Earnings Call Transcript - REG Q3 2021

Operator, Operator

Greetings and welcome to the Regency Centers Corporation Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I will now turn the conference over to your host, Christy McElroy, Senior Vice President of Capital Markets. You may begin.

Christy McElroy, Senior Vice President of Capital Markets

Good morning and welcome to Regency Centers' Third 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 of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations, and are subject to various risks and uncertainties. It's possible that actual results may differ materially from those suggested by the forward-looking statements we may make. Factors and risks that could cause actual results to differ materially from these statements may be included in our presentation today and are described in more detail in our filings with the SEC, specifically in our most recent Form 10-K and 10-Q filings. In our discussion today, we will also reference non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials which are posted on our Investor Relations website. Please note that we have also posted a presentation on our website with additional information, including disclosures related to forward earnings guidance and the impact of COVID-19 on the Company's business. Our caution on forward-looking statements also applies to these presentation materials. Lisa?

Lisa Palmer, President and Chief Executive Officer

Thank you, Christy, and good morning, everyone. Thank you so much for joining us. We feel really good about the progress that we've made toward recovery and also with the improvement we're seeing in our operating trends. Our third quarter results are reflective of a healthy environment for open-air, grocery-anchored shopping centers. Not only are we feeling closer to normal, but we're excited about what the future holds. I'm also really pleased to report that despite the recent concern about potential impacts from the Delta variant, we've continued to make meaningful progress on rent collections, narrowing the gap further as nearly all of our tenants are in a position to pay us full current rent. Steady retailer demand is driving strong leasing activity, which, combined with reduced tenant move-outs, has improved occupancy. We've also had success maintaining leverage in our lease negotiations, driving contractual rent growth and remaining prudent on CapEx, while further improving our rent spreads. Our team has been working really hard to drive deals that will lead to long-term growth in the value of our assets. As a result of these positive trends and an increased pace of improvement, we're again raising full-year guidance for 2021. In previous quarters, we've discussed that we believe the recovery of NOI back to 2019 levels would likely occur in the second half of 2022 on an annualized basis. But given the rate of progress we've seen in recent months, we are now pulling that forward to the first half of 2022. We've also increased our dividend by 5%, a reflection of our confidence in a return to sustained growth over the long term. You'll recall, and I know you're probably sick of this, but I can't possibly remind you enough, that we never cut our dividend during the pandemic. We're committed to growing our dividend while also accretively investing our sector-leading free cash flow to drive solid total returns for our shareholders. That's a good segue into our investment and capital allocation strategy where we remain on our front foot. The private transaction markets are competitive; they remain competitive, and we've continued to see downward pressure on cap rates as more buyers have emerged for high-quality, well-located grocery-anchored centers. But our strong balance sheet and access to low-cost capital provide a competitive advantage that allows us to be opportunistic. We do have a long track record of investing with discipline on a leverage-neutral and earnings accretive basis. Our pipeline is active and we continue to see good opportunities. With that, we just announced that we are under contract to acquire Blakeney Shopping Center, a dominant grocery-anchored community town center in South Charlotte. This is a high-quality, well-leased center with strong demographics and a tenant mix that fits well with our strategy. Our Southeast team is excited to bring this exceptional asset into the Regency portfolio, and we expect the transaction to close this month. The addition of high-quality assets like Blakeney, along with our development and redevelopment program, are important for portfolio enhancement. At the same time, we remain committed to selling centers that are lower growth or non-strategic, or when it's clear to us that maximizing the value of a property involves a predominantly non-retail use. For example, our recent sale of the former Sears box adjacent to our Hancock Center in Austin was one of those cases where we determined that its highest and best use was medical office. The addition of this office component and the traffic that will be generated to our site will enhance the value of this well-leased center where HEB is currently expanding its highly productive store. Our best risk-reward proposition is to invest capital into strong grocery-anchored neighborhood and community retail, which is the bread and butter of Regency's strategy. This commitment to portfolio enhancement has proven to be important and will continue to fortify our future NOI growth. In closing, our shopping centers are well-positioned to benefit from long-term migration and flexible work trends that favor suburban trade areas. We are actively positioning our portfolio to thrive today and into the future. If the industry has learned anything over the last 18 months during which we saw hyper-accelerated digital commerce and fulfillment and distribution challenges, it's that having brick-and-mortar locations close to where consumers live is critical to retailer success. Jim.

Jim Thompson, Chief Operating Officer

Thanks, Lisa. Good morning everyone. We remain encouraged by the continued improvement in our portfolio operating trends accelerated by the reopening of the West Coast this summer. Our tenants are generally fully open and operating in all markets with the lifting of restrictions translating into higher rent collections, and continued strong leasing activity. Portfolio foot traffic rebounded back to 100% of 2019 foot traffic levels as of late October, despite the slight dip in September related to the Delta variant. Many of our tenants are experiencing positive sales trends in 2021, with groceries holding their gains from 2020, and many restaurants reporting record-high productivity. We continue to see further sequential improvement in rent collections with Q3 collections at 98%. Notably, our collection rate for deferrals remains high at over 95% year-to-date. In translation, tenants are honoring their commitments. Our leased occupancy rate is up 50 basis points over the second quarter after adjusting for the sale of the vacant former Sears building at the Hancock Center, which Lisa just mentioned. These gains were driven by strong leasing activity and fewer tenant move-outs. Most importantly, our net effective rent-paying occupancy also rose this quarter and is now over 90%. As we've noted previously, this metric is the best indicator of our recovery progress. As noted, leasing activity continues to be robust, and we remain encouraged by the strength of our pipelines. Q3 total leasing volumes were 125% of 2019 quarterly averages. Shop renewal rates were 80%, elevated over historical trends. Rent spreads continued to improve to a blended rate of over 5%, while our GAAP rent spreads also continue to get closer to pre-COVID levels at over 12%. We are maintaining contractual rent growth on leasing activity in line with recent years, with embedded rent steps on more than 80% of our leases executed this quarter. Additionally, our weighted average lease term for deals has risen back above pre-COVID levels. To summarize, our leasing trends are moving in the right direction, enabling us to maximize NOI growth for the long term. All of that said, we are fully aware and acknowledge that retailers today are facing challenges related to labor shortages, cost inflation, supply chain disruptions, and permitting backlogs. While these issues are impacting build-out costs and tenant rent commencement timing, so far, this has only been on the margin for Regency. That said, we will continue to monitor these issues and work closely with our tenants to help them manage through them where we can. Moving to development activity, we continue to make good progress on our in-process ground-up and redevelopment projects and completed a $21 million Bloomingdale's Square redevelopment in Tampa this quarter. We remade and modernized the center by repurposing a former Walmart box to accommodate an expansion and relocation of a highly productive existing Publix and backfilled the former grocery box with a new LA Fitness. We added more visible and functional shop space and made enhancements and renovations to the remaining portions of the center. This successful project helped to cement this center's relevance and dominance in its trade area, while generating a return of over 8%. Construction cost inflation and labor shortages are real and are creating some pressures, but are not materially impacting the current yields and costs in our in-process projects. We're keeping our finger on the pulse of these trends and are being very thoughtful in our cost projections and delivery timing when underwriting new and potential pipeline projects. In summary, we're very pleased with the positive momentum that we continue to experience in our operating portfolio and in our value creation pipeline, driving us closer to full recovery and supporting our future growth. Mike?

Mike Mas, Chief Financial Officer

Thanks, Jim. Good morning, everyone. I'll provide some color around third quarter results, walk through the changes to full-year 2021 guidance, and offer some helpful reminders when thinking about next year. Third quarter NAREIT FFO of $1.12 per share was helped by several items. Uncollectible lease income was a positive $10 million in the quarter, the details of which we've broken out on page 33 of our supplemental. We reserved over $4 million on third quarter billings, which is down from over $10 million a quarter ago associated with uncollected revenues from cash-basis tenants. This was more than offset by the collection of nearly $6 million of amounts reserved during the first half of 2021, as well as the collection of close to $9 million of revenues that were originally reserved in 2020. Our full-year '21 guidance calls for a $46 million positive impact from the collection of 2020 reserves, of which we have recognized $41 million through the third quarter. We also recognized close to $14 million of one-time promote income in the third quarter related to the USAA JV transaction, which positively impacted NAREIT FFO, but is not included in our core operating earnings metric. Finally, straight-line rent in the third quarter benefited from the reversal of reserves triggered by the conversion of some cash-basis tenants back to accrual accounting, as reflected in non-collectible straight-line rent at a positive $4 million. This is a non-cash accounting impact that contributes to NAREIT FFO but again, did not impact our core operating earnings. Following these conversions, which represent about 5% of ABR, we now have 22% of our ABR remaining on a cash basis of accounting. For the smaller pool, our cash basis collection rate was 91% in the third quarter, a 700 basis point increase from a quarter ago. The collection rate on the old pool before the conversions was 93% in the third quarter, up from the 86% in the second quarter that we disclosed on the last call. As Jim mentioned, our net effective rent-paying occupancy now exceeds 90% as we've continued to narrow the spread between rent-paying and our commenced occupancy rate, due to the progress we've made increasing collections on cash-basis tenants. We remain in a great position from a balance sheet perspective as cash flows continue to recover and leverage even after excluding prior year reserve collections has returned to pre-pandemic levels. We ended the quarter with full capacity in our revolver, and we have no unsecured debt maturities until 2024. You'll recall that we issued about $150 million of equity in Q2 through our ATM program on a forward basis. We settled a portion of that during the third quarter to fund the USAA transaction, generating $83 million of net proceeds. The remainder is unsettled, which we view as capacity for future investment opportunities. We have until June of 2022 to issue the shares. We did not raise any additional equity capital during the third quarter. Turning to guidance, we point you to the detail in our business update slide deck posted to our website. A big driver of the $0.12 increase in the midpoint of our core operating earnings range comes from a higher same-property NOI growth forecast, as we increased the range by 150 basis points at the midpoint. This increase was driven almost entirely by core improvement, including a higher cash basis collection rate on current year billings and lower move-out activity. As I mentioned, our forecast for the collection of prior year 2020 reserves is up only slightly at $46 million. Other drivers of the increase to full-year core operating earnings expectations include higher lease termination fees and lower G&A. Our NAREIT FFO range has increased by an additional $0.05 at the midpoint on top of the change I just described, primarily driven by the increase in straight-line rent associated with the conversion of tenants back to accrual from cash basis during the third quarter. While it's possible that we may convert additional tenants back to accrual during the fourth quarter, our guidance does not assume any additional reversal of straight-line rent reserves. I like to point out that these non-cash accounting impacts are a big reason why we provide and guide to core operating earnings. In addition to NAREIT FFO, this metric excludes non-cash amounts such as straight-line rent and mark-to-market adjustments and can provide a much cleaner picture of our earnings trajectory. We will provide 2022 guidance with Q4 results in February, as we normally do. But we wanted to remind everyone that some of the bigger non-recurring moving pieces that haven't been disclosed and discussed throughout the year when thinking about modeling for next year. First, our $46 million guidance for collection of 2020 reserves is a prior-period adjustment not associated with 2021 billings. Second, we recognized abnormally high expense recoveries of about $3.5 million net of reserves in the second quarter related to the 2020 expense reconciliation process. Third, G&A during the first quarter benefited by about $2 million from the forfeiture of previously expense share grants related to the departure of our CIO earlier this year. Lastly, although not impacting core operating earnings, we recognized close to $14 million of promote income in the third quarter. We look forward to discussing our 2022 outlook in more detail together with next quarter's results. As Lisa mentioned, given the pace of improvement we've experienced to this point of the year, we now expect the recovery of our NOI back to 2019 levels will occur on an annualized basis at some point during the first half of next year, that's about 6 months earlier than we had previously expected. With that, we look forward to taking your questions.

Operator, Operator

Thank you. And at this time, we'll be conducting a question-and-answer session. One moment please, while we poll for questions. Our first question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.

Michael Goldsmith, Analyst

Good morning. Thanks a lot for taking my question. Your third quarter benefited from the strengthening of the core business in conjunction with collecting some of the past rent. So presumably and as your guidance suggests, recovery of prior reserves is going to decrease in the future. Can you talk about the trajectory of those two businesses and whether that means an FFO acceleration in the future?

Mike Mas, Chief Financial Officer

Good morning, Michael. Thank you for your question. You brought up an important point regarding the slower guidance for the fourth quarter. I want to clarify that at the midpoint, it equates to about $0.06 per share. Approximately a third of this, which I want to emphasize pertains to core operating earnings rather than NAREIT FFO, is due to a slowdown in our prior-year collections. Specifically, these collections have decreased from over $20 million in the first quarter to around $9 million in the third quarter, and we expect it to be about $5 million in the fourth quarter. Additionally, about a third of this decline in the fourth quarter is related to other items affecting net operating income, such as percentage rent and settlement income, with a noticeable dip expected from the unusually strong third quarter. Looking at our general and administrative guidance, we anticipate that the fourth quarter will see a slight increase compared to the third quarter. These factors will contribute to the deceleration as we wrap up this year. As we consider next year, the matter of uncollectible lease income will play a significant role in our earnings trajectory. Currently, through the third quarter, we're dealing with about a 250 basis point charge for bad debt or uncollectible lease income. Our expectations are that by the end of the year, the rate of cash-basis tenancy collections will continue to grow, and we foresee finishing the year with a bad debt expense charge from current year billings in the range of plus or minus 170 basis points. This is notable given our past historical run rates around 50 basis points, indicating substantial potential to close that gap. This is a key reason why we focus on net effective rent-paying occupancy, which increased by 200 basis points this quarter and is expected to keep rising into 2022. We will have more to share about our 2022 guidance in February, but it's unlikely that we will return to our historical 50 basis point run rate by the end of next year. However, we are confident in our ability to continue narrowing the gap from where we expect to finish this year at 170 basis points.

Lisa Palmer, President and Chief Executive Officer

Michael, I appreciate your questioning. There are many numbers and facts to consider, but I want to emphasize the significant improvement in demand for leasing and the space in our properties, despite the loss in occupancy. What will drive the acceleration is our ongoing ability to re-lease that space, which is crucial, and we are starting to see that demand materialize.

Michael Goldsmith, Analyst

Incredibly helpful. As a follow-up in your guidance, the expected cap rate for dispositions fell from 5.5% to 6% last quarter to 5.5% this period. In addition, your acquisition cap rates decreased from 5.5% to 5.1%. Is it fair to say that industry cap rates have compressed 40 to 50 basis points since last quarter? And how does that affect your view on doing acquisitions, dispositions, development, and redevelopment going forward?

Lisa Palmer, President and Chief Executive Officer

I don't think that the cap rates have compressed by 50 basis points from last quarter to this quarter. Our guidance reflects the mix of properties. We announced the acquisition of Blakeney, which is an exceptional asset, and the negotiation for that occurred before last quarter, so the cap rates were already established. With the Blakeney acquisition, we matched that with low-cap rate dispositions of non-strategic assets in the fourth quarter, which contributed to the increased guidance for those dispositions at a lower cap rate. It's a combination of properties on both the acquisition and disposition sides specific to Regency. Cap rates have been decreasing throughout the year, and as I mentioned, I don't see much change quarter-over-quarter. However, for the types of properties we currently own and wish to add to our portfolio, we expect cap rates to be in the 4.5% to 5% range. This doesn't alter our approach to acquisitions and additions. Portfolio enhancement has always been a key part of our strategy, and we believe that continuing to invest in high-quality assets similar to those we already own will support our future NOI growth as we dispose of assets that may have a lower growth profile than our average or are considered non-strategic.

Michael Goldsmith, Analyst

Thanks again and good luck in the fourth quarter.

Operator, Operator

And our next question comes from the line of Katy McConnell with Citi. Please proceed with your question.

Katy McConnell, Analyst

Thanks. Good morning, everyone. Can you provide some more background on how the Blakeney deal was sourced and what you're underwriting for upside opportunity to the property? Also, how do dispositions affect your funding plans beyond the fourth quarter?

Lisa Palmer, President and Chief Executive Officer

There’s a lot to unpack in that question. I’ll start answering, and then Jim will follow, and Mike might add insights about funding. This deal was part of the market, but as we’ve mentioned before, we usually perform better when we can engage with off-market deals through our relationships. Nonetheless, there are certain assets that come to market where we also see success by utilizing our local teams. I have a personal belief that we are among the best in the industry, and our Southeast team is outstanding. We already manage assets similar to Blakeney in our portfolio, and we have strong confidence in the quality of this asset. Regarding funding, which Mike will discuss, this allows us to incorporate this asset into our portfolio in a way that enhances our earnings. We are adding an exceptional asset that is expected to grow at a rate higher than our average, contributing positively to our earnings.

Jim Thompson, Chief Operating Officer

Yeah, Katy, I can't overstate how excited our team is about this asset. It's truly a center of gravity for retail and restaurant offerings in that affluent South Charlotte market. We believe we see a great opportunity to really apply our asset management skill set and eye towards fresh remarketing, remerchandising, and a new look at the Center to really drive what we believe is higher-than-normal NOI growth out of that asset.

Lisa Palmer, President and Chief Executive Officer

Before Mike gets into the funding, I don't want to miss the opportunity to highlight that we affectionately call the asset a turducken, as we're nearing the month of Thanksgiving. This refers to our investments Officer in our Carolina market. And for those of you that don't know what a turducken is, it's a turkey stuffed with a chicken and duck. This asset, as Jim said, is a center of gravity and offers a target piece with more of a community center feel. There's a neighborhood center with Harris Teeter anchoring that and then there's a main street retail. You can choose how you think is the turkey, the chicken, or the duck, but it truly is a center of gravity and exceptional asset.

Mike Mas, Chief Financial Officer

Hey, Katy, just following up and cleaning that up from a funding standpoint. You're right. And this is a little bit to Michael's question as well. When you think about recycling, you typically think about dilution. And we're familiar with that. We had some dilutive recycling in our history. We're in a unique period of time where we're adding to our disposition pipeline. It's actually low cap; at the same time, we're displacing low-growth, non-strategic assets. You see Pleasanton Plaza, you see the Hancock Sears pad, and again, these are non-income producing assets. This is an ability to put that capital back to work. You see Gateway 101, it's basically two boxes, very low cap, very low growth, if any, it's flat as a board. Recently, we were able to sell the Parnassus Height Medical Center, again, a highly sought-after asset class, not consistent with Regency's strategy, low cap rate. We're adding a couple more to the disposition guidance, and what that blend of capital provides us is actually an opportunity to invest that accretively into a property like Blakeney, which has a headline and on the surface looks to be quite an aggressive cap rate, and it is. But Regency at this unique period of time was able to make sense of that economically.

Michael Bilerman, Analyst

Just as a follow-up, can you talk about where institutional capital is in partnering with you for further acquisitions? Do you see more opportunities looking ahead?

Lisa Palmer, President and Chief Executive Officer

Of course. Thank you, Michael. I think I do remember that meeting 25 years ago. We have spoken with many investors about this over the past few years, especially in light of some of the buy-in of the USAA and some other dispositions. Back 25 years ago, we really utilized third-party capital for access to capital, access to opportunities, and access to expertise. Three years ago, it was a combination of access to capital and access to opportunities. We were a much smaller company then. Today as we think about it, I just said, I believe that if we don't have the best, we certainly are really darn close to being the best team in the business. So we don't necessarily need access to expertise, and the capital markets can be a little volatile. We haven't had the need for access to capital. We don't have that need today, but never say never. Maintaining good relationships with our partners is still an important objective for us, and we continue to do that. However, at this time, the access to opportunity would really be the biggest check for us in terms of where we would need to access third-party capital. That’s how we're thinking about it today. We have great partners, we really appreciate our partners and the relationships with our partners, and we will continue to sit side-by-side with them. But for new capital at this point, it's not necessarily high on our priority list.

Ki Bin Kim, Analyst

Thank you. Good morning. You guys have been able to achieve a high level of leasing velocity. I'm just curious about how deep that demand is and how is the velocity at which the top of the funnel is being fed with additional pipeline. Is that looking compared to the number of deals you've been signing to-date?

Jim Thompson, Chief Operating Officer

Yes, Ki Bin, this is Jim. The leasing velocity has been very positive. I believe this is due to a mix of renewed confidence in physical retail from retailers and a surge in demand after a year and a half of limited activity. We are noticing a strong shift towards quality, and we consider ourselves to be a key player in that shift. The categories we are engaging with are the same ones we've been focusing on for the past two decades. We are involved in numerous medical deals, pet deals, restaurants, fast-casual dining, banks, and personal service sectors, and the demand is robust across all regions. There appears to be solid demand from retailers, and I am cautiously optimistic that we will maintain a positive trajectory.

Ki Bin Kim, Analyst

Great. And want to ask about your leasing spreads. The new lease spreads were essentially flat, but you are using less Capex than many of your peers. Can you help us better understand this dynamic and the choices behind it?

Jim Thompson, Chief Operating Officer

Yeah, Jim again. I'll take that and I appreciate you recognizing that the blended spreads for this quarter were 5.1%. We're on a nice trajectory there. In addition to those initial spreads, I think it's important, which is obviously an important metric, to take a broader look at what is going on long term to create long-term sustainable NOI. I think one of the components, contractual rent steps and our ability to manage expense recovery ratios are key contributors. I think appropriate and prudent leasing CapEx, which you touched on, that's a major factor in long-term earnings growth. Tenant selection, really making sure we're picking the right mix to drive synergy and traffic at our centers but also having an eye towards relevancy and survivability coming out of this pandemic environment is important. We want tenants that are going to be here with us. We don't like to churn space. All these factors matter, and together I’m confident that our overall results have us on a very good vector towards the long-term NOI and earnings growth objectives.

Derek Johnston, Analyst

In this environment, which is more attractive, development at tighter yields or strategic acquisitions like Blakeney? Given the competitive backdrop, which do you feel as Regency's wiser capital allocation call?

Lisa Palmer, President and Chief Executive Officer

Derek, I actually don't view it as an either-or choice. We like all and we are fortunate to be in a position where capital is not scarce for us. So we are trying and continue to make progress on rebuilding our ground-up development pipeline. We are making progress on our redevelopment pipeline, and we are in the market and see a good pipeline of opportunities for acquisitions. As long as we are able to invest accretively and grow the Company's future trajectory for NOI growth and earnings growth. That's the box that needs to be checked.

Derek Johnston, Analyst

Got it and thank you. How is small shop demand stacking up compared to pre-pandemic?

Jim Thompson, Chief Operating Officer

Yes, Derek. I think, as I previously mentioned, the demand is there. We continue to asset manage no different today than we did pre-pandemic. We are always looking to get the right tenant at the right price to make sure they are successful, which in turn drives sales and makes us successful. Right now, the demand seems to be pretty deep. We continue to be selective and are generally never have been and don't intend to fill spaces with anything and hope they stick. We're very specific in our merchandising mix and really try to make good long-term decisions.

Operator, Operator

Our next question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.

Craig Schmidt, Analyst

I was wondering if I could get an update on the Serramonte Center, particularly with J.C. Penney space and then the Crossing Clarendon.

Lisa Palmer, President and Chief Executive Officer

Craig, I'll have Jim address both.

Jim Thompson, Chief Operating Officer

Yes. Serramonte with the J.C. Penney space, we are investigating several different redevelopment opportunities. We're early in the process and trying to identify the best direction for that replacement box. As for the Crossing Clarendon, it's in great shape. Our retail ground floor space is fully spoken for, either at lease or in lease negotiation. We're waiting on a use waiver which we expect to receive in the next 30 days, which will clear all contingencies. By year-end, we should be posting over 90% leased. It's come together nicely, and we are excited about the lifetime fitness deal.

Lisa Palmer, President and Chief Executive Officer

Those are both tremendous assets, and we're continuing to harvest value from those and grow NOI. Both of those assets are going to have outsized NOI growth in the near future.

Craig Schmidt, Analyst

The G&A costs, I'm just wondering, do we expect a decent increase in 2022 with increased travel? Or have you guys been relatively active throughout 2021, so there's not going to be a significant pickup?

Mike Mas, Chief Financial Officer

I lost my life status on Delta. That means that thing. We are anticipating a significant increase. I appreciate you asking the question. It does give us the opportunity to put this out there. 2021's run rate on a quarterly basis is in the $19 million range or so. Recall that we are benefiting this year from that $2 million forfeiture benefit upon the departure of our CIO. Next year's run rate is probably going to be closer to the $21 million range on a quarterly basis. What we're capturing in that number is compensation increases together with filling open positions, as well as some of the benefit we've been accruing in '21 as we've been running a little bit lighter from a headcount plan perspective. Increases in T&E, as you mentioned, the entire company is starting to get back on the road, and there are more conferences being held, businesses being conducted more in-person than on Zoom going forward. We're planning for that to return to pre-pandemic levels. The development overhead is probably going to be flat for '21 as we continue to build our pipelines. Our development spend will look a lot in 2022 like it did in '21. We'll likely grow that ability to capitalize in '23 and beyond.

Lisa Palmer, President and Chief Executive Officer

Thank you, Craig.

Richard Hill, Analyst

Hey, good morning, guys. I have one key question about 4Q, and then one sort of bigger picture question. On 4Q, can you provide us thoughts on rents becoming straight line and how that will look in 4Q? I noted that moving tenants from cash basis to accrual accounting was around $0.03 in 3Q. So any thoughts on what that might look like in 4Q?

Mike Mas, Chief Financial Officer

Rich, we do not provide guidance on that. I would say that we have a very strict policy, and we prefer it that way. For tenants to transition back to accrual accounting, they need to demonstrate to us that they have the creditworthiness to meet the GAAP standard. The requirements are quite high. They must be current on their rent for a significant duration. Additionally, we need to consider the type of business they operate, and honestly, some of the labor issues we are currently facing are influencing our decision on bringing tenants back to accrual accounting. I believe it will just take time. We may experience some move outs, but we do not expect to see a significant number of those tenants converting back to paying rent status.

Richard Hill, Analyst

On occupancy, you noted in the past that it is key to getting back to normal. You continue to have really good leasing trends. Can you talk about where you feel occupancy is going to get back to normal? Is that a year, 2 years, 3 years? I recognize I'm asking you to shake your crystal ball here.

Lisa Palmer, President and Chief Executive Officer

We haven't given guidance on occupancy. I think one of the best metrics or measures is when we expect to get back to 2019 annualized levels, and that is now in the first half of 2022. So we are getting the benefit of some contractual rents along the way, which may offset a little bit of the occupancy, but I don't want to get in trouble with any future guidance, but I think next year and into 2023, we should continue to see some occupancy improvement.

Richard Hill, Analyst

Thanks, guys. Congrats on a nice quarter.

Operator, Operator

And our next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question.

Michael Mueller, Analyst

Lisa, I think you talked about cap rates on high-quality centers being 4.5% to 5%. Looking at your dispositions this year, they're 5.5% to 6%. How much of that 5.5% plus cap rate product do you still have in the company?

Lisa Palmer, President and Chief Executive Officer

We updated our guidance to be 5% to 5.5% on dispositions. As I said, when we think about portfolio enhancement and the centers that we are selling, they typically have a lower growth profile and/or are non-strategic. So you would expect that especially with the lower growth profile that cap rates would be a little bit higher than the 4.5% to 5%, because as long as everyone looks at total returns, whether it be going in cap plus growth or unlevered IRRs. That’s why you see a little bit of that discrepancy.

Mike Mas, Chief Financial Officer

The details actually don't include the non-income producing land that we're selling, so our effective earnings base cap rate is low.

Lisa Palmer, President and Chief Executive Officer

The second half of your question.

Michael Mueller, Analyst

Do you see any other JV wind-downs or buyouts over the next few years?

Mike Mas, Chief Financial Officer

Building on the comment Lisa made earlier, there's nothing to count on there. We'd like our partners a lot and they've been good to us for a long period of time. It's been a very symbiotic relationship. I wouldn't count on our ability to do a trade like the USAA transaction, but never say never. It would take a shift in our partners' mentality right now. Today, they're committed to the space, specifically to the grocery-anchored neighborhood shopping center sector.

Anthony Powell, Analyst

A question on base rent collections. The laggers are personal service and fitness, but we're seeing some pretty big improvements in activity in those sectors real-time. Could you see an improvement in those two categories really by the first half of next year do you think?

Jim Thompson, Chief Operating Officer

Yes, I would say the answer that is yes. The lag that you're seeing today is predominantly West Coast where they were the most impacted and the last to recover. But they're all on the rise. Large format fitness has bounced back very nicely. It's really more the smaller boutique folks that have been impacted, again, predominantly on the West Coast. We fully expect them to bounce back.

Lisa Palmer, President and Chief Executive Officer

I do believe that the demand from retailers to be close to consumers' homes has increased also, pushing healthy demand to Regency shopping centers.

Paulina Rojas Schmidt, Analyst

I can imagine high labor costs or a lack of labor availability is accelerating retailers focus on technology. Are you keeping a closer eye on any one in particular?

Lisa Palmer, President and Chief Executive Officer

We're making sure that we are proactive and realizing the importance of proximity to consumers. More specifically, BOPIS and last-mile distribution, which is becoming more critical. We believe this is the most impactful change for our retail tenants, and we're committed to maintaining a dialogue with them.

Mike Mas, Chief Financial Officer

The remaining uncollected lease income should continue to improve as our collection rate increases for cash-basis tenancy, but it remains challenging for specific categories and geographies. We don't anticipate significant move-outs, but there will be challenges ahead.

Lisa Palmer, President and Chief Executive Officer

The embedded rent lease bumps for 80% of the leases executed this quarter are predominantly anchor driven, although we do see some flat rates for small shops.

Tammi Fique, Analyst

Has there been a general shifting to more national tenants across your portfolio or has the local small shop tenant percent of GLA or ABR remained steady versus pre-pandemic?

Mike Mas, Chief Financial Officer

The mix is really about the same as it was pre-pandemic, roughly 20% local tenants.

Tammi Fique, Analyst

On the acquisitions, what are the unlevered IRRs that you are targeting today and has that changed as cap rates have compressed?

Lisa Palmer, President and Chief Executive Officer

Today, we could make unlevered IRRs in the 6% range work, and that's been relatively consistent for quite some time now.

Operator, Operator

And we have reached the end of the question-and-answer session. I'll now turn the call over to Lisa Palmer for closing remarks.

Lisa Palmer, President and Chief Executive Officer

Thank you all for your interest and participation today. Always appreciate our conversations. I look forward to talking again soon. I think next week with a lot of you. Have a great weekend.

Operator, Operator

And this concludes this conference and you may disconnect your lines at this time. Thank you for your participation.