Q4 2023 Retail Opportunity Investments Corp Earnings Call

Participants

Lauren Silveira; CAO; Retail Opportunity Investments Corp.

Stuart Tanz; CEO; Retail Opportunity Investments Corp.

Michael Haines; CFO; Retail Opportunity Investments Corp.

Rich Schoebel; COO; Retail Opportunity Investments Corp.

Lizzy Doykan; Analyst; Bank of America Corp.

Dori Kesten; Analyst; Wells Fargo Securities LLC

Juan Sanabria; Analyst; BMO Capital Markets Corp.

Todd Thomas; Analyst; KeyBank Capital Markets

Paulina Rojas; Analyst; Green Street Advisors Inc.

Michael Mueller; Analyst; JPMorgan Chase & Co.

Wesley Golladay; Analyst; Robert W. Baird & Co. Inc.

Craig Mailman; Analyst; Citigroup Inc.

Linda Tsai; Analyst; Jefferies Financial Group Inc.

Presentation

Operator

Welcome to Retail Opportunity Investments' 2023 fourth quarter and year end conference call. Participants are currently in a listen-only mode following the company's prepared remarks, the call will be opened up for questions. Now I'd like to introduce Lauren Silveira, the company's Chief Accounting Officer. Please begin.

Lauren Silveira

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. Participant 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?

Stuart Tanz

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 hasn't been a year of extraordinary challenges, 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 remain 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 achieved achieving a new record for the company in terms of overall leasing activity. Additionally, we again achieved re-leasing rent growth for a record 11th consecutive year, including 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 anchor tenants, including long-standing grocer tenants by doing so, we enhance the long-term strength and stability of our OIC'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 is to 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 markets that essentially idle through much of the year. While it was certainly not a, we continue 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 for 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 properties located in the Los Angeles market in a densely populated, mature, diverse community centers, anchored by a well-established supermarket, 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 sixes 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, 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 2020 for Mike Stewart.

Michael Haines

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 for $141 million, equating to $1.6 per share and 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 our early $100 million of floating rate debt.
Also in the midst of the Fed's rate tightening, we saw $150 million in floating rate debt to fixed rate assets 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 a regional banking turmoil, we proactively extended the maturity of our credit line, sending a maturity date of 2027 with the ability to extend it for an additional year to 2028. We also have the ability to double the capacity of the credit line 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 to note that we just have two mortgages that together only total about $60 million booking had come April 1, one of the two loans mature, we were down to only one mortgage remaining in addition to lowering our floating rate 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 6.2 times for the fourth quarter, which is the lowest of our net debt ratio has been dating back to 2014.
Looking ahead, our debt maturity schedule is well laddered over the next five years with approximately $300 million maturing each year on average, having now reestablished our OC 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 as 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 core portfolio NOI will continue to grow, driven by a combination of contractual rent increases together with expected re-leasing rent growth.
Additionally, as Stuart touched on, we're 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, fund acquisitions, our guidance assumes that we will issue equity in separately acquisition activity as we move through the year with the goal of keeping our financial ratios intact as we grow our portfolio monitoring. Our expected external internal growth will be interest costs based on the bonds that we issued in 2023. Together well 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 would 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 $1.3 to $1.9 per diluted share.
Now I'll turn the call over to Rich Schoebel, our COO. Rich?

Rich Schoebel

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, has a diverse mix of long-standing tenants, together with new concepts and businesses seeking to expand to the West Coast, continued divide for space these diverse businesses are predominantly destination type tenants in the wellness, self-care, restaurant, 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 involve renewing valued anchor tenants, including long-standing grocers for the 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 path spaces, spaces that are well suited for the type of businesses that are leading to 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 have 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 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 and 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 seven anchor leases scheduled to mature during the year totaling 281,000 square feet. Three of the seven have already renewed their lease, and we currently expect another to renew as well as to the remaining two anchor leases scheduled to mature on is with Rite Aid, which is one of the 12 stores that they intend to keep operate we're currently in the process of amending their lease to extend it for another five years.
With respect to the other anchor lease, we are in the process of releasing this space and are currently in discussion with several national destination entertainment businesses 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 these tenants, we currently expect that 21 of the 22 anchors will renew for the bulk of which we expect will renew early as we move through 2024 through remaining anchor leases, one of the 12 leases with Rite 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 this 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.

Stuart Tanz

Thanks, Rich. And our ability to post another strong year of leasing underscores the resiliency and competitive strength of our grocery-anchored portfolio and the intrinsic value of our operating platform, singular West Coast focus and Eco 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 wrench rich Rich mentioned. While we are already close to having new tenants lined up for the spaces at significantly higher rents. On average, there will be downtime as we get 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 that 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 EUR100 million of off-market transactions in our pipeline, all of which is truly irreplaceable real estate in the heart of a densely populated sought after communities. While the transactions are not yet finalized, we currently expect that the potential pricing on a blended 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?

Question and Answer Session

Operator

Thank you. To ask a question, you'll need to press star one one on your telephone. To withdraw your question, please press star one one again, please wait for your name to be announced. Please standby while we compile the Q&A roster. One moment for our first question. Our first question comes from the line of Jeffrey Spector with Bank of America Securities. Your line is now open.

Lizzy Doykan

Good morning. This is Lizzy, on for Jeff, actually. Lizzy Doykan. So I guess just starting with going back to the rationale around issuing equity in the quarter and then putting out and guidance for the year. Could we just maybe get some more color around expectations, it cost and kind of why why that range is a bit wider and, you know, presumably or and it looks like that would be dilutive kind of depending on your view of NAV, but just wanted to get some more color around that he plans to issue equity.

Stuart Tanz

Sure. Well, look, in terms of the fourth quarter, we issued this buffer stock specifically to finance the acquisition 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.

Lizzy Doykan

Okay, great. And I guess just to follow up, are you seeing cap rates for the centers you're interested in a trend today? We've been more of a compression there since maybe we last touched on this in October, November?

Stuart Tanz

Sure. Look, there's very little activity in the market. So it's very tough to pin a cap rates in this market because they could, 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 off market opportunities, that cap rate again in the mid sixes or even a bit higher.

Lizzy Doykan

Great. And then separately, just wanted to touch on your and same same-store NOI outlook? And can we clarify why exacts and step-ups are to that 1% to 2% range is most of the drag really from the downtime associated with backfilling and spaces that were lost. And if there's any more color you can add on the building blocks to that range, which implies that and a deceleration from your last year's growth, that would be great.

Stuart Tanz

You're right. It's purely a function of the three 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 on 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.

Lizzy Doykan

Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Dori Kesten with Wells Fargo Securities. Your line is now open.

Dori Kesten

Take it back to the urban acquisition guide. I guess I understand you have $100 million in the pipeline today. What gives you confidence in the $100 million to $300 million, are you rather close to having an alliance?

Stuart Tanz

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 on So we're feeling pretty good about really going out and finding very high-quality assets at compelling prices. And so as we sit here today, look, we you know, 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.

Dori Kesten

Okay. I believe on the Q3 call you were talking about some potential acquisitions funded with OP units these days. What you're referring to are those other ones?

Stuart Tanz

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, will be at a much or a higher price than where our stock is currently trading.

Dori Kesten

Okay. And that last question, in your interest expense guide for the year, what assumptions are embedded our plan for refinancing swaps and paying down debt passed?

Michael Haines

Well, the guidance is going to take into account the refinancing the 24 bonds later in the year, and 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 Trilogy and path flow, Mike, our debt free cash flow of the year, whether we use it to pay down debt or fund acquisitions is about $20 million to $30 million, depending on actual CapEx costs and interest costs through the year.

Operator

Thank you. Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Your line is now open by.

Juan Sanabria

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 all the real stuff is in the base. Is that as a starting point for the year or if you expect to see a seasonal dip in the first quarter. But if you could just give us a sense of the trends through the year end, how we should expect the year to end that would be great from a build occupancy perspective, are we still making very good progress on getting the rents commenced?

Rich Schoebel

And but as you know, as we're commencing rent for adding new unconventional rents to the bucket and with the raise and the other anchor space we spoke of, it will take some time to refit those spaces a bar, we expect that we will continue to bring on rent consistent with our historic averages.

Juan Sanabria

Okay. But it sounds like the one anchor, the Rite Aid, the couple of closures are in the phase to start the year. I'm thinking about where you ended last year and then you have one more anchor closure and is that kind of all the meaningful declines or negative impacts we should be factoring in for the for the year, absent some kind of random puts and takes here and there?

Stuart Tanz

Yes.

Juan Sanabria

Okay. Great. And then just curious on 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 monetizations of that value creation?

Stuart Tanz

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, get finally get full entitlements in Nevada. And so both the other two projects 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, some of the multifamily market right now is still in what I would call in a sort of a stalled stage in terms of transacting on. And my personal opinion is that as we move through the year, if we can get some cap rate compression in the multi-family business, then the there's a good chance that we'll be able to transact on these properties.

Juan Sanabria

Thank you.

Operator

Our next question comes from the line of Todd Thomas with KeyBank Capital Markets. Your line is now open.

Todd Thomas

A couple of questions. First, the the additional anchor vacancy that you mentioned, I'm just curious how much occupancy and that 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 that trajectory, 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 and re-leasing.

Rich Schoebel

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 on the mark to market on that one anchor spaces, 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 right rates on a blended basis, it's going to be a very nice increase.

Todd Thomas

Well. Okay. Does it or is there any additional impact from Rite Aids at all assumed in the guidance. It didn't sound like it, but just curious, you know, as things are still ongoing over there. I'm just curious if you have any additional assumptions at all embedded in guidance either around the space being recaptured or potential lease negotiations?

Stuart Tanz

Well, we're really finished when I say finished, we are a hub 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 by 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.

Todd Thomas

Okay. And then just shifting over to the acquisitions and the guidance there. And I guess as it pertains to the funding and the equity issuance that's assumed alongside the investments, the range that you've provided, you know, 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?

Stuart Tanz

Sure. Well, look, we are very sensitive to price. But again, we feel pretty good looking at the pipeline in terms of possible accretion in terms of if we decide to issue equity will be, um, you know, I think will again will be a function of the pricing of where we're buying these assets and the price of our stock. But some certainly, you know, we'll monitor things as we move along both in terms of timing and in terms of in terms of issuing equity if we decide to go that route as it relates to issuing that equity.

Todd Thomas

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 some the capital raising activity alongside that on a leverage-neutral basis just with where the company's blended cost of capital is today and equity debt also in the sort of mid to high 6% range. I'm just I'm just wondering how much accretion that you're anticipating or what's embedded in the guidance?

Michael Haines

It sounds like. So looking at the low and the high end on the low end, if we'd acquire about $100 million we're expecting to that. That's had about a penny $0.01. And on the high end, we about three. So at the midpoint, if you do $200 million. That's going to be $0.02. That's just kind of ballparking of the use of the equity and debt to buy those acquisitions.

Todd Thomas

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% and debt financing really may be 30% or 35%, assuming you reinvest your free cash flow into acquisitions. So if you do not acquire assets, the interest expense would be would be below the guidance range.

Michael Haines

Right. Presumably yes, that's correct. And then the also the refinancing activity you have to do, and that's going to be depending on where the yield curve as we move through the year. Obviously, we had the 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.

Todd Thomas

Okay. But the debt portion of the acquisition activity that you'll be funding that that you're assuming is being funded on the line?

Stuart Tanz

Correct.

Todd Thomas

Okay. Got it.

Stuart Tanz

Thank you.

Operator

And next question comes from the line of Paulina Rojas with Green Street.

Paulina Rojas

Last time we spoke, I think we talked about one of the Rite Aid and leases being rejected and the other two being in a sale process. Some I'm curious, why weren't those leases it acquired the they had mean to and mark to market, and they wonder if it's because of the of the term if they have term left, but are those two locations?

Rich Schoebel

You're right, we're offered for first for sale by Rite Aid. But the feedback we received from Rite Aid was that they were not willing to pay the dead rent. Um, you know that the administrative rent that's required to be paid on those locations. So if people didn't step up immediately and agree to pay that debt rent, even while they were doing due diligence, they were just moving forward with with rejecting those leases. So that was sort of their strategy out of the gate and those two locations, some no one jumped fast enough. However, and as we touched on, there is a good mark-to-market on those leases, and we have had very strong interest in the spaces.

Paulina Rojas

Thank you. And my other question is in the Kroger Albertsons merger is the risk right? And it's potentially weighing on your stock as well. So is there anything you can do today proactively to prepare for the consequences of this merger and that it could have not immediately. But in the near term, 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.

Stuart Tanz

Look, I mean, we've been analyzing this transaction and traffic now for almost two visitors. But on look, we continue to communicate, you know, 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 C. and S. as well on. 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 you know, we do think the outcome of this will not have much impact in terms of ROIC, how do you assess the appetite for other grocers for the space?
Very strong, extremely strong. We've had a series of LOIs already come in for a number real number, but some locations on the assumption that C. and S. 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 JP Morgan. Your line is now open.

Michael Mueller

Maybe one thing, and I apologize if this was addressed. I missed that first part of the call, but what's what's the biggest thing that you would say that has changed as it relates to acquisitions where you're coming off of 2023.

Stuart Tanz

But now you have pretty good expectations for 2024 when you when you're talking to sellers, I mean, what are they point to it gives you better confidence on I think what's changed out there, Mike, is that a lot of sellers were on the sidelines in '23 on. But as you know, 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, you know what I would call very high quality assets at compelling prices. So it's really the market is beginning to change in terms of some of these sellers coming to 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 on, you know, we are certainly in some very productive conversations in terms of meeting the goals that we've set out to shareholders.

Rich Schoebel

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 when in 2024 do you get to the point where build occupancy in flex and starts to kind of move back up. It's going to be closer to the end of the year as we work through these leases and then also get commenced on all these leases that are currently in the pipe.

Michael Mueller

Okay. Okay. Thank you.

Operator

Our next question comes from the line of Wesley Golladay with Baird. Your line is now open.

Wesley Golladay

Sort of missed 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 we signed leases for that space? And when do you think the tenants will open for that I'm Richard.

Rich Schoebel

It's a very little bit of our ABR. I don't have the exact percentage here in front of me. And, you know, really where we're at now is we're trying to pick the best tenant for the space on how we have with a lot of demand from a lot of different tenants. And, you know, one of the factors we're taking into account is obviously the cost of getting them in at the time getting the rent commenced on. So we we want to make sure we pick the right tenant and um, you know, look, we see a lot of demand for the space and expect to have a very nice spread in the rents.

Stuart Tanz

Yeah, the mark to market on that particular space is going to be quite good depending on what we end up doing. But the tenants are currently paying a modified triple net lease at about $6 a square foot.

Wesley Golladay

Okay. Fantastic. You mentioned there'd be an entertainment concept, should we expect that uptick in tenant improvements there?

Rich Schoebel

Yes. And that's what we're taking into account as we speak. And so yes, so some of these under Tim 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 appear.

Wesley Golladay

Fair point. And Lastly, just on the acquisitions, you know, the stock's sitting at $13 a share today, a little north of a seven cap depending on whose numbers you use and how sensitive are you at these levels could pursue this external growth on?

Stuart Tanz

We are more sensitive. I mean, when I say that obviously, we realize what where our cost of capital is and we want to be smart in terms of buying and concurrently with buying assets, raising equity in terms of our balance sheet. So we're watching obviously the price on, you know, 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 need and our FFO yield on these assets. So we'll see how things progress as we move through the year.

Rich Schoebel

It isn't on a quality perspective, where would you rank these assets you could acquire within the portfolio. And these will be some of the highest quality assets that we have acquired in the last 10 years, 13 years.

Wesley Golladay

Got it. Thank you.

Operator

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

Craig Mailman

Couple of quick ones, then a big picture one. But just on I noticed the your amortization of below 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 '24's guidance?

Craig Mailman

For '24's guidance. The $14 million. I'm just trying to see -- (multiple speakers)

Michael Haines

Yeah, that's going to occur in the first quarter. That's related to the lease that Rich was referring to that when you do the original Phase one 41 purchase price allocation. They assume that option periods are going to be exercised. And in this case, they weren't so of that below-market lease liability is going to be one-time additive event in Q1.

Craig Mailman

Okay. But how much of that $14 million is going to be in 1Q?

Michael Haines

I think I don't have the exact number for me. I want to say it's around $4 million. So there's nothing really to write in that that's solely the anchor being that it is just that the rest of it's all the other leases just regularly amortizing down over time.

Craig Mailman

Perfect. And then on bad debt, and is there anything specific related to Rite Aid or is that just your general kind of placeholder for this point in the year on the initial outlook is just a general placeholder, the yes, the bad debt.

Michael Haines

Yeah, the bad debt, in '24, the $3 million to $5 million range is our standard and if there's anything relative, it will be well within our budget.

Craig Mailman

Okay. And then circle back to acquisitions, more more big picture here, Stuart, I think you just said you know if you can acquire some of these assets would be the highest quality you've bought in the last 10 to 13 years and you guys are kind of targeting high sixes and I'm just trying to get a sense. You know, I have you guys trading in the low sevens, depending on where you guys think NAV is today, I mean, and are these private market trades just really indicative of where they are the market should be.
And, you know, 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, changed 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 it the gate well, some undervalued as an understatement in my humble opinion in terms of where that stock is trading.

Stuart Tanz

But yes, I mean, look, we will, um, you know, this is not this is not an A market indication in terms of where the market is or the market's going. These are transactions that are done off principal to principal. And you know, there's again, there's typically a reason why we're getting better pricing on it, whether it's timing or other moving pieces. That's really what's driving of the transactions from our perspective.
So again, this is not sort of a marker. This isn't a mark in the market. It's just, you know, 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, you know, have 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, you know, 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 these assets is relative to your legacy portfolio on these, what we're looking at is probably going to deliver, you know, it probably a 3% internal growth may be a bit better. Was it just depends on on how we manage and how we lease. But 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 bought and not to belabor the point that has been addressed.

Craig Mailman

But just as you guys think about the appropriate investment spread relative to your cost of capital or at least what the you know, the minimum accretion you need is kind of where are you thinking these days? Is it 50 basis points? Is 100 kind of where's 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.

Craig Mailman

Great. Thank you.

Operator

Thank you. And our final question comes from the line of Linda Tsai with Jefferies. Your line is now open.

Linda Tsai

In 2023, bad debt was $3.4 million, and you have $3 million to $5 million bad debt expectation for '24. Can you just remind us how this compares history?

Stuart Tanz

I think that's I would say COVID out of that in terms of security behind it.

Michael Haines

I think we've got probably initially a little bit conservative or normal. Bad debt budget is 1.5% of total revenue. So we put some goalposts around that for guidance on 2023 might have been a little bit higher than normal, but a $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 occupancies were down a little bit by Rite Aid, but presumably still pretty high on an absolute basis. And just generally like how are you feeling about the overall retailer environment as it relates to retailer demand versus store closures?

Rich Schoebel

Yes. Retail demand continues to be very strong as we've touched on it will be times during the call. You know, when we do get a space back, there's typically multiple otherwise, I'll pull off recon spaces and we see of the tenant base on the West Coast buying for the product that we have a grocery-anchored product, dumb still have 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 seven. Grocery was up three. Restaurants were up six. I mean these are very, very strong numbers in terms of what we're seeing so far in 24. So we think that certainly the grocery-anchored segment of retail is going to hold up quite well.

Linda Tsai

Great. Thank you.

Operator

Thank you. 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 RICI. If you have any additional questions, please contact Lauren, and 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 participation. You may now disconnect. Everyone, have a wonderful day.