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spk07: Welcome to Retail Opportunity Investments 2021 First Quarter Conference Call. Participants are currently enlisted on the node. Following the company's prepared comments, the call will be opened up for questions. Please note that certain matters discussed in this call today constitute forward-looking statements within the meaning of federal securities laws. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the company can give no assurance that these expectations will be achieved. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially from future results expressed or implied by such forward-looking statements and expectations. Information regarding such risks and factors is described in the company's filings with the Securities and Exchange Commission including its most recent annual report on Form 10-K. Participants are encouraged to refer to the company's filings with the SEC regarding such risks and factors, as well as for more information regarding the company's financial and operational results. The company's filings can be found on its website. Now, I would like to introduce Stuart Tant, the company's Chief Executive Officer.
spk02: Thank you. Good day, everyone. We appreciate everyone joining us today and hope that you and your families are all doing well. Here with me today is Michael Haynes, our Chief Financial Officer, and Rich Schoble, our Chief Operating Officer. While it's only been a few short months since our last earnings call, we are pleased to report that a lot of encouraging progress is now underway on the West Coast. All businesses up and down the West Coast are now allowed to be open. In terms of our portfolio, we are pleased to report that today over 99% of our tenants are currently open and operating. We only have just a small handful of tenants that have yet to reopen, primarily a few salon, fitness, and restaurant tenants, all of which have indicated that they are preparing to reopen soon. With businesses reopening, customer traffic and shopping activity have also both ramped up. Additionally, with over 99% of our tenants now open, our rent collection is heading towards pre-pandemic levels as well. Notwithstanding that the West Coast only recently began reopening, we still received approximately 92% of our bill-based rent in the first quarter. Since the shutdowns began being lifted, our collection rate has been steadily increasing. As highlighted in our press release, we've already received approximately 93% of our base rent for April, which is ahead of our historic pace during the pandemic. Assuming there are no setbacks regarding the pandemic, we expect our rent collection rate will head towards pre-pandemic levels as we move through the second quarter. In step with tenants reopening, customer activity ramping up, and rent collection steadily increasing, leasing activity is also returning to pre-pandemic levels. while occupancy typically drops in the first quarter following the holiday season. However, given the considerable pent-up demand for space that had been building across our portfolio during the last shutdown, as many businesses were waiting for the rollout of vaccines to begin, we were able to capitalize on that demand and actually achieve positive rent absorption in the first quarter, while also achieving positive rent spreads. Importantly, the new leases that we are signing are with terrific new necessity and service-based tenants, many of which are new businesses entering our markets for the first time, along with a growing number of established businesses seeking to expand their presence in our markets where they have a very strong customer base. Many of these businesses were either unaffected or in some cases positively affected, financially speaking, during the pandemic and are now looking to capitalize on their success by expanding in our core markets. Along with leasing and business activities steadily increasing, we are also seeing municipalities becoming increasingly more engaged and responsive in terms of the permitting process. recognizing the importance of helping businesses and their local economies rebound as the pandemic subsides. We are working hard to make the most of this to speed up the process of getting new tenants up and running. Additionally, it is helping in terms of advancing our pad development initiatives, which we are capitalizing on as well. In fact, the way things are starting to take shape, this could be a strong year in terms of tenant and pad openings. Going forward, assuming there are no setbacks in terms of additional shutdowns again, we are becoming increasingly optimistic that our business could return to full operation in the months ahead. Now, I'll turn the call over to Michael Haynes, our CFO. Mike?
spk05: Thanks, Stuart. Starting with our first quarter financial results, GapNet income attributed with common shareholders for the first quarter of 2021 was $7.4 million, equating to $0.06 per diluted share. Funds from operations for the first quarter totaled $31 million, equating to $0.24 per diluted share. Same-center net operating income, which includes all 88 of our shopping centers, totaled $47.2 million for the first quarter of 2021, which is 5.6% below our same-center NOI for the first quarter of last year prior to the pandemic. Notwithstanding the first quarter number, which we anticipated, we continue to expect same-center NOI will be between 0% and 3% growth for the full year. To date, we have received 91.8% of total billed base rent for the first quarter. As Stuart touched on, during a good portion of the first quarter, the West Coast was still under business restriction mandates, so for us to collect nearly 92% of our billed base rent speaks to the strength of our grocery anchor portfolio. With respect to the remaining 8%, which totals approximately $4.1 million, $1.6 million of that we set aside as a bad debt reserve. While our bad debt is still a bit elevated as compared to our historical quarterly bad debt, $1.6 million is a notable improvement over our quarterly bed debt during the height of the pandemic. Going forward, we expect it will trend back down closer to our historical quarterly rate, which prior to the pandemic had consistently averaged well below $1 million. In terms of the remaining $2.5 million of bill-based rent not yet received, we've agreed to defer $1.4 million of that, and in terms of the balance, with all businesses now allowed to be open again, we expect to receive the bulk of it as we move through the second quarter. Turning to our balance sheet, During the first quarter, we continued to utilize free cash flow to pay down debt. Specifically, we paid down $34.2 million of debt during the quarter. Overall, since the pandemic began, we've lowered our total debt by approximately $75 million to date. And with the $34 million paid down in the first quarter, as of March 31st, the outstanding balance under $600 million credit facility was just $14 million. Lastly, in terms of our FFO guidance, we remain on track to achieve FFO between 95 cents and $1.02 for diluted share for 2021. Now I'll turn the call over to Rich Schoble, our COO.
spk04: Rich? Thanks, Mike. Expanding on Stuart's comments, leasing activity and demand for space over the past couple of months has been accelerating sharply. The demand runs the gamut from existing tenant relocations and expansions to new tenants moving their businesses to our centers from other competing properties to new businesses entering the market for the first time or expanding their reach on the West Coast. The underlying theme that we are consistently hearing from existing as well as prospective tenants is that they are all optimistic about their business prospects going forward. As a result of this increased activity, as Stuart indicated, our portfolio lease rate increased during the first quarter to 96.9% as of March 31st. Breaking that down between anchor and non-anchor space, our anchor space continues to be 100% leased as it has been throughout the pandemic and our shop space is now over 93% leased. While tenant optimism and demand for space is strong, given that we are not yet entirely out of the woods with the pandemic, during the first quarter, there was a fair amount of back and forth in terms of negotiating the initial base rent, which is reflected in our rent spreads that increased by 4.9%. While the spread is below our typical double-digit increase on new leases, from our perspective, our number one goal coming out of the pandemic is to enhance tenancies at every opportunity. And we are doing just that, focusing on businesses that have performed impressively well throughout the pandemic. Just to cite a few examples, during the first quarter, we signed new leases with several new, very strong urgent care health and wellness businesses that have performed very well over the past year and are now expanding their presence on the West Coast. In the fast food sector, which has performed very well throughout the pandemic, we signed a new concept operator that is rapidly expanding on the West Coast. We actually signed not just one lease with this new operator, but three, one in Southern California, one in Northern California, and one up in the Pacific Northwest. Additionally, we signed leases with two fast food operators that both have an incredible, loyal following, one in Northern California and one up in Seattle. Both operators rarely meet. Both operators rarely open in new locations and are highly selective when they do. In fact, the operator in Seattle promoted for weeks their new location as being top secret with a countdown culminating in a big reveal event at our center, which is Crossroads, that drew a huge crowd of followers to our center on the night of their reveal, including local press and city officials. Turning to our renewal activity, which, like new leasing, has picked up notably, with an increasing number of tenants coming to us early to renew their leases. Specifically, during the first quarter, we renewed a total of 66 leases. In terms of renewal rent, a good number of the renewals involved tenants exercising renewal options that contractually stipulated the initial rent at the start of the renewal period remain on par with the previous rent, with fixed rent increases going forward over time. Additionally, on renewals where the new rent was negotiable, similar to new leases, there was a fair amount of back and forth as to the initial renewal rent. As a result, our overall increase in cash rent on renewals for the first quarter was 3.2%. Again, a bit below our historical average for renewals. Importantly, as with our new leasing activity, our renewal activity largely centered around tenants that have been open and performing well throughout the pandemic and have a vested interest in staying at our shopping centers given their strong, loyal customer base in the surrounding community. With leasing activity increasing in the first quarter, not surprisingly, the economic spread between lease and build space increased during the first quarter. At the beginning of the year, the spread stood at about 4%, representing approximately $8.6 million of incremental annual cash rent. During the first quarter, new tenants representing about $1 million of that $8.6 million took occupancy and commenced paying rent. Taking that into account, along with new leasing activity during the first quarter, the spread increased to 4.1% as of March 31st, representing approximately $9.6 million of incremental cash rent to come online as new tenants take occupancy and commence paying rent going forward. Thankfully, as Stuart highlighted, local municipalities are starting to become more responsive in expediting the permitting process. As a result, the level of activity in terms of new tenant build-outs together with existing tenant expansion and relocation work that is now underway across our portfolio, is certainly comparable to pre-pandemic activity and may even surpass that in the coming months. Lastly, this welcome new municipality engagement is also helping to accelerate our PAD pipeline. We currently have a dozen projects underway in various stages of development, ranging from the planning stages to several that are nearing completion. Altogether, the projects will add roughly 60,000 square feet and add over $2 million in annual rent once they are all completed, which we had anticipated would be over the next 18 months. Assuming the various municipalities continue to be proactively engaged in helping expedite the process, many of our PADD projects could get completed well within that timeframe. Overall, based on the momentum that is building across our portfolio, we are becoming increasingly optimistic, as Stuart commented, that 2021 could be a strong year in terms of portfolio operations and leasing, particularly in the second half of the year. Now I'll turn the call back over to Stuart. Thanks, Rich.
spk02: As the momentum and activity builds across our portfolio, we are also now starting again to seek out acquisition opportunities. We are focusing our efforts specifically on off-market opportunities to acquire neighborhood shopping centers that are simply grocery-anchored with maybe one or two sub-anchored necessity-based tenants. Over the past year, the properties in our portfolio that hands down perform the best with essentially no issues during the pandemic were exactly this profile. While it's a bit too early to talk specifics, we do have several off-market opportunities that we are currently looking at closely that fit this profile nicely. In terms of dispositions, beyond the one property that we sold last week for $25.8 million, which generated a gain of over $9 million, looking ahead, as the acquisition market is now starting to come back in earnest, we are planning to move forward this quarter with marketing for sale our last two properties in Sacramento. Once we sell these properties, we will fully be exiting the Sacramento market. Finally, with the pandemic subsiding, we are now making plans to return to working in the office starting in June. In preparing for everyone's return, we have implemented significant enhancements to our office aimed at ensuring the safety and well-being of everyone following all of the proper protocols and then some. Additionally, we have a team that is currently assisting employees with scheduling vaccination appointments. To date, over 80% of the company has been vaccinated. A year ago, at the beginning of the pandemic, we had no idea how working remotely from home would pan out. Thankfully, to our entire team's credit, everyone stepped up incredibly. Over the past year, we became a more nimble and efficient organization, and we have also become closer as individuals. looking ahead while having to relinquish the comfort of wearing sweats or pajamas all day, and again face commuting in California, which will be an adjustment for us all. We have great optimism of what we will accomplish in the months ahead as we come back together as a stronger, closer organization and continue on our mission of building long-term value. Now we will open up the call for your questions.
spk07: Operator? Operator? Ladies and gentlemen, if you have a question at this time, please press star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, press the pound key. Your first question comes from the line of Caddy McDonald with Citi. Your line is now open. Good morning, Citi.
spk01: Good afternoon, everyone. So given you saw positive net absorption this quarter, do you expect commenced occupancy will continue to improve from here, or are you assuming you could still see some potential occupancy fallout from the tenant categories where rent collections are still pretty low?
spk02: I think that occupancy will continue to stay strong for us. I think that as we move into the third quarter and certainly the fourth quarter, I'm expecting that that will continue to be a positive number in terms of absorption.
spk01: Okay, thanks. And then just on the acquisition side, can you talk about your appetite to get more opportunistic as far as equity funding? at these levels based on the deals you're looking at today.
spk02: Mike Pazin- In terms of equity funding on acquisitions, Mike, well, we haven't raised any equity.
spk05: Mike Pazin- Right. Mike Pazin- Mike? Mike Pazin- I would say just given that we don't have any debt maturing this year and our credit line balance is almost zero, we don't have an immediate use for raising the equity. Instead, if we start acquiring properties again, then we would look to raise equity to help fund those acquisitions together with the proceeds from the Sacramento dispositions.
spk01: Okay, great. Thanks.
spk05: Thank you.
spk07: Your next question comes from the line of Craig Smith with Bank of America. Your line is now open.
spk14: Good morning, Craig. Good morning, or good afternoon. Good morning. Hey, I was wondering where cap rates are for Class A grocery anchored centers in the West Coast, California, Oregon, and Washington. There's been a lot of chatter. And where... would those cap rates stand relative to pre-COVID cap rates?
spk02: Well, there hasn't been a lot of activity in the market in terms of high-quality grocery drug-anchored shopping centers. What we have seen more recently, cap rates have actually contracted. In fact, you could say that given the fact that capital today is much more focused towards the grocery drug-anchored segment of retail, that what we're hearing is that cap rate compression should continue as we look forward for the rest of the year. So although there hasn't been any meaningful transactions that we can look to, what I can tell you and the chatter we're hearing on the West Coast is that capital is now beginning to build for this product type and we're expecting valuations to go up and cap rate compression to continue. That cap rate compression will be probably less than than it was before the pandemic.
spk14: Okay. I've been hearing similar things. And then in terms of the increasing construction costs, is that impacting your plans for the densification efforts you're pursuing, particularly the first three?
spk04: You know, it's something we're watching very closely. I think where we're at in terms of the process here, in terms of permitting, you know, we do not expect to break ground this year. It would be early next year. And we're hopeful that those pricing will come back more in line with, you know, where it was pre-pandemic.
spk07: Okay. Thank you.
spk05: Thank you.
spk07: Your next question comes from the line of Michael Gorman with BTIG. Your line is now open.
spk13: Good morning, Mike. Good morning out there. Quick question on the tenant side of things. I'm just curious what the conversations are like that you're having with some of the tenants that are on the more challenged side. You know, from your perspective as a landlord, you're almost a year in. Clearly you've got a lot of demand on the leasing side. So what are the conversations like with those tenants that still aren't still aren't able to either get open or still aren't able to pay their rents at this point?
spk04: The tenant base is still very optimistic, and I think they all at this point see the light at the end of the tunnel in terms of getting open and operating at full capacity at pre-pandemic levels. The tenants that have weathered this storm to this point are really just focused on the future. At this point, we're having almost very few conversations relative to rent referrals. You know, we've been very successful in getting grants from local municipalities and other aid sources to our tenant base so that they've been able to weather this storm. So what we're hearing is just a lot of optimism.
spk13: Okay, and then maybe... Away from the restrictions, I know this came up on the last quarter call, but you saw Kroger close two of their locations over the course of the past couple of months because of wages, obviously a lot of raw material pressures on some of the retailers. Are you seeing increased pressure on your tenants away from just the business restrictions and even in their normal course of business?
spk04: No, I mean, obviously, you know, what we do hear a lot about is the minimum wage and the impact that has. Also, you know, some, you know, hesitancy on, you know, some employees' willingness to come back to work, you know, given the government support that they're currently receiving. But having said that, you know, our tenants, again, have been able to staff their stores at the necessary levels to keep going forward. You know, we're actually working with Kroger on expansions and, you know, some new click and collect initiatives that are, you know, some things they're testing out at a few of our properties. So the tenant base, again, is, you know, from the anchors all the way to the small shop tenants are very optimistic. And, you know, they're weathering these various aspects that they're dealing with.
spk13: Okay, great. And then maybe, Stuart, just taking a step back from a strategic level and piggybacking a little bit on Craig's question, as you start looking more at the acquisition market, it sounds like it's heating up a little bit more as you look to market the Sacramento assets. How are you thinking about looking at the NOI, looking at the rent rolls of either a potential target or as you're thinking about selling some of these assets, Are you projecting complete return to pre-pandemic levels? Because obviously the cap rates are one half of the equation. How are you thinking about the NOI side of the equation as you underwrite assets?
spk02: Very conservatively, and in most cases, in terms of the deals that we have on the table right now, which are, again, off-market, very high quality, we're giving no credit to the NOI associated with any tenant that has either had deferral or we think potentially could go out of business. So we're underwriting again very conservatively. And more importantly, we realize that whatever we buy at this point, we're really focused to make sure that there's strong internal growth and value that can be created after closing.
spk13: Fantastic. And then just one last mechanical one. Mike, on the dividend, obviously it's been a benefit from the retained cash flow perspective. how is that trending from the taxable income side of the equation? Are you going to be required to boost that in second half from a taxable income perspective, or do you have room there?
spk05: It's kind of hard to tell right now, Mike. We originally set it to be kind of tied or matched to what we anticipated 2021 taxable income to be, but that's going to move around a little bit. particularly if things improve more rapidly than we thought. So I'm kind of measuring it as we go through the year, and if we need to increase it to match taxable income, then we'll end up doing that for sure.
spk13: All right. Thanks, gentlemen. Appreciate the call. Thank you.
spk07: Your next question comes from the line up Juan Sanabria with BMO Capital Markets. Your line is now open. Good morning, Juan.
spk09: Good morning. Thanks for the time. I was just hoping for a little bit more color on the guidance ranges both for same store and FFO and what would be the drivers for the top and the bottom and where do you feel most comfortable now? And are you including any noise or one-time benefit from any tenants who may be cash accounting where you're getting some deferrals paid back at all?
spk05: Well, we're still comfortable with our range of 0% to 3% for the year. It's going to be kind of lumpy as you go through the quarters. But you've got to remember, we're measuring 2021 against 2020. We didn't move anyone to cash basis accounting, so all the revenues have been accrued. It's more of a balance tradition on the collection side. So we're still comfortable with the FFO guidance of $95 to $1.02 and the same store of 0% to 3%, given where we are today.
spk09: Okay. And then just following up on Craig's earlier question on cap rates, can you give us any color on the cap rates on the San Diego sale and kind of what you're thinking you can get for Sacramento and how that compares to maybe just a range of going in cap rates for potential acquisitions you're underwriting conservatively today?
spk02: Sure. San Diego with income in place on closing the low fives. And in terms of Sacramento, the range there is probably going to be anywhere from 6% to 8%.
spk09: And any color on kind of what you're seeing for acquisitions is to think about the two in tandem? Yes.
spk02: The current acquisitions, we are looking at these are extremely well-located, high-quality assets. I can give you sort of a range, probably in the 5.5 to 6 range with the ability to create about 150 basis points of increase in yield over an 18-month period of time.
spk09: Great, thanks. And just one technical question. What was the change in the same store asset count sequentially in the first quarter? I think you added one asset.
spk02: Mike, I think it's the same pool, right? Same quarter to same quarter in terms of the... What would not be in the same pool? I think it's the exact same pool as last year. You know what? We'll quickly look. Mike, we'll take a quick look at that. But I believe it is the exact same pool from last year, Juan. Yes, 88 properties in both areas. Same pool, exactly.
spk09: If I look at the fourth quarter, you had 87 assets in the same store pool. We have 88 this time for fourth quarter versus first quarter. We could take it offline.
spk02: Yeah, I think it might be Summer Walk, which was an acquisition we did in Seattle, just outside of in the Metro Seattle market. That may be the one property.
spk05: Yeah, we bought that during the fourth quarter of 2019, so it's now in the pool for quarter over quarter. Got it.
spk07: Thank you.
spk05: Thank you.
spk07: Your next question confirms the line. Wes Galladay with Baird. Your line is now open. Wes Galladay Good morning, Wes.
spk12: Hey, good morning, Stuart. Good morning, everyone. Can you maybe talk about the timing of commencing that $9.6 million of ABR? Maybe frame it up as how much this year and how much next year, and will it be back half loaded?
spk04: Yeah, I think that, you know, most of this will come on, a big chunk of it will come on by the end of this year. certainly back loaded into the third and fourth quarter. Of course, you know, it's always changing. We're always adding to it as well. But we do expect to bring that number down this year.
spk12: Gotcha. And then you also mentioned maybe taking a different approach on leasing right now, doing renewal. I guess when do you anticipate going back to, I guess, going back or achieving historic levels of renewal leasing and new leasing spreads?
spk04: Yeah, I mean, I don't know. If it's really a new, you know, focus, we've always been focused on keeping the properties highly occupied. But we do foresee that, you know, going into the third and fourth quarter that we should be getting ourselves back to, you know, more normalized spreads.
spk12: Okay. And then when we look at the tenants that are not paying, you obviously have some deferrals, but I guess with a bucket that is, you're reserving against. Are they mostly gone by now or is it still a... Is it more of a dispute of we don't think we need to pay when we were closed and going forward they may be a good tenant? I guess how much truly is our risk out of the run rate going forward?
spk04: Well, I think we've been fairly conservative in terms of our reserves. And yes, there's certainly a subset of tenants that we are going back and forth on as it relates to some positions they've taken about whether they have to pay rent or not. But in those cases, as I said, we've tried to be conservative in terms of the reserves we've placed on them. At this point, it's really down to a very small set of tenants that we are paying going back and forth with on this. And as people have been opening up, we've been able to resolve many of the ones that were lingering.
spk12: Gotcha. And then one last one. Looking at the portfolio throughout all regions is pretty well leased with the exception of the Crest asset, which is well located, about 69.2%. I guess any plans to bring that back up to a highly straight over the near term?
spk04: Yes.
spk12: Yeah, absolutely.
spk04: We've got good demand for the space in Seattle. I think as many people have seen, Seattle has suffered from things other than the pandemic this year. And I think as businesses are opening up and the office buildings continue to increase their daytime occupancy, we expect that the Seattle market will come back very strong.
spk02: Yeah, and that's downtown Seattle, not the overall market. Correct. Correct.
spk12: Got it. Thanks for taking the questions, guys.
spk02: Thank you.
spk07: Your next question comes from the line at Todd Thomas with KeyBank Capital Markets. Your line is now open. Good morning, Todd.
spk08: Hi. Good morning. A couple questions, I guess, on acquisitions or transactions. Stuart, historically, you've acquired pretty core or I guess core plus assets with some below market rents in some instances. As you begin to look at investments here, are you targeting similar assets, or are you starting to see and target more value-add or opportunistic investments as you look ahead?
spk02: Very high-quality, stabilized assets is what we have our eye on right now and what I think we'll begin transacting on as we move through the quarter.
spk08: Okay. And then you also, you commented that, you know, capital's beginning to build for grocery and drug anchored centers. I think you mentioned that it's not where it was pre-pandemic though. Can you just elaborate a little bit more on that comment and describe the competitive landscape today and, you know, who you're seeing in your markets show up in terms of competition as you start to look at investments and what that's like a little bit?
spk02: Sure. From a capital perspective, what we're hearing on the ground is that there has been and will continue to be a very large shift from multifamily and industrial into retail, with the primary focus of grocery drug anchored retail. Cap rates in those sectors have now into the threes. I think capital realizes that they can now get a better spread for assets that are very stable in nature, very defensive in nature, and very, and when I say stable, that's long-term cash flow. So from a capital perspective, we're seeing a certain flow now of capital leaving certain sectors and coming, again, into the grocery drug anchored format. In terms of the buyer profile, certainly the 1031 market is heating back up for grocery drug anchored, and institutional capital is also beginning to heat up again. The institutional capital side left the market during the pandemic. There now we're beginning to see them come back. So the competition is really coming from the 1031 market, institutional capital, and some private buyers.
spk08: Okay, that's helpful. Mike, in terms of the guidance, you reaffirmed the guidance, the FFO guidance, and that included the $25.8 million sale. Are there any additional dispositions, the two Sacramento assets or anything else that's embedded in the guidance? And what's the timing for like what should we expect with regard to Sacramento?
spk05: I would think maybe Sacramento is probably back-end loaded for the year, but it wasn't built into our original guidance. And so if we do transact and sell those, we'll probably likely look to just 1031 and into new assets.
spk08: Okay. And then just one last one, Mike, with regard to the bad debt, So $1.6 million in the quarter, and you mentioned that you expect to see that get back toward pre-pandemic levels, which was, you know, you mentioned below $1 million per quarter. When do you see that starting to happen? Do you expect that in the second quarter, or do you think it'll take a little bit longer than that?
spk05: I don't know if we'll get all the way back down below $1 million by the end of the second quarter, but as the whole West Coast continues to open up and our collection rates kind of get back to our pre-pandemic levels – that's naturally just going to drop off. But it may not happen right away by Q2. It might bleed into Q3, depending on reopenings.
spk08: Okay, great. All right, thank you. Thank you.
spk07: Your next question comes from the line of Mike Mueller with J.P. Morgan. Your line is now open.
spk11: Good morning, Mike. Hey, good morning. quick follow-up on the reserve. If you're looking at that $1.6 million, can you just give us a sense as to, you know, are there some chunky components in there or is it like lots of little tenants? I mean, just what's making up that $1.6 million?
spk04: I mean, I don't know that it's, you know, tilted in any direction. You know, we go through the reserves on a tenant-by-tenant basis and we look at each individual case and and make the appropriate reserve based on the circumstances of that tenant. So it's a very detailed tenant-by-tenant review.
spk05: As you would expect, it's probably, you know, kind of more heavily weighted towards the restaurant fit. Sure, absolutely. Entertainment categories.
spk11: Got it. Okay. And then I think it was you, Stuart, mentioned talking about medical tenants in terms of leasing activity. And just curious, when you think about those uses and bringing those uses into a center where you haven't had them before, I mean, do you view them as more of like a junior anchor? How do rents compare to other forms of, you know, retail that you would have had in there beforehand? Just any sort of color would be great.
spk02: Rents are typically very strong, higher. TIs are typically a bit more. And in terms of the tenant mix, they're a great tenant to have because they certainly are necessity-based. And it does seem like, given the circumstances that we've all been through, that people certainly love the fact that they have the convenience of getting in their car and getting medical attention very quickly. And I think that's what's driving a lot of this throughout the country and our portfolio is the fact that someone versus getting on the Internet can get in their car and within a minute to two minutes get medical attention.
spk11: Got it. Okay. That was it. Thank you. Thank you.
spk07: Your next question comes from the line at Linda's side with Jeffrey. Your line is now open.
spk05: Good morning, Linda.
spk00: Good morning. Just to follow up to Mike's question, in terms of the TIs being a little higher for new uses like urgent care, what should we expect for TI spends directionally in 2021 versus, you know, last year or maybe 2019?
spk02: Well, overall, CapEx at the company is going to be relatively light for two reasons. Number one, we haven't had any anchor fallout, thank God, but it would. And so from that perspective, we don't really see other debt. From that perspective, capital or TIs will be relatively very low for us. From an inline shop space, depending on how much turnover we have, We also believe that that number will trend less as well. In fact, I think if you look at our supplemental in the first quarter of the year, that's exactly what's been reflective. I don't know, Rich, if you want to add.
spk04: I guess the only thing I would add to that is on these tenants that take a bit more of TI, they're also the type of uses that we're signing longer-term leases, and they typically don't go anywhere because the cost to relocate is quite high. And once the improvements are in place, we're able to utilize that for a future tenant if someone were to leave the center. So it's really, at some level, an investment in the property that will reap rewards going forward as well.
spk00: Thanks for that. And then just in terms of the color that you provided on the targeted acquisitions, smaller grocery anchored with one or two other tenants, What percentage of your existing portfolio fits this profile? And then what are your thoughts on why this was a superior performing format during the pandemic?
spk02: Well, certainly when you look at our portfolio outside of Fallbrook and Crossroads, which are our two larger centers, which are two, in my humble opinion, two of the strongest assets on the West Coast, everything else basically fits that profile. In terms of looking at the profile, I think at the end of the day, certainly, I think, as you know, Linda, this management team has been doing this for close to three decades. This has been the product type that time after time after time has been the most resilient. And more importantly, coming out of the pandemic, This tenant base has certainly been the tenant base that has held up as it relates to deferrals, abatements, and more importantly, the fact that these tenants, in my view, in our view, are going to sustain going through this pandemic and looking forward are going to have the ability to keep paying rents at or higher levels than they have in the past.
spk00: Thank you.
spk07: Your next question comes from the line of Chris Lucas with Capital One Securities. Your line is now open.
spk03: Good morning, Chris. Hey, Stuart. How are you? I'm good. Rich, I was hoping to get a little more color on the book to build maybe if you could provide a sense as to whether or not there's any particular market that is more active than others at this point relative to sort of the pro-rata share. of your portfolio?
spk04: No, I wouldn't say it's weighted either, you know, towards any particular region.
spk03: Okay. Is there much book to build in the Sacramento portfolio at all? Just curious as to what, you know, sort of was necessary there to get those assets to a point where the lease up was, you know, got those assets ready for sale.
spk04: No, there's, you know, there has not been significant, there's not a lot of dollars represented from the Sacramento portfolio in that number.
spk03: Okay, thanks. And then I guess bigger picture, Stuart, so Portland's going back into the extreme risk restrictions on Friday. I guess I just wonder from a tenant's perspective, particularly small tenants that are most impacted by this sort of open, not open, limited open you know, difficulty in getting employees to come back. What are you hearing from them in terms of their ability to continue to persevere in an environment where they're sort of on and off on a kind of seems like every six-week basis at this point?
spk02: Well, remember, Chris, it's county by county. It's a temporary shutdown. In fact, what we've been told is this will be the last shutdown because Our exposure in terms of the tenants that are going to be impacted is minimal. And I would tell you the group that's probably a bit impacted is just the full-service restaurants, maybe a bit of fitness. All in all, that segment of our portfolio is holding up extremely well. Collections are very strong. And the tenant base that we currently have today, as we had in the past, are very optimistic in terms of the marketplace. So to us, it's just a small sort of bleep in the process here. And it's very temporary in nature. So we don't really see any impact in terms of this this shutdown.
spk03: Thank you. That's all I have.
spk07: Thanks, Rich. Your next question comes from the line of Paulina Rojas-Smith with Green Street. Your line is now open.
spk06: Good morning.
spk10: Hi there. Physical occupancy during the quarter held up much better than I anticipated. Directionally, I'm not interested in a specific number. How do you think occupancy will trend during the year? Increase slightly, decline slightly, or more meaningful movements? Do you have any range in mind? I would love to hear how are you thinking about this metric.
spk04: Given the demand for space, the leasing team is very busy. And, you know, we expect that, you know, while the second quarter may be sort of on par with the first quarter, as we go throughout the year, we expect to, you know, hopefully get our occupancy up just a touch to finish out the year very strong. There's a lot of demand for the space out there coming from a lot of different tenants.
spk10: Based on what you see on the ground, do you think investors or retailers' perception of the markets you're in has changed at all in the last 12 months? Have you noticed, for example, more interest in certain regions over others? Any color on the market trends for your West Coast corridor, of course, would be appreciated.
spk04: I think what the tenant base has seen out there is, as Stuart was touching on, the strength of our grocery drug-anchored portfolio and the fact that our properties have essentially remained open throughout the pandemic has increased the desire to come to our properties. We have brought tenants in from enclosed malls and from promotional centers. you know, more regional type of centers into our property because they see that as, you know, where they can operate more fully and have the foot traffic that can support their business. So we've seen a shift of tenants, you know, looking at our product type coming out of other product types.
spk02: And the velocity of foot traffic has definitely increased. I mean, I think as you know, because I know you're in California, we expect our governor to open up, take all restrictions off by June 15th. So from that perspective, the optimism has never been stronger on the ground. And we believe that the velocity of foot traffic will continue to build on and at our centers. And they have been strong throughout the Potomac, as Rich said, because we're grocery drug anchored, but we're really starting to see even more velocity now that most people are vaccinated on the West Coast and the fact that all the restrictions will be lifted shortly.
spk10: Okay, thank you.
spk05: Thank you.
spk07: Thank you. Your next question concerns the line of Michael Gorman with BTIG. Your line is now open. Hey, Mike.
spk13: Hi. Just a quick follow-up. Going back to the acquisitions, you know, there's been a lot of discussion nationally about changes to the tax structure, capital gains, maybe changes on inheritance taxes. And I'm curious. some of these off-market deals that you're looking at, I would assume OP units are going to be a factor if that's the case, and how are you thinking about OP units here as a competitive advantage given the potential volatility in some of these tax structures that could influence behavior?
spk02: Yeah, no, it's a great question, Mike, and I do agree that the chatter for OP units continues to be more frequent. Obviously, our stock, with the increase in appreciation, is getting to a point where the conversations are certainly developing into potentially some deals. But I do think if the tax structure does change in terms of what the new administration is proposing, that could accelerate the OP front in terms of transactions and also potentially increase more deals for us to acquire, given the fact that the sellers will be looking at bigger tax impacts as it relates to both at the corporate level and at the personal level.
spk13: Excellent. Great. Thanks very much. Thank you.
spk07: And we have no further questions at this time. I will now turn the call back to the presenters.
spk02: In closing, I'd like to thank all of you for joining us today. We greatly appreciated your interest in ROIC. If you have any additional questions, please contact Mike, Rich, or me directly. Also, you can find additional information in the company's quarterly supplemental package, which is posted on our website, as well as our 10-Q. Thanks again, and have a great day, everyone.
spk07: Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may disconnect.
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