Retail Opportunity Investments (ROIC) Q1 2022 Earnings Call Transcript

Retail Opportunity Investments (ROIC -0.32%)
Q1 2022 Earnings Call
Apr 26, 2022, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Retail Opportunity Investments' 2022 first quarter conference call. [Operator instructions] Now, I would like to introduce Laurie Sneve, the company's chief accounting officer.

Laurie Sneve -- Chief Accounting Officer

Thank you. Before we begin, please note that certain matters discussed in this call today constitute forward-looking statements within the meaning of federal securities laws. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the company can give no assurance that these expectations will be achieved. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to differ materially from future results expressed or implied by such forward-looking statements and expectations.

Information regarding such risks and factors is described in the company's filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K. Participants are encouraged to refer to the company's filings with the SEC regarding such risks and factors as well as for more information regarding the company's financial and operational results. The company's filings can be found on its website. Now, I'll turn the call over to Stuart Tanz, the company's chief executive officer.

Stuart?

Stuart Tanz -- Chief Executive Officer

Thanks, Laurie, and good morning, everyone. Here with Laurie and me today is Michael Haines, our chief financial officer; and Rich Schoebel, our chief operating officer. We are pleased to report that we are off to a terrific start thus far in 2022. Demand for space continues to propel our business forward.

Capitalizing on the demand, during the first quarter, we leased over 416,000 square feet, which is the second most active quarter on record for the company in terms of first quarter leasing activity. Additionally, we are capitalizing on the tenant demand to drive rents higher. We achieved double-digit rent growth on same space new leases signed during the first quarter. In terms of renewals, we also achieved solid increases in rent.

With respect to acquisitions, we are off to a solid start as well. We recently acquired two grocery-anchored shopping centers, both located in the Pacific Northwest totaling $36 million. The private seller had debt on the properties that was maturing soon, so they were seeking a buyer who could underwrite and commit quickly with no financing contingencies. Given that we knew both shopping centers extremely well, having owned them back in our Pan Pacific days, we were in a terrific position to respond to the seller's needs and capitalized on a great opportunity to acquire two terrific shopping centers.

One of the Portland -- one of the property is located in the Portland market. Specifically, the shopping center is well situated in the heart of an affluent, densely populated community. The center is anchored by Walmart Neighborhood Market. Additionally, the seller is in the process of developing a freestanding drive-through pad at the shopping center.

Once completed, we expect to purchase the pad. The second shopping center is located in the Seattle market. It too is well situated in an affluent, densely populated community. The shopping center is anchored by Albertsons.

In addition to these acquisitions, we also have another grocery-anchored shopping center currently under contract for $24 million located in the San Francisco market, specifically in the East Bay area in a very densely populated community. The property has been owned by the same family for 30 years. They actually built the center, so it's never been on the market, which is exactly the type of off-market transactions we seek out, rare opportunities to acquire generational irreplaceable real estate. Importantly, instrumental in our ability to get this deal, the family is personally close to individuals that we had purchased a number of properties from previously, who confirmed our long-standing track record and reputation in the marketplace as a knowledgeable and reliable acquirer.

Together, these three acquisitions totaled $60 million with a blended going in yield just north of 6%. Looking ahead, there are a number of releasing and repositioning opportunities, which we intend to capitalize on, that should enhance the underlying value going forward. Importantly, all three of these shopping centers are within strategic proximity to a number of our existing shopping centers in each of these markets, which will enhance our ability and flexibility in terms of maneuvering tenants and continuing to fully capitalize on the strong demand for space. Now, I'll turn the call over to Michael Haines, our CFO.

Mike?

Mike Haines -- Chief Financial Officer

Thanks, Stuart. For the three months ended March 31, 2022, the company had $76.5 million in total revenues and $26.7 million in GAAP operating income as compared to $69.2 million in total revenues and $22.5 million in GAAP operating income for the first quarter of 2021. GAAP net income attributable to common shareholders for the first quarter of 2022 was $11.6 million, equating to $0.09 per diluted share as compared to GAAP net income of $7.4 million or $0.06 per diluted share for the first quarter of 2021. Same center net operating income on a cash basis for the first quarter of 2022 was $49.5 million as compared to same center NOI of $46 million for the first quarter of 2021, representing a 7.5% increase.

In terms of funds from operations, for the first quarter of 2022, FFO totaled $36.2 million, equating to $0.28 per diluted share as compared to FFO of $31 million or $0.24 per diluted share for the first quarter of 2021. There are three items worth noting that helped drive our first quarter results. First, GAAP-based rent during the first quarter came in about $2 million higher than our budget. Second, other income for the first quarter totaled $1.4 million, the bulk of which being associated with one tenant where we recaptured their space early and released it to a new tenant at a higher rent.

And the third item was lower-than-expected bad debt. We had budgeted bad debt to continue being a bit elevated during the first half of 2022 and then returning back down to around our historical average in the second half of the year. In actuality, for the first quarter, bad debt totaled $628,000, which is fully in line with our bad debt before the pandemic, if not a touch lower than our historical average. Turning to the company's balance sheet and financing activity.

During the first quarter, we retired early, with no penalty, two mortgages totaling $23.5 million. With paying off the two mortgages, our unencumbered GLA as a percent of our total GLA increased to a new record high of 96.5% as of March 31. Taking into account the three shopping center acquisitions, all of which are debt free, our unencumbered GLA will increase further. Additionally, today, we've just two properties out of the entire portfolio with mortgage debt totaling less than $62 million, which equated to only 4.6% of our total debt outstanding as of March 31.

In terms of equity, year-to-date, we have raised $23.4 million through our ATM, issuing in total approximately 1.2 million shares, including issuing about 700,000 shares during the first quarter and approximately 500,000 shares early in the second quarter. Going forward, our goal is to continue raising equity, generally in secular acquisition activity, depending upon market conditions. At March 31, the company's total market capitalization was approximately $3.9 billion and with approximately $1.3 billion of debt outstanding, equating to a 34% debt-to-total market cap ratio. Of the $1.3 billion of debt, 95.4% is unsecured, the vast majority being fixed rate with a well-laddered maturity schedule, including nothing maturing for the next year and a half.

In terms of our credit facility, we continue to maintain a limited balance. Specifically, at March 31, only $10 million was outstanding on our $600 million unsecured line. Lastly, our financial ratios continue to move steadily toward returning to our historical pre-pandemic levels. For the first quarter, interest coverage was 3.6 times, up from 3.2 times a year ago.

Additionally, net debt to annualized EBITDA was 6.4 times for the first quarter as compared to 7.3 times a year ago. Now, I'll turn the call over to Rich Schoebel, our COO. Rich?

Rich Schoebel -- Chief Operating Officer

Thanks, Mike. Echoing Stuart's and Mike's comments, leasing activity during the first quarter exceeded our expectations. While leasing during the first quarter, following the holiday season, traditionally takes a bit of time to ramp up, that was not the case this year. As Stuart indicated, our leasing activity in the first quarter proved to be the second most active on record for the company.

In fact, we were just shy of surpassing the record that we achieved four years ago in the first quarter of 2018. The demand for space across our portfolio continues to be broad-based, ranging from supermarkets and other necessity-based and off-price anchor tenants looking to expand and increasingly becoming more and more proactive in seeking out prime locations, many of which are tenants that already have a considerable presence in the market and are now seeking to enhance their dominance. In terms of in line space, healthcare, wellness, boutique, fitness and restaurant tenants, especially quick-serve restaurants, continue to lead the charge. Additionally, among national tenants, we are seeing a growing trend of longtime traditional brick-and-mortar tenants that in recent years had reduced their number of stores, now returning with completely new, more tailored merchandising strategies and looking to expand their presence in key markets as they roll out their new concepts.

We continue to work hard to make the most of the strong demand to enhance the competitive strength and underlying value of our portfolio. To take you through our first quarter results, as of March 31, our portfolio lease rate stood at a very strong 97.2% leased, up from 96.9% a year ago. Breaking that down between anchor and non-anchor space, we continue to maintain our anchor space at 100% leased. And in terms of non-anchor space, we ended the first quarter at a solid 93.9% leased.

As Stuart noted, during the first quarter, we leased a total of 416,000 square feet. The bulk of our activity centered around tenant renewals, specifically renewing anchor tenants. At the start of the year, we had seven anchor leases scheduled to expire during all of 2022. During the first quarter, utilizing our long-standing proactive hands-on approach, we successfully renewed five of the seven anchor leases.

With respect to the remaining two, one has indicated that they intend to renew, and the other anchor space that was scheduled to expire later this year, we've already released at a higher rent to adjacent longtime grocer who is seeking to expand their store. In terms of non-anchor space renewals, we also had an active successful first quarter, renewing 61 non-anchor leases in total. An interesting and positive trend that is starting to take shape with a growing number of existing tenants is that they are looking to extend their leases with longer terms beyond what their renewal options typically call for and longer than what tenants have typically sought historically. This is especially the case with our key grocer tenants.

We're capitalizing on this to drive renewal rents higher and to achieve stronger, more advantageous lease terms overall. During the pandemic, the uncertainty in the marketplace temporarily translated into renewal rent increases that were below our historical average. Today, with the pandemic uncertainty now largely behind us, we are quickly returning to achieving renewal rent increases in line with our historical rent growth. In fact, for the first quarter, renewal rents increased by over 7% on average.

In terms of new leases, we also had a solid first quarter, leasing over 94,000 square feet of space, achieving a 15.8% increase in same space base rent. Lastly, with respect to leased versus build, at the start of the year, the spread stood at 4.7%, equating to $10.6 million of rent from new leases where the new tenants had not yet taken occupancy and commenced paying rent. During the first quarter, we were successful in getting over $2 million of the $10.6 million open and operating, which is the largest dollar amount to commence during any quarter dating back to 2019. We view this as another important and positive trend that we hope to build on.

Taking into account new leases signed during the first quarter, at March 31, the spread stood at 4.6%, representing $9.6 million of rent that has not yet commenced. We currently expect the bulk of the $9.6 million will steadily come online as we move through the year. Looking ahead, based on our first quarter leasing activity and the favorable trends that are taking shape, all being driven by the ongoing demand for space, we believe that 2022 has the potential to be a strong year in terms of leasing. Now, I'll turn the call back over to Stuart.

Stuart Tanz -- Chief Executive Officer

Thanks, Rich. Just to briefly expand on Rich's comment regarding looking ahead, in addition to continuing to capitalize on the strong leasing trends to drive our business going forward, we are also working hard to grow our portfolio, capitalizing on our long-standing relationships. While the acquisition market is highly competitive today, perhaps more so now than ever before in our nearly 30 years experience, as more and more investors continue to aggressively pursue grocery-anchored shopping centers on the open market, our pipeline of potential off-market acquisitions continues to steadily build. We currently have several compelling deals in the works to acquire truly irreplaceable grocery-anchored real estate that have a wealth of opportunities to enhance value going forward.

We have had our eye on these properties and have been patiently, yet persistently, pursuing the sellers for a long time, and we are now hopefully moving toward finally bringing them to fruition. In short, we are excited about the various ongoing opportunities and look forward to making the most of them in the coming months and continue to build value. Finally, in light of our first quarter performance, together with what we have in the works on the leasing and acquisition fronts, we have raised our FFO guidance range for 2022 to between $1.04 and $1.10 per share. Now, we will open up your call for questions.

Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from the line of Craig Schmidt. Your line is now open.

Stuart Tanz -- Chief Executive Officer

Good morning, Craig.

Craig Schmidt -- Bank of America Merrill Lynch -- Analyst

Good morning. I just wondered -- I mean, listening to your comments, and I know already you're on a pace to fall within your guidance range of acquisitions, do you think that the acquisitions in '22 might be back-end loaded?

Stuart Tanz -- Chief Executive Officer

Looking at the pipeline currently, as it stands today, I think the acquisitions will come as we have sort of modeled on a -- sort of on a pretty straightforward measurement of -- depending on what that number might be but it should be mostly back-end loaded quarter after quarter to the end of the year.

Craig Schmidt -- Bank of America Merrill Lynch -- Analyst

Great. And then I wonder if you could give us an update on your densification initiatives.

Rich Schoebel -- Chief Operating Officer

Sure. We continue to make steady progress with each of the projects, Craig, including continuing to be on track to break ground on Crossroads later this year.

Craig Schmidt -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

Rich Schoebel -- Chief Operating Officer

Thank you.

Operator

Your next question comes from the line of Michael Bilerman. Your line is now open.

Stuart Tanz -- Chief Executive Officer

Good morning, Mike.

Mike Haines -- Chief Financial Officer

Good morning, Mike.

Michael Bilerman -- Citi -- Analyst

Good morning, guys. Stuart, just on sort of the acquisition side, you talked about irreplaceable assets and my mind here is extensive. Now, I recognize your relationships in structuring, whether it be with units or other mechanisms, allows you to be competitive relative to market cap rates. But can you talk a little bit about sort of pricing levels on this pipeline and whether you would be eager to sell more, right? Your guidance, $30 million to $50 million of dispos relative to, call it, $100 million to $300 million of acquisitions, obviously means you're going to be raising more capital through equity and I think you were able to tap the market extraordinarily well, given where your stock price was during the first and early part of the second quarter at 19.50.

But just sort of help me walk through some of those comments.

Stuart Tanz -- Chief Executive Officer

Sure. Well, from a pricing perspective, we've modeled about a five and a half cap rates, five and three-quarter cap rate on acquisitions throughout the year. And depending on the individual deal, those cap rates may be a bit higher or a bit lower. For us, as you probably know, the most important thing is what can we do in terms of creating value when we buy these assets.

In terms of selling assets, we have geared up and will be taking to the market shortly, about $25 million, $30 million in shopping centers. We are also looking at another $30 million behind that, primarily the two densification projects in Nevada and in Pinole. Subject to the strength of this pipeline in terms of how it builds and obviously, our stock price, we will continue looking at other opportunities to generate capital, which means potentially selling more assets. So as we continue along building the pipeline, and it's really going to be a combination of both.

It's going to be a combination of looking at the pipeline and the size of that pipeline. Definitely moving a number of assets to market, probably totaling about $50 million to $60 million. And at the same time, depending on our stock price, we'll tap the ATM.

Michael Bilerman -- Citi -- Analyst

And then as you think about -- you made the comment about rebuying some Pan Pacific assets. Remind me, Stuart, out of the 90 or so you have today, how many are old Pan Pacific assets? And I guess how many more could you get your hands on if you were able to?

Stuart Tanz -- Chief Executive Officer

Currently, we own four Pan Pacific assets that we've bought very recently. Very excited to have these assets in our hands. We lived with them for many years. When we sold PNP, as you probably know, Mike, we had 241 assets and we are closely looking at the opportunities of acquiring more.

But at the same time, a number of assets back in the P&P days were in more secondary markets, whereas the assets today that we own are in the metro markets. So we're focused on what's out there from what we owned and operated under P&P, but we're still very selective in terms of what we're buying. And more importantly, if we're buying -- rebuying and reowning these assets, they've got to have some juices, you might say, or the ability to create value.

Michael Bilerman -- Citi -- Analyst

OK. And then just finally, Stuart, just as we think about sort of funding the balance of the acquisitions, should we assume then the plug is just common equity to keep leverage and check at these levels? Or are you willing to take leverage up in order to round up the acquisition volumes?

Stuart Tanz -- Chief Executive Officer

No. We will continue to be focused on leverage, obviously, with net debt to EBITDA being one of the bigger metrics. So we've done a very good job in turning that metric down. And depending on how the pipeline goes as well as the sale of the assets, we'll continue to move that number down to give us the firepower to keep doing what we do best, and that is grow this company smartly and create a lot more value for shareholders.

Michael Bilerman -- Citi -- Analyst

Thanks, Stuart.

Stuart Tanz -- Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Todd Thomas. Your line is now open.

Stuart Tanz -- Chief Executive Officer

Good morning, Todd.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Hi. Good morning. Stuart, just following up quickly on your comments there around dispositions, are you contemplating more dispositions I guess beyond what's in the guidance for '22? As we look ahead over the next couple of years, is there more pruning to be done? Or are you really thinking about dispositions primarily to fund future investments where that might be more attractive or have favorable growth profile?

Stuart Tanz -- Chief Executive Officer

We will continue to look at pruning where the opportunity arises and mostly focused on internal growth, obviously, in these assets and making sure that if the internal growth is moving down that we will take advantage of the current market conditions. So it's a combination of looking at really getting -- finally realizing the value on the densification projects as well as churning assets that don't have much internal growth. So the answer to your question is yes, we will continue to look at funding this pipeline. And we may increase our target as we continue to get through the year depending on the other side of that equation in terms of growing the company.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

OK. And then I think you said that, for the year, as it pertains to guidance, you modeled about a five and a half to five and three-quarter percent cap rate on investments. And I think in your prepared remarks, you said that you achieved 6% cap rates on acquisitions completed in the first quarter. Just curious if you could talk a little bit about pricing trends, whether or not you're seeing any changes at all to pricing, just given the increase in borrowing costs and whether that's having an impact at all in your markets as you look ahead for future investments.

Stuart Tanz -- Chief Executive Officer

Sure. Well, I mean, the current environment is competitive. There's a ton of capital and buyers looking to acquire this segment of retail. It's certainly the most sought-after segment today.

Cap rates on the West Coast, depending on whether you're looking at one-off assets or portfolios, are certainly some of the lowest cap rates we've seen in a long time. I'm not going to quote deals, but I think, Todd, you're aware of what's in the market or what's been announced more recently. We're seeing these assets trade sub-5s. But we, as a team, with the relationships that we've got on the ground, we've been very successful in finding properties that are accretive the day we buy them, given our cost of capital and then more importantly, have a nice runway in terms of building growth.

So it's hard to predict where the market is going to go at this point. But what I can tell you is that we've not seen any movement in the market from a cap rate perspective on transactions that have been widely marketed. Cap rates are still at the levels they were and what we've seen over the last several months.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

OK. Any indication at all from investors or from brokers that you might talk to that pricing for deals or for larger portfolios, perhaps institutions might be demanding or commanding kind of higher yields going forward? Is the sub-5% cap rate that we've been maybe hearing about or talking about a little bit, is that still achievable today in the market if there's a high-quality collection of assets that comes to market?

Stuart Tanz -- Chief Executive Officer

Yeah. Cap rates have not moved. They really have been at the same place they've been over the last six, nine months. I will tell you, we are seeing a bit of an opportunity out there in terms of some of the private buyers pulling back, given the interest rate environment and that's providing the sort of a window of opportunity from our perspective.

But the good news is that our pipeline continues to build and -- but pricing for widely marketed deals for the quality of assets that we own and we buy have not moved.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

OK. All right. Thank you.

Operator

Your next question comes from the line of Juan Sanabria. Your line is now open.

Stuart Tanz -- Chief Executive Officer

Good morning. 

Juan Sanabria -- BMO Capital Markets -- Analyst

Hi. Good morning. Just wanted to follow up on Todd's line of questioning, but maybe from a different perspective. I was hoping you guys could comment on your own cost of funding and how that's changed over the last six months or year-to-date and how that impacts your ability to pay kind of mid-5% cap rates for assets and what the spread to your funding costs are and how that's evolved.

Rich Schoebel -- Chief Operating Officer

Well, I mean, in terms of our cost of capital or cost of funding, on the equity side, obviously, that has gotten better for us. And that's provided a nice runway in terms of executing our plan. On the debt side, Mike, I don't think really anything has moved there either.

Mike Haines -- Chief Financial Officer

Nothing material. I mean, we're still looking at a revolver with very low cost of debt capital. So yeah.

Rich Schoebel -- Chief Operating Officer

And then more importantly, credit agencies have certainly endorsed our business plan and have endorsed management's focus on delevering the balance sheet. So that certainly kept our cost of debt capital in a very good place.

Juan Sanabria -- BMO Capital Markets -- Analyst

What if you guys had to go out and raise new 10-year kind of permanent financing instead of doing it on the line, I guess, is where I'm trying to get to.

Mike Haines -- Chief Financial Officer

Yeah. Well, the good news is we don't have anything maturing in the near term. The next thing is not until the end of next year. But obviously, we're keeping a close eye on the interest rate environment and seeing where that's going.

There's a lot of different variables out there that can impact that between now and next year. So and it's hard to say where you can price something today, but that's -- it's hard to say.

Juan Sanabria -- BMO Capital Markets -- Analyst

OK. And then I was just hoping on the guidance front, I saw straight line rents and amortization above and below market rents inched up. How much more opportunity is there to move rents from cash to GAAP to maybe further boost FFO? And kind of where are you in that process of reassessing that? And what, if anything, flowed through the first quarter numbers that you kind of hinted at how GAAP net income, I think Michael in your prepared remarks, were stronger than base rents than you had expected?

Mike Haines -- Chief Financial Officer

Well, it's kind of difficult to project. When we set out with the initial guidance at the beginning of the year, it's based on our property level budgets and FAS 141, now that we're back into acquisition, now that's going to be a contributor to GAAP rents as well as straight-line rent based on the leasing velocity. And so until you actually cut the deals or buy an asset and go through the purchase price valuation exercise, it's really hard to know what that number is going to be. So we're going to have to revisit that likely every quarter going forward as we continue the acquisition pace and with the strength of the leasing demand.

Juan Sanabria -- BMO Capital Markets -- Analyst

And one just last quick one for me. You mentioned kind of other income, $1 million benefit. Was that just the lease term fee that you were able to capture? I just wasn't clear on what that was.

Mike Haines -- Chief Financial Officer

Yeah. Essentially, yes. I mean if you look at our other income line item on an annual basis going back, we're generally between $3 million and $4 million a year for those odd, one-off kind of things. So we always have that level of income.

This quarter happened to be a little bit heavier than normal. So that's what that is.

Juan Sanabria -- BMO Capital Markets -- Analyst

Got it. Thank you very much.

Mike Haines -- Chief Financial Officer

Thanks, Juan.

Operator

Your next question comes from the line of R.J. Milligan. Your line is now open.

Stuart Tanz -- Chief Executive Officer

Good morning, RJ.

R.J. Milligan

Good morning, guys. So I just want to follow up on maybe Craig and Todd's questions just in terms of the market. And I was just curious, Stuart, and I know that you guys sort of look at acquisitions that are off-market and don't really fit in sort of the general market conditions. But I'm curious if there's any expectation to see a pause in transactions in sort of the normal way out on the West Coast, just given the change in interest rates.

Stuart Tanz -- Chief Executive Officer

No. Right now, I guess there's a couple of things that -- I mean, first of all, we have ICSC coming up. And typically, what you do see with ICSC is a number of sellers bring their assets to market on a widely marketed basis because they're anticipating getting a much bigger investor base, looking at these assets at the conference. So we -- leading up ICSC, you always get some pickup in activity.

But in general, we're not seeing much pause in the market right now. We're seeing a bit of an acceleration on the anticipation that interest rates are going up and what impact that might have from a seller's perspective. But right now, the pipeline is very robust, and we're optimistic that we'll certainly meet the goals that we've laid out in guidance.

R.J. Milligan

OK, excellent. And then my second question is obviously there was a decent amount of leasing done in the first quarter, sort of, I guess, it was the second best quarter, first quarter on record. Just curious, though, that sort of implies there was your typical fallout, right, because the gap between signed but not rent paying didn't move all that much. And so I'm just curious, maybe Rich can give some color as to where that fallout was, maybe specific categories or sectors.

Rich Schoebel -- Chief Operating Officer

Sure. I mean I think it's the typical fallout that you see the beginning of every year after the holidays. There wasn't any one particular category that was impacted. There's probably a few tenants that struggled through COVID and left the centers who had given the opportunity.

But the leasing team has never been busier. The inquiries for space, multiple LOIs on spaces, so we see very strong demand going forward.

Stuart Tanz -- Chief Executive Officer

OK. Make sense.

Operator

Your next question comes from the line of Wes Golladay. Your line is now open.

Stuart Tanz -- Chief Executive Officer

Good morning, Wes.

Mike Haines -- Chief Financial Officer

Good morning, Wes.

Wes Golladay -- Robert W. Baird and Company -- Analyst

Just sticking with the tenant question, have you guys cycled through all the tenants that have been impacted by COVID, including those that can pay that have elected not to pay?

Rich Schoebel -- Chief Operating Officer

I mean, we have a couple of lingering tenants that we're going round and round with, but it's really basically inconsequential. It's sort of similar to the normal back and forth with tenants pre-COVID. But yes, there's a couple of tenants that have not been fully resolved, but we expect to have those resolved here going forward, now that the courts are fully open, and we're able to enforce our rights.

Wes Golladay -- Robert W. Baird and Company -- Analyst

Got it. And then I guess, can you just provide an update now on the densification efforts for the Northern California parcels? Do you plan to sell anything this year? And I guess, in total for the two that you're working on, what is the gross proceeds you expect?

Rich Schoebel -- Chief Operating Officer

Sure. Well, I mean, the two in Northern California, one is in front of the Planning Commission or City Council, within the next 30 to 45 days for final approval. And the other project is probably another 90 to 120 days away from final approval. Both of those assets are going to be -- are going to hit the market for sale shortly.

And we're expecting anywhere from $25 million to $30 million of cash for the sale of those assets. We maybe get lucky and get a bit more than that. And from that perspective, we're going to be delivering to a potential builder, a fully entitled project, which, again, has given us the ability to build that value over the last several years. And these are in two very strong markets.

So we're anticipating a lot of demand for these assets -- for the land. And again, no impact to NOI in terms of selling this.

Wes Golladay -- Robert W. Baird and Company -- Analyst

Got it. And then going to the acquisition market, I guess, can you give us a sense of how many buyers rely on high leverage to buy assets on the West Coast?

Rich Schoebel -- Chief Operating Officer

Well, the private buyer -- obviously, the private sector relies on leverage more than anything else. Institutional capital, REITs don't rely on leverage as the private side does. But Certainly, a lot of the assets in the range that we buy in, being one-off transactions, there's a lot of private buyers out there that are buying these type of deals. So that's where we're beginning to see a bit of an impact as it relates to interest rates.

Wes Golladay -- Robert W. Baird and Company -- Analyst

Got it. And then Mike, one for you. You have a few swaps, about $300 million of swaps expiring later this year. When do you plan to address those?

Mike Haines -- Chief Financial Officer

Well, right now, the maturity end of August, we're currently exploring several different strategies, taking into account a number of different variables, including the interest rate environment obviously. So at this point, we have not yet made a decision what to do with those.

Wes Golladay -- Robert W. Baird and Company -- Analyst

OK, got it. Thanks, everyone.

Mike Haines -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Paulina Rojas. Your line is now open.

Stuart Tanz -- Chief Executive Officer

Good morning.

Paulina Rojas -- Green Street Advisors -- Analyst

Hi. Good morning. Hello. I think you mentioned in your prepared remarks that base rent in the quarter came in higher than the budget.

What surprised you positively there?

Mike Haines -- Chief Financial Officer

I'm sorry, can you repeat the last part? Base rent on a -- I just said, the base rent was -- came in stronger than what we had originally budgeted. And that was -- the contributing parts of that, too, was straight line rent and FAS 141 on top of regular cash base rent.

Paulina Rojas -- Green Street Advisors -- Analyst

I see. OK. Thank you. And then your real estate is tilted toward essential services rather than discretionary spending categories, of course.

But are you concerned that higher inflation and lower real income could cause a decline in consumer spending in the coming months?

Stuart Tanz -- Chief Executive Officer

No. Most of our assets are located in very affluent dense communities. So we don't have -- really not seen much impact at all as it relates to the inflationary issues or the interest rate issues. We don't think it's going to impact the markets we're in, certainly as much as it could impact other markets that have less density and weaker income profiles.

OK, thank you very much.

Thank you.

Operator

Your next question comes from the line of Chris Lucas. Your line is now open.

Stuart Tanz -- Chief Executive Officer

Hey, Chris.

Chris Lucas -- Capital One Securities -- Analyst

Good morning, everybody. Just, Rich, maybe start with you. On the strength of the commencements during the quarter, was the bulk of the significant bulk of that shop space -- just kind of curious if tenants are sticking to their targeted windows of openings and/or whether there's more flexibility there.

Rich Schoebel -- Chief Operating Officer

Sure. Yeah, I think the majority was shop tenants. As you know, with the portfolio 100% leased for the anchor spaces, there's not a ton that are in there. There are a few.

But yes, I think that the permitting process and the construction process has gone back to more normal time frames and some of the lag that probably occurred during COVID has started to come online. So we see, going forward, that this should steadily be coming online, the remaining throughout the year.

Chris Lucas -- Capital One Securities -- Analyst

OK, thank you for that. And then, Mike, just on the non-cash rent that was above. So the transactions that you closed after the quarter, so they shouldn't have made the impact. Was all of that sort of excess non-cash income related to the leases -- the anchor leases that you did or the renewals or what drove that number above your expectations?

Mike Haines -- Chief Financial Officer

Well, are you referring to FAS 141 or straight line or both?

Chris Lucas -- Capital One Securities -- Analyst

Just the combination of non-cash rents, yes, just the combination.

Mike Haines -- Chief Financial Officer

Yes. So straight line is really a function of the leasing activity. And then the FAS 141, it's quite a process when you acquire an asset, you have to go through a full valuation for GAAP purposes. And until you have all the purchase price allocated to hard assets and tangible assets and liabilities, you don't really know what that number is.

So each lease is valued. So that what -- when we first set our guidance at the beginning of the year, that was based on what we knew at the time. And then there was a couple of assets that were going through that process that we acquired late in the fourth quarter that were finalized in Q1, which then changed the number going forward. So that's why we adjusted the guidance on that range.

And it will probably adjust again based on the current acquisitions because they're now going to be going through the process as well, and that will show up later this year.

Stuart Tanz -- Chief Executive Officer

Yeah. Chris, the most recent acquisitions are not in the current number actually, just to clarify that. I mean it's really coming out of the fourth quarter more than anything out there.

Chris Lucas -- Capital One Securities -- Analyst

OK. That's really helpful. And then, Stuart, for you, just in terms of the opportunity set, how important is the changing rate environment to basically getting some owners to really look at sales versus refis at this point?

Stuart Tanz -- Chief Executive Officer

We're seeing a bit of movement in the market because of rising interest rates, but pricing, again, continues to be at record levels and deal flow continues to be very active. But we are seeing a bit of a window that has opened up primarily through our relationships, more than anything else, where sellers who have known us many years are beginning to get worried from a refinancing perspective. And they've reached out to us, off-market, anticipating that they can do a transaction that's going to be seamless and quick, and not have their rent rolls sort of advertised all over the market.

Chris Lucas -- Capital One Securities -- Analyst

Great. Thank you for that. That's all I had this morning. Appreciate it.

Stuart Tanz -- Chief Executive Officer

Thanks, Chris.

Mike Haines -- Chief Financial Officer

Thanks, Chris.

Operator

Your next question comes from the line of Michael Gorman. Your line is now open.

Mike Haines -- Chief Financial Officer

Hey, Mike.

Stuart Tanz -- Chief Executive Officer

Hey, Mike.

Michael Gorman -- BTIG -- Analyst

Hey, good morning. A couple of quick questions here. I know you've covered a lot of ground. Stuart, just sticking with the acquisitions, we've talked a lot about the increased demand and kind of the competitiveness for marketed deals.

Have you seen anything especially coming out of the volatility of COVID and then the recovery? What are you seeing in terms of the underwriting criteria that's out there in the marketplace? How does it compare to maybe the last time things got too toppy in the strip center sector? Is the underwriting getting stretched in addition to the pricing or is it mostly just on the pricing side here?

Stuart Tanz -- Chief Executive Officer

It's primarily on the pricing side. Obviously, as we've been through ups and downs over the last 30 years, we have seen buyers enter the market, who spent very little time underwriting. However, in today's market, the buyer profile is more suited to underwriting, where they're really looking at risk in a good way, and they're taking into consideration rents that aren't going to -- that are more normal in nature versus rents that could be a lot higher in terms of their underwriting. We continue to be conservative in our own underwriting, given what we've been through with COVID.

We think that's very important in terms of what we're buying and how we're guiding the Street in terms of our numbers. But all in all, the current environment is still showing some very strong discipline.

Michael Gorman -- BTIG -- Analyst

OK, great. That's helpful. And then maybe just one more for you, Stuart and Mike. I apologize if I missed it, but could you provide any update on how the board is thinking about the dividend or kind of where the dividend sits right now relative to taxable income? Obviously, things have strengthened.

You increased the guidance. Things are definitely more stable. The balance sheet leverage ratio looks great. So how should we think about the quarterly payout going forward?

Stuart Tanz -- Chief Executive Officer

Well, obviously, this is decided at the board level, not at our level. But the good news is that our payout ratio is still among the lowest in the sector. And as we look through the balance of the year, if things continue to go as well as they're going, then we will be raising our dividend.

Michael Gorman -- BTIG -- Analyst

OK, great. Thanks so much for the time.

Stuart Tanz -- Chief Executive Officer

God bless you.

Operator

Your next question comes from the line of Tammi Fique. Your line is now open.

Stuart Tanz -- Chief Executive Officer

Good morning.

Tammi Fique

You mentioned that long-term brick-and-mortar tenants that were previously reducing store counts are now returning to key markets with new concepts. And I guess I'm just wondering if you can talk in more detail about those tenants and what the open-to-buys are and what their criteria are for opening new stores? Thank you.

Rich Schoebel -- Chief Operating Officer

Sure. I mean I think in many cases, what we've seen is they're coming back with a slightly smaller footprint and, as we touched on in the prepared remarks, with a more finetuned product offering. But we have been impressed that we've had some shopping centers where tenants had left the property at the end of their term several years ago, and now they're back leasing at the exact same property with their finetuned concept. So we just see this as a demonstration of the strength of the properties and that people want to tap into the demographics that we're able to offer.

Stuart Tanz -- Chief Executive Officer

And the grocer, obviously, is a big part of this as well. We've also found that these tenants, when we start communicating with them, having that grocery anchor component is critical in terms of their overall merchandising plans.

Tammi Fique

OK. Great. And then maybe following up on an earlier question, given the gap between leased and build occupancy, can you tell us what your tenant retention rates are today and how that compares with historical level?

Rich Schoebel -- Chief Operating Officer

Yes. Our tenant retention rate is typically in the high-80% range. That has really not changed, I think, as you see from our overall occupancy, that is supported by the renewal of existing tenants. And in fact, in some cases, we'd love to get some of these spaces back as you get below-market rents and our leasing team is usually chomping at the bit to get some of these spaces back.

Tammi Fique

OK, thank you. And then last one. Previously, dispositions were focused more on exiting a specific market. So I'm just curious if there's anything specific characterizing the properties you are looking to sell, either in terms of geography, changing demographics or if it is really just based solely on like the individual growth profiles of the assets?

Stuart Tanz -- Chief Executive Officer

Yeah, it's based on the individual assets and the profile from those assets, more than anything else with, obviously, the two densification projects on tap because we're just not in the business of developing shopping centers or anything else. So that's the focus. It's non-income-producing or value-creating land in terms of densification and it is assets that don't have internal growth in terms of looking at the next two to three years.

Tammi Fique

OK, great. Thank you.

Stuart Tanz -- Chief Executive Officer

Yeah.

Operator

Your next question comes from the line of Todd Thomas. Your line is now open.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Hi. Thanks for letting me jump back in here real quick. I just wanted to go back to the $300 million of swaps that expire at the end of August. Mike, it sounds like there hasn't been a decision made yet as to what will happen there, how you plan to address that.

But can you just talk about, I guess, first, what's sort of embedded in guidance and kind of what your expectation is today when the swaps burn off just -- and where the sort of term loan is, as you kind of look ahead, what pricing looks like for your various options?

Mike Haines -- Chief Financial Officer

Sure. Well, right now, it's embedded in guidance, as you know, the swaps burn off and so the term loan itself is lever based with the margin. So -- and our model simply takes the forward curve of LIBOR and build that into the forward interest expense for the balance of the year, assuming we didn't do anything and just let it revert to floating, which is actually one of the possibilities. We're very highly fixed rate debt.

And in today's environment, it may not be necessarily a bad thing to have a little bit of floating rate debt out there. So that's one of the possibilities. And if we were to go out and try to do -- if we're going to be growing the company and adding a little bit to the line, maybe we add that to the term loan and term that out for 10 years. And what that rate looks like, hard to say, low-fours perhaps, certainly less than where our inaugural bond deal was.

But it's just hard to say. But right now, the guidance has it simply reverting to floating rate based on LIBOR curve going forward.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

OK. Got it. So for the second half of the year, you're picking up about 150 or 200 basis points of interest expense savings on $300 million related to the swaps for the term loan.

Mike Haines -- Chief Financial Officer

Right, right, exactly.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

All right. Great. That's all. Thank you.

Operator

Your next question comes from the line of Linda Tsai. Your line is now open.

Stuart Tanz -- Chief Executive Officer

Good morning, Linda.

Linda Tsai -- Jefferies -- Analyst

Hi. Good morning. Could you just give us an update on how expense recoveries are trending and what your expectation is as you go through the rest of 2022?

Stuart Tanz -- Chief Executive Officer

The recovery rate is consistent with our historical averages. The leases we sign are primarily 99% triple net. And so those rates stay pretty steady.

Rich Schoebel -- Chief Operating Officer

Yes. It moves around a little bit quarter to quarter just on timing of expenses and leveling of the recoveries based on those expenses as they're incurred. But generally speaking, we're in the high-80s, 90% recovery rate. And then as the tenants who are in that gap between build versus lease, as they take possession, your recovery rate is going to go up even higher because it will start contributing.

Stuart Tanz -- Chief Executive Officer

Exactly. It's going to get a bit better because that gap closes.

At it narrows, right? As it narrows.

Linda Tsai -- Jefferies -- Analyst

And then just in terms of the competitive environment in terms of the different buyers you're seeing coming into the markets that you're concentrated in, are there certain areas where you're seeing more competition than others?

Stuart Tanz -- Chief Executive Officer

That was across the primary markets, across the whole West Coast. Obviously, grocery drug-anchored centers, again, is the most sought-after segment of the retail market. And I think as we've learned going through the pandemic, this particular defensive posture is something that investors are much more focused on today than they were some years ago. But the good news is that the market has been quite robust just in terms of the opportunities for us.

And -- but it's across all markets. It's not one market in particular. And it will move around. I mean we did a lot in the Pacific Northwest.

Now things are shifting back to California for us. But again, it's just going to move around quarter to quarter, year-to-year depending on sellers and their expectations.

Linda Tsai -- Jefferies -- Analyst

Great. That's it for me. Thank you.

Operator

And speakers, we don't have any questions over the phone. I would like to turn it back to Mr. Stuart.

Stuart Tanz -- Chief Executive Officer

Well, thank you. In closing, I would like to thank all of you for joining us today. If you have any additional questions, please call Mike, Rich, Laurie or me directly. Also you can find additional information in the company's quarterly supplemental package, which is posted on our website as well as in our 10-Q.

Lastly, for those of you attending ICSC Convention in Las Vegas next month, after a two-year hiatus, please stop by our booth, which will be in the South Hall specifically booth number 9184. Again, that's 9184. Hope to see you all there. And thanks again, and have a great day, everyone.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Laurie Sneve -- Chief Accounting Officer

Stuart Tanz -- Chief Executive Officer

Mike Haines -- Chief Financial Officer

Rich Schoebel -- Chief Operating Officer

Craig Schmidt -- Bank of America Merrill Lynch -- Analyst

Michael Bilerman -- Citi -- Analyst

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Juan Sanabria -- BMO Capital Markets -- Analyst

R.J. Milligan

Wes Golladay -- Robert W. Baird and Company -- Analyst

Paulina Rojas -- Green Street Advisors -- Analyst

Chris Lucas -- Capital One Securities -- Analyst

Michael Gorman -- BTIG -- Analyst

Tammi Fique

Linda Tsai -- Jefferies -- Analyst

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