Q1 2022 Retail Opportunity Investments Corp Earnings Call
Ladies and gentlemen, this is the operator.
Today's conference is scheduled to begin momentarily until that time your line little bit They said music hold until the conference begins.
Again, ladies and gentlemen, this is the operator today Scott Francis is scheduled to begin momentarily until that time.
They said music hold until the conference. Thank you.
[music].
Welcome to retail Albright.
2022 first quarter conference call participants are currently in a listen only mode.
Knowing the Companys prepared remarks, the call will be opened up for questions now I would like to introduce Lori Smith.
Company's Chief Accounting Officer.
Thank you before we begin please note that certain matters discussed in this call today constitute forward looking statements within the meaning of federal Securities laws. Although the company believes that the expectations reflected in such forward looking statements are based upon reasonable assumptions. The company can give no assurance that these expectations will be achieved.
Such forward looking statements involve known and unknown risks uncertainties and other factors, which may cause actual results to differ materially from future results expressed or implied by such forward looking statements and expectation.
Information regarding such risks and factors as described in the company's filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K participants are encouraged to refer to the company's filings with the SEC regarding such risks and factors as well as for more information regarding the company's financial and operational results the company's filings.
Can be found on website now I'll turn the call over to Stuart has the company's Chief Executive Officer for Thanks, Laurie and good morning, everyone.
Here with Lori and me today is Michael Haines, our Chief Financial Officer, and Rick <unk>, Our Chief operating officer.
Pleased to report that we're off to a terrific start thus far in 2022.
Demand for space continues to propel our business forward.
Capitalizing on the demand during the first quarter, we leased over 416000 square feet, which is the second most active quarter on record for the company in terms of first quarter leasing activity.
Additionally, we are capitalizing on the tenant demand to drive rents higher.
We achieved double digit rent growth on same space, new leases signed during the first quarter in terms of renewals. We also achieved solid increases in rent.
With respect to acquisitions, we are off to a solid start as well.
We recently acquired two grocery anchored shopping centers, both located in the Pacific northwest totaling $36 million.
The private seller had debt on the properties that was maturing soon so they were seeking a buyer who can underwriting commit quickly with no financing contingencies.
Given that we knew both shopping centers extremely well having owned them back in our Pan Pacific days, we were in a terrific position to respond to the seller's needs and capitalize on our great opportunity to acquire two terrific shopping centers.
One of the Portland, one of the properties is located in Portland market, specifically the shopping center is well situated in the heart of an affluent densely populated community.
The center is anchored by Walmart neighborhood market.
Additionally, the seller is in the process of developing a freestanding drive through pad at the shopping center.
Once completed we expect to purchase the pod.
The second shopping center is located in the Seattle market.
It too is well situated in an affluent densely populated community.
The shopping centers anchored by Albertsons.
In addition to these two acquisitions. We also have another grocery anchored shopping center currently under contract for 24 million located in the San Francisco market, specifically in the East Bay area in a very densely populated community.
The property has been owned by the same family for 30 years, they actually built the center.
It's never been on the market, which is exactly the type of off market transactions, we seek out where opportunities to acquire a generational irreplaceable real estate.
Importantly, instrumental in our ability to get this deal. The family is personally close to individuals that we had purchased a number of properties from previously who confirmed our longstanding track record and reputation in the marketplace as a knowledgeable and reliable acquirer.
Together these three acquisitions totaled $16 million with a blended going in yield just north of 6%.
Looking ahead, there are a number of releasing and repositioning opportunities, which we intend to capitalize on that should enhance the underlying value going forward.
Importantly, all three of these shopping centers are within strategic proximity to a number of our existing shopping centers in each of these markets, which will enhance our ability and flexibility in terms of maneuvering tenants continuing to fully capitalize on the strong demand for space now.
Now I'll turn the call over to Michael Haines, Our CFO , Mike. Thanks, Stuart for the three months ended March 31, 2022, the company had $76 5 million in total revenues and $26 7 million in GAAP operating income as COO.
Compared to $69 2 million until revenues and $22 5 million in GAAP operating income for the first quarter of 2021.
GAAP net income attributable to common shareholders for the first quarter of 2022 was $11 6 million equating to nine cents per diluted share as compared to GAAP net income of $7 4 million or <unk> <unk> per diluted share for the first quarter of 2021.
Same center net operating income on a cash basis for the first quarter of 2022 was $49 5 million as compared to the same center NOI of 46 million for the first quarter of 2021, representing a seven 5% increase.
In terms of funds from operations for the first quarter of 2022 episodes totaled $36 2 million equating to 28 cents per diluted share as compared to <unk> 31 million or <unk> 24 per diluted share for the first quarter of 2021.
There are three items worth, noting that helped drive our first quarter results first GAAP based rent during the first quarter came in about $2 million higher than our budget.
Other income for the first quarter totaled $1 4 million the bulk of what's being associated with one tenant where we recaptured the space early and released it to a new tenant at a higher rent.
The third item was lower than expected bad debt, we had budgeted bad debt to continue being a bit elevated during the first half of 2022, and then returning back down to around our historical average in the second half of the year next reality for the first quarter bad debt totaled 628000, which is fully in line with our bad debt before the pandemic, if not a touch lower than our historical.
Leverage.
Turning to the company's balance sheet and financing activity during the first quarter. We retired early no penalty two mortgages totaling $23 $5 million with paying off the two mortgages, our unencumbered GLA as a percent of our total GLA increased to a new record highs 96, 5% as of March 31.
Taking into account the three shopping center acquisitions, all of which are debt free our unencumbered GLA will increase further.
Additionally, today, we had just two properties out of the entire portfolio with mortgage debt totaling less than $62 million, which equated to only four 6% of our total debt outstanding as of March 31.
In terms of equity year to date, we have raised $23 4 million through our ATM issuing in total approximately $1 2 million shares including issuing about 700000 shares during the first quarter and approximately 500000 shares early in the second quarter.
Going forward our goal is to continue raising equity generally and separate our acquisition activity depending upon market conditions.
At March 31 to come as total market capitalization was approximately $3 9 billion.
With approximately $1 3 billion of debt outstanding equating to a 34% debt to total market cap ratio.
Of the $1 3 billion of debt 95, 4% as unsecured the vast majority of being fixed rate with a well lettered maturities schedule, including nothing return for next year and a half.
In terms of our credit facility, we continue to maintain a limited balance specifically at March 31, only 10 million was outstanding on our $600 million unsecured line.
Lastly, our financial ratios continue to move steadily towards returning to our historical pre pandemic levels for the first quarter interest coverage was three six times up from three two times a year ago. Additionally, net debt to annualized EBITDA was six four times for the first quarter as compared to seven three times a year ago now I will turn the call over.
Shovel, our CFO rich thanks, Mike Echoing Stuart's in Mike's comments leasing activity during the first quarter exceeded our expectations.
While leasing during the first quarter following the holiday season traditionally takes a bit of time to ramp up that was not the case this year.
As Stuart indicated our leasing activity in the first quarter proved to be the second most active on record for the company. In fact, we were just shy of surpassing the record that we achieved four years ago in the first quarter of 2018.
The demand for space across our portfolio continues to be broad based ranging from supermarkets and other necessity based and off price anchor tenants looking to expand and increasingly becoming more and more proactive in seeking out prime locations. Many of which are tenants that already have a considerable presence in the market and are now seeking to enhance their.
Dominance.
In terms of inline space healthcare wellness boutique fitness and restaurant tenants, especially quick serve restaurants continue to lead the charge.
Additionally, among national tenants, we're seeing a growing trend of long time traditional brick and mortar tenants that in recent years had reduced their number of stores now returning with completely new more tailored merchandising strategies and looking to expand their presence in key markets as they roll out their new concepts.
We continue to work hard to make the most of the strong demand to enhance the competitive strength and underlying value of our portfolio.
To take you through our first quarter results as of March 31, our portfolio lease rate stood at a very strong 97, 2% leased up from 96, 9% a year ago.
Breaking that down between anchor and non anchor space, we continue to maintain our anchor space at 100% leased and in terms of non anchor space. We ended the first quarter at a solid 93, 9% leased.
As Stuart noted during the first quarter, we leased a total of 416000 square feet.
Bulk of our activity centered around tenant renewals, specifically renewing anchor tenants.
At the start of the year, we had seven anchor leases scheduled to expire during all of 2022.
During the first quarter utilizing our longstanding proactive hands on approach, we successfully renewed five of the seven anchor leases.
With respect to the remaining two one has indicated that they intend to renew and the other anchor space that was scheduled to expire later this year, we've already re leased at a higher rent to the adjacent longtime grocer, who is seeking to expand their store.
In terms of non anchor space renewals. We also had an active successful first quarter renewing 61 non anchor leases in total.
And interesting and positive trends that it's starting to take shape with a growing number of existing tenants is that theyre looking to extend their leases with longer terms beyond with their renewal options typically call for and longer than what tenants are typically soft historically.
This was especially the case with our key grocer tenants.
We are capitalizing on this to drive renewal rents higher and to achieve stronger more advantageous lease terms overall.
During the pandemic the uncertainty in the marketplace temporarily translated into renewal rent increases that were below our historical average.
Today with the pandemic uncertainty now largely behind US we are quickly returning to achieving renewal rent increases in line with our historical rent growth.
In fact for the first quarter renewal rents increased by over 7% on average.
In terms of new leases. We also had a solid first quarter leasing over 94000 square feet of space, achieving a 15, 8% increase in same space base rent.
Lastly, with respect to leased versus build at the start of the year the spread stood at four 7%.
Waiting to $10 $6 million of rent from new leases, where the new tenants had not yet taken occupancy and commenced paying rent.
During the first quarter, we were successful in getting over $2 million of the 10, six open and operating which is the largest dollar amount to commence during any quarter dating back to 2019.
We view this as another important and positive trend that we hope to build on.
Taking into account new leases signed during the first quarter at March 31, the spread stood at four 6% representing $9 $6 million of rent that has not yet commenced we currently expect the bulk of the $9 6 million will steadily come online as we move through the year.
Looking ahead base.
Based on our first quarter leasing activity and the favorable trends that are taking shape, all being driven by the ongoing demand for space. We believe that 2022 has the potential to be a strong year in terms of leasing.
Now I will turn the call back over to Stuart.
Thanks Rich.
To briefly expand on Rich's comment regarding looking ahead. In addition to continuing to capitalize on the strong leasing trends to drive our business going forward. There are also working hard to grow our portfolio capitalizing on our long standing relationships.
While the acquisition market is highly competitive today, perhaps more so now than ever before in our nearly 30 years' experience as more and more investors continue to aggressively pursue grocery anchored shopping centers on the open market.
Our pipeline of potential off market acquisitions continues to steadily build.
We currently have several compelling deals in the works.
To acquire truly irreplaceable grocery anchored real estate.
Have a wealth of opportunities to enhance value going forward.
We've had our eye on these properties and have been patiently yet persistently pursuing the sellers for a long time and we are now hopefully moving towards finally, bringing them to fruition.
In short we are excited about the various ongoing opportunities and look forward to making the most of them in the coming months and continue to build value.
Finally in light of our first quarter performance together with what we have in the works on the leasing and acquisition fronts.
We have raised our <unk> guidance range for 2022% to between $1 four and $1 10 per share.
Now we will open up your call for questions.
Operator.
Thank you and participants as a reminder to ask a question you will need to press star one on your telephone keypad again Thats Star then the number one on your telephone. Please go ahead. So we draw your question breast are bad.
Your first question comes from the line of Greg Schmidt. Your line is now open.
Good morning.
Good morning.
I just wondered.
Listening to your comments.
And I know already you are on a pace to fall within your guidance range of acquisitions do you think that the acquisitions in 'twenty two might be backend loaded.
I'm looking at the pipeline currently as it stands today.
I think the acquisitions will come as we have sort of modeled.
On a sort of on a pretty.
Straightforward measurement.
Hum.
Depending on what that number might be but it should be mostly backend loaded quarter after quarter till the end of the year.
Great and then I Wonder if you could give us an update on your densification initiatives.
Sure we continue to make steady progress with each of the projects Craig including continuing to be on track to break ground on crossroads later this year.
Great. Thank you.
Thank you.
Your next question comes from the line of Michael Bilerman. Your line is now open.
Good morning.
Good morning, guys.
Stuart just on sort of the acquisition side.
You talked about irreplaceable assets and Mike.
Here's expenses.
Now I recognize your relationships and structuring.
Whether it be with unit.
Or other mechanisms allows you to be competitive relative to market cap rates, but can you talk a little bit about sort of pricing levels on this pipeline and whether you are would be eager to sell more right your guidance.
$30 million to $50 million of just those relative to call it $100 million to $300 million of acquisition.
It means youre going to be raising more capital through equity in.
I think you were able to tap the market extraordinarily well given where your stock price was during the first and early part of the second quarter at $19 50.
But just sort of help me walk through some of those comments.
Sure.
Well from a pricing perspective, we've modeled about a five cap.
Cap rates, five and three quarter cap rate on acquisitions throughout the year.
And depending on the individual deal.
Cap rates may be a bit higher or a bit lower for us as you probably know the most important thing is what can we do in terms of creating value when we buy these assets.
In terms of selling assets.
We have geared up and will be taken to the market shortly about $25 million to $30 million in in shopping centers.
We are also looking at another $30 million behind that.
Primarily the two densification projects.
In Novato and pinole.
Subject to the strength of this pipeline in terms of how it builds.
And obviously our stock price, we will continue looking at other opportunities to generate capital, which means potentially selling more assets. So as we continue along building.
The pipeline and it's really going to be a combination of both it's going to be a combination of looking at the pipeline and the size of that pipeline.
Definitely moving a number of assets to market, probably totaling about $50 million to $60 million and at the same time, depending on our stock price will tap the ATM.
And then as you think about you made the comment about re buying some pan Pacific assets Reminding me Stewart out of the 90 or so you have today, how many are old Pan Pacific asset.
I guess, how many more could you get your hands on.
If you were able to.
Currently we own four Pan Pacific assets that we've bought very recently.
I'm very excited to have these assets back in our hands.
We live with them for many years.
When we sold Pnp as you probably know Mike we had 241 assets.
Yeah.
And.
We are constantly looking at the opportunities of acquiring more.
But at the same time, a number of assets back in the Pnp days were in more secondary markets, whereas the assets today that we own are in the metro markets. So we're focused on what's out there from what we owned and operated under Pnp, but were still very selective in terms of what we.
We're buying and more importantly, if we're buying the re buying and re owning these assets they've got to have some juices, you might say or the ability to create value.
Okay and then just finally started yesterday as we think about sort of.
Funding the balance of the acquisitions should we assume then the plug is just common equity to keep leverage in check at these levels or are you willing to take leverage up.
In order to round out the acquisition volumes.
No we will continue to be focused on leverage.
Obviously with net debt to EBITDA being one of the bigger metrics.
So we've done a very good job in turning that.
That metric down.
And depending on how the pipeline goes as well as the sale of the assets will continue to move that number down to give us the firepower to keep doing what we do best and that is grow this company smartly.
And create a lot more value for shareholders.
Thanks George.
Thank you.
Your next question comes from the line of Todd Thomas Your line is now open.
Good morning, Todd Hi, good morning.
Stuart just following up quickly on your comments there around dispositions.
Are you contemplating more dispositions I guess beyond what's in the guidance for 'twenty two as we look ahead over the next couple of years.
Is there more pruning to be done or are you really thinking about dispositions primarily to fund future investments.
That might be more attractive or have favorable growth profile.
We will continue to look at pruning.
Where the opportunity arises and mostly focused on internal growth obviously in these assets.
You know, making sure that.
That if there if the internal growth isn't moving down that we will take advantage of the current market conditions.
So it's a combination of looking at it really getting finally, realizing the value on the Densification projects.
As well as churning assets that don't have much internal growth. So the answer. Your question is yes, we will continue to look at funding this pipeline.
And we May increase our target as we continue to get through the year, depending on the other side of that equation in terms of growing the company.
Okay, and then I think you said that for the year.
As it pertains to guidance you modeled about a five and a half to five and three quarter percent.
Cap rate.
On on investments.
And I think in your prepared remarks, you said that you achieved 6% cap rates on acquisitions completed in the first quarter. Just curious if you could talk a little bit about pricing trends, whether or not youre seeing any changes at all to pricing just given the increase in borrowing costs and whether that's having an impact at all in.
In your markets.
Look ahead for future investments.
Sure.
Well I mean.
You know the current environment is competitive.
There's a ton of capital and buyers looking to acquire this segment of retail it's certainly the most sought after segment today.
Cap rates on the West coast.
Pending on whether Youre looking at one off assets or portfolios or certainly some of the lowest cap rates, we've seen in a long time.
I'm not going to close deals, but I think Todd Youre aware of what's in the market or what's been announced more recently.
We're seeing these assets trade sub fives.
But.
As a team with the relationships that we've got on the ground we've been very successful in finding.
Properties that are accretive the day, we buy them given our cost of capital and then more importantly have a nice runway in terms of building growth. So it's hard to predict where the market is going to go at this point, but what I can tell you is that we've not seen any movement in the market from a cap rate perspective on transactions that have been done.
Widely marketed cap.
Cap rates are still at the levels they were at.
What we've seen over the last several months.
Okay.
Any indication at all.
From from investors or from brokers that you might talk to that.
Pricing for for.
For deals, though are for larger portfolios perhaps.
Institutions might might be.
Demanding or commanding kind of higher higher yields going forward as the sub 5% cap.
Cap rate that we've been maybe hearing about or.
Talking about a little bit is that still.
Achievable today in the market.
If there is a high quality collection of assets that comes to market.
Yes cap rates have not moved.
They really have been at the same place they have been over the last six to nine months.
I will tell you we are seeing a bit of an opportunity out there in terms of some of the private buyers pulling back given the interest rate environment, and that's providing that sort of a window of opportunity from our perspective.
But the good news is that our pipeline continues to build and.
But pricing for widely marketed deals for the quality of assets that we own and we buy have not moved.
Okay alright, thank you.
Your next question comes from the line of <unk>. Your line is now open.
Good morning, good morning.
Just wanted to follow up on top line of questioning, but maybe from a different perspective.
I was hoping you guys could comment on your own cost of funding and how thats changed over the last.
Six months or year to date.
And how that.
Impacts your ability to pay.
Kind of mid five cap rates for assets.
What the spread.
To your funding costs are and how that's evolved.
Well I mean in terms of our cost of capital or cost of funding.
On the equity side, obviously that that has gotten better for us.
And that's provided US has provided a nice runway in terms of executing our plan on the debt side, Mike I don't think really anything has moved there either nothing material in there we're still looking at a revolver at very low cost of debt capital. So yeah.
And then more importantly, the credit agencies have certainly endorse our business plan and have endorsed managements focus on delevering the balance sheet. So that's certainly kept our cost of debt capital in a very good place.
Or did you guys have to go out and raise new 10 year kind of permanent financing instead of doing it on the line I guess is where im.
Trying to get to.
The good news is we don't have anything maturing in the near term. The next thing is not until the end of next year, but obviously, we're keeping a close eye on the industry environment and seeing where that's going there's a lot of variables out there that can impact that between now and next year. So.
And it's hard to say, where you could price something today, but thats.
So it's hard to say.
Okay, and then I was just hoping.
On the guidance front straight line rents.
Amortization of above and below market rents and shops.
How much more opportunity is there to move rents from cash to GAAP too.
Maybe further boost.
So and kind of where are you in that process of reassessing that.
And what if anything flew flowed through the first quarter numbers that you've kind of hinted at.
Alright gaps.
Net income I think Michael in your prepared remarks was stronger then.
Our base rents than you'd expected.
Well, it's kind of difficult to predict.
To project when we set out with initial guidance at the beginning of their it's based on our property level budgets and Basil and Furthermore, now that we're back into acquisition mode, that's going to be a contributor to GAAP rents as well as straight line rent based on the leasing velocity and so until you actually cut the deals.
Or buy an asset and go through the purchase price valuation exercise its really hard to know what that number is going to be so we're going have to revisit that likely every quarter going forward as we continue the acquisition pace and the strength of the leasing demand.
And one just last quick one for me you mentioned kind of other income.
$1 million benefit.
That just the lease term fee that you were able to capture I just wasn't clear on what that was.
Yes, essentially yes, I mean, if you look at our other income line item on an annual basis going backward generally between $3 4 million a year for those.
One off kind of things.
So we always have that level of income this quarter happened to be a little bit heavier than normal so.
So that's what that is.
Got it thank you very much.
One.
Your next question comes from the line of RJ Milligan. Your line is now open.
Good morning, Hey, good morning, guys.
So I just wanted to follow up on maybe Craig can talk tough questions.
In terms of the market.
I'm, just curious Stuart and I know that you guys sort of look at acquisitions that are off market and don't really fit in sort of the general market conditions, but I am curious if theres any expectation to see a pause in transactions and sort of the normal way out on the west coast, just given the change in interest rates.
Uh huh.
No right now I guess, there's a couple of things.
That I mean first of all we have ICSC coming up and typically.
What you do see with ICSC has a number of sellers bring their assets to market on a widely marketed basis.
Because they are anticipating getting a much bigger investor base looking at these assets at the conference so leading up to Ics you always get some pickup in activity.
But in general.
We're not seeing a much pause in the market right now, we're seeing a bit of acceleration on the anticipation on interest rates are going up and what impact that might have from a seller's perspective, but right now the pipeline is very robust.
And we're optimistic that we'll certainly meet the goals that we've laid out in guidance.
Okay excellent and then my second question is obviously, there was a decent amount of leasing done in the first quarter.
Sort of.
Yes, it was the second.
First quarter first quarter on record.
Just curious though.
Sort of implies that there was your typical fallout right because the gap between.
Signed but not rent paying didn't move all that much and so I'm just curious maybe rich can give some color as to where that fallout was maybe specific categories or sectors.
Sure I mean, I think it's the typical fallout that youll see the beginning of every year after the holidays.
There wasn't any one particular category that was impacted.
Theres probably.
A few tenants that.
Struggled through Covid.
And.
Left.
The centers.
Given the opportunity.
The leasing team has never been busier.
The inquiries for space.
Multiple LOI on spaces, so we see very strong demand going forward.
Okay. Thanks, guys.
Yes.
Your next question comes from the line of Wes Golladay. Your line is now open.
Good morning last one anyway.
Hey, good morning, guys just sticking with the tenant question have you guys cycled through all the tenants that have been impacted by COVID-19 , including those that can pay that.
Okay.
I mean, we have a couple of lingering.
Tenants that were.
Going round and round with but it's really.
Basically inconsequential.
Sort of similar to the normal.
Back and forth with tenants are pre COVID-19 .
But yes, there is a couple of tenants that have not been fully resolved, but we expect to have those resolved here going forward now that the courts are fully open and we're able to.
Foresight rights.
Got it and then I guess can you just provide an update now on the Densification efforts for the Northern California parcels do you plan to sell anything this year and I guess in total for the two that you are working on what does the gross proceeds do you expect.
Sure.
I mean, the two in northern California, one is in front of the planning Commission of City Council within the next 30 to 45 days for final approval.
And the other project is probably another 90 to 120 days away from final approval. Both of those assets are going to be are going to hit the market for sale shortly.
And we're expecting anywhere from $25 million to $30 million of.
Cash for the sale of those assets, when maybe we get lucky and get a bit more than that.
And.
From that perspective, we're going to be delivering to a potential builder a fully entitled projects, which.
Again, it's given us the ability to build that value over the last several years and these are in two very strong markets. So we are anticipating a lot of demand for these assets for visa for the land and again no impact to NOI in terms of selling us.
Got it and then go into the acquisition market.
I guess can you give us a sense of how many buyers rely on high leverage to buy assets on the west coast.
While the private by obviously, the private sector relies on leveraged more than anything else some institutional capital right.
Don't rely on leverage as the private side does.
But certainly a lot of the <unk>.
Assets in the range that we buy in being one off transactions. There is a lot of private buyers out there that are buying these types of deals. So that's where we're beginning to see a bit of an impact.
As it relates to guidance rates.
Got it and then Mike one for you you have a few swaps about $200 million swaps expiring later this year when do you plan to address those.
Well right now.
Sure at the end of August we're currently exploring several different strategies, taking into account a number of different variables, including insured environment. Obviously it. So at this point, we have not yet made a decision what to do with us.
Okay got it thanks, everyone.
Thanks.
Your next question comes from the line of Polina Ross. Your line is now open.
Good morning, and good morning.
Hello.
And I think you mentioned.
Certain remarks that based rent quarter attaining higher than budget.
Question over there.
I'm sorry.
Sure.
Yes, basically yes.
Yeah.
Yes, no. We can I would just say is that based on it was it came in stronger than what we originally budgeted.
Contributing parts of that to Australia, and we're in that phase one for one on top of regular cash base rent.
How much volatile.
Okay. Thank you and then.
Your real savings.
Forward.
<unk> services, rather than discretionary spending category of course, but are you concerned.
Higher inflation and nowhere.
Comparable final consumer spending.
Yes.
No most of our assets are located in very affluent dense communities.
So.
We don't have really not seen much impact at all as it relates to the inflationary.
Issues or the interest rate issues.
We don't think it's going to impact the.
The markets were in certainly as much as it could impact other markets that have less density and weaker income profiles.
Okay. Thank you very much thank.
Thank you.
Your next question comes from the line of Chris Lucas. Your line is now open.
Hey, Chris Good morning, everybody.
Just rich maybe to start with you on the strength of the Commencements. During the quarter was was the bulk of the significant bulk of that.
Shop space, just kind of curious if tenants are sticking to their.
Targeted windows of openings in or whether there's more flexibility there.
Sure, Yes, I think the majority was shop tenants as you know with the portfolio, 100% leased for the anchor spaces. There is not.
<unk> that are in there there are a few.
But yes, I think that the permitting process in the construction process has.
Gone back to more normal timeframes and some of the lag that probably occurred during COVID-19 has.
It started to come online.
So we see.
Forward that this should steadily becoming online the remaining throughout the year.
Okay. Thank you for that and then Michael just on the on the noncash.
Rent that.
Above so the transactions that you closed closed after the quarter. So they shouldn't have made the impact was all of that sort of excess non cash income related to.
The leases the anchor leases that you did or the renewals or what drove that number above your expectations.
Well, you're referring to <unk>, 41, or Australia, or both and we think 745, it's just a combination of noncash rents yeah. Just the combination yet so straight line is really a function of the leasing activity and in the Fas 141, you know it's quite a process. When you acquire enough that you have to go through the full valuation.
For GAAP purposes, and until you have all the the the purchase price allocated to hard assets intangible assets and liabilities you don't really know what that number is so each lease was valued so that when.
When we first of all our guidance at the beginning of the year that was based on what we knew at the time and then there was a couple of assets that we're going through that process that we acquired late in the fourth quarter that were finalized in Q1, which then changed the number going forward. So that's why we adjusted the guidance on that range and then it will probably adjust again based on current ex acquisitions, because they are now going to be going through the process as well.
That will show up later this year.
Yes, Chris the most recent acquisitions are not in the current number is actually just to clarify that I mean, it's really coming out of the fourth quarter more than anything else right right. Okay. That's really helpful. And then Stuart for you just in terms of the opportunity set how important is the changing rate environment.
To basically getting some owners to really look at sales versus refis at this point.
You know.
We're seeing a bit of movement in the market because of rising interest rates.
But pricing again continues to be at record levels and deal flow continues to be very active.
But we are seeing a bit of a window that is opened up primarily through our relationships more than anything else, where sellers are known as many years.
Are beginning to get worried from a refinancing perspective, and they've reached out to us.
Off market.
Anticipating that.
They can do a transaction thats going to be seamless and quick.
And not have their rent rolls sort of advertised all over the market.
Great. Thank you for that that's all I had this morning appreciate it thanks sure. Thanks, Chris.
Your next question comes from the line of Michael Gorman. Your line is now open.
Hey, Mike Hey, Mike Hey.
Hey, good morning.
Couple of quick questions here I know, we've covered a lot of ground Stewart just sticking with the acquisitions, we've talked a lot about the increased demand and kind of a competitiveness for marketed deals have you seen anything, especially coming out of the volatility of Covid and then the recovery.
What are you seeing in terms of the underwriting criteria that's out there in the marketplace. How does it compare to maybe the last time things got too toppy in the strip center sector.
Is the underwriting getting stretched in addition to the pricing is it mostly just on the pricing side here.
It's primarily on the pricing side.
Obviously as we've been through ups and downs over the last 30 years, we have seen buyers into the market.
<unk>, who spent very little time underwriting.
However, today's market.
The buyer profile is more suited to.
Two underwriting where they're really looking at risk.
And a good way and theyre taking into consideration.
Rents that are <unk>.
There are more normal in nature versus rents that you know that could be a lot higher in terms of their underwriting we continue to be conservative in our own underwriting given what we've been through with Covid. We think thats very important in terms of what we're buying and how we're guiding.
The street in terms of our numbers, but.
All in all of the current environment.
Still are showing some very strong disciplines.
Okay, Great. That's helpful. And then maybe just one more for you Stuart and Mike.
<unk>.
I apologize if I missed it but could you provide any update on how the board is thinking about the dividend or kind of where the dividend sits right now relative to taxable income obviously things.
<unk> do you increase the guidance things are definitely more stable the balance sheet leverage ratio looks great.
So how should we think about the quarterly payout going forward.
Well, obviously this is decided at the board level not at <unk> level, but the good news is that our payout ratio is still among the lowest in the sector.
And.
As we look through the balance of the year, if things continue to go as well as Theyre going then we will be raising our dividend.
Okay, great. Thanks, so much for the time.
Thank you.
Your next question comes from the line of Dmitry. Your line is now open.
Good morning.
You mentioned that long term brick and mortar tenants that were previously reducing store counts are now returning to key markets with new concepts and I guess I'm. Just wondering if you can talk in more detail about those tenants and what their open to buys are and what their criteria criteria are for opening new stores. Thank you.
Sure I think in many cases, what we've seen is they are coming back at a slightly smaller footprint.
You know and as we touched on in the prepared remarks with a more fine tuned.
<unk> offering.
But we have been.
Pressed that we've had some shopping centers, where tenants had left the party at the end of their term several years ago and now they are back.
Leasing at the exact same property with there.
Fine tuned concept so.
We just see this as a demonstration of the strength of the properties.
And that people want to.
Tap into the demographics that we're able to offer and the growths are obviously is a big part of this as well. We've also found that these tenants.
When we start communicating with them.
That grocery anchored component is critical in terms of.
Their overall merchandising plans.
Okay, great. Thank you and then maybe following up on an earlier question given the gap between leased and build occupancy can you tell us what your tenant retention rates are today and how that compares to historical levels.
Yes, our tenant retention rate is typically in the high 80% range.
That has really not changed I think as you see from our overall occupancy that is supported by the renewal of existing tenants.
And in fact in some cases.
Would love to get some of these spaces back because you have below market rents and.
Our leasing team is usually chomping at the bit to get some of these spaces back.
Okay. Thank you and then last one.
Previously dispositions were focused.
More on exiting our specific market. So I'm just curious if there's anything specific characterizing of properties you are looking to sell either in terms of geography, changing demographics or is it really just based solely on the individual credit profiles of the assets.
Yes based on the individual assets and to grow in the profile from those assets more than anything else with obviously, the two densification projects on tap because we're just not in the business of developing.
Shopping centers or anything else. So thats the focus it's not income producing value creating land.
In terms of Densification and it is.
Assets that don't have internal growth in terms of looking at the next two to three years.
Okay, great. Thank you.
Makes sense.
Your next question comes from the line of Todd Thomas Your line is now open.
Hey, Todd Hi, Bob.
Hi, Thanks for let me jump back in here real quick I just wanted to go back to the $300 million of swaps that.
Im expire at the end of August Mike.
It sounds like there hasnt been a decision made yet.
What will happen there how you plan to address that but can you just talk about.
I guess first what what sort of embedded in guidance and kind of what you are.
Expectation is today.
When the swaps burn off just and where the sort of term loan is.
As you kind of look ahead, what pricing looks like.
For your various options.
Well right now, but better than guidance.
The swaps burn off and so the terminal itself is as lever based.
Margin so.
Our model is simply take the forward curve of LIBOR.
Build that into the forward interest expense through the balance of the year, assuming we didn't do anything just let a revert to floating which is actually one of the possibilities.
Very highly fixed rate debt.
In today's environment. It may not be necessarily a bad thing to have a little bit of floating rate debt out there. So that's one of the possibilities. If we were to go out and try to do.
If we're going to be growing the company and adding a little bit to the line, maybe we add that to the term loan and term that out for 10 years and what that rate looks like.
Hard to say low fours, perhaps certainly less than where our inaugural bond deal was.
But it's just hard to say, but right now the guidance has.
It hasnt simply reverting to floating rate based on LIBOR curve going forward.
Okay got it.
For the second half of the year, you are picking up about 150 or 200 basis points of interest expense savings on.
$300 million related to the write ups for that <unk> got it.
Alright, great. That's all thank you.
Your next question comes from the line of Linda Choi. Your line is now open.
Good morning, Linda.
Hi, good morning.
Can you just give us an update on how expense recoveries are trending and what your expectation is as CFO through the rest of 2022.
The recovery rate is.
Consistent with our historical.
Averages.
The leases we signed are primarily 99% are triple net.
And so.
Those rates stay pretty Scott, yeah, it moves around a little bit quarter to quarter, just some timing of expenses and leveling up the recoveries based on those expenses as they are incurred.
But generally speaking we're in the high high Eighty's, 90% recovery rate and then as the.
As the tenants who are in that gap between build versus lease is they take possession you recover it is going to go up even higher because they'll start contributing exactly it's going to get a bit better because of that gap closes that narrows right out there.
Thanks, and then just in terms of the competitive environment in terms of the different buyers youre seeing coming into the markets that you are concentrated in our there are there certain areas, where youre seeing more competition than others.
No it's across the primary markets across the whole West coast, obviously grocery drug anchored centers again is the most sought after a segment of the retail market and.
I think as we've learned going through the pandemic. This particular defensive posture is something that investors are much more focused on today than they were some years ago, but the good news is that you know.
The.
The market has been quite robust just in terms of the opportunities for us and.
But its cross sell markets its not in one market in particular.
And it will move around I mean, we did a lot in the Pacific Northwest now things are shifting back to California for us.
But again, it's just going to move around quarter to quarter year to year, depending on.
Sellers and their expectations.
Great. That's it for me thank you.
And speakers, we don't have any questions. So very different I would like to turn it back to Mr. Stuart.
Well. Thank you in closing I would like to thank all of you for joining US today. If you have any additional questions. Please call, Mike Rich Laurie or me directly.
Also you can find additional information in the Companys quarterly supplemental package, which is posted on our website as well as in our 10-Q.
Lastly for those of you attending ICSC convention in Las Vegas next month after two year hiatus, please stop by our booth, which will be in the South Hall, specifically Booth number 9184, again Thats 9184.
Hope to see you all there and thanks again and have a great day everyone.
And ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
Yes.
Okay.
Okay.
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