TJX, Publix, Burlington, Ross, Five Below Nordstrom Rack, so those are the kinds of folks we're talking to and I think that gives you a sense for now we're seeing great shop demand but also the anchor demand is very, very strong.
Great, thank you.
I just. I think the only thing I'd add to that I think is, we remain confident in that suburban market in which we operate, kind of anchored by that dominant grocer with the need, necessity type of retailers and we think we believe we're going to continue to see demand shift towards our product type and our quality
And Greg. I'll just add really well said. But we continue, I think we sound like a broken record, but what the past 2.5 years if that's a long it's been, have really demonstrated and validated is the importance of the neighborhood community shopping center and the retail and service ecosystem and I said and I said we signed a broken record, if you went back and you listen to earnings calls prior to the pandemic and then throughout it, we feel really good about the future of our business.
Sorry, just one point of clear on the foot traffic, are you seeing any increase in mid-week traffic and do you have the data on length of today whether that's changed since pre-pandemic?
It's basically still the same. And that, remember we did as everybody did, we did get with the pandemic and we recovered really quickly and much more quickly in some markets versus others of it as we always, I said that was indiscriminate but what it was discriminate always the amount of shutdowns and so we there have not been significant differences from pre-pandemic to today.
And our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.
Good morning, thanks for taking my question. Maybe to follow-up on Greg's question here. Can you talk a little bit about the demand from tenants and maybe break it down between discretionary versus essentials. I know you have more exposure to the exceptional side but trying to understand if different types of tenants are slowing their demand or still momentum kind of continues on both sides.
I would tell you that I see the demand basically staying pretty robust across all sectors of the folks that we do business with, so we're really not seeing a category I can point to say this is falling off.
Thanks for that. And my second question, the lease spreads accelerated on a cash basis, on a GAAP basis. So, if there is there kind of a continued upward trend here and then I think you also mentioned that you have escalators in 90% of your new leases, where does that stand before and how accepting our tenants in taking on these escalators? Thanks.
Sure. Yes. The cash rent spreads are roughly this quarter right at 9%, trailing 12 months is right in that neighborhood. That mirrors what we believe long term is our target for the cash rent spreads and again we'll couple of that cash rent spread with embedded spreads that we're putting in the existing, the new leases.
The combination of that really is what and I think judicious CapEx spend that kind of gets us that net effective rent and GAAP rent spreads that we're, we're kind of look at is real answer to whether not where we're making progress in our business.
As far as the embedded, we are in this inflationary area right now, we are taking steps to raise our ask were asked between 3% and 4% on deals today which is higher, we've done in the past, and where we have a pretty good success of that, I think everybody recognizes the inflation touches everyone and we're not getting left out of the program. So we're actually having pretty good success getting that higher embedded rent steps.
And our next question comes from the line of Ki Bin Kim with Truist. Please proceed with your question.
Thanks and good morning. So you have a 240 basis point spread between signed and occupied. Could you just talk about what that ABR looks like, and how much of it is actually being accrued in the income statement already?
On the pre-lease percentage Ki Bin? This is Mike. So that's worth about $34 million up, we actually added some disclosure to our NAV page, I don't have the number, but -
Page 33
Page 33. Thanks, Christy, and you'll see that we added some disclosure to get you to the value of that pre-leased pipeline. All of that is again it's pre-lease percentage. So that's embedded into our forward outlook of same-property NOI growth. We did. I'll take this opportunity to reconfirm that we've increased our outlook for the balance of the year by 100 basis points. It is largely driven by higher commenced occupancy and lower move-outs in the combination of the two.
So we'll continue to deliver space, we're doing so quite successfully. It's not easy, but the team is doing a remarkable job bringing that pre-leased pipeline into production. And then lastly, the other huge element from our same property NOI outlook is uncollectible lease income, we've been just so surprised this year, how quickly that is healing and returning back to classic levels of 50 basis points, last year was 175 basis points of bad debt.
We came out thinking it be in the 100 basis points area, now we've lowered our eyes as again about 75 basis points for the balance of the year, so that implies a back half of the year. That's basically on par are getting pretty close to that historical average. So we feel to confirm the points that Jim made earlier I feel really good about the in-place tenancy, and the health of our tenants.
I can't help but just make a quick comment that while we talk about, it is extremely important to get the same but not occupied paying rent and to get back to maybe more stabilized level, I'm very happy if it stays where it is as long as our percent rent paying is also increasing because that means we're doing a lot more new leasing and so that's a good thing. So the fact that as SNL moving much and our percent rent paying is increasing, means we're doing more new leasing. So that's a really positive sign.
Great. And second question from me, when I look at your tenant list is 5.5 years tenant rosters, I can see in the strip center space, it shows your top 30 tenants, so, I'm assuming the rest is by equally as healthy. How do you think about your tenant roster today versus pre-COVID and as there are some concerns about the macro slowdown or inflation impacts on different consumer segments. How do you think your portfolio in your tenant roster handles that situation versus what might have been three years ago.
Ki Bin. I think I'll be honestly I think we're absolutely a stronger - in a stronger position today with our tenancy. Obviously, the last couple of years, really split that we, from the chaff our survivors are smarter stronger just like I said in the opening comments, they're savvy, they're reactive, they know how to get things done with a lot of adversity. And that gives me a lot of comfort and it really much going into any kind of slowdown, I feel very comfortable with the folks we've got on the roster right now.
Our next question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.
Thank you. My question is on the contractual bumps, you mentioned in the opening comments, I'm just wondering what are your annual contractual bumps generally ranging and do you have any CPI bumps in any of your existing leases?
At annual average is probably somewhere in the two to four range. CPI, we do, we've got kind of a mixed bag. We do have some CPI, but generally, I would say that's a pretty small portion. Most are stated - stated rates we have at renewal time, we got some fair market value, we're kind of shifting towards that fair market value window renewal. I think that gives - it's fair both ways and it doesn't block anybody into a predicament if you will.
So I think that's 2% to 4%. It sounds like it's a little bit higher than it was. Are you, I've been able to increase that?
I'm sorry. say that again?
This 2% to 4% bumps around a little bit higher than I'm used to hearing and I'm just wondering if you've been able to raise that in the last few years.
The 2% to 4% is new and in place is probably closer to the.
Yes, let me, I'll take that, Jim.
So, what you typically hear us talk about Craig is our portfolio-wide impact to growth. So if you look through the entirety of the portfolio, we're at 1.3% or so of growth were teetering on 1.4% as the team Jim articulated. On a deal specific basis, we're getting 2% to sometimes 4% growth on over 90% of our new leasing and that's what's helping drive that 1.3. But it's - there's 9,000 tenants that we're working through. We have move out that actually you can have a tenant moving out that was paying 3% contractual increases. So that's a, it's a mountain to move, but we're making great progress in that regard.
Great. And then if I could, a follow-up there is, I mean, I understand your appropriate caution about the macro environment, but there are articles going around saying that 50% of small businesses could go out of business in the months ahead. I find that I have not heard anyone suggest a recession as bad as the Great Recession. And the great recession had nowhere near that number of damage the small shop.
And just, are you seeing anything that would make you unduly worried about your small shops, even given the macro environment?
Craig, I'll take that one. Absolutely not. And I'll just reiterate what Jim just talked about with regards to the health of our tenant base, it sounds a little bit contradictory when we say we're coming into this, what may be what may become ever session, if it's not already from a position of strength and that meaning that the tenants that we have in place, the merchants that are in our shopping centers really have survived, I love that Jim says it's separate the wheat from the chaff, like really have survived a really difficult challenging time from a demand standpoint with COVID-19.
And so we have really strong good operators and they - even those that may pull back on maybe new store opening plans, we have the best locations and if they pullback from - okay I'm going to open two stores in this market to one, I don't see an impact to Regency whatsoever in that scenario. I will go out on the limb and agree with you and say and I could I may very well be wrong, but I don't see another GFC in the future, at least not in the next two years.
The next question comes from Craig Mailman with Citigroup. Please proceed with your question.
Hi, good morning. So this is following up on the previous question on escalators and you guys are running at above average retention rates, getting better resolution here in the past are the retailers who want to keep the space that they have - are you able to, -.or let me ask - are you giving up anything to get the higher escalators or are you getting the face rent increases that you would have wanted regardless along with a better escalators. Can you talk about the kind of the negotiation there with tenants?
I don't think we're giving anything up to negotiate market where - we're pretty good negotiators on rents and that's what we believe market is today. We're seeing other landlords moving that direction. So we're just negotiating what we believe is market today.
So as we think about kind of long-term trends in same so the structural uptick in escalators here. I mean, what do you think your portfolio could start to post, in the next couple of years as you really churn through and reset leases.
Yes, hi, Craig, it's Mike. So I'll go back to the 1.3 going 1.4. That's a big change is sound small, but it is a big change. But in the overall picture of our forward outlook on same property NOI growth, we're still the two largest contributors in the near term, will continue to be occupancy increases and lease spreads.
Certainly embedding contractual increases is important to Regency's long-term outlook and our long-term growth and we will not stop embedding those increases into our leases which we have been doing for a long period of time at this point. But right now, our eyes are on our ability to push commenced occupancy. We've talked about 2022 achieving plus or minus 100 basis points and commenced and we feel as good as we have six months ago and saying that and we have good visibility to achieving that objective and so this point if we think about even a softer economic backdrop.
Given our relative position of strength, we feel like we can grow through a period of disruption and continue to add rent paying occupancy in '23 and on previous calls, we've talked about another 100 basis points plus or minus of opportunity, more to come on when that will - more to come when we put out formal guidance for in our outlook for next year and beyond. But there is at least another 100 basis points of commenced there to get back to our peak occupancy levels, then the other major contributors lease spreads.
And Jim, spent lot of time on the 9% range. Mid to high single digits is, where we want to be, where we need to be to achieve our objectives of averaging north of 2.5 certainly 275 before redevelopment contributions and when you add in the investment, the reinvestment to our portfolio, we feel good about averaging 3% are better on a sustained basis going forward.
Okay, then maybe on the a similar kind of aspect is right now. FFO growth is a little bit impacted by the demolition collections. But with the higher retention rate you guys should theoretically have less CapEx, higher net effectives. I'm just trying to think if you - maybe it doesn't fully correct itself by '23 with as you look maybe into the outer years and not looking for guidance per se, but just a sense of where that longer-term AFFO growth in the portfolio could start to trend and how that could look relative to peers in the sector.
I'll let you handle the peers component better, so let's talk about a couple ways to interpret our got our disclosure first, so core operating earnings. I would point you right to that metric we are unique in this space and we use core operating earnings, obviously we're stripping out the impacts of anything that's non-cash. The only difference being core operating earnings and AFFO is going to be capital and when we think about capitals, we are planning and have been spending about 10% to 11% of our NOI. Every year in maintenance capital is combined with leasing capitals.
We don't see that trending materially outside of those bounds, Craig, I would probably point you more towards the upper end of that range at about 11% given the amount of space we have left to lease, it's just going to be a volume business that we probably will spend a little bit more capital, beyond and then to your point on prior year collections, so you got to eliminate the impact of prior year collections from a - to get to more of a core AFFO metric. When you do that as we think about our business going forward, our core operating earnings growth. Therefore, our AFFO growth should match or should match together, should move in lockstep with one another. Because we just don't see any kind of disproportionate moving parts between those elements.
And our next question comes from the line of Wes Golladay with Baird. Please proceed with your question.
Hi, everyone. Just want to go back to you, maybe looking at your watch list. At this point of time, is it more skewed towards and that's with capital structure issues - sounds like everything on the ground levels come pretty good.
I think generally that's probably yes the right answer. There are a couple of folks on there that really don't have debt issues as much as they got operational issues. But for the most part, you're exactly correct on that assumption.
And would you typically have a much higher recovery rate, when it's just a reorg?
Absolutely. As we look, as we look at that watch list and look at the guys that might be towards the top of that list, we do a lot of place or data and things like that to try to understand. Look at sales, where do they fit in the organization and unfortunately for the, for the vast majority of those locations we sit in the top 60% 70% of their, of their locations, which gives us great leverage when it comes to negotiating in a reorganization BK.
So in addition to that, we look at existing rents versus what we again believe market rents are. And I think we've got some pretty good opportunity for upside in a lot of those cases. So at this point, we're pretty comfortable where we are in the watch list and our position in that whole arena where it goes from here.
We have a very detailed investment strategy, but it really comes down to, we like to own, acquire, develop properties were bad news is good news?
I guess maybe. I mean it sounds like the anchor space is pretty much spoke while the vacant space. And would it be fair to say maybe you want some space back at this point. I think you mentioned you had some upside at some of these assets.
As Lisa said we like opportunity to bad news becomes good news and that's a lot of times getting those anchor spaces back and can trigger the redevelopment that you're waiting on and those are the kinds of things with watchlist tenants. Our strategic plans that we devised for every one of our assets. Our guys are, if I get it back, what am I going to do.
So we're not, surprised when it happens or if it happens, but we're ready in the event it does happen that we know where we're headed.
Got it. And then for the redevelopment. I think the comment earlier in the call was the development and redevelopment would be a positive contributor next year but more specifically for the redevelopment, do you expect it to be that net positive contribution that you have in your algorithm or is there anything special that's going to come offline that may be a little bit of a detriment to offset the positive from what's coming online next year.
More to come details wise, but on balance is going to be a major contribution on a net basis. We will continue I hope to have some opportunities to frankly take some NOI offline to set up new redevelopments, but in particular, The Abbot and The Cross in Clarendon are the two assets that the teams have been working extraordinarily hard on we've been from a financial finance perspective, very excited looking out to when those properties start to stabilize and that time is now.
The leases have been executed, great visibility into when we start - we'll start seeing some income start to come in at the very tail end of even this year, providing from this point forward, there's in those two assets and if you put our four in-process ground up developments into the bucket. By 2024, that's another $15 million plus of NOI that we are creating in the portfolio. So the short answer, we do anticipate returning to a positive contribution from redevelopments as we look into '23 and '24.
And our next question comes from the line of Ronald Camden with Morgan Stanley. Please proceed with your question.
Couple of quick ones. Just looking at the shop occupancy. It's been taking up nicely over the last 12 months. I think I heard you say earlier that there is maybe 100 basis points more to go to get to peak. Just trying to get a sense of just for some context throughout the cycles, how high does that can that occupancy get, could you get to sort of a 93 plus range or do you start trying for some structural factors? Thanks.
Yes, so the 100 basis points, by the way, was an online commenced rate. So that's shops and anchors, we look at 92.5%, 93% as a kind of a top end from a shop percent leased perspective. So that's where our eyes are, we believe in the quality of the portfolio, we believe we can replicate those ceilings and the teams are working hard to do that.
Great. And then just my next question was just trying to back to sort of the breadcrumbs of the growth algorithm. You have a really great break down sort of the same-store NOI in the sub. I see base rents are 3%. Just trying to get a handle some of the other two big lines uncollectibles. And this is year-to-date numbers uncollectible adding 4.7% recoveries a headwind of 3.9%, as you're thinking about sort of the future and those sort of presumably normalized, is this sort of the right new way to think about it in terms of the long-term growth prospects of the company?
Let's first make some short-term comments and then we'll get into the long, but we do see. I appreciate you noted that new disclosure, by the way. So, and I hope everyone takes it takes a look at that. I think it's really helpful, what it first does is highlights that base rent growth as we've been trying to point people's eyes to is the best line item to look at for the health and forward quality of our earnings stream in the near term and what you see there is yes, 3% growth outside of the noise in the first half of this year, we should do better than that to finish out the year on the base rent line.
We will, that will not be a decelerating impact, that will be an accelerated impact. We will continue to have tailwind as I mentioned previously from bad debt expense or uncollectible lease income as the portfolio very quickly moves back to historical averages, again 175 basis points last year moving to about 75 basis points this year, 50 basis points around being in our long-term sustained average.
There is noise in the other line items. We've got, it was just a lot of COVID era type of adjustments still moving through really 2021 that are impacting all of the other components of growth, but I think looking forward, I would, my our eyes are focused on base rent growth, the amplified impact of recovery income as you lease up space and raise your commenced occupancy, you're going to amplify that growth by picking up margin on your collections and then we add into that the investment and what we just talked about with Wes and the contribution from redevelopments and you put all that in into the bucket and we feel great about achieving our long-term objectives of 3% or better through redevelopments and in the short term we should do better than that from an occupancy perspective, because we have room to grow rent paying occupancy.
And also, that's certainly the same property NOI growth kind of long-term growth model, which is a very large component of the going forward growth for the company and, but we also have the ability to invest the very high level of free cash flow that we generate, which will also be an important part of our long-term growth of core operating earnings per share and point you to our investor presentation, not just a disclosure where we do a very - thank you team, a very nice job of illustrating our growth model going forward.
And that's on a stabilized basis, so it's not even actually accounting for the occupancy increases that we are seeing today and we will continue to see in the near future.
And the next question comes from the line of Hong Zhang with JPMorgan. Please proceed with your question.
Yes, hi. I think in the past you've talked about potentially reaching back to 96% leased occupancy as early as late next year. I guess, given your, your commentary about the uncertainty that's in the market right now, has your thinking around that changed at all?
I'm happy to jump in. I will reiterate again that regardless of the macro backdrop, we feel really confident about the quality of our properties and our going-forward health of our business, we were just re-it - just repeating really what we said in our prepared remarks, we have - we're entering this with a position of strength as we have worked through a lot of dislocation and disruption through the past two years, our operators, our tenants, our merchants are in an extremely healthy position and we believe in. Jim talked about how we've watched them to be adaptive and react to and be flexible and I really believe that even if there is softening consumer demand, which we're not seeing because of again our trade areas are supportive of consumers that are able to absorb a little bit more, but even if there is softening demand, we truly believe that they're going to be able to adapt to be flexible as we've seen them already do and then with that retailers and merchants play a long-term game as well.
It's not just about the next 12 months and they're also positioning our companies for future growth. And they're going to need new locations for that future growth and they're going to desire to be in the best locations and we feel that we are really well positioned to be able to work with them and help them meet their goals as well.
And the next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.
Hi, everyone. Good morning. And I'm sorry, I know we spent probably too much time on this, but it's important. I'll try to be pointed because investors definitely seem concerned about the forward outlook of the business trends in the second half, much more so than strong results and even pipeline commentary, but know look we believe Regency is very well positioned, but could you speak to actual conversations with tenants and prospective tenants?
And I guess the question is are we sensing or seeing any slowdowns in decision making right now or is this exercise really mostly conjecture at this point. That's kind of what I'm trying to figure out.
Derek, I would tell you that we're fresh of CSC Las Vegas. Trust me. We have been at this game, a long time, and I'm looking for smoke more than anybody, and just not seeing it today. There is continued positive attitude towards growth, deals are getting done and yes, we're looking hard, but you're not seeing any cracks at this point in the armor.
Thank you. That's helpful. And that's also in line with peer commentary just I guess, sticking on leasing. So the Abbott and Boston, I was wondering if you can just get an update on the early leasing there and tenant interest. I know it's stabilized at 24. Right, but you do have some rents commencing. I think in the back half of this year. So it is really any color on the demand, the interest of this mixed use asset and really how you feel about the project and how perspective tenants are reacting as well. Thank you.
Sure. The Abbott is nearing construction completion. It looks fantastic. If you get an opportunity up in the Harvard areas please poke your head and I think you'd be impressed with what we've accomplished up there. Leasing momentum is strong, we're 100% leased on our retail, it was, it was a little slow on the office side coming out of COVID, they were, close to go, but we have had great current opportunity on the office side, and I believe we just signed. there we go. just off the press, just signed at least on the majority of our office space in the tower.
So very, very positive news. The, like I said, the project looks great, tenants are under construction should be opening up and now that we've got this office lease executed, we will have a good report for next quarter.
And then next question comes from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your question.
Hi, good morning. It's Eric on for Juan. I was just hoping if you could talk about how your tenant underwriting has changed post pandemic and kind of your thoughts today given the potential slowdown in the economy.
I think our underwriting really is, has been consistent. We our pretty conservative in underwriting we embed contingencies we've increases contingencies as we saw interest rates increase as we saw a slowdown from supplies and other things. So I think our underwriting has continued to keep up with the moving parts in the economy and from an underwriting standpoint we still are able to underwrite deals. It's still meet our threshold from a yield perspective with good visibility towards expectation for costs.
So, Eric, I'll jump in and add. I don't the way your question was framed I think we look at tenant underwriting whether in the operations side of business or project underwriting in the investment side of business for all seasons and we don't, necessarily look at the economic backdrop and change, where we have a very focused strategy on our merchandising mix and what types of operators.
We want to partner with and do business with and that's been consistent through all seasons and all economic cycles. And we make adjustments on the margins in our investment activity to account for or provide for a changing landscape in costs, as you would expect us to do. But really, we don't you push the accelerator or push on the brakes materially in any way we apply our very long long-standing well-honed strategy on both, on both sides.
Okay, Thank you. And then just follow up on foot traffic given your defensive portfolio, I was just curious how you're Centers performing in versus the competition in the respective trade markets.
As you would expect them to perform. We are not, we believe we own market dominant centers, trade area dominant centers, that is our objective. We call it our DNA approach to the investment, we use premier high quality as these designations. And, the reason we use those designations as they outperform on several metrics, one of which is tenant demand consumer demand and they continue to outperform on consumer demand. Our centers are the preferred Centers generally in those, in those preferred trade areas, foot traffic levels would support that outperformance, sales would support that performance, tenant demand and rents.
Yes, I think the best or the best scorecard that you can really use for that. Yes, you can look at foot traffic and should, but what are - what our average base rents because that's what the market is demanding. So that's what the retailers are using as their basis for the sales that they can produce and sales and in both cases as we've already talked about earlier today. As Jim did, we talked about bankruptcies. Regency is in the very top percentage in both of those categories.
And our next question comes from the line of Paulina Rojas with Green Street. Please proceed with your question.
Hi, you talked about the strength of your tenants but in terms of your small shop cohort I hear from you and your peers, but they are, they are stronger than in the past. And aside of the fact that they are survivors from a period of disruption which is yes itself very telling are you able to track any other hard metric as sales leverage to substantiate that statement, that they are stronger than in the past and I know the access to information is limited, but I was wondering if there is anything at all, you can, that it's more and tangible you can focus on and track over time?
Certainly, sales has been a major indicator in the past and we continue to use that with our small shop tenants, we are able to get that kind of reporting. So that's probably our best metric to at least judge historical performance. We obviously look hard to credit going in, but it's also an important factor. Small shop tenants is their past performance.
From an operator standpoint, you can walk in a retailer's store and get a pretty good sense of whether they're - whether they're a good retailer not and that's, that's what our folks in the field, do an excellent job of staying close to our, to our tenants and you can read the tea leaves and that's I mean it's hard to put it on paper and give you a metric, but that's how we, that's how we, you have to run your business to be able to stay ahead of that and I think that's one of the, one of the things we do very, very well at the asset manager level is really understanding what's going on behind those tenant doors.
You mentioned sales how frequently can you - can you have access to their sales performance?
We generally take a hard dive on an annual basis.
And I think we hear, and I know Paulina you've heard us talk about this as well. We have 22, maybe a little bit more than 20 offices across the country with people in the - on - in the local markets that are working with our tenants really closely.
So we absolutely look at our reported sales, but also just having good relationships with our, with our tenants, with our customers is really important to understanding the health of their businesses, the challenges they may be facing, I think it is we really rose above some of the challenges in the pandemic because of that and we will continue to do so in good times and in bad times.
And so that's also an important part of it. So it's not a hard and fast metric and nothing that we can actually report, but it's certainly those relationships, those conversations and understanding what's important to them.
Thank you, then my other question is regarding commenced occupancy, sure decreased by 10 basis points sequentially, less than, 1Q, and that is usually affected by seasonality. Right? So and my first question. Is there any reason behind that structure sequential instrument? And the second part is and I think you mentioned you were targeting incremental 100 basis points for this year? So can you please confirm that that refers to the same property in-place occupancy and the average for the year, not end to end? I want to make sure I am understanding the target of 100 well.
That's the commenced occupancy increases that we're targeting is a period based measurement, so it will be at year-end we should be 100 basis points up from where we started. I think we're already 40 basis points through the first half of the year, so that speaks to the confidence we have in delivering space from that pre-leased pipeline over the balance of this year Paulina. That's a spot rate. So that what we're excited about is the impact on 2023.
Okay. So yes, occupancy commencements should be stronger in the back half?
Yes, it needs to be to achieve our objectives of 100. Yes, it's plus or minus 100 but we feel good about delivering the space that's again already contracted for. So it's just a matter of our tenants building out, I'm not making light of how difficult this could be, the teams are doing, I mean daily hard work delivering spaces building our spaces that we can get to rent commencement.
[Operator Instructions] Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.
Hi, you've got 12% left on cash basis accounting last quarter it was 14%, just given the trajectory you've been coming out of from the pandemic, how many quarters might it take to get to a normalized level of cash percentage of tenants on cash basis accounting?
Hi, Linda. It's Mike. Yes, I don't have a discrete answer to your question, but we're making great progress. I do think we do have some visibility to at least another 1% to 3%, kind of sticking with our policy of what a tenant needs to do and how they need to behave for us to convert them back to accrual accounting.
So we do see another 1% to 3%, I think in our near-term impact, which by the way would include another, call it two million dollars to five million dollars of non-cash straight-line rent conversions, so we don't guide on that number in the supplement, but we do talk about it on this call. Beyond that and then the question becomes will when it, what is your normal percentage of cash basis tenants and that's again a little bit harder to get a gauge on because the leasing standards also changed as we look at our historical averages.
So, but we think our numbers are probably in the mid, mid-single digit area, the 5% to 8% range, somewhere in that area, plus or minus, so we've got a little bit of room to run, but we're nearing the end and we'll continue to - we'll continue to make progress as we have,
And I appreciate the question and the concern for, it's a metric that we have all begun to report, but the important thing to really focus on is bad debt expense because tenants can be a cash basis tenant by paying rent. And as Mike said earlier we are seeing our bad debt expense return to more typical historical levels. That's the more important thing that we really, and that's what we focus on here as well.
Thanks for that. And then the jobs report came out this morning and was better than expected with decent hiring in retail, including grocery and general merchandise. Are you hearing this as well from your tenants in terms of using labor shortages?
I think generally speaking, we have seen in the same conversations that we're having with our tenants that we have seen things is over, I think we even said that last quarter, so it's a little more than even a quarter where we've seen some easing of both labor shortages and also supply chain difficulties, both.
And our next question comes from the line of Michael Gorman with BTIG. Please proceed with your question.
Yes, thanks, good morning. And we're running a little long, so I'll try to be quick. But stepping back for a minute and looking longer-term Lisa, you talked about ESG and some of the targets you'd laid out in your new report from the spring and I'm just wondering if you could talk about how we should think about the capital commitment to these initiatives over the next eight to 10 years or so and internally how Regency is approaching underwriting the different projects and different initiatives that you have on the emissions front.
It is not going to - there will be an additional cost and incremental costs, but there is also savings as we do implement some of the energy efficiency things that we've already - we've done over the past 13 years from a water conservation LED lighting and we'll continue to do and we'll also continue to perhaps generate some revenues from solar panels. And so from a material standpoint, it's not material.
What's more important is the fact that we are really focused on embodied responsibility and corporate responsibility within our company and it truly is a foundational strategy and as we think about and talk about new investment opportunities, it is part of the conversation. Every acquisition, every development, we will look at the impact essentially to our targets into our goals and objectives. But it's not a material cost.
If I may just add a little bit more detail, therefore you, Michael, 80% of our objectives can be achieved by really pulling two levers, right? Through 2030. It's LED light conversions and it's addition of solar panels on property. So to Lisa's point, LED light version is already part of our plan. So that is in effect a neutral element of our expense rate and then solar panels is points where that's where you actually save some money, and in fact, you have an ROI you make money on the solar panel installations.
So just for a little bit more added color, the balance. So, where the other 20% going to come from? Innovation is going to play a big role and then we might have to buy some racks as well which they'll be high quality racks and we'll be very smart with that.
That's great color. Thank you. And just maybe following up on that. I understand that it's quarter Regency anyway, but I'm wondering as the entire market evolves is you're having more conversations around developments, redevelopments, maybe even acquisitions and lease discussions. I'm wondering if you're seeing Regency's dedication to ESG come up in those conversations as may be a competitive advantage is something that maybe helps in these negotiations and then these discussions and for regular way business.
Let me start on the capital market side, yes. Whether at the tapping the unsecured bond markets or whether it's - we have a bit of a financial incentive within our revolver, but we're seeing, we're seeing it permeate through the capital markets and we do believe ultimately whether it's access or whether it's pricing reductions there will be some marginal benefit us on the operation side.
On the operational side, I would say there are Kindred Spirits that appreciate what you do but I don't think it's ingrained in the at the real estate level as much as is the capital market and then we do development.
And then I'll take the transaction side. On the transaction, we've actually we were part of a bid process, if you will, on a portfolio of properties, unfortunately we were not successful in it, it was a major part of the bid as to the efforts that the company is putting into the E in ESG. So yes, it is, it is very important to other stakeholders, as well.
Thank you, everyone. At this time we have reached the end of the question and answer session. And I would now like to turn the call back over to Lisa Palmer for any closing remarks.
Thank you all very much, appreciate your time with us as some of you may be heading to the, shore or the beach or the Long Island for the weekend. Enjoy your weekend. Thanks all.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.