© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to Retail Opportunity Investments 2020 Third Quarter Conference Call.
Participants are currently in a listen-only mode. Following the company's prepared comments, the call will be opened up for questions.
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 would like to introduce Stuart Tanz, the company's Chief Executive Officer.
Thank you. Good day, everyone. We appreciate everyone joining us today and hope that you and your families are doing well and continue to be safe. Here with me today is Michael Haines, our Chief Financial Officer; and Rich Schoebel, our Chief Operating Officer.
We're pleased to report that our portfolio of grocery-anchored shopping centers continues to perform impressively strong during this unprecedented time. The important strategic initiatives that we implemented during the second quarter at the beginning of the pandemic to adapt and best position our centers with the appropriate safeguards protecting tenants and customers alike serve to facilitate the reopening of tenants and to promote shopping activity at our properties as we progress through the third quarter.
Additionally, our initiative to create new outdoor space is to enable certain businesses to reopen has also been embraced by the communities they serve. In short, customers and shopping activity at our shopping centers have returned in force.
In step with customers returning and tenants businesses steadily increasing, our base rent collection rate has steadily increased as well. The beginning of the pandemic, back in April, when strict business shutdown orders were first put in place, our base rent collection rate was about 68% at that time, which was the highest in our sector. Thanks in large part to our longstanding daily necessity grocery-anchored focus.
Working collaboratively with our tenants, we're successful with increasing our base rent collection rate to 82% when we reported second quarter results. During the third quarter, we continue working with tenants to reestablish their businesses. As a result of our efforts today, our base rent collection rate for the third quarter is approaching 90%.
Along with customer activity and rent collection steadily increasing, leasing activities also returned in force. While demand for space across our portfolio has held firm throughout the pandemic, actual leases being signed did slow considerably during most of the second quarter, given all of the uncertainty at that time. However, as our tenants reopen their businesses and shopping activity returned, during the third quarter, retailers went from just inquiring about space to again wanting to sign leases and move forward expeditiously.
As a result, during the third quarter, we executed over 441,000 square feet of leases, which was close to setting a new record in terms of our historical third quarter leasing activity. Additionally, not only did we achieve strong leasing volume in the third quarter, we also achieve solid rent growth as well posting a blended cash increase of 12% on new and renewed leases.
Overall, we're encouraged as to the progress that we've made thus far towards returning to full normal operations. That said, no doubt there will continue to be extraordinary challenges and we intend to remain proactive in adapting our business and working closely with our tenants as the pandemic continues to evolve.
Lastly, notwithstanding facing extraordinary challenges during the past eight months, our ROIC was just awarded investment grade rating and stable outlook from Fitch Ratings. To achieve this, during such an unprecedented and uncertain time, we think speaks volumes as to the long-term strength, stability, and resiliency of our portfolio and business.
Now, I'll turn the call over to Michael Haines, our CFO. Mike?
Thanks Stuart.
With our portfolio and tenants making solid progress during the third quarter, from a financial perspective our business strengthened as well.
GAAP net income attributable to common shareholders for the third quarter of 2020 was $6.5 million, equating to $0.06 per diluted share, and funds from operations for the third quarter totaled $31.6 million, equating to $0.25 per diluted share. As compared to our results for the second quarter, both net income and FFO increased notably in the third quarter.
To-date, we've received 88.7% of our total base rent for the third quarter. With respect to the remaining 11.3% which totaled approximately $5.8 million of that approximately $1.4 million has been deferred to-date, roughly $2.7 million is currently in negotiation, and approximately $1.7 million was a bad debt reserve for current tenants. We also reserved approximately $500,000 of bad debt relating to past tenants. So our total bad debt for the third quarter was approximately $2.2 million.
Turning to our balance sheet, given our portfolio and business progress during the third quarter, we repaid the $130 million on our credit line that we had drawn as a liquidity safeguard back at the beginning of the pandemic. As a result, at September 30, there was only $103.5 million outstanding on our $600 million unsecured credit facility, meaning we currently have just shy of $500 million available on our line.
Additionally, we currently have $62 million in cash on our balance sheet today, of which approximately $49 million represents the net cash flow from operations that we've carefully conserved since the beginning of April. Assuming our business continues to progress as we move through the fourth quarter, our objective will be to utilize the majority of the cash on our balance sheet to further reduce outstanding debt.
Now I’ll turn the call over to Rich Schoebel, our COO. Rich?
Thanks Mike.
Echoing Stuart and Mike's comments, our portfolio and tenant base continue to perform well and made solid strides toward returning to full normal operations.
Starting with our lease rate, our anchored space continues to be 100% leased, and our shop space remains at strong 93% leased. In terms of our overall lease rate, at September 30, our portfolio stood at 96.8% leased which represents only a 90 basis point differential from where our portfolio lease rates stood prior to the pandemic.
The fact that our lease rate continues to hold up remarkably firm is indicative of our longstanding strategy of focusing on tenants that provide daily necessities and essential services, which have remained in demand throughout the pandemic.
And speaking of demand, as Stuart indicated, during the third quarter leasing activity returned in force. Specifically, we leased over 441,000 square feet of space in total, including 134,000 of new leases, where we achieved a 12.2% increase in same space comparative cash rents. Bulk of the new leases where shop tenants, where we leased 104,000 square feet of space, achieving a 14.9% cash increase in base rent.
In terms of renewal activity, we renewed 307,000 square feet of space during the third quarter, increasing cash base rents by 11.6% on average, including an 11.9% increase on anchor renewals, and 11.3% increase on shop space renewals. The bulk of these renewals simply involve tenants exercising existing renewal options, in many cases ahead of scheduled expirations and with contractual rent increases.
We think our tenants' interest in readily renewing the leases during this uncertain time with double-digit rent increases reflects the strength and desirability of our shopping centers. Additionally, the demand for space is coming from a strong mix of existing tenants whose businesses have performed very well during the pandemic; such that they're opportunistically seeking to expand into neighboring spaces, as well as some new retailers again will perform very well and are now seeking new opportunities to grow their businesses.
From our perspective, the pandemic is accelerating the natural transition of underperforming space being taken over by stronger retail concepts and service providers. Importantly, we're capitalizing on this trend to create greater synergies and complementary uses among our tenants, which in turn will enhance the overall strength of our tenant base, as well as enhance the consumer draw and appeal of our centers.
Given the significant increase in leasing activity during the third quarter as compared to the second quarter, the economic spread between leased and build space increased during the third quarter. At the beginning of the third quarter the spread stood at 2.9%, representing approximately $5.9 million in additional incremental annual rent on a cash basis. Taking into account leasing activity during the third quarter, the spread increased to 3.4% as of September 30, representing approximately $6.9 million of incremental cash rent to come online as new tenants take occupants and commence paying rent.
In terms of anchor lease expirations for the remainder of 2020, we have just one anchor lease expiring in the fourth quarter. The lease is with one of our strongest national grocers, they have a five-year renewal option remaining on their current lease. However, rather than simply exercising the renewal option, they would like to establish a new long-term lease which we're in the process of negotiating with them.
Looking ahead to 2021, we only have six anchor leases scheduled to expire, four which grocery and drugstores, which we expect to renew. With respect to the other two anchor tenants, we currently expect they will renew as well as the businesses have remained open during the pandemic and their stores have been performing exceptionally well.
Lastly, in terms of pad development activity, during the third quarter, we broke ground on a new pad building at one of our shopping centers in the Seattle market, which is fully committed. Additionally, we have two other pads that we expect to break ground on the coming months that are also pre-leased, one at the center in the San Francisco market and one at a center here in San Diego. Importantly, the pads are pre-leased to a strong mix of essential national retailers whose businesses have all fared well during the pandemic.
Furthermore, the fact that these retailers are eager to move forward during the pandemic speaks to their confidence in the underlying long-term fundamentals of our core West Coast market and to the strength of our shopping centers.
Now I'll turn the call back over to Stuart.
Thanks Rich.
During the fourth quarter as we head towards the holiday season, demand for space and leasing activity continues to ramp-up. We're working hard to make the most of the opportunities with the overriding objective being to enhance the strength and diversity of our tenant base as Rich discussed. We're also continuing to work extremely hard continuing to be highly engaged and proactive at enhancing and best positioning our centers as the pandemic evolves.
For example, with the cooler season approaching, we've already secured many key items such as space heaters and wind barriers, in order that our tenants can continue to utilize outdoor spaces in the coming months. Additionally, we continue to be very proactive in working with local municipalities in steering small businesses grants and assistance towards our tenant base and helping our tenants take advantage of the assistance.
As an example, just recently, a municipality up in our Seattle market started a promotional program aimed at helping local full service restaurants get back up and running by the municipality funding a 30% discount to dining customers. When they announced the program, we immediately contacted all of our dining restaurant tenants, almost all of which were unaware of the opportunity.
In light of our business and portfolio continuing to progress, we expect to reinstate our dividend starting in the first quarter. Given that there is still considerable uncertainty regarding the pandemic, when we do reinstate the dividend, it will be at a conservative payout ratio in order that we can continue to conserve ample cash flow. While we have largely been in a defensive mode for the past eight months, focusing on protecting value through adopting our centers and working collaboratively with our tenants, now that our business and portfolio are steadily progressing towards returning to normal operations, we're working to shift back to office.
As Rich highlighted, we have three pads getting underway. We also have a number of additional pads throughout our portfolio in the planning stages as well. Additionally, we continue to make excellent progress on the densification front. With respect to the three projects currently going through the entitlement process, all three are steadily progressing, such that we could be in a position to break ground on possibly two of the projects during 2021, with a third starting in 2022.
As it relates to the acquisition market after eight months of essentially no activity on the West Coast, we're starting to see some property owners testing the marketplace. Thus far, pricing parameters and expectations are largely the same as before the pandemic, especially for prime, grocery-anchored shopping centers. Needless to say, we're keeping a close watch on the market with an eye towards being in a position to start our recycling program again in 2021, depending on how things unfold.
In terms of potential off market privately held acquisition opportunities was still early. Our sense is that these properties that are well located solid shopping centers, yet undercapitalized and therefore less equipped to handle tenant turnover during the pandemic could prove to be excellent buying opportunities for us in 2021. We're carefully watching to see how those opportunities develop as well.
Finally, as the pandemic has evolved presenting new challenges at every turn, it has been an enlightening experience for all of us at ROIC in terms of how we run our business, and how we are having to quickly adapt and keep adapting, while also staying safe, as well as keeping our loved ones safe too.
I'm proud to say that our team has stepped up incredibly and continues to do so every day. Along the way, we've become more nimble and efficient as an organization. While no one knows when the pandemic will fully subside, I can assure you that our team is as committed and determined as ever to our mission of working tirelessly at building long-term value.
Now we will open up the call for your questions. Operator?
Thank you. [Operator Instructions].
Our first question comes from the line of Katy McConnell with Citi. Your line is open.
Thanks and good morning everyone. So can you walk us through the question on cost of rents that's under deferral versus unresolved at this point, and fill out unresolved part, can you discuss your plan and the outlook for ultimately collecting based on the health of these tenants?
Sure. So your question came in a bit blurry, but so in terms of resolving what is unresolved, we continue to work through that part of our tenant base every day. And we're getting close and getting most of that unresolved over the next month, two months. I think by the end of the fourth quarter, we should be in great shape just in terms of having almost all of our tenants resolved. But again, these are ongoing discussions that are complicated in nature and we're making very good progress on that front. I think the first part of your question was related to Katy, can you just repeat that, it came through a bit fuzzy here.
Yes. I was just trying to get a sense for that portion that's under deferral agreements that you're working on versus the portion that's completely unresolved.
So what we've got, Mike. How much we got left?
I'm not sure how much is totally housing deferral, I think about $5 million or so that's been totally deferred. And just as a data point, the amount that was deferred from the second quarter that started to be rebuild in the third quarter, we rebuild about $411,000 something like that. And we collected about 87% of that. So the collection rate on the deferred amount that's been rebuild is pretty high. We're very pleased with that. And hopefully, that stays -- that continues going forward.
Thank you. And our next question comes from the line of Mike Mueller with JPMorgan. Your line is open.
Hey, good morning. Just wondering, can you walk us through; take the reserve level from 2Q and then where you ended up in Q3? And what changed and kind of what came out of it? What categories of tenants – what -- just any color you can give us on that progression from Q2 to Q3?
Well, I mean in terms of -- I mean really, it was all part of the negotiations that started all the way back in April and May, those accelerated during the third quarter, and a number of those did get resolved. And in getting those resolved, obviously we got payments for what was owed in Q2 and Q3 as well, and getting paid in Q3 for Q2 that increased the overall collection. And in some cases, we had to take what we reserved and back that up -- and reverse that. So I think that had a bit of an impact in terms of lowering the reserve for Q3. Anything else, Mike that you want to add.
Obviously you and Rich were no better to talk to the tenants on a daily basis. But I think there's a higher confidence level on the collection rate. I know, in Q2, we were pretty aggressive and took about $4.9 million or so on the current tenants and this quarter like $1.7 million. So there's a big drop. Yes. But I think it's -- I think it's because we're more comfortable with the tenant base and their ability to pay over the long-term.
Yes, of course, during the third quarter, Mike, a lot of our tenants began either got open and, with the -- I think as we've articulated with the huge increase in traffic, that gave them the confidence to also go back and pay us what they owed us for that month. And previous to that, as well, they had the confidence in their business is not only surviving, but also their business is picking up and sales in a lot of cases for the tenants those reopened have actually gotten pretty close to what they were before the pandemic.
Got it. Okay. And one other question too. I know you gave us the collection percentage for the quarter. Do you happen to have what it was, say in September at the end of the quarter?
Close to 90%. Well for the third quarter each month was really consistent ranging between 88% and 89%. So it's really, really consistent across each of the lots .
Got it, okay.
October is heading in the same direction even a bit more positive at this point.
Thank you. And our next question comes from Michael Gorman with BTIG. Your line is open.
Good morning, gentlemen. Thank you. Quick, sorry, if I missed this, but Stuart or Rich in your conversations with tenants or even reworking some of the leases have any of them started to explore restructuring their spaces or reworking their floor plans. We've seen some of those come out of Walmart to maybe adapt to some of the new trends that they're seeing as a result of the pandemic, whether it's more omnichannel or changing the distribution capabilities out of the store. Are any of your tenants are already starting to talk about that with some of their locations in your portfolio?
Yes, I mean, this is Rich, I think that the tenants as they're coming in are looking at the what is the new reality and adjusting how they're setting up their businesses accordingly. Some of the restaurant tenants we've been talking to recently are making sure that they have sufficient outdoor seating, covered, heated, opportunities for curbside pickups and also for the potential of operating as a ghost kitchen, in the event that they're not able to offer in person dining. So I think that that is I think people are being cognizant of, what could be a new reality going forward and making sure that they have set up their business accordingly.
And just as part of those conversations, whether it be like the ghost kitchens, or maybe a micro fulfillment center and a grocer, are they asking for your assistance? Whether CapEx helps with zoning? Or is this more just something that they're taking on themselves within the four walls?
Mostly, it's been just the right to do it. But they are taking on the heavy lifting in terms of the permitting and the rest.
Okay, great. And then one for Mike, I'm sorry, if I missed it, but with the investment grade rating from Fitch, what does that do to the spreads on your line of credit, and also, if you were to go into the unsecured markets today like what's interested in the [indiscernible]?
Their rating doesn't really affect our borrowing margin on the credit line and term loan right now because we've got the mid BBB rating from Moody's. So it keeps everything where it is. And as far as the unsecured market, we just thought it is important to have additional credit reserve on our profile.
Thank you. And our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Your line is open.
Hi, good morning. Just first question back to the collection rates in general, Stuart, sounds like each month in the quarter was pretty consistent in that 87%, 88% or 89% range? Just any comments, I guess, first on October? And then also do you anticipate getting above 90% or do you think that there may not be significantly more upside here in the near-term?
The trend has been positive, continues to be positive. I think the answer is, yes, we will be trending above 90%. I can't give any guarantees. But all indications are that we're getting close to resolving lot of this outstanding rent. And as part of that, as long as the tenants stay open, I think you're going to be seeing the fourth quarter head into the 90s for ROIC.
Okay. And then, Mike, on the reserve and the breakout around the uncollected rent in the quarter that that was helpful. So the reserve itself, you noted was $1.7 million a little over $4 million last quarter so a nice improvement there. Would you continue to expect that bad debt line to improve in the fourth quarter? Or do you think that we sort of stabilize around this level until we either see collections improve more meaningfully? Or there's some turnover in the tenant base?
Yes, it's really hard to say, it's too early to predict at this point, given that the pandemic is still ongoing, it's almost impossible for us to know whether or not there will be additional shutdowns again, hopefully not. So, unfortunately it remains to be seen.
Okay. And just one last question, Stuart, maybe Rich too. Can you just comment on the health of your local tenant base, collections increased about 300 basis points for that segment of the portfolio, but it still sits below 80%. There's some concern there, I guess, can you just speak to that segment of the portfolio in terms of expectations to further stabilize collections? And some of the risk around occupancy loss for those tenants?
Well, I mean, I will have Rich. I mean, let's not forget, Todd, that during the quarter in California, a number of our tenants both -- primarily it would be local tenants had to re-shutdown their businesses. So that had some impact. Now they've reopened and in some cases, the capacity that they've reopened, that is more than it was before they shut down. So I think that's going to continue to improve our collections for our local tenant base as we move through the fourth quarter. Rich, anything you want to add?
Yes. I mean, I think that, I think there's obviously been a bit more nervousness with the local tenant base than someone who probably has a bit stronger and deeper balance sheets as these regional and national tenants had. And but what we're seeing as these tenants are allowed to reopen the sales levels are back to pre-pandemic in most cases, and in many cases above pre-pandemic levels. It's been encouraging to watch some of these sales trends. I mean clearly, there was very slow period there for several months. But when you look at the sales volumes that they're able to do currently, they're in many cases back to pre-pandemic and in some cases above pre-pandemic levels. So we're encouraged. I think that the local tenant base is hopeful for some additional support from the federal government. And I think with that, many of them will be able to weather this storm.
Thank you. And our next question comes from Juan Sanabria with BMO Capital Markets. Your line is open.
Hi, good morning out there. First, just on the dividend. How are you guys thinking about that for 2021 kind of reference wanting to save some internal cash flow, which sounds like a great plan to be but are you thinking about setting it based on a FAD payout ratio or more on the taxable dividend? And how do you think about a long-term payout ratio from a FAD or cash flow perspective?
Well, the dividend, as you know, is really the Board's decision. But from our perspective, as you know, we will be looking at the tactical side; we will be looking at payout as it relates to CAD and FAD or FAD. This is very -- the payout ratios are very important to us. CapEx has obviously come down this year as we continue to model 2021, CapEx doesn't look like it's -- we're going to spend a bit more money but it doesn't look like it's going to be that much more elevated. So from that perspective, I think the payout ratios will be conservative. But will be at a point where we believe the yields will be high enough that factors will continue to buy the stock or the dividend yield, and we will conserve enough cash to make sure that we can pay all our expenses and retain some cash in terms of delevering the balance sheet.
Maybe I could just follow-up on that balance sheet point kind of in a low seven now, I think you want to get to the mid to low sixes, any timeframe to get there and should we think of you guys as net sellers or buyers in 2021 given want to balance the opportunity to acquire accretively and attractively. But at the same time, probably want to delever longer-term, so if you could just help us think through how you're thinking about it that would be great.
Sure. We will be both buyers and sellers in 2021. And Mike in terms of we've got cash on the balance sheet that's going to build up during the fourth quarter. And we intend to take that tax and pay debt down. So from a combination of the big increase in tax that's been on our balance sheet because we haven't paid our dividends for the three quarters. Selling of assets I think this company is going to be in a great position to start growing again in 2021.
Thank you. And the next question comes from Craig Schmidt with Bank of America. Your line is open.
Good morning. Regarding your leasing, how would you characterize the new tenants in the non-anchor space? And also maybe how would you characterize the anchor space renewals in terms of what type of tenants and who's particularly in the smaller space, who's interested in taking new space now?
It's coming from a broad range of tenants. I think as we touched on in the prepared remarks, its people that are looking for great opportunities. So we're dealing with tenants who are looking for new locations to add to their existing, as well as people that are looking for opportunities where they can get into a space that is completely built out as a restaurant, for instance at a very low entry cost, and are really looking towards the future and are looking past the present situation.
As we all know, some of these businesses take several months to get up and running and the people want to be ready to go as soon as they can. So, it's a broad range. And it's coming from the same sectors that we were seeing before the pandemic.
Okay, great. And then in terms of the anchors, were they like off price guys or drug store who did the renewals, the six renewals?
The new leases were done by central retailers.
I think he's asking about the renewals. So it was a mix of primarily of grocery stores that took down their options during the quarter. We did have some value operators as well and a couple of drug stores, but primarily it was grocery stores during the quarter.
Okay. And then I was noticing property tax in 2020 seems to be up between 5% and 6%. What do you expect might happen in 2021 if you find state and local short of revenue?
Well we've got Prop 15, coming up on November 15, and we'll see what happens there. We don't believe Prop 15 will have much impact on our California property taxes. I do think that you could see some downward movement on property taxes next year because of the impact from the pandemic. Obviously, many shopping centers have been impacted by the loss or decline in NOI. And that's one of the major metrics tax assessors use in terms of coming up with valuations.
I think it could have an opposite impact next year for us, and that although our portfolios held up exceptionally well, I do think that from a -- going to the assessor and talking with them about lowering taxes, given the problems that we've all seen in retail will certainly help our tax rates, I believe, to come down next year. So we'll see how it goes. Obviously Prop 15 is on the ballot next week, but we think there won't be much impact to the company in terms of property taxes in 2021.
Thank you. Our next question comes from Vince Tibone with Green Street. Your line is open.
Good morning. I have a follow-up on bad debt. Sorry about to keep going over this. But I just want to make sure I've heard correctly, I believe you said $500,000 of the third quarter charge was related to second quarter receivables. But there's also a benefit from some repayment of second quarter receivables that you've previously written off that you've now received cash for? Is that correct? And there's kind of both the positive and negative impact in second quarter and then the third quarter number?
Well, hey, Vince, this is Mike. I'll try to summarize it. So the Q3 bad debt number was about $2.2 million, $500,000 of it was related to past tenants. In the second quarter, we've taken a charge against the past tenants as well, we always pursue tenants, even when they left occupancy they're still on our AR. So in Q2, it was $1 million in Q2, we added another $500,000 for past tenants.
Got it. Okay.
Q2, in-place tenants it was about $4.7 million or $4.8 million, this quarter it was $1.7 million. Now of the deferred rent that was deferred that related to Q2 ARs that got rebuild in Q3s, because some of those agreements kick in and record repayment starting in July, we rebuild $411,000 or $412,000 I think, and about 87% of that was paid. So that's just the timing of your collection on the deferred rent. Doesn't have anything really to do with bad debt?
Got it. There was no reversals of like cash paid tenants or write-off that you reverse that is kind of a $1 million benefit for example to the bad debt charge that's what I wanted to clarify.
Right, well the third quarter bad debt for current tenants may have been reduced because of the reversals that come from the second quarter that we feel more comfortable, they don't need reserve any longer or they paid. So that's why it came down little more, does it make sense?
Okay, yes, thank you for clarifying. That's helpful. And then just if you can comment more like specifically, what made you feel so much more optimistic on third quarter collections compared to the second quarter, just more tenants opened their sales level like what it seems like going down from $1 billion to about 4%, you said 1.7, I believe in terms of a reserve for total revenue? What made you more comfortable?
Well, I was certainly getting the tenants open that had a huge impact.
Yes, I mean, I think the other thing to understand is we look at this -- at the tenant-by-tenant basis, and we've been in constant communication with the tenant base ahead of the pandemic and throughout the pandemic, even more so. So we have a pretty good sense of how the individual tenants are doing. We've had visibility into their operating metrics, and their balance sheets as well, going through deferral process. So, again, when we look at our reserves each quarter, it's on a tenant-by-tenant basis, and every situation is unique. And we bring to that the information that that we have gleaned throughout the quarter. So as we went through them, that's where we landed in terms of our thinking.
Okay, thank you for that color. Maybe one more quick one for me. In the first quarter, you disclosed about 13% of your DLA is leased to restaurants, are you able to share any rough split between full-service dining and quick service restaurants in your portfolio?
I think it's in our –
We have it in the Investor Presentation. We don't have it great at our fingertips now. I think we can follow up with you with some more specific data. We don't have a whole lot of full service restaurants in the portfolio. There are a few, many of them are back open and operating, including out in the common areas. We've -- I think as we touched on in the prepared remarks, we've spent some considerable time working with the tenant base to create some really nice outdoor dining opportunities. But most of our restaurants either fall into the fast food category or the quick serve restaurant with probably a handful that you would consider as full service.
Yes, I'm envisioning the pie chart in our Investor Presentation. I'm pretty sure the full service is about 4% and limited fast casual like 8% or 9% and limited services like 4% of those [ph], it adds up to about 20%, 21%, 22% all together, but that includes the full service.
Thank you. Our next question comes from the line of Linda Tsai with Jefferies. Your line is open.
Good morning. In terms of capital recycling, is it fair to characterize acquisitions as being largely batch funded with dispositions next year? Or to what extent would free cash help fund any of these yields?
The answer is probably, yes. We will try to match fund, obviously, every deal is going to be different in terms of what we're selling and what we're buying. But we've quietly sort of tippy toe back into the market right now. But we will I think as we go towards 2022, it will be a combination of really matching the two.
Thanks. And then in terms of the tenant to sales are about pre-pandemic levels, are these essential retailers or more like restaurants who increase their capacity with outdoor dining?
It seems to come across the board. But yes, I mean, we have some, many of the restaurants are doing much better, obviously our grocery and drugstore anchors are doing quite well. But it really depends on the individual business and their customer base. I wouldn't say that it's all from one category or another.
Thanks. And then just one last one, it seems like TIs on renewals for non-anchor spaces ticked up, what's driving that? And would you expect that to continue?
I just -- I don't know that they would look at that as a run rate going forward. Again, every renewal negotiation, new lease negotiation is individual, it depends on what the tenants needs are and what we're getting in return.
But at times that uptick is really also tenants that are expanding, as well. So that's when you would on a renewal, give them a bit of TI which typically we don't on renewals.
Thank you. [Operator Instructions].
Our next question is Katy McConnell with Citi. Your line is open.
Hey, it's Michael Bilerman here with Katy. Stuart, you talked in your opening comments about advancing and breaking ground on two out of the three densification projects next year in 2021, could you talk a little bit about the capital that you’re committing to those projects and whether you plan to have any partners involved in that?
Sure and good morning, Michael. Well, let's go quickly through each one of them.
Crossroads. With respect to Crossroads, where we're building 220 apartments in about 15,000 square feet of retail, project cost in the $17 million range unlevered yields around eight. Of course, bear in mind that these numbers will still move around as we finalize our development agreement with the Citi and as we go through the working drawings and the construction bidding process. We're right now we're moving forward on the Crossroads as if we intend to own the project. But that could change as we get ready to pull permits in the first quarter.
Novato, which is our shopping center, just north in Marin County, just north of San Francisco took just took as a major step forward with the Citi in terms of approving a plan there, 175 apartments, 14,000 square feet of retail, our costs and yields really the same range of the Crossroads. And that particular project, probably JV.
And last Knolls we're going through the planning process with the Citi, which the Citi continues to be very supportive with 200 apartments, still some moving pieces on that one, bit too early to just discuss the economic terms, however like Novato, we intend to probably do a JV scenario on that one as well.
So it sounds like you are, I can hear your enthusiasm coming through the call about sort of getting back to [indiscernible] and having external opportunities especially in the markets that you have had this long-term knowledge and relationships with and I’m sure the list of assets that you would want to buy is quite long, especially given now a lot of those owners being undercapitalized where you believe I think you can bring something advantageous to the table and really generate those returns. And so I want to make sure I'm characterizing that right where you really eager to buy, right?
Well, Mike, you have known –
Still I'm happy you go for a second, right?
Right. I mean, Mike, this management team for decades, probably 25 years, the strength of this team is acquisition, since it's our acumen for going out and finding off market opportunities, where we can buy good yields, but more importantly, through our offering platform, lift those yields within probably 150, 200 basis points within a very short period of time. That's one of our great specialties. We're excited about what potentially we see coming down the road. And so yes, you're right. We see some enthusiasm out there.
In terms of management, we believe that this long -- with this experience, this depth of experience and knowledge of the market is critical in terms of doing what we've done to build ROIC but more importantly, looking forward. So we're excited, we see some opportunities, we'll be turning the capital to get there and maybe looking at other forms of structures, but we think there's going to be some good opportunities for this company in 2021. And we're excited to grow again.
Well, and that's where I guess the capital side of things, right? The constraint is your equity, cost of capital is not going to be given where your stock is, there's just I don't think an issue any equity to get there, right. So the only way to fund these opportunities is either aggressively selling assets before you commit to buy because the last thing I think you were the marketing would want is to go off and start all these densification projects and go out and buy a couple hundred million dollars of assets without securing the capital needed to go and buy. And so I guess how far advanced are your sales discussions in generating that -- those proceeds? And how far along are the alternate capital sources outside of common equity, which I assume is completely off the table? Given the fact that your balance sheet is more levered then you would like it to be and certainly relative to the peer set?
Yes. Look, we are beginning to move forward. I don't know how that's going to progress, given the environment out there. But we're moving forward and going back to the market in terms of selling some assets, Sacramento, we had a very good asset here in San Diego actually under contracted at a very low cap rate that buyer has come back to the table, and others. So we probably are going to accelerate some of the buy side and on the same side we're -- we will look to deploy that into new assets. We're not raising equity. And we have been approached, I think as you know, Mike by outside capital in terms of looking at other structures, we continue to have those conversations, we continue to think about that, that is our last priority given how straightforward and how simplistic our balance sheet has been. So, we're -- it's really going to be driven through sales of assets and retaining earnings and retained earnings. And we think that will bode well for our management team and bode well for our shareholders in 2021.
Thank you. And I'm not showing any further questions at this time. I'd now like to turn the call back to your speakers for any further remarks.
In closing, thank you again for your time. If anyone has any additional questions, please contact Mike, Rich or me directly and for those of you who are participating, the NAREIT's Virtual Conference coming up. We soon we look forward to connecting with you then. Thank you and have a great day everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may all disconnect.