Earnings Call Transcript - REG Q1 2020

Operator, Operator

Greetings. Welcome to the Regency Centers First Quarter 2020 Earnings Call. At this time, all participants will be in listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. At this time, I’ll turn the conference over to Laura Clark, Senior Vice President, Capital Markets. Ms. Clark, you may begin.

Laura Clark, Senior Vice President, Capital Markets

Good morning and welcome to Regency’s first 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. I will now turn the call over to Lisa, who will address Regency’s key priorities in light of the COVID-19 pandemic. A presentation providing additional information regarding COVID-19 business updates and impacts is posted on our website. Lisa?

Lisa Palmer, President and Chief Executive Officer

Thank you, Laura. Good morning, everyone. The last couple of months have been an experience that none of us could have ever imagined, nor one that any of us will ever forget. I hope you’re all well. I know several of you have been personally impacted during this challenging time, and our thoughts are with you. Our thoughts and appreciation are also with those on the frontlines—healthcare workers, public safety officials, first responders, delivery drivers, and to name many more, the employees of the many retail businesses that continue to provide our country with essential goods and services. All are working courageously to serve, protect and provide for all of us. During this pandemic, Regency has been dedicated to ensuring the wellbeing of our team members, tenants, and the people in the communities that our properties serve. We are fortunate to have the resources and systems in place to allow our teams to work remotely. At the same time, our property and asset management teams have continued to respond appropriately to any on-site tenant requests. I’m extraordinarily proud of how everyone at Regency has responded, and I’m especially proud of the tireless work performed by our property management teams. I thank all of you. As with any major disruptions, how well you are positioned at the beginning of that disruption is critical. Those companies positioned in strength will have a significant advantage to emerge successfully. At Regency, we have worked diligently and thoughtfully to build a company that can withstand challenges and adversity, through the strength of our unparalleled combination of strategic advantages, which have never been more relevant than they are today: our people, our portfolio, our development program, and our balance sheet. Our portfolio focuses on necessity, service, convenience, and value. More than 80% of our national portfolio of neighborhood and community shopping centers is anchored by a grocery store, with another 10% including a mass merchandiser like Walmart or Target, a national drugstore, or a home improvement store such as Lowe’s or Home Depot. Our local teams, 22 offices throughout the country, have been working diligently with tenants and vendors, enabling all of our properties to remain open and operating, allowing our tenants to continue to provide the goods and services that the surrounding neighborhoods need. In fact, in April, approximately 60% of our tenants allowed us to operate in some form, including categories such as groceries, drugs, banks, restaurants, pet, and office supplies. The remainder of our portfolio is occupied by many best-in-class high credit quality retailers, such as TJX or Burlington, as well as many other retail and service providers that are anxious to reopen. We also benefit from a pipeline of high-quality developments and redevelopments that our talented investment teams have structured to provide us with timing and financial flexibility, affording us the optionality to either continue to move forward during this time, or to pause, positioning these projects for future value creation over the long term. Lastly, one of Regency’s greatest advantages is our extremely strong balance sheet featuring low leverage, a low payout ratio with the highest level of free cash flow in the sector, liquidity to satisfy our commitments, and thoughtfully managed maturities. This intentional positioning is a key element of our strategy and maintaining this financial strength is of critical importance. Considering the possibility that we may still be able to maintain the current dividend even beyond this quarter, given the benefit of our solid financial position, our Board approved full payment of our dividend at the rate of $0.595 per share. That said, over the coming months, management and the Board will carefully monitor the extent and success of the opening of the country and economy, consumer behavior, retailer performance, actual Regency results, and our view of future rent collection and NOI. Even though we recognize that there may still be uncertainty when we have our earnings call with you in August, we should have a much better view of the impacts from the pandemic and recession on our company. I want to emphasize that the resulting future major decisions will be very deliberate. This concludes the decisions related to the level of the quarterly dividends, where we must, and we will weigh near-term liquidity and balance sheet metrics with future expectations for Regency’s portfolio, including preserving our financial strength to best position us for achieving our strategic objectives and sustained outperformance. None of us could have imagined the current challenges facing our country, the economy, retailers, and the shopping center business. But even in this environment, I’m firmly convinced that Regency will not only successfully weather this crisis and navigate the bridge to the new normal, but also will thrive in the post-pandemic world. My belief goes back to the strategic advantages that Regency has built: a high-quality, necessity and convenience-focused portfolio, our value-add asset management and development capabilities, the strength of our balance sheet and liquidity position, and our unparalleled team of experienced professionals. In this, my confidence is unwavering. Jim?

Jim Thompson, Chief Operating Officer

Thanks, Lisa. Before I get into the details around COVID-19 impacts, I think it is important to quickly touch on the solid first quarter momentum we were experiencing before the pandemic began. First quarter leasing and base rent growth exceeded our expectations. While leasing activity has clearly been impacted by the COVID situation, we have still been able to execute a number of renewals over the last two months and are continuing to negotiate new leases with numerous tenants. Many anchor tenants such as Publix, Target, Wegmans, and TJX, as well as drugstores, medical uses, and banks continue to pursue new deals during this time. We are already seeing activity pick up in those markets where shelter-in-place guidelines are being relaxed. We are confident that leasing activity will increase once we have further clarity on reopening across the country. As Lisa mentioned, the top priority for our asset management teams continues to be maintaining the safety and well-being of our team members, tenants, properties, and the customers in our communities. All of our properties have been open and operating for the entirety of the pandemic. In addition to reaching out to each of our 8,000-plus tenants and continuing to safely make regular on-site visits to properties, our asset management group has also set up our tenant assistance website. The site includes resources that our tenants are able to leverage, as well as direction on how they can access and apply for government or other assistance programs. We recently hosted a webinar that hundreds of our tenants attended, providing further information on Regency’s plans to help tenants successfully and safely reopen their businesses. As of the end of April, approximately 40% of our tenants were closed, although we anticipate within the next 30 days to see many of those retailers begin to implement plans to reopen as mandated closures are lifted. We collected 62% of our pro-rata base rent for the month of April. This includes a collection rate of over 90% from tenants deemed to be essential, which represents nearly half of our pro-rata ABR. April collections for restaurants, which represent approximately 19% of our total ABR, was 41%. Finally, the April collection rate for other retail and service categories, which represents a little over a third of our annual ABR, was 37%. Given the ongoing uncertainty in the marketplace and the extent of future impacts, we remain in the early stages of working with tenants on potential rent deferral plans to help our retailers, especially those that have been totally closed for a period of time, allowing them to focus on reopening and start to rebuild their customer base. We recognize that Regency's success, as it always has been, is tied to our tenants. So we aim to work with our retailers, understanding their needs while being mindful of our contractual rights and long-term strategic objectives. As mandates are lifted and we begin to help our tenants and centers transition into a post-COVID environment, our teams are prepared to make adjustments to the operation of our centers, such as facilitating more buy online and pickup areas, adding hand sanitation stations, installing social distancing signage reminders, and prohibiting the use of certain common areas until they are deemed safe for all customers. Just as Regency's team and portfolio has successfully navigated through various cycles and disruptions throughout history, our teams are well-equipped and doing everything we can to help our tenants and properties prepare to recover as successfully and quickly as possible. Mac?

Mac Chandler, Chief Investment Officer

Thanks, Jim. We continue to have confidence in our ability to create long-term value through disciplined development and redevelopment. That said, given the current environment, it is prudent to reassess the scope, timing, and projected investment on each of our in-process projects, as well as our extensive pipeline. We realize the importance of reevaluating projects to determine if modifications may be necessary as we think about the future needs of our retailers and their customers, including potential changes to design and formats. At the end of 2019, we had approximately $350 million of developments and redevelopments in process but nearly $225 million remaining to be invested. Since the onset of the pandemic, we’ve diligently reevaluated future timing and scope for each of these projects. As a result of this process, we intend to finish construction on those projects that are nearly complete, as well as those where we have lease-in city obligations. We will invest approximately $80 million to complete these projects. We are also fortunate that at a select number of other projects, construction was at a point where we’re able to pause without experiencing material impacts to our long-term value creation. This has allowed us to defer investment of approximately $145 million of in-process commitments. For the projects continuing construction as planned, including The Village at Hunter’s Lake in Tampa and Point 50 in Fairfax, Virginia, the scope and costs are essentially unchanged. For other projects like Carytown Exchange in Richmond, The Abbot on Harvard Square, and Market Common Clarendon in Arlington, we intend to phase our investment in these projects, providing us flexibility as we determine the most appropriate future direction. For Culver Public Market in Los Angeles and Serramonte Center in the Bay Area, we have not yet started vertical construction. We have suspended activity to allow for more time to study and potentially phase these projects. Investments like these require more material reconsideration of tenancy, scope, timing, and return on investment, given the impact of the ongoing response to the COVID-19 pandemic. We will be sure to update you on our revised plans as soon as they become more clear. We are also thoroughly reviewing our near-term investment pipeline and will continue to position these opportunities to start while preserving optionality in order to best manage our commitments until we have better visibility of our free cash flow. We were fortunate to be in a position to continue moving these projects forward while we assess the timing and scope of our plans. This includes projects such as Westbard Square in Bethesda and Costa Verde in the UTC market of San Diego. We remain excited to start these projects when the timing is right. It’s important to note that these projects are major redevelopments of existing owned shopping centers, and a deferred timing of our incremental investment is mitigated by our ability to maintain NOI from the existing roster of tenants. We continue to have conviction in the long-term value creation opportunities afforded by these exceptional locations. But at the same time, we understand that these investments require patience and discipline, two cornerstones of Regency’s proven investment strategy. Mike?

Mike Mas, Chief Financial Officer

Thanks, Mac, and good morning, everyone. I’ll start with our first quarter results where we were off to a good start for the year relative to our initial expectations. While not indicative of expected full-year results, I do think it’s important to note that the operating environment was quite healthy. However, after reserving for open receivables as a result of the pandemic, same property NOI growth for the quarter came in at negative 70 basis points. As noted on our last earnings call, we did plan for a negative first quarter growth rate driven by bankruptcy-related move outs, but still our underlying results were better than those expectations. However, as many of you are aware, GAAP requires that we reserve for any receivables we’re collecting based on the entirety of the lease obligation being less than probable. Given the current environment, we reviewed all receivables with emphasis on non-essential tenants, restaurants, local tenants, tenants that did not pay April rent, and all watch-list tenants. Any receivable that was less than probable was reserved, and we will recognize the income as those amounts are received. This resulted in a bad debt charge in the same property growth in the quarter of approximately $2 million above what we originally planned. Relatedly, and as required by the standard, the changing collectability expectations for certain tenants also resulted in a reversal of the related non-cash straight-line rent of approximately $3.5 million. We will continue to evaluate our collectible and uncollectible lease income reserves as the current situation evolves. Now, regarding the balance sheet and our liquidity position. Over the years, we have committed to a rigorous set of principles in order to maintain balance sheet strength and flexibility, highlighted by low leverage levels, maximizing free cash flow, access to liquidity to meet our needs, and a well-laddered maturity profile to reduce risk. As a result, we are well-positioned from a balance sheet and liquidity standpoint as we pivot towards mitigating the impacts from the ongoing response to this health crisis. During the quarter, we took several steps to further solidify our position, including settling our forward equity offering and drawing down on our revolving credit facility. These actions, combined with property sale proceeds that closed during the quarter, positioned Regency with a cash balance of $735 million, which when combined with undrawn capacity, provides total liquidity of approximately $1.3 billion. While protecting and enhancing our liquidity position, we’re also carefully managing all future capital requirements, including development spending, property-level expenditures, as well as G&A and dividend payments, as mentioned earlier by Lisa. Importantly, and to amplify what Lisa said, we will closely monitor the ongoing impact of the pandemic response on our cash flows, and future dividends will be subject to our ongoing comfort with our liquidity position, our leverage ratios, and our taxable income forecasts. Lastly, as we previously announced, we withdrew our 2020 guidance due to the extreme uncertainties of the impact of the COVID-19 situation. We look forward to providing guidance again when we have greater clarity around reopening and the impacts to our business. We understand the need for timely information in this rapidly changing environment and are committed to being as transparent as possible. To that end, in March, we provided material mid-quarter business updates, if warranted. That concludes our prepared remarks. And we now welcome your questions.

Operator, Operator

Thank you. At this time, we’ll now be conducting a question-and-answer session. Thank you. Our first question is from the line of Christy McElroy with Citi. Please proceed with your question.

Christy McElroy, Analyst

Thank you. Good morning. My first question is for Mac, just following up on some of your opening remarks. In thinking about just the construction pipeline and understanding you’re deferring $145 million of CapEx, assuming for now that’s just sort of pausing and pushing out that spend and extending the pipeline, to what extent will you revisit that to potentially permanently reduce the scope of those projects and reduce that plan spend and those projections? And given that you’ve removed some of the yield productions? What impact should we expect these delays and interruptions will have on those yield productions ultimately?

Mac Chandler, Chief Investment Officer

Thanks, Christy. Good morning. I’d say we’re going to revisit that pipeline continually. It’s still very early in the process. As visibility becomes clearer, we’ll reassess these projects. And as you mentioned, that has to do with tenancy, timing, and scope, ROI, so it’s a little too soon to say when these projects will come back online. If some, we elect not to pause, but to stop. But I think at this point, we believe in these projects. We believe in the locations and the concept. We think long term, they’re going to be terrific projects. We just need to take a little more time to study these projects. So I can’t give you a lot more clarity at this point, but we’re constantly revisiting those, and we’ll know more. As the quarters go by, we’ll be sure to update everybody.

Christy McElroy, Analyst

Okay, second question is for Mike. You’ve started to become more conservative already in evaluating the collectability of your leases. What percentage of your ABR did you convert to cash basis as of Q1? And maybe you can provide a little more color on how you’ll be further approaching this process as you think about the accounting for Q2 in this environment.

Mike Mas, Chief Financial Officer

Hey, Christy, good morning. Thank you for the question. I think it’s a little too early to respond to your first part of your question—how much did we convert to cash basis? What we did at the end of the quarter was really about those receivables that were on our books at that point in time, and using the April reaction to the health crisis to inform our assessment of profitability. So it was simply that our probability of collections has decreased for a certain segment of our tenants as of March. As we move into the second quarter, I think that’s where the relevancy of your question will come into play. And there’s still a lot to be determined there. As we work through the progress of opening up, as we work with our tenants on lease modifications to the extent they’re necessary, and the context of all of those discussions. Those agreements will inform us as we think about how the standard applies to revenue recognition. You hit the nail on the head—some of these modifications will continue to result in accrual accounting. Some will be converted into cash basis. And it’s on us, and we’ll do the best job we can to inform you and all of our investors and stakeholders in that impact going forward.

Christy McElroy, Analyst

That will be helpful. Thank you.

Operator, Operator

The next question is from the line of Greg McGinnis with Scotiabank. Please proceed with your question.

Greg McGinnis, Analyst

Hey, everyone. So I’ve seen a few somewhat dire reports on the potential fallout of retailers due to the pandemic primarily in apparel, specialty retail, and restaurants. I’m just curious what your exposure to bankruptcies have been thus far this year, how your watch-list has evolved through the pandemic, and what steps you’re taking to try and mitigate any potential fallout.

Mike Mas, Chief Financial Officer

Hey, Greg. Good morning. I’m sorry, maybe a little bit of a broken record on too early to tell. In fact, nothing has really changed with respect to our watch-list. The sizing of our watch-list is about the same as it has been. It’s been less than 5% of our ABR identified. Do we anticipate that there could be some acceleration in tenant failures and bankruptcy filings? Absolutely. This is an environment that will certainly result in that. But we haven’t added any amount of significance to our watch-list in some time. I don’t think this situation has resulted in that occurring just yet.

Lisa Palmer, President and Chief Executive Officer

And I think I would add, as I think about the part of retail real estate that we operate in, I think it’s best positioned. Whatever that post-pandemic world looks like, I like the fact that we are close to neighborhoods and that we have grocery-anchored shopping centers. The quality of our real estate was true pre-COVID, and it’s certainly going to be, I think, even more true post-COVID, as retailers continue to focus on having a physical presence, which I think they still need. If anything, this has highlighted some of the difficulties in the cost of delivering and picking up, and that physical presence is going to be critical as part of their overall strategy and being close to the customer. Having the best locations is going to be of critical importance to them.

Greg McGinnis, Analyst

Right, that’s fair. And then, Lisa, are you seeing much benefit from the Paycheck Protection Plan loan? I mean, have your tenants been successful in getting those funds? And do they use them to pay rents? Or is it more so just keeping folks employed, and then you guys may need to step in and help on the rent side?

Lisa Palmer, President and Chief Executive Officer

I’m going to let Jim really dig into this. This gives me the opportunity to give another shout-out to our property management team, which Jim ultimately has responsibility for. So allow him to get into the details, but our team has worked very hard since the start of this pandemic, staying in touch with all of our tenants, particularly those local tenants that don’t have access to capital markets to bridge them through this. So I’ll let Jim talk to that.

Jim Thompson, Chief Operating Officer

Yeah, Greg, we’ve spent a lot of time sharing information, educating, and in some instances really helping some of the local tenants fill out the application forms for assistance. We hosted webinars and I think we’ve done a good job of helping local folks get access to those programs. There have been several tenants that have paid their rent in April due to the fact they were able to access those funds. There is an indication that that has worked. As we get deeper into the conversations with the tenants, that answer will come into play as far as how we evaluate additional needs that they may require to reopen.

Greg McGinnis, Analyst

All right. Thanks, Jim.

Operator, Operator

The next question is from the line of Craig Schmidt with Bank of America. Please proceed with your questions.

Craig Schmidt, Analyst

Thank you. I’m just wondering, as the mandates in some of your markets are lifted and non-essential retailers can open, what has been the consumer acceptance of these tenants opening in terms of more discretionary shopping?

Mike Mas, Chief Financial Officer

Craig, it’s obviously very, very early. Texas kind of led the charge with the May 1 opening. I can give you some limited feedback on what we’re hearing from our folks in the field. Number one, I think all the retailers that are returning to work are very focused on ensuring their customers feel safe and are trying to create a welcoming but safe environment for customers to return to. From a restaurant perspective, full-service folks are currently limited to 25% occupancy. What we have seen in general is the full-service guys are sticking with to-go orders right now, as it is more advantageous until restrictions ease to make in-room dining more profitable. We’ve also seen that in areas where salons opened up, there have been immediate and positive responses. Gyms in Atlanta were given the green light, but we’re noticing they are taking a cautious approach, waiting to ensure they’ve got robust reopening protocols before resuming operations. Consumer confidence is going to be key to all of this.

Craig Schmidt, Analyst

That’s great. It’s interesting to see where the priorities lie. Just one other thing, I was wondering if public somewhat more liberal rent relief program informed any of your rent deferral negotiations with your tenant?

Jim Thompson, Chief Operating Officer

Short answer, no. As I indicated in the opening remarks, we’re in the early stages of negotiation. We’re certainly not taking a blanket approach at all. We’re being very thoughtful, strategic, and targeted. Each tenant will be handled individually. Our goal is to negotiate common ground to get our retailers open and selling goods and services as soon as possible. Fortunately, we enjoy a high-quality platform, and the majority of our tenants perform well and want to be here. There’s a nice balance in the negotiation, and conversations have been productive and positive thus far.

Craig Schmidt, Analyst

Thank you for that detail. Bye.

Lisa Palmer, President and Chief Executive Officer

Thank you, Craig.

Operator, Operator

Our next question is from the line of Shivani Sood with Deutsche Bank. Please proceed with your questions.

Shivani Sood, Analyst

Hi, good morning. The Regency team has a history of working with third-party capital, and you guys certainly have a wide pool of capital available to you. So just curious how these conversations have trended in recent weeks, particularly given utilization of grocery-anchored centers as distribution centers in recent weeks. Is there incremental capital and demand from some of your partners?

Mike Mas, Chief Financial Officer

Hey, Shivani, good morning. I appreciate the question. We’re very fortunate to be partnered with some of the largest pension funds in the country, such as CalPERS, CalSTRS, and the State of Oregon. We have access to capital through those long-standing relationships, and our partners also have access to capital. The plans that Jim and his team are operating to work with our tenants aim to minimize disruption to income and cash flow as much as possible. Our partners agree with that approach. They believe in the future effectiveness of groceries and necessity-based centers and are interested in continuing to invest in those spaces. While we’re not necessarily looking to change our capitalization strategy, we feel that the portfolio we currently own together with our partners is appropriately sized.

Lisa Palmer, President and Chief Executive Officer

I think it’s also important to emphasize our value with long-term partnerships. We haven’t needed external capital for quite some time, but treating our partners right pays off in the future. If the need arises to access third-party capital again, I believe it would still be available to us.

Shivani Sood, Analyst

That’s great to hear. In terms of the mortgage debt on specific properties, curious if the 62% rent received in April would potentially trigger any revaluation requirements or covenants. Is there anything we should be aware of there?

Jim Thompson, Chief Operating Officer

No, nothing to be aware of. We’ve been in communication with all of our mortgage holders. In fact, we’ve successfully closed on $225 million in mortgages in the first quarter of this year, and many of those closings extended into the shutdown and health crisis. I must commend our capital markets team, Andrew Mumford, who runs the mortgage business for us at Regency, for maintaining those relationships and closing those projects. Our lenders have upheld their commitments, and I think that value reflects truly effective long-term relationships.

Lisa Palmer, President and Chief Executive Officer

Not this quarter, we closed them this week.

Jim Thompson, Chief Operating Officer

This week.

Shivani Sood, Analyst

Thanks for your time.

Operator, Operator

The next question comes from the line of Richard Hill with Morgan Stanley. Please proceed with your question.

Ronald Kamdem, Analyst

Hey, you got Ronald Kamdem on for Richard Hill. Two quick ones for me. The first one is just going back to the dividend decision. I would like just a little more color on the thought process there. As you know, nobody really knows what’s going to happen over the next 3, 6, 12 months. Are we supposed to read into that having seen the April data? If things don’t get worse, you felt comfortable that the dividend could be maintained at these levels? Obviously, if things do get worse, everything is off the table. I’m just trying to get a sense of the scenarios that were thought through about that decision?

Lisa Palmer, President and Chief Executive Officer

Of course, I’m really just going to reiterate what I said in the prepared remarks. Going back to something that is clearly part of our strategic objectives: positioning our balance sheet to withstand disruptions. We intentionally strengthened our position to withstand challenges and unexpected downturns. We came into this with low payout ratios. Our FFO payout ratio is in the low 60s, our AFFO payout ratio in the low 70s range. What that afforded us was a high absolute level of free cash flow. We deferred some of our capital spend on developments, which provided us more financial flexibility. There’s uncertainty ahead, but we believe we can maintain the current dividend. However, as I mentioned earlier, we will monitor closely what happens over the next 3 months. Consumer confidence is key, and we will manage the dividend carefully while ensuring we can achieve our strategic objectives.

Ronald Kamdem, Analyst

Helpful. My second question was just on going back to expenses. Can you provide some color on how much of your expenses can actually be deferred? We’re assuming things like property taxes probably can’t. But just how much of those can be deferred? What level of rent collection is breakeven to cover those expenses?

Mike Mas, Chief Financial Officer

From an operating expenses perspective, we believe we operate a best-in-class shopping center at a best-in-class efficiency rate. Our shopping centers are open, and nearly 60% of our tenants are actively operating. Therefore, the flexibility within our operating expenses is limited, more so fixed than variable. We’re doing our best to enhance and provide liquidity where we can. At the property level, we can move the needle a little more on CapEx. If we can defer some onetime capital items safely, we will do that. Beyond that, we’re achieving our goals regarding liquidity. For breakeven, it’s about 50% rent collection on the top line to breakeven before capital expenditures, and roughly around 55% after capital expenditures.

Ronald Kamdem, Analyst

Got it. That’s helpful. I want to thank you guys again for all the transparency and disclosures you provide. I think you’re really leading your peers here. We appreciate it.

Lisa Palmer, President and Chief Executive Officer

Thank you.

Jim Thompson, Chief Operating Officer

Laura and Kathryn do an exceptional job and we appreciate you recognizing that.

Operator, Operator

Our next question comes from the line of Brian Hawthorne with RBC Capital Markets. Please proceed with your question.

Brian Hawthorne, Analyst

Hi, just one for me. How are you guys balancing adjusting the tenant mix versus trying to work with some of your current tenants, or will you replace them if that you feel it’s a better long-term strategy?

Lisa Palmer, President and Chief Executive Officer

I think, it’s our standard playbook. During this pandemic, we may have more opportunities to recapture space and potentially remerchandise in the future. More to come, but we’re always looking to do that.

Brian Hawthorne, Analyst

Is there anything—any tenants or industries in particular, where you’re kind of more interested now in remerchandising than maybe you were before?

Jim Thompson, Chief Operating Officer

No, the known watch-list tenants are where we would expect to encounter planning opportunities. Those are the spaces we’re talking to stronger, better retailers about.

Lisa Palmer, President and Chief Executive Officer

Jim is being a bit humble. We’ve had a track record of proactively managing our tenant mix and merchandising. This will certainly accelerate that evolution.

Brian Hawthorne, Analyst

Okay. Thank you for taking my questions.

Operator, Operator

Our next question is from the line of Michael Mueller with JPMorgan. Please proceed with your question.

Michael Mueller, Analyst

Yeah. Hi. Putting aside that you have some government exposure this time, can you talk a little bit about how your small shops compare today versus the GFC?

Lisa Palmer, President and Chief Executive Officer

We’re different today than we were 10, 11, or 12 years ago. We’ve sold properties and shifted to a disciplined development program focused on long-term holds rather than opportunistic flips. Our occupancy levels during the GFC were about 92% overall and 84% for small shops, and our current quality is significantly higher than back then.

Michael Mueller, Analyst

Got it. And what triggers do you look for to potentially repay some of the cash you pulled off the line?

Mike Mas, Chief Financial Officer

Triggers for repayment will likely be influenced by financial market dynamics rather than just our portfolio. We're currently carrying cash as an insurance policy, and we're committed to monitoring debt maturity profiles to remain flexible.

Michael Mueller, Analyst

Got it. Thank you. That was it.

Operator, Operator

Our next question is from the line of Floris van Dijkum with Compass Point. Please proceed with your question.

Floris van Dijkum, Analyst

Good morning, guys. A lot of my questions have been answered, but I have just a broader question. Given that Regency’s got this great balance sheet, you’re sitting on tremendous liquidity. A lot of your tenants are struggling. Some of your peers are looking to provide loans or other financial assistance to their tenants. Would you consider investing in some of your retailers, particularly the worthwhile ones? Or is your view that you’re going to stick to your knitting?

Lisa Palmer, President and Chief Executive Officer

We’re early in the discussion with our retailers and appreciate that some are vital components of our centers. While we acknowledge the challenges, we’re primarily focusing on understanding how to assist tenants with reopening effectively. We aren’t ruling out future investments, but it remains to be seen how that plays out.

Floris van Dijkum, Analyst

Thanks, Lisa.

Operator, Operator

The next question comes from the line of Linda Tsai with Jefferies & Company. Please proceed with your question.

Linda Tsai, Analyst

Hi. I think in past investor presentations, you cited the stat of 40,000 groceries in the industry going to 30,000. How are you thinking about the magnitude of that number now? Are there any disruptors that might shift that, maybe potentially the proliferation of micro-fulfillment centers?

Lisa Palmer, President and Chief Executive Officer

Not sure that we ever put that in print in an investor presentation. Hypothetically, we discussed that there are 40,000 grocery stores, and even if we were to lose 25%, we’d still have strong positioning with our 300-plus grocery-anchored centers.

Linda Tsai, Analyst

Thanks.

Operator, Operator

Our next question comes from the line of Chris Lucas with CapitalOne Securities. Please proceed with your question.

Chris Lucas, Analyst

Good morning, everyone. Jim, I’m sorry if I missed this, but did you provide a percentage of ABR that wonder what you’ve already agreed to deferral requests?

Jim Thompson, Chief Operating Officer

Chris, no, I didn’t. We’re early in the process. There’s more to come, and we’ll share more down the road as we get through some of this negotiation.

Chris Lucas, Analyst

I just want to make sure I didn’t miss that. Lastly, Mike, regarding the loans that you’ve recently closed on, were there any lender underwriting changes that incorporated the impact from COVID to their process?

Mike Mas, Chief Financial Officer

No, Chris. The lenders have lived up to their commitments without any COVID-related modifications.

Chris Lucas, Analyst

Okay, thanks. Lastly, just regarding some of these larger development projects that are on review at this point, how should we be thinking about some of the deleasing numbers you’ve provided, particularly Costa Verde and Westbard?

Mike Mas, Chief Financial Officer

It’s project-specific. To give you an example, Westbard is more likely to maintain its occupancy and NOI than Serramonte, where we have negotiated a termination. J.C. Penney's lease was set to expire sooner, so we anticipate some responses will differ.

Mac Chandler, Chief Investment Officer

What’s important is that we’re preparing to maintain income and extend tenants on a short-term basis until the timing is right to start these projects.

Chris Lucas, Analyst

Okay, great. Thank you. Appreciate it.

Operator, Operator

Next question is from the line of Tammi Fique with Wells Fargo. Please proceed with your questions.

Tammi Fique, Analyst

Hi, good morning. Just wondering on the $225 million of mortgages. Were those negotiations taking place pre-COVID? Well, I know they closed recently, but were those negotiations happening earlier?

Mike Mas, Chief Financial Officer

Yes, Tammi, those commitments were made pre-COVID, but we closed the deals during the ongoing crisis. We didn’t see any retrades on pricing or conditions.

Tammi Fique, Analyst

But are there any indicators for changes in LTVs or underlying cap-rate assessments that we should be aware of?

Mike Mas, Chief Financial Officer

Yes, credit spreads are up from what we secured for ourselves and underwriting might be changing, though we haven’t pursued any new mortgages as of yet.

Tammi Fique, Analyst

Okay, thanks. I’m wondering if you can comment on what you are seeing so far in May compared to what you collected in April?

Mike Mas, Chief Financial Officer

Our collections in May through yesterday have mirrored what we experienced in April, but we do anticipate that May may ultimately settle at a lower level.

Lisa Palmer, President and Chief Executive Officer

We will remain committed to being transparent and providing updates as our numbers become clearer.

Tammi Fique, Analyst

Okay, definitely appreciate that. Are you seeing any particular pockets of weakness in your collections for April?

Mike Mas, Chief Financial Officer

No, there’s no real geographic difference at this point. As markets begin to open, we might glean some data showing different impacts, but currently, it’s consistent across the board.

Tammi Fique, Analyst

All right, thanks. Lastly, regarding the goodwill impairment you took in the quarter, what was that related to?

Mike Mas, Chief Financial Officer

To clarify, goodwill is based on the synergy value from our 2017 merger with Equity One. The rapid decrease in share value triggered a qualitative test leading to a quantitative impairment analysis. This resulted in a write-down of about 40% of the original goodwill figure. This represents the synergy value that was absorbed but continues to exist within our assets.

Tammi Fique, Analyst

Okay, thank you. That’s helpful.

Mike Mas, Chief Financial Officer

Sure.

Mac Chandler, Chief Investment Officer

Thank you.

Lisa Palmer, President and Chief Executive Officer

Thank you.

Operator, Operator

Thank you. At this time, we have no additional questions. I’ll turn the call over to Lisa Palmer for closing remarks.

Lisa Palmer, President and Chief Executive Officer

I want to thank everyone again for their time. I want to thank all of our frontline workers. We did have the Blue Angels fly through here today, but it was a little quiet outside my window. So I want to thank them also for saluting Jacksonville hospitals. And happy Mother’s Day weekend to all the mothers. Thanks again.

Operator, Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.