Brixmor Property Group Inc. (BRX) Q3 2020 Earnings Report, Transcript and Summary

Good morning. Greetings, and welcome to the Brixmor Third Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Stacy Slater, Head of Investor Relations. Please go ahead, ma'am.

Thank you, operator, and thank you all for joining Brixmor's third 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 1 or 2 per person. If you have additional questions regarding the quarter, please requeue. At this time, it's my pleasure to introduce Jim Taylor.

Thank you, Stacy. Good morning, everyone, and thank you for joining our third quarter earnings call. I'm very pleased to report on how the past several months of disruption have revealed the outstanding durability and resilience of our team, our portfolio, and importantly, our business plan to drive value and growth, whether it's our strong collection levels, our disciplined spend on OpEx to alleviate CAM burdens and reduce leakage, the strong and recovering year-over-year trends in traffic levels, the declining levels of bad debt that reflect our proactive watch list management, the sector-leading leasing volumes and market share with today's growing tenants, our forward leasing pipeline and, of course, our continued delivery of value-accretive reinvestment. In many ways, the disruption caused by the pandemic has accelerated our path to delivering value and growth from our portfolio that's consistent with our purpose as a company of being the center of the communities we serve. Let's dig into the results. Currently, over 97% of our tenants are now open and operating. And importantly, traffic levels over the last several weeks have been trending around 92% of prior year levels, which we believe is at the top of the peer group for which we track such data. Our cash collections continue to improve and are tracking just behind tenant reopenings, with our third quarter cash collections at 88.2% versus 84.5% for the 6 months ended 9/30. When you factor in deferral agreements, we now have nearly 93% of our total ABR for the third quarter addressed. That momentum continued through October, where nearly 90% of our ABR cash collected and another 2.4% was addressed through deferral agreements. As you might expect, the remaining 7% of ABR for the third quarter that has not been addressed is heavily concentrated in the categories of entertainment, small-format fitness, and full service sit-down restaurants. Drawing on our experience with other natural disasters, our priority with these tenants most of whom are small business centers, has been to focus on getting them reopened and operating first and then prioritizing deferral requests and payment plans. We expect to work towards resolution with these tenants over the next few months. As we continue to drive cash collections, you've also seen our bad debt reserves correspondingly decline. Angela will cover those reserves in a minute, but we believe that we have been appropriately conservative in our collectibility analysis. Further, I believe that our disclosure on reserves taken is among the most transparent. Importantly, our new leasing production continues to accelerate with compelling tenants in core categories like specialty grocery, quick service restaurants, value apparel and general merchandise. We have signed nearly 700,000 square feet of new leases this quarter at an average cash spread of 14%. This new lease spread would have been 20% if we adjust for a single backfill of a bankrupt tenant with a specialty grocer, for whom we expect to add significant vibrancy to the center impacted. And importantly, our net effective rents this quarter were extremely strong even when skewed towards anchor deals, coming close to an all-time high for us, demonstrating both the demand being in our centers and our discipline with capital. Looking forward, we expect our new leasing spreads to continue in the mid- to upper teens based on our new leasing pipeline. Our total leasing pipeline stands at over 2.1 million square feet and $36 million in ABR. I would further note that our continued acceleration in leasing has resulted in just under $40 million of signed, but not commenced ABR, that is expected to deliver over the next several quarters. When you consider both the forward pipeline and the signed but not commenced leases, that's $76 million of ABR, which will be an important tailwind going forward in driving our outperformance. New leasing production also continues to drive our forward reinvestment pipeline, which currently stands at $373 million at an incremental return of 10%. And importantly, we continue to deliver our projects even in today's environment with $51 million of projects delivered this quarter at an incremental return of 9%. As I've mentioned many times before, we are generating tremendous value even in a rising cap rate environment, given not only the incremental returns, but also the improvement in the cap rates that would be applied to the centers impacted. I'd like to thank Citigroup for hosting their Live from New York series at our redevelopment project in Mamaroneck, New York, where we replaced the vacant A&P box with a phenomenal specialty grocer, a pharmacy and a great lineup of small shop tenants. In short, we put almost $13 million to work and an incremental return of 10%, nearly doubling the value of our investment and importantly, and again, delivering on our purpose of owning centers that are the center of the communities they serve. In fact, since we began over 4 years ago, we've completed 120 reinvestment projects across the portfolio, representing over $450 million of investment at an average incremental return of 10%. Projects like Beneva Village, Seminole Plaza, Rose Pavilion, the Village at Mira Mesa, Hearthstone Corners, Gateway Plaza, Marlton Crossing, Preston Ridge, Roseville and Park Shore Plaza, among many others. Please check them out on our property tour portal on our website. It's just simply phenomenal value creation and, again, strong evidence of our disciplined approach with capital. In short, this pandemic has revealed the true strength of our business plan and has accelerated the opportunities we have to create additional value. Looking ahead, we do expect elevated levels of tenant failures as the impact of the pandemic continue to be developed disproportionately in certain categories. Every retail landlord will be facing this challenge. However, that's why platform and rent bases are so critical if you expect to be in the position of truly creating value versus treading water or losing value. Brixmor has and will continue to deliver real value through this crisis and beyond. Given our progress, we are pleased to reinstate our dividend at a rate of $0.215 per share payable in January of next year. We believe this initial level to be conservative, but also reflecting our confidence in our forward plan, while allowing for retained capital to be reinvested in our accretive reinvestment pipeline. Importantly, we believe it is at a level that can grow even an environment of continued disruption. And as Angela will cover in a minute, we are currently generating ample free cash flow and enjoy almost $1.9 billion of liquidity and cash and available line of credit, ensuring that we can continue to execute our plan for the next several years without having to access the capital markets. Allow me to conclude my remarks by thanking the Brixmor team for your continued focus and execution through this crisis. Your commitment inspires me and embodies our first cultural tenant that great real estate matters, but great people matter even more. Thank you. Angela?

Thanks, Jim, and good morning. As Jim highlighted, our results for the third quarter continue to demonstrate the strengths and resiliency of our portfolio, with improving rent collection trends and strong new leasing activity. Before walking through our third quarter results, I'd like to highlight our COVID-19 base rent disclosures down on Pages 11 and 12 of our supplemental financial package, which provides detailed transparency related to the impact COVID-19 has had on our income statement in both the second and third quarters of this year. We appreciate that there is significant diversity in practice this quarter related to revenue recognition for lease modifications and cash basis tenants. We hope that this disclosure provides clarity on our practices and policies. To summarize some key highlights from this disclosure, third quarter billed base rent was $211 million, which is down less than 1% from pre-pandemic level. Cash collections related to Q3 billed base rent totaled $184 million, while another $9 million was addressed through executed deferral and abatement agreements, resulting in $18 million of accrued third quarter base rent that was uncollected and unaddressed as of September 30. In addition, the amount of accrued but uncollected and unaddressed base rent related to the second quarter has decreased from $43 million reported in our last supplemental to $21 million as of September 30 as a result of additional cash collections and deferral and abatement agreements executed for Q2 amounts during the third quarter. Revenues deemed uncollectible totaled $21 million in the third quarter, a notable decrease relative to the $28 million recognized in the second quarter. The amount recognized in Q3 was comprised of $15 million related to third quarter billed base rents, $2 million related to second quarter billed base rent on a net basis and $4 million related to recovery income and prior period balances on a net basis. In addition, during the third quarter, we reversed $11 million of previously accrued straight-line rental revenue, which is accounted for directly in straight-line rental income, net. These reversals reflect additional tenants move to cash basis accounting during Q3. Tenants representing over 14% of our total leased ABR are now being accounted for on a cash basis, with the most notable concentrations in restaurants, entertainment, apparel and fitness. While the collection rates for these tenants continue to lag the broader portfolio, we are encouraged by the trends we are seeing, with rent collections improving from 36% in Q2 to 57% in Q3, and over 58% in October. As Jim highlighted, we believe that we have been appropriately conservative in our assessments of collectibility. As highlighted on Page 12 of our supplemental package, for the second and third quarters on a combined basis, we are 59% reserved on all accrued for uncollected base rent, which is comprised of a 37% reserve on executed deferrals, not subject to lease modification treatment, and a 75% reserve on all accrued but unelected and unaddressed amounts. NAREIT FFO for the third quarter was $0.36 per share and same-property NOI growth was negative 9.3%. NAREIT FFO reflects $0.07 per share of revenue deemed uncollectible and $0.04 per share of straight-line rental income reversals, in addition to $0.02 per share of litigation and other nonroutine legal expenses. Same-property NOI growth reflects a 930 basis point detraction from revenue deemed uncollectible and a 190 basis point detraction from lease modifications, deferral agreements and abatements, which outweighed a 160 basis point positive contribution from all other base rents and a 70 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. Consistent with the last 2 quarters, we are not providing guidance based on continued uncertainty related to rent collections, potential reserves and/or tenant failures, which we do expect to accelerate despite minimal fallout to date. Notably, tenants that have filed for bankruptcy or have announced liquidation plans in 2020, represented approximately 230 basis points of billed based rent in Q3, and some of the space will be rejected and come back to us in the coming. However, as Jim noted in his remarks, the spread between billed and leased occupancy today is 320 basis points, representing $39 million of annualized base rent, 88% of which is expected to come online by the end of next year. Total amount of signed but not commenced revenue is consistent with what we reported to you last quarter despite another $10 million of rent commencements during the current period, reflecting the strength of recent leasing activity. We believe that this embedded revenue growth will provide an important source of stability as we navigate the coming quarters. Turning to the balance sheet. We raised an additional $300 million of 10-year unsecured bonds during the third quarter at an effective rate of 3.18% and use of proceeds to fully repay our revolving credit facility. As a result of this transaction and free cash flow generated during the quarter, our total liquidity improved by over $400 million to $1.9 billion, which includes over $600 million of cash on hand. And we have no debt maturities until 2022. As Jim discussed, the Board of Directors has elected to reinstate our quarterly dividend at a rate of $0.215 per share. The reinstatement highlights our conviction and the resiliency of our portfolio, platform and long-term business plans as we continue to experience rent collection levels at the top end of the industry strength and demand for new leasing. Furthermore, the level of this reinstatement reflects both our expectations of ongoing disruption as well as confidence in our ability to retain capital to work accretively as we capitalize on this disruption to accelerate our portfolio repositioning efforts. And with that, I'll turn the call over to the operator for Q&A.

[Operator Instructions] The first question is from Katy McConnell, Citibank.

So of your remaining bankruptcy exposure, how much more are you assuming gets rejected at this point? And then of the 110 basis point impact in 3Q, can you provide some more color on the progress you've made to date in re-leasing negotiations? Or many direct lease assumptions to get a sense for the time frame of retenanting?

Yes. Let me let, Angela, take the first part of the question in terms of the basis point impact. But I would just observe generally that we've not been getting the locations rejected at the rate that tenants have had bankruptcy, which is kind of interesting. I think it reflects, in part, the lower rent basis that we have. These are often boxes that we'd like to get back. But obviously, we don't have control of that through the bankruptcy process. Now on the other side, a lot of our leasing volume over the last couple of quarters has been backfilling many of those bankrupt boxes like, for example, the specialty grocery deal that I referenced in my remarks, really a great outcome for the center impacted, getting rid of a weaker tenant and replacing it with a use that's going to truly be relevant. Angela, do you want to take the first part?

Yes. Katy, as I mentioned in my remarks, in the third quarter, we recognized about 230 basis points of build based rent from tenants that are currently in bankruptcy. I would say, while it's a fluid process and the amount of space we ultimately take back from those tenants with bankruptcy could ultimately end up being different. I would assume at this point that we probably lose about half of that ABR exposure over time.

And Brian?

Yes. And Katy, I would just add the progress the teams continue to make. 9 of our 16 anchor leases during the third quarter were backfilling former bankrupt space. Included within that were a 24-hour fitness box as well as JCPenney. So what we've demonstrated over the past few years you're seeing continue. And we're really encouraged by the fact that we were able to start backfilling some of the space very quickly.

Okay. Great. And then can you update us on where you think the portfolio stands today from a below-market perspective? And how this might have changed since COVID began?

What we continue to demonstrate are strong spreads, as I mentioned in my opening remarks, our spreads on new leases would have been 20%, but for one transaction. And we expect our spreads to be in the mid-to-upper teens on a new lease basis as we look out over the next several quarters, given what we already have in our forward leasing pipeline. So we're very encouraged by what we're seeing there. I'd also point you, Katy, to what we have rolling over the next 3 years from an anchor space perspective, it's below $9. And if you look at where we've been signing leases, the net effective rents that we're realizing, we're able to make significant money given where those rents are. So it puts us in a great competitive advantage as we're competing with tenants who are relocating, tenants that are growing, expanding their portfolio. As you would expect, tenants are more than ever focused on four-wall EBITDA profitability. So being able to make a spread with the new tenant, improve the use of the assets something that we've demonstrated not only before the pandemic, but during the pandemic, and we expect it to be a big momentum driver for us we emerge.

Next question is from Alexander Goldfarb, Piper Sandler.

So actually picking up from Katy's question, just so I make sure I understand it correctly. The 50% that you expect to not make it, was that sort of overall when you look at your rent collection so far, and let's use round numbers, call it, 90%. You expect the remaining 10%, half of that won't make it or that 50% was related to a different element?

It was related to just the bankruptcy number, which Angela referenced, a couple of hundred points. And it's our best estimate in terms of -- as you move through the bankruptcy process, obviously, not every tenant who does that will survive. What has been surprising to us is that many of these tenants have opted to keep our locations open as they go through Chapter 11. So it may delay our ability, Alex, frankly, to get those boxes back.

Okay. But as you think about the remaining uncollected rents or the non-resolved, and we'll call the remaining 10%. Do you have a pretty good handle on how that's all going to shake out? Or are there -- for whatever reason, there's less clarity on the -- I would think at this base, I would think at this point in the cycle where we are in the pandemic recession, et cetera, that the tenants who have issues are pretty clear that they have issues, and you know they're not going to make it. And the ones who seem to be trying to find their footing aren't yet current on rents, but finding their footing that you're comfortable with. So just trying to get the assessment on that remaining 10%.

Yes. We actually think it's a little bit smaller than that. As I mentioned, we've collected and dealt with 3 deferral agreements, about 93%. And within that, 7%. We've been pretty intentional, Alex, about being patient in getting these tenants reopen. Many of them are small businesses. And what we've learned in other natural disasters is that forcing them to be current on their rent as they're just reopening the business puts additional stress. So we get them open, get them operating. And we find that we have much better survival rates out of that tenancy as the centers recover. I do think what is important though is as we've gone through this, we've been able to continue to bracket what's really at risk and what we think will continue to be strong through ongoing pandemic. And I think our portfolio has revealed its strength in that regard.

Okay. And then the second question is just on the overall tenant demand, this cycle from you and your peers, leasing has been just a hallmark. Everyone's talked about record leasing much better than prior periods. That stands in contrast to some of the news headlines you read about the economy as far as just the challenges that certain geographies seem to have. So overall, is it your view that just the retailers are just in a much better spot and that things are not as bad as some of these regional headlines are? Or is that the retailers are shifting their investment dollars from other areas to focus more on open air, and that's been something that's occurred that you've seen throughout this year?

We definitely think we're a beneficiary of a shift in focus towards open-air in being within the last mile of the consumer. And the retailers that we're growing with are retailers that have managed to thrive in this environment. And I'm real proud of the market share Brian and team has been able to go garner some of those new openings. Certainly, I think retailers, if you talk to them, will say that they're more focused on suburban markets where they're single-family housing, and they see a lot of positive trends. Certain of the urban core markets have been impacted by declining rents and even with the declining rents, rent still at a level where these retailers don't think they can be profitable. Brian, I don't know if you have any other?

Yes, Jim, you mostly covered it. I think you also highlighted in your opening remarks, Alex, as we talked about on prior calls and now, you can see in our pipeline, the categories or in our executed deal -- sorry, and in our pipeline, categories that continue to do well, whether that's in home, specialty grocery, fast casual restaurants. And think of the names that we signed this quarter with Floor and Decor, HomeGoods, Burlington. So many of these transactions, the other encouraging thing was some of them started pre-COVID and were on hold, and we're actually at a comfort level to move those deals forward. And then you had a good mix of deals that started and finished during the COVID period. So we were really pleased and encouraged with the activity, and it is in categories, to Jim's point, that have continued to thrive in this environment.

We have a question from Todd Thomas, KeyBanc Capital Markets.

Just following up on the leasing discussion. I realize it's bifurcated, and there will be some tenant failures and move outs. But do you expect to see leasing volumes begin to accelerate in the quarters ahead as negotiations with tenants materialize? And do you anticipate that the signed, not commenced pipeline will begin to grow from the current $39 million level?

Yes. We are really encouraged by what we see, as I mentioned in my comments, in that forward pipeline. And we do expect the signed, but not commenced, at a minimum, hold steady. Part of it is going to be driven by how much we deliver in a particular quarter. This quarter, we delivered over $10 million of new ABR, but our pipeline held steady, which is particularly encouraging given where it was the prior quarter. And with our forward pipeline at over 2.1 million feet and $36 million of ABR gives us pretty good visibility on that activity. Brian?

Jim, you pretty much covered it again. I would just continue to add, Todd, that within those categories, we continue to see robust demand, and still for 2021 store openings. And our team, it's really a credit to the relationships and dialogues that they've had where they pivoted very quickly to new lease discussions and really capitalizing on that demand. So we feel encouraged. And to Jim's point, yes, we expect that the activity within those categories to continue to grow.

Okay. And then, Angela, so turning to the balance sheet, I guess, with the $300 million notes offering, and you're sitting with $600 million of cash and a fully undrawn revolver. How should we think about the deployment of that capital later this year into '21?

Yes. I mean, I think a few things, Todd. We obviously have the ability to repay some debt early, and we'll be evaluating all of our options to do so, including all the term loans. So we'll be watching that closely. And then obviously, as we get into 2021, we have delayed, as we've talked about on prior calls, redevelopment spend, spend in the value-enhancing portfolio. And based on the conviction we're feeling about the business overall today, rent collection levels, the improving picture we're seeing in leasing, I would expect that some of that capital does go to continue to fund the redevelopment pipeline as we look into 2021.

Do you expect to sit with an elevated cash balance at year-end? Or would you expect that to be whittled down significantly?

I think it will most likely be whittled down, but I think it's still going to be outsized relative to historical norm.

We have a question from Caitlin Burrows, Goldman Sachs.

I'm not sure if this is what Alex was talking about before. But the portion of your rents there in the bucket are still to be decided, uncollected under negotiation. It seems like that portion has declined to now be like 8% for each of 2Q, 3Q and October rent. So I was wondering what sort of tenants are included in this category? Were you saying that these are small shop focused? And what's the outlook for getting that kind of 8% resolved?

Yes. It largely is some mom and pops, it does include some -- no surprise, entertainment concept that includes some full service restaurants, some small-format fitness. And our approach with those categories has been to be a bit more patient just drawing on lessons that we've gleaned from other disruptions, getting those tenants open and operating and getting to a position where things like deferrals, payment plans, et cetera, can be more appropriately negotiated.

Okay. And I guess, if we look at like October, cash collections are already about 90%. Could you give us an idea of what is normal rent collection? And how soon you expect you could get there?

I think that we're going to continue to grind higher. I think we're going to continue to steadily improve as we've shown. We're now addressing about 92%, as you said, or 93% of our revenue. And my guess is over the next few months, we'll get a lot more visibility in terms of deferral agreements payment plans with some of the balance of that 7%. But it's going to take some time. As I think we emerge from this crisis, that will accelerate quickly.

The next question is from Greg McGinniss, Scotiabank.

Just regarding the dividend, how should we think about the payout amount relative to taxable income this year? And maybe said a bit differently, in addition to what's already been paid this year, will the reinstated amount be enough to satisfy the distribution requirement this year?

We had the benefit given our historical ownership, being able to fully suspend 2 dividends in '20. So this dividend will be paid in '21 and will be applied to our taxable income for '21. It will be paid in the first week of January. So I'm real pleased that we are in that position. We don't have to pay a catch-up dividend. We don't -- this is really us setting a very conservative level looking forward, as I mentioned in my remarks, that allows us to apply more capital to our reinvestment pipeline, but importantly allows us to grow even with additional disruption.

Okay. And then just shifting back to leasing for a second. How much of leasing volume this quarter was kind of build up from the deals that were on hold versus that continued expectations for leasing going forward? And I know you mentioned kind of mid-teen spreads on new leases, but is it fair to assume a similar mid-single-digit spread overall going forward?

I think it will improve a bit. We do have a higher volume of renewals as you saw. And I think that probably represented the biggest "backlog" in terms of deals that we did that were kind of on hold. But I'm very encouraged by the marginal level of new leasing activity that we're seeing. Brian?

Yes. It was a good mix, as I mentioned earlier, and particularly some of those anchor deals for the likes of Burlington and HomeGoods and a Kmart box that we just -- is on our supplemental and reinvestment plan down outside of Naples. And so we also had a number of those specialty grocer deals that literally started during COVID, and we were to able to get those finished very quickly. So it was a good mix on the anchor front. And then I would just point out, as Jim mentioned on the volume to renewals, it was encouraging to us to see that backlog start to come forward and those tenants be willing to execute renewals. Once they had clarity on traffic coming back to their centers, once they had some clarity on how their business was starting to perform. We actually saw many of those tenants come back to the table. So that was really encouraging to see overall, it kind of trends -- it kind of matches the trends that we've been seeing with both collections and openings.

We have a question from Vince Tibone, Green Street Advisors.

I saw you were marketing a former Walmart box of industrial at your center in Bristol, Pennsylvania. Is this more a one-off opportunity? Or could you see a large number of these potentially happening over the next few years? And are you able to share any kind of potential CapEx unit economics of this kind of activity?

Thank you for the question, Vince. That particular Walmart Box is interesting in New Bedford, and that it sits up and apart from the balance of the center. And we have a few boxes like that, that represent probably better and higher use as industrial opportunities where we're seeing industrial rents in the mid-teens to high 20s. And I think in that instance, we're kind of capitalizing on that demand from industrial users to be within the last mile of the consumer. But while that sort of convergence of logistics and retail is interesting, it really only works as a pure logistics use when it's separate and apart from the center. And as I mentioned, we have a few opportunities like that, which I'm particularly encouraged by. It's great valu-harvesting opportunities where we could probably bring it back as retail, but it makes more sense as industrial.

That's helpful. So just like -- and maybe it's hard to generalize. But it looks like that site was more of a detached Walmart. Is it fair to say that even if it was at an end cap, like putting industrial at the end cap of the power center would just be blocked by the REAs of every other retailer, I would assume?

Oftentimes. You're right. Either you have implications with the REA or from my perspective, Vince, it's an issue of customer safety. You don't want to do a heavy truck use right up against the retail. So even if we did have the ability to do it, we think about it real hard. So it's really those situations where you have a box that's separate and apart from the balance of the center that it makes the most sense.

The next question is from Craig Schmidt, Bank of America.

We've heard a lot of talk regarding holiday '20 and how that -- the sales are going to be more spread out, more events occurring prior to what was Black Friday. Are you seeing any anecdotal evidence that there is an increase in traffic or sales at your portfolio in early November?

We have seen steadily improving traffic week in and week out, which we find encouraging. And part of that very may well be driven by the retailer's decision to kind of spread out the holiday season started earlier, compete with Amazon for their big day. Brian, I don't know if you have any more color?

Yes. I would just say, Craig, the biggest winners that are -- for the holiday season are really going to be those retailers with omnichannel capabilities and many of the strongest anchors that we have in our portfolio. You think about what Target's done, what Walmart's done. And many of our tenants that really threw back-to-school started testing out more of the curbside pickup initiatives that weren't there before. You think of Ulta's, Best Buy, Kohl's, PetSmart is rolling them out across the portfolio as well. And the general public has gotten more used to curbside pickup. So I think that convergence, and those retailers that have been focused on that omnichannel strategy are going to be in a very good position to succeed, and we're fortunate to have a number of those throughout the portfolio.

Great. And then just how important will holiday '20 be for you regarding your portfolio and store closings in 2021?

The holiday season is always important, but we have a portfolio that's less dependent on holiday traffic, right? Our portfolio is community centers with essential uses, grocer, et cetera. So holiday is certainly important for every retailer. But as a general rule, we're a bit more insulated from the impacts of a great holiday or a week or holiday, given the nature of our tenancy.

We have a question from Mike Mueller, JPMorgan.

I was wondering, if you look to 2021 and beyond and just think about the high-level capital recycling framework that you've had in terms of $400 million to $600 million of dispositions, and however many hundreds of millions of redevelopment spend. Does anything like that change over the next few years?

Mike, the only thing that I would highlight is that we do expect an acceleration of some of the redev opportunities that have been pre-leased in '21. So some of our spend will be more elevated than what it's been on a long-term basis. Again, this is all pre-leased with good credit quality behind it. And as I mentioned in my opening remarks, very compelling incremental return. So we think it's a good place to put capital to work and continue to improve our centers. And in terms of the volume, capital recycling and acquisitions, it's going to be opportunity-driven. What I like about where we are in this environment is we're not in that seller. We have the ability to be patient. And we are starting to see some interesting acquisition opportunities where we can put our platform to work in what we believe our competitive advantage is. But we'll be patient and balanced.

The next question is from Samir Khanal, Evercore.

When I look at your net effective rents, I mean, they're quite -- they're up quite a bit in the quarter and even if you look kind of pre-COVID, and -- but it looks like you had a bit of higher level of anchor signings in the quarter. That's above the 10,000 square feet. And I would have thought those anchors usually pay a bit lower rent and sort of higher CapEx in the small shop. Is that just a function of more specialty grocer signings that you talked about? Or are there other categories as well that are very active sort of over that -- the 10,000 square feet here that we should know about?

It's a couple of things. It's definitely the mix. We had some great specialty grocery deals that we think are going to be transformative to the centers that they've impacted. We've also just been disciplined with capital. And we're real proud of where that net effective rent stands. And as I mentioned in my remarks and you pick up on, it's close to an all-time high for us, even with the higher mix of anchor deals in the quarter.

We have a question from Haendel St. Juste, Mizuho.

First question is on the dividend. I want to go back for a second, but maybe from a different angle. You generated $0.36 of GAAP FFO in the third quarter. If I add back the $0.02 of charges, I guess, a $0.38, $1.52 FFO run rate. Can you talk about maybe as we think about the dividend, right, and I think about historically, the proportion of AFFO to FFO is around 75%, which, if I use $1.52, that gives me $1.12, $1.13 FFO run rate, which is about a 75% coverage on the new dividend. So I guess I'm asking, is my math and my logic way off here? And maybe you can help us better understand how and why you arrived at your new $0.86 annualized dividend?

Okay. It is, we believe, a more conservative payout as we look forward into '21, and we will have taxable income. And we try to strike the right balance between making sure we were distributing at the rate of our taxable income, but also having a conservative payout ratio looking forward even with additional disruption because what was very important to us is to make sure that we could be in a position to grow that dividend as we continue to deliver the signed but not commenced rent, and we continue to moves through this pandemic. So that was really what's guiding the decision. It's not intended to be implicit guidance going forward, but you should see it as what we believe a conservative level.

Yes. I would just add on to that, that you have to remember, I think, in the annualization math for the current quarter that you are annualizing $11 million of straight-line rental income reversals in addition to the significant amount of revenue deemed uncollectible. And obviously, we don't know exactly where those things are going in the future, but particularly on the straight-line side, I think it's a little difficult to annualize that into the longer-term run rate.

Got it. Got it. Okay. And then maybe how does the, I guess, current lack of liquidity in the transaction market play a role in your thinking on the dividend? Not suggesting that you've used dispositions in the past to pay your dividend, you use them as a source of rebate funding and even debt reduction in the past. But clearly, it's a source of capital, which so far today, doesn't really appear to be there. So perhaps some thoughts on that. And as well as maybe what you're seeing and hearing in the transaction market today, retail volume being pretty -- so far even nonexistent even for grocery anchors.

Haendel, it's a great question. I think I'd start with the fact that we're actually cash flow positive, will be very cash flow positive even with the reinstated dividend. Of course, we, as a REIT, ultimately have to distribute taxable income. So that factors into our analysis. In terms of what we're seeing in the transaction market, and Mark, maybe you can comment on it. Assets that we're looking to sell, we're finding good bids for. The market seems to be liquid for the community grocery-anchored and other types of assets we have they generally are in the smaller overall transaction size. What we're particularly excited about looking forward as we think about capital recycling are some of the assets that have seen the disruption, but their landlords aren't in a position to address it. And that's where we think we can get to some opportunistic returns. Mark?

Yes, Jim, I think what I would add is one of the fundamental changes we're seeing in the market today is that significant increase in demand for net lease like assets that are focused on a central retail. I think the Home Depot and Walmart that we sold this past quarter in the Berkshire is a pretty good example. I mean if you look at the cap rate there, it was in and around 6%, didn't have a management fee. So a comparable cap rate. So shopping center sales of high 5s, that's really reflective of the very significant demand from net lease investors for central retail, and that's really across any geographic location. And for example, those 2 assets, the cap rate was easily 250 to 300 basis points tighter than where that center would have traded on a full center basis. So a good amount of capital raised and institutional interest in net lease assets, there's really been a true increase in demand for net lease. So given that valuation for those kind of assets, combined with the scale of our company, it really does provide us with a very attractive cost-effective cap recycling option, particularly obviously with the noncore assets. And I think that will really allow us to fund our business line accretively going forward.

There's a question from Linda Tsai.

Just following up on your comments, Mark, about the demand for net lease assets. I mean, are you guys comfortable with selling the anchors in those centers in terms of maybe giving up some rights there?

What's interesting is that where we're harvesting some of the net lease value, we're actually doing it in the noncore portion of the portfolio, and we're doing it, as we've done in the, past in pieces. So we're selling some of the out parcels or some of the ground leases separately from the balance of the center. What we found is that it's very accretive from a valuation standpoint. We don't see diminution in terms of cap rate on the balance of the center. And we actually are seeing good overall demand given that we've reduced the size of the overall investment.

Yes. The other thing I would add, isn't just anchors, it's certainly out parcels and things like that. And the other thing to remember is that we control the center fully today, generally. So we have the ability to write an REA that's in our favor. So I think that's a piece of the puzzle we're looking at, what we're selling about leases.

And then as the environment continues to show stabilization and your liquidity profile improves, how are you thinking about targeted leverage over the next year?

Yes. I would say, I don't think that our view on long-term leverage levels for the portfolio has changed at all. I think the resiliency we're seeing certainly confirms the thesis that being in that kind of low 6x range is where we ultimately should get to. Obviously, the trajectory to getting there will depend on how things play out over the coming quarters. But I don't think our thought process around the right absolute level has changed as a result of the pandemic.

We have a question from Floris Van Dijkum, Compass Bank.

Quick question. Just wanted to get a sense of where your NOI could trough. And obviously, next year, you've got with your signs not operating pipeline. You've got some growth baked into your results. But I was trying to get a sense of what your third quarter billed revenues were compared to your first quarter billed revenue. I noticed that it's about $1 million or just under 0.5% lower than it was in the in the second quarter. But curious to see what it was relative to the first quarter. If you can, can you shed any light on that or Angela?

Yes. Let me start. You're actually highlighting something that's been interesting to us. And that is that we've seen today very low levels of tenant failure. Of course, as we drop it down to the NOI line, we're reducing that NOI by revenues that we deem uncollectible. And I think we've been very conservative on that. Looking forward, and the timing, it's going to be interesting because I do expect tenant failures to accelerate as we move through the next few quarters. But behind that, as you pointed out in your remarks, we stand pretty well cushioned in terms of the size but not commenced rent that we expect to be commencing over the next couple of quarters. So it's a tough call to make from a timing perspective. You might see NOI flat up. But Angela, I don't know if you want to make more comments there.

Yes. Just on the question. I think, as it relates to the current -- or the third quarter billed base rent relative to pre-pandemic level. It's about a 70 basis point delta. The first quarter billed base rent was around $212.8 million. So it's really only down 70 basis points, which speaks to the comments we made earlier that while we do obviously, anticipate there's going to be some acceleration in tenant disruption, we really haven't seen a significant amount of that to date.

Can I -- maybe can you guys give some -- you talked a little bit about traffic, Jim, and it's not necessarily holiday sales that drive the success of your center. How many -- what do you deem to be successful centers? What kind of traffic patterns do you look for? And how many traffic counters do you have at your centers?

So we don't utilize traffic counters. We actually utilize cellphone data on and off the properties, which allows us to pretty accurately track traffic overall as well as, importantly, relative trends in that traffic. And we've been encouraged that as the tenants reopen, we're seeing corresponding increases in traffic to the center. Not quite to where we were pre-pandemic, but we're in the low to mid-90s from a traffic perspective. What's also interesting is we're hearing anecdotally from our tenants that they're getting better capture from the customers that they're seeing as well as bigger basket sizes, both of which we think are good signs of health across the portfolio. We have seen some regional differences, which I think have been tracking regional closure orders, quite frankly. And as soon as those roll off, we see traffic recover. It performed pretty well. So we're real encouraged by the flow of traffic that we're seeing into our centers.

We have a follow-on question from Vince Tibone, Green Street Advisors.

One more just quick one for me. Could you elaborate on the common tenant categories that are signing new leases in the small shop space?

Sure. Brian?

Yes. We've been encouraged. It's been a good mix of national tenants in the medical, fast casual restaurants have been incredibly active. We do have some larger general merchandise categories as well in that space. So it's been primarily national tenants right now in the small shop space within those categories. Locals are being a bit more cautious, as you can imagine in this environment. But again, we've been encouraged by what we're seeing today and is and as traffic has picked up, we've been seeing, over the past month or so, maybe more of those local tenants come back to the table. But really, it's in that medical, fast casual restaurant category where we're seeing a lot of activity.

That's helpful. And then on the local side, just curious, how does this compare to the GFC? Like did -- I mean, this is obviously a lot different for a lot of reasons, but was local demand this weak then? Or this is really the lowest it's been?

I think what we're encouraged by is that it depends on the category right, Vince. And I think that's what's different about this. This isn't broad-based, but there are certain categories of tenants, which are obviously at higher risk, the small format fitness, some of the personal services, full service restaurants, et cetera. Those are the categories that have been most directly impacted by this. As the restrictions ease, and the tenants are allowed to reopen, we've been very encouraged by the reports that we're getting, albeit in those particular categories that I highlighted, that's where I think you're going to see the largest levels of tenant failures as we go forward. But far different than the GFC, which was much broader-based and sort of a different economic outcome.

We have a question from Tammi Fique, Well Fargo Securities.

In light of Gap recent news to focus on open-air centers, have you seen an increase in demand by retailers moving from enclosed centers to open-air? And then I guess, in light of your commentary around being more essential use community centers. Is that a tenant base where you're interested in increasing your exposure?

Well, I think we have capacity and still be smart in terms of the relative exposure. It's very similar to when we joined, we saw we were underrepresented in restaurants, and we've been able to bring some great fast casual type uses into our centers. That sort of Gap announcement was not a surprise to us. It's something that we've been seeing and frankly, talking about for a while that I think retailers across all retail categories are reexamining where they want to have their store. They wanted at a place where they can have reasonable occupancy costs, they wanted to have it at a place where they can, as Brian alluded to before, have buy online, pick up in store and have multiple ways to serve the customer. And they want to be near the customer. They want to be convenient to the customer. And we think that's true, not only with the mall-native tenants, but some of the digitally native concepts as well as a broadening funnel types of uses that are considering open-air shopping centers is a great place to do business. Brian mentioned some of the medical. So we're actually encouraged, Tammi, across the board. We think we have room to grow with some of those apparel uses and not be overexposed in terms of an ABR perspective.

Okay. Great. And then maybe just going back to the improving leasing demand picture. I guess, given the weak secured lending environment and lower cash flows, kind of broadly speaking, do you think that your ability and that of your peers to fund tenant build-out is driving incremental demand to your centers? I guess how important is sponsorship to the tenants that are being selective in their expansions today?

Incredibly important. It's a great question. Brian?

Yes. I think that's certainly important. What's also important is the ability to put together the lineup of co-tenants that these tenants want to be. And just to what Jim was saying today, whether it's the mall-native brands or some of the digitally native brands, they want to be where they see their customers, where there's foot traffic. And what our team has demonstrated and we're continuing to demonstrate is that we can still put those co-tenancies together. We still have the reinvestment projects to be able to do that. So that's where I think most of these tenants are focused, are you going to be able to execute on adding the lineups and co-tenants that they want, and we've demonstrated it to date and are confident in doing that going forward.

And Tammi, we do believe that the liquidity and access to capital as these retailers look to partner to execute on their growth plans is incredibly important.

Okay. And then just maybe one last question. And sorry if I missed this, but what is the normal collection rate for your portfolio?

Probably 99.5%, something like that. There's always some -- obviously, in a normal environment, we're recognizing some level of revenue deemed uncollectible, but it's typically been less than 1%, certainly.

We have a final question from Greg McGinniss, Scotiabank.

Just a quick follow-up on leasing. Could you comment on the differences in leasing demand that you're seeing based on geography and whether more restrictive operating environments have had an impact on leasing demand?

Brian?

What's actually been interesting to us, Greg, is some of the markets where we've had some of the most onerous restrictions. You think about the Northeast, our North team is having a record year. And I think it demonstrates the reinvestments that, that team has made that even during this, we've been able to really capitalize on those. So it hasn't really trended to where there's an increase in closures. We certainly did see a bit of a lag during those second spikes in places like Texas and California. But what was encouraging to us is that we continue to see the activity fairly broad basin and particularly in the north as we move deals forward even with those elongated closures.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the call back over to Stacy Slater for closing remarks.

Thanks, everyone, for joining us today.

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