Greetings and welcome to the Regency Centers Corporation Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to your host, Christy McElroy, Senior Vice President of Capital Markets. You may begin.

Good morning and welcome to Regency Centers' Third Quarter 2021 Earnings Conference Call. Joining me today are Lisa Palmer, President and Chief Executive Officer, Mike Mas, Chief Financial Officer, Jim Thompson, Chief Operating Officer, and Chris Leavitt, SVP and Treasurer. As a reminder, today's discussion may contain forward-looking statements about the Company's views of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations, and are subject to various risks and uncertainties. It's possible that actual results may differ materially from those suggested by the forward-looking statements we may make. Factors and risks that could cause actual results to differ materially from these statements may be included in our presentation today and are described in more detail in our filings with the SEC, specifically in our most recent Form 10-K and ten Q filings. In our discussion today, we will also reference non-GAAP financial measures. The comparable GAAP. Financial measures are included in this quarter's earnings materials which are posted on our Investor Relations website. Please note that we have also posted a presentation on our website with additional information, including disclosures related to forward earnings guidance and the impact of COVID-19 on the Company's business. Our caution on forward-looking statements also applies to these presentation materials. Lisa?

Thank you, Christy, and good morning, everyone. Thank you so much for joining us. We feel really good about the progress that we've made toward recovery and also with the improvement we're seeing in our operating trends. Our third quarter results are reflective of a healthy environment for open-air, grocery-anchored shopping centers. And not only are we feeling closer to normal, but we're excited about what the future holds. I'm also really pleased to report that despite the recent concern about potential impacts from the Delta variant, we've continued to make meaningful progress on rent collections, narrowing the gap further as nearly all of our tenants are in a position to pay us full current rent. Steady retailer demand is driving strong leasing activity, which combined with reduced tenant move-outs, has moved the needle and occupancy. We've also had success maintaining leverage in our lease negotiations, driving contractual rent growth and remaining prudent on CapEx, while further improving our rent spreads, our team has been working really hard to drive deals that will lead to long-term growth in the value of our assets. As a result of these positive trends and an increased pace of improvement, we're again raising full-year guidance for 2021. In recent quarters, we've discussed that we believe the recovery of NOI back to 2019 levels would likely occur in the second half of 2022 on an annualized basis. But given the rate of progress we've seen in recent months, we are now pulling that forward to the first half of 2022. We've also increased our dividend by 5%, a reflection of our confidence in a return to sustained growth over the long term. You'll recall, and I know you're probably sick of this, but I can't possibly remind you enough, that we never cut our dividend…

Thanks, Lisa. Good morning everyone. We remain encouraged by the continued improvement in our portfolio operating trends accelerated by the reopening of the West Coast this summer. Our tenants are generally fully open and operating in all markets with the lifting of restrictions translating into higher rent collections, and continued strong leasing activity. Portfolio foot traffic rebounded back to a 100% of 2019 foot traffic levels as of late October. despite the slight dip in September related to the Delta variant. Many of our tenants are experiencing positive sales trends in 2021, with groceries holding their gains from 2020, and many restaurants reporting record high productivity. We continue to see further sequential improvement in rent collections with Q3 collections at 98%. Notably, our collection rate for deferrals remains high at over 95% year-to-date. Translation, tenants are honoring their commitments. Our leased occupancy rate is up 50 basis points over the second quarter after adjusting for the sale of the vacant former Sears Building at the Hancock Center, Lisa just mentioned. These gains were driven by strong leasing activity and fewer tenant move-outs. Most importantly, our net effective rent paying occupancy also rose this quarter and is now over 90%. As we've noted previously, this metric is the best indicator of our recovery progress. As noted, leasing activity continues to be robust and we remain encouraged by the strength of our pipelines. Q3 total leasing volumes were 125% of 2019 quarterly averages. Shop renewal rates were 80% elevated over historical trends. Rent-spreads continued to improve to a blended rate of over 5%. While our GAAP rent spreads also continue to get closer to pre -COVID levels at over 12%. We are maintaining contractual rent growth on leasing activity in line with recent years with embedded rent steps on more than 80%…

Thanks, Jim. Good morning, everyone. I'll provide some color around third quarter results, walk through the changes to full-year 2021 guidance, and offer some helpful reminders when thinking about next year. Third quarter NAREIT FFO of a $1.12 per share was helped by several items. Uncollectible lease income was a positive $10 million in the quarter. The details of which we've broken out on page 33 of our supplemental. We reserved over $4 million on third quarter billings, which is down from over $10 million a quarter ago associated with uncollected revenues from cash-basis tenants. This was more than offset by the collection of nearly $6 million of amounts reserved during the first half of 2021, as well as the collection of close to $9 million of revenues that were originally reserved in 2020. Our full-year '21 guidance calls for a $46 million positive impact from the collection of 2020 reserves, of which we have recognized $41 million through the third quarter. We also recognized close to $14 million of one-time promote income in the third quarter related to USAA JV transaction, which positively impacted NAREIT FFO, but is not included in our core operating earnings metric. Finally, straight-line rent in the third quarter benefited from the reversal of reserves triggered by the conversion of some cash-basis tenants back to accrual accounting, as reflected in non-collectible straight-line rent at a positive $4 million. This is a non-cash accounting impact that contributes to NAREIT FFO. But again, did not impact our core operating earnings. Following these conversions, which represent about 5% of ABR. We now have 22% of our ABR remaining on a cash basis of accounting. For the smaller pool, our cash basis collection rate with 91% in the third quarter, a 700 basis point increase from a quarter ago.…

Thank you. And at this time, we'll be conducting a question-and-answer session. [Operator Instructions] One moment please, while we poll for questions. Our first question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.

Good morning. Thanks a lot for taking my question. Your third quarter benefited from the strengthening of the core business in conjunction with collecting some of the past rent. So presumably and as your guidance suggests, recovery of prior reserves is going to decrease in the future. And as that why it's down, can you talk about the -- you're going to be passing from collection of pass-through to continued growth of the core business. So can you talk about the trajectory of those two businesses and whether that means an FFO acceleration in the future?

Sure. Hey, Michael, good morning. I appreciate it.

You're welcome. Yeah.

You bring up a good point. First, the deceleration in the implied guidance for the fourth quarter. I just want to make sure we get that out there and explain some of the pieces here about -- as you have, you've done the math, it's about $0.06 per share at the midpoint. About a third of that, and again, I'm speaking to core operating earnings, not NAREIT FFO, about third of that is going to be, as you mentioned, a result of 2020 our prior-year collections decelerating. So the trajectory there, as you can see, has gone from $20 million -- over $20 million in the first quarter to roughly $9 million in the third. We have guided to that number being about $5 million in the fourth, about a 1/3 of that deceleration in the fourth quarter comes from other -- what I would call other NOI line items, percentage rent, settlement income. We did have a bit of a frothy third quarter, so that should decelerate in the fourth. And then we do -- as you look at the G&A guidance, you'll see that the fourth quarter from a run-rate perspective will be slightly higher than the third. So those are the drivers decelerating into the end of this year. As we think about next, it's -- uncollectable lease income is going to continue to be a story of accelerating our earnings path. We're at about 250 basis points on current year collections through the third quarter, as a bad debt charge or an uncollectible lease income charge. If you think about how we finished the year, we're anticipating that our cash-basis tenancy continues to climb from a collection rate perspective. I think we might end the year in a plus or minus 170 basis-point range as a bad debt expense charge on current year billings. And remember our historical run rates in the 50 basis point range. So we see a tremendous amount of opportunity to continue to close that gap. That's why we keep talking about net effective rent-paying occupancy. We increased that by 200 basis points this quarter. We anticipate that to continue to grind higher into 2020. Much more to come on 2022 guidance, I do want to hold that back until February. I don't know that we'll get back to our 50 basis point historical run rate by the end of next year. But we do feel pretty confident that we'll just continue to close that gap from that 170 where we think we'll end in the current year.

And Michael, I like how you ask the questions, so I'll -- and with all of those, there's a lot of numbers and a lot of facts there and a lot of moving pieces. What I want to make sure doesn't get lost is the really vast improvement and the demand for leasing and for space in our properties because we did lose occupancy. And what is going to drive the acceleration is going to be our continued ability to release that space. And that's really important and we're seeing that demand come through.

Incredibly helpful. And just as a follow-up in your guidance, the expected cap rate for dispositions fell from 5.5% to 6% last quarter to 5.5% this period. In addition, your acquisition cap rates decreased from 5.5 to 5.1. Is it fair to say that industry cap rates have compressed 40 to 50 basis points since last quarter? And how does that make you change -- or how does that make you think about doing acquisitions, dispositions, development, and redevelopment going forward? Does that 'change your view?

I don't believe that the cap rates are necessarily compressed by 50 basis points quarter-over-quarter. Our guidance as a result of the mix. So we did announce the acquisition of Blakeney which is an exceptional asset. And that -- obviously the negotiation of that was even prior to last quarter so the cap rates were already there. With the Blakeney acquisition, we are also, if you will, match funding that with very low cap rate dispositions, non-strategic in the fourth quarter and that's what drove that the increased guidance for dispositions with that lower cap rate for that. So it's a mix of properties on both the acquisition side and the disposition side specific to Regency. Cap rates have compressed all year long and as I said quarter-over-quarter, I don't think that there's been much of a change, but there's no question that for the type of property that we already own and therefore are looking to add into our portfolio, it's going to be in the 5 -- 4.5 to 5 cap rate range. That's high-quality grocery anchored shopping center pricing today. It does not change how we think about acquiring and how we think about adding, as I mentioned in my prepared remarks. Portfolio enhancement has always been a really important part of our strategy, and we do believe that continuing to grow with premier high-quality assets like we already on will help fortify our future NOI growth as we dispose of those that perhaps may have a lower growth profile than our average, or may be non-strategic.

Thanks again and good luck in the fourth quarter.

Thanks, Michael.

And our next question comes from the line of Katy McConnell with Citi. Please proceed with your question.

Thanks. Good morning, everyone. So I'm the Carolina deal, can you provide some more background on how the deal was sourced and what you're underwriting for upside opportunity to the property. And then lastly, just wondering how dispositions [Indiscernible] your funding plans for the beyond fourth quarter?

There's so much in that question. I think it's going to take three of us to answer it. I'll start and then I'll pass to Jim, and then Mike may tap into the funding. It was a market at deal. However -- and that we've talked about this in the past, there is. No question that we typically have had more success when we're able to get in front of marketed fields and do things off market use our relationships. But there are a select number of assets that do come to the market that are market -- that we also have success in where we're able to leverage, really leverage our local teams. I'm a little bit biased here. I believe that if not the best, we're certainly really close to the best in the business, and we have an exceptional Southeast team. We have assets that look a lot like Blakeney already in the portfolio, and we have a lot of conviction around the quality of this asset. And then from the funding piece that Mike 's going to talk about, that allows us to add this to our portfolio on an accretive basis. So we're adding an exceptional asset that is going to have a growth rate that's above our average on an accretive to earnings basis. To me, that is why we were able to be aggressive on a market appeal. And I'll look to Jim to talk specifically about how we think about the growth rate here.

Yeah, Katy, I can't I can't overstate how excited our team is about this asset. It's truly a center gravity for retail and restaurants offerings in that affluent South Charlotte market. But as we look at it, we have a lot of respect for the current ownership. They've owned the asset for good long while and have done a really nice job in merchandising. But we believe we see a great opportunity to really apply our asset management skill set and eye towards fresh remarketing, remerchandising, and a fresh look, if you will, on the Center to really drive what we will believe our higher-than-normal NOI growth out of that asset, and that's the bottom line. We looked at that as an opportunity to get into a great Center and have outsized earnings opportunity.

Before Mike gets into the funding, I don't want to miss the opportunity to -- we, very affectionately, call the asset of turducken, as we're nearing the month of thanksgiving. That came -- that was tabbed out away by our investments Officer in our Carolina market. And for those of you that don't know what a turducken is, turkey, chicken and duck. And this asset really, as Jim said, as a center of gravity and it offers there's, there's a target piece with more of a community center feel. There's a neighborhood center with Harris Peter anchoring that and then there's a main street retail. You can choose how you -- what you think is the turkey, the chicken, or the duck, but is it truly is a center of gravity and exceptional asset.

Hey, Katy, just following up and clean that up from a funding standpoint. You're right. And this is a little bit to Michael's question as well. When you think about recycling, you typically think about dilution. And we're not -- we're familiar with that. We had some dilutive recycling in our history. We're in a unique period of time. Where we're adding to our disposition pipeline is actually low cap, low -- at the same time, low growth, non-strategic assets. And if you click through and just look at our dispositions on a year, you see Pleasanton Plaza, you see Hancock Sears Pad, non-income producing assets. Obviously, this is an ability to put that capital back to work. You see Gateway 101, it's basically two boxes, very low cap, very low growth, if any, it's flat as a board. And then we were recently able to sell the Parnassus Height Medical Center. Again, highly sought-after asset class, not consistent with Regency strategy, low cap rate. We're adding a couple more to the dispo guidance and what that blend of capital provides us is actually an opportunity to invest that accretively into a property like Blakeney, with on -- which has a headline and on the surface looks to be quite an aggressive cap rate and it is. But Regency at this unique period of time was able to make sense of that economically.

Just as a follow-up, it's Michael Bilerman, good morning. Lisa, you've used institutional capital for a very, very long time. I can remember sitting down with you almost 25 years ago when you were running a fund platform with Bruce. Can you talk a little bit about where institutional capital is in partnering with you for further acquisitions, I see you looking at a lot of stuff right now, or whether you'd want to do it wholly-owned. And conversely, whether you would sell more into JV or institutional capital. Maybe just talk a little bit about the appetite, just given your deep history and relationships with that capital.

Of course. Thank you, Michael. And I think I do remember that meeting 25 years ago. We have spoken with many investors about this over the past few years, especially in light of some of the buy-in of the USAA and some other dispositions. And back 25 years ago, we really utilized third-party capital as -- we've always said, there's 3 reasons, access to capital, access to opportunities and access to expertise. And 3 years ago, it was a combination of access to capital and access to opportunities. We were much smaller Company then. Today as we think about it, I just said, I believe that if we don't have the best, we certainly are really darn close to the best of the team in the business. So we don't necessarily need to access to expertise and the capital markets can be a little volatile. We haven't had the need for access to capital. We don't have it. We don't have that need today. But never say never. Maintaining good relationships with our partners is still an important objective for us and we continue to do that. However, at this time, that the access to opportunity would really be the biggest check for us in terms of where we would need to access third-party capital, That’s how we're thinking about it today. We have great partners really appreciate our partners. We appreciate the relationships with our partners, and we will continue to sit side-by-side with them. But for new capital at this point, it's not necessarily high on our priority list.

Alright. Thank you.

And our next question comes from the line of Ki Bin Kim with Truist. Please proceed with your question.

Thank you. Good morning. You guys have been able to achieve a high level of leasing velocity. I'm just curious about how deep that demand is and is the velocity at which the top of the funnel is being fed with additional pipeline. Is that -- how is that looking compared to the number of deals you've been signing to-date?

Yes. Ki Bin, this is Jim. Yeah, the velocity has been really good. And as I look at it, I think it's a combination of basically a renewed confidence in the brick and mortar business from retailers certainly pent up demand for -- from a year-and-a-half of really not a lot of activity that's opening up. And obviously, we continue to see a nice migration to quality, which we believe we are that answer to migration. But the categories that we're seeing are the ones we've merchandised to for the last 20 years. So we're doing a lot of medical deals, pet deals, restaurant, fast-casual, banks, personal service, and the demand is really across all regions. It's really -- it's almost imperceptible where there's more demand than others because it's coming from everywhere. Like I said, the pipeline as we look at our existing pipeline into the 90-day future, if you will, it continues to look very robust. We have more vacancy than we've had in a long time. We have product, we have availability, and there appears to be good solid retailer demand for that and so I'm cautiously optimistic we stay on a nice trajectory.

Great. And want to ask about your leasing spreads. The new lease spreads were essentially flat, but you are using less Capex than many of your peers as a percent of rental value or just whole dollars, just help us better understand this dynamic and the choices behind it?

Yeah, Jim again. I'll take that, and I appreciate you recognizing that the blended spreads is up to -- for this quarter was 5.1%, so we are on a nice trajectory there. But, in addition to those initial spreads, I think it's important, which is obviously an important metric, I like to step back and kind of take a broader look at what really is going on long term -- to create long-term sustainable NOI. I think one of the components, contractual rent steps and our ability to manage expense recovery ratios are our key contributors. I think appropriate and prudent leasing CapEx which you touched on. That's a major factor I think in long-term earnings growth. Tenant selection, really making sure we're picking the right mix to drive synergy and traffic at our Centers but also having a mind coming out of this pandemic environment, make sure we have an eye towards relevancy and survivability of the folks we're dealing with. We want people that's going to be here with us. We don't like to churn space. And all these things matter. And in combination with what we're seeing from a GAAP and net effective rent growth at the 12% number I referenced in the remarks, I'm confident that our overall results have us on a very good vector towards the long-term NOI and earnings growth objectives that we're looking for.

Okay. Thank you.

Our next question comes from the line of Derek Johnson with Deutsche Bank. Please proceed with your question.

Hi, everybody. Thank you. In this environment, which is more attractive, development at tighter yields or strategic acquisitions like, Blakeney, add compressing cap rates and just given the competitive backdrop, which do you feel as Regency's wiser capital allocation call?

Derek, I'd actually don't view it as an either-or choice. We like all and we are not -- fortunately, the position that we're in as I just responded to Michael not in a position where capital is scarce for us. So we are trying and continue to make progress on rebuilding our ground-up development pipeline. We are making progress on our redevelopment pipeline, and we are in the market and see a good pipeline of opportunities for acquisitions. As long as we are able to invest accretively and grow the Company's future trajectory for NOI growth and earnings growth. That's the box that needs to be checked.

Got it and thank you. And maybe back to Jim or whoever wants to talk about demand. How is small shop demand stacking up? Just looking at small shop leasing pipeline now versus pre -pandemic and really, how does it compare? And if you We're seeing outside demand, is it providing the flexibility to bring in the right Regency style merchandising mix? Of course, given the Center or are you feeling the need with the occupancy hole to be a little more flexible on concept or maybe TI is going forward? We haven't seen it yet, but just looking ahead. Thank you.

Yeah, Derek. I think as I previously mentioned, I think the demand is there. We continue to asset manage no different today than we did pre -pandemic. We are always looking to get the right merchant at the right price to make sure they are successful and in turn, drive sales and make us successful. So, again, we -- right now the demand seems to be pretty deep. But we continue to be selective. We are generally never have been and don't intend to be fill it up with anything and hope they stick. We're very specific in our merchandising mix and really try to make good long-term decisions.

Thank you.

And our next question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.

Thank you. I was wondering if I could get an update on the Serramonte Center, particularly with J.C. Penney space and then the Crossing Clarendon.

Craig, we're going -- I'll have Jim address both. I think.

Yes. Serramonte with the J.C. Penney space. we are investigating several different redevelopment opportunities. So we're we're early in the process and trying to identify the best direction for that replacement box. And as far as the -- was it Crossing Clarendon?

Crossing Clarendon. Yes.

Really in great shape there. Our retail ground floor space is fully spoken for either, either at lease or in lease negotiation. As we mentioned last quarter, I believe the lifetime fitness deal is executed. We're waiting on a use waiver which we expect to get in the next 30 days which will clear all contingencies and by year-end, we should be posting over 90% leased. We are -- it's come together nicely and excited to be lifetime over [Indiscernible]

I think was I knew I wouldn't be out to help myself from jumping in. Those are both tremendous assets and we're, as Jim mentioned, we're continuing to harvest value from those and grow NOI and both of those assets are going to have outsized NOI growth in the near future.

And that's good. Its over a 30-year redevelopment dollars. So the other question I had -- and I love the truducken reference.

Truducken.

Truducken yeah. I was -- when I was examining it during our time putting all 3 pieces together. But you guys did it. Hats off.

Thank you, Craig.

Anyway, the G&A costs, I'm just wondering, we expect a pretty decent increase in 2022 with increased travel or have you guys been relatively active throughout 2021 that's not going to have a significant pickup.

I lost my life status on Delta. That means that thing. So we are anticipating a significant increase [Indiscernible] I was just going to say I appreciate you asking the question. It does give us the opportunity to put this out there. 2021's run rate on a quarterly basis is in the $19 million range or so. And again, I'll refer to my remarks, recall that we are benefiting this year from that $2 million forfeiture benefit upon max departure. Next year's run rate is probably going to be closer to the $21 million range on a quarterly basis. What we're capturing in that number is compensation increases together with filling open positions, some of the benefit we've been occurring in '21 as we've been running a little bit lighter from a headcount plan perspective. Increases the T&E, as you mentioned, the entire Company is -- we're starting to get back on the road and there's more conference is being held, businesses being conducted more in-person than on Zoom going forward. And so we're planning for that to return to pre-pandemic levels. And then the point I'd make is development overhead. Probably going to be in the flat range '21 as we continue to build our pipelines. We have the development spend will look a lot in 2022 like it did in '21. And then we anticipate growing that ability to capitalize '23 and beyond.

Great, that's helpful. Thank you.

Thank you, Craig.

Our next question comes from the line of Rich Hill with Morgan Stanley. Please proceed with your question.

Hey, good morning, guys. First of all, thank you for being strategic when you're hosting this call. This is a first call I've had in a while where I'm not double or triple booked, so thank you very much. I have 1 key question about 4Q, and then 1 sort of bigger picture question. On 4Q, can you maybe provide us any thoughts on rents becoming straight line and how that will look in 4Q? I noted that moving tenants from cash basis to accrual accounting was around $0.03 in 3Q. So any thoughts on what that might look like in 4Q?

Rich, we don't guide on it. I would say as we look at -- we have a very strict policy and we want it that way. Bringing tenants back to accrual accounting is going to take them to prove to us that the credit is there to meet that GAAP standard, right? So the bar is relatively high. You got be current on your rent for an extended period of time. And then I would add to that there's an overlay of what business are you in and I'll be frank. Some of the labor concerns that we're looking at today are impacting how we think about bringing tenants back to accrual accounting. As I look at our AR and our open AR and think about what tenants may or may not qualify. It could be in the 5% of ABR range in the fourth quarter that converts. I don't have a precise number for you on what that could mean from a straight-line rent perspective. But generally speaking, it works pro rata. So every percentage point that we convert is about worth, on a pound-for-pound basis, the same. I hope that helps. We're going to have to take these as they come Rich, unfortunately. And I do look forward to being back to normal when we have everyone nearly everyone back on accrual accounting

From your lips to God's ears. I completely agree with you on the complete understand [Indiscernible]

So bigger-picture question, occupancy. Look, we've noted in the past, and very correctly, that occupancy is the key to getting back to normal. You continue to have really good leasing trends. Can you maybe talk about where you feel occupancy is going to get back to normal? Is that a year, 2 years, 3 years? I recognize I'm asking the shake your crystal ball here, and my crystal ball is not great right now, so hopefully yours is a little bit better than mine.

We haven't given guidance in occupancy. I think one of the best metrics or measures is when we expect to get back to 2019 annualized levels, and that is now in the first half of 2022. So we are getting the benefit of some contractual rents along the way, which may offset a little bit of the occupancy, but I don't want to get out of -- get in trouble with any future guidance, but I think next year and into 2023, we should continue to see some occupancy left. So maybe sometime in 2023.

Yeah, that's great, Lisa. I'm sorry. I wasn't trying to get you to talk about '22.I was just

I was looking at Mike the whole time I answered that Rich to make -- making sure I wasn't getting in any trouble.

No, I was really just talking about the cadence of occupancy returning to normal. Not as a comment.

2022 we'll benefit from some of the redevelopment, NOI growth that we talked about and contractual rent steps that are already embedded. While we'll be back to that 2019, it doesn't necessarily mean that occupancy is all the way back at that time, which is a good thing, because that means we still have more room to grow.

Got it. Look, as someone that grew up in the South, I certainly know what a Turducken is. Thanks, guys. Congrats on a nice quarter.

Thanks Rich. Thank you.

And our next question comes from the line of Mike Mueller with JPMorgan, please proceed with your question.

Hi. Lisa, I think you talked about cap rates on high-quality centers being 4.5 to 5. Looking at your dispose this year, they're 5.5% to 6%. I guess, how much of that 5.5 plus cap rate product do you still have in the Company?

So I think we updated our guidance to be 5 to 5.5

On dispositions.

On just on dispositions, Mike.

Okay.

Make sure that that's clear because generally speaking, as I said, when we think about portfolio enhancement and the centers that we are selling, they are going to typically have a lower growth profile and/or be non-strategic. And so you would expect that especially with the lower growth profile that cap rates would be a little bit higher than the 4.5 to 5, because we as long as everyone out there looks at total returns, and whether it be going in cap plus growth or unlevered IRRs. So that's why you see a little bit of that discrepancy. I think for the 5 to 5.5, that's when we -- as Mike talked about our funding, that works for us, if you will, from a portfolio enhancement standpoint.

And the details that actually doesn't include the non-income producing land that we're selling, so our effective earnings base cap rate is low.

[Indiscernible].

In the low 4 range.

The second half of your question.

Okay. And then maybe just switch gears for a second here. Do you see any other JV winddowns or buyouts over the next few years.

I think building on the comment Lisa made earlier to Michael Bilerman question, there's nothing to count on there. We'd like our partners a lot and they've been good to us for a long period of time. And it's been a very symbiotic relationship. And so we -- I don't know, Mike, that I'd count on our ability to do a trade like the USA transaction, but never say never, and we can't predict what their plans are from a retail exposure perspective. And there may be an opportunity that Regency is presented with to consider buying in a JV partnership and we would do that. We like the assets equally that are in those portfolios. There is no fundamental kind of qualitative difference between the assets in our JV portfolios and what's on Balance Sheet. So we'll take it day-to-day, quarter-to-quarter. But it would take a shift in our partners mentality right now. Today, our partners are committed to the space, very specifically to the grocery -anchored neighborhood shopping center sector.

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

Thanks, Mike.

And our next question comes from the line of Anthony Powell with Barclays. Please proceed which your question.

Hi, good morning. Question on I guess, base rent collections, the 2 laggers are personal service and fitness, but we're seeing some pretty big improvements in activity in those sectors real - time. So just curious, could you see an improvement in those 2 categories really by the first half of next year do you think?

Yeah, I would say the answer that is yes. And really the lag that you're seeing today is predominantly West Coast where they were the most impacted and the last to recover and with some certain mask mandates and COVID requirements that has still probably impacted those two categories in the West Coast more than anywhere else. But they're all -- they're basically on the rise. Large format fitness has bounced back very nicely. It's really more than smaller boutique folks that have been with limits. And again, predominantly West Coast. But what we see strong -- strong growth in that sector and fully expect them to bounce back.

Got it. Thanks. and how much of the strong leasing demand has been driven by retailers trying to expand their last-mile distribution capabilities? We've heard some of your peers talk about that and it seems like a pretty strong secular tailwind for the industry. So what are you seeing on that front?

Let's rewind back to pre-pandemic. You would have heard us speaking about retail headwinds, and -- but that we were confident that retailers placed a very high value on the right real estate, on the right bricks-and-mortar locations. And that the -- if you're on the -- if you are in the right trade area and the right market, retailers would be willing to essentially pay full market rents for that real estate. And that, I would say, is what's happened over the past 20 months with the disruption -- with the hyper accelerated digital commerce, that's only been validated even further that it is really important to be close to consumers homes in quality real estate. I do believe that there has been an increase in demand, maybe a little bit pent up as people were were a little cautious as to how the pandemic would play out. But now with hindsight being 2020, the retailers have even more confidence in the importance of being close to the consumer because they do need to be more intentional about last-mile distribution. And the quality of that real estate matters. And I think that there is no question. That is what is driving increased healthy demand to Regency shopping centers.

All right. Thank you.

Thank you.

Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.

Hi. At this point in the cycle would you consider slightly higher leverage to generate higher returns given your low leverage, the positive retailer environment, and access to capital?

It's a great question, Linda. We want to operate where we are. We want to operate in the band of 5 to 5.5. We're in the low 5 times area now. Let me just make a point that we use on a -- we used to have 12-months, the $46 million of prior period collections is in that number. It's worth about a quarter return, not material. So we're still in a very healthily in the band. But this is a big point for us moving forward on our growth trajectory. We have -- with our free cash flow and our Balance Sheet position, we're going to have -- and growing EBITDA, recall we're at the low point of this, we're coming out, we're going to start growing EBITDA, we believe at a more accelerated rate. We're going to have the opportunity to use a little bit leverage to that free cash flow to acquire shopping centers or build shopping centers or redeveloped shopping centers to amplify and accelerate our growth rate in the near-term going forward. All while not putting our Balance Sheet at any more risk than it is today and operating within that, the low-end we think of that band where we want to be. So it's a -- we're in a -- we're perfectly positioned, we believe to remain as we said on our front foot from a growth perspective and look at opportunities across all 3 bands, acquisitions, redevelopments, and developments.

Mike might be a little bit too humble, so I'm going to pound our chest a little bit more. And I think it's something we are really proud of. The fact that we're at 5 times, with or without prior period collections and with not -- with maintaining our dividend throughout the pandemic. So we did not cut our dividend. And in fact, if you read the press release and listen to our prepared remarks, we just raised it another 5%. Sector leading free cash flow without reducing our dividend, increasing our dividend, and still having 5 times net debt-to-EBITDA, I'm really proud of that.

That's impressive for sure. And then also, I read about OP drive-thru grocery opening its first sight in South Carolina. Our existing Brewster's considering adding drive - thrus, I realized both these is similar in concept, but do you see this as emerging trend? And is this an added benefit having this type of offering at a center?

I think maybe on the margin. Quite frankly, there are -- there have been Publix

Publix tried it.

Has drive - thrus and they lay fallow, quite frankly. So I think if it catches on, you may see something, but I think what the other form of distribution not much sure to drive through is going to be a game changer.

I don't know if that it's that much more effective than the curbside

Pickup is really pretty efficient effective.

Thanks.

Thanks, Linda.

And our next question is from Wes Golladay with Baird. Please proceed with your question.

Hey, everyone. I want a quick question on the uncollected rents, huge improvement going from 10 million to 4 million in the third quarter from the second quarter, do you have any expectation that we'll come down further in 4Q and then when you guide to next year by the midpoint of next year being back 2019 levels, how do you see this $4 million number playing out?

Hey, Wes, I think it ties into the comments I made at the top. It's effectively the result of that bad debt expense ratio or that uncollectible lease income rate, finishing the year at 1.7%. We're at 2.5% now, so, yes, we are anticipating that number will decline in the fourth quarter. And then I would anticipate that it would continue to decline next year. We're do -- we're moving that net effective rent-paying. I can see a, again, 200 basis points this quarter. We need to compress that to within 50 basis points of commenced occupancy, at which time we can stop talking about it. Because 50 bps spread to commence is historically average. So yes, I do anticipate that number to slowly grind down from here.

I guess maybe, building off of that comment, so you have -- would you assume all these people to stay in occupancy but just become paying [Indiscernible] attrition from this group.

Yes. I think we believe around this tale that more of those will be survivors than move outs. And to Jim's point earlier, some of this is category-driven and geography-driven. Getting into West Coast, a couple of months behind, getting them back up on their feet. These uses that are more impacted than others in that geography. I think it's just a matter of time. We will have some move outs, but we don't -- we anticipate on balance more of those just converting back to rent-paying status.

Got it. Thanks for the time and look forward to catching up next week. Yeah.

Thanks.

[Operators Instructions] Our next question is from the line of Paulina Roadhouse Smith with Green Street. Please proceed with your question.

Good morning. I will imagine high labor costs or lack of labor availability is accelerating retailers focus in technology to make their businesses less labor-intensive. Of all the potential disruptors ahead, and there are many, and more massive adoption of cashierless stores, farther warehouse automation, driverless cars, etc., what these think are the most relevant for you as landlord, of course? Are you keeping a closer eye on any one in particular? Of course, there is no good or wrong answer. I'm only looking for your general thoughts.

Yeah, I appreciate the question, Paulina. We're really making sure that we are thinking about being proactive to the extent that we can be proactive whether it be with simply relationships with our retail tenants and our merchants, or whether it's what we can do internally. It's all of the above. I'm going to try to -- there's no question that the most impactful because I believe it's permanent is more of the BOPIS and the last mile distribution. And we have seen that accelerate over the past 24 months. And our retailers and our merchants, as you alluded to, are getting smarter about it and are investing more money in technology. But at the same time they also, as I just said in my prior response, they also appreciate and value that last mile distribution being close to a consumer's home. And I've said it on other calls, and if you would listen to a panel with something that I did at a conference in September, we had a target real estate representative on the panel and he said it was like 90% of their orders are fulfilled from the stores. So that is probably the thing that we think about the most to make sure that we're staying as close to in evaluating how can we take advantage of those opportunities, how can we actually play a part in that and play a role in that and partnering with our retailers. And then of course, supply chain disruption, as Jim talked about, and labor shortages are something that we hope are temporary and transitional. I think that there's probably a little bit more evidence that the labor shortage may be recovering a little bit faster. And that really does impact us and impacts our -- by impacting our tenants so far more than the supply chain has. So it's all the above and we used the terms we.re on our front foot for investments. We're on our front foot for ensuring that we're staying ahead and evolving with not just changing retailer and merchant preferences, but also changing consumer preferences. Really thinking about the next 10 to 12 years.

Thank you. And then another question, you mentioned in your prepared remarks, I think embedded rent lease bumps for 80% of the leases executed this quarter. Is the remaining 20% exclusively comprised by anchors or you also have flat at rent for some small shop?

It's really just a kind of across-the-board split. It's not -- It's predominantly presently anchor driven. You're getting increases from that vast majority of your shops.

Thank you.

Thank you, Paulina.

Our next question comes from the line of Tammi Fique with Wells Fargo. Please proceed with your question.

Thank you. I'm curious with the fallout from the pandemic that you experienced and the importance and cost of omnichannel. Has there been a general shifting to more national tenants across your portfolio or has the local small shop tenant as a percent of GLA or ABR remained steady versus pre -pandemic?

I think the mix is really about the same as it was pre -pandemic quite frankly. I think we're roughly 20% local.

Yes.

So we haven't seen a real shift from that.

Okay thanks And then I'm curious on. On the acquisitions, what are the unlevered IRRs that you are targeting today and has that changed at all as cap rates have compressed?

The thresholds for us are really going to come back to again as I spoke about earlier, it's going to -- it will certainly depend upon our cost of capital that we're using to fund the acquisitions. Because whatever we are acquiring and adding to our portfolio, in addition to being accretive to our future growth rate, also should be accretive to our earnings growth rate, so with that said, I mean today we can, with our cost of capital, we could make unlevered IRRs in the 6% range work. And that's been relatively consistent for quite some time now.

Great. Thank you.

Thanks, Danny.

And we have reached the end of the question-and-answer session. I'll now turn the call over to Lisa Palmer for closing remarks.

Thank you all for your interest and participation today. Always appreciate our conversations. Look forward to talking again soon. I think next week with a lot of you. Have a great weekend.

And this concludes this conference and you may disconnect your lines at this time. Thank you for your participation.