Retail Opportunity Investments Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 12 speakers on the call.

Operator

Welcome to Retail Opportunity Investments Third Quarter 2023 Conference Call. Participants are currently in a listen only mode. Following the company's prepared remarks, the call will be opened up for questions. Now, I would like to introduce Lauren Silvera, the company's Chief Accounting Officer.

Speaker 1

Thank you. Before we begin, Please note that certain matters, which we will discuss on today's call, are forward looking statements within the meaning of federal securities laws. These forward looking statements involve risks and other factors, which can cause actual results to differ significantly from future results that are expressed or implied by such forward looking statements. Participants should refer to the company's filings with the SEC, including our most recent annual report on Form 10 ks to learn more about these risks and other factors. In addition, We will be discussing certain non GAAP financial results on today's call.

Speaker 1

Reconciliation of these non GAAP financial results The GAAP results can be found in the company's quarterly supplemental, which is posted on our website. Now, I'll turn the call over to Stuart Tanz, the company's

Speaker 2

And Rich Schoebel, our Chief Operating Officer. We are pleased to report that our grocery anchored portfolio continues to perform well, Notwithstanding our portfolio being essentially fully leased at over 98%, we continue to make the most of the ongoing strong demand for space. In fact, through the 1st 9 months of 2023, we have leased a record amount of space thus far. Additionally, in step with capitalizing on the demand for space to achieve record leasing volume, We are also capitalizing on the demand to continue driving rents higher, posting our strongest quarter year to date in terms of releasing rent growth on both new leases and renewals. With respect to acquisitions, the West Coast has largely been idle this year with only a limited number of grocery anchored shopping centers trading.

Speaker 2

Interest rates continuing to rise throughout the year and the related uncertainty and difficulty in terms of obtaining reasonable debt financing has compelled many would be buyers to stay on the sidelines. Notwithstanding buyers being on the sidelines, certain private owners are starting to become more active in seeking to transact. We view this as an opportunity. In fact, we currently have an acquisition that we are close to having under contract. It's an excellent grocery anchored shopping center that we've had our eye on for some time.

Speaker 2

The property is located in the Los Angeles market in a densely populated, mature, diverse community. The center is anchored by a well established natural food supermarket that is a long time national tenant of ours. The seller is a private owner who is seeking an efficient closing, which given our knowledge of the market and the specific center and its tenant roster, We are in a position to facilitate their closing objective. Beyond this acquisition, we have several other opportunities that we are currently have our sights on, each with seller circumstances that we are well positioned to capitalize on. Turning to our balance sheet.

Speaker 2

During the Q3, we completed a public bond offering raising $350,000,000 in total. The offering Interest in the marketplace and was oversubscribed at tracking interest from 60 investors in total, which we think speaks to the long term strength and stability of our grocery anchored portfolio and business. Now, I'll turn the call over to Michael Haynes to take you through the details of the offering and our Q3 results. Mike? Thanks, Stuart.

Speaker 2

Starting with our financial results. For the

Speaker 3

Q3, GAAP net income attributable to common shareholders For the 3 months ended September 30, 2023, was $8,400,000 equating to $0.07 per diluted share. And in terms of funds from operations for the Q3 FFO totaled $36,000,000 equating to $0.27 per diluted share. With respect to our financial results for the 1st 9 months of 2023, GAAP net income attributable to common shareholders totaled 26,500,000 or $0.21 per diluted share. In terms of FFO, the company had $105,400,000 in total FFO or $0.79 per diluted share for the 1st 9 months In terms of net operating income, NOI on a same store cash basis increased by 8.2% during the 3rd quarter And increased by 3.6% for the 1st 9 months of 2023. Our 3rd quarter results were impacted by 2 First, other income increased notably, primarily as a result of recapturing 3 leases, which we have already lined up new tenants Take the bulk of the recaptured space at notably higher rents.

Speaker 3

Partially offsetting the increase in other income, GAAP rent amortization declined, primarily as a result of removing a buy buy baby lease from our portfolio during the Q3. We've declined the one time non cash GAAP adjustment. And just like the recapture spaces, we already have several new tenants lined up for the Buy Buy Baby space, both at a higher rent and on a same space cash basis, one of which is already open and operating. With respect to our balance sheet, as Stuart touched on, during the Q3, we raised $350,000,000 through a public bond Offering of senior unsecured notes. It was our first time raising capital in fully bond market in nearly a decade.

Speaker 3

As such, we made a concerted effort to fully engage with the market having with a broad and diverse mix of investors, a number of which were new to the company. We intend to utilize the proceeds to retire the $250,000,000 of senior notes that mature in December. Additionally, we paid down $100,000,000 over $300,000,000 term loan. Looking out over the next 5 years, our debt maturity schedule is well laddered with approximately $300,000,000 maturing each year on average. Having now reestablished ROIC in the public bond market, our objective is to be a more consistent annual issuer going forward.

Speaker 3

Taking into account the bond offering, as of September 30, over 96% of our debt is effectively fixed rate, over 96% of our debt is unsecured Over 96 percent of our portfolio is on the encumbered. Additionally, for the Q3, net debt to annualized EBITDA was 6.4 times, down from 6.6 times from a year ago. Lastly, with the year coming to a close, we have updated and narrowed our FFO guidance range for 2023. On the positive side, leasing activity this year has far exceeded our initial projections that we set back at the beginning of the year. However, the persistent rise in interest rates impacted our initial projected interest expense and our projected investment activity, both of which adjusted accordingly interrupted the guidance range for the year.

Speaker 3

Now I'll turn the call over to Rich Schoebel, our COO, to discuss property operations. Rich?

Speaker 4

Thanks, Mike. As Stuart highlighted, we achieved another successful active quarter of leasing. Demand across our portfolio continues to be Consistently strong with a broad range of prospective new tenants actively seeking space. Given our properties location attributes, Together with the strong draw of our long time supermarket anchors and other core service and destination tenants, our centers continue to be sought out by prospective tenants as the shopping center of choice in the respective communities. Capitalizing on the demand, we continue to lease space at a record pace.

Speaker 4

Year to date, we have leased approximately 1,500,000 square feet, which is a new record for us in terms of leasing volume for the 1st 9 months. In step with our record leasing activity, we again achieved a portfolio lease rate above 98%, finishing the 3rd quarter at 98.2 percent leased. Breaking that down between anchor and non anchor space, our anchor space continues to be 100% leased and our shop space is close behind at 96% leased. During the Q3, we executed 95 leases totaling 465,000 square feet. The bulk of our leasing activity continues to center around renewing long standing value tenants with a number of them continuing to come to us early to renew, particularly key anchor tenants.

Speaker 4

Specifically, during the Q3, we renewed 6 anchor tenants, 5 of which were not scheduled to mature until next year. Additionally, as Stuart indicated, We continue to have good success in terms of releasing rent growth. Specifically, during the Q3, we achieved a 36% increase in same space Cash based rents on new leases and a 7% increase on renewals. Underscoring our strong leasing activity and consistent performance Is a proactive approach of seeking out, identifying and capitalizing on opportunities to recapture space well in advance of lease maturities and releasing the space quickly, enhancing tenancies and driving rents higher in the process. Just to cite an example, During the Q3 at 2 of our centers, we recaptured prime freestanding pad, each with a drive through.

Speaker 4

The pads have been leased to a regional tenant whose business Anticipating the acquisition could bring about some consolidation, we reached out to the tenant and successfully recasted their spaces and now have several new national quick serve restaurant operators lined up with base rents that represent a 44% increase on average over the previous tenants' rent. In addition to the strong rent increase, the new restaurant operators will be a much stronger daily draw to our centers, which in turn will enhance future leasing demand at the properties. Along with our recapturing initiative, We also continue to have good success getting new tenants open and operating. Year to date, new tenants representing approximately $6,000,000 of Incremental base rent on a cash basis have opened and commenced paying rent, including $1,900,000 opened in the 3rd quarter. In terms of new tenants that haven't yet opened, including those that we just signed during the Q3, the incremental amount stood at 7 point $3,000,000 as of September 30, the bulk of which we expect to commence over the next several quarters.

Speaker 4

With respect to Rite Aid and their recent announcement, at September 30, we had 15 leases with Rite Aid across our portfolio, which altogether accounted for 1.7 percent of our total base rent. 3 of the leases are on Rite Aid's closure list. The 3 together account for 0.3 percent of our total base rent. The average base rent for The 3 is 50% to as much as 80% below current market rents. In terms of the remaining 12 leases with Rite Aid, they all continue to perform well as and the rents are below market on average as well.

Speaker 4

Turning to lease maturities going forward. As of September 30, We only had 141,000 square feet maturing during the Q4, including 2 anchor leases totaling 44,000 square feet, both of which we expect to release before year end. Looking out further to next year, we have 7 anchor leases currently scheduled to mature in 2024, of which we currently expect that 6 of the 7 will renew. In terms of non anchor space, We have about 500,000 square feet of in line space scheduled to mature next year, which we expect to renew and release consistent with our historical performance. Now I'll turn the call back over to Stuart.

Speaker 2

Thanks, Rich. Based on our leasing performance year to date and our leasing activity here early in the 4th Quarter. We were on track to finish the year strong in terms of property operations and post another successful year of maintaining our high portfolio lease rate and achieving record leasing volume, while also achieving solid re leasing rent growth and enhancing our tenant base. In terms of growing our portfolio, it's safe to say that 2023 has been a frustrating year as the market has been largely idle and slow to adjust to the higher interest rate environment as I mentioned. Along with the market also adjusting to the ongoing challenges that Certain commercial property sectors in certain prominent markets across the country are currently faced with.

Speaker 2

Fortunately, The long term fundamentals of the grocery anchored sector remain sound, especially as it relates to our specific portfolio and are highly protected markets. As we look towards 2024, the current The market is that acquisition activity could potentially accelerate as property level low interest rate debt begins to mature in earnest next And private owners could have limited viable refinancing options. In anticipation, we've been strategically tracking a number Off market opportunities across our core markets, working to establish and maintain an ongoing constructive dialogue with private owners. Over our team's nearly 30 year history of specializing in the grocery anchored sector on the West Coast, This strategy has proven instrumental time and again in our ability to gain access to acquire exceptional properties that rarely ever hit the market. While it's early in terms of the acquisition market becoming fully active and favorable again, we are encouraged from what we are currently seeing and look forward The opportunity to strategically grow our portfolio in 2024.

Speaker 2

Now, we will open up the call for your questions. Operator? Thank

Operator

And our first question comes from Juan Sanabria of BMO Capital Markets. Please proceed.

Speaker 4

Good morning, Warren.

Speaker 5

Good morning, Stuart. Just hoping you could talk a little bit more about Rite Aid and the Potential uses that you're looking at to backfill space. And if you have any color on Any incremental space they may look to give back, there's an article today that through the bankruptcy process, they might hand back more than In the initial list of rejections and divestitures that they were initially planning, so just curious what extra intel you may have?

Speaker 4

Rich? Yes. So in terms of uses, right now, we are speaking to a broad range of Potential new tenants, including fitness, grocery, automotive. There seems to be a lot of demand. I mean, what really has happened here is opportunities that we were unable to Fulfill from tenants have now become possible.

Speaker 4

So I think as you know, so far they've only rejected one lease of ours. There's significant interest in that space.

Speaker 2

Yes, Juan, the demand has been a bit overwhelming.

Speaker 5

Okay. And then a second question, could you just talk a little bit about how build occupancy Was flat, but base rents were down quarter over quarter, just seems a little in Congress. I'm just hoping for some color there.

Speaker 3

Hey, Juan, it's Mike. I think the without digging into the details, my hunch is it's probably a I mentioned in my prepared remarks that the GAAP adjustment for the Buy Buy Baby lease, which had an above market lease. So when that lease was Certainly, we had to recognize that above market rental revenue, which is a hit to revenue, probably the positive decrease.

Speaker 5

Great. And just one last one, if you don't mind. What's the expected cadence of the lease commencements for the $7,400,000 of Don, but not occupied?

Speaker 3

I think it's about I think 60% of it or so is supposed Come online by March 31 and another 15% by June. So that's majority of it by June.

Speaker 5

Thank you, guys. I appreciate it.

Speaker 3

Thanks, Claude. Yes.

Operator

Thank you. One moment for our next question. And our next question comes from Craig Mailman of Citi. Please proceed.

Speaker 2

Hey, good morning. Good morning, Craig.

Speaker 5

How are you doing? So just wanted to Follow-up on your commentary, Stuart, about the acquisition environment and potentially that it could reflect here as some refinancings are coming due next I'm just kind of curious on the assets that you're tracking at least, is it Just that they can't get financing or the debt service coverages don't make sense. I'm just trying to kind of Square of the Circle, sellers looking to monetize here into a weak environment versus just kind of eating the higher interest expense given the NOI growth that you're starting to see here in the retail space. So I guess just commentary on that and then how what pricing you guys would be given what cost Capital is moving for you and just debt rates to make these work accretive and interesting.

Speaker 2

Sure. Well, it's primarily a combination of the challenges in the financing market And the fact that they have to in not all cases, but in a lot of cases have to come out of pocket in terms of providing more equity in order to get new financing. In terms of our cost of capital, the goal With what we're looking at buying right now as well as what's in the pipeline is to try to find that sweet spot in that 6.5 7.5% cap range with the ability to drive rents through either vacancy or operating margin efficiencies about 150 basis points within an 18 month period. That's the goal. And What we believe in terms of what we're seeing right now that subject to doing due diligence on these a couple of these deals, We will be able to close on these transactions accretively as it relates to our cost of capital.

Speaker 5

Okay. So you might have a little bit of dilution or a push relative to where you can finance these going in, but ultimately You're going to be at an 8% to a 9% cap, if you could execute on that plan. How do you finance that here debt, equity, OP units, asset sales, kind of what's the optimum mix look like? And In particular for the asset that you're talking to, I know you're not in contract yet, but it sounds like you're close. Kind of Is that in the realm of returns you just talked about?

Speaker 5

And again, how do you finance that?

Speaker 2

Well, the financing is done through a combination of OP And we do have an OP unit transaction that I believe will come to fruition now, if not in the Q1 and the Q2 of next year, Certainly at a stock price that will be higher than where our stock is currently trading. But it's a combination of that transaction OP units, A combination of selling some more assets and our ATM. That's how we're going to help finance The upcoming opportunities as we look into the end of this year and into next year.

Speaker 5

Okay. Just lastly, I know you guys haven't given guidance yet, but just a thought here, you guys kind of lowered 'twenty three guidance this quarter, partly as a result of the acquisitions coming out of it. As you guys think about presenting guidance next year, I mean, should we assume kind of no acquisitions baked in and are under contract? Kind of how are you going to approach Just given the volatility in the macro and how that's kind of impacted the transaction market?

Speaker 2

Sure. Well, I mean, obviously, we'll be giving guidance on our year end call in terms of filling in some of the questions that you're Right now, but I think you'll see again, as you've heard in our remarks, a bit more activity on external growth, A bit more activity on dispositions along with potentially Creating a bit more growth or more growth in terms of what we're seeing at the property level because operations continue to be very strong. As you've heard in from our remarks today.

Speaker 5

Great. Thanks guys.

Speaker 2

Yes.

Operator

Thank you. One moment for our next question. And our next question comes from Jeffrey Spector of B&A Securities, please proceed.

Speaker 4

Good morning, Jeff.

Speaker 1

Good morning. This is actually Libby on for Jeff. So I was just wondering if you could provide more color on your confidence And the narrowed range for same store NOI. Is that more so a function of Greater visibility on the timing of store openings and commence rent, what would kind of swing that to the lower end versus The higher end there. And just to follow-up on that, to confirm, is there any amount of rent fallout or lost occupancy that's assumed from Rite Aid or troubled retailers for the full year.

Speaker 3

You want to answer the question as it relates to fallout though, Rick?

Speaker 4

Yes. Right now in terms of fallout, Only one lease has been rejected by Rite Aid. The other two leases are in their sale process. And As you know, they are required to pay the rent while they until they reject any leases. So We don't anticipate any financial fallout as it relates to Rite Aid or any other major tenant.

Speaker 3

Yes. As far as same store NOI for the balance of the year, given that we're already at 3.6 Yes. For the 9 months, yes, I feel pretty comfortable between 3% and 4%. The other income items kind of contributed that in the Q3, but Q4 should be back in line Our normal historical, so the 3% to 4% range we feel pretty comfortable with.

Speaker 1

Okay. Thank you. And second, I was just curious if you could give the latest Temperature check on small shop tenant health. Just given like the 96% lease rate you spoke to, seems fairly consistent. If you could just give the latest on the health incentives there.

Speaker 4

Sure. Yes, I mean the shop tenants continue to be very active and our leasing team has been capitalizing on that. They are fielding multiple LOIs for the spaces that we do have available, and it is coming from a broad range of Local, regional and national tenants.

Speaker 1

Okay, great. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from Wesley Golladay of Baird. Please proceed.

Speaker 3

Hey, Stuart. Good morning, Wes.

Speaker 2

Good morning, everyone.

Speaker 6

Hey, Stuart. A follow-up to the funding question for acquisitions. I mean, can you give us your appetite for selling stock at today's level? It looks like you're at mid to high 7s Where are we open today? And then, where can you sell assets today?

Speaker 2

Well, in terms of selling shares, we don't have a set price in mind. We consider a number of factors when contemplating raising equity to fund our investment activity, including our current stock price and the acquisition yields. In terms of cap rates, there's been, I think as you heard in my remarks, Very few transactions for high quality grocery anchored centers on the West Coast. What we have seen more recently Has a couple of widely marketed deals in the 5s, 1 in the low fives, 1 in the mid fives. And again, as we sit here today, a bit more activity over the last several weeks on the West Coast, primarily related to ICSC, which is occurring tomorrow Friday in San Diego.

Speaker 2

You usually get a number of assets that come to market when you have this size of a gathering of retail experts. But cap rates today are still sitting in that, let's call it 6% range give or take, Depending on the profile of the asset, some are below the 6%, some are at the 6% or a bit above, but 6% on average still.

Speaker 6

Got it. And then maybe on the Rite Aid, I think you did a comprehensive review at ICSC with the management team over there. Overall, it sounds like you also Feel pretty good about your portfolio. They are contemplating both asking for rent cuts and then also closing stores. Would it be safe to say that you have no appetite for rent cuts considering where your mark to market is on these assets?

Speaker 3

Absolutely.

Speaker 2

The demand has been a bit overwhelming to tell you the truth. We've only been in the market with these locations Probably a couple of weeks, Rich. And we've got a number of LOIs that have hit our table already, even on the locations that haven't been rejected. So, we're pretty confident certainly sitting here today that we'll be able to create some Good value over time in terms of what we see on the ground with the Rite Aid situation And the mark to market depending on the location is quite large depending on again the location of the actual space. But Very encouraging in terms of what we're seeing right now on the ground.

Speaker 2

I don't know if you want to add anything to that, Rich.

Speaker 4

No. I mean, I think as you see from other Bankruptcy situations, normally we've been coming out ahead on those, whether the lease is accepted and there's no downtime or when we get the space back and we're able to bring that space up to market rent. So we would expect a very similar situation here with Rite Aid.

Speaker 6

Got it. And then can I just get one more on this other income line item? It looks like it's a combination of maybe correct me if I'm wrong, about $2,000,000 of term income, call it below $300,000 of interest income, just from the cash position you held. Does that seem correct? And it also looks like you got about Maybe 1 year's worth of rent for free or interim income.

Speaker 6

Is that a good way to look at it?

Speaker 3

The other income details of the $3,500,000 of other income in the 3rd quarter, 2 point $10,500,000 I should say was lease termination settlement income in connection with those leases that we recaptured that I mentioned, which we've already as I Also talked about have already landed new tenants at higher rents. The balance of it was just a mix of other miscellaneous income items and the touch of interest income on the cash from the bond offering that's sitting in the money market.

Speaker 6

Got it. Thanks everyone.

Speaker 4

Thanks, Matt.

Operator

Thank you. One moment for next question. And our next question comes from Dore Kestin of Wells Fargo Securities. Please proceed.

Speaker 2

Good morning, Doreen.

Speaker 7

Good morning, guys. Given the improvement you've noted of late in the transaction environment, is it Fair to assume that your prior disposition guidance could be pushed into 2024?

Speaker 2

We will probably increase that guidance in 24 In terms of dispositions as we ramp up on the acquisition side, although it's I can't give you any specifics for second, We believe that the market is so tight as it relates to Looking at high quality grocery anchored assets that we believe that there will be a nice window that will be opening up that will give us the ability to accelerate some of the disposition side of that equation, again, as we move into 2024. But again, we'll give you Firm guidance in our next call.

Speaker 7

Okay. And then on the with the 23 maturities addressed, What are your initial thoughts on the timeline for addressing your 24s? I know you mentioned kind of annual offerings going forward. And I guess just part of that, can you give us an update on your views regarding fixed versus floating exposure in this environment?

Speaker 4

So in terms of expirations,

Speaker 3

Yes, the 24s, I mean, obviously, as we have in our We've swapped out a good portion of our term loan to become unhedged in August of next year, which is about the same timeline that we I'll address the 23 maturities this year. It really depends on where the market is going to be with interest rates. Obviously, Depending on whether it's continue going up or if they start turning back down, if they start turning back down, you do want to have some level of floating rate exposures to take advantage of that. So Right now, we're pretty highly fixed, but at the end of the year, we'll take out the 23s. We'll be a little bit more floating and we're comfortable with that level.

Speaker 3

So we just have to kind of watch and see where the market goes on the interest rate side of things.

Speaker 7

Okay. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from Michael Mueller of JPMorgan. Please proceed.

Speaker 4

Good morning, Mike. Hey,

Speaker 8

good morning. Just a couple of quick ones here. I may have missed it, but Can you talk about just the rough dollar volume of the near term transaction that you think could happen? It sounds like it would happen in 2024, but The one that's lined up. And from a higher level perspective, when we're thinking about 2024, Should we be thinking of a base case of roughly equal levels of acquisitions and dispositions?

Speaker 3

You want to

Speaker 2

I mean, again, we're going to give guidance at our next Call, Mike, if you were to look out into 2024 at this point and look at the pipeline of what we have in front of us, including a potential OP transaction. You probably could be sitting in the $80,000,000 to $100,000,000 range right now. That could change, of course. On the disposition side, we're probably ramping that up, Probably in this $50,000,000 to $75,000,000 initially, but that's where things sit as of this call.

Speaker 3

I don't know, Mike. Yes, I was going to say trim the portfolio around the edges of what we currently own and use those proceeds to buy some accretive acquisitions.

Speaker 8

Got it. Okay. And then, is there any update on the, I guess, the land sales tied to the redevelopments? Just maybe an update there?

Speaker 2

We continue to track the market in terms of The entitled land that we've got, we continue to speak with buyers. We continue to speak. We've had a lot of interest in Strong operators coming to us to joint venture these assets or these opportunities. Once we see the market begin to get better as you might say, we will push these assets To the market as well and we still expecting to get if we were to sell 2 of the 3 around $25,000,000 to $30,000,000 But the market again has been very difficult and but we continue to monitor it very closely and we're in a very good position when things we see things begin to change to move these properties very quickly to the market. Got it.

Speaker 2

Thank you. Yes.

Operator

Thank you. One moment for our next question. And our next question comes from Linda Tsai of Jefferies. Please proceed.

Speaker 3

Good morning, Linda. Hey, Linda.

Speaker 9

Hello. Just to clarify, given the discount where your stock is Trading and what you said about acquisition and disposition volumes for next year, you'll be more focused on dispositions near term rather than acquisitions?

Speaker 2

Combination of both.

Speaker 1

Okay.

Speaker 9

And then it sounds like Rite Aid has announced 150 But the Rite Aid article Juan referred to says more coming. I just want to confirm that the 3 leases or on the list of identified, the 500 identified or would you expect an announcement of more closures from Rite Aid from which the remaining 12 stores would also be considered.

Speaker 2

Well, it's tough to look ahead in terms of that process. I think Rite Aid has had some time now to really evaluate their store count. I think that's one of the reasons why it took a bit longer to see the bankruptcy. We have one store, I think that Rich mentioned that is closing. The other 2 are up for sale.

Speaker 2

They're still operating. Tough to tell you anything beyond that? I mean, Rich, do you No.

Speaker 4

I mean, I think they've also leading up to this have exited a certain number of Stores as well, some of them we've already reletted significant increases in rent. And so it's really hard to predict Which ones may in the future come available, but as we touched on, the demand has Given the fact that there's really no supply available in our markets,

Speaker 2

the demand has been exceptional. And I mean a number of these locations have drive thrus and they're located in what I would call the Premier part of our shopping centers, which would be at the intersection of where the 2 Roadways or arterials meet. So, that's why we feel pretty confident that I don't I'm not saying that we won't see more rejections, but I wouldn't be surprised if as Rite Aid moves to get out of bankruptcy That what we have sitting there remains pretty well intact.

Speaker 9

Thanks. And then just one last one. How do you for next year, how do you think about the puts and takes of interest expense against the pricing power you're seeing with new spreads and releasing spreads?

Speaker 3

Well, we'll put out the guidance For next year, the maturities for $24 come up until December. So unless we pull the trigger early, we can pretty much model where it's going to be for all of the year. 4th quarter, we're going to have the interest expense from both the 23s, which we refinanced already. We also have the benefit of the interest income while the cash is sitting there. So 24, We'll be able to give pretty solid guidance on that in February when we give guidance for the year.

Speaker 1

Thanks.

Operator

Thank you. One moment for our next question. And our next question comes from Paulina Rojas Schmidt of Green Street. Please proceed.

Speaker 2

It's early on the West Coast for you. How are you doing, Bonnie?

Speaker 10

Here I am awake and ready with my questions.

Speaker 3

So I

Speaker 10

hope that's good enough.

Speaker 4

Yes. So

Speaker 10

My question is, when you take a step back and look at the potential consequences of the current High interest rate environment on retailer balance sheet. How would you describe your level of concern Beside of what you're seeing today, it's more I'm thinking about more the future. It doesn't seem like you're particularly worried, especially given your attitude towards acquisitions.

Speaker 2

Well, look, the situation in terms of The interest rate environment is something that none of us can control. So as we look into 2024, I think most economists have been wrong in 2023. I think interest rates are going to stay elevated for longer than what Most are anticipating. However, as we look into 2024, we had a very So, we have the ability and certainly to go back and deal with the financing. And more importantly, we do have some time now and some flexibility out there to really think about Whether we want to accelerate some dispositions and use some of that to pay more debt down, and On top of that, potentially look at what might be out there to help alleviate The concern of high interest rates, without giving you specifics.

Speaker 2

So, Everyone in 24 is really dealing with the same issue in terms of all our balance sheets, and we feel very good very Comfortable given the strength of where our balance sheet sits today that we'll be able to get through this And hopefully lock in debt at an attractive rate. And Mike, I don't know if you want to add to that.

Speaker 3

I agree with what you're saying. I think there's no shortage of opinions out there in the marketplace of what's happening in the overall So we just have to be patient, wait and see how it kind of evolves and just work with the market as we see it. The good news is with the 23s already refinanced, the 24s, we've got full capacity on the credit line. So we've got some Flexibility there on the timing of that as well.

Speaker 10

Thank you. And then my other question is, when I look at your implied cap rate, it is significantly higher than Some of your grocery anchored peers, which is unusual from at least a historical perspective. Would this in the market is Getting wrong or is the market putting Too much weight into Rite Aid? What is your interpretation of the current event?

Speaker 2

Yes. I mean, look, I think the challenges for ROIC in 2023 has been the debt maturity, which has now been resolved And the noise around Rite Aid. And right now, it just looks like it's noise from our We feel very comfortable sitting here today that we will come out of this with Potentially some very strong rent growth. Remember, we have not had an anchor space available in this portfolio in 5 years. And more importantly, when we look at the market today on the West Coast, there's nothing available.

Speaker 2

There's nothing to lease from an anchor perspective. So the demand is again has been a bit overwhelming since we finally had an anchor space come available. We've got a Series of LOIs from incredible grocery anchor tenants as well as others. So again, we feel pretty comfortable Today with where we sit and more importantly, at some point, the noise is going to go away. We think we'll be able to show the market pretty quickly that there's a lot of mark to market value that's going to be created through this process.

Speaker 10

I think you mentioned you have seen demand from grocers, right, for the space. Can you provide some color on What type of grocers have approached you?

Speaker 2

We've had the regional grocers, Local grocers and national grocers at the table all at one time

Speaker 4

approach us, Rich. I don't know We're

Speaker 3

not getting specific on names. It's a variety of all the types of

Speaker 4

Very strong tenants.

Speaker 10

Okay. And the last one, are you thinking about Single tenant users for the space or you think it's likely that if you were to receive more space back, you would have to and subdivide this space into smaller stores.

Speaker 4

Most of our Rite Aid spaces have already been rightsized, where we've taken back space and downsized them already. So our The goal would be to re tenant them with a single tenant, but we also would look at splitting them, which we've done in other circumstances. It really all depends on the users, the economics and all the factors that we would consider when we lease the

Speaker 10

Thanks. Thank you.

Speaker 4

Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from Todd Thomas of KeyBanc Capital Markets. Please proceed.

Speaker 4

Hey, Todd. Hi, Todd.

Speaker 11

Hi, good morning. A couple of follow ups. First, I was wondering if you could tell us With regard to Rite Aid, how much term is left on average across the 14 leases in the portfolio, And can you talk about your interest or appetite in buying leases at auction whether that's an option that you're contemplating?

Speaker 2

The answer is yes in terms of behind the leases, especially if we see the pipeline of LOIs and grow as we're seeing right now. The answer is yes. We are currently looking at buying these leases as we're having this discussion. Rich, in terms of term,

Speaker 4

Yes, I don't have the average term here, Todd, but we've been renewing Rite Aid throughout the year and they range The next expiration is not until 2026, and then we go all the way out to 2029 and as far out as 2030. So there's a bit of term on many of these leases and then of course options.

Speaker 11

Okay. And then just circling back to the dispositions. Stuart, I'm curious if you can just Talk a little bit more about the strategic rationale, I guess, behind those planned asset sales, what you're hoping to accomplish with the dispositions And whether the cap rate spread on dispositions relative to some of the acquisition yields that you're Starting to see or underwrite today would be accretive or is it really more about the rate of NOI growth between the buys and sells?

Speaker 4

It's a

Speaker 2

combination of the NOI growth, a combination of the arbitrage in terms Cap rates, we believe that on some of these assets we may get into the 5s, and then Obviously, buying with on the other side of that equation in the mid-6s or low-7s. So, it's a combination really of Those two things. And we have seen on the West Coast a couple of transactions with 1031 buyers where they have been paying up to buy these type of assets quite aggressively. So Hopefully with a bit of luck and a bit of focus in terms of timing here and more importantly, The fact that there's such little product on the market, I think will help drive this program of potentially accelerating selling some of these assets.

Speaker 11

Okay. And then, I think I heard you mention Joint Ventures earlier, but I think that was specifically around some of the land sales that you were maybe discussing. But in thinking about acquisitions, you own everything really on balance sheet today, no joint ventures, nothing complicated. Is everything that you're considering Moving forward in terms of acquisitions also on balance sheet or would you consider bringing in a partner or Looking to do something a little bit more creative perhaps to make the deals pencil and be in a position to take greater advantage of opportunities that might surface.

Speaker 2

The focus of as you know Todd of this management team for the last 30 years is to stay on balance sheet. We have been approached quite aggressively over the last 6 months by some of the biggest players in the business in terms of going off balance sheet. Nothing is in front of us today that would get us excited. However, I'll never say never if Someone does walk in and gives us something that could be highly accretive to shareholders with the plan of What I would call getting these assets back on the balance sheet over time. But again, The focus continues to be on balance sheet in terms of growth as we look into the balance of this year and next year.

Speaker 11

Okay. That's helpful. And one last one maybe for Mike, if I could, on the model here. Is The 4Q run rate, you made some adjustments around straight line rent. But as we think about the implied Q4 for both straight line and FAS 141, just with the Data guidance, is that the right level to consider heading into 2024 as we think about, I guess, Considerations around non cash rent for the New Year?

Speaker 3

I would say, yes. Obviously, we had a little bit of Pull down from the buybuy daily lease that we had terminated in Q3, so that was a bit of a drag. But straight because we haven't really acquired anything recently, our FAS 141 rent amortization is static, so when the guidance comes out in February, it should be pretty solid for the whole year barring any unknown terminations Or acquisitions if we do end up buying something. On the straight line rent side, I would say that the run rate was So the 9 months number would be a good if you annualize that, that would be a good run rate given our leasing activity.

Speaker 11

Okay, got it. So the Q4, the implied Q4 straight line rent should be a pretty clean run rate to think about moving forward?

Speaker 3

It should be. It will all depend on the leasing activity due in Q4.

Speaker 11

Right. Okay, got it. All right. Thank you.

Speaker 3

Okay. Thanks, Bob.

Operator

Thank you. I'm showing no further questions at this time. I would now like to turn it back To Stuart Tance for closing remarks.

Speaker 2

In closing, thanks to all of you for joining us Today, as always, we appreciate your interest in ROIC. If you have any additional questions, please contact Lauren, Mike, Rich or me directly. Also, you can Additional information in the company's quarterly supplemental package, which is posted on our website as well as our 10 Q. Lastly, for any of you that are attending the ICSC Conference in San Diego that starts today, we hope to see you there. And for those of you that are planning to attend NAREIT's Annual Conference in a few weeks from now in Los Angeles, we look forward to seeing you there too.

Speaker 2

Thanks again and have a great day everyone.

Operator

This concludes today's conference call. Thank you for participating and you may now disconnect.

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Earnings Conference Call
Retail Opportunity Investments Q3 2023
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