SITE Centers Corp. Q2 FY2020 Earnings Call

Good day and welcome to the SITE Centers Second Quarter 2020 Operating Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. And I'd now like to turn the conference over to Brandon Day of Investor Relations. Please go ahead.

Good morning, and thank you for joining us. On today's call, you will hear from Chief Executive Officer, David Lukes; Chief Operating Officer, Michael Makinen; and Chief Financial Officer, Conor Fennerty. Please be aware that certain of our statements today may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from our forward-looking statements. Additional information about these risks and uncertainties may be found in our earnings press release issued this morning and in the documents that we file with the SEC, including the most recent report on Form 10-K and 10-Q. In addition, we will be discussing non-GAAP financial measures on today's call, including FFO, operating FFO, and same-store net operating income. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release. This release, our quarterly financial supplement, and the accompanying slides may be found on the Investor Relations section of our website.

Thank you, Brandon. Good morning, and thank you for joining our second quarter earnings call. Once again, I'd like to thank my colleagues at SITE Centers for their tireless work over the course of the quarter. Our team has been dealing with various unique situations with our tenants and our properties, and they have certainly earned our admiration during this period of remote working. I'll start today with a brief summary of the events during the quarter, then give some thoughts on what we are seeing and hearing from our tenants, and conclude with some comments around the dividend and recent transactional activity. As I stated on our first quarter call, 100% of our properties have been open and operating in accordance with the ever-changing local and state guidelines. This is important as 84% of our centers are anchored by an essential retailer, and our responsibility as the landlord was to continue to provide access and the necessary operations. Unfortunately, many tenants were not able to remain open. As of April 4, our low point, only 45% of our tenants were open for business. Over the quarter, we saw a gradual increase in tenant openings, and as of this past Friday, we are 92% open. For the most part, the remaining closed tenants are fitness and entertainment businesses, which have struggled to open due to social distancing requirements. This significant reopening activity has allowed us an unusually high degree of communication with all of our tenants, and two topics have emerged that are worth sharing with you today. First, payment of contract rent remains a primary focus in our conversations, and almost all tenants have acknowledged their obligation to pay under their lease contracts. Many, however, have asked for help in spreading those obligations over a longer period of time as they work to get business operations back on track and better align their cash flows. This has proven to be no small feat as it means both tenant and landlord need to review several thousand leases, even in our focused portfolio of only 69 wholly-owned assets. We've been very pleased with the agreements we've executed so far, where we are providing a deferral of some or all rent for a few months in return for true financial benefits to our company, such as options exercised, lease terms extended, or restrictive covenants loosened to our benefit. As of today, we've come to agreements on deferral programs that equal 17% of second quarter rent and 10% of July rent, whereas rent abatement or forgiveness agreements are negligible at only 40 basis points of second quarter rent. We have many ongoing discussions with tenants that are quite complex, which helps explain the fact that our tenants are 92% open, but our July collections are at 71%. I would expect this gap to close as we execute more agreements, but we will remain patient in our approach and provide more detail in the next few quarters. Some categories, such as fitness and theaters, are likely to remain challenged for some time. But these two groups represent only 7% of our ABR. The national profile of our tenant roster has proven to be a benefit, especially considering that 20 of our top 50 tenants have raised over $40 billion of debt and equity over the past four months, which has substantially improved their liquidity positions from March and April. As you can imagine, the level of dialogue with tenants during the quarter has been high. And if the first topic has been about rent during the pandemic, the second topic is the tenants' view of trends they see emerging from the pandemic. Since our properties are substantially all in high-income suburban locations, our tenants are consistently mentioning two key themes: first, work from home is increasing in this country. Whether it's one additional day per week or one per month, employees are spending more time in their communities, which is leading to more balanced traffic over the course of the week and an increase in visits per week. For our suburban-based properties, even the smallest change in shopping patterns can have an outsized and positive impact on sales and ultimately leasing prospects. Second, the value of convenience is increasing. Accessibility and ease of parking is crucial to tenants and customers alike. This is leading to additional opportunities on two fronts. First, as I mentioned last quarter, we started to see increased demand from traditionally mall-based retailers. This activity is accelerating with tenants attracted to our open-air footprint, lower occupancy costs, and proximity to many of the same customers. Second, the demand for convenience is increasing our ability to adapt our real estate and profitably convert existing square footage into pads or shop runs, unlocking accretive investment opportunities. Adaptations of valuable square footage will be an important part of our future, and we feel confident that we've selected the right real estate but also realistic that growth will not be linear given the increase in tenant bankruptcies. We're in the early stages of building this pipeline, and our expectation is that we'll have a number of value-enhancing tactical redevelopments in the coming years. In order to maintain maximum flexibility for these endeavors, the Board of Directors has agreed to suspend the third-quarter dividend. We remain optimistic about our company's outlook and know that a strong balance sheet is crucial to capitalize on opportunities that will be available to us. We've worked tirelessly over the last three years to improve both our balance sheet and our liquidity, and retaining cash flow from the suspended dividend, along with our favorable maturity profile, eliminates any near-term financing risk for the company. Before turning the call over to Mike, I wanted to address the agreements with Blackstone to unwind our two joint ventures, which were announced in connection with earnings. These agreements effectively swap the value of our preferred investment for equity and cash and replace fee and interest income with higher multiple operating cash flow. We are excited about this transaction and the property-level opportunities. We will be able to provide much more detail about our business plans for the properties post-closing. And with that, I'll turn it over to Mike.

Thank you, David. In the second quarter, activity from national tenants picked up from the pandemic lows, though overall volume is still below pre-pandemic levels as tenants prioritize their existing operations. We signed four anchor leases in the second quarter and 114,000 square feet of total space, with spreads on new leases of 17% for the trailing 12-month period. Subsequent to the quarter-end, we signed Sprouts at Lake Brandon Village and have a number of other anchor leases near completion. Active sectors remain the discounters, grocery, beauty, quick-service restaurants, and banks. Local tenant activity has also picked up since March and April, although it remains much more submarket-specific, with COVID outbreaks interrupting activity. In terms of quarterly results, the lease rate for the portfolio was down 50 basis points from the first quarter, largely due to the rejection of two 24 Hour Fitness leases. In addition to 24 Hour Fitness, national bankruptcies this year where we have exposure include Pier 1, Gold's Gym, GNC, Tuesday Morning, Chuck E. Cheese, and Ascena, which in aggregate totaled 2.3% of base rent, including leases that have been affirmed. For leases rejected to date in bankruptcy, we expect backfill timing to be longer than average given the slowdown in leasing velocity. That said, our team is in active discussions with a variety of quick-service restaurants and service users to backfill these locations, which have largely been shops. Moving to construction activity and tenant deliveries, four consolidated anchors started paying rent in the second quarter, including Total Wine at Wando Crossing, and we have another nine consolidated anchors signed but not yet opened, with rent commencement dates expected in 2020 and 2021. Total base rent from tenants signed but not opened as of quarter-end was $11 million. Construction activity on these spaces remains largely uninterrupted with no material impact due to recent shutdowns. Lastly, led by our property management team, we continue to improve our efforts to assist our tenants with marketing, delivery, and curbside pickup. A recent tenant survey we conducted indicated that over half of our tenants are interested in curbside service, with 80% of our national restaurants, which represent the majority of our restaurant exposure, currently utilizing or expected to roll out curbside service in the future. As David mentioned, our assets are located in affluent ZIP codes and provide excellent curbside visibility and access. We continue to work with our tenants on a one-off basis to ensure we're tailoring services to fit their needs.

Thanks, Mike. I'll comment first on quarterly earnings, discuss the Blackstone transaction, and conclude with our balance sheet and liquidity. Second quarter results were primarily impacted by uncollected rent and reserves related to the pandemic. We've adjusted our income statement presentation this quarter to help clearly identify the impact. In prior periods, revenue deemed at risk was reserved and labeled as bad debt. In our adjusted presentation, all billed revenue is included in base rent and recoveries, with an offset or reduction for revenue deemed uncollectible, which includes bad debt and unpaid rent from cash basis tenants. This change does not impact NOI, same-store NOI, or operating margins and is merely a change in presentation. Unpaid contractual revenue at site share for the quarter, including deferrals, totaled $44 million, with $15 million of this amount deemed at risk or uncollectible, which was an $0.08 per share hit to OFFO. We also wrote off $3 million of pro-rata straight-line rent, which was an additional $0.02 per share headwind. There were no other material one-time items that impacted second quarter OFFO. Subsequently, $4 million of the $44 million of unpaid revenue was paid, reducing total unpaid revenue from the second quarter to $40 million at site share as of Friday. Moving forward, we are not providing an updated outlook at this time. However, there are a few items to consider for the third quarter and back half of the year. As I mentioned last quarter, as a result of the pandemic, it is likely that disposition volume will be lower than our initial 2020 guidance, thereby reducing downward pressure on management fee revenue from 2019, which will help partially mitigate the impact from uncollectible revenue and reduced occupancy from bankruptcy-related closures. Interest expense is also expected to be lower in the third quarter due to a lower average line of credit balance. In terms of uncollectible revenue, cash basis tenants have paid 19% of quarter billed revenue. To date, these same tenants have paid 36% of their billed July revenue. If July trends remained constant for the entire third quarter, which is not our assumption but simply a point of reference, third quarter net revenue would be approximately $2 million higher than the second quarter. Monthly cash basis collection trends are detailed on Page 11 of our earnings slides. Regarding the agreements with Blackstone to terminate the two joint ventures, as David outlined, upon meeting certain closing conditions, SITE Centers will collectively acquire 100% ownership of nine properties, including two properties that the company previously did not hold a material interest in, and receive approximately $20 million of unrestricted and restricted cash based on the balances at quarter-end. The properties to be acquired are secured by $197 million of debt with an average interest rate of 3.3%. In the second quarter, management fees from the two Blackstone joint ventures were just under $500,000, and interest income from our preferred investments was $3.5 million. We expect both closings to occur by the fourth quarter and will provide additional details once they occur. Turning to our balance sheet, the company remains well positioned with no debt maturing in 2020, no unsecured maturities until 2023, and minimal future development commitments. Additionally, we repaid $400 million of the $500 million from our first-quarter line of credit draw in June and have $685 million of availability on our lines of credit and $128 million of consolidated cash on hand at quarter-end. We have no material uses at this time but expect to maintain excess cash on hand for the foreseeable future in light of the macro environment. In terms of our covenants, there were no material changes from the first quarter with two of our 69 wholly-owned properties encumbered today, providing future potential sources of additional capital and substantial capacity on each of our public bond and bank covenants. In our earnings slide deck, we again provided pro forma covenants to adjust for cash on hand, as our real estate assets and unencumbered assets covenants do not net out cash in the calculations. Lastly, as David mentioned, the Board has suspended the third-quarter dividend. Based on our estimate of taxable net income today, we continue to believe that no further dividends are required to be paid in 2020 to satisfy our REIT requirements, which will result in almost $80 million of additional retained free cash flow in the second half of the year. There will likely be a need to declare a dividend in the fourth quarter, though that will be paid in 2021. That said, no decisions around future dividends have been made at this time. We continue to believe our financial strength will allow us to take advantage of future opportunities, some of which David outlined to create stakeholder value. With that, I'll turn it back to David.

Thank you, Conor. Operator, we're now ready to take questions.

First question today will come from Christy McElroy with Citigroup.

Conor, I know you mentioned that there was an additional $4 million. It sounded like it was paid on Friday, so it didn't impact the numbers, the collection numbers that you have in there. So this number may be different. But with regard to the 19% that remains unresolved in July, that implies that tenants are reopened but still not paying rent. Can you just talk about how you guys are dealing with this unresolved bucket, which seems to be primarily national tenants, especially as we get closer to the August 1 rent payment? How are you thinking about lawsuits? And is that refusal to pay rent driving that 8% that are still not open?

Christy, I'll turn it over to Conor in a second; this is David. If you think about the last couple of months, I think a lot of this comes down to the philosophy of a deferral program. You can tell that the amount of rent abatement we've done has been minimal. It's been 40 basis points of second quarter rent. But the deferrals are certainly growing as time goes on, and I would expect that to continue. The majority of the uncollected rent is from tenants with whom we have ongoing dialogues, but we have yet to finalize a resolution. You asked about how we think about the deferrals. There's a bargain to be had between the landlords and the tenants. I think we've gotten past the point where the request from the tenant side is for abatement. We've moved into a realistic dialogue about how we can effectively allow them time to pay for a period of time. In return, they might loosen some restrictions or agree to additional terms in their leases. I think, as the initial shock of the pandemic has started to subside a little bit, calmer heads have prevailed. Both sides are realizing that there's a pretty good deal to be had, and there are trade-offs that make sense. I would say that we will start to close that gap between those that are opened and those that are paying, but I don't think the gap is going to be entirely closed in the month of July.

Yes, Christy, just to clarify, the $4 million I talked about. The reason I included that as a reference point is to think about same-store in our balance sheet as of June 30. Our payment data is as of last Friday. My point is simply that just in the month of July, we've collected another $4 million of the second quarter contractual rent. To expand on David's last point, if you recall, for the first quarter, we reported April collections on April 30 at 50%. Today, we're at 67%, right? So a 17% increase over the last three months. I don't know if we'll see as dramatic of an increase over the next three months for July. But it is an important point on David’s previous comments that the dialogues are active with the vast majority of our tenants who haven't paid. Some are simply giving up and saying, 'Hey, I’ll just start paying again.' Others are saying they need a deferral, while some are holding out. It's a very dynamic situation, and given our concentrated tenant profile, one tenant can swing the percentages quite dramatically.

Okay. Got you. And then just on the Blackstone unwind. Can you just talk a little bit about the genesis of that transaction? How did the two sides think about attributing value to the assets in this environment? And post-closing, how does the transaction impact your pro rata leverage?

Sure. I can cover the first and third parts of that, but not too much on the middle. The genesis of the dialogue was simply the fact that this joint venture was formed, almost six years ago. It was significantly larger at the time, as you know. And as the portfolio gets smaller, it was simply not efficient for either party. So we made it a joint goal to split up the assets, and this started months ago. I would say it was a pre-pandemic desire to resolve the joint venture in a way that was beneficial to both sides. Going forward, the difference for us is that it's a lot simpler to have a focused effort on nine assets that we know well. I think the business plans that we have for those assets will likely be different if they are wholly owned than they would be in a joint venture. So we feel very good about the resolution, and I hope that closing takes place sometime toward the end of the year.

Yes, Christy, for leverage, we'll move up about 0.25 or maybe modestly higher than that post-closing. The assets have a modestly higher growth rate than our current portfolio. We think that there will be some natural deleveraging from those assets once the occupancy gaps start to close. And as David indicated, there are other items from our business plans, which will further impact leverage that we can discuss post-closing. One other thing I’d add is that all of it is secured debt, and obviously, it’s not recourse debt.

And our next question comes from Samir Khanal with Evercore.

So Conor, when I look at the leasing spreads, I mean, they've held up here, but I would think they were negotiated sort of pre-COVID here. Can you give us an idea how negotiations are going at this point, and if COVID language is being implemented? Also, can you speak to deals that are assigned or under negotiation subsequent to the quarter-end?

Sure, Samir. It's David. The anchor leases, having four anchor leases signed during this quarter is significant, and then one post-quarter. However, the reality is, as you correctly point out, those negotiations were months ago and are not necessarily a reflection of anticipated leasing spreads going forward. To be honest, I don't think there's enough current activity to provide a good emotional gauge of where rents are heading in the future. It's just not current enough data. It would be fair to say that in a portfolio that's now as small as ours, with only 69 properties out of more than 30,000 retail properties in the United States, we're not a great indicator of macro trends. That said, on a micro basis, we are seeing demand from all types of tenants at our properties. I believe the next six to nine months is crucial in determining where rents are heading and how desirable our land is.

Got it. And I guess my second question is on the rent commencement dates for some of the tenants that were planning to open later this year. Is it fair to assume that the bulk of those are being pushed out into next year at this point? And how should we be thinking about that?

It's reasonable to assume that, especially since we all assumed everyone was working from home. The construction industry has been surprisingly resilient. Everything is a little slower, but Mike can provide more detail on that.

Yes, Samir, one of the most important things to point out is that while many tenants were prevented from operating in April, our construction progress was for the most part uninterrupted, with the exception of New Jersey and a few other local municipalities. As a result, we've been able to deliver to tenants in a timely manner. While some of the tenants are certainly looking at pushing some rent commencement dates, we've maintained a relatively stable timeline overall.

Okay. Even with the flare-ups we've seen or heard about in California, Arizona, or even Florida, do you think the bulk of those would still kind of be on track?

None of the flare-ups have affected our construction timeline.

What he's indicating, Samir, is that there hasn't been much negative impact. However, I think if there are renewed outbreaks in California and the southwest, we should reasonably expect some tenants to call up and request delays for openings. From our perspective, we will work very hard to ensure that the openings remain strong, so we expect some of the rent commencement dates to slip.

And just on the $11 million number we disclosed, those leases we’re signing today will be for 2021. So don't expect all $11 million to come online by the back half of the year.

And our next question comes from Todd Thomas with KeyBanc Capital Markets.

First, just a follow-up on Christy's question. David, you said deferrals were increasing as you moved forward here, but that bucket decreased by 10% from June to July, from 20% to 10%, and the unpaid balance increased by a couple of percent. Can you provide some detail on what's happening there with the unpaid percentage increasing while deferrals decrease as we move forward? And as we think about the deferral agreements that you've struck, have you had to revisit any of those or maybe write off any deferred rent since negotiations with tenants have begun?

Yes, Todd. I think your second part of the question is really important because, as we all know, when you shake hands with someone at a certain point, it's based on the conditions at that time. If there's a second wave or there's re-closings in certain parts of the country, there's no question that we'll have to reopen conversations because payment plans are based on time. If the timing changes, I think the plans will also need to change. It's very hard to speculate right now, but we have not had to revisit any of our deferral programs. An important point is that of all the deferral programs we've enacted with existing tenants under existing term, none have included a reduction in base rent. So to date, I feel that it has been a very positive negotiation between a tenant wanting time and a landlord wanting control or term, and it's worked well. If the pandemic situation alters, however, I think some of those deferrals could potentially change as well. Regarding your first question, what I meant when responding to Christy is that, three or four months ago, one might assume that you're working with tenants until they open. Once they do open, everything returns to normal. The complexities of negotiating deferred arrangements and leases means that there's a lag period. So even though the tenants have opened, we're still navigating these discussions to resolve and assist in extending those programs. Therefore, I believe that July is not the endpoint for deferral programs; we may see them extend a bit into the fall as we work through the documentation.

And Todd, we also have some new disclosures on Page 9 of our slides regarding deferral repayments. 89% of our deferrals executed today are expected to be repaid in 2021 and beyond. Our tenants are aware that deferring rent, expecting to pay back in a short window seems unrealistic. As such, we're trying to craft agreements that consider this is not a snapback economy.

Okay, that’s helpful. And regarding Page 9, Conor, looking at the composition of the uncollected base rent in the quarter, how has that changed in July? Is that something you can provide color on?

I don't have that exact data, Todd. My guess is it's probably not that different because the same tenants we're negotiating with for agreements are the same ones for July discussions. So they appear to want to see some resolutions for their second quarter obligations before they agree to July.

And our next question comes from Rich Hill with Morgan Stanley.

I wanted to get a bit more clarity on the leasing spreads. It seems like new leases and renewals both increased prior to last quarter. However, I note that net effective rents came down. So I was wondering, Conor, if you could help me walk through that.

Yes, so Rich, if you look on Page 14 on our net effective rents, on the far right, we provide the percentage of GLA related to anchors, greater than 10,000 feet. Our net effective rents are the lowest in the last year, but this coincides with our highest percentage of anchor deals. To align with Mike's comments, we're seeing anchors active while local tenants, which typically have smaller shops, have higher net effective rents, are showing much more volatility in their activity. The most significant declines over the last four months have been among the shops, which coincidentally have the highest net effective rent. I anticipate that trend will continue through the year as long as these flare-ups persist.

Got it. That's very helpful. Just a quick follow-up. On lease terms, have you seen any differences in 2Q in terms of the lease terms being signed, or has it been relatively consistent?

That's been relatively consistent. We really haven't seen any changes in the lease term.

Got it. Just one final question for me. I think you addressed this, but just humor me for a bit. Can you walk through the difference between cash basis tenants paying 19% of 2Q '20 versus the 64% that was collected in 2Q?

Cash basis tenants represent about 10% of our base rent for the second quarter. You can back into what they represent as a percentage of unpaid rent, and it's a decent chunk. I can provide more detail off the call if needed.

And our next question will come from Alexander Goldfarg with Piper Sandler.

So two questions. First, going back to Christy and Todd's question. Conor, on the accrued but not collected rents, in the supplemental, you mentioned $25 million that was accrued but not collected in the second quarter. However, you talked about the net $40 million that remains unresolved. Can you reconcile those two? And regarding the write-offs in the second quarter, does this mean that the $25 million of accrued but not collected is likely collectible rent, or should we expect further write-offs?

Yes, it's a good question, Alex. I’ll start with the last one. If we're accruing revenue and not collecting it, there is a high degree of probability required to recognize that revenue. Our view today is that, that revenue we're accruing but not collecting is collectible. Regarding your question about bridging the gap between the $44 million unpaid rent and the $25 million, the $25 million on Page 12 is related to same-store NOI. The $44 million is related to the entire portfolio. We provide this information in detail in our slide deck, so we can discuss it further afterward if you'd like.

Okay, that's helpful, Conor. So from an earnings perspective, we should consider the larger number and not the smaller same-store number.

You're absolutely correct.

And then the second question is, David, hopefully, your tenants have some insight that could answer this. Curbside has gained rapid adoption. Have tenants indicated how much curbside has helped offset sales lost by customers typically shopping in-store? Can you provide insight on tenant sales now on a net basis, and if they can quantify how much they believe curbside has helped offset traditional sales?

Yes, Alex, it's a great question. I wish we had definitive metrics on that. Our recent tenant survey revealed a strong interest in curbside access. Not surprising, considering recent consumer behavior. We've seen positive anecdotal and empirical evidence from tenants using curbside. Unfortunately, we lack precise data on its relative impact on overall sales.

One thing worth noting is that when evaluating customer draw through cell phone app data within our grocery properties, while many operators report increased sales, we've observed that customer counts in-store may be down 30-40%. Sales are up 25%, but customer presence in parking areas is increasing. This shift clearly represents a strong trend, and we're actively working with our tenants to maximize this opportunity.

And our next question will come from Ki Bin Kim with SunTrust.

Can you elaborate on your philosophy regarding deferral agreements? Clearly, there will be differing strategies among companies. What was your approach, and which customers were included?

We approached this situation deliberately. Early in the pandemic, there was so much uncertainty that we chose to wait to see how things would unfold before jumping into deferral arrangements. Most of the agreements we reached originated during the stage when tenants began to reopen. Our focus was to structure win-win scenarios since, if we effectively lend to tenants, we need to ensure mutual benefits. As David mentioned earlier, we’ve evaluated each tenant space by space, lease by lease, considering options to ease restrictive covenants in exchange for deferrals.

So, it's correct to infer that the most creditworthy tenants are the ones receiving deferrals? Or are there many tenants requiring deferrals despite uncertain survival prospects?

Ki Bin, if we categorize it, I would say there's three groups. First, small shop businesses needing help, regardless of creditworthiness; it’s in our interest to keep them solvent, though they constitute a small part of our rent roll. Second, there are reliable tenants, where their credit strength allows us to feel confident in deferral agreements. Lastly, there are tenants needing control over lease terms and conditions. Therefore, while the reasons for deferrals vary, they don't fit neatly into either creditworthiness or control categories alone.

Right, last question. How should we think about same-store NOI going forward? Given the inclusion of accrued but not paid rents, I'm curious if the improvement will mainly derive from a smaller unresolved bucket.

Ki Bin, the fact is we aren't focusing on same-store NOI, as it's not particularly relevant for the foreseeable future.

Yes, Ki Bin, quite a few factors come into play. We've disclosed some guidance on NOI, but we provided it more for an earnings perspective than same-store parameters. Cash basis tenants, the $11 million in signed but unoccupied rents, and our ABR are vital for our bottom line. We made significant reserves this quarter tied to uncollected rent. How that evolves over the coming year will impact same-store numbers, but to David's point, we don't typically manage our business with same-store NOI as our core focus. Its relevance has diminished due to pandemic impacts.

And our next question will come from Linda Tsai with Jefferies.

In terms of the unpaid contractual rent at $44 million, but with the recent $4 million payment, which merchandising category do those tenants belong to?

Linda, it's all over the spectrum. That $4 million does not pertain to a single category. Our payment data is from last Friday, whereas the quarter's numbers reflect a different period. We expect overall numbers to increase, as discussed by David and Mike regarding ongoing tenant agreements, some tenants may simply begin to pay their rent in full. But there isn't a particular category standing out here.

Understood. Regarding the comment about rejected leases from bankruptcies, how long do you anticipate backfilling them versus before?

Linda, we find the future of leasing heavily relies on widespread reopening across the country, so we cannot confidently provide insight for the year ahead.

The irony here is, as Mike and David noted, we're observing more leasing velocity with anchors than shops. The majority of our bankruptcy rejections are concentrated within the shops portfolio.

One final question. You mentioned broader trends focusing on working from home and increasing demand for convenience, as well as interest from the mall-based retailers. How do you foresee merchandising shifting? What types of tenants are you looking to attract?

Moving forward, we will continue to see a preference for convenience and service-based tenants. This includes quick-service restaurants, drive-thru institutions, financial services, and off-price merchandise as strong drivers.

And our next question will come from Mike Mueller with JP Morgan.

You talked about very few abatements, and the lease rate only dropped about 50 basis points sequentially. Regarding the $15 million deemed at risk or uncollectible, how should we think of that as a rearview metric versus something recurring over the next few quarters? Is that a function you believe you're not collecting it, or truly at risk?

It's a great question, Mike, and it's hard to answer without guidance. The payment rate is the biggest factor. For example, if we have a 71% payment overall for the third quarter based on our July data, uncollectible revenue will likely be less than what we recorded in the second quarter. If we consider counters like cash basis tenants, reserves, and general industry considerations, our perspective on specific tenants or sectors will play a part in uncollectibles. Ultimately, your sentiment on collection rates will direct the revenue deemed uncollectible.

Got it. Okay. And last question: You had about $3.8 million of fee income tied to Blackstone, so how much of that will diminish with the unwind?

Blackstone fees were about $500,000 for the second quarter, and interest income from our preferred investments was $3.5 million. Those will represent the bulk of the impact. We still have a 5% stake in those joint ventures, but that won’t be material. The most substantial impact will be the lost fees and interest, which will be replaced by NOI from the properties.

And our next question will come from Floris van Dijkum with Compass Point.

David, can you quantify some of the benefits from the extensions and easements within your lease discussions? Is that possible at this stage? How should we perceive the accruing value for SITE Centers?

Floris, that's certainly feasible. We conduct net present value analyses on deferral arrangements to evaluate the financial outcomes. However, I'd hesitate to aggregate that into overall guidance. We're making financially beneficial decisions, which I'll leave at that.

But is the majority of that benefit on an NAV basis or just on an earnings basis? Is it extended payments or creating additional space at your centers?

Most of the benefit is on an NAV basis. The majority of the value lies in eased restrictions that allow us to adapt the property further. While there are scenarios where tenants can execute options or extend terms, the core goal tends to lie in regaining control of the real estate potential.

One last question from me: which tenant category required the most deferrals? Is it apparel? Is it gyms? Or do you think you’ve written off most of your gym income? How should we analyze that across portfolio segments?

Given the size of our tenants, we haven't detailed the percentage of deferrals across categories. However, small fitness and entertainment tenants likely need assistance but represent a smaller percentage of our rent roll. Larger tenants, particularly in the discount and grocery categories, are more manageable due to their control over real estate and the willingness to negotiate effectively. However, we haven't quantified those percentages for you.

Understood. One final inquiry: Do you anticipate reinstating guidance by year-end, considering your earnings aligned closely with expectations despite not providing prior guidance?

Floris, I believe you acknowledge our commitment to transparency alignment with guidance. That commitment remains intact despite the pandemic. We'll determine the timing of guidance reinstatement once we assess conditions more clearly.

And our next question will come from Christy McElroy with Citigroup.

It's Michael Bilerman here with Christy. I hope to return to the Blackstone transaction, a couple of quick clarifying inquiries. In what ways were you solving for the exchange? The preferred had been written down to about $90 million from a face value of $200 million. Many years ago, it was close to $400 million as sales proceeds paid that down. As you were contemplating resolving that $89 million, the $20 million in cash, it seems you valued the equity above and beyond the $200 million of mortgage debt at about $70 million. Is there another way to conceptualize what you were aiming to achieve?

Michael, I’ll attempt to clarify within the bounds we have prior to closing. We aimed for a simplification of our business structure, protecting shareholder interests associated with the preferred, and aligning our real estate opinions encumbered by multiple pools of loans. This transaction allows us to streamline assets for a more focused strategy.

Regarding the debt, could you share the debt yield on the $200 million of outstanding mortgage debt for those assets?

Michael, we can't disclose that at this time. You can try to piece it together from our property table.

Based on my calculations, $18 million of NOI suggests this debt yield runs about 9%. Is that a reasonable estimate?

Michael, we just can't comment on that. I'm sorry.

How do you perceive the impact of lost income? I understand you've previously mentioned preferred income generated on $200 million. Despite the earlier write-down to $90 million, you were still earning at least cash interest. How would you categorize this effect relative to cash flow generation through the preferred?

We consider the transaction to be FFO neutral in year 1, Michael. This will assist in addressing your NOI queries. The cash flow outcome will depend on our business plan capabilities and the CapEx we invest at the properties, which we'll detail post-closing.

Should we also consider this with respect to marketing the debt, given it appears your debt is a bit above market? What would it look like on an AFFO basis?

It would be immaterial from a non-cash perspective, as there's no benefit from that.

And our next question comes from Vince Tibone with Green Street Advisors.

I have a further follow-up on the Blackstone deal. I want to better grasp how you perceived this transaction given your current cost of capital. You position it as a swap, but isn't this more akin to around a $250-270 million acquisition, financed through existing mortgage debt and the book value of preferred equity? What rationale do you have for growing the balance sheet and acquiring now, given current stock trading and capital costs?

I’m unsure how you reach the conclusion that this is an asset purchase. We previously had an equity position on these properties.

I see it that way since you're basically acquiring an additional $200 million in debt on the balance sheet while swapping preferred for interest in those properties. Therefore, from that perspective, you're increasing both your assets and liabilities.

We’ve always perceived the preferred equity as being subordinate to the mortgage debt. In various instances, it may also be subordinate to common equity. This move allows us to consolidate among a smaller asset pool.

Could you provide any details on how the valuation was negotiated in comparison to pre-COVID levels? Can you share any insight into the cap rate variations between February and now?

The valuation process involved two parties with significant historical context working collaboratively to reach fair conclusions for both sides.

Last question: Are you able to disclose the decline in second-quarter same-property NOI on a true cash basis?

Yes, Vince. On Page 12, we'll lift data on same-store and cash basis for comparisons. I think, prior queries from others might clarify that but overall, same-store NOI will see incredible volatility over the next two years as we navigate these deferrals.

And our next question will come from Haendel St. Juste with Mizuho.

I wanted your view on a recent call where a CEO of a large private shopping center portfolio mentioned that total portfolio NOI could trough 15% below pre-COVID levels before recovering, potentially over years. How do you feel about that? Is that reasonable?

I don't have a particular opinion on that statement, but I can speak to our own assets, which might differ from the overall industry.

In terms of your portfolio over the next two to three years, how long do you think it will take for stabilization to occur; is 2022 realistic? And what does the cash flow look like in perspective to where you think it will be?

I ponder these exact questions daily. The unpredictable nature of the pandemic across communities and its indefinite timelines make it difficult to project which tenants will thrive, making guidance on trough levels uncertain.

And our next question will come from Chris Lucas with Capital One.

Can you provide further details about how the assets were selected for the Blackstone JV? Was this a cherry-picking exercise or an alternating selection model?

Chris, this negotiation was flexible, allowing both sides to reach favorable conclusions that met individual needs. There was room for both parties to find agreement.

Were security deposits or letters of credit utilized to satisfy any rent obligations under deferral agreements?

No, that was not the case.

Lastly, can you provide a weighted average payback period for deferral agreements, or do you have an approximate idea of when they might be due?

We communicated aggregates by year on Page 9 — the purple ring chart illustrates deferrals anticipated for repayment. The bulk is designated for 2021, but that chart may change as we gain more insight into unresolved balances for the second quarter in July.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to David Lukes for any closing remarks.

Thank you all, and we look forward to talking to you next quarter.

And the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.