Brixmor Property Group Inc. (BRX) Q2 2020 Earnings Report, Transcript and Summary

Greetings and welcome to the Brixmor Property Group Second Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Stacy Slater. Please go ahead Stacy.

Thank you, operator, and thank you all for joining Brixmor's second quarter conference call. With me on the call today are Jim Taylor, Chief Executive Officer and President; and Angela Aman, Executive Vice President and Chief Financial Officer; as well as Mark Horgan, Executive Vice President and Chief Investment Officer; and Brian Finnegan, Executive Vice President Chief Revenue Officer who will be available for Q&A. Before we begin, let me remind everyone that some of our comments today may contain forward-looking statements that are based on certain assumptions and are subject to inherent risks and uncertainties as described in our SEC filings and actual future results may differ materially. We assume no obligation to update any forward-looking statements. Also, we will refer today to certain non-GAAP financial measures. Further information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in the earnings release and supplemental disclosure on the Investor Relations portion of our website. Given the number of participants on the call, we kindly ask that you limit your questions to one or two per person. If you have additional questions regarding the quarter, please recap. At this time, it's my pleasure to introduce Jim Taylor.

Thanks Stacy and thanks to each of you for joining our second quarter call. I trust that each of you and your families are safe and well. Let me begin my remarks by stating how pleased I am with the durability and resilience of both our portfolio and our team as is evident in our response and performance during this COVID-19 crisis. At the height of the regional closure orders in mid-April, more than 40% of our tenancy by revenue was closed and we saw a similar drop in traffic levels. Yet our teams had already jumped into action in early March with targeted reductions of 15% in CAM to alleviate tenant expense burdens without sacrificing service levels, additional signage and curbside pickup areas for tenants that remained open, relief in terms of deferment for those tenants forced to close, and assistance in accessing PPP and other government programs. We've received universally positive feedback from our tenants for the partnership approach we took. Today, approximately 94% of our tenants are open and we've seen a corresponding recovery in traffic levels versus last year. Tenants that do remain closed are heavily concentrated in categories such as bars, restaurants, and entertainment uses, some of which have been impacted by re-closure orders in jurisdictions like California. For those tenants that have reopened, we are getting largely positive feedback including reports of larger basket sizes and higher conversion rates versus last year. For gym, many memberships have been kept on hold following reopening, but the gym operators are also seeing unexpectedly positive trends in new memberships. For restaurants that have drive-thru pick up or outdoor dining, business is recovering well, while those with indoor seating dining are seeing reduced levels due to capacity restrictions. As of July 29th last week, we've collected 76.6% of our second quarter rent and have entered into deferral agreements or abatements for another 9.8% of rent for the quarter. Of that, we limited abatements to only $1 million or 40 basis points of base rent and a majority of those abatements were granted in connection with extensions in turn. In other words, we've addressed over 86% of our second quarter base rent as of last week. That momentum also proved out in July where we've collected 79.7% of our base rent as of last week and deferred or abated another 4.2%. From a collectibility standpoint, during the quarter, we took a reserve on base rent of $22 million, which equates to 39% of the recognized and uncollected rent as of June 30. Angela will provide more color on our reserve approach and our recent collections in a few minutes. But we believe that given our collection rates and tenant performance upon reopening that we've been appropriate and balanced. I believe our collection statistics which compare favorably to the broader industry underscore the quality of our community-centered portfolio, but they only tell part of the story. Our balanced business plan continues to deliver even during the crisis. Excluding revenues deemed uncollectible, our same-store NOI would have been 3.5% in line with plan. We also signed over 400,000 square feet of new leases this quarter at an average cash-on-cash spread of 19%, have over $39 million of leases that are signed, but not commenced. And have generated a pipeline of new leases with vibrant tenants that, is at its highest level in the last several years, at 1.3 million square feet and $23 million of new ABR at an average rent of over $18 per foot during this crisis. As the crisis abates, which it will, we are poised for a strong recovery with a business model that capitalizes on this disruption. Of course, for all of us, questions persist about the duration of the crisis and its economic impacts. Will movie theaters ever recover? What will be the fallout of restaurant tenants that have been forced to re-close? Where will the overall occupancy reset be in terms of tenant failures, which have been relatively modest through this point of the crisis? The truth is no one knows the answers to these questions, and responsible management teams must prepare themselves for a wide range of potential outcomes and scenarios. But, there are some immutable truths that this crisis has revealed that underscore our confidence in our balanced business plan, and how Brixmor is positioned to continue to outperform, not just in spite of this disruption but rather because of it. First, as you've heard me say before, rent basis matters. While we expect spreads to moderate a bit from historical levels, we still benefit from significantly below-market rents rolling over the next three to five years. In fact, the average rent on our anchor space rolling over the next three years is $9, well below the average anchor rents we've been signing over the last 12 months and through this crisis. And as tenants are, of course, increasingly focused on store profitability, occupancy cost is a key focus. We have the basis to compete for these tenants and still make money. Second, successful tenants, as I've said before, are increasingly willing to relocate to get to the appropriate size in prototypes as their store models evolve. This crisis has only accelerated that evolution. We again, are well-positioned given our national platform and low rent basis to compete for this demand. Third there is a growing number of retail tenants fleeing obsolete product types in favor of the lower occupancy costs, superior visibility and proximity to the customer that our open air centers provide. We've been struck by how many retailers, who two years ago, would not consider open air formats, are now coming to us in SAS. Fourth, tenants are realizing the importance of having product within the last mile of the consumer. They are finding that BOPIS and curbside pickup are profitable and convenient ways to serve their customers. We expect that much of that shift towards these models during COVID will persist after COVID. And we have the parking lots and flexibility in our well-located centers to accommodate multiple tenants using these channels. Fifth, because of the importance of being within the last mile to the consumer, we are also seeing a convergence of micro fulfillment and retail, for which we have ample flexibility to accommodate in our centers. Sixth, having an appropriate mix of essential hybrid and non-essential tenants, not only drives relevance at the center to the community it serves. It provides the broadest possible funnel of tenant demand, and enhances the durability and resilience of cash flow as disruption inevitably occurs within retail cycles. Finally, we are seeing all of these underlying strengths, impacting our business right now, particularly as reflected in our forward leasing pipeline, which again is at a several year high despite COVID. And we believe that these very same strengths will be durable drivers of our business going forward. Looking forward, we do expect the rate of tenant failures to increase, opening up space for better and more relevant concepts. We believe, we've adequately reflected these expectations of increased tenant failures in the reserves taken year-to-date and the number of tenants we've taken to a cash versus accrual basis. Accordingly, this second quarter should represent a low point from an income standpoint. While the reduced FFO we've reported due primarily to the reserves taken in the loss on debt extinguishment this quarter, is still adequate to cover our dividend. We remain focused on ensuring that we have adequate growth capital as we emerge on the other side of this crisis. Our decision with respect to the suspension of the third quarter dividend allows us to ensure that next year's reinvestment pipeline is fully funded on a leverage-neutral basis. It allows us to capitalize on favorable tax deductions allowable this year. And it puts us in the best position to reinstate our dividend in the fourth quarter as fully as possible. As mentioned last quarter, we don't want to be in a position to have to raise external equity at a time when growth opportunities we believe, will be most compelling. I'd like to conclude my comments by thanking the entire Brixmor team, who quarter after quarter, through crisis and beyond continue to outperform. Your actions drive us towards our purpose of being the center of the communities we serve. Thank you. Angela?

Thanks, Jim, and good morning. Our results for the second quarter underscore the measurable strength of this portfolio, including the granularity of the asset base, its proximity to customers and its significant tenant and geographic diversification. When coupled with attractive rent basis, we believe the result is a platform uniquely positioned to navigate the current environment. To illustrate the impact of COVID-19 on our second quarter financial statements, we have provided additional disclosure on page 11 of our supplemental package, which buckets base rent into its component parts, based on rent collections and deferral or abatement agreements executed as of June 30. As you will see, we have separated deferral agreements based on their accounting treatment, consistent with the lease modification relief provided by the FASB. All abatements as well as deferral agreements that are accounted for as lease modification, generally due to a concurrent extension of lease term, are not accrued for or recognized in the income statement during the current period. All other deferral agreements are accrued for and recognized in base rent during the current period. To summarize the new disclosure, as it relates to our total portfolio, our second quarter billed base rent was $212 million, of which $1 million was subject to deferral and abatement agreements that were not accrued for during the quarter, resulting in accrued base rent flowing through the income statement of $211 million. Cash rent collections totaled $155 million, or 73.2% of billed base rent as of June 30. Leaving $56 million accrued but uncollected, of which $12.6 million was subject to deferral agreements executed as of June 30 and $43.3 million was unaddressed and under negotiation. Subsequent to quarter end, $7.3 million of additional cash was collected and $7.2 million of additional deferral and abatement agreements were executed, reducing the $43.3 million unaddressed at June 30 to $28.8 million or only 13.6% of build base rent as of July 29. During the quarter, we recognized a total of $27.8 million of revenue deemed uncollectible, comprised of $22 million related to current period base rent and approximately $6 million related to recoveries in prior period AR balances. As Jim highlighted, the $22 million related to base rent represents 39% of the total amount recognized, but uncollected as of June 30, comprised of a 22% reserve on amounts deferred and a 44% reserve on amounts uncollected and unaddressed or under negotiation. Based on the cash collections and deferral agreements executed subsequent to quarter end, the reserve represents not 44%, but over 60% of the $28.8 million of uncollected and unaddressed rent. In addition, our analysis of collectibility also resulted in the reversal of $11.5 million of previously accrued straight-line rental revenue. As a reminder revenues deemed uncollectible and straight-line rental reversals were also taken in the first quarter, to acknowledge the impact of COVID-19 on certain nonessential watch-list tenants. On a year-to-date basis, revenues deemed uncollectible totaled approximately 600 basis points of total revenue, as adjusted, and straight-line rental income reversals totaled $19.4 million. NAREIT FFO in the second quarter was $0.32 per share and same-property NOI growth was negative 9%. As discussed, NAREIT FFO reflects $0.09 per shares of revenue deemed uncollectible and $0.04 per share of straight-line rental income reversal, in addition to $0.04 per share of loss on debt extinguishment related to the repurchase of $183 million of unsecured notes during the quarter and $0.01 per share of litigation and other non-routine legal expenses. Same-property NOI growth reflects a 1,260 basis point detraction from revenue deemed uncollectible, which outweighed a 290 basis point contribution from base rent and 150 basis point contribution from net recoveries. As we have proactively cut back on discretionary operating expenses and adjusted service levels across the portfolio to manage net recovery leakage for the company and lessen the expense burden on many impacted tenants. Turning to the balance sheet. We raised $500 million of 10-year unsecured bonds during the second quarter and used the proceeds and existing cash on hand to repay $500 million under our revolver and repurchased $183 million of 2022 unsecured notes. As a result of these transactions, our total liquidity improved by $200 million during the quarter to $1.4 billion comprised of over $300 million of cash on hand and $1.1 billion of availability under our revolver. This liquidity profile is particularly significant in light of the fact that we have no debt maturities until 2022. Based on current rent collection levels and the adjustments we have made in operating and capital expenditures, we are fully funding the recurring operations of our platform without utilizing any of the substantial available liquidity. Our breakeven cash collection rate is approximately 50% before CapEx or approximately 60% after normal course maintenance and leasing CapEx, well below the 76.6% and 79.7% collection rates realized in the second quarter and July, respectively as of July 29. While we are pleased to be in such a strong liquidity position with ample cost base to navigate the challenges inherent in the current environment, we are also mindful of the many unknowns for which we must remain fully prepared. As a result, the Board of Directors has continued the temporary suspension of our dividend. In order to ensure we emerge from this crisis a stronger and better platform. We believe our long-term business plan, which focuses on accretively reinvesting in our portfolio of well-located neighborhood and community shopping centers with strong retailer productivity and low in place rent has and will continue to demonstrate measurable success and we believe that it is these portfolio attributes that will define the best positioned platforms post crisis. And with that I will turn the call over to the operator for Q&A.

Thank you. This time we will be conducting a question-and-answer session. [Operator Instructions] The first question is from Christy McElroy, Citibank. Please go ahead.

Hi. Good morning, guys. Thank you. Just in regard to the new leases you're executing today. Can you talk about where new demand is coming from in terms of categories or specific retailers that you would call out sort of, in this environment? And how should we think about leasing volume in Q3 relative to Q2, I guess, it would be helpful to sort of, understand the cadence of activity as we've gone through the lockdowns through today.

Christy, I'll let Brian give you a flavor of some of the tenants that we're signing deals with. But I appreciate the question because it highlights that we continue to sign accretive new leases at pretty significant volumes. Tough for us to predict what next quarter will bring versus this quarter. But we certainly have a lot of confidence over the next several quarters given the size of the forward leasing pipeline that we have and frankly the quality of tenants that are in. Brian?

Yes. Thanks, Jim. And Christy, in terms of categories, we saw some themes during the quarter relative to tenants that have performed well during the crisis. First off in grocery, we signed two gross leases in the Northeast during the quarter. We have three more in the legal pipeline right now that were just added during the period and more behind that that we're expecting to come through. In terms of specific tenants, we signed leases with Dollar Tree, Five Below, Chipotle, Chase Bank and BofA. Again, many tenants who have continued to be active and who have large growth plans and haven't really slowed down in terms of lease negotiations during the crisis. And more importantly, if you look at our leasing pipeline, we actually added to it as Jim mentioned in his opening remarks it's up 25% from the end of the year at 1.3 million square feet. In terms of what we expect to get signed during the quarter many of those negotiations had slowed and we are starting to see that shake out a bit, but definitely hard to predict. We expect it to be down from where we are historically. But considering the circumstances, we're really pleased with what the team was able to execute on during the quarter and I think, it demonstrates the continued demand to be in our shopping centers.

And then just in thinking about your liquidity and capital position. I know it's still early. There's a lot of uncertainty, but how do you think about the potential for dislocation in the transaction markets and your ability and your willingness to take advantage of that? Are you in a position to buy today?

Well, it's part of why we're being so careful with capital. It was part of the tough decision to continue to suspend the dividend. And Angela referred to the liquidity that we do have and importantly, the fact that we're covering today from a cash flow perspective even with some of these reserves. So as we look forward, we do expect significant dislocation in the property market, but we're going to be patient and pick our points. Mark?

Yeah, Jim, I think you've said it well. I mean, we're seeing a pretty slow transaction market today and that's been the case since the start of the pandemic. So it's pretty early to cap rate -- to comment on cap rates today given that the main issue is really trying to figure out where NOI sits between the buyer and the seller. But we are seeing some green sheets in terms of liquidity with smaller assets and triple net leases. So while it's going to be lumpy, I think we'll see the liquidity trend improve over time with the grocery and community centers showing the strongest liquidity as they normally do. And I agree Jim with what you said, I think over the next couple of years what's interesting from our perspective is that we're going to see better opportunities for acquisitions than we did over the past couple of years. And I think that's really exciting so we'll find some great assets where we can drive out performance.

Thank you.

And, Christy, I think what's really important in this environment is the national platform that we have because there is a lot of disruption. So the insights that we have into our core tenancy, I think give us a competitive advantage in a market that's still own by a lot of one-off owners.

Thanks so much, guys.

You bet.

Next question is from Todd Thomas, Raymond James [ph]. Please go ahead sir.

It's KeyBanc. That's fine. Good morning. First question. You talked about Jim being at about 86% I think for the combination of collection and deferrals in July. Do you have a sense for how long that metric might take to recover to a more normalized level? And then you've talked now about the strength of the forward leasing pipeline. When do you get to a point when you begin to recapture space and churn the non-rent paying tenants or those that have not reopened at this point yet that have had the ability to reopen?

Well, it's interesting because you haven't seen a lot of tenant failures yet. We will see some and the timing of that will likely play out over the next couple of quarters. In terms of our collection strength, we're really pleased. We're seeing that number subsequent to quarter end beginning to approach 90% when we have 94% of our tenants open. And as you could imagine, the differential is related to those tenants who may be open but aren't yet fully open. And we and they want to see how their businesses moved through this part of the crisis to determine how we're going to negotiate. But in terms of specific timing, I think it's going to take a couple of quarters to play out. And what makes that so important Todd, and I think this is such an important question is that dislocation is going to happen in every portfolio. And then the question is how are you positioned to recover while you make money through this disruption or not. And that's again where I think that rent basis that we benefit from is an extraordinarily powerful thing, because tenants don't want to give up the space. But when they do, we have we believe healthy and substantial demand behind them typically at rents that are in excess of what we have in place.

Okay. I don't know if I missed it in the comments. So are you able to comment at all on where you're at for August in terms of collections and how you would expect that to trend relative to July?

We're not commenting on that now. But I think we're going to be pretty much in line.

Okay. And then one last one. Jim your comments you mentioned on micro fulfillment. I'm not sure if that was directed at grocery in particular or just retail maybe more broadly, but can you describe how tenants are implementing micro fulfillment across Brixmor's portfolio? How much exposure you have? And what's in the pipeline today?

Yeah. I appreciate the question. And as we think about micro fulfillment, it's really how the tenants are changing, how they're using their boxes and how they're dedicating the space within their box. In addition to certain tenants, looking at adjacencies as a way to serve some of that curbside pickup or delivery business that they're currently doing. And I think that that is an incremental driver of demand at our centers. It's early, but we're already in discussions with a number of our larger tenants around helping them fulfill that strategy of the last mile. And where we're doing it, is really across the country but, it's early still. And the reason I highlighted it, is because I think what this crisis has shown is, the need for retailers to have good position, within the last mile of the consumer. The fully e-commerce models, didn't work. There was a lot of frustration, a lot of unmet demand. The retailers, who have a bricks-and-mortar presence, had a competitive advantage. And so they're thinking more and more creatively about, how to use their footprint more efficiently, but also adjacencies and other parts of shopping centers that serve their customers, as they want to be served. And you mentioned grocery that's obviously, a big driver of it. But we're expecting to see it more broadly. And we think it's a competitive advantage. As we compete for new tenants the ability to offer tenants that additional channel or channels, I think is a pretty powerful thing.

Okay. Thank you.

You're welcome.

Next question is from Samir Khanal, Evercore ISI. Please go ahead, sir.

Hi. Good morning everyone. Jim, I guess, with the sort of the virus second wave, you're seeing in areas like Florida, Texas or California, have you seen any sort of differences in foot traffic or collections in your centers?

We haven't yet. But it's something that we're monitoring real closely. It's difficult for a business to close once. It's even harder for them to close again. And so we're watching it. We want to make sure that we're successful in bringing some of those tenants to the other side of this crisis. But it's early yet to see any dramatic impacts, as it relates to traffic or other measures. That's part of though Samir, even in those jurisdictions where some of the tenants have been forced to re-close, our centers are still largely open, as they have a lot of essential uses of course that remain open, as well as hybrid uses that have demonstrated that they can operate safely through the pandemic. And I think that's a key point, because what we're talking about now on the margin is a much smaller segment of the portfolio. We're concerned about it. We're focused on it. But it's a little early yet to determine, if the tenants have re-closed, what impacts there will be.

I guess, as a follow-up here for Brian or Angela, where do we stand on rent commencement dates today for later in the year? Are tenants still looking to open up stores in time for the holidays, as we think about sort of that lease versus occupied spread that you have, or should we assume, most of the rent commencement dates have been pushed out on next year at this point?

Angela, do you want to?

Sure. Yeah. Hi, Samir, the $39 million that Jim referenced, which is -- makes up that spread between our leased and build rate today. Between 40% and 50% of that, we expect to commence during the course of 2020, with the remainder in 2021. And a small piece probably about 5% of it, into 2022. So we do expect significant rent commencements over the course of the year. Those expectations do reflect a number of leases that we have worked with tenants to move into 2021, based on what's best for them. And the decisions, we've made as it relates to capital spending this year. But as I said a significant portion of that time, but not commenced should come online, during the course of 2020.

Thanks so much.

The next question is from Craig Schmidt, Bank of America. Please go ahead, sir.

Thank you. I mean, you've had a very good resilience, in terms of lease occupancy. But given the increase in store closing -- permanent store closings, do you expect occupancy will be lower by year-end, than where you are here at the end of second quarter?

Craig, we do. And I made the comment in my remarks that, we haven't yet seen the full wave of tenant failures that will result from this crisis. And what's, interesting is, even those tenants that have declared bankruptcy, our portfolio has been minimally impacted in terms of actual store closures. But I do think it's rational to expect, that there will be certain levels of tenant failures in different parts of the country, which is something that we're prepared for. And we think we're in a good position to capitalize on.

Great. And then related leasing spreads obviously have been trending down by quarter. When do you think we hit an inflection in point and they could start increasing again?

I want Brian to comment on this a little bit. But of course, during the crisis, as you're negotiating renewals and other things, to keep some of those tenants in place you're willing to cut maybe tighter deals than you would in a more normal environment. And I expect that we will continue to have leasing spread that leads the sector albeit perhaps not at the 30% new lease spreads that we had over the last several quarters. Importantly, we still do have a lot of room to make money in. Brian?

Yes. Jim you covered most of it. I would just add Craig, Jim mentioned in his opening remarks. Of that $1.3 million in the legal pipeline, the rents are above $18 box. So we're already in the low 20s in terms of new lease growth over our in place rents. And we could see renewals moderate a bit here. As Jim mentioned, we are strategically keeping some of those renewals short term. Many are part of deferral agreements. So I'd expect that number to moderate a bit. But long term we're very confident in the ability to drive the rent basis higher in the portfolio. And you can really see that in the leasing pipeline and the rents that we've been able to attract in those new leases even through this.

Thank you. Thank you for that.

We have a question from Ki Bin Kim SunTrust.

Thanks, good morning.

How are you?

Good. Thanks, Jim. So does low rent matter as much in this type of environment, where there's going to be more supply coming available in high rent locations, at lower rent locations. And I'm just kind of thinking out loud here but if I'm a retailer, I don't know if saving a couple of bucks a square foot in rent really matters that much when I have a lot of options.

Well, I think location always matters. And look I think we demonstrate the locations of our assets quarter-in and quarter-out with our sector leading – leasing volumes. And as we look forward and historically high forward leasing pipeline. But yes, rent basis does matter. If you want to make money, right? If you're looking forward and you're seeing $25 rent going to $18 and you've got to put capital to work to get the $18, it's going to be a painful several quarters if not longer as you work through that. I believe that we're going to continue to capitalize on great locations that given the history of this portfolio have had lower rents. And I think we're going to continue to capitalize on that spread, which you can see as you look at the numbers this quarter in fact. So I do think that tenants are going to be even tougher in the environment going forward and they're not just going to sign any rent. They're going to want to know with their improved forecasting models, can they be profitable and the sales driven by that particular store and rent is going to be a key part of that consideration.

Okay. Thanks. And your expenses dropped a little bit year-over-year. I'm just curious how much of that is sustainable versus expenses maybe reflecting a lower run rate just because the reality of being shut down for a couple of months?

Well, I'm really proud of – I mentioned it in the remarks, I'm really proud of the job that Haig and the operations team did immediately throttling back levels at the property changing service levels, changing scopes to make sure that the tenants, particularly those that were closed had lower CAM expense burdens. So we reduced it across the board by 15% to in some instances 20%. As the traffic picks up back at the centers, as you see the tenants reopening it they have, we do expect expense savings to abate if you will, as we continue to bring the assets up to their normal service level. So the year-over-year decline was very intentional and part of our response to making sure that the tenants had as low an expense burden as possible.

Okay. Thanks, Jim.

You bet.

We have a question from Shivani Sood, Deutsche Bank. Please go ahead.

Hi, good morning. Jim you've mentioned several times now that you expect tenant failure to remain elevated. So just curious, how you're incorporating that new norm in the leases that are being signed or how that's changed the team's underwriting with regards to new leases, especially for smaller tenants?

It really makes you highly, highly focused on underlying credit, but also that you're bringing in the type of tenant that you expect is going to be successful. And our approach as a company is to always try to bring in tenants that help that center connect with the community it serves. And we're getting smarter and smarter about it. There's more and more data. The traffic data that we use that Brian's team capitalizes on what they respond is highly insightful in terms of what types of tenants are going to draw traffic, what types of tenants are going to do well. And so while this will be disruption and we will see higher levels of tenant failure, we're not wondering how we're going to backfill space. We're not concerned about the bright or the broad funnel of potential uses that would work well in our shopping centers. So that's the approach that we're taking. We're obviously being more and more disciplined in terms of capital that we're putting to work to make sure that the credit is going to be there.

And then in terms of the two dispositions in the quarter, can you remind us were those in progress pre-COVID?

One of them was. And one of them was an opportunistic sale of a highly vacant shopping center where we had a bid that was in line with some of the bids that we had seen pre-COVID.

Thanks for the color.

You bet.

Next question is from Caitlin Burrows, Goldman Sachs. Please go ahead.

This is Julien on for Caitlin. So first I guess small shop leased occupancy increased 10 basis points sequentially and only declined about 10 bps year-over-year which I think is better than people feared. I guess does that surprise you? And what is kind of your outlook for the trajectory of small shop occupancy going forward?

Yes it doesn't surprise us. And in part it goes to the point Julian and I was making earlier around tenant failures. We haven't seen a huge number of tenant failures yet but they will come. And Brian maybe you could just comment in terms of how we're thinking about the backfill demand.

Yes. Julien as we talked about earlier many of the uses that or tenants that I had mentioned were able to sign leases with. One I did and we signed four leases with spectrum during the quarter. But it really goes to Jim's point. We haven't seen those tenant failures come through yet. We do expect that to happen as we go through the year. So I expect to see that number wouldn't be surprising if it came down. But in terms of demand behind it, we continue to see active tenants in the quick serve fast food restaurant category. I mentioned spectrum and other consumer electronics cell phone users, uses that were actively in negotiation with the backfill. So the demand is there but we do expect that to moderate as tenant failures come through.

Got it. And so I guess it sounds like your expectation for tenant failures is probably going to be more concentrated in the small shop tenants?

I think it would be both large and small format. I think what we're seeing this crisis to -- from a high-level perspective is accelerate the demise of concepts that we're already losing relevance before the crisis. And we're going to see that play through both with small shop tenants and large anchor tenants. Net-net for us we believe that's a good thing as we can bring in better and more relevant uses. But to your earlier question about occupancy we haven't seen that yet. And it just takes a while to work its way through the portfolio.

Got it. Thank you so much.

You bet.

We have a question from Mike Mueller, JPMorgan. Please go ahead, sir.

Hi. Jim you talked about second quarter being a low earnings point quarter. Do you think that comment would still hold true if you ignored the second quarter debt charges and the big straight-line write-off?

Yes. I really was referring to both the straight-line rent write-off as well as the reserves that we've taken. And remember that we not only took reserves in the second quarter, but we also took some in the first quarter as the crisis became more apparent. And we've taken a number of tenants as well to a cash basis, which we'll see what the failure rates ultimately end up being. But I do think with the combination of those things excluding the debt charge, we think this is going to be a low point. Angela?

Yeah. I think that's – I think that's well said, Jim. I think looking at all things considered, I talked earlier about the signed, but not commenced and continuing to expect some good momentum on that top line based rent contribution. Continued I think measured approach to operating costs over the course of the year. So I do think that recoveries continue to be a positive contributor. And then as we move forward into the third quarter, and ultimately the fourth quarter where that revenue is deemed uncollectible number ultimately lands is going to depend heavily on where rent collection plans overall. So that's what we'll be keeping an eye on.

Got it. Okay. That was it. Thank you.

Thank you, Mike.

We have a question from Wes Golladay, RBC Capital. Please go ahead.

Hey, good morning, everyone. I'm just curious, if you're seeing more demand for your outparcels and if more tenants are willing to be on an outparcel with the drive-through capabilities?

We are. Brian?

Yes. And you saw it, again, as I mentioned, a few of those tenants, we continue to have very active dialogue with the banks Chase Bofa have been very active. Chipotle has been very active. So our outparcel program, we expect to accelerate that. And it's one of the things that, in terms of the deferral agreements that, we've been able to unlock even more outparcel opportunities in those discussions. So we've seen the demand continue and we expect to be able to push that forward, because of what we've been able to unlock in many of these conversations.

Okay. Got it. And then just looking at the 16% of unaddressed July rent, do you have an approximation of the split between tenants that are just being opportunistic and you're doing longer negotiations with versus those that are actually struggling and then maybe parlay that into are you actually still signing new leases with some of the tenants that are not paying?

Brian?

Yeah. If you look at the 16% number, just with deals that we have out basically handshake agreements that we're expecting to get signed here during the month. That pushes that number basically to 90%. And then, the remaining 10% that's out there, it's primarily the tenants in the fitness sit down restaurant entertainment category that frankly don't have clarity on reopening yet. Many in New Jersey and in California, where some of these restrictions have still been in place and what we've seen so far is that when there is clarity on reopening, it brings many of those tenants to the table. And it's certainly, a challenge for their businesses. We're in touch with them. We're working with them. But as they have more clarity on reopening their businesses we think we'll be able to bring those to resolution. And that's the bulk of really what's out there in that 10%.

Got it. But – so there could be some new leases you're doing. You're doing new business wants some people –

Yeah. In terms of new business, we have not – to be clear, we have not signed any new leases with tenants that have not been paying the rent.

Great. Thank you very much.

We have a question from Floris van Dijkum, Compass Point. Please go ahead.

Hi. Good morning, guys. Question, Jim I guess on – there are not many transactions in the market right now, but what is going on in your view in cap rates for your type of assets are they moving up, or are they staying stable, or do you see cap rates for some assets declining? I'd love to get your commentary on that. And also, when you do go on offense what are the things that you would be looking for?

I want Mark to comment. But I think much more than an issue of where cap rates are. Right now, it's an issue of underwritten NOI and what level is it – I think that, disconnect is actually going to be a huge source of potential opportunity for us given our national platform and given the visibility we have on underlying tenant demand. So it's really an environment, I think going forward we're going to have certain platforms that are unable to capitalize on the tenant failures, and space that they get back. But as for cap rate versus NOI level, Mark maybe you can give some more color?

Sure. Thanks, Jim. As we said earlier, the marketplace has been pretty slow. I do think it's a bit early to comment on cap rate direction. As I said, we are seeing some green shoots. I think it's a little early so we have some more color over the next couple of quarters. As far as what we're going to be looking forward to in the acquisition market, it's going to be very similar to what we looked for in the past. Where can we find assets that we can take advantage of our platform to drive value. If you look at some of the deals we've done over the last couple of years like the one in San Clemente or the one down in Venice where we really had true value-add opportunities, I think we'll see more of those as we go forward into this new environment.

And maybe a follow-up question for me. Any way you can quantify some of the modification benefits that you've been able to achieve as a result of those modifications?

It's a great question. And Brian and the team have done a phenomenal job in every circumstance where we were granting deferral, making sure that we were getting value in terms of lifted restrictions, outparcels et cetera that far exceeded the time value if you will of that deferral or the additional credit risk that we were taking on as part of it. Brian?

Yes, Floris, we don't have an aggregate number, but if you think about the value of a Chase Bank outparcel, if you think about the value a 5-year extension that's in place and we're able to do that really across the portfolio with a number of these tenants. It's even more than we had talked about. Our principle from the beginning is that the value that we're getting was justifying the cost of the deferral agreement and we're really proud of the team a part of these discussions and coming to win-win agreements with a number of our retailers. And you can see it and you will see it in terms of the deals that we're able to strike with new tenants, new outparcel opportunities that come out of this. So we've been very pleased and it's a -- it's in every agreement that we're doing. We're getting this type of value.

Thanks guys.

Thank you.

The next question is from Vince Tibone, Green Street Advisors. Please go ahead.

Hey, good morning. I have one more question for Mark. Could you just share a little color on secured debt availability today? Maybe how loan terms have changed since the pandemic hit?

Well we're really not a user of secured mortgage debt. So it's really not a place where we're experts in that market. But what I would say is, it's a what we're hearing is that the market continues to be slow for the majority of retail with a bright line on grocery acre you're seeing some deals get done and some financing that isn't quite as aggressive as you looked at six months ago, but still that's still pretty strong. But again, we're not -- we don't really use that product very often so it's not something we're experts in.

No that was more because trying to read through the potential cap rate or value moves. I mean I know a lot of your buyers use secured debt. So just -- is there any like more thing you can quantify in terms of LTVs being down for maybe 60% before COVID to 50% or even 40% today, or is it still too kind of -- too dark to provide any more definitive read-through on LTVs?

I still think it's pretty I guess dark is the word you used to look at it, but it's -- you're going to see it very similar to what you normally see in this market where you can get the most attractive financing and grocery anchor deals and when you get down the risk spectrum that's where the lenses become more conservative. But I think it's a little early to exactly comment on where we're seeing overall leverage rates land.

Yes, I do think it's fair to point out that lenders are going to take a more conservative view of lease-up and other types of risk in this environment than they did before which may impact LPV, but it gets back to what is the NOI ultimately being underwritten?

Right. Totally makes sense. I appreciate that color. One more quick one for me. Can you just discuss the typical structure and payback period of the deferral agreement you have reached with tenants thus far?

Angela?

Yes, sure. In terms of the deferrals, on average they've been between two and three months. The time period over which you might see that impact the financial statement -- in some cases, it's a little bit longer because some of the deferrals have been structured as an example two months over -- spread over a four month period. So where tenants are continuing to pay 50% of rent for four months. But on average the total deferred time period has been two to three months and we expect that substantially all of the deferrals will be paid back by the end of 2021.

Perfect. So is it fair to say most of the cash from the deferrals getting paid back would hit in 2021 not 2020, so I'm focusing more on a cash basis or cash flows.

Yes, the majority likely is -- it will likely show up in 2021. I think that's fair.

Great. Thanks.

Thanks, Vince.

We have a question from Greg McGinniss, Scotiabank. Please go ahead, sir.

Hey, good morning. So Jim, you mentioned switching tenants to cash basis accounting given the expected higher level of tenant failures. Digging into that comment a bit and I apologize this is a multi-parter. But what percent of rent has been shifted to cash accounting since the beginning of the year? What is the total level of contractual rent from cash basis tenants? And then how much of the rent reserve is related to the cash basis tenants now? And finally, what percent of rent from cash basis tenants was actually paid in Q2 and July? And I can go over that again if you need me to.

It feels like a bar exam question, multi part. I need to break out my little blue book and make sure I got all the points. For the reserves that we took in the quarter, obviously, those related to tenants that we took to a cash basis. I don't think we're prepared to provide detail on what percentage of our overall tenancy is on a cash basis. But what's important is the accounting provides that where you don't see it probable that you will collect 97% of the rent over the balance of the lease term you take that tenant to a cash basis. So I'm real proud of the effort that Angela and team led across the entire platform where we went tenant-by-tenant, and made those types of assessments. We did detailed liquidity analyses, et cetera, to make sure that we were getting as accurate and appropriate view as to where the reserves needed to be taken. Is it possible that we take additional reserves in a future quarter of course and that can move either way when you account for things as we do on a specific ID basis. Angela?

Yes. I mean, just like a couple of the questions embedded in there, Greg. I would point you to the COVID disclosure, we added to the supplemental this quarter. On page 11, footnote 5, which talks specifically about the reserve does break out the component of the reserve taken against base rent attributable to cash basis tenants. So of the $22 million reserve taken against base rent for the total portfolio $20.1 million related to the cash basis tenants, so substantially all of it. In terms of the rent collection levels attributable to the cash base of tenants, it was just a little over 20% for the second quarter and that almost doubled or more than doubled actually for July. So you're up closer to 43% in terms of rent collections from cash basis tenants in July.

Okay. Thanks for the clarity. And just a quick follow-up talking about setting the reserve. So with the increased collection in Q2 from when you set the reserve since closing the books, I'm just curious if that reserve seems more or less conservative than maybe you need it to be?

Yes. I mean, I would just say, we tried as we went through this exercise Jim sort of described the process. This is a lease-by-lease analysis across the entire portfolio. And we really worked hard to make sure that we brought in all of the knowledge about all of these tenants across the organization into that process to make sure that we were as complete and accurate as we could be in terms of setting that reserve. Based on that in the comments I made in my prepared remarks, the fact that we're now based on the cash collections that have occurred subsequent to quarter end and the additional deferred amount, we're now 60% reserved on what's outstanding. I think, again, feels pretty appropriate and balanced based on the current environment. But certainly that's a significant reserve around those amounts still pending.

Yes, Greg, that's 6-0, 60%.

Right. Thank you.

You bet.

We have a question from Linda Tsai, Jefferies. Please go ahead.

Hi. Any sense of how much PPP loans have helped your local tenants and the degree to which this is a source of funds to rental payments going forward?

I think, it was meaningful across our small shop tenancy in particular. We don't have specific statistics in terms of how many of our tenants actually received it. We have been tracking though of course those tenants we have. And the first thing they do is, concurrent on rent which we've seen. I don't think it's going to be a huge source of rental income though going forward. I think the biggest source of rental income going forward is going to be these businesses reopening. So, we said at 94% reopened. And as Brian alluded to in his remarks, the amount that we have yet to collect are substantially related to those businesses that haven't fully reopened yet.

Thanks. And then just one for Angela. When you do start feeling better about your outlook and reinstate the dividend, what level would you target as a percentage of normalized AFFO? And then, also how would that ratio look if you factored in the impacts of deferrals and – yes if you factored in the impact of deferral?

Yes. I mean thanks Linda. I think, ultimately this is a board-level decision. And it's going to depend on a number of different factors including some of the things you point out in terms of deferrals, in terms of our cash collections. And importantly, as we've talked a lot about on this call the level of tenant failures across the portfolio when we determine what the right level is. I'm not prepared at this point to share a specific target ratio in terms of how the Board will think about that. But I think certainly, we're encouraged by the strength and resiliency of this portfolio. And as Jim said in his prepared remarks, we're doing everything we can to put ourselves in a position to emerge from the crisis a stronger and better platform and be able to reinstate the dividend as fully as possible based on all those factors.

Thanks.

Ladies and gentlemen, we've reached the end of the question-and-answer session. And I would like to turn the call back to Stacy Slater for closing remarks. Stacey?

Thanks everyone. We'll talk to everyone soon.

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