Retail Opportunity Investments Corp.

Welcome to Retail Opportunity Investments 2024 First Quarter 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 meeting 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 Tanz, the company's Chief Executive Officer. Stuart?

Thank you, Lauren, and good morning, everyone. Here with Lauren and me today is Michael Haines, our Chief Financial Officer, and Rich Schovel, our Chief Operating Officer. We are pleased to report that we are off to a solid start thus far in 2024. We continue to make the most of the strong demand for space across our portfolio, especially as it relates to anchor space. At the start of the year, we had four anchor spaces that recently became available, an unusual occurrence for us, given that we have maintained our anchor space at 100% least for the past seven years. We are pleased to report that we currently have four terrific national tenants lined up to take all of the space and at higher rents. In fact, on a blended basis, we expect the increase in rent will be more than double the previous blended rent. Turning to acquisitions, we recently acquired a terrific grocery anchored shopping center located here in the San Diego market. The property serves as the primary shopping center anchoring a master plan community that is situated in one of the most sought-after affluent sub-markets in San Diego, truly irreplaceable real estate. Through a long-standing off-market relationship, the seller came to us directly seeking to execute a quick transaction. Given that the property is located literally in our backyard, we knew this center extremely well, and we're in a strong position to accommodate an efficient closing. The center features not just one, but two supermarkets, Trader Joe's and Stater Brothers, both of which are generating strong sales numbers and have been thriving at the property for years. In the few short weeks that we've owned the property, we've already leased the available space at the center. Several of our long-standing tenants, including a grocery tenant, has reached out to us to express their interest in leasing space at the center. Safe to say, we're very excited to own this property. In terms of the numbers, we acquired the shopping center for $70 million, according to a 6.75% cash yield, which is north of the 7% on a GAAP basis. Additionally, going forward, Over the next couple of years, there are opportunities to release below market space and re-merchandise some inline space that should grow the yield notably. With respect to dispositions, we currently have two properties under contract to sell totaling $68 million with a blended exit cap rate in the low sixes. From our perspective, selling these properties and effectively redeploying the capital accretively into an irreplaceable asset such as our San Diego acquisition enhances the underlying intrinsic value of our overall portfolio, as well as our ability to continue growing cash flow in the time ahead. Now I'll turn the call over to Michael Haynes, our CFO, to take you through our financial results for the first quarter. Mike? Thanks, Stuart. During the first quarter, total revenues increased to $85.3 million, in part driven by base rents, which came in higher than our internal forecast. and also in part by higher than usual amortization of above and below market rent. As we discussed in our last call, an anchor lease expired during the first quarter that was substantially below market, which accounted for the bulk of the increase and which we had taken into account with respect to our FFO guidance range for the year. Gap net income attributable to common shareholders was $11 million for the first quarter of 2024, equating to $0.09 per diluted share. And FFO for the first quarter of 2024 totaled $37.9 million, equating to $0.28 per diluted share. In terms of same-center net operating income, during the first quarter, same-center cash NOI increased 5.7%, which was driven by a balance of base rent and recovery increases, as well as an increase in other income in connection with our lease recapture initiatives. While the 5.7% increase is above our internal forecast for the first quarter, we remain cautious looking ahead, particularly given the anchor space releasing activity that Stuart spoke of. While we have all of the available anchor space currently spoken for, there will be some downtime between leases, which is reflected in our same-center NOI guidance range for the full year. Turning to our financing activities, as Stuart indicated, we recently acquired a shopping center for $70 million. While we utilize the credit line to initially fund the acquisition, our objective is to effectively finance the transaction with the proceeds from the pending dispositions, which we expect to close in the next 60 to 90 days. In terms of our balance sheet and financial ratios, net debt to annualized EBITDA was 6.4 times for the first quarter, down from 6.7 times a year ago. Here at the start of the second quarter, we retired in full a $26 million mortgage. As a result, we currently have only one mortgage loan remaining for $34 million, meaning that 93 of our 94 shopping centers are currently unencumbered, and this last mortgage matures in about 18 months from now. Looking ahead, with respect to refinancing the bonds that mature at the end of the year, we continue to watch the market closely and are in a position to move forward opportunistically when market conditions become more subtle than favorable. Now I'll turn the call over to Rich Schoble, our COO. Rich? Thanks, Mike. As Stuart highlighted, demand for space across our portfolio continues to be strong. During the first quarter, we signed 87 leases, totaling over 383,000 square feet. the bulk of which centered around renewing valued anchor tenants. Specifically, during the first quarter, we renewed seven anchor tenants, totaling 207,000 square feet, three of which were actually not scheduled to mature until next year. All three of those tenants came to us early, with two of the tenants seeking to renew their lease for another five years, and one of them, a longstanding grocery tenant, seeking to renew their lease for another 10 years. As we noted on our last call, four anchor spaces recently became available, totaling 179,000 square feet. And as Stuart noted, we currently have new national tenants lined up to lease the spaces, all of which will be a terrific new strong draw to our centers. Additionally, all four leases will have 10-year initial lease terms and all at higher rents. We are currently in the process of finalizing the lease agreements. Once the leases are executed, We expect to deliver the spaces expeditiously, as there is only a limited amount of prep work required on our part. With respect to non-anchor, inline space, demand also continues to be strong. During the first quarter, we signed non-anchor leases totaling 176,000 square feet. And as with our anchor leasing activity, our inline leasing activity centered around tenant renewals, with a good number of them also coming to us early to renew. In terms of releasing rent growth, we posted another solid quarter, achieving a 12% increase on new leases signed during the first quarter and a 7% increase on renewals. While our first quarter leasing volume was among one of our most active first quarters on record, we are poised to potentially have an even stronger second quarter. In addition to the anchor leases that we are finalizing, our non-anchored leasing pipeline is very strong as well. being driven by a diverse mix of necessity, service, and destination tenants that are seeking to implement expansion plans across core West Coast markets. Lastly, in terms of getting new tenants open, we continue to make steady progress. During the first quarter, new tenants representing 1.4 million of incremental annual base rent on a cash basis opened and commenced paying rent. Additionally, new leases signed during the first quarter added just over $1 million of incremental annual base rent. Accordingly, at March 31st, we had approximately 6.7 million in total of incremental annual base rent from new tenants not yet open, the bulk of which we expect will do so as we move through the year. Now I'll turn the call back over to Stuart. Thanks, Rich. In terms of the acquisition market and the current state of play, The recent renewed concerns regarding inflation, along with the corresponding rise in interest rates, has yet again caused market activity to pause on the West Coast as a number of buyers have quickly moved back to the sidelines. We think that this could potentially work to our advantage as the year progresses, especially as it relates to off-market opportunities that could arise involving private owners facing looming mortgage maturities. With this in mind, We continue to be proactively engaged and continue to have proactive discussions with our off-market sources. Lastly, I would like to briefly expand on Rich's remarks regarding tenant renewals. From our perspective, tenants consistently come to us early, both anchor and non-anchor tenants, to renew their leases for another five to ten years out in the face of uncertain economy we think speaks volumes as to the continued growing appeal of the grocery anchored sector in general and specifically speak to the attributes of our portfolio. It's also indicative of the underlying strength and stability of our core tenant base and their business prospects going forward. Furthermore, following the pandemic, tenants have since shifted to being more guarded in carefully selecting the communities and shopping centers in which to expand their businesses. Needless to say, we've worked hard to capitalize on this shift, which is reflected in our consistently strong leasing results year after year and is what drives our discipline acquisition strategy. Looking ahead, we believe that our properties are well positioned today with their location attributes, compelling demographics, and strong grocery daily necessity focus to continue being among the top sought-after shopping centers of choice on the West Coast by these value-discerning tenants. Now we will open up the call for your questions. Operator?