Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Regency Centers Corp  (NYSE:REG)
Q3 2018 Earnings Conference Call
Oct. 26, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Regency Centers Corporation Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Laura Clark, Vice President-Capital Markets. Thank you. You may begin.

Laura Elizabeth Clark -- Vice President of Capital Markets

Good morning, and welcome to Regency's third quarter 2018 earnings conference Call. Joining me today are Hap Stein, our Chairman and CEO; Lisa Palmer, our President and CFO; Mac Chandler, EVP of Investments; Jim Thompson, EVP of Operations; Mike Mas, Managing Director of Finance; and Chris Leavitt, SVP and Treasurer.

I would like to begin by stating that we may discuss forward-looking statements on this call. Such statements involve risks and uncertainties. Actual future performance outcomes and results may differ materially from those expressed in forward-looking statements. Please refer to our filings with the SEC which identify important risk factors that could cause actual results to differ from those contained in forward-looking statements.

On today's call we will also reference certain non-GAAP financial measures. We've provided a reconciliation of these measures to their comparable GAAP measures in our earnings release and financial supplement which can be found on our Investor Relations website.

Before the turning the call over to Hap I would like to thank those of you who participated in our Investor Perception study. We are grateful for your candor and appreciate the feedback. Hap?

Martin E. Stein -- Chairman and Chief Executive Officer

Thanks Laura.

Good morning everyone. In on our evolving business we continue to see the rise of retailers that have identified what it takes to remain relevant and evolve and the fall of those who have not.

As we all know, Sears was once a successful brand, but in the ebb and flow of the retail industry, their declining performance over the last decade, further hindered by excessive debt, illustrates how critical it is for retailers to keep the pulse of consumer preferences and expectations. Sears' failure, along with the success of numerous winning retailers also demonstrates the importance of having the capital to invest in the betterment of store, customer service and experience as well as the technology platform that supports multichannel retailing.

The best-in-class retailers, including Amazon, Whole Foods, Kroger, Target, Publix and TJX just to name a few, continue to make sizable investments in their bricks-and-mortar footprints. Based upon our many conversations that we've had with key retailers it is clear that physical stores remain a very a critical component of a multichannel strategy. It's really apparent in how retailers are investing in their physical footprints and providing a seamless and differentiated shopping experience to meet the evolving needs of the customers.

Kroger is not only enhancing their technology and delivery platform but investing in their store through the Restock Kroger initiative which focuses on customer experience, value and talent development. Safeway/Albertsons, while partnering with Instacart and rolling out (inaudible) is also remerchandising 400 of their stores.

Publix continues to heavily invest in both new and existing locations with plans to redevelop over 130 stores this year as part of their $1.5 billion capital plan. Publix has also demonstrated a real point of differentiation, with the commitment to exceptional customer service. Going above and beyond offering aid in communities that were impacted by recent catastrophic storms is another example of the many ways that grocers are able to effectively connect to their shoppers and communities.

Target has expressed their commitment to bricks and mortar and indicated that the store is the central part of their strategy. They plan to remodel all stores by 2020, continue to open their very successful small format store and are investing in their team as well as pickup and delivery service.

In addition, Amazon has announced an aggressive rollout of bricks and mortar locations, and this is in addition to the large investment in Whole Foods. These and other best-in-class retailers are benefiting from the proactive investments and producing solid results.

Publix reported strong comparable sales and generated an impressive nearly $1 billion in free cash flow in the first half of the year. TJX's comparable store sales rose 6% last quarter, and Target reported their largest quarterly sales growth in 13 years. Our well-conceived and well-merchandised shopping centers located in trade areas with substantial purchasing power appeal to these and other outstanding retailers and restaurants. Regency's proven strategy, which our team has successfully executed with astute capital allocation and intense asset management, has been distinguished by sector-leading NOI growth over the last six years.

We do spend a significant amount of time ensuring that Regency is staying relevant and employing our unequaled strategic advantages to achieve our objectives: first, earning a high-quality portfolio that sustains sector-leading same property NOI growth; second, creating substantial value through our national development and redevelopment platform; third, maintaining a very conservative balance sheet; and fourth, engaging the team that is the best in the -- that is the best in the shopping center business that's guided by Regency's special culture and operates efficiently with industry-leading systems; and finally, earnings and dividend growth and in turn total shareholder return that is consistently at or near the top of the shopping center sector.

J.T.?

James D. Thompson -- Executive Vice President of Operations

Thanks, Hap.

Core fundamentals between Regency's premier portfolio remain extremely healthy. As Hap said, retailers continue to see value in locating high-quality shopping centers and staying close to their customers. This is evident as occupancy climbed to nearly 96% this quarter. Moveouts were the lowest they've been in two years. And bad debt remains very healthy. The strong fundamentals across our portfolio translated into another solid quarter of same property NOI growth, driven by base rent growth of 3.8%.

As I noted on our prior call, rent spreads in any given quarter can vary based on the mix of leasing. This quarter, we executed on several opportunities to bring valuable anchor spaces to market, resulting in new rent spreads at 35% and total rent spreads of 10%.

I'd like to take a moment and highlight our shop space performance that clearly demonstrates the quality and resilience of our portfolio. Our shop space percent leased has been 92% plus for the last six quarters. We are seeing demand for space across all categories from many thriving tenants. We've been successful executing increases in starting rents. And in addition, are achieving contractual rent steps for shop space that average 2.5%, while judiciously managing capital commitments, all leading to strong net effective rent growth over the last five years.

I'd like to touch on recent retailer bankruptcies before turning it over to Mac, and I'll start with a Toys R Us update. Of the five locations originally in the portfolio, one of the locations was released and the center's has been sold. One location was assumed by another retailer at auction where we experienced zero downtime. One has been released and has already rent commenced. And the remaining two locations that we most recently acquired at auction, we're in active negotiations with a specialty grocer and a fitness user. Next, we have 25 Mattress Firm locations in our portfolio. Only five of these leases have been formally rejected that at this time. Most importantly, we are confident that with the quality of our real estate we will have the opportunity to upgrade merchandising as we backfill any closures.

And finally Sears, where we have two Kmarts and one Sears location. Two of these locations were included on the initial closure list, both of which were redevelopment opportunities that we are excited to finally unlock. All three are re located in grocery anchor shopping centers where grocery sales average over $950 per square foot, demonstrating draw of our real estate as well as the opportunity and our ability to substantially upgrade the anchor.

Average rents on these locations are less than $8 per square foot. Though these bankruptcies will certainly impact near-term results, more importantly, the remerchandising and redevelopment opportunities triggered by recapturing this real estate will positively impact our shopping centers over the long term.

Mac?

Dan M. Chandler -- Executive Vice President of Investments

Thank you, Jim.

The healthy fundamentals we are experiencing in our operating portfolio are also evident in our investment activity. We continue to find compelling ways to astutely invest our capital and build up our new development and redevelopment pipeline. Our in-process development and redevelopment projects are performing very well, with strong leasing interest and economics in line with underwriting. For example, this quarter our Mellody Farm development in greater Chicago celebrated its grand opening, with all five anchors, including Whole Foods, REI and Nordstrom Rack open for business. All have reported impressive sales exceeding expectations.

And with regards to our pipeline, we continue to make progress on our development and redevelopment opportunities, and are positioned to achieve our five-year goal of 1. 25 billion to 1.5 billion in (inaudible) deliveries. Our local teams are pursuing new opportunities in our target markets, including LA., D.C. and Houston.

We are also making meaningful progress on our pipeline of infill redevelopments. We are especially excited to start redevelopment of the office building at Market Common Clarendon and the Abbot in Cambridge which should start in Q4 and Q1 respectively. Further, our entitlements are progressing positively in Bethesda, which should allow our Westwood Shopping Center redevelopment to commence next year. And while we are in the early stages from a timing standpoint, we are making great strides to unlock the value creation opportunities at several premier properties such as Costa Verde in San Diego; Town and Country, Los Angeles; and Piedmont Peachtree in Atlanta's preeminent backyard market.

These larger-scale pipeline opportunities and others, especially those that are mixed use with nonretail components take tremendous discipline, expertise and persistence. Proudly, our platform possesses these qualities. And, as we've said in the past, if we decide to co-invest in a compelling nonretail component that will complement our retail, we will only partner with best-in-class well-capitalized developers.

Moreover, we continue to unlock value through redevelopments that are more tactical in nature. This is a focus where we have enjoyed great success over the years and is an integral part of our product of asset management and fresh-look merchandising and placemaking philosophy. Current examples include: Bloomingdale Square, a $19 million redevelopment started this quarter where we are relocating and expanding a Publix into a former Walmart space and adding Home Centric and LA Fitness to the shopping center.

At Gateway at Aventura, we proactively acquired the former Toys R Us parts at auction and are now in anchor negotiations to greatly enhance the value and drawing power of this excellent property. Lastly, at Point 50 at Fairfax, Virginia, we are completely repositioning their center by building a new Whole Foods 365 as well as several new shop buildings.

Now turning to transactions. Similar to last quarter, there is a limited availability of institutional-grade shopping centers on the market. Demand and pricing for these high-quality centers continues to be strong. On the selling side, the momentum we reported last quarter is coming to fruition. The buyers for these centers that we are selling are still discerning the market has improved as debt market (inaudible) and deals are getting done.

We have more visibility into expected sales volume for late 2018 and early 2019 and have accordingly increased our disposition guidance. The outlook revision to our disposition cap rate is a reflection of the pool of properties we expect to close and not a change in pricing expectations. As a reminder, our strategy is to sell approximately 1% to 2% of our asset base annually.

We invest these proceeds along with free cash flow into value-add developments and redevelopments, high-growth acquisitions and our own stock when pricing is compelling. This quarter, we co-invested in Ridgewood Shopping Center, located in south Raleigh's stop line and anchored by a highly productive Whole Foods. This center had been owned by the same family for nearly seven years. And our local presence and deep market knowledge gave us an inside track to acquire our 14th shopping center in the Raleigh market.

Lisa?

Lisa Palmer -- President and Chief Financial Officer

Thank you, Mac, and good morning, everyone.

As Jim stated, we had another solid quarter as our high-quality portfolio continues to perform. Year-to-date same property NOI growth of 3.8% has been driven entirely by base rent growth. But as we mentioned on our prior call and as our full year guidance indicates, while we are still projecting strong base rent growth in the fourth quarter, we do expect a deceleration in overall same property NOI growth as this strong base rent growth will be offset by three main drivers.

First, as expected, our real estate tax reassessments in California triggered by our merger with Equity One have started to come in and are retroactive to the date of acquisition. So essentially this equates -- it actually is -- two years of real estate tax expense. While the vast majority of real estate taxes are recoverable from our tenants, we will experience a drag from the non-recoverable portion of these reassessments.

Next, we are also up against a tough comp in base rent from redevelopments that came online in the fourth quarter of last year, specifically from two much larger projects, Serramonte and Aventura. And lastly, as Jim discussed, though recent retailer bankruptcies will create opportunities to remerchandise and reposition our real estate in the future these will have near-term impacts. So although the timing related to the Sears bankruptcy could moderately swing us one way or the other we have incorporated reasonable assumptions on their moveout dates into our revised 2018 same property NOI growth that is a plus or minus 3. 25%.

Turning to earnings. Both NAREIT FFO and operating FFO for the full year were revised upward by $0.01 at the low end, incorporating slightly better performance in same property NOI. Before we turn the call over for questions and reminding you that we won't provide formal guidance for 2019 until early next year, I still would like to give you some insight into our same property NOI growth expectations as we do look to next year.

Let me start with a reminder of our road map to our same property NOI growth objectives. First embedded in the portfolio is 1.3% growth coming from contractual rent increases. Then, another 1% to 1.2% comes from new and renewal leasing rent spreads. Combined, these provide about 2.5% growth. Finally, the contribution from redevelopments is expected to add another 50 to 100 basis points of annual growth. Together, absent any changes in rent-paying occupancy, these components equate to our strategic objective of 3% plus average annual same property NOI growth.

However, our initial look into 2019 includes a couple of short-term impacts to this road map. First, while timing is still very uncertain the downtime associated with our three Sears boxes (ph) could impact same property NOI growth by up to 50 basis points. Next, the redevelopment contribution has been and will continue to be uneven at times. Over the past five years, including year-to-date 2018, the annual contribution has ranged from 40 basis points to 170 basis points, averaging at 75 basis points positive contribution plus the 50 to 100 basis points range in our road map.

In 2019, the contribution is expected to be minimal as NOI is taken offline at some of our larger, more transformational redevelopment projects. So while our contribution from redevelopments to our NOI growth can be uneven, and I want to reiterate that, we still remain extremely excited about our expanding pipeline and the contributions to growth that will come in 2020 and beyond. So the difficult-to-predict Sears bankruptcy and the atypical contribution from redevelopments is likely to result in a more muted 2019 same property NOI growth in the low to mid-2% range.

That said, there is much more to come as we close out the year before issuing formal guidance. But most importantly, given our very high-quality portfolio and our active redevelopment pipeline we continue to expect our same property NOI growth to return to 3% or greater over the long term.

We're extremely pleased with our results this quarter and the position of our high-quality portfolio and strong balance sheet, all of which support our ability to grow earnings and dividends which in turn expect total shareholder return to be consistently at or near the top of the shopping center sector.

That concludes our prepared remarks. We now open to your questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Nick Yulico with Scotiabank.

Greg McGinnis -- -- Analyst

Hey, good morning. This is Greg McGinnis on with Nick. Just hoping if you can provide some details on those new anchor lease signings. Just trying to understand if see this is a repeatable situation. Of those, 88 new leases, how much were actually above that 35% mark?

Martin E. Stein -- Chairman and Chief Executive Officer

Greg, I'm not sure I can bifurcate that fully but bottom line in that, we had strong anchor growth of 85% (ph), really driven by Publix and LA Fitness in our Bloomingdale redevelopment. Those were the real leaders. As I said in my opening statement, the mix on a quarter-to-quarter basis is hard to predict and hard to -- to try to analyze or bifurcate. But overall we're really excited. 12.7% of that new growth rent was in shop space, so the combination of 35% is -- really come across the board. On the renewal side, I will say that we're somewhat muted on a very large Target at Serramonte renewal which was flat. So overall, we were happy with the rent growths and (inaudible).

Dan M. Chandler -- Executive Vice President of Investments

As we have indicated in the past, we're going to have -- Greg, we're going to have a number of legacy leases that will repeat the benefit that we received from the Publix and LA Fitness leases and that leases that J.T. just mentioned. It won't be all the time but over time we're going to see more of that than less of that.

Greg McGinnis -- -- Analyst

Okay, great. Appreciate the insight there. And then -- I appreciate the details on the same store NOI growth guidance as well, but I'm trying to understand a bit more here. So 3Q came in stronger than originally expected, so I'm just curious what changed there if this was the full reason that guidance was raised and if any of that impact that you were expecting is part of what that pushed into 2019?

Lisa Palmer -- President and Chief Financial Officer

Primarily, it is the reason why, one, that we raised the low end of our earnings guidance and additionally took off the low end of our same property NOI guidance. That's just a matter of -- as you know and as we all know, the most difficult thing to predict are moveouts. And we always incorporate a -- what we believe to be a reasonable assumption. And that came in better than expected for the quarter. So we have fewer moveouts than we anticipated.

Greg McGinnis -- -- Analyst

Okay, great. Thank you very much.

Martin E. Stein -- Chairman and Chief Executive Officer

Thanks, Greg.

Operator

Our next question comes from the line of Christy McElroy with Citi.

Christy McElroy -- Citi -- Analyst

Hi, good morning, everyone. Lisa, just following up again on the topic of the same store NOI into 2019. Just with regard to the California reassessment, the portion of that that's one-time, are we looking at another three more quarters of drag there to the recovery rate? And in terms of the redevelopment, just to clarify, are you talking about -- so inherent in the low to mid to 2% range? Is that a zero contribution or is that a drag from redevelopment?

Lisa Palmer -- President and Chief Financial Officer

First, real estate tax reassessments, we would expect that just the fourth quarter should be the last of the one-time impact. And next year, as in any typical year as in other states where the properties are reassessed in certain intervals, we are expecting potentially, it's like a 5% increase in real estate taxes next year. But remember that we do recover about 90% of that so that there would be a minimal blip (ph) for that. And so the recovery rates going forward, for all recoveries we would expect is, right about where we are year-to-date, assuming no change in occupancy, so in 82% to 83% range. And then with regards to redevelopment contribution for next year, again, it's pretty early as you know. And we need to have a little bit more visibility as to when leases come online and as we finish projects. So I don't know that we can give you any specifics, and we will do that in early next year. So I would expect it to be somewhere in the zero to 50% range of a positive contribution.

Christy McElroy -- Citi -- Analyst

Okay. And then just with regard to the accounting themes, the $0.06 to $0.07 moving into G&A in 2019. I understand that that also includes the leasing cost that previously would have been capitalized into the basis of your in-process development projects. How much of the estimated $0.06 to $0.07 would have been attributed to sort of normal recurring CapEx versus sort of that development redevelopment bucket? Just geographically thinking from a modeling perspective, just where those -- where that would have gone through?

Lisa Palmer -- President and Chief Financial Officer

Christy, I'm not sure I -- you're asking how much of our internal leasing costs are --

Christy McElroy -- Citi -- Analyst

No, just with regard to the $0.06 to $0.07, yes, just splitting out the $0.06 to $0.07 with what it would be gone through recurring CapEx versus what it would have been through development redevelopment spend for leasing cost. Because it would have been -- it would have shown up in your development schedule, right, in the total cost attributed to each development project. So I'm wondering if that gets adjusted.

Lisa Palmer -- President and Chief Financial Officer

It's still -- in our disclosure when we get leasing capitalization costs, it's still our -- we'll have to get offline on that. We'll come back to you.

Christy McElroy -- Citi -- Analyst

Okay. Thanks so much.

Operator

Our next question comes from the line of Craig Schmidt with Bank of America Merrill Lynch. Please proceed with your question.

Craig Schmidt -- Bank of America -- Analyst

Thank you. On the three boxes from Sears Holding, does Regency have control over these boxes?

James D. Thompson -- Executive Vice President of Operations

Craig, at this point we do not. All we know it's we have two boxes that were on the initial 142-store closure list. We've not heard anymore than that. We obviously have been awaiting this day for a long time. Our teams have been focused on redevelopment plans. We feel like we're in great shape and eager to recover our real estate so we can move forward and enhance our centers by backfilling these old Sears and Kmart boxes with more dynamic retails today. So more to come obviously but no news other than what's showing up on the closure list and we're prepared when it comes back to take those two.

Martin E. Stein -- Chairman and Chief Executive Officer

And in addition, as Jim indicated earlier in the prepared remarks, the inbound comments and interest in the space has been very, very encouraging.

Craig Schmidt -- Bank of America -- Analyst

And is there a broader acreage of land that comes with the stores?

James D. Thompson -- Executive Vice President of Operations

In Sears specific, we have a tire battery auto (ph) and probably some excess parking area that we can probably do some patch/outgoing zone. So beyond the box we think there are some external redevelopment opportunity as well.

Craig Schmidt -- Bank of America -- Analyst

And was October rent paid on these boxes?

James D. Thompson -- Executive Vice President of Operations

Yes.

Craig Schmidt -- Bank of America -- Analyst

Okay. Thank you.

Operator

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

Derek Johnston -- Deutsche Bank -- Analyst

Hi, good morning. We've discussed the real estate taxes estimates and how it relates to the EQI (ph) portfolio. But in relation to the Prop 13 bill in California can you give us an update on the weighted average age of the legacy Regency assets there? Have you begun to assess that potential impact?

Lisa Palmer -- President and Chief Financial Officer

Yes, and this just legacy Regency. Obviously, it is essentially those that are being reassessed at age zero, if you will. So of the remaining which is about 20% of our asset base, it's 13 years.

Derek Johnston -- Deutsche Bank -- Analyst

Thanks. And just switching over to the omnichannel repositioning that you discussed at the beginning. What efforts and the roles of the local strip anchored grocers are you seeing? Which are best positioned to address online delivery, online pickup growth segments? And what actual investments are you seeing on the ground, and what can you guys do to expedite the adoption?

Martin E. Stein -- Chairman and Chief Executive Officer

We're facilitating the adoption of the pickup and delivery. And we're seeing a keen focus on the part of pretty much all of the grocers. But I think it's a key thing, and that's all important. Technology's important in the store and they're all investing heavily in that. But it's also the shopping experience and the service that is really the point of differentiation. And I think that's critically important to remember and to keep that in mind. And that's the reason why we think that our grocery sales are as high as they are both on an aggregate basis of $2.5 million and $650 per square foot.

Derek Johnston -- Deutsche Bank -- Analyst

Great. Thanks.

Operator

Our next question comes from the line of Jeremy Metz with BMO. Please proceed with your question.

Jeremy Metz -- BMO Capital Markets -- Analyst

Hey, good morning. Going back to the Sears and Kmart topic, assuming you can get control of those boxes do any of those represent an opportunity to kick off bigger densifications of those sites just given how Sears and Kmart boxes presumably were? And then it sounds like you have been more or less been ready for this as most have been. So any rough capital investment that this could potentially represent?

James D. Thompson -- Executive Vice President of Operations

Jeremy, to answer the first question, we studied the densification and believe our best -- our best avenue today is to replace with like retail. So the densification I think will be just higher better use, better quality retail. I'm sorry, what was the second? About capital. This is early -

Dan M. Chandler -- Executive Vice President of Investments

It's really too early. We've got a lot -- it's Hap really indicated, we've got a lot of interest from lot of different players. And until we can spend some more time and really understand when we're going to get back and those kind of things, we're are really not in a position today to talk about returns. But we are -- obviously, we continue to target the 7% to 9% when we get our hands back on our redevelopment. That's kind of our goal.

Lisa Palmer -- President and Chief Financial Officer

I think it's -- just to add a little bit of color, Jim, two of the three are Kmart boxes. They're not Sears boxes. So they're just typical legacy Kmarts. And that's the reason we still own them because it's really strong real estate. And we do believe that it will be an opportunity to upgrade the merchandising and then potentially also grow NOI at those centers.

Martin E. Stein -- Chairman and Chief Executive Officer

The teams are extremely excited about the opportunity.

Jeremy Metz -- BMO Capital Markets -- Analyst

Yes, I know. That's fair. Question for Mac in terms of acquisition. The Ridgewood Center that you did anchor by Whole Foods, was this sourced by your partner? Or why not put that one on balance sheet just given that it seems they've done a fair way from Regency? And then I guess sticking with acquisitions, one of your peers mentioned the move-in rates causing some sellers to pull back. I know you guys have been active, but maybe you can talk about what you're seeing and hearing out there from an acquisition standpoint.

Dan M. Chandler -- Executive Vice President of Investments

Sure thing, Jeremy. You're right that Richwood is right down the LA for us. It's a terrific center, and we look forward to working with Whole Foods as their lease does expire sometime in the next 10 years. Our partner with -- that we acquired the property with actually had some internal recycling. So they were selling a center that we owned with them and this was part of their internal capital recycling. So they were up and the rotation that we worked with them on that, and that's the reason for that. In terms of just overall perception, buyers are closing. I mean, we mentioned this last quarter. There is -- just a formal fitting -- footing underground for sellers. Debt markets are cooperating, and it seems like the market has firmed up and we've noticed that in the transactions we've closed to date. And we have another 60 million under contract with scheduled closings by year-end and then another 65 million where we're negotiating purchase agreements. But in those cases, buyers are -- have already begun their due diligence. So -- they may not all close by the end of the year, some could roll to next year and some could drop out. But we are seeing buyers feeling measurably better about things than they were six months ago, and we're seeing that in the transaction market.

Jeremy Metz -- BMO Capital Markets -- Analyst

Yes. So I guess I was also trying to -- wonder just from an acquisition standpoint, as you are out there, are you seeing, not you guys but other sellers in the market pull back a little bit here or has there been any change in the cadence of deals that are out there that you're seeing?

Dan M. Chandler -- Executive Vice President of Investments

I think what makes it hard to measure is there is very little property of the caliber that we're looking for that's on the market. And we've seen very, very few transactions out there. So there are definitely institutional buyers and advisors out there looking for the class and product that we are product that has a strong 10-year CAGR. But unfortunately there's a pretty select few properties out there that are transacting because buyers owners are reluctant to put their properties in the market because it's hard to find a replacement property. There's so little class in the market.

Jeremy Metz -- BMO Capital Markets -- Analyst

Okay. Fair enough. Last one from me. Hap, you mentioned the importance of investing in the store and the customer experience. As you think about your increasing role in that the landlord needing to play a bigger part in creating that overall environment. Are you committing more capital or looking to commit more capital along this front which may not necessarily be able to immediately attribute a return to the longer-term, it's going to benefit the center and therefore your ability to both retain and source new tenants as you need?

Martin E. Stein -- Chairman and Chief Executive Officer

Number one, as part of our -- obviously our large-scale redevelopments and even our tactical redevelopments, there our fresh look philosophy where there's a tremendous emphasis on merchandising and on placemaking you're going to distinguish the look of those things, the appeal of those shopping centers to the communities and neighborhoods that they serve, so I think that's important. But we've got an ongoing maintenance program, and in that ongoing maintenance program, we're very focused on placemaking and ongoing leasing and merchandising is critical to that. So that's a part of the way we do our business each and every day. And we feel really good about the way our shopping centers are distinguished and we continue to focus on how to keep them relevant. And we're also -- I think it's our view is that we're going to -- we would spend between 10% and 11% of NOI on -- from a tenant improvement white box ongoing business, building improvements standpoint, and think that that number is still good. And together with the redevelopments, both tactical and major, we'll keep our shopping centers looking fresh and relevant to our communities.

Jeremy Metz -- BMO Capital Markets -- Analyst

Thanks for the time.

Operator

Our next question comes from the line of Ki Bin Kim with SunTrust. Please proceed with your question.

Ki Bin Kim -- SunTrust -- Analyst

Thanks. So you have an interesting dynamic that's going on in your development pipeline. You might have about $280 million of pipeline, but I look at the percent leased and think about the dollars at risk, there's really not much because a lot of it has been leased pretty well. It kind of clears up your pipeline or your development capability for next year. You also mentioned a lot these other bigger projects in your opening remarks. So I'm just trying to get a sense of how much do you think you will start next year.

Dan M. Chandler -- Executive Vice President of Investments

Sure. I'm happy to take that. This is Mac. While we haven't given formal guidance yet on our development starts for next year and we will be doing that in the near future. But you are right, the developments that we have that are under way are performing very well at 80% leased. We're very happy with those. And it allows us to use our expertise to work on some of these longer-term redevelopments and I touched upon several of those in our opening remarks. I'll just give you an example. Westwood Shopping Center which came over with an equity loan in about a year's time we should be ready to start that project. And that is very promising. It's a mixed-use project with retail and it's got approximately 200 apartments and some tenants to it. And these are complicated projects. Not every company is capable of doing this but we think we have the team and expertise and the market knowledge to take this on. So we're bullish about that. we'll eventually give guidance on where we think will be. But over the long term but which is really the right way to provide the measure of our contribution it's not a year-to-year business ours is going to be lumpy. But we think we are on track to hit 5-year target of 1.25 billion to 1.5 billion in starts. And deliveries would come that as well. So hopefully that answers your question.

Ki Bin Kim -- SunTrust -- Analyst

Yes, I mean, it does. I mean I think about Bethesda project. That by itself is probably very sizable. You started about 200 million this year. I mean I guess just directionally it does feel like it could be a lot more in the next few years, am I thinking about it correctly?

Dan M. Chandler -- Executive Vice President of Investments

I think directionally you would see us doing more redevelopments as a percentage of our total investment then we have been the years past. There was some years it was no ground up as compared to development. And I think that's switching and more agnostic to that to that we like the flexibility and optionality that redevelopment gives us. And so I wouldn't associate more but I would say the mix between ground up and redevelopment is shifting more toward redevelopment and were very pleased with that and that's to these are properties that we own. And then Town & Country is sort of one you hinted at. and we're coming to partnership on that property which is terrific property across the street from The Grove. we mentioned that before. But that allows us to bring our expertise to a family to enter into a family partnership and to add density to that. And ultimately that that will be one of our marquee properties across the country. We're very pleased with that.

Ki Bin Kim -- SunTrust -- Analyst

Okay. The last question. So last question (inaudible) Kmart I realize you don't have much direct exposure. How do you think about the tangential exposure just from the amount of supply that might hit the market and how that affects your portfolio?

Dan M. Chandler -- Executive Vice President of Investments

Sure. This is Mac. If you look at page 15 supplemental you can start to think of some things here from the set of properties. It is a (inaudible) it's a theater and kid center. Those two larger projects that are really big-box centers, one in India is unanchored, shadow anchored by Home Depot (ph). So it's not the typical quasi-infill grocery anchored centers that we own. And we feel that these properties are ready to be sold. These were prioritized dispositions for us and ready to be sold and largely marketed and they cleared. And it's the type of center that I mentioned, sort of the set tenants (inaudible) compulsive location too. These are smaller markets. And if you dig into the demographics, they are lighter than our typical property. They are on the low end. And they're typically lower growth. And people are paying for growth. So all those characteristics contribute to the pricing and we feel if the pricing was correct, these are really outliers in many ways.

Ki Bin Kim -- SunTrust -- Analyst

Okay. Thank you.

Operator

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

Rich Hill -- Morgan Stanley -- Analyst

I wanted to maybe just go back to the properties that you're buying and selling. Maybe we can talk about the properties you're selling first. Could you provide any more color as to what's maybe making those less attractive and trade at lighter cap rates. Is it location? is it the type of grocery store there available tenant mix? What is making that less attractive to you? Or maybe you want to go into something that's so-called higher quality.

Dan M. Chandler -- Executive Vice President of Investments

Sure. This is Mac. If you just look at page 15 supplemental, you can start to think of some things here from the set of properties. It's (inaudible) anchor. It's dealer anchored center. Those two larger projects that are really big-box centers. One in India is unanchored, shadow anchored by Home Depot (inaudible). So it's not typical quasi-infill grocery infill centers that we own. And we feel that these properties are ready to be sold. These were prioritized dispositions for us. They were ready to be sold and (inaudible) marketed and they cleared. And it's the type of center that I mentioned sort of the -- tenants at of the compulsive location too. These are smaller markets. And if you dig into the demographic they are lighter than our typical property. They are down the low end. And they're typically lower growth. And people are paying for growth. So all those characteristics contribute to the pricing and we feel if the pricing was correct these are really outliers in many ways.

Rich Hill -- Morgan Stanley -- Analyst

Got it. And so it looks like your buys and sells have been fairly similar this year, at least in terms of number. But you also mentioned it's hard to find the high-quality properties that you want to own. Do you think there's more low-quality properties to go for you to sell? Or as you just mentioned, is it really just an outlier? Or I guess what I'm asking do you think there's more opportunity to see more portfolio rotation at this point in time or is it, or is it becoming harder just the availability of high-quality properties?

Dan M. Chandler -- Executive Vice President of Investments

Go ahead, Hap. Go ahead.

Martin E. Stein -- Chairman and Chief Executive Officer

Being able to find good uses of capital is an issue. Being able to do transactions on a tax efficient basis is also important. But the other key thing is we don't have to sell properties. We're in a position where those properties that kind of have the characteristics that Mac just described are maintaining (ph) to less than 5% of our portfolio. So we're in a position to sell when it makes sense to sell and when we have the appropriate use of funds and we can do it on tax efficient basis.

Rich Hill -- Morgan Stanley -- Analyst

Got it. And just one more follow-up question if I could. Are there any examples where you can take out so-called 7 (9) property and put money into it and make it a 4 9 (ph) property? I mean, did that exist or is that just not a big use of your funds on your opinion?

Martin E. Stein -- Chairman and Chief Executive Officer

That's -- where we can do -- where we have an opportunity to do that, we do that each and every day. That's a key part of our business and we've been doing that for years. And these redevelopments represent a lot of those what were transforming the properties that we have.

Rich Hill -- Morgan Stanley -- Analyst

Got it. Thank you guys. Very helpful.

Operator

Our next question comes from the line of Michael Mueller with JPMorgan. Please proceed with your question.

Mike Mueller -- JPMorgan -- Analyst

Hey, good morning. I thought I got out of the queue. My question was the prior question on -- about how much of the 7.5 to 8 cap properties are left in the portfolio. So I think -- I think it was about --

Dan M. Chandler -- Executive Vice President of Investments

So Mike, I don't know that -- I don't know that we actually answered the question. So I will point you to -- I'll point you to our investor presentation and where we have about 2% that we consider kind of non-core and think about again reminding you of our funding strategy. So free cash flow is going to fund our development spend to the extent that we are short, we are going to -- and do not have access to the equity markets, even if it's not a compelling price at the time. We will use dispositions for that and it will come from that 2% bucket. And if you do -- to give a little bit more color on Page 15 in the supplemental if you look at those, there's not a single one on here that we will now -- and bought individually. It either came in as a package of a portfolio acquisition and a couple of them were legacy developments and we're building much larger power centers back in the late --

Martin E. Stein -- Chairman and Chief Executive Officer

From a margin development standpoint.

Dan M. Chandler -- Executive Vice President of Investments

From a margin development standpoint which we do not do today.

Mike Mueller -- JPMorgan -- Analyst

So basically if that 2% of the portfolio was gone and we're looking in the supplemental, the disposition cap rates wouldn't be 7.5 or higher?

Laura Elizabeth Clark -- Vice President of Capital Markets

I think that's a fair assumption.

Mike Mueller -- JPMorgan -- Analyst

Got it. Okay. That's it. Thank you.

Operator

Our next question comes from the line of Chris Lucas with Capital One. Please proceed with your question.

Chris Lucas -- Capital One Securities -- Analyst

Good morning everybody. Hey, just a couple of quick ones. Lisa on the implied guidance for fourth quarter, $0.03 spread between 91 and 94. Is there any one item that that sort of causes that spread or is it a myriad of factors that you're unsure about going in?

Lisa Palmer -- President and Chief Financial Officer

The same-property NOI is a big driver obviously. And although our guidance is 3.25% plus or minus, there is -- it could be plus or it could be minus. And Sears is a big driver of that as well depending upon when -- if we get November and December in and that is one of the largest drivers.

Chris Lucas -- Capital One Securities -- Analyst

Okay. And then just kind of following up on that topic, the Mattress Firms you've had rejected, given the likely scenario, the plans they're going to come out, I think they want to get out of bankruptcy this year. You'll get paid what for those rejected leases?

Lisa Palmer -- President and Chief Financial Officer

It's still -- I am a little hesitant to say that I'm certain what's going to happen. So our understanding at this point is that we are going to get paid for them for up to a year. But again I think.

Martin E. Stein -- Chairman and Chief Executive Officer

A year from when they fall.

Lisa Palmer -- President and Chief Financial Officer

A year from when they fall. So I'd think there's more to come. Right now that is the assumption.

Martin E. Stein -- Chairman and Chief Executive Officer

Bankruptcies and uncertain process and we've incorporated that into our projections.

Chris Lucas -- Capital One Securities -- Analyst

Right. So just Hap -- just I want to clear, you're saying that you could get up to a year but it would be a year from now that you would get paid or when they come out?

Lisa Palmer -- President and Chief Financial Officer

I don't know that we really know and that's part of the uncertainty as well. But the early indication is that we will get up to a year's worth of rent.

Martin E. Stein -- Chairman and Chief Executive Officer

Whether that's when they filed or that's from when they come out, we still don't know.

Chris Lucas -- Capital One Securities -- Analyst

And then as it relates to Sears in terms of the guidance you provided earlier and the drag to same-store NOI from next year. Is that -- does that matter as to whether that's a 7 on a 11 liquidation or just (inaudible) what are you guys assuming?

Lisa Palmer -- President and Chief Financial Officer

No, I mean that won't matter. What matters is whether or not we actually -- whether someone assumes and buys the lease or if we get it back.

Chris Lucas -- Capital One Securities -- Analyst

Okay. Great. Thank you. I appreciate it.

Martin E. Stein -- Chairman and Chief Executive Officer

Thank you, Chris.

Operator

Our next question comes from the line of Samir Khanal with Evercore. Please proceed with your question.

Samir Khanal -- Evercore -- Analyst

Just a question on the leasing spreads for new deals. I mean it's up 35% but didn't look like you put a lot of CapEx. Certainly if you look at the CapEx in the quarter versus mainly the trailing 12 it actually fell. I want to know what's going on there.

Martin E. Stein -- Chairman and Chief Executive Officer

Samir, yes, it was initially (ph) that it fell with the volumes. What that represents is really the driver there with Publix at our Bloomingdale redevelopment. That particular deal is a tear down rebuild. So what you have was less what we call TI and White Box and it's really rebuilding a building. So that artificially dampened that number. If you took Publix out on that, we would normalize at $30 which is right in line.

Samir Khanal -- Evercore -- Analyst

Okay got it. And I guess my second question is just regarding your NOI guidepost of that low to mid-2% range for 2019 I mean how are you guys thinking about sort of credit loss reserves for 2019 versus this year? How much cushion do you have sort of built in for it maybe other distressed retailers besides sort of the Sears and Mattress Firm of about sort of 90 basis points excuse me 50 basis points downtime?

Lisa Palmer -- President and Chief Financial Officer

Again that's not formal guidance. So we will come back to you in early part of next year with more formal guidance. But Sears is obviously incorporated in there as I indicated in my remarks up to 50 basis points.

Samir Khanal -- Evercore -- Analyst

So at this point, beyond Sears, you're not incorporating any other?

Lisa Palmer -- President and Chief Financial Officer

Samir, yes. Of course we always do. And it's even the bad debt expense doesn't it doesn't exactly translate to how much we're incorporating to kind of our credit collection loss if you own underwriting. We've been kind of around the 45 in 40 to 50 basis points bad debt expense. I think that's a good indication that we've had a pretty normal and steady rate of moveouts if you will and bankruptcies and store closures. And we would expect something similar next year on.

Martin E. Stein -- Chairman and Chief Executive Officer

We're incorporating our current thinking is incorporating a normal amount of issues. But at the same time we are also incorporating that the underlying business is good. leasing spreads will remain healthy. We're seeing strong demand for space. So we feel good about the underwriting fundamentals of the business and our ability to continue. take Sears bankruptcy aside 2.5% underlying same property NOI growth that Lisa described earlier.

Lisa Palmer -- President and Chief Financial Officer

And I think in my prepared remarks directly hit that. And also even it's also implied. If you go back to the map again 1.3% contractual rent steps and another 1.2% from rent lease spreads that gets you to 2.5%. And I just told you we're expecting and incorporating up 50 basis points of Sears and we're still saying we're going to be in the 2% to 2. 5% range.

Martin E. Stein -- Chairman and Chief Executive Officer

Yes.

Operator

Our next question comes from the line of Vince with Green Street.

Vince Tibone -- Green Street -- Analyst

I have a clarification question on the Sears closures. Are you going to have to bid for the leases at and bankruptcy auctions?

Lisa Palmer -- President and Chief Financial Officer

Jim?

James D. Thompson -- Executive Vice President of Operations

Yes. We don't know. We're on the closure list but there's no telling how Sears will sell the leases before they reject. We just don't know at this point. We are obviously in planning we are preparing to defend our real estate.

Vince Tibone -- Green Street -- Analyst

Got it. they're still paying the rent and lease is still in play until further notice.

James D. Thompson -- Executive Vice President of Operations

Yes.

Vince Tibone -- Green Street -- Analyst

And can you talk a little more broadly about the pros and cons of buying a lease in bankruptcy auction versus letting a new tenant purchase below-market lease?

James D. Thompson -- Executive Vice President of Operations

We obviously we evaluate every aspect. And I would say during the Toys we evaluated a deal in Chicago where it was at auction. We were prepared to bid if needed. We did our homework understand who was interested in this space and felt comfortable with that user and felt the economics of no downtime protecting rent was a good alternative to us jumping in and protecting the real estate. So it's one-off thing. We evaluate on every space that's in play.

Martin E. Stein -- Chairman and Chief Executive Officer

And just to review what we kind of did that's a combination of working with replacements buying leases and then some of them going coming back to us on that day.

Lisa Palmer -- President and Chief Financial Officer

Before Mac does the individual biggest thing is the pro, it gives us control of the real estate allows us to control the merchandising. And often cases which Mac is going to talk about lets us unlock a lot of value.

Vince Tibone -- Green Street -- Analyst

That's the lease causes.

Dan M. Chandler -- Executive Vice President of Investments

You may change that you segments by upgrade but also by lumping out that form a lease you may get rid of some restrictions that have to do with competing uses exclusives co-tenancy parking requirements. Sometimes older leases are just outdated with how the market works. So you get a fresh start. And there's generally at a reasonable price the pros heavily outweigh the cons. And you take some leasing risk. You're not going to have pre-leased. But we're in that business anyway and we have a good feel for that and we factor that into our pricing. So net-net it's usually advantageous for us to buy or lease back.

Vince Tibone -- Green Street -- Analyst

That's really helpful color. Thank you. That's all I have.

Operator

(Operator Instructions) Our next question comes from the line of Linda Tsai with Barclays. Please proceed with your question.

Linda Tsai -- Barclays -- Analyst

Hi (technical difficulty).

Lisa Palmer -- President and Chief Financial Officer

We can't hear you.

Linda Tsai -- Barclays -- Analyst

Sorry about that. Hi, does having Kmart box versus having a Sears give more flexibility given the size and maybe in terms of back-filling more easily with the tenants versus having to redevelop?

Lisa Palmer -- President and Chief Financial Officer

(multiple speakers) The reason I had comment specifically that they were Kmart versus Sears is exactly that the size of the box. And they're in your typical neighborhood community center so there's not a lot of densification opportunity on those.

Linda Tsai -- Barclays -- Analyst

Okay. And then in terms of the 35% increase in new leases can you give us a sense of what percentage of your anchor leases are considered legacy?

Dan M. Chandler -- Executive Vice President of Investments

Linda, we can't give you that percentage. This is Mac. But we do have as we said in our Investor Day our 40 leases that we call 'legacy' leases that are available to us in the upcoming say 5-plus years. And those are the leases that are going to really drive this top line rent growth metric.

Lisa Palmer -- President and Chief Financial Officer

And even it's pretty interesting even in our portfolio of our size that it doesn't take much for it to really move the needle because there's such large increases with these legacy anchor leases.

Martin E. Stein -- Chairman and Chief Executive Officer

And they could use space for a significant amount of that. But as far health of the portfolio and the relative strength and sustainability of the portfolio I think it could give us the same store rent spreads that we're experiencing 12% on the shop space.

Linda Tsai -- Barclays -- Analyst

A lot of your peers are using seeing technology and data to better understand shopping habits and help make location decisions. To what extent are you engaging in these initiatives too?

Martin E. Stein -- Chairman and Chief Executive Officer

Linda, I'm happy to answer that. Lisa, do you want to dig into that? This is not a new thing for us. We have actually been at the forefront of using technology to help us with merchandising to target actual customers by using mobile data to track where our customers are coming from. And we've actually been trying over a dozen different technologies over the years and actually have helped companies create that technology by working with them closely. So we think for better merchandising we've been able to convince that announce that our sites make sense by showing them what our customers are coming from and using technology that they don't have in-house. And it's been eye-opening for them. And that's really helped us. And then the future really is using this technology that actually target customers coming onto our property through advertisements through mobile phones. And that's in the early stages of it. But we were spending a fair bit of time on this. And the industry still has years to grow up and we've it's not a new thing for us. We've been following this for many, many years.

Linda Tsai -- Barclays -- Analyst

Thanks.

Operator

Our next question is from Christy McElroy from Citi. Please proceed with your question.

Christy McElroy -- Citi -- Analyst

Hi. Thanks for taking the follow-up. Just on Mattress Firm, I know there's an initial closure and it's all very fluid. There's more potentially coming. Just you've got five closings 20 remaining. on the 20 are they have they sort of work through the process and potentially emerge here are they trying to renegotiate rent relief on those 20? Or is it still sort of up in the air?

Dan M. Chandler -- Executive Vice President of Investments

Christy, as any good bankrupt tenant will do they will absolutely ask on every location which they did here. We've been firm in our responses. They're I think the average ABR is $33 on ours. I think the we're located they're located in centers that are 96% leased. They generate a very good real estate high visibility high access. So that's where we felt very good about being strong we're recapturing real estate. We got asked we said no. And the five may turn into seven or eight, but at the end of the day we will proactively release those boxes with smaller base.

James D. Thompson -- Executive Vice President of Operations

Just say no.

Christy McElroy -- Citi -- Analyst

Okay and then just following up on some of the Ki Bin's question. You guys were talking about Westwood a bit. Any sort of early estimates you can give us in terms of the potential for a capital commitment on this project? Is this something that you would be maybe working with partners on a non-retail component? And would this project stay in the same store pool?

Martin E. Stein -- Chairman and Chief Executive Officer

I can -- just on the first part of that. Plus or minus $75 million is what we have circled for investment in that and we would -- all of the retail. We are negotiating with a partner where we would take half of the apartments, 50% interest and that's included in the $75 million. There's also approximately 75 town homes, which are for-sale products and we're going to provide some of the capital for that. But that's not a long-term hold as I mentioned. So -- and Lisa can talk to you about sort of the big picture of what's in and out of that, but we're excited about that project. It should have a return of in the high 6s is what a stabilized return is. And it's going to be done in project for us.

Dan M. Chandler -- Executive Vice President of Investments

And just -- in both cases on the town home and multifamily developer that we're negotiating with and -- both are best-in-class and also have a meaningful amount of capital invested on their share of the -- of those portions of the development.

Lisa Palmer -- President and Chief Financial Officer

At this point in time -- and with the earlier head nod of the 2% to 2.5% we are assuming that Westwood stays in our same property pool, but it's a great question as we really do have larger projects that we're beginning to work on beyond -- a scale beyond what we've had in the past. We've got another one that's in our pipeline in San Diego in Costa Verde, it's over $5 million of NOI. And we may essentially take that to zero as we redevelop it. So it's something we're evaluating. And we'll have more clarity on how we will handle those large projects in the future. But for now, Westwood is assumed to be staying in the same property pool.

Christy McElroy -- Citi -- Analyst

Okay. And then is Giant staying at the project (inaudible)?

Lisa Palmer -- President and Chief Financial Officer

(inaudible).

Martin E. Stein -- Chairman and Chief Executive Officer

Giant is staying. Sorry to interrupt you. Sorry to interrupt you. We're going to relocate them and put them into a brand-new store in a podium format with parking below them.

Christy McElroy -- Citi -- Analyst

Okay. Thank you.

Operator

Thank you. It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Martin E. Stein -- Chairman and Chief Executive Officer

We appreciate your time and interest in Regency and wish that you all have a wonderful weekend. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Duration: 65 minutes

Call participants:

Laura Elizabeth Clark -- Vice President of Capital Markets

Martin E. Stein -- Chairman and Chief Executive Officer

James D. Thompson -- Executive Vice President of Operations

Dan M. Chandler -- Executive Vice President of Investments

Lisa Palmer -- President and Chief Financial Officer

Greg McGinnis -- -- Analyst

Christy McElroy -- Citi -- Analyst

Craig Schmidt -- Bank of America -- Analyst

Derek Johnston -- Deutsche Bank -- Analyst

Jeremy Metz -- BMO Capital Markets -- Analyst

Ki Bin Kim -- SunTrust -- Analyst

Rich Hill -- Morgan Stanley -- Analyst

Mike Mueller -- JPMorgan -- Analyst

Chris Lucas -- Capital One Securities -- Analyst

Samir Khanal -- Evercore -- Analyst

Vince Tibone -- Green Street -- Analyst

Linda Tsai -- Barclays -- Analyst

More REG analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.