Retail Opportunity Investments Corp. Price & Performance (ROIC)

Stuart?

Thank you, Lauren, and good morning, everyone. Here with Lauren and me today is Michael Haynes, our Chief Financial Officer and Rich Schoebel, our Chief Operating Officer. Before we begin, over the past several months, we've 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. What we will say is that the company carefully evaluates all opportunities to enhance value with the objective of taking actions that the company firmly believes are in the best interest of all stakeholders. Turning to the company's performance, we were pleased to report that the fundamentals of our grocery anchored shopping centers in the grocery anchored sector as well as the fundamentals of our protective supply constrained markets all Retail rock solid and continue to be in long standing core drivers of our business. Perhaps 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 90 7.1 percent Our ability to consistently maintain a high portfolio lease rate is underscored by the strong longstanding demand for space, which continues come from a growing wide range of diverse tenants, Capitalizing on the demand, through the 1st 9 months of 2024, we've already leased well over 1,200,000 square feet of space including over 4 50,000 square feet in the 3rd quarter alone.

Additionally, we continue to capitalize on the demand to enhance tenant as well as to drive rents higher. In fact, we are currently on track to post our 12th consecutive year of achieving solid rent growth on both new and renewed leases.

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 the Q3, we sold 2 properties, 1 located in San Diego and the other located up in Seattle. While both properties were stable assets, we felt the growth prospects going forward were limited. And now is the appropriate time to sell each property in capitalize on the value that we created. In terms of acquisitions, as we previously reported back in the Q2, we acquired a terrific dual grocery anchored shopping center that is situated in one of the most sought after affluent communities in the San Diego market, truly irreplaceable real estate. In terms of the economics, we sold the 2 properties for a total of 69,000,000 equating to a blended exit cap rate in the low 6% range. Both properties were sold to private 1031 buyers in separate transactions. With respect to the acquisition, which we sourced through a long standing off market Retail The purchase price was $70,000,000 equating to a going in cap rate in the high 6% range.

The purchase price was $70,000,000 equating to a goonian cap rate in the high 6% range. The purchase price was $70,000,000 equating to a goonian cap rate in the high 6% range which we've already started to increase to quickly leasing available space at the Going forward, we expect to grow the yield notably over the next several years. Through re leasing below market space as well as enhancing the in line tenant mix, addition to these transactions, we are currently exploring selling an additional property here in the Q4 and have also identified a couple potential off market acquisition opportunities that if we decide move forward with, we would look to close quickly, possibly before year end, given that we know both properties very well. Now I'll turn the call over to Michael Hanes to take you through our financial results for the Q3. [indiscernible] Thanks, Stuart. GAAP net income attributable to common shareholders totaled 32,100,000 for the Q3 of 2024 equating to $0.25 per diluted share. Included in GAAP net income is $26,700,000 of gain on sale from 2 properties that we sold during the Q3rd quarter On a same center cash basis, net operating income for the 3rd quarter was down slightly as we anticipated by about 2%.

As compared to same center NOI from the Q3 of last year driven by lease recapture income, which was notably higher in the 3rd quarter of last year as a result of recapturing spaces that had considerable term remaining on the leases. All of which we have since released and at significantly higher rents on average. In terms of the 1st 9 months of 2024, same center NOI increased by 1.5% as compared to the 1st 9 months of last year. With respect to funds from operations, for the Q3, FFO totaled $33,200,000 equating to $0.25 per diluted share. The 2 property sales impacted FFO along higher interest expense as compared to a year ago. In terms of FFO for the full year, given that through the 1st 9 months, FFO totaled $0.78 per diluted share, We currently expect to finish 20 24 with FFO per diluted share for the year in the $1.03 to $1.05 range. With respect to same center NOI growth, we continue to expect that it will be in the 1% to 2 percent range on a year over year basis. As we commented on our last call, our ongoing anchor releasing activity and the associated downtime between leases has muted same center NOI growth this year.

As 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. Lastly, turning to our balance sheet, specifically as it relates to the $250,000,000 of senior notes that mature in December, we are closely monitoring the market under an are in a position to move forward expeditiously with refinancing the bonds. Now I'll turn the call over to Schoebel, our COO to discuss property operations. Rich? Thanks, Mike. To expand on Stuart's comments regarding tenant demand and just how strong it is, trend that started a few years ago of prospective tenants submitting standing offers to lease space whenever it may come available and prospective tenants being willing to sign leases before the space is actually available continues to gain momentum across our portfolio and 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. 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. Turning to our leasing results. During the Q3, leased over 450,000 square feet of space bulk of which involve renewing longstanding valued tenants. And year to date, we have thus far leased over 1,200,000 square feet with over 3 fourths of that being renewal activity.

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 6 anchor leases that we renewed during the Q3, all 6 were not scheduled to mature until next year. Furthermore, at the beginning of 2024, we had 22 anchor leases scheduled to mature next year in 2025. Totaling 708,000 square feet.

Based on our early renewal and releasing initiatives, now have only 10 anchor leases scheduled to mature next year, totaling just 317,000 square feet. And based on our discussions to date with these tenants, we currently expect that all 10 will renew. Respect to releasing rent growth, as Stuart indicated, we continue to have good success at driving rents higher. Specifically, during the Q3, we achieved a 4 [indiscernible] and a 7% increase on a renewal activity.

In terms of Rite Aid, as recently reported, they are now moving forward as a private company with new leadership. With respect to the 11 Rite Aid stores in our portfolio, all 11 leases have been extended for another 5 years on average maintaining the previous in place base rents. Part of extending the leases, some additional TIs were provided on our part to be put towards the repositioning initiatives which is reflected in our 3rd quarter leasing statistics table.

In terms of the 4 Rite Aid stores that we recaptured, the new tenants that we signed to replace Rite Aid are already underway with the respective build out plan and these new tenants base rent is over 20% higher on average from what Rite Aid had been paying before. Lastly, we continue to have good success with getting new tenants open and operating. The beginning of 2024, newly signed tenants representing about $7,000,000 of incremental base rent on a cash basis Of that $7,000,000 year to date approximately $4,600,000 of that are now open and paying rent.

Including $1,400,000 that opened during the Q3. And while $4,600,000 of incremental rent has opened, given our strong leasing activity, new leases that we have signed year to date have added $5,900,000 of additional incremental rent. Including $2,400,000 from new leases that we have signed during the Q3. Taking all of this activity into account, as of September 30, total incremental rent from new leases that haven't yet commenced stood at approximately 8,200,000 dollars Now I'll turn the call back over to Stuart.

Thanks, Rich. We move forward, wrapping up 20 24, we expect to have an active and productive 4th quarter. On the leasing front, we were on track thus far to have another successful quarter. We are steadily moving towards completing the anchor releasing initiative that we commenced earlier in the year. The largest being the re leasing of the coals space at Fallbrook. Once the releasing is complete, we expect that our anchor space will again at 100% leased as it has been for the previous 7 years in a row and we expect that we'll bring our overall portfolio lease to up lease rate to around 98% again. Additionally, we expect that our anchor release initiative will add over $2,000,000 of additional incremental long term annual revenue Looking ahead in 2025, as Rich comment, we currently expect all of our anchor leases that are scheduled to mature next will renew Several of those have no further renewal options and are notably below market. In addition to leasing, as Mike noted, We will be refinancing the $250,000,000 of maturing bonds which we expect to do in the coming weeks. Lastly, as I touched on earlier, are currently looking at several interesting opportunities to continue advancing our investment capital recycling initiatives.

From our perspective, selling certain fully valued properties with limited growth going forward while at the 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 build 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. We ask that you please refrain from questions along those lines. With that, operator, please open up the call [indiscernible] You will then hear an automated message advising your hand is raised.

And our first question for the day will be coming from Dori [indiscernible] Fargo Securities. Your line is open. Good morning, Jori.

Good morning. You mentioned refinancing your bonds in the next few weeks. Do you still expect to include the term loan with that? And then just on pricing, I think you previously mentioned expect like in the high 5s. Is that still appropriate?

Yes. Hi, Derek. It's Mike. Yes, we do would expect to do include the term loan as part of the whole refinancing initiative on the bonds. That's our goal. And the 10 years bounced around a little bit, but we expect price somewhere probably in the mid-5.5% range.

Okay. And then you've talked about your same store NOI returning to a 3% to 4% growth rate. Would you would you call that a 26% expectation just taking into account store openings in mid-twenty 5 which I would assume would put your 25 growth closer to the I don't know, 2%, 2.5% range?

I don't know if it's necessarily a 26% event. I would expect 25% to be notably higher this year's, simply because some of those anchors are going to be into paying earlier in the year as I expect. Stuart, I'll be commenting on that. But expect 25 to be obviously higher than 24. We're just coming off of a high high measured from last year. So 25% versus 24% should be returning to normal Okay. Thank you very much.

Thank you. One moment for our next question. And our next question will be coming from Juan Santa Maria of BMO Capital Markets.

Maybe just as the first question, just curious on what drove the higher G and A expected outlays for the year?

It's basically one of its comp related The performance based shares based on when you think the measurements you're going to achieve, you have to adjust at every every quarter based on expectations. And this quarter, we had to adjust that up a little bit. Okay.

And then just on the transactions market, you talked a little bit about some of the cap rates for the most recent transactions, but hoping you could give us a sense of where the assets that you may sell and buy in the Q4 or early into 'twenty 5 being valued or if you could comment in general on where you see asset values from a cap rate perspective in your website?

Yes. I mean, look, I think as we all know, the acquisition market is ebbed and flowed as it relates to the tenure We saw some pickup in activity over the last quarter, cap rates dropping 25, 50 basis points. Now that the 10 years moved up a bit, I'm 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. From a cap rate perspective, you're looking on the West Coast for high quality grocery anchored assets What we see what's trading more recently would be in the high fiveslow 6s. So we continue to hope that we can sell assets as done over the last several quarters and again in that high 5, low 6 range and continue to buy off market transactions at 6 or higher. Towards that mid-six range so that we're churning this the capital as you would say accretively.

Thank you very much.

Thank you. One moment for the next questions. And our next question will be coming from Craig Mailman Good morning, Craig. Hey, good morning, guys. Just on the acquisition market, I think more recently when we were with you guys, you had mentioned some OP 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 to buy on the capital recycling?

Well, we continue to pursue on the acquisition front two things. Obviously, with the relationships we have on the West Coast, we can continue to pursue OP transactions. As well as straight purchases. But as we look forward into the Q4 and into 'twenty 5, we do think that we've identified more opportunities to buy assets. And as we continue to build the pipeline, we will continue to sell assets so that it's not having any impact in terms of raising any equity. Or our balance sheet. [indiscernible] And then just on Fallbrook, any update on when that lease could be signed? Sure. Yeah.

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 and the lease executed before the end of the year.

Great. Thank you.

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

Good morning, Todd. Good morning, Todd. Hi.

Hi, thanks. Good morning. Stuart, not asking about the speculation itself, but the stock reacted to that and has held at higher levels. It's up almost 16% on the year.

And so whether your AFFO 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 cap capital, maybe use the ATM to take advantage of your improved cost of capital and put some put some of that capital to work?

Yes. I mean, look, the focus has been on the balance sheet. With debt coming due in terms of making sure that we can as we move through the balance of the year and into early next year, Todd. So don't think we're going to be looking to the equity markets in terms of raising capital. The focus now is really on 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 the market when the time is right to refinance the debt that's coming due.

Okay. And Michael, was there any consideration to entering in to new swap agreements or refinancing the $450,000,000 of combined December and January maturities over the last several several weeks. The yield curve's bounce quite a bit off the bottom, just curious on the decision hold off and the timing around all of that Well, we allowed the wind swaps to [indiscernible] Obviously, the goal is to do both the 2024s and the term loan. And enter into a swap now would just kind of muddy that up a little bit because we're expecting the goal is to go back to the bottom market in the near term. So it didn't make sense to do a swap currently.

Okay. And just one more if I could. So bad debt you're at $1,600,000 for the year. The $3,000,000 for the full year in the revised guidance implies a considerable pickup in the 4th quarter. Is there anything that you're eyeing specifically that might hit in the last quarter the year. We're almost through October. I'm just curious if you can comment on that in the general health of the tenant base today?

I think the tenant base is pretty healthy. We're just being continue to be cautiously conservative on the bad debt [indiscernible] Nothing in particular?

Okay. All right. Thank you.

Thank you. One moment for the next question. And our next question will be coming from Nicholas Stemman of Baird. Your line is open. Good morning, This is actually Wes. Hey, good morning, everyone. Oh, Wes, hey, Wes.

Yes, I guess this whole auto dial in is picked up, Nick, for you. Okay, quick question for you on Fallbrook. You said you're looking to have a lease signed there. And when can you have that tenant opened and you're still looking at a pretty big box split there?

Yes. There's still well, the box didn't need to 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 of 'twenty 6.

Percent. Okay. And then you have that comment about tenants are eyeing space before a tenant actually moves out. You look to increase your recaptures Was that mainly an anchor comment?

No. I mean, we have there's other opportunities out there. Some we've recaptured a couple of pads at the end of last year, which we released at significantly higher rents this year. And so there's opportunities sort of embedded throughout the portfolio. The timing of when can access them, that depends. But we're eyeing opportunities throughout the portfolio in shop space and anchor. Okay. And then one final one on the balance sheet. With the long term yield start to rise, would you maybe pivot to a term loan We've given us some consideration that I'd have to talk to my banking group about the appetite on the bank side for term loans. I think that's come back a little bit lately. That's always one of the considerations for sure.

Okay. Thanks, everyone. Thank you. Thank you.

Thank you. One moment for the next question. And our next question will be coming from the line of Michael Mueller of JPMorgan Your line is open.

Hey, good morning. Just curious, what actually what exactly drove the FFO 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. Yeah. Well, hey, Mike. Aside from interest expense, the one main variable that's always a bit of a challenge in terms of gauging where actual results will shake out is versus our budget as we head towards year end is property level NOI. Is driven in part by our leasing activity. So leasing is in line with our 4th quarter budget, we would expect to end up in the middle of our range.

Got it.

Okay. And then just out of curiosity, like in terms of general question here, when you're looking at your renewal leasing, what portion of your renewal leasing, if we look either for the Q3 year to date is tied to fixed renewals versus just kind of going straight to market?

Yes. It's Rich. I don't have specific number here in front of me, but it really varies from quarter to quarter. Based on the lease that's expiring. There's definitely several leases coming up. Anchor leases that don't have any options remaining. We will expect to those leases up to market. But it's hard to give you a specific percentage because all the leases are varied.

Okay. Appreciate it. Thank you.

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

Good morning.

Good morning.

What percentage of your assets would you say that fit this description of stable properties with limited growth ahead that you would be inclined to recycle?

Well, it's tough to get I mean, from a percentage perspective, we've identified probably right now about 5, 6 assets that would move to market sooner than later as it relates to the profile of its NOI growth. We still have a couple of assets that are on the table to sell that. We have had the opportunity to re tenant more recently that aren't grocery anchored Those are at the top of the list. And we were lucky enough one of them was a Rite Aid that we leased to a national tenant that should be coming online within the next 3 to 4 months. That's the type of asset we'll focus on now selling. So as we come through the portfolios, we do often probably 5 or 6 assets is probably what we're looking at as we look into 2025.

That's helpful. Out of curiosity, can you share what retailers have taken this space formerly occupied by Rite Aid?

The Rite Aid spaces, Paulina?

Yes.

Yes, correct.

Yes. So we have Dollar Tree's taken a piece of 1 space. We have a swim school. We have a salon suites tenant and we have a grocer.

And a auto parts.

Okay, very, very diverse. And my last question is some restaurants have been recently on the news showing weakness And I know your concentration to restaurants is mainly in quick service, But how much would you say is local versus national [indiscernible] I don't have a specific number here in front of me or [indiscernible] don't know, Stuart, would you say 50% is local? Credit for restaurants? Yes, about 15%, yes. And sales continue to be quite strong, Pauline, on the West Coast as it relates to the whole category. In terms of our portfolio. But as you said, John, we haven't had the exposure to the tenants that you're seeing in the headlines. In fact, most of them we don't have any exposure to.

Correct.

Okay. Thank you very much. Yes.

Thank you. And that concludes the Q and A session for today. I would like to turn the call over to Stuart for closing remarks. Please go ahead.

Hi, closing. Thanks to all of you joining us today. As always, we appreciate your interest in ROIC. If you have any additional questions, please contact Lauren, Mike, Rich or me directly. Also, you can find additional information in the company's quarterly supplemental package which is posted on our website well as our 10 Q Lastly, for those of you who are attending NAREIT Conference in Las Vegas in a few weeks, we look forward to Thanks again and have a great day everyone.

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