管理層發言
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. 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?
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. Nick?
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 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. 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. Mike?
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.
分析師問答
Our first question comes from Samir Khanal with Bank of America.
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.
Sure. Last quarter, we discussed the known slowdown in our growth rate, and that situation remains unchanged. However, I want to emphasize that the second quarter was notable due to several positive factors, which have elevated our overall performance. Despite this, we still anticipate that the second half of the year may be somewhat below our midpoint expectations. As you pointed out, base rent has been and will continue to be our largest contributor. The challenges with credit loss impacts are primarily influencing our expectations for the latter half of the year. We now have more clarity regarding the bankruptcies from Party City, Joann, and Rite Aid, which will affect our results in the back half of the year. Additionally, our uncollectible lease income has been significantly lower during the first half compared to historical averages, and we expect a modest increase in this area for the second half.
While we are planning for levels still below our historical norms, they will be higher than what we experienced in the first half, which is adding pressure to our growth rate. Furthermore, last year’s figures for uncollectible lease income were also low in the second half, so our current expectations will be measuring against a slightly higher baseline this year. In the second quarter, we experienced a unique shift of some percentage rent into this quarter from the first quarter. Other income remains somewhat irregular, and we saw some unusual increases during the second quarter. Additionally, I want to highlight our reconciliations, which reflect our team's efforts and the fact that our rent-paying occupancy exceeded our expectations. We not only collected more rent compared to last year but are also optimistic about continued recoveries moving forward. I hope this clarification helps regarding our growth rate and trajectory. However, I also want to reiterate that we've had an outstanding first half of the year, and we are excited about maintaining that momentum.
Our next question comes from Michael Goldsmith with UBS.
Could you explain the same property NOI growth algorithm? Your presentation features an excellent chart that highlights the factors contributing to the over 7% same property NOI growth this quarter. As we look ahead, occupancy seems to be at its peak for leased spaces, though there might be some potential for improvement on new leases. Can you discuss the focus on other elements of the same property NOI growth algorithm as we move away from occupancy? Additionally, Alan mentioned significant contractual rent increases in most of our leases; could you elaborate on that as well?
Yes. Let me start by saying that I appreciate your acknowledgment of the disclosure, which I am quite proud of. The team does a great job sharing that information. Looking ahead, we continue to see potential for growth in terms of commenced occupancy. Although we currently have peak leasing percentages, we have not yet reached peak levels for commenced occupancy. This gives us confidence as we progress through the second half of this year and into 2026, as we expect to maintain an above-trend growth profile for Regency. Alan will discuss the SNO pipeline in a moment, but we anticipate it will continue to improve positively. Additionally, from an algorithm perspective, our redevelopment efforts have been beneficial, and we expect this trend to continue, positively impacting our same property NOI growth metric. We've mentioned before that in 2025, we expect this to add over 100 basis points to our growth rate, and as of today, it seems likely that this will carry over into 2026. We've excelled in starting and completing our redevelopment projects, and we believe the positive effects on NOI growth will persist into next year.
Yes, Michael, I'll just color up the SNO piece. And 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 date. 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 by 40 basis points. So the team is clicking on all cylinders on that front, and I hope that, that number continues to compress certainly over time.
Our next question comes from Greg McGinniss with Scotiabank.
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 lease for the asset? And from your perspective, what gave you a competitive edge in successfully executing the deal?
Nick here, thanks for the question. This situation is a great example of an off-market opportunity. The seller is a family that has owned these properties since the 1800s, with a history of master planning and developing tens of thousands of acres in Southern California. They chose us for three main reasons. First, the quality of our currency was important to them; the UPREIT transaction offered tax benefits that they valued. Secondly, they cared about the quality of our operations because they have a strong connection to the community and take pride in these shopping centers. Finally, they were interested in future development opportunities within their master plan. They felt that we were the only company that satisfied all three criteria. We are proud to have worked with them and to create a high-quality transaction for everyone involved.
I just need to come over 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. 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.
Our next question comes from Steve Sakwa with Evercore ISI.
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.
I appreciate your question, Steve. It's Nick again. As we've been discussing for several quarters now, we are seeing strong demand from leading grocers as they expand their presence in the markets we operate in. We are actively engaging with these key grocers about potential partnerships to enhance their programs. As mentioned in my prepared remarks, we are optimistic about identifying these opportunities, although they can be quite challenging to secure. However, our strong relationships, expertise, and capital position us well in these situations. Our teams are doing an excellent job nationwide collaborating with these grocers to finalize deals. We're confident about our prospects. Over the last two years, we initiated $250 million in projects, and we anticipate starting an equal or greater amount this year. We expect that most of this will involve ground-up developments due to the success we've experienced. Regarding yield, we are currently in the 7% range or slightly above, and I expect that we will maintain that level for the foreseeable future.
Our next question comes from Craig Mailman with Citi.
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?
The recovery rate will slow down moving forward due to a one-time aspect related to the completion of our annual reconciliation process in the second quarter. This led to a recognition of prior year figures that surpassed our prior estimates, amounting to approximately $1 million included in the second quarter. I expect the recovery rate to decrease by about 100 basis points if we consider Q2 as a benchmark going forward. However, the average in-place occupancy is what is driving this increased recovery rate for us. Last quarter, we mentioned this potentially changing by 75 basis points or more in 2025, but now, due to our success in the second quarter, we anticipate it will increase by over 100 basis points in 2025. This significant shift in average commencing occupancy is what is fundamentally enhancing our expense recoveries.
Our next question comes from Todd Thomas with KeyBanc Capital Markets.
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?
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. Small redevelopments within that portfolio, but again, exactly what we do every day in our core portfolio. We expect that growth rate to be north of 3% moving forward. 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 we bought all of their assets that currently exist. That's 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. In terms of future development, there are planned future development, especially on the residential side, which will bring more demand to the existing assets. We have had discussions and very positive dialogue about participating and partnering to everybody's benefit on those projects in the future.
Our next question comes from Haendel St. Juste with Mizuho Securities.
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 I was also curious kind of what your appetite for more potential acquisitions could be near term.
Yes, to reiterate our plans, we will settle that in the second half of the year, by around the end of November or early December. From our perspective, the use of proceeds is flexible. We see it as additional capacity to grow our development pipeline and fund value-enhancing acquisition opportunities. I also want to mention that there seems to be some momentum in our ability to engage in DownREIT transactions and smaller joint ventures, allowing us to leverage our understanding of assets and acquire the unowned portions of shopping centers. This could be a near-term use of that capital, but overall, I view it primarily as added capacity.
Our next question comes from Cooper Clark with Wells Fargo.
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, 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's a lot of capital that's 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 in the low 5s depending on the growth profile into the low 6s. There's some stability in that, and it feels like that's the way it's been 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 acquire things to meet our growth objectives, given our development and redevelopment program. But when those opportunities present themselves, we feel like we can acquire assets that are equal or better than our quality and growth profile and that we can fund accretively. RMV is a perfect example of that.
Our next question comes from Juan Sanabria with BMO Capital Markets.
Just hoping you could talk a little bit about the tenant health on the small shop side. You said that the turnover was less than expected. What do you attribute that to? And how are tenants feeling about tariffs, particularly on the small shop side, where I think there's less maybe ability to pass costs through or to have negotiating leverage 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 very proud of the disciplined and intentional approach of how we're managing that. The 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. Cycling through and enhancing merchandise has always been key for us. We're hearing nothing but 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're 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. Feedback is positive, and the pipeline that's coming behind it remains very positive.
I would like to emphasize what we've been stating for many years. Regarding our product type, there's no clear agreement on the impact of policies. However, we do have a high-quality portfolio. As you mentioned, our tenants are in a strong position, and we are located in good suburban trade areas. With a focus on essential needs, value, convenience, and daily necessities, we are optimistic about future opportunities and growth within our portfolio. Our tenants are resilient, and so are consumers. We observe positive trends in our portfolio, including foot traffic and tenant sales. I am confident about our situation.
Our next question comes from Rich Hightower with Barclays Bank.
There have been a lot of insightful questions raised. Regarding the adjustment of the credit loss assumption for 2025, it's definitely a positive development. However, do you have any insights on potentially troubled tenants for 2026? Despite the earlier statements about strong tenant health, are there any leading indicators we should be aware of?
Rich, let me address the guidance and the recent changes, and then Alan can provide insights from a tenant health perspective. I want to emphasize that we have narrowed our outlook for credit loss. It's important to note that when we refer to credit loss at Regency, it includes both move-outs due to bankruptcies and uncollected lease income or bad debt expense. Both of these factors have decreased in our outlook for the year, with bankruptcies having the largest decline. In the past three months, we've gained clarity from the outcomes of bankruptcy proceedings, allowing us to understand which stores we will lose and when. This certainty has enabled us to adjust our expectations positively. For instance, in May, we learned that CVS will take over four Rite Aid locations in our Pacific Northwest portfolio, which has impacted our plans and allowed for a more optimistic outlook. I don't think there's much more to add beyond what Alan has already mentioned regarding our outlook.
Our tenants are in excellent health, and the accounts receivable above 90 days are at historically low levels. We expect a retention rate around 75 to 80 basis points. While tenants will inevitably move out, that aspect of our business remains unchanged. We will continue to actively manage our assets, enhancing our merchandising mix to provide the best products for consumers. At the same time, bankruptcies are a reality of our business, and some tenants will fail. Regency performs better than most in these situations. We retain a significant portion of our tenants during reorganizations, and those we do not retain are often re-leased quickly, frequently at higher rents.
Our next question comes from Wes Golladay with Baird.
I just want to talk about the earlier commencements of a few tenants. Were those primarily junior anchors? 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 is really what it boils down to. I think, again, that's a testament to driving a very efficient process being front and center, visible, and partnering with our retailers to get them open.
Wes, did that answer your question?
Yes. Was it simply about getting it open, or were they expressing a desire to open earlier, perhaps for the summer instead of the fall? Is there something like that happening?
No, I don't believe there was any pressure. I think our interests are aligned. The sooner we can get things open, the quicker we can serve our consumers, and the faster we can drive sales, which benefits everyone involved. I don't have much more to add, Wes. It has been a solid partnership, and we take pride in collaborating with our retailers and tenants to do everything we can to facilitate their opening as soon as possible.
Our next question comes from Ki Bin Kim with Truist Securities.
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? Just a 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?
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?
It was essentially about our ability to manage occupancy costs. I'm pleased to discuss this, as I've addressed it in past calls and meetings. There has been limited supply, and the supply-demand situation is currently in our favor. It should be mutually beneficial. Our tenants' success is crucial for our own success. They recognize the limited supply, as do we. Our tenants are experienced operators who continue to invest in their businesses and find ways to reduce costs so they can handle higher occupancy costs. Therefore, we are definitely advancing this, which is why you see the strong contractual rent increases that our team is securing in leases, in addition to the rent growth upon expiration.
Our next question comes from Mike Mueller with JPMorgan.
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?
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 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 quarter here.
Our next question comes from Floris Van Dijkum with Ladenburg Thalmann.
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?
Absolutely, and we are continuing to do that. I feel good that we are already surpassing prior peaks. Alan has often said records are made to be broken, and we continue to break them. Our thinking has changed, and we do believe that we can continue to push higher. I believe that the percent leased is highly correlated with the quality of a portfolio. Ours is very well leased. But you can't look at it in isolation. Nick just mentioned the focus on redevelopments and intense asset management. When you do redevelop, there will often be strategic vacancy, which may cloud the numbers somewhat. But there is no question that we believe we can continue to surpass and maintain higher levels of percent leased than we have historically.
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.
Our next question comes from Jamie Feldman with Wells Fargo.
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 a transaction like this may be out there and how you balance taking the good with the bad in portfolio transactions.
Yes. Let me begin, Nick, and you can address the specifics of the deal. Jamie, this is very much an M&A mindset when we encounter these opportunities. They don't arise frequently, similarly to large-scale M&A. The approach is largely the same. We are collaborating, exchanging value. We are selling our portfolio, and they are selling their assets. We are acquiring their assets, and they are acquiring our portfolio. We approach this with a focus on our value and net asset value, while also considering their value and cash flows. This includes the value of the below-market debt they are contributing, specifically a 4.2% coupon for 12 years, which holds value. To reiterate Nick's earlier point, Regency can be quite appealing, and we attract sellers since anyone with an UPREIT can offer tax protection. The opportunity to partner with us and recognize the value in the combined organization and the growth potential of those assets, along with our portfolio balance, is what we believe sets Regency apart as we continue seeking more opportunities.
I’d like to add to the question about how we balance our portfolio. As we’ve always mentioned, whether we’re dealing with a single asset, a portfolio of five properties, or a company, we evaluate if the transaction adds to our earnings. We also consider if it is neutral or beneficial for our future growth rate and the overall quality of the portfolio. If it meets those criteria, we are capable of executing successfully.
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. You double that, 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. It was a pretty special transaction. We're very proud to have our new unitholders. I know they're proud of the outcome we've accomplished together, and we're excited to see these properties grow.
Our next question comes from Paulina Rojas with Green Street Advisors.
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 being 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 have talked about 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, if again, if it checks all 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.
Our next question comes from Michael Gorman with BTIG.
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 remains the same. For the year, we're forecasting $75 million in sales. We adjusted the cap rate this quarter to 5.5% now that we have better clarity on the transaction. It's mainly one asset that we believe has lower growth potential compared to the rest of the Regency portfolio. The cap rate indicates that we're receiving close to full value for it. We're looking at a grocery-anchored shopping center that we plan to sell because we don't see growth potential there in relation to Regency. The other aspects of the guidance involve smaller parts of the portfolio that aren't strategic. We have acquired some small office buildings in the UVP portfolio that we intend to sell as they don't fit our strategy.
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, either non-strategic or where the growth rate is not on par with what we expect for the whole portfolio and able to invest those funds accretively, we'll capitalize on that opportunity. We believe that it fortifies future NOI growth and always have believed that.
Our next question comes from Ronald Kamdem with Morgan Stanley.
This is just a quick follow-up just on the acquisition environment. I see you guys have the large deal, and 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 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 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 think another group of assets will come out after Labor Day. We are seeing a marginal pickup in velocity. But as we've articulated here several times, we're going to chase the ones that make sense for us and lean in on those. But the good news is we don't have to find those to make our earnings growth that we're projecting.
To be clear, although we say we don't need to pursue these opportunities, we prefer to do so because we have been very successful in acquiring exceptional shopping centers that meet our criteria. We benefit from a cost of capital advantage and a platform advantage. When we identify these opportunities, we have successfully executed on them, and I anticipate that we will 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.