Regency Centers Corp (REG) 2018 Q3 法說會逐字稿

Greetings, and welcome to the Regency Centers Corporation Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Laura Clark, Vice President, Capital Markets. Thank you. You may begin.

Good morning, and welcome to Regency's third quarter 2018 earnings conference call. Joining me today are Hap Stein, our Chairman and CEO; Lisa Palmer, our President and CFO; Mac Chandler, EVP of Investments; Jim Thompson, EVP of Operations; Mike Mas, Managing Director of Finance; and Chris Leavitt, SVP and Treasurer.

I would like to begin by stating that we may discuss forward-looking statements on this call. Such statements involve risk and uncertainties. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements. Please refer to our filings with the SEC, which identify important risk factors that could cause actual results to differ from those contained in forward-looking statements.

On today's call, we will also reference certain non-GAAP financial measures. We provided a reconciliation of these measures to their comparable GAAP measures in our earnings release and financial supplement, which can be found on our Investor Relations website.

Before turning the call over to Hap, I would like to thank those of you who participated in our investor perception study. We are grateful for your candor and appreciate the feedback.

Hap?

Thanks, Laura. Good morning, everyone. In all our evolving business, we continue to see the rise of retailers that have identified what it takes to remain relevant and evolve in the fall of those who have not. As we all know, Sears was once a successful brand. but in the ebb and flow of the retail industry, their declining performance over the last decade, further hindered by excessive debt, illustrates how critical it is for retailers to keep the pulse of consumer preferences and expectations. Sears' failure, along with the success of numerous winning retailers, also demonstrates the importance of having the capital to invest in the betterment of store, customer service and experience as well as a technology platform that supports multichannel retailing. The best-in-class retailers, including Amazon, Whole Foods, Kroger, Target, Publix and TJX, just to name a few, continue to make sizable investments in their bricks and mortar footprints. Thanks upon our many conversations that we've had with key retailers, it is clear that physical stores remain a very critical component of a multichannel strategy.

It's really apparent in how retailers are investing in their physical footprints and providing seamless and differentiated shopping experience to meet the evolving needs of their customers. Kroger is not only enhancing their technology and delivery platform but investing in their store through the Restock Kroger Initiative, which focuses on customer experience, value and in talent development. Safeway/Albertsons, while partnering with Instacart in rolling out Drive-up (sic) [Drive-up & Go], is also remerchandising 400 of their stores. Publix continues to heavily invest in both new and existing locations, with plans to redevelop over 130 stores this year as part of their $1.5 billion capital plan. Publix has also demonstrated a real point of differentiation with a commitment to exceptional customer service.

Going above and beyond offering aid in communities that were impacted by recent catastrophic storms is yet another example of the many ways that grocers are able to effectively connect to their shoppers and communities. Target has expressed their commitment to bricks and mortar and indicated that the store is the central part of their strategy. They plan to remodel all stores by 2020, continue to open their very successful small format store and are investing in their team as well as pickup and delivery service.

In addition, Amazon has announced an aggressive rollout of bricks and mortar locations, and this is in addition to the large investment in Whole Foods. These and other best-in-class retailers are benefiting from their proactive investments and producing solid results.

Publix reported strong comparable sales and generated an impressive nearly $1 billion in free cash flow in the first half of the year. TJX's comparable store sales rose 6% last quarter, and Target reported their largest quarterly sales growth in 13 years.

Our well-conceived and well-merchandised shopping centers located in trade areas with substantial purchasing power appeal to these and other outstanding retailers and restaurants. Regency's proven strategy, which our team has successfully executed with astute capital allocation and intense asset management, has been distinguished by sector-leading NOI growth over the last 6 years. We do spend a significant amount of time ensuring that Regency is staying relevant and employing our unequaled strategic advantages to achieve our objectives: first, earning a high-quality portfolio that sustains sector-leading, same property NOI growth; second, creating substantial value through our national development and redevelopment platform; third, maintaining a very conservative balance sheet; and fourth, engaging the team that is the best in the shopping center business, is guided by Regency's special culture and operates efficiently with industry-leading systems; and finally, earnings and dividend growth and in turn, total shareholder return that is consistently at or near the top of the shopping center sector.

JT?

Thanks, Hap.

Core fundamentals within Regency's premier portfolio remains extremely healthy. As Hap said, retailers continue to see value in locating a higher-quality shopping centers and staying close to their customer. This is evident as occupancy climbed to nearly 96% this quarter. Moveouts were the lowest they had been in 2 years, and bad debt remains very healthy. The strong fundamentals across our portfolio translated into another solid quarter of same property NOI growth, driven by base rent growth of 3.8%.

As I noted on our prior call, rent spreads in any given quarter can vary based on the mix of leasing. This quarter, we executed on several opportunities to bring valuable anchor spaces to market, resulting in new rent spreads at 35% and total rent spreads of 10%.

I'd like to take a moment and highlight our shop space performance that clearly demonstrates the quality and resilience of our portfolio. Our shop space percent leased has been 92%-plus for the last 6 quarters. We are seeing demand for space across all categories from many thriving tenants. We've been successful executing increases in starting rents. And in addition, are achieving contractual steps for shop space that average 2.5%, while judiciously managing capital commitments, all leading to strong net effective rent growth for the last 5 years.

I'd like to touch on recent retailer bankruptcies before turning it over to Mac, and I'll start with a Toys "R" Us update. Of the 5 locations originally in the portfolio, one of the locations was re-leased, and the center's been sold. One location was assumed by another retailer at auction, where we experienced 0 downtime. One has been re-leased and has already rent commenced. And the remaining 2 locations that we most recently acquired at auction, we're in active negotiations with a specialty grocer and a fitness user.

Next, we have 25 Mattress Firm locations in our portfolio. Only 5 of these leases have been formally rejected at this time. Most importantly, we are confident that with the quality of our real estate, we will have the opportunity to upgrade merchandising as we backfill any closures.

And finally, Sears, where we have 2 Kmarts and 1 Sears location. 2 of these locations were included on the initial closure list, both of which are redevelopment opportunities that we are excited to finally unlock. All 3 are located in grocery anchor shopping centers where grocery sales average over $950 per square foot, demonstrating the draw of our real estate as well as the opportunity and our ability to substantially upgrade the anchor. Average rents on these locations are less than $8 per square foot.

Though these bankruptcies will certainly impact near-term results, more importantly, the remerchandising and redevelopment opportunities triggered by recapturing this real estate will positively impact our shopping centers over the long term. Mac?

Thank you, Jim. The healthy fundamentals we are experiencing in our operating portfolio are also evident in our investment activity. We continue to find compelling ways to astutely invest our capital and build both our new development and redevelopment pipeline. Our in-process development and redevelopment projects are performing very well, with strong leasing interest and economics in line with underwriting. For example, this quarter, our Mellody Farm development in greater Chicago celebrated its grand opening with all 5 anchors, including Whole Foods, REI, and Nordstrom Rack, open for business. All have reported impressive sales exceeding expectations.

In regards to our pipeline, we continue to make progress on our development and redevelopment opportunities and are positioned to achieve our 5-year goal of $1.25 billion to $1.5 billion in starts and deliveries. Our local teams are pursuing new opportunities in our target markets, including LA, D.C. and Houston.

We are also making meaningful progress on our pipeline of infill redevelopments. We are especially excited to start the redevelopment of the office building at Market Common Clarendon and The Abbot in Cambridge, which should start in Q4 and Q1, respectively.

Further, our entitlements are progressing positively in Bethesda, which should allow our Westwood Shopping Center redevelopment to commence in next year. And while we are in early stages from a timing standpoint, we are making great strides to unlock the value creation opportunities at several premier properties, such as Costa Verde in San Diego, Town & Country in Los Angeles and Piedmont Peachtree in Atlanta's preeminent bucket market. These larger-scale pipeline opportunities and others, especially those that are mixed-use with non-retail components, take tremendous discipline, expertise and persistence. Proudly, our platform possesses these qualities. And as we've said in the past, if we decide to coinvest in a compelling non-retail component that will complement our retail, we will only partner with best-in-class, well-capitalized developers.

Moreover, we continue to unlock value through redevelopments that are more tactical in nature. This as a focus where we have enjoyed great success over the years and is an integral part of our proactive asset management and fresh look merchandising and place-making philosophy.

Current examples include Bloomingdale Square, a $19 million redevelopment started this quarter, where we are relocating and expanding a Publix into a former Walmart space and adding Home Centric and LA Fitness to the shopping center. At Gateway at Aventura, we proactively acquired the former Toys "R" Us box at auction and are now in anchor negotiations to greatly enhance the value and drawing power of this excellent property. Lastly, at Point 50 in Fairfax, Virginia, we are completely repositioning the center by building a new Whole Foods 365 as well as several new shop buildings.

Now turning to transactions. Similar to last quarter, there is a limited availability of institutional-grade shopping centers on the market. Demand and pricing-produced, high quality centers continues to be strong. On the selling side, a momentum we reported last summer -- last quarter is coming to fruition. The buyers for these centers that we are selling are still discerning the market has improved as that market got solidified and deals are getting done.

We have more visibility to expect a sales volume for late 2018 and early 2019 and have accordingly increased our disposition guidance. The outlook revision to our disposition cap rate is a reflection of the pool of properties we expect to close and not a change of pricing expectations. As a reminder, our strategy is to sell approximately 1% to 2% of our asset base annually. We invest these proceeds, along with free cash flow, into value-add development and redevelopments, high-growth acquisitions or our own stock when pricing is compelling.

This quarter, we coinvested in Ridgewood Shopping Center located inside Raleigh’s Beltline and anchored by a highly productive Whole Foods. This center had been owned by the same family for nearly 70 years. And our local presence and deep market knowledge gave us an inside track to acquire our 14th shopping center in the Raleigh market.

Lisa?

Thank you, Mac. And good morning, everyone. As Jim stated, we had another solid quarter as our high-quality portfolio continues to perform. Year-to-date, same property NOI growth of 3.8% has been driven entirely by base rent growth. So as we mentioned on our prior call and as our full year guidance indicates, while we are still projecting strong base rent growth in the fourth quarter, we do expect a deceleration in overall same property NOI growth as this strong base rent growth will be offset by 3 main drivers.

First, as expected, our real estate tax reassessment in California, triggered by our merger with Equity One, have started to come in and are retroactive to the date of acquisition. So essentially, this equates -- it actually is 2 years of real estate tax expense. While the vast majority of real estate taxes are recoverable from our tenants, we will experience a drag from the nonrecoverable portion of these reassessments.

Next, we are also up against a tough comp on base rent from redevelopments that came online in the fourth quarter of last year, specifically from 2 much larger projects: Serramonte and Aventura.

And lastly, as Jim discussed, the recent retailer bankruptcies will create opportunities to remerchandise and reposition our real estate in the future. These will have near-term impacts.

So although the timing related to the Sears bankruptcy could moderately swing us one way or the other, we have incorporated reasonable assumptions on their move-out dates into our revised 2018 same property NOI growth that is a plus or minus 3.25%.

Turning to earnings. Both NAREIT FFO and operating FFO for the full year were revised upward by $0.01 at the low end, incorporating slightly better performance in same property NOI.

Before we turn the call over for questions and reminding you that we won't provide formal guidance for 2019 until early next year, I still would like to give you some insight into our same property NOI growth expectations as we do look to next year.

Let me start with a reminder of our road map to our same property NOI growth objective. First, embedded in the portfolio is 1.3% growth coming from contractual rent increases. Then another 1% to 1.2% comes from new and renewal leasing rent spreads. Combined, these provide about 2.5% growth. Finally, the contributions from redevelopments is expected to add another 50 to 100 basis points of annual growth. Together, absent any changes in rent-paying occupancy, these components equate to our strategic objective of 3%-plus average annual same property NOI growth.

However, our initial look into 2019 includes a couple of short-term impacts to this road map. First, while timing is still very uncertain, the downtime associated with our 3 Sears boxes could impact same property NOI growth by up to 50 basis points. Next, the redevelopment contribution has been and will continue to be uneven at times. Over the past 5 years, including year-to-date 2018, the annual contribution has ranged from 40 basis points to 170 basis points, averaging a 75 basis points positive contribution, thus the 50 to 100 basis points range in our road map. In 2019, the contribution is expected to be minimal as NOI is taken off-line at some of our larger more transformational redevelopment projects. So while the contribution from redevelopments to our NOI growth can be uneven, and I want to reiterate that, we still remain extremely excited about our expanding pipeline and the contributions to growth that will come in 2020 and beyond. So the difficult-to-predict Sears bankruptcy and the atypical contribution from redevelopment is likely to result in a more muted 2019 same property NOI growth in the low to mid-2% range.

That said, there is much more to come as we close out the year before issuing formal guidance. But most importantly, given our very high-quality portfolio and our active redevelopment pipeline, we continue to expect our same property NOI growth to return to 3% or greater over the long term.

We are extremely pleased with our results this quarter and the position of our high-quality portfolio and fortress balance sheet, all of which support our ability to grow earnings and dividends, which, in turn, expect total shareholder return to be consistently at or near the top of the shopping center sector.

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

(Operator Instructions) Our first question comes from the line of Nick Yulico with Scotiabank.

This is Greg McGinniss on with Nick. Just was hoping you could provide some details on those new anchor lease signings. I'm just trying to understand if this is a repeatable situation of those 88 new leases, how much were actually above that 35% mark?

Greg, I'm not sure I can bifurcate that for you, but bottom line in that we had strong anchor growth of 85% really driven by Publix and LA Fitness in our Bloomingdale redevelopment. Those were the real leaders. As I said in my opening statement, it -- the mix on a quarter-to-quarter basis is hard to predict and hard to try to analyze or bifurcate. But overall, we're really excited. 12.7% of that new growth rent was at shop space. So the combination of 35% is really kind of across the board. On the renewal side, I will say that we were somewhat muted on a very large Target at Serramonte, a renewal which was flat. So overall, we were happy with the rent growths and like to track our own [back on].

As we've indicated in the past, we're going to have -- Greg, we're going to have a number of legacy leases that will repeat the benefit we receive from the Publix and LA Fitness leases and other leases that JT just mentioned. It won't be all the time, but over time, we're going to see more of that than less of that.

Okay, great. Appreciate the insight there. And then -- no, I appreciate the details on the same store NOI growth guidance as well, but I'm trying to understand a bit more here. So 3Q came in stronger than originally expected. So I'm just curious what changed there. This was the full reason that guidance was raised and if any of that impact that you were expecting in this part of what got pushed into 2019.

Primarily, it is the reason why, one, that we raised the low end of our earnings guidance and additionally, took off the low end of our same property NOI guidance. That's just a matter of -- as you know and as we all know, the most difficult thing to predict are moveouts. And we always incorporate a reason -- what we believe to be a reasonable assumption. And that came in better than expected for the quarter. So we had fewer moveouts than we anticipated.

Our next question comes from the line of Christy McElroy with Citi.

Lisa, just following up on the -- again, the topic of the same-store NOI into 2019. Just with regard to the California reassessments, the portion of that, that's onetime, are we looking at another 3 more quarters of drag there to the recovery rate? And then in terms of the redevelopment, just to clarify, are you talking about -- so inherent in the low mid- to 2% range? Is that 0 contribution? Or is that a drag from redevelopment?

First, real estate tax reassessments, we would expect that just the fourth quarter should be the last of the onetime impact. And next year, as in any typical year, as in other states where properties are reassessed at certain intervals, we are expecting potentially up to like a 5% increase in real estate taxes next year. But remember that we do recover about 90% of that, so that -- there would be a minimal bleep for that. And so the recovery rate going forward for all recoveries, we would expect is right about where we are year-to-date, assuming no change in occupancy so in the 82% to 83% range. And then with regards to redevelopment contribution for next year, again, it's pretty early, as you know. And we need to have a little bit more visibility as to when leases come online and as we finish projects. So I don't know that we can give you any specifics, and we will do that in early next year. But would expect it to be somewhere in the 0 to 50% range of a positive contribution.

Okay. And then just with regard to the accounting themes, the $0.06 to $0.07 moving into G&A in 2019, I understand that, that also includes the leasing cost that previously would have been capitalized into the basis of your in-process development projects. How much of the estimated $0.06 to $0.07 would have been attributed to sort of normal recurring CapEx versus sort of that development, redevelopment bucket, just geographically thinking from a modeling perspective just to where those -- where that would have gone through?

Christy, I'm not sure I -- you're asking how much of our internal leasing costs are...

No, no. with regard to the $0.06 to $0.07, yes, just splitting out the $0.06 to $0.07 with what it would've gone through, recurring CapEx versus what would have been through development, redevelopment spend for leasing cost. Because it would have been -- it would have shown up in your development schedule, right, in the total costs attributed to each development project? So I'm wondering if that gets adjusted.

It's still -- but in our disclosure, when we give leasing capitalization costs, it's still -- we'll have to come -- we'll have to get off-line on that. We'll come back to you.

Our next question comes from the line of Craig Schmidt with Bank of America Merrill Lynch.

On the 3 boxes from Sears Holding, does Regency have control over these boxes?

Craig, at this point, we do not. All we know is we have 2 boxes that were on the initial 142-store closure list. We've not heard anymore than that. We obviously have been awaiting this day for a long time. Our teams have been focused on redevelopment plans. We feel like we're in great shape and eager to recover our real estate so we can move forward and enhance our centers by backfilling these tired, old Sears and Kmart boxes with more dynamic retailers today. So more to come obviously, but no news other than it's showing up on the closure list, and we're prepared, when it comes back, to take those 2.

And in addition, as Jim indicated earlier in his prepared remarks, the inbound comments and interest in the space has been very, very encouraging.

And is there a broader acreage of land that comes with the stores?

In the Sears specific, we have tire, battery, auto and probably some excess parking area that we believe we can probably do some [patch less outgoings] on. So beyond the box, we think there's some external redevelopment opportunities as well.

Okay. And was October rent paid on these boxes?

Yes.

Our next question comes from the line of Derek Johnston with Deutsche Bank.

We've discussed the real estate tax estimate and how it relates to the EQY portfolio. But in relation to the Prop 13 bill in California, can you give us an update on the weighted average age of the legacy Regency assets there? Have you begun to assess that potential impact?

Yes, and it is just the legacy Regency. Obviously, as essentially those that are being reassessed at age 0, if you will. So of the remaining, which is about 20% of our asset base, it's 13 years.

And just switching over to the omnichannel repositioning that you discussed at the beginning, what efforts and the roles of the local strip-anchored grocers are you seeing? Which are best positioned to address online delivery, online pickup growth segments? And what actual investments are you seeing on the ground? And what can you guys do to expedite the adoption?

We're facilitating the adoption of the pickup and delivery. And we're seeing keen focus on the part of pretty much all of the grocers. And I think the key thing -- this -- that's all important. Technology's important in the store, and they're all investing heavily in that. But it's also the shopping experience and service that is really the point of differentiation. And I think that's critically important to remember and to keep that in mind. And that's the reason why we think that our grocery sales are as high as they are, both on a aggregate basis of $2.5 million and $650 per square foot.

Our next question comes from the line of Jeremy Metz with BMO.

Going back to the Sears and Kmart topic, assuming you can get control of those boxes, do any of those represent an opportunity to kick off bigger densifications of those sites, just given how big the Sears and Kmart boxes presumably were? And it sounds like you, more or less, been ready for this, as most have been. So any rough capital investment that this could potentially represent?

Jeremy, to answer the first question. We studied the densification and believe our best avenue today is to replace with like retail. So the densification, I think, will be just higher, better use, better quality retail. And I'm sorry, what was the second?

About capital. [It's early...]

It's really too early. We've got a lot -- it's happening, okay. We've got a lot of interest from a lot of different players. And until we can spend some more time and really understand when we're going to get back and those kind of things, we're really not in a position today to talk about returns. But we are -- obviously, we continue to target the 7% to 9% when we get our hands back on the redevelopment. That's kind of our goal.

Yes, I think it -- just to add at a little bit color, Jim, 2 of the 3 are Kmart boxes. They're not Sears boxes. So they're just typical legacy Kmarts. And there's a reason we still own them because it's really strong real estate. And we do believe that it will be an opportunity to upgrade the merchandising and then potentially also grow NOI of the centers.

The teams are extremely excited about the opportunity.

Yes, no, that's fair. Question for Mac in terms of acquisition. The Ridgewood Center that you get anchored by Whole Foods, was this sourced by your partner? Or why not put that one on balance sheet, just given that it seems they've done a fair way for Regency? And I guess sticking with acquisitions, one of your peers mentioned that move-in rate's causing some sellers to pull back. I know you guys have been active. But maybe you can talk about what you're seeing and hearing out there from an acquisition standpoint.

Sure thing, Jeremy. You're right that Ridgewood is right down the alley for us. It's a terrific center, and we look forward to working with Whole Foods, as their lease has expired sometime in the next 10 years. Our partner with -- that we acquired the property with, actually had some internal recycling. So they were selling a center that we own with them, and this was part of their internal capital recycling. So they were up, rotationally, worked with them on that, and that's the reason for that. In terms of just overall perception, buyers are closing, and we mentioned this last quarter. There is just a firmer fitting -- footing underground for sellers, debt markets are cooperating. And it seems like the market has firmed up, and we've noticed that in the transactions we closed to date. And we have another 60 million under contract, with scheduled closings by year-end and another 65 million where we're negotiating purchase agreements. But in those cases, buyers are -- have already begun their due diligence. So they may not all close by end of the year. Some could roll to next year, and some could drop out. But we are seeing buyers feeling measurably better about things than they were 6 months ago, and we're seeing that in the transaction market.

Yes. So I guess I was also trying to -- want to just hear from an acquisition standpoint, as you're out there, are you seeing -- not you guys but other sellers in the market pull back a little bit here? Or has there been any change in the cadence of deals that are out there that you're seeing?

I think what makes it hard to measure is there is very little property of the caliber that we're looking for that's on the market. And we've seen very, very few transactions out there. So there are definitely institutional buyers and advisers who are out there looking for the class A product that we are -- product that has a strong 10-year CAGR. But unfortunately, there's a pretty select few properties out there that are transacting because buyers -- owners are reluctant to put their properties in the market because it's hard to find a replacement property. There's so little class A in the market.

Okay. Fair enough. Last one for me, Hap, you mentioned the importance of investing in the store and the customer experience. As you think about your increasing role in that, the landlord needing to play a bigger part in creating that overall environment, are you committing more capital or looking to commit more capital along this front, which may not necessarily be able to immediately attribute a return to the longer-term, it's going to benefit the center and therefore your ability to both retain and source new tenants as you need?

Well, number one, as part of our, obviously, our large-scale redevelopments and even our tactical redevelopments, the -- they are fresh-look philosophy where there's a tremendous emphasis on merchandising and on place making. We're going to distinguish the look -- distinguish the appeal of those shopping centers to the communities and neighborhoods that they serve, so I think that's important. But we've got an ongoing maintenance program. And in that ongoing maintenance program, we're very focused on place making and our ongoing leasing, and merchandising is critical to rent. So that's a part of the way we do our business each and every day. And we feel really good about the way our shopping centers are distinguished, and we continue to focus on how to keep them relevant. And we're also -- I think it's our view as -- we spent between 10% and 11% of NOI on -- from a tenant improvement, white box, ongoing business, building improvements standpoint and think that, that number is still good. And together, with the redevelopments that are tactical in nature, will keep our shopping centers looking fresh and relevant to our communities.

Our next question comes from the line of Ki Bin Kim with SunTrust.

So you have an interesting dynamic that's going on, on your development pipeline. You might have about $280 million of pipeline. But I look at the percent leased and think about the dollars at risk, there's really not much because a lot of it has been leased pretty well. It kind of clears up your pipeline or development capability for next year. You also mentioned about these other bigger projects on your opening remarks. So I'm just trying to get a sense of how much do you think you will start next year.

Sure. I'm happy to take that. This is Mac. While we haven't given formal guidance yet on our development starts for next year, and we will be doing that in the near future. But you are right, the developments that we have that are underway are performing very well at 80% leased. We're very happy with those. And it allows us to use our expertise to work on some of these longer-term redevelopments. And I touched upon several of those in our opening remarks. I'll just give you an example. Westwood Shopping Center, which is a center that came over with equity loan, in about a year's time, we should be ready to start that project. And that is very promising. It's a mixed-use project with retail, it's got approximately 200 apartments and some townhomes to it. And these are complicated projects. And not every company is capable of doing this, but we think we have the team and the expertise and the market knowledge to take this on. So we're bullish about that. We'll eventually give guidance on where we think we'll be. But over a long term, which is really the right way to measure our contribution. It's not a year-to-year business, it's always going to be lumpy. But we think we are on track to hit our 5-year target of $1.25 billion to $1.5 billion in starts. And then there are deliveries, would come at that too as well. So hopefully that answers your question.

Yes, I mean, it does. I mean, I think about the Bethesda project. That, by itself, is probably very sizable. You guys started about 200 million this year. I mean, I guess, just directionally, it does feel like it could be a lot more in the next few years. So is that -- am I thinking about it correctly?

I think, directionally, you would see us doing more redevelopments as a percentage of our total investment than we have in the years past. There was some years it was more ground up as compared to redevelopments. And I think that's switching and more agnostic to the tune that we like the flexibility and optionality that redevelopments give us. And so I wouldn't associate more, but I would say, the mix between ground up and redevelopment is shifting more towards redevelopment and we're very pleased with that, and these are larger properties that we own. And then Town & Country is sort of the one -- you went to that, and we're coming into a partnership on that property, which is a terrific property located across the street from The Grove, and we've mentioned that before. But that allows us to bring our expertise to a family, to enter into a family partnership and to add some density to that. And ultimately that, that will be one of our marquee properties across the country. We're very pleased with that.

Okay, just last question. So the last question. On Sears/Kmart, I realize you don't have much direct exposure. How do you think about the tangential exposure, just from the amount of shelf supply that might hit the market and how that impacts your portfolio?

In general, space is space, and it has an impact. But we think -- and we feel real good about our locations, about our anchor tenants, about the team's focus. And we have re-leased virtually all of the space that's coming back to us in anchor space. It has -- and I think it is indicative to say that it doesn't have any impact. But we believe that, as Lisa said, that we can generate in fact 2.5% from an underlying NOI growth standpoint before redevelopments. And we think over time that redevelopments are going to contribute an additional 50 to 100 basis points. And we've got the team in place, the commitment. All I need to say, with regard to the redevelopments, it's kind of become a topic du jour, and this has been an integral part of our business historically. And we've got the team in place in the markets to make these projects happen. As Mac said, they can be complicated, they can be difficult. And we don't even view the tactical ones, like as I indicated earlier. It's just an opportunity to refill a box, et cetera. It's an opportunity to further distinguish the look of our shopping centers for the long-term. And just to reiterate what Mac said, I think we're very well positioned to achieve the $1.25 billion to $1.5 billion of development starts and to average, as Lisa said, 3% same property NOI growth, even in a market where there's going to be additional store closings.

Our next question comes from the line of Rich Hill with Morgan Stanley.

I wanted to maybe just go back to the properties that you're buying and selling. Maybe we can talk about the properties you're selling first. Could you provide any more color as to what's maybe making those less attractive and trade at lighter cap rates? Is it location? Is it the type of grocery store there, available tenant mix? What is making that less attractive to you? Or maybe you want to [-- wrote in] something that's so-called higher quality.

Sure thing, Rich. This is Mac. If you just look at Page 15 our supplemental, you can start to think of some things here from the set of properties. It's a Winn-Dixie anchor. It's deals-anchored center. It's a tiered-anchored center. There's 2 larger projects that are really big-box centers, the one in India is unanchored, shadow anchored by Home Depot and WinCo. So it's not the typical class A infill grocery-anchored centers that we own. And we feel that these properties are ready to be sold. These were prioritized dispositions for us and ready to be sold and were widely marketed and made clear. And it's the type of center that I mentioned, sort of the tenants are there, but it's also the location, too. These are smaller markets. And if you dug into the demographics, they're lighter than our typical property. They're on the low end. And they're typically lower growth. And people are paying for growth. So all those characteristics contribute to the pricing, and we feel that the pricing was correct. These are really outliers in many ways.

Got it. And so it looks like your buys and sells have been fairly similar this year, at least in terms of number. But you also mentioned it's hard to find the high-quality properties that you want to own. Do you think there's more low-quality properties to go for you to sell? Or as you just mentioned, is it really just an outlier? Or I guess what I'm asking, do you think there's more opportunities to see more portfolio rotation at this point in time? Or is it becoming harder, just on the availability of higher quality properties?

Go ahead, Mac.

Go ahead, Hap. Go ahead.

Being able to find good uses of capital is an issue. Being able to do transactions on a tax-efficient basis is also important. But the other key thing is we don't have to sell properties. We're in a position where those properties that kind of have the characteristics that Mac just described are mainly less than 5% of our portfolio. So we're in a position to sell when it makes sense to sell and when we have the appropriate use of funds, and we can do it on tax efficient basis.

Got it, and just one more follow up question if I will. Are there any examples where you can take out so-called 7 9 property and put money into it and make it a 4 9 property? I mean, does that exist? Or is that just not a good use of your funds, in your opinion?

That's a -- where we can do -- where we have an opportunity to do that, we do that each and every day. That's a key part of our business, and we've been doing that for years. And these redevelopments represent a lot of those where we're transforming the properties that we have.

Our next question comes from the line of Michael Mueller with JPMorgan.

I thought I got out of the queue. My question was the prior question on about how much of the 7.5 to 8 cap properties are left in the portfolio. So I think...

Mike, I don't know that we actually answered the question. So I will point you to -- I'll point you to our investor presentation. And where we have about 2% that we consider kind of noncore. And think about -- again, remind you of our funding strategy, so free cash flow is going to fund our development spend to the extent that we are short, we are going to spend -- do not have access to the equity markets, even if it's not a compelling price at the time. We will use dispositions for that, and it will come from that 2% bucket. And if you do, to give a little bit more color on Page 15 in the supplemental, if you look at those, there's not a single one on here that we went out and bought individually. It either came as -- in a package of a portfolio acquisition and a couple of them were legacy developments. So we're building much larger power centers back in the late...

From a margin development standpoint.

From a margin development standpoint, which we do not do today.

So basically if that 2% of the portfolio was gone, and we're looking in the supplemental, the disposition cap rates wouldn't be 7.5 or higher?

I think that's a fair assumption.

Our next question comes from the line of Chris Lucas with Capital One.

Just a couple of quick ones. Lisa, on the implied guidance for fourth quarter, $0.03 spread between 91 and 94. Is there any one item that sort of causes the -- that spread? Or is it just a myriad of factors that you're unsure about going in?

It's -- same property NOI is a big driver, obviously. And although our guidance is 3.25% plus or minus, there's -- it could be plus, or it could be minus. And Sears is a big driver of that as well, depending upon when -- if we get November and December in. And that is one of the largest drivers.

Okay. And then just kind of following up on that topic, the Mattress Firms you've had rejected, given the likely scenario, the plans they're going to come out, so I think they want to get out of bankruptcy this year, you'll get paid what for those projected leases?

Well it's still -- I'm a little hesitant to say that I'm certain what's going to happen, so our understanding at this point is we are going to get paid for them for up to a year. But again, I think ...

A year from when they filed.

A year from when they filed. So I think that it's -- more to come. But that -- right now, that is the assumption.

Bankruptcy's an uncertain process, and we've incorporated that into our projections.

Right, so just cap -- just so I'm clear, you're saying that you could get up to a year, but it would be a year from now that you would get paid or when they come out?

I don't know that we really know when, and that's part of the uncertainty as well. But the early indication is that we will get up to a year's worth of rent.

Whether that's from when they filed, or that's from when they come out, we still don't know.

And then as it relates to Sears in terms of the guidance you provided earlier and the drag to same-store NOI from next year, does that matter as to whether that's a 7 or an 11 liquidation or just a reorg? And what are you guys assuming?

But -- no, I mean, that won't matter. What matters is whether or not we actually -- whether someone assumes and buys the lease or if we get it back.

Our next question comes from the line of Samir Khanal with Evercore.

Just a question on the leasing spreads for new deals. I mean, it's up 35%, but it didn't look like you put a lot of CapEx. Certainly if you look at the CapEx per term in the quarter versus maybe the trailing 12, it actually fell. So I just want to know what was kind of going on there.

Samir, yes, it was interesting that it fell with the volumes. What that represents is really the driver there with Publix at our Bloomingdale redevelopment. That particular deal is a tear down, rebuild. So what you had was less what we call TI and white box, and it's really rebuilding a building. So that artificially dampened that number. If you took Publix out on that, we would normalize at $30, which is right in line.

Okay, got it. And I guess my second question is just regarding your NOI guidepost of that low to mid-2% range for '19, I mean, how are you guys thinking about sort of credit loss reserves for '19 versus this year? How much cushion do you have sort of built in for maybe other distressed retailers, besides sort of the Sears and Mattress Firm of about sort of a 90 basis point -- excuse me, a 50 basis points downtime?

Again, that's not formal guidance, so we will come back to you in early part of next year with more formal guidance. But Sears is obviously incorporated in there, as I indicated in my remarks, up to 50 basis points.

So at this point beyond Sears, you're not incorporating any other?

Samir, yes. Of course, we always do. And it's -- even though bad debt expense doesn't -- it doesn't exactly translate to how much we're incorporating into kind of a credit collection loss, if you will, on typical underwriting. We've been kind of around the 45 in the -- 40 to 50 basis points range in bad debt expense. So I think that, that's a good indication that we've had a pretty normal and steady rate of moveouts, if you will and bankruptcies and store closures. And we would expect something similar next year on top of Sears.

We're incorporating -- our current thinking is incorporating our normal -- a normal amount of issues. But at the same time, we're also incorporating that the underlying business is good. Leasing spreads will remain healthy. We're seeing strong demand for space. So we feel good about the underlying fundamentals of the business and our ability to continue. Take the Sears bankruptcy aside, the 2.5% underlying same property NOI growth that Lisa described earlier.

And I think my prepared remarks directly hit that. And also, there's even some -- it's also implied, if you go back to the roadmap again, a 1.3% contractual rent stats and then another 1.2% from rent lease spreads, that gets you to 2.5%. And I just told you that we're expecting and incorporating up 50 basis points of Sears, and we're still saying we're going to be in the 2% to 2.5% range.

Yes.

Our next question comes from the line of Vince Tibone with Green Street.

I have a clarification question on the Sears closures. Are you going to have to bid for those leases at bankruptcy auction?

I mean, Jim, whatever...

Yes. At this point, we don't know. We're on a closure list, but there's no telling how Sears will -- whether they'll try to sell the leases before they reject. We just don't know at this point. We are, obviously, in our planning, we are preparing to defend our real estate.

Got it. Okay. But at this point, they're still paying the rent, and the lease is still in place until further notice.

Yes. Right.

Can you just talk maybe a little more broadly about the pros and cons of buying a lease in bankruptcy auction versus letting a new tenant purchase at below-market lease?

Well, we -- obviously, we evaluate every aspect. And I would say, during the Toys, we evaluated a deal in Chicago where it was at auction. We were prepared to bid if needed. We did our homework, understood who was interested in the space and felt comfortable with that user and felt the economics of no downtime, protecting rent was a good alternative to us jumping in and protecting the real estate. So it's a one-off thing. We evaluate every -- on every space that's in play.

Yes, and Mac might just review kind of what we did with Haggen because it's a combination of working with replacements to Haggen, buying leases and then some of them going -- coming back to us on that day.

Before Mac does his individual dance, I mean, the biggest thing is, is the pro -- is it gives us control of the real estate, allows us to control the merchandising. And in often cases, which Mac is going to talk about, allows us to unlock a lot of value.

That's the lease causes?

You may change the use, Vince, and upgrade the use. But you also, by wiping out that former lease, you may get rid of some restrictions that have to do with competing uses, exclusives, cotenancy, parking requirements. Sometimes these older leases are just outdated with how the market works. So you get a fresh start. And there's generally, at a reasonable price, the pros heavily outweigh the cons. And you take some leasing risk. You're not going to have it pre-leased. But we're in that business anyway, and we have a good feel for that, and we factor that into our pricing. So net-net, it's usually advantageous for us to buy our leaseback.

(Operator Instructions) Our next question comes from the line of Linda Tsai with Barclays.

Having Kmart box versus having a Sears give more...

Linda, we can't hear you.

We can't hear you.

Oh, sorry about that. Does having a Kmart box versus having a Sears give you more flexibility, given the size, maybe in terms of backfilling more usually with the tenant versus having to redevelop?

It depends.

It depends.

The reason I had comment specifically that they were Kmart versus Sears is exactly that, the size of the box. And they're in your typical neighborhood community shopping center, so there's not a whole lot of densification opportunities at those.

Okay. And then in terms of the 35% increase in new leases, can you give us a sense of what percentage of your anchor leases are considered legacy?

Linda, we can't give you that percentage. This is Mac. But we do have, as we indicated in our Investor Day, our 40 leases that we call "legacy" leases that are available to us in the upcoming, say, 5-plus years. And those are the leases that were -- are going to really drive this top line rent growth metric.

And even -- it's pretty interesting even in a portfolio of our size, it doesn't take much for it to really move the needle because there's such large increases with these legacy anchor leases.

And they control space for a significant amount of time, the key thing as far as the health of the portfolio and the relative strength and sustainability of the portfolio, I think the same store rent spreads that we're experiencing, 12% on our shop space.

And a lot of your peers are using technology and data to better understand shopping habits and help kind of make location decisions. To what extent are you engaging in these initiatives, too?

Linda, I'm happy to answer that. Lisa, do you want to take that?

[Go ahead, Mac].

This is not a new thing for us. We've actually been at the forefront of using technology to help us with merchandising, to target actual customers by using master mobile data to track where our customers are coming from. And we've actually been piloting -- we're probably over a dozen different technologies over the years and actually have helped companies create that technology by working with them closely. So where you think for better merchandising, we've been able to convince tenants that our sites make sense by showing them where their customers are coming from and using technology that they don't have in-house. And it's been eye-opening for them. And that's really helped us. And then the future really is using this technology to actually target customers coming onto our property through advertisements, through mobile phones. And that's in the early stages of it. But we -- we're spending a fair bit of time on this. And the industry still has years to grow up, but it's not a new thing to us. We've been following this for many, many years.

Our next question is from Christy McElroy with Citi.

Just on Mattress Firm, I know that there's the initial closure list. It's all very fluid. There's more that's potentially coming. Just -- you've got 5 closings, 20 remaining. On the 20, is -- are they -- as they sort of work through the process and potentially emerge here, are they trying to renegotiate rent relief on those 20 remaining? Or is it still sort of up in the air?

Christy, as any good bankrupt tenant will do, they will absolutely ask on every location, which they did here. We've been firm in our responses. They're -- I think the average ABR is $33 on ours. I think the -- we're located -- they're located in centers that are 96% leased. They generate to a very good real estate, high visibility, high access. So that's where we felt very good about being strong by recapturing real estate. When asked, we said no. And the 5 may turn into 7 or 8, but at the end of the day, we will proactively re-lease those boxes with a smaller base.

Just say no.

Okay. And then just on -- following up on some of Ki Bin's questions, you guys were talking about Westwood a bit. Any sort of early estimates you can give us in terms of the potential for a capital commitment on this project? Is this something that you would be maybe working with partners on any non-retail components? And would this project stay in the same store pool?

I can take the first part of that. Plus or minus 75 million is what we circled for investment in there, and we would have all of the retail, we are negotiating with a partner where we would take half of the apartments, 50% interest, and that's included in the 75 million. There's also approximately 75 townhomes which are a for-sale product, and we're going to provide some of the capital for that. But that's on a long-term hold, as I mentioned. So Lisa can talk to you about sort of the big picture of what's in and out of that. But we're excited about that project, it should have a return of, oh, in the high 6s, is what our stabilized return is. And it's going to be a dynamite project for us.

And just in both cases on the townhome and multifamily developer that we're negotiating with, and both are best-in-class and both will have a meaningful amount of capital invested on their share of those portions of the development.

At this point in time, with the earlier head nod of the 2 to 2.5%, we are assuming that Westwood stays in our same property pool. But it's a great question as we really do have larger projects that we're beginning to work on beyond -- a scale beyond what we've had in the past. We've got another one that's in our pipeline in San Diego in Costa Verde, it's over $5 million of NOI. And we may essentially take that to 0 as we redevelop it. So it's something that we're evaluating, and we'll have more clarity on how we will handle those large projects in the future. But for now, Westwood is assumed to be staying in the same property pool.

Okay. And then is Giant staying at the project, I mean, as a result?

Giant is staying. We're going to relocate them -- Giant is planning to stay. We're going to relocate them and put them into a brand-new store in a podium format with parking below them.

It appears we have no further questions at this time. I would now like to turn floor back over to management for closing comments.

Really appreciate your time and interest in Regency and wish that you all have a wonderful weekend. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.