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Retail Opportunity Investments Corp
Earnings Call Analysis
Q3-2023 Analysis
Retail Opportunity Investments Corp
The company is experiencing a robust phase in its leasing activities, with new tenants representing approximately $6 million of incremental base rent already contributing to earnings for the year, including $1.9 million initiated in the third quarter. Looking ahead, a further $7.3 million in base rent from newly signed tenants is anticipated to commence over the next several quarters. The management is also proactively managing lease maturities, with just 141,000 square feet set to mature in the fourth quarter, and re-leasing targets are expected to be met before year-end.
Despite a frustrating year due to market stagnation and adjustment to higher interest rates, the company has upheld its property operations. With strong leasing performance up to and including the fourth quarter, they are on track to maintain a high portfolio lease rate and hit record leasing volumes. Rent growth on re-leasing remains solid and the tenant base has been enhanced. There are expectations of an accelerated acquisition activity in 2024 due to the long-term sound fundamentals of the grocery-anchored sector to which the company's portfolio belongs.
The company demonstrates agility in adapting to changes among tenants, including Rite Aid's store closures impacting a minor 0.3% of the company's total base rent. Management is actively engaging with a broad range of potential new tenants in diverse sectors such as fitness, grocery, and automotive, reflecting an ability to seize new leasing opportunities that arise. Such strong demand counters any concerns about occupancy stability, notwithstanding an isolated dip in base rents due to GAAP adjustments from lease terminations, notably the Buybuy Baby above-market lease termination.
The company is eyeing acquisition opportunities, particularly assets with potential to yield a 6.5% to 7.5% cap rate, aiming to increase rents significantly through various improvements within an 18-month timeframe. Ongoing market challenges in the financing sector are seen as a strategic chance to grow the portfolio, with transactions being pursued on terms expected to be accretive to the cost of capital. Asset purchases are being keyed to not only immediate yield but also the prospect of enhancing the property's performance and thereby its value.
An impressive 60% of the $7.3 million in base rent from the new leases signed is slated to begin by the end of the first quarter of the upcoming year, with an additional 15% by mid-year. This phased commencement signals a sustained growth in leasing revenue into the near future, ensuring a consistent and growing stream of income from a diversified tenant base.
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Welcome to Retail Opportunity Investments' Third Quarter 2023 Conference Call. [Operator Instructions] 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 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 Schoebel, 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 9 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 re-leasing 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 sideline, 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 properties 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 long-time 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 grew considerable interest in the marketplace and was oversubscribed at tracking 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 Haines 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 3 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 9 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 9 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 9 months of 2023. Our third quarter results were impacted by 2 items.
First, other income increased notably primarily as a result of recapturing 3 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, GAAP rent amortization declined primarily as a result of removing a Buybuy Baby lease from our portfolio during the third quarter. The decline is a onetime noncash cap adjustment.
And just like to recapture spaces, we already have several new tenants lined up for the Buybuy 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 unsecured notes.
It was the first time raising capital in public bond market in nearly a decade. As such, we made a conservative 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 of our $300 million term loan.
Looking out over the next 5 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 30, 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 6.4x, down from 6.6x 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 has far exceeded 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 interrupted guidance range for the year. Now I'll turn the call over to Rich Schoebel, 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 long-time 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 9 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 nonanchor 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 long-standing value 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 6 anchor tenants, 5 of which were not scheduled to mature until next year.
Additionally, as Stuart indicated, we continue to have good success in terms of re-leasing rent growth. Specifically, during the third quarter, we achieved a 36% increase in same-space, cash base 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 re-leasing the space quickly, enhancing tenancies and driving rents higher in the process.
Just to cite an example, during the third quarter, 2 of our centers, we recaptured prime freestanding pad, each with the 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 recasted 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 tenant's 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 30. The bulk of which we expect to commence over the next several quarters. With respect to Rite Aid and their recent announcement, at September 30, 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 3 together account for 0.3% of our total base rent.
The average base rent for the 3 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 the rents are below market on average as well.
Turning to lease maturities going forward. As of September 30, we only had 141,000 square feet maturing during the fourth quarter, including 2 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 7 anchor leases currently scheduled to mature in 2024, of which we currently expect that 6 of the 7 will renew. In terms of non-anchor space, we have about 0.5 million square feet of in-line 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 are 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 re-leasing 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 in certain prominent markets across the country are currently faced with. Fortunately, the long-term fundamentals of the grocery-anchored sector remains 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. And 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?
[Operator Instructions] And our first question comes from Juan Sanabria of BMO Capital Markets.
Just hoping you could talk a little bit more about Rite Aid and the potential uses that you're looking at to backfill space? And if you have any color on any incremental space, they may look to give back. There's an article today that through the bankruptcy process, they might hand back more than the initial list of rejections and divestitures that they were initially planning. So just curious what extra intel you may have.
Rich?
Yes. So in terms of uses, right now, we are speaking to a broad range of potential new tenants, including fitness, grocery, automotive, there seems to be a lot of demand. I mean what really has happened here is opportunities that we were unable to fulfill from tenants, have now become possible. So I think, as you know, so far, they've only rejected 1 lease of ours. There's significant interest in that space.
Yes, Juan, the demand has been a bit overwhelming.
Okay. And then a second question, could you just talk a little bit about how build occupancy was flat, but base rents were down quarter-over-quarter? It just seems a little in progress. I'm just hoping for some color there.
Juan, it's Mike. I think the -- we'll not dig into the details of -- my hunch is it's probably a -- I mentioned in my prepared remarks that the GAAP adjustment for the Buybuy Baby lease, which had an above-market lease. So when we had -- when that lease was terminated, we had to recognize that above-market rental revenue, which is a hit of revenue, it's probably the cause of the decrease.
Great. And just one last one, if you don't mind. What's the expected cadence of the lease commencements for the $7.2 million of [indiscernible] occupied?
I think it's about -- I think 60% of it or so is supposed to come online by March 31 and another 15% by June. So that's the majority of it by June.
And our next question comes from Craig Mailman of Citi.
So just wanted to follow up on your commentary, Stuart, about the acquisition environment and potentially that it could inflect here as some refinancings are coming due next year. I'm just kind of curious, on the assets that you're tracking at least, is it just that they can't get financing or the debt service coverages don't make sense? I'm just trying to kind of square the circles, sellers looking to monetize here into a weak environment versus just kind of eating the higher interest expense, given the NOI growth that you're starting to see here in the retail space. So I guess just commentary on that and then how -- what pricing you guys would [ need ] given where cost of capital is moving for you and just debt rates to make these work in accretive interest rates?
Sure. Well, it's primarily a combination of the challenges in the financing market. And the fact that they have to, in not all cases, but in a lot of cases, have to come out of pocket in terms of providing more equity, in order to get new financing.
In terms of our cost of capital, the goal with what we're looking at buying right now, as well as what's in the pipeline is to try to find that sweet spot in that 6.5% to 7.5% cap range, with the ability to drive rents through either vacancy or operating margin efficiencies, about 150 basis points within an 18-month period. That's the goal.
And what we believe in terms of what we're seeing right now that subject to doing due diligence on a couple of these deals, we will be able to close on these transactions accretively as it relates to our cost of capital.
Okay. So you might have a little bit of dilution or a push relative to where you can finance going in, but ultimately, you're going to be in 8% to 9% cap if you could execute on that plan. How do you finance that your debt, equity, OP units, asset sales? Kind of what's the optimal mix look like? And in particular, for the asset that you're talking to, I know you're not in a contract yet, but it sounds like you're close, kind of is that in the realm of the returns that you just talked about? And again, how do you finance that?
Well, the financing is done through a combination of OP units, and we do have an OP in the transaction that I believe will come to fruition now. If not in the first quarter, in the second quarter of next year, certainly at a stock price that will be higher than where our stock is currently trading. But it's a combination of that transaction, OP units, a combination of selling some more assets and our ATM. That's how we're going to help finance the upcoming opportunities, as we look into the end of this year and into next year.
Okay. And just lastly, I know you guys haven't given guidance yet. But just the thought here, you guys kind of lowered '23 guidance this quarter, partly as a result of the acquisitions coming out of it. As you guys think about presenting guidance next year, I mean, should we assume kind of no acquisitions baked in that are under contract? Kind of how are you going to approach that, just given the volatility in the macro and how that's kind of impacted the transaction market?
Sure. Well, I mean, obviously, we'll be giving guidance on our year-end call, in terms of filling in some of the questions that you're asking right now. But I think you'll see, again, as you've heard in our remarks, a bit more activity on external growth, a bit more activity on dispositions, along with potentially creating a bit more growth or more growth, in terms of what we're seeing at the property level because operations continue to be very strong, as you've heard from our remarks today.
And our next question comes from Jeffrey Spector of B&A Securities.
This is actually Lizzy on for Jeff. So I was just wondering if you could provide more color on your confidence in the narrowed range for same-store NOI. Is that more so a function of greater visibility on the timing of store openings and commenced rent? What would kind of swing that to the lower end versus the higher end there? And just to follow up on that, to confirm, is there any amount of rent fallout or lost occupancy that's assumed from Rite Aid or troubled retailers for the full year?
You want to answer the question as it relates to fallout, Rich?
Yes. Right now, in terms of fallout, only 1 lease has been rejected by Rite Aid. The other 2 leases are in their sale process. And as you know, they are required to pay the rent, while they -- until they reject any leases. So we don't anticipate any financial fallout as it relates to Rite Aid or any other major tenants.
Yes. As far as same-store NOI for the balance of the year, given that we're already at 3.6% for the 9 months, yes, I feel pretty comfortable between 3% and 4%. The other income items kind of contributed to that in the third quarter, but fourth quarter should be back in line with kind of our normal historical. So the 3% to 4% range we feel pretty comfortable with.
Okay. And second, I was just curious if you could give the latest temperature check on small shop tenant health, just given like the 96% lease rate you spoke to, seems fairly consistent. If you could just give the latest on the health of tenants there.
Sure. Yes. I mean the shop tenants continue to be very active, and our leasing team has been capitalizing on that. They are fielding multiple LOIs for the spaces that we do have available. And it is coming from a broad range of local, regional and national tenants.
And our next question comes from Wesley Golladay of Baird.
Stuart, a follow-up to the funding question for acquisitions. I mean, can you give us your appetite for some stock at today's level, looks like you're at mid- to high 7s, depending on where we open today. And then where can you sell assets today?
Well, in terms of selling shares, we don't have a set price in mind. We consider a number of factors when contemplating raising equity to fund our investment activity, including our current stock price and the acquisition yields.
In terms of cap rates, there's been, I think as you heard in my remarks, very few transactions for high-quality grocery-anchored centers on the West Coast. What we have seen more recently, has a couple of widely marketed deals in the 5s, one in the low 5s, one in the mid-5s. And again, as we sit here today, a bit more activity over the last several weeks on the West Coast, primarily related to ICSC, which is occurring tomorrow and Friday in San Diego.
You usually get a number of assets to come to market when you have this size of a gathering of retail experts. But cap rates today are still sitting in that, let's call it, 6% range, give or take, depending on the profile of the asset. Some are below the 6%, some are at the 6% or a bit above. But 6% on average still.
Got it. And then maybe on the Rite Aid, I think you did a comprehensive review at ICSC with the management team over there. Overall, it sounds like you also feel pretty good about your portfolio. They are contemplating both asking for rent cuts and then also closing stores. Would it be safe to say that you have no appetite for rent cuts considering where your mark-to-market is on these assets?
Absolutely. The demand has been a bit overwhelming to tell you the truth. We've only been in the market with these locations, probably a couple of weeks, Rich. And we've got a number of LOIs that have hit our table already. Even on the locations that haven't been rejected. So we're pretty confident, certainly sitting here today that we'll be able to create some good value over time in terms of what we see on the ground with the Rite Aid situation.
And the mark-to-market depending on the location, it's quite large, depending on, again, the location of the actual space. But very encouraging in terms of what we're seeing right now on the ground. I don't know if you want to add anything to that, Rich.
No. I mean, I think as you see from other bankruptcy situations. Normally, we've been coming out ahead on those, whether the lease is accepted and there's no downtime or when we get the space back, and we're able to bring that space up to market rent. So we would expect a very similar situation here with Rite Aid.
Got it. And then can I just get one more on this other income line item? It looks like it's a combination of maybe, correct me if I'm wrong, about $2 million of term income, below $300,000 of interest income, just from the cash position you held, does that seem correct? And it also is like you got about maybe 1 year's worth of rent or interim income. Is that a good way to look at it?
The other income details of -- the $3.5 million of other income in the third quarter, $2.5 million of it, I should say, was lease termination settlement income in connection with those leases that we were captured that I mentioned, which we've already -- as I also talked about, have already lined up new tenants at higher rents. The balance of it was just a mix of other miscellaneous and [indiscernible] and the touch of interest income on the cash from the bond offering that's sitting in the money market.
And our next question comes from Dori Kesten of Wells Fargo Securities.
Given the improvement you've noted of late in the transaction environment, is it fair to assume that your prior disposition guidance could be pushed into '24?
We will probably increase that guidance in '24, in terms of dispositions as we ramp up on the acquisition side. Although it's -- I can't give you any specifics this second. We believe that the market is so tight as it relates to looking at high-quality grocery-anchored assets, that we believe that there will be a nice window that will be opening up that will give us the ability to accelerate some of the disposition side of that equation, again, as we move into '24. But again, we'll give you firm guidance in our next call.
Okay. And then on the -- with the '23 maturities addressed, what are your initial thoughts on the time line for addressing your '24s? I know you mentioned kind of annual offerings going forward? And I guess just part of that, can you give us an update on your views regarding fixed versus floating exposure in this environment?
So in terms of expirations...
[indiscernible].
Yes, the '24s, I mean, obviously, as we have in our filings, we swapped out a good portion of our term loan to become unhedged in August of next year, which is about the same time line that we addressed the '23 maturities this year. It really depends on where the market is going to be with interest rates.
Obviously, depending on whether rates continue going up, if they start trending back down, you do want to have some level of floating rate exposures to take advantage of that. So right now, we're pretty highly fixed. But at the end of the year, we will take out the '23s. We'll be a little bit more floating and we're comfortable with that level. So we just have to kind of watch and see where the market goes on the interest rate side of things.
And our next question comes from Michael Mueller of JPMorgan.
Just a couple of quick ones here. I may have missed it, but can you talk about just a rough dollar volume of the near-term transaction, that you think could happen? It sounds like it would happen in 2024, but the one that's lined up. And from a higher level perspective, when we're thinking about 2024, should we be thinking of a base case of roughly equal levels of acquisitions and dispositions?
I mean, again, we're going to give guidance in our next call, Mike. If you were to look out into '24 at this point and look at the pipeline of what we have in front of us, including a potential OP transaction, you probably could be sitting in the $80 million to $100 million range right now. That could change, of course. On the disposition side, we're probably ramping that up, probably in the $50 million to $75 million initially, but that's where things sit as of this call. I don't know Mike...
Yes, I'd just say, in terms of portfolio around the edges of what we currently own and use those proceeds to buy some accretive acquisitions.
Got it. Okay. And then is there any update on the, I guess, the land sales tied to the redevelopments? Just maybe an update there.
We continue to track the market in terms of the entitled land that we've got. We continue to speak with buyers. We continue to speak, we've got a lot of interest in strong operators coming to us to joint venture, these assets or these opportunities.
Once we see the market begin to get better, as you might say, we will push these assets to the market as well. And we're still expecting to get if we were to sell 2 of the 3, around $25 million to $30 million. But the market again has been very difficult. And -- but we continue to monitor it very closely, and we're in a very good position when things -- we see things begin to change, to move these properties very quickly to the market.
And our next question comes from Linda Tsai of Jefferies.
Just to clarify, given the discount where your stock is trading and what you said about acquisition and disposition volumes for next year, you'll be more focused on dispositions near term rather than acquisitions?
Combination of both.
Okay. And then it sounds like Rite Aid has announced 150 rejections, but the Rite Aid article, Juan referred to, says more are coming. I just wanted to confirm that the 3 leases are on the list of identified -- the 500 identified? Or would you expect an announcement of more closures from Rite Aid from which the remaining 12 stores would also be considered?
Well, it's tough to look ahead in terms of that process, I think Rite Aid has had some time now to really evaluate their store count. I think that's one of the reasons why it took a bit longer to see the bankruptcy. We have 1 store, I think that Rich mentioned that is closing. The other 2 are up for sale. They're still operating. Tough to tell you anything beyond that. I mean, Rich, do you...
No. I mean I think they've also leading up to this, have exited a certain number of stores as well. Some of them we've already reletted significant increases in rent. And so it's really hard to predict which ones may in the future become available.
But as we touched on, the demand has -- given the fact that there's really no supply available in our markets, the demand has been exceptional.
And I mean, a number of these locations have drive-throughs and they're located in what I would call the premier part of our shopping centers, which would be at the intersection of where the 2 roadways or arterials meet. So that's why we feel pretty confident that I don't -- I'm not saying that we won't see more rejections, but I wouldn't be surprised as we move -- as Rite Aid moves to get out of bankruptcy that what we have sitting there remains pretty well intact.
And then just one last one. How do you -- for next year, how do you think about the puts and takes of interest expense against the pricing power you're seeing with new spreads and re-leasing spreads?
Well, we'll put out the guidance for next year. The maturities for '24 don't come up until December. So unless we pull the trigger early, we can pretty much model where it's going to be for all of the year. Fourth quarter, we're going to have the interest expense from both the '23s which we've refinanced already. We also have the benefit of the interest income, while the cash is sitting in. So '24, we'll be able to give pretty solid guidance on that in February when we give guidance for the year.
And our next question comes from Paulina Rojas-Schmidt of Green Street.
Early on the West Coast for you. How are you doing, Paulina?
Here I am, awake. I'm ready with my question, so I hope that's good enough.
Yes.
So my question is, when you take a step back and look at the potential consequences of the current high interest rate environment on retailer balance sheet. How would you describe your level of concern? Beside of what you're seeing today, it's more -- I'm thinking about more the future. It doesn't seem like you're particularly worried, especially given your attitude towards acquisitions?
Well, look, look, the situation in terms of the interest rate environment is something that none of us can control. So as we look into '24, I think most economists have been wrong in '23. I think interest rates are going to stay elevated for longer than what most are anticipating.
However, as we look into '24, we had a very successful bond offering. So we have the ability and certainly to go back and deal with the financing. And more importantly, we do have some time now and some flexibility out there to really think about whether we want to accelerate some dispositions and use some of that to pay more debt down. And on top of that, potentially look at what might be out there to help alleviate the concern of high interest rates, without giving you specifics.
So everyone in '24 is really dealing with the same issue in terms of all our balance sheets. And we feel very good, very comfortable given the strength of where our balance sheet sits today that we'll be able to get through this. And hopefully, lock in debt at an attractive rate. And Mike, I don't know if you want to add to that.
I agree with what you're saying. I think there's no shortage of opinions out there in the marketplace on what's happening in the overall economy and where rates might go. So we just have to be patient, wait and see how it kind of evolves and just work with the market as we see it. The good news is, with the '23s already refinanced, the '24s, we've got full capacity on the credit line. So we've got some flexibility there on the timing of that as well.
And then my other question is, when I look at your implied cap rate, it is significantly higher than some of your grocery-anchored peers, which is unusual from at least a historical perspective. What do you think the market is getting wrong? Or is the market putting too much weight into Rite Aid? And what is true interpretation of the current events?
Yes. I mean, look, I think the challenges for ROIC in '23 has been the debt maturity, which has now been resolved. And the noise around Rite Aid. And right now, it just looks like it's noise from our perspective. We feel very comfortable sitting here today, that we will come out of this with some -- potentially some very strong rent growth.
Remember, we have not had an anchor space available in this portfolio in 5 years. And more importantly, when we look at the market today on the West Coast, there's nothing available. There's nothing to lease from an anchor perspective. So the demand is, again, has been a bit overwhelming since we finally had an anchor space come available. We've got a series of LOIs from incredible grocery-anchored tenants as well as others.
So again, we feel pretty comfortable today with where we sit. And more importantly, at some point, the noise is going to go away. We think we'll be able to show the market pretty quickly that there's a lot of mark-to-market value that's going to be created through this process.
I think you mentioned, you have seen demand from grocers, right, for the space. Can you provide some color on what type of grocers have approached you?
We've had the regional grocers, local grocers and national grocers at the table, all at one time, approach us, Rich, I don't know...
Without getting specific on names, it's a variety of all those types of...
Very strong tenants.
Okay. And the last one, are you thinking about single tenant users for the space? Or do you think it's likely that if you were to receive more space back, you would have to subdivide the space into smaller stores?
Most of our Rite Aid spaces have already been rightsized where we've taken back space and downsize them already. So our goal would be to retenant them with a single tenant, but we also would look at splitting and which we've done in other circumstances. It really all depends on the users, the economics and all the factors that we would consider when we lease the space.
And our next question comes from Todd Thomas of KeyBanc Capital Markets.
A couple of follow-ups. First, I was wondering if you could tell us with regard to Rite Aid, how much term is left on average across the 14 leases in the portfolio, excluding the one that's been rejected. And can you talk about your interest or appetite in buying leases in auction, whether that's an option that you're contemplating?
The answer is yes in terms of buying the leases, especially if we see the pipeline of LOIs and grow as we're seeing right now, the answer is yes, we are currently looking at buying these leases as we're having this discussion, Rich, in terms of term?
Yes, I don't have the average term here, Todd. But we've been renewing Rite Aids throughout the year, and they range -- the next expiration is not until 2026. And then we go all the way out to 2029 and as far out as 2030. So there's a bit of term on many of these leases and then, of course, options.
Okay. And then just circling back to the dispositions. Stuart, I'm curious if you can just talk a little bit more about the strategic rationale, I guess, behind those planned asset sales. What you're hoping to accomplish with the dispositions and whether the cap rate spread on dispositions relative to some of the acquisition yields that you're starting to see or underwrite today would be accretive? Or is it really more about the rate of NOI growth between the buys and sells?
It's a combination of the NOI growth, a combination of the arbitrage in terms of cap rates. We believe that on some of these assets, we may get into the 5s. And then obviously buying with -- on the other side of that equation in the mid-6s or low 7s. So it's a combination really of those 2 things. And we have seen on the West Coast, a couple of transactions with 1031 buyers where they have been paying up to buy these type of assets quite aggressively.
So hopefully, with a bit of luck and a bit of focus in terms of timing here, and more importantly, the fact that there's such little product on the market, I think will help drive this program of potentially accelerating selling some of these assets.
Okay. And then I think I heard you mention joint ventures earlier, but I think that was specifically around some of the land sales that you were maybe discussing. But in thinking about acquisitions, you own everything really on balance sheet today, no joint venture, nothing complicated. Is everything that you're considering moving forward in terms of acquisitions also on balance sheet? Or would you consider bringing in a partner or looking to do something a little bit more creative perhaps to make the deals pencil and be in a position to take greater advantage of opportunities that might surface?
The focus of, as you know, Todd, of this management team for the last 30 years is to stay on balance sheet. We have been approached quite aggressively over the last 6 months by some of the biggest players in the business in terms of going off balance sheet.
Nothing is in front of us today that would get us excited. However, I'll never say never if someone does walk in and gives us something that could be highly accretive to shareholders, with the plan of what I would call getting these assets back on the balance sheet over time. But again, the focus continues to be on balance sheet in terms of growth as we look into the balance of this year and next year.
Okay. That's helpful. And one last one maybe for Mike, if I could, on the model here. Is the 4Q run rate, you made some adjustments around straight-line rent. But as we think about the implied fourth quarter for both straight line and FAS 141, just with the updated guidance. Is that the right level to consider heading into 2024, as we think about, I guess, considerations around noncash rent for the new year?
I would say yes. We obviously had a little bit of a pull down from the Buybuy Baby lease that we had terminated in Q3, so that was a bit of a drag. But because we haven't really acquired anything recently, our FAS 141 rent amortization is pretty static. So when the guidance comes out in February, it should be pretty solid for the whole year, barring any unknown terminations or acquisitions, if we do end up buying something. On the straight-line rent side, I would say that the run rate was -- the 9 months number would be -- if you annualize that, that would be a good run rate, given our leasing activity.
Okay. Got it. So the fourth quarter, the implied fourth quarter straight-line rent should be a pretty clean run rate to think about moving forward?
It should be. It will all depend on the leasing activity due in Q4.
I'm showing no further questions at this time. I would now like to turn it back to Stuart Tanz for closing remarks.
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.
Lastly, for any of you that are attending the ICSC conference in San Diego, that starts today. We hope to see you there. And for those of you that are planning to attend NAREIT's annual conference in a few weeks from now in Los Angeles, we look forward to seeing you there, too. Thanks again, and have a great day, everyone.
This concludes today's conference call. Thank you for participating, and you may now disconnect.