Earnings Call Transcript - REG Q1 2021

Operator, Operator

Greetings and welcome to Regency Centers Corporation First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Christy McElroy. Thank you. You may begin.

Christy McElroy, Host

Good morning, and welcome to Regency Centers' first quarter 2021 earnings conference call. Joining me today are Lisa Palmer, President and Chief Executive Officer; Mike Mas, Chief Financial Officer; Jim Thompson, Chief Operating Officer; and Chris Leavitt, SVP and Treasurer. As a reminder, today's discussion may contain forward-looking statements about the company's views, future business, and financial performance including forward earnings guidance and future market conditions. These are based on management's current belief and expectations and are subject to various risks and uncertainties. It is 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 10-K. 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 additional disclosures related to forward earnings guidance and the impact of COVID-19 on the company's business. Lisa?

Lisa Palmer, CEO

Thank you, Christy, and good morning everyone. Thank you so much for joining us at the end of what I know has been a long week in earnings season. It's also been a long and oftentimes difficult past year. But as a company and an industry, we've really come so far. First, as always, I'd like to thank the entire team here at Regency. I'm really proud and appreciative of what we've been able to accomplish over the last year. A quarter ago, when we spoke to you, we were facing rising restrictions in parts of the country, contributing to continued uncertainty about the future. We are gaining ground, but still playing defense. As I sit here today, I'm really pleased to report that we've turned the corner over the last three months. We are encouraged by continued improvement in the retail environment and in the health of our tenants. And you can see the evidence of that in our first quarter results, as well as in our revised forward earnings guidance. We've seen a continued trend towards easing tenant restrictions, which is especially impactful for our California properties. Some categories and geographies still continue to lag. But overall, we are on an improving trajectory. These lifting restrictions that allow our tenants to open and operate are having the waterfall effect of improving foot traffic and tenant sales, as consumers are re-engaging when they're able to. And in turn, we are collecting more rents and have seen an improving trend of rent collection. Michael will discuss this in greater detail, but the main drivers of our earnings guidance increase results from this improvement. We expect higher collections on the cash basis tenant, as well as some additional recovery of 2020 rent that we had previously reserved. And we're also encouraged by continued demand with regards to leasing. Thinking a bit longer-term, we believe there are clear tailwinds for our company and our sector as the pandemic has shined a spotlight on our business in a positive way. As we all have experienced the world with e-commerce, retail sales spiking meaningfully, our tenants will clearly see and appreciate the value of the last mile distribution capabilities that their stores in our centers offer. And after spending months at home facing restrictions on interactions, consumers have a new appreciation for the environment and convenience of our open-air and neighborhood and community centers. But all that said, our heads aren't here in the Jacksonville tents, we acknowledge and appreciate that real challenges in brick-and-mortar retail still exist, and that will continue to be the shrinking of retail GLA in the U.S. But well-located, well-operated centers, like we own will still be a critical component of the retail ecosystem, meeting the demands of retailers, service providers and consumers. This renewed appreciation from both sides fortifies the long-term needs for physical locations close to consumers' homes. And then, also the micro-migration that's occurring with more people moving into the suburbs should provide a long-term benefit to our suburban shopping center portfolio. As should a more permanent shift towards part-time, remote work, increasing daytime population foot traffic close to the consumers' homes. Finally, as the macro-economic and retail environment has shifted toward a definitive trajectory of improvement. As a company, we have pivoted from defense to offense. We are on our front foot. We're focusing on growth, not just organically but putting capital to work externally. We are well-positioned to take advantage of opportunities. We continue to have one of the best balance sheets in the sector with low leverage, over revolver capacity and access to low-cost capital. Additionally, as you know, I'd like to remind you, even with no reduction in our dividend throughout the pandemic, we are generating solid free cash flow, which we expect will only continue to grow with our revised outlook. From this position of strength, we continue to focus on value creation within our development and redevelopment pipeline. Recall that we added two new ground-up projects to our in-process pipeline a quarter ago, and in the near future, we expect to add a couple more. With the success we've seen with phase 1 of Carytown, we plan to move forward with phase 2. We also plan to move our mixed-use multi-phase Westbard project in Bethesda, Maryland into the in-process pipeline. To finish up, we are still on the recovery path back to our 2019 NOI. But the pace on that path feels better. The environment is healthier and more certain today. And as a result, we have greater conviction and are more positive in our outlook. We are pivoting to office. We remain bullish on open-air grocery-anchored neighborhood and community centers. As I've heard several times over the past month or so, today is better than yesterday. And I'm confident that tomorrow will be better than today.

Jim Thompson, COO

Thank you, Lisa, and good morning everyone. I agree with Lisa's remarks and want to express my gratitude to our Regency team for the successes we've achieved during this challenging time. When the vaccine news broke last November, we began to see hope regarding the pandemic. Today, that hope feels more tangible as the situation improves. However, we are not fully out of the woods yet. There are still governmental capacity restrictions in some of our markets, particularly on the West Coast. Recently, we witnessed rollbacks in Oregon and Washington due to rising case numbers. Nevertheless, we are progressing positively. With the lifting of stay-at-home orders and restrictions on the West Coast in recent months, we are experiencing an uptick in foot traffic and rent collection. This mirrors what we saw in other markets across the country in 2020 as they reopened. As shown in the chart on Page 4 of our slide deck, foot traffic for our portfolio overall has recovered to 90% of 2019 levels as of April, with some regions nearing 100%. Rent collections for the current period have also improved, reaching 93% in the first quarter and 94% for April. While the West Region still trails behind in foot traffic and collections, it is gradually catching up and represents our greatest opportunity for future growth. As we have mentioned in previous calls, our approach with deferral agreements has been patient, ensuring tenants are open and operating before pushing them into agreements. This strategy has proven successful financially and has fostered goodwill with our retailers. Our focus has always been to restore our tenants to a rent-paying status and avoid vacant spaces, which lead to downtime and increased capital expenses. We valued our merchandising and tenant mix before the pandemic, and collaborating with these operators is the quickest way to stabilize their spaces and generate revenue again at or near pre-pandemic levels. Regarding leasing, we are pleased with the strong interest and activity we're seeing. Categories for new leases include grocers, medical services, QSRs, health and beauty, fast food, home improvement, fitness, and personal services. Additionally, we have observed an uptick in traditional mall tenants transitioning to open-air formats, particularly in home concepts, athletic retail, eyewear, and cosmetics. Our new leasing volume in the first quarter surpassed that of Q1 2020, marking the highest first quarter new leasing volume in the last five years, driven by increased economic optimism and possibly pent-up demand from 2020. Renewal leasing volumes have remained steady throughout the pandemic, with the first quarter pace exceeding historical trends for both shop and anchor space. Our leasing pipeline remains strong, and we're witnessing growth in retailer activity across all regions, which instills confidence in the sustainability of deal volume. While our recent spreads have been modest, reflecting the current environment and the types of leases we are signing, we continue to successfully increase rents for central tenants and QSRs. However, we are also making some shorter-term concessions for non-essential tenants and table service restaurants to support them during this challenging period, which is putting some pressure on our initial cash spreads. We do not consider this reflective of the long-term trajectory of market rents. Historically, our properties have commanded market-leading rents, and we expect this trend to continue. The strong embedded contractual rent growth we have consistently achieved over the years generally brings our tenants' rents closer to market rates ahead of lease expirations, compressing those initial spreads. Encouragingly, we are still successfully negotiating rent depths in line with historical averages. Finally, in terms of occupancy, it has decreased by 30 basis points sequentially. Typically, we see a seasonal drop in occupancy during the first quarter, but move-out activity was lower than anticipated. While some tenant fallout we expected may still happen in the coming quarters, we also saw more tenants renew their leases than we had forecasted. In summary, although this past year has been one of the most challenging in my career, it has been incredibly rewarding to witness our team rise to the occasion and navigate this unique environment successfully. We are clearly on a road to recovery, and our visibility and confidence have only increased as the country continues to reopen.

Mike Mas, CFO

Thank you, Jim. Good morning, and happy Friday to everyone. I will start by discussing the first-quarter results and then outline the changes in our full-year guidance. For the first quarter, our NAREIT FFO was $0.90 per share, with positive uncollectible lease income for the quarter, as reserves from current billings of around $18 million were more than compensated by the collection of over $20 million from prior period reserved revenues from cash basis tenants. If you look at our COVID disclosure on Page 32 of the supplemental, you will see the breakdown of our uncollectible lease income. It also shows that, excluding prior period collections, we recognized 94% of our first-quarter billings as revenue. Our cash basis tenant pool currently represents 28% of ADR, down slightly from 29% last quarter due to move-outs. We have not yet transitioned any tenants back to accrual basis accounting from cash basis during this phase of recovery. Our same property commenced occupancy rates decreased by 30 basis points sequentially. However, our net effective rent-paying occupancy, which we've discussed in previous calls, increased by over 50 basis points in the first quarter due to better collections from cash basis tenants. Same property NOI, excluding lease termination fees, decreased by 1.6% in the first quarter compared to the prior year. It’s worth noting that the first quarter of 2021 is the last quarter we will face challenging pre-COVID comparisons. Our balance sheet is in excellent condition. As mentioned last quarter in mid-January, we used cash reserves to pay down a term loan. In early February, we refined our $1.25 billion line of credit, extending the term by an additional four years. We ended the quarter with a more typical cash balance and full capacity on our revolver, with no significant unsecured debt maturities until 2024. The secured mortgage lending markets, which were difficult for retail last year, have started to pick up again, showing demand for high-quality grocery-anchored shopping centers owned by strong sponsors. After the quarter ended, we completed a $200 million refinancing of our portfolio of secured mortgage loans on 10 assets within one of our JVs, achieving a blended rate of 2.9%. From a leverage standpoint, our net debt to EBITDA remained at a comfortable 5.9 times, despite the pandemic’s effects on our trailing earnings. We see a clear path back to the low-to-mid 5 times range as our NOI continues to improve. Regarding our guidance, please refer to Pages 13 through 16 of our earnings investor presentation. Last quarter, amid ongoing rollbacks in some markets and overall uncertainty, we presented our earnings guidance under three macroeconomic scenarios: reverse course, status quo, and continued improvement. From a macro perspective, we now have confidence that we are in a continued improvement environment and can eliminate the first two scenarios from our guidance analysis, which supported the lower and midpoint levels of our previous range. We are transitioning to a more traditional guidance framework based on this positive outlook with a narrower range. Three key drivers connect our previous upper end of $3.14 per share for NAREIT FFO to a new range of $3.33 to $3.43 per share. The first two drivers directly affect same-property NOI, which you can see illustrated on Slide 15 of the presentation. The first driver is higher collections of prior period reserve revenue. When we provided guidance in February, we had already collected nearly $9 million in prior period revenues, and this amount was included in our previous guidance range, influencing our full-year same-property NOI growth forecast by about 125 basis points. Our new guidance range reflects an impact from prior period collections of approximately 425 basis points at the midpoint, of which around 80% has already been collected as of April, with the remaining 20% expected through the year’s end. The second driver is our anticipated higher collection rate on current year billings from cash basis tenants, meaning we expect more cash basis tenants to convert from non-rent payment to rent-paying. Our collection rate of cash basis tenants increased from January to April, with roughly a third now current on rent, up from about 15% last quarter. This improvement adds confidence in our expectations for higher collections moving forward. The third major driver is a reduction in our G&A forecast, which we have lowered for the full year by approximately $5 million at the midpoint. With greater certainty regarding timelines for the start at Westbard and the second phase at Carytown, we anticipate higher overhead capitalization. Furthermore, we have factored in savings from Mac Chandler’s departure in the first quarter, much of which was one-time due to the unwinding of previously expensed share variance. In conclusion, we are very pleased with our first-quarter results and are optimistic to be raising our outlook today. We believe we have gained better visibility into the economic environment and the recovery of our cash flows. Looking ahead, our priorities remain: first, converting non-paying cash basis tenants back to rent-paying; second, filling spaces left vacant; third, returning leverage to pre-pandemic levels through organic growth; and finally, shifting back to an opportunistic mindset for capital allocation. We would now be happy to take your questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Katy McConnell with Citi. Please go ahead.

Katy McConnell, Analyst

Great, thanks. Good morning, everyone. Can you talk a little bit more about how cash basis collection levels trended this quarter and what's driving the improvement over Q4? And then for the outstanding balance, how much more upside are you assuming in collections as opposed to potential occupancy fallout?

Mike Mas, CFO

Hey Katy, it's Mike. Thanks for your question. I want to share some statistics regarding our cash basis pool collection rate that will clarify things for you. In the first quarter of 2021, we collected 78% of rents from our cash basis tenants, which is an increase from 75% the previous quarter. Notably, when we updated the fourth quarter, our collection rate is now at 79%, maintaining a steady performance. The most significant factor influencing our improved guidance range is the trends we are seeing this year. Here are the month-over-month figures: January was at 67%, February increased to 73%, March rose to 77%, and in April, we reached 81%. This reality reflected in the numbers is not fully apparent in the Q1 report, but it gives us the confidence to enhance our cash collection rate moving forward. March and April's success compared to January and February is key. When we last communicated in early February, the outlook wasn't as optimistic due to rollbacks on the West Coast, but the performance in March and April has changed the situation. Regarding our projections for same-property performance, we focus more on uncollectible lease income than on move-out activity. Although we can have move-outs, they are already factored into our uncollectible lease income estimations. We prefer to discuss net effective rent paying occupancy, which currently stands at around 86% to 87%, reflecting a sequential increase of 50 basis points in the first quarter. From our perspective, we have reached the lowest point in occupancy rates and are now progressing as we convert tenants from non-rent paying status to cash basis. As for the guidance range, the midpoint suggests gradual improvement through the year, with higher collection rates for cash basis tenants supporting the upper end and lower percentages for cash basis impacting the bottom end. Here's an interesting point: a 1% collection rate from cash basis tenants corresponds to about $3 million in total revenues for Regency. Hence, our same-property growth range reflects approximately $10 million up or down from the midpoint. It is important to note that we do not need to achieve 100% collection to reach the upper end of our guidance range, as there's roughly a 3% margin on each end. I know I shared a lot of information, Katy, and I hope you find it helpful. Please feel free to ask any follow-up questions.

Katy McConnell, Analyst

That's really helpful. Thanks so much for all that detail. And then just to switch topics given the outperformance in your shares year-to-date, what's your appetite to issue equity at this point? And is there anything embedded in guidance for that?

Lisa Palmer, CEO

Katy, it's Lisa. I'll take that. We do not have anything embedded in guidance for an equity raise. We view equity as a capital source to fund our growth. And to the extent that we are able to issue equity and put it to work accretively on a long-term earnings growth basis, we will do that. And I think we have a really great track record in doing so. So it's tied to opportunities. And opportunities, compelling opportunities, acquisition, free cash flow, still funding our development pipeline, so always an arrow in the quiver, and one that we will use when we can use it accretively.

Craig Schmidt, Analyst

Great, thank you. As the country continues to open up, are you seeing more curbside BOPIS activity the same or less?

Jim Thompson, COO

Jim here. We're observing a significant increase in activity, particularly with Kroger, which reported that their click-and-collect program is four times larger than before. Major brands are exploring various forms of buy-online, pick-up in-store options. This trend is clearly established and is an important method for reaching consumers. While getting people into the store remains the most effective strategy for grocers, the option for curbside pickup or delivery is a strong alternative that is likely to persist.

Lisa Palmer, CEO

And we like that Craig, right. I mean any additional traffic into our centers will benefit us. It's more eyes on our shop space. They may be different trips. But it still becomes the shopping center of choice and where the consumers that are close to their homes look to go to when they need something right, whether it's goods, services, or food. We think that it really is a benefit to our shopping centers. And we like that we are in close proximity to people's homes.

Craig Schmidt, Analyst

No, I agree. I see the benefit and thanks for the early confirmation that it is here to stay. I guess my follow-up question would be, what are the retailer's appetite for opening new developments, and particularly beyond the grocers?

Jim Thompson, COO

Jim here. We are experiencing strong activity as reflected in our Q1 leasing results. The 266,000 square feet of new leasing in Q1 is the highest we've seen in five years, as noted in the prepared remarks. Our pipelines remain robust. Mike mentioned Carytown Phase 2, which is currently developing and is 85% leased. Phase 1 faced a pause during the pandemic but has shown great pre-leasing interest and demand for space. We are moving forward with Phase 2 to bring that product online. Overall, we are witnessing positive activity in both new leasing and our existing portfolio.

Lisa Palmer, CEO

And we're really focused on continuing to build that development pipeline so that we can get back to kind of pre-COVID levels in terms of our starts and spend on an annual basis.

Derek Johnston, Analyst

Hi, everybody. Good morning. Are you seeing changes in the lease structures given the pandemic, any changes like co-tenancy clauses? Anything related to the methodology for assessing percentage rent, especially since it seems hard to capture in omni-channel sales? And the dedicated parking that you discussed for click-and-collect is that an opportunity to push rents a bit?

Jim Thompson, COO

Derek, that's a great question. To address the changes in lease structure, there hasn't been a significant impact on margins. What we have noticed is that the time from negotiation to RCD is increasing. Permitting and decision-making are taking longer, but apart from this extended front-end timeline, the deal terms are largely stable. The area of percent rent has become complicated due to online sales, as it varies widely from tenant to tenant. We've found that data is incredibly useful for comparing sales and foot traffic to assess actual volume and potential sales at a location. Our engagement with percent rent is minimal, primarily limited to our grocery segment, which has been easier to manage. However, with the rise of online sales, we're uncertain about how this will be reported moving forward. While we don't have much exposure to percentage rent, it does present challenges ahead. Regarding dedicated parking, we are being very supportive of our tenants to facilitate their product distribution. Our focus is on enhancing traffic and helping them succeed as our anchors, rather than viewing this as a potential rental income source.

Derek Johnston, Analyst

All right. Thank you. How about the Serramonte? Is it still expecting to deliver in the second half of 2021 given the location and shutdowns, and it's a pretty large scale project? Can you give some color as to the buzz around leasing and excitement in the development?

Mike Mas, CFO

I'll start with a disclosure and let Jim talk about the project. Derek, it's a multi-phase project that will unfold over several years. We anticipate visibility in delivering the first phase, which includes our significant investment in the mall's interior and the development of new pads on the exterior to replace some outdated retail locations. We are confident in our ability to complete this phase by 2021. However, the multi-phase nature of the project will extend over the coming years.

Jim Thompson, COO

Yes, in terms of leasing activity at the mall, we have successfully finalized a high-end restaurant. We are also seeing good interest from well-known, larger interior mall tenants that will enhance our merchandising mix. We are actively pursuing opportunities with the J.C. Penney space and are making progress in that area. Overall, we are very pleased with the real estate. It's great, we're open for business, and both tenants and consumers are excited to be back. There's definitely a growing buzz as the marketplace regains consumer confidence and people return to the environment.

Rich Hill, Analyst

Good morning, everyone. Congratulations on a strong quarter and thank you for being transparent with your numbers. They are very useful. It seems that the situation is much better than we may have feared in 2020, as shown by the leasing volume and cash collections. I’m trying to understand what this indicates for the new normal moving forward. To rephrase, I’m not looking to simply average out the accounting adjustments that could have been made in 2020 with perfect information. I have two questions. First, can you provide the same-store NOI for Q1 without the benefit from cash collections? Second, could you give us some insights into the leasing environment? I recognize how strong the leasing has been, but it would be helpful to understand what rents look like compared to 2020 and the past five years, as well as how negotiations are progressing.

Mike Mas, CFO

Sure. Really quickly on the impact of Q1 Rich and I'll hand it off to Jim. But prior period collections was a 950 basis point boost to our same-property growth rate in the quarter.

Jim Thompson, COO

Yes, Rich. As I mentioned, the leasing environment is improving overall in terms of terms, appetite, and types of uses. We're seeing a return of various businesses, including those that were most affected, which reassures me, especially the fitness and personal services sectors that are re-entering the market with new locations. This suggests they have a future in the market. While there will inevitably be failures, there are investors ready to step in with new capital. Overall, we’re experiencing strong activity and rent growth in essential sectors. In non-essential areas, we are being more creative and selective in assisting businesses to rebuild without concerning ourselves overly with rent spreads. Our performance heavily relies on the balance between anchor tenants and shops, and anchor leasing typically offers the most significant opportunities for adjusting rent values. This quarter, we had one standout anchor deal that unfortunately resulted in some negative spreads. To elaborate, it involved a well-capitalized fitness franchisee relocating from the northeast, likely due to COVID, to occupy a space in South Florida that had been empty for over four years, previously occupied by an educational facility. We structured a low initial rent to support the growth of their business, with a substantial rent increase scheduled in the third year and without any landlord capital for the initial improvements. In the long term, this is a valuable addition for the area as it will attract traffic to a location that has been dormant for years. From our perspective, the deal structure is well-suited for the long-term success of the center. We are confident that our centers can continue to command leading rents over time, and we expect to see that trend persist.

Lisa Palmer, CEO

If I may take a broader perspective, reflecting on our discussion from a year ago, we speculated on the potential impact, but we were operating with limited information amidst significant uncertainty. Back then, I had mentioned to many of you that we might expect a decline in market rents. However, I can confidently say today that we are not experiencing that decline. This is primarily because our performance has surpassed our initial concerns, and it highlights the advantageous conditions in our sector. We possess quality shopping centers in close proximity to consumers' homes, where our retailers and service providers recognize the opportunity for high productivity in their stores and are therefore ready to pay premium rents for prime locations. We are well-placed to take advantage of this situation, especially considering the ongoing constraints on new supply and the lack of competition that mirrors the quality we offer. Looking ahead, I am optimistic that we will continue to command those premium rents and see growth in net operating income moving forward.

Rich Hill, Analyst

Yes. Hey Lisa, that's really helpful. And just one follow-up question, if you would have asked me three months ago, six months ago, certainly 12 months ago, I would have told you, I thought it was unlikely that tenants were going to be able to pay back rent and current rent. So I think that's a pretty bullish outlook for the future if they can pay double rent. So does that mean that you're getting rents that are above Q1 2020 levels or similar to Q1 2020 levels at this point? How should we think about that as I'm just thinking about modeling core growth?

Lisa Palmer, CEO

Yes. I'd be a little bit careful with the ability to pay double rent, because a lot of that is being driven by a lot of the stimulus that is being provided by our government. Without that I'm not certain that many tenants would be able to pay double rents, because if they weren't then we weren't charging rents high enough. And I believe that we push rents to where we can. So I would think that again, I think about that we are returning to a healthy kind of pre-COVID environment with even more support and conviction that we own the right retail. We are in the right sector in terms of being part of the retail offering for where tenants want to be in and for where consumers want to shop.

Greg McGinnis, Analyst

Hey, everyone. So Lisa, I'm going to visit my mother this weekend who lives by Westbard. And I'm sure she'll be glad to hear that asset is finally getting a facelift. But I also think she'd want to know about potential NOI disruption there. And that the rest of the relevant development starts. So any details you can provide there would be appreciated.

Lisa Palmer, CEO

Your mother sounds like she might want to come work for Regency, I'll let Jim and Mike talk to that on disruption and whatnot.

Mike Mas, CFO

We do have, it's beyond Westbard, we have to facilitate an active redevelopment pipeline, there's going to be some disruption in NOI, Greg, as you know, and we have about $2 million of decline baked into our plan for 2021. And then we would bring that back up starting in 2022 and beyond in the accretion from those redevelopments.

Wes Golladay, Analyst

Hi, everyone, could you explain why the reserves were $17 million, which is largely similar to the fourth quarter, especially considering that tenants are paying more in cash? Is there a possibility of an upside reversal later in the year?

Mike Mas, CFO

Sure. So let me get a little bit technical to help and then we'll kind of bring it up bigger picture. But so the fourth quarter, it's a little bit apples and oranges a little bit, but we’re trying to make an apples-to-apples, fourth quarter had about a $500,000 positive impact from prior periods in that number. And then the first quarter of 2021 had about $1 million additives related to CAM reconciliations. So there's a bit of a seasonal component to it, right. So we build CAM recs with cash expensed so that amplifies the bad debt expense. So the apples-to-apples change is really about a $1.5 million of improvement. So you don't see that on the surface. But then I kind of go back to my earlier comments. And really, we were seeing the improvement in our cash basis tenant, collection rate, so late in the quarter of March and then extending beyond the quarter of April. That's what's giving us the confidence to increase our outlook moving forward. And Wes, even if you think about it, big picture collection rate on the top is basically unchanged, right quarter-over-quarter 93% plus or minus the same. That I think that helps frame out that sequential question you have.

Wes Golladay, Analyst

Got you. And then I might have missed it. But did you talk about the, I guess for the balance of the year 2Q to 4Q, the amount of 2020 rent that you will, I guess expect to unreserve for that going forward?

Mike Mas, CFO

Yes, no, I appreciate you asking because we didn't get to that point. So beyond just an increase in current year collection rate, we have also included an increase in the collection with 2020 reserve rate. So we had 125 basis points in our original guidance, we now have 425 basis points positive impact in our guidance range. So that's an incremental 300 basis points, so think about that in dollars, that's roughly $30 million at the midpoint in our new range. And as you can see in the results, we've already collected $20 million of that, in fact, through April; we collected another $4 million. So we're 80% through our guidance range on 2020 reserved collections.

Flooris Van Dijkum, Analyst

Thanks for taking my question, guys. Lisa, maybe if you could, you guys have a lot of dry powder enviable balance sheets, obviously earnings are on the upswing, things are looking good. Maybe your thoughts on as you deploy, you've talked about the redevelopment, which is an attractive capital source or capital use and some of your ground-up development opportunities as well. But as you look at acquisitions, has the pandemic changed your thinking about what you want to acquire and buy and maybe talk about the types of assets and both in terms of types of assets, and maybe in terms of regional exposure as well?

Lisa Palmer, CEO

I wouldn't say that the pandemic and isolation if you think about the impacts on tenants has necessarily changed how we're thinking about where we may want to deploy capital. But some of perhaps the more permanent trends that were that may, that we're seeing from the pandemic have influenced how we're thinking about where we may deploy capital. What I mean by that is a lot of the migration trends in terms of potentially opening or widening the fairway for us with regards to markets where we may invest. And I don't necessarily mean that we're going to go to brand new markets. But if you take a market that we're in like Atlanta, for example, we've been very focused in Hawaii if you will, right, the first ring of Atlanta now with a more permanent, more remote work, people we're seeing migrations pattern of people moving a little bit further away from the city. And so that may open up more opportunities for us in markets that we already know, we're already in, we already have scale, we already have critical mass, where we may be able to kind of expand that reach, if you will, that's probably the largest influence in terms of where we're looking to deploy capital. But beyond that, our strategy has not changed. We still will develop, redevelop, acquire high-quality, well-located grocery-anchored neighborhood, and community shopping centers.

Paulina Rojas Schmidt, Analyst

Good morning. And how different is the interest today in the private market for smaller grocery-anchored neighborhood centers versus your centers and maybe one or two boxes in addition to a brochure? Also I think you said before that you expected to return to pre-pandemic levels by 2023. Given your guidance raised and generally the more optimism there is it seems that this to be achieved earlier. I know I'm asking a lot. But do you think, what are the odds that you are back to pre-pandemic in 2022?

Lisa Palmer, CEO

I'm going to pass that to Mike. So I don't get in trouble for providing 2022 or 2023 guidance.

Mike Mas, CFO

There hasn't really been any change in our previous statements from late 2022. We consider 2023 a recovery period. It's important to acknowledge that there's considerable overlap between 2020 and 2021, which has contributed to growth in 2021. However, we've experienced a 200 basis point drop in occupancy. The recovery process will take time, as it always does; finding tenants, negotiating leases, building out spaces, and starting rent is a lengthy process. Ultimately, this will determine our results and how they compare to 2019, as well as our speed of recovery. The situation with uncollectible lease income between 2020 and 2021 is a shallower decline, but it won't change our final outcomes. This vacancy number is significant because it impacts our cash flow, and it will ultimately influence our results in relation to 2019.

Operator, Operator

Our next question comes from Tammi Fique with Wells Fargo. Please go ahead with your question.

Tammi Fique, Analyst

Hi. Thank you. I guess I'm curious, as you think about new developments starts are you at all concerned about the impact of rising construction costs on yields relative to sort of historical yield?

Mike Mas, CFO

Yes, Tammi. We historically have done really a pretty good job of embedding growth in our underwriting so that we don't get caught flat-footed. And looking over our shoulder we've done a pretty nice job of that in existing pipeline deals. So obviously, underwriting it's just a fact out there. Construction is a challenge pricing staff; deliverables are very difficult right now. So all of those factors would go into the mixer in our thought process as we look at our underwriting and pipeline.

Lisa Palmer, CEO

I believe that some of our developments might be delayed, especially given the current environment. We have consistently delivered on prescriptive deals, aside from our expectations. We’ve been proactive in engaging with the market. If growth does not align with our anticipated timeline, we may need to adjust how we set up this pipeline.

Chris Lucas, Analyst

Hey, good afternoon, everybody. Just a couple of quick ones on my end. I think that when you guys were going through the pandemic, you had a number of projects that were sort of set to deliver or nearly ready to deliver, and you made accommodations with tenants with that, by allowing them to open up I'm thinking specifically about 0.50. But are you seeing tenants that maybe had gone through that negotiated sort of delayed openings, now pushing to accelerate those openings or is the timing pretty much set and that's just how they're going to be?

Mike Mas, CFO

Chris, I believe the hesitation to open is largely behind us, similar to the increase in foot traffic as people have returned. Most of our assets that were in that situation have either been replaced by tenants who chose not to move forward or have welcomed similar businesses because of the right mix of merchandise. Many of these spaces were already partially prepared for such uses. It has become almost natural for those same types of users to fill those spaces again, and we are seeing progress as people pursue opportunities today.

Chris Lucas, Analyst

And maybe the flip of that question is I don't know if it's just in my neighborhood, but we're seeing more hours getting cut by shops and retailers based on lack of staff. Are you finding retailers hesitant to sign leases in low labor pool availability markets because of that, or is that not impacting the decision processes at this point?

Mike Mas, CFO

I wouldn't say it's impacting the decision process right now. But it certainly is it's a reality out in the workplace. We hear it from retailers, restaurant tours to soft goods to get across the gamut. It's a real issue, trying to find labor, so more to come. Hopefully, there'll be some changes from the legislative changes that may be impactful to get folks interested in coming back to work. But there's definitely a lack of supply from last year.

Linda Tsai, Analyst

Hi, thanks for taking my question. Given the year-to-date success of cash basis tenants paying back rents can you tell us about the process that's entailed in moving cash basis back onto accrual and maybe a sense of how much earnings could still benefit from straight line rent receivables coming back that had been written off?

Mike Mas, CFO

The process will be very careful. It's much more about assessing future rent-paying ability than looking at the past. Although past performance often reflects the ability to pay rent, it won't be as simple as just becoming current and reverting to an accrual basis. We will need to establish a track record and meet certain thresholds for projecting the future rent capabilities of those tenants. This assessment likely won't take place at Regency until later this year. We have not made any changes to straight line rent in our guidance, and you will see that in our revised ranges, which remain at plus or minus $30 million.

Juan Sanabria, Analyst

Hi, good morning. Just a question on the balance sheet and turning more opus which you touched on in your prepared remarks. Do you foresee that being more ramping up developments and redevelopments that were maybe postponed as a result of COVID or are you seeing interesting external acquisitions? And if so, are those more for stabilized assets or redevelopment opportunities where maybe the yield is a bit less? You're kind of once you think about the long-term prospects for that asset?

Lisa Palmer, CEO

Yes, we still believe that the best use of our capital is in redevelopment and development opportunities. We will continue to rebuild that pipeline and increase our spending in these areas. Additionally, we are exploring the market for acquisition opportunities and will pursue those that fit well with our strategy. We have historically been successful in leveraging our redevelopment and development expertise to achieve better growth, leasing, or value creation. We are considering all options and have the capacity to move forward, and we will pivot to grow from here.

Operator, Operator

Our next question comes from Ki Bin Kim with Truist Securities. Please proceed with your question.

Ki Bin Kim, Analyst

Thanks. So maybe a little bit more about an open-ended question. But I thought was interesting that you guys made a pretty clear commitment to spend $175 million in development annually for the next five years. Obviously, that language wasn't in there last quarter. And it looks like you've even re-increased the scope of Serramonte. So, like I said, a little bit open-ended question. But this is pretty long-term commitment, I think carries a lot more weight. I'm not sure if I'm overreaching. But just help us walk through what you're seeing and thinking.

Mike Mas, CFO

Yes. Hi Ki Bin. I'll begin with some disclosure and then Lisa will provide insights on capital allocation. We made an adjustment to the Serramonte figure to include the gross lease area of the entire center, as we do with all other redevelopments. We realized we hadn't accounted for all the GLA on site, but this isn't a change in scope. We remain optimistic about the Serramonte redevelopment project. Regarding the $175 million of forward capital expenditure, it's essentially a placeholder. Our intention has been consistent; we aim to invest around a billion dollars over the next five years in new developments and redeveloping our existing shopping centers. We look forward to getting back to our proactive approach and making strides in building those pipelines, starting with Carytown Phase 2 and Westbard.

Lisa Palmer, CEO

I think Mike expressed it very well, and we are fully committed to development, which is a core competency of Regency. I believe we have one of the best teams in the industry, and their expertise in development helps us maximize and optimize the value of our operating assets alongside new developments. We are always looking to expand this capability, and it enhances our future growth rate. With the $100 million of free cash flow we are generating, we aim to invest that into developments with approximately 7% returns, which benefits everyone involved.

Operator, Operator

Our next question comes from Paulina Rojas Schmidt with Green Street Advisors. Please proceed with your question.

Paulina Rojas Schmidt, Analyst

Good morning. How different is the interest today in the private market for smaller grocery-anchored neighborhood centers versus your centers and maybe one or two boxes in addition to a brochure? Also I think you said before that you expected to return to pre-pandemic levels by 2023. Given your guidance raised and generally the more optimism there seems to be achieved earlier. I know I'm asking a lot. But do you think, what are the odds that you are back to pre-pandemic in 2022?

Lisa Palmer, CEO

I'm going to pass that to Mike. So I don't get in trouble for providing 2022 or 2023 guidance.

Mike Mas, CFO

There has been no significant change from what we discussed last year regarding our outlook for a recovery period in 2023. It's crucial to remember that there is considerable overlap between 2020 and 2021, leading to what may seem like growth in 2021. However, we have experienced a 200 basis point decline due to occupancy issues, and this recovery will take longer, as always; it involves finding tenants, negotiating leases, building out spaces, and starting to collect rent. Ultimately, this process will determine how we compare to 2019 and how quickly we can reach those levels. The situation with uncollectible lease income from 2020 to 2021 shows a less severe decline, but it doesn't necessarily change the final outcomes, making the vacancy rate significant. This is all important because it directly impacts our cash flow, and the vacancy rate will affect our position relative to 2019.

Operator, Operator

Our next question comes from Tammi Fique with Wells Fargo. Please proceed with your question.

Tammi Fique, Analyst

Hi. Thank you. I guess I'm curious, as you think about new developments starts are you at all concerned about the impact of rising construction costs on yields relative to sort of historical yield?

Mike Mas, CFO

Operator, Operator

Thank you. We've reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Lisa Palmer for closing comments.

Lisa Palmer, CEO

Thank you again for the Regency team. But also thank you all for being on the call with us today and as I opened in my remarks, I know it's been a long week and a long earnings season and I appreciate you being with us on a Friday afternoon. Have a great weekend.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.