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spk07: The conference will begin shortly.
spk01: To raise your hand during Q&A, you can dial star 1 1.
spk07: Hello, and welcome to the Retail Opportunity Investment 2022 Third Quarter Conference Call. All participants are currently in a listen-only mode. Following the company's prepared remarks, the call will be opened up for questions. Now, I would like to introduce Laura Sneed, the company's Chief Accounting Officer. You may begin.
spk06: Thank you. Before we begin, please note that certain matters that will be discussed on today's call are forward-looking statements within the meaning of federal securities laws. Although we believe that these forward-looking statements are based on reasonable assumptions, we can give no assurance that these assumptions will be achieved. These forward-looking statements involve risks and other factors which can cause actual results to differ significantly from future results that are expressed or implied by such forward-looking statements. These risks and other factors are described in the company's filings with the SEC including our most recent annual report on Form 10-K. Participants should refer to the company's filings to learn more about these risks and other factors, as well as for more information regarding our financial and operational results. Now I'll turn the call over to Stuart Tan, the company's Chief Executive Officer. Stuart?
spk13: Thank you, Lori, and good morning, everyone. Here with Lori and me today is Michael Haynes, our Chief Financial Officer, and Rich Schoble, our Chief Operating Officer. The strong demand for space across our portfolio and our ability to capitalize on the demand continues to be the main headline story this year for ROIC. We continue to lease space at a record pace. In fact, in just the first nine months, we have already leased 1.2 million square feet of space, which is a new record for the company. In step with leasing space at a record pace, we continue to steadily increase our overall portfolio lease rate as we move through the year. Today, our portfolio stands at a very strong 97.8% lease. In terms of releasing rent growth, we are pleased to report that we had one of the best quarters on record for the company, achieving a 48% increase in cash-based rents on new leases signed during the third quarter. With respect to renewal activity, existing tenants, especially core long-standing anchor tenants, are increasingly coming to us early to renew their leases, in some cases by as much as nine months to a year in advance of their lease expirations. As a result, we are renewing space at a record pace. Turning to our investment activities, capitalizing on our long-standing off-market relationships, During the first nine months of the year, we acquired five terrific, well-established grocery and anchorage shopping centers, totaling $120 million, including two that we acquired during the third quarter for $60 million. All five of the centers are well-situated in densely populated affluent residential communities and feature strong grocery operators, along with a diverse mix of in-line tenants. The blended going-and-yield on the $120 million is in the low to mid 6% range. There are a number of releasing, repositioning, and value-add opportunities that we are already aggressively pursuing. In fact, in just a few months' time today, we have already increased the blended lease rate on the five properties by approximately 200 basis points thus far. Additionally, the new acquisitions are located within our core markets where we have an established presence. thereby enhancing our ability to maneuver tenants among our centers and continue capturing the strong demand for space. Looking ahead, while we continue to keep a close eye on the acquisition market, given the current economic uncertainty and the ongoing rise in interest rates, we believe that the prudent approach in this environment is to pause our investment activity for the time being and wait to see how the market evolves. Now I'll turn the call over to Michael Haynes, our CFO. Mike?
spk14: Thanks, Stuart. Gap in income attributable to common shareholders for the three months ended September 30th, 2022 was 18.5 million, equating to 15 cents per diluted share. And in terms of funds from operations for the third quarter, FFO totaled 36.5 million, equating to 27 cents per diluted share, as compared to FFO of 32.6 million, or 25 cents per diluted share, for the three months ended September 30th, 2021. With respect to our financial results for the first nine months of 2022, Gap in income attributable to common shareholders totaled $41.7 million, or $0.33 per diluted share. In terms of FFO, the company had $109.4 million in total FFO, or $0.83 per diluted share for the first nine months of 2022, as compared to FFO of $95.3 million, or $0.74 per diluted share for the first nine months of 2021. In terms of the company's investment activities during the third quarter, we funded the acquisitions primarily through a combination of proceeds from a property sale and free cash flow from operations. Importantly, during the third quarter, while our gross real estate assets grew by $42 million, our total principal debt only increased by less than $6 million. As a result, our net debt to annualized EBIT went from 6.7 times for the second quarter down to 6.6 times for the third quarter. While our shopping centers continued to perform well, in fact, ahead of our initial property level budgets thus far for 2022, At the corporate level, we are not immune to the Fed's ongoing initiative of raising interest rates to curb inflation. Specifically, during the third quarter, the company's interest expense increased by approximately $300,000. As of September 30th, approximately 26% of our total debt was floating rate. In terms of the 74% that is fixed rate debt, nothing is scheduled to mature between now and the end of 2023. And beyond that, our debt maturity schedule is well-laddered. In terms of our FFO guidance for the full year of 2022, We have narrowed our previous range of $1.08 to $1.12 per share to now be a range of $1.09 to $1.11 per share. In anticipation that the Fed will raise rates again during the fourth quarter, our new guidance range takes into account another $1.2 to $1.5 million of added interest expense on top of our Q3 interest expense. Our tighter guidance range also takes into account no additional acquisitions or dispositions between now and year end, as Stuart noted. Lastly, our guidance range continues to assume that same center NOI growth will be in the 4% to 5% range for the full year. For reference, during the first nine months of the year, same center NOI increased by 4.4%. Now I'll turn the call over to Rich Schoble, our COO. Rich?
spk15: Thanks, Mike. As Stuart highlighted, demand for space across our portfolio continues to be strong, and we continue to make the most of it to drive our leasing results to new heights. Specifically, the third quarter proved to be our most active year to date. Leasing over 480,000 square feet of space during the quarter, bringing our total leasing activity thus far for the year to 1.2 million square feet, which as Stuart indicated, is a new record for the company, surpassing our previous nine-month record that we achieved four years ago. Additionally, our strong leasing activity continues to drive our portfolio lease rate higher. You may recall that at the end of the first quarter, our portfolio stood at 97.2% leased, which we increased to 97.6% in the second quarter. Today, as of September 30th, our portfolio lease rate has now increased to 97.8%, which is just shy of our record high 97.9% lease rate that we achieved in 2019. Notwithstanding being essentially fully leased, we continue to work hard at capturing the demand for space through finding creative ways to free up space within our portfolio primarily through a combination of recapturing space early, shifting certain tenants and right-sizing others to make way to not only accommodate key, long-standing existing tenants who are seeking to expand, but also to create space within our portfolio to bring in more and more new destination tenants and enhance our overall tenant mix. Just to highlight a few examples, during the third quarter, at one of our shopping centers in the Pacific Northwest, A new tenant that had recently opened introduced us to a group that's looking to roll out a new cultural center concept on the West Coast and seeking to lease space at our property for their inaugural location. Notwithstanding our shopping center being 100% leased, we went to work and proactively recaptured a space early that wasn't scheduled to expire until next year. With the new lease, we are achieving a significant increase in rent and, equally important, we expect that the new tenant will become a terrific, unique draw to the center. And we are currently in discussions with the group about rolling out their cultural center concept at a number of shopping centers across our portfolio. To cite another example, we were recently approached by a prominent, successful rock climbing gym operator on the West Coast who was seeking space specifically at one of our Southern California shopping centers. However, we didn't have enough available space at the center for their needs. Rather than turning them away, we quickly went to work maneuvering several inline tenants and combining their spaces with unused space at the back of the property to create the ideal space for the gym operator. Again, we achieved an increase in rent while also bringing a great new destination tenant to our center. Additionally, at another one of our Southern California shopping centers, we were recently approached by a national tenant seeking to lease a junior anchor space. Again, rather than turn them away, Instead, we went to an existing anchor tenant and successfully recaptured a portion of their space, specifically space that they had been subletting to another tenant. The new lease with a new national tenant is at a significantly higher rent and we're able to structure the deal such that there is effectively no downtime in terms of rent and only requires a minimal amount of TIs for the new tenant. Along with these new tenants seeking space, A growing number of our existing restaurant tenants continue to come to us seeking to expand their spaces to accommodate additional seating areas as well as new bar spaces, and they are looking to extend their lease terms. In addition to these traditional dine-in restaurants seeking to expand their spaces, a broad range of food service businesses continue to seek out our shopping centers looking to open new grab-and-go concepts which are proving to be very popular and profitable. We continue to work creatively to bring these new tenants into our portfolio. In terms of renewal activity, as Stuart noted, we continue to have a very active, successful year. Specifically, year to date, we have already renewed 884,000 square feet of space, including renewing 349,000 square feet of space in the third quarter alone. And as Stuart touched on, a growing number of existing tenants are coming to us early to take down their options especially as it relates to key anchor tenants. In fact, of the 182,000 square feet of anchor space that were renewed during the third quarter, over three-fourths of that were anchor tenants with leases not due to be renewed until next year. Lastly, in terms of lease versus build, during the third quarter, new tenants representing approximately $1.4 million in annual base rent opened and commenced paying rent. Bringing our total thus far for the year, to $6.1 million of annual base rent from newly opened tenants. In terms of additional new leases signed, given our strong leasing activity, during the third quarter we signed new leases representing an aggregate $2.7 million of annual base rent. Taking this into account, as of September 30th, we have approximately $9.1 million of annual base rent from new tenants that haven't yet taken occupancy and commenced paying rent. We continue to work diligently at getting these new tenants open expeditiously. Now I'll turn the call back over to Stuart.
spk13: Thanks, Rich. As the fourth quarter gets underway, thus far we are on track to post another solid quarter of leasing as the demand for space continues to be strong. In fact, at a recent West Coast ICSC conference in San Diego a few weeks ago, we had a number of very productive meetings with both existing and prospective new tenants. many of them focused and ready to strike deals considerably more so than what we've seen in the past few years. We think this bodes well both in terms of finishing 2022 strong on the leasing front and in terms of building good momentum heading into 2023. Finally, notwithstanding current REIT stock prices, the fundamental drivers, both near-term and long-term, of our West Coast grocery-anchored portfolio remains sound. Near-term, we believe that the current demand for space will continue to provide a wealth of opportunities for our team to enhance value through our proactive, hands-on approach of working our shopping centers and tenant base. We expect to continue driving rental rates and same-center NOIs steadily higher, while also working to further our tenant diversity, which is the cornerstone of our business. Long-term, Our core West Coast markets continue to be among the most demographically strong and diverse markets in the country. Also, our markets continue to be among the most protected, supply constrained in the country as well. We believe that these distinct attributes are what will continue to make our markets among the most sought after by a broad range of tenants and investors alike. Additionally, We believe these factors will continue to serve as the foundational strength and appeal of our West Coast grocery-anchored portfolio, as well as enhance our ability to continue building value for years to come. Now we'll open up the call for your questions. Operator?
spk07: Thank you. Ladies and gentlemen, to ask the question, you will need to press star 1-1 on your telephone. That's star 1-1 to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Juan Santabria with BMO. Your line is open.
spk03: Good morning, Juan. Good morning. I was just hoping to understand guidance a little bit better. You kept it the same, tightened the range, but you had a couple questions I guess, different or opposing forces. One, he had higher rates as some of the swaps expired. I'm not sure what that impact is to the fourth quarter, and he had great leasing. I was just curious, as well as higher non-cash rental income expectations for the year now. I was just hoping maybe you could talk a little bit about guidance and the puts and takes and specifically what kind of occupancy or build occupancy we should expect by year-end, just to think about how that $9 million comes online of billed but not commenced, or leased but not commenced. Sorry.
spk14: Quite a few questions in that question. Let's address the gap of billed versus leased. That $9.1 million, we expected the large majority of it to come online by June. A large chunk of it's supposed to actually start this quarter in Q4 2022. And as far as the guidance goes, interest expense did go up, obviously, because this office matured. But we expect that revenue in the fourth quarter will increase as a result of owning the new acquisitions for a full quarter, along with the new tenants who are expected to take occupancy during the quarter. So that's kind of one of the drivers kind of offsetting the interest expense increase. And if you look at the guidance table and the press release also, you'll note that FAS 141 revenue is up a little bit in the fourth quarter, and that's from the purchase price allocations from the assets we acquired in August. Our VAT debt was lowered a little bit, kind of tracking where we are for the year. And our G&A, I think, came down on the higher end as well. So a lot of small moving parts that kind of get you to a relatively stable fourth quarter.
spk03: Okay, great. And then just on the balance sheet, I guess, what is the plan at this point with You've got 26% floating, which you talked about, and you've got an expiration coming up at the end of 23 and how we should think about those two pieces moving forward and how you plan to manage the risk around that.
spk14: Well, as far as the term line goes, the term line doesn't mature until 2025, so there's ample time for the market to kind of evolve and settle down. I'm not sure where it's all going right now, but ideally we'd like to refinance the term loan with public bonds, along with perhaps paying down a portion of the loan, depending on market conditions. And then there's the bonds that are due December of next year. Again, we've got some time left on that. You have to remember that that's at a little over 5% coupon. So I'm not sure the rate environment will be next year, but it might be a push. We'll have to kind of wait and see.
spk04: Thank you very much.
spk14: Excellent.
spk07: Thank you. Please stand by for our next question. Our next question comes from the line of Todd Thomas with KeyBank. Your line is open.
spk01: Good morning, Todd. Hi, thanks. Good morning. Stuart, I just wanted to first ask, I realize guidance assumes nothing else during the year in terms of investments, but just wanted to get an update from you on the current thinking around investments heading into 23 with regard to your appetite and ability to deploy capital on an accretive basis in the current environment.
spk13: Sure. Well, I mean, currently, you know, the market's really in what we would call a pause situation where, you know, there's really very little transactional activity going on at the present time. A lot of buyers and sellers are taking a wait-and-see approach in terms of the economic uncertainty and interest rates. As it relates to 23, We're obviously going to keep our ear to the ground in terms of opportunities if cap rates haven't really moved up much for our product, but there's not much product on the market either. We'll continue to monitor the market and obviously continue to look at some properties that are on the market in terms of dispositions to help fund some potential acquisitions. But right now, the view is to really be patient. And so as we head into 23, we'll continue to monitor things very closely. And if the opportunities do, you know, if we do find a couple of opportunities who are there, then, you know, we'll look at those opportunities and decide how we'll fund them, you know, when that time comes.
spk01: Okay. Are you anticipating an increase in cap rates or an increase in required returns as you kind of talk to folks and think about the next several quarters moving forward?
spk13: I'm anticipating some movement in cap rates, but for high-quality grocery-anchored shopping centers right now, cap rates really haven't moved much. There's no real benchmark right now to look at as it relates to where those cap rates might go.
spk01: Okay, and then just a clarification. I think you said for the five year-to-date acquisitions, about $120 million, I think you said that the initial yield was in the low to mid 6% range, but I thought you mentioned after that you've already increased the yield on those acquisitions by 200 basis points. Can you clarify that comment? And maybe I misunderstood, but just curious what the initial yield was and maybe what the current yield was on those acquisitions. Sounds like there was a little bit of lease up and value add that may have already materialized.
spk15: Yeah, I mean, it's primarily around, as you touched on, the lease up. We've, you know, found that in certain circumstances these properties have been undermanaged, and our team, you know, well in advance of closing has gone out and secured tenants. And, you know, spaces that had sat for the prior owner were leased up, you know, almost immediately upon closing.
spk13: So that's what's driving that. And, you know, the impact of that 100, or excuse me, 250 base points really won't be felt, obviously, to the first and second quarter of next year, because that's when the income will come online from a rent perspective.
spk01: Okay, got it. So the low to mid 6% cap rate, that was the initial yield, the NOI yield at closing. You're expecting about a 250 basis point uplift over the next couple quarters. Correct. Okay. And then just lastly, Mike, on the swaps, I just want to make sure I understand. So right now there is no plan to implement any interest rate swaps or hedge the exposure at all on the $300 million of term loans. Is that right?
spk14: That's correct. For right now, for the short term, we're going to allow them to remain floating and kind of see how the rate environment evolves.
spk01: Okay. Got it. Thank you. Thank you.
spk07: Thank you. Please stand by for our next question. Our next question comes from the line of Craig Mailman with Citi. Your line is open.
spk05: Good morning. How's it going, Stuart? I just want to circle back to the leasing side of things. You guys have clearly been pulling forward some renewals here with good rent spreads. I'm just kind of curious your thought process on trying to delay that or to let rents continue to rise, or if you guys are more concerned about the leasing environment over the next six months and just want to put this in the bag. I'm just trying to understand your broader macro framework in general.
spk13: Sure. Well, maybe I'll comment on the anchor spaces first, Rich. I mean, we have a number of anchors coming due in 2023, and the focus from our perspective is to stay ahead of that curve. And when I say that, the focus has been to go to some of these anchor tenants that are doing extremely well at our centers. and getting more term than just their typical five-year option. So that's been one of our goals looking out over the last 60 to 90 days in terms of these anchor annuals. These tenants have come to us earlier than usual, but the goal is to really, what I would say, stagger now some of these leases. So five years from now, we don't have the same impact. So that's been one of our goals over the last 60 to 90 days from the anchor perspective. And the number of those leases have fixed increases, of course, because they're contractual options. Do you want to comment on the inline space?
spk15: Sure. I mean, I think, you know, we understand the value of our real estate. And, you know, so when we're doing these leases, you know, while a tenant, you know, may be trying to... you know, get the best deal they can, we also know what the market is for the space. So we're not leaving any dollars on the table, but, you know, occupancy is an important factor for us. And, you know, as you see with our, you know, historic occupancy, that's always a factor that we keep in mind. But, you know, I don't feel like we're leaving any money on the table.
spk05: Oh, go ahead.
spk13: And there's been no sign of any weakness from our tenant base at all. That's the other thing to point out, Craig.
spk05: That's helpful. I just wanted to first, given kind of the early option execution here, I mean, are you guys trying to put through, or let me ask it this way, what are you guys trying to get out of it? Are you trying to push through higher bumps here? Are you guys trying to get less restrictions that may be in some of these rooms? Outside of just pure rent bumps, are you guys able to get anything on the concession side that is beneficial to you longer term?
spk13: The answer is yes. And when I say that, it's really depending on the situation. But the reality is that we have a number of anchor leases that don't have much term left. And these tenants have come to us and wanted a lot more term. And in doing so, we have approached them to do a number of other things like deal with, although we have very little co-tenancy, but things like ESG related. as well as, you know, exclusive and other things. So the answer is absolutely yes. That has been part of our negotiation with these anchor tenants.
spk05: Okay. And then just I noticed on the renewal side, TI's were up pretty markedly this quarter, especially on the anchor side of things. Is that skewed by a lease or two or is that, you know, what's going on there?
spk15: I think that, you know, again, every deal is specific. And, you know, sometimes it's driven by, you know, maybe we're recapturing a portion of a space. And so there's a bit higher cost relative to, you know, splitting utilities and that sort of thing. But that's, you know, obviously offset by the increase in rent that we're going to receive. So the return on those dollars is quite nice.
spk04: Hey, it's Nick Joseph here with Craig. Just one more on the transaction market. Understand the pullback, but how wide is that bid-ask spread for high-quality assets today?
spk13: How wide is the bid-ask spread? Tough to answer the question because there's not much going on in the market at the present time as it relates to what that bid-ask spread might be. I would tell you that certainly some of the deals that have been in the pipeline that have closed more recently have really had very little, we've seen very little impact from a cap rate perspective. But in terms of the bid-ask, it's just too early to tell and there's very little transactional activity going on to give you an answer. Let's wait another quarter and I think certainly we should have more clarity on that front.
spk04: I guess how much have you moved up your return hurdles if you were to do an acquisition today?
spk13: It depends on the asset and it depends on the growth of the NOI in terms of looking at the asset and what it might deliver longer term. But certainly, given the cost of capital that has gone up for all of us, our expectation has certainly gone up at least 100 basis points.
spk04: Thank you very much.
spk13: Thank you.
spk07: Thank you. Please stand by for our next question. Our next question comes from the line of Craig Schmidt with Bank of America. Your line is open. Thank you.
spk10: Good morning, Craig. Hey, how are you guys? Doing well.
spk13: How about yourself?
spk10: Yeah, hanging in there. It just sounds from your comments that the leasing still remains elevated and the activity into the fourth quarter. I'm just wondering how much of 2023 leasing has already been completed?
spk15: Well, a significant portion of the anchor leases that were scheduled to expire next year have been completed, and we're making good progress on the shop tenant side as well. I don't have a specific percentage for you in front of me, but it's very similar to years past where tenants are coming to us looking to renew and secure longer terms. So very healthy.
spk10: Great. And then, Jim, the run rate for property operating expense has been double digit. Are you expecting that to continue at that pace or could it actually increase?
spk13: on the expense side, he's asking. Understood.
spk10: It was up 10.2. Yeah, it was up 10.2. I think today it's up 12.9. I'm just wondering, given inflationary pressures and whatnot, if that can hold at that lower double-digit name, or could they increase?
spk13: Well, I think costs in general have gone up across the board, primarily, Craig, as it relates to utility and security in some cases. That's what's driving some of that increase in the expense. But some of that, I believe, is going to begin to level off from an inflation perspective. And as we've wrapped up budgets for 23, that number is certainly not as high as what you've seen to date as it relates to the budgeting process.
spk10: Okay, great. And just finally, Have you had any conversations with either Kroger or Albertson since they announced their plans to merge?
spk13: The answer is we haven't spoken to them in a couple of months now. I know why they're not returning our calls. But the good news is Rich and I are set to get on the phone with both of these tenants over the next week to two weeks. So we'll be able to reconnect with them with obviously the focus on the relationship between and the stories we've got with them. But no, we have not spoken with them recently, but we will be having conversations with them over the next week to two weeks. I don't think there's much they can say at this point. I would assume they're still in somewhat of a quiet period.
spk10: I got you. Thank you. Thank you, then. Bye.
spk13: It's a pleasure.
spk07: Thank you. Please stand by for our next question. Our next question comes from the line of Michael Gorman with BTIG. Your line is open.
spk11: Good morning, Mike. Good morning, guys. Thank you. Most of my questions have been answered, but I just wanted to have a quick follow-up on the expense side. Just as we were looking at the run rate, I understand inflation and everything, but it looks like recoveries have been lagging the actual expense growth. So I'm just wondering, is it Is it the specific categories that are growing on the expense side that aren't being reimbursed or recovered from tenants or any color on why there's the differential there between the recovery growth and the expense growth?
spk15: I think there's been a few initiatives we've done this year as we've expanded some of our ESG initiatives that we will recoup over time as those initiatives reduce expenses. But some of those initiatives do have caps or other things where anchor tenant may not participate. But we still see it as a positive for the long term because those overall expenses will come down as things like LED conversions go in place and solar and other things like that, water efficiencies. So there's a bit of a front end cost on that. That's probably impacting that number.
spk11: Got it. Got it. Thanks, Rich. That's helpful. And then, Stuart, maybe just going back for a minute and talking a little bit more about the transaction environment. I know in recent quarters that there's been kind of a tailwind to demand, not only from retail investment, but also from demand for housing developers and apartment communities and things like that. Can you talk about any impact that you're seeing from that side of things, any change in demand there because of what's going on in the capital markets or what's going on with kind of expectations for housing in your markets?
spk13: Yeah, no, things continue to be strong on the housing front. Certainly the housing market has slowed down. The one interesting point to probably tell you in terms of what I've learned more recently is that unentitled land seems to be gaining more value right now than entitled land because of the timetable out there as it relates to you know, the economic, you know, environment. But from a housing perspective, things are extremely strong at West. We haven't really seen, you know, any real slowdown. Pricing has stabilized, but really hasn't changed much. And the demographics in terms of our assets continue to get better because as more density gets built, it's certainly bringing a lot more customers to our centers. So from a data perspective, traffic continues to gain good momentum.
spk11: Great. That's helpful. And then maybe one other question as we're going through this pause. You certainly have a lot of connections in the marketplace and have your finger on the pulse. Any sense for any, I'll call it kind of pending stress or pending distress from some owners out there where maybe there's a big CapEx burden that's coming up? or a big vacancy or releasing where maybe right now they're okay waiting to see where the market shakes out, but in the next six to nine months, they're going to have to hit the marketplace and may provide more opportunities?
spk13: The answer is yes. I am beginning to get some calls and some emails from some owners that have some financing coming up from their perspective and or CapEx issues. So, we're beginning, we're at the early, early stages of beginning to see some cracks out there, Mike. So, nothing too dramatic right now, but the answer is yes, I am beginning to see a bit of friction out there as it relates to owners that are looking out late next year and have potentially some issues that they're looking at. It's beginning to show a bit, but nothing yet. Nothing like we've seen in 08 or 09, of course. But the answer is yes, I am beginning to get some emails, some traffic, as you would say.
spk11: Great, thanks. And having lived through 809, I'm glad to hear it's not looking like that yet. So appreciate the time, guys.
spk08: Thank you.
spk07: Thank you. Please stand by for our next question. Our next question comes from the line of Wes Goloday with Baird. Your line is open.
spk16: Hey, good morning, everyone. Hey, hey, everyone. Can you just give us an update on the land sales? I know you had a pipeline that you're aggregating, and then you were going to break ground on one project up north in Bellevue with the cost of capital rising. Any appetite to either pause that or outright monetize the asset at this moment?
spk13: Yeah, maybe I'll just quickly start out with Crossroads. I mean, certainly we're still in the permitting process. You know, we're expected to be in a position to start construction, certainly as we move towards the first quarter. But given the current economic uncertainty, we are considering possibly holding off on breaking ground on that project. In terms of the other projects, the good news is that we did get final entitlements in Pinole last week. And Novato is also moving along quite well and we're in the midst of beginning to move one of the two to the market over the next several weeks. We think there's a pretty good chance of transacting there. And then as it relates to any other properties like that are in the pipeline, we're just continuing to work those as it relates to entitlements. But that's what's going on as it relates to both the crossroads and the other two properties.
spk16: Okay, and then you mentioned there was really no weakness in the tenant base. One of the companies we're watching is Rite Aid. I know it's a big tenant. You've actually taken on a little bit more exposure by the acquisitions this year. It seems to be more of a capital structure issue, but could you provide some, I guess, qualitative commentary of how you feel about the portfolio exposure there, whether it's below market rents, productive locations, just any kind of context for us?
spk15: Sure. Rich, do you want to? Sure. I mean, you know, Rite Aid only accounts for about 1.7% of our total base rent. You know, it's derived from about 16 leases that are, you know, spread throughout our portfolio. You know, all the locations seem to be performing well. Many of these leases are significantly below market, so may present some opportunities for us, you know, as well. So we're not concerned about Rite Aid.
spk16: Great. Thanks, everyone.
spk15: Thank you. Thanks, Wes.
spk07: Thank you. Please stand by for our next question. Our next question comes from the line of R.J. Milligan with Raymond James. Your line is open.
spk17: Good morning, R.J. Good morning. Good morning, guys. I just want to expand on the question of the signed but not opened and the cadence. You expect the bulk of that to come online by June, but you're also adding to that bucket with the leasing you're doing today. So obviously that's more rent coming online, maybe in the back half of 23 and into 24. So I guess I'm just trying to gauge how long the runway is for growth on what's been signed in 3Q, what will be signed in 4Q. And curious if that implies healthy growth in 2024, barring any major credit issues.
spk15: Yeah, I mean, I think overall it's a positive story here. You know, as you touch on, you know, we commenced a significant amount of rent in the quarter, but we also added to the bucket. And, you know, good news on some of the things we've added to the bucket as we touched on the prepared remarks is, you know, some of this has got fixed rent commencement dates. So we're not at the mercy of permits and things like that. But there's, you know, always going to be, you know, certain leases that take longer to get commenced because as I touched on earlier, you know, maybe we're recapturing a portion of an anchor space and you've now got to demise it and that just takes a bit longer, you know, than just delivering a space as is.
spk17: I guess what I'm trying to get at is if the leasing stops, you know, today, given what's signed but not open, doesn't imply pretty healthy growth over the course of 2023?
spk15: Yeah, you're saying if we did no more leasing?
spk14: Yeah, I suppose if it stopped today, the 9.1 million, the bulk of it's supposed to start between now and June. So as that, I mean, they start paying rent so that you get a full run rate all the way through 2023 in that regard. And of course, we're obviously going to be doing more leasing activity this quarter and into the first quarter after the year end. So the buck will always be being replenished. It just depends on what volume it's going to be replenished, depending on market conditions. We don't see any cracks or any signs of tenant weakness now.
spk16: That's all I have, guys. Thank you. Thank you.
spk07: Thank you. Please stand by for our next question. Our next question comes from the line of Mike Mueller with JP Morgan. Your line is open.
spk02: Good morning. Hey, good morning. A couple of questions. So the first one, you know, what was the average escalator baked into your leases that you've signed here to date? And the second question, you talk about, and granted, spotty data out there, but you thought that grocery cap rates have been somewhat sticky with rates going up. But out of curiosity, do you think that grocery cap rates can be below the long-term financing cost over a multi-year period?
spk13: Well, I'll try to answer the second part of your question first in terms of cap rates. I think it depends. I think we're entering a different time right now where the grocery drug anchor format has become the most sought after in terms of capital, both private and institutional. Whether that has a long-term impact in terms of valuation or the stickiness, as you might say, is probably going to, the answer is yes, I think it's going to have some impact. Certainly as it relates to where cap rates might move for other types of retail real estate. So we could be in a different place right now looking into, as interest rates do go up, where owners today, as I speak with them, seem very comfortable owning what they have, and that's why the transactional market has slowed dramatically, because the fundamentals, what's different this time around, Mike, is the fundamentals are so strong, and yet the cost of debt capital has gone up a lot. So I think what you're going to see as we move into 2023 is an environment where there'll be a lot less transactions occurring for this product type, which will keep cap rates quite compressed. And so that's why, in trying to answer your question, I think we're in a different sort of secular change here. How dramatic that change is, I can't tell you at this moment. Certainly, cap rates are going to go up a bit. But I think you're not going to see a one-to-one sort of change as you've seen in the past just because the fundamentals are just so strong.
spk15: And then in terms of the rent escalators, I mean, I think historically, as we've talked about, for the shop tenants, it's been typically around 3% annually. And for the anchors, 10% or 12% every five years. But we're cognizant of inflation, and I think, you know, that's driving some of the demand, tenants wanting to come in and lock in rents. But, you know, we're pushing more for, you know, 5% annually on the shop spaces and more like in the 15% every five years for the anchors.
spk02: Got it. Okay. Thank you.
spk14: Thanks. Thanks, Mike.
spk07: Thank you. Please stand by for our next question. Our next question comes from the line of Christopher Lucas with Capital One. Your line is open.
spk12: Good morning, Chris. Hi, good morning. Good morning, guys. I have a number of follow-ups, so let me just get through them pretty quickly. Stuart, just on the development site that you had mentioned, I guess Panola had gotten its approvals for the zoning needed. Is that a first half? Next year's sort of event, do you think?
spk13: In terms of the sale of the asset, I think is your question. The answer is it could be. We don't know yet because we're just in the midst of bringing it to the market. I think we will transact, but this is probably a first quarter event versus a fourth quarter event.
spk12: And then I guess, Rich, on the market, On tenant fallout, just generally, how would you compare 22 to sort of 18 or 19? And then given what you've done so far in terms of getting ahead of the 23 expirations, how does 23 stack up relative to 22?
spk15: Yeah, and I think that in terms of tenant fallout, it's sort of back to the pre-pandemic levels. You know, I think that, you know, the reality is that COVID created a shakeout, that the weak tenants have fallen out, and, you know, we don't see any additional weakness beyond, you know, what you might have seen prior to the pandemic.
spk12: So for any of the anchors for next year that haven't renewed, is that more of a timing process for you guys at this point, or do you think there's some risk there?
spk15: I think of the anchor leases remaining for next year, there's about 17 of them scheduled to expire. Based on our early discussions with them, we are anticipating that at least 13 of those will be renewing. The majority of those are the grocery and drugstores. The remaining leases, we're in discussions with them, but it's a little bit too early to say for sure that they're going to renew. and there may be an opportunity there where we actually don't want them to renew, and that's why we're discussing with them, you know, how much will they pay.
spk13: Yeah, I mean, I think, Chris, this could be an opportunity for us because, as you know, we've had no anchor vacancy for a period of time, and given the demand and how strong the demand is, I look at this potentially as an opportunity next year if one of these tenants do fall out.
spk12: Okay, thanks for that, guys. And then I guess Maybe just taking a step back as it relates to that sort of natural tension between landlords and tenants in terms of who's got more leverage. Is that changing at all from where it was, say, end of last year or early part of this year?
spk13: Well, the pendulum has certainly swung back to the landlord pretty quickly. coming out of the pandemic, that's for sure.
spk15: Yeah, I mean, given, you know, our West Coast focus and the fact that there's been virtually no new, you know, product brought to the market and our grocery drug anchored focus, you know, our centers continue to be in very high demand. We have multiple, you know, tenants vying for spaces as they come available. So we're not seeing any fall off in the demand side.
spk12: Okay, and then last question for me, and I apologize if I missed the – this was covered in the initial comments, but the large rent spread for the non-anchor for the quarter, the 60.6%, is that driven off of one specific lease, or was there a handful of leases that were that strong?
spk15: It was a handful of leases. Some of them were quite significant. as we were bringing in much better tenants and releasing them. And we've got more that's happening as we speak right now. So there's still some significant leases that are significantly below market that we're recapturing and finding tenants that will pay a market rent for them. Great.
spk12: I appreciate it. Thank you.
spk14: Yep. Thank you. Thanks, Chris.
spk07: Thank you. Please stand by for our next question. We have a follow-up from the line of Juan Sanabria. One moment.
spk05: Hi.
spk07: Your line is open.
spk03: Hi. Good morning again. Just curious on the same store NOI guidance which was maintained, the growth understandably has slowed throughout the course of the year, but the the midpoint would imply a re-acceleration in that growth, and maybe that's related to some of the leased deals commencing. Just curious if you can give us any sense of where within the range you feel most comfortable and how we should expect the trajectory relative to what you've reported to date, which seems to run a lot before the fourth quarter.
spk14: Commencement. Yeah, so we're 4.4% year-to-date through September. We maintain the goalposts of 4% to 5%. That's largely because our Q4 budgeted same store is notably stronger than the first three quarters. So if that comes to fruition, which we expect it to, we'll still be well within that 4% to 5% range, probably, I'm thinking, midpoint or even higher than 4.5%. So we'll see. We feel very comfortable given what we budgeted for Q4's same store in Hawaii.
spk03: Great. Thanks. And then just one quick follow-up. I mean, the Kroger-Albert Smith deal, just curious on how you see – the leasing dynamics changing with them, you may be in a position where you have a significantly larger, more powerful tenant and what that may mean to your ability to continue to drive some of the clauses to be more favorable to you or you just view it positively given you probably have a better capitalized tenant at the end of the day.
spk13: Yeah, I mean, look, long term, we think the Kroger Albertson merger would potentially be beneficial from our perspective. You know, we currently have 21 shopping centers with Albertsons and 11 centers with a Kroger store. So, you know, only 32 properties out of our 93 have any impact in terms of the Kroger Albertsons, you know, transaction. But these 32 stores are diversified across three states. And within these states, these stores are diversified evenly in terms of ABR and across multiple metro markets, including LA, Orange County, Portland, and Seattle. And within these markets, these stores are specifically located in distinct separate sub-market communities. And the other thing is that these stores operate under seven different banners. So as we look at this transaction, a lot of these stores are solid performers. In fact, on average, if you were to average sales of all of these stores, these 32 stores, these stores are doing on average an excess of $630 a square foot in sales. And then lastly, you know, the 32 leases are certainly below market on average with some of these significantly below market. You know, and again, shopping centers that are well located in highly desirable affluent communities. So, you know, strong demand for the space if something were to happen. And, you know, there's a lot of demand out there from, you know, value-oriented and specialty grocers in these locations. So if Albertsons and Kroger divest of some of these locations, we view this as a potential opportunity. And then as you just touched on, the last thing is credit. This is certainly going to improve the overall credit in terms of owning these anchor tenants or this particular anchor tenant in our forage.
spk03: Thanks, Stuart.
spk13: Thank you.
spk07: Thank you. I'm sure no further questions in the queue. I would now like to turn the call back over to Stuart for closing remarks.
spk13: Great. In closing, thanks to all of you for joining us today. As always, we appreciate your interest in ROIC. If you have any additional questions, please contact Lori, Mike, Rich, or myself. Also, you can find additional information in the company's quarterly supplemental package, which is posted on our website, as well as our 10Q. Lastly, for those of you that are planning to attend NAIDREIT's conference in a few weeks from now in San Francisco, we certainly look forward to seeing all of you there. Thanks again, everyone, and have a great day. Thank you.
spk07: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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