Retail Properties of America, Inc.
Q4 2020 Earnings Call Transcript

Published: 17 Feb 2021

[Operator:]

Greetings. And welcome to Retail Properties of America Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Mike Gaiden, Vice President of Investor Relations and Capital Markets. Thank you, sir. Please go ahead.

[Mike Gaiden:]

Thank you, Operator. And welcome to the Retail Properties of America fourth quarter 2020 earnings conference call. In addition to the press release distributed last evening, we have posted a quarterly supplemental information package with additional details on our results in the Invest section on our website at www.rpai.com. On today’s call, management’s prepared remarks and answers to your questions may include statements that constitute forward-looking statements under federal securities laws. These statements are usually identified by the use of words such as anticipates, believes, expects and variations of such words or similar expressions. Actual results may differ materially from those described in any forward-looking statements and will be affected by a variety of risks and factors that are beyond our control, including, without limitation, those set forth in our earnings release issued last night and the risk factors set forth in our most recent Form 10-K, 10-Q and other SEC filings. As a reminder, forward-looking statements represent management’s estimates as of today, February 17, 2021, and we assume no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Additionally, on this conference call, we may refer to certain non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers and definitions of these non-GAAP financial measures in our quarterly supplemental information package and our previous 2020 earnings releases, all of which are available in the Invest section of our website at www.rpai.com. On today’s call, our speakers will be Steve Grimes, Chief Executive Officer; Julie Swinehart, Executive Vice President, CFO and Treasurer; and Shane Garrison, President and Chief Operating Officer. After their prepared remarks, we will open up the call to your questions. With that, I will now turn the call over to Steve Grimes.

[Steve Grimes:]

Thank you, Mike, and good morning, everyone. I appreciate you joining the call today. As I reflect on 2020, I am reminded of the unprecedented challenges we faced in the spring and summer that tested nearly every aspect of our platform. At the same time, I’ve been overwhelmingly impressed by the responsiveness of our people to these trials. I want to take a moment to thank our employees for answering the call from both our tenants and our communities during the past year and solidifying a major rebound towards normalcy across our business, including 94% cash collections in Q4, which are being adversely impacted by our two multi-tenant assets in California.

[Julie Swinehart:]

Thank you, Steve. This morning, I will review our fourth quarter and full year financial results, our rent collection trends and our capital structure positioning. I will also share initial thoughts around our 2021 guidance. During the fourth quarter, we generated operating FFO per diluted share of $0.20, down $0.07 year-over-year. The impact of the pandemic remains evident in our fourth quarter year-over-year lease income declines of $13.6 million or $0.06 per diluted share, which explains the vast majority of our year-over-year operating FFO change and is driven by the combination of occupancy declines, reduced but improving collection levels and collectability assumptions pertaining to uncollected amounts. In addition, a $2.8 million decrease in straight-line rental income equating to $0.01 per diluted share, largely driven by the Q4 movement of certain additional tenants to the cash basis of accounting distributed to this overall decline in lease income. As we continue to evaluate ultimate collectability of amounts due from tenants, our cash basis tenant population grew to nearly 12% of ABR as of December 31, 2020, up from 10% at the end of Q3. Operating FFO per diluted share decreased $0.01 sequentially driven by an increase in G&A expense in the fourth quarter, as determinations for discretionary incentive compensation were made and therefore accrued. Prior to Q4, we did not have a basis upon which to record these amounts.

[Shane Garrison:]

Thank you, Julie. Our fourth quarter results reflect the ongoing improvement in our operational metrics, as well as provide for a framework as we outline our limited but improving 2021 outlook and fundamentals in this unique operating environment. As Julie detailed, in Q4, we achieved the second straight quarter of accelerating collections with 19 of our 24 tenant use categories now above the 90% collections level, including 17 categories at 95% or better. And we continue to convert tenant negotiations and the sign deals within process amendments falling to just 40 basis points of build base rent in Q4. These efforts also brought our total address rent statistics to the 96% to 97% range for each of the last three quarters and in turn also helps fuel our sequentially higher volume of lease signings. While leasing volume in Q3 was our highest on a trailing 12-month basis, we increased our total number of lease signings by 12% in Q4, demonstrating continued interest in our high quality portfolio and solid execution within the platform. In aggregate, our ongoing dialogue with existing and potential tenants helped us drive fourth quarter executed GLA within 3% of year ago levels. Notably, we accomplished this velocity while continuing to sustain aggregate positive spreads, which also accelerated for the second consecutive quarter, heading incrementally closer to stabilize patterns before the onset of the pandemic. Looking deeper, new leasing spreads, which measured 3.3% in Q4 continue to show heightened quarter-to-quarter volatility, given an incrementally modest sample size and reflect our effort to balance duration, occupancy and economics in the current environment. Our renewal spreads of 3.8% sustained the positive comps seen throughout the pandemic. More importantly, we continue to focus on forward growth, with annual bumps of approximately 200 basis points on comparable new leases executed in the quarter. Notably, our lifestyle mixed use assets drove the average higher at 230 basis points for the segment and our fourth quarter leasing effort also helped produce our total ABR expiring in 2021 by 22% and our anchor ABR expiring in 2021 by 37%. While our leasing velocity continues to improve, we anticipate occupancy to continue a downward trend for the next few quarters. In Q4 Retail portfolio occupancy declined by 50 basis points to 91.7%, accelerated from Q3’s 140 basis points sequential decline, helps by moderating impacts of COVID-19 and favorable seasonality. Our anchor occupancy of 94.7% and lease rate of 96.2% continue to serve as an indicative foundation for our overall portfolio that will provide for cash flow and help us drive small shop signings in 2021. While we faced an outsize year in 2020 on the bankruptcy front, we are left with a fundamentally stronger rent roll and we’ll look to build on that solidified base over the next few years. Of note, bankrupt tenants accounted for just 1.3% of our ABR at December 31st, down from 2.6% as of September 30th, and announced bankruptcies thus far in 2021 have accounted for just four locations in our portfolio. During Q4, bankruptcy backfill accounted for eight deals or 7% of leases executed with demand driven by medical and other uses. While focused on optimizing the fundamentals of our existing operating portfolio, we continue to advance our redevelopment and expansion projects in the quarter. At One Loudoun with conviction in the broader non-cyclical strengths of Loudoun County and Northern Virginia, driven heavily by the technology sector, we elected to continue construction, and as a result, avoided a surge in lumber and other structural costs and delays in 2020 and are now poised to begin leasing this month, driving incremental cash flow that will aid in our return to historical earnings levels, as we track toward our existing stabilization target in 2022. Specifically, at our largest expansion project to-date, we continue to advance toward our goal of an opening this spring at Pad G’s multi-family residential branded Vyne. These 99 units will serve to further expand and diversify our cash flows into multi-family, as we continue to execute on our meaningful air right entitlements created over the past few years. Turning to the commercial portion of Loudoun, we continue to complete interior finishes for Pad G’s 33,000-square-feet of office space, which is now in lease or negotiation for approximately 90% of the GLA. Across the street at Pad H, we’re installing drywall and other finishes for the remaining 279 multi-family units scheduled to deliver later this year. At Circle East, Ethan Allen opened in January and Shake Shack, our other anchor looks at for opening this month. Our release rate continues to improve at a cadence of one to two deals per quarter and our pipeline represents over 50% of the GLA at a project. We remain patient in this difficult environment but are encouraged by increasing fundamentals and interest as tenants start to open and the macro appears more favorable. Pivoting to our 2021 transaction outlook, we remain vigilant for opportunities, balancing assets specific valuation factors against broader portfolio positioning and capital allocation opportunities. While Julie outlined many of the financial specifics embedded within our guidance assumptions, I want to emphasize a few points underlying our guidance and assumptions for 2021. First, we like most anticipate some form of recovery in the back half of the year, largely driven by vaccine distribution. With that, we also believe that leasing volumes will be volatile, but continue to generally trend positively as the year goes on. However, with some level of uncertainty and structural overhang, we continue to believe that economic occupancy will be delayed while overall lease volumes increase. In summary, we will see the majority of the economic benefit from the fundamental progress we will make this year specific to leasing volumes and lease rate after 2021. We remain confident in the relevancy of our assets and our platform, which our results in the last two quarters have only reinforced. However, our climb back to normalized levels of occupancy, we’ll take a straightforward combination of time, hard work and pragmatism, and while I am confident in this broader path forward, the exact timing of these developments will only crystallize in the coming quarters as we remain focused on our goals of rent roll durability and improving our foundation for sustained growth and our cash flows for the intermediate and long-term. With that, I will turn the call back to Steve.

[Steve Grimes:]

Thanks, Shane, and Julie, for your reports. Loads of information to digest and we appreciate your time today. I think at best we turn the call over to questions at this time. Operator?

[Operator:]

Our first question today is coming from Derek Johnston of Deutsche Bank. Please go ahead.

[Derek Johnston:]

Hi. Thank you and good morning. Just wanted to dig in on the occupancy a little more that Shane mentioned, really where do you envision occupancy troughing and what level may occupancy settle especially for shop tenants. So, when I look at the model and when I look at the opportunity set, there’s a trough likely in 3Q ‘21 or 4Q ‘21 and then thus setting the table for resume growth, albeit from a lower base?

[Shane Garrison:]

Hi, Derek. Good morning. This is Shane. I’ll start us off here. I think one of the reasons we have such a wide ranges, it’s tough to say when and where we trough. I would tell you that, consistent with my prepared remarks, we certainly see continued downward pressure on occupancy at least through Q2, if not through Q3. We do have some rent commencements coming online. That 130 bps spread. Most of that comes on in the second half. It’s about $5 million annualized. So, it’ll take some pressure as far as accretion up and occupancy. But it’s a little speculative right now as to how far each segment goes and where we actually trough. But it does look like from our perspective, Q2 to Q3 is the time period.

[Derek Johnston:]

Okay. Thank you. That’s helpful. And I guess kind of staying on this trend is, what can you share about your watchlist as it stands now? I mean, you guys did take back a lot of space in 4Q and it was largely due to expected bankruptcies is the watchlist basically washed out at this point, is Bed Bath and Beyond now like firmly off the list and at the rest of your centers? And any color on the updated watchlist would be very helpful? Thank you.

[Shane Garrison:]

Yeah. It’s a great question. And we have obviously had some issues around our watchlist exposure historically. I think one of the upsides from what has gone on in the last year specific to our portfolio is exactly what you touch on and that our rent roll continues to dramatically change and certainly be more tangible and hard and a lot of respects. So, Athena is obviously out of our top 25 at this point. Dick’s has moved into our top 20. Ulta has moved up. Total Vyne has moved up. So you can see sort of the hardening of our top 25 from our credit perspective. And to your very point our watchlist exposure has diminished greatly, albeit painfully in the short-term. As far as what’s remaining on the watchlist. I would tell you it’s more categorically than it is any one name 10 at this point, movie theaters, which I’m sure will be a broad based topic on this call and certainly through the rest of the year is paramount to us. It’s diminished. Its 260 basis points at this point. We elected to offensively take one of our theater boxes back in South Lake in the quarter. So it’s diminished. But as a category, certainly, high on our list, and certainly, restaurants and certain gyms remain. Those are the three buckets. So much less than named tenant and as you would expect, more categorically focused at this point.

[Julie Swinehart:]

And Derek, this is Julie. Good morning. I would just add to that, the disclosure that we’ve included in the supplemental around our cash basis tenants. So that figure has migrated up again in Q4 to 12%. It’s up from about 10% at the end of Q3 and 8% at the end of Q2. And that subset of tenants, even though we collected over 94% for the portfolio in aggregate, the cash basis tenants, we only collected about 65% from them during the fourth quarter. And I think, when you -- when I think about that element, and certainly, great question on occupancy as it relates to, how we’re thinking about OFFO for 2021, I think, occupancy is certainly a variable and a factor. But things like cash basis tenants with 12% of our ABR on the cash basis, knowing that I can only record revenue to the extent they pay in the quarter or in the year for that example -- for that matter, also leads to some of that variability. So, January is, I can share off to a strong start. We’ve got 93% collected from our tenants in January. But again, that cash basis tenant population we only have about 65%. And that 93%, I’m referring to kind of new 2021 rent. There’s also this layer, if you will, of deferrals. So we didn’t really have much of any deferred amounts due in 2020. And I mentioned in my prepared remarks that we did collect on 98% of those, much of what is due from those deferrals starts in January. So we haven’t yet collected that 93% from that subset, which is just another element of variability that we’ve contemplated in that $0.08 wide range.

[Derek Johnston:]

Thank you very much.

[Steve Grimes:]

Thank you.

[Operator:]

Thank you. Our next question is coming from Chris Lucas of Capital One Securities. Please go ahead.

[Chris Lucas:]

Hey. Good morning, everybody. Hey. Julie, if I could, can we go back to fourth quarter G&A. I don’t know if you touched on this, but could you maybe give some color around the meaningful spike?

[Julie Swinehart:]

Sure, Chris. Good morning. As I mentioned in our -- in my prepared remarks, the company elected to award discretionary incentive compensation. Now, historically, our incentive compensation is based on kind of standard metrics and it’s not of a discretionary nature. I think us and many others were in the boat in 2020, where it was a very different year and that historic practice whereby we would have been accruing quarterly was not something that was -- that we have support to accrue, frankly, until fourth quarter. So you see the effects of the results of the evaluations made for incentive compensation for the executives, as well as employees reflected all in the fourth quarter. So it is much, much outside compared to the build up for the year and that was one of the reasons that we chose to guide in 2021, because of the lumpiness, if you will, of the quarter-to-quarter G&A in 2020.

[Chris Lucas:]

Okay. And…

[Steve Grimes:]

Chris, this is Steve. I’m going to add on to that one. Thank you. I’d mentioned at the onset of the pandemic that we were going to be sharpening our pencils from a G&A perspective and we did do that. If you’ll see year-on-year decline in G&A from 2019, obviously, the guide at the midpoint is a bit higher than what we experienced, not only in ‘20, but also in ‘19. And I would just, as Julie had mentioned, in terms of the lumpiness, I would caution people from taking the Q4 and annualizing. From our perspective, we’re trying to get back to some level of pre-COVID levels in terms of G&A, which includes things like travel and conferences, which we’re hopeful we can get to in the back half of the year, as well as bonuses not on a discretionary basis, but at a target level basis. So should those things go, I would say, adversely, if you will, meaning we’re not traveling, you can see that number come to the lower end to the range to the extent that you get to the higher end of the range means that we’re just having a bang up gear and in all things are great, so just wanted to get some perspective on the range vis-à-vis the fourth quarter print.

[Chris Lucas:]

Thanks, Steve, for that. I guess just wanted to make sure, though, that for ‘21 then, should we be thinking about volatility in that number? Is it or should it be a smoother number through the course of the year?

[Julie Swinehart:]

Oh! Good question, Chris. I would say, it would be a smoother number as we’ve seen in the past. I would point out that Q1 tends to be slightly elevated for G&A for some other compensation related reasons. And then, as we get -- frankly, as we get towards, call it, Q3, and certainly, in Q4, we are truing up or truing down any sort of expected payout off of targets in those quarters. So I would expect less lumpiness than what you saw Q4 versus the previous quarters this year.

[Chris Lucas:]

Okay. Thanks for that. And then, Shane, just wanted to talk specifically about Athena, you -- I guess, the -- going into the bankruptcy, you have roughly 28 units. Where does that stand now and how does the, I guess, the protests that the landlords have posted against the settlement impact either positively or negatively the potential outcome for whatever remaining units there are?

[Shane Garrison:]

Yeah. Our Athena exposure, Chris, is fairly diminished. I want to say, we’re 50 basis points, 60 basis points something like that now. So we’ll -- the protests around the final bankruptcy resolution, I think, remains to be seen. But I think for us, all things considered much less impactful than it was pre-bankruptcy. That’s really the only color I could have on the tenant as relates to us.

[Julie Swinehart:]

Yeah. But…

[Chris Lucas:]

Okay.

[Julie Swinehart:]

…numerically we’re down to 18 spaces at year end.

[Shane Garrison:]

Yeah.

[Julie Swinehart:]

Off the space of…

[Chris Lucas:]

Okay.

[Julie Swinehart:]

…top 25 tenants in the supplemental for sure.

[Chris Lucas:]

Sure. Okay. Thank you for that. And then, Shane, just sticking with you for a second, when you think about how you break down your sort of various box sizes, if you will, where is the most strength that you’re seeing in terms of leasing activity and where is the most challenging size right now?

[Shane Garrison:]

It’s a great question and I’ll peel a few layers here, but let me give you this setup from a pipeline standpoint. So our pipeline is significant. We are pushing about 400 basis points of ABR on the pipeline right now. And there’s a lot of sprouts, as you know, Chris, in the economy that are just waiting for kind of that last spark to in the form of really a path forward on vaccine distribution, and hopefully, resolution later in the year. So, I think, the foundation is set there. We see outside of the pipeline, there’s other indicative as I was reading over the weekend, looking at kind of new business applications, the U.S., January was up 73% year over year with Retail far in away by a factor of 2 to 1 in first place with a little over 100,000 applications. So -- and that’s what we see. The anchor space, we’re still over 96% leased and it’s a little more stable than the headline would tell you in real Class A space. I would say, it is much tighter than the broader denominator would kind of indicate. But the in line space is interesting. I would say, one in four of our tenants in the shop space pipeline is restaurant and it’s counterintuitive until you really think about the availability of broad based cheap debt and the entrepreneurial spirit is still alive and well and it’s -- the restaurant category has always been very resilient. So in some ways it’s surprising, some ways isn’t, when you kind of do the math and put the pieces together. That is the one piece of our industry that is really kind of at the middle of their creative destruction process. So we see a lot of lessons learned quickly and on the back of that space today that has relatively new black iron and relatively new build outs, there is a considerable demand for those and we anticipate turning around a lot of that space pretty quickly this year, again, with an increasingly indicative macro healing. So the toughest space, conversely, I would say, continues to be kind of that 5,000 feet to 10,000 feet. There’s less and less years as users that will take a clean 10,000 feet and that’s been increasing over the last couple years. But at the top and bottom smaller shop and the larger space continues to be demonstrate considerable demand.

[Chris Lucas:]

Okay. Thanks for that. And then just on the restaurant demand that you’re talking about, is that coming from national or multi-regional chains versus sort of the entrepreneurial the sort of the or localized entrepreneur or is it pretty broad based?

[Shane Garrison:]

I would say, it leans more towards the individual or smaller regional players than it does nationals.

[Chris Lucas:]

Okay. Interesting. Thank you. That’s all I had this morning.

[Shane Garrison:]

Thank you.

[Steve Grimes:]

Thanks, Chris.

[Operator:]

Thank you. Our next question is coming from Todd Thomas of KeyBanc Capital Markets. Please go ahead.

[Todd Thomas:]

Hi. Good morning. Shane, First question I guess just following up on that commentary perhaps around food and restaurants -- and maybe merchandising your centers. In general, is that likely to change at all going forward you’re lifestyle in mixed-use segment skews more toward food and experiential maybe local shops as well? How should we think about leasing and merchandising the centers going forward?

[Shane Garrison:]

Hi, Todd. Good morning. I’m hesitant to commoditize the commentary. I think that it depends on -- it’s less about the configuration of the center mixed-use or neighborhood in this case and more about what makes the corridor the center is in tick and what drives sales. So -- and those assets in corridors where we see historically have been driven by daytime population inordinate office attendance in this case versus those that are driven more kind of an 18-hour and have a broader nightlife. As a contrast, we have been hit harder by those assets that have historically relied on daytime population than the broader 18-hour type assets that have a much more lively night component. So it depends. I think that we still very much view restaurant regardless of format as a significant driver of traffic. We just need to understand longer-term what the stickiness is a behavior, especially as it relates to office attendance and how that impacts us, and we won’t understand that even by the end of next year. But again, I think, looking at the pipeline and the indicative momentum build up in specifically that category, we still feel great about getting a lot of those deals executed hopefully here in short order.

[Todd Thomas:]

Okay. And then, Julie, I guess, a couple of questions around the ‘21 guidance. So the $0.20 of OFFO in the quarter or $0.80 annualized. That’s the midpoint of the ‘21 guidance. What are the key drivers in the model that would result in a sequential decrease in OFFO? It seems like G&A and maybe straight-line rent, we’re a bit outsized in the quarter relative to where they may be on balance during ‘21. I’m just curious if you could talk about that and what the downside impact might be coming from?

[Julie Swinehart:]

Sure, Todd. Thanks for the question. And we tried to share about our framework around guidance in both the release and then also in our prepared remarks and you’re right G&A as we put out there is certainly an element. When I think about same-store NOI and again we’re not issuing same-store NOI guidance today. But some of the variables within there are of course your occupancy assumptions, which I think Shane alluded to and we’ve had a question on already. And then really for the balance a lot of it’s around collections. And it’s keeping in mind that we have $9.9 million that we recognized last year in 2020 that’s kind of fair way -- down the fairway deferrals that we need to collect on in 2021 and on top of that I mentioned an additional $4 million in deferrals that didn’t qualify for that preferential revenue recognition treatment. So it’s not in revenue yet, but it’s due in 2021. So it’s collections on the existing 2021 amount, but also these deferrals. It’s also heavily dependent on collections from our cash basis tenants, and again, cash basis is what it sounds like, literally I cannot record revenue if it comes in a day after the quarter, we have to record in the next quarter. And with 12% of our ABR on the cash basis, it’s something that we can influence and we will certainly continue to try to collect from tenants timely. But it’s a little bit out of our control as well with that timing factor. And I think those are some of the same-store NOI components that have the most variability outside of same-store though. And you mentioned this non-cash and specifically within non-cash it straight-line rent. That is a figure that I’d say is probably one of the more significant variables in our guidance that is hard to kind of fee I guess and it’s hard to call out a runway a run rate. If I look back a few years and think about straight-line rent, we had amounts in the $4 million, $5 million range and those were some of our record leasing year. So, historically for us, I’d say the single driver -- largest driver for positive straight-line rent has been new tenants taking occupancy and the impact of those tenants that have rent bumps, especially if they’re offered a couple of months of free rent, those can be material contributors to straight-line rent. So Shane commented on our expectations around the least occupied spread widening the straight-line rent balances for those 12% of tenants on the cash basis are essentially frozen, so they will not grow. So if I were to point you to one element outside of some of our assumptions within same-store NOI. It’s this straight-line component and I can tell you that several points within our guidance range contemplate negative straight-line amounts for 2021. So hopefully that’s helpful to understand some of the components.

[Todd Thomas:]

Okay. With regard to the cash basis tenants, I guess, Steve you touched on the capital that’s been raised by many of your tenants, which is enabled companies to reinvest in their business, reduce leverage, some of your tenants have raised significant capital even in some of the categories like theaters that I suspect not paying rent over the last few months. Does that change the conversation at all around rent payments are you able to engage in more constructive conversations with some of these tenants that publicly disclose their capital raising activity? And I guess, Julie, relative to the 65% cash basis collections that you reported in the fourth quarter and I think you said we’re consistent in January, does that lead to higher collections going forward?

[Steve Grimes:]

Well, I’ll start, Todd. Thanks for the question. Yeah. I did say in my opening remarks that there were a number of tenants retailer specific that we’re accessing the debt markets, which obviously implies that there is some level of comfort in lending to those folks. And I also said that and while debt doesn’t necessarily mean payment of rent it and I think debt issuance means there is a little bit of help to that business where we should fully expect for rent. That being said on the theater side, as Shane and pointed out, theaters are still watchlist for us as well, as well as health clubs. And then there is just a number of other retailers that have been out there that are pretty much at the top of our list that are just giving us even more certainty around anchor occupancy and ability to pay. But with that, I’ll turn it over to Julie to the second part of the question.

[Julie Swinehart:]

Sure. The collection levels from our cash basis tenants have certainly improved during 2020. If I look back at Q2, we were collecting about 30% in the 30s, low 30s that in Q3, the cash basis tenant population at that time we collected in the low 50%. So it’s improving when I get to the mid-60s. And I can share with you within that 65% collection level, we do have all of our theaters on the cash basis, for example, and we collected 38% from them during the quarter a little bit more came in after year-end as you see in our supplemental disclosure. So setting theaters aside the balance of non-theater cash basis tenants we collected about 80% from them in Q4. So certainly improving, and again, it’s one of the more significant components that we flexed and provide some different scenarios as went ahead and went to set guidance. But again it’s early. I think what I can commit to as being transparent as we report first quarter results and going forward to be very clear on how the subset of our tenant population fared. And I think just if I haven’t mentioned yet, there is certainly the possibility that some of these tenants come off the cash basis. But I can tell you that that is a much higher hurdle, we typically need to see some demonstrated several quarters of paying in full and paying on time from these folks to move them off. It’s much easier to move on. And I know we have increased that population from where we sit today, we’re very confident that 12% today is the right amount, but that number could grow. I’ve seen it grow each of the last two quarters and you it’s early in the year, but it’s something that again will continue to report on each quarter going forward.

[Todd Thomas:]

Okay. All right. Great. Thank you.

[Steve Grimes:]

Thanks Todd.

[Shane Garrison:]

Thank you.

[Operator:]

Thank you. Our next question is coming from Paulina Rojas Schmidt of Green Street. Please go ahead.

[Paulina Rojas Schmidt:]

Good morning. And I was wondering how should view on the long-term growth and for any of the markets you’re in changed in the recent 12 months. And if so in what markets doesn’t improve or worsened, any major -- any comment on major trends would be very helpful?

[Steve Grimes:]

Sure. I’ll start that. I think it’s an evolving picture and certainly in a pandemic strict environment it’s hard to have any broad based takeaways that extend with permanency. So I can tell you from a collection standpoint kind of recent indications our collections of stabilized but for California really. There is no other disparity. I mean even in New York we’re almost at 100% collections. What California though which only has two remaining multi-tenant assets. We’ve been pretty vocal since just after IPO that that the state itself is not a market we are going to be in long-term, but our collective -- our collections experienced there in the quarter was probably a blended in the 70s somewhere, including the theater. So that remains a very tough environment unsurprisingly from a collection standpoint. Long-term growth, I think that story continues to be written. We have about 30% of our portfolio in Texas. Texas continues to have an order that population growth. Phoenix continues to do well, which is one of our top 10 markets. Seattle Atlanta still does very well for us, as well as the mid-Atlantic. So it’s early. I think there is some structural change going on. We’ll see what kind of permanency this has, as it relates to remote office and other things that would kind of shape some of this long-term. But what we can look at right now is population growth and collections experienced and for our current portfolio and the top 10 markets, the lion’s share of where we are is where we want to be long-term.

[Paulina Rojas Schmidt:]

Thank you. And then another question, some of your peers have engage in percentage rent arrangements and with some of our tenants as a form to provide them some flexibility and help them get together side of these crisis, have you done something similar at all and any color around the topic would be helpful?

[Steve Grimes:]

Yeah. We absolutely have, but -- and I would say that the hurdle to that is that to the extent we’ve agreed on some interim percentage rent as a bridge back to normalcy. Those tenants have to be tenants that we believe it’s prudent to continue to invest and because that’s what it is, it’s not only time it’s also capital that we are theoretically foregoing. So we’ve done it -- unsurprisingly we done it with some of our restaurant categories, the larger format restaurants that we have. We’ve certainly engaged in other categories. I think we had -- we done it with one theater as an example of one-off operator and certainly a few gym. So the categories that continued below our 94% plus in the quarter, are the ones that we have certainly done percentage rent interim deals to get them, it’s kind of the other side and generally we try to do that at a quarter to -- no longer than two quarters forward. So most of that, if not all of that should burn off March or the latest June this year as we look at again and a forward kind of ramp on the macro, so we’ll see what happens. But we’re positioned for a bridge to the other side without encumbering that space long-term with below market structure.

[Paulina Rojas Schmidt:]

Thank you. Very helpful.

[Steve Grimes:]

Thank you.

[Operator:]

Thank you. Our next question is coming from Katy McConnell of Citi. Please go ahead.

[Katy McConnell:]

Hey. Thanks. Good morning, everyone. Could you talk about your outlook for the March market upside on the bankruptcy exposure that you have left at this point? And to what extent is the bankruptcy backfill to help drive the improvement and new leasing spreads in 4Q?

[Julie Swinehart:]

Yeah. Katy, I’ll start with just a quick mention of our bankruptcy exposure, it’s just lower than it has in the last two quarters at about 1.3% of our ABR as of the end of the year.

[Steve Grimes:]

And I’m sorry, Katy, the question was specific to our remaining exposure?

[Katy McConnell:]

Yeah. The exposure you haven’t addressed yet or that’s done quite?

[Steve Grimes:]

Oh! We haven’t addressed yet. What do we have a 1.5% left then.

[Julie Swinehart:]

Yeah.1.3%.

[Steve Grimes:]

Yeah. Yeah. So about 1.3% currently. It’s still very fluid. I think the good news is that, when we look at our occupancy, which has winnowed obviously down to 91 plus pushing 92 at this point. And again, the remaining tenants and the tangible increase in credit in conjunction with we were over 500 basis points of bankruptcy last year and now were 140 basis points, 150 basis points. So it’s a fluid process albeit much smaller and it’s hard to say kind of where this ends up in 2021. It’s hard to believe that -- looking at the current environment that with 16,000 plus stores closing last year we would be anywhere near that number. But again that assumes like we have in our broad based modeling that there is some macro improvement midyear. So still fluid but markedly diminished bankruptcy activity and our outlook is that it should be again with like some improvement in the macro economy midyear.

[Katy McConnell:]

Okay. Got it. Thanks. And then can you discuss how you’re thinking about the timeline for starting some of the projects you’ve already entitled in your shadow pipeline. And has that changed at all over the last few months as we’ve gotten more clarity around your leasing CapEx needs in the down time?

[Steve Grimes:]

Sure. Let me, I guess, it’s worth just starting kind of where we’re at right now. So development continues to be a bigger piece for us as a company and a brand, and obviously, that’s something we spent years positioning for in regards to monetizing non-core assets and creating that -- right and entitlement value. So we’ve got the four projects on the page right now, that $0.06 on a stabilized basis and I think that’s one of the more unique stories in our space that should be stabilized at the end of ‘22. Southlakes 100% leased will deliver that shortly on track on budget just a single tenant pad deal. The Shoppes at Quarterfield, we delivered all the in the quarter. The remaining National Fitness user we have pushed the rent start out and that was part of a broader portfolio negotiation but still 100% leased, a bit more carry. So the overall return bandwidth has come down, but still double-digits and really related to just more carry as we pushed out rent start which turns to our two biggest projects. Circle East, we continue to add one to two leases a quarter, we are 17% now and that’s an asset that continues to garner more interest and I think that prospectively with the two colleges coming back directly adjacent to us in addition to the multi-family taking off across the street and just the corridor continuing to mature, we expect great things from that asset this year and we are certainly on track for a Q3, Q4 ‘22 stabilization there. And then turning to Loudoun, far and away our largest project very important to our shareholders and certainly to our brand. Happy to report that we delivered Pad G early, as I said in my prepared remarks, we’ve actually leased our first apartment before we even went live with leasing. And looking at the office and the commercial portion of that, our office has we’re in lease or life for about 90% of the space already largely tech driven in that corridor. And the other retail 35,000 feet or so, we have about 30% of that in active -- some form of active negotiation. So, again, all-in $0.06 of accretion, but it’s taken a lot to get there and to your point we want to stay in the accretion as far as delivery cycle goes. So we have Naperville teed up. We’ll talk through that as the year progresses that was entitled last year. We also still have about 4 million square feet of commercial in general. So we continue to look at Loudoun Uptown. We continue to look at Merrifield as far as our ability to go vertical there and finish that entitlement. So it’s like -- I’m hesitant to give you a date as to when we will tie into the next-generation of projects. But I would tell you, we’re looking at it and we’re trying to balance staying in the accretive delivery cycle with risk and the macro developing. So stay tuned, but we’re certainly contemplating our next project as we speak.

[Katy McConnell:]

That’s really helpful. Thank you.

[Steve Grimes:]

Thank you.

[Operator:]

Thank you. Our next question is coming from Linda Tsai of Jefferies. Please go ahead.

[Linda Tsai:]

Hi. Good afternoon. Apologies if I missed this, when you say leasing will be volatile. Are you implying a little bit of a pullback for 2Q, generally would you expect to sustain the run rate of the last two quarters in ‘21?

[Steve Grimes:]

Hi, Linda. Good morning. It’s hard to say. I think that when we say leasing is volatile. I think it’s all things leasing and including occupancy and lease rate. I think from a -- from just an overall topline trend as we talked about earlier, what we see, all things considered is a continued momentum at the topline. Hard to say what the volume is quarter-to-quarter, but just generally throughout the year, we should increase our leased rate certainly by year end from where we are at. But we think occupancy will be lumpy, right? And if we think we won’t trough until Q2 or Q3, but continue to kind of gap out on the lease rate that some of the volatility we talk about. And we think -- and I think more importantly when you think about the arc and bandwidth of our earnings this year that’s certainly a component of that. When we obviously put a lot of thought into that bandwidth and some of the scenarios we contemplated, we are -- just how deep is the structural overhang around labor or permitting process, especially if kind of everybody comes to the table at once and that’s certainly part of our consideration there. So it will be lumpy, but again as a trend and we certainly see momentum at the top with occupancy playing catch up throughout the year.

[Linda Tsai:]

Thanks for that color. And then the bankruptcy backfills you said there were eight of them, what kind of tenants were they?

[Steve Grimes:]

Kind of all over the board really. We have done -- believe it or not with a little health and beauty, we actually had fitness in there, a little bit of restaurant and I think we had one of the larger -- I got total Vyne type concept. So depending on the size kind of all over, but great space is still in demand and like we talked about earlier, I think, the Class A space it’s truly hard to appreciate just how constricted that supply is, but I think it will continue to demonstrate throughout the year.

[Linda Tsai:]

Thank you.

[Steve Grimes:]

Thank you.

[Operator:]

Thank you. Our next question is coming from Floris van Dijkum of Compass Point. Please go ahead.

[Floris Van Dijkum:]

Thanks for taking my question guys. I wanted to talk a little bit about the capital allocation if you will. I mean you have $170 million pipeline, which you’re making some good progress on, $100 million is basically been spent already. So you got incremental $70 million to go. You’re probably going to retain call it $30 million to $40 million of cash after dividends this year. And as you’re thinking about building up Shane you sort of alluded to the shadow pipeline, but way you haven’t mentioned Carillon yet, curious to see where that stands as well, because that’s obviously significantly more spend? As you’re thinking about doing that future projects as well, which appear to be decent returns on the invested capital? Have you thought about more non-core sales and maybe if you can comment also potentially on the opportunity on the any ground rent monetizations in your portfolio.

[Shane Garrison:]

Sure, Floris. Good morning. Look, I think, obviously, first and foremost, our best capital allocation is to get this portfolio back to stabilization through leasing capital and I think you agree. After that, though, we’re going -- we mentioned we would be opportunistic on the transaction side, we’ll talk about development in a minute. And to that point, we would -- anything we do on the transaction side, there is a couple of things to think about. One, to the extent we acquire anything it would be more of the same that we’ve done historically, which would be phenomenal that’s kind of in a shot and medium-term covered land play that we think we can densify longer term. We would certainly more likely acquire first than later and that’s simply because the market is tight and that product is very tough to find. But also the capital we would use to fund that is very much from the pool, you’re touching on. So we’ve got 500 basis points or so of ABR and ground leases we view that as a very liquid pool with a very sticky pricing and those two things combined in addition to the dynamics on the acquisition side kind of mandate that we would buy before we sell, assuming we transact. As it relates to development, again, we think these returns are very compelling, especially with the larger mixed-use projects, these projects that have scale and mass and you can the basket better. We very much of U.S. as more of a rarity than they were historically, which gives us an order to pricing power especially through the vertical. So love to keep building that pipeline and we’ll certainly keep that in mind as an allocation goes, but we certainly need to stabilize leasing first. Carillon, specifically, I didn’t mention it, it is very much still in our thoughts. It is still entitled obviously with considerable commercial and multi-family. The hospital will open in late spring. We continue to have conversations around medical office have not gotten anything off the ground to where we would feel comfortable going, right? We have to be highly leased on the medical office building to go at this point. We haven’t gotten there. Although we still have very fluid conversations around that and we still have conversations on the multi-family, like, I think, we could go with any number of partners that would still like to go on the multi-family. What has changed unsurprisingly has been the retail, right? Retail has changed dramatically since we started that project. The good news is the wet and dry infrastructure in the ground is still at a point where it’s very malleable. We can kind of go wherever we want, so there’s not a lot of lost investment in the in the infrastructure. So I’m not saying we will or won’t. I think it depends on how the year shapes up. I also think that to the extent we do go on the multi-family as an example when we’ve talked about this before you would expect us to contribute the land to a joint venture where and we would own up to 50% of that with no further capital allocation, which would obviously continue to demonstrate the value and certainly be accretive in short order. So we have optionality, Floris, and that’s really what we are structured for, right? We have options and we will take them into consideration as the year develops.

[Floris Van Dijkum:]

That’s great color, Shane. Just to make sure that I -- so you are looking at a couple of acquisition potentials and those would primarily be funded through things like ground lease dispositions, is that the way to think about it?

[Shane Garrison:]

Yeah. That’s correct, Floris.

[Floris Van Dijkum:]

Great. Thanks. That’s it from me.

[Shane Garrison:]

Thank you.

[Operator:]

Thank you. Our last question today is coming from Mike Mueller of JPMorgan. Please go ahead.

[Mike Mueller:]

Yeah. Hi. I just want to go back to guidance again. So if the quarter was $0.21 when you add back the straight-line write-off that annualizes to about 84. I know Shane talked about losing occupancy, but I’d imagine that’s reserved against already or not paying anything in terms of cash. So is the implicit assumption that I guess there is no improvement in reserves or collections or maybe they take a step back, is that part of the scenario?

[Julie Swinehart:]

Good afternoon, Mike. Thanks for the question.

[Mike Mueller:]

Yeah.

[Julie Swinehart:]

I can’t stress enough the variability in our expectations around really two main concepts and within same-store NOI its collections, right? So we model various scenarios. We are being aware that we’ve got a significant portion of our tenant based on the cash basis of accounting and that we are collecting at levels far below the portfolio average there. And I think for some -- at least some point into 2021 those trends could continue. Again we’re all I think talking about a back half of the year improvement. Again, we could move additional tenants to the cash basis, which can be quite a noisy on the straight-line rent front, so now I’m outside of same-store NOI, but on earnings and we’ve afforded for some possibility there. Again, our 12% is certainly far below many of the peers. It’s not to say that -- our 12% is right for our business today, but that is a figure that could change. So, I think, as I was trying to note in an answer previously today, straight-line rent has been strongly benefited by -- in the last couple of years. So call it 2019, 2018 by the strong leasing years that we had moving tenants and tenants with rent steps, tenants with some element of free rent significantly boosted those figures. And then the negative, what are we negative $2 million or so in straight-line for 2020 was impacted, of course, by moving more tenants to the cash basis. But again these tenants now can’t grow, the straight-line can’t grow, so if they were elements of growth prior, we’re not seeing that in 2021. So, again, just trying to point you to the variability and potentially still I don’t want to say a logical, but non-linear nature of straight-line rent and what that can do. Again, committed to transparent disclosure every quarter and I’ll be sure to speak to this point on calls going forward as well.

[Mike Mueller:]

Got it. And maybe lastly, so does it feel like ‘21 is the trough year or I know Shane talk about stabilization in ‘22. Should we think of ‘22 as the trough year where you begin to inflect?

[Julie Swinehart:]

Oh! Shane stabilization comments, I think, were related to our developments.

[Shane Garrison:]

Correct. Yeah.

[Julie Swinehart:]

As opposed to the broader portfolio.

[Mike Mueller:]

Okay.

[Shane Garrison:]

Yeah. We think…

[Mike Mueller:]

Got it.

[Shane Garrison:]

We think -- we still feel ‘21, some point at ‘21 is trough occupancy and building leasing momentum should push us well into ‘22 on stabilization benefit.

[Mike Mueller:]

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

[Shane Garrison:]

Thanks.

[Steve Grimes:]

Thanks, Mike.

[Operator:]

Thank you. At this time, I’d like to turn the floor back over to Mr. Grimes for closing comments.

[Steve Grimes:]

Well, thank you, everybody, for your time today. We know that there’s a lot of information in here to digest. I pretty much say this every quarter, but this quarter for sure, there’s quite a bit to digest and offer up to any of you that need further clarification as you start to digest this information more. We’re always available to help you in this process. We’re encouraged by everything that we put out today in terms of what I think we have in terms of disclosure and that will only be solidified as quarter on quarters or the quarters past. Q1 I think can be incredibly telling and it for the most part is right around the corner. So we will be talking with you all very soon hopefully with continued progress. So thanks again for your time today.

[Operator:]

Ladies and gentlemen, thank you for your participation and interest. You may now disconnect your lines or log off the webcast and enjoy the rest of your day.