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RO

RETAIL OPPORTUNITY INVESTMENTS CORP (ROIC)·Q3 2024 Earnings Summary

Executive Summary

  • Q3 2024 was execution-heavy: leasing accelerated to 450,623 sq ft (year‑to‑date 1.2M) with strong cash rent spreads (new +13.8%, renewals +7.0%), while the portfolio remained tightly occupied at 97.1% (anchors 98.0%, non‑anchors 96.0%) .
  • Financially, revenue was $83.5M and diluted EPS was $0.25, boosted by a $26.7M gain on asset sales; FFO was $33.2M ($0.25/sh), down vs. prior year on dispositions and higher interest expense .
  • 2024 guidance updated: GAAP EPS raised (to $0.45–$0.47) on realized gains, but FFO trimmed to $1.03–$1.05 (from $1.04–$1.07), reflecting less net acquisition activity and interest costs; G&A also nudged higher .
  • Capital recycling is accretive (sold $68.8M at low‑6% cap; bought $70.1M at high‑6% cap), with management still exploring additional Q4 dispositions and off‑market buys; refinancing of $250M December notes is planned near mid‑5.5% with the term loan likely included .
  • S&P Global consensus estimates were unavailable via our tool for ROIC this quarter (mapping issue), so beat/miss vs. Street cannot be assessed; use company guidance and reported figures for positioning. Values retrieved from S&P Global were unavailable due to mapping; consensus comparison not provided.

What Went Well and What Went Wrong

What Went Well

  • Robust leasing velocity and spreads: 110 leases (450,623 sq ft) in Q3 with +13.8% cash spreads on new and +7.0% on renewals; anchors at 98.0% and overall 97.1% leased underpin stable cash flows .
  • Accretive capital recycling: Two Q3 sales for $68.8M (low‑6% exit caps) and prior Q2 off‑market acquisition for $70.1M at a high‑6% going‑in yield; management reiterated aim to sell fully valued/limited‑growth assets and buy irreplaceable centers at higher yields .
  • Clear path to occupancy/NOI recovery: Anchor re‑leasing expected to lift annual revenue by >$2M and bring the overall lease rate back toward ~98%; management expects same‑center NOI growth to improve in 2025 and normalize or better thereafter .

Management quotes:

  • “We are pleased to report that the fundamentals of our grocery‑anchored shopping centers... remain rock solid... our portfolio lease rate... today stands at a strong 97.1%.”
  • “We are currently on track to post our 12th consecutive year of achieving solid rent growth on both new and renewed leases.”
  • “We expect that our anchor re‑leasing initiative will add over $2 million of additional incremental long‑term annual revenue.”

What Went Wrong

  • Same‑center cash NOI declined 2.1% YoY in Q3, largely due to lapping elevated lease recapture income in Q3’23 and anchor downtime; year‑to‑date same‑center NOI was +1.5% .
  • FFO diluted ($33.2M; $0.25/sh) fell vs. prior year ($36.0M; $0.27/sh) as early‑quarter disposition timing and higher interest expense weighed on run‑rate earnings .
  • Guidance trimmed on FFO/sh to $1.03–$1.05 (from $1.04–$1.07), reflecting muted net acquisitions and cost structure (higher G&A) into year‑end; property‑level NOI variability also cited as a late‑year modeling risk .

Financial Results

MetricQ3 2023Q2 2024Q3 2024
Revenue ($USD Millions)$81.745 $83.320 $83.484
Net Income Attrib. to Common ($USD Millions)$8.428 $7.366 $32.128
Diluted EPS ($)$0.07 $0.06 $0.25
FFO – Diluted ($USD Millions)$35.979 $34.130 $33.187
FFO per Diluted Share ($)$0.27 $0.25 $0.25
Same‑Center Cash NOI ($USD Millions)$55.441 $55.625 $54.252
Same‑Center Cash NOI YoY (%)—+1.7% (2.1%)
Portfolio Leased Rate (%)98.2 (same‑center) 97.0 97.1
Dividend per Share ($)$0.15 $0.15 $0.15

KPI and balance sheet indicators:

KPIQ2 2024Q3 2024
Leases Executed (Count / Sq Ft)131 / 392,746 110 / 450,623
New Leases (Count / Sq Ft)40 / 116,651 35 / 110,464
Renewal Leases (Count / Sq Ft)91 / 276,095 75 / 340,159
Cash Rent Spread – New+12.4% +13.8%
Cash Rent Spread – Renewals+5.8% +7.0%
ABR Signed Not Yet Commenced ($M)$7.292 $8.218
Net Principal Debt / Annualized EBITDA (x)6.6x 6.3x
Unencumbered GLA (%)98.7% 98.7%

Transaction detail and earnings mix:

  • Asset Sales: $68.8M in Q3 (two properties; $26.7M aggregate gain) .
  • Acquisition: Bressi Ranch Village Center for $70.1M (dual grocery‑anchored) acquired in Q2; cited as high‑6% going‑in yield .

Why results moved:

  • EPS uplifted by realized gains on Q3 dispositions; FFO impacted by lost NOI from the larger sale early in the quarter and higher interest expense; same‑center NOI lapped elevated recapture income in Q3’23 and faced anchor downtime .

Guidance Changes

MetricPeriodPrevious Guidance (7/23/24)Current Guidance (10/22/24)Change
GAAP Net Income per Diluted ShareFY 2024$0.25 – $0.28 $0.45 – $0.47 Raised (realized gains)
FFO per Diluted ShareFY 2024$1.04 – $1.07 $1.03 – $1.05 Lowered (fewer net acquisitions; rate costs)
G&A Expense ($M)FY 2024$23.0 – $22.5 $23.5 – $23.2 Raised (comp accruals)
Interest Expense & Other Finance ($M)FY 2024$80.0 – $78.0 $80.0 – $78.5 Maintained/Minor tweak
Straight‑Line Rent ($M)FY 2024$0.6 – $1.5 $0.6 – $1.0 Lowered
Above/Below‑Market Rent Amort. ($M)FY 2024$14.3 – $14.3 $14.6 – $14.6 Raised
Bad Debt ($M)FY 2024$4.0 – $3.0 $3.0 – $3.0 Lowered at high end
Net Acquisitions ($M, net of dispositions)FY 2024$13.5 – $13.5 $1.3 – $1.3 Lowered materially
Same‑Center NOI Growth (Cash)FY 20241.0% – 2.0% 1.0% – 2.0% Maintained

Context:

  • Management highlighted difficult acquisition markets (pricing not aligning with rates), leading to lower net external growth, modestly trimming FFO while realizing gains on sales that lift GAAP EPS .

Earnings Call Themes & Trends

TopicQ1 2024Q2 2024Q3 2024Trend
Anchor re‑leasing and occupancyFour anchor spaces lined up; blended rent >2x prior; commencements targeted late ’24/early ’25 .Portfolio 97% leased; anchor renewal momentum; signed LOI for 115k sf Kohl’s backfill; commencements late ’25 timing noted .Expect 100% anchor leased post re‑leasing; adds >$2M annual revenue; overall lease rate ~98% .Improving; volume elevated; commencements skew to late ’25/’26.
Capital recycling (buy/sell and cap rates)Two properties under contract to sell; acquisition at ~6.75% cash yield .Sold ~$57M at low‑6% cap; continue recycling to fund growth .Q3 sold $68.8M (low‑6%); targeting buys at mid‑6% and sales high‑5% to low‑6% .Accretive spread maintained; pace selective.
Refinancing strategyWatching market; aim for opportunistic bond deal later in year .Plan to refi $250M Dec notes; possibly refi $200M term loan concurrently .Expect pricing around mid‑5.5%; include term loan in package .Advancing; pricing visibility improved.
Same‑center NOI outlook+5.7% in Q1; guide 1–2% for FY given anchor downtime .+1.7% Q2 and +3.7% 1H; back‑half slower vs 1H .(2.1%) in Q3; FY 1–2% reaffirmed; 2025 higher, normalizing by 2026 .Near‑term muted; re‑accelerating in 2025/26.
Tenant/credit (Rite Aid, restaurants)Rite Aid extensions largely agreed; backfills moving quickly where recaptured .Limited exposure to stressed names; receivables normal .All 11 Rite Aid leases extended ~5 years; backfills >20% rent uplift on recaptures .Stabilizing; selective upgrades.
Acquisitions/external growthInitial target $100–$300M, equity dependent .Sellers on sidelines; trimmed high end of FFO guidance as acquisitions slowed .Off‑market pipeline under review; fewer net acquisitions embedded in guide .Slower; opportunistic only.

Management Commentary

  • “The fundamentals of our protected supply‑constrained markets all remain rock solid… our portfolio lease rate… today stands at… 97.1%.” — CEO Stuart Tanz
  • “We sold 2 properties… for a total of $69 million… blended exit cap rate in the low 6% range… [and] acquired… for $70 million… going‑in cap rate in the high 6% range.” — CEO Stuart Tanz
  • “Same‑center NOI… down… ~2%… driven by lease recapture income, which was notably higher… last year… [and] FFO… impacted [by] the larger sale… early in the third quarter, [and] higher interest expense.” — CFO Michael Haines
  • “We expect… anchor re‑leasing… will add over $2 million of additional incremental long‑term annual revenue… [and] bring our overall portfolio lease rate to around 98% again.” — CEO Stuart Tanz

Q&A Highlights

  • Refinancing: Company expects to price the bond deal around mid‑5.5% and include the term loan in the transaction .
  • Same‑store NOI trajectory: 2025 should be “notably higher” than 2024; management sees normalization to historical averages (3–4%) by 2026 as anchor tenants open/commence .
  • G&A: Higher comp‑based accruals pushed G&A outlook up modestly .
  • Transactions/cap rates: West Coast grocery‑anchored trades noted at high‑5% to low‑6% cap rates; goal is sell inside/buy outside that range via off‑market relationships .
  • Fallbrook (Kohl’s backfill): Lease execution targeted by year‑end; opening very late 2025 or early 2026 given box work/splitting .
  • Bad debt: Tenant base “pretty healthy”; guidance conservatively maintained with no specific flagged items for Q4 .

Estimates Context

  • S&P Global consensus (EPS/Revenue/FFO) for Q3 2024 was unavailable via our tool due to a mapping issue; therefore, we cannot assess beats/misses versus Street for this quarter. We anchor analysis on reported results and company guidance. Values retrieved from S&P Global were unavailable due to mapping; consensus comparison not provided.

Key Takeaways for Investors

  • Near‑term prints skewed by capital recycling and rates: GAAP EPS lifted by realized gains; FFO trimmed on fewer net acquisitions and higher interest expense, but operational underpinnings (97%+ occupancy; rent spreads) remain solid .
  • 2024 is a transition year; 2025/26 set up for growth: Anchor re‑leasing/commencements should re‑accelerate same‑center NOI in 2025 and normalize in 2026, with >$2M incremental revenue identified from current initiatives .
  • Capital recycling is additive: Selling high‑5%/low‑6% cap assets and redeploying into high‑6% yields sustains positive investment spreads while preserving balance sheet flexibility .
  • Refinancing watch: $250M Dec notes (and likely term loan) expected to price ~mid‑5.5%; execution and final terms are a key catalyst for rate trajectory and FFO sensitivity into 2025 .
  • Leasing momentum durable: 1.2M sq ft YTD (second most active on record), growing ABR not‑yet‑commenced to $8.2M positions billed occupancy to grind higher through 2025 .
  • Tenant quality holding up: All 11 Rite Aid leases extended; limited exposure to headline stress; rent-uplift on recaptures underscores embedded mark‑to‑market .
  • Risk‑reward: Without Street consensus, use FFO guide ($1.03–$1.05) and NOI trajectory as anchors; stock‑moving catalysts include refinancing execution, anchor lease signings/commencements (Fallbrook), and additional off‑market acquisitions/dispositions .