Prepared remarks
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.
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?
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.
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 in 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.
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 right down the middle of Regency's Fairway, strategically 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 of 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.
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, and to 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.
Questions and answers
I guess, Mike, as you alluded, very strong print for same-store in the quarter. Certainly, a big contributor was the base rent, but you 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.
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. However, 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 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 BK move-outs from Party City, Joann, and 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, 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 going forward, which has increased our level there.
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.
Question is just about the same property NOI growth algorithm. You have a wonderful chart in your presentation that outlines the different drivers, which are driving the 7% plus same property NOI growth during the quarter. As we think about it going forward, clearly, occupancy is somewhat at peak. Leased occupancy, there's maybe still a little bit of room on the commencement side. But can you just talk about the shift away from occupancy into some of the other components of the same property NOI growth algorithm to kind of make up for that? And I know Alan mentioned in his comments, just continued meaningful contractual rent steps in a majority of our leases, if you could touch on that as well.
Yes. Michael, it's Mike here. From the algorithm perspective, I'll let Alan add more if needed. I appreciate your acknowledgment of the disclosure and I'm proud of the team's efforts in sharing that. Looking ahead, we still see room for growth in commenced occupancy. Although we are at high levels of leased occupancy, we have not yet reached peak levels of commenced occupancy, which gives us confidence as we progress through the second half of this year and into 2026. This suggests a continued growth opportunity for Regency, and we are excited about it. Alan will discuss the SNO pipeline shortly, which we expect to continue to improve positively. From an algorithm standpoint, redevelopments have been and are expected to remain beneficial to our same property NOI growth metric. We've mentioned before that in 2025, we anticipate a positive impact of over 100 basis points on our same property growth rate, and this trend may extend into 2026. We've successfully initiated and completed our redevelopment projects, and we believe the positive effects on NOI growth will persist into the next year.
Yes, Michael, I'll just color up the SNO piece. I would just say 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, it's a great thing, particularly when it's in conjunction with percent commenced going up, which it did 40 basis points. So the team is clicking on all cylinders on that front, and I hope that number continues to compress certainly over time.
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 to lease for the asset? And from your perspective, what gave you a competitive edge in successfully executing the deal?
I appreciate the question. This opportunity was truly off-market. The seller is a family that has owned these properties since the 1800s and has managed tens of thousands of acres in Southern California for generations. They chose to work with us for three main reasons. First, the quality of our currency was significant to them. The UPREIT transaction offered them important tax options for the future, and the quality of the shares they received as new shareholders in Regency Centers was essential. We value their commitment to our platform. Second, the quality of our operations was a key factor. The sellers have a deep connection to the community, having contributed to its development over time, and there are residential projects planned nearby. They live and shop in these areas and take great pride in the shopping centers. Ensuring that a capable operator would manage these centers moving forward was crucial for them. Lastly, the potential for future development opportunities was important. They wanted a partner for upcoming phases of their master plan. Given their priorities, they felt that we were the only company that met all their criteria. We are proud to have collaborated on this quality transaction for everyone involved.
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. Just ditto everything Nick said in terms of why the sellers were comfortable and wanted to transact with Regency. It goes to the people, to our strategy, and to the company that we've built. So grateful to the whole team, grateful to the sellers.
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 are incremental discussions you're having with national retailers about new developments.
I appreciate the question, Steve. It's Nick. As we've been saying for quite some time, we are seeing increasing demand from top grocers expanding their presence in the markets where we operate. We're actively engaged in discussions with these key grocers about partnering to enhance their programs. As mentioned in the prepared remarks, we're optimistic about identifying these opportunities, although they can be quite challenging to secure. However, we believe we have an advantage due to our strong relationships, expertise, and available capital. Our teams are doing an excellent job nationwide in collaborating with these grocers and executing deals. We're optimistic about our progress. We've initiated $250 million in projects over the past two years, and we anticipate starting at least that much this year, if not more. We expect most of these projects to be ground-up developments due to our team's success. Regarding yield, we are currently in the 7% range and expect to maintain that yield for the foreseeable future.
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? 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?
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, small redevelopments within that portfolio, but again, exactly what we do every day in our core portfolio. We do expect that growth rate to be north of 3% moving forward. Although that portfolio has been really well taken care of and really well operated, there are still opportunities for growth within it, which is what we're excited about. In terms of your first question, I'll start with the acquisitions first. 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. What we were so excited about within this acquisition is we own all of the retail servicing these phenomenal master-planned developments. Knowing that we really do control that market is what we're excited about. We do anticipate potential for future retail, and we have had discussions and very positive dialogue about participating and partnering for everybody's benefit on those projects in the future.
You guys mentioned a plan to settle the $100 million remaining forwards in the second half of the year. 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.
Haendel, it's Mike. To restate our plans, we aim to finalize that in the latter half of the year, specifically by the end of November or early December. We are confident in achieving that timeline. From our perspective, the use of proceeds is flexible. We see it as additional capacity to expand our development pipeline and fund beneficial acquisition opportunities. I should mention that there seems to be growing momentum for us to engage in DownREIT transactions and smaller joint ventures, which would allow us to leverage our understanding of these assets and acquire the unowned portions of shopping centers. This could be a direct short-term application of that capital. Overall, I would categorize it as enhanced capacity.
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?
Sure. Let me speak first, Cooper, this is Nick, to what we're just seeing in the market in general, 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's very interested in owning irreplaceable grocery-anchored assets throughout the country. Whether that's single assets or portfolio quality assets, seeing cap rates push down in the low 5s depending on the growth profile into the low 6s. There is 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 really 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 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.
Could you share some insights about the health of tenants in the small shop segment? You mentioned that turnover was lower than anticipated. What do you think is contributing to this? Additionally, how are tenants responding to tariffs, especially in the small shop sector where there may be less ability to pass on costs or negotiate with suppliers?
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. Our pipeline, particularly on the new lease side, remains very strong. Your question about the health of the tenant, it's 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. 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 expense to the consumer, they will. They'll 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 the pipeline that's coming behind it remains very positive.
I want to emphasize what we've been stating for years. When it comes to our product type, there is no clear understanding of how policies will impact us. However, we know that our portfolio is of very high quality. The health of our tenants is strong, and we are located in good suburban areas. With a focus on essential needs, value, convenience, and daily necessities, we are optimistic about future growth opportunities within our portfolio. Our tenants are resilient, and so are the consumers. We continue to observe positive trends in our portfolio, including foot traffic and tenant sales. I feel very confident about it.
A lot of good questions so far. But I think just to follow up on the tightening of the credit loss assumption for 2025. Obviously, that's a good sign. 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?
Let me address the guidance and the recent changes briefly, and then Alan can provide insight from a tenant health perspective. I want to emphasize that we have narrowed and lowered our credit loss outlook. When discussing credit loss at Regency, it includes move-outs due to bankruptcies or lost base rent along with uncollectible lease income, or what is traditionally referred to as bad debt expense. Both factors have decreased in our annual outlook, with the most significant decline occurring in the bankruptcy outlook. Over the past three months, we have gained much clarity from bankruptcy proceedings, allowing us to identify which stores we will lose and which we will retain, along with the timing of those changes. This certainty has enabled us to lower our expectations positively. For instance, we found out in May that CVS will take over four Rite Aid locations in our Pacific Northwest portfolio, which has altered our plan and contributed to our revised outlook.
There's not much more to add beyond what Alan mentioned regarding our outlook. Our tenants are very healthy, with accounts receivable over 90 days at historically low levels. We expect a retention rate in the 75 to 80 basis point range. Some tenants will move out, which is a consistent aspect of our business plan. We will continue our active asset management, focusing on enhancing our merchandising mix to deliver the best products to our consumers. Bankruptcy filings will occur, as this is part of our business landscape. While some tenants will fail, Regency performs better than most in these situations. In many reorganizations, we retain a significant number of our tenants, and those we don’t retain are typically re-leased quickly, often at higher rents.
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?
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. That's really what it boils down to. I think it's a testament to driving a very efficient process being front and center, visible and collaborating with our retailers to get them open.
Was it just about getting it open, or were they pushing to say they wanted to open for the summer instead of waiting? Was there anything like that happening?
No, there was no hesitation. I believe our interests are aligned. The sooner we can open, the quicker we can attract consumers, and the faster we can generate sales, which benefits everyone involved. I don’t have much more to add, Wes. It was simply a strong partnership. We take pride in collaborating with our customers, which include our retailers and tenants, and we do everything possible to facilitate an earlier opening for them.
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, 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?
Ki Bin, so to answer your first question, yes, it does include options. Our negotiated renewal rates are absolutely higher when you're excluding the option rate from that metric. Your second question was on?
We have been focused on managing occupancy costs, and I am glad to discuss this as I have in previous calls and meetings. It is clear that we are currently in a favorable supply-demand situation due to limited supply. It is essential for our tenants to succeed for us to be successful, and they are aware of the limited availability as well. Our tenants are becoming better operators; they are investing in their businesses and finding ways to reduce costs, allowing them to handle higher occupancy expenses. As a result, we are actively pushing for these increases, which is reflected in the strong rental increases we are seeing in our lease agreements, alongside the rent differentials upon lease expiration.
In the comments, you specifically mentioned working to source new developments. Looking at the subset, 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? How deep is the redevelopment pipeline?
Sure. Mike, I appreciate the question. Look, 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, we are always going to 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. When you talk about a spend rate and a start rate in the $250 million-plus range, I do think as you look forward, the majority of that will start to come from ground-up developments. Again, this year, you'll see that flip in terms of our starts as we round the third and fourth quarters here.
So Lisa, 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? 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?
Absolutely, we are continuing to make progress. I am really proud that we are already exceeding previous records. Alan has often said that records are meant to be broken, and we are continuing to do so. Our perspective has evolved, and we believe we can keep pushing higher. I think the percentage leased is closely linked to the quality of a portfolio, and ours is very well leased. However, it's important to consider it in context. Nick just mentioned the emphasis on redevelopments and focused asset management. During redevelopments, there may be strategic vacancies that could affect the numbers. There is no doubt that we believe we can continue to achieve and maintain higher leased percentages than in the past.
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.
Just following up on the second part of Cooper's question. 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. It would be helpful for you to frame how transactions like this may be out there and how you balance taking the good with the bad in portfolio transactions.
Yes. Let me start, Nick, and you can address the specifics of the deal. It's really an M&A mindset when approaching these opportunities. They don't come around often, similar to large-scale M&A. The approach is mainly about partnership, where there is a give and a take. We are selling our portfolio while they are selling their assets. We purchase their assets, and they buy our portfolio. We consider what our value is and what our net asset value is, balancing that with our perception of their value and cash flows. It’s important to note that those cash flows include the below-market debt they contribute, which in this case has a 4.2% coupon for 12 years and carries significant value. As Nick mentioned earlier, Regency can be very appealing to sellers since anyone with an UPREIT can offer tax protection. Our ability to partner with them and highlight the potential value of the combined organization moving forward, along with the growth prospects of both the acquired assets and the overall portfolio, sets Regency apart as we continue to seek more opportunities.
I'd just add from the question about how we balance 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? Is it neutral or accretive to the quality of the portfolio? If it checks those boxes, we can execute and we do successfully.
Yes. 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, and we're at $0.02 accretion on a relatively small portfolio with respect to the quantum of Regency's assets. It just, again, 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.
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? Should I think about future acquisitions being really almost 100% driven by granular trade area and property considerations?
Paulina, let me try to address what I believe I heard with regards to really this portfolio diversification and exposure to markets. We really like the markets in which we operate. We really like the diversification, national exposure. We've talked about that there are potentially some markets that we would like to expand into to grow further like our acquisition in Nashville earlier this year. We will continue to invest incrementally in the markets that we like. Again, if it checks all of those boxes, if we are able to find compelling opportunities that are accretive to earnings, accretive to growth, accretive to quality. We are confident and comfortable with our portfolio diversification. We don't have outsized exposure to any one MSA.
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? 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 that's in those assets? How are you thinking about what's in that bucket and using that for a funding source going forward?
Yes. I appreciate it, Mike. The guidance is unchanged. We've been forecasting $75 million of sales for the year. We did drop the cap rate this quarter on those to 5.5% now that we have more clarity on the transaction. Frankly, it's largely one asset where we see lower growth potential than the balance of the Regency portfolio. The cap rate that we're disclosing reflects we're getting pretty full value for that. Call it a flattish grocery-anchored shopping center that we would be disposing of. 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 since they don't align with our strategy.
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. Historically, cap rates have been really tight. Is this just a one-off? Or is this a notable shift where you think over the next couple of years, there will be more opportunities?
Ron, I appreciate the question. This is Nick. Yes, look, the reality is sellers come out when they see demand picking up. As I articulated earlier, there is a demand for core grocery-anchored shopping centers from the investment community. 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 think another group of assets will come out after Labor Day. We are seeing a marginal pickup in velocity. 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.
To be really clear, while we say we don't need to, we like to because we've been very successful. If you look at our track record for 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.
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.
Thanks so much, Rob. Thank you all for your interest in Regency, and have a great day. Thank you.
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.