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Regency Centers Corp (REG) Q2 2019 Earnings Call Transcript

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Regency Centers Corp (NASDAQ: REG)
Q2 2019 Earnings Call
Aug 2, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, welcome to Regency Centers Corporation Second Quarter 2019 Earnings Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions] .

I will now turn the conference over to Laura Clark. Ms. Clark, you may now begin.

Laura Clark -- Vice President

Good morning, and welcome to Regency's Second Quarter 2019 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.

On today's call, we may discuss forward-looking statements. 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 the forward-looking statements.

We will also reference certain non-GAAP financial measures. We provided a reconciliation of these measures to their comparable GAAP measures in our earnings release and financial supplements, which can be found on our Investor Relations website.

Before turning the call over to Hap, I wanted to mention our upcoming Raleigh Market Showcase event in early October. This event will feature our high quality properties, including recent development, redevelopment and acquisitions as well as our local market team. We hope that many of you will be able to join us, and I am happy to provide more details to those of you who would like to attend.

Hap?

Hap Stein -- Chairman and Chief Executive Officer

Thanks, Laura. Good morning, everyone.

Before discussing our results and outlook for the remainder of the year and for the future, I'd like to highlight the Executive changes we announced yesterday. I am extremely excited that Lisa Palmer will become President and Chief Executive Officer effective January 1, 2020. And at that time, I'll transition to Executive Chairman. On August 12, Mike Mas will become Executive Vice President and Chief Financial Officer. In addition, Jim Thompson and Mac Chandler will be appointed Chief Operating Officer and Chief Investment Officer to better recognize their roles within the company.

This succession is a result of a well considered plan that Regency had been crafting for the last several years, and I have no hesitation this transition will be seamless. I'm deeply gratified to work with the best professionals in the business. Regency's people are the cornerstone of the company and our values, and they have worked together to build a truly wonderful company. Lisa is the embodiment of Regency's culture and success. Over the last several years, Lisa and I have been partners in the direction of Regency, making decisions together every step of the way the Regency's vision, strategy and consistent execution. And it's through this partnership, I know that her understanding of our business, her ability to execute on our strategy, her experience in the capital markets as well as her devotion to our special culture position her to continue to build on Regency's past success.

And with the support of this Executive Team and of our people we will continue our focus on being the pre-eminent national owner, operator, and developer of shopping centers. Now to the quarter. Lisa, Jim, Mac and Mike will discuss in more detail how we are operating in in our view is a reasonably favorable environment which is reflected in the underlying fundamentals.

This includes a portfolio that is over 95% leased, net growth and high single digits and bad debt prior years healthy levels. That said, the delayed timing of new leasing in the first half of the year as well as not exceeding our assumptions for move-outs resulted in a decline in rent paying occupancy. This has impacted the second quarter as well as the back half of the year. As a result, we now expect to finish toward the lower end of our same-property NOI growth range which doesn't meet our high expectations.

However, in spite of moderately lower NOI growth in 2019, this year we continue to generate substantial free cash flow translating into meaningful growth in core earnings and AFFO. Most important of all, I'm confident in our unequal combination of strategic advantages including the quality of our portfolio, our development capabilities, strength of our balance sheet, and our highly engaged team has and will continue to position Regency to be a leader in the shopping center sector and generate total returns of 8% to 10%.

Now I'll turn the call over to Regency's future Chief Executive Officer. Lisa Palmer.

Lisa Palmer -- President and Chief Financial Officer

Thank you. Hap, and good morning everyone. I want to thank Hap and the Board for this tremendous opportunity. We are truly fortunate to have had such an impactful year of our company and for our employees. Hap and our senior leadership team with the guidance of an exceptional Board have positioned the company for a seamless transition. As Hap said, we've worked so closely together along with Mike, Jim, Mac, and our entire team is ready and excited to continue to build on Regency's past success and move the company forward as we realize our vision and achieve our key objectives.

Moving to the quarter, I'd like to highlight a few things as our team continued to execute on our strategy. Our high quality portfolio remains at a healthy 95% leased and our leasing pipeline is deep. We started exciting new development and redevelopment projects including Culver City Market and The Abbot which Mac will talk about in just a little bit. We further enhanced the quality of our portfolio through the acquisition of a premier shopping center in Silicon Valley. And with our balance sheet strength, we were able to fund the acquisition on an essentially non-dilutive leverage neutral basis.

Our conservative balance sheet and approximately $170 million of free cash flow which is after capital and dividends continue to provide substantial financial flexibility and access to capital through future cycles. We recently published our Annual Corporate Responsibility Report which highlights our commitment to our people, our communities, our best-in-class ethics and corporate governance and environmental stewardship. And importantly, we now expect core operating earnings to grow 3% to 4% for the year and AFFO by over 6%.

Our portfolio continues to benefit from the successful retailers that are expanding their physical presence. Our high volume grocers are driving substantial food traffic as brick and mortar locations remain a critical component to their strategy and at the center of their success. These best-in-class grocers are attracting desirable shop retailers and restaurants as they continue to commit resources to customer service, the store experience, value, and technology initiatives. And in spite of the well publicized headwinds in the retail sector, we remain confident that our high quality portfolio will outperform over the long term and meet our strategic objective to average same-property NOI growth of 3% which is supported by organic growth as well as positive contributions from our attractive pipeline of redevelopment opportunities.

The continued execution of our proven strategy has positioned Regency extremely well to achieve these objectives. Mac, Sorry, I'm going to hand it over to Jim.

Jim Thompson -- Executive Vice President, Operations

Thanks, Lisa. Same property NOI growth in the first half of the year of 2.1% was supported by base rent growth of 2.5%. The quality, appearance, and location of our properties as well as our fresh-look merchandising continue to list its good demand. This is evidenced by new and renewal leasing volumes in the first half of this year, which exceeded the first half in 2018. Move-outs and bad debt that remain near prior year levels are both indicative of a healthy tenant base. We are astutely managing our leasing capitals and achieving high single-digit leasing spreads and executing on embedded rent increases both of which are contributing to straight line rent growth of 16% for the trailing four quarters.

That said, relevant retailers as well as Regency continue to be diligent and deliberate in lease negotiations as well as site and merchandizing selection, which contributed to delays and leased timing in the first half of the year. In addition, timing associated with permitting and the construction process in markets where the retail environment is thriving continue to cause delays. We are also executing on our proactive asset management to fortify our merchandising mix as well as our same property NOI growth over the long term.

I'd like to share a few notable examples that occurred this quarter. At our Riverside Square Center in Chicago, we proactively recaptured a space from a regional gym operator and upgraded that merchandising with Blink Fitness, a premium quality value-based fitness concept that is a subsidiary of Equinox. Blink took a total of 15,000 square feet at a rent that was over 20% accretive to the former operator. Also at Citrus Plaza in South Florida, we decline Bed Bath & Beyond's request to renew at a reduced rent, recaptured that space and are executing a new lease with Burlington at a 130% rent spread. These examples as well as many others demonstrate that we are being thoughtful and making the right long-term decisions even when resulting in downtime. In regards to potential future bankruptcy filings in store rationalization, we are diligently monitoring launched list retailers. Our local teams have been actively marketing many of these basis and given the desirability of our real estate there are number of back-fill prospects we are working with. Should we get these spaces back, we expect to upgrade the merchandising often at higher rents. The recent news around the potential for Barneys to file bankruptcy with new information, and there is much uncertainty around the eventual outcome.

Importantly, despite their corporate struggles, we feel good about the long-term prospects of this unique location in Chelsea. All that said, while the bankruptcies and store closures continue to dominate the headlines expanding categories like off price, fitness, restaurants, entertainment, and grocery users are making up for these closures and presenting merchandising upgrades and redevelopment opportunities, leaving us feeling good about the state of our business.

Mac?

Mac Chandler -- Executive Vice President, Investments

Thanks, Jim. Our capital allocation strategy, which clearly differentiates Regency's business model starts with the $170 million of annual free cash flow after capital and dividends. This enables us to fully self fund our development and redevelopment objective to start and deliver $1.25 billion over five years on an extremely favorable and cost-effective basis. In the second quarter, we started a terrific ground-up development in Culver City, arguably the most sought-after market in Southern California. This dense infill project will be anchored by Urbanspace, one of the leading market haul operators as well as several local restaurants and retailers.

The trade area of Culver marketplace is extremely compelling with more than 275,000 people with average household incomes of over $125,000. We also started four redevelopments this quarter. The largest being our mixed-use project in Cambridge, known as The Abbot. We're extremely excited about this exceptional opportunity and its value creation. The Abbot is the most prominent location in Harvard Square, benefits from tremendous per traffic and world-class demographics. Our in-process developments and redevelopments are performing well.

The projects are nearly 90% leased and committed, with expected yields that remain comfortably well above cap rates for comparable Class A properties. Our in-process redevelopments as well as select future redevelopment opportunities are on track to contribute over $40 million of incremental NOI. One such example is our Westwood Shopping Center in Bethesda. Now that we have secured our entitlements, we continue to advance our plans and look forward to discussing more details later this year.

As we have previously communicated, a key component of our investment strategy is portfolio quality enhancement through the acquisition of premier assets. On July 1, we did just this with our acquisition of The Pruneyard, a 258,000 square feet center in the heart of Silicon Valley. This iconic center anchored by Trader Joe's and Marshalls sits in close proximity to the West Valleys most affluent neighborhoods and technology employers and as merchandise to superb local retailers and restaurants.

Adjacent to The Pruneyard, our three office towers and hotel, which were not part of the transaction, but do contribute to our significant foot traffic. The Pruneyard is expected to generate a 3.5% NOI CAGR and an IRR in excess of 6.5%. It is yet another example of a strategic acquisition that serves to fortify our NOI growth. Consistent with our capital allocation strategy. We plan to fund the transaction with lower growth dispositions combined with debt in the unsecured market, both of which are reflected in our guidance updates.

Mike?

Mike Mas -- Managing Director of Finance

Thank you, Matt. I'd like to provide some color around our reaffirms same property NOI growth and updated earnings guidance. First, we are maintaining our initial 2019 same-property NOI growth guidance range of 2% to 2.5%, which is centered around varying degrees of new, renewal and move-out activity. As we've discussed this morning, net leasing activity that occurred over the first half of the year and more importantly, the timing of that activity has led to our current expectation for same-property NOI growth to end the year closer to the lower end of this range.

And for added clarity, please also note that our reaffirmed range does not incorporate any potential lost rent from Barneys, as that situation remains very fluid. And as Jim mentioned, there is much uncertainty around the eventual outcome. Our annual rent exposure to Barneys is approximately $4.9 million dollars meaning same-property NOI growth could be impacted by up to a maximum of 25 basis points this year. As we have previously communicated coming into this year, our 2019 same-property NOI growth range falls below our 3% strategic objective, primarily due to the long-awaited Sears bankruptcy, together with a muted contribution from redevelopment deliveries.

However, as we consider the high quality of our portfolio and look forward to the visible redevelopment opportunities in our pipeline, we remain confident in our ability to achieve our objective to average same property growth of 3% over the next five years. Turning to FFO, the Barney's credit situation resulted in an unexpected non-cash expense of approximately $0.02 per share from the reserve of the tenants straight-line rent receivables. This non-cash charge will be offset by a number of other positive impacts for the full year, including more favorable G&A and a slight push and timing of our planned dispositions, which in total allowed us to tighten our FFO range while keeping the midpoint constant at $3.83 per share.

As a reminder, we like to use core operating earnings as a better metric to measure performance for Regency, as it eliminate certain non-recurring and non-cash items and more closely reflects cash earnings, and our ability to grow the dividend. In the second quarter, we grew core operating earnings per share by 4.6% after adjusting for the lease accounting change, and given the positive impacts of lower G&A and new disposition timing, we now expect to grow core operating earnings per share for the full year by 3% to 4%. You may recall that this range was wider with a floor of 2% when we initially offered guidance.

That concludes our prepared remarks. And we now welcome your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from the line of Christy McElroy with Citi. Please proceed with your question.

Christy McElroy -- Citi

Hi, good morning everyone. Just first Michael and Katy, and I just wanted to offer congratulations to Lisa and the rest of the team obviously part of the longer-term plan, but well deserved and Hap we'll definitely in the fray, but we know you will still be around. Just, just a follow up Mike, on some of the Barney stuff. I know it's not the same store range yet for '19. But does this potentially derail -- I know it's only 30 basis points, but you have a plan to sort of get back to that 3% same-store NOI growth rate by 2020, does that -- does this and sort of the timing issues of 2019 potentially impact that?

And with regard to that specific store, it's not a normal holding for you. I know the focus for them has been more on their Midtown store rent. But how would you feel about having to release that space versus where market is today?

Mike Mas -- Managing Director of Finance

Thank you, Christy. I appreciate the question. I will be retenanting to Jim. But let me first address your question around our NOI growth and I think what you're asking the future profile. I'm not going to give 2020 guidance at this point in time. We're just not prepared for that. But I would say that listen Barneys, Sears, Toys before that. This is part of the business, always has been. We're going to have the retailers who fail and we'll continue to have retailers that sell. This is a large -- a large rent for us and we -- quarter of a point impact for this year and under a lot of assumptions maybe a quarter of a point next year as well. That being said, it's a two -- it's a 2.25, 2.5 business business organically, again assuming that we're going to have tenant fallout.

And that -- and then we, the real reason we're at these levels this year is the lack of and the muted contribution from redevelopment deliveries. We've been very vocal and have communicated that in the past. The exciting part is we see our redevelopment pipeline continue to make progress and Mac can add color to that. You saw start at The Abbot, you saw us we're making great progress on Westwood. Market Common is under way. All of these are why we believe our future and why it was very clear that our five year average from this point forward will be back in that 3% range, which is consistent with our objective.With respect the borrowings. I'll let Jim comment on it.

Jim Thompson -- Executive Vice President, Operations

Chris, you're right that it is a bit of a unique property for our portfolio. But ever since the merger, we felt at that underlying real estate and Chelsea dress had really long-term potential for future opportunity. That's backed up a little bit by the fact we had unsolicited offers to buy that asset in the past. The trade area continues to improve and at the end of the day, yes, we think there is a value add play, should we get the real estate back. Obviously, there is a tremendous amount of uncertainty as to what will happen during this discussion of bankruptcy, but our team is evaluating options as we speak. So more to come as we learn more.

Christy McElroy -- Citi

Okay, thanks. And then, understanding your disposition expectation to help fund Pruneyard, but do you have anything under contract for sale today, sorry, if I missed that Mac in your comments and was the downward revision to the disposition cap rate a function of the mix of what you're selling, or just sort of better execution than what you expected?

Mac Chandler -- Executive Vice President, Investments

Thanks, Christy, nothing under contract. Although we're negotiating three different purchase contracts now to identify the buyer, and then we have three other properties that we've taken out to market. So, they're officially on the street. So, initial interest on those look really good. So, we feel good about it. And then the reason we've lowered our cap rate on the dispositions is we've got a little bit better pricing than we expected. And if you look at what we saw to date, keep in mind too, we've had about a third of those assets are Louisiana properties that sold for roughly a 10 cap. So when you average that in there, it gives you a good indication of the quality of our properties and the pricing that we've been able to realize.

Christy McElroy -- Citi

Thanks so much.

Hap Stein -- Chairman and Chief Executive Officer

Thank you. Christy. Appreciated your nice comments. Greatly appreciated.

Operator

Our next question is from the line of Jeremy Metz with BMO Capital Markets. Please proceed with your questions.

Jeremy Metz -- BMO Capital Markets

Hey, good morning. And you know again congrats on all the appointments -- Christy's comment there. Hap you mentioned...

Lisa Palmer -- President and Chief Financial Officer

How nice that Hap has the chance to jump me. So thanks, Jeremy, thank you.

Jeremy Metz -- BMO Capital Markets

So in the opening remarks, you mentioned the low end of the same-store NOI range in the delay in timing for some rent payments. I'm just wondering, any more color you can give on that in terms of what is driving some of that relative to the expectations? I mean, you did mention the permitting in the construction delay, but I don't really think it's necessarily new, we heard about this process dragging last year. So I would assume some of that was built in that expectation, but any more color on that?

Mike Mas -- Managing Director of Finance

Let me start and again I think Jim will cleanup for me a little bit here. But again, I appreciate you bringing it up. So we are focused and our team buys are pointing toward the lower end of the range right now. And it's really due primarily to the timing of our net leasing activity that we experienced over the first six months. So the way I would like to describe it, in other words is we're expecting our average rent paying occupancy to be a little bit lower for a little bit longer this year. And that is lower than what we had hoped for. And, however, it is more consistent with the assumptions that we had in place supporting the lower end of our range.

So living out of the question as we looked at the year. Importantly, we remain very comfortable with the assumptions on both ends at this point in time, although our eyes are pointing toward the bottom. At this point in time in the year, there is more about move-out assumptions, obviously. And with respect to that, more positive results on that front as well as maybe an increase in timing on rent commencements is what could get us to outperform. So we're focused on that, but again it's really timing, tenant demand is healthy, and Jim will speak to that. Our volumes have been very good. They are roughly in line with our expectations and are roughly in line with prior years.

Jim Thompson -- Executive Vice President, Operations

Yeah. Jeremy, I'll just piggyback Mike a little bit on that. The volumes have been strong, pipeline is solid. When you look at our shops we're consistent, we're 91.5% on the small shop space today. We've consistently been in the 91% to 93% range, which has been quite frankly at or near the top of our sector. So we're still optimistic and bullish on the tenant demand. We think the continued execution of our redevelopment, remerchandising opportunities and efforts will continue to keep us in that 91% to 93% range. And personally, I'm bullish that we can move toward the higher end of that range as we execute on these redevelopments and remerchandising.

Jeremy Metz -- BMO Capital Markets

Helpful. Thanks. And then second from me, just in terms of The Pruneyard acquisition. So we think about this just more of a stabilized type of acquisition. Is there any value add or notable upside potential there that you could be sitting on? And then, just sticking where they're adding further in the pipeline on the acquisition front that you can maybe get to the goal line here?

Mac Chandler -- Executive Vice President, Investments

Sure, Jeremy. This is Mac. I think in the short term, you can expect us to be, as we've discussed, very solid property with great CAGR. It's got a 3.5% 10 year CAGR. It is going to pick up kind of quickly because there is a, there is about five tenants that are in build out that haven't commenced rent that should happen over the next nine months.

Further out, maybe 10 more than 10 years out, there's a couple of boxes that will grow the market and there could be some really interesting opportunities there. The Sports Basement box sets itself up you could do a lot of different things with that. So, I want to get ahead of ourselves but it is one of the reasons we like the property long-term. There is tremendous demand for office, multifamily and retail, just the kind of demand that we look for.

As to other acquisitions, in the early guide and what we're getting real close on, there are a couple of properties that we are looking at our acquisitions that would have a redevelopment focus, and we really prefer those properties that use our team, platform and our capital, and there's two sort of mid-sized projects that hopefully we can give you a little bit more color on next quarter.

Jeremy Metz -- BMO Capital Markets

Thanks --.

Operator

Our next question is from the line of Richard Hill with Morgan Stanley. Please proceed with your question.

Richard Hill -- Morgan Stanley

Hey, good morning guys. Lisa, and Mike, I want to come back to Pruneyard and think about how much of a benefit it was to FFO. Recognized you kept the FFO guide consistent at a tighter range despite the $0.02 one-time non-cash straight-line rent charge. So that mean we should think about Pruneyard as a maybe a $0.02 benefit that offset that?

Lisa Palmer -- President and Chief Financial Officer

Rich, in my prepared remarks, I think I commented that we were doing this essentially on a non-dilutive, although I didn't say accretive, but it's essentially earnings neutral, with the fact that it was a going in cap rate in the mid 4's and we're going to be funding that partially with dispositions and you've seen our dispositions guidance. We're able to offset the cost of that dispositions with lower-cost debt. So, it's essentially earnings neutral.

Yeah, if you just will remind everyone just strategically why these acquisitions make sense. It's an important part of our capital allocation strategy to continue to fortify that NOI growth to acquire premier assets and we've talked about in the past, right? It's no accident that we've been able to maintain and lead our sector with above average same-property NOI growth. And we think we continue on enhancement of the quality of the portfolio. We don't need to, but we're very opportunistic in doing so. We think that that's an important part of our strategy.

Richard Hill -- Morgan Stanley

No, that makes perfect sense and thanks. Go ahead.

Mike Mas -- Managing Director of Finance

Hey, Rich will quickly on FFO. The offset to that non-cash charge was as we indicated in the call, better G&A expectations as well as slight timing enhancement to our dispositions.

Richard Hill -- Morgan Stanley

Got it, got it. Okay, that's all for me. And congrats to everyone on the call as well.

Mike Mas -- Managing Director of Finance

Thanks, Rich.

Operator

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

Craig Schmidt -- Bank of America

Yeah. Also, I'd like to jump on and give congratulations to all those promoted in the executive leadership change, and it's great to see talent developed within the company. So again, congratulations. I wondered if we could discuss just a little bit here the allocation of capital of redevelopments versus acquisitions. And maybe talk about what was the more compelling recent to buy Pruneyard. Was its asset quality or it's upside opportunity?

Mike Mas -- Managing Director of Finance

I think the number one use of our capital of $170 million of free cash flow is to fund our development and redevelopment program. And the majority of those investments today are redevelopments. And then I would say in the second priority becomes value add acquisitions like the two that Mac implied that we're looking at right now where there is a meaningful amount of upside. And then the third category would be core acquisitions, high quality acquisitions with superior growth prospects like The Pruneyard at 3.5% projected NOI growth plus some potential upside beyond that. And we're funding those through the sale of assets and as Lisa mentioned, given our our plan right now, we think that we can do it on a essentially earnings and balance sheet neutral basis with superior NOI growth going forward and/or value-add opportunities going forward.

Craig Schmidt -- Bank of America

Great, thank you.

Mike Mas -- Managing Director of Finance

Thank you, Craig.

Operator

The next question is from the line of Samir Khanal with Evercore. Please proceed with your question.

Samir Khanal -- Evercore ISI

Good morning, everyone. So, just switching gears a little bit on grocers I know, I'm just curious to get your views on Albertsons, it sounds like they're starting to move in the right direction. They're addressing leverage, curious just to see what you're seeing on the ground given the exposure they had. Thanks.

Lisa Palmer -- President and Chief Financial Officer

I'll take that one. So, just for the past couple of years really, three years potentially, even we have seen continual improvement and the actual store operations of Albertsons, better sales, sometimes only anecdotally, if they are not reporting. But generally better operations and they went through some management changes and we know their management pretty well especially their last CEO. And under that very short period of time right after that kind of failed Rite Aid merger, they really pivoted on improving their balance sheets well, and they've made tremendous improvements in their balance sheet and further improvements in their operations and even their margins. If you were to read some research reports, you'll see that Albertsons actually has some of the healthiest EBITDA margins in the sector.

So that's Albertsons and that's how -- so we are comfortable with the direction in which they are headed. But even more importantly, the quality, we really like our real estate and the quality of the the grocers, the individual stores of Albertsons that we have in our centers are above average and the real estate itself, itself is well above average. So we like our position with Albertsons, but we do recognize the potential risks that are there.

Samir Khanal -- Evercore ISI

Great, thanks for the color.

Mike Mas -- Managing Director of Finance

Thanks Samir.

Operator

The next question is from the line of Brian Hawthorne with RBC Capital Markets. Please proceed with your question.

Brian Hawthorne -- RBC Capital Markets

Hi, Equity One had mentioned the big uplift from anchor explorations. How much of that is left to go?

Mike Mas -- Managing Director of Finance

We appreciate the question, Brian. And you'll recall from our last Investor Day, we cited 40 what we call legacy leases. And that's, those are combination of both legacy portfolios of anchor leases that are coming due. A lot of that remains, and that all be supportive of this five-year plan that we feel good about, and our ability to generate organic NOI growth in that 2.25 to 2.5 range and then supplementing that with redevelopment opportunities. Some of those legacy leases are what triggered these redevelopment opportunities.

Brian Hawthorne -- RBC Capital Markets

Okay. And then on Mellody Farm, it's [Indecipherable] 90% leased. When do those tenants start paying and I guess what do you kind of get to that stabilized yield? Or when do you expect to get there?

Mac Chandler -- Executive Vice President, Investments

Sure, Brian, this is Mac. We're up to 93% leased and committed and in this last quarter we leased more than 35,000 square feet, including deal with the West [Indecipherable] which we thought was really one of our last sort of pivotal spaces. Most of the tenants are open, operating, doing well, reporting sales in excess of their projections. So, I think by year-end, we should be at a stabilized leased basis. But if you get a chance, we encourage you to get out there to take a look at it. It's doing well and we're very pleased with that asset.

Hap Stein -- Chairman and Chief Executive Officer

But the center looks fabulous. And I feel also, not only the place making there, but also the merchandising is exceptional.

Brian Hawthorne -- RBC Capital Markets

When you say, by year-end reached the stabilized yield that means like by December or do you mean by fourth quarter you'll be at the [Indecipherable] yield. I think what's the supplement says.

Mike Mas -- Managing Director of Finance

Well, between December and Fourth quarter is pretty finite. What I would just assume by year-end at this point.

Brian Hawthorne -- RBC Capital Markets

Okay. All right, thanks for the added color. Thanks so much.

Operator

The next question is from the line of Vince Tibone with Green Street. Please proceed with your question.

Vince Tibone -- Green Street

First off, congratulations from me as well. My first question is, how do you think about your cost of capital today? Based on guidance changes, it appears you prefer dispositions over issuing equity to fund acquisitions. I'm just curious, is there like a certain stock price where you consider issuing equity to fund external growth?

Mike Mas -- Managing Director of Finance

Number one, as we've said before, we start with $170 million of free cash flow after dividends, after capex and the number one priority on that is to fund developments and redevelopments. And then beyond that, we look at how we can make a trade, whether it's we're selling property to buy back stock that we've done in the past or selling property to fund acquisitions we're doing with The Pruneyard, sometimes using debt and at times in the past when we thought the trade made sense, we've issued equity.

Vince Tibone -- Green Street

Got it, that make, that makes sense. My next is kind of on your acquisition strategy going forward. I mean do you think Regency could buy more large ticket items since there seems to be significantly fewer potential buyers, let's say, 100 plus million dollar centers versus small dollar centers? And then I was just curious, are there any markets or regions that you think are particularly attractive today and you're actively looking to increase your exposure?

Lisa Palmer -- President and Chief Financial Officer

I'll add color on the markets. But I'd just reiterate what Hap said in terms of the use of our capital. In the fact that we are opportunistic and to the extent that we're able to identify and have the ability to acquire shopping centers with the value add component or with above-average growth. And we're able to fund it on and essentially leverage neutral basis and an earnings efficient basis. We'll continue to do that. We think it's, we think it's an important part of our strategy. But I'd also reiterate we don't need to. When we talk about our organic business model, it's same property NOI growth, it's our developments and redevelopments that are funded by the $170 million of free cash flow and it's the strength of our balance sheet and our talented team. Acquisitions are generally additive to that.

Hap Stein -- Chairman and Chief Executive Officer

I'd only add where we are always in the market looking for really compelling opportunities. You can see what we bought in the past and we've been buying in the coast. We bought a great center if you forward a number of years ago, we bought a great center in Raleigh. So it's, it's dependent on obviously the dynamics of the market. The intersection, the demographics and in the health of the tenants, we look at carefully that let load as compared to sales. So could we buy another large acquisition again? I would say it just depends. But would have to be compelling and we'd look at all these factors that we've discussed.

Vince Tibone -- Green Street

Great, thank you.

Hap Stein -- Chairman and Chief Executive Officer

Thanks.

Operator

Thank you. [Operator Instructions] The next question is from the line of Michael Mueller with JPMorgan. Please proceed with your question.

Michael Mueller -- JPMorgan

Thanks. And obviously congratulations from our whole team here as well. So I guess first for The Pruneyard higher it seems to NOI growth CAGR. Can you talk a little bit about what the mark-to-market is or is it coming from outside farms, the combination of it and the bumps comparable to your portfolio or even above

those levels.

Hap Stein -- Chairman and Chief Executive Officer

Sure, Michael. Much of the growth in there is due to embedded rent steps, and the tenants that releases that were heretic have very strong bumps, a little bit better than what we have been able to get compared to our overall portfolio. But it's not surprising given the strength of the center and the strength of the market in the demographics. So tenants have signed up for higher bumps because they expect to fully realized higher profits over time given tremendous trade area. So there's a little bit of roll over, a little bit of mark-to-market, there is in every center. But there isn't for example, one big box that's coming back in year six that's driving the model. It's not one of those situations. It's very much lease to lease.

Michael Mueller -- JPMorgan

Got it, OK. And then I know the watchlist was brought up earlier. Which portion of your ABR does the current watchlist make up in aggregate?

Hap Stein -- Chairman and Chief Executive Officer

It's a good question. I'll give you a longish answer. We use a pretty extensive watchlist internally and we like to be fit up, we'd like to team to be aware of where we see issues, which can be financial. So that's more of the traditional bankruptcy risk that you see that burst frankly has absent [Indecipherable], has put them aside, has actually shrunk over time really from Sears and actual realized bankruptcies occurring.

The second part of the list we use is just a store closure or store rationalization list, and this is where we'll include concepts that we feel may be over saturated. Importantly in that environment, Regency historically performs better. We find that when fleets are rationalized. It is very often that are locations within our centers are higher performers, upper tier, upper half of their portfolios and we just do better in that regard.

And then lastly, we'd like to include otherwise healthy financially risk, financially tenants that for whatever reason that are maybe stubbed their toe and a good example of that would have been Chipotle in the past with the food quality issue that they came across. So we do include them on our internal list. The percent of our overall rents is in it's well under 2%, probably in that 1.5% range and that's really across those three categories, Mike, so it's that's pretty broad.

Michael Mueller -- JPMorgan

Okay. That was it. Thank you.

Hap Stein -- Chairman and Chief Executive Officer

Thanks, Mike.

Operator

Thank you. Our next question is from the line of Linda Tsai with Barclays. Please proceed with your question.

Linda Tsai -- Barclays

Hi. Let me add my congratulations to everyone. Lisa and Mike, you guys make a great team. I know Sears had a 40 basis point impact on the same property in the quarter, kind of impact do you expect to in 3Q and 4Q, and then maybe just an update on the releasing of those boxes?

Mike Mas -- Managing Director of Finance

Sure. Let me take that. Let me take the impact question and Jim will handle the releasing. We're expecting all bankruptcy is included in the second half of the year. It's in that 30 basis point range, doesn't impact the same property growth primarily through base rent.

Jim Thompson -- Executive Vice President, Operations

I'll then jump in on our Hancock Center, which is one of largest users. That's a very good center that we own there. And it's in part, it's in Austin. It's a terrific market just north of the city. It's also anchored by HEB that is over $100 million in sales. So it's got great tenant performance and great foot traffic. The existing box has great bones, great structural integrity, great ceiling heights, great color layouts and it really sets itself up well for an adaptive reuse. So we've been setting these plans. We haven't picked a definitive angle that we're going, but I would say the likely approach is we're going to convert it into creative office.

The strong demand for tenants looking for space is just like that. It's going to take a little bit time but because we'd be using the existing box, it doesn't take any discretionary entitlements. So, more to come on that one, but I would say we will be able to start that construction next year and deliver to tenants about 12 months following the commencement of construction.

Linda Tsai -- Barclays

Thanks for that.

Hap Stein -- Chairman and Chief Executive Officer

For the last Kmart, we have is in Gadsden, Florida and we are at [Indecipherable] with the market leading grocer for that particular box, and I would suspect that we will have a little more clarity in the next six months on the direction of that and probably 18 to 24 month deliverable.

Linda Tsai -- Barclays

Thanks. And then maybe just addressing the comment that retailers that are closing stores that tends to happen less at Regency given your higher-quality centers. In terms of Dressbarns and GNC, how much exposure do you have there, and then how do you feel about those rents versus market?

Mike Mas -- Managing Director of Finance

Our exposure for Dressbarn, we only have eight locations. It's about 10 basis points, Linda. And then GNC is in the 20 basis point range. Jim can comment further. This is kind of regular way business for us, but we feel really good about the returning opportunities.

Jim Thompson -- Executive Vice President, Operations

Yeah, there is nothing unique there that we're happy to get our space back. We've been watching obviously both of them for a while, and we really like I said, I think we've got an opportunity to upgrade our merchandising at the end of the day.

Linda Tsai -- Barclays

Thanks.

Hap Stein -- Chairman and Chief Executive Officer

Thank you Linda.

Operator

Thank you. At this time, I will turn the floor back to Hap Stein for closing remarks.

Hap Stein -- Chairman and Chief Executive Officer

Once again, we thank everyone of you for your interest in Regency and give me a one more call, and I'll look forward to that and really enjoyed the relationships with the investment community. It's been special, and we've had a, because I get to work with a good team, it's been extremely successful. More often than not the story is easy to tell . So, but thank you all very much and everybody have a great weekend. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Laura Clark -- Vice President

Hap Stein -- Chairman and Chief Executive Officer

Lisa Palmer -- President and Chief Financial Officer

Jim Thompson -- Executive Vice President, Operations

Mac Chandler -- Executive Vice President, Investments

Mike Mas -- Managing Director of Finance

Christy McElroy -- Citi

Jeremy Metz -- BMO Capital Markets

Richard Hill -- Morgan Stanley

Craig Schmidt -- Bank of America

Samir Khanal -- Evercore ISI

Brian Hawthorne -- RBC Capital Markets

Vince Tibone -- Green Street

Michael Mueller -- JPMorgan

Linda Tsai -- Barclays

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