Stuart Tanz: Look, we’ve been analyzing this transaction internally now for almost two 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.
Paulina Rojas-Schmidt: How do you assess the appetite for — of other grocers for the space?
Stuart Tanz: 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 one or two of these locations. But again, there’s nothing we can do at this point until there’s more clarity.
Operator: Our next question comes from the line of Michael Mueller with JPMorgan.
Michael Mueller: 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?
Stuart Tanz: 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 three months, six months, nine 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.
Michael Mueller: 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 seems 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 in flex and starts to kind of move back up?
Richard Schoebel: 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.
Operator: Our next question comes from the line of Wesley Golladay with Baird.
Wesley Golladay: Just another follow-up on that one anchor lease that you mentioned. I mean it looks like you have clear runway outside of that one 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?
Richard Schoebel: 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.
Stuart Tanz: 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.
Wesley Golladay: You mentioned it would be an entertainment concept. Should we expect an uptick in tenant improvements there?
Richard Schoebel: 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.
Wesley Golladay: 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, I don’t know the numbers you’re using. How sensitive are you at these levels to pursue external growth?
Stuart Tanz: We’re sensitive. I mean when I say that, obviously, we’ve realized 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.
Wesley Golladay: Okay. And then on a quality perspective, where would you rank these assets if you were to acquire them within the work portfolio?
Stuart Tanz : These will be some of the highest quality assets that we have acquired in the last 10 to 13 years.
Operator: And our next question comes from the line of Craig Mailman with Citi.
Craig Mailman: A couple of quick ones and then one of the big picture one. But just noticed the — your amortization of below and above market leases kind of ticked up here relative to last year. What’s driving that?
Michael Haines: Are you talking about the actual for ’23 or for ’24’s guidance?
Craig Mailman: The ’24’s guidance with the $14 million there. I’m just trying to see, is there anything sort of one-time there for…
Michael Haines: Yes, there is. That’s going to 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 one-time additive event in Q1.
Craig Mailman: Okay. But how much of the $14 million is going to be in 1Q?
Michael Haines: I think — I don’t have the exact number in front of me. I want to say it’s around $4 million.
Craig Mailman: So there’s nothing relate to Rite Aid and that’s solely the anchor in [indiscernible].
Michael Haines: No, that’s just that. Yes, the rest of it is all the other leases just regularly amortizing down over time.
Craig Mailman: 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?
Michael Haines: It’s just a general place holder in the outlook. Yes, the bad debt in $24 million to $35 million range is our standard. And if there’s anything relative right, we do well within our budget.
Craig Mailman: 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?
Stuart Tanz: 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-to-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’re excited, and we’ll see how things go as we move through the year.
Craig Mailman: What do you think the growth profile of some of these assets is relative to your legacy portfolio?
Stuart Tanz: 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.
Craig Mailman: And not to belabor the point because they know it’s 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?
Stuart Tanz: 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?
Operator: And the final question comes from the line of Linda Tsai with Jefferies.
Linda Tsai: 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?
Stuart Tanz: I think, I would say, Covid out of that in terms of history. I think we got probably initially a little bit considerably. Our normal bad debt budget is 1.5% of total revenue. So we put some goalposts 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.
Linda Tsai: 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?
Richard Schoebel: 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.
Stuart Tanz: 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.
Operator: 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.
Stuart Tanz: 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.
Operator: This concludes today’s conference call. Thank you for your participating. You may now disconnect. Everyone, have a wonderful day.
