Q3 2024 Retail Opportunity Investments Corp Earnings Call
Welcome to retail opportunity investments third quarter 2024 conference call.
Is there currently in a listen only mode.
Speaker Change: Following the Companys prepared remarks, the call will be open for questions now I would like to introduce Lawrence of area, the company's Chief Accounting Officer.
Thank you.
Speaker Change: Note that certain matters, which we will discuss on today's call are forward looking statements within the meaning of federal securities laws.
Speaker Change: These forward looking statements involve risks and other factors, which can cause actual results to differ significantly from future results that are expressed or implied by such forward looking statements.
Speaker Change: Participants should refer to the company's filings with the SEC.
Speaker Change: Our most recent annual report on Form 10-K to learn more about these risks and other factors.
Speaker Change: In addition, we will be discussing certain non-GAAP financial results on today's call. A reconciliation of these non-GAAP financial results to GAAP results can be found in the company's quarterly supplemental which is posted on our website.
Speaker Change: Now I'll turn the call over to Stuart <unk>, the company's Chief Executive Officer Stuart.
Thank you Lauren and good morning, everyone.
Speaker Change: Here with Lauren and me today is Michael Haines, our Chief Financial Officer, and Rick <unk>, Our Chief operating officer.
Speaker Change: Before we begin over the past several months, we have received a number of questions regarding speculation in the market.
As a matter of company policy, we do not comment on market rumors or speculation and will not do so today.
Speaker Change: What we will say is that the company carefully evaluate all opportunities to enhance value with the objective of taking actions that the company firmly believes are in the best interest of all stakeholders.
Speaker Change: Turning to the company's performance. We are pleased to report that the fundamentals of our grocery anchored shopping centers in the grocery anchored sector as well as the fundamentals of our protected supply constrained markets. All remain rock solid and continues to be launched our longstanding core drivers of our business.
Speaker Change: <unk> is the best evidence of this is our portfolio lease rate, which has been above 96% for the past 10 years and today stands at a strong 97, 1%.
Speaker Change: Our ability to consistently maintain a high portfolio lease rate is underscored by the strong longstanding demand for space, which continues to come from a growing wide range of diverse candidates.
Capitalizing on the demand through the first nine months of 2024, we've already leased well over one 2 million square feet of space, including over 450000 square feet in the third quarter alone.
Speaker Change: Additionally, we continue to capitalize on the demand to enhance tenancies at every opportunity as well as to drive rents higher.
Speaker Change: In fact, we are currently on track to post our 12th consecutive year of achieving solid rent growth on both new and renewal leases.
Speaker Change: Along with enhancing the value of our portfolio through our leasing initiatives. We continue to implement our investment program that is aimed at enhancing the long term value of our portfolio through disposing certain fully valued properties, while acquiring exceptional grocery anchored shopping centers during.
Speaker Change: During the third quarter, we sold two properties one located in San Diego and the other located up in Seattle.
Speaker Change: Both properties were stable assets, we felt the growth prospects going forward were limited and now is the appropriate time to sell each property and capitalize on the value that we create.
Speaker Change: In terms of acquisitions as we previously reported back in the second quarter, we acquired a terrific grocery anchored shopping center that is situated in one of the most sought after asset on communities.
Speaker Change: It is in the San Diego market truly irreplaceable real estate.
In terms of the economics, we sold two properties for a total of 69 million equating to a blended exit cap rate in the low 6% range.
Speaker Change: Both properties were sold to private 10 31 buyers in separate transactions.
Speaker Change: With respect to the acquisition, which we sourced through long standing off market relationship. The purchase price was $70 million equating to a going in cap rate in the high 6% range, which we've already started to increase so quickly leasing available space at the center.
Speaker Change: Going forward, we expect to grow that youll, notably over the next several years through re leasing below market space as well as enhancing the inline tenant mix.
Speaker Change: In addition to these transactions. We're currently exploring selling an additional property here in the fourth quarter and have also identified a couple of potential off market acquisition opportunities that if we decide to move forward with we would love to close quickly, possibly before year end given that we know both properties very well.
Mike: Now I'll turn the call over to Michael Haines to take you through our financial results for the third quarter, Mike. Thanks, Stuart GAAP net income attributable to common shareholders totaled $32 1 million for the third quarter of 2024, equating to 25 cents per diluted share.
Michael Haines: <unk> and GAAP net income is $26 7 million of gain on sales from the two properties that we sold during the third quarter.
Michael Haines: On a same center cash basis net operating income for the third quarter was down slightly as we anticipated by about 2% as compared to same center NOI from the third quarter of last year, driven by lease recapture income, which was notably higher than the third quarter of last year. As a result of recapturing spaces that had considerable term remaining on the lease of all of which.
Michael Haines: We have since released in a significantly higher rents on average.
Michael Haines: In terms of the first nine months of 2020 for same center NOI increased by one 5% as compared to the first nine months of last year with respect to funds from operations for the third quarter <unk> totaled $33 2 million equating to 25 per diluted share.
Michael Haines: The two property sales, particularly the larger sale, which occurred early in the third quarter impacted <unk>, one higher interest expense as compared to a year ago.
Michael Haines: In terms of <unk> for the full year given that through the first nine months <unk> totaled 78 cents per diluted share. We currently expect to finish 2024 with <unk> per diluted share for the year and $1 three to $1 five range with respect to same center NOI growth. We continue to expect that it will be in the 1% to 2% range on a year over year basis.
Michael Haines: As we commented in our last call our ongoing anchor re leasing activity and the associated downtime between leases is muted same center NOI growth this year.
Michael Haines: We complete the anchor releasing looking ahead at next year as new anchors take occupancy together with targeted re leasing opportunities in 2025, we expect same center NOI growth will be in line with our historical average potentially stronger.
Michael Haines: Lastly, turning to our balance sheet, specifically as it relates to the $250 million of senior notes that mature in December we are closely monitoring the market or in a position to move forward expeditiously with refinancing the bonds now ill turn the call over shovel, our COO to discuss property operations rich thanks, Mike to expand on Stuart's comment.
Speaker Change: Regarding tenant demand and just how strong it is a trend that started a few years ago of prospective tenants submitting standing offers to lease space whenever it may come available and perspective tenants being willing to sign leases before the space is actually available continues to gain momentum across our portfolio in markets today.
Additionally, like for like tenants are increasingly jumping at the chance to lease space that fits their infrastructure needs and are proactively seeking out such opportunities.
Speaker Change: All in all demand across our grocery anchored portfolio continues to be strong and continues to come from a broad range of necessity service and destination tenants.
Speaker Change: Turning to our leasing results during the third quarter, we leased over 450000 square feet of space, the bulk of which involve renewing long standing valued tenants and.
Speaker Change: And year to date, we have thus far at least over one 2 million square feet with over three fourths of that being renewal activity.
Speaker Change: The bulk of our renewal activity continues to center around anchor tenants many of which continue to renew well ahead of their scheduled maturities in fact of the six anchor leases that we renewed during the third quarter. All six were not scheduled to mature until next year.
Speaker Change: Furthermore, at the beginning of 2024, we had 22 anchor leases scheduled to mature next year in 2025 totaling 708000 square feet.
Based on our early renewal and releasing initiatives. We now have only 10 anchor leases scheduled to mature next year totaling just 317000 square feet and based on our discussions to date with these tenants. We currently expect that all 10 will renew.
Speaker Change: With respect to re leasing rent growth as Stuart indicated we continue to have good success at driving rents higher specifically during the third quarter, we achieved a 14% cash increase on new leasing activity on a same space comparative basis, and a 7% increase on our renewal activity.
Speaker Change: In terms of Rite aid as recently reported they are now moving forward as a private company with new leadership.
Speaker Change: With respect to the 11 Rite aid stores in our portfolio. All 11 leases have been extended for another five years on average maintaining the previous in place base rents as part of extending the leases. Some additional ti. We are provided on our part to be put towards the repositioning initiatives, which is reflected in our third quarter leasing statistics table.
Speaker Change: In terms of the four rite aid stores that we recaptured the new tenants that we signed to replace right are already underway with respect to build out plans and these new tenants base rent is over 20% higher on average for Rite aid had been paying before.
Speaker Change: Lastly, we continue to have good success with getting new tenants open and operating.
Speaker Change: At the beginning of 2020 for newly signed tenants representing about $7 million of incremental base rent on a cash basis had not yet opened their businesses and commence paying rent.
Speaker Change: That $7 million year to date, approximately $4 6 million of them are now open and paying rent, including $1 4 million that opened during the third quarter.
Speaker Change: And while $4 6 million of incremental rent has open given our strong leasing activity new leases that we've signed year to date have added $5 9 million of additional incremental ramp, including $2 4 million from new leases that we've signed during the third quarter.
Speaker Change: Taking all of this activity into account as of September 30, total incremental rent from new leases that havent, yet commenced stood at approximately $8 2 million.
Speaker Change: Now I will turn the call back over to Stuart. Thanks.
Stuart GAAP: Thanks Rich.
As we move forward wrapping up 2024, we expect to have an active and productive fourth quarter.
Stuart GAAP: On the leasing front, we're on track thus far to have another successful quarter.
Stuart GAAP: We are steadily moving towards completing the anchor re leasing initiative that we commenced earlier in the year the largest being the really some of the coal space at Fallbrook.
The re leasing is complete we expect that our anchor space will again be at 100% leased as it has been for the previous seven years in a row and we expect that will bring our overall portfolio lease up lease rate to around 98% again.
Stuart GAAP: Additionally, we expect that our anchor release initiatives will add over $2 million of additional incremental long term annual revenue.
Speaker Change: Looking ahead in 2025 as Ritch comment. We currently expect all of our anchor leases that are scheduled to mature in exterran will renew.
Speaker Change: Several of those have no no further renewal options at our notably below market.
Michael Haines: In addition to leasing as Mike noted, we will be refinancing the $250 million of maturing bonds, which we expect to do in the coming weeks.
Michael Haines: Lastly, as I touched on earlier, we are currently looking at several interesting opportunities to continue advancing our investment capital recycling initiatives.
Michael Haines: From our perspective, selling certain fully valued properties with limited growth going forward.
Michael Haines: Same time acquiring through off market sources irreplaceable assets like our recent acquisition no doubt enhances the long term strength and appeal of our overall portfolio as well as our ability to continue growing cash flow and building value well into the future.
Before taking questions as I stated at the beginning of the call as a matter of company policy, we do not comment on market rumors or speculation.
Michael Haines: We ask that you please refrain from questions along those lines with.
Michael Haines: With that.
Michael Haines: Operator, please open up the call for your questions.
Speaker Change: Thank you if you would like to ask a question.
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Speaker Change: We also asked situate for your name and company to be announced before you proceed with your question.
Speaker Change: One moment, while we compile the Q&A roster.
Speaker Change: And our first question for the day will be coming from Dori.
Speaker Change: Cash suite of Wells Fargo Fargo Securities. Your line is open.
Dori Cash: Good morning, George.
Dori Cash: Good morning, Hi, you mentioned refinancing your bonds in the next few weeks that you still expect Q include the term loans with that and then just on pricing I think you previously mentioned.
Dori Cash: In the high fives is that still appropriate.
Michael Haines: Yes, hydro it's Mike, Yes, we do we would expect to.
Michael Haines: Include the term loan as part of the whole refinancing initiative on the bonds that's our goal.
Michael Haines: The tenures bounce around a little bit, but we expect to be priced somewhere probably in the mid 5% range.
Michael Haines: Okay.
Speaker Change: And then you've talked about your same store NOI returning to at 3% to 4% growth rate would you would you call that a 26 expectation just taking into account store openings in mid 20 fives.
Speaker Change: Which I would assume would put your 25 growth closer to the end of.
Speaker Change: Q2, 5% range.
I don't know if it's necessarily a 26 event I would expect 25 to be notably higher than this year.
Speaker Change: Simply because some of those anchors are going to be able to pay earlier and the euro as I expect startups can you comment on that but I would expect 25%. Obviously hired 24, we're just coming off of a high.
Speaker Change: Hi measure from last year, So 25 versus <unk> 24 should be returning to normal.
Speaker Change: Okay. Thank you very much.
Speaker Change: Thank you one moment for our next question.
Speaker Change: And our next question will be coming from Juan Sanabria.
Juan Sanabria: Good morning.
Juan Sanabria: Good morning.
Juan Sanabria: Maybe just as a first question just curious on what drove the higher G&A expected.
Juan Sanabria: The outlays for the for the year.
It's basically.
Speaker Change: A modest comp related.
Forest base shares recently when do you think the measurements you're going to achieve yet to adjust that every every quarter based on expectations and this quarter.
Speaker Change: <unk> had to adjust that up a little bit.
Speaker Change: Okay.
Speaker Change: And then just on the transactions market.
Speaker Change: You talked a little bit about some of the cap rates for the most recent transaction spirit.
Speaker Change: Hoping you could give us a sensor.
Speaker Change: Where are they assets that you may sell and buy in the fourth quarter early into 'twenty five.
Speaker Change: <unk> are.
Are being valued or art.
Speaker Change: If you could comment in general on where you see asset values from a cap rate perspective.
Speaker Change: And your worst sure okay.
Speaker Change: Yes, I mean look I think as we all know.
Speaker Change: The acquisition market has ebbed and flowed as it relates to the 10 year.
Speaker Change: We saw some pickup in activity over the last quarter cap rates dropping $25 50 basis points.
Speaker Change: Now that the 10 years moved up a bit but im expecting the market potentially to slow down a touch but continue with the momentum that we saw over the last quarter in terms of more activity.
Speaker Change: From a cap rate perspective.
Speaker Change: Youre looking on the West coast for high quality grocery anchored assets.
Speaker Change: What we see what's trading more recently would be in the high fives low success. So we continue to hope that we can sell assets as we've done over the last several quarters and again in that high fives low six range and continue to buy off market transactions.
At six or higher.
Speaker Change: Or is that mid six range. So that we're churning the capital as you would say accretively.
Speaker Change: Thank you very much.
Speaker Change: Thank you one moment for the next question. Please.
Speaker Change: And our next question will be coming from Craig Melman.
Good morning, Craig.
Craig Melman: Hey, good morning, guys.
Craig Melman: Just on the acquisition market I think more recently.
Craig Melman: We were with you guys you had mentioned some LP unit deals potentially coming back into the mix is that still on the table at all or should we just consider you guys need to sell kind of 50 75 basis points inside to continue to buy on the capital recycling.
Speaker Change: Well, we continue to pursue on the acquisition front two things obviously with the relationships we have on the West coast, we continue to pursue all P transactions.
Speaker Change: As well as straight purchases.
But as we look forward into the fourth quarter and into 'twenty five.
Speaker Change: We do think that we've identified more opportunities.
Speaker Change: To buy assets and as we continue to build the pipeline and we will continue to sell assets. So that it's not having any impact in terms of raising any equity.
Our balance sheet.
Speaker Change: Okay.
Speaker Change: And then just on Fallbrook any update on when that lease could be signed.
Speaker Change: Sure, Yes, we continue to work on finalizing the lease with the prospective tenant which is a national long time tenant of ours. We have our goal is to have this process completed in the lease executed before the end of the year.
Speaker Change: Great. Thank you.
Thank you Juan Melissa the next question.
Speaker Change: And our next question will be coming from Todd Thomas of Keybanc capital markets. Your line is open.
Todd Thomas: Good morning, Tom Hi, Hi, Thanks, Good morning.
Speaker Change: Sure.
I'm not asking about.
Todd Thomas: The speculation itself, but the stock reacted to that and has held at higher levels. The top almost 16% on the year and so whether youre, a <unk> yield or implied cap rate your cost of capital has improved quite a bit.
You talked about seeing some potential acquisitions I'm just curious when is the right time to perhaps be in the market to raise equity capital may be use the ATM to take advantage of your improved cost of capital and put some put some of that capital to work.
Speaker Change: Yes, I mean look the focus has been the balance sheet with cash coming through in terms of making sure that we continue to focus on those metrics.
Speaker Change: As we move through the balance of the year and into early next year. Todd. So I don't think were going to be looking to the equity markets in terms of raising capital. It's the focus now is really got churning, our capital and focusing on keeping our balance sheet in check and more importantly, continuing to work on the metrics around going back to.
Speaker Change: The market when the time is right to refinance the debt that's coming due.
Todd Thomas: Okay and.
Todd Thomas: Michael was there any consideration to entering into new new swap agreements or.
Michael Haines: Refinancing the $450 million of combined December and January maturities over over the last several several weeks.
Michael Haines: The yield curves bounce quite a bit off the bottom just curious on the decision to hold off and the timing around all of that.
Well.
Speaker Change: We allowed the one swaps to mature in August kind of coincident with the expectation of the timing of new refinancing. Obviously the goal is to grow through 2024, and the term loan and entered into a swap now we're just kind of.
Speaker Change: <unk> that up a little bit because of that we're expecting the goal is to go back to the bond market in the near term. So it didn't make sense to swap currently.
Speaker Change: Okay, and just one more if I could.
Speaker Change: Bad debt.
Speaker Change: You are at $1 6 million for the year, the $3 million for the full year.
Speaker Change: In the revised guidance implies a considerable pickup in the fourth quarter is there anything that you're eyeing specifically.
Speaker Change: That might hit in the last quarter of the year, where we're almost through October I'm. Just curious if you can comment on that and the general health of the tenant base today.
Speaker Change: I think that 10 basis pretty healthy we're just bank continue to be cautiously conservative on the bad debt.
Guidance.
Speaker Change: Nothing in particular.
Speaker Change: Okay alright, thank you.
Speaker Change: Okay.
Speaker Change: Thank you one moment for the next question.
Speaker Change: And our next question will be coming from Nicholas Stanley of Baird. Your line is open.
Speaker Change: Good morning.
Speaker Change: Hello, This is actually worth hey, good morning, everyone.
Speaker Change: Yes, I guess this whole auto-dial Linda has picked up a bit for you.
Speaker Change: Okay quick question for you on Fallbrook.
Speaker Change: You said you are looking to have a lease signed there and when can you have that kind of opened and he's still looking at a pretty big box split there.
Yes.
Speaker Change: Yes, there is still well the box that can be split, but significant work needs to be done to the box to accommodate the needs of the tenant and so we would expect that that would be completed next year and the tenant opening either very late next year or the first part of 'twenty six.
Okay, and then you have that comment about tenants you're iron space before it can it actually moves out would you look to increase your recaptures and was that mainly at anchor comment.
Speaker Change: No I mean, we have there is other opportunities out there. Some some we recaptured a couple of pads at the end of last year, which we released at significantly higher rents this year.
Speaker Change: So there is opportunities sort of embedded throughout the portfolio.
Speaker Change: The timing of when you can access them.
Speaker Change: That depends but we're eyeing opportunities throughout the portfolio and shop space and anchor.
Speaker Change: Okay, and then one final one on the balance sheet with a long term yields start to arise would you maybe pivot to a term loan.
Speaker Change: We have given us some consideration that I would have to talk to my banking here about the update on the <unk> side for term loans. So I think thats come back a little bit lately.
Speaker Change: That's always one of the considerations for sure.
Speaker Change: Alright, thanks, everyone. Thank.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you one moment to the next question.
Speaker Change: And our next question will be coming from the line of Michael Mueller of Jpmorgan. Your line is open.
Michael Mueller: Yes, hi.
Michael Mueller: Hey, good morning, just curious what.
Michael Mueller: What exactly drove the <unk> guidance reduction considering that there wasn't a change in the same store NOI expectation and the other adjustments seem to kind of wash each other out.
Speaker Change: Acquisitions, yes, well, hey, Mike aside from interest expense the Onemain variable that's always a bit of a challenge in terms of gauging, where actual results will shake out versus our budget as we head towards year end as property level, NOI, which is driven in part by our leasing activity. So if leasing is in line with our fourth quarter budget, we would expect to end up in the middle of our range.
Speaker Change: Got it.
Speaker Change: Okay.
Speaker Change: And then just just kind of curious do you like in terms of general question here when Youre looking at your renewal leasing what portion of your renewal leasing if we look either for the third quarter year to date is tied to fixed renewals versus just kind of going straight to market.
Yes, it's rich I don't have a specific number here in front of me, but.
Speaker Change: It really varies from quarter to quarter based on the lease that's expiring there is definitely some several leases coming up some anchor leases that don't have any options remaining and we will expect to get those leases up to market but.
Speaker Change: It's hard to give you a specific percentage because all the leases are varied.
Speaker Change: Okay. Appreciate it thank you.
Speaker Change: Thank you Mr. The next question.
Speaker Change: And our next question will be coming from the line of Pollyanna Rojas Smith.
Speaker Change: Green Street your line is open.
Speaker Change: Good morning.
Speaker Change: Good morning.
Speaker Change: What percentage of your assets assets would you say that CB prescription of <unk>.
<unk>.
Speaker Change: Top artists, which indicates growth ahead. Thank you would you be inclined to cycle.
Speaker Change: Well.
Speaker Change: It's tough to get I mean from a percentage perspective.
Speaker Change: We've identified probably right.
Speaker Change: Right now about five or six assets that would move to market.
Sooner than later as it relates to the profile of its NOI growth.
Speaker Change: We started a couple of assets that are on the table to sell that we have had the opportunity to re tenant more recently that are grocery anchored.
Speaker Change: Those are at the top of the list and.
Speaker Change: We were lucky enough one of them was a rite aid that we lease to a national tenant that should be coming online with the next three to four months. That's the type of asset we will focus on selling.
Speaker Change: Selling.
So when as we come through the portfolios, we do often probably five or six assets is probably what we're looking at as we look into 2025.
Speaker Change: That's helpful.
Speaker Change: I was just curious if you can share what retailers have taking the space, formerly occupied by Rite aid.
Speaker Change: The right spaces Paulina, yes, yes, correct, yes.
Speaker Change: No.
Speaker Change: We have.
Dollar tree has taken a piece of one space, we have a swim school we have a.
Speaker Change: Our salon suites tenant and we have a grocer.
Speaker Change: And a auto parts.
Speaker Change: Okay very interesting.
Speaker Change: <unk>.
Speaker Change: And my last question.
Speaker Change: Some restaurants have been recently on the news showing weakness.
Speaker Change: And I know your concentration to restaurants.
Speaker Change: Is mainly in quick service, but how much would you say is local versus national.
Speaker Change: <unk>.
Speaker Change: And Dan I don't have a specific number here in front of me or a percentage.
Speaker Change: But.
Speaker Change: I don't know if <unk> would be say, 50% is local credit for gas drove about 15%.
Sales continue to be quite strong on the west coast as it relates to the whole category.
Speaker Change: In terms of our portfolio and as you touch on we haven't had the exposure to the tenants that you are seeing in the headlines in fact, most of them, we don't have any exposure to.
Speaker Change: Correct.
Speaker Change: Okay. Thank you very much.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Thank you and that concludes the Q&A session for today I would like to turn the call over to Stewart for closing remarks. Please go ahead.
In closing thanks to thanks to all of you for joining us today as always we appreciate your interest in ROIC.
Stewart: If you have any additional questions. Please contact Laura Mike Rich or me directly also you can find additional information in the company's quarterly supplemental package, which is posted on our website as well as our 10-Q.
Stewart: Lastly for those of you who are attending NAREIT conference in Las Vegas in a few weeks, we look forward to seeing you. There. Thanks again and have a great day everyone.
Stewart: Yeah.
Speaker Change: This concludes today's conference call. Thank you all for participating you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].