Retail Opportunity Investments Corp. (NASDAQ:ROIC) Q1 2023 Earnings Call Transcript
Retail Opportunity Investments Corp. (NASDAQ:ROIC) Q1 2023 Earnings Call Transcript April 26, 2023
Retail Opportunity Investments Corp. misses on earnings expectations. Reported EPS is $0.06 EPS, expectations were $0.08.
Operator: Good day, and welcome to Retail Opportunity Investments First 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'd like to introduce Laurie Sneve, the company's Chief Accounting Officer.
Laurie Sneve : 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 Tanz, the company's Chief Executive Officer. Stuart?
Stuart Tanz: Thank you, Laurie, and good morning, everyone. Here with Lori and me today is Michael Haines, our Chief Financial Officer; and Rich Schoebel, our Chief Operating Officer. As reported in our press release, Laurie Sneve is retiring in a couple of weeks. Laurie and I have worked together for over 20 years, first at Pan Pacific and then for the past 11 years here at ROIC. I am truly grateful for her invaluable contributions with some guidance and leadership over the years. She will be missed by everyone at ROIC and all of us wish her the very best in her retirement. With Laurie retiring, Lauren Silvera will become Chief Accounting Officer. Lauren joined ROIC back in 2013 as the company's Corporate Controller and has been an important part of the ROIC team for the past decade.
Mike, Rich and I look forward to working with Lauren in her new role. Turning to our first quarter results. Our grocery-anchored portfolio and tenant base continue to perform very well. In fact, in terms of leasing activity, notwithstanding our portfolio being essentially full at over 98% leased at the start of 2023, we achieved the most active quarter in the company's history, leasing a new quarterly record amount of space and driving our portfolio lease rate to an all-time high at quarter end. Additionally, we again achieved solid re-leasing rent growth. In fact, it was our 45th consecutive quarter over 11 years in a row of achieving re-leasing rent growth on both new leases and renewals. Speaking of renewals, we posted our most active quarter by far in terms of renewing tenants, including long-time valued anchor tenants as well as a broad range of strong non-anchored tenants.
Many of our tenants continue to reach out to us early to execute renewal options with a growing number looking to extend past the typical five-year option period. We think the renewal activity is indicative of the strength and long-term appeal of our grocery-anchored portfolio with its strong location attributes and demographics. It is also indicative of the strength of our tenant base today. Dampening our record-setting leasing during the first quarter, we had several expenses that impacted FFO and same-center NOI. Most notably, we incurred an inordinate amount of snow removal costs primarily as a result of the unusual severe snowstorms up in the Seattle area back in July and February. We also incurred a onetime expense during the first quarter related to concluding an open item with a seller of a property that we had previously acquired.
Notwithstanding these expenses, we remain on track in terms of our guidance for the year. Along with working to enhance our portfolio through our leasing initiatives, we are also working to enhance our financial flexibility, especially in light of the recent banking turmoil. During the first quarter, we extended the maturity date of our credit facility. While the facility wasn't scheduled to mature until next year, we extended the maturity date out to four years from now with the flexibility to extend it by as much as five years. Additionally, watching the interest rate swap market closely during the fourth quarter, we swapped top of our floating rate term loan, reducing our floating rate debt considerably. Now I'll turn the call over to Michael Haines, our CFO, to take you through the details.
Mike?
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Michael Haines: Thanks, Stuart. GAAP net income attributable to common shareholders for the first quarter of 2023 was $8.1 million, equating to $0.06 per diluted share. Funds from operations for the first quarter totaled $33.8 million, equating to $0.25 per diluted share. As Stuart touched on, during the first quarter, we had several expenses that impacted our first quarter results. That said, property-level rental revenue from the quarter actually came in above our budget such that actual GAAP operating income for the first quarter was fully in line with our budget, notwithstanding the added expenses. With respect to bad debt for the first quarter, that debt was approximately $1 million, which was below our budgeted amount of 1.5% of total revenue.
The bulk of the $1 million related to a combination of the onetime expense that Stuart mentioned and various tenant account adjustments. In other words, the bulk of our first quarter net debt was not related to 10 vacancies. Overall, our tenant base continues to perform well. In terms of financing initiatives, as Stuart noted, during the first quarter, we extended the maturity date on our credit line. Specifically working with our banking group, we extended the maturity date from February 2024 to March 2027, with the flexibility to extend the maturity for another year to March 2028. Additionally, borrowings on our line are now based on SOFR. We also have the flexibility to double the capacity on the credit line from its current capacity of $600 million, up to $1.2 billion.
As of the end of the first quarter, we had just $67 million drawn on the line. As Stuart highlighted, we continue to watch the debt market closely with an eye towards reducing our floating rate path, namely our $300 million floating rate term loan. During the first quarter, we capitalized on a favorable window and entered into two interest rate swap are fixed interest rate on $150 million of our $300 million term loan, locking in the rate at 5.4% through August of next year. With the swaps in place, we lowered our floating rate debt from 28% of our total debt, where we were started 2023, down to 16% as of March 31. Additionally, in terms of the company's interest expense, our initial budget for 2023 assumed that the interest rate on our $300 million term loan would remain floating throughout the year.
Having put the swaps in place, we estimate it could lower our overall actual interest expense for the year by $0.5 million more depending upon the trajectory of interest rates as the year progresses. In terms of the $150 million that is still floating, we purposely held off swapping it out in order to give us flexibility in terms of refinancing options later in the year, including possibly refinancing the $150 million, together with the $250 million of fixed rate positive mature in December. Additionally, the term loan is repayable in full or part at any time and doesn't mature until another two years, which also gives us considerable flexibility regarding refinancing strategies. Lastly, in terms of mortgage debt, with the banking terminal, there is currently a lot of concern regarding the commercial real estate lending market, particularly as it relates to mortgage refinancings going forward.
Given the original banks hold the bulk of mortgage debt, fortunately, we only had two mortgage loans on our balance sheet that together totaled about $61 million, one matures next year and the other matures in 2025. Our plan is to refinance both loans with unsecured debt. Now I'll turn the call over to Rich Schoebel, our COO. Rich?
Richard Schoebel: Thanks, Mike. While the first quarter of each year has traditionally been relatively quiet in terms of leasing activity following the holiday season as existing and prospective tenants evaluate and set plans for the new year. In distinct contrast, in recent years, the first quarter has become increasingly active across our portfolio with more and more tenants buying for any space that may have become available following the holiday season. This is especially the case as it relates to shop space, where we continue to see a growing number of franchisees seeking to expand not only in the quick-serve restaurant sector, but more and more in the medical, wellness and self-care sectors, along with boutique fitness and child development.
A number of which are bringing new concepts to the market and all continue to seek out grocery-anchored shopping centers. Capitalizing on the demand, we posted our most active quarter on record for the company, leasing over 559,000 square feet. Additionally, our robust leasing activity helped drive our portfolio lease rate to a new record high of 98.3%. As Stuart highlighted, the bulk of our leasing activity centered around tenant renewals. Specifically, during the first quarter, 512,000 of the 559,000 square feet that we leased involved renewing existing tenants. In terms of anchor space, at the start of 2023, we had a total of 393,000 square feet scheduled to roll during the course of the year. In just the first three months alone, we have already renewed 384,000 square feet of anchor tenants.
Five of the anchor tenant renewals were long-standing supermarket tenants. Additionally, one of the anchor renewals involved a long-standing tenant whose lease wasn't scheduled to roll until 2028, but they came to us wanting to exercise their five-year option now and extend their lease through 2033. We also had three anchor tenants that came to us about extending their five-year renewal option out to seven years. Taking all of our anchor renewal activity into account, as of March 31, we now have only three anchor leases scheduled to roll this year, two of which we expect to renew with one tenant seeking a seven-year extension instead of five, and they would also like to extend the leases similarly at several other locations within our portfolio that roll in future years.
With respect to the third anchor lease, which is a 17,000 square foot space, we are currently in discussions with several prospective new tenants to lease the space where we expect to achieve a significant increase in rent. Looking out further in 2024, we currently have 13 anchor leases scheduled to roll, of which we expect that 12 will renew. In terms of non-anchor space, at the start of the year, we had 466,000 square feet of shop space scheduled to roll. During the first quarter, we re-leased 175,000 square feet in total of shop space of which about three fourth of that were renewals. In terms of re-leasing rent growth, we posted another solid quarter, achieving an 11% increase in new leases signed during the first quarter and a 6% increase on renewals.
Lastly, with respect to getting new tenants open and operating, we had another active successful quarter. At the start of the year, the spread between leased and build space stood at 3.9%, equating to $7.6 million of rent from new tenants that have not yet taken occupancy and commenced paying rent. During the first quarter, new tenants representing $2.1 million of the $7.6 million took occupancy, taking into account new leases signed during the first quarter. At March 31, the spread stood at 3.2%, representing $6.5 million of rent that has not yet commenced. We expect the bulk of the $6.5 million will come online as we move through the year. Now I'll turn the call back over to Stuart.
Stuart Tanz: Thanks, Rich. Our continued success with leasing and the ongoing demand for space against the backdrop of increasingly challenging and uncertain economic environment speaks volumes as to the fundamental strength of our portfolio and the benefits of our hands on approach. As we continue to capitalize on the demand, we are focused on making the most of every opportunity to enhance our already strong necessity and service-based tenant mix. Importantly, as always, we continue to be disciplined and selective with the tenants that we are renewing and the new tenants that we are bringing to our portfolio. In terms of acquisitions and dispositions, we currently have one property under contract to sell for $15.4 million.
It's a property up in the Portland market that we acquired back some years ago as a value-add reposition play. Since acquiring the property, we fully re-tenanted and remerchandised the center, increasing the NOI substantially along the way. While the center is a stable property, it is one of the few properties in our portfolio that is not grocery anchored. Beyond this, we have several other properties that we are exploring selling. However, at the moment, we are currently holding off with moving forward until there's more clarity in the market. Just a few short months ago, the acquisition market was starting to show encouraging signs of becoming active and favorable again. However, the sum banking turmoil has caused traditional mortgage lenders and other capital sources as well as buyers and sellers to pull back significantly.
As a result, activity in the market in terms of actual deals being consummated is currently very limited. With respect to the few transactions that have occurred recently in the grocery-anchored sector on the West Coast, cap rates have been in the low-6s, but there hasn't been enough activity to really know with confidence where the market is heading. While we are being patient, we continue to be proactively engaged and continue to have discussions with our off-market sources, so that we are in a strong position to move forward once there's clarity in the marketplace. Based on our experience over many years through numerous challenges, market conditions often change rapidly and opportunities quickly arise, especially in terms of off-market acquisitions.
In the meantime, we intend to continue working diligently in enhancing the value of our existing portfolio. Notwithstanding all of the various macroeconomic challenges, our portfolio remains rock solid, and the fundamental drivers of our grocery-anchored business remains sound. Now we will open up the call for your questions. Operator?
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