Hello and welcome to the Retail Opportunity Investments 2022 Third Quarter Conference Call. [Operator Instructions] Now, I would like to introduce Laurie Sneve, the company’s Chief Accounting Officer. You may begin..

Thank you. Before we begin, please note that certain matters that will be discussed on today's call are forward-looking statements within the meaning of federal securities laws. Although we believe that these forward-looking statements are based on reasonable assumptions, we can give no assurance that these assumptions will be achieved.

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. These risks and other factors are described in the company's filings with the SEC including our most recent annual report on Form 10-K.

Participants should refer to the company's filings to learn more about these risks and other factors as well as for more information regarding our financial and operational results. Now, I’ll turn the call over to Stuart Tanz, the company’s Chief Executive Officer.

Stuart?.

Thank you, Laurie and good morning, everyone. Here with Laurie and me today is Michael Haines, our Chief Financial Officer; and Rich Schoebel, our Chief Operating Officer. The strong demand for space across our portfolio and our ability to capitalize on the demand continues to be the main headline story this year for ROIC.

We continue to lease space at a record pace. In fact, in just the first 9 months, we have already leased 1.2 million square feet of space which is a new record for the company. Instead of leasing space at a record pace, we continue to steadily increase our overall portfolio lease rate as we move through the year.

Today, our portfolio stands at a very strong 97.8% leased. In terms of re-leasing rent growth, we are pleased to report that we -- that we had one of the best quarters on record for the company, achieving a 48% increase in cash base rents on new leases signed during the third quarter.

With respect to renewal activity, existing tenants, especially core long-standing anchor tenants are increasingly coming to us early to renew their leases, in some cases by as much as 9 months to a year in advance of their lease expirations. As a result, we are renewing space at a record pace.

Turning to our investment activities, capitalizing on our long-standing off-market relationships. During the first 9 months of the year, we acquired 5 terrific well-established grocery-anchored shopping centers, totaling $120 million, including 2 that we acquired during the third quarter for $60 million.

All 5 of the centers are well situated in densely populated, affluent residential communities and feature strong grocery operators along with a diverse mix of in-line tenants. The blended going-in yield on $120 million is in the low to mid-6% range.

There are a number of re-leasing, repositioning and value-add opportunities that we are already aggressively pursuing. In fact, in just a few months' time today, we have already increased the blended lease rate on the 5 properties by approximately 200 basis points thus far.

Additionally, the new acquisitions are located within our core markets, where we have an established presence, thereby enhancing our ability to maneuver tenants among our centers and continue capturing the strong demand for space.

Looking ahead, while we continue to keep a close eye on the acquisition market, given the current economic uncertainty and the ongoing rise in interest rates, we believe that the prudent approach in this environment is to pause our investment activity for the time being and wait to see how the market evolves.

Now, I’ll turn the call over to Michael Haines, our Chief Financial Officer.

Mike?.

Thanks, Stuart. GAAP net income attributable to common shareholders for the 3 months ended September 30, 2022, was $18.5 million, equating to $0.15 per diluted share.

And in terms of funds from operations for the third quarter, FFO totaled $36.5 million, equating to $0.27 per diluted share, as compared to FFO of $32.6 million or $0.25 per diluted share for the 3 months ended September 30, 2021.

With respect to our financial results for the first 9 months of 2022, GAAP net income attributable to common shareholders totaled $41.7 million or $0.33 per diluted share.

In terms of FFO, the company had $109.4 million in total FFO or $0.83 per diluted share for the first 9 months of 2022 as compared to FFO of $95.3 million or $0.74 per diluted share for the first 9 months of 2021.

In terms of the company's investment activities during the third quarter, we funded the acquisitions primarily through a combination of proceeds from our property sale and free cash flow from operations.

Importantly, during the third quarter, while our gross real estate assets grew by $42 million, our total principal debt only increased by less than $6 million. As a result, our net debt to annualized EBITDA went from 6.7x for the second quarter, down to 6.6x for the third quarter.

While our shopping centers continue to perform well, in fact ahead of our initial property level budgets thus far for 2022. At the corporate level, we are not immune to the Fed's ongoing initiative of raising interest rates to curb inflation.

Specifically, during the third quarter, the company's interest expense increased by approximately $300,000 [ph]. As of September 30, approximately 26% of our total debt was floating rate. In terms of 74% is a fixed rate debt, nothing is scheduled to mature between now and the end of 2023. And beyond that, our debt maturity schedule is well laddered.

In terms of our FFO guidance for the full year of 2022, we have narrowed our previous range of $1.08 to $1.12 per share to now be in range of $1.09 to $1.11 per share.

In anticipation of the federal raise rates again during the fourth quarter, our new guidance range takes into account another $1.2 million to $1.5 million of added interest expense on top of our Q3 interest expense. Our tighter guidance range also takes into account no additional acquisitions or dispositions between now and year-end, as Stuart noted.

Lastly, our guidance range continues to assume that same-center NOI growth will be in the 4% to 5% range for the full year. For reference, during the first 9 months of the year, same-center NOI increased by 4.4%. Now, I'll turn the call over to Rich Schoebel, our COO.

Rich?.

Thanks, Mike. As Stuart highlighted, demand for space across our portfolio continues to be strong and we continue to make the most of it to drive our leasing results to new heights. Specifically, the third quarter proved to be our most active year-to-date.

Leasing over 480,000 square feet of space during the quarter, bringing our total leasing activity thus far for the year to 1.2 million square feet which, as Stuart indicated, is a new record for the company, surpassing our previous 9-month record that we achieved 4 years ago.

Additionally, our strong leasing activity continues to drive our portfolio lease rate higher. You may recall that at the end of the first quarter, our portfolio stood at 97.2% leased which we increased to 97.6% in the second quarter.

Today, as of September 30, our portfolio lease rate has now increased to 97.8% which is just shy of a record high 97.9% lease rate that we achieved in 2019.

Notwithstanding being essentially fully leased, we continue to work hard at capturing the demand for space through finding creative ways to free up space within our portfolio, primarily through a combination of recapturing space early, shifting certain tenants and rightsizing others to make way to not only accommodate key long-standing existing tenants who are seeking to expand but also to create space within our portfolio to bring in more and more new destination tenants and enhance our overall tenant mix.

Just to highlight a few examples. During the third quarter, at one of our shopping centers in the Pacific Northwest, a new tenant that had recently opened introduced us to a group that's looking to roll out a new cultural center concept on the West Coast and seeking to lease space at our property for their inaugural location.

Notwithstanding our shopping center being 100% leased, we went to work and proactively recaptured a space early that wasn't scheduled to expire until next year. With the new lease, we are choosing a significant increase in rent and equally important, we expect that the new tenant will become a terrific unique draw to the center.

And we are currently in discussions with the group about rolling out their cultural center concept at a number of shopping centers across our portfolio.

To cite another example, we were recently approached by a prominent successful rock-climbing gym operator on the West Coast, who is seeking space specifically at one of our Southern California shopping centers. However, we didn't have enough available space at the center for their needs.

Rather than turning them away, we quickly went to work maneuvering several in-line tenants and combining their spaces with unused space at the back of the property to create the ideal space for the gym operator. Again, we achieved an increase in rent while also bringing a great new destination tenant to our center.

Additionally, at another one of our Southern California shopping centers, we were recently approached by a national tenant seeking to lease a junior anchor space. Again, rather than turning them away.

Instead, we went to an existing anchor tenant and successfully recaptured a portion of their space, specifically space that they had been subletting to another tenant.

The new lease with a new national tenant is at a significantly higher rent and we're able to structure the deal such that there is effectively no downtime in terms of rent and only requires a minimum amount of TIs for the new tenant.

Along with these new tenants seeking space, a growing number of our existing restaurant tenants continue to come to us seeking to expand their spaces to accommodate additional seating areas as well as new bar spaces and they are looking to extend their lease terms.

In addition to these traditional dine-in restaurants seeking to expand their spaces, a broad range of food service businesses continue to seek out our shopping centers looking to open new grab-and-go concepts which are proving to be very popular and profitable. We continue to work creatively to bring these new tenants into our portfolio.

In terms of renewal activity, as Stuart noted, we continue to have a very active, successful year. Specifically, year-to-date, we've already renewed 884,000 square feet of space including renewing 349,000 square feet of space in the third quarter alone.

And as Stuart touched on, a growing number of existing tenants are coming to us early to take down their options, especially as it relates to key anchor tenants. In fact, of the 182,000 square feet of anchor space that we renewed during the third quarter, over 3/4 of that were anchor tenants with leases not due to be renewed until next year.

Lastly, in terms of lease versus build, during the third quarter, new tenants representing approximately $1.4 million in annual base rent opened and commenced paying rent, bringing our total thus far for the year to $6.1 million of annual base rent from newly opened tenants.

In terms of additional new leases signed, given our strong leasing activity, during the third quarter, we signed new leases representing an aggregate $2.7 million of annual base rent.

Taking this into account, as of September 30, we have approximately $9.1 million of annual base rent from new tenants that haven't yet taken occupancy and commenced paying rent. We continue to work diligently at getting these new tenants open expeditiously. Now, I’ll turn the call back over to Stuart..

Thanks, Rich. As the fourth quarter gets underway, thus far, we are on track to post another solid quarter of leasing as the demand for space continues to be strong. In fact, at a recent West Coast ICSC conference in San Diego a few weeks ago, we had a number of very productive meetings with both existing and prospective new tenants.

Many of them focused and ready to strike deals considerably more so than what we've seen in the past few years. We think this bodes well both in terms of finishing 2022 strong on the leasing front and in terms of building good momentum heading into 2023.

Finally, notwithstanding current REIT stock prices, the fundamental drivers, both near term and long term of our West Coast grocery-anchored portfolio remains sound.

Near term, we believe that the current demand for space will continue to provide a wealth of opportunities for our team to enhance value through our proactive hands-on approach of working our shopping centers and tenant base.

We expect to continue driving rental rates and same-center NOI steadily higher while also working to further our tenant diversity which is the cornerstone of our business. Long term, our core West Coast markets continue to be among the most demographically strong and diverse markets in the country.

Also, our markets continue to be among the most protected supply constraint in the country as well. We believe that these distinct attributes are what will continue to make our markets among the most sought after by a broad range of tenants and investors alike.

Additionally, we believe these factors will continue to serve as the foundational strength and appeal of our West Coast grocery-anchored portfolio, as well as enhance our ability to continue building value for years to come. Now, we'll open up the call for your questions.

Operator?.

[Operator Instructions] Our first question comes from the line of Juan Sanabria with BMO..

I was just hoping to understand guidance a little bit better. You kept it the same tight in the range. But here you had a couple, I guess, different or opposing forces wanting to hit higher rates as some of the swaps expired. I’m not sure what that impact is to the fourth quarter, it had great leasing.

I was just curious as well as higher noncash rental income expectations for the year now. I was just hoping maybe you could talk a little bit about guidance and the puts and takes.

And specifically, what kind of occupancy or build – occupancy we should expect by year-end just to think about how that $9 million comes online of build but not commenced or at least not commenced, sorry..

Quite a few questions in a question. Let's address the gap of build versus lease, that $9.1 million, we expected the large majority of it to come online by June, a large chunk of it is supposed to actually start this quarter in Q4 2022.

So -- and as far as the guidance goes, interest expense did go up, obviously, because of the swaps matured but we expect that revenue in the fourth quarter will increase as a result of owning the new acquisitions for a full quarter, along with the new tenants that were expected to take occupancy during the quarter.

So that's kind of -- one of the drivers' kind of offsetting the interest expense increase. And if you look at the guidance table in the press release also, you'll note that FAS 141 revenue is up a little bit in the fourth quarter and that's from the purchase price allocations from the assets we acquired in August.

Our bad debt was lowered a little bit, kind of tracking where we are for the year. And our G&A, I think, came down on the higher end as well. So a lot of small moving parts that kind of get you to a relatively stable fourth quarter..

Okay, great.

And then just on the balance sheet, I guess, what is the plan at this point with -- you've got 26% floating which you talked about and you've got an expiration coming up at the end of '23 and how we should think about those 2 pieces moving forward and how you plan to manage the risk around that?.

Well, as far as the term loan growth. The term loan doesn’t mature until 2025. So there’s ample time for the market to kind of evolve and settle down. I’m not sure where it’s all going right now but ideally would like to refinance the term loan with public bonds, along with perhaps paying down a portion of the loan depending on market conditions.

And then there’s the bonds that are due December of next year. Again, we’ve got some time left on that. And you have to remember that that’s at a little over 5% coupon. So I’m not sure how the rate environment will be next year, what might be a push and we will have to kind of wait and see..

Next one..

Our next question comes from the line of Todd Thomas with KeyBanc..

Stuart, I just wanted to first ask, I realize guidance assumes nothing else during the year in terms of investments but just wanted to get an update from you on the current thinking around investments heading into ‘23 with regard to your appetite and the ability to deploy capital on an accretive basis in the current environment..

Sure. Well, I mean, currently, the market is really in what we would call a pause situation where there's really very little transactional activity going on at the present time. A lot of buyers and sellers are taking a wait-and-see approach in terms of the economic uncertainty and interest rates.

As it relates to '23, we're obviously going to keep our ear to the ground in terms of opportunities, if cap rates haven't really moved up much for our product but there's not much product on the market either.

So we'll continue to monitor the market and obviously continue to look at some properties that are on the market in terms of dispositions to help fund some potential acquisitions. But right now, the view is to really be patient. And so as we head into '23, we'll continue to monitor things very closely.

And as the opportunities do, if we do find a couple of opportunities here were there, then we'll look at those opportunities and decide how we'll fund them when that time comes..

Okay.

Are you anticipating an increase in cap rates or any – an increase in required returns as you kind of talk to folks and think about the next several quarters moving forward?.

I'm anticipating some movement in cap rates but for high-quality grocery-anchored shopping centers right now, cap rates really haven't moved much. And there's no real benchmark right now to look at as it relates to where those cap rates might go..

Okay. And then just a clarification. I think you said for the 5 year-to-date acquisitions, about $120 million. I think you said that the initial yield was in the low to mid-6% range. But I thought you mentioned after that you’ve already increased the yield on those acquisitions by 200 basis points.

Can you just clarify that comment? And maybe I misunderstood but just curious what the initial yield was and maybe what the current yield was on that – on those acquisitions? It sounds like there was a little bit of lease-up and value-add that may have already materialized..

Yes. I mean it's primarily around as you touched on the lease-up. We've found that in certain circumstances, these properties have been under-managed and our team well in advance of closing has gone out and secured tenants. And spaces that had sat for the prior owner were leased up almost immediately upon closing. So that's what's driving that..

And the impact of that 100 -- or excuse me, 250 basis points really won't be felt obviously to the first and second quarter of next year because that's when the income will come online from a rent perspective..

Okay, got it.

So the low to mid-6% cap rate, that was the initial yield, the NOI yield at closing, you're expecting about a 250 basis point uplift over the next couple of quarters?.

Correct..

Okay. And then just lastly, Mike, on the swaps, I just want to make sure I understand -- so right now, there is no plan to implement any interest rate swaps or hedge the exposure at all on the $300 million of term loans.

Is that right?.

That's correct. For right now, for the short term, we're going to allow them to remain floating and kind of see how the rate environment evolves..

Our next question comes from the line of Craig Mailman with Citi..

Stuart, I just want to circle back to the leasing side of things. You guys have clearly been pulling forward some renewals here with good rent spreads.

I’m just kind of curious your just thought process on trying to delay that or to let rents continue to rise or if you guys are more concerned about the leasing environment over the next 6 months? And I just want to put this in the bag.

I’m just trying to understand your broader macro framework in general?.

Sure. Well, maybe we'll comment -- I'll comment on the anchor spaces first, Rich. I mean we have a number of anchors coming due in '23 and the focus from our perspective has been able to stay ahead of that curve.

And when I say that, the focus has been to go to some of these anchor tenants that are doing extremely well at our centers and getting more term than just their typical 5-year option. So that's been one of our goals looking out over the last 60 to 90 days in terms of these anchor renewals. These tenants have come to us earlier than usual.

But the goal is to really what I would say, stagger now some of these leases. So 5 years from now, we don’t have the same impact. So that’s been one of our goals over the last 60 to 90 days from the anchor perspective. And the number of those leases have fixed increases, of course, because they are contractual auctions.

Do you want to comment on the in-line space?.

Sure. I mean I think we understand the value of our real estate. And so when we're doing these leases, while a tenant may be trying to get the best deal they can, we also know what the market is for the space. So we're not leaving any dollars on the table but occupancy is an important factor for us.

And as you see with our historic occupancy, that's always a factor that we keep in mind. But I don't feel like we're leaving any money on the table..

Are you guys – go ahead..

And there's been no sign of any weakness from our tenant base at all, that's the other thing to point out, Craig..

That’s helpful.

And I just wanted to – first, given kind of the early option execution here? I mean are you guys trying to put through – or let me answer it this way, what are you guys trying to get out of it? Are you trying to push to higher bumps? Are you guys trying to get less restrictions that may be in some of these leases outside of just pure rent bumps, are you guys able to get anything on the concession side that is beneficial to longer term?.

The answer is yes. And when I say that, it's really depending on the situation.

But the reality is that we have a number of anchor leases that don't have much term left and these tenants have come to us and wanted a lot more [indiscernible] doing so, we have approached them to do a number of other things like deal with -- although we don't -- we have very little co-tenancy but things like ESG related as well as exclusive and other things.

So the answer is absolutely yes. That has been part of our negotiation with these anchor tenants..

Okay. And then just I noticed on the renewal side, Tis were up pretty markedly this quarter, especially on the anchor side of things.

Is that skewed by a lease or 2? Or is that – what’s going on there?.

I think that, again, every deal is specific and sometimes it's driven by maybe we're recapturing a portion of the space and so there's a bit higher cost relative to splitting utilities and that sort of thing. But that's obviously offset by the increase in rent that we're going to receive. So the return on those dollars is quite nice..

It's Nick Joseph here with Craig. Just one more on the transaction market.

I understand the pullback but how wide is that bid-ask spread for high-quality assets today?.

How is the bid spread, tough to answer the question because there's not much going on in the market at the present time as it relates to what that bid-ask spread might be.

I would tell you that certainly, some of the deals that have been in the pipeline that have closed more recently have really had very little -- we've seen very little impact from a cap rate perspective. But in terms of the bid-ask, it's just too early to tell and there's very little transactional activity going on to give you an answer.

Let's wait another quarter. And I think certainly, we should have more clarity on that front..

I guess how much have you moved up your return hurdles if you were to do an acquisition today?.

It depends on the asset and it depends on the growth of the NOI in terms of looking at the asset and what it might deliver longer term. But certainly, given the cost of capital that has gone up for all of us, our expectation has certainly gone up at least 100 basis points..

Our next question comes from the line of Craig Schmidt with Bank of America..

It just sounds from your comments that the leasing still remains elevated and the activity into the fourth quarter. I’m just wondering how much of 2023 leasing has already been completed..

Well, a significant portion of the anchor leases that were scheduled to expire next year have been completed and we're making good progress on the shop tenant side as well. I don't have a specific percentage for you in front of me but it's very similar to years past where tenants are coming to us, looking to renew and secure longer term.

So very healthy..

Great. And then the run rate for operating – property operating expenses have been double digit.

Are you expecting that to continue at that pace? Or could it actually increase?.

On the expense side, he is asking..

Understood. I think that it was up 10.2%? Yes, it was up 10.2% -- I think your – to date, it’s up 12.9%.

I’m just wondering given inflationary pressures and whatnot, that could hold a bit that lower double-digit name or could they increase?.

Well, I think costs in general have gone up across the board, primarily, Craig, as it relates to utility and security in some cases. That's what's driving some of that increase in the expense. But some of that, I believe, is going to begin to level off from an inflation perspective.

And as we wrapped up budgets for '23, that number certainly not as high as what you've seen to date as it relates to the budgeting process..

Okay, great.

And just finally, have you had any conversations with either Kroger or Albertsons since they announced their plans to merge?.

The answer is, we haven’t spoken to them in a couple of months now. I know why they will not return to our calls but the good news is Rich and I are set to get on the phone with both of these tenants over the next week to 2 weeks. So we’ll be able to reconnect with them with obviously the focus on the relationship and the stores we’ve got with them.

But no, we have not spoken with them recently but we will be having conversations with them over the week to 2 weeks. I don’t think there’s much they can say at this point. I would assume there’s still in somewhat of a quiet period..

Our next question comes from the line of Michael Gorman with BTIG..

Most of my questions have been answered but I just wanted to have a quick follow-up on the expense side, just as we were looking at the run rate, I understand inflation and everything. But looks like recoveries have been lagging the actual expense growth.

So I’m just wondering, is it the specific categories that are growing on the expense side that aren’t being reimbursed or recovered from tenants? Or any color on why there’s the differential there between the recovery growth and the expense growth?.

I think there's been a few initiatives we've done this year as we've expanded some of our ESG initiatives that we will recoup over time as those initiatives reduce expenses. But some of those initiatives do have caps or other things where anchor tenant may not participate.

But we still see it as a positive for the long term because those overall expenses will come down as things like LED conversions go in place and solar and other things like that water efficiencies. So there's a bit of a front-end cost on that, that's probably impacting that number..

Got it. Got it. That’s helpful. And then, Stuart, maybe just going back for a minute and talking a little bit more about the transaction environment. I know in recent quarters that there’s been kind of a tailwind to demand not only from retail investment but also from demand for housing developers and apartment communities and things like that.

Can you talk about any impact that you’re seeing from that side of things? Any change in demand there because of what’s going on in the capital markets or what’s going on with kind of expectations for housing in your markets?.

Yes. No, things continue to be strong from the -- on the housing front. Certainly, the housing market has slowed down.

The one interesting point to probably tell you in terms of what I've learned more recently is that unentitled land seems to be gaining more value right now than entitled land because of the timetable out there as it relates to the economic environment. But from a housing perspective, things are extremely strong at West.

We haven't really seen any real slowdown. Pricing has stabilized but it really hasn't changed much. And the demographics in terms of our assets continue to get better because as more density gets built, it's certainly getting -- bringing a lot more customers to our centers. So from a data perspective, traffic continues to gain good momentum..

Great. That's helpful. And then maybe one other question as we're going through this pause. You certainly have a lot of connections in the marketplace and have your finger on the pulse.

Any sense for any, I'll call it, kind of pending stress or pending distress from some owners out there where maybe there's a big CapEx burden that's coming up or a big vacancy or re-leasing where maybe right now, they're okay waiting to see where the market shakes out.

But in the next 6 to 9 months, they're going to have to hit the marketplace and may provide more opportunities?.

The answer is, yes. I am beginning to get some calls and some e-mails from some owners that have some financing coming up from their perspective and/or CapEx issues. So we're beginning -- we're at the early, early stages of beginning to see some cracks out there, Mike. So nothing too dramatic right now but the answer is yes.

I am beginning to see a bit of friction out there as it relates to owners that are looking out late next year and have potentially some issues that they're looking at. So it's beginning to show a bit but nothing yet -- nothing like we've seen in '08 or '09, of course.

But the answer is yes, I am beginning to get some e-mail, some traffic, as you would say..

Great. And having lived through ‘08, ‘09. I’m glad to hear it’s not looking like that yet. So I appreciate the time..

Our next question comes from the line of Wesley Golladay with Baird..

Can you just give us an update on the land sales? I know you had a pipeline that you’re aggregating.

You were going to break ground on one project up north in Bellevue with the cost of capital rising, any appetite to either pause that, just to outright monetize the asset at this moment?.

Yes. Maybe I'll just quickly start out with Crossroads. I mean certainly, we're still in the permitting process. We're expected to be in a position to start construction certainly as we move towards the first quarter. But given the current economic uncertainty, we are considering possibly holding off on breaking ground on that project.

In terms of the other projects, the great -- the good news is that we did get final entitlements in Panola last week and Nevada was also moving along quite well and we're in the midst of beginning to move 1 of the 2 to the market over the next several weeks. We think we'll -- we think there's a pretty good chance of transacting there.

And then as it relates to any other properties like that are in the pipeline, we're just continuing to work those as it relates to entitlements. But that's what's going on as it relates to both the Crossroads and the other 2 properties..

Okay. And then, you mentioned there was really no weakness in the tenant base. One of the companies we're watching is Rite Aid. I know it's a big tenant.

You're actually taking on a little bit more exposure by the acquisitions this year that seems to be more of a capital structure issue but could you provide some, I guess, qualitative commentary on how you feel about the portfolio exposure there, whether it's below market rents, productive locations.

Just any kind of context for us?.

Sure.

Rich, do you want to add?.

Sure. Yes, I mean, Rite Aid only accounts for about 1.7% of our total base rent. It’s derived from about 16 leases that are spread throughout our portfolio. All the locations seem to be performing well. Many of these leases are significantly below market, so it may present some opportunities for us as well.

So we don’t – we’re not concerned about Rite Aid..

Our next question comes from the line of R.J. Milligan with Raymond James..

I just want to expand on the question of the sign but not open and the cadence. You expect that both -- that they come online by June but you're also adding that bucket with the leasing you're doing today. So obviously, that's more rent online, maybe in the back half of '23 and into '24.

So I guess I'm just trying to gauge how long the runway is for growth on what's been signed in 3Q, what will be signed in 4Q and curious if that implies healthy growth in 2024 barring any major credit issues?.

Yes. I mean I think overall, it's a positive story here. As you touch on, we commenced a significant amount of rent in the quarter but we also added to the bucket. And the good news on some of the things we've added to the bucket as we touched on the prepared remarks is some of this has got fixed rent commencement dates.

So we're not at the mercy of permits and things like that. But always going to be certain leases that take longer to get commenced because as I touched on earlier, maybe we're recapturing a portion of an anchor space and you've now got to demise it, that just takes a bit longer than just delivering a space as is..

I guess what I’m trying to get at is if the leasing stops today, doesn’t – given what’s signed but not opened, doesn’t imply pretty healthy growth over the course of 2023?.

Yes, you're saying we did no more leasing..

Yes, I suppose if it stopped today, the $9.1 million as the bulk of it is just to start between now and June. So is that – I mean they start paying rent, so these will get a full run rate all the way through 2023 in that regard.

And of course, we’re obviously going to be doing more leasing activity this quarter and into the first quarter after the year-end. So the bucket will always be being replenished. It just depends on what volume it’s going to be replenished depending on market conditions. We don’t see any cracks or any signs of weakness now..

Our next question comes from the line of Mike Mueller with JPMorgan..

A couple of questions. So the first one, what was the average escalator baked into your leases that you signed year-to-date? And the second question, you talked about and granted spotty data out there but your thought that grocery cap rates have been, I don’t know, somewhat sticky – sticky with rates going up.

But out of curiosity, I mean, do you think that grocery cap rates can be below the long-term financing cost over a multiyear period?.

Well, I'll try to answer the first -- the second part of your question first in terms of cap rates. I think it depends -- I think we're entering a different time right now where the grocery drug anchor format has become the most sought after in terms of capital, both private and institutional.

Whether that has a long-term impact in terms of valuation or the stickiness as you might say is probably going to -- the answer is yes. I think it's going to have some impact. Certainly, as it relates to where cap rates might move for other types of retail real estate.

So we could be in a different place right now looking into -- as interest rates do go up, where owners today, as I speak with them, seem very comfortable key only in what they have and that's why the transactional market has slowed dramatically because the fundamentals of what's different this time around, Mike, is the fundamentals are so strong and yet the cost of debt capital has gone up a lot.

So, I think what you’re going to see as we move into ‘23 is an environment where there’ll be a lot less transactions occurring for this product type which will keep cap rates quite compressed. And so that’s why – and try to answer your question, I think we’re in a different sort of secular change here.

How dramatic that change is, I can’t tell you at this moment. Certainly, cap rates are going to go up a bit but I think you’re not going to see a one-to-one sort of change as you’ve seen in the past, just because the fundamentals are just so strong..

And then in terms of the -- yes, in terms of the rent escalators, I mean, I think historically, as we've talked about, for the shop tenants, it's been typically around 3% annually. And for the anchors, 10% or 12% every 5 years. But we're cognizant of inflation.

And I think tenants are -- that's driving some of the demand tenants wanting to come in and lock in rents. But we are pushing more for 5% annually on the shop spaces and more like in the 15% every 5 years for the anchors..

Our next question comes from the line of Christopher Lucas with Capital One..

I have a number of follow-ups. So let me just get through them pretty quickly. Stuart, just on the development side that you had mentioned, I guess, Panola had gotten its approvals for the zoning you needed.

Is that a first half of next year, sort of event, do you think?.

In terms of the sale of the asset, I think, is your question..

Yes..

I can't -- the answer is, it could be -- we don't know yet because we're just in the midst of bringing it to the market. I think we will transact but this is probably a first quarter event versus a fourth quarter event..

And then I guess, Rich, on tenant fallout just generally, how would you compare ‘22 to sort of ‘18 or ‘19? And then given what you’ve done so far in terms of getting ahead of the ‘23 expirations, how does ‘23 stack up relative to ‘22?.

Yes. I mean I think that in terms of tenant fallout, it's sort of back to the pre-pandemic levels. I think that the reality is that COVID created a shakeout, the weak tenants have fallen out. And we don't see any additional weakness beyond what you might have seen prior to the pandemic..

So for any of the anchors that have – for next year that haven’t renewed, is that more of a timing process for you guys at this point? Or do you think there’s some risk there?.

No. I mean I think of the anchor leases remain for next year, there's about 17 of them scheduled to expire. And based on our early discussions with them, we are anticipating that at least 13 of those will be renewing. The majority of those are the grocery and drug stores.

The remaining leases, we're in discussions with them but it's a little bit too early to say for sure that they're going to renew. And there may be an opportunity there where we actually don't want them to renew. And that's why we're discussing with them how much will they pay..

Yes. I mean I think, Chris, this could be an opportunity for us because, as you know, we've had such -- we had no anchor vacancy for a period of time. And given the demand and how strong the demand is, I look at this potentially as an opportunity next year if we -- if one of these tenants do fall out..

Okay. Okay. And then, I guess -- maybe just taking a step back as it relates to sort of the -- sort of natural tension between landlords and tenants in terms of who's got more leverage.

Is that changing at all from where it was, say, end of last year or early part of this year?.

Well, the pendulum has certainly swung back to the landlord pretty quickly coming out of the pandemic. That’s for sure, Rich..

Yes. Given our West Coast focus and the fact that there's been virtually no new products brought to the market and our grocery drug-anchored focus, our centers continue to be in very high demand. We have multiple tenants buying for spaces as they come available. So we're not seeing any falloff in the demand side..

Okay. And then last question for me and I apologize if I missed the – this was covered in the initial comments but – the large rent spread for the non-anchor for the quarter, the 60.6%.

Is that driven off of one specific lease? Or was there a handful of leases that were that strong?.

It was a handful of leases. Some of them were quite significant as we were bringing in much better tenants and re-leasing them. And we've got more that's happening as we speak right now. So there's still some significant leases that are significantly below market that we're recapturing and finding tenants that will pay a market rent for them..

We have a follow-up from the line of Juan Sanabria..

Just curious on the same-store NOI guidance which was maintained. The growth understandably has slowed throughout the course of the year but the midpoint would imply a reacceleration in that growth and maybe that's related to some of the leased deals commencing.

Just curious if you can give us any sense of where within the range you feel most comfortable and what would -- how we should expect the trajectory relative to what you've reported to date for same-store NOI before the fourth quarter?.

Commencement – lease commencement..

Yes. So we're 4.4% year-to-date through September. We maintained the goal post of 4% to 5%. And that's largely because our Q4 budgeted same-store is notably stronger than the first 3 quarters. So if that comes to fruition which we expect it to, we'll still be well within that 4% to 5% range, probably I'm thinking midpoint or even higher than 4.5%.

So we'll see. But we feel very comfortable given what we budgeted for Q4 as same-store NOI..

Great. And then just one quick follow-up. I mean the Kroger-Albertsons deal. Just curious on how you see the leasing dynamics changing with them.

You may be in a position where you have a significantly larger, more powerful tenant and what that may mean to your ability to continue to drive some of the clauses to be more favorable to you? Or were you just view it positively given you probably have a better capitalized tenant at the end of the day? ..

Yes, I mean, look, long term, we think the Kroger-Albertsons merger would potentially be beneficial from our perspective. We currently have 21 shopping centers with Albertsons and 11 centers with a Kroger store. So only 32 properties out of our 93 have an impact in terms of the Kroger-Albertsons transaction.

But these 32 stores are diversified across 3 states. And within these states, these stores are diversified evenly in terms of ABR and across multiple metro markets, including L.A., Orange County, Portland and Seattle. And within these markets, these stores are specifically located in distinct separate submarket communities.

And the other thing is that these stores operate under 7 different banners. So we're -- as we look at this transaction, we -- a lot of these stores are solid performers. In fact -- on average, if you were to average sales of all of these stores, these 32 stores, these stores are doing on average in excess of $630 a square foot in sales.

And then lastly, the 32 leases are certainly below market on average, with some of these significantly below market. And again, shopping centers that are well located in highly desirable affluent communities. So strong demand for the space if something were to happen.

And there's a lot of demand out there from value-oriented and specialty grocers in these locations. So if Albertsons and Kroger divest off some of these locations, we view this as a potential opportunity. And then as you just touched on, the last thing is credit.

This is certainly going to improve the overall credit in terms of owning these anchor tenants or this particular anchor tenant in our [indiscernible]..

I'm showing no further questions in the queue. I would now like to turn the call back over to Stuart for closing remarks..

Great. In closing, thanks to all of you for -- 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 Laurie, Mike, Rich or myself.

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 those of you that are planning to attend NAREIT conference in a few weeks from now in San Francisco, we certainly look forward to seeing all of you there.

Thanks, again, everyone and have a great day. Thank you..

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect..