SITE Centers Corp. (SITC) Q3 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the SITE Centers Third Quarter 2020 Operating Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Brandon Day of Investor Relations. Please go ahead.

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

Good morning. Thank you for joining our third quarter earnings call. Our results this quarter reflect continued progress in terms of tenant reopenings and collections, which is a function of the hard work from all of my colleagues at SITE Centers. There's been no shortage of personal and professional headwinds that we faced this year. And despite that, we've accomplished a great deal. So thank you to everyone at SITE Centers for the hard work and the hours and the contributions to-date. I'll start today with a summary of the events during the quarter then give some thoughts on tenant activity and some trends that are building throughout our portfolio of well-located suburban properties. Consistent with the last two quarters 100% of our properties remain open and operating as we continue to provide access and the necessary support to our tenants. Over the course of the quarter, tenants made more progress reopening in accordance with state and local guidelines. And as of this past Friday, 98% of our tenants are open, which is up about 6% from three months ago. Turning to collections. As we've mentioned on prior calls, we believed the trajectory of our collections would generally track our open rate which in fact has turned out to be the case. Collections continued to tick higher and unpaid rents continued to move lower. As of Friday, we've collected 84% of third quarter and 90% of October rents. We're also continuing to make progress on previous rent due and we've now collected 70% of the second quarter rent, which is up from 64% at the time of our second quarter call. Unresolved monthly rent is now less than 8% and I would expect that we would resolve the majority of these balances through a combination of deferrals and payments by year-end. That said, we continue to take a methodical approach to resolving any unpaid rent and we're extremely pleased with the agreements executed to-date. Specifically, we've reached agreements with tenants to defer 16% of second quarter rent and 8% of third quarter rent. As you recall, our strategy has been to provide deferrals where appropriate of some or all rent for a few months in return for true financial benefit to our company such as; options exercised, lease terms extended or restrictive covenants loosened to our benefit. In exchange, tenants have more time to get business operations on track and better match their cash flows. Conor will provide additional detail on the dollars and the timing of our deferral program, but it's largely concentrated with our top tenants that make up the lion's share of our tenant roster. We believe that these deferrals, which are essentially short-term loans are well-positioned for repayment since our large national tenants have demonstrated significant access to capital. In fact, over the past seven months, 23 of our top 50 tenants have raised over $50 billion in debt and equity. This access to capital as well as improving operations for many of our national tenants has begun to impact overall leasing activity and we're starting to see signs of a pickup in tenant interest and overall leasing demand. In fact our total leasing volume this quarter is higher than leasing activity was in the same quarter a year ago with total leasing of 803,000 square feet up 4% versus the third quarter of last year. We signed three anchor leases in the third quarter with spreads on total new leases up 18% for the trailing 12-month period. Subsequent to the quarter end, we signed an additional two anchors and a few others in the final stages. Whether it's sporting goods, discounters, quick service restaurants, drive through bank branches, warehouse clubs or grocery stores our national tenants see an opportunity to take market share in the future as a result of a change in distribution channels happening today. Our portfolio offers access to high-income suburban communities with strong co-tenancy, convenient access for parking or curbside pickup and much lower operating costs than malls or street retail. As we look into the next year or so, we are assuming a continued shift of our tenant base to include those tenants that are proving successful in the last mile of wealthy suburbs. Total base rent from our inventory of signed, but not opened tenants as of quarter end totals just under $11 million, which is roughly 3% of annualized third quarter base rent. These leases along with the deals signed subsequent to quarter end will help drive future cash flow growth. We are now eight months into a pandemic that has accelerated many trends in retail. We continue to see some tenants struggle to adjust and close stores or file bankruptcy and we're realistic that growth will not be linear, given the increase in these closures that have been announced to date and future fallout that will occur as a result of the pandemic. On the other hand, as we witnessed this quarter, current leasing remains as strong as last year and retailers clearly value our open-air format and they want to be in the communities where we own properties. And we feel confident that we've not only selected the right real estate, but that we're making prudent capital allocation decisions to fund those leases that will inevitably strengthen our properties and future cash flow. Moving to the dividend. As previously announced, the Board suspended the second and the third quarter dividends. The Board continues to monitor our dividend policy and it's possible that the Board will need to declare a dividend during the fourth quarter to satisfy 2020 taxable net income requirements. If declared, the dividend would be paid in the first quarter of 2021 and we will provide additional details by year-end. Lastly, before turning the call over to Conor, I wanted to address the decision to eliminate the Chief Operating Officer position, which we disclosed in early September. We have a very strong roster of leaders at our company, who have proven to work well as a team and make the right operational decisions for our properties. Given our size and the quality and the tenure of our executive team, we've chosen to structure the company without a COO position. This decision has given me much more direct visibility into operations and a chance to spend more time on property business plans with my colleagues. I'd like to thank Mike Makinen for his tireless efforts at the company. He's been a great friend and did a fabulous job, setting up our operations for continued success. And with that, I'll turn it over to Conor.

Thanks, David. I'll comment first on quarterly earnings and moving pieces in the back half of the year, discuss the Blackstone transaction, and conclude with our balance sheet and liquidity. Third quarter results were primarily impacted by uncollected rent, lease modifications and reserves related to the pandemic. Total uncollectible revenue at site share was $16 million, or an $0.08 per share hit to OFFO. This amount was effectively flat in dollar terms from the second quarter. However, almost 30% of the reported third quarter uncollectible revenue relates to lease modifications. In the scenario, where a lease is eligible for this treatment, cash-based rent is offset in the uncollectible line item to effectively zero out the cash contribution for the relevant period. Given the patient approach to addressing unpaid rents that David mentioned, there were significantly more modifications agreed to or executed and thus recorded in the third quarter compared to the second quarter. Other than the write-off of $3 million of pro rata straight-line rent, which was an additional $0.02 per share headwind, there were no other material onetime items that impacted third quarter OFFO. Moving forward, we are not providing an updated outlook at this time. However, there are a few items to consider for the fourth quarter in 2021. First, included in third quarter results was $2.4 million of revenue or approximately 200 basis points of occupancy from tenants in bankruptcy. The majority of this revenue is from tailored brands, Tuesday Morning and Ascena and this balance includes leases that have not been rejected to date. Second, based on announced asset sales to date, RVI fee income in the first quarter of 2021 is expected to be no more than $4 million. Third, interest expense is expected to be higher in the fourth quarter due to the closing of the Blackstone transactions, which includes the assumption of $197 million of debt with an average interest rate of 3.3%. Fourth, G&A is expected to be closer to the second quarter run rate in the fourth quarter as we benefited from a few timing-related items this quarter. Lastly, subsequent to quarter end $2 million of billed revenue related to the second and third quarter rents were paid reducing our total unpaid balance. In terms of deferral agreements included in the receivables line item on our balance sheet at quarter end is approximately $22 million of COVID-related revenue, we expect to collect in the future. Details on the timing and composition of the balance are outlined on page nine of our earnings slide deck. To summarize, almost 70% of this revenue is attributable to public tenants with an average market cap of $19.8 billion and 42% of the balance is from tenants with at least a BBB+ credit rating. By category, tenants operating in the discount sector account for half of our deferrals in dollars. We expect to collect approximately 94% of this revenue by year-end 2021. On Blackstone, we closed the first of the two joint ventures on October 15 and expect to close the Blackstone three joint venture by year-end. Based on balance sheets as of the third quarter, we expect to receive a 100% ownership of the nine properties as previously disclosed along with approximately $20 million of unrestricted and restricted cash. In the third quarter, management fees from the two Blackstone joint ventures were just under $500,000 and interest income from our preferred investments was $3.5 million. We will provide additional details on our plans for these properties once the second joint venture closes. Turning to our balance sheet, the company remains well positioned with no debt maturing in 2020, no unsecured maturities until 2023, and minimal future development commitments. Additionally, we have $795 million of availability on our lines of credit and $57 million of consolidated cash on hand at quarter end. We have no material uses at this time. Lastly, as David mentioned, based on our estimate of taxable net income today, we expect there will be a need to declare a dividend in the fourth quarter though that will be paid in 2021. The suspension of the second and third quarter dividends provided almost $80 million of additional retained free cash flow through year-end, which helps reduce net debt and position the company for the future, where we continue to believe our financial strength will allow us to take advantage of opportunities to create stakeholder value. With that, I'll turn it back to David.

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

And ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] And our first question today will come from Rich Hill with Morgan Stanley. Please go ahead.

Hey, guys. Last time -- long time since I've had two first names. I wanted to -- hey, I wanted to just sort of chat about your negotiations with tenants. Recognized rent collections improved pretty nicely and deferrals came down. But what I think a lot of us are trying to understand is the velocity of recovery to normalization if you will? And I recognize it's too early to get into a 2021 guide. I'm not trying to go there. But you did mention a steady increase in rent collections as more stores open. So, a long way of asking, what's driving that 8% rent deferral? What's driving the 2% that's just not being collected? And do you think that starts to meaningfully increase over the next quarter to two quarters to three quarters, or is it sort of maybe even a 2022 event, which some of our channel checks suggest it might be?

Good morning, Rich. It actually if you look on page 8 of our slide deck that's along with the presentation, there's a fairly clear line of kind of a slow reduction in the unpaid rent and the unpaid portion went to two different buckets. It went partly to the collected bucket and partly to the deferred bucket. So it actually feels like it's a much more consistent pattern than I would have expected back in April. On our first quarter call at the beginning of this, I think, we were expressing patience was required over the past couple of months. I think what we on the landlord side and the tenants effectively on the borrowing side have figured out is that there is an elegant solution to this problem. The leases require payment and I think that has been universally understood that it's -- the credit is on the lease to pay the rent and the triple net. On the other hand, those leases also have restrictions on landlord land, and land is a very important ingredient for convenience. And so for us it's an opportunity to get control back. And for the tenant, it's been an opportunity to have a little bit of help in terms of deferring that. So, I guess, to answer your question, right now, it feels pretty good. It feels like we're getting down to the final group of tenants that we have to work through. And there have been hundreds of negotiations and conversations from big tenants all the way down to small tenants. So it feels like we're getting down to the final group of them. I would say that the temperament between landlord and tenant feels pretty positive. And the only caveat, I would put in there is, the last week or two with respect to COVID has not been particularly good in the country. And I think there is some risk that as we get into the winter months that we see some backsliding in deals that we've already agreed to and papered with tenants and we end up kind of going in the other direction. I think that's a possibility, but it doesn't seem dramatic right now.

Yes. Thank you. And just one quick follow-up question for me. You mentioned the lease and that being a contract in place. Are you seeing any tenants come back and ask for lease modifications not in the form of deferral, but truly, hey, look we need to have a lower rental rate than previously, and maybe the question I'm asking is, how are you thinking about occupancy versus rent negotiations at this point, or is it just that tenants are negotiating or honoring the lease and you're collecting upon that?

Well, for the most part it's been a horse trade between -- we'll help with some deferrals, we'll release some restrictions, we'll change some co-tenancy clauses and then the rent will get paid up. And that's why you're seeing the collections even from 2Q still rising, because we come to agreements we shake hands we pay for it, and at that point the past due is paid. There have been a couple of tenants that -- and I think any recession in my career tenants always come and say, oh, my gosh, things are terrible. I need to reduce my rent by 50% and sign a new lease. And the reality is there's no impetus for a landlord to do that. And so I think true lease modifications really haven't happened. The only time they're serious to consider, I think is when a tenant is in bankruptcy. And you can look across the whole portfolio and make a better decision, but it just -- the rent modifications, and you can see it by the amount of rent that we've abated, which has been extremely minimal. We really just haven't seen modifications just be a very popular subject right now.

Got it, that’s very helpful. Thank you, guys.

And our next question will come from Katy McConnell with Citi. Please go ahead.

Great. Thanks and good morning, everyone. So just to get a better sense for the recovery time line, can you update us on your outlook for narrowing the lease to commence spread in this environment? And do you expect it to gap out further before starting to narrow with the new leasing activity you're working on?

Hey, Katy, it's Conor. Yeah, I would expect it to expand and for two reasons. One, the leases we're signing today, are not going to open until next year and really until the back half of next year. That's the first point. And the second point is, as I mentioned in my prepared remarks, we have a couple of hundred basis points of tenants in bankruptcy. We'll wait to see which leases get rejected in that and how that impacts our commenced rate. But, I would expect, our commenced rate to decline in the fourth quarter. But based off the velocity, we're seeing on the leasing side, I also expect to see that gap kind of expand. So, for those two reasons, I would expect the gap to expand. Where that ends up or how that kind of trends over the course of next year TBD, but I would expect at least in the fourth quarter for that gap to expand.

Okay, great. And then, if you could talk a little bit more about the anchor re-leasing progress during the quarter, and how close negotiations during COVID have changed? And then based on your backfill demand that you're seeing for either full or more partial box space, how are you expecting leasing CapEx to trend next year?

Hi, Katy, it's David. The quarter, it's hard not to feel positive about anchor leasing in the past couple of months. I mean I think that's been one of the biggest surprises for all of us is that the past couple of years as we've been investing leasing CapEx to backfill spaces or split spaces, and we've had a lot of success in leasing anchor space in the last couple of years. But in the last couple of months, we've definitely seen an increase in demand. And I found it a little bit surprising, but there’s been a number of new concepts that are starting to grow. There's been a lot of national portfolio reviews by the stronger tenants looking to relocate into higher quality properties. And for the most part, the amount of box splits has been reduced and the amount of full leases and replacement boxes has increased. And so, I think that our CapEx is going to remain elevated as long as we're leasing a box space, but it feels like the CapEx is starting to shift much more towards the entire box and not splitting the property if you know what I'm saying.

Yeah. And just from a dollars perspective, Katy remember, our dollars for CapEx were down this year -- have trended down -- excuse me, this year. As part of our negotiations in the horse trading that David has talked about, we have pushed some rent constant debtors as retailers are very focused on getting their kind of own house in order before they open new stores. So, from a pure dollars perspective, I would expect our CapEx to go up next year for that reason. And then, for the second reason as we talked about the last couple of quarters a kind of growing tactical redevelopment pipeline. And if you look at our redevelopment page in our supp, I think the dollars to spend went up $20 million or $30 million. That's because of our kind of growing pipeline of smaller scale site plant adaptations that you'll see more from us in the next couple of months and see some of those come online even in 2021.

Okay, great. Thanks, all.

And our next question will come from Samir Khanal with Evercore. Please go ahead.

Yeah. Good morning, everyone. I guess David or Conor, on the leasing spreads, it's good to see they're above 5% on a blended basis, but is there a way to kind of parse out what's kind of pre-COVID and COVID time period to kind of assess how negotiations are going on rents?

Samir, I was -- I had, perhaps, the fact that you would ask that question. Yeah. I wish we had a really elegant answer for you. The difficulty we have is that our portfolio is skinning down to around 70 wholly owned properties. And the in-place prior tenant rent can be all over the map. So, the leasing spreads, I think if you kind of look in long-term trends, it tends to tell you a story. But when you're looking at very short periods of time, it's not very easy to tell that story. I can say that I don't believe that market rents are growing very fast, but I don't feel like they're shrinking either. It feels like we're trading water with rents and what really is driving numbers is what the prior tenant was paying, whether it was at market or below market.

Okay. And I guess on the segment for like mom and -- mom-and-pop local tenants. How are they kind of performing now with sort of the burn-off of the PPP loans and all kind of the financial grants at this point?

Well, remember, our exposure to local tenants is pretty low. I will say that I think that's the most difficult category to be in right now. I think I mentioned in my prepared remarks, the amount of debt and equity raised by national tenants has been so staggering that their balance sheets are in great position. And even if you think of your own life, you're driving around the different stores, the ones that have access to capital, the ones that have been able to reconfigure their store, adapt their operations quickly, retrain their staff and kind of get themselves back profitable. I think the smaller tenants, particularly full-service restaurants, dry cleaners, tenants that were more reliant on the previous pre-COVID workforce routine are really going to struggle. And I think this winter is going to be very difficult for a lot of small local shop tenants.

Great. Thanks for the color.

Okay. Thank you.

And our next question will come from Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Hi, thanks. Good morning. First question just following up on occupancy and lease rates, which decreased in the quarter a bit. And Conor I think you indicated that the commenced rate is likely to decrease in the fourth quarter. Do you have a sense around how much occupancy loss you might sustain over the next few quarters? And do you have visibility around stabilization of occupancy at this point?

Yeah. Todd, we certainly have visibility on what we've leased, which has been quite a bit. I mean 800000 square feet in the quarter, which is more than last year this quarter is a lot of square footage. So the move-ins are quite easy for us to pace out over the next four quarters. The difficulty of course is to move out. And I think everyone at SITE Centers that's involved in leasing and collections recognizes that this pandemic is not over. I don't think tenant fallout is over. And so I think the back door is still open on tenants that are vacating. I wish I had a better idea as to how to project that for you, but I think it has entirely to come down to how long the social distancing continues, how the winter goes and whether some of these tenants can hang on through the winter. I just -- we just don't really have a great view on that.

Yeah. I'd just say Todd, the only thing I think we -- to echo David's comments from the prior response and we feel really good about our national tenant roster. I mean, they are extremely well-positioned. The -- a number of them have figured things out from the second quarter in terms of click and collect curbside pickup et cetera. So I would just say we feel really good about our national exposure, but to my prepared remarks we have a couple of hundred basis points of tenants in bankruptcy. And I would expect a number of those to close. So I think to David's point, we expect it to be lower in the fourth quarter. But I would say on average the tenants we're signing for the tenants, the national tenants we still have to open they're doing extremely well and well positioned.

Okay. And then in terms of leasing demand, David it sounds like demand is fairly broad-based or maybe for some of the larger boxes and you commented that you're anticipating fewer box splits what about the less than 10,000 square foot space? It's about a little over 30% of the portfolio. Occupancy was a little bit more off than the greater than 10,000 square foot space this quarter. How is demand for the smaller shop spaces faring?

You know what, that's actually a really good point. The demand for small shops in dominant centers still seems to be pretty good. We're signing leases. We're kind of maintaining occupancy. The demand for box spaces and I would say it's more like 15, 20, 25 all the way up to 50,000 square feet has been surprisingly strong. It's the middle zone where it's kind of 8,000 to 12,000 square feet where there's not a lot of current concepts right now out there to take an 8,000 to 10,000 square foot space. And so the demand in that middle zone is a little bit less than we would like to see. And unfortunately it also matches with inventory from Pier 1 and a couple of others. And I guess what you could expect is that a lack of demand in that middle zone is probably going to require adaptation of those buildings into either larger or smaller spaces to meet demand. The good news from our perspective is that strip shopping centers are extremely adaptable and pretty quick to adapt to. It's not complicated construction. It's not expensive construction. And I think over time you're going to continue to see the open-air format be very, very flexible to demand. Right now the demand is for really big spaces in really small spaces and the 10,000 square foot space is a little bit less though.

Okay, got it. Thank you.

And our next question will come from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey, good morning down there.

Hi, Alex.

Hey, how are you? Two questions. First on the Blackstone transaction, which you guys outlined, last quarter and this quarter you closed half, you've got another half to close at the end of the year. But when you look at the consideration and the debt load, you're really taking on a lot of debt. There's some nominal consideration in the press. But yes there's a lot of debt that's coming on. How do you guys think about the debt versus the equity in those centers? And are these centers where we could assume that there's probably going to be a debt work out where the debt will be structured to something that rightsizes with the centers. If you could just comment, because clearly what's going on in retail seems to be heavily debt driven because a lot of the landlords are dealing well with the tenants but the debt side of the equation with lenders seems to be the sticking point. So maybe you can address that?

Sure, sure. Well, let me give a broad response to that Alex and then I can -- Conor can fill in the holes. The way that we looked at this transaction and this is kind of going back a quarter or so is that this joint venture was structured over six years ago. It was as you remember significantly larger. It's down to a size that really wasn't relevant or efficient for either party either Blackstone or SITE Centers. And the capital stack was really three main components. There was a mortgage component right with a third-party lender. There was a preferred component, which was quite large and that was SITE Centers. And then there's a common equity piece, of which we were only 5%. And over the past 3.5 years as we've taken reserves on the preferreds, you can effectively see that the common that little 5% piece that we owned was really not worth anything because the pref was being impacted. So if you're talking about the impact of leverage on retail real estate, I would say that it really was our pref investment that was impacted not the mortgage debt. In fact, the mortgage debt on these properties is not that significant right now. I mean, if you back into the numbers that's shown in our supplemental it's about an 11 debt yield. So I wouldn't call that wildly over levered. And the NOI on these properties is pretty stable. So I really don't see any of these going to a workout situation. It's really a matter of us trading our preferred position where we didn't have control over our own destiny for a common position where we do have control. And I think in the next six months, you'll see us come out with more business plans as to how we want to invest in these properties and do things differently. But it was really just a shifting from preferred to common and picking up a concentration in these nine assets and picking up control.

Yes. Alex, the only thing to add as we talked about this last quarter, we expect about 0.25 turn increase in debt-to-EBITDA as a result of the transaction. The other thing to flag is remember there's $20 million of cash coming with these properties, which is fairly significant. And the last thing is, we talked about from a stabilization perspective is to have long-term de minimis impact on our absolute leverage based off the business plans that David alluded to. So again, there's a couple of components, the pref , the cash piece and then obviously the leverage. The pools are -- there's also a couple of different structures and pools that are worth considering as well which we can get into greater detail once these all close. So it's a long way of saying kind of near-term impact is a quarter turn, but the long-term impact effectively assume to be net neutral.

Okay. And the second question is David you spoke about the heavy demand that seemed to be very strong for the -- at the larger box size. Clearly curbside online pickup, curbside -- or sorry online ordering and curbside pickup has been a tremendous success. Are you seeing the retailers, the tenants sort of overhaul their strategies to focus more on integrating online with curbside? Or were these trends already there and what COVID did was really allowed these trends to show up whereas even pre-COVID the retailers were already doing a lot of stuff? I'm trying to understand how much COVID and the curbside has really changed the retailer strategy vis-à-vis their demand for open air?

Yes. It's a great question. I mean, I even looking around my own neighborhood. I can think of retailers that were doing curbside and they had kind of figured out that strategy a year ago, but the customer adoption wasn't that strong. And it feels like two things have already come out of COVID. Number one is that the earlier adopting companies were very successful right off the back because people like me that really hadn't spent much time doing click and collect are suddenly doing it constantly. So that was the first trend is it just seemed to accelerate the return on that retailer's investment. The second is the remaining retailers that did not have a curbside strategy had to get one pretty fast. And frankly, they seem to have looked at their neighbors in the centers and see how they're doing it and simply done a replication. So the adaptation has been much faster I think than many of us were expecting both from the customer and all these retailers. I mean it's pretty amazing. Like I said the local small shops, I think are really struggling with it other than some of the food delivery options they have. But the national tenants that have access to capital I mean it's incredible how fast they pivoted.

Thank you.

And our next question will come from Ki Bin Kim with Truist. Please go ahead.

Thanks and good morning out there. I just want to go back to your comments about the rent scheme uncollectible. I think you mentioned that it was $16 million unchanged. It looks like on a consolidated basis it went up a little bit and your JVs went down. Can you just talk a little bit more behind that detail because I would have thought even with lease modifications the improvement in your collections would imply that that number should have improved highly more so in 3Q?

Yes. Ki Bin, it's Conor. It's a really good question. So there's kind of three things driving that. One is, you're absolutely right. The collection rate is up a decent amount from the second to the third quarter. The composition of that though was important in the sense that our cash basis tenants were up only call it 10% plus. Whereas obviously for the total portfolio is up more dramatically. So if you think about the biggest piece remains of the uncollectible revenue the offset for cash basis tenants that don't pay rent, that's the first point. The second point is, we're seven months into the pandemic I would say we are still in reserve building mode. We're still learning about some tenants. I would say based off some of David's comments and how close we are to some agreements. We could see some reversals in the fourth quarter TBD, but I would just tell you we're seven months into pandemic and we don't feel like it's the appropriate time to reverse those reserves as of now. And then the third piece is that I referenced are modifications and this is a longer answer, so apologies in advance. But there's effectively two ways or there's a number of ways, but two schools I think you're going to see in the third quarter of how people apply their lease modifications. The first potential path is you'll see it netted out of cash rental income, right? So you'll see a lower cash rental income. We have not gone with that approach because I think it's going to be difficult for people to figure out what the run rate is from a cash rent income going forward if you take that approach. The other way is to effectively include modifications in your uncollectible revenue so that the cash basis rental income is offset by lease modifications. And to David's point, we've taken a very patient methodical approach on these agreements and so – and we can't recognize that until we have an agreement or an executed agreement. So it's a long way of saying, 30% of our uncollectible revenue this quarter was related to modifications rents and recoveries, where we've deferred rent in exchange for the typical example would be an option being exercised which changes the lease and the duration. So those are the three big buckets. I would expect all else equal, if we had a higher contractual, or payment rate, or collection rate stayed at this elevated level, and we had no more material modifications we would have a lower uncollectible reserve in the fourth quarter. But to David's point that's TBD we'll see when we get there.

Okay. So it sounds like a denominator issue in terms of how you're just showing that on collection?

Yeah. What I would say – I would say, it's more of a geography issue. So you'll see two people – two different approaches. One you would net out from rental income. And the other approach is the one we've taken, which is where you include your modifications in uncollectible revenue. So it's not necessarily a – I would say, kind of a reserve which is what I think people generally think of uncollectible revenue.

Okay. And then just some higher-level question. As you sit here today, you've seen some pretty strong improvement in rents paid, the stores are opening progress and sales activity. What do you think about the chance as we get past the holiday season that there's – that we take a step back in terms of like just fundamentals across your business? And if tenants hold off for the holidays, but maybe declare bankruptcy as we come into year like 2021?

Ki Bin, it's David. I guess, we feel like right now things are chugging along pretty good. And it feels like the pandemic is not getting any easier in the last couple of weeks. And yet, we're signing a lot of leases tenants are paying rent and they're doing business. They've figured it out. So I'm starting to think myself that there might be a bit of a departure between what happens in the next couple of months with the pandemic and what happens the next couple of months with our tenants. And I just don't see a situation, where we go into a repeat mode, because it just feels different than it was six months ago. There are some categories that I think are going to struggle like theaters and fitness and local restaurants. But if you look on page 13 of our deck, which is a repeat from a couple of months ago with the chart, I mean, those are the three categories that I could see struggling through the winter. And on a combined basis there's still not a dramatic percentage of our NOI and so – or our ABR. So I do feel pretty good about the operations right now.

Okay. Thank you, guys.

Thank you.

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

Hey, good morning. Thanks for taking my questions. So I wanted to get, I guess, a little bit of clarity first on the cash accounting question. I guess, I was more curious on how that bucket the doubtful account has changed from second quarter to third quarter? And then what tenants or perhaps if not tenants sector/industries now account – or accounted for that change?

Hey, Ki Bin, it's Conor. I would say on a tenant account perspective, it hasn't changed that dramatically, partly because a number of tenants on cash basis are gone i.e. Pier 1 and a couple of others. From a dollar perspective, it has gone up. We're seven months into pandemic. Each month that goes by we learn a bit more. But I – there's no one category that we are now more worried about. To David's point, we've circled theaters, local restaurants, and fitness for some time as the three we worry about. Are there other companies outside those sectors that we're worried about? Absolutely. But I would say, it's very company-specific or idiosyncratic in that nature. So again, we certainly added to our list from the third quarter, but I feel like to David's point we have a really good sense today of kind of who's struggling and who's outperforming. And it feels like we've got a pretty good hold on that right now.

Got it, Conor. And it's Haendel by the way. So second question is going back to the rent collections for a bit the 90% headline number certainly a positive and higher than we and many investors we speak what we're expecting. But part of the problem that, we have from our side of the table is understanding what's going on within that figure with so many leases in big box being restructured the impact of elevated store closures and pending closures, and the catch-up in unpaid rent. So I was hoping, you could talk a bit more about the moving parts and their impact on third quarter collections here? And should we think of 90% of the new baseline for collections going forward, or do some of the things that helped during third quarter, perhaps won't help in fourth quarter like perhaps some of the catch-ups suggesting that 90% might be the ceiling or high watermark for a while? Thank you/.

Hey, Haendel, there's a number of things to unpack there. So I guess on the first one, from the denominator of the pool, we include everything under a denominator. And that's – it's a really good question, because I don't think there's perfect consistency across the sector on that. So whether we abate, defer, collect, whatever it is it's included in our denominator for every single month. So that's the first point, I would make. And if you looked at our build base rent quarter-over-quarter, it's almost effectively unchanged which I think helps support that point. So that's the first thing I'd say. The second point, coming back to the kind of high watermark, we're at 90%. We've been there for 2 straight months. We're not going to go over our views and commit to the fact that this is the new normal, this is what we expect to collect. But I would just point you back to David's comments at the beginning of the call, we are still working through some of these agreements. Our collections, if you recall on April 30 were 50% for the month of April, we're now at 70% for the second quarter and we're still collecting second quarter rent. So I would point you to 2 things: one, I still think you're going to see a number of tenants pay as we come to agreements in the fourth quarter second and third quarter rent. And then for the fourth quarter to David's point, we're still working through some agreements some very large tenants. And given how concentrated we're, those have a material basis or they can't have a material impact on our collection rate. So it's a long way of saying, we're not going to commit to a number we expect to see over the fourth quarter, but there are agreements still outstanding of some tenants that aren't paying rent that could have a positive impact on collections. So TBD, but I think -- just kind of summarize, I think we feel very good about our national tenants, how they're positioned, how they're performing in the latest couple of months. And so we'll see how that trends over the fourth quarter.

That's helpful Conor. And if I could, would you clarify or maybe help me understand the impact of the catch-up rents during third quarter -- the second quarter. So the rents that were due in second quarter getting paid in third quarter. What impact that had to the collections figure? Thanks.

So the collection figures are as of October 23, so as of last Friday. So if they're paid or collected, they're just included in that respective month in which they are billed. So it's a long way of saying take the second quarter for the 16% deferrals for those tenants that start to pay that deferral what you'll start to see is the collection rate go up and the deferral rate go down, right? So that's how it be impacted from just our normal collections reporting. From a balance sheet perspective, it's going to depend on whether it's accrual or cash basis tenant. If it's an accrual tenant, you won't see it anywhere other than in our cash balance. And if you take a look at our net debt quarter-over-quarter, it was down I think call it $30 million to $40 million part of that is retained cash flow from those tenants kind of paying up past due rent. If it's a cash-basis tenant then the -- from an income statement perspective, it will be recorded in the quarter that they pay. There was a little bit of a benefit in the third quarter and I'm going off the top of my head which is dangerous, I think it's about $1 million here or there, you could see a benefit in the fourth quarter as well to that. But it's not -- I don't think that's necessarily a material thing. If you're on a cash basis, I would say we have a fairly cautious outlook. So a long way of saying, when a tenant pays, you'll see that kind of fill up in the bucket that it relates to from a monthly perspective and then how that flows through the income statement, it just depends on whether it's accrual or cash basis.

Got it. Got it. Thank you. Appreciate it.

You're welcome.

And our next question will come from Vince Tibone with Green Street Advisors. Please go ahead.

Hey, good morning. I have a follow-up on lease modifications. Can you just help me understand exactly what and what does not trigger a lease modification per gap? For example, I would assume a peer deferral does not put an abatement or lower ongoing rent would. Just any more color on this topic of what's included? What triggers this gap rolling would be helpful?

You got it. So you're spot on Vince. A straight deferral with no other change to lease would not be included as a modification. What would be included of modification would be something like you just mentioned a material change to the composition of lease i.e. whether it's the rent per square foot or term whatever it might be. To David's point from earlier, we've had very few kind of restructuring of leases outside of bankruptcy. Where we have seen the most frequent modification is a change to the duration of the term -- of the lease. And so I'll give you an example where if we say to someone we'll defer your rent for the second or the third quarter, in exchange you're hitting an option, which is a very common occurrence as part of kind of our horse trading that David alluded to then that would be a modification. That rent would be excluded from same-store NOI and the cash rent would effectively be neutralized by running through the kind of the cash basis that we would have built a normal kind of lease through our uncollectible revenue line item. So the biggest piece on the modification front Vince would be deferrals with an option exercise. And then the other component would be abatements. As David mentioned that's a small number. But those are the kind of the two biggest buckets that would fall in that modification.

So what I'm trying to just get at is almost like how much of that -- you said 30% of the under collectible revenue line item roughly was due to lease modifications like is there any forward-looking implications of that let's say 30% of that lease modification -- of the lease modifications? What I'm trying to get at is, if there's for example lower rent going forward baked in it's kind of hard to extrapolate the onetime charge into what it would be, or is there anything you can help me better understand what -- how to separate onetime third quarter charges per gap rules to extrapolating what is the go-forward run rate from some of that noise?

You got it. So I would just say generally, the vast majority of our modifications and deferrals have related to the second and the third quarter. And so in that scenario where we don't have additional deferrals or abatements for the fourth quarter, the base rental income number we've reported for the third quarter is a great run rate to use going forward. Obviously, you need to adjust for bankruptcies or occupancy loss. But that's exactly why the kind of the genesis of your question is exactly why we ran the abatements and modifications through the uncollectible revenue line item, as opposed to adjusting the top line. So it's a long way of saying, all else equal, if our collection rate was identical in the fourth quarter to the third quarter and we had no other deferrals our uncollectible revenue would drop by 30% quarter-over-quarter. So the only adjustment or kind of normalization you need to think about is really the uncollectible revenue item as opposed to the top-line which should effectively be unchanged. The other piece is there is as part of these modifications where the rent kind of does show up on the income statement is straight-line rent. Coincidentally, the kind of extra straight-line rent we recorded from modifications this quarter was almost entirely offset by straight-line rent write-offs related to adding cash basis tenants or adding new cash basis tenants to Haendel's question. So from a run rate perspective, our top-line is a very -- for the third quarter is a very good run rate to use all else equal before you adjust for bankruptcy tenants.

Got it. No, that's really helpful color. One more just quick clarification for me. On the data point in your deck where it says material national bankruptcies to-date represent 2% of ABR does that 2% include tenants such as Pier 1 and Ascena that have already moved out, or is this 2% of current run rate ABR?

So that 2% is our quarter end occupancy. So you're spot on. There are a bunch of guys who left mid-quarter. We're trying to give the occupancy number as of quarter end. The dollars amount we also gave and I forget what that is I think it was just over $2 million. That is what -- so if someone closed mid-quarter whatever a month or two months they paid would be included in that top line. So it's giving you both ways the revenue impact and the quarter-end occupancy impact.

Perfect. Thank you.

You’re welcome.

Our next question will come from Mike Mueller with JPMorgan. Please go ahead.

Yeah, hi. I just have a quick one. The color on the lease modifications was great by the way. But for the 3Q deferrals what are the categories where you were seeing deferral requests come in from outside of say local restaurants, theaters and fitness?

Mike, I would say for the third quarter, it's not that the requests are coming in. I would say it's the tail-end of the large bucket of requests we had back in April. I mean, it's really been dealing with the kind of 2Q problems early on when all these national tenants were trying to adapt their store footprint to fit curbside pickup and they were trying to figure things out and they just needed some help. We can only do so many per month. And so I think that's why you're seeing a gradual reduction in the amount of unpaid is because we're just getting through the documentation. It takes a long time. There really haven't been any new requests that I'm aware of in the last couple of months.

Okay. That’s helpful. Thank you. That was it.

Thanks, Mike.

And our next question will come from Floris Van Dijkum with Compass Point. Please go ahead.

Hey. Good morning, guys. Thanks for taking my question. Could you remind us again what the -- your collection rate excludes recoveries correct? And how much of an impact would it have if you were to include recoveries as a percentage of your collected rate?

Floris, you are correct. Our collections rate is base rent only. We exclude recoveries. If we were to exclude recoveries it would be a higher collection rate. If you think about a number of our deferrals don't defer triple nets. And so if you included deferrals then our collections it would be a higher percentage of collection. I don't have the number off the top of my head.

Okay. Thanks, Conor. Another quick question for you. I mean in terms of your $76 million of rents that you recognized in the third quarter I noticed your small shop occupancy dropped by 3%. David, I think was alluding to that you expect potential more weakness in that particular segment of your business. How do you guys think about your billable rents as a percentage of your billable rents, or can you give us some more color on that relative to the first quarter billable rents or what you expect going forward?

I think Floris, I mean to my earlier comments our billable rent was almost unchanged quarter-over-quarter as a result of leases commencing offsetting bank or tenants leaving. To your point, the bankruptcies to-date has been mainly small shops, but they've been mainly under that -- just under that 10,000 square foot cut off or shops versus anchors, which is a little arbitrary right and it's been kind of 8,000 to 10,000 square foot spaces. So in our run rate as Vince and I just talked about it's about 200 basis points of additional bankruptcy. A number of those maybe with the exception of Stein Mart are in the small shop space. So I would expect to see continued pressure on our lease rate for small shops small shops in under 10,000 square feet and additional improvement potentially in our lease rate over 10,000 square feet based off the momentum David and I have talked about from the anchors perspective.

Great. Thanks. Thanks, Conor.

You’re welcome, Floris.

And our next question will come from Katy McConnell with Citi. Please go ahead.

It's Michael Bilerman here with Katy. David, I was wondering if you can go through if you look at sort of the lease role going forward, but also the leases that you executed in the third quarter that $800,000 and you had some opening commentary about how that's up relative to last year. Can you, sort of, talk about at what point were those leases because a lot of it was 80% was renewals when were those discussions started pre-COVID versus post COVID versus stuff that was already in progress that you just got across the goal line versus new discussions you had for those tenants to renew or sign a new lease?

And Michael, that's a great question. The last two earnings calls, we've -- I think with our tone, and the management tone has been a little bit more hey, let's all remember, these conversations started pre-COVID. And they were on third base. This quarter is a little different, because the leasing this quarter was really generated over the course of the summer, spring and summer. And I know it's somewhat surprising. But I think what's really happening is, tenants that want to fill in the gap in certain high income suburbs, are looking to properties where they have the right co-tenancy. And when they want to be there, they want to be there. And so we've seen a lot of the national tenants, try and get into locations when they feel like they have an opportunity. So these are recent deals. I mean they're not kind of leftovers, from the pre-COVID world.

Most of it is renewals.

Yeah.

Do you have to give anything up in those, to get the tenant to renew?

No. I mean, I think these are basically -- it's a similar type of negotiation that you would have pre-COVID. There have been conversations. And some tenants that have wanted to put language in, about pandemics. There have been some tenants that wanted to help with renovation, with TI packages for renewals. There have been some tenants, that don't want to exercise an option, but they want to renew flat. There have also been a number of tenants that skipped their option earlier in the summer. And then by the end of the summer wish they hadn't and ended up paying more rent. So, it's been a very interesting past couple of months. And I think you're sensing a little bit of a change in tone, because this quarter, really feels like there's been some tailwinds that I haven't seen in a longtime. I personally think that the amount of -- that kind of work-from-home, in white collar jobs, in wealthier suburbs is having a somewhat dramatic impact. And I think the tenants recognize that.

And when you look towards 2021 and 2022, right, where you got one million square feet next year 1.7 million, year after at what point -- I guess, where are you in those discussions with those tenants? Obviously a significant amount of that lease roll does have renewal options and extension options available. So just where -- how should we think about the cadence of putting those to that?

At this point, I would say that, I would look to the last couple of years. And look at the renewal probability or the options exercise probability. And it -- I don't think, it's going to be better. But I don't think it's going to be significantly worse. In other words, a lot of the delay in these deferral conversations with larger anchor tenants is because, we said, "Hey we'll talk about a deferral, but let's look at the next 18 to 24 months of your role. And let's agree to options exercised, in return for dealing with the spring pandemic rent that was due." Because we also want -- like you, we also want some surety, as to what's going to happen on a renewal. And even if we end up not agreeing, at least we get a window into, how the tenant feels about that location. And for the most part, we've been pleasantly surprised. I think where you're going to see the struggle in our portfolio or the strip center space in general is that, there are a number of chains that are shrinking their footprint, whether it's through bankruptcy or just naturally they want to shrink footprint. In instead of four units in a city, they want to get on to three units in the city. And in doing so, I do think that the spaces have value. And we're proving that there are backfill tenants there. But it's at a cost. And that cost is downtime and CapEx.

Right.

And -- but it feels a lot like, the last couple of years, with respect to move-outs and move-ins. It's just in the last quarter, I feel like the move-in story has gotten significantly better.

Yeah. Just two other quick ones, you spent a lot of time talking about the horse trading you're doing with tenants being able to get something back in return for deferring their rent or having them pay some upfront. Is there a way to sort of summarize what that aggregate get that you've got? Is there a way that you can put it in totality? I see each individual tenant is not material in and of itself…

Yeah.

…but perhaps when you've aggregated all this up you can give us some sense of "Hey Michael, at our 69 wholly owned centers, we've been able to get this much space back or -- and things like that."

Yeah. That's actually a very creative idea.

Yeah. I mean, it's hard, Michael. I mean, it's funny on some things that it was a very modest get meaning. We rewrote some language in the lease or we allowed us to do a lease in the future, which is difficult to kind of quantify. But you're right. For every single one of these modifications or agreements, we went tenant-by-tenant, bringing the NPV pre and post and figure out what was a value to us. For some of them, I alluded to actually Katy's question on, some tactical rebound projects we've unlocked it was the ability to do a pad. And you're absolutely right. The value creation on those is material. So, it's a really good question, it's something we should quantify. But we've done it. It's just a sense of kind of adding it all up.

Right, well that would be helpful. And then, I guess, once -- was really doing one thing maybe you can do another which is, I think having -- I think all of the rent deferrals and collections and cash versus GAAP, I do think having just a table, as we're moving quarter-to-quarter just to understand the cash flow impacts of these things. And I recognize we can look at the net debt and see what happen sequentially, but there's a lot of other things going on right? You're not paying a dividend today. It's just a strip out really what's happening on the rental line. What was collected, what was deferred, when was that deferral actually paid, actually having that each quarter to allow us to compare, okay, this is what it was in 2Q, this is how much has been recovered. I think having that information would be very helpful to the investment community.

Completely understand the point Michael. I think the biggest challenge is going to be quarter end versus reporting date. Meaning if we report two weeks from now I guarantee you our collection rate will be higher than it is today. And then thus the impact of the balance sheet and the post quarter end collections will be impacted as well. So completely understand the point. As you know, we're hyper-focused on disclosure and transparency. So, as we kind of get into the meat of these deferrals in 2021, I think it's an excellent point, and we are laser-focused on figuring out the best way to disclose that to the investment community.

Okay. Thank you so much.

Thanks, Michael.

And our next question will come with Linda Tsai with Jefferies. Please go ahead.

Hi. Thanks for taking my question. In terms of redevelopments, would you expect to shift the split between major and tactical and the post-COVID recovery period?

Yeah, good morning, Linda. I think that you're going to see that a lot of the value that has been created from getting control back from some of the tenant leases is going to be tactical in nature. And so I think for our company, we're very focused on the highest return on capital at the lowest risk and the tactical redevelopments for right now for us is the largest bucket of opportunity. I don't see us engaging on large mixed-use projects going vertical with a lot of high density. I think for us, we're focused very, very much on the blocking and tackling of small projects, because they're faster and they're more accretive. And that's what we have inventory of because of a lot of these tenant negotiations in the last couple of months.

Thanks. That makes sense. And then just a quick follow-up on the store rationalization comment. In terms of Gap brands announcement to focus more on Athleta, Old Navy locate 80% outside of malls within a few years, 34 leases between your JV and wholly owned, would you expect to be positively or negatively impacted on that basis, or is it just kind of too early to tell?

Yeah. I mean, if there was one story that makes a strip center landlord happy, it was that story, because I think it's a verification that the open-air format achieves the same customers at a much less expensive build out and operational cost than the mall. And our company is almost entirely Old Navy. And I think that the sales, we're seeing there is strong. The desire for that company to really focus on the open-air format is going to be a big benefit to us, and they're not the only ones. I mean, there are other mall tenants. And frankly street retail tenants that are saying, you know what, the most important feature for customers for the future is convenience. And this asset class of suburban strip in high-income areas is 100% based on convenience. So I think it's a net benefit to us.

Thanks.

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

Hey, good morning guys. Just a couple of quick ones. On the 30% of the uncollectible rent that was in lease modifications I'm assuming that those that triggered options show up in the leasing data you guys reported?

Hi, Chris. The answer is yes, if they've been executed. And just a small clarification, just the 30% of our uncollectible revenue is related to modifications. Just want to clarify that.

Right. Okay. And then as it relates to the -- I guess with $22 million of deferrals is that the right number, Conor?

Yes. There's $22 million of accrued -- in our receivables is $22 million of accrued deferrals correct.

Okay. What is -- I mean I think you -- so maybe I'm -- just to make sure I'm understanding that. Of your deferrals, let's just take a step back, what is the cash component versus the accrued component? In other words, what is the potential positive impact to future results based on the collection of the deferrals?

Yes. So, that's a great point. So the $22 million is just the accrual-based tenants, right? Cash-basis tenants, I don't have the number off the top of my head. But implicitly, if we have them on cash basis, we are not expecting that to be paid. I don't think Chris it's going to be a kind of a game changer for us from the cash flow perspective. But we generally have not been executing deferrals for cash-basis tenants. There are some, but typically these are tenants that we are -- we want to keep on a very tight leash. And so, instead of deferral we might be looking for another alternative kind of inducement for lack of a better word. So, it's -- I don't have the number off the top of my head. I don't believe its material. But also implicitly, we do not expect to receive it, but something we can provide more disclosure on.

Okay. And then last question for me. Just going back to the percentage of the uncollectible rent related to lease modifications. What was that for second quarter? Just so I have a sort of comparative.

It was plus or minus 10% just over 10%.

Okay. Great. Thank you.

And our next question will come from Katy McConnell with Citi. Please go ahead.

Hi, it's Michael Bilerman again. Just wanted to quickly ask about external growth and what you're hearing from capital partners. You obviously did the foreign Chinese JV with the Chinese investors I guess it was about 18 months ago. Are you finding much appetite for partners to want to co-invest in the sector today?

It feels Michael like speaking to common equity investors there's a lot of curiosity and a lot of intrigue because things appear to be better than they had thought it would be. The yields are seemingly strong. But I think that in the middle of this pandemic with no real end insight, I think it's hard for institutional investors to make that leap of faith. And so, I would say that those that move from interest to hey let's talk tend to be more opportunistic in nature. And for a partner like us, we really want institutional partners. The dilemma with opportunistic of course is that it just -- it's financially not as successful for us. So, I think you'll see us wait to form new joint ventures until we feel like we have a really strong institutional partner that has an alignment of interest with us. In other words long term.

Right. And then does -- I guess are you eager -- is there anything to sell into this marketplace that you can continue to hone in on?

I -- explain I'm sorry?

I'm sorry. I mean, I guess one hand is potentially on the buy, but is there anything that you feel is the market at all deep enough yet to be able to liquefy more assets?

I don't think meaningfully so. In other words the net lease market is obviously very strong still 1031 market. But when you really think about the labor required and doesn't really make a difference and what's left I guess I feel like the transaction market is still really slow.

All right. Okay. Thank you.

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to you, David Lukes for any closing remarks.

Thank you, all very much and we'll speak to you next quarter.

And ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. And at this time you may now disconnect.