Earnings Call Transcript - REG Q2 2021

Operator, Operator

Greetings, and welcome to Regency Centers Corporation Second Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Christy McElroy. Thank you. You may begin.

Christy McElroy, Host

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

Lisa Palmer, CEO

Thank you, Christy. Good morning, everyone, and thank you for joining us this morning. We are pleased to report another quarter of results reflecting strong progress toward recovery. The tide has continued to rise following the removal of most capacity restrictions across the country. Our portfolio of foot traffic is now back to at least 100% of pre-COVID levels in nearly all of our markets, and we've made meaningful progress on rent collections. Retailer demand is healthy. This is reflected in our strong leasing activity. And we're seeing fewer tenant failures and, therefore, lower move-out activity than we expected. We acknowledge that we are not completely out of the woods yet. We are all keenly aware of rising virus cases in many cities across the country as we experience another wave of the pandemic. New mask and vaccine restrictions are emerging, with the risk of perhaps even the return of capacity restrictions in some markets. But with the knowledge and experience that we and our tenants have gained over the last 1.5 years, we feel good about where we stand long term and our ability to weather additional storms. And importantly, if we do see new restrictions, we believe that the impact will be short term. Our industry and specifically Regency's portfolio have proven its resiliency, and this is most evident in the meaningful improvement in our West Coast markets in recent months as all of our tenants were finally allowed to fully operate as the market opened up. I have said this before, and I will say it again, the best shopping center assets will continue to thrive in the post-pandemic world. On last quarter's call, we discussed pivoting to office. We are confident in our path to recovery, and our strong balance sheet and access to low-cost capital give us a competitive advantage in developing and acquiring on an earnings and quality accretive basis. We have a really successful track record in that regard. And so with this pivot, we started our multiphase Westbard project in Bethesda, Maryland, and we expanded our existing project in Richmond, Virginia, which I might add is experiencing robust tenant demand. Looking forward, we remain encouraged and excited about additional opportunities in our pipeline. Earlier this week, we also purchased our partner's 80% share in our USAA joint venture, a great opportunity to allocate capital on an accretive basis into high-quality assets that we have known and operated for 20 years. We raised equity during the quarter through our ATM on a forward basis, funding this transaction as well as providing additional capacity for future investments. As always, we are active in pursuing and evaluating acquisition opportunities. In today's transaction market, however, we do continue to see even greater competition for deals. There's been meaningful capital formation targeting high-quality grocery-anchored neighborhood and community centers as the investment market appreciates the demonstrated performance and resiliency of these high-quality assets. So as a result, and as you would expect, we've seen continued compression in cap rates for these types of assets across all of our target markets. Before I turn it over to Jim, I'd like to take just a moment to touch on something that's extremely important to Regency and to me. One of the highlights of the second quarter for us was the release of our 2020 Corporate Responsibility Report, which allows us the opportunity each year to showcase our leading ESG practices. We are proud of our accomplishments across all four pillars of our strategy: our people, our communities, governance, and environmental stewardship. So please allow me this opportunity to share several highlights from this report and our progress over the last year. And again, these are just highlights: the development and implementation of a more robust diversity, equity, and inclusion strategy; a gender pay gap that is now essentially zero; impressive philanthropic efforts by our team members in what was a really challenging personal environment as well as professional; increased tenant and community engagement during the pandemic, for which we were recently recognized by ICSC with three MAXI awards; further progress on Board diversity and refreshment; the introduction of an ESG metric for executive compensation; the issuance of our first TCFD report on climate change risk; and finally, outperformance in our reduction targets for greenhouse gas emissions, energy efficiency, and waste diversion. Strong corporate responsibility is a foundation of our company. It's ingrained in our culture. And no doubt, it's part of what makes us great. And just as we approach all aspects of our business, we look to continue to improve and evolve our best practices over time. Jim?

Jim Thompson, COO

Thanks, Lisa, and good morning, everyone. We remain encouraged by continued improvement in operating trends in our portfolio, including increased foot traffic, higher rent collections, and strengthening leasing activity. We took another big step in our recovery during the second quarter as many more operating restrictions were lifted, providing a necessary catalyst to convert many more of our tenants back to rent-paying status. While the progress and results are very rewarding, we realize it's not all clear sailing. We continue to monitor the implications of rising COVID case levels and implementation of mask and vaccine mandates in certain geographies around the country. But in contrast to earlier periods of the pandemic, vaccines are now widely available. Consumers are resuming more normal behaviors, shopping at stores, eating at restaurants, and working out at fitness clubs. As of mid-July, nearly all of our 22 markets are now at or above 100% of 2019 foot traffic levels. And after nearly 1.5 years of operating in this environment, many of our tenants have learned to roll with the punches, demonstrating resiliency and creativity in adapting to an evolving normal. Moving to rent collections: we again saw improvement in all regions with Q2 and July collections both at 96% at this point. Our unresolved rent bucket continues to shrink. As tenants have been able to get back to fully operating, our teams have been successfully working to get them rent-paying again. Our leased and commenced occupancy rates ticked up this quarter, reflecting reduced move-outs but also strong leasing activity. More importantly, our net effective rent-paying occupancy, which we discussed previously, is up over 150 basis points sequentially to north of 88%. We continue to believe this is the best indicator of our recovery progress. We also had another strong leasing quarter, exceeding 2019 levels on both new and renewal leasing as our teams are working tirelessly to get vacant space backfilled to accommodate the demand we are seeing. We are pleased to see great activity across all regions, including the harder hit states out west. Our leasing pipelines look healthy for the remainder of the year, with active interest from tenants in categories such as grocery, medical, restaurants, fitness, pet-related uses, off-price, health and wellness, and some traditional mall retailers like home, athletic, eyewear, and cosmetics. Although activity is strong, we are seeing some impact from rising material costs, labor shortages, and permitting backlogs at local municipalities, all contributing to continued pressure on rent commencement timing. Our tenants are also experiencing inflationary cost pressures and staffing shortages in the normal course of operating their businesses. But we're hearing when we speak with our tenants that they are generally able to pass on many of these higher costs to consumers, especially in the trade areas that we operate in, reflected in strong sales among many of our grocery and restaurant tenants. We saw improvement in rent growth in the second quarter as well as we are making fewer short-term pandemic-related concessions to bridge our tenants. We continue to push embedded rent steps to maximize revenue and cash NOI growth over the life of the lease. Our GAAP rent spreads are back above 10% and closer to our 15% historical average levels. As our leasing activities ramp back up, we also remain focused on maintaining a prudent level of CapEx spend. Our positive momentum in leasing activity also extends to our end process, ground-up development, and redevelopment projects. At our crossing Clarendon redevelopment in Arlington, Virginia, we're very excited to announce that we just signed a new lease with Lifetime. This premier health and wellness club with a co-working component will take over 100,000 square feet of the 4-story loft building, reducing lease-up risk by bringing the project to over 90% leased from 3% a quarter ago and providing an earlier-than-expected rent commencement date. At the Abbot in Cambridge, Massachusetts, we have four signed leases and we've seen significant increases in office market tours now that restrictions have lifted, employees are returning to offices in Boston, and students are returning to Harvard. As mentioned on our last call, in the second quarter, we started Phase 1 of our mixed-use Westbard project in Bethesda, Maryland. The first phase of this project will include a new giant-anchored 120,000 square foot podium-style retail building with structured parking and about 100 senior living units being developed in partnership with a best-in-class senior housing developer-operator. Regency's net project cost for this phase will be about $37 million, net of land sale proceeds. We are seeing some modest impacts from higher construction material and labor costs, but our underwriting had cost escalations built in for that, and thus far, the impacts to our projections have been minimal. In summary, we have a lot of good things happening. We're very encouraged by the trends we're seeing and the progress we've made, due in large part to the hard work of our management, leasing, and development teams in the field. Mike?

Mike Mas, CFO

Thanks, Jim. Good morning, everyone, and thank you for joining us. I'll begin by addressing second quarter results and then walk through the changes in our full year guidance as well as the moving parts of the JV portfolio transaction and capital raise. Second quarter NAREIT FFO was $0.99 per share, helped by several items. Uncollectible lease income was a positive $7 million in the quarter as reserves on current period billings of approximately $5 million were more than offset by the collection of 2020 reserve revenues associated with cash basis tenants of close to $12 million. You can see this breakout of our uncollectible lease income on our COVID disclosure, Page 33 of the supplemental. As you may recall, our previous full year guidance range assumed about $30 million collection of 2020 reserves during '21, while we have already exceeded that as of quarter end. We also benefited from a higher recovery rate in the second quarter following a better-than-anticipated outcome from our annual reconciliation process. We do expect our recovery rate to revert back to more normal levels going forward. Most importantly, we are seeing higher-than-expected collection rates on our cash basis tenants of 86% in the second quarter. That's up from 78% in the first. During the quarter, we raised close to $150 million of common equity through our ATM program on a forward basis at an average price of about $64.50 per share. We currently plan to settle in the third quarter roughly $85 million to fund the equity component of our recently completed USAA JV buyout and view the balance of the capital raise as capacity for future funding of investment opportunities. We can settle the remaining shares at any time before June of 2022. The buyout of our JV partner's 80% interest in the portfolio closed effective August 1. As Lisa mentioned, this was a unique opportunity to invest in high-quality assets on a leverage-neutral and earnings-accretive basis. The cap rate was about 5.5%. In addition to the partial settlement of the forward ATM, funding for the transaction includes our assumption of the partner's share of mortgage debt and $13 million of promote income received upon liquidation of the JV. Turning to guidance, we point you to the detail in our earnings slide deck posted to our website. We've previously discussed the larger needle movers to our earnings. And they certainly continue to move in the right direction, resulting in another healthy increase to our full-year expectations. The most meaningful change that we made was to our same-property NOI forecast, up 725 basis points at the midpoint, and we reconcile the components of these changes in our slide deck. Of this change, 225 basis points is attributable to an increase in our forecast for the collection of rent previously reserved in 2020. Our forecast for the year is now $45 million, up from $30 million previously. Of the $45 million, as I mentioned earlier, we have recognized about $32 million through quarter end and have collected another $3 million in July. The other 500 basis points of the guidance increase is driven by fundamental current year improvement, supported by higher collection rates from cash basis tenants and lower move-out activity, reflecting the progress we experienced through the second quarter and raised expectations for the balance of the year. Please also note that we've added the $13 million promote income tied to the JV portfolio transaction to our NAREIT FFO forecast, which will be recognized in the third quarter. We will not include this one-time transactional income in our core operating earnings metric. While we have not yet moved any tenants back to accrual basis accounting from cash basis, we are continuing with our evaluation and expect a subset of tenants that have remained current on rent to qualify in the second half of this year. While conversions may have a positive impact on straight-line rent and NAREIT FFO, we have not yet included any of this movement into our revised guidance range. From a balance sheet perspective, we remain on very solid footing as our free cash flows continue to grow meaningfully. Benefiting from a low payout ratio without having reduced our dividend, our leverage continues on a visible path back to pre-pandemic levels. We have cash on hand, full revolver capacity, no unsecured debt maturities until 2024, and balance sheet capacity remaining from our forward equity raise to be opportunistic. As we have discussed previously, we continue to expect our recovery back to 2019 NOI levels by the end of next year on an annualized basis, primarily due to the time it takes for rent to commence on backfilling vacant space. So with every dollar of reserved rent that we are able to recover and with every tenant, we can convert back to rent paying rather than absorb the vacancy, the shallower the trough and the higher the level from which we will continue to grow. With that, we look forward to taking your questions.

Operator, Operator

Our first question comes from Katy McConnell with Citi.

Katy McConnell, Analyst

So first, just wondering if you can provide some more background on how the USAA transaction came about? And then how you're thinking about acquisition opportunities going forward?

Mike Mas, CFO

Katy, this is Mike. I'll begin, and then Lisa will discuss future opportunities. The transaction came to light recently. USAA is acting as a real estate adviser for a group of investors. To give you some background, this joint venture was established in 2009, and this presented a strong buying opportunity for that group to realize a return. We were in a position to take advantage of that. In any joint venture, whether it involves a single asset or a portfolio, the partner is usually your best option for a purchase, and we were prepared for that. We're pleased to acquire these properties, which we have owned and operated for 20 years, and we know them very well. They integrate well into our portfolio and align perfectly with our high-quality assets, so we are excited to proceed with this transaction.

Lisa Palmer, CEO

And just thinking about forward, and I think I'll take you back three months when we talked about turning the corner, because that's really when we really had the confidence. And we talked about the pivot to offense, that we had a much clearer path to continued improvement, and we continue to see that, which is great. And with that and free cash flow in excess of $100 million, the really strong balance sheet that we have, and access to low-cost capital, just as I said in my prepared remarks, we have a really successful track record in not just acquiring, Katy, but also developing. So using that access to capital and that low-cost capital is a competitive advantage to continue to have accretive investments going forward, and we're always looking.

Katy McConnell, Analyst

Great. And then maybe on the development side, now that you've started the second phase of Carytown and the Westbard project, can you comment on how pre-leasing is going so far for the retail components? And then for Westbard, where you stand on future basis for residential as far as securing partners?

Jim Thompson, COO

Yes, Katy, it's Jim. On Carytown, I'll take that first. We've had really good activity and a couple of executed leases, some names you may know: Torchy’s Taco out of Texas has migrated to North Carolina and opening days in one of our other centers in that marketplace, have 100 people deep. So North Carolina people like tacos as much as they like barbecues, it appears. Also, we've got Virginia ABC Liquors executed a deal. Prospects, probably the most iconic high-end jeweler in the Richmond marketplace is in dialogue with us as well as Lululemon. So that gives you a flavor of the type of tenants we're talking to there. As far as Westbard, we're very, very early, obviously. We've just started construction. We've got a ways to go. But we've had some good early dialogue with some tenants that have expressed interest. But we feel very confident that, that product is going to be very, very well received in the marketplace. As to the partners, we have continued dialogue with some folks that we've been engaged with for the last two years, and we're working towards finalizing agreements at this point on Phase 2.

Operator, Operator

Our next question is from Derek Johnston with Deutsche Bank.

Derek Johnston, Analyst

So how have conversations gone with key political leaders in your markets, especially the West, given your exposure? I mean, I'm sure you guys have had them. Do you get a sense that they have learned from the shutdowns last year and are perhaps more comfortable with local retail preparedness and the ability to maintain a safe environment for shoppers and tenants? Have any conversations given you greater confidence in the officials and maybe their evolved possible handling of any pandemic-related spikes? Anything you could share would be helpful.

Lisa Palmer, CEO

I can't comment on what political leaders may or may not do since that could change regardless of their statements. However, the confidence we've observed in the market shows that our tenants, retailers, and service providers are operating safely, even amidst restrictions and additional protocols. This has instilled confidence in tenants who play significant roles in their communities and are in communication with local and political leaders. It's not solely the shopping center owners that are voicing concerns; it's their constituents—business owners and community members—who are actively engaged. I believe that's what these leaders are truly hearing. We maintain confidence that even with potential increased restrictions, such as mask mandates or capacity limits, the more effective operators have learned and adapted. We anticipate continued improvement moving forward.

Derek Johnston, Analyst

Can we just, Mike, maybe run through the reserve collection assumption embedded in guidance a little bit? I believe you collected $32 million versus $30 million we were previously expecting year-to-date. And then the positive change to $45 million in recoveries throughout the second half. It indicates a run rate of around $6.5 million per quarter in the second half. Should we anticipate a higher collection rate in 3Q for modeling versus 4Q? Or should we kind of just balance it out in the second half of the year? And clearly, it seems like there's an opportunity to hopefully surpass the $45 million level? Any color is welcome.

Mike Mas, CFO

I appreciate it, Derek. I'll do my best, but predicting the timing of those collections is quite challenging. We did offer $3 million in July, so at least we have that amount for everyone to incorporate into their models. Beyond that, I recommend considering it on a straight-line basis as we wrap up the year. We feel confident in the $45 million midpoint number, which can fluctuate within the range. We might collect a bit more or less, as it is a difficult figure to pin down given the changes throughout the year. Regarding the same-property range, the midpoint essentially assumes that the net effective rent paying occupancy level, currently around 88%, continues to gradually increase for the remainder of the year. In simpler terms, we expect cash basis tenants to show a slow upward trend in their collection rates, currently at 86%, which is 20% higher than at the beginning of the year in January. That's been a significant increase. I mentioned this in last quarter's call and want to reiterate it: for every 1% increase in collection rate among our cash basis tenants, it translates to roughly $3 million in yearly income. This can also help frame the tolerances in the range. With the understanding that 1% equals $3 million, and considering the $45 million, most of which has already been accounted for and collected, we are aiming to be as clear as possible. This should assist everyone in thinking about the full-year range we've provided.

Operator, Operator

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

Craig Schmidt, Analyst

I know you've been touching on external growth and its acceleration. But with acquisitions, you have the lower, more competitive cap rates. With redevelopments, you have higher construction costs, labor, and material. I'm just wondering which of those levers is the most appealing in terms of driving external growth, acquisitions or redevelopment?

Lisa Palmer, CEO

We need an and, Craig, because I'd love to say all of the above. We've always maintained that if I have to choose, I'll clearly go with the option that offers higher returns. Therefore, the best way to utilize our capital is through redevelopment and reinvesting in assets that we know well and have operated for a long time to achieve strong returns. However, I would like to emphasize that I aim for us to be able to do everything. If we can leverage our platform, our market knowledge, and our low cost of capital to add high-quality assets to our portfolio that enhance both our quality and our earnings, it will enable us to grow our cash flows and increase NOI. I'd like to pursue all avenues.

Craig Schmidt, Analyst

And then just looking at the percent leased at Costa Verde at 66%, I assume that retailers are interested in redevelopment/development and pursuing those as new location opportunities?

Lisa Palmer, CEO

Yes. I mean Jim can add some color if he'd like, but Costa Verde is an exceptional location and real estate asset. And the fact that we have the ability to add as much value as we're going to add there really speaks to that and validates that. When we do commence the full redevelopment, there already is and will continue to be a tremendous amount of demand for the retail space there.

Craig Schmidt, Analyst

Great. And then one last question. I don't know if it's mix related, but I'm wondering why the new leasing spreads on new leases are flat in 2Q '21.

Jim Thompson, COO

Craig, it did have a little bit to do with mix. We had a heavier than normal mix of shops versus anchors this quarter. But importantly, I think I'd like to stress, the trend line for spreads is really moving in the right direction, as are all our operating metrics. Our philosophy on prudent CapEx spend certainly impacts this metric. And having said that, I'd say our CapEx as a percent of total NOI tends to be at the lower end of the peer group, which does allow us to maximize free cash flow. As we sit there and look at our business and try to make asset management decisions, we look at total rent. And total rent includes, obviously, these initial spreads, embedded rent steps which we continue to be very successful in achieving, and growing expense recoveries which we, I think, do very well year in, year out, and continue to lease up our space back to historic levels. I think in combination, all those actions are going to result in the larger objective of creating sustainable NOI and earnings growth in the long run.

Operator, Operator

Our next question is from Greg McGinniss with Deutsche Bank.

Greg McGinniss, Analyst

So you've shown a sequential lease occupancy growth, accelerating leasing volumes. What are some of the tailwinds and maybe headwinds to tenant retention and demand? And how should we think about the cadence of potential recovery in economic occupancy or the net effective rent-paying occupancy, I guess?

Mike Mas, CFO

I'll start by mentioning our objectives, which we discussed on the call. We are still aiming for a return to 2019 levels of net operating income on an annualized basis, potentially in the latter half of 2022. We're optimistic about this and are actively working to expedite the process. However, one challenge we face is that we lost about 200 basis points of occupancy due to the pandemic. We are making progress in increasing occupancy, but this process takes time. It's evident how long it takes to lease, build out, and begin collecting rent. Therefore, accelerating this recovery will be more difficult, but we are doing our utmost to achieve it. Perhaps Jim can share some insights on the challenges he observes from the operator's perspective regarding leasing activity.

Jim Thompson, COO

Yes, Greg. Before I go on the headwinds, I think I would like to touch back on the activity we're seeing today is very strong across all regions. I think when I look at the pipeline and look forward, it continues to be robust. So I think from a tailwind standpoint, the leasing opportunity is in front of us, and we're going to take advantage of it. As Mike indicated, we've got more vacancy than we've had historically. So I think we've got product, we've got demand, and we're going to make those two things turn into rent-paying occupancy. Headwinds, obviously, are what we've talked about. I think there's labor issues, there's pricing, supply chain issues. How those shake out, we don't know. I will say today, the tenants, the retailers are dealing with that. A lot of them are able to pass through those costs to consumers at this point. So it really feels like things are blowing our way right now. They're headwinds, and we're watching them, but they're not stopping progress.

Lisa Palmer, CEO

I believe that's the best way to look at the situation. In 2020, we faced many more challenges than advantages, but that has changed. Currently, the advantages we have are clearly outweighing the challenges we are encountering.

Greg McGinniss, Analyst

So maybe to dig into that a little bit more, and I appreciate the color. So our tenant watch list analysis highlights a much improved environment compared to the last few years. I'm just curious what is your view on that, how has your watch list exposure improved over the last 18 months? And what are you still viewing as maybe some of the higher-risk tenants or industries?

Mike Mas, CFO

Let me start with the watch list, Greg. I think our view aligns with yours. Looking back at our watch list over the years and consecutive quarters, it has significantly improved through attrition. We've seen many tenants work through the system, file for bankruptcy, and vacate our centers, which has allowed us to find opportunities to re-lease those spaces. The tenants that remain have generally enhanced their credit quality, either through their operations—where the pandemic may have provided a boost for certain necessity-based and essential retailers—or through their access to capital markets, whether privately or publicly. Overall, there has been a notable improvement in credit quality. Therefore, our perspective is similar to yours; it’s a much different and improved landscape. Jim, do you have anything to add?

Jim Thompson, COO

Not really. You hit it on the head, Mike.

Operator, Operator

Our next question comes from Juan Sanabria with BMO Capital Markets.

Juan Sanabria, Analyst

Just hoping if we could talk a little bit about just market rents and how those have trended for, I guess, both the anchor and small shop space just generically across your portfolio, and whether or not rents are truly in fact, rising? And if so, if you've seen any degradation in maybe inferior space as people look to improve the quality of where they're located and the stronger are getting stronger. But just curious on what the actual market rent growth has been maybe over the last six months or relative to 2019.

Jim Thompson, COO

From my perspective, it seems that market rents are quite stable compared to what we experienced before the pandemic. Strong centers draw in quality retailers, and those retailers prefer to be near other reputable businesses. This is a familiar environment for us to thrive in. As I mentioned earlier, we now have more space available than in the past, which is attracting significant interest and activity from retailers looking to join our product type. To put it simply, I believe market rates are generally in line with what we were accustomed to before the pandemic.

Juan Sanabria, Analyst

Okay. Great. And then just on the joint ventures, any other opportunities with existing partners to buy out their interest in over the next 12, 18 months? Or any funds maturing or things like that where you could have some goalposts that you can see that you could maybe convert on?

Mike Mas, CFO

Juan, all the ventures are long-lived, so there's no finite lives to any of them. So there's nothing kind of contractually that would bring an opportunity to the horizon. As we mentioned, this was a unique opportunity with a particular joint venture and a group of owners. That could change from our other JV partners going forward. But at this point in time, they are all very well committed to the space. They enjoy their allocation to grocery-anchored retail. Their portfolios are performing well, very consistent quality to Regency's overall quality. So we're there, and we could be there as a potential buyer as we have with USAA. But it's going to take a willing seller at this point. We don't have that right now.

Lisa Palmer, CEO

And I think that, that's really probably one of the most important points that if they do become a willing seller, we have the capacity and the ability to act.

Operator, Operator

Our next question comes from Richard Hill with Morgan Stanley.

Ron Kamdem, Analyst

You have Ron Kamdem on for Richard Hill. Congrats on a quarter. I have two quick questions. First, regarding foot traffic, it's great to see such a strong recovery back to pre-COVID levels. I'm curious if there are any noticeable changes in spending patterns. Are people spending more? Is there a different demographic involved? I'm interested to know if you've observed any changes in spending behavior and intentions now compared to pre-COVID.

Jim Thompson, COO

Initially, we observed that there were fewer visits but larger purchases. People seemed to be shopping less frequently but were buying the same amount or more. Now, it seems that this is stabilizing; foot traffic is returning, which likely means that basket sizes are decreasing slightly. However, when we analyze the sales of grocers and consider the reports from our teams regarding quarterly activity, it's notable that many restaurants across the country experienced significant sales increases compared to 2019 levels this summer. This strongly suggests that customer traffic is picking up, and they are not just browsing but making purchases. Overall, we are encouraged by these developments.

Ron Kamdem, Analyst

Great. My second question is regarding the guidance change. The commentary from the cash basis tenants is quite clear, but I would like more details on the lower move-out activity. What did you observe in the first half of the year, and what are your assumptions for the second half? Additionally, how does that compare to a typical year?

Mike Mas, CFO

I'm going to focus my comments on net effective rent-paying occupancy. We believe that this metric is the best indicator of our performance in 2021. The uncollectible leasing component, which is the opposite of our collection rate, significantly impacts our numbers. At the same time, we were pleased to observe an increase in leasing activity and anticipate fewer move-outs. This aligns with our expectation of continued growth into 2022 and beyond. Regarding guidance on our leasing percentage, we will only provide information on net effective rent-paying occupancy, which is currently around 88%. We expect that figure to gradually improve for the remainder of the year.

Operator, Operator

Our next question is from Mike Mueller with JPMorgan.

Mike Mueller, Analyst

Yes. Your development, redevelopment pipeline is very heavily skewed towards redevelopment. I'm just curious, is there a shadow pipeline of new opportunities that we could see start off over the next few years?

Jim Thompson, COO

Yes, Mike, absolutely. As the world recovers, there is an appetite from the grocery sector for growth. We're certainly in tune with that and working hard to locate sites. Our shadow pipeline is building, in my opinion, nicely. And we're talking to the type of traditionals and groceries that we are historically used to doing business within our portfolio. So yes, we feel pretty good about what we're seeing out there from an activity standpoint.

Lisa Palmer, CEO

And Mike, you've heard us speak to that before, right? Development is not a switch, you don't turn it on and off. And even throughout 2020, while we may have paused spending, we did not pause advancing the ball on projects we are already working on. And the team was working really diligently to ensure that we continued to move those forward. So we do expect that you'll continue to see that shadow pipeline convert to a real in-progress pipeline.

Operator, Operator

Our next question comes from Linda Tsai with Jefferies.

Linda Tsai, Analyst

Given consolidation in the shopping center space, does having two larger peers in the space change the competitive landscape? Like maybe in terms of acquisitions or conversations with tenants from a leasing standpoint?

Lisa Palmer, CEO

I will address the competition related to acquisitions, and I will let Jim discuss leasing. I don't think it affects us. The acquisition landscape has always been competitive, regardless of the size of the competitors. Depending on the market, we might compete with larger public companies or may be up against smaller players and private capital as well. The competition is robust, and the capital for investing in high-quality grocery-anchored shopping centers is coming from a variety of sources, both small and large, public and private.

Jim Thompson, COO

From a leasing standpoint, I'd...

Lisa Palmer, CEO

The quality of the asset, it really does get down to the individual asset. And so I don't think the competitive set changes, quite frankly, from an owner's perspective.

Mike Mas, CFO

And relative to your comments about cash basis going back to accrual, potentially benefiting the second half of '21 but not being factored in estimates in your forecast, what's the best way to think about the magnitude of the potential benefit? Is it like a couple of pennies or a far greater slug like the benefit, cash basis tenants helping 2Q?

Linda Tsai, Analyst

Mike, I appreciate your question and it's unfortunate that we're facing these accounting requirements, which create some volatility in our FFO guidance. However, I find it equally challenging to provide you with a precise estimate. The best approach for us is to maintain transparency, which involves two main points. Firstly, some tenants may switch back to accrual accounting this year. As I mentioned last quarter, about 13% of our ABR that is current on rent is classified as cash basis tenants, which serves as a potential indicator of the size of this group. I want to clarify that not all of these tenants are likely to switch because we are setting high standards before converting any tenant from cash basis to accrual. Lastly, I want to emphasize that this is why we continue to report core operating earnings as our main earnings metric. We aim to eliminate noncash impacts, which reflects how we operate our business and make decisions internally, a practice we've discussed with our Board. We firmly believe this is the best metric for monitoring our success.

Operator, Operator

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

Lisa Palmer, CEO

Thank you all for joining us on a Friday. I appreciate your time, and I also do want to just give a quick shout out to the Regency team. And thank you for a great quarter and great results. And everyone, have a nice weekend.

Operator, Operator

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