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Retail Opportunity Investments Corp
Earnings Call Analysis
Q2-2024 Analysis
Retail Opportunity Investments Corp
For the second quarter of 2024, the company reported total revenues of $83 million, with operating income of $28 million. The first six months of 2024 showed total revenues of $169 million, illustrating a solid revenue stream. Notably, the same-center net operating income (NOI) for Q2 2024 increased by 1.7%, and the increase for the first half of the year is at 3.7%, surpassing original guidance of 1% to 2%. This reflects the company's robust performance amid active leasing activity.
During the second quarter, the company leased approximately 393,000 square feet, marking the second most active second quarter in history. The overall lease rate across the portfolio increased to 97%, with shop space at 96% leased and anchor space at 98% leased. This increased demand is driven by tenants from various sectors, particularly in fitness, wellness, and food services, seeking to expand in the West Coast markets where the company has a strong presence.
In addition to new leases, the company achieved a 12% increase in base rent on new leases signed in Q2. The renewal of 276,000 square feet of space led to a 6% hike in rent. The ability to renew leases successfully with increased rental rates indicates a healthy demand for the company’s offerings, coupled with a strategy focused on grocery-anchored shopping centers in mature communities that emphasize necessity-based shopping.
The firm made notable moves in acquisitions and dispositions, acquiring a grocery-anchored shopping center for $70 million that bolsters its portfolio in San Diego. Conversely, a property was sold for around $57 million, further streamlining the portfolio. This reflects a balanced approach to maintaining asset quality and optimizing cash flow, with the aim of enhancing long-term value.
Management raised the lower end of the funds from operations (FFO) guidance based on performance, now expecting same-store sales to grow in the range of 3% to 4% in 2025, higher than the previous year as the benefits of new leases kick in. The sale of properties is projected to yield about $25 million, which will be used to pay down debt further strengthening the balance sheet.
Despite the strong performance, the acquisition market remains challenged, with management now assuming no further acquisition activity for the rest of the year due to high debt financing costs and unyielding seller pricing expectations. This has resulted in a cooling acquisition pipeline, shifting focus towards organic growth and optimizing existing assets.
The company is positioned with several upcoming lease expirations, particularly with anchor tenants, which are anticipated to renew at market rates that are significantly higher than historical levels. This is expected to create substantial future cash flow opportunities as long-standing leases approach their end, given that many are outdated in terms of current market valuations.
The balance sheet shows considerable strength, with 94 out of 95 shopping centers unencumbered by mortgages, save for a small $34 million loan maturing in the next 15 months. With no immediate debt maturities projected for the next two-plus years, the firm is well-positioned to navigate potential headwinds in the economic landscape, particularly concerning interest rates.
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Welcome to Retail Opportunity Investments Second Quarter 2024 Conference Call. [Operator Instructions] I would now 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 Tanz, the company's Chief Executive Officer. Stuart?
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. Demand for space across our portfolio continues to be strong, and we continue to work hard at making the most of it, leasing space at a near record pace. In fact, Year-to-date, we've already leased over 776,000 square feet.
Additionally, we continue to achieve re-leasing rent growth posting a 12% increase on new leases for the second quarter representing our 50th consecutive quarter, extending over 12-plus years, dating back to when we first commenced reporting property statistics in 2012 when we owned just 35 shopping centers. As we've grown our portfolio nearly threefold since, we have consistently achieved re-leasing rent growth every year and every quarter. With respect to acquisitions, as we reported on our last call, early in the second quarter through a long-standing off-market relationship, we acquired for $70 million, an excellent core grocery-anchored shopping center. The property serves as the primary shopping center anchoring a master-planned community known as Bressi Ranch that is situated in one of the most sought-after affluent submarkets in San Diego, truly irreplaceable real estate.
The center features not just 1 but 2 strong supermarkets, Trader Joe's and Stater Brothers, both of which are long-standing tenants of ours. Looking ahead, there are a number of opportunities for us to enhance the underlying value and grow the center's cash flow through enhancing the in-line tenant mix as well as re-leasing below-market space, which we're already working on. With respect to dispositions, we recently sold a property for approximately $57 million. It's a center that we acquired back in the early days of ROIC. Over the years, we've substantially remerchandised and repositioned the center, significantly increasing the cash flow along the way, surpassing our initial goals and projections. Notwithstanding the center being a stable property today, looking ahead, we felt the growth prospects were limited and now was an appropriate time to sell this particular property.
From our perspective, selling this property, while essentially at the same time that we were acquiring an irreplaceable asset like Bressi, no doubt enhances the long-term strength and appeal of our overall portfolio as well as our ability to continue growing cash flow going forward.
Now I'll turn the call over to Michael Haines to take you through our financial results for the second quarter and the first 6 months. Mike?
Thanks, Stuart. For the 3 months ended June 30, 2024, the company had $83 million in total revenues and $28 million in operating income. For the first 6 months of 2024, the company had $169 million in total revenues and $58 million in operating income. On a same-center cash basis, net operating income for the second quarter of 2024 increased by 1.7% and increased by 3.7% for the first 6 months. The 3.7% increase for the first half of the year is above our same-center NOI guidance range for the full year of 1% to 2%, however, as we discussed on our last call, given the ongoing anchor space re-leasing activity, there will be some downtime between leases, which is reflected in our guidance.
GAAP net income attributable to common shareholders totaled $7.4 million for the second quarter of 2024, equating to $0.06 per diluted share. And for the first 6 months of 2024, GAAP net income was $18.4 million or $0.14 per diluted share. Customer operations for the second quarter of 2024 totaled $34.1 million, equating to $0.25 per diluted share. And for the first 6 months of 2024, FFO totaled $72.1 million or $0.54 per diluted share.
Turning to our balance sheet. During the second quarter, we retired in full a $26 million mortgage. As a result, we currently only have 1 mortgage loan remaining for $34 million, meaning that 94 of our 95 shopping centers are unencumbered, equating to about 99% of our total portfolio GLA, and the last remaining mortgage matures in 15 months from now.
With respect to the $250 million of senior notes that mature in December, our objective is to refinance the bonds through long-term public bond offering, preferably a 10-year deal. Depending on how interest rates or the bond market evolves during the second half of the year, we may also look to refinance possibly at the same time our $200 million term loan. Assuming we do and looking ahead, other than the $34 million mortgage, we would have no debt maturing for the next 2-plus years.
Now I'll turn the call over to Rich Schoebel, our COO, to discuss property operations. Rich?
Thanks, Mike. As Stuart highlighted, demand for space across our portfolio is strong, coming from both existing and prospective tenants. In terms of prospective tenants, there's no shortage of demand coming from a broad range of destination tenants especially new children enrichment concepts, most notably academic, robotic and exercise themed concepts. Additionally, mainstay destination tenants in the fitness, self-care and wellness sectors continue to expand along with restaurants, including traditional restaurants as well as new digital kitchen only concepts.
There are two common themes amongst these diverse tenants. First, they are strategically seeking to expand only in select very specific markets on the West Coast, markets where we have a strong established presence. And second, they are seeking to lease space in necessity centric shopping centers that are well situated in highly protected mature communities, which again is exactly what our portfolio offers. From our perspective, these diverse destination tenants serve as a natural value-add complement to the grocery-anchored daily necessity focus of our portfolio and business.
As Stuart commented, we continue to make the most of the demand. During the second quarter, we leased 393,000 square feet, which is the second most active second quarter on record for the company. Breaking the 393,000 square feet down, we signed 40 new leases totaling 117,000 square feet, achieving a 12% increase in same-space base rent, as Stuart highlighted. Additionally, we renewed 276,000 square feet of valued tenant achieving a 6% increase in base rent, notwithstanding the bulk of the renewals being tenants that exercised long-standing fixed renewal options, many of which did so early.
In step with our second quarter strong leasing activity, our portfolio lease rate increased to 97% as of June 30. Breaking that down between shop and anchor space, our shop space was 96% leased and our anchor space was 98% leased. In terms of getting new tenants open, we had another successful active quarter, specifically, tenants representing upwards $2 million of incremental annual base rent on a cash basis open their businesses and commenced paying rent during the second quarter.
Additionally, in step with our strong leasing activity, new leases signed during the second quarter added over $2.5 million of incremental annual base rent bringing our total incremental rent from new leases that haven't commenced yet to approximately $7.3 million as of June 30.
Lastly, at June 30, we had 17 anchor leases scheduled to mature next year in 2025. Two of the 17 have already renewed here just recently. As to the other 15, based on tenant discussions to date, we currently expect that at least 13 of the 15 anchors will renew and possibly all 15 could, which again speaks to the strength of our portfolio and the strength of our anchor tenant base.
Now I'll turn the call back over to Stuart.
Thanks, Rich. Based on our solid portfolio performance during the first half of the year, together with what we see on the horizon with our core portfolio in the second half of the year, we have raised the lower end of our initial FFO guidance. In terms of the higher end of our initial guidance, which was largely based on growing our portfolio back at the start of the year, there was increasing activity in the acquisition market, driven in part by the market's expectation that interest rates would be cut soon.
Based on the momentum that was building, we expected that 2024 would potentially prove to be another productive year on the acquisition front, and we set our initial guidance accordingly. However, as the year has progressed, debt financing costs have not come down and seller expectations in terms of pricing and cap rates have not moved. As a result, the market has been largely idle.
Additionally, the uncertain economy continues to weigh on the acquisition market, making it unclear as we sit here today when the market could pick back up again and become more favorable. In light of these factors, we are now assuming no additional acquisition activity in terms of our guidance for the second half of the year. Accordingly, we have lowered the high end of our initial FFO guidance. With respect to dispositions, we do have a couple of properties that we may move forward with selling during the second half of the year, but only totaling around $25 million, assuming both properties were to be sold.
While the acquisition market remains muted, we continue to focus on growth opportunities within our core portfolio, expanding on Rich's remarks regarding upcoming anchor maturities. Going forward, over the next several years, a growing number of our maturing long-standing anchor tenants do not have any remaining renewal auctions to exercise. Given that many of these anchor leases were originated a long time ago, some by as much as 20 to 30 years ago, these anchor leases are significantly below market today. Safe to say, we intend to make the most of these re-leasing opportunities over time capitalizing on the long-term strength and appeal of our grocery-anchored, necessity-based portfolio and are sought after highly protected markets.
Now we will open up the call for your questions. Operator?
[Operator Instructions] Today, our first question will be coming from Dori Kesten of Wells Fargo Securities.
The deceleration in same-store NOI growth that's implied for the second half of the year, is that evenly spread among Q3 or 4? Is there anything you want to point out as maybe differentiated by quarter?
Well, the same-store 1.7% for the second quarter is...
No. I mean the second half of the year.
Oh, second half of the year. Yes, we're keeping the same-store guidance of 1% to 2% because of the back half. We're expecting it to be not as strong as first half, obviously, because just the way the numbers were comparing this year to last year's results.
Okay. And then I think on the updated list of dispositions out of Albertsons and Kroger, you guys have a number of -- number of stores potentially to be operated by [ stat ]. Can you give us an updated view of the situation from your perspective? And does the new team there or, I guess, potentially there [ ease your operating concerns? ]
Yes. I mean from a lease perspective, we have 32 leases in total that have with Kroger and Albertsons, only 8 are being sold right now to CNS, 6 of which are in Oregon and two are in Washington. None of the 18 leases that we have with Kroger and Albertsons in California are being sold to CNS.
And in terms of the transaction, we continue to communicate with both Kroger and Albertsons, and conduct business as usual, including renewing one of their leases in the second quarter. However, because they're still waiting to see if the merger goes through, they're not in a position to discuss the merger, and we haven't spoken to CNS.
And our next question will be coming from Todd Thomas of KeyBanc Capital Markets.
A couple of questions. I guess, first, Stuart, your comments about lower level of net investment activity going forward. We're now talking about rate cuts again later in the year and into 2025. So is it more about timing just given the uncertainty around rate cuts and what was sort of previously unanticipated and that investment activity is delayed? Or are sellers just unwilling to transact the current prices? And can you talk a little bit about sort of where that bid-ask spread is today?
Sure. Well, I mean, yes, it's timing as it relates to interest rates. And I think as I said in my comments, sellers are still reluctant to -- given the interest rate environment and the fact that the market is somewhat idle, sellers are still reluctant to bring their properties to market. Going forward and looking into '25, assuming that interest rates, we do see some movement in interest rates. We do anticipate hopefully that the acquisition market will pick up a bit more. But as we said in the comments at the start of the year, we anticipated more activity. And when interest rates didn't come down, that came -- that certainly came to a halt very quickly. So sellers are still on the sidelines right now, and we'll see how things move on the second half of the year.
Okay. And Mike, can you discuss the impact to guidance from the lower levels of net investment activity and the capital raising the equity issuance, which you're now not assuming relative to your prior expectations, what did that amount to with the updated guidance?
Yes. I think in our last call, we talked about how for every $100 million, the net of investment activity, it added about $0.01 of FFO, which is why we since we're removing all acquisition activity going forward for the balance of the year, that's why we pulled down the high end of the guidance.
Okay. And then just shifting over to the operational side. So I'm just curious, there's been a little bit of an increase in some tenant credit concerns. You took down your bad debt expense slightly at the midpoint. Can you talk a little bit about the health of the tenant base today versus 3 months ago? And are some of these bankruptcies or announced store closure announcements. Are there any changes to the sort of outlook, the forward outlook just based on some of these announcements that we've seen more recently?
The tenant base continues to perform well, Todd. Receivables are consistent with historic averages. I think we've been very fortunate. A lot of the names -- tenant names you've heard in the news, we have very little exposure to. And where we've had exposure, either leases have been accepted or purchased through the bankruptcy process or the tenants have come out of bankruptcy and kept the leases. So there's been very little impact from the tenants in the news.
Okay. Got it. Any update on the Kohl's backfill at Fallbrook. I think there was potential for rent to commence either very late this year or early '25 to the extent that you were able to get a lease signed. Is there any update around the progress there?
Sure. Yes. I think at this point, during the second quarter, we signed leases totaling about 45,000 square feet of the 179,000 square feet of available anchor space. That leaves a pending 134,000 square feet remaining. We currently have a signed LOI in the largest space, the Kohl's space you're referring to, which is 115,000 square feet. We continue to work to finalize the lease with the prospective tenant who's a long-term national tenant of ours. And the remaining 19,000 square feet, we're contemplating right now splitting the space into 2, and we're in discussions with 2 prospective tenants on that space.
Our next question is coming from Craig Mailman of Citi.
Just want to follow up on the anchor leasing opportunity, Stuart. I know you've been excited to finally start to get bigger chunks back without extension options here. Can you just give us a sense at least in your early talks or analysis here? I know it's hard to give exactly where you think rent spreads could be, but some type of you point to maybe where OCRs on some of these are and what that could indicate at least in terms of what you think rents could go on some of these renewals?
Sure. And you want that broken down anchor versus non-anchor or just around the anchor?
Just around the anchor because that -- I mean, both two. I mean I'm just trying to get a sense you guys are impacted a little bit this year on the same-store side by some timing issues around commencements on signed leases. As we're looking into next year, it feels like you have an opportunity to maybe get some premium spreads on what's leasing and then you get the benefit of the commencement of some of these leases. So just trying to get a sense as we look into '25 for all the strips where growth could reaccelerate a little bit without trying to get guidance out of you. But just sort of the -- the pieces to maybe build up to what kind of same-store could look like next year?
Sure. Well, currently, in terms of what we have left with the anchor vacancies the mark-to-market on the leases that we currently are working on are quite large because starting rents on these leases we're in the mid-single digits. So assuming that these leases do get executed, which we are anticipating over the next 30 days, the mark-to-market is extremely strong. Going forward on anchor spaces, as you look at what Rich articulated over the next year, looking into '25, again, a number of these leases are well below market. But on a blended basis, I would tell you that trend is probably going to be higher as we move into '25 on the anchor side.
In line space, it will vary depending on what is expiring and where, but in general, I'm anticipating that trend to also move higher as we get through the balance of this year and into '25. As Rich articulated, the strength, the underlying strength and demand that we're seeing on the ground on the West Coast continues to be extremely strong. So as we look to the balance of the year and into '25, we're expecting pretty strong growth on both sides of that equation.
So I mean, if you guys did blended spreads of about 7% so far this year, could that blend up into the low teens next year maybe 10% of your total GLA. Is that sort of a decent way to think about it? And then as the drag burns off this year, which, Mike, I don't know if you want to give a sense of what the 1% to 2% same-store would have been or what the drag on that is by the commencement timing. I mean are we talking about same-store potentially above 4% next year? Assuming everything hits? Or are there other kind of puts and takes that we should think about as we're looking into '25?
Yes. Again, we're anticipating that those spreads will continue to move higher. In terms of same-store, that will -- the benefit of what we're now leasing or have leased this year really comes into focus Mike, I'd say, mid-'25. So you'll get some benefit next year from what we're doing now from a same-store perspective. The real punch though will come in '26, obviously, because you're going to get a full year of a run rate in terms of the NOI. But same-store in '25 should be stronger than '24, given the fact that these spaces that we're finally leasing that did come pretty quickly after these acres vacated, that real benefit hits late next year and certainly into '26 at this point. We're anticipating same-store moving back up to the 3% to 4% range next year, maybe a bit higher depending on how fast we can get these tenants open.
Okay. Then one last one for Mike. On the debt refinances. Kind of where do you think spreads are today on a term loan and unsecured debt? And then also, as we think about the swaps that mature in August, should we just assume kind of back half of the year, about 150 you revert back to kind of the mid-6s where the term loan is just from a modeling perspective?
Well, first of all, on the swap side, our goal is to refinance its term loan possibly at the same time we refinanced the December bond. So we're not intending to replace the swaps. So when those revert to floating rate on the term loan, you're going to be in the low, like say, 6.3%, 6.4%. But looking at where the 10-year is today, and with the credit spreads for us, we probably priced a deal around 6, so you're going to get some pickup there. So we're just kind of keeping an eye on the overall market to refinance, obviously, the [ '24 bonds ] and the term loan potentially at the same time and bring that down to about high 5.5% to 6% range.
And if we do finance that, if I'm correct, Mike, we did have nothing due on our balance sheet for several years. Is that right?
Just that one mortgage next year, which is not meaningful. Yes.
And our next question will be coming from Juan Sanabria of BMO Capital Markets.
Just following up on the line of question from earlier. Any color you can give on one of the big lot stores, I think, in Lacey that was on the closure list, any potential term fees that you'd expect or any insights on to when that may close and potential backfills?
Sure. Yes. As you know, we only have one Big Lots in the portfolio. And as of now, we've not heard officially from Big Lots directly, but we do understand that the location we have up in Lacey, Washington is a potential closure. That center has been 100% leased for the past 7 years. And we already have offers on the space and the rent is substantially below market. So between any termination fee and the uptick in the rent, we don't see this as a big risk.
And how much term is left on that just to get a sense of the quantum of the potential term fee?
There's about -- they've just exercised an option, I think, about a year ago. So I think there's about 4 years remaining, the store has just been renovated. It's in good shape. We expect we can turn this over with limited TI dollars and very little downtime.
Okay. Great. And then just on the restaurants just in general, with the increase in minimum waging in California. I guess what are you seeing broadly with regards to demand or health of the tenants? I mean theres this some news about a potential bankruptcy on MOD Pizza that subsequently was bought after that kind of news broke. So just curious on what you're hearing from tenants and particularly just the health with higher costs running through their income statements?
Sure. I mean, clearly, it's something that the tenant base brings up, but they'll use any angle to negotiate on, right? So it definitely comes up. Obviously, MOD Pizza highlighted that. We only have 6 MOD Pizza's in our portfolio that account for less than 0.3% of our total base rent. They're all very modern spaces. As you said, it looks like that one is going to get resolved. But from our perspective, the prices have to go up in order to cover this, but it's really not having a huge impact on the rent because our properties are highly leased in very dense markets that people buying for restaurant spaces, we normally would have multiple LOIs on anything that came available.
And our next question will be coming from Jeffrey Spector of Bank of America Securities.
You got Andrew Reale on for Jeff this morning. Just one, last quarter, I believe you had $68 million of dispositions under agreement. In July, you sold the 1 property for $57 million. Is that $11 million delta still under agreement to be disposed or something changed there?
Yes. We still have a couple of assets under contract. We do expect potentially one to close in August, the month we're in as of yesterday. But the answer is yes. We do still have a couple of dispositions on tap, and we expect at least one may be both to close certainly by year-end, about another $25 million of proceeds, which we'll use just to pay down debt on the balance sheet with.
Okay. And was that July disposition still at a low 6 cap rate?
The one that we just sold?
Yes.
Yes, low 6s, Jeff.
And the next question is coming from Wes Golladay of Baird.
Just following up on that last question. Can you tell us what asset was sold?
The asset was that was sold. The center that we sold was located here in the San Diego market. And again, the exit cap rate was in the low 6s. It was in oceanside.
Okay. Okay. That helps. Going back to the 8 potential CNS properties, do you have any rights as a landlord maybe if a termination fee or...
Yes.
Yeah, okay. Can you elaborate on that?
Sure. Yes, we do have a number of leases that we do have the right to terminate if this transaction were to go through. We're currently in discussions with Kroger and Albertsons in terms of what we may want to do with these leases. And currently, those discussions continue to take place, and we are making some headway in terms of where, what we might do with these leases long term. The good news is -- a number of these leases are in the best properties that we own, very high-quality assets and the rents are quite low, but the situation is still very fluid. So we'll continue to monitor things and sort of go from there in terms of where all this might end up.
Okay. And then hopefully, the multifamily industry continues to bottom out here and hopefully goes upward. I'm just curious if you can give us an update if you've seen any more interest in your potential outparcel sales. And then more specifically, is there an update at the Crossroads? I believe they were contemplating an expansion, but I'm not sure where that went.
Yes. I mean at the Crossroads, we continue to -- in terms of the Crossroads, we've completed all the work in terms of pulling the construction permits. However, we're waiting to do so until the market conditions get a bit more favorable. In light of our discussions, the city who is a big supporter of the project granted us a 2-year window for pulling the permits. In addition, the city has been proactively engaged about increasing the development density at the Crossroads by a lot, specifically for additional multifamily in the future, and they're keenly interested in the Crossroads given the center's prime location within the city of Bellevue. But what's really happened at the Crossroads in terms of densification over the last couple of months. As we look forward in the next 5 to 10 years is going to really create a lot of value long term as it relates to the fact that the property is going to be designated subject to City Council approval, a high density now for the whole property. So we're very excited about that in terms of what's happened there over the last several months.
Got it. And then you did make the point about the anchor leases having no renewals and big mark-to-markets there. Just curious if you're going to also get better terms on reimbursements?
Yes. I mean we look at the entire lease when we have the opportunity to plug any leakage as it relates to the triple nets to address any restrictions or co-tenancies that may be in those leases, we look at the lease wholesale when we have the opportunity, absolutely.
Our next question will be coming from Hongliang Zhang of JPMorgan.
I guess, I have a question on the digital kitchens that you mentioned on the call. Do you have any studies or any data around the possibility of those customers cross shopping in your -- in the other stores in your shopping centers?
No specific data about cross shopping that I can give you on this call. But these digital kitchens are not just commissary kitchens. These really are just mostly to go type kitchens where people are ordering on the app and coming to pick them up. Obviously, they also do DoorDash and all the other delivery services. But it is bringing customers to the shopping centers when they're picking up their orders. And we expect that someone will pick up their groceries at the same time that they're picking up their dinner.
[Operator Instructions] Our next question will be coming from Linda Tsai of Jefferies.
Just a follow-up to some of the other questions. So for the signed LOI for Kohl's, the 115,000 square feet and then I know you're working on the remaining space, which you would split. What's the earliest rent could commence based on the info you have today?
Well, right now, it's an extensive TI -- a pretty extensive TI package which is why it's taken a touch longer to get to the executed lease, but we want to make sure we cross all the I's and T's as it relates to the construction. We're anticipating if the lease gets executed in the next 30 days that we're about, I would tell you, late next year 4Q of '26 is it looks like the rent would commence. Sorry, of '25, not '26.
Got it. And then for the Big Lots in Lacey, what would be a good potential backfill? And then is a lease term fee incorporated in your current guidance?
I didn't get that. I'm sorry.
Can you repeat the first part of the question?
Oh sure. Just like a good potential backfill for that Big Lots and then do you have a lease term fee in your guidance?
No, we don't have the termination fee in our guidance, no. No.
No. No termination fee. And again, as Rich said, we haven't had a formal rejection of the lease either. So...
But yes, the minute that hit the news, our leasing team went to work. So when they were excited to hear that potential to get it back as they've already received good interest on the space, long ahead of anyone talking about us getting the space back, right.
And I think our bad debt guidance range truly would cover that kind of a downtime anyway.
Got it. And then Rite Aid announced more closures last month. Could you just give us an update on anything that might be impacting your portfolio?
Sure. Yes, no impact in terms of the closings. Our Rite Aids continue to operate. Sales continued to gain some traction coming out of bankruptcy. And we're hopeful that we should hear any day that things are done. But right now, no update in terms of our Rite Aid as it relates to where we were last quarter. The only other thing to talk about is Kroger has -- we're getting close to signing the very small Rite Aid we got back. And Kroger is the one who's taking that space, and we're very excited about -- the fact that Kroger has stepped up to, again, continue to build on this location. But more importantly, the downtime in rent and no TIs in the downtime and rent will be very short, given the fact that Kroger is just expanding next to their current store.
And then just 1 last 1 on Walgreens announcing potential store closures, any news or impact to your portfolio?
Yes. I mean, we have very little exposure to Walgreens. In fact, the center we just sold had one of our Walgreens in it. So that's come out of our portfolio over the last quarter. But Rich?
Yes. We have 4 Walgreens in the portfolio, Stuart, at the end of the quarter, as Stuart touched on, we sold one of those locations. Another one location had been previously sublet by Walgreens to Dollar Tree. We're anticipating doing a direct lease with Dollar Tree on that location, which will leave us with 2 Walgreens up in the Pacific Northwest.
And our next question is coming from Paulina Rojas-Schmidt of Green Street.
Same as for you. So we're all in the same boat here. And my question is I'm looking at your disclosure on new leases for anchor space. I know you only signed a few leases, it's not representative really of your portfolio. But I'm still intrigued by the low [ AVR ] per square foot around $10. So can you provide some color on the space market, location or type of tenant -- to better understand the lower -- certainly lower than average in place rent here.
Paulina, are you referring to the anchor renewals during the quarter?
Both really because let me see if I have them in front of me. If I remember well, both, yes, the one new lease anchor space has an initial rent of $10 per square foot. And for renewals, it's also around $10, $11 per square foot. So what type of tenants are paying such low rent today?
Well, as it relates to the anchor renewals, in many cases, the anchor tenants are exercising options. And in some cases, those options are flat. And in some cases, those leases were initially structured as ground leases where the anchor tenant actually built the space, which gave them the very low rent. And that's the rent we underwrote when we bought the property. And so there is some drag on the renewals as it relates to options that may already be in place that are below market for what we could get to the space, and we could actually get it back. And then in terms of new leasing, I mean, it really just depends on the whole package of what the deal structures, whether how much TI we're putting into it, how much the tenant is able to pay.
But on average, we're getting more than what we were previously for the spaces. The anchor space is, if you were to look at them in total throughout the portfolio are below market on average.
Okay. And then big picture, how would you compare demand or the market rent that you have observed in -- market rent growth that you have observed in the last few years for anchor and shop space. Is it fair to say that the strength of market rent growth has been more strongest for shop space?
Well, yes, typically shop space is going to be -- you're going to capture a lot of that higher rent just because a lot more leases. And if you have more leases that are expiring without any options, and you can capture that space that rent increased quite quickly. I don't know if you want to add anything to that, Rich?
No, I don't think so.
And a follow-up about the rights that you mentioned or consent for the divestiture of some leases, some anchor leases. And how does that work? So how does it apply to, for example, subleases you also have, in those cases, the right to reject further subleasing the space?
Yes. I mean I think as I articulated a number of these leases are very old leases. So when an anchor tenant goes into a transaction. The -- one of the -- depending on the lease, of course, it gives the landlord the ability to recapture the space if the net worth of that tenant doesn't meet a certain threshold or we have the right to recapture the space. If a merger is done, if there's a big transaction done...
There's different variables. But correct me wrong, I don't think any of the 8 identified are actually sublet. They're actually being operated by Albertsons and Kroger, right?
Correct. Correct.
[indiscernible] have been sublet.
No, no, no. Nothing has been sublet. They're either operated by Kroger. 3 are Kroger and the balance are Albertsons so...
Direct leases.
Right. So again, every circumstance, and every lease is going to be different. And we're in the midst now of having a conversation around the ability to either amend the lease or maybe do more than just that. So again, the situation is still very fluid. So this could be a moot conversation if the transaction on August 26 gets voted down by the appellate court. So I think we'll have more clarity next quarter as it relates to what's going on, on these leases. But the good news is, not a lot of leases from our perspective when you look at the total amount of exposure.
And then last one, so California in general, used to command lower cap rates, a premium market. Do you think that's still the case today?
Yes. When I look at capital and where capital wants to be in terms of the product that we own and operate, again, dominant grocery drug-anchored assets and very affluent dense markets. Demand from that capital is as strong in California or the whole West Coast as it is anywhere else in the country. And in some cases, even stronger depending on the circumstances of the real estate and the attributes of the real estate. So yes, California is still on a lot of people's radar screen.
And if you compare your markets with perhaps Austin or some Florida markets that are very hot today. How do you think the cap rate compares there for similar products?
Well, I'm not as familiar as Austin or Florida as I am with the West Coast. I've certainly tracked those markets. But I would tell you that cap rates historically have been lower on the West Coast. And I believe as we continue to see some transactions in the market, we're certainly seen as much demand in cap rates that are as low on the West Coast as they are anywhere else.
Thank you. This does conclude today's Q&A session. And I would now like to turn the call back over to Stuart for closing remarks. Please go ahead.
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 Lauren, Mike, Rich or me directly. Also, you can find additional information in the company's quarterly supplemental package, which is posted on our website as well as our 10-Q. Thanks again, and have a great day, everyone.
Thank you, everyone, for joining. You may now disconnect.