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Operator
Greetings. Welcome to the Regency Centers Corporation second quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And please note that this conference is being recorded. I will now turn the conference over to Christy McElroy, Senior Vice President, Capital Markets. Thank you. You may begin.
Christy McElroy
Good morning, and welcome to Regency Center's second quarter 2022 earnings conference call. Joining me today are Lisa Palmer, President and Chief Executive Officer, Mike Moss, Chief Financial Officer, Jim Thompson, Chief Operating Officer, Chris Levitt, SVP and Treasurer, Alan Ross, Senior Managing Director of the East Region, and Nick Wibbenmeyer, Senior Managing Director of the West Region. As a reminder, today's discussion may contain forward-looking statements about the company's views of future business and financial performance. including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties. It's possible that actual results may differ materially from those suggested by the forward-looking statements we may make. Factors and risks that could cause actual results to differ materially from these statements may be included in our presentation today and are described in more detail in our filings with the SEC, specifically in our most recent Form 10-K and 10-Q filings. In our discussion today, we will also reference certain non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials, which are posted on our Investor Relations website. Please note that we have also posted a presentation on our website with additional information, including disclosures related to forward earnings guidance. Our caution on forward-looking statements also applies to these presentation materials. Lisa?
Lisa Palmer
Thank you, Christy. Good morning, everyone. Thank you for joining us today. We are pleased to report strong second quarter results reflecting a still healthy operating environment. Leasing demand continues to be strong, and tenant move outs remain light, driving occupancy and rent growth higher. We acknowledge the increasing macroeconomic headwinds, and in our view, that makes our results all the more notable. We know that we're not immune to the adverse impacts of inflation, interest rate increases, and recessionary risks, all of which could have implications for us, but we very much believe that we are extremely well positioned to weather any economic storm. For the remainder of this year, as a result of that, we are very confident in our forecast as reflected in our guidance increase. And looking beyond 2022, Regency's portfolio and balance sheet were built for times of greater uncertainty. Everything we've done over the last decade and every decision we've made positions the company not only to play offense and drive growth when times are good, But to successfully navigate challenging macroeconomic environments, we are designed to outperform through cycles, evident most recently in the resiliency of our performance through the pandemic and how quickly we were able to pivot back to offense and return to pre-pandemic levels of NOI, earnings per share, and leverage. Importantly, in the context of the current environment, the demographic profile of our trade areas is supportive of a consumer that has more cushion to absorb pressures from inflation and economic softness. And in times when tenant bankruptcies may be elevated, our locations tend to be among the best performing, limiting occupancy decline. Additionally, current positive momentum is a source of tailwinds into 2023 and beyond. First and foremost is our strong pipeline of leases. both executed and those in negotiation. Also, next year, we will see an even greater benefit from development and redevelopment NOI coming online. And finally, as we've been saying, our dense suburban neighborhoods and communities continue to benefit from structural tailwinds stemming from post-pandemic migration and hybrid work. Where we have begun to see some impact from the current environment is in the capital markets, but again, we are extremely well-positioned. The strength of our balance sheet and our low leverage afford us the luxury of not needing to raise capital when it's not advantageous to do so. And our dry powder and ready access to capital give us a competitive advantage should opportunities arise. A prime example of that was the execution of our share repurchases in the second half of June. We saw a window of opportunity to essentially buy our own high-quality properties in a mid-6% implied cap rate range. A meaningfully more attractive price than what we would pay for anything comparable in the private market today. We were uniquely positioned to take advantage of that dislocation given our balance sheet strength and liquidity position. We can't control the macro environment, but we can control our response to it. As we sit here today, we remain confident in our operational strategy and our balance sheet strength, regardless of the macro backdrop. Closing out, I'd like to comment briefly on ESG. As many of you know that have been covering Regency for a while, we take pride in having best-in-class, sector-leading environmental, social, and governance programs, across which we continue to meet or exceed our goals. We did publish our annual corporate responsibility report in late May and also announced an interim 2030 target for reducing absolute Scope 1 and 2 greenhouse gas emissions, which was endorsed by the Science-Based Targets Initiative. We also set a long-term net zero target of 2050. We don't take these commitments lightly. These targets were established after extensive work by our team to identify and analyze the impact of specific initiatives that will help us reach these goals, which includes further improvements in common area energy efficiency and continued growth in our on-site solar program. Corporate responsibility is a foundational strategy for Regency, and it has been for many years. It's part of our culture, and is as fundamental to what we do as is our commitment to portfolio quality and balance sheet strength. Jim?
Christy
Thanks, Lisa, and good morning, everyone. While we are keeping a close eye on the increasing economic pressures in the U.S. today, the operating environment for our open-air retail centers currently remains healthy and active. We had a great second quarter of operating results, leading us to further increase our 2022 same property NOI guidance by 100 basis points to 5.25% at the midpoint, excluding prior year collections. This confidence in our outlook is driven by continued positive vectors in our key metrics. First, continued robust tenant demand with new leasing volumes up 20% year-to-date versus the historical average. Increasing occupancy, both on leased and commenced basis, especially on shop space as we backfill space vacated during the pandemic. Our tenants are paying rent, and we're nearly back to more customary levels of current period bad debt. Retention rates remain above historical average. Cash spreads were nearly 9% in the second quarter, and we're embedding contractual rent steps in close to 90% of our executed leases, especially important in this inflationary environment, contributing to gap rent spreads of 17%. strong tenant sales reports, again, contributing to higher percentage rent, and we're maintaining low levels of leasing capex with net effective rent growth also in the mid-teens. Our success and momentum relating to all these key drivers of our business gives us continued confidence in the strength of our core operating outlook. As Lisa discussed, we do acknowledge the heightened risk of softer economic environment, including the potential for an uptick in tenant failures. We're not seeing that yet as tenant move out activity has remained light, and we believe that is a result of the purge of weaker operators that occurred during the pandemic. Our tenants are as healthy as they've ever been, especially our shop tenants who went through the ringer two years ago and emerged stronger and smarter. So if we do see bankruptcies materialize, we feel like we're in a good relative position. Turning to development, we now have nearly $390 million of development and redevelopment projects in process at yields in the 7% to 8% range. Despite construction cost increases over the last couple years, we remain on track and on budget with our current in-process projects. Additionally, we continue to source new opportunities supported by strong tenant demand at yields that are holding steady despite cost increases we're seeing in our underwriting. During the second quarter, we started phase two of our ground-up Bay Brook development in Houston. You may recall that we completed phase one of this project late last year, and the HEB anchor, which opened in December, is already one of the top performing grocers in the Houston market. This new phase of the project will include roughly 50,000 square feet of shops and out parcels adjacent to the new HEB store. We have already signed or committed leases on the nearly 75% of the new space, and anticipate the first tenants opening in about a year from now. We also started a major redevelopment this quarter at our Buckhead Landing property in Atlanta, formerly known as the Piedmont Peachtree. With total costs of around $25 million, we will redevelop the 150,000 square foot center and replace the existing grocer with a new Publix anchor. Our team is really excited to start this much anticipated transformation of this irreplaceable location in the heart of Buckhead. Our consistent track record and successful execution within our development and redevelopment program is a testament to the depth and perseverance of our experienced teams across the country. This avenue for investment is a core competency for Regency, and it's where we have the ability to create value and drive incremental growth. In upcoming quarters, we look forward to sharing further details on additional projects as we plan to start over the next 12 to 18 months. In summary, even in a more volatile macro environment, we remain encouraged by continued strength in tenant sales, foot traffic, and demand for space, supporting continued same property NOI growth, and reflective of the resiliency and quality of our locations and tenant base. Beyond that, our self-funded value creation pipeline provides an additional layer of accretion and growth. Mike?
Lisa
Thank you, Jim. Good morning, everyone. I'll start by addressing second quarter results, walk through key changes in our 2022 revised guidance, and touch base on our balance sheet. First, we'd like to point out some new disclosure on page eight of our supplemental, where we now summarize the contributing elements of our same property NOI growth Last quarter, we spent time describing the noise that exists in the quarterly cadence of our NOI growth rate throughout 2022, driven primarily by the collection of prior year reserves as well as an expense recovery adjustment that occurred in the second quarter of last year. Due to the continued significant impacts of these items, we stress that base rent growth is the best indicator of what is truly driving our business and is the best representation of our continued growth trajectory. You should find that this new disclosure is helpful in making these things more clear, and as you can see in the table, the largest positive contributors to second quarter performance were growth in base rent and improvement in current year uncollectible lease income, which together added a total of 450 basis points to our NOI growth rate. While the offsetting factors include the tougher year-over-year comparisons relating to prior year reserve collections and expense recoveries, detracting a total of 380 basis points from our results. We've also added gap or straight line rent spreads to our supplemental on page 19 as a complement to our historically reported cash spreads. Gap spreads have always been an important metric for us internally, given our strong focus on embedding contractual rent growth into our leases. And we believe this metric helps provide an even more fulsome picture of the primary drivers of our base rent growth over time. Notably, As of the second quarter, even after removing the positive impact of prior year collections, our core operating earnings per share has returned to pre-pandemic 2019 levels. This achievement is a testament to our portfolio's quality and resiliency. We also converted more cash basis tenants back to accrual in the second quarter, continuing a trend over the last year, following improvement in both collections and underlying tenant credit. The resulting reversal of straight-line rent reserves contributed $3.5 million, or 2 cents per share, to NAREID FFO, which was not included in prior guidance. We now have about 12% of our ABR remaining on a cash basis of accounting. Turning to our updated current year guidance, we refer you to page 6 of our second quarter earnings presentation, specifically the column indicating the drivers of the increase in our NAREID FFO range at the midpoint. The biggest change was to our same property NOI growth forecast, up 100 basis points at the midpoint, positively impacting our NAERD FFO per share outlook by about six cents. All the positive operating trends we are seeing that Jim outlined and that impacted our second quarter results are supportive of the 100 basis point increase for the full year. The primary drivers include higher average commence occupancy, benefiting both base rent and expense recoveries, and better collections on cash basis tenants. leading to decreasing levels of uncollectible lease income. Another driver of the increase is non-cash revenues, up $0.03 per share at the midpoint, primarily driven by the impact on straight-line rent from the conversion of cash-based tenants back to accrual during the second quarter. Recall that we only include these impacts in resulting guidance on an as-converted basis. Our balance sheet remains in excellent condition, ending the quarter with full capacity on our revolver, with total leverage at the bottom end of our targeted range of five to five and a half times net debt to EBITDA. This strong balance sheet position enabled us to take advantage of an opportunity to repurchase our shares in the second half of June. We bought back 1.3 million shares for about $75 million, representing an average price of $58.25 per share. As Lisa mentioned, this price implied a cap rate in the mid-sixes a price at which we would happily buy assets that match Regency's quality and growth profile. Notably, the share repurchase was about a penny accretive to 2022 earnings. The debt markets have remained volatile, and the movement in both treasuries and spreads has impacted our cost of debt capital. But with no unsecured maturities until 2024, we have the luxury to remain patient, waiting for more opportunistic windows. We're also reminded that during periods of dislocation in the capital markets, the importance of our significant level of free cash flow is highlighted, which at north of $130 million annually allows us to continue investing creatively. Looking ahead from an operational perspective, inflationary impacts on the consumer, combined with a softer economic backdrop, introduces some uncertainty into our outlook beyond 2022. But as we reflect on our resiliency throughout the pandemic, the impacts from which could be described as indiscriminate towards property location and tenant quality We believe Regency's portfolio is well positioned ahead of a more traditional economic recession with greater bifurcation and performance across the quality spectrums of trade area locations, property formats, and tenant exposures. As Lisa indicated, you won't hear us say we're immune to the impacts of a downturn, but the good news is that we are starting from a position of strength. Our leasing pipelines are very active, featuring a healthy mix of tenant demand across all markets, categories, and sizes, with retention rates that continue to be above historical averages. One silver lining of the pandemic is that the less resilient operators were culled out during 2020, and our tenant base has emerged even stronger, providing stable footing in our occupancy. We also have a strong value creation pipeline, fully funded with free cash flow, with visibility to more meaningful NOI contributions in 2023 and 2024, and maybe most importantly, as we consider the rising economic uncertainties We have one of the strongest balance sheets in the sector, allowing us the ability to remain on offense and create value through investment should opportunities arise. With that, we look forward to taking your questions.
Operator
Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing any star keys. One moment, please, while we poll for any questions. Our first question comes from the line of Greg McGinnis with Scotiabank. Please proceed with your question.
Greg McGinnis
Hey, good morning. So leasing GLA was down from prior quarters at 1.3 million square feet. Is that just a function of more limited anchor leasing? Because obviously the number of leases was quite good. Or how should we be interpreting that result?
Christy
Greg, this is Jim. Great question, and I'd be happy to kind of explain what's going on there. Basically, the total number of transactions was right in line with trailing 12 months, as were the new leasing volumes. And quite frankly, rent spreads were very solid as well. But overall, the GLA leased was slightly down for the quarter due to the renewals. And it's really the mix between anchors and shops. Typically, we're about 50-50 mix. This particular quarter, it was 70-30 heavy on shops, which basically smaller square footage averages It also relates to that ABR of $34.43, which is a little higher than the average. As I looked at that, and don't tell anybody, but I looked at the July numbers from a renewal standpoint just to satisfy my own curiosity. July numbers are significantly, on the renewal side, significantly higher than our average monthly rates, and the mix is back where the anchors should be. I think the anomaly will be sorted out prior to year end, so I'm not too worried about that. In addition, I just mentioned that the overall renewal retention rate is right at 80%, which is, again, higher than our typical average.
Greg McGinnis
Okay, so it sounds like it's just a timing issue then. It really is. Okay, great. And the second question for me is, With the post-pandemic migration to closer suburbs and hybrid work from home seemingly here to stay, how does that impact the foot traffic you're seeing at the centers and decisions around merchandising?
Christy
Greg, I think the foot traffic we're seeing is really back to where we've seen it before. In general, our demand is very strong really across the board across regions as well as product type. Categories that are doing exceptionally well, I think, are very active are grocery value apparel, the QSRs, restaurants, obviously. We're seeing a lot of good, strong demand in the health, fitness, medical, and also the pet categories. The mix between locals and nationals for the shop space is really relatively the same as what we've seen. Really, from an overall demand standpoint, I'd say, just to give you a flavor on the anchors, we've got 39 available spaces today. Twenty-four of those are either at LOI or at lease. Again, I think that's with the likes of TJX, Publix, Burlington, Ross, Five Below, Nordstrom Rack. Those are the kind of folks we're talking to, and I think that gives you a sense for not only are we seeing great shop demand, but also the anchor demand is very, very strong.
Greg McGinnis
Great, thank you.
Christy
The only thing I'd add to that I think is we remain confident in that suburban market in which we operate, kind of anchored by that dominant grocer with need, necessity type of retailers. And we believe we're going to continue to see demand shift towards our product type and our quality.
Lisa Palmer
And, Greg, I'll just add, really well said. We continue, I think we sound like a broken record, but what the past two and a half years, if that's how long it's been, have really demonstrated and validated is the importance of the neighborhood community shopping center in the retail and service ecosystem. And I said we sound like a broken record. If you went back and you listened to earnings calls prior to the pandemic and then throughout it, we feel really good about the future of our business.
Greg McGinnis
I'm sorry, just one point of clarification on the foot traffic. Are you seeing any increase in midweek traffic? And do you have the data on length of stay, whether that's changed since the pre-pandemic?
Lisa Palmer
it's basically still the same. And remember, we did, as everybody did, we did dip with the pandemic and we recovered really quickly and much more quickly in some markets versus others. As we always say, it was indiscriminate, but what it was discriminant on was the amount of shutdowns. So there have not been significant differences from pre-pandemic to today. Thank you.
Operator
And our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.
Michael Goldsmith
Good morning. Thanks a lot for taking my question. Maybe to follow up on Greg's question here, can you talk a little bit about the demand from tenants and maybe break it down between discretionary versus essentials? I know you have more exposure to the essential side, but trying to understand if different types of tenants are... are slowing their demand or if the momentum kind of continues on both sides?
Christy
I would tell you that I see the demand basically staying pretty robust across all sectors of the folks that we do business with. So really not seeing a category I can point to to say this has fallen off.
Michael Goldsmith
Thanks for that. And as my second question, the lease spreads accelerated on a cash basis, on a gap basis. So is there kind of a continued upward trend here? And then I think you also mentioned that you have escalators in 90% of your new leases. Where did it stand before, and how accepting are tenants in taking on these escalators? Thanks.
Christy
Sure. Yes, the cash rent spreads, roughly this quarter, right at 9%. Trailing 12 months is right in that neighborhood. That mirrors what we believe long term is our target for the cash rent spreads. And again, when we couple that cash rent spread with the embedded spreads that we're putting in the new leases, the combination of that really is what, and I think judicious CapEx spend, that kind of gets us that net effective rent and gap rent spreads that we're kind of looking at as a real answer to whether or not we're making progress in our business. As far as the embeddeds, we are in this inflationary area right now. We are taking steps to raise our ask. We're asking between 3% and 4% on deals today. which is higher than we've done in the past. And we're having pretty good success with that. I think everybody recognizes the inflation touches everyone, and we're not getting left out of the program. So we're actually having pretty good success getting that higher embedded rent step.
Michael Goldsmith
Thank you very much. Good luck in the back half.
Operator
Thank you. Thanks, Michael. And our next question comes from the line of Kee Bin Kim with Truist. Please proceed with your question.
Michael
Thanks, John. Good morning. So you have a 240 basis points spread between signed and occupied. Could you just talk about what that ABR looks like and how much of it is actually being accrued in the income statement already?
Lisa
on the pre-lease percentage key, Ben. This is Mike. So that's worth about $34 million of rent. We actually added some disclosure to our NAD page. I don't have the page number, but page 33. Thanks, Christy. And you'll see that we added some disclosure to get you to the value of that pre-lease pipeline. All of that is, again, it's pre-lease percentage. So that's embedded into our forward outlook of same property NOI growth. We did. I'll take this opportunity to to reconfirm that we've increased our outlook for the balance of the year by 100 basis points. It is largely driven by higher commenced occupancy and lower move outs in the combination of the two. So we'll continue to deliver space. We're doing so quite successfully. It's not easy, but the team's doing a remarkable job bringing that pre-lease pipeline into production. And then lastly, The other huge element from the same property, NOI Outlook, is uncollectible lease income. We've been just, you know, so surprised this year at how quickly that is healing and returning back to classic levels of 50 basis points. You know, last year was 175 basis points of bad debt. We came out, you know, thinking it'd be in the 100 basis points area. Now we've lowered our eyes again to about 75 basis points for the balance of the year. So that implies a back half of the year that's basically on par or getting pretty close to that historical average. So we feel, to confirm the points that Jim made earlier, feel really good about the in-place tenancy and the health of our tenants.
Lisa Palmer
I can't help but just make a quick comment. While we talk about it, it is extremely important to get the signed but not occupied paying rent. and to get back to maybe a more stabilized level. I'm very happy if it stays where it is, as long as our percent rent paying is also increasing, because that means we're doing a lot more new leasing. So that's a good thing. So the fact that that S&O isn't moving much and our percent rent paying is increasing means we're doing more new leasing. So that's a really positive sign.
Michael
Great. And second question for me, when I look at your tenant list, it's probably one of the healthiest tenant rosters I can see in the strip center space. It shows your top 30 tenants, so I'm assuming the rest is probably equally as healthy. How do you think about your tenant roster today versus pre-COVID? And as there are some concerns about a macro slowdown or inflation impacts on different consumer segments, how do you think your portfolio and your tenant roster handles that situation versus today? what it might have been three years ago.
Christy
Key, Ben, I think, I'll be honest with you, I think we're absolutely in a stronger position today with our tenancy. Obviously, the last couple of years really split the wheat from the chaff. Our survivors are smarter, stronger, just like I said in the opening comments. They're savvy. They're reactive. They know how to get things done with a lot of adversity, and that gives me a lot of comfort. And it really, much going into any kind of slowdown, I feel very comfortable with the folks we've got on the roster right now.
Ben
Okay, thank you.
Operator
And our next question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.
Craig Schmidt
Thank you. My question is on the contractual bumps you mentioned in the opening comments. I'm just wondering what are your annual contractual bumps generally ranging, and do you have any CPI bumps in any of your existing leases?
Christy
Annual average is probably somewhere in the two to four range. CPI, we've got kind of a mixed bag. We do have some CPI. But generally, I would say that's a pretty small portion. Most are stated rates. At renewal time, we've got some fair market value. We're kind of shifting towards that fair market value window at renewal. It's fair both ways. it doesn't lock anybody into a predicament, if you will.
Craig Schmidt
So I think that's... That 2% to 4% sounds like it's a little bit higher than it was. Have you been able to increase that?
Christy
I'm sorry, say that again?
Craig Schmidt
The 2% to 4% bumps sound a little bit higher than I'm used to hearing. I'm just wondering if you've been able to raise that in the last few years.
Christy
The two to four is new and in place is probably closer to the... Yeah, let me... I'll take that one, Jim.
Lisa
So what you typically hear us talk about, Craig, is our portfolio-wide impact to growth. So if you look through the entirety of the portfolio, we're at 1.3% or so of growth. We're teetering on 1.4% as the team and Jim articulated. On a deal-specific basis, we're getting two to sometimes 4% growth on over 90% of our new leasing. And that's what's helping drive that 1.3 up. But there's 9,000 tenants that we're working through. We have move outs that actually you can have a tenant moving out that was paying 3% contractual increases. So it's a mountain to move, but we're making great progress in that regard.
Craig Schmidt
Great. And then if I could follow up. I mean, I understand your appropriate caution about the macro environment, but there are articles going around saying that 50% of small businesses could go out of business in the months ahead. You know, I find that I have not heard anyone suggest a recession as bad as the Great Recession, and the Great Recession had nowhere near that number of damage to small shops. Are you seeing anything that would make you unduly worried about your small shops, even given the macro environment?
Lisa Palmer
Craig, I'll take that one. Absolutely not. And I'll just reiterate what Jim just talked about with regards to the health of our tenant base. It sounds a little bit contradictory when we say we're coming into this, what may become a recession, if it's not already, from a position of strength. And that meaning that the tenants that we have in place, the merchants that are in our shopping centers, really have survived. I love that Jim said separate the wheat from the chaff. really have survived a really difficult, challenging time from a demand standpoint with COVID-19. And so we have really strong, good operators. And even those that may pull back on maybe new store opening plans, we have the best locations. And if they pull back from, okay, I'm going to open two stores in this market to one, I don't see an impact to Regency whatsoever. in that scenario. I will go out on the limb and agree with you and say, and I may very well be wrong, but I don't see another GFC in the future, at least not in the next two years.
Craig Schmidt
Okay. Thank you very much.
Operator
And the next question comes from Craig Mailman with Citigroup. Please proceed with your question.
Craig Mailman
Good morning. Following up on the previous question on escalators, you guys are running at above average retention rates, getting better escalators than you have in the past. The retailers who want to keep the space that they have, are you able to or let me ask, are you giving up anything to get the higher escalators or are you getting the face run increases that you would have wanted regardless along with the better escalators? Can you talk a little bit about the kind of a negotiation there with tenants.
Christy
I don't think we're giving anything up to negotiate market. We're pretty good negotiators on rents, and that's what we believe market is today. We're seeing other landlords moving that direction, so we're just negotiating what we believe is market today.
Craig Mailman
So as we think about kind of long-term trends, And same for the structural uptick in escalators here. I mean, what do you think your portfolio could, you know, start to post in the next couple of years as you really turn through and reset leases?
Lisa
Yeah. Hey, Craig, it's Mike. So, you know, I'll go back to the 1.3 going to 1.4. That's a big change. It sounds small, but it is a big change. But in the overall picture of our forward outlook on St. Parp and NLI growth, We're still, the two largest contributors in the near term will continue to be occupancy increases and lease spreads. Certainly, embedding contractual increases is important to Regency's long-term outlook and our long-term growth, and we will not stop embedding those increases into our leases, which we have been doing for a long period of time at this point. Right now, our eyes are on our ability to push commenced occupancy. We've talked about 2022 achieving plus or minus 100 basis points in commenced, and we feel as good as we have six months ago in saying that, and we have good visibility to achieving that objective. And to Lisa's point, if we think about even a softer economic backdrop, given our relative position of strength, we feel like we can grow through a period of disruption and continue to add rent pay and occupancy in 23. And on previous calls, we've talked about another 100 basis points plus or minus of opportunity. More to come on when that will, more to come when we put out formal guidance in our outlook for next year and beyond, but there's at least another 100 basis points that's commenced there to get back to our peak occupancy levels. Then the other major contributor is lease spreads. And Jim spent a lot of time in the 9% range mid to high single digits is where we want to be, where we need to be to achieve our objectives of averaging, you know, north of two and a half, certainly, 275 before redevelopment contributions. And when you add the investment and the reinvestment into our portfolio, we feel good about averaging 3% or better on a sustained basis going forward.
Craig Mailman
Okay. And then, you know, maybe on a similar kind of aspect is You know, right now, AFFO growth, you guys are a little bit impacted by the knowledge from collections. But, you know, with the higher retention rate, you guys should theoretically have less CapEx, higher net effectives. I'm just trying to think, you know, maybe it doesn't fully correct itself by 23, but as you look maybe into the outer years, I'm not looking for guidance per se, but just a sense of, where that longer term AFO program from the portfolio could start to trend and how that could look relative to peers in the sector.
Lisa
I'll let you handle the peers component. So let's talk about a couple ways to interpret our disclosure first. So core operating earnings, I would point you right to that metric. We are unique in the space and we use core operating earnings Obviously, we're stripping out the impacts of anything that's non-cash. The only difference between core operating earnings and AFFO is going to be capitals. And when we think about capitals, we are planning and have been spending about 10% to 11% of our NOI every year in maintenance capitals combined with leasing capitals. We don't see that trending materially outside of those bounds. Craig, I would probably point you more towards the upper end of that range at about 11%. You know, given the amount of space we have left to lease, it's just going to be a volume business, so we probably will spend a little bit more capital. Beyond, and then to your point on prior year collections, so you've got to eliminate the impact of prior year collections to get to more of a core AFFO metric. When you do that, as we think about our business going forward, our core operating earnings growth, therefore our AFFO growth should match together, should move in lockstep with one another. because we just don't see any kind of disproportionate moving parts between those elements.
Craig Mailman
Okay, thank you.
Operator
Sure. And our next question comes from the line of Wes Galladay with Baird. Please proceed with your question.
Wes Galladay
Hey, everyone. I just want to go back to you, maybe looking at your watch list. At this point in time, is it more skewed towards tenants with capital structure issues It sounds like everything on the ground level is looking pretty good.
Christy
I think generally that's probably, yes, the right answer. There are a couple folks on there that really don't have debt issues as much as they've got operational issues. But for the most part, you're exactly correct on that assumption.
Wes Galladay
And you typically have a much higher recovery rate when it's just a reorg situation.
Christy
Absolutely. As we look at that watch list and look at the guys that might be towards the top of that list, we do a lot of placer data and things like that to try to understand, look at sales, where do they fit in the organization. Fortunately, for the vast majority of those locations, we sit in the top 60%, 70% of their locations, which gives us great leverage when it comes to negotiating um, you know, in, in, in a reorganization BK. Um, so in addition to that, we look at existing rents versus what we again, believe market rents are. And I think we've got some, some pretty good opportunity for, um, for upside in, in, in a lot of those cases. So at this point, we're, we're pretty comfortable where we are in the watch list and, and our position, um, in that whole arena where it goes from here.
Lisa Palmer
We have a very detailed investment strategy, but it really comes down to we like to own, acquire, develop properties where bad news is good news.
Wes Galladay
I guess maybe with, I mean, it sounds like the anchor space is pretty much spoken for all the vacant space. And would it be fair to say maybe you want some space back at this point? I think you mentioned you have some upside in some of these assets.
Christy
Yeah, as Lisa said, we like opportunity to bad news becomes good news. And that's a lot of times getting those anchor spaces back can trigger the redevelopment that you're waiting on. And those are the kind of things with watch list tenants are strategic plans that we devise for every one of our assets. Our guys are, if I get it back, what am I going to do? So we're not surprised when it happens or if it happens, but we're ready to in the event it does happen, that we know where we're headed.
Wes Galladay
Got it. And then for the redevelopment, I think the comment earlier in the call was the development and redevelopment will be a positive contributor next year. But more specifically for the redevelopment, do you expect it to be that net positive contribution that you have in your algorithm? Or is there anything special that's going to come offline that may be a little bit of a detriment to offset the positive from what's coming online next year?
Lisa
Yeah. David Wiltshire- More to come details West, but on balance it's going to be a major contribution on a net basis, we will continue, I hope, to have some opportunities to to frankly take some ny offline to set up new opera to set up new redevelopment but. David Wiltshire- In particular, the abbott and Clarence and the crossing Clarendon are two assets that the teams have been working extraordinarily hard on we've been from a financial finance perspective. very excited looking out to when those properties start to stabilize. And that time is now. The leases have been executed. Great visibility into when we start. We'll start seeing some income start to come in at the very tail end of even this year, providing from this point forward, in those two assets, and if you put our four in-process ground-up developments into the bucket, by 2024, that's another $15-plus million of NOI that we are creating in the portfolio. So to the short answer, we do anticipate returning to a positive contribution from redevelopments as we look into 23 and 24.
Wes Galladay
Great. Thanks for the time.
Lisa
Thanks, Wes.
Operator
And our next question comes from the line of Ronald Camden with Morgan Stanley. Please proceed with your question.
Ronald Camden
A couple quick ones. Just looking at the shop occupancy, you know, it's been taking up nicely over the last 12 months. I think I heard you say earlier that there's maybe 100 basis points more to go to get to peak. Just trying to get a sense of just for some context throughout the cycles, you know, how high can that shop occupancy get? Could you get to sort of the 93-plus range, or do you start to run into some structural factors? Thanks.
Lisa
Yeah, so the 100 basis points, by the way, was an all-in commenced rate. So that's shops and anchors. We look at 92.5%, 93% as kind of a top end from a shop percent lease perspective. So that's where our eyes are. We believe in the quality of the portfolio. We believe we can replicate those ceilings. And the teams are working hard to do that.
Ronald Camden
Great. And then just my next question was just trying to back to sort of the breadcrumbs of the growth algorithm. You have a really great breakdown of sort of the same store NOI and the SUP. I see base rents at 3%. Just trying to get a handle of some of the other two big lines on collectibles. And this is year-to-date numbers. On collectible, adding 4.7%. Recoveries, a headwind of 3.9%. as you're thinking about sort of the future and those sort of presumably normalized, is this sort of the right new way to think about it in terms of the long-term growth prospects of the company?
Lisa
Let's first make some short-term comments and then we'll get into the long. But we do see, I appreciate you noting the new disclosure, by the way, and I hope everyone takes a look at that. I think it's really helpful. What it first does is highlights that base rent growth, as we've been trying to point people's eyes to, is the best line item to look at for the health and forward quality of our earnings stream in the near term. And what you see there is, yes, 3% growth outside of the noise in the first half of this year. We should do better than that to finish out the year on the base rent line item. That will not be a decelerating impact. That will be an accelerating impact. We will continue to have tailwind, as I mentioned previously, from bad debt expense or uncollectible lease income. As the portfolio very quickly moves back to historical averages, again, 175 basis points last year moving to about 75 basis points this year, 50 basis points, Ron, being our long-term sustained average. There is noise in the other line items. We've got just a lot of COVID-era type of adjustments still moving through really 2021 that are impacting all of the other components of growth. But I think looking forward, our eyes are focused on base rent growth, the amplified impact of recovery income. As you lease up space and raise your commenced occupancy, you're going to amplify that growth by picking up margin on your collections. And then we add into that the investment and what we just talked about with Wes and the contribution from redevelopments. And you put all that into the bucket, and we feel great about achieving our long-term objectives of 3% or better through redevelopments. And in the short term, we should do better than that from an occupancy perspective because we have room to grow rent-paying occupancy.
Lisa Palmer
And also, that's certainly the same property, NOI growth. kind of long-term growth model, which is a very large component of the going forward growth for the company. But we also have the ability to invest the very high level of free cash flow that we generate, which will also be an important part of our long-term growth of core operating earnings per share. And I point you to our investor presentation, not just the disclosure, where we do do a very, thank you team, a very nice job of illustrating our growth model going forward. And that's on a stabilized basis, so it's not even actually accounting for the occupancy increases that we are seeing today and we will continue to see in the near future.
Ronald Camden
Excellent. That's all my questions. Thank you.
Operator
And the next question comes from the line of Hong Zhang with JP Morgan. Please proceed with your question.
spk11
Yeah, hi. I think in the past you've talked about potentially reaching back to 96% leased occupancy as early as late next year. I guess given your commentary about the uncertainty that's in the market right now, has your thinking around that changed at all?
Lisa Palmer
I'm happy to jump in. I will reiterate again that regardless of the macro backdrop, we feel really confident about the quality of our properties and our going forward health of our business. Just repeating really what we said in our prepared remarks, we're entering this with a position of strength. As we have worked through a lot of dislocation and disruption through the past two years, our operators, our tenants, our merchants are in an extremely healthy position. And we believe, and Jim talked about how we've watched them be adaptive and react to and be flexible. And I really believe that even if there is softening consumer demand, which we're not seeing because, again, our trade areas are supportive of consumers that are able to absorb a little bit more. But even if there is softening demand, we truly believe that they're going to be able to adapt and be flexible, as we've seen them already do. And then with that, retailers and merchants play a long-term game as well. It's not just about the next 12 months. And they're also positioning their companies for future growth. And they're going to need new locations for that future growth. And they're going to desire to be in the best locations. And we feel that we are really well positioned to be able to work with them and help them meet their goals as well.
Jim
Got it. Thank you.
Operator
And the next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.
Derek Johnston
Hi, everyone. Good morning. And I'm sorry. I know we spent probably too much time on this, but it's important. I'll try to be pointed because investors definitely seem concerned about the forward outlook over business trends in the second half, much more so than strong results and even pipeline commentary. But, you know, look, we believe Regency is very well positioned. But, you know, could you speak to actual conversations with tenants and prospective tenants? And I guess the question is, you know, are we sensing or seeing any slowdowns in decision-making right now? Or is this exercise really mostly conjecture at this point? That's kind of what I'm trying to figure out.
Christy
Derek, I would tell you that We're fresh off ICSC out in Vegas. Trust me, I've been at this game a long time, and I'm looking for smoke more than anybody and just not seeing it today. There's continued positive attitude towards growth. Deals are getting done. And, yes, we're looking hard, but you're not seeing any cracks at this point in the armament.
Jim
No, thank you.
Derek Johnston
That's helpful, and that's also in line with peer commentary. Just, I guess, sticking on leasing, so the Abbott in Boston, I was wondering if we can just get an update on the early leasing there and tenant interest. I know it stabilizes at 24, right? But you do have some rents commencing, I think, in the back half of this year. So just really any color on the demand, the interest, of this mixed-use asset and really how you feel about the project and how prospective tenants are reacting as well. Thank you.
Christy
Sure. The Abbott is nearing construction completion. It looks fantastic. If you get an opportunity up in the Harvard area, please poke your head, and I think you'd be impressed with what we've accomplished up there. Leasing momentum is strong. We're 100% leased on our retail. It was a little slow on the office side coming out of COVID. They were close to go. But we've had great current opportunity on the office side. And I believe we just signed it. Oh, there we go. Off the press, just signed a lease on the majority of our office space in the tower. So very, very positive news. Like I said, the project looks great. Tenants are under construction, should be opening up. And now that we've got this office lease executed, we'll have a good report for next quarter.
Jim
All right, excellent. Congrats. Thank you.
Operator
And the next question comes from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your question.
Jim
Hi, good morning. It's Eric on for one. I was just hoping if you could talk about how your tenant underwriting has changed post pandemic and kind of your thoughts today, you know, given the potential slowdown in the economy.
Christy
I think our underwriting really has been consistent. We are pretty conservative in underwriting. We embed contingencies. We've increased those contingencies as we saw interest rates increase, as we saw slowdowns from supplies and other things. I think our underwriting has continued to keep up with the moving parts in the economy. And from an underwriting standpoint, we still are able to underwrite deals that still meet our threshold from a yield perspective with good visibility towards expectation for cost.
Lisa
So Eric, I'll jump in and add. I don't, the way your question was framed, I think we look at tenant underwriting, whether in the operations side of business or project underwriting in the investment side of business for all seasons. And we don't necessarily look at the economic backdrop and change. We have a very focused strategy on our merchandising mix and what types of operators we want to partner with and do business with. And that's been consistent through all seasons and in all economic cycles. And we make adjustments on the margins in our investment activity to account for or provide for a changing landscaping cost as you would expect us to do. But really, we don't, you know, you push the accelerator or push on the brakes materially in any way. We apply our very long-standing, well-honed strategy on both sides.
Jim
Oh, great. Thank you. And then just to follow up on foot traffic, you know, given your defensive portfolio, I was just curious, you know, how are your centers performing versus the competition in the respective trade markets?
Lisa
As you would expect them to perform. We are not, you know, we believe we own market dominant centers, trade area dominant centers. That is our objective. We call it our DNA approach to investment. We use, you know, premier high quality as these designations. And the reason we use those designations is they outperform on several metrics, one of which is consumer demand. And they continue to outperform on consumer demand. Our centers are the preferred centers generally in those preferred trade areas. Foot traffic levels would support that outperformance. Sales would support that outperformance. Tenant demand.
Lisa Palmer
and rents yeah i think the best the best scorecard that you can really use for that yes you can look at foot traffic and should but what are what are average base rents because that's what the market is demanding so that's what the retailers are using as their basis for the sales that they can produce and sales um and in both cases as we've already talked about uh earlier today um as Jim did when we talked about bankruptcies, Regency is in the very top percentage in both of those categories.
Jim
Great. Thank you, guys. I appreciate it.
Operator
And our next question comes from the line of Paulina Rojas with Green Street. Please proceed with your question.
Paulina Rojas
Good morning. Good morning, Paulina. Hi. You talked about the strength of your tenants and But in terms of your small shop cohort, I hear from you and your peers that they are stronger than in the past. Aside of the fact that they are survivors from a period of great disruption, which is, yes, by itself very telling, are you able to track any other hard metrics sales leverage to substantiate the statement that they are stronger than in the past? I know the access to information is limited, but I was wondering if there is anything at all that is more tangible you can focus on and track over time.
Christy
Certainly, sales has been a major indicator in the past. And we continue to use that with our small shop tenants. We are able to get that kind of reporting. So that's probably our best metric to at least judge historical performance. We obviously look hard at credit going in, but it's also an important factor with small shop tenants is their past performance From an operator standpoint, you can walk in a retailer's store and get a pretty good sense whether they're a good retailer or not. And that's what our folks in the field do an excellent job of staying close to our tenants. And you can read the tea leaves. And that's, I mean, it's hard to put it on paper and give you a metric, but that's how we, you have to run your business to be able to stay ahead of that. And I think that's one of the things we do very, very well at the asset management level is really understand what's going on behind those tenant doors.
Paulina Rojas
You mentioned sales. How frequently can you have access to their sales performance?
Christy
We generally take a hard dive on an annual basis.
Lisa Palmer
And I know, Paulina, you've heard us talk about this as well. We have 22, maybe a little bit, more than 20 offices across the country with people in the local markets that are working with our tenants really closely. So we absolutely look at our reported sales, but also just having good relationships with our tenants, with our customers as is really important to understanding the health of their businesses, the challenges they may be facing. I think we really rose above some of the challenges in the pandemic because of that, and we will continue to do so in good times and in bad times. And so that's also an important part of it. So it's not a hard and fast metric and nothing that we can actually report, but it's certainly those relationships, those conversations, and understanding what's important to them.
Paulina Rojas
Thank you. Then my other question is regarding command-style occupancy. So I saw it increased by 10 basis points sequentially, less than one queue, that it's usually affected by seasonality, right? So my first question is, is there any reason behind that softer sequential implement? And the second part is, I think you mentioned you were targeting increment of 100 basis points for this year. So can you please confirm that that refers to same property, in-place occupancy, and average for the year, not end-to-end? I want to make sure I am understanding the target of 100 well.
Lisa
The commenced occupancy increases that we're targeting is a period-based measurement, so it will be at year-end. We should be 100 basis points up from where we started. I think we're already 40 basis points through the first half of the year, so that speaks to the confidence we have in delivering space from that pre-lease pipeline over the balance of this year, Paulina. But that's a spot rate, so what we're excited about is the impact on 2023.
Paulina Rojas
Okay, so yeah, occupancy, commencement should be stronger in the back half.
Lisa
Yes, it needs to be to achieve our objectives of 100, You know, it's plus or minus 100, but we feel good about delivering the space that's, again, already contracted for. So it's just a matter of our tenants building out. I'm not making light of how difficult this can be. The teams are doing, I mean, daily hard work delivering spaces, building out spaces so we can get direct commencement.
Paulina Rojas
Thank you very much.
Operator
Sure. And as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.
Linda Tsai
Hi. You've got 12% left on cash basis accounting. Last quarter it was 14%. Just given the trajectory, you've been coming out of – from the pandemic, how many quarters might it take to get to a normalized level of cash, you know, percentage of tenants on cash basis accounting?
Lisa
Hey, Linda, it's Mike. I don't have a discreet answer to your question, but we're making great progress. I do think we do have some visibility to at least another one to three percent, kind of sticking with our policy of what a tenant needs to do and how they need to behave for us to convert them back to to accrual accounting. So we do see another 1% to 3%, I think, in our near-term impact, which, by the way, would include another, call it $2 million to $5 million of non-cash straight-line rent conversions. So we don't guide on that number in the supplement, but we do talk about it on this call. Beyond that, then the question becomes, well, what is your normal percentage of cash basis And that's, again, a little bit harder to get a gauge on because the leasing standards also changed as we look at our historical averages. But we think our number's probably in the mid-single-digit area, the 5% to 8% range, somewhere in that area, plus or minus. So we've got a little bit of room to run, but we're nearing the end. And we'll continue to make progress as we have.
Lisa Palmer
And I appreciate the question and the concern for it. It's a metric that we have all begun to report. But the important thing to really focus on is bad debt expense because a tenant can be a cash basis tenant but paying rent. And as Mike said earlier, we are seeing our bad debt expense return to more typical historical levels. That's the more important thing that we really – and that's what we focus on here as well.
Linda Tsai
Thanks for that. And then the jobs report came out this morning and was better than expected with decent hiring and retail, including grocery and general merchandise. Are you hearing this as well from your tenants in terms of easing labor shortages?
Lisa Palmer
I think generally speaking, what we have seen in the same conversations that we're having with our tenants, that we have seen things ease over, I think we even said that last quarter, so it's a little more than even a quarter, where we've seen... some easing of both labor shortages and also supply chain difficulties, both.
Ben
Thanks.
Operator
And our next question comes from the line of Michael Gorman with BTIG. Please proceed with your question.
Michael Gorman
Yeah, thanks. Good morning. I know we're running a little long, so I'll try to be quick. But stepping back for a minute and looking longer term, Lisa, you talked about ESG and some of the targets you've laid out in your new report from the spring. And I'm just wondering if you could talk about how we should think about the capital commitment to these initiatives over the next eight to 10 years or so and internally how Regency is approaching underwriting the different projects and different initiatives that you have on the emissions front.
Lisa Palmer
It is not going to, there will be an additional cost, an incremental cost, but there's also savings as we do implement some of the energy efficiency things that we've already, we've done over the past 13 years from a water conservation, LED lighting, and we'll continue to do. And we'll also continue to perhaps generate some revenues from solar panels. And so from a material standpoint, it's not material. What's more important is the fact that we are really focused on embodied responsibility and corporate responsibility within our company. And it truly is a foundational strategy. And as we think about and talk about new investment opportunities, it is part of the conversation. Every acquisition, every development, we will look at the impact, essentially, to our customers. targets into our goals and objectives, but it's not a material cost.
Lisa
If I may just add a little bit more detail there for you, Michael, 80% of our objectives can be achieved by really pulling two levers, right, through 2030. It's LED light conversions and it's the addition of solar panels on property. So to Lisa's point, LED light conversions are already part of our plan. So that is, in effect, a neutral element of our expense rate. And then solar panels is to her points where that's where you actually save some money. In fact, you have an ROI. You make money on the solar panel installation. So just for a little bit more added color, the balance, so where's the other 20% going to come from? Innovation is going to play a big role, and then we might have to buy some RECs as well, which they'll be high-quality RECs, and we'll be very smart with that.
Michael Gorman
That's great color. Thank you. And just maybe following up on that, I understand that it's core to Regency anyway, but I'm wondering as the entire market evolves, as you're having more conversations around developments, redevelopments, maybe even acquisitions and lease discussions. I'm wondering if you're seeing Regency's dedication to ESG come up in those conversations as maybe a competitive advantage, as something that maybe helps in these negotiations and in these discussions for regular way business.
Lisa
Let me start on the capital market side. Yes. Whether it's tapping the unsecured bond markets or whether it's We have a bit of a financial incentive within our revolver, but we're seeing it permeate through the capital markets. And we do believe, ultimately, whether it's access or whether it's pricing reductions, there will be some marginal benefit to us. On the operations side?
Christy
On the operational side, I would say there are kindred spirits that appreciate what you do, but I don't think it's ingrained at the real estate level. As much as it is a capital market.
Lisa
And then we do development.
Lisa Palmer
I was going to say, since we're tag-teaming, and I'll take the transaction side. On the transaction side, we were part of a bid process, if you will, on a portfolio of properties. Unfortunately, we were not successful in it. It was a major part of the bid as to the efforts that the company is putting into the E in ESG. So yes, it is very important to other stakeholders as well.
Michael Gorman
That's very helpful. Thanks, everybody.
Operator
Thanks, Michael. Thank you, everyone. At this time, we have reached the end of the question and answer session, and I would now like to turn the call back over to Lisa Palmer for any closing remarks.
Lisa Palmer
Thank you all very much. Appreciate your time with us. As some of you may be heading to the to the shore or the beach or the long island for the weekend. Enjoy your weekend. Thanks all.
Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.
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