Retail Opportunity Investments Corp
NASDAQ:ROIC
Earnings Call Analysis
Q4-2023 Analysis
Retail Opportunity Investments Corp
Despite 2023 being a year with pronounced challenges for some real estate sectors, the grocery-anchored sector, especially within coveted West Coast markets, stood steadfast, showing fundamental strength. The company broke previous records by leasing over 1.7 million square feet, securing double the space coming due, and achieving an 11th consecutive year of double-digit growth for same-space new leases. These achievements helped solidify the company's core income and prepare it for future growth.
While total revenues soared to a new high of $328 million, increased interest expenses due to higher interest rates partially counteracted these gains. The company managed to pull in $35 million in GAAP net income, amounting to $0.27 per diluted share, and funds from operations (FFO) reached $141 million, or $1.06 per share. This represented a 3.7% increase in net operating income on a comparative cash basis over the prior year. Efforts to improve the balance sheet included refinancing activities, lowering floating rate debt to just 9% of total debt, extending the credit line maturity, and achieving a historically low net debt ratio of 6.2x.
The company re-entered the public bond market after nearly a decade, raising $350 million through an offering of unsecured senior notes. This capital was used for retiring existing debts, including $250 million of senior notes and $100 million of floating rate debt. Additionally, they converted $150 million of floating rate debt to fixed rate, strategically fortifying against interest rate hikes, and expanded their credit line capacity from $600 million to potentially $1.2 billion. The laddered debt maturity schedule is planned to average $300 million in maturities each year over the next five years.
The company expects continued demand for space, underpinning a strong mix of tenants and potential leasing activity. The focus remains on enhancing the appeal of the properties and growing the income stream. The anticipation is that acquisitions will pick up in 2024, with an aim to buy $100 million to $300 million in shopping centers, balanced by corresponding dispositions. They plan to finance these acquisitions with equity issuances geared towards maintaining financial ratios while pursuing growth.
For 2024, they expect to continue performing well, with portfolio net operating income (NOI) set to grow due to contractual rent increases and anticipated re-leasing rent growth. The guidance for FFO is specified at $1.03 to $1.09 per diluted share. While moderating these growth expectations will be higher interest costs, projected between $78 million to $80 million, and an estimated bad debt range of $3 million to $5 million, the overall outlook is optimistic based on the current tenant base's strength.
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Welcome to Retail Opportunity Investments' 2023 Fourth Quarter and Year-End Conference Call. [Operator Instructions]. Now I'd like to introduce Lauren Silveira, the company's Chief Accounting Officer. Please begin.
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.
Notwithstanding 2023 having been a year of extraordinary challenges for certain commercial real estate asset classes and certain CBD markets across the country, in distinct contrast, the long-term core drivers of the grocery-anchored sector remained fundamentally sound, especially as it relates to our portfolio in a highly protected sought-after West Coast markets.
Capitalizing on the strong fundamentals, we achieved a number of new leasing records and milestones for the company. For the 14th consecutive year we leased essentially double the amount of space that was originally scheduled to mature. Specifically, in 2023, we leased over 1.7 million square feet, achieving a new record for the company in terms of overall leasing activity. Additionally, we again achieved re-leasing rent growth for a record a 11th consecutive year, including a 11 years in a row of achieving double-digit growth on same space new leases.
Importantly, we worked at strategically renewing early a number of key valued anchored tenants, including long-standing grocery tenants. By doing so, we enhanced the long-term strength and stability of ROIC's core anchor income stream well into the future. We also continued to implement our long-standing strategy of proactively enhancing the tenant mix across our portfolio through seeking out opportunities to recapture early and re-lease select spaces.
Going forward, this not only serve to enhance the strength of our tenant base and appeal of our properties, it will also serve to grow our income stream having achieved higher re-leasing rents.
In terms of acquisitions, in light of the considerable uncertainty in commercial real estate during 2023, the West Coast acquisition market that is essentially idle through much of the year. While it was [indiscernible], we continued to maintain an active dialogue with our long-standing off-market sources in order to be in a strong position to capitalize on unique opportunities when the market began to pick up again.
To that end, during the closing months of 2023, certain private owners started to become more active in seeking to transact. Capitalizing on this, in December, we acquired an excellent neighborhood grocery-anchored shopping center that we had our eye on for some time. The property is located in the Los Angeles market in a densely populated mature diverse community.
The center is anchored by a well-established supermarket that is a long-time national tenant of ours. The seller was a private owner that was in need of a closing before year-end. Given our knowledge of the market, together with our knowledge of the property and tenant roster, we were in a strong position to facilitate an efficient closing and in return, achieved attractive pricing including a cap rate in the high 6s for what is irreplaceable sought-after real estate. Looking ahead, based on what we're currently seeing, market activity for acquisitions could resume on the West Coast in 2024 potentially in earnest.
Turning to our balance sheet. During 2023, we worked diligently to enhance our long-term financial strength, and profile through implementing a number of strategic capital market initiatives, including reentering the public bond market, balancing our debt maturity schedule while also reducing our floating rate debt and extending our credit line maturity as well as raising a bit of equity in connection with the acquisition.
Now I'll turn the call over to Michael Haines, our CFO, to take you through the details of our balance sheet initiatives as well as our financial results for 2023 and initial guidance for 2024. Mike?
Thanks, Stuart. Starting with our financial results. For the year ended 2023, total revenues reached a new record high of $328 million. Offsetting record revenues, interest expense during 2023 increased notably as a result of higher interest rates. In terms of net income for the year 2023, GAAP net income attributable to common shareholders totaled $35 million or $0.27 per diluted share.
With respect to funds from operations, FFO for the year 2023 totaled $141 million, equating to $1.06 per share. Net operating income for 2023 on a same-center comparative cash basis increased by 3.7% over 2022.
Turning to our financing activities. During 2023, we raised in total approximately $363 million of capital, $350 million of which were raised in September through a public offering of unsecured senior notes. As Stuart noted, it was the first time raising capital in the public bond market in nearly a decade. Accordingly, we made a concerted effort to fully engage with the market, having discussions with a broad and diverse mix of investors, a number of which were new to the company.
We utilized the proceeds from the offering to retire the $250 million of unsecured senior notes that matured in December. Additionally, we retired early $100 million floating rate debt. Also, in the midst of the Fed's rate tightening, we sought $150 million in floating rate debt to fixed rate. As such, at year-end, just 9% of our total debt outstanding was effectively floating rate, down significantly from a year ago when our floating rate debt was 28% of our total debt outstanding. Along with proactively lowering our floating rate debt earlier in the year, in light of the regional banking turmoil, we proactively extended the maturity of our credit line. Spending and maturity date at 2027 with the ability to extend it for an additional year to 2028.
We also have the ability to double the capacity of the [indiscernible] from its current capacity of $600 million up to $1.2 billion. Additionally, in the context of what happened in the regional banking sector this past year, it's important enough that we just had 2 mortgages that together only total about $60 million. Looking ahead, come April, when one of the two loans mature, we will down to only one mortgage remaining.
In addition to lowering our floating rate and secured debt, during 2023, we continue to work on enhancing the company's financial ratios, including the company's net debt ratio. We ended the year with a net debt ratio of 6.2x for the fourth quarter, which is the lowest that our net debt ratio has been dating back to 2014. Looking ahead, our debt maturity schedule is well laddered over the next 5 years with approximately $300 million maturing each year on average. Having now reestablished ROIC in the public bond market, our objective is to be a consistent annual issuer going forward.
Looking at 2024, in addition to refinancing the senior notes that mature at the end of the year, we may also look to refinance our term loan and credit line borrowings with long-term fixed rate bonds depending upon market conditions as the year progresses. With respect to equity capital, in light of the acquisition that Stuart discussed, in December, we issued common stock through our ATM raising approximately [ $13 ] million.
In terms of guidance for 2024, we currently expect our portfolio NOI will continue to grow driven by a combination of contractual rent increases, together with expected releasing rent growth. Additionally, as Stuart touched on, we are anticipating that the acquisition market will become active and favorable again. Accordingly, we currently expect to acquire between $100 million to as much as $300 million of shopping centers, net of dispositions.
The fund acquisitions, our guidance assumes that we will issue equity in [ step ] of the acquisition activity as we move through the year with the goal of keeping our financial ratios intact as we grow our portfolio.
Moderating our expected external internal growth will be interest costs. Based on the bonds that we issued in 2023, together with our projected acquisition and refinancing activity, we currently expect that the company's interest expense will be in the $78 million to $80 million range for 2024. Additionally, in terms of bad debt, our guidance assumes a range of $3 million to $5 million, although our current expectation is that it will be more towards the lower end based on the overall strength of our tenant base today. Taking into account all of these factors and other various assumptions, we have set our initial FFO guidance range for 2024 at $1.03 to $1.09 per diluted share.
Now I'll turn the call over to Rich Schoebel, our COO. Rich?
Thanks, Mike. As Stuart highlighted, 2023 proved to be one of our best years in terms of leasing. Demand for space across our portfolio continues to be consistently strong as a diverse mix of longstanding tenants, together with new concepts and businesses seeking to expand to the West Coast, continue to buy per space. These diverse businesses are predominantly destination type tenants in the wellness, self-care, restaurants, service and entertainment segments.
Most important from our perspective, is their keen interest in leasing space at select shopping centers that are well located in diverse communities and have an established grocer as the core daily draw, which is exactly what our portfolio offers.
Capitalizing on the demand, as Stuart highlighted, during 2023, we achieved a new record for the company, leasing over 1.7 million square feet in total. The bulk of our activity centered around renewing long-standing tenants. Specifically, we renewed approximately 1.3 million square feet during 2023 and over half of that involved renewing valued anchor tenants, including long-standing grocers with a number of tenants coming to us early to renew. Some by as much as over a year in advance of their [ lease ] maturities.
In terms of new leasing activity, given the lack of available space across our portfolio and the modest amount of space that was scheduled to mature during 2023, we made a concerted effort to proactively recapture select spaces focusing on sought-after anchor and pad spaces, spaces that are well suited for the type of businesses that are leading the demand.
In total, we successfully executed upwards of 400,000 square feet of new leases, a good portion of which were with tenants new to our portfolio. In step with our renewal and new leasing activity, we again posted another solid year in terms of re-leasing rent growth including a 7% increase on renewals and a 22% increase on same-space new leases.
With respect to Rite Aid, as we discussed on our last call back in October, out of the 15 leases we had with Rite Aid across our portfolio, three of the stores closed in the fourth quarter, which is reflected in our portfolio lease rate, which was 97.7% at year-end. We already have much of the space spoken for with new synergistic tenants that we are excited about and we expect to achieve a notable increase in the average base rent.
In terms of the remaining 12 leases with Rite Aid, all of the stores continue to perform well, and Rite Aid has indicated that they intend to keep operating the stores and plan to implement new merchandising and operational strategies aimed at enhancing their performance going forward. As 2024 is getting underway, demand for space continues to be strong across our portfolio such that we expect to have another solid year.
In terms of occupancy, we expect to maintain our overall portfolio lease rate in the 97% to 98% range as we move through the year. In terms of lease rollover, specifically anchor lease maturities, at the start of 2024, we had 7 anchor leases scheduled to mature during the year, totaling 281,000 square feet. 3 of the 7 have already renewed their lease and we currently expect another 2 will renew as well. As to the remaining 2 anchor leases scheduled to mature, 1 is with Rite Aid, which is 1 of the 12 stores that they intend to keep operating. We're currently in the process of amending their lease to extend it for another 5 years.
With respect to the other anchor lease, we are in the process of re-leasing the space and are currently in discussion with several national destination entertainment business that will be a terrific added draws to our property. Additionally, we expect to achieve a substantial increase in base rent over the prior tenant's rent.
Looking out further at 2025, we currently have 22 anchor leases scheduled to mature, based on our early proactive discussions with the tenants, we currently expect that 21 of the 22 anchors will renew, the bulk of which we expect will renew early as we move through 2024. The remaining anchor lease is 1 of the 12 leases with Ride Aid that we are currently in the process of extending the lease term.
Lastly, in terms of non-anchor space maturing in 2024, at the start of the year, we had 484,000 square feet of shop space scheduled to mature. Similar to our anchor re-leasing activity, we are already hard at work and having good success at renewing and re-leasing the space. Additionally, we are also proactively pursuing recapture opportunities and expect to have another productive year as we did in 2023.
Now I'll turn the call back over to Stuart.
Thanks, Rich. Our ability to post another strong year of leasing underscores the resilience and competitive strength of our grocery-anchored portfolio and the intrinsic value of our operating platform Singular West Coast focus. To echo Rich, looking ahead, we expect to have another strong and productive year in 2024. In terms of same-center net operating income, we fully expect to continue growing our NOI in 2024. However, on a cash basis, the growth rate for this year will be moderated as a result of Rite Aid stores that closed in the fourth quarter and the anchor lease that Rich mentioned.
While we are already close to having new tenants lined up for the space is at significantly higher rents on average, there will be downtime as we get the new tenants in place which is reflected in our same-center NOI guidance growth rate for 2024. Once the new tenants are in place, together with what we expect to be another strong year of leasing in 2024, looking out further at 2025, we currently expect a same-center NOI growth will be in line with our historical growth rate in the 3% to 4% range, if not better.
In terms of acquisitions, as 2024 is getting underway, we currently have close to a $100 million of off-market transactions in our pipeline. All of which is truly irreplaceable real estate in the heart of densely populated sought-after communities. While the transactions are not yet finalized, we currently expect that the potential pricing on a blend basis will be comparable to our fourth quarter acquisition.
Safe to say, we are excited about these opportunities and look forward to growing our portfolio in 2024 and continuing to build long-term value.
Now we will open up the call for your questions. Operator?
[Operator Instructions]. Our first question comes from the line of Jeffrey Spector with Bank of America Securities.
This is [ Lizy ] on for Jeff actually. So I guess just starting with -- going back to the rationale around issuing equity in the quarter and then putting out guidance for the year. Could we just maybe get some more color around expectations of cost and kind of why that range is a bit wider, presumably it looks like that would be dilutive kind of depending on your view of NAV. But just wanted to get some more color around the plans to issue equity.
Sure. Well, look, in terms of the fourth quarter, we issued the stock specifically to finance the acquisition on a balance sheet neutral basis and to maintain our financial ratios. Based on the cash cap rate and the FFO yield on the acquisition, the transaction is accretive with good growth opportunities going forward. Looking forward, obviously, it's going to be a function of cap rates in terms of where we're acquiring any future assets and the price of our stock.
Okay. Great. And I guess just a follow-up. Where are you seeing cap rates for the centers you're interested in trend today? Have we seen more of a compression there since maybe we last touched on this in October, November?
Sure. Look, there's very little activity in the market. So it's very tough to pin cap rates in this market because they are depending on the asset and depending on the growth profile, cap rates continue to sort of move around. But going forward, we're expecting with what we see in our pipeline in terms of the market opportunities, that cap rate, again, in the mid-6s or even a bit higher.
Okay. Great. And then separately, just wanted to touch on your same-store NOI outlook. And can we clarify what the exact step-ups are to that 1% to 2% range is most of the drag really from the downtime associated with backfilling spaces that were lost. If there's any more color you can add on the building blocks to that range, which implies a deceleration from this year -- last year's growth, that would be great.
Sure. It's purely a function of the 3 Rite Aids that we mentioned back on our last call and what Rich was good enough to articulate today. Along with one other anchor tenants that is vacating or has vacated at the end of January. Those are really the building blocks to our same-store NOI.
The good news is that we're making some very good momentum in re-leasing those spaces. And as I said in the closing sort of part of my presentation, we're expecting most of that to be leased in the next, let's call it, first quarter, early second quarter, and we'll see the positive impact of that as we move through the balance of the year and into '25.
One moment for our next question. Our next question comes from the line of Dori Kesten with Wells Fargo Securities.
Back to the net acquisition guide. I guess -- I understand you have a $100 million in the pipeline today. What gives you confidence in the $100 million to $300 million. Are you rather close to having an LOI on that 100?
Just -- we -- I think we've been hard at work over the last several quarters in terms of reconnecting with our, what I would call, our pipeline of sellers. And we are seeing some of these sellers come under pressure as it relates to debt coming due. So we're feeling pretty good about really going out and finding very high-quality assets at compelling prices.
So as we sit here today, look, we do have some exciting opportunities ahead of us. Obviously, we're still in the due diligence stage in terms of buying these assets. But we still -- we're feeling very comfortable sitting here today that we'll be able to achieve certainly that lower end of our guidance.
Okay. And I believe on the Q3 call, you were talking about potential acquisitions funded with OP units, are these that you're referring to? Or the...
No. These -- there are -- those opportunities are at our doorstep as well right now. And obviously, that equity, if we end up doing these transactions, we'll be at a much or a higher price than where our stock is currently trading.
Okay. And last question. In your interest expense guide for the year, what assumptions are embedded for refinancing swaps paying down with cash?
Well, the guidance is going to take into account refinancing the '24 bonds later in the year. It's really kind of tied to the forward yield curve. That's the best thing we can use to model that interest cost out. And in terms of cash flow, Mike?
Free cash flow, whether we use it to pay down debt or fund acquisitions, about $20 million to $30 million, depending on actual CapEx costs and interest costs through the year.
Our next question comes from the line of Juan Sanabria with BMO Capital Markets.
Good morning. Just hoping you could talk a little bit about the builder commenced occupancy and how we should expect that to trend over '24. I'm not sure if all the [ Rites ] stuff is in the base as a starting point for the year or if you expect a seasonal dip in the first quarter, but if you can just give us a sense of the trend for the year and how we should expect the year to end that would be great from a build occupancy perspective.
Sure. Well, we're still making very good progress on getting the rent commenced. And -- but as you know, as we're commencing rents, we're adding new uncommenced rents to the bucket. And with the Rite Aid and the other anchor space we spoke of. It will take some time to reset those spaces, but we expect that we will continue to bring on the rent consistent with our historic averages.
Okay. But it sounds like the one anchor, the Rite Aid, the couple of closures are in the phase to start the year, thinking about where you ended last year, and then you have one more anchor closure. Is that kind of all the meaningful declines or negative impacts we should be factoring in for the year? I've seen some kind of random puts and takes here and there.
Yes.
Okay. Great. And then just curious, any update on the assets where you guys are pursuing entitlements and kind of the processes there? And what, if anything, is assumed in guidance with starts or for monetization of that value creation.
Well, in terms of the crossroads, we are getting to the end in terms of the permitting process, but given the current market environment, we plan to sort of sit tight for the time being in terms of breaking ground. We did, during the fourth quarter, finally get full entitlements in Nevada. So both the other 2 projects are at this point are fully entitled, and we are engaged with a series of builders and/or buyers in the market right now to potentially sell these assets.
However, the multifamily market right now is still in, what I would call, in a sort of a stalled stage in terms of transacting. And my personal opinion is that as we move through the year, if we can get some cap rate compression in the multifamily business, then there's a good chance that we'll be able to transact on these properties.
One moment for our next question. Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets.
A couple of questions. First, the additional anchor vacancy that you mentioned. I'm just curious how much occupancy that might represent if you can share that? I'm just curious how much lower occupancy may go before bottoming out here, so we can just think about the trajectory of occupancy and maybe help us understand the trajectory of same-store NOI growth a little bit throughout the year.
And then, Rich, can you talk about the potential mark-to-market on that space and the Rite Aids that you've discussed recapturing and re-leasing?
Sure. In terms of the occupancy hit, it really won't have a significant impact, and we're still comfortable with maintaining the 97% to 98% range throughout the year. The mark-to-market on that one anchor space is, it could be very significant. It's a very low single-digit rent. So we're expecting a big spread there. And then on the Rite Aid, on a blended basis, it's going to be a very nice increase as well.
Okay. Does -- is there any additional impact from Rite Aids at all assumed in the guidance, it didn't sound like it, but just curious as things are still ongoing over there. Just curious if you have any additional assumptions at all embedded in guidance either around space being recaptured or potential lease negotiations.
Well, we're really finished -- when I say finished. We are -- we have gone through and spent a lot of time with Rite Aid over the last several months. And at this point, we're just waiting to have these leases confirmed through the bankruptcy process. Anything can happen as we know as we get through the process, but we feel very comfortable we sit today that if things continue to go well and the Rite Aid comes out of bankruptcy, the extent of what we've articulated today in terms of what we've seen in vacancy will remain where it is.
Okay. And then just shifting over to the acquisitions and the guidance there. I guess, as it pertains to the funding and the equity issuance that's assumed alongside the investments, the range that you've provided. How price sensitive are you to the stock price as you kind of look ahead here with the growing pipeline of deals that you're seeing?
Sure. Well, look, we are very sensitive to price. But again, we feel pretty good looking at pipeline in terms of possible accretion in terms of if we decide to issue equity will be -- I think will -- again, will be a function of the price where we're buying these assets and the price of our stock. But certainly, we'll monitor things as we move along, both in terms of timing and in terms of issuing equity if we decide to build that route as it relates to issuing that equity.
Okay. At the midpoint of the guidance, I guess, for acquisitions, for equity issuance, I mean, how much accretion is built into the guidance that you're anticipating from this investment activity and, I guess, the capital raising activity along side that on a leverage-neutral basis, just with where the company's blended cost of capital is today, equity debt also in the sort of mid- to high-6% range. I'm just wondering how much accretion that you're anticipating or what's embedded in the guidance?
Todd, it's Mike. So looking at the low and the high end. On the low end, we acquired about $100 million, we're expecting that to add about [ $0.01 ], $0.01 and on the high end of it about [ $0.03 ]. So at the midpoint, if you do $200 million, it's going to be $0.02. That's just kind of ballparking the use of equity and debt to buy those acquisitions.
Okay. All right. That's helpful. One last one, Mike. On the interest expense question from earlier, though, that is tied to the acquisitions, right? And you're assuming about I guess 40% debt financing are really maybe 30% or 35%, assuming you reinvest your free cash flow into acquisition. So if you do not acquire assets, the interest expense would be below the guidance range, right?
Presumably, yes. That's correct. And then we also have the refinancing activities we have to do, and that's going to be depending on where the yield curve as we move through the year. Obviously, we had a hiccup this year, early this week with the CPI, but we'll see where the 10-year treasury goes as we move through the year.
Okay. But the debt portion of the acquisition activity that you'll be funding that you're assuming is being funded on the line?
Correct.
One moment for our next question, please. Next question comes from the line of Paulina Rojas with Green Street.
Last time we spoke, I think we talked about one of the Rite Aid leases being rejected and the other 2 being in a sale process. So I'm curious why weren't those leases acquired? They had meaningful mark-to-market. And I wonder if it's because of the term, if they have legal-term left?
Sure. Those 2 locations, you're right, were offered for sale by Rite Aid. But the feedback we received from Rite Aid was that they were not willing to pay the debt rent, the administrative rent that's required to be paid on those locations. So if people didn't step up immediately and agreed to pay that debt rent even while they were doing due diligence, they were just moving forward with rejecting those leases. So that was sort of the strategy out of the gate. And those 2 locations, no one jumped fast enough.
However, as we touched on, there is a good mark-to-market on those leases and we have had very strong interest in the spaces.
My other question is the Kroger Albertsons merger is a risk, right, and it's potentially weighing under stock as well. So is there anything you can do today proactively to prepare for the consequences of this merger, but it could have not immediately, but in the medium term? Or you're really, there is not much you can do today. You're putting the topic to rest until there are more news.
Look, I mean we've been analyzing this transaction internally now for almost 2 years. But look, we continue to communicate a lot with both Kroger and Albertsons, and conduct business as usual, including renewing leases. And their discussions, they have ongoing discussions as we all know with the government. So they're not yet in a position to disclose what specific stores will be sold as part of the merger, and we haven't spoken to CNS as well.
So there's not much more I can sort of tell you as it relates to your question. I mean we're all waiting at this point. And we do think the outcome of this will not have much impact in terms of ROIC.
How do you assess the appetite for -- of other grocers for the space?
Very strong, extremely strong. We've had a series of LOIs already come in for a number -- not a number, but some locations on the assumption that CNS may take 1 or 2 of these locations. But again, there's nothing we can do at this point until there's more clarity.
One moment for our next question, please. Our next question comes from the line of Michael Mueller with JPMorgan.
A lot of stuff has been answered, but maybe one thing, and I apologize if this was addressed. I missed the first part of the call. But what's the biggest thing that you would say that has changed as it relates to acquisitions where you're coming off of 2023, but now you have pretty good expectations for 2024. When you're talking to sellers. I mean, what do they point to that gives you better confidence?
I think what's changed out there, Mike, is that a lot of sellers were on the sidelines in '23. But as mortgages are coming due as redemptions are coming in from the institutional community, we seem to be making very good headway in terms of these conversations. And more importantly, sort of finding what I would call, very high-quality at compelling prices.
So it's really, the market is beginning to change in terms of some of these sellers come into the realization that they've got to do something now rather than wait 3 months, 6 months, 9 months as it relates to either debt coming due or to potentially move equity or to redeem some of the -- what's in queue in terms of cash, as you might say. But that's what we're sort of seeing out there. There's a bit of a change occurring. And for us, we are certainly in some very productive conversations in terms of meeting the goals that we've set out to shareholders.
Got it. And then maybe take a shot at Juan's question a different way here. If we're looking at the year-end build occupancy, it sounds like you're going to have a move out on the anchor side that will pull it down a little bit. Where in 2024, or when in 2024, do you get to the point where build occupancy inflects and starts to kind of move back up?
I think it's going to be closer to the end of the year as we work through these leases and then we also get commenced on all these -- the leases that are currently in the pipeline.
One moment for our next question. Our next question comes from the line of Wesley Golladay with Baird.
Just another follow on that 1 anchor lease that you mentioned. I mean it looks like you have clear runway outside of that 1 lease all the way to 2026. But for that anchor, what percentage of the ABR do they represent. And how soon do you think you'll resign leases for that space? And when do you think the tenants will open for that?
It's a very little bit of our ABR. I don't have the exact percentage here in front of me. And really, we're at now is we're trying to pick the best tenant for the space. We have a lot of demand from a lot of different tenants. And one of the factors we're taking into account is obviously the cost of getting them in and the time we're getting the rent commenced. So we want to make sure we pick the right tenant. And look, we see a lot of demand for the space and expect to have a very nice spread in the rents.
Yes, the mark-to-market on that particular space is going to be quite good, depending on what we end up doing. But the tenant is currently paying a modified triple-net lease at about $6 a square foot per year.
You mentioned it would be an entertainment concept. Should we expect an uptick in tenant improvements there?
Yes. And that's what we're taking into account as we speak is, yes, some of these [ interim ] uses will cost a little bit more to refit the space, converting it from retail, but they're also the highest rent payers. So we're balancing all of those factors.
Yes, fair point. And then lastly, just on the acquisitions. The stock's sitting at $13 a share today, 7 -- a little north of a 7 cap, depend on whose numbers you're using. How sensitive are you at these levels to pursue this external growth?
We're sensitive. I mean when I say that, obviously, we realize where our cost of capital is, and we want to be smart in terms of buying and concurring with buying assets, raising equity in terms of our balance sheet. So we're watching, obviously, the price and like everyone else. But we feel pretty good in terms of where these assets are going to end up in terms of cap rates and our FFO yield on these assets. So we'll see how things progress as we move through the year.
Okay. And then on a quality perspective, where would you rank these assets you go to acquire them within the work portfolio?
These will be some of the highest quality assets that we have acquired in the last 10 to 13 years.
One moment for next question. And our next question comes from the line of Craig Mailman with Citi.
A couple of quick ones and then one of the big picture one. But just I noticed the -- your amortization of below and above market leases kind of ticked up here relative to last year. What's driving that?
Are you talking about the actual for '23 or for '24's guidance?
The '24 guidance. The $14 million there. I'm just trying to see, is anything sort of onetime there for...
Yes, that's kind of occur in the first quarter. It's related to the lease that Rich was referring to. When you do the original FAS 141 purchase price allocation, they assume that option periods are going to be exercised. And in this case, they weren't. So that below-market lease liability is going to be onetime additive event in Q1.
Okay. How much of the $14 million is going to be in 1Q?
I think -- I don't have the exact number in front of me. I want to say it's around $4 million.
So there's nothing relate to Rite Aid and that's solely the anchor in...
That's just that, yes, the rest of it is all the other leases just really amortizing down over time.
Perfect. And then. On bad debt, is there anything specific related to Rite Aid? Or is that just your general kind of placeholder at this point in the year on the initial outlook?
It's just a general placeholder, yes, the bad debt in $24 million the $3 million to $5 million range is our standard. And if there's anything relative right, we do well within our budget.
Okay. And then circling back to acquisitions, more big picture here. Stuart, I think you just said, if you can acquire some of these assets, it'd be the highest quality. You've bought in the last 10 to 13 years. And you, guys, are kind of targeting high 6s. I'm just trying to get a sense, I have you guys trading in the low 7s, depending on where you guys think NAV is today.
I mean, are these private market trades just really indicative of where the market should be? And I know you guys have talked a lot about your stock being a little bit undervalued here. But does your ability to kind of break some of these loose and sellers getting more willing to transact at these levels change your view at all of kind of your discount to NAV? And again, I know it's been brought up a lot on this call, your sensitivity to kind of issuing equity here to buy these. I'm just trying to get a sense of what's the real accretion here to NAV even though maybe you're getting a little bit of accretion here to earnings out of the gate?
Well, undervalued is an understatement in my humble opinion, in terms of where the stock is trading. But yes, I mean, look, we will -- this is not a market indication in terms of where the market is or the market is going. These are transactions that are done principal to principal.
And there's -- again, there's typically a reason why we're getting better pricing, whether it's timing or other moving pieces, that's really what's driving the transactions from our perspective. So again, this is not sort of a mark -- this isn't a mark in the market. It's just the ability -- this is what we do best as a management team. I mean we've been doing this for 30 years. We have acquired a number of assets on the West Coast, and we have a pretty good idea what we're buying and the accretion we can get from these assets. I mean not only do we think we will be buying them, hopefully, accretively as we close these transactions, but it's what comes afterwards that's more important in terms of growth. So we are -- we're excited, and we'll see how things go as we move through the year.
What do you think the growth profile of some of these assets is relative to your legacy portfolio?
These -- what we're looking at is probably going to deliver probably a 3% internal growth, maybe a bit better, it just depends on how we manage and how we lease. I mean the one thing that we do well is we stay ahead of this tenant base, and we -- as you have seen and heard many years, we were very proactive in terms of capturing what I would call the mark-to-market on the assets we own and we buy.
And not to [ belabor ] the point for those has been addressed. But just as you, guys, think about the appropriate investment spread relative to your cost of capital at least what's the minimum accretion you need is, kind of where are you thinking these days? Is it 50 basis points? Is it 100? Kind of where is the minimum also taking into account sort of that maybe longer-term growth? Or other opportunities within the asset that you can unlock going forward?
Yes. Look, it's just a function of looking at the underlying leases and what we're getting from those leases as it relates to rollover or what we can potentially terminate and get a much higher mark-to-market on. So that internal growth is very important from our perspective, and every situation is different. I don't know if you want to add anything to that, Rich?
Thank you. And the final question comes from the line of Linda Tsai with Jefferies.
In 2023, bad debt was $3.4 million and you have a $3 million to $5 million bad debt expectation for '24. Can you just remind us how this compares to history?
I think I'll [indiscernible] COVID out of that in terms of history, but I think we got probably initially a little bit concerned. Our normal bad debt budget is 1.5% of total revenue. So we put some goal posts around that for guidance. 2023 might have been a little bit higher than our normal, but $3 million to $5 million is just kind of a general range to see what happens with the tenant base over the year.
Got it. And then your occupancy has weighed down a little bit by Rite Aid, but presumably still pretty high on an absolute basis. Just generally, how are you feeling about the overall retail environment as it relates to retailer demand versus store closures?
Yes, retail demand continues to be very strong as we've touched on a few times during the call. When we do get a space back, there's typically multiple LOIs, helpful offers on the spaces. And we see the tenant base on the West Coast buying for the product that we have with grocery-anchored product is still a very high demand.
I mean the numbers this morning were very strong as it relates to the resiliency of our tenant base, Linda. Pharmacy was up almost 7%. Grocery was up 3%. Restaurants are up 6%. I mean these are very, very strong numbers in terms of what we're seeing so far in '24. So we think certainly the grocery-anchored segment of retail is going to hold up quite well.
I'm currently showing no further questions at this time. I'd like to turn the call back over to Mr. Stuart Tanz for closing remarks.
Great. In closing, thank you all 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-K. Thanks again, and have a great day, everyone.
This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.