Earnings Call Transcript - REG Q2 2025

Operator, Operator

Greetings, and welcome to Regency Centers' Second Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Christy McElroy. Thank you. You may begin.

Christy McElroy, Host

Good morning, and welcome to Regency Centers' Second Quarter 2025 Earnings Conference Call. Joining me today are Lisa Palmer, President and Chief Executive Officer; Mike Mas, Chief Financial Officer; Alan Roth, East Region President and Chief Operating Officer; and Nick Wibbenmeyer, West Region President and Chief Investment Officer. 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 these 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 to our Investor Relations website. Please note that we also have 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. As a reminder, given the number of participants we have on the call today, we respectfully ask that you limit your questions to one and then rejoin the queue with any additional follow-up questions. Lisa?

Lisa Palmer, CEO

Thank you, Christy. Good morning, everyone. We are pleased to deliver another quarter of excellent results, driven by both internal and external growth. This is highlighted by the strength of our operating fundamentals and our accretive capital allocation. On the operating side, we're having a phenomenal year. We continue to outperform on all metrics, demonstrated by strong same property NOI growth and total NOI growth. In the second quarter, we had great success commencing rents for tenants in our SNO pipeline, achieved record low shop move-outs, and sustained robust leasing activity with strong rent growth. Our investments team is also firing on all cylinders, sourcing high-quality opportunities and deploying more than $600 million of capital year-to-date. Most recently, we were excited to announce the acquisition of five outstanding shopping centers located in a premier community in South Orange County, California. Strategically, this transaction checks all of our boxes. It's accretive to earnings, quality and growth while enhancing our presence in this supply-constrained Southern California market. During the second quarter, we also released our annual Corporate Responsibility Report, highlighting our progress and future strategic direction. Our ongoing commitment to corporate responsibility in support of our business objectives remains a foundational strategy for Regency, and the many achievements noted in the report reflect the dedication and efforts of our entire team. Given the strength in our results, substantial progress in leasing and opportunistic capital allocation, along with greater visibility for the remainder of the year, we are raising our full year growth outlook for same property NOI, core operating earnings and Nareit FFO. Regency's distinct strategic advantages continue to differentiate our company and position us favorably for future growth. Our high-quality grocery-anchored shopping centers located in desirable suburban trade areas provide essential retail offerings focused on necessity, service, convenience and value. Our well-established national development platform allows us to drive substantial value creation. And our strong balance sheet with low leverage and dependable access to low-cost capital enables our team to continue to pursue and successfully execute on strategic growth opportunities. We are only halfway through 2025, and I am so proud of our team's accomplishments so far. I look forward to building on this success for the remainder of this year into 2026 and beyond.

Alan Todd Roth, CFO

Thank you, Lisa, and good morning, everyone. Our team achieved outstanding second quarter operating results, highlighted by same property NOI growth exceeding 7%, with base rent being the largest contributor at 4.5%. As discussed on last quarter's call, we had anticipated above-trend growth in the second quarter, and we delivered even better results, which were driven by a multitude of positive factors, including robust leasing activity, record low shop move-outs, favorable bankruptcy outcomes, accelerated rent commencement timing on a few key anchor tenants and meaningful improvement in our expense recovery rates. We maintained our same property lease rate and continue to grow shop occupancy as our high-quality properties are commanding strong tenant demand from a wide range of categories, including grocers, restaurants, health and wellness, off-price and personal services. Our team is seizing every opportunity to enhance merchandising as leading retailers recognize that high-quality, well-located space is in short supply, and it is in centers like ours where these best-in-class retailers are achieving exceptional results. We continue to commence tenants within our SNO pipeline at a rapid pace, driving our commenced occupancy rate higher by another 40 basis points quarter-over-quarter. At the same time, we are also continuing to backfill the pipeline with new leases. Our leased and commenced occupancy spread was 260 basis points at quarter end, representing an SNO pipeline of $38 million of incremental base rent. We continue to drive rent growth higher in the quarter for both new and renewal leasing, achieving cash rent spreads of 10% and GAAP rent spreads of nearly 20%. Our GAAP spreads demonstrate our ability to not only drive mark-to-market rent increases when signing new and renewal leases, but also reflect our continued success embedding meaningful contractual rent steps in the majority of our leases. In summary, I'm really proud of our results, and I'm even more proud of the work of our incredible team to achieve them. We are capitalizing on persistent demand for our best-in-class shopping centers and the phenomenal operating trends that exist in our sector as we upgrade our merchandising and drive NOI higher. With current year lease commencements largely derisked, we are full speed ahead on continuing to build our future lease pipeline as we drive momentum and sustained growth opportunities well into 2026.

Nicholas Andrew Wibbenmeyer, COO

Thank you, Alan, and good morning, everyone. We've maintained a robust pace of investment activity with more than $600 million of accretive capital deployment so far this year. Our investments platform is unequaled by our ability to acquire, redevelop and, importantly, develop ground-up best-in-class shopping centers. As Lisa mentioned, we recently had a tremendous opportunity to lean into acquiring. Last week, we closed on a five-asset portfolio within the Rancho Mission Viejo master planned community in Orange County, California for $357 million. The RMV portfolio, as we refer to it, is 97% leased and includes more than 600,000 square feet of high-quality retail GLA in one of Southern California's most sought-after suburban submarkets. These shopping centers are positioned at primary intersections with strong trade area demographics and anchored by high-performing grocers. The transaction is well aligned with Regency's capital allocation strategy, accretive to our growth, earnings and overall portfolio quality as well as leverage neutral to our balance sheet. Furthermore, our UPREIT structure provided us a competitive advantage in the transaction, offering tax planning optionality to the seller as well as an opportunity to participate in our future success through the ownership of our operating partnership units. We also assumed $150 million of below-market debt with an average term to maturity of about 12 years. In addition to the acquisition of these exceptional assets, we continue to successfully execute on our $500 million in-process development and redevelopment pipeline. Consistent with the fundamental strength that exists throughout our operating portfolio, leasing activity for these projects is robust and blended project returns exceed 9%. Importantly, our team is completing projects on time and on budget. We are also making significant progress sourcing incremental opportunities, especially in our ground-up development program. While overall supply growth in our sector remains limited, we continue to find more than our fair share of attractive projects as the leading national developer of high-quality open-air shopping centers. We have started nearly $50 million of new projects this year. And after two consecutive years of $250 million or more of starts, we continue to have visibility to at least that level in 2025, with the majority of the investment in ground-up development. Leading grocers and retailers across the country are demonstrating a strong commitment to expand in our markets and partner with us on the high-quality centers we are developing. In closing, our team is energized and is taking advantage of the flywheel momentum we've built within our investments platform to source new opportunities. As a result, we continue to see substantial activity across the board in acquisitions, redevelopment and ground-up development, fueled by our best-in-class team, sector-leading balance sheet, substantial free cash flow and access to capital. We look forward to announcing additional exciting investments in the near future.

Michael J. Mas, CFO

Thank you, Nick, and good morning, everyone. As you've heard from Lisa, Alan and Nick, Regency delivered exceptional results again this quarter. Our same property NOI and earnings growth surpassed our expectations, and we are grateful for our team's hard work in delivering these results. Following the strong first half performance, combined with greater conviction on our outlook for the remainder of the year, we are raising our current year earnings guidance. I'll refer you to pages 5 and 6 in our earnings presentation, while I highlight some key guidance changes. We raised our same property NOI growth range to 4.5% to 5%, up 115 basis points at the midpoint. We raised our NAREIT FFO range by $0.06 per share at the midpoint, now representing full year growth of more than 7%, and we raised our core operating earnings per share by $0.05 at the midpoint, representing growth north of 6%. The increase to same property NOI guidance was fundamentally driven by higher average commenced occupancy from higher shop retention rates, combined with strong lease commencement activity. Additionally, with the follow-on impact of the elevated occupancy, together with the completion of our annual reconciliation process, we are benefiting from higher expense recovery rates, further amplifying NOI growth. Lastly, with greater clarity on the outcomes related to some of the more high-profile bankruptcies this year, we are also narrowing our credit loss guidance to 75 to 85 basis points. While the increase to same property NOI was the largest contributor to our overall earnings guidance range, our accretive investment activity is also moving the earnings needle even higher, including the accretion expected to be generated by our recently announced RMV portfolio acquisition. We've also substantially derisked our capital raising plan for the year following the successful execution of our $400 million bond offering in May. We issued 7-year notes at a 5% coupon, allowing us to prefund our November unsecured bond maturity and resolve our remaining corporate level financing needs. This issuance demonstrates our clear cost of capital advantage as we remain the only shopping center REIT with an A credit rating from both Moody's and S&P. Our leverage is comfortably within our target range of 5 to 5.5x and will remain so even taking into consideration the portfolio acquisition, which was funded on an effective leverage-neutral basis. We continue to generate significant levels of free cash flow, have nearly full availability on our $1.5 billion credit facility and still have $100 million of unsettled equity from our forward ATM issuance late last year, which we will settle in the second half of this year. With our sector-leading financial and balance sheet position, we will continue to play offense and execute on strategic investment opportunities fortifying ongoing earnings growth. With that, we welcome your questions.

Operator, Operator

Our first question comes from Samir Khanal with Bank of America.

Samir Upadhyay Khanal, Analyst

I guess, Mike, as you alluded, very strong print for same-store in the quarter. Certainly, a big contributor was the base rent, but also saw some positive contributions from recoveries, other income and percentage rent. So walk us through kind of how you're thinking about the contribution from the various components into the second half as we think about the same-store NOI cadence.

Michael J. Mas, CFO

Sure. Samir, yes, so last quarter, we spent a little bit of time talking about the known deceleration in the growth rate that we are seeing in the numbers, and that hasn't changed. What I would add to that is the second quarter was exceptional on a couple of other line items, which has kind of just raised the entire C level, but that bias to the second half of the year being a little lower than the midpoint still exists. So what's going on here? As you said, base rent has been and will continue to be the largest contributor. But some of the credit loss elements are where that bias is happening in the back half of the year. As we know, we have now more certainty and we know that the bankruptcy move-outs from Party City, from Joann, from Rite Aid, these will be back half of the year elements. We also have uncollectible lease income. The first half of the year has been incredibly low, well below our historical averages. We are planning for a slightly higher level of uncollectible lease income in the back half of the year. I will share that we're planning for still below historic levels, but higher than the first half, which is putting a little pressure on that growth rate. Lastly, there's a comp in the prior year from an uncollectible lease income perspective, again, very low in the back half of last year, so comping to a little bit higher this year in our expectations. There is, and in the second quarter, uniquely, there is some percentage rent that shifted into the quarter from the first quarter. There's other income, which, by definition, is a bit of an uneven line item, and we had a little bit of froth in the second quarter. And then lastly, I tried to color it up in the prepared remarks, but our reconciliations. Again, this is a testament to the team and just rent paying occupancy being higher, and it exceeded our expectations on our ability to not only collect rent on a prior year basis, but also to continue to collect recoveries. I hope that helps on the growth rate and the trajectory. But I also hope it doesn't take away from the fact that we've had an incredible first half of the year, and we're looking forward to continuing that momentum.

Operator, Operator

Our next question comes from Michael Goldsmith with UBS.

Michael Goldsmith, Analyst

The question is about the same property NOI growth algorithm. You have a great chart in your presentation that highlights the various drivers contributing to the over 7% same property NOI growth this quarter. As we consider the future, it appears that occupancy is at its peak for leased spaces, although there might still be slight potential for improvement in the commenced leases. Could you discuss the transition from focusing solely on occupancy to incorporating other aspects of the same property NOI growth algorithm to compensate for that? I know Alan mentioned the ongoing significant contractual rent increases in most of our leases, so if you could elaborate on that as well.

Michael J. Mas, CFO

Yes. Let me start by saying that I appreciate your recognition of the disclosure; I'm proud of it and our team does a great job sharing that information. From a prospective standpoint, we continue to see growth potential regarding commenced occupancy. Although we are at peak levels of percent leased, we have yet to reach the highest levels of commenced occupancy. This gives us confidence as we transition through the second half of this year and into 2026, indicating that we have an above-trend growth opportunity ahead of us at Regency, and we are excited about it. Alan will address the SNO pipeline shortly, but we expect it to improve positively. Additionally, from an algorithm perspective, redevelopments have significantly contributed to our same property NOI growth metric, and we anticipate that trend to continue. We expect 2025 to have a positive impact of over 100 basis points on our same property growth rate. As we sit here now, it seems likely that this success will extend into 2026. We've excelled in starting, delivering, and progressing in our redevelopment efforts, and I believe the positive impact on NOI growth will persist into next year.

Alan Todd Roth, CFO

Yes, Michael, I'll just color up the SNO piece. Our team is continuing to make really great progress bringing rent online, as I mentioned, in the opening remarks. But I'm even more proud of continuing to backfill that pipeline with additional signed leases. The process is working just in terms of getting our tenants to start plans early, proactively fitting out our spaces to make them more marketable, ordering equipment in advance, all leading to some accelerated rent commencement dates. From a normalized run rate, I think we've mentioned, we expect that at a stabilized basis, SNO will be at about 175 basis points. But the compression we had this quarter is a great thing, particularly when it's in conjunction with percent commenced going up, which it did 40 basis points. The team is clicking on all cylinders on that front, and I hope that number continues to compress certainly over time.

Operator, Operator

Our next question comes from Greg McGinniss with Scotiabank.

Viktor Fediv, Analyst

This is Viktor Fediv on with Greg McGinniss. I'd like to dig into this SoCal acquisition to better understand transaction markets through these plans. So who are you competing against for the asset? And from your perspective, what gave you a competitive edge in successfully executing the deal?

Nicholas Andrew Wibbenmeyer, COO

Greg, this is Nick. Appreciate the question. This is one of those opportunities that I can really sort of pound my chest that it was truly off-market. The seller is a family that's owned these properties since the 1800s. They've owned tens of thousands of acres throughout Southern California that they've been master planning and developing now for generations. They chose us and they came to us really for three primary reasons in our discussions with them. First and foremost, the quality of our currency mattered. The UPREIT transaction was really important to them from a tax optionality standpoint moving forward on their side. The quality of the currency they were getting in return was really critical, given they are now a large shareholder of Regency Centers. And so we appreciate their commitment to our platform and their ownership now in our company. Beyond the quality of our currency, the quality of our operations mattered. Again, they have a very vested interest in this community, not only in what they've done to develop it to date, but there's future development on the horizon residential to the east of these projects. They live and shop in these communities. They're very, very proud of these shopping centers. So the quality of the operator taking over these shopping centers to make sure they are best-in-class moving forward was critical to them. Last but not least, there are future development opportunities within the future phases of their master plan development. The opportunity to partner with them on future developments mattered. When they prioritized those three items, the only company they felt like checked all three of those boxes was us. We are very proud to have engaged with them, coming up with a quality transaction for all parties involved.

Lisa Palmer, CEO

I just need to come over the top just for a second and just say I'm really proud of the team because it took many throughout our organization to make this happen. It certainly didn't happen overnight, as you can imagine. And just ditto everything Nick said in terms of why the sellers were comfortable and wanted to transact with Regency. And that goes to the people and to our strategy and to the company that we've built. So grateful to the whole team, grateful to the sellers.

Operator, Operator

Our next question comes from Steve Sakwa with Evercore ISI.

Stephen Thomas Sakwa, Analyst

Could you maybe expound on the development opportunities? It seems like development yields are quite high for you guys, the acquisition yields. I'm just curious if there's incremental discussions you're having with the national retailers about new developments.

Nicholas Andrew Wibbenmeyer, COO

I appreciate the question, Steve. Again, it's Nick. Yes, as we've been articulating, we continue to see demand from best-in-class grocers growing their physical presence in the markets that we do business. We continue to have very active conversations with those key grocers about partnering with them to help them build their program out. As I've articulated in the prepared remarks, we're bullish on our ability to find those opportunities. They are very difficult. It is challenging to find these deals. But we are best-in-class given our relationships, our expertise and our capital. Our teams just continue to do a tremendous job coast-to-coast partnering with these grocers and putting these deals together. We expect to start $250 million in ground-up developments this year or even beyond that, and we do expect the majority of that to be in ground-up developments given the success our team has had. In terms of yield, as you've seen, we're in that 7% range, and I would expect us to maintain that yield sight for the time being.

Operator, Operator

Our next question comes from Craig Mailman with Citi.

Nicholas Gregory Joseph, Analyst

It's Nick here with Craig. You touched on the better expense recovery rates in the quarter and net OpEx dropped meaningfully quarter-over-quarter. So how sustainable is that going forward? Or do you expect a reversal?

Michael J. Mas, CFO

The recovery rate will slow down moving forward due to a one-time factor from the second quarter, as we completed our annual reconciliation process. This led to recognition from the previous year that was higher than our earlier estimates, roughly around $1 million being factored into the second quarter. We expect this recovery rate to decrease by about 100 basis points if we use the second quarter as a benchmark for the future. However, the average in-place occupancy is really driving the increased recovery rate for us. Last quarter, we anticipated that it could increase by 75 basis points or more in 2025. Given our success in the second quarter, we now expect an increase of over 100 basis points in 2025. This significant change in average commenced occupancy is what is fundamentally boosting our expense recoveries.

Operator, Operator

Our next question comes from Todd Thomas with KeyBanc Capital Markets.

Todd Michael Thomas, Analyst

I wanted to go back to the SoCal acquisition. Do you have any rights to participate in future developments or future acquisition opportunities with the sellers in SoCal within that master-planned community? And then you highlighted that it's accretive to Regency's core growth rate. Can you just provide some additional detail on the growth opportunity within the portfolio, which is 97% leased? What's the upside related to? And is there any incremental CapEx or reinvestment capital anticipated in order to generate that outsized growth?

Nicholas Andrew Wibbenmeyer, COO

Sure. Todd, let me start with your second question. Yes, we're really excited about the future growth of that portfolio. As you articulated, it is 97% leased. However, we do think there's upside in some of the rents that are in the near term. There are some small redevelopment opportunities. There's currently a vacant Rite Aid and the Sendero Marketplace that we anticipate redeveloping, and the soon-to-be vacated CVS further north in the Bridge Park. So we do expect that growth rate to be north of 3% moving forward. Although that portfolio has been well taken care of, there are still opportunities for growth within it, which is what we're excited about. In terms of your first question, no, we don't have the ability to acquire more within that master-planned community because the answer is simple. We bought all of their assets that currently exist. That is what we were so excited about within this acquisition is we own all of the retail servicing these phenomenal master-planned developments. We control that market, and knowing that is what we're excited about. We do anticipate the potential for future retail, and we have had discussions and very positive dialogue about participating and partnering on these projects in the future.

Operator, Operator

Our next question comes from Haendel St. Juste with Mizuho Securities.

Haendel Emmanuel St. Juste, Analyst

You guys mentioned plans to settle the $100 million remaining forwards in the second half of the year. So I guess I was curious what your thoughts or plans were for that capital. I think most of us presume it's for development or rebuild, but also I was curious kind of what your appetite for more potential acquisitions could be near term.

Michael J. Mas, CFO

Yes, to reiterate our plans, we're going to settle that in the second half of the year. We have to settle it contractually by the end of November or early December, and we will do that. From a use of proceeds perspective, we see it as additional capacity to continue growing our development pipeline and funding accretive acquisition opportunities. I will mention there seems to be some momentum in our ability to engage in DownREIT transactions and smaller joint ventures, which allow us to take advantage of rolling up and acquiring the unowned portions of those shopping centers. So that is a potential near-term direct use of that capital. Overall, I would just view it as added capacity.

Operator, Operator

Our next question comes from Cooper Clark with Wells Fargo.

Cooper R. Clark, Analyst

Could you provide thoughts on further portfolio style deals from here and where you're seeing portfolio cap rates versus single asset transactions as we think about the SoCal acquisition and the upward revision to acquisition cap rates and guidance?

Nicholas Andrew Wibbenmeyer, COO

Sure. Let me speak first, Cooper, this is Nick, to what we're just seeing in the market in general, and then Mike may color up a little bit of just how to think of the cap rate related to RMV. We’re still seeing overall a lot of demand in our sector. There is capital that is very interested in owning irreplaceable grocery-anchored assets throughout the country. Whether that's single assets or portfolio quality assets, we’re seeing cap rates push down into the low 5s depending on the growth profile into the low 6s. There's some stability in that in the sense that it feels like that's the way it's been here over the last couple of quarters given the capital flow and interest in our sector for all of the reasons you're hearing flow through our operating results. We continue to be competitive. The good news about our business plan is we don't have to buy things to meet our growth objectives, given our development and redevelopment program. When those opportunities present themselves, where we feel like we can acquire assets that are equal to or better than our quality and growth profile and that we can fund accretively, we are ready to move, and RMV is a perfect example of that.

Operator, Operator

Our next question comes from Juan Sanabria with BMO Capital Markets.

Juan Carlos Sanabria, Analyst

Could you discuss the health of tenants on the small shop side? You mentioned that turnover was lower than expected. What do you think is the reason for that? Also, how are tenants responding to tariffs, especially on the small shop side, where they may have less ability to pass on costs or negotiate with suppliers?

Alan Todd Roth, CFO

Juan, I appreciate the question. Look, we're looking at foot traffic to our assets, and it remains positive. Our ARs are at historic lows. Our sales are up for our retailers. And our pipeline, particularly on the new lease side, remains very strong. So your question about the health of the tenant is very strong in our portfolio, and I'm very proud of the disciplined and intentional approach of how we're managing that. Retention rate was about 77%. It's a little bit higher than we typically see. Again, I think that's a little bit of the supply constraint that you're seeing out there, coupled with productive stores for them. For us, cycling through and enhancing merchandise has always been a key thing for us. We're hearing nothing but really positive feedback from our existing tenant base. As they think through your tariff question, they're time-tested operators. They know how to operate and be agile through uncertain times. I suspect if the time comes where they need to negotiate with suppliers, they will. If they need to consider sourcing goods elsewhere, they will. If it's passing through some expenses to the consumer, they will. They are going to evaluate all the levers that need to be done. I don't believe they're sitting back. They're evaluating those things now, and many are making changes right now. So feedback is positive, and our pipeline remains very strong.

Lisa Palmer, CEO

I would just reiterate what we've been saying for many years. If you think about our product type, there's no consensus on what the impact will be of policies. But what we do know is that we have a really high-quality portfolio. The health of our tenants is really strong, and we are in good suburban trade areas. With the focus on essential needs, value, convenience, daily necessities, we feel really good about the future opportunities and growth within our portfolio. Not only are our tenants resilient, but the consumer is also very resilient. We continue to see that with all of the trends in our portfolio, foot traffic, tenant sales, etc. I feel really good about it.

Operator, Operator

Our next question comes from Rich Hightower with Barclays Bank.

Richard Allen Hightower, Analyst

A lot of good questions so far. But I think just to maybe just a follow-up on the tightening of the credit loss assumption for 2025. Obviously, that's a good sign. But any indications on maybe potentially troubled tenants for '26? Even notwithstanding the comments just now about very strong tenant health, any sort of leading indicators there?

Michael J. Mas, CFO

Rich, let me just speak to the guidance and the change a little bit, and then Alan can jump into it from a tenant health perspective. I appreciate you helping us reiterate that we did narrow and lessen our outlook for credit loss. When we speak of credit loss at Regency, it is a combination both of move-outs from bankruptcies or lost base rent together with uncollectible lease income or traditionally bad debt expense. Both of those elements have declined in our outlook for the year. The bankruptcy outlook is what declined the most. If you think about what's occurred over the last three months, it's just a lot of clarity. We've had a lot more clarity come to us through the outcomes of these bankruptcy proceedings. We now know that which stores we will lose and which we won't, and when. The timing and that certainty is what's allowed us to lower our eye level in a very positive way. As an example, we learned in May that CVS was taking four of the Rite Aid positions in our Pacific Northwest portfolio. We don't have much more to add beyond what Alan already shared from an outlook perspective. Our tenants are extraordinarily healthy. The AR that we're looking at greater than 90 days is at historically low levels. We would continue to anticipate a retention rate roughly in the 75 basis point to 80 basis point range. Tenants will move out. This will not change. Active asset management will continue. We're always looking to upgrade our merchandising mix and ensure that we're providing the best product for our consumer. But at the same time, there are going to be bankruptcy filings. It is an element of our business. Tenants will fail. Regency does better than most in those outcomes. We retain many of our tenancies in reorganizations. Those that we don't retain, we re-lease pretty quickly and oftentimes at higher rents.

Operator, Operator

Our next question comes from Wes Golladay with Baird.

Wesley Keith Golladay, Analyst

I just want to talk about the earlier commencements of a few tenants. Were those primarily junior anchors? And are they just looking to open the season earlier?

Alan Todd Roth, CFO

Wes, I'm assuming you're talking about earlier commencement of rent. Yes, it was a couple of anchor tenants that, in fact, we were just able to accelerate openings, which is really what it boils down to. That's a testament to driving a very efficient process, being front and center, visible, and partnering with our retailers to get them open.

Christy McElroy, Host

Wes, did that answer your question?

Wesley Keith Golladay, Analyst

Was it just the ability to get it open, or were they pushing to say they wanted to open instead of falling behind, aiming to be ready for the summer? Was there anything like that happening?

Alan Todd Roth, CFO

No, I don't have much more to add than that, Wes. It's important that our interests are aligned. The sooner we can get things open, the quicker we can serve our consumers and start generating sales, which benefits everyone involved. We take pride in our partnerships and work closely with our retailers and tenants to help them open sooner.

Operator, Operator

Our next question comes from Ki Bin Kim with Truist Securities.

Ki Bin Kim, Analyst

Just a couple of quick ones on leasing. The renewal spread this quarter, 17.2% on a GAAP basis. Can you remind me, does that include options or not? And what would that spread look like without options? And just second question, just over time, any lessons learned on how much you can stretch occupancy costs in your better quality assets? I realize it's probably higher for those assets, but has that elasticity changed at all over time?

Alan Todd Roth, CFO

Ki Bin, so to answer your first question, yes, it does include options. Our negotiated renewal rates are absolutely higher when excluding the option rate from that metric. Your second question was on?

Lisa Palmer, CEO

It was basically on our ability to push occupancy costs. I’m happy to take it because I’ve spoken about this on other calls and in most meetings. There’s clearly been limited supply. So the supply-demand equation, we’ve talked about is in our favor today. It has to be win-win. Alan used that term as well. Our tenants need to be successful for us to be successful. But they know that there’s limited supply, we know that there’s limited supply. Again, they’re better operators. They’re time tested, and they continue to invest in their businesses and to really find other ways to eliminate costs so that they can afford higher occupancy costs. So yes, we are absolutely pushing. It’s why you continue to see the really strong contractual rent steps that the team is getting in our leases in addition to the rent spreads upon expiration.

Operator, Operator

Our next question comes from Mike Mueller with JPMorgan.

Michael William Mueller, Analyst

In the comments, you specifically mentioned working to source new developments. Looking at the sub, it's about a 50-50 split today between ground-up and redevelopment investment. Do you think that's about where the mix is going to stay for the next 3 to 5 years? And how deep is the redevelopment pipeline?

Nicholas Andrew Wibbenmeyer, COO

Sure. Mike, I appreciate the question. The reality is, as I articulated a little bit ago, we continue to find success in the ground-up program. I do think just given where our occupancy is going, redevelopments will always be a core part of our business. We’re going to constantly be pruning our portfolio for opportunities to invest capital accretively. I don’t want to take away from those efforts. But when you talk about a spend rate and a start rate in the $250 million-plus range, I think as you look forward, the majority of that will start to come from ground-up developments. This year, you’ll see that flip in terms of our starts as we round the third and fourth quarter here.

Operator, Operator

Our next question comes from Floris Van Dijkum with Ladenburg Thalmann.

Floris Gerbrand Hendrik Van Dijkum, Analyst

So Lisa, I mean, I've heard you talk about the favorable supply and demand and, obviously, one of the best operating environments in history or certainly recent history. Has your thinking changed on what your peak occupancy, both leased and physical can be? And how much more room do you think there is? Certainly, some of your peers have been achieving higher occupancy levels, leased occupancy than you guys, which historically you've led the sector. Has your thinking changed on how much more room you have to push occupancy levels higher?

Lisa Palmer, CEO

Absolutely, and we are continuing to do that. I feel good that I'm already surpassing prior peaks. Records are made to be broken, and we continue to break them. Our thinking has evolved, and we believe we can continue to push higher. I think the percent leased is closely linked to the quality of a portfolio. Ours is very well leased. This shouldn't be viewed in isolation. The focus on redevelopments and intense asset management is important. Redevelopments can sometimes create strategic vacancies, which may affect the numbers. However, we strongly believe we can continue to exceed and maintain higher levels of percent leased than we have in the past.

Alan Todd Roth, CFO

There is no ceiling, Floris. We are very comfortable and absolutely committed to also taking space offline when it's accretive to do the redevelopments, as Lisa mentioned. Good question.

Operator, Operator

Our next question comes from Jamie Feldman with Wells Fargo.

James Colin Feldman, Analyst

Just following up on the second part of Cooper's question. So how do you think about the magnitude of potential for more larger-scale OP unit deals? It sounds like this one took years to come together. It was pretty unique in terms of the scale and quality. So it would be helpful for you to frame how a transaction like this may be out there and how you balance taking the good with the bad in portfolio transactions.

Michael J. Mas, CFO

Yes. Let me start, Nick, and you can address the details of the deal. Jamie, it’s really about having an M&A mindset when exploring these opportunities. They don’t come around very often, just like large-scale mergers and acquisitions. The approach is quite similar. We’re collaborating, which involves both giving and receiving. We are selling our portfolio while they are selling their assets. We are acquiring their assets, and they are acquiring our portfolio. We evaluate our value and NAV, and we also consider our perception of their value and cash flows. This includes the value of the below-market debt they're contributing, which has a 4.2% coupon for 12 years, adding to its worth. To reiterate, Regency can attract sellers, especially since anyone with an UPREIT can offer tax protection. Partnering with us allows recognition of the combined organization’s future value and growth potential for the assets, which we believe distinguishes Regency as we seek further opportunities.

Lisa Palmer, CEO

And I'd just add from the question about how we balance the portfolio, it’s what we always say. I’ll just reiterate it, whether it’s a single asset, whether it’s a portfolio of five properties or whether it’s a company, is the transaction accretive to earnings? Is it neutral or accretive to our future growth rate? And is it neutral or accretive to the quality of the portfolio? If it checks those boxes, we have the ability to execute and we do so successfully.

Michael J. Mas, CFO

Just to come back, I want to get some points out there that hopefully are pretty clear through our disclosure. We’re getting $0.01 to this year's earnings, which, again, is only a half year’s worth of ownership. Double that, we’re at $0.02 accretion on a relatively small portfolio regarding the quantum of Regency’s assets. It speaks to the quality of this trade. I think it was a pretty special transaction. We’re very proud to have our new unitholders. I know they’re proud of the outcome that we’ve accomplished together, and we’re excited to see these properties grow.

Operator, Operator

Our next question comes from Paulina Rojas with Green Street Advisors.

Paulina Alejandra Rojas-Schmidt, Analyst

I found it interesting that you increased your exposure to California, already your top state by ADR. Do you have any strategic plans to increase or reduce exposure to other U.S. markets? Or should I think about future acquisitions as being driven largely by granular trade area and property considerations?

Lisa Palmer, CEO

Paulina, let me try to address what I believe I heard regarding this portfolio diversification and exposure to markets. We really like the markets in which we operate. We really like the diversification and national exposure. We’ve talked about that there are potentially some markets that we would like to expand into further, like our acquisition in Nashville earlier this year. We will continue to invest incrementally in the markets that we like, if it checks all the boxes — if we are able to find compelling opportunities that are accretive to earnings, growth, and quality. Again, we are confident and comfortable with our portfolio diversification, and we don't have outsized exposure to any one MSA.

Operator, Operator

Our next question comes from Michael Gorman with BTIG.

Michael Patrick Gorman, Analyst

Understanding it’s a smaller component, can we maybe just reverse the acquisition discussion and talk about the disposition guidance and how we think about that $75 million? And are those assets that are no longer accretive to Regency’s growth profile? Or are these assets that have maybe moved out of the quality spectrum, whether it’s demographics or geography or tenant base in those assets? How are you thinking about what's in that bucket and using that as a funding source going forward?

Michael J. Mas, CFO

Yes. I appreciate it, Mike. The guidance is unchanged. For the year, we’ve been forecasting $75 million of sales. We did drop the cap rate this quarter on those to 5.5% now that we have some clarity on the transaction. It’s largely one asset where we see a lower growth potential than the balance of the Regency portfolio. By the way of the cap rate that we’re disclosing, you can tell we’re getting pretty full value for that. Call it, a flattish grocery-anchored shopping center that we would be disposing of that we just don't see the growth potential there any longer relative to Regency. The other tidbits of the guidance would include smaller pieces of the portfolio that are just non-strategic. We picked up some small office buildings in the UVP portfolio that we are moving to dispose of, given that they just don’t align with our strategy.

Lisa Palmer, CEO

To reiterate what Nick said earlier about being in the position that we do not need to acquire anything to achieve our growth objectives, given our exceptional development platform. We also don’t need to sell anything. But when we have an opportunity to dispose of something that, as Mike said, is either non-strategic or the growth rate is not on par with what we expect for the whole portfolio, and we can invest those funds accretively, we’ll capitalize on that opportunity. We believe that it fortifies future NOI growth and we’ve always believed that.

Operator, Operator

Our next question comes from Ronald Kamdem with Morgan Stanley.

Ronald Kamdem, Analyst

This is just a quick follow-up just on the acquisition environment. I see you guys have the large deal, a couple of your peers talked about activity. Just historically, cap rates have been really tight. Is this just a one-off? Or is this sort of a notable shift where you think over the next couple of years, there will be more sort of opportunities?

Nicholas Andrew Wibbenmeyer, COO

Ron, I appreciate the question. This is Nick. The reality is sellers come out when they see demand picking up. As I articulated earlier, there is demand for core grocery-anchored shopping centers from the investment community. I do think that is bringing some sellers out that are testing that market. As we look at what's on the market right now, I would say it's up from a year ago. We're a little bit in that summer lull right now where people are going to wait until after Labor Day to call for offers. I do believe another group of assets will come out after Labor Day. There is a marginal pickup in velocity. But as we've articulated on this call several times, we're going to chase the ones that make sense for us and lean in on those. The good news is we don't have to find those to meet our earnings growth that we're projecting.

Lisa Palmer, CEO

Yes. To be really clear, while we say we don’t need to, we like to because we’ve been very successful in acquiring compelling outstanding shopping centers that check all of those boxes. We have a cost of capital advantage. We have a platform advantage. When we're able to find those opportunities, we’ve been able to execute successfully, and I expect that we'll continue to do so.

Operator, Operator

We’ve reached the end of the question-and-answer session. I'd now like to turn the call back over to Lisa Palmer for closing comments.

Lisa Palmer, CEO

Thanks so much, Rob. Thank you all for your interest in Regency, and have a great day. Thank you.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.