Q3 2022 Retail Opportunity Investments Corp Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.
Yeah.
Hello, and welcome to the retail opportunity investment 2022 third quarter conference call.
All participants are currently in a listen only mode.
Knowing the company's prepared remarks, the call will be open for that.
The call will be opened up for questions now I would like to introduce floor sneap, the company's chief Accounting Officer, you may begin.
Thank you before we begin please note that certain matters that will be discussed on today's call are forward looking statements within the meaning of federal securities laws.
Although we believe that these forward looking statements are based on reasonable assumptions, we can give no assurance that these assumptions will be achieved these forward looking statements involve risks and other factors, which could cause actual results to differ significantly from future results that are expressed or implied by such forward looking statements.
These risks and other factors are described in the company's filings with the SEC, including our most recent annual report on Form 10-K participants should refer to the company's filings to learn more about these risks and other factors as well as for more information regarding our financial and operational results now I'll turn the call over to George.
Sure. Thank you Lori and good morning, everyone.
With Lori and me today is Michael Haines.
<unk> financial Officer, and Rick <unk>, our Chief operating officer.
The strong demand for space across our portfolio and our ability to capitalize on the demand.
Just to be the main headline story this year for ROIC.
We continue to lease space at a record pace.
In fact in just the first nine months, we have already leased one 2 million square feet of space, which is a new record for the company.
It's definitely the space Center.
At the pace, we continue to steadily increase our overall portfolio lease rate as we move through the year.
Our portfolio stands at a very strong 97, 8% leased.
In terms of re leasing rent growth. We are pleased to report that we've got.
We had one of the best quarters on record for the company.
Steven a proportionate increase in cash rents on new leases signed during the third quarter.
With respect to renewal activity.
Okay, especially corn longstanding anchored tenants are increasingly coming to us early to renew their leases in some cases by as much as nine months to a year in advance of their lease expirations.
As a result, we are renewing space at a record pace.
Turning to our investment activities capitalizing on our long standing off market relationships. During the first nine months of the year, we acquired five terrific well established grocery anchored shopping centers totaling $120 million, including two that we acquired during the third quarter for $60 million.
All five of our centers are well situated in densely populated affluent residential communities and features strong grocery operators along with a diverse mix of inline tenants.
The blended going in yield on the $120 million is in the low to mid 6% range. There are a number of really repositioning and value add opportunities that we are already aggressively pursuing in fact in just a few months time today, we have already increased our blended lease rate.
On the five properties by approximately 200 basis points, thus far.
Additionally, the new acquisitions are located within our core markets, where we have an established presence, thereby enhancing our ability to maneuver tenants among our centers continue capturing the strong demand for space.
Looking ahead, while we continue to keep a close eye on the acquisition market given the current economic uncertainty and the ongoing rise in interest rates, we believe that the prudent approach in this environment as to cause our investment activity for the time being and wait to see how the market evolves.
Now I'll turn the call over to Michael Haines, Our CFO , Mike Thanks Stuart.
Net income attributable to common shareholders for the three months ended September 32022 was $18 5 million equating to <unk> 15 cents per diluted share.
Terms of funds from operations for the third quarter <unk> totaled $36 5 million equating to 27 cents per diluted share as compared to <unk> $32 6 million or 25 cents per diluted share for the three months ended September 32021.
With respect to our financial results for the first nine months of 2020 to GAAP net income attributable to common shareholders totaled $41 7 million or 33 cents per diluted share.
The company had $109 4 million in total level.
Or <unk> 83 cents per diluted share for the first nine months of 2022 as compared to <unk> $95 3 million or 74 cents per diluted share for the first nine months of 2021.
In terms of the company's investment activities during the third quarter, we funded the acquisitions, primarily through a combination of proceeds from a property sale and free cash flow from operations importantly, during the third quarter, while our gross real estate assets grew by $42 million. Our total principal debt only increased by less than $6 million as a result, our net debt to annualized.
EBIT went from six seven times for the second quarter down to six six times for the third quarter.
While our shopping centers continue to perform well in fact ahead of our initial property level budgets. Thus far for 2022 at the corporate level, we are not immune to the fed's ongoing initiative of raising interest rates to curb inflation, specifically during the third quarter. The company's interest expense increased by approximately 300000.
As of September 30th approximately 26% of our total debt was floating rate in terms of the 74% for the fixed rate debt nothing is scheduled to mature between now and the end of 2023 and beyond that our debt maturity schedule is well ladder.
In terms of our <unk> guidance for the full year of 2022, we have narrowed our previous range of a $1 eight to $1 12 per share to now be at the range of $1 nine to $1 11 per share.
Anticipation that the federal raise rates again during the fourth quarter, our new guidance range takes into account, although the one two to $1 5 million of added interest expense on top of our Q3 interest expense are tighter guidance range also takes into account no additional acquisitions or dispositions between now and year end as Stuart noted lastly.
Lastly, our guidance range continues to assume that same center NOI growth will be in the 4% to 5% range for the full year for reference during the first nine months of the year same center NOI increased by four 4% now I will turn the call over to Rick shovel, our CFO rich thanks, Mike.
Stuart highlighted demand for space across our portfolio continues to be strong and we continue to make the most of it to drive our leasing results to new Heights.
Specifically the third quarter proved to be our most active year to date.
Leasing over 480000 square feet of space during the quarter, bringing our total leasing activity, thus far for the year to $1 2 million square feet.
As Stuart indicated is a new record for the company, surpassing our previous nine months record that we achieved four years ago.
Additionally, our strong leasing activity continues to drive our portfolio lease rate higher.
You may recall that at the end of the first quarter our portfolio stood at 97, 2% leased which we increased to 97, 6% in the second quarter.
Today as of September 30, our portfolio lease rate has now increased to 97, 8%, which is just shy of a record high 97, 9% lease rate that we achieved in 2019.
Notwithstanding being essentially fully leased.
Continue to work hard at capturing the demand for space through finding creative ways to free up space within our portfolio, primarily through a combination of recapturing space early.
Shifting certain tenants and right sizing others to make way to not only accommodate key longstanding existing tenants who are seeking to expand.
But also integrate space within our portfolio to bring in more and more new destination tenants and enhance our overall tenant mix.
Just to highlight a few examples during the third quarter at one of our shopping centers in the Pacific Northwest a new tenant that had recently opened introduced us to a group that's looking to rollout a new cultural center concept on the west coast and seeking to lease space at our property for their inaugural location.
Notwithstanding our shopping center being 100% leased we went to work and proactively recaptured the space early there wasn't scheduled to expire until next year.
With the new lease we are choosing a significant increase in Ram and equally important we expect that the new tenant will become a terrific unique draw to the center.
And we are currently in discussions with a group of about rolling out their cultural center concept at a number of shopping centers across our portfolio.
Decided. Another example, we were recently approached by a prominent successful rock climbing gym, operator on the West Coast, who is seeking space specifically one of our southern California shopping centers. However, we didn't have enough available space at the center for their needs.
Rather than turning them away, we quickly went to work maneuvering several inline tenants and combining their spaces with unused space at the back of the property to create the ideal space for the gym operator.
Again, we achieved an increase in rent while also bringing a great new destination tenant Tour center.
Additionally, at another one of our southern California shopping centers were recently approached by national tenants seeking to lease a junior anchor space.
Again, rather than turn them away instead, we went to an existing anchor tenant and successfully recaptured a portion of their space specifically space that they had been subletting to another tenant.
The new lease with a new national tenant is that a significantly higher rent and we're able to structure. The deal such that there is effectively no downtime in terms of Ram and only requires a minimum amount of ti for the new tenant.
Along with these new tenants seeking space a growing number of our existing restaurant tenants continue to come to us seeking to expand their spaces to accommodate additional seating areas as well as new bar spaces.
And they are looking to extend their lease terms in.
In addition to these traditional dine in restaurants seeking to expand their spaces, a broad range of foodservice businesses continue to seek out our shopping centers looking to open new grab and go concepts, which are proving to be very popular and profitable.
We continue to work.
Creatively to bring these new tenants into our portfolio.
In terms of renewal activity as Stuart noted, we continue to have a very active successful year spa.
Pacifically year to date, we've already renewed 884000 square feet of space, including renewing 349000 square feet of space in the third quarter alone.
And as Stuart touched on a growing number of existing tenants are coming to us early to take down their options, especially as it relates to key anchor tenants.
In fact of the 182000 square feet of anchor space that were renewed during the third quarter over three fourths of that where anchor tenants with leases not due to be renewed until next year.
Lastly in terms of lease versus build during the third quarter, new tenants, representing approximately $1 $4 million in annual base rent opened and commence paying rent.
Our total thus far for the year to $6 1 million of annual base rent from newly opened tenants.
In terms of additional new leases sign given our strong leasing activity during the third quarter, we signed new leases, representing an aggregate $2 7 million of annual base rent.
Taking this into account as of September 30, we have approximately $9 1 million of annual base rent from new tenants that haven't yet taken occupancy and commenced paying rent.
We continue to work diligently at getting these new tenants open expeditiously.
Now I'll turn the call back over to Stuart.
Thanks Rich as.
As the fourth quarter. It gets underway. Thus far we are on track to post another solid quarter of leasing is the demand for space continues to be strong and.
In fact at our recent West Coast ICSC Conference in San Diego, a few weeks ago, we had a number of very productive meetings with both existing and prospective new tenants.
Many of them focused and ready to strike deals considerably considerably more so than what we've seen in the past few years.
We think this bodes well both in terms of finishing 2022 strong on the leasing front and in terms of building good momentum heading into 2023.
Finally, notwithstanding current REIT stock prices the fundamental drivers both near term and long term of our west coast grocery anchored portfolio remains sound.
Near term, we believe that the current demand for space will continue to provide a wealth of opportunities for our team to enhance value through our proactive hands on approach of working our shopping centers and tenant base.
We expect to continue driving rental rates and same center NOI steadily higher.
While also working to further our tenant diversity, which is the cornerstone of our business.
Long term, our core west coast markets continue to be among the most.
Demographically strong and diverse markets in the country.
Also our markets continue to be among the most protected supply constrained in the country as well.
We believe that these distinct attributes are what will continue to make our markets. Among the most sought after by a broad range of tenants and investors alike.
Additionally, we believe these factors will continue to serve as the foundational strength and appeal of our west coast grocery anchored portfolio as well as enhance our ability to continue building value for years to come.
Now we will open up the call for your questions.
Operator.
Thank you, ladies and gentlemen to ask a question you will need to press star one on your telephone.
Star One wanted to ask a question. Please standby, while we compile the Q&A roster.
Our first question comes from the line of Juan Sanabria with BMO. Your line is open.
Good morning, Mike Good morning.
Good morning, I was just hoping to.
I understand guidance, a little bit better.
Kept it the same tightened the range.
But yet you had a couple I guess different or are opposing forces Monday hit higher rates as some of the swaps.
Expired.
Sure what that impact is to the fourth quarter and had great leasing was just.
Curious as well as higher non cash rental income expectations for the year now I was just hoping maybe you could talk a little bit about guidance.
And takes.
Specifically, what kind of occupancy or build.
Occupancy we should expect by year end just to think about how that $9 million comes online that are built in that convention.
<unk> sorry.
Okay.
It was quite.
Quite a few questions in that question.
Yes.
GAAP build versus lease at $9 1 million, we expect that the large majority of it to come online by June a large chunk of it supposed to actually start this quarter in Q4 2022.
So as far as and as far as the guidance goes interest expense did go up obviously because of the swaps matured, but we expect that.
Revenue in the fourth quarter will increase as a result of owning the new acquisitions for a full quarter along with the new tenants that were expected to take occupancy during the quarter. So that's kind of what are the one of the drivers kind of offsetting the interest expense increase and if you look at the.
The guidance table in the press release also you'll note that fast.
<unk> thousand 141 revenue is up a little bit in the fourth quarter and that's from the purchase price allocations from the assets we acquired in August .
Our bad debt was lowered a little bit kind of construct where we are for the year and our G&A I think came down on the higher end as well so while a lot of small moving parts that kind of gets you to a relatively stable fourth quarter.
Okay, Great and then.
Just on the balance sheet I guess, what is the plan at this point with.
<unk> got 26% floating which you talked about and you've got an expiration coming up at the end of 'twenty three and how we should think about those two pieces moving forward.
How do you plan to manage the risks around that.
Well.
As far as the term loan girls the term loan doesn't mature until 2025. So there is ample time for the market to kind of evolve and settle down.
I'm not sure where it's going right now, but ideally we'd like to refinance the term loan with public bonds, along with perhaps paying down a portion of it alone depending on market conditions.
And then theres the bonds that are due December of next year again, we've got some.
Some time left on that you have to remember that that's at a little over 5% coupons. So.
Not sure of the rate environment will be next year, but it might be a question of will have to kind of wait and see.
Thank you very much.
Thanks, a lot.
You.
Please standby for our next question.
Our next question comes from the line of Todd Thomas with Keybanc. Your line is open.
Good morning, Scott.
Hi, Thanks, good morning.
Stuart I just wanted to first ask.
I realized guidance assumes nothing else during the year in terms of investments, but just wanted to get an update from you on.
On the current thinking around investments heading into 'twenty, three with regard to your appetite and ability to deploy capital.
On an accretive basis.
Current environment.
Sure well let me.
Currently the.
The market is really what we would call a pause situation where.
There's really very little transaction transactional activity going on at the present time.
A lot of buyers and sellers are taking a wait and see approach in terms of the economic uncertainty and interest rates as it relates to 'twenty three.
We're obviously going to keep our ear to the ground in terms of opportunities.
If cap rates haven't really moved up much for our product, but theres not much product on the market either.
So we will continue to monitor the market and obviously continue to.
Look at some properties that are on the market in terms of dispositions to help fund some potential acquisitions, but right now the view is to really be patient.
And so as we head into 'twenty three.
We continue to monitor things very closely and as the opportunities do.
Yes.
If we do find a couple of opportunities here or there then.
We'll look at our R&D up those opportunities and decide how we will fund them when that time comes.
Okay.
Anticipating an increase in cap rates or any increase in required returns as you.
Kind of talk to folks and.
Think about that.
Several quarters moving forward.
I'm anticipating.
Some movement in cap rates, but for high quality grocery anchored shopping centers right now cap rates really.
Haven't moved much and there is no real.
Benchmark right now to look at as it relates to.
Where those cap rates might go.
Okay, and then just a clarification I think you said for the five year to date acquisitions about $120 million I think you said.
The initial yield was in the low to mid 6% range, but I thought you mentioned after that you've already increased the.
The yield on those acquisitions by 200 basis points can you just clarify that comment in.
Maybe I misunderstood, but just curious what the initial yield was and maybe what the current yield was on that.
Those acquisitions it sounded like there was a little bit of lease up and value add that may have already materialized.
Rich, it's primarily around as you touched on the lease up.
I found that in certain circumstances. These properties have been under managed.
Our team.
Well in advance of closing has gone out and secured tenants.
Spaces that had sat for the prior owner.
We're at least up almost immediately upon closing so thats whats driving that and the impact of that 100 or excuse me 250 basis points really won't be felt obviously to the first and second quarter of next year, because that's when the income will come online from a rent perspective.
Okay got it so.
Low to mid 6% cap.
Right that was the initial yield the NOI yield that at closing.
<unk> about a 250 basis point uplift over the next couple of quarters.
Correct, Okay, and then just lastly, Mike on the swaps I just wanted to make sure I understand so right now there is no plan to implement any any interest rate swaps or hedge the exposure at all on the $300 million of term loans is that right.
That's correct.
Right now for the short term, we're going to allow them to remain flooding kind of see how the rate environment evolves.
Okay got it thank you.
Thank you Tom.
Thank you.
Please standby for our next question.
Our next question comes from the line of Craig Mailman with Citi. Your line is open.
Hey, good morning.
Stuart.
I just wanted to circle back to.
The leasing side of things you guys have clearly been pulling forward some renewals here with good rent spreads on.
Just kind of curious your thought process on.
Trying to delay that or.
Rents continue to rise or are you guys are more concerned about the leasing environment over the next six months and just wanted to put it in the bag I'm just trying to.
Understand your broader macro framework.
In general.
Sure.
Well, maybe we'll comment I'll comment on the anchor spaces first rich I mean, we have a number of anchors coming due in 'twenty three and the focus from our perspective has been able to is to stay ahead of that curve.
And when I say that the focus has been to go to some of these anchor tenants that are doing extremely well at our centers and getting more term than just their typical five year options. So that's been one of our goals looking out.
Over the last 60 to 90 days in terms of these anchor renewals. These tenants have come to us earlier than usual.
But the goal is to really.
What I would say staggered now that some of these to these leases. So five years from now we don't have the same impact so thats been one of our goals over the last 60 to 90 days from the anchor perspective, and a number of those leases have fixed increases of course, because theyre the <unk>.
Tracks will auctions do you want to comment on the in line space.
Sure I mean, I think we understand the value of our real estate and so when we're doing these leases.
While attendance may be trying to.
Get the best deal. They can we also know what the market is for the space. So we're not leaving any dollars on the table, but occupancy is an important factor for us.
<unk>.
You can see with our historic occupancy that's always a factor that we keep in mind.
But.
I don't feel like we're leaving any money on the table.
Are you guys.
Okay.
I'll go ahead and there is there's been no sign of any weakness from our tenant base at all.
That's the other thing to point out Craig.
That's helpful and then I just wanted to first.
Given the kind of the early.
Option.
Execution here I mean are you guys trying to put through or let me answer. It. This way what what are you guys trying to get out of that are you trying to push through higher bumps are you guys trying to get less restrictions that may be in some of these wounds is.
Outside of just pure rent bumps are you guys able to get anything on the concession side yet.
Is beneficial to longer term.
The answer is yes.
And when I say that it's really depending on the situation, but the reality is that.
We have a number of anchor leases that don't have much term left and these tenants come to us and wanted a lot more terminal in doing so we have approached them to do a number of other things like deal with although we don't we have very little co tenancy, but things like ESG related.
As well as you know.
Exclusive and other things. So the answer is absolutely, yes that has been part of our negotiation with these anchor tenants.
Okay and then just.
I noticed on the renewal side, we're up pretty markedly this quarter.
Especially on the anchor side of things is that skewed by a lease or two or is that whats going on there.
I think that.
Every deal is specific and sometimes its driven by.
Maybe we're recapturing a portion of our space and so there is a bit higher cost relative to splitting utilities and that sort of thing, but that's obviously offset by the increase in rent that we're going to receive so the return on those dollars is quite nice.
Hey, it's Nick Joseph here with Craig just one more on the transaction market understand.
I understand the pullback, but how wide is that bid ask spread for high quality assets today.
How wide is the bid ask spread.
Tough to answer the question because theres not much going on in the market at the present time as it relates to what that bid ask spread might be.
I would tell you that certainly some of the deals that have been in the pipeline that have closed more recently.
Have really had very little we've seen very little impact from a cap rate perspective.
But in terms of the bid ask it's just too early to tell and Theres very little transactional activity going on to give you an answer.
Let's let's wait another quarter and I think certainly what we should have more clarity on that front.
I guess, how much have you moved up your return hurdles. If you were to do an acquisition today.
Well it depends on the asset and it depends on the growth of the NOI in terms of looking at the asset and what it might deliver longer term.
But certainly given the cost of capital that has gone up for all of us.
Our expectation is certainly gone up at least 100 basis points.
Thank you very much.
Thank you.
Thank you.
Please standby for our next question.
Okay.
Our next question comes from the line of credit Smith with Bank of America. Your line is open.
Good morning, Craig.
Hey, how are you guys.
Well how about yourself.
Hanging in there.
It sounds from your comments.
The lithium still remains elevated.
And the activity into the fourth quarter I'm, just wondering how much of 2023 leasing has already been completed.
A significant portion of the anchor leases that were scheduled to expire next year have been completed.
And we're making good progress on.
The shop tenant side as well.
Have a specific percentage for you.
Front of me, but.
It's very similar to years past.
Tenants are coming to us looking to renew and secure longer terms.
So very healthy.
Great and then.
The run rate for operating property operating expenses have been double digit.
Are you expecting that to continue at that pace, so could actually increase.
Yeah.
Yeah.
On the expense side is asking.
Understood I think it was up 10 two.
Yes. It was up tend to I think year to date, it's up 12 nine.
Just wondering.
Given inflationary pressures and whatnot.
That can hold at that lower double digit name or.
Could they increase.
Well I think costs in general have gone up across the board, primarily Craig as it relates to utility.
And.
And security in some cases, that's what's driving some of that increase in the expense.
But some of that I believe is going to begin to level off from an inflation perspective.
And as we've wrapped up budgets for 'twenty three.
That number is certainly not as high as what <unk> seen to date as it relates to the budgeting process.
Okay, Great and just finally have you had any conversations with either kroger or albertsons since they announced their plans to merge.
Yeah.
The answer is we haven't spoken to them in a couple of months now I know why.
But the good news is rich in IR set to get on the phone with both.
These tenants over the next week to two weeks, so we will be able to reconnect with them with obviously the focus on the relationship and the stores, we've got with them.
But no we've not spoken with them recently, but we will be having conversations with them over that in week two weeks I don't think theres much. They can say at this point.
I would assume theres still in somewhat of a quiet period.
I got you. Thank you. Thank you ma'am.
Thanks, Greg.
Thank you please standby for our next question.
Our next question comes from the line of Michael Gorman with <unk>. Your line is open.
Good morning, Mike.
Good morning, guys. Thank you most of my questions have been answered, but I just wanted to have a quick follow up on the expense side just as we were looking at the run rate I understand inflation and everything but it looks like recoveries have been lagging the actual expense growth. So I'm. Just wondering is it is it the specific categories that are growing on the expense side that aren't being reimbursed to recover.
From tenants or any any color on why there is the differential there between the recovery growth and the expense growth.
But I think there's been a few initiatives we've done this year as we've.
We expanded some of our ESG initiatives.
That we will recoup overtime as those initiatives reduce expenses.
But some of those initiatives do have caps or other things where anchor tenant may not participate but.
We still see it as a positive for the long term because law.
Those overall expenses will come down as things like lead conversions go in place.
And solar and other things like that water efficiencies, so theres a bit of a front end cost on that.
That's probably impacting that number.
Got it got it thanks for that.
Helpful. And then maybe just going back for a minute and talking a little bit more about the transaction environment.
In recent quarters that theres been kind of a tailwind to demand not only from retail investment but also from.
Demand for housing developers and apartment communities and things like that can you can you talk about any impact that youre seeing from that side of things any change in demand there because of what's going on in the.
Capital markets or what's going on with kind of expectations for housing in your markets.
Yes, no. Thanks to continued to be strong from the on the housing front certainly the housing market has slowed down.
The one interesting point to probably tell you in terms of what Ive learned more recently is that.
Unintended land.
Seems to be gaining more value right now that entitled land because of the timetable out there as it relates to.
The economic.
Environment.
But from a housing perspective things are extremely strong out west we haven't really seen any.
Any real slowdown.
Pricing has stabilized, but it really hasnt changed much.
The demographics turned in terms of our assets continue to get better because there's more density gets built.
Certainly, giving bringing a lot more customers to our centers. So from a data perspective traffic continues to gain good momentum.
Great. That's helpful. And then maybe one other question as we're going through this pause.
You certainly have a lot of connections in the marketplace and have your finger on the pulse any sense for any I'll call. It kind of pending stress our pending distress from some owners out there, where maybe theres a big capex burden, that's coming up or a big vacancy or re leasing where.
Maybe right now, they're okay waiting to see where the market shakes out but in the next six to nine months, they're going to have to hit the marketplace and may provide more opportunities.
Sure.
The answer is yes, I am beginning to get some calls.
Some emails from some owners that have some financing.
Coming up from their perspective and or Capex issues.
So we're beginning we're at the early early stages of beginning to see some cracks out there Mike.
Mike.
So.
Nothing.
Two dramatic right now, but the answer is yes, I am beginning to see a bit of.
Our friction out there as it relates to owners that.
Or are looking out late next year and have potentially some issues that theyre looking at so.
It's beginning to show a bit but nothing yet.
Nothing like we've seen in OA to all nine of course, but.
The answer is yes, I am beginning to get some email some traffic as you would say.
Great, Thanks, and having lived through it one item I am glad to hear it is not looking like that so I appreciate the time guys.
Yeah.
Okay.
Yes. Thank you.
Please standby for our next question.
Our next question comes from the line of Wes Golladay with Baird. Your line is open.
Hey, good morning, everyone.
Hey, Hey, everyone could you just give us an update on the land sales I know you've got a pipeline that youre aggregating and then you were going to break ground on one project up north in Bellevue with the cost of capital raising any appetite to either pause that.
Outright monetize the asset at this moment.
Yes, maybe I'll just quickly start out with crossroads I mean, certainly we are still in the permitting process.
We were expected to be in a position to start construction certainly as we move towards the first quarter.
But given the current economic uncertainty, we are considering possibly holding off on breaking ground on that project.
In terms of the other projects the great. The good news is that we did get final entitlements and Pinot last week in Nevada is also moving along quite well and we're in the midst of.
Beginning to move.
One of the two to the market.
Over the next several weeks, we think we will.
We think there is a pretty good chance of transacting there.
And then as it relates to.
As it relates to any other properties that are in the pipeline. We're just continuing to work those as it relates to entitlements, but that's what's going on as it relates to both the crossroads and the other two properties.
Okay, and then you mentioned there was really no weakness in the tenant base one of the one of the companies were watching is rite aid I know, it's a big tenant you're actually taken on a little bit more exposure by acquisitions. This year seems to be more of a capital structure issue, but could you provide some I guess qualitative commentary of how you feel about the portfolio.
Osha there, whether it's below market rents productive locations, just any kind of context for us.
Sure Rich do you want to sure Rite aid only accounts for about one 7% of our total base rent.
It's derived from about 16 leases that are spread throughout our portfolio.
All of the locations seem.
Seem to be performing well many of these leases are significantly below market.
So may present, some opportunities for us.
As well so we don't we're not concerned about it.
Great. Thanks, everyone.
Thanks Ross.
Thank you.
Please standby for our next question.
Our next question comes from the line of RJ Milligan with Raymond James Your line is open.
Good morning, RJ good morning.
Good morning, guys I just wanted to expand on the question of the signed but not opened and the cadence do you expect the bulk of.
Is that to come online by June .
But you are also adding to that bucket with the leasing you're doing today. So obviously, that's more rent coming online maybe in the back half of 'twenty three 'twenty four so I guess I'm just trying to gauge how long the runway for growth on what's been signed in <unk>, what will be signed in <unk>.
And I'm curious if that would be quite healthy growth in 2024, barring any major credit issues.
Yes, I mean, I think overall, it's a positive story here.
As you touch on we commenced a significant amount of rent in the quarter, but we also added to the bucket.
And.
Good news on some of the things we've added to the bucket as we touched on the prepared remarks is.
Some of this has got fixed rent commencement dates so we're not at the mercy of permits and things like that.
But there is.
Always going to be.
Certain leases that take longer to.
Get commenced because as I touched on earlier, maybe we're recapturing a portion of an anchor space and you've now got a demise it and that just takes a bit longer.
Then just delivering a space as is.
Sure.
I guess, what I'm trying to get at.
If the leasing stopped.
Today.
Given what's signed but not opened doesn't imply a pretty healthy growth over the course of 2023.
Yes, I mean, if youre, saying, if we did no more leasing.
Yes, I suppose if it stopped today the $9 1 million of the bulk the bulk of it supposed to start between now and June So is that I mean, they start paying rent so that you'll get a full run rate all the way through 2023 in that regard and of course, we're obviously going be doing more leasing activity.
This quarter and into the first quarter. After the year end. So the Buck will always be being replenished. It just depends on what volume it is going to be replenished depending on market conditions.
We don't see any cracks or any signs of that.
Weakness now.
That's all I had guys. Thank you.
Okay. Thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Mike Mueller with Jpmorgan. Your line is open.
Good morning.
Hey, good morning couple of questions. So the first one.
What was the average escalator baked into your leases.
That you've signed year to date and the second question, you talked about and granted spotty data out there, but your thoughts like grocery cap rates have been.
Somewhat sticky sticky.
With rates going up.
But out of curiosity I mean, do you think that grocery cap rates can be belong be below the long term financing cost over.
Multi year period.
Well I'll try to ask the first the second part of your question first in terms of cap rates.
I think it depends I think we're entering a different.
Time, right now where the.
The grocery drug anchored format has become the.
The most sought after in terms of capital both private and institutional.
Whether that has a long term impact in terms of valuation or the stickiness as you as you might say.
<unk> is probably going to the answer is yes, I think it's going to have some impact.
Certainly as it relates to where cap rates might move for other types of retail real estate.
So we could be in a different place right now looking into as interest rates do go up where.
Owners today as I speak with them seem very comfortable owning what they have and thats why the transactional market is slow dramatically because the fundamentals of what's different this time around Mike as the fundamentals are so strong.
And yet the cost of debt capital has gone up a lot.
So I think what youre going to see as we move into 'twenty three is a environment, where there'll be a lot less transactions occurring for this product type.
Which will keep cap rates quite compressed.
And so that's why.
To answer your question I think we're in a different.
Sort of secular change here, how dramatic that changes I can't tell you.
At this moment certainly cap rates are going to go up a bit, but I think youre not going to see a one to one sort of changed as you've seen in the past just because the fundamentals fundamentals are just so strong.
And then in terms of.
Yes in terms of the rent escalators I mean, I think historically as we've talked about for the shop tenants, it's been typically around 3% annually.
And for the anchors 10 or 12% every five years.
But we're cognizant of inflation and I think.
Tenants are that's driving some of the demand tenants wanting to come in and lock in rents, but we are pushing more for 5% annually on the shop spaces and more like in the 15% every five years for the anchors.
Got it okay. Thank you.
Thanks, Mike.
Thank you.
Please standby for our next question.
Our next question comes from the line of Christopher Lucas with capital One your line is open.
Good morning, Chris Good morning, Good morning, guys.
I have a number of follow up so let me just get through them pretty quickly Stuart just on the development site that you mentioned I guess if at all.
Got it.
Approvals for.
The zoning you needed.
Is that is that a first half of next year sort of event you think.
In terms of the sale of the asset I think is your question.
Yes.
I can't.
The answer is it could be we don't know yet because we're just in the midst of bringing it to the market I think we will transact but.
This is probably a first quarter event versus a fourth quarter event.
Okay.
And then I.
I guess rich on the on the.
On tenant fallout just generally how would you compare 'twenty two to sort of 18 or 19, and then given what you've done so far in terms of getting ahead of the 23 explorations, how does 23 stack up relative to 'twenty two.
Yes, I mean, I think that in terms of tenant fallout.
Back to the pre pandemic levels.
I think that.
The reality is that Covid created a shake out the weak tenants have fallen out.
We don't see any additional weakness beyond what you might have seen prior to the pandemic.
So for any of the anchors that for next year that habit and renewed is that more of a timing.
Process for you guys at this point.
Or do you think there is some some risk there.
No I mean I think of the.
Of the anchors leases remaining for next year, there's about 17 of them scheduled to expire and based on our early discussions with them. We are anticipating at least 13 of those will be renewing.
The majority of those of the grocery and drug stores. The remaining leases we're in discussions with them, but it's a little bit too early to say for sure that theyre going to renew and there may be an opportunity there, where we actually don't want them to renew and Thats why we are discussing with them.
How much will they pay.
Yes.
Chris This could be this could be an opportunity for us because as you know we've had such that we had no anchor vacancy for a period of time.
And given the demand and how strong the demand as I look at this potentially as an opportunity next year. If one of these tenants do fallout.
Okay. Okay. Thanks for that guys and then I guess, maybe just taking a step back as it relates to sort of.
Sort of a.
Natural tension between landlords and tenants in terms of you Scott.
More.
Language.
Is that changing at all from where it was say end of last year early part of this year.
While the pendulum has certainly certainly swung back to the landlord pretty quickly.
Coming out of the pandemic that's for sure given our west coast focus and the fact that theres been virtually no new.
<unk>.
Products like rock through the to the market.
And our grocery drug anchored focus our centers continue to be in very high demand.
We have multiple.
Tenants vying for spaces as they come available. So we're not seeing any falloff in the demand side.
Okay, and then last question for me Paul.
I apologize if I missed it.
If this was covered in the initial comments, but the large rent spread for the non anchor for the quarter. The 66% is that driven off of one specific lease or was there a handful of leases that were that strong.
It was a handful of leases home were quite significant.
As we were bringing in much better tenants and.
Releasing them.
We've got more that's happening as we speak right now so there is still some significant leases that are significantly below market.
We're recapturing and finding tenants that will pay a market rent for them.
Great I appreciate it thank you.
Yep. Thank you thanks, Chris.
Thank you.
Please standby for our next question, we have a follow up from the line of Wuhan Santa Maria.
<unk>.
Hi, Your line is open.
Hi, Julien.
Good morning, again, just curious on the same store NOI guidance, which was maintained.
The growth understandably slowed throughout the course of the year.
The midpoint would imply a reacceleration in that growth and maybe that's related to some of the least.
Deals commencing just curious if you can give us any sense of.
We're within the range you feel most comfortable.
How we should expect a trajectory relative to what you've reported to date same store NOI for the fourth quarter.
Commencement of these criminals, yes, there were four 4% year to date through September we maintain the goalpost of 4% to 5% and Thats largely because our Q4 budgeted same service is notably stronger than the first three quarters. So if that comes to fruition, which we expect it to will still be well within that 4% to 5% range.
Probably.
I'm thinking mid point or even higher than four and a half so we'll see.
We feel very comfortable given what we budgeted for Q4 same store NOI.
Great. Thanks, and then just one quick follow up I mean.
Kroger Albertsons just curious on how you see the leasing dynamics changing with them.
You may be in a position where you have.
A significantly larger more powerful tenant in.
That may mean to your ability to.
It keeps it drives them.
Clauses.
More favorable to your <unk>.
Just viewed positively given you probably have a better capitalized tenant at.
At the end of the day.
Yes, I mean look long term, we think the Kroger albertsons merger with potentially beneficial from our perspective. We currently have 21 shopping centers with Albertsons and 11 centers with a Kroger store. So only 32 properties out of our 93.
Have any impact in terms of the Kroger albertsons.
Transaction.
But these 32 stores are diversified across three states and within within these these states. These stores are.
Our diversified evenly in terms of ABR.
And across multiple metro markets, including La Orange County, Portland, and Seattle.
And within these markets. These stores are specifically located in distinct separate sub market communities.
And the other thing is that the stores operate under seven different banners. So.
As we look at this transaction, we a lot of these stores are solid performers in fact.
Average if you were to average sales of all of these stores. These 32 stores.
These stores are doing on average in excess of $630 a square foot in sales.
And then lastly, you know the 32 leases are certainly below market on average with some of these significantly below market.
And again shopping centers that are well located in highly desirable athletic community. So.
Strong demand for the space, if something were to happen.
And there's a lot of demand out there from value oriented and specialty grocers in these locations.
So if albertsons and Kroger divest of some of these locations. We view this as a potential opportunity and then as you just touched on the last thing is credit. This is certainly going to improve the overall credit.
In terms of.
Owning these these anchor tenants or this particular anchor tenant in our portfolio.
Thanks Stuart.
Thank you.
Thank you.
I'm showing no further questions in the queue I would now like to turn the call back over to Stuart for closing remarks.
Great in closing thanks to all of you for 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 Lori micro rich or myself.
You can find additional information in the company's quarterly supplemental package, which is posted on our website as well as our 10-Q lastly for those of you that are planning to attend NAREIT conference in a few weeks from now in San Francisco, We certainly look forward to seeing all of you there. Thanks.
Thanks, again, everyone and have a great day. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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