Greetings. Welcome to Regency Centers Corporation Second Quarter 2019 Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I'll now turn the conference over to Laura Clark. Ms.

Clark, you may now begin..

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 the 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 supplement, which can be found on our Investor Relations website. Before turning the call over to Hap, I want to mention our upcoming Raleigh market showcase event in early October.

This event will feature our high quality properties including recent developments, redevelopment and acquisitions as well as our local market team. We hope that many of you will be able to join us, and I'm happy to provide more details to those of you who would like to attend.

Hap?.

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 that executive changes we announced yesterday.

I'm extremely excited that Lisa Palmer will become President and Chief Executive Officer effective January 1st, 2020, and at that time, I will transition to Executive Chairman. On August 12th, 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 the result of a well-considered plan that Regency has been crafting for the last several years and we have no hesitation that 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 may 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 through Regency's vision, strategy, and consistent execution.

And it's through this partnership I know that our understanding of the business, our ability to execute on our strategy, our experience in the capital markets as well as our devotion to our special culture position her to continue to build on Regency's past success.

And with the support of the executive team and of our people, we'll continue our focus on being the preeminent national owner, operator, and developer of shopping centers.

Now to the quarter, Lisa, Jim, Mac, and Mike will discuss in more detail how we're operating in and in our view is a recently favorable environment which is reflected in the underlying fundamentals. This includes a portfolio that is over 95% leased, net growth in high single-digits and bad debt at prior year's 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 towards 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 unequaled combination of strategic advantages including the quality of our portfolio, our development capabilities, the strength of our balance sheet and our high -- 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..

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 leader of our company and for our employees. Hap and our senior leadership team with the guidance of an exceptional Board -- in the company for a seamless transition.

As Hap said, we've worked so closely together along with Mike, Jim and 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 in the, which Mac will talk about in just felt a bit.

We further enhanced the quality of our portfolio through the acquisition of a premier shopping centers in Silicon Valley, and with our balance sheet strength, we are able to fund the acquisition on an essentially non-dilutive leverage neutral basis.

Our conservative balance sheet at approximately $170 million of free cash flow, which is after capitals 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 foot 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 from 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 hand it over to Jim..

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 continued to elicit good demand.

This is evidenced by new and renewal leasing volume in the first half of this year which exceeded the first half in 2018. Move-outs and bad debt that remained 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 merchandising selection, which contributed to delays and lease 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 striving continue to cause delays. We're 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 captured 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 in Sheridan Plaza in South Florida, we declined Bed, Bath & Beyond's request to renew and reduce rent. We captured that space and are executing on a new lease with Burlington at 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 and store rationalization, we are diligently monitoring launch list retailers.

Our local teams have been actively marketing many of these spaces, and given the desirability of our real estate, there are a number of backfill prospects we're 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 Barney's to file bankruptcy was new information and there's 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?.

Thanks Jim. Our capital allocation strategy, which clearly differentiates Regency's business model starts with $170 million of annual free cash flow after capitals and dividends.

This enables us to fully self-fund our development and redevelopment objective, start and deliver $1.25 billion over five years on an extremely favorable and cost-effective basis. In the second quarter, we started our terrific ground-up development in Culver City, arguably the most sought-after market in Southern California.

This dense and build project will be anchored by Urbanspace, one of the leading market hall operators as well as several local restaurants and retailers. The 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 Abbott. We're extremely excited about this exceptional opportunity and its value creation. The Abbott is the most prominent location in Harvard Square, benefits from tremendous foot traffic and world-class demographics.

Our in-process developments and redevelopments are performing well. The projects are nearly 90% leased and committed with the 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've previously communicated, a key component of our investment strategy is portfolio quality enhancement through the acquisition of premier assets. On July 1st, we did just this with our acquisition of The Pruneyard, a 258,000 square foot center in the heart of Silicon Valley.

This iconic center anchored by Trader Joe's and Marshalls sits in close proximity to the West Valley's most affluent neighborhoods and technology employers and is merchandize to superb local retailers and restaurants.

Adjacent to The Pruneyard are three office towers and a hotel, which were not part of 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%. This 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 will lower growth dispositions combined with debt in an unsecured market, both of which are reflected in our guidance upgrades.

Mike?.

Thank you, Mac. I'd like to provide some color on our reaffirmed 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 loss from Barney's as that situation remains very fluid. And as Jim mentioned, there is much uncertainty around the eventual outcome.

Our annual rent exposure to Barney's is approximately $4.9 million, 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 the 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 tenant's straight line receivable.

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 in timing of our planned disposition, which in total allowed us to tighten our efforts 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 eliminates 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 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 the floor of 2% when we initially offered guidance. That concludes our prepared remarks, and we now welcome your questions..

Thank you. At this time, we'll be conducting a question-and-answer session [Operator Instructions] Thank you. Our first question is from the line of Christine McElroy with Citi. Please proceed with your question..

Hey, good morning everyone. Just first Michael and Katie, and I just wanted to offer our congratulations to Lisa and the rest of the team. Obviously, part of the longer term plan, but well deserved. And Hap, we'll definitely miss you in the fray, but we know you'll still be around. Just to follow-up, Mike, on some of the Barney's stuff.

I know it's not in the same-store range yet for 2019, 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 in 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 re-lease that space versus where that market is today?.

Thank you, Christine. I appreciate the question. I'll leave the re-tenanting 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, Barney's, Sears, Toys before that, this is part of the business. Always have been. We're going to have retailers who fail and we'll continue to have retailers who fail. This is a large rent for us and a 0.25 point impact for this year and under a lot of assumptions, maybe 0.25 point next year as well.

That being said, it's just two to -- it's a 2.25, 2.5 business organically, again assuming that we're going to have tenant fallout. Again the real reason we're at these levels this year is the lack of and the muted contribution from redevelopment deliveries, and we've been very vocal and have communicated with them in the past.

The exciting part is we see redevelopment pipeline continue to make progress, and Mac and I have color on that. You saw us start The Abbot. You saw us -- we're making great progress on Westwood. Market common is underway.

All of these are why we believe our future NOI 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 to Barney's, I'll let Jim comment on the re-leasing..

Chris, you're right. It is a bit of a -- property for our portfolio. But ever since the merger, we felt that, that underlying real estate and Chelsea address had really long-term potential for future opportunity. Let's back up a little bit, but in fact, we had unsolicited offers to buy that asset in the past. Trader continues to improve.

And at the end of the day, yes, we think there is value at play should we get the real estate back. Obviously, there's 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..

Okay. Thanks. And then understanding you've raised your disposition expectation to help fund -- 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 distribution cap rate a function of the mix and what you're selling or sort of better execution for what you expected?.

Thanks Christy. Nothing under contract, although we're negotiating three different purchase contracts to identify the buyer. And then we have three other properties that we've taken out to the market, so they're virtually on The Street. So, initial interest on those -- we feel good about it.

And then the reason we've lowered our cap rate on the disposition is we've gotten a little bit better pricing than we expected. And if you look at what we sold today, keep in mind, too, we've had -- about a third of those assets are Louisiana properties that sold for roughly 10 caps.

So, if we average that in there, gives you a good indication of the quality of our properties and the pricing that we've been able to realize..

Thanks so much..

Thank you, Christy and appreciate your nice comments, greatly appreciate..

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

Hey, good morning and congrats on all the appointees. I'll echo Christy's comment there. You mentioned..

Thank you before Hap had the chance to jump me. So, thanks, Jeremy, thank you..

So, in the opening remarks you mentioned the lowering of the same-store NOI range is the delay in timing for some rent payments. I'm just wondering any more color you can give on that in terms of what you're driving some of that relative to the expectation.

And you did mention the permitting and the construction delays, but I don't really think that's necessarily new. We heard about this process strategy last year, so I would assume some of that was built on the expectations.

But any more color on that?.

Let me start, and again, we'll clean up on here in a little bit. Again, I appreciate you bringing it up. So, we are focused and our team's eyes are pointing towards 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'd 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. However, it is more consistent with the assumption that we had in place supporting the lower end of our range.

So, now the question is we look 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 of the year, it's more about move-outs assumptions obviously.

And with respect to that, more positive results on that front as well as net increase in timing of our expenses what you give us to outperform. So we'll focus on that. But again, it's really timing, tenant demand is healthy, and Jim will speak to that. Volumes have been very good.

They're roughly in line with our expectations and they're roughly in line with prior years..

Yes, Jeremy, I'll just piggyback a little bit on that. The volumes have been strong. Pipeline is solid. When you look at our shops, we're at 91.5% on the small shops space today. We consistently been in the 91% to 93% range, which has been quite frankly at or near at 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 this in that 91% to 93% range. And personally, I'm bullish that we can move towards the higher end of that range as we execute on these redevelopments and remerchandising..

Helpful. Thanks.

And then second for me just in terms of The Pruneyard acquisition, should we think about this just more as a stabilized type of acquisition, or is there any value-add or notable upside potential there that you can be sitting on? And just sticking with aiding further in the pipeline on the acquisition, you can maybe can get to the goal line here..

Sure Jeremy this is Mac. I think in the short-term, you can expect this to be, as we've discussed, various property with great CAGR at 3.5%. 10-year CAGR is going to pick up kind of quickly because there's about five tenants are in buildout 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 other boxes that will roll the market and there could be some really interesting opportunities here, the sports basement box, sets itself up. You can do a lot of different things with that.

Don't want to get ahead of ourselves, but it is one of the reasons we'd like the property long-term, there's tremendous demand for office, multifamily, just the kind of demand that we look for. As to other acquisitions, we already guided and we're getting really close on.

There are couple of properties that were looking at, that are acquisitions that would have a redevelopment focus and we really prefer those properties that use our team, our platform, and our capital, and those two midsized projects that hopefully we can give you a little bit more color on next quarter..

Thanks. Appreciate..

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

Hey good morning guys. Lisa or Mike, I want to come back to The Pruneyard and think about how much of the benefited was to FFO. Recognize you kept the FFO guide consistent at a tighter range despite the $0.02 onetime non-cash in straight-line rent charge.

So, that mean we should think about The Pruneyard as maybe a $0.02 benefit that offset that?.

Now, Rich, in my prepared remarks I think I commented that we're doing this essentially on a non-dilutive -- although I didn't say pretty good but essentially earnings neutral.

It was the fact that going in cap rates in the mid-4s and we're going to be funding that partially with disposition and we're seeing our disposition guidance we're able to offset the cost of that this position as well as the cost debt. So, it's essentially earnings neutral.

If you just 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 it in the past. It's no accident that we've been able to maintain and lead our sector with above same-property NOI growth.

And we think the continued enhancement of the quality of the portfolio -- we don't need to, but we're very opportunistic in doing so, I think that's an important part of our strategy..

That makes perfect sense. Thanks guys..

Real quick on FFO. The offset to a non-cash charge was, as we indicated in the call, better G&A expectations as well as a slight timing enhancement to our dispositions..

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

Thanks Rich..

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

Yes. 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 the allocation of capital of redevelopments versus acquisitions and maybe talk about what was more compelling reason to buy The Pruneyard, was it the asset quality or its upside opportunity..

I think that the number one use of our capital, $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 Mac implied that we're looking at right know when there's a meaningful upside.

And in the third category will be core acquisitions -- high quality acquisitions with superior growth prospects like The Pruneyard and 3.5% project NOI growth plus a potential upside beyond that. And we're funding those through the sale of assets.

And as Lisa mentioned, given our right now and we think we can do it on essentially on earnings and balance sheet neutral basis with superior NOI growth going forward and/or value add opportunities going forward..

Great. Thank you..

Thank you, Craig..

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

Good morning everyone. So, just switching gears a little bit on grocers. I know 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 as to see what you're seeing on the ground again the exposure they have..

I'll take that one, Samir. Just for the past couple of years really, three years potentially, even we've seen continual improvement in the actual store operations of Albertsons, better sales sometimes anecdotally they're reporting, but generally better operations.

And as 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 RiteAid merger, they really pivoted on improving the balance sheet as well and they made tremendous improvements in their balance sheet and further improvements in their operations and even their margins.

If you were to go 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're 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 grocers, the individual stores of Albertsons that we have in our centers are above average, and the real estate itself is well above average. So, we like our position with Albertsons, but we do recognize the potential risks of that..

Great. Thanks for the color..

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

Hi. I equity wanted to mention the big uplift from anchor expirations.

How much of that is left to go?.

We appreciate the question, Brian, and if you recall from our last Investor Day, we started what we call the legacy leases, and those are a combination of both legacy portfolios of anchor leases that are coming due.

A lot of that remains and that all will be supported by this five-year plan that we feel good about and our ability to generate organic NOI growth in that 2.25% and 2.5% range and we're supplementing that with redevelopment opportunities. Some of those legacy leases are what triggered these redevelopment opportunities..

Okay. And then on -- it seems like 90% leased.

When do those tenants start paying the rent? And I guess when do you get to that kind of stabilized yield? Or when do you expect to get there?.

Sure, Brian. This is Mac. Roughly 93% lease was committed and with last quarter, we leased more than 35,000 square feet including the -- was really one of our last sort of pivotal stations. Most of the tenants are open, operating, doing well, reporting sales in excess of the projections. So, I think by year-end, we should be stabilized lease spaces.

If you get a chance, we encourage you to get out there and take a look at it. It's doing well and we're very pleased with that..

The center looks fabulous. And not only the place you mentioned there, but also the merchandising is exceptional..

When you say by year-end reached a stabilized yield, that means like by December? Or do you mean by fourth quarter, you'll be at the 6.8 yield? I think that's what it was..

Well, difference between December and the fourth quarter is pretty finite. I would just assume by year end at this point..

Okay. All right. Thanks..

The next questions from the line of Vince Tibone with Greenstreet. Please proceed with your question..

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 assumed equity to fund acquisitions.

I'm curious is there like a certain stock price for you to assume equity to fund external growth?.

Well, 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 of that is to fund developments and redevelopments.

And then beyond that, you 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 as we are doing with The Pruneyard, sometimes using debt. And at times in the past when we thought when the trade made sense, we issued equity..

Got it. That makes sense. My next is kind of your acquisition strategy going forward.

Do you think Regency could buy more large ticket items? There seemed to be significantly fewer potential buyers, let's say $100-plus million 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 our exposure?.

I'll -- color on the markets. But I'll just reiterate what Hap said in terms of the use of our capital and the fact that we are -- we're opportunistic.

And then to the extent that we're able to identify and have the ability to acquire shopping centers with a value-add component or with above-average growth and we're able to fund it on an essentially leverage-neutral basis and then earnings-efficient basis, we'll continue to do that. 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 development and redevelopment 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..

Yes, I don't -- we are always in the market looking for the most compelling opportunities. You can see what we bought in the past and we've been buying in the coast. We bought a great center in Florida a number of years ago. We bought a great center in Raleigh.

So, it's dependent on also the dynamics of the market, the intersection, the demographics and the health of the tenants. We look at carefully the rent load as compared to centers. So, could we buy another large acquisition again? I would say it just depends, but it would have to be compelling. We look for those factors that we discussed..

Great. Thank you..

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

Thanks. And obviously congratulations from our whole team here as well. So I guess first for The Pruneyard higher same-store NOI growth CAGR.

Can you tell a little bit about what the mark to market is? Or is it coming from outsized comps, the combination of it? And are the bumps comparable to your portfolio or even above those levels?.

Sure Michael. Much of the growth in there is due to embedded rent steps, and the tenants -- at least that we're inheriting the strong bumps have been better than what we have been able to get typical of our overall portfolio. But it's not surprising given the strength of the center of the strength of the market and the demographics.

So tenants signed up for higher bumps because they expect to fully realize higher profits over time given tremendous trade areas. So, there's a little bit of -- 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..

Got it, okay. And I know the watch list was brought up earlier.

What portion of your ABR does the current watch list make up in aggregate?.

It's a good question. I'll give you a longish answer. We use a pretty extensive watch list internally and we like to beef it up. We like the teams to be aware of where we see issues, which can be financial. So that's more than the traditional bankruptcy risk that you see.

That list frankly, has absent Barney's, we've put them aside, has actually shrunk over time really from Sears and actual real-life bankruptcies occurring. The second part of it was we use just store closures, store rationalization list, and this is where we'll include concepts that we feel may be oversaturated.

Importantly, in that environment, Regency historically performs better. We find when fleets are rationalized, it is very often that their 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 financial risk -- financial tenants that for whatever reason are maybe stub their toe and a good example of that will be 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 rent has been -- it's well under 2%. We're probably in that 1.5% range, and that's really across those three categories, Mike. So, it's pretty broad..

Okay, that was it. Thank you..

Thank you..

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

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.

What kind of impact do you expect on 3Q and 4Q and maybe just shed some update on the re-leasing of those boxes?.

Sure. Let me take the impact question and Jim will handle the re-leasing. We're expecting all bankruptcies included in the second half of the year, it's in that 30 basis point range as an impact on the same-property NOI growth primarily to base rent..

I'm going to start our [Indiscernible] center which are our largest use is. That's a very good center that we own there. And it's in part -- it's in Austin, terrific market, just north of the city. It's also anchored by H-E-B that's 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 column layouts, and it really sets it up well for an adaptive reuse. So, we've been studying these plans. We haven't picked a definitive angle that we're doing.

But obviously, the likely approach is we're going to convert into accretive offers, a strong demand for tenants looking for space just like that. It can take a little bit of time, but because we've been using the existing box, it doesn’t take discretionary entitlements. So, more to come on that one.

But I would say we'll be able to start that construction next year and deliver to tenants about 12 months following the commencement of construction..

The last Kmart we have is in Gainesville, Florida and we are at LRI, 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 an 18 to 24 months of deliverable..

Thanks. And then maybe just addressing the comment that retailers that are closing stores, but it tends to happens less at Regency given your higher quality centers.

In terms of Dress Barn and GNC, how much exposure do you have there? And how do you feel about those rent versus market?.

Our exposure for Dress Barn, we only have eight locations and it's about 10 basis points, Linda. And then GNC it was 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 retaining opportunities..

Yes, there's nothing new there. We're happy to have spreads back. We've been watching obviously both of them for a while. And we really -- like I said, we think we've got an opportunity to upgrade our merchandising at the end of the day..

Thanks..

Thank you, Linda..

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

Once again, we thank every one of you for your interest in Regency and give me one more call and I look forward to that, and we really enjoyed the relationships with our investment communities. It's been special. We've had -- feel good work with a good team. It's been extremely successful. More often than not, the story is easy to tell.

So, I thank you all very much, and everybody have a great weekend. Bye, bye..

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation..