Regency Centers Corp (REG) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Regency Centers Fourth Quarter 2017 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I'd like to turn the conference over to your host, Laura Clark. Thank you. You may begin.

Good morning, and welcome to Regency's Fourth Quarter 2017 Earnings Conference Call.

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've provided a reconciliation of these measures to their comparable GAAP measures in our earnings release and financial supplement, which can be found on our Investor Relations website.

Joining me today are Hap Stein, our Chairman and CEO; Lisa Palmer, our President and CFO; Mac Chandler, EVP of Investments; Jim Thompson, EVP of Operations; Mike Mas, Managing Director of Finance; and Chris Leavitt, SVP and Treasurer.

It was great seeing many of you in New York at our 2018 Investor Day, and we sincerely appreciate the time you spent with us. Since not much has changed since then, we will be brief today. For those of you that were not able to attend or listen to the live webcast, please reference the replay and presentation on our website.

I will now turn the call over to Hap.

Thanks, Laura. 2017 was truly a remarkable year for Regency, as our people continue to demonstrate that they are the best professionals in the business. I'm extremely proud of Regency's 2017 accomplishments and how well positioned we are to continue to achieve our strategic objectives.

To begin, in spite of the challenges in retail real estate, the team was able to push the same property portfolio to an impressive 96.3% leased and achieve same property NOI growth of 3.6%, which was the sixth consecutive year above 3.5%. This places Regency at the top of the shopping center sector for both of these metrics.

Even though store closures accelerated and expansions of some retailers were more deliberate, we are continuing to experience healthy demand from successful operators. During the year, our team continued to identify and start outstanding developments and redevelopments at compelling yields, bringing our in-process projects to over $0.5 billion. We also further fortified Regency's financial position. And in times of market volatility like today, this is a very poignant reminder of why a strong balance sheet remains a critical component of our strategy. In addition, we successfully completed the merger with Equity One, which has met or exceeded our high expectations. The merger not only made us a larger company, but a better company, and that's the most important thing.

To further enhance the quality and NOI growth portfolio of our portfolio, we sold a number of lower growth assets and purchased premier centers with superior NOI growth prospects, some of which were highlighted in Investor Day. It is worth noting that given the existing quality of our portfolio, Regency's capital recycling strategy is flexible and very modest at an average of 1% to 2% of asset footings.

Yesterday, we announced the implementation of a share repurchase program. This provides further flexibility to execute our capital recycling plan when pricing is compelling. The impact on leverage should be essentially neutral due to the modest size of the program. And similar to acquisitions, we'd be funding the share repurchases with the sale of lower growth assets.

Regency's combination of accomplishments was truly unequaled, as evidenced by our superior shareholder returns over the last 1-, 3- and 5-year periods. As you can imagine, our successes in 2017 and over the last 5 years had been extremely gratifying. That said, given the ever-changing and challenging environment in which we operate, we fully realize that we can't afford to rest on our laurels. Our commitment to staying relevant and to being best-in-class will enable our deep and talented team to continue to capitalize on our unequaled combination of strategic advantages, to execute our strategy and to grow shareholder value.

Lisa?

Thank you, Hap, and good morning, everyone. I want to start by echoing Laura's comments on Investor Day. Thank you all for taking the time to join us, whether in person or through the webcast. We're thankful for your support of Regency and hope you found the time spent valuable.

2017 demonstrated another strong year of performance, as Hap said. Full year results were driven by strong base rent growth of 3.5%, a testament to our premier portfolio. And looking to 2018, there have been no changes to the previously provided NAREIT FFO and operating FFO guidance ranges.

As a reminder from Investor Day, operating FFO eliminates nonrecurring items as well as certain noncash accounting adjustments. In our view, this metric better reflects the operating performance of our business and demonstrates our ability to grow cash earnings.

While we will continue to discuss operating FFO with you, we do feel it is important to emphasize that NAREIT FFO is currently the better metric for comparability across the REIT sector, given the standard definition. Therefore, we are asking the analyst community to report NAREIT FFO for consensus purposes going forward.

As we've discussed, we believe our unequaled combination of strategic advantages will enable us to consistently deliver same property NOI growth of 3% and operating FFO growth of 5% to 7% over the long term. With 2017 operating FFO growth of 9% and our projected growth this year, our 2-year compounded earnings growth will meet this objective.

Our 2018 same property NOI growth guidance also remains unchanged. At Investor Day, I mentioned that this guidance incorporates some tenant fallout from move-outs, store closures and bankruptcies. Since that time, there have been several store closure announcements, including Toys "R" Us, and our exposure continues to be minimal. Announcements to date were incorporated in our guidance.

I would like to reiterate that given what we know today, we still expect to finish in the upper half of our 2.25% to 3.25% range, which would represent maintaining occupancy in the 96% area. With Regency's prospects to grow operating FFO and free cash flow and given our low payout ratio, we increased our dividend, which would represent nearly 6% growth for the full year.

As Hap said, 2017 was a remarkable year for Regency with the successful merger and integration of Equity One and another year of impressive results. I can't state enough how proud I am of our team over this past year.

That concludes our prepared remarks and we now welcome your questions.

(Operator Instructions) Our first question is from Ki Bin Kim from SunTrust Robinson Humphrey.

Could you -- so in your press release, you guys mentioned some of the heavier anchor leasing driving some volatility in TIs and perhaps rent spreads. Could you provide a little more color on that and if there's anything -- any more similar items like that in the horizon?

Ki, this is Jim. I'll answer that. As you mentioned, the Q4 was relatively small sample size to begin with, but we did have high anchor activity. 6% of that activity was in the anchor side, which is about double of what we normally expect to see. That equates really to 9 transactions on the anchor side. And just to kind of give you a flavor for the quality of those transactions, we had 2 HomeGoods, a Dick's, ULTA and a Michaels. We did have one outlier in Louisiana, which was a negative 59% rent growth, backfilling a very difficult space. And the best news in all of that is that, that asset is now ready for disposition. On spreads, when I step back and look at a full year -- in the full year context, we were 8% overall. If you break down new deals from shop space, it was a 10% growth, and new deal anchor was 12% when you net out the Hobby Lobby deal from earlier in the year we talked about in the backfill of Sports Authority. So in general, I think rent spreads look pretty good overall. Looking at moderating TI, again, driven primarily due to that high anchor leasing activity. Anchors typically require a little higher TI, but in this particular subset, we had some intricate white box work that needed to be performed as well. But overall, I would tell you that the quality of the retenanting is first and foremost in our minds, and we will continue to deploy capital astutely to ensure we get the best-in-class retailers to remerchandise our centers.

And just to add a little bit of color. Our outlook hasn't changed. You've heard us say this when we announced the merger at Investor Day, that one of the compelling factors in the Equity One merger was a lot of the inherent mark-to-market of near-term expiring anchor leases, and we still see that over the next 2 to 3 years.

And if you combine those with the contractual rent increases that we're being able to generate, as Lisa said, I think that we're well positioned to achieve our strategic objective of 3-plus percent same property NOI growth over the long term.

Okay. And the second question, I appreciate the share repurchase announcement. But if the environment -- the cost of capital environment stays this way, does that change your thinking about underwriting at all or buying anything at all? Even though it's $150 million, does that change at all at a sub-5 cap?

I would say it's historic. Our capital allocation recycling plan is as follows, and we've been real consistent about this. We start with free cash flow. We sell 1% to 2% of lower growth centers, and we reinvest that capital into compelling and outstanding development opportunities and acquisitions with superior NOI growth prospects. And we've added what we think is the flexibility to invest, with the stock buyback announcement, another compelling investment opportunity, and that is to potentially buy back our stock. And when it makes sense to invest in the stock and repurchase shares in the stock, we'll do that. It could be a very compelling investment opportunity, and we're going to do all this in a way that's going to essentially be leverage neutral, because more than anything else, in a volatile environment, maintaining a strong balance sheet is critically important.

And I would emphasize, and Hap started with this in terms of being very consistent about our capital recycling strategy, it is an important part of our strategy. And we do believe that our outperformance and our operating metrics and our NOI isn't by accident. And it is important for us to fortify that NOI growth to continually enhance our portfolio. It's something we've done for the past 21 years, and we will continue to do that.

And we've done it on an incremental basis to where we don't have to do it on a significant basis. And on that incremental basis, it's paid dividends from NOI growth standpoint and from a portfolio quality standpoint.

Our next question is from Christy McElroy from Citigroup.

This is Katy McConnell on for Christy. Given many of your peers are pulling back on acquisitions in this environment, can you talk a little bit about your willingness to continue to be a buyer today? And can you also talk about any changes you're seeing in market pricing and the buyer pools that are coming to the table today?

Well, I'll start with capital allocation. As I said, I think we've been pretty clear about this, is when it makes sense to sell assets and reinvest those proceeds into acquisitions, we'll do that. But we now have the flexibility of rather than doing that, it may be a more compelling investment to buy our shopping centers. If you look at our implied cap rate today at somewhere north of 6%, the quality of our portfolio, that seems very, very interesting to us. And that's part of the reason that we decided to put in place a stock buyback program. And I'll turn it over to Mac to respond to what may be happening in the market for shopping centers.

Sure thing. Really what we're seeing is, starting with the A quality centers, the types of centers that we're looking to acquire, still a tremendous amount of demand for centers in -- with productive, dominant grocers in the best markets. And in part, there's really very little supply coming into the market. And we saw that in '17 and probably we'll see that again in '18. So that scarcity is also driving the demand there for the highest quality centers. In the B category, sort of the B shopping centers, transactions are still clearing, but buyers are a little more skeptical and a little bit of softening there on pricing. Buyers are pricing in some risk, whether that's real or perceived more so than, say, a year ago. And then further down the scale, when you get down to power centers, some further softening there, and I'd say, fewer buyers in that product type out there.

Our next question is from Jeremy Metz from BMO Capital markets.

Mac, just following up on your comments on the shifting pricing environment, especially for the noncore lower growth stuff, any chance you can better quantify how much it's really moved in the past, call it, 60 to 90 days?

Jeremy, it's always a tough question to answer, because it's so dependent on the grocer or the market, even down to the intersection. So -- and I think -- what I would say is, as you get -- if you get closer to the larger centers, $50 million and above, probably the gap is more so than the smaller less than $50 million centers. So I know it's not a very specific answer, but 50 to 75 basis points over not 60, 90 days, but over, say, 6 months. But it's one of those questions that it's tough to be very specific. We see different shades of demand and transactions in different markets.

That's helpful. And then you guys mentioned getting a couple of those Toys "R" Us leases back. Once you get those back, would you look to re-lease those as is or possibly break them up? And then just what's the mark-to-market on those today in their current configuration?

Jeremy, we expect to get -- of the 5 Toys, we expect to get 2 of them back. Quite frankly, Toys reached out for rent reduction, which we declined. And we'd rather control our real estate and upgrade our merchandising. On one of those locations, we are engaged with a tenant for reletting. The other asset is in Boston, a well-merchandised center. So we'll look at breaking boxes up. I think the Boston space is a pretty good size box so that -- we'll look at all opportunities. What we're looking for is, again, best-in-class merchants. And we'll do, we think, an astute job of trying to select that backfill opportunity at the right market rate.

Hence probably fair to assume a pretty significant mark-to-market, is that fair?

As you can expect, the 3 we didn't get back, we think there is a significant opportunity. The ones that they rejected were the higher rent deals, I think were $14.50 -- roughly $14.38 in rent. So I would -- I suspect there may be a little moderation, but it depends on how -- whether we end up breaking up boxes or going with full refill.

Okay. And last question from me, Hap. I know we're only about a month removed from your Investor Day, so not a lot of time has obviously passed. I wonder if you feel any different today with regards to the retail environment post-tax reform? Are you feeling more encouraged today or it's generally the same as it's been a few weeks ago?

It's too early to tell. I mean, obviously, what we've seen is, as it relates to tax reform, is I think it feels like there's more growth in the economy, but we're also seeing more volatility in the capital markets. And how that's going to play out remains to be seen. But we continue to see robust demand from the better operators, which I think is good. I don't -- wouldn't say the demand has picked up. It certainly hasn't slackened off. We're 96.3% leased; 92 -- almost 92.5% on shop space. So we're starting from a pretty strong position. And so the underlying fundamentals of the business appear to be extremely healthy.

Our next question is from Craig Schmidt from Bank of America.

This is [Justin] on for Craig this morning. Just wanted to go back to market transactions for a second. If we look at the cap rate that you have in your guidance assumption of 7.25, can you give us an indication of how wide that range could be?

Mac, you want to answer that question?

Sure thing. [Jeff], some of it really depends on an asset-by-asset selection. I'll give you an example. When you look at what we sold in 2017, what affected our aggregate cap rate greatly was Westwood Towers, and that was really an apartment building tower within our Westwood project in which the lessee had a fixed option to buy the property at a fixed price. And so that cap rate actually skewed quite a bit the aggregate cap rate there. So when it comes to 2018, it'll depend so much -- somewhat on the product mix. So probably too soon to say exactly what the range is going to be, but we're seeing good activity on these -- on the properties that we want to sell. It does shift a little bit. As the year goes on, we constantly are adjusting sort of what we take to market and what clears. So can't get much more clear at this point. It really is an asset-by-asset selection, and they eventually all roll up. And that's why we give that plus or minus guidance there.

No, that's fair. And can you remind us which geographical regions you want to remain in and grow in versus shrink?

Sure. Mac can follow back up on this, but we went through -- I think we went over this at Investor Day in detail. And it might be worth your while to go back, but we did a -- we worked with CoStar to do an extensive market study to look at underlying demographics in the various markets, to look at supply constraints and to look at opportunities to have a meaningful platform. And the good news is, is that 95% of our capital is now deployed in the markets where we want to be long term, and that includes gateway markets; that includes stem markets; that includes growth markets. And it's a -- in our mind, it's in 18-hour cities, like Atlanta and Dallas. So we've got a wonderful canvas on which to invest in. We did identify -- we have identified 2 markets where it may make sense for us to add a presence to. We're going to be evaluating that in the months to come. But we've got -- the target markets we're in right now we have a presence. We've got enough to say grace over if we can find opportunities and ability to build a platform in those 2 -- other 2 markets, great. If not, we're going to be fine. So...

And the other 5% isn't necessarily concentrated in any one market that we're going to be exiting a market per se. When we talk about our capital recycling strategy and our property sales, as Hap mentioned, we're targeting our lower growth assets. So it's an asset-by-asset selection rather than a market selection.

Correct. And I think that's important to note. A number of those 5% are -- that are in outside of what you might call our core markets, many of those are still really good shopping centers. I mean, I think offhand, a Publix-anchored center in Tallahassee, Florida where Publix's performance is extraordinary, and that center is close to 100% leased. And we have a number of assets like that, that we can still effectively manage and are still good long-term assets, but they're not in the markets we identify from a target standpoint. Is there anything you want to add to that, Mac?

No, I think that covers it. We haven't made any public announcements of us exiting one specific market. Nothing like that. It's really an asset-by-asset selection as mentioned.

Our next question is from Brian Hawthorne from RBC Capital Markets.

So just kind of building on the geographical analysis. Can you talk about where you're seeing the most demand by region? And then also, can you talk about the hardest space to lease, whether it's by geography, size or location in the center?

Jim?

We're seeing good solid demand really across the country. I couldn't really rifle shot any particular weakness or outstanding performer. But across the board, I'd say our demand is there. Within a shopping center, there's always boxes that are unusual in size. And that's when we get creative and create the right box, whether we tear down the back portion to create a box that is relevant in today's perspective. But generally, I think we can get pretty creative to make sure that we create the right size boxes for what the market demands today.

And the other part of our -- which we went over at Investor Day was what we call our DNA analysis, in where we had a market study that identified the markets we want to be in. We also did a study of what are the corners that we want to be in, the trade areas that have the right demographics, right purchasing power, average household income plus population density, the right education level, those factors and supply constraints. And so our capital is deployed in premier shopping centers that are in great locations throughout the country.

Our next question is from Nick Yulico from UBS.

This is Greg McGinniss on with Nick. Just looking at the Hewlett Crossing purchase, [Jewel AC] was a bit smaller than usual in very dense areas. Should we expect a redevelopment opportunity there? Also with the expense of pricing for A quality assets, are acquisitions generally going to be centered around redevelopment opportunities?

Mac?

Yes, happy to take that one. In that particular Hewlett project, we're expecting a modest redevelopment. It's not a large-scale one. The property performance worked very well today. It's a -- it needs a little bit of a refresh, but not a full-blown one by any stretch. It is a smaller asset, but we like it. It's got great growth. It's in the neighborhood. We think it's got great competitive advantages over the long term. There's very little product in that market. It's got parking, which other sort of street retail doesn't have. So we like that a lot. I'd also say that we love acquisitions where there is a major redevelopment component on it, because we compete really well. Some of the institutions don't have the platform that we have. And even our peers don't have the platform that we do. So we love opportunities like that. Town & Country, that we discussed at the Investor Day is a great example of that, and that's where the family that owns it really recognized our platform and our ability to transform the property. And that was a significant factor for them when they brought us into the partnership. So we relish those opportunities to use our platform to our advantage.

And reiterating on that is, from an investment and capital allocation standpoint, priority one, our value-add redevelopments and

developments and then outstanding acquisitions with superior NOI growth prospects. But value-add redevelopments and developments are priority one from where we're going to prioritize the investment of capital.

And you mentioned Town & Country. Is that still looking like it's probably going to be a year out from now?

Yes.

Still holding with that schedule.

Okay. And during the Investor Day, you highlighted Toys and Sears as being potential occupancy risks. And were the 2 Toys rejected in line with your expectations? And what are your thoughts on potential closures from the 5 Sears and Kmart leases?

I'll just take that from a higher level and how it's incorporated into our guidance. And Jim is welcome to add some specific color if he'd like. But just reiterating again, the 100 basis point range in our same property NOI guide of 2.25% to 3.25% does incorporate store closures, move-outs, bankruptcies. And the fact that we say that we're comfortable with -- we're still comfortable with the high-end -- the upper end of that range, which equates to about 96% leased, and the fact that we've already -- we know we've gotten 2 Toys boxes back would tell you that, yes, that was incorporated into our guidance. And the lower end of the range, we think, is reasonably conservative, but not necessarily what we're expecting in terms of how many of those we might get back. And again, so it's incorporated. 2017 bankruptcies impacted our same property NOI growth by 20 basis points, and our guidance for 2018 incorporates more than that.

I appreciate that. Just final question from me. Regarding the potential buyback, is this more likely that if you dispose $150 million in assets and there is not an equivalent level of acquisitions, it might be funded? Or is it -- if there's the potential for more disposition sales, then that money might be spent on the buyback?

I don't want to keep giving you the same answer, but I will, is that our plan is free cash flow of about $160 million, dispositions to enhance the quality of the portfolio and our NOI growth rate of 1%, 2% of lower quality assets a year. And then we'll reinvest that capital on developments first, and secondly, acquisitions. And now we have the flexibility to substitute investments in a great portfolio with great NOI growth prospects at compelling pricing, and that's our Regency's stock. And having that flexibility does remind me of a book that one of our directors, Dave O'Connor, mentioned recently that he would -- wants to write at some point in his life, which is optionality is the key to life. And I think that applies -- that flexibility and optionality applies. And we have that optionality now, and I think that's important, given the volatility in the market and where it could be a compelling use of our capital.

Great. And I agree with the optionality comment as well.

Our next question is from Vince Tibone from Green Street Advisors.

I was hoping to drill down a little bit more on the occupancy guidance. Are you able to provide a little bit more color between anchor and small shop in terms of where you think some of the bankruptcies or closure risks reside? Is that all in the anchor space? Or is there -- you see occupancy maybe falling a little bit on the shop side as well?

Move-outs and store closures happen across all the spectrum -- the full spectrum of store sizes. And don't expect it to be much different than what we've experienced in the past. So it really is -- it is almost kind of pro rata in how you think about what makes up our portfolio. So we will -- we're projecting that the lower end of that occupancy guidance is a combination of shop loss as well as some anchor loss.

But I think it's important to note, as Lisa said earlier in answer to a question, that -- in the prepared remarks, that we hope and we think there is a reasonably good chance we could end the year in the 96% leased standpoint, which would mean we've maintained the occupancy across the spectrum of anchors and shop space.

Okay, great. And then one more just on -- I know it's early, but any specific change in tenant behavior you've noticed since the passage of the tax reform bill?

No. This is Jim. I would say no. You read different articles about some excitement from business, small business owners, but really have not seen any indication of that at this point.

(Operator Instructions) And our next question comes from Steve Sakwa from Evercore ISI.

Obviously with bond yields up and stock prices down, cost of capital has changed. And I'm just curious if you guys have changed your kind of unlevered IRR hurdles for kind of both acquisitions and developments?

In a sense, yes, but number one, from a development standpoint, our returns on invested capital and our IRR returns are well in excess of whatever kind of cost of capital that you might attribute to that. So that's number one. And secondly, I think it does start with -- you've got a $160 million of free cash flow. We're going to sell 1% to 2% of assets to enhance on a long-term basis the quality of the portfolio and NOI growth. And as to where do you reinvest that capital, you reinvest that capital in acquisitions with superior NOI growth prospects, or now do you reinvest that capital into buying in our stock? And I think what we're saying is, is we see some visibility to where it may make compelling sense rather than buying acquisitions to buy and -- to repurchase our shares.

Right. I guess, it makes sense that the unlevered IRR on the stock is better than an unlevered IRR on a Class A asset I guess you can find in the market today.

I think there is a good chance that, that may be the case.

But also, do -- but do want to remind you also that it doesn't appear that we're contradicting what we're saying. We do have an asset under contract and we will honor our contract. We're excited about that opportunity.

Correct. And the other thing that I think we need to keep in mind is that you can't not continue to be in the market. We may be in a situation where we don't buy because we're reinvesting the available capital. And as I said, key thing is we're going to essentially do this in a leverage-neutral basis, maybe in the market, and we'll stay in the market because it is a volatile market and that may change also. So we're going to take the capital from the sales and invest that as astutely as makes sense.

And the acquisition that we have under contract is the Northeast opportunity that we've talked about that we also sold our forward equity offering in December to fund that.

At $70-plus per share.

Okay. And then I guess, Lisa, I mean, you sort of touched on this a bit. So as it relates to just kind of your tenant watch list and things that have fallen out, I realize there's still a little bit of time until maybe the kind of bankruptcy, at least early window in the year maybe closes or we get a little bit more finality on that. But just how are you sort of feeling about the things that were on your shadow pipeline or shadow close list or kind of watch list today versus, say, a month or 6 weeks ago?

We -- our outlook really hasn't changed since then. Toys did happen and it was within our expectations, which is why we still feel really comfortable at the upper end of our range for both same property NOI as well as occupancy. And obviously, there's others that will come this year, and we're expecting that some will come this year. And -- but our outlook has not changed from a month ago. But as you said, Steve, it's still early. And Sports Authority did surprise a lot of people with the fact that they gave all of them back. And their best surprise could happen, which is why we have incorporated more conservatism into the lower end of our range.

And I would say, Steve, it's a timing issue, because long term, we're going to be able to refill the boxes, even the ones that we haven't closed, whatever the flag may be. And more often than not, it'll be to a better retailer at better rents, not all the time, but more often than not, it'll be those things. And long term, because of the quality of the portfolio, because of the embedded mark-to-market opportunities and the contractual rent growth that we're getting, we expect to be able to generate 3-plus percent NOI growth. And that is part of our strategic plan. That means it's guaranteed. Doesn't mean there may not be a little bit of short-term pain if some of the stuff accelerates from a timing standpoint, but those tenants are on the watch list, have been on the watch list, and if it happens it's more spread out, we'll be at the upper end of the range this year. But long term, that growth rate will be in the 3%-plus range.

And if I may reiterate one more time, because I enjoy saying it, our exposure is low, and that is not an accident. And we really do believe that, that is a result of our strategy and the consistent discipline that we have exercised in executing that strategy with a very modest amount of sales annually that enables us to keep that NOI growth a very quality NOI stream.

That cumulative impact is meaningful. And if I can follow on, it's also worth noting that we have re-leased well over 95% of the bankruptcy, the recent bankruptcy spaces that we've gotten back and store closures that we've gotten back, which speaks to the quality of the portfolio.

And our next question comes from Collin Mings from Raymond James.

Just one question for me. Just as far as the development and redevelopment activities, and the platform you touched on. Just as you continue to bring additional projects into the mix, can you maybe just update us on what you're seeing on the cost side? Again, we're obviously seeing some labor pressure in terms of wages, things like that. And just how that's impacting maybe which projects you're moving forward with at this point?

Mac?

Sure. Collin, I'll be happy to answer that. We're seeing the same cost increases that you mentioned. Pretty much everyone is. I think we've budgeted for them accordingly. So we haven't been -- haven't had any tremendous surprises. And if you look at our pipeline that's in process, we've really been able to manage our costs and our returns very well. As you look for that out in the pipeline, you may see some returns drop a little bit. But when we evaluate whether we want to go forward with those, we look at long-term growth, we look at quality and we look at the very encouraging spreads to our development returns versus acquisitions. So every project stands on its own. Are we going to get -- let a small reduction in return kill a project that we believe in long term? Probably not, but we're going to look -- we look very hard at every one of those. So you'll see, as we have more stores throughout the year, our returns in aggregate are pretty consistent with past years. What you will see is probably a bigger shift in the mix between redevelopments versus developments. It's probably closer to 50-50 this year. And in past years, it's been more maybe 70-30 developments to redevelopments. So that's one of the compelling reasons why we like the Equity One merger is this embedded pipeline of redevelopment opportunities. And we're very encouraged over the next 5 years plus as we start some of these projects.

(Operator Instructions) And our next question comes from Chris Lucas from Capital One Securities.

Just 2 quick ones from me, I think. On the Toys, on the 3 remaining Toys that you have, were there any changes to the lease terms as it relates to either lease duration, rents or expense reimbursements?

No. We did not enter into any dialogue on modification leases. And as I indicated, we would cherish to get our real estate back on the other 3.

Okay. And then, I guess, maybe more -- a bigger picture context question. I think maybe 3 years ago, on one of your calls, the tenant fallout was essentially historically low. And I guess, I'm trying to understand, in the current environment, how would you rate the level of tenant fallout compared to sort of a longer time frame? Or is this a normalized level? Is this an elevated level? Or is this below average?

If I look really long term, it's still below the long-term average. But over the -- with the increased closures and bankruptcies of the past year, it did tick up a little bit. And we are, again, forecasting it to be slightly higher than last year's levels in terms of as a percentage of your GLA. But long term, at least for Regency, that trend was declining, and it stayed low and has stayed low. And I think that, that is the result of the quality of our portfolio and the fact that we really have -- I mean, if you go back to early mid-2000s and compare that portfolio, what we own then to what we own today, we've significantly enhanced the quality of our portfolio and the quality of our tenant and merchandising mix.

Yes, just further little bit of color on that, we are not immune to the disruptions and the store closures that are out there, and we don't want to -- and when we say this, we're not going to be immune to that. But we do think that the quality of the portfolio and the focus of our accounting operations team, and it's reinforced by the recycling, further insulates us from some of that, that's occurring out there, that will continue to occur, and that's where our expectation is, is we...

It's a normal part of the business.

It's a normal part of the business.

This concludes the question-and-answer session. I'd like to turn the floor back to management for any closing comments.

We appreciate your time this morning and your interest in Regency and wish that you have a wonderful weekend. Thank you very much.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.