Retail Opportunity Investments Corp. (NASDAQ:ROIC) Q4 2023 Earnings Call Transcript
Retail Opportunity Investments Corp. (NASDAQ:ROIC) Q4 2023 Earnings Call Transcript February 15, 2024
Retail Opportunity Investments Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to Retail Opportunity Investments’ 2023 Fourth Quarter and Year End Conference Call. Participants are currently in a listen-only mode. Following the company's prepared remarks, the call will be open up for questions. Now, I'd like to introduce Lauren Silveira, the Company's Chief Accounting Officer. Please begin.
Lauren Silveira: 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, Lauren, and good day, everyone here with Lauren and me today is Michael Haines, our Chief Financial Officer; and Rich Schoebel, our Chief Operating Officer. Notwithstanding 2023, having been a year of extraordinary challenges for certain commercial real estate asset classes and certain CBD markets across the country. In distinct contrast, the long-term core drivers of the grocery anchorage sector remain fundamentally sound, especially as it relates to our portfolio and highly protected sought after West Coast markets. Capitalizing on the strong fundamentals, we achieved a number of new leasing records and milestones for the company. For the fourteenth consecutive year, we leased essentially double the amount of space that was originally scheduled to mature.
Specifically, in 2023, we leased over 1.7 million square feet achieving a new record for the company in terms of overall leasing activity. Additionally, we again achieved releasing rent growth for a record eleventh consecutive year, including 11 years in a row of achieving double-digit growth on same space new leases. Importantly, we worked at strategically renewing early a number of key valued anchor tenants, including longstanding grocer tenants. By doing so, we enhanced the long-term strength and stability of ROIC's core anchor income stream well into the future. We also continued to implement our long-standing strategy of proactively enhancing the tenant mix across our portfolio through seeking out opportunities to recapture early and release select spaces.
Going forward, this will not only serve to enhance the strength of our tenant base and appeal of our properties, it will also serve to grow our income stream having achieved higher releasing rents. In terms of acquisitions, in light of the considerable uncertainty in commercial real estate during 2023, the West Coast acquisition market sat essentially idle through much of the year. While it was sitting idle, we continue to maintain an active dialogue with our long-standing off market sources in order to be in a strong position to capitalize on unique opportunities when the market began to pick up again. To that end, during the closing months of 2023, certain private owners started to become more active in seeking to transact. Capitalizing on this, in December, we acquired an excellent neighborhood grocery-anchored shopping center that we 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 supermarket that's a long time national tenant of ours. The seller was a private owner that was in need of a closing before year end. Given our knowledge of the market together with our knowledge of the property and tenant roster, we were in a strong position to facilitate an efficient closing and in return achieved attractive pricing, including at cap rate in the high 6s for what is irreplaceable sought after real estate. Looking ahead, based on what we're currently seeing, market activity for acquisitions could resume on the West Coast in 2024, potentially in earnest. Turning to our balance sheet.
During 2023, we were diligently to enhance our long-term financial strength and profile through implementing a number of strategic capital market initiatives, including re-entering the public bond market, balancing our debt maturity schedule, while also reducing our floating rate debt and extending our credit line maturity, as well as raising a bit of equity in connection with the acquisition. Now, I'll turn the call over to Michael Haines, our CFO, to take you through the details of our balance sheet initiatives as well as our financial results for 2023 and initial guidance for 2024. Mike?
Michael Haines : Thanks, Stuart. Starting with our financial results. For the year ended of 2023, total revenues reached a new record high of $328 million, offsetting record revenues, interest expense during 2023 increased notably as a result of higher interest rates. In terms of net income for the year 2023, GAAP net income attributable to common shareholders totaled $35 million or $0.27 per diluted share. With respect to funds from operations, FFO for the year 2023 totaled $141 million, equating to $1.6 per share. Net operating income for 2023 on the same center comparative cash basis increased by 3.7% over 2022. According to our financing activities, during 2023, we raised in total approximately $363 million of capital, $350 million of which were raised in September through a public offering of unsecured senior notes.
As Stuart noted, it was the first time raising capital in the public bond market in nearly a decade. Reportingly, 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 utilized the proceeds from the offering to retire the 250 million of unsecured senior notes that matured in December. Additionally, we retired early $100 million of floating rate debt. Also, in the midst of the fed's rate tightening, we swapped $150 million in floating rate debt fixed rate. As such, at year end, just 9% of our total debt outstanding was effectively floating rate, down significantly from a year ago when our floating rate debt was 28% of our total debt outstanding.
Along with proactively lowering our floating rate debt, earlier in the year, in light of the regional banking turmoil, we proactively extended the maturity of our credit line, sending in the maturity data to 2027 with the ability to extend it for an additional year to 2028. We also have the ability to double the capacity of the credit line from its current capacity of $600 million up to $1.2 billion. Additionally, in the context of what happened in the regional banking sector this past year, it's important to note that we just had two mortgages that together only total about $60 million. Looking ahead, come April, when one of the two loans mature, we were down to only one mortgage remaining. In addition to lowering of floating rate and secured debt, during 2023, we continued to work at enhancing the company's financial ratios, including the company's net debt ratio.
We ended the year with a net debt ratio of 6.2x for the fourth quarter, which is the lowest that our net debt ratio has been dating back to 2014. Looking ahead, our debt maturity schedule is well laddered over the next five years with approximately $300 million maturing each year on average. Having now reestablished ROIC in the public bond market, our objective is to be a consistent annual issuer going forward. Looking at 2024, in addition to refinancing the senior notes that mature at the end of the year, we may also look to refinance our term loan and credit line borrowings of long-term fixed rate bonds, depending upon market conditions as the year progresses. With respect to equity capital, in light of the acquisition that Stuart discussed, in December, we issued common stock through our ATM, raising approximately $13 million.
In terms of guidance for 2024, we currently expect our core portfolio NOI will continue to grow, driven by a combination of contractual rent increases together with expected releasing rent growth. Additionally, as Stuart touched on, we are anticipating that the acquisition market will become active and favorable again. Accordingly, we currently expect to acquire between 100 million to as much as 300 million of shopping centers net of dispositions. The fund acquisitions are guidance assumed that we will issue equity in step of the acquisition activity as we move through the year with the goal of keeping our financial ratios intact as we grow our portfolio. Moderating our expected external internal growth will be interest costs. Based on the bonds that we issued in 2023, together with our projected acquisition and refinancing activity, we currently expect that the company's interest expense will be in the $78 million to $80 million range for 2024.
Additionally, in terms of bad debt, our guidance assumes a range of $3 million to $5 million, although our current expectation is that we'll be more towards the lower end based on the overall strength that we're tenant based today. Taking into account all of these factors and other various assumptions, we have set our initial FFO guidance range for 2024 at $1.03 to $1.09 per diluted share. Now, I'll turn the call over to Richard Schoebel, our COO. Rich?
Richard Schoebel: Thanks, Mike. As Stuart highlighted, 2023 proved to be one of our best years in terms of leasing. Demand for space across our portfolio continues to be consistently strong as a diverse mix of longstanding tenants together with new concepts and businesses seeking to expand to the West Coast, continue to buy per space. These diverse businesses are predominantly destination type tenants in the wellness, self-care, restaurant, service, and entertainment segments. Most important from our perspective is their keen interest in leasing space at select shopping centers that are well located in diverse communities and have an established grocer as the core daily draw, which is exactly what our portfolio offers. Capitalizing on the demand, as Stuart highlighted, during 2023, we achieved a new record for the company, leasing over 1.7 million square feet in total.
The bulk of our activity centered around renewing long-standing tenants. Specifically, we renewed approximately 1.3 million square feet during 2023 and over half of that involved renewing valued anchor tenants, including long-standing grocers with a number of tenants coming to us early to renew. Some by as much as over a year in advance of their lease maturities. In terms of new leasing activity, given the lack of available space across our portfolio and the modest amount of space that was scheduled to mature during 2023, we made a concerted effort to proactively recapture select spaces focusing on sought-after anchor and pad spaces, spaces that are well suited for the type of businesses that are leading to demand. In total, we successfully executed upwards of 400,000 square feet of new leases, a good portion of which were with tenants new to our portfolio.
In step with our renewal and new leasing activity, we again posted another solid year in terms of re-leasing rent growth including a 7% increase on renewals and a 22% increase on same-space new leases. With respect to Rite Aid, as we discussed on our last call back in October, out of the 15 leases we had with Rite Aid across our portfolio, 3 of the stores closed in the fourth quarter, which is reflected in our portfolio lease rate, which was 97.7% at year-end. We already have much of the space spoken for with new synergistic tenants that we are excited about. We expect to achieve a notable increase in the average base rent. In terms of the remaining 12 leases with Rite Aid, all of the stores continue to perform well, and Rite Aid has indicated that they intend to keep operating the stores and plan to implement new merchandising and operational strategies aimed at enhancing their performance going forward.
As 2024 is getting underway, demand for space continues to be strong across our portfolio such that we expect to have another solid year. In terms of occupancy, we expect to maintain our overall portfolio lease rate in the 97% to 98% range as we move through the year. In terms of lease rollover, specifically anchor lease maturities, at the start of 2024, we had seven anchor leases scheduled to mature during the year, totaling 281,000 square feet. Three of the seven have already renewed their lease and we currently expect another two will renew as well. As to the remaining two anchor leases scheduled to mature, one is with Rite Aid, which is 1 of the 12 stores that they intend to keep operating. We're currently in the process of amending their lease to extend it for another five years.
With respect to the other anchor lease, we are in the process of re-leasing the space and are currently in discussion with several national destination entertainment business that will be a terrific added draws to our property. Additionally, we expect to achieve a substantial increase in base rent over the prior tenant's rent. Looking out further at 2025, we currently have 22 anchor leases scheduled to mature. Based on our early proactive discussions with the tenants, we currently expect that 21 of the 22 anchors will renew, the bulk of which we expect will renew early as we move through 2024. The remaining anchor lease is 1 of the 12 leases with Ride Aid that we are currently in the process of extending the lease term. Lastly, in terms of non-anchor space maturing in 2024.
At the start of the year, we had 484,000 square feet of shop space scheduled to mature. Similar to our anchor re-leasing activity, we are already hard at work and having good success at renewing and re-leasing the space. Additionally, we are also proactively pursuing recapture opportunities and expect to have another productive year as we did in 2023. Now I'll turn the call back over to Stuart.
Stuart Tanz: Thanks, Rich. Our ability to post another strong year of leasing underscores the resilience and competitive strength of our grocery-anchored portfolio and the intrinsic value of our operating platform and singular West Coast focus. To echo Rich, looking ahead, we expect to have another strong and productive year in 2024. In terms of same-center net operating income, we fully expect to continue growing our NOI in 2024. However, on a cash basis, the growth rate for this year will be moderated as a result of Rite Aid stores that closed in the fourth quarter and the anchor lease that Rich mentioned. While we are already close to having new tenants lined up for the space is at significantly higher rents on average, there will be downtime as we get the new tenants in place, which is reflected in our same-center NOI guidance growth for 2024.
Once the new tenants are in place, together with what we expect to be another strong year of leasing in 2024, looking out further at 2025, we currently expect that same-center NOI growth will be in line with our historical growth rate in the 3% to 4% range, if not better. In terms of acquisitions, as 2024 is getting underway, we currently have close to $100 million of off-market transactions in our pipeline. All of which is truly irreplaceable real estate in the heart of densely populated sought-after communities. While the transactions are not yet finalized, we currently expect that the potential pricing on a blended basis will be comparable to our fourth quarter acquisition. Safe to say, we are excited about these opportunities and look forward to growing our portfolio in 2024 and continuing to build long-term value.
Now, we will open up the call for your questions. Operator?
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