Retail Opportunity Investments (US:ROIC)2019-02-20 19:59Financial Data and Key Metrics Changes - For the full year 2018, total revenues increased to $296 million from $273 million in 2017, and GAAP operating income rose to $103 million from $94 million [16] - For Q4 2018, total revenues were $75 million, up from $73 million in Q4 2017, while GAAP operating income increased to $27 million from $26 million [17] - GAAP net income attributable to common shareholders for 2018 was $42.7 million or $0.38 per diluted share, compared to $38.5 million or $0.35 per diluted share in 2017 [18] - Funds from operations (FFO) for 2018 were $142.1 million, compared to $138.9 million in 2017, with FFO per diluted share remaining at $1.14 [19] - Same center net operating income (NOI) increased by 2.5% for both the full year and Q4 2018 [20] Business Line Data and Key Metrics Changes - The company leased over 1.5 million square feet in 2018, achieving a record high year-end portfolio lease rate of 97.7% [7][31] - Same space cash rent growth on new leases exceeded 20% for the fourth consecutive year [8] - In Q4 2018, the company executed 109 leases totaling 402,000 square feet, achieving a 26.8% increase in same space cash rents [34] Market Data and Key Metrics Changes - The company reported strong demand for space across its portfolio, particularly in core West Coast markets [6] - The economic spread between build and lease space decreased to 2.9% by the end of 2018, representing $6.8 million in additional incremental annual base rent [38] Company Strategy and Development Direction - The company is focusing on disposing of non-core properties to enhance long-term competitive strength, having sold properties for $28 million and $17 million in 2018, with additional properties lined up for sale [9][10] - Densification of shopping centers is a key strategy, with 20 centers identified for potential multi-family components, aiming for a $200 million investment with projected returns in the mid-7% range [12][13] - The company plans to partner with experienced multi-family developers to mitigate development risks [14] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the strong fundamentals of the business and the portfolio's performance, expecting continued strong demand for space in 2019 [46] - The company anticipates FFO for 2019 to be between $1.11 and $1.15 per diluted share, with same-center NOI growth expected between 2% and 3% [27][28] Other Important Information - The company maintained a minimal floating rate debt exposure of 10% and increased its unencumbered portfolio to 95% of total assets [21][23] - The interest coverage ratio was 3.4x, and the net debt to EBITDA ratio improved to 7.1x by year-end [26] Q&A Session Summary Question: Contribution of land for densification projects - Management confirmed that they plan to obtain a construction loan for actual construction costs [57] Question: Same-store NOI growth guidance and permitting issues - Management acknowledged that the permitting process remains cumbersome on the West Coast and that estimates are conservative [58] Question: Funding for acquisitions above $50 million - Management indicated that external growth is anticipated primarily through asset sales, with no equity issuance planned [61] Question: Bad debt expense budgeting - Management budgeted bad debt expense at 1.5% of revenue, which is historically above actual numbers [80] Question: Targeted cap rates for dispositions and acquisitions - Target cap rates for dispositions are 6.5% to 7%, while acquisitions are targeted at about 5.5% [83] Question: Impact of leasing spreads and tenant negotiations - Management noted that leasing spreads accelerated due to year-end pushes from retailers, and they are negotiating new leases with expiring tenants [96]