Retail Opportunity Investments Corp.

Opportunity Investments Third Quarter 2023 Conference Call. 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 Lauren Silveira, the company's Chief Accounting Officer.

Thank you. Before we begin, please note that certain matters which we will discuss on today's call are forward-looking statements within the meaning of federal securities laws. 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. Participants should refer to the company's filings with the SEC, including our most recent annual report on Form 10-K, to learn more about these risks and other factors. In addition, we will be discussing certain non-GAAP financial results on today's call. Reconciliation of these non-GAAP financial results to GAAP results can be found in the company's quarterly supplemental, which is posted on our website. Now, I'll turn the call over to Stuart Hans, the company's Chief Executive Officer. Stuart?

Thank you, Lauren, and good morning, everyone. Here with Lauren and me today is Michael Haynes, our Chief Financial Officer, and Rich Schovel, our Chief Operating Officer. We are pleased to report that our grocery anchored portfolio continues to perform well. Notwithstanding our portfolio being essentially fully leased at over 98%, we continue to make the most of the ongoing strong demand for space. In fact, through the first nine months of 2023, we have leased a record amount of space thus far. Additionally, In step with capitalizing on the demand for space to achieve record leasing volume, we are also capitalizing on the demand to continue driving rents higher, posting our strongest quarter year to date in terms of releasing rent growth on both new leases and renewals. With respect to acquisitions, the West Coast has largely been idle this year, with only a limited number of grocery-anchored shopping centers trading. Interest rates continuing to rise throughout the year and the related uncertainty and difficulty in terms of obtaining reasonable debt financing has compelled many would-be buyers to stay on the sidelines. Notwithstanding buyers being on the sidelines, certain private owners are starting to become more active in seeking to transact. We view this as an opportunity. In fact, we currently have an acquisition that we are close to having under contract. It's an excellent grocery-anchored shopping center that we've had our eye on for some time. The property is located in the Los Angeles market in a densely populated, mature, diverse community. The center is anchored by a well-established natural food supermarket that is a longtime national tenant of ours. The seller is a private owner who is seeking an efficient closing, which given our knowledge of the market and the specific center and its tenant roster, we are in a position to facilitate their closing objective. Beyond this acquisition, we have several other opportunities that we currently have our sights on, each with seller circumstances that we are well positioned to capitalize on. Turning to our balance sheet, during the third quarter, we completed a public bond offering, raising $350 million in total. The offering drew considerable interest in the marketplace and was oversubscribed, attracting interest from 60 investors in total, which we think speaks to the long-term strength and stability of our grocery-anchored portfolio and business. Now I'll turn the call over to Michael Haynes to take you through the details of the offering and our third quarter results. Mike? Thanks, Stuart. Starting with our financial results, for the third quarter, GAAP net income attributable to common shareholders for the three months ended September 30, 2023, was $8.4 million, equating to $0.07 per diluted share. And in terms of funds from operations, for the third quarter, FFO totaled $36 million, equating to $0.27 per diluted share. With respect to our financial results for the first nine months of 2023, GAAP net income attributable to common shareholders totaled $26.5 million, or $0.21 per diluted share. In terms of FFO, the company had $105.4 million in total FFO, or $0.79 per diluted share for the first nine months of 2023. In terms of net operating income, NOI on a same-center cash basis increased by 8.2% during the third quarter and increased by 3.6% for the first nine months of 2023. Our third quarter results were impacted by two items. First, other income increased notably, primarily as a result of recapturing three leases, which we have already lined up new tenants to take the bulk of the recaptured space at notably higher rents. Partially offsetting the increase in other income, gap rent amortization declined, primarily as a result of removing a buy-buy baby lease from our portfolio during the third quarter. The decline is a one-time non-cash gap adjustment. And just like the recaptured spaces, we already have several new tenants lined up for the buy-buy baby space, both at a higher rent and on a same-space cash basis, one of which is already open and operating. With respect to our balance sheet, as Stuart touched on, during the third quarter, we raised $350 million through a public bond offering of senior and secured notes. It was our first time raising capital in the public bond market in nearly a decade. As such, we made a concerted effort to fully engage with the market, having discussions with a broad and diverse mix of investors. a number of which were new to the company. We intend to utilize the proceeds to retire the $250 million of senior notes that mature in December. Additionally, we paid down $100 million over a $300 million term loan. Looking out over the next five years, our debt maturity schedule is well-laddered, with approximately $300 million maturing each year on average. Having now reestablished ROIC in the public bond market, our objective is to be a more consistent annual issuer going forward. Taking into account the bond offering, as of September 30th, over 96% of our debt is effectively fixed rate, over 96% of our debt is unsecured, and over 96% of our portfolio is unencumbered. Additionally, for the third quarter, net debt to annualized EBITDA was 6.4 times down from 6.6 times from a year ago. Lastly, with the year coming to a close, we have updated and narrowed our FFO guidance range for 2023. On the positive side, leasing activity this year as far as our initial projections that we set back at the beginning of the year. However, the persistent rise in interest rates impacted our initial projected interest expense and our projected investment activity, both of which have been adjusted accordingly and are up to the guidance range for the year. Now I'll turn the call over to Rich Shovel, our COO, to discuss property operations. Rich? Thanks, Mike. As Stuart highlighted, we achieved another successful active quarter of leasing. demand across our portfolio continues to be consistently strong with a broad range of prospective new tenants actively seeking space. Given our property's location attributes, together with the strong draw of our longtime supermarket anchors and other core service and destination tenants, our centers continue to be sought out by prospective tenants as the shopping center of choice in their respective communities. Capitalizing on the demand, we continue to lease space at a record pace. Year to date, we have leased approximately 1.5 million square feet, which is a new record for us in terms of leasing volume for the first nine months. In step with our record leasing activity, we again achieved a portfolio lease rate above 98%, finishing the third quarter at 98.2% leased. Breaking that down between anchor and non-anchor space, our anchor space continues to be 100% leased, and our shop space is close behind at 96% leased. During the third quarter, we executed 95 leases, totaling 465,000 square feet. The bulk of our leasing activity continues to center around renewing longstanding valued tenants, with a number of them continuing to come to us early to renew, particularly key anchor tenants. Specifically, during the third quarter, we renewed six anchor tenants, five of which were not scheduled to mature until next year. Additionally, as Stuart indicated, We continue to have good success in terms of releasing rent growth. Specifically, during the third quarter, we achieved a 36% increase in same-space cash-based rents on new leases and a 7% increase on renewals. Underscoring our strong leasing activity and consistent performance is a proactive approach of seeking out, identifying, and capitalizing on opportunities to recapture space well in advance of lease maturities and releasing the space quickly, enhancing tenancies and driving rents higher in the process. Just to cite an example, during the third quarter, at two of our centers, we recaptured prime freestanding pads, each with a drive-through. The pads have been leased to a regional tenant whose business was recently acquired. Anticipating the acquisition could bring about some consolidation, we reached out to the tenant and successfully recaptured their spaces and now have several new national quick serve restaurant operators lined up with base rents that represent a 44% increase on average over the previous tenants rent. In addition to the strong rent increase, the new restaurant operators will be a much stronger daily draw to our centers, which in turn will enhance future leasing demand at the properties. Along with our recapturing initiative, we also continue to have good success getting new tenants open and operating. Year to date, New tenants representing approximately $6 million of incremental base rent on a cash basis have opened and commenced paying rent, including $1.9 million opened in the third quarter. In terms of new tenants that haven't yet opened, including those that we just signed during the third quarter, the incremental amount stood at $7.3 million as of September 30th, the bulk of which we expect to commence over the next several quarters. With respect to Rite Aid and their recent announcement, at September 30th, we had 15 leases with Rite Aid across our portfolio, which altogether accounted for 1.7% of our total base rent. Three of the leases are on Rite Aid's closure list. The three together account for 0.3% of our total base rent. The average base rent for the three is 50 to as much as 80% below current market rents. In terms of the remaining 12 leases with Rite Aid, They all continue to perform well, and their rents are below market on average as well. Turning to lease maturities going forward, as of September 30th, we only had 141,000 square feet maturing during the fourth quarter, including two anchor leases totaling 44,000 square feet, both of which we expect to release before year end. Looking out further to next year, we have seven anchor leases currently scheduled to mature in 2024, of which we currently expect that six of the seven will renew. In terms of non-anchor space, we have about a half a million square feet of inline space scheduled to mature next year, which we expect to renew and release consistent with our historical performance. Now I'll turn the call back over to Stuart. Thanks, Rich. Based on our leasing performance year to date and our leasing activity here early in the fourth quarter, We were on track to finish the year strong in terms of property operations and post another successful year of maintaining our high portfolio lease rate and achieving record leasing volume, while also achieving solid releasing rent growth and enhancing our tenant base. In terms of growing our portfolio, it's safe to say that 2023 has been a frustrating year as the market has been largely idle and slow to adjust to the higher interest rate environment, as I mentioned. along with the market also adjusting to the ongoing challenges that certain commercial property sectors and certain prominent markets across the country are currently faced with. Fortunately, the long-term fundamentals of the grocery anchored sector remain sound, especially as it relates to our specific portfolio and our highly protected markets. As we look towards 2024, The current expectation in the market is that acquisition activity could potentially accelerate as property level low interest rate debt begins to mature in earnest next year and private owners could have limited viable refinancing options. In anticipation, we've been strategically tracking a number of potential off-market opportunities across our core markets, working to establish and maintain an ongoing constructive dialogue with private owners. Over our team's nearly 30-year history of specializing in the grocery anchored sector on the West Coast, this strategy has proven instrumental time and again in our ability to gain access to acquire exceptional properties that rarely ever hit the market. While it's early in terms of the acquisition market becoming fully active and favorable again, we are encouraged from what we are currently seeing and look forward to the opportunity to strategically grow our portfolio in 2024. Now we will open up the call for your questions. Operator?