Earnings Call Transcript
REGENCY CENTERS CORP (REG)
Earnings Call Transcript - REG Q2 2020
Operator, Operator
Greetings. And welcome to the Regency Centers Corporation Second Quarter 2020 Earnings 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 is being recorded. I would now like to turn the conference over to your host, Ms. Laura Clark, Senior Vice President, Capital Markets for Regency Centers. Thank you. You may begin.
Laura Clark, Senior Vice President, Capital Markets
Good morning. And welcome to Regency’s second quarter 2020 earnings conference call. Joining me today are Lisa Palmer, President and Chief Executive Officer; Mike Mas, Chief Financial Officer; Mac Chandler, Chief Investment Officer; Jim Thompson, Chief Operating Officer; and Chris Leavitt, SVP and Treasurer. As a reminder, today’s discussion contains forward-looking statements about the company’s future business and financial performance. These are based on management’s current expectations and are subject to risks and uncertainties. Factors and risks that could cause actual results to differ materially from these statements are included in our presentation today and on our filings with the SEC. The discussion today also contains non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter’s earnings materials, all of which are posted on our Investor Relations website. Please note that we have provided an additional COVID-19 disclosure in this quarter’s supplemental package and have also posted a presentation on our website with additional information regarding COVID-19 Business Updates and Impacts. Lisa?
Lisa Palmer, President and CEO
Thank you, Laura. Good morning, everyone. I hope you’re all doing as well as possible. First, I just want to open and acknowledge and thank the amazing Regency team. I’m extremely proud and grateful for the dedication and commitment our team has demonstrated during this incredibly challenging time. As we’ve continued to navigate through the last several months, the entire Regency team has prioritized the well-being of their fellow team members, our tenants, and the people and the communities that our property serves, while also making great progress in assisting tenants with successful re-openings, improved rent collections, and rent deferral negotiations. As states and markets have lifted restrictions over these last few months, we’ve been encouraged by the success that our tenants have experienced. Our base rent collections for the second quarter, including executed deferral agreements, was 77% and nearly 80% in July. We’ve seen firsthand that as tenants have been able to reopen, consumers are eager to return to some sense of what was once normal, and that means resuming some of their prior shopping behaviors. Despite the progress Regency and our tenants have made, we are keenly aware that there’s still a lot of uncertainty ahead. It is so difficult to predict the future, and we know that this situation will continue to evolve and may be more challenging as this disruption is even more prolonged. We don’t know for how long the virus will continue to spread without an effective treatment or vaccine. We can’t predict how resilient consumers will be or how tenants will be able to adapt and innovate, or some tenants will need additional support in order to survive. But what we do know, as we look towards the future, we are certain of Regency’s combination of unequaled strategic advantages that we’ve worked to build over time. This combination affords us the opportunity to withstand this difficult time, and I’m confident that we will emerge well-positioned for future success. The quality of our geographically diverse portfolio, comprised of necessity-based retailers, has never been more important than it is today. Our development program, with a pipeline of exciting value-added projects, is structured to provide timing and financial flexibility. Our highly engaged team is achieving great results while doing business the right way, and perhaps, most importantly, in today’s environment, a balance sheet and liquidity position that was rock solid entering the pandemic, enabling us to absorb the body blows that we’ve endured the past four months. Given our strong balance sheet and belief that our rent collections will continue to improve over time, our Board again declared the payment of our quarterly dividend at the same level. Our ability to continue the dividend at the current level is an output of a strong starting position of a very low payout ratio, combined with actual results that, while certainly not up to our historic performance levels, appear to not only have stabilized but also to be trending in a positive direction. Working closely with our Board, we will monitor our financial metrics and projections in addition to economic and industry trends, and we will make future dividend decisions based on the facts and circumstances at that time. Before handing over to Jim, I’d like to touch on Regency’s continued commitment to corporate responsibility. In addition to our strategic business advantages, Regency has always had a strong set of core values that have guided our business strategy since we were founded over 50 years ago. Among those core values is a commitment to do what is right for the environment, our people, our communities, and our company. By doing what is right in each of these areas, we’re effectively managing risks and ensuring the success and sustainability of our business. As I hope you saw in our recently published Annual Corporate Responsibility report, implementation of these initiatives occurs across all departments at Regency and is ingrained in our culture. I’m confident that this commitment to do what is right, along with the combination of our unequaled strategic advantages, will continue to position Regency to be a leader in the shopping center sector going forward. Jim?
Jim Thompson, Chief Operating Officer
Thanks, Lisa. Good morning. As Lisa said, our top priority remains the well-being of our team, tenants, and communities. As of the end of July, 95% of our tenants are open, compared to 75% two months ago. The majority of tenants that have reopened experienced better than anticipated initial success and have been encouraged by consumer reception. Customers appreciate that retailers are taking extra precautions and measures to help them feel safe and welcomed in their stores. Regency is also working side by side with our tenants, including implementing increased safety and cleanliness procedures and installing enhanced signage and wayfinding. We will continue to make additional modifications and adjustments to help our tenants and their customers feel safe and comfortable. As highlighted in our business update posted on our website, as of the end of July, we have collected 77% of base rent for Q2, including executed deferrals. Looking beyond quarter end, we have collected 79% of July base rent on that same basis. We are encouraged that July collections have trended ahead of April, May, and June at the same point in time for those respective months. We have purposely taken a very deliberate approach to negotiating rent deferrals with our tenants. As tenants began opening or have visibility on when they would be able to open, we were in a better position to understand their financial needs to open and operate successfully. Just as important, Regency has been able to obtain certain non-monetary concessions in our deferral agreements, including waiving co-tenancy clauses, lifting use restrictions, extending terms, or requiring enhanced sales reporting. Even with tenants that are still limited on how they can operate due to government orders, such as full-service dining and fitness categories, we are seeing that the better operators are able to adapt to the circumstances and are creative in how they successfully operate their businesses during this time. For example, we have many nail and hair salons that have extended their normal operating hours in order to accommodate more clients, restaurants that are creatively using additional outdoor areas for seating, such as sidewalks and even parking spaces, and fitness operators that are hosting outdoor classes and adding additional class times to accommodate customers' modified work-from-home schedules. At the same time, in certain markets that had reopened, but restrictions have since been put back in place, many tenants are unfortunately experiencing a regression in the progress they have made over the last several months. Just as we did during the initial shutdowns and imposed restrictions in March, we will continue to work with these tenants to provide support and flexibility as they navigate the evolving environment. While our operations teams have been primarily focused on providing support to our 8,000 in-place tenants throughout the pandemic, we are also continuing to negotiate and execute new leases with retailers including grocers, off-price, banks, home improvement, service users, and restaurants. We signed over 120,000 square feet of new leases this quarter, including a new anchor lease with a home improvement retailer in a former Kmart space in Florida with rent growth over 55%. Although our net leasing volumes were down this quarter due to limited new leasing activity, it’s worthwhile to mention that we renewed nearly 1.2 million square feet of leases with positive rent spreads. While the majority of new leases signed in Q2 began pre-COVID, we are seeing tenant interest falling and it terms similar to pre-COVID expectations, while there’s no questions our operations team is keenly focused on collecting rents due and papering lease modifications. This hint of new lease interest is energizing to me and certainly our leasing teams. Mike?
Mike Mas, Chief Financial Officer
Thanks, Jim, and good morning, everyone. As we know, Q2 results were meaningfully impacted by rent collections that remained at low pre-pandemic levels. To better understand its impact, we’ve enhanced our disclosure in our supplemental and I strongly encourage you to reference those added pages if you haven’t already. I’m going to focus my comments on uncollected rents and specifically how those amounts are recognized in our results, both earnings and same-property NOI. And I’ll finish with some comments on our balance sheet and liquidity position. Given continued uncertainty, we will not be providing forward-looking guidance at this time. Uncollected pro-rata rents and recoveries billed in the second quarter totaled over $84 million. Following an extensive collectability review, based on a multitude of factors including credit rating, location and chain performance, tenant category, tenant communications, and a host of other relevant inputs, we deemed nearly 50% of these rents, even if contractually deferred, as likely to be uncollectible. To use a more common description, we’re accounting for these receivables on a cash basis, meaning the income was not recognized in the quarter and will only be recognized as revenue when and if cash is received. The balance of the uncollected pro-rata rents and recoveries billed in the second quarter, approximately $44 million was from tenants with financial and operational attributes warranting being accrued as revenue and carried as a receivable at quarter end. Again, this includes rents that were contractually deferred. Importantly, when including accrued rents and recoveries, together with collected billings, Regency has recognized revenue in the second quarter, equating to 86% of total quarterly billings and other income. The uncollectible lease income charged this quarter. Again, moving tenants to a cash basis of accounting also resulted in a reversal of previously recorded straight-line rent. On a non-cash basis, this negatively impacted the second quarter by approximately $19 million. Together, current quarter uncollectible lease income charges are impacting NAREIT FFO by $0.35 per share. Moving to the balance sheet, during the quarter we took additional measures to enhance our already strong liquidity position by issuing $600 million of 10-year bonds and repaying the defensive draw we made on our line of credit in Q1, bringing our line capacity back to a full $1.2 billion. As of quarter end, we are carrying approximately $600 million of cash on hand. Together with our earnings announcement, we also noted our intent to redeem the entirety of our $300 million of bonds maturing in 2022. The stronger than anticipated rent collection rates in the quarter, combined with the progress we are making on tenant negotiations, gives us confidence to use a material portion of our cash balances to retire this near-term debt and eliminate the added interest expense. We continue to have a $265 million term loan outstanding maturing in 2022, and we will monitor our progress and the evolving retail landscape over the next several months before deciding to retire any additional near-term obligations. With our line of credit fully available and our pro forma cash balances following the bond redemption, we remain very well-positioned with over $1.5 billion of liquidity, more than covering development, redevelopment commitments, and debt maturities through 2022. Before we turn to your questions, there was one person deserving of a special mention this quarter. Laura Clark will be leaving Regency for an exceptional opportunity within REIT Land, and we could not be happier for her. Laura’s contributions to Regency have been significant, as everyone on this call likely knows, and while she will be missed, we are excited to watch her career continue to grow. Best of luck, Laura, and from your Regency team, thank you. With that, we’d be happy to take your questions.
Operator, Operator
Thank you. Our first question comes from Christy McElroy with Citi. Please go ahead with your question.
Christy McElroy, Analyst
Hi. Good morning. Thank you. It looks like local tenants comprised 23% of your ABR but only about 16% of the deferrals that you’ve agreed to. Can you sort of discuss your approach to dealing with those local tenants and attempting to collect rent, maybe specifically restaurants? There’s been a lot of press reports about permanent restaurant closures. There’s obviously a lot of concerns that non-payment of rent could potentially turn into vacancy. I’m just trying to get a sense for your strategy to both collect that rent and also mitigate that potential occupancy loss within your own portfolio?
Mike Mas, Chief Financial Officer
Sure. Hey, Christy. This is Mike. Let me start with a little bit on our disclosure, and then I’m going to pass it on to Jim to more directly, I think, answer your question. We did highlight our local exposure, and then we also highlighted our collection rates for local tenants both for the quarter as well as in July, and you see a decline in the rate of collection there. I’d like to note, however, that we have found that the local payers have been later than our national tenants. So measuring one month of local payment rates versus three months has been, I just want to make that distinction that the local tenants have been paying a little bit later in this environment. In fact, if you were looking at our collection rates in July, at the same point in time as that of April, May, and June by months, you’ll see that that local collection rate has actually increased sequentially for all four months, and we feel like that momentum is pretty positive and consistent with the other directional changes that we’re seeing in our portfolio. With respect to the follow-up, I’ll let Jim give you some color.
Jim Thompson, Chief Operating Officer
We have been very focused over the last several years on proactive asset management of merchandising and really improving the quality of our smaller shop tenants. They are strong entrepreneurs who rely on their businesses for their livelihood, so they are highly invested. They have significant stakes in the game and play important roles in our merchandising shopping centers. Generally, they are adaptable and have responded well to the changing environment. As I mentioned earlier, our teams are actively working on deferral plans to help these businesses get back on their feet. While we anticipate some challenges ahead, these retailers were performing well before the pandemic, and we want to do everything we can to support their survival and success in the post-pandemic landscape.
Lisa Palmer, President and CEO
And if I may just quickly address the restaurant closures, I don’t think that there’s any doubt that we’re going to see a lot of failures in the restaurant category. But I think that the numbers that you see and the news reports that you’re reading really are looking at America as a whole. And I like where we’re positioned, close to the neighborhoods, close to people’s homes. And also from an exposure standpoint, we have a lot less in sort of that fine dining, if you will, which will probably be the hardest hit. But as more people continue to work from home, and perhaps moving forward as people continue to work from home even in a permanent state, I do believe that having those options for people close to their homes, the neighborhood community shopping center, we’re still going to have restaurants as an important part of our merchandising mix that are at our really high-quality portfolio going forward.
Christy McElroy, Analyst
Okay. That’s helpful. And then just thinking about the broader, including national and regional tenants, Jim, you mentioned in your comments in the opening remarks, being thoughtful about future performance and doing those deferral deals, have you done any rent abatements to date? And in terms of that, looking at that unresolved bucket overall, what is your desire to keep pushing for deferral agreements, so pushing that deferral percentage higher here versus going down the road of litigation eventually?
Jim Thompson, Chief Operating Officer
Christy, that’s a great question. I’d like to share our approach to the deferral process. As mentioned last quarter, we initially took a patient and careful stance. We did not respond to the early rent relief requests from tenants back in March and April; our goal was to help them open up before addressing their needs. Now that we've increased the percentage of our retailers open from 59% at the end of April to 95% today, the situation has become clearer for both tenants and landlords. We're finding common ground for fair trade-offs between repayment plans and non-monetary concessions that benefit both parties. We initially focused on our top 300 tenants, representing about 70% of our annual base rent, to negotiate agreements. As of now, we’re actively working with every operating retailer to craft necessary modifications, evidenced by the 84% national and 16% local executed deferral agreements. The hardest-hit categories are theaters, entertainment, fitness, full-service restaurants, and child-related services. We continue to be patient with this group as many of these businesses remain closed or are operating at limited capacity. To reiterate, we’ve been meticulous in the deferral process, with only 4% executed deferrals noted in the investor slide deck. Most of the uncollected rent comes from tenants with whom we have ongoing relationships and discussions but who have yet to fulfill their agreements. We are confident we can close the gap on this uncollected amount, but each deal is unique and will take time to resolve.
Christy McElroy, Analyst
Thank you.
Jim Thompson, Chief Operating Officer
I will add one thing, I think it’s important. While tracking these deferral agreements is important, you really can’t lose sight that our existing leases are binding contracts and the deferrals are just modifications outlining payback programs. The collectability of the outstanding receivable is really the key to the success and really coming out the other side of this pandemic the way we want to see it.
Christy McElroy, Analyst
Thanks so much for the color.
Operator, Operator
Thank you. Our next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.
Derek Johnston, Analyst
Hi, everybody. Thank you. When we look at the cadence of NOI going forward, it’s fair to say that you are now operating and growing from a lower base. Should we expect a lag in occupancy declines as you possibly move tenants out, as it seems occupancy held up better than the NOI decline indicates? How should we think about that in our models?
Lisa Palmer, President and CEO
Derek, I mean, you are right. We have not been, as Jim just described in terms of the negotiations with our tenants, we certainly haven’t been evicting tenants. And there are going to be many that will fail, and we know that. Even on Laura’s last day, she would be giving me the eye that I’m not allowed to provide any future NOI guidance, so I’m going to refrain from that. But absolutely, do expect that we are going to see occupancy declines, and the NOI is reflecting. The reserves are reflecting some of that today.
Derek Johnston, Analyst
Okay. Actually, thank you. That’s helpful. And something a little more positive, feeling omnichannel post-COVID is really emerging as the gold standard for navigating sales and wallet share for your tenants or retailers. How are you positioning Regency to capture the increasing demand trends of the omnichannel efforts, and how are you facilitating bringing in tenants with the strategy and focus?
Lisa Palmer, President and CEO
We have emphasized for a considerable time the strengths of our strategy and portfolio. We are closely connected to the neighborhoods and maintain a high-quality portfolio. While there are 30,000 to 40,000 shopping centers in the U.S. and we anticipate ongoing store closures, a physical presence remains essential in this omnichannel environment. Retailers will retain the stores that are most productive and have the best quality, which is where we are well-positioned to benefit. The pandemic has accelerated this trend, pushing retailers to innovate and adapt more quickly. As Jim mentioned in his prepared remarks, we are committed to supporting retailers, partnering with them to help them meet the needs of their customers, which also includes our shoppers.
Derek Johnston, Analyst
Okay. Great. And lastly, how are you thinking about the development and redevelopment projects? When do you anticipate returning back to offense and moving value-enhancing projects forward at a more rapid rate?
Mac Chandler, Chief Investment Officer
Hi, Derek. This is Mac. We continue to evaluate these projects one at a time. Each one takes a lot of experience, a lot of discipline that we’ve always shown. And when we start a project is based on a lot of factors; some of it’s pre-leasing, some of it’s the format, some of it is the location. It’s really a risk-adjusted return at the end of the day. And so we’re setting up projects that are ready to go and some that aren’t ready to go, but we’re continuing to advance entitlements to put ourselves in a position to start. So that when we have visibility to a green light position, we’ll be in a position to start. So it’s tough to tell you exactly when each project is going to start today, but we have lots of experience in this, and we’ll know on a case-by-case basis when to start projects. And I think we’ll be able to also take advantage of a declining construction costs, which will help our yield as well. And so we’re setting ourselves up well, having this platform of offices throughout the country where we have local sharpshooters and local teams ready to go. I think that really gives us a distinct advantage. So we’re excited about that and the teams will be ready to start these projects when conditions present themselves.
Derek Johnston, Analyst
Thank you.
Mike Mas, Chief Financial Officer
Hey, Derek. This is Mike. I just want to follow up on Mac’s comments because I think it is a balance. As well as Mac and team are preparing at the property level and tenant demand, and in fact, will probably drive much of that decision-making. We’re also thinking about funding, right? So we need to align both the opportunity with the development with the opportunity on the funding side. And as you know, prior to the pandemic, with free cash flow being our primary funding source of our development pipeline, that may change, but we have access to multiple sources of capital, whether that be property sales of lower growth assets or potentially even new capital in the form of debt or equity. We’re preparing on that front as well.
Derek Johnston, Analyst
Thanks, everybody.
Lisa Palmer, President and CEO
Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.
Craig Schmidt, Analyst
Thank you. Just some thoughts regarding your exposure by use, do you see as you go through the process of maybe decreasing your exposure to fine dining, fitness, and possibly personal services as some of those shakeout? And maybe you’re not as quick to release to those uses again?
Mike Mas, Chief Financial Officer
I’ll start with a few comments, and Lisa or Jim may add to it. First, regarding fine dining, we have only a 1% exposure to that category. So, while it appears in our disclosures, it makes up a very minor part of our rent roll. With fitness at 4%, we remain optimistic about the long-term prospects. Personal fitness and health are strong trends, and the pandemic has likely emphasized this even further. We believe that boutique fitness will continue to be a beneficial component of our shopping centers. On the personal service front, we also maintain a positive long-term view. Overall, we think our shopping centers meet consumer needs effectively.
Lisa Palmer, President and CEO
I believe Mike covered most of the points. Regarding our property type, one thing that is clear is that it is always in demand. Throughout my career and Jim's, we’ve consistently observed failures followed by new ideas. I anticipate that we will continue to witness innovation stemming from this disruption. While I don’t know what those ideas will specifically be yet, I expect that our future leasing will likely involve some of these new concepts, and older concepts may eventually fade away.
Craig Schmidt, Analyst
Okay. Thank you. And then just…
Jim Thompson, Chief Operating Officer
Rest you can model on…
Lisa Palmer, President and CEO
Yeah.
Craig Schmidt, Analyst
… given the spike in California, Texas, and Florida, I am wondering if you are seeing a reduction in terms of discretionary goods spending in the last couple of weeks?
Lisa Palmer, President and CEO
I think it’s too early to really tell. As with many, I try to stay updated on all the research reports, mobility data, and OpenTable reservations. We did notice a brief drop in the specific areas you mentioned, but it recovered fairly quickly. Whether there will be any permanent reduction in traffic is still uncertain. However, consumers have shown resilience, which is encouraging for us. The data tools we’ve used to monitor foot traffic have, in some cases, surprisingly shown a positive recovery trend.
Craig Schmidt, Analyst
Okay. Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Nick Yulico with Scotiabank. Please proceed with your question.
Greg McGinnis, Analyst
Hi. This is Greg McGinnis on with Nick. Lisa, you mentioned that the reserve reflects some of the expected occupancy decline. And I am wondering if you might be able to provide some more context on the expected short- versus long-term impact of uncollectable Q2 rents. So basically, how much of that rent could we maybe strip out to create a run rate from what today, or maybe said differently, how much of the uncollectable rent is effectively a Q2 rent abatement, but the tenant is still viable and will survive to pay rent in Q3?
Lisa Palmer, President and CEO
Okay. I’ll let Mike address that.
Mike Mas, Chief Financial Officer
I appreciate the question. It's challenging to provide the specific guidance you're looking for. For the quarter, we moved about 20% of our tenants to a cash basis of accounting, leaving 80% on an accrual basis. The collection rates for the cash basis tenants were at 40%, and by July, that improved to 50%. This is an important factor to consider when evaluating our portfolio, particularly regarding the reserved rent that corresponds to the 60% that remains uncollected in that category. From an accrual perspective, we collected 80% of that 80% of our exposure. Given our view of these tenants operationally and from a credit perspective, we are accruing that rent. Ultimately, we recognized revenue equal to about 86% of our total potential rent for the quarter, which is where we are focusing our attention. As Jim’s team continues to work on deferrals and contract modifications, we are confident in the collectability of that 86% of our rents, represented by actual cash collections or strong visibility toward collections.
Greg McGinnis, Analyst
Thank you for the clarification on the disclosure. I'm curious about how much of the uncollectible rent is related to tenant move-outs and bankruptcies at this point, especially since occupancy is trending down.
Mike Mas, Chief Financial Officer
I will answer briefly. We’ve received a few questions about abatements, and there have practically been none so far. However, the reserve is still in place. They are accounted for on a cash basis, meaning they'll only be recognized when rents are actually collected. The overall impact remains unchanged. I hope this information is useful. The notion that bad debt expense will no longer exist is somewhat misleading; it's essential to consider the performance of our cash basis tenants. I believe the 80% to 20% split is informative. Additionally, 40% of those tenants paid rent in the second quarter, and that figure is now 50% as of July, which is another helpful statistic. When you compare this to our significantly better opening percentages over the past three months, that’s about all we can provide in terms of a forward-looking perspective.
Greg McGinnis, Analyst
Okay. Thanks, Mike.
Operator, Operator
Thank you. Our next question comes from the line of Brian Hawthorne with RBC Capital Markets. Please proceed with your question.
Brian Hawthorne, Analyst
Hi. So within the categories that you’re signing leases, there are a couple of that have only paid with like two-thirds or three quarters of the rent. Are you negotiating leases with tenants that are not paying rent currently? Like negotiating new leases?
Jim Thompson, Chief Operating Officer
No. This is Jim, Brian. No. We’re not.
Brian Hawthorne, Analyst
Okay. Good answer. Okay. And then, have you guys seen demand change for certain locations within the shopping center? I mean, kind of looking at pads. Is there a higher demand there?
Mike Mas, Chief Financial Officer
I think the reality is that the pandemic brought about was certainly drive-throughs; everybody wants a drive-through today. So pad with a drive-through, I think, for the future is going to be a must; it’s going to be a very, very highly sought-after attribute. But other than that, I think the banks have been very active in their pad-type of user. So pads are always seemed to be very resilient and the depth of tenant debt like pad is generally pretty deep. So pads are pretty easy to work with.
Brian Hawthorne, Analyst
Got it. Okay. Thank you.
Lisa Palmer, President and CEO
Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Richard Hill with Morgan Stanley. Please proceed with your question.
Ron Kamdem, Analyst
Hi. You got Ron Kamdem on for Richard Hill. Just two quick ones going back to sort of the bad debt. And obviously, we’re not asking for guidance. But I think we’re all trying to figure out if there is another bad debt charge coming. So I guess the question really is, when I think about when we get to the end of Q3 and we’re looking at I think your report your July uncollected at 21%. Are you going to have to go through sort of the same exercise to try to figure out what’s uncollected and how much to reserve against it? And is there any reason to think that there’s something about this mix that’s either better or worse than it was in Q2? So, again, not asking for guidance, maybe just a high-level color on how we should think about that bad debt going forward a little bit?
Mike Mas, Chief Financial Officer
Sure. First and foremost, you cannot reserve for rent that has not yet been billed. If you have cash-basis tenants in your shopping centers who are still occupying space, and you bill rent that they haven't paid in the third quarter, you would reserve for that. It will depend on individual assessments of what percentage of that exposure will either start paying rent or vacate. If they move out, you won't incur that debt expense, but you also won't have income, so the outcome would be similar. I hope that clarifies things, but the notion that there will no longer be bad debt expense is misleading. It really revolves around how we should assess the performance of our cash-basis tenants. I hope the 80-20 split is useful. Notably, 40% of those tenants paid rent in the second quarter, which increased to 50% by July; that’s a useful statistic. This is in the context of our opening percentages being significantly better than they were three months ago. For now, that's the best forward-looking insight we can provide.
Ron Kamdem, Analyst
Got it. That’s helpful. If I could ask a follow-up on that, considering your 21% uncollected amount and applying a 50% ratio based on your Q2 bad debt, what might I be missing with that approach? Does that make sense?
Mike Mas, Chief Financial Officer
It makes sense, and that can be an assumption. We can’t comment on…
Ron Kamdem, Analyst
Okay.
Lisa Palmer, President and CEO
Well, what we don’t know is how many of those cash-basis tenants that did not pay that we reserved for begin today? That’s what you don’t know, and that’s what we don’t know.
Mike Mas, Chief Financial Officer
Right.
Ron Kamdem, Analyst
I understand, and I appreciate your clarification on that. My other question pertains to the straight-line rent charge that was reversed in the second quarter. Is this situation analogous to the bad debt question? Should we expect a similar reversal, or is there something in Q3 that could help mitigate that? How should we approach straight-line rents going forward?
Mike Mas, Chief Financial Officer
This is a good question. It is different. The decision to switch a tenant from accrual to cash basis is a one-time reversal of the straight-line rent balance. As long as those tenants remain unchanged, the 80%, 20% split will stay the same, which means we can expect less variability related to straight-line rent in future quarters. However, this will depend on how we evaluate tenancy moving forward. The 80%, 20% split is not fixed at this moment. From a procedural standpoint, we have invested considerable time this quarter analyzing our tenants and assessing the likelihood, which we estimate at 75% or better, that they will fulfill their contract obligations. That is a significant threshold. While I don’t foresee substantial changes at this point, we are in an unusual environment where many factors fluctuate from month to month and quarter to quarter, so we will reevaluate at the end of the third quarter.
Ron Kamdem, Analyst
Got it. Very helpful. Thank you. That’s all I had.
Mike Mas, Chief Financial Officer
Sure.
Operator, Operator
Thank you. Our next question comes from the line of Mike Mueller with JP Morgan. Please proceed with your question.
Mike Mueller, Analyst
Yeah. Hi. I guess, what does the Board see as the benefit of holding on to the dividend at the current level?
Lisa Palmer, President and CEO
I want to remind you that we intentionally strengthened the balance sheet to position ourselves to weather the next economic downturn. We never quite expected a storm like this one.
Mike Mueller, Analyst
Yeah.
Lisa Palmer, President and CEO
So I think it’s really important to remember that the strength of our balance sheet and financial position coming into this really was a true differentiator for us. Our FFO payout ratio was in the low 60s. Our AFFO payout ratio was in the low 70s. That provided us with $150 million of free cash flow that Mike even alluded to earlier. We pulled back capital spend early. So we deferred that, essentially almost a like amount of $150 million capital spend. And this really provided a really big cushion for us. And so with that backdrop, and the fact that we continue to see what we believe to be an improvement in rent collections going forward, it allowed us to declare our full dividends. And our future projections essentially cover our dividend payments, which is really the objective. And so that’s why we have paid it. That’s a fact. The dividend is an output. It’s not a decision just to hold it, just to hold it. I’ll reiterate that our future decisions are going to be really deliberate. The payment this quarter doesn’t guarantee future payments. We have to continue to weigh all the facts and circumstances as they happen. But based on where we sit today, with the starting position and with what we are seeing with actual results, it makes sense to pay our dividend. As a REIT, part of the total return is the income return, and that’s an important part of our total return.
Mike Mueller, Analyst
Got it. Okay. And then, out of curiosity, the sequential small shop occupancy decline. Was that fairly broad-based or was it concentrated? Can you just give us a little bit of color on that?
Mike Mas, Chief Financial Officer
Yeah, I think that was basically wrapped up in the BK. We had, gosh, 16 – at this point in ‘20, we have 16 brands that have filed, of which we’ve got 150 individual store locations and out of that, we’ve got 40 that we expect either have rejected or will likely reject. So the decline is primarily BK at this point.
Mike Mueller, Analyst
Got it. Okay. That was it. Thank you.
Lisa Palmer, President and CEO
Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Floris van Dijkum with Compass Point. Please proceed with your question.
Floris van Dijkum, Analyst
Good morning, everyone. My question is about the current trends in cap rates. When considering your asset valuation, it hinges on two factors: the net operating income and the cap rate. Have you noticed any changes in cap rates? Additionally, could you share your thoughts on the public markets and your perspective on the stability of values for your asset costs?
Mac Chandler, Chief Investment Officer
Hi, Floris. This is Mac. I’ll address the first part of your question and then pass it to Mike. Regarding cap rates, there isn't a significant amount of A quality properties, which our portfolio represents. Owners of these properties understand their long-term value and are reluctant to sell. There is a real scarcity of such assets. However, those sellers who are willing to sell are facing high demand for grocery-anchored neighborhood centers. The properties that are performing best tend to be smaller, reflecting the available capital in the market. We are seeing cap rates remain stable and strong. Buyers are assessing how to underwrite future cash flows, approaching the task with caution and anticipating limited growth for the next couple of years, after which they typically revert to historical norms. We have some properties listed for sale, and the demand has been robust. There is also interest in debt financing, with 50% to 60% permanent loans available at excellent rates, the best we've seen in a long time. For our type of product, values are holding up well. I’ll let Mike explain how this impacts our NAV.
Lisa Palmer, President and CEO
I’ll take over from here and give Mike a moment. We’ve been discussing the importance of neighborhood community shopping centers and essential retail quite frequently. This remains crucial today, and we can see that by how cap rates are responding. Although the applied cap rate hasn’t changed much, it’s challenging to determine the NOI stream and the cash flow needed to recover more NOI as we lease. We anticipate a significant amount of leasing in the future that will require tenant improvement spending. From a valuation standpoint, we've shared all the information we can; it really hinges on where the NOI stabilizes, and we don’t have that clarity yet due to ongoing uncertainty. We need to see where that new baseline lands, but I do expect growth from there. We’re starting from a lower base, will continue to lease, and should experience above-average same-property NOI growth for a while. However, achieving this will require capital. I understand I haven't fully answered your questions, Floris, because estimates will vary widely, and we need more clarity on when this situation will stabilize to begin our recovery.
Floris van Dijkum, Analyst
Thanks, Lisa. That’s it for me.
Operator, Operator
Thank you. Our next question comes from the line of Michael Gorman with BTIG. Please proceed with your question.
Michael Gorman, Analyst
Sure. Good morning. Lisa, I’d like to revisit your earlier comments on omnichannel, specifically regarding e-commerce grocery. Could you share insights on the discussions you’re having with tenants about their e-commerce trends in grocery? Additionally, how are they approaching the implementation of newer technologies like MSCs, and what’s their strategy regarding your portfolio, particularly in terms of productivity at top locations? Are they considering allocating space for MSCs within those stores, or are they exploring alternatives? Thank you.
Lisa Palmer, President and CEO
Sure. I would say that those conversations really haven’t changed much. The better operators were already focused on how to best serve their customers in the most profitable manner. While Kroger is concentrating on larger robotic automated warehouse partnerships with Walgreens, Ahold and Albertsons appear to be most focused on micro-fulfillment centers. Amazon is also continuing its efforts with Whole Foods, Amazon Go, and the expansion of traditional grocery stores. All of them are focused on serving their customers in the most profitable way; and there’s still no doubt that the most profitable approach today is to bring customers into the store. They are all very focused on serving their customers in an omnichannel manner, but as much as possible, they seek the most profitable way, which involves encouraging in-store visits. With that said, it’s clear that the better operators are investing more in technology and exploring various methods to improve that experience. We continue to have ongoing discussions with them, partner with them, and assist them in facilitating the delivery of their goods within our shopping centers. This landscape will continue to evolve, and we will see further consolidation in the grocery sector. Scale is important, and having cash flow to invest in innovation and technology will determine the winners in this space.
Michael Gorman, Analyst
That’s helpful. I guess just clarifying. I mean, when you speak to the grocers, the high productivity of their stores in your portfolio make them more likely to kind of leave those intact and look elsewhere for technological solutions in the market, or is that not playing a role?
Lisa Palmer, President and CEO
Well, clearly, it plays a role when they think about their most profitable stores. It’s about their profitability. And typically, the more productive stores are going to be more profitable. So that certainly plays a role as when they’re thinking about their network of stores and fulfillment centers. They are going to be very reluctant to close something that is profitable. They could use that store as the core or the center of a smaller network, if you will, and add micro-fulfillment around it to continue to service the customers even out of that particular store. So it absolutely is an input and a variable.
Michael Gorman, Analyst
Excellent. Thanks so much, Lisa.
Lisa Palmer, President and CEO
Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Ki Bin Kim with Truist Financial. Please proceed with your question.
Ki Bin Kim, Analyst
Thanks. Good morning. So going back to the 14% of revenue reserves, how much of these rents are from tenants who were decently healthy pre-COVID? And how is this impacting the ways you’re thinking about helping these tenants? How?
Mike Mas, Chief Financial Officer
Yes. I appreciate the question, Ki Bin. I think let me answer it this way. So our cash basis, the percentage of our ABR that we had on a cash basis pre-COVID was only 3%. Now, as I stated earlier, we’ve identified a collection of tenants that equates to about 20% of our rent roll, which is now on a cash basis. So I think by extension and that 3% was primarily basically BK watch list tenants. So by extension, I would answer your question to say that the majority of them were healthy. But as Jim kind of spend some time on earlier from a local tenant perspective, at least, this is a storm for them that is pretty challenging. And it’s the severity of the circumstances, the inability to operate at all in some cases that has changed our perspective from a classification standpoint. But again I can’t reiterate that 40% of those tenants are still paying rent currently, and that is actually 50% right now through July. I don’t know, Jim, if you want to add anything to that.
Jim Thompson, Chief Operating Officer
No. Thank you.
Ki Bin Kim, Analyst
I appreciate that your deferral arrangements are only 4%. Deferral ranges are often given out, but in some cases, they hold little value. I'm considering the perspective of tenants for a moment. Many of these local tenants cannot afford to pay lump sum rents, right? Just deferring it and paying it back in a year might be a burden for them. How are you approaching this, and do deferrals actually make sense for many of your tenants?
Jim Thompson, Chief Operating Officer
Ki Bin, as we engage with these tenants, we aim to understand their circumstances, their future outlook, and their credit capabilities. We approach each situation individually to make the best decisions possible. If we have long-term operators who consistently meet their commitments and prove to be strong operators, we will go above and beyond to ensure their success. We have various resources available and will utilize them as needed. Our priority is to invest our funds where they will yield the best outcomes. That's all I can share at this moment.
Mike Mas, Chief Financial Officer
Yeah. I will say this for Jim, because he has told me many, many times, we’re not going to put a tenant into a deferral plan that puts them out of business.
Jim Thompson, Chief Operating Officer
Right.
Ki Bin Kim, Analyst
Okay. Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.
Linda Tsai, Analyst
Hi. Of the 16 brands that have filed in the 40 spaces that have been rejected or likely to be rejected, when is the earliest you might expect to get those spaces back? And any sense of whether you’d see more demands in the national brands or local tenants as backfill options?
Jim Thompson, Chief Operating Officer
Linda. This is Jim. We will be getting, I think, some of those rejections probably in the next 30 days or so. As far as demand, pre-COVID, we obviously had a lot of interest in, for instance, Tier 1. We are in dialogue with several of those. I think there’s still interest. I think the speed to market, if you will, of converting that interest into an executed document is slowed dramatically, and I expect the same. At the end of the day, Lisa said we think we’ve got great real estate. The tenants within our portfolio have historically operated at very high levels. As we get space back, it’s a supply and demand business. We think we’re going to have good product in good centers, and if the market allows it, we’re going to get more than our fair share of returning opportunities.
Linda Tsai, Analyst
Thanks a lot for that color. And then just one other, how are you thinking about dispositions in the post-COVID environment? How might parameters around low growth have changed pre- versus post-COVID?
Mac Chandler, Chief Investment Officer
Linda, I can take that to start with. When we consider properties that are being disposed, we do it like we have been historically. It’s a ground-up basis. We look for properties that might be non-strategic, certainly, low growth, just non-core properties that we’re not going to miss so to speak. So in today’s world, we’ll take a second look to make sure that we accurately forecast growth going forward. Will that change? Sure, certainly, I would think at some properties. So we’ll take it on a case-by-case, and it’s probably a little too soon to have a perfect assessment of forward growth compared to pre-COVID times. But we’ll continue to look at that. But these are good properties to have as well. I don’t want to dismiss them. I think the buyers of our properties have done quite well, and we wish them well. So I’ll let others update as needed.
Mike Mas, Chief Financial Officer
Hey. Thanks, Mac. It’s Mike. I’ll go back to kind of our funding plan, and one thing I’d like to make sure you hear is that we’ll be very disciplined. To the extent property sales are a lever in our funding plan, and they most likely will be. We’re going to be very disciplined on the valuation. And I think Mac is exactly right. We’re going to have our own view of the forward NOI stream of these properties. And if the market is not giving us the value we believe we deserve, well, we’re prepared to hold that asset, and we will choose to hold that asset, and we’ll make appropriate other funding decisions from that point. We have a large portfolio, a diverse portfolio. We have a lot of optionality within that portfolio to fund what we plan to have as a vibrant — again, a vibrant redevelopment and development opportunities set going forward.
Lisa Palmer, President and CEO
We have always been committed to dispositions and firmly believe that we have a high-quality portfolio. While I believe most publicly owned companies face this, everyone has some lower quality and lower growth assets, even those in the top 10% of U.S. ownership. We have consistently focused on improving the quality of our portfolio and enhancing future NOI growth rates. This is a crucial aspect of our strategy.
Linda Tsai, Analyst
Thanks. Good luck.
Lisa Palmer, President and CEO
Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Chris Lucas with Capital One Securities. Please proceed with your question.
Chris Lucas, Analyst
Hi. Good morning, everybody, or I guess afternoon now, sorry. Just a couple of quick ones, just as it relates to, I guess, rent collection, particularly on the more challenged lines of business. Does geography play a role in that? And then, I guess, sort of on the same geography line of thought, when you guys were pursuing litigation, does geography drive that as well?
Jim Thompson, Chief Operating Officer
Chris. It’s Jim. As far as impact on collection rates, I think certainly, there are really three things that come into play. You’ve got kind of the essential category mix, which will drive that recovery, obviously. Geography certainly comes into play. We’ve got, as you’re well aware, we’ve got areas within the country that have higher mandated closure still. So that will have a big impact. And then the local national mix, as I referred to earlier, in our strategy that local group is kind of the last group that we’re engaged with right now. So that will have an impact on that same collection rate. Well, part two of the question was…
Chris Lucas, Analyst
It’s related to litigation and geographies?
Jim Thompson, Chief Operating Officer
Oh! Litigation?
Chris Lucas, Analyst
Yeah.
Jim Thompson, Chief Operating Officer
Chris, where we are in that is, if warranted, we’re taking legal action on tenants that have, number one, either have the ability to pay and have chosen not to, or are non-responsive or unreasonable tenants. In many cases, this approach of late has become pretty effective in bringing payments through the door or at least getting folks to the table for further discussion.
Chris Lucas, Analyst
Okay. And then, Mike, I’m just curious, have you collected rent in, I guess, third quarter that was applicable to second quarter, just kind of curious how you’re dealing with that?
Mike Mas, Chief Financial Officer
I believe the crossover rents amount to about $8 million that we collected in July, which were owed from the second quarter. If you consider our reserve as a percentage of billings, it would increase from 47% to 52%, Chris.
Chris Lucas, Analyst
Okay. Do you have a split between what was on a cash-basis accounting for the $8 million?
Mike Mas, Chief Financial Officer
I don’t have that for. I’d have to follow up with you on that one.
Chris Lucas, Analyst
Okay. Okay. Great. Thank you. That’s all I have this morning.
Lisa Palmer, President and CEO
Thanks, Chris.
Mike Mas, Chief Financial Officer
Thanks Chris.
Lisa Palmer, President and CEO
Thank you. Ladies and gentlemen, that...
Operator, Operator
I’m sorry. I’ll turn it back to Lisa …
Lisa Palmer, President and CEO
I was just going to jump in. Yeah. Thanks Lisa. Thank you all for your time today. Your continued interest in Regency, your support. I do hope that you all stay safe, wear a mask. And again, thank you to the Regency team. I really do appreciate this time that we’re living in is really hard for all of us. So thank you to everyone and good Laura. Thank you.
Operator, Operator
Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.