Retail Opportunity Investments Corp (ROIC) Q2 2020 Earnings Call Transcript

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Retail Opportunity Investments Corp (NASDAQ:ROIC)
Q2 2020 Earnings Call
Jul 30, 2020, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Retail Opportunity Investments 2020 Second Quarter Conference Call [Operator Instructions] 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 filing with the SEC regarding such risks and factors as well as more information regarding the company’s financial and operational results. The company’s filings can be found on its websites.

Now I’d like to introduce Stuart Tanz, the company’s Chief Executive Officer.

Stuart A. TanzChief Executive Officer

Thank you. Good day, everyone. We hope that all of you and your families are doing well and have remained safe. Here with me today is Michael Haines, our Chief Financial Officer; and Rich Schoebel, our Chief Operating Officer. These past few months have been incredibly challenging for everyone across the country and the world. In terms of the West Coast, and specifically, as it relates to our shopping center business, we too have been faced with extraordinary challenges. At the time of our last earnings call, about three months ago in April, the West Coast was in the early stages of the stay-at-home orders where only businesses that were deemed essential were allowed to be open. Fortunately, given our long-standing focus on the grocery, daily necessity sector, the bulk of our tenant base is essential. So while countless retail properties across the West Coast were all but completely shut down back in April, our shopping centers remain active with over 70% of our tenants open and operating at that time. As the second quarter progressed, capitalizing on our long-standing strategy of always being proactively engaged with our tenants and very hands-on in terms of operating our shopping centers, we made significant strides with putting our portfolio on a strong and steady course toward returning to normal full operations. We implemented a number of strategic initiatives at the property level to adapt and best position our centers during this time, including adding newly enhanced health, safety and cleaning protocols along with reworking parking patterns to enable efficient and safe, no contact curbside pickup. Additionally, we implemented a comprehensive new signage program, adding over 700 signs across our portfolio, addressing a variety of key items from social distancing, mask and hygiene protocols to provide intense status information. Furthermore, we work creatively and collaboratively with our full-service restaurant tenants to introduce new, safe and pleasant outdoor areas for dining, utilizing shaded, broad sidewalk areas and existing courtyard space as well as adjacent lawn and parking areas where a number of our restaurant tenants have now created private umbrella spaces for additional outdoor dining. We are pleased to report that our hard work and strategic initiatives are serving to facilitate a seamless transition in terms of getting tenants efficiently reopened in this new environment as stay-at-home orders have been slowly lifted. Today, 88% of our tenants are open and operating again. Additionally, the terms of rent received back in April, you may recall that we have received about 67% of our total base rent at that point. Since then, as a result of our property initiatives and working closely with tenants over the past several months, we’ve increased that 67% significantly to 82%, not just for April, but in terms of rent received to date for the entire second quarter. As tenants begin to reopen,our initial expectation is that it would take time for customers to return to their normal shopping and dining patterns. To our surprise, from what we’ve seen thus far across our portfolio, customers are returning quickly and returning in force. Parking lots are bustling, stores are active as are restaurants. Importantly, customers and tenants are following safety guidelines and mandates. With respect to leasing interest, retailers in the marketplace are currently taking notice of customers returning at our shopping centers. Over the past month or so, we’ve seen a considerable increase in the amount of inquiries from retailers searching for space. The vast majority of these are in the service and specialty sectors as well as traditional indoor mall retailers seeking to relocate their businesses to open-air centers. Additionally, we’re getting a lot of interest from astute restaurant and boutique fitness operators who were seeking to quickly step into any available former restaurant or fitness space. While it’s still early in the reopening process on the West Coast, we are encouraged by what we have seen thus far. Now I’ll turn the call over to Michael Haines, our CFO. Mike?

Michael B. HainesChief Financial Officer

Thanks, Stuart. While we are encouraged by how things are progressing across our portfolio, the pandemic took its toll on our business during the second quarter in terms of our financial results. GAAP net income attributable to common shareholders for the second quarter of 2020 was $4.6 million, equating to $0.04 per diluted share. And funds from operations for the second quarter of 2020 totaled $29.2 million, equating to $0.23 per diluted share. Needless to say, our results are down considerably from the same comparative period a year ago, including same-center net operating income, which after eight consecutive years and 33 consecutive quarters of growth, declined 9.3% in the second quarter and 3.1% for the first six months of 2020. As Stuart noted, to date, we’ve received 82% of our total base rent for the second quarter. With respect to the remaining 18%, which totals approximately $9.3 million in outstanding rent for the second quarter, of that, approximately 20 sorry, $2.2 million has been deferred to date pursuant to signed agreements, the bulk of which requires tenants to pay the deferred amounts in monthly installments between now and year-end. Additionally, we are currently working to establish additional deferment agreements, which together total approximately $2.2 million of the $9.3 million of outstanding second quarter end. Lastly, to be conservative, in the second quarter, we recorded $5.9 million in bad debt expense, of which approximately $1 million related to prior past tenants that was written off from the second quarter and a $4.9 million bad debt reserve for current tenants. Turning to our balance sheet. As we discussed in our last earnings call back in April, we drew $130 million from our credit facility to enhance the company’s liquidity position in order to be prepared for the challenges and potential cash needs going forward as a result of the pandemic. Since April, while implementing the various initiatives that Stuart touched on to adapt and enhance our centers, we also worked hard to conserve cash. Today, we now have $161.3 million of cash on our balance sheet, representing a $27.8 million increase since April, which takes into account having made our semiannual bond interest payments in June, which totaled $16.5 million. Given the ongoing pandemic and the related uncertainty as to the potential long-term impact to the shopping center industry and to our business specifically, we intend to continue carefully conserving cash flow. Now I’ll turn the call over to Rich Schoebel, our COO. Rich?

Richard K. SchoebelChief Operating Officer

Thanks, Mike. Notwithstanding the entire West Coast from San Diego up to Seattle having been under strict stay-at-home orders for a good portion of the second quarter, our portfolio held up remarkably well. Starting with our portfolio lease rate. When the pandemic hit and the stay-at-home orders were issued back in March, our portfolio lease rate stood at 97.7%, just shy of our all-time record high of 97.9% that we set last year. Despite having roughly 30% of our tenant base temporarily closed for a good portion of the second quarter, in terms of actual tenant fallout, we only had a handful of tenants closed for good such that our portfolio lease rate held up well, ending the second quarter at 97%. And regarding the tenants that did close, we’re close to now having their space spoken for with new tenants. However, though, that’s not to suggest that we expect our portfolio lease rate to rise in the months ahead. No doubt, there will be additional space that will become available as the pandemic continues. In terms of leasing activity, deals being executed were all but nonexistent at the outset of the second quarter, during which time we were largely consumed with rent deferrals. However, as stay-at-home orders started being lifted in late May and in June, it was as if the leasing switch was suddenly flipped back on, with retailer demand quickly ramping up such that we were able to finish the second quarter with good momentum, posting over 8% rent growth on new leases and over 7% on renewals. Just to highlight a few of the leases we signed during the second quarter to give you a sense of the type of activity, we executed a new lease with a restaurant operator that has had a very successful business for over 16 years at an indoor mall who decided that the time had come to move and reestablish their business in an open-air shopping center. Additionally, we also signed a new lease with a new pharmacy concept that’s based in Northern California who notwithstanding the pandemic, is seeking to expand into Southern California with the goal of securing a number of key locations in Southern California by year-end, our center being their first location. We also signed a 10-year lease with a fast-growing national fitness operator, who replaced a prior anchor fitness tenant. In addition to the leases we signed in the second quarter, we currently have a number of lease transactions in various stages of negotiation with a variety of service and specialty retailers. Additionally, we continue to receive inquiries from opportunistic retailers seeking to earmark prime spaces at our centers in the event of tenant fallout. And not surprising, restaurant operators are aggressively seeking spaces with outdoor patios as well as drive-through capability. So as Stuart stated, we are encouraged by what we are seeing across our portfolio thus far in terms of demand for space returning. Looking ahead at our anchor lease expirations during the second half of 2020, we only have one anchor lease scheduled to expire between now and year-end, the leases with one of our strongest national grocers. They have 5-year renewal option remaining on their current lease. However, rather than simply exercise the renewal option, they would like to establish a new long-term lease, which we are currently discussing with them. Looking out further at next year. As of June 30, we had 11 anchor leases scheduled to expire in 2021, eight of which are with grocery and drug stores. We expect that all eight will stay. In terms of the other three anchor leases, one has just renewed their lease early, and we currently expect that the other two anchor tenants will renew as well. All three of these anchor tenants have remained open during the pandemic, and their stores have been performing exceptionally well. Lastly, with respect to our ongoing densification initiatives, all three projects that we have been pursuing continue to progress through the entitlement process. While the frequency of discussions with city officials has slowed a bit, given the pandemic and the related logistical challenges, city officials continue to be proactively engaged with us and continue to be supportive in moving the process forward. Now I’ll turn the call back over to Stuart.

Stuart A. TanzChief Executive Officer

Thanks, Rich. While we are encouraged by the progress that we are making today and by what we are seeing in the marketplace, we know that the path to getting back to full operations will not be straight and simple. In fact, with the recent rise in cases in California, officials have paused the reopening for certain businesses, such as movie theaters, for example, and mandated that a number of other businesses that had reopened scale back or temporarily close again, such as salons, gyms and full-service restaurants. However, they are allowed to conduct business outside where feasible. With that in mind, we are redoubling our efforts in helping tenants utilize shaded outdoor areas as well as creating additional shaded outdoor space, as I mentioned. In terms of grocery stores, drug stores and general retail, those tenants all continue to be open and operating. Thus far, the new orders have not had a meaningful impact to our California shopping centers. Needless to say, we are watching it very closely and continue to work on creative and safe ways to help tenants continue to serve their communities. In terms of the third quarter, to date, we have received 85% of total base rent for July. As we move through the second half of 2020, our hope is that we will continue to steadily move forward toward full operations again. That said, as all of this continues to evolve with considerable uncertainty, including the recent pullback in California and how that could impact our business in the third quarter, our Board out of an abundance of caution, has decided to keep the company’s quarterly dividend temporarily suspended in order that we continue to conserve as much cash flow as possible. Lastly, about four months ago, as stay-at-home orders commenced and we began working from our homes, we were not quite sure what the impact would be in terms of how we function as an organization. Fortunately, everyone across the company has stepped up incredibly. Today, four months into it, I’m pleased to say that having to work remotely has actually brought the organization closer together. The manner in which we conduct businesses has evolved into a greater collaboration of exchange and ideas. Additionally, we have become more efficient in our communications and considerably more agile with turning good ideas quickly into productive actions. Looking ahead, once this passes, we’re all optimistic that we will indeed emerge as a strong organization that’s better equipped and our portfolio better positioned to build value going forward. Now we will open up the call for your questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] Our first question is from the line of Christy McElroy from Citi.

Stuart A. TanzChief Executive Officer

Good morning Christy.

Christy McElroyCiti — Analyst

Good morning. So the $5.9 million bad debt number, it sounds like that was just on rent and recoveries being reserved. It doesn’t sound like there was any sort of straight-line rent reserve in there. So just wondering if you could help me reconcile the straight-line rent component of rental revenue, this $319,000 in second quarter. How much was that impacted by any sort of write-off of straight-line rent receivable resulting from converting any tenants to cash basis? And was there also any positive offsetting impact from leases that were treated as a modification due to any abated rents?

Michael B. HainesChief Financial Officer

Well, first of all, we haven’t done any lease modifications for abated rents. We’ve been focusing on deferrals. We have not moved anyone to a cash basis. The straight-line rent number, it does have an impact of about $185,000 of total write-offs for straight-line rent. The bulk of it was actually came from one fitness tenant, which is $130,000. So that’s a net number on the income statement for straight-line rent income. So our straight-line rent write-off was fairly not a very meaningful number.

Stuart A. TanzChief Executive Officer

Yes. Christy, we’ve been fortunate from the standpoint that we haven’t really had much impact from all the bankruptcies out there. And I think, as Mike is articulating, the one anchor lease that we’ve lost, which actually was released during the quarter right away was 24 Hour Fitness.

Michael B. HainesChief Financial Officer

Right.

Christy McElroyCiti — Analyst

Okay. And then because you gave some numbers in the opening. It sounds like from what you said, the $2.2 million, it sounds about if I think about the 18% that was not collected in the second quarter, about 400 basis points of that is under deferral. So I’m just wondering, how much of the reserve was attributable to tenants that are under deferral agreement versus those in the 14% that are unresolved.

Michael B. HainesChief Financial Officer

Well, there I don’t think of the $4.8 million that was for current tenants, there wasn’t a meaningful number that was relative to the amount that we actually deferred. It was basically just being conservative across the portfolio, largely for categories that we wanted to be cautious about like the restaurants and the fitness users.

Christy McElroyCiti — Analyst

Okay. So more of a general reserve than a lease-by-lease?

Michael B. HainesChief Financial Officer

Right.

Christy McElroyCiti — Analyst

Okay. And then just one last question for Rich. Just following up on your comments on leasing. Of the leases that were executed in the quarter that you talked about and you showed in the supplemental, if they were signed in the second quarter, when were those leases negotiated? So I’m just trying to get a sense for what leasing really looks like in the midst of the COVID environment versus those that were maybe previously under LOI and converted to sign during this period?

Richard K. SchoebelChief Operating Officer

Yes. I think as I touched on in the prepared remarks, there were a few leases that were just at the finish line at the end of the first quarter that came in early in the second quarter. But some of these were initiated within the second quarter. There was a bit of a pause after those first few that were first quarter deals came in, and then the activity picked up as we went through the quarter. So I don’t have the specific breakdown of which how many were started in the first quarter, but the majority of those that are in the second quarter numbers were commenced and negotiated in the second quarter.

Christy McElroyCiti — Analyst

Okay, thank you.

Operator

And our next question comes from the line of Todd Thomas from KeyBanc Capital Management.

Stuart A. TanzChief Executive Officer

Good morning, Todd.

Todd ThomasKeyBanc Capital Management — Analyst

Hi, thanks. Good morning, Stuart. Stuart maybe Rich, I was just wondering if you were able to comment at all on your expectations around August collections. Maybe any idea what you might expect relative to the 84.9% for rent paid in July? And then also, in terms of the percent of the portfolio open at 87.5%, has that decreased from June levels as a result of some more recent closures and the virus flaring up in some of your markets? And do you see a path to getting that back to the low to mid-90%?

Richard K. SchoebelChief Operating Officer

Yes. I think that in terms of the second part of your question there, there was a few tenants that had to modify their operations. But the good news is, as you’d probably read, is the state of California has allowed more operators to go out into the common area, which has allowed them to continue to offer their services, particularly in the health and beauty sector. And we have accelerated our opening up of the common areas for fitness and restaurant users. So we expect that, that open number will stay probably around this range, hopefully start to trend better as we go through the balance of the year and things, hopefully, more users are allowed to reopen.

Stuart A. TanzChief Executive Officer

And then in terms of collections, Todd, I mean, August is number one, it’s very fluid, as you know, out there. But and we are working around the clock in terms of collections. I do think that it’s a bit too early right now as it relates to August to give you any indication. But the one thing we have found, as you saw for the second quarter as a whole is that as we continue through these deferrals, there are a number of tenants that have been open, have done quite well and still haven’t paid us any rent. So it’s still a fluid situation. And the good news there, in my view, is those numbers will continue to tick up because every time you sign a deferment, you typically get paid for the prior months. And that’s why I believe even the second quarter will continue to tick up as we move through the third quarter because as these deferments do require these tenants to go all the way back and pay us at the start of the second quarter through the third quarter.

Todd ThomasKeyBanc Capital Management — Analyst

Okay. And then you spoke about some activity in the fitness category. And you mentioned 24 Hour Fitness, they filed bankruptcy during the quarter and that it sounds like you got one back that you might have released already. How many more 24 Hour Fitness locations do you have? And can you provide some additional color on that category, and the leases that you’re signing or negotiating in terms of what those leases look like and the rents, perhaps, just considering that only 35% of the fitness space is open and you’re collecting 40% of the base rent today?

Richard K. SchoebelChief Operating Officer

Sure. So we have a total of three additional 24 Hour Fitness locations in our portfolio. They account for less than 1% of our total base rent. They’re all very good locations from all indications that we have had prior to the pandemic, and we expect that they will hopefully be accepted. But as there’s just no way to predict. In terms of the fitness category, we have about 11 national anchor fitness gyms in the portfolio, and those account for only about 2.4% of our total base rent. So most of our fitness operators are the smaller boutique, one-on-one personal trainers, things like that. They have been able to transition out into the common areas, in most cases. And you’re correct, we lost one 24 Hour Fitness. It was actually a concept of 24 Hour called BFit that they basically jettisoned immediately, and we had an opportunistic operator, a local operator who saw an opportunity to come in and grab that location and be up and operating very quickly and seamlessly.

Stuart A. TanzChief Executive Officer

And with very little TIs, Todd.

Todd ThomasKeyBanc Capital Management — Analyst

Okay. And Mike, I think you mentioned that you didn’t transition any tenants to cash-based accounting in the quarter. How does that work? So there’s three additional 24 Hour Fitnesses and maybe some others. You didn’t they’re not being accounted for on a cash basis. Can you just explain how that works?

Michael B. HainesChief Financial Officer

Well, the leases are still in place. And even though they may not be open and operating, that’s still a valid lease under accounting rules. And so unless we have a sense that they’re actually going to leave the party, the straight-line rent is I don’t have a justification or accounting rules that would write it off. The one anchor the one that Rich mentioned, the BFit, that’s the one that we did write up $130,000 for that hit straight-line rent as an offset to revenue. So by and large, with over 80% of our tenants current on their rent can and given their business continue to form, we don’t have a reason to switch anyone over to a cash basis at this time.

Stuart A. TanzChief Executive Officer

And we did reserve all of the rent and CAM associated with those leases during the quarter.

Michael B. HainesChief Financial Officer

I just didn’t touch the straight-line, right, because the leases are still valid leases.

Todd ThomasKeyBanc Capital Management — Analyst

Okay. All right, thank you.

Stuart A. TanzChief Executive Officer

Thanks.

Operator

And our next question on the line comes from the line of Brian Hawthorne from RBC Capital Markets.

Stuart A. TanzChief Executive Officer

Good morning, Brian. Or how are you guys doing to the high end.

Brian HawthorneRBC Capital Markets — Analyst

Doing well.

Stuart A. TanzChief Executive Officer

And you did.

Brian HawthorneRBC Capital Markets — Analyst

Thank you. My first question is, so when you guys have these open spaces, how deep is the demand for those locations, like, on the leases that you are signing?

Richard K. SchoebelChief Operating Officer

I mean, I think, typically, we have a couple to three people vying for these spaces. I think we are benefited from the fact that we don’t have a lot of space available to begin with. Our centers are all primarily grocery, drug-anchored and have been very busy throughout the pandemic, and I think that people that may not be operating in a grocery-anchored center are looking for these opportunities to get where the foot traffic and the customers are. So this has been helpful in terms of us keeping the spaces spoken for.

Brian HawthorneRBC Capital Markets — Analyst

Okay. And then how have requests for rent relief changed as the portfolio opened? And how is the health of the local small shop tenant?

Richard K. SchoebelChief Operating Officer

I’m not sure that it’s really changed all that much. I mean we are dealing with this on an individual basis. Everybody’s circumstances are different. I mean it ranges from people that have been in business for decades to people that just opened the week before the shutdown. And we spend a lot of time focused on how their sales were leading into the pandemic, how they’ve been held up throughout the pandemic. We it’s not just a come and ask for something and you get it. We really want to make sure that it’s tailored to the tenant situation, that we can structure a proposal that gets them keeps them open and operating and, hopefully, gets them back into full business as quickly as possible.

Brian HawthorneRBC Capital Markets — Analyst

Great, thank you.

Operator

The next question comes from the line of Craig Schmidt from Bank of America.

Stuart A. TanzChief Executive Officer

Good morning, Craig.

Craig SchmidtBank of America — Analyst

Okay, thank you very much. We saw that regional and national rent collection increased in July over second quarter, but the local was more or less flat. I’m wondering, do you think that as you go to the third quarter that, that will remain flat? Or is there potential for increase?

Richard K. SchoebelChief Operating Officer

From the local tenant base, I think there’s still the potential for increase. I think as Stuart touched on, there’s as we wrap up these deferral agreements, it typically involves them coming current on that rent that they have not paid in the previous quarter. Some of these tenants have withheld their rent. As Stuart said, they’ve been open, they’ve been operating, but they withheld their rent. Primarily, we assume through trying to use it as some form of leverage in terms of the negotiations. But once the deferral agreement is signed, it brings us in the retroactive rent, and we would expect that the tenant would pay that going forward, which should increase the collections percentage.

Craig SchmidtBank of America — Analyst

Great. And then just is the first half of G&A expense a good run rate for the second half?

Michael B. HainesChief Financial Officer

Probably. Two things impacted G&A in the second quarter. Our overhead was a little bit lower compared to last year. And we also and second, last year, in the second quarter, we had legal expenses that were related to resolving a long-standing issue with a seller of a property we had acquired 10 years ago. But going forward, in terms of the second half, I think G&A should be approximately $4 million to $4.5 million a quarter.

Craig SchmidtBank of America — Analyst

Great, thank you.

Stuart A. TanzChief Executive Officer

Thanks, Craig.

Operator

Thank you. The next question comes from the line of Mike Mueller from JPMorgan.

Stuart A. TanzChief Executive Officer

Good morning, Mike.

Mike MuellerJPMorgan — Analyst

Yeah. A couple of questions here. On the deferrals, out of curiosity, if you’re having tenants paid back rent to get a deferral so they have to pay April, May, June or so theoretically, what exactly is being deferred on a go-forward basis then?

Richard K. SchoebelChief Operating Officer

Well, again, as I said, it’s very, very individualized. So it really depends on whether they’re back in operation or they’re still shut down. I mean we have some fitness-type users like swim schools up in Seattle that have basically are not able to operate or operate only with like four to five students at a time. So their deferral, we may have deferred some future rent as well to help them through what we anticipate to be their opening period. In many cases, we’re tying that deferral would be for a fixed period of months. But if they were happened to be allowed to open up during that period, they would have to not have a deferred rent. So I don’t know if that helps.

Mike MuellerJPMorgan — Analyst

So for the $9.3 million of rent that was uncollectible, where I think you said $2.2 million has been deferred to date, is that $2.2 million of past rent that wasn’t paid and is being deferred? Or that’s future rent that’s being deferred?

Michael B. HainesChief Financial Officer

I think the $2.2 million was second quarter rent that’s been deferred. And I think maybe what Rich and Stuart were referring to about the future of deferrals involving paying past rent, if someone didn’t pay any rent during the full second quarter, and we’re going to defer, say, 25% or 50%, they have to pay the other 50% due from second quarter to get the deferral for the other piece. It could be a combination deferring some in the second quarter and potentially some of the third quarter, depending on the tenant use.

Stuart A. TanzChief Executive Officer

Exactly.

Mike MuellerJPMorgan — Analyst

Okay. That makes it clear then. And then on top of that $2.2 million, did you say there was another $2.2 million that was in the works as well for deferrals?

Michael B. HainesChief Financial Officer

Yes. We’ve executed about $2.2 million in deferment agreements, and the other $2.2 billion are in the works currently for the ones who have just not paid anything. We’re still negotiating with those talents, as Stuart mentioned.

Mike MuellerJPMorgan — Analyst

Okay. Yes, I just want to be sure because it’s the same number. So OK.

Michael B. HainesChief Financial Officer

Yes. Coincidentally.

Stuart A. TanzChief Executive Officer

Yes. And again, Mike, is if assuming we get those done over the next several weeks, they will have to pay what they owe us in the second quarter. And that’s why I made my comment about collections will probably continue to go up.

Mike MuellerJPMorgan — Analyst

Got it. And then last question. So the remaining $5 million or so that’s not accounted for, can you just give us a little bit of color about that bucket of income and what types of tenants and what negotiations are kind of, like, going on there?

Stuart A. TanzChief Executive Officer

Sure. I mean it’s continuing to work with it. It’s a different set of tenants. They primarily, it’s restaurants, a couple of fitness places and then a spatter of some other types of uses. And I think we’re working very hard at closing that gap. I think you’ll see a meaningful closing of that gap in the third quarter because we are making some very good headway. We as you probably know, Mike, the court systems outside of Seattle have been closed on the West Coast, so it’s this game of communicating with the tenants. And we’re doing certain things to bring them to the table that are working. So I believe that we’ll close that gap. That gap will close pretty good during the third quarter.

Mike MuellerJPMorgan — Analyst

Okay, fair enough. Thank you.

Operator

The next question comes from the line of Vince Tibone from Green Street Advisors.

Stuart A. TanzChief Executive Officer

Good morning, Vince.

Vince TiboneGreen Street Advisors — Analyst

Hello. Of the tenants in your portfolio that are still not open, do you know the split between the ones that are forced to be closed due to government mandates and ones that are still closed even though they could be open?

Richard K. SchoebelChief Operating Officer

There’s very few tenants that are not open that would be allowed to open. And usually, that’s for a specific personal reason of their own. And it’s not the larger tenants. It’s some mom-and-pop tenants that maybe are just too afraid to open.

Stuart A. TanzChief Executive Officer

But very few.

Vince TiboneGreen Street Advisors — Analyst

Got it. And then are you do you have a sense of how many tenants, if any, in your portfolio that you know are permanently going to close? I mean that’s somewhat baked into occupancy, I guess, but do you have any rough estimate you could provide there?

Richard K. SchoebelChief Operating Officer

Not really. I mean, for the most part, particularly from the local tenant base, this is what they know. This is what they do. There really isn’t a plan B for them. So they’re doing whatever they can to get their businesses back up and running to support their families.

Stuart A. TanzChief Executive Officer

And they’re very enthusiastic in terms of their business. They’ve all done very well, as Rich articulated, some have been in these centers for many decades. And we just find when we have conversations with them that they’re very enthusiastic and really want to work hard in terms of getting things reopened, who aren’t open. And then once they’re open, I think they’re very creative in terms of creating ways or finding ways of increasing sales.

Vince TiboneGreen Street Advisors — Analyst

That makes sense. One more for me. Can you just help me understand how exactly you calculate same-property NOI? You stated the same-property cash NOI, but that doesn’t appear to be the case given second quarter collection levels. Just want to just reconcile that and confirm I have the right understanding here.

Michael B. HainesChief Financial Officer

Well, we calculate same-store NOI the way we always have, so on accrual basis with noncash straight-line rent and above and below market rent, amortization stripped out of that. So it’s really it’s those same-store cash rates that’s accrual basis, but you strip out the GAAP noncash components to get that same level.

Vince TiboneGreen Street Advisors — Analyst

So it’s still accrual based, but it just backs out those two line items. That’s what I thought, but just wanted to confirm. And then just on are you able to provide same-property NOI in the quarter on a true cash basis what it was at current rent collection levels?

Michael B. HainesChief Financial Officer

I don’t really the short answer is no, only because you’d have to have a separate set of books to do true cash accounting, which would be cash operating expenses, cash rent collected. And that it’s just we’re not prepared to do that.

Linda TsaiJefferies — Analyst

Okay, fair enough.

Stuart A. TanzChief Executive Officer

Thank you.

Operator

And our next question comes from the line of Linda Tsai from Jefferies.

Stuart A. TanzChief Executive Officer

Good morning, Linda.

Linda TsaiJefferies — Analyst

When you highlight these national tenants that have done well during the pandemic and still don’t pay rents, and this is certainly something many of your peers have mentioned, too, what’s your expectations when their leases come up for renewal? Do you think they’ll be similarly contentious in terms of seeking reduced rents going forward? Or do you view this stubbornness is more isolated to business shutdowns?

Stuart A. TanzChief Executive Officer

Well, it’s very simple. You don’t pay us rent, you leave. That’s simple. One way or another after this pandemic leaves, we believe the and what we’ve seen so far is there will be a pickup in terms of demand, given the quality of assets that we own and where we are. You don’t pay rent, you don’t stay in occupancy. It’s that’s simple. The good news is that we don’t have a lot of anchor tenants at this point that we have some that haven’t paid us any rent, but we’re getting very close to really working things out from that perspective. So as we move into the third quarter, I don’t think there will be many left in our portfolio. And again, remember, the majority of our anchors are grocery stores and drugstores as well as other essential daily necessity retailers. So that also helps.

Linda TsaiJefferies — Analyst

And then in terms of mall-based tenant coming into your center, did this tenant occupy in-line space? Or was it a larger maybe junior anchor size tenant?

Richard K. SchoebelChief Operating Officer

It was more of a shop-type tenant. It was a restaurant use in terms of size, yes.

Operator

And our last question on the line comes from Chris Lucas from Capital One Securities.

Stuart A. TanzChief Executive Officer

Hey, good morning, Chris.

Chris LucasCapital One Securities — Analyst

Hey good morning, guys. A couple of simple ones, I hope. On your rent collection metrics, you’re using base rent as the sort of denominator, base rent build. If you included sort of expenses as well, would that would those numbers be that different?

Michael B. HainesChief Financial Officer

No, I think they’re pretty comparable when you include recoveries as well.

Christy McElroyCiti — Analyst

Okay. And then just as it relates to the rent collection numbers, just making sure, you didn’t utilize any security deposit or letters of credit to sort of support or cure rent collection at all.

Stuart A. TanzChief Executive Officer

No, not at all.

Michael B. HainesChief Financial Officer

We still have our security deposits from the balance sheet.

Stuart A. TanzChief Executive Officer

Still have a nice security deposit sitting in the back from every tenant.

Chris LucasCapital One Securities — Analyst

I appreciate it. Thank you.

Operator

And we did have one more question coming the line from the line of Christy McElroy from Citi.

Michael BilermanCity — Analyst

It’s Michael Bilerman, sorry. So I just wanted to know, and I apologize if I missed it at the beginning, is there any sort of update on external growth? I know we spoke back at NAREIT about your desire and potential capital partners coming to you, you think about how you started ROIC coming out of the GFC. Where is the mindset today in terms of deploying capital in terms of structure, balance sheet, joint ventures, a fund, the blind pool, how are you thinking about it?

Stuart A. TanzChief Executive Officer

Well, when we continue to think about it. We, obviously, like everyone else, the transaction market is pretty well frozen. There’s still the big issue of underwriting NOI. And so and then on the other hand, we do realize that having a very transparent and straightforward company is very important to us and our shareholders. And so right now, we continue to think about it. We continue to have conversations but nothing yet has been done, and we’ll continue to look at those opportunities and see what might come up. But at the present time, we’re still moving down the same path as we always have.

Michael BilermanCity — Analyst

In those conversations, those are conversations with potential sellers? Or those are conversations with potential other capital partners?

Stuart A. TanzChief Executive Officer

It’s both. We have had conversations with both, including sellers that have wanted to take OP units. But obviously, we’re not issuing OP units where our stock is currently trading. But those conversations are ongoing, and I think those will continue to be ongoing.

Michael BilermanCity — Analyst

Good. All right, thank you.

Operator

I do have one more question that comes in the line. This is from the line of Chris Lucas, Capital One Securities.

Chris LucasCapital One Securities — Analyst

Yes. Sorry to go back into the queue. I just had one other question. I don’t know if you mentioned this earlier in your comments, but do you have any sense as to what level of tenant participation you had in the PPP loan program? Doesn’t sound like it.

Richard K. SchoebelChief Operating Officer

Yes. It’s hard to give you sort of a percentage or anything like that. Certainly, our tenant base has been seeking out every opportunity, and that can be anything from a local grant from a local city that has come up with a program to help their mom-and-pop type tenants all the way up to the federal program. All of our deferral agreements require that they apply for whatever assistance that’s available and that they direct any assistance they receive for rent to us to pay back the deferred rent sooner. And then we are also working very closely with the tenant base ourselves to make them aware of the programs as they come out, particularly the local ones, which aren’t always highly advertised. So we’ve been very successful in getting some of these local grants directed to our tenant base.

Chris LucasCapital One Securities — Analyst

Thank you.

Stuart A. TanzChief Executive Officer

You’re welcome.

Operator

And we do have one more question in the queue from the line of John Kim, BMO Capital Markets.

Stuart A. TanzChief Executive Officer

Hey, John.

John KimBMO Capital Markets — Analyst

Hey, Stuart. Good morning. You said in your prepared remarks that you are attracting some mall tenants into your space. And I’m wondering if you could elaborate on what industries they’re coming from outside of restaurants. And if you think this is a change in the real estate strategy or just shopping around for a cheaper rent?

Stuart A. TanzChief Executive Officer

I think it could be a structural change personally. We have been very active, both in the open-air format as well as the mall format. We think the windows opened up given that operating costs are a lot less in open-air centers. And more importantly, I think, as Rich touched on, it’s the amount of foot traffic that’s being generated by the grocery stores and the drug stores. We have found that, that has really caught a lot of tenants, mall tenants, sort of ears and eyes in terms of opportunity. So I think this could be more of a structural change. And you can bet we’re taking advantage of this in a big way.

John KimBMO Capital Markets — Analyst

Any commentary on the tenants or the industries they’re in? And what may have surprised you with some of these tenants?

Richard K. SchoebelChief Operating Officer

I don’t think there’s been anything that’s really surprised us. I think that it’s come from a broad range of uses. Obviously, at 97% occupancy, we have to target the tenant that will fit the space. So I think that, that drives the use more so than anything else.

John KimBMO Capital Markets — Analyst

Great, thank you.

Operator

Thank you. And at the current time, there are no other questions in queue.

Stuart A. TanzChief Executive Officer

Well, in closing, thank you again for your time today. If anyone has any additional questions, please feel free to contact Mike, Rich or myself directly. We hope that you and your families all remain safe and healthy. Thank you, and have a great day, everyone.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Stuart A. TanzChief Executive Officer

Michael B. HainesChief Financial Officer

Richard K. SchoebelChief Operating Officer

Christy McElroyCiti — Analyst

Todd ThomasKeyBanc Capital Management — Analyst

Brian HawthorneRBC Capital Markets — Analyst

Craig SchmidtBank of America — Analyst

Mike MuellerJPMorgan — Analyst

Vince TiboneGreen Street Advisors — Analyst

Linda TsaiJefferies — Analyst

Chris LucasCapital One Securities — Analyst

Michael BilermanCity — Analyst

John KimBMO Capital Markets — Analyst

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