Retail Opportunity Investments Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2024

There are 12 speakers on the call.

Operator

Welcome to Retail Opportunity Investments Second Quarter 2024 Conference Call. Participants are currently in a listen only mode. Following the company's prepared remarks, the call will be open for questions. I would now like to introduce Lauren Severa, the company's Chief Financial 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 to 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 Chief Executive Officer. Stuart?

Speaker 2

Thank you, Lauren, and good day, everyone. Here with Lauren and me today is Michael Haines, our Chief Financial Officer and Rick Schoebel, our Chief Operating Officer. Demand for space across our portfolio continues to be strong and we continue to work hard at making the most of it, leasing space at a near record pace. In fact, year to date, we've already leased over 776,000 square feet. Additionally, we continue to achieve re leasing rent growth posting a 12% increase on new leases for the 2nd quarter representing our 50th consecutive quarter extending over 12 plus years dating back to when we first commenced reporting property statistics in 2012 when we owned just 35 shopping centers.

Speaker 2

As we've grown our portfolio nearly threefold since, we have consistently achieved re leasing rent growth every year and every quarter. With respect to acquisitions, as we reported on our last call, early in the Q2 through a long standing off market relationship, we acquired for $70,000,000 an excellent core grocery anchored shopping center. The property serves as the primary shopping center anchoring a master planned community known as Fresci Ranch that is situated in one of the most sought after affluent submarkets in San Diego, truly irreplaceable real estate. The center features not just 1, but 2 strong supermarkets, Trader Joe's and Stater Brothers, both of which are longstanding tenants of ours. Looking ahead, there are a number of opportunities for us to enhance the underlying value and grow the center's cash flow through enhancing the in line tenant mix as well as releasing below market space, which we are already working on.

Speaker 2

With respect to dispositions, we recently sold the property for approximately 57,000,000 dollars It's a center that we acquired back in the early days of ROIC. Over the years, we substantially merchandised and repositioned the center, significantly increasing the cash flow along the way, surpassing our initial goals and projections. Notwithstanding the center being a stable property today, looking ahead, we felt the growth prospects were limited and now was an appropriate time to sell this particular property. From our perspective, selling this property, while essentially at the same time that we were acquiring an irreplaceable asset like Gressey, no doubt enhances the long term strength and appeal of our overall portfolio as well as our ability to continue growing cash flow going forward. Now, I'll turn the call over to Michael Haynes to take you through our financial results for the Q2 and the 1st 6 months.

Speaker 2

Mike? Thanks, Stuart. For the

Speaker 3

3 months ended June 30, 2024, the company had $83,000,000 in total revenues and $28,000,000 in operating income. For the 1st 6 months of 2024, the company had $169,000,000 in total revenues $58,000,000 in operating income. On a same center cash basis, net operating income for the Q2 of 2024 increased by 1.7% and increased by 3.7% for the 1st 6 months. The 3.7% increase for the first half of the year is above our same center NOI guidance range for the full year of 1% to 2%. However, as we discussed on our last call, given the ongoing anchor space re leasing activity, there will be some downtime between leases, which is reflected in our guidance.

Speaker 3

GAAP net income attributable to common shareholders totaled 7,400,000

Speaker 2

dollars for the Q2 of

Speaker 3

2024 equating to $0.06 per diluted share. And for the 1st 6 months of 2024, GAAP net income was $18,400,000 or $0.14 per diluted share. Funds from operations for the Q2 of 2024 totaled $34,100,000 equating to $0.25 per diluted share. And for the 1st 6 months of 2024, FFO totaled $72,100,000 or $0.54 per diluted share. Turning to our balance sheet.

Speaker 3

During the Q2, we retired in full a $26,000,000 mortgage. As a result, we currently only have 1 mortgage loan remaining for $34,000,000 meaning that 94 of our 95 shopping centers are unencumbered equating to a 99% of our total portfolio GLA. And the last remaining mortgage matures in 15 months from now. With respect to the $250,000,000 of senior notes that mature in December, our objective is to refinance the bonds through a long term public bond offering, preferably a 10 year deal. Depending on how interest rates in the bond market evolves during the second half of the year, we may also look to refinance possibly at the same time our $200,000,000 term loan.

Speaker 3

Assuming we do and looking ahead, other than the $34,000,000 mortgage, we would have no debt maturing for the next 2 plus years. Now I'll turn the call over to Rup Schoebel, our COO to discuss property operations. Rich?

Speaker 4

Thanks, Mike. As Stuart highlighted, demand for space across our portfolio is strong, coming from both existing and prospective tenants. In terms of prospective tenants, there's no shortage of demand coming from a broad range of destination tenants, especially new children enrichment concepts, most notably academic, robotics and exercise themed concepts. Additionally, mainstay destination tenants in the fitness, self care and wellness sectors continue to expand along with restaurants, including traditional restaurants as well as new digital kitchen only concepts. There are 2 common themes amongst these diverse tenants.

Speaker 4

First, they are strategically seeking to expand only in select very specific markets on the West Coast, markets where we have a strong established presence. And second, they are seeking to lease space in necessity centric shopping centers that are well situated and highly protected mature communities, which again is exactly what our portfolio offers. From our perspective, these diverse destination tenants serve as a natural value add complement to the grocery anchored daily necessity focus of our portfolio and business. As Stuart commented, we continue to make the most of the demand. During the Q2, we leased 393,000 square feet which is the 2nd most active second quarter on record for the company.

Speaker 4

Breaking the 393,000 square feet down, we signed 40 new leases totaling 117,000 square feet achieving a 12% increase in same space base rent as Stuart highlighted. Additionally, we renewed 276,000 square feet of valued tenants achieving a 6% increase in base rent, notwithstanding the bulk of the renewals being tenants that exercised longstanding fixed renewal options, many of which did so early. In step with our 2nd quarter strong leasing activity, our portfolio lease rate increased to 97% as of 30. Breaking that down between shop and anchor space, our shop space was 96% leased and our anchor space was 98% leased. In terms of getting new tenants open, we had another successful active quarter.

Speaker 4

Specifically, tenants representing upwards $2,000,000 of incremental annual base rent on a cash basis open their businesses and commence paying rent during the Q2. Additionally, in step with our strong leasing activity, new leases signed during the Q2 added over $2,500,000 of incremental annual base rent bring our total incremental rent from new leases that haven't commenced yet to approximately $7,300,000 as of June 30. Lastly, at June 30, we had 17 anchor leases scheduled to mature next year in 2025. 2 of the 17 have already renewed here just recently. As to the other 15, based on tenant discussions to date, we currently expect that at least 13 of the 15 anchors will renew and possibly all 15 could, which again speaks to the strength of our portfolio and the strength of our anchor tenant base.

Speaker 4

Now, I'll turn the call back over to Stuart.

Speaker 2

Thanks, Rich. Based on our solid portfolio performance during the first half of the year together with what we see on the horizon with our core portfolio in the second half of the year, we have raised the lower end of our initial FFO guidance. In terms of the higher end of our initial guidance, which was largely based on growing our portfolio back at the start of the year, there was increasing activity in the acquisition market driven in part by the market's expectation that interest rates would be cut soon. Based on the momentum that was building, we expected that 2024 would potentially prove to be another productive year on the acquisition front and we set our initial guidance accordingly. However, as the year has progressed, debt financing costs have not come down and seller expectations in terms of pricing and cap rates have not moved.

Speaker 2

As a result, the market has been largely idle. Additionally, the uncertain economy continues to weigh on the acquisition market making it unclear as we sit here today when the market could pick back up again and become more favorable. In light of these factors, we are now assuming no additional acquisition activity in terms of our guidance for the second half of the year. Accordingly, we have lowered the high end of our initial FFO guidance. With respect to dispositions, we do have a couple of properties that we may move forward with selling during the second half of the year, but only totaling around $25,000,000 assuming both properties were to be sold.

Speaker 2

While the acquisition market remains muted, we continue to focus on growth opportunities within our core portfolio, expanding on Rich's remarks regarding upcoming anchor maturities. Going forward, over the next several years, a growing number of our maturing longstanding anchor tenants do not have any remaining renewal options to exercise. Given that many of these anchor leases were originated a long time ago, some by as much as 20 years to 30 years ago, these anchor leases are significantly below market today. Safe to say, we intend to make the most of these releasing opportunities over time, capitalizing on the long term strength and appeal of our grocery anchored necessity based portfolio and our sought after highly protected markets. Now we will open up the call for your questions.

Speaker 5

Operator? Thank

Operator

Today, our first question will be coming from Dore Kestin of Wells Fargo Securities. Your line is open.

Speaker 2

Good morning, Dorey. Hi, Dorey.

Speaker 6

Hey, good morning. The deceleration in same store NOI growth that's implied for the second half of the year, Is that evenly spread among Q3 or Q4? Is there anything you'd want to point out as maybe differentiated by quarter?

Speaker 3

Well, the same store 1.7% for the 2nd quarter is

Speaker 6

No, the second half of the year.

Speaker 3

The second half of the year. Yes, we're keeping the same store guidance of 1% to 2% because of the back half. We're expecting it to be not as strong as first half obviously because of this just the way the numbers were comparing this year to last year's results.

Speaker 6

Okay. And then I think on the updated list of dispositions out of Albertsons and Kroger, you guys have a number of stores potentially to be operated by Ciena. Can you give us an updated view of the situation from your perspective? And does the new team there or I guess potentially there ease your operating concerns?

Speaker 2

Yes. I mean from a lease perspective, we have 32 leases in total that have with Kroger and Albertsons. Only 8 are being sold right now to CNS, 6 of which are in Oregon and 2 are in Washington. None of the 18 leases that we have with Kroger and Albertsons in California are being sold to CNS. And in terms of the transaction, we continue to communicate with both Kroger and Albertsons to conduct business as usual, including renewing one of their leases in the second quarter.

Speaker 2

However, because they're still waiting to see if the merger goes through, they're not in a position to discuss the merger and we haven't spoken to CNS.

Speaker 6

Okay. Thank you.

Speaker 4

Yes.

Operator

Thank you. One moment for the next question. And our next question will be coming from Todd Thomas of KeyBanc Capital Markets. Your line is open.

Speaker 2

Good morning, Todd.

Speaker 7

Hi, thanks. Good morning. A couple of questions. I guess first, Stuart, your comments about lower level of net investment activity going forward, We're now talking about rate cuts again later in the year and into 2025. So is it more about timing just given the uncertainty around rate cuts and what was sort of previously anticipated and that investment activity is delayed or are sellers just unwilling to transact the current prices?

Speaker 7

And can you talk a little bit about sort of where that bid ask spread is today?

Speaker 2

Sure. Well, I mean, yes, it's timing as it relates to interest rates. And I think as I said in my comments, sellers are still reluctant to given the interest rate environment and the fact that the market is somewhat idle, sellers are still reluctant to bring their properties to market. Going forward and looking into 2025, assuming that interest rates, we do see some movement in interest rates. We do anticipate hopefully that the acquisition market will pick up a bit more.

Speaker 2

But as we said in the comments at the start of the year, we anticipated more activity and when interest rates didn't come down that came that certainly came to a halt very quickly. So sellers are still on the sidelines right now and we'll see how things move on the second half of the year.

Speaker 7

Okay. And Mike, can you discuss the impact to guidance from the lower levels of net investment activity and the capital raising, the equity issuance, which you're now not assuming relative to your prior expectations. What did that amount to with the updated guidance?

Speaker 3

Yes. I think in our last call, we talked about how for every $100,000,000 the net of investment activity, it added about $0.01 of FFO, which is why we since we're removing all acquisition activity going forward for the balance of the year, that's why we pulled down the high end of the guidance.

Speaker 7

Okay. And then just shifting over to the operational side. So I'm just curious, there's been a little bit of an increase in some tenant credit concerns. You took down your bad debt expense slightly at the midpoint. Can you talk a little bit about the health of the tenant base today versus 3 months ago?

Speaker 7

And are some of these bankruptcies or announced store closure announcements, are there any changes to the sort of outlook, the forward outlook just based on some of these announcements that we've seen more recently?

Speaker 4

The tenant base continues to perform well, Todd. Receivables are consistent with historic averages. I think we've been very fortunate. A lot of the names tenant names you've heard in the news, we have very little exposure to. And where we've had exposure, either leases have been accepted or purchased through the bankruptcy process or the tenants have come out of bankruptcy and kept the leases.

Speaker 4

So there's been a very little impact from the tenants in the news.

Speaker 7

Okay, got it. Any update on the Coles backfill at Fallbrook? I think there was potential for rent to commence either very late this year or early 2025 to the extent that you were able to get a lease signed. Is there any update around the progress there?

Speaker 4

Sure. Yes. I think at this point during the Q2, we signed leases totaling about 45 1,000 square feet of available anchor space. There's that leaves a pending 134,000 square feet remaining. Currently have a signed LOI in the largest space, the coal space you're referring to, which is 115,000 square feet.

Speaker 4

We continue to work to finalize the lease with a prospective tenant who is a long term national tenant of ours. And the remaining 19,000 square feet, we are contemplating right now splitting the space into 2 and we're in discussions with 2 prospective tenants on that space.

Speaker 7

All right. Thank you.

Speaker 4

Yes.

Operator

Thank you. One moment for our next question. Our next question is coming from Craig Mailman of Citi. Your line is open.

Speaker 2

Good morning, Craig. Good morning.

Speaker 8

Hey, how are you guys? Just want to follow-up on just want to follow-up on the anchor leasing opportunities, Stuart. I know you've been excited to finally start to get bigger chunks of this back without extension options here. Can you just give us a sense, at least in your early talks or analysis here, I know it's hard to give exactly where you think rent spreads could be, but some type of viewpoints maybe where OCRs on some of these are and what that could indicate at least in terms of what you think rents could go on some of these renewals?

Speaker 2

Sure. And you want that broken down anchor versus non anchor or just around the anchor?

Speaker 8

Just around the anchor because that I mean both too. I mean I'm just trying to get a sense, you guys are impacted a little bit this year on the same store side by some timing issues around commencements on signed leases. As we're looking into next year, it feels like you have an opportunity to maybe get some premium spreads on what's leasing and then you get the benefit of the commencement of some of these leases. So just trying to get a sense as we look into 'twenty five for all the strips where growth could reaccelerate a little bit without trying to get guidance out of you, but just sort of the pieces to maybe build up to what kind of same store could look like next year?

Speaker 2

Sure. Well, currently in terms of what we have left with the anchor vacancies, the mark to market on the leases that we currently are working on are quite large, because starting rents on these leases were in the mid single digits. So assuming that these leases do get executed, which we are anticipating over the next 30 days, the mark to market is extremely strong. Going forward on Anchor Spaces, as you look at what Rich articulated over the next year looking into 2025, again, a number of these leases are well below market, but on a blended basis, I would tell you that trend is probably going to be higher as we move into 25 on the anchor side. In line space, it will vary depending on what is expiring and where.

Speaker 2

But in general, I'm anticipating that trend to also move higher as we get through the balance of this year and into 2025. As Rich articulated, the strength the underlying strength and demand that we're seeing on the ground on the West Coast continues to be extremely strong. So as we look to the balance of the year and into 2025, we're expecting pretty strong growth on both sides of that equation.

Speaker 8

So I mean, if you guys did blended spreads of about 7% so far this year, Could that blend up into the low teens next year on maybe 10% of your total GLA? Is that sort of a decent way to think about it? And then as the drag burns off this year, which, Mike, I don't know if you want to give a sense of what the 1% to 2% same store would have been or what the drag on that is by the commencement timing. I mean, are we talking about same store potentially above 4% next year, assuming everything hits? Or are there other kind of puts and takes that we should think about as we're looking into 2025?

Speaker 2

Yes. Again, we're anticipating that those spreads will continue to move higher. In terms of same store, that will the benefit of what we're now leasing or have leased this year really comes into So So you'll get some benefit next year from what we're doing now from a same store perspective. The real punch though will come in 2026 obviously, because you're going get a full year of a run rate in terms of the NOI. But same store in 2025 should be stronger than 24 given the fact that these spaces that we're finally leasing that did come pretty quickly after these anchors vacated that real benefit hits late next year and certainly into 26% at this point.

Speaker 2

We're anticipating same store moving back up to the 3% to 4% range next year, maybe a bit higher depending on how fast we can get these tenants open. And

Speaker 8

then one last one for Mike. On the debt refinances, kind of where do you think spreads are today on a term loan and unsecured debt? And then also, as we think about the swaps that mature in August, should we just assume kind of back half of the year about 150, you revert back to kind of the mid-6s where the term loan is just from a modeling perspective?

Speaker 3

Well, first of all, on the swap side, our goal is to refinance the term loan possibly at the same time we refinanced the December bond. So we're not intending to replace the swaps. So when those revert to floating rate on the term loan, you're going to be in the lows like say 6.3, 6.4. But looking at where the tenure is today and with the credit spreads for us, we probably price the deal around 6. So you're going to get some pickup there.

Speaker 3

So we're just kind of keeping an eye on the overall market to refinance obviously the 24 months and the term loan potentially at the same time and bring that down to about high 5% to 6% range.

Speaker 2

And if we do finance that, if I'm correct, Mike, we did have nothing due on

Speaker 3

our balance sheet for several years. Correct. We just have one mortgage next year, which is not meaningful. Yes.

Speaker 8

Great. Thank you. Yes, sir.

Operator

Thank you. One moment for the next question, please. And our next question will be coming from Juan Sanabrea of BMO Capital Markets. Your line is open.

Speaker 2

Good morning, Juan. Good

Speaker 8

morning. Just following up on the line of question from earlier, any color you can give on one of the Big Lots stores, I think, in Lacey that was on the closure list? Any potential term fees that you'd expect or any insights on to when that may close and potential backfills?

Speaker 4

Sure. Yes. As you know, we only have 1 big lots in the portfolio. And as of now, we've not heard officially from big lots directly, but we do understand that the location we have up in Lacey, Washington is a potential closure. That center has been 100% leased for the past 7 years and we already have offers on the space and the rent is substantially below market.

Speaker 4

So between any termination fee and the uptick in the rent, we don't see this as a big risk.

Speaker 8

And how much term is left on that just to get a sense of the quantum of the potential term fee?

Speaker 4

There's about they just exercised an option I think about a year ago. So I think there's about 4 years remaining. The store has just been renovated. It's in shape. We expect we can turn this over with limited TI dollars and very little downtime.

Speaker 8

Okay, great. And then just on the restaurants just in general with the increase in minimum wage in California. I guess what are you seeing broadly with regards to demand or health of the tenants? I mean there was some news about a potential bankruptcy on MOD Pizza that subsequently was bought after that kind of news broke. So just curious on what you're hearing from tenants and particularly just the health with higher costs running through their income statements?

Speaker 4

Sure. I mean, clearly, it's something that the tenant base brings up, but they'll use any angle to negotiate on, right? So it definitely comes up. Obviously, Mod Pizza highlighted that. We only have 6 Mod Pizzas in our portfolio that account for less than 0.3% of our total base rent.

Speaker 4

They're all very modern spaces. As you said, it looks like that one's going to get resolved. But from our perspective, the prices have to go up in order to cover this, but it's really not having a huge impact on the rent because our properties are highly leased in very dense markets that people buying for restaurant spaces, we normally would have multiple LOIs than anything that came available.

Speaker 8

Thank you very much.

Speaker 2

Thank you.

Operator

Thank you. Thank you. One moment for the next question. And our next question will be coming from Jeffrey Spector of Bank of America Securities. Your line is open.

Speaker 2

Good morning, Jeff. Good morning, Jeff.

Speaker 9

Hey, guys. You got Andrew Reel on for Jeff this morning. Thanks for taking our questions. Just one, last quarter, I believe you had $68,000,000 of dispositions under agreements. In July, you sold the one property for 57,000,000 dollars Is that $11,000,000 delta still under agreement to be disposed or something changed there?

Speaker 2

Yes. We still have a couple of assets under contract. We do expect potentially one to close in August, the month we're in, as of yesterday. But the answer is yes. We do still have a couple of dispositions on tap and we expect at least one maybe both to close certainly by year end, about another $25,000,000 of proceeds, which we'll use just to pay down debt on the balance sheet with.

Speaker 9

Okay. Thanks. And was that July disposition still at a low 6 cap rate?

Speaker 2

The one that we just sold? Yes. Yes. Low 6s, Jeff.

Speaker 9

All right. Thank

Operator

you. Thank you. One moment please for the next question. And the next question is coming from Wes Golladay of Baird. Your line is open.

Speaker 10

Good morning, John. Good morning. Hey, good morning, everyone. Just following up on that last question, can you tell us what asset was sold?

Speaker 2

The asset that was sold, the center that we sold was located here in the San Diego market. And again, the exit cap rate was in the low 6s. It was in ocean side.

Speaker 10

Okay. Okay. That helps. Going back to the 8 potential CNS properties, do you have any rights as a landlord? Maybe like a termination fee or okay.

Speaker 2

Can

Speaker 10

you elaborate on that?

Speaker 2

Sure. Yes, we do have a number of leases that we do have the right to terminate if this transaction were to go through. We're currently in discussions with Kroger and Albertsons in terms of what we may want to do with these leases. And currently, those discussions continue to take place and we are making some headway in terms of where what we might do with these leases long term. The good news is a number of these leases are in the best properties that we own, very high quality assets and the rents are quite low.

Speaker 2

But the situation is still very fluid. So we'll continue to monitor things and sort of go from there in terms of where all this might end up.

Speaker 10

Okay. And then hopefully the multifamily industry continues to bottom out here and hopefully goes upward. I'm just curious if you can give us an update if you've seen any more interest in your potential outparcel sales? And then more specifically, is there an update at the Crossroads? I believe they were contemplating an expansion, but not sure where that went.

Speaker 10

Yes.

Speaker 2

I mean, at the Crossroads, we continue to in terms crossroads, we've completed all the work in terms of pulling the construction permits. However, we're waiting to do so until the market conditions get a bit more favorable. In light of our discussions, the city who is a big supporter of the project granted us a 2 year window for pulling the permits. In addition, the city has been proactively engaged about increasing the development density at the crossroads by a lot, specifically for additional multifamily in the future. And they're keenly interested in the Crossroads given the center's prime location within the city of Bellevue.

Speaker 2

But what's really happened at the Crossroads in terms of densification over the last couple of months as we look forward in the next 5 to 10 years is going to really create a lot of value long term as it relates to the fact that property is going to be designated subject to city council approval, a high density now for the whole property. So we're very excited about that in terms of what's happened there over the last several months.

Speaker 10

Got it. And then you did make the point about the anchor leases having no renewals and big mark to markets there. Just curious if you're going to also get better terms on reimbursements?

Speaker 2

Yes. I mean, we look

Speaker 4

at the entire lease when we have the opportunity to plug any leakage as it relates to the triple nets to address any restrictions or co tenancies that may be in those leases. We look at the lease wholesale when we have the opportunity, absolutely.

Speaker 10

Okay. Thanks everyone.

Speaker 2

Thank you.

Operator

Thank you. One moment for the next question. Our next question will be coming from Hongliang Zhang of JPMorgan. Your line is open.

Speaker 2

Good morning, guys.

Speaker 5

Hey. I guess I have

Speaker 8

a question on the digital kitchens that you mentioned on the call. Do you have any studies or any data around the possibility of those customers cross shopping in your in the other source of your shopping center?

Speaker 4

No specific data about cross shopping that I can give you on this call. But these digital kitchens are not just commissary kitchens. These really are just mostly to go type kitchens where people are ordering on the app and coming to pick them up. Obviously, they also do DoorDash and all the other delivery services. But it is bringing customers to the shopping centers when they're picking up their orders.

Speaker 4

And we expect that someone will pick up their groceries at the same time that they're picking up their dinner.

Speaker 7

Got it. That makes sense. Thank you.

Speaker 4

Yes.

Operator

Thank you. Our next question will be coming from Linda Tsai of Jefferies.

Speaker 2

Good morning Linda.

Speaker 11

Good morning. Just a follow-up to some of the other questions. So for the signed LOI for Kohl's, the 115,000 square feet, and then I know you're working on the remaining space which you would split. What's the earliest rent could commence based on the info you have today?

Speaker 2

Right now, it's an extensive TI pretty extensive TI package, which is why it's taking a touch longer to get to the executed lease, but we want to make sure we cross all the Is and Ts as it relates to the construction. We're anticipating if the lease gets executed in the next 30 days that we're about, I would tell you late next year, 4Q of 2026 is it looks like when Redwood commence sorry, of 25, not 26.

Speaker 11

Got it. And then for the big lots in Lacey, what would be a good potential backfill And then is a lease term fee incorporated in your current guidance?

Speaker 2

I didn't get the answer.

Speaker 4

Can you repeat the first part of the question?

Speaker 11

Sure. Just like a good potential backfill for that big lots and then do you have a lease term fee in your guidance?

Speaker 4

No, we don't have the termination fee in our guidance. No, no.

Speaker 2

No. No termination fee. And again, as Rich said, we haven't had a formal rejection of the lease either.

Speaker 4

So But yes, the minute it hit the news, our leasing team went to work. So when they were excited to hear that it's a potential to get it back because they've already received good interest on the space long ahead of anyone talking about us getting the space back. Right.

Speaker 3

And I think our bad debt guidance range would cover that kind of a downtime anyway.

Speaker 11

Got it. And then Rite Aid announced more closures last month. Could you just give us an update on anything that might be impacting your portfolio?

Speaker 2

Sure. Yes. No impact in terms of the closings. Our Rite Aid continued to operate. Sales continued to gain some traction coming out of bankruptcy.

Speaker 2

And we're hopeful that we should hear any day that things are done. But right now, no update in terms of our Rite Aid as it relates to where we were last quarter. The only other thing to talk about is Kroger has we're getting close to signing the very small Rite Aid we got back, and Kroger is the one who's taking that space. And we're very excited about the fact that Kroger has stepped up to again continue to build on this location. But more importantly, the downtime in rent, no TIs and the downtime in rent will be very short given the fact that Kroger is just expanding next to their current store.

Speaker 11

Thanks. And then just one last one on Walgreens announcing potential store closures. Any news or impact to your portfolio?

Speaker 2

Yes. I mean, we have very little exposure to Walgreens. In fact, the center we just sold had one of our Walgreens in it. So that's come out of our portfolio over the last quarter. But Rich?

Speaker 4

Yes. We have 4 Walgreens in the portfolio. As Stuart at the end of the quarter, as Stuart touched on, we sold one of those locations. Another one of those locations had been previously sublet by Walgreens to Dollar Tree. We're anticipating doing a direct lease with Dollar Tree on that location, which will leave us with 2 Walgreens up in the Pacific Northwest.

Speaker 6

Thank you.

Operator

Thank you. One moment for the next question. And our next question is coming from Paulina Rojas Smith of Green Street. Your line is open.

Speaker 2

Hi, Paulina. Good morning. Good morning. Good early morning for you by the way.

Speaker 5

Yes. Same as for you. So we're all in the same boat here. My question is, I'm looking at your disclosure new leases for anchor space. And I know you only signed a few leases, it's not representative really of your portfolio, but I'm still intrigued by the low ABR per square foot around $10 So can you provide some color on the space, markets, location or type of tenant to better understand the lower certainly lower than in play average in place rent here?

Speaker 4

Aliyah, are you referring to the anchor renewals during the quarter?

Speaker 5

Both really because let me see if I have them in front of me. If I remember well, both yes, the one new leaf and core space has an initial rent of $10 per square foot and for renewal, it's also around $10 $11 per square foot. So what type of tenants are paying such low rent today?

Speaker 2

Well, as it relates to the anchor renewals, in many cases, the anchor tenants are exercising options. In some cases, those options are flat. And in some cases, those leases were initially structured as ground leases where the anchor tenant actually built the space, which gave them the very low rent. And that's the rent we underwrote when we bought the property. So there is some drag on the renewals as it relates to options that may already be in place that are below market for what we could get for the space and we could get it back.

Speaker 2

And then in terms of new leasing,

Speaker 4

I mean, it really just depends on the whole package of what the deal is structured, whether how much TI we're putting into it, how much

Speaker 2

the tenant is able to pay. But on average, we're getting more than what we were previously for the spaces. The anchor spaces, if you were to look at them in total throughout the portfolio are below market on average.

Speaker 5

Okay. And then big picture, how would you compare demand or the market rent that you have observed in market rent growth that you have observed in the last few years for anchor and shop space. Is it fair to say that the strength of market rent growth has been more strongest for shop space?

Speaker 2

Well, yes, typically shop space is going to be where you're going to capture a lot of that higher rent just because a lot more leases. And if you have more leases that are expiring without any options, then you can capture that space quite quick that rent increase quite quickly. I don't know if you want to add anything to that, Rich.

Speaker 4

No, I don't think so.

Speaker 5

And a follow-up about the rights that you mentioned or consent for the divestiture of some leases, some anchor leases. How does that work? So how does it apply to, for example, subleases? You also have, in those cases, the right to reject Kroger subleasing the space?

Speaker 2

Yes. I mean, I think as I articulated, a number of these leases are very old leases. So when an anchor tenant goes into a transaction, the one of the depending on the lease, of course, it gives the landlord the ability to recapture the space if the net worth of that tenant doesn't meet a certain threshold or we have the right to recapture the space if a merger is done, if there's a big transaction done.

Speaker 3

There's different variables. But correct me if I'm wrong, I don't think any of the 8 identified are actually sublet. They're actually being operated by Albertsons and Kroger,

Speaker 2

right? Correct. Currently None

Speaker 3

of them have been sublet.

Speaker 2

No, no, no. Nothing's been sublet. They're either operated by Kroger 3 or Kroger and the balance are Albertsons. Direct leases. Right.

Speaker 2

So again, every circumstance and every lease is going to be different. And we're in the midst now of having that conversation around the ability to either amend the lease or maybe do more than just that. So again, situation is still very fluid. So this could be a move conversation if the transaction on August 26 gets voted down by the appellate court. So I think we'll have more clarity next quarter as it relates to what's going on these leases.

Speaker 2

But the good news is, not a lot of leases from our perspective when you look at the total amount of exposure.

Speaker 5

Thank you. And then a last one. So California in general used to command lower cap rates, a premium market. Do you think that's still the case today?

Speaker 2

Yes. When I look at capital and where capital wants to be in terms of the product that we own and operate, again, dominant grocery drug anchored assets in very affluent dense markets, Demand from that capital is as strong in California or the whole West Coast as it is anywhere else in the country. And in some cases, even stronger depending on the circumstances of the real estate and the attributes of the real estate. So, yes, California is still on a lot of people's radar screen.

Speaker 5

And if you compare your markets with perhaps Austin or some Florida markets that are very hot today, how do you think the cap rate compares there for similar products?

Speaker 2

Well, I'm not as familiar as Austin or Florida as I am with the West Coast. I certainly track those markets, but I would tell you that cap rates historically have been lower on the West Coast. And I believe as we continue to see some transactions in the market, we're certainly seeing as much demand and cap rates that are as low on the West Coast as they are anywhere else.

Speaker 5

Okay. Thank you very much.

Speaker 4

Yes.

Operator

Thank you. This does conclude today's Q and A session. And I would now like to turn the call back over to Stuart for closing remarks. Please go ahead.

Speaker 2

In closing, thanks to all of you for joining us today. As always, we appreciate your interest in ROIC.

Speaker 7

If you

Speaker 2

have any additional questions, please contact Lauren, Mike, Rich or me directly. Also, you can find additional information in the company's quarterly supplemental package, which is posted on our website as well as our 10 Q. Thanks again and have a great day everyone.

Operator

Thank you everyone for joining. You may now disconnect.

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Earnings Conference Call
Retail Opportunity Investments Q2 2024
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