Retail Opportunity Investments Corp (ROIC) 2015 Q4 法說會逐字稿

Welcome to Retail Opportunity Investments' 2015 fourth-quarter and year-end conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

Please note that certain matters discussed in this call today constitute forward-looking statements within the meaning of the federal securities laws. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company can give no assurance that these expectations will be achieved. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause actual results to differ materially from future results expressed or implied by such forward-looking statements and expectations.

Information regarding such risks and factors is described in the Company's filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K. Participants are encouraged to refer to the Company's filings with the SEC regarding such risks and factors, as well as for more information regarding the Company's financial and operational results. The Company's filings can be found on its website.

Now, I would like to introduce Stuart Tanz, the Company's Chief Executive Officer.

Thank you. Here with me today is Michael Haines, our Chief Financial Officer; and Rich Schoebel, our Chief Operating Officer.

We are pleased to report that the Company posted another very strong year in 2015, notwithstanding it being a year in which there was considerable uncertainty in the overall US and global economies. In contrast to that, within our core markets on the West Coast, and specifically as it relates to the grocery-anchored shopping center sector, the fundamental demographic drivers and supply/demand characteristics remained very favorable, and we continued to capitalize on this to take our business to new heights, achieving both portfolio growth and many operating results well above the goals we set forth at the beginning of the year.

Starting with acquisitions, during 2015, we surpassed our stated target of acquiring $300 million for the year. In fact, 2015 proved to be our most successful year to date, completing a total of $480 million of grocery-anchored acquisitions for the year, broadening our West Coast presence by another 1.3 million square feet. Our success on the acquisition front is driven by three key factors: First is our ongoing ability to source attractive off-market opportunities, capitalizing on relationships that we have worked hard to cultivate over the past 25 years.

Second, by having a strong presence in multiple metropolitan markets up and down the West Coast, we're able to generate a sizable pipeline of opportunities, which enables us to not only be highly-disciplined in selecting the best, most attractive transactions, but it also enables us to grow our presence in a geographically-balanced manner. In fact, during 2015, we acquired properties in four different core markets, including adding grocery-anchored shopping centers to our San Francisco, Los Angeles, Portland, and Seattle portfolios.

The third distinguishing factor is one that has taken shape in 2015, utilizing our currency in the form of OP units to acquire well-established grocery-anchored shopping centers, properties that are situated in highly sought-after irreplaceable locations that are rarely ever traded. In fact, three out of the four shopping centers that we acquired most recently in December involved OP units. Had it not been for the sellers' desire to take ROIC currency, we would not have been able to acquire these exceptional properties, nor on such attractive reasonable terms.

While growing our portfolio is a core component of our business plan, what's equally, if not more important, is the type of grocery-anchored shopping centers that we continue to acquire -- properties that are well-situated, well-established in demographically strong affluent markets, that provide a reliable stable base of cash flow, and offer a number of opportunities to steadily grow the cash flow and enhance value going forward. And tied to that is another very important core component of our business plan: enhancing value through our proactive hands-on approach to managing and leasing our properties.

Just as we set new records for the Company on the acquisition front in 2015, we also achieved record operating results as well. We leased 1.3 million square feet during 2015, which was not only a new record for the Company, it was also upwards of three times the amount of space originally scheduled to expire, which was in part driven by our initiative to recapture below-market space and release it to new, stronger retailers at considerably higher rents. In fact, same-space comparable rents on new leases increased by over 40% for the year, another milestone for the Company.

Additionally, for the second year in a row, we achieved a year-end portfolio lease rate above 97%. Having managed shopping centers for over 25 years, I can tell you that maintaining a large portfolio with many moving parts above 97% is no easy task. The fact that we have done it for two years running speaks not only to the quality of our shopping centers and the strength of our markets, but also to the dedication and skill set of our team.

Turning to our balance sheet, along with growing our portfolio, we continue to maintain our conservative strong financial position. In 2015, we raised $543 million of capital. As a result, our debt ratio remained in a conservative low 30% range, and we ended the year again with a strong interest coverage of 4 times. Additionally, our unencumbered portfolio reached a new record high for the Company, of 96% at year end.

Lastly, in light of our growth and performance in 2015, we are pleased to announce that the Board has increased the Company's dividend by 5.9%, representing the sixth year in a row since we commenced operations as a shopping center REIT in 2009 that we have delivered increased dividends to shareholders.

Now, I will turn the call over to Michael Haines, the Company's Chief Financial Officer. Mike?

Thanks, Stuart.

For the three months ended December 31, 2015, the Company had $51.3 million in total revenues and $16.3 million in GAAP operating income, as compared to $41.7 million in total revenues and $11.7 million in GAAP operating income for the fourth quarter of 2014. In terms of property-level net operating income, on a same-center comparative basis, cash NOI increased by 5.6% for the fourth quarter of 2015 as compared to the fourth quarter last year. For the full year 2015, the Company had $192.7 million in total revenues and $59.3 million in GAAP operating income, as compared to $155.9 million in total revenues and $43.8 million in GAAP operating income in 2014.

With respect to property-level NOI, on a same-center comparative basis, cash NOI for the full year 2015 increased by 4.7% over 2014. While the 4.7% is roughly at the midpoint of the range that we set forth a year ago in our initial guidance for 2015, the number is a bit lower than it would have otherwise been, as a result of our recapturing below-market space initiative. As we recapture leases and replace those with stronger retailers at higher rents, on a cash basis there is a bit of downtime between leases, which is reflected on our same-center cash NOI analysis. As the new tenants take occupancy and start paying rent, we expect to see a positive impact to our same-center cash numbers going forward.

Turning to GAAP net income attributable to common shareholders, for the fourth quarter of 2015, the Company had GAAP net income of $7.5 million, equating to $0.07 per diluted share, as compared to GAAP net income of $4.8 million or $0.05 per diluted share for the fourth quarter of 2014. For the full year 2015, GAAP net income was $25.1 million or $0.25 per diluted share, as compared to GAAP net income of $21.1 million or $0.24 per diluted share for 2014.

In terms of funds from operations, for the fourth quarter of 2015, FFO totaled $25.9 million, as compared to FFO of $20.2 million for the fourth quarter of 2014. On a per-share basis, FFO was $0.25 per diluted share for the fourth quarter of 2015, representing a 19% increase of FFO per diluted share for the fourth quarter 2014. FFO for the full year 2015 was $96 million, as compared to FFO of $74.6 million for 2014. On a per-share basis, FFO increased 12.9% to $0.96 per diluted share for 2015.

Turning to the Company's balance sheet, as Stuart mentioned, we raised $543 million of capital during 2015. Specifically, we issued common shares through our ATM program, as well as through our public offering, at a blended price of $16.70 per share, raising a total of approximately $97 million of equity. Additionally, in September we closed on a new $300 million unsecured term loan. And lastly in December, as Stuart noted, in connections with several acquisitions, we issued operating partnership units based on a value of $17.29 per unit on average, equating to approximately $146 million. Taking all of this into account, at year-end 2015 the Company had a total market cap of approximately $3.991 billion of debt outstanding, equating to a debt to total market cap ratio of just 33%.

With respect to the $991 million of debt outstanding, the vast majority of that is unsecured. In fact, at year end, we had only $63 million of mortgage debt outstanding. And as Stuart indicated, over 96% of our portfolio, in terms of gross leasable area, was unencumbered at year-end. In terms of our credit line, at year-end 2015 we had $136 million outstanding, meaning there was over $360 million available on our line. Additionally, both our credit line and our new term loan have accordion features, providing the Company with another $700 million of incremental capacity.

One additional note regarding our credit line and term loan. Combining the two, at year end, we had total of $436 million of floating-rate debt outstanding. During the first quarter of 2016, we fixed $100 million of that through two swap agreements. Taking that into account, two-thirds of our debt today is now effectively fixed rate.

Looking ahead at 2016, we currently expect FFO to be between $1 even and $1.04 per diluted share for the year. In terms of acquisitions, our guidance assumes that we will acquire approximately $300 million of shopping centers during 2016, at going-in cap rates between 5% and 6% on average. Additionally, with respect to our current portfolio, our FFO guidance was based on maintaining occupancy in the 96% to 97% range. And in terms of same-center NOI, our FFO guidance was based on achieving same-center NOI growth in the 4% to 5% range.

Now I will turn the call over to Rich Schoebel, our COO, to discuss property operations. Rich?

Thanks, Mike.

As Stuart indicated, we posted another very strong year in 2015 on the property operations front. We leased a record amount of space during 2015, and for the second year in a row achieved a portfolio lease rate above 97%. Specifically, we ended the year at 97.2%, including having 33 of our shopping centers at 100% leased, which is a new record for our Company. Breaking the 97.2% number down between anchor and non-anchor space, at year-end 2015, our anchor space was 99% leased, and our shop space was 95% leased.

With respect to the economic spread between occupied space and leased space, which includes newly-signed tenants that will soon take occupancy and commence paying rent, you may recall that at the end of the third quarter, the spread was approximately 3.9%, representing about $6 million in incremental annual base rent on a cash basis. During the fourth quarter, tenants representing approximately $1.8 million of that $6 million took occupancy and started paying rent.

In terms of the current spread between occupied and leased space, as of year end it was approximately 4.2%. This takes into account not only those tenants that started paying rent in the fourth quarter, but also includes all of the new leases we signed during the fourth quarter. With these new leases included, the 4.2% spread represents about $6.5 million in incremental annual base rent on a cash basis as of year end. For perspective, during 2015, each quarter, tenants representing between $1.3 million and $2.1 million of annual incremental cash flow took occupancy, and started paying rent, aggregating roughly $7 million in total for the year, while at the same time, we were also signing new leases, representing about $1.9 million each quarter on average of additional incremental cash rent totaling about $7.5 million for the year. As a result, we are ending each quarter with our economic spread being roughly the same amount, in the $6 million range. Needless to say, we're working hard to narrow that spread. However, we do believe that the fact that the spread has remained relatively level is indicative of just how strong tenant demand continues to be across our portfolio.

Turning to our specific leasing statistics for the past year, during 2015 we executed 348 leases totaling approximately 1.3 million square feet of space, including 159 new leases totaling approximately 600,000 square feet, achieving a very strong 40.3% increase in same-space cash rents. And we renewed 189 leases totaling approximately 700,000 square feet, achieving a solid 9% increase in cash rents.

During the fourth quarter, we executed 72 leases totaling 246,000 square feet, including 35 new leases totaling 124,000 square feet, achieving a 27.3% increase in same-space cash rents. And we renewed 37 leases totaling approximately 122,000 square feet, achieving a 12.9% increase in cash rents. Looking ahead to 2016, about 7% of our portfolio is scheduled to expire, totaling roughly 600,000 square feet, which accounts for 8.6% of our total base rent. The vast majority of this is non-anchor shop space, which we expect to re-lease, achieving same-space double-digit rent growth on average for new and renewed leases combined.

In terms of anchor space, at year-end 2015 we only had five leases scheduled to expire in 2016, representing just 1.2% of our total base rent. We have already renewed one of those anchor leases here in the first quarter ahead of schedule, and we expect one of the other anchors to exercise their renewal option within the next several weeks. As it relates to the other three anchor leases, we are currently in the process of re-leasing those spaces to new stronger retailers, and expect to achieve higher rents.

As we have discussed previously, during 2015 we initiated an aggressive strategy of seeking out every possible opportunity to recapture below-market leases. Our objective was twofold: one was to increase our bottom line cash flow by taking advantage of higher market rents. With that in mind, during 2015, we successfully recaptured approximately 270,000 square feet of space in total, which we estimate will add approximately $2.4 million of incremental annual cash flow.

The second objective with our recapturing initiative was to improve the retailer mix, which we had great success with. Just to give you a quick example, at one of our shopping centers in Northern California, we recaptured an underperforming anchor space that we replaced with a much stronger supermarket operator. Additionally, capitalizing on this new grocer as a draw, we recently signed two new anchor leases at the property. One was a new national retailer that has been a longtime tenant of ours at other shopping centers that will be a great addition to this center; and one lease with an existing anchor tenant at the property, that in light of the two new retailers and the additional draw and appeal they are bringing to the center, this existing anchor elected to sign a new lease.

Looking ahead, in 2016 we intend to continue our recapture initiative and currently have identified between 200,000 and 300,000 square feet of additional potential opportunities, which, if successful, we estimate could add as much as $1.5 million in annual incremental cash flow. In addition to our recapturing below-market space initiatives we are also capitalizing on the unique opportunities within our portfolio to enhance long-term intrinsic value. At our Crossroads Shopping Center, as many of you are aware, during 2015 we entered into an agreement with the developer for one of the outparcels to build an upscale senior living community. The project will break ground later this year. With this project now underway, we are beginning discussions on another outparcel at Crossroads, which is also slated for multi-family and retail.

Looking out long-term, as these outparcels are developed over time, not only will they generate additional stable revenue, but equally important is how adding these new mixed-use developments to our property will enhance the long-term intrinsic value and appeal of Crossroads.

Additionally, at our Fallbrook Shopping Center, during 2015, we redeveloped one of the large outlying pads that, when all is said and done, will generate over $0.5 million in incremental annual cash flow, and we are now adding several other potential redevelopment and outparcel opportunities at Fallbrook -- again, with the ultimate goal over time of not only adding to our bottom line, but also enhancing Fallbrook's long-term intrinsic value and appeal.

Lastly, we currently have approximately 92,000 square feet of additional pad expansion and potential redevelopment opportunities within our portfolio that we are currently pursuing. Most of this should come to fruition in 2016 and 2017. We expect that the total cost will be between $18 million and $20 million, with a projected annual yield in excess of 16% on average.

Now I will turn the call back over to Stuart.

Thanks, Rich.

With 2015 in the books, and with the bar set high, we are now turning our sights to the new year with the goal of raising the bar even further. And we are off to a terrific start. In terms of acquisitions, we have a great transaction currently under contract, where we are buying two terrific grocery-anchored shopping centers in the Santa Barbara market. For those of you not familiar, Santa Barbara is considered the Gold Coast of California, not only for its beauty, but also for its extraordinary affluent demographic profile. From a real-estate point of view, specifically as it relates to shopping centers, it's an extremely difficult market to enter, as it is highly protected and supply-constrained. In our 25 years of acquiring shopping centers on the West Coast, this is the first time that we have been able to enter this market.

One of the key reasons for our success is the sellers sought to take ROIC currency. The two shopping centers we are acquiring fit our profile perfectly. They have been privately owned for years; they both feature supermarkets that have very successful stores at the centers; and there are a number of great opportunities to re-lease and retenant below-market space going forward. Needless to say, we are very excited to be acquiring these shopping centers and entering the Santa Barbara market.

Beyond this transaction, our pipeline of off-market opportunities remains active, and we are confident in our ability to acquire another $300 million of shopping centers in 2016.

On the property operations front, we are pursuing a number of initiatives that Rich outlined, which we believe will have a very positive impact on our business, and will help to drive our internal growth for the next several years. Also, as Mike touched on, our balance sheet continues to be very strong, and is well-positioned to facilitate our ongoing growth objectives. As I noted at the outset, our core markets all continue to perform well, and demand for space remains strong. What's important to understand is that we have operated in the same West Coast markets for the past 25 years, so we know them extremely well, and know all of the signs of any potential change -- which we have been seeing nothing to date -- and given that we focus on mature markets that are supply-constrained, we are in a favorable position.

Additionally, our type of shopping centers that feature daily necessity retailers serving their immediate surrounding communities, and properties like ours that are well-situated in sought-after locations are always in demand. With that in mind, we continue to be very excited and optimistic about the future prospects of our business.

And now we will open up the call for your questions.

(Operator Instructions)

Christy McElroy, Citi.

With regards to the $300 million of acquisitions and guidance, from your expected average share count, the 113 million shares on average, there doesn't appear to be any additional equity issuance price, built into that. What should we expect in terms of funding for acquisitions? Beyond the OP units that you already have built-in for the two assets under contract?

Christy, it's Mike. Our FFO guidance is based on keeping our credit metrics in roughly the same place that they were at year end. That said, because of the amount of units that we issued in the fourth quarter and we'll issue here in the first quarter in connection with the transaction that we currently have under contract, we do have a bit of room in terms of our debt ratio. With that in mind, we are assuming we acquire $300 million for the year, we would expect to raise about $150 million of equity or so during 2016, which could come from a combination of additional units, our ATM, or possibly a public offering.

The only thing I would add to that, Christy, is certainly at the present time we don't need equity, and when I say that, we do have another series of OP transactions that potentially are coming our way,

and the advantage with OP transactions, in my humble opinion, is that it's sticky equity. In terms of having that equity, it's long term, and typically these sellers tend to hold onto it for a long period of time. So at the present time, as Mike has articulated it, we have modeled a bit of equity but we really -- where the Company is situated today and in terms of the pipeline, I don't see us needing much as we move through the year.

Okay, and then in terms of the 4.2% lease-to-commence spread at year-end 2015, within that 4% to 5% same-store NOI growth range, is there any assumption for a narrowing of that spread, that lease-to-commence spread?

I think that as Rich mentioned during the prepared remarks, we're always adding to it, and we are expecting it's going to probably come in a little bit, but there will always be somebody in that pool.

Okay. Thank you.

Paul [Norvin], Canaccord.

If you look at the seven deals you closed over the last few months, is there any -- is there anything you could highlight in terms of opportunities that are above and beyond the normal lease roll, where you think you could drive same-store? Any kind of those properties that would stand out?

Rich articulated probably three different initiatives that we're working on to really drive same-store. As it relates to what we acquired more recently, the answer is yes. Warner Plaza, we are currently looking at some redevelopment there. That is more longer term, and it's not part of those initiatives but certainly is one property that offers some major upside, given the attributes of the real estate.

I think the other one you would want to look at is potentially Sternco, again, given its location. We think there's a lot of opportunity up there and the leases, we were able to get to all those leases in very short term.

So Sternco, as you probably know, is in Bellevue, which is one of the most desirable markets in the country, and certainly on the West Coast. This particular asset, from a mark-to-market perspective, we are getting today in Crossroads about $50 to $60 a square foot. The average rent at Sternco is only $20, $22. There's substantially some very strong upside in that asset, as well as some redevelopment opportunity. I think that's about it in terms of the last six or seven assets we bought, outside of capturing the mark-to-market rents as tenants roll over.

Great. If you look at -- you mentioned 270,000 square feet of space recaptured in 2015 for $2.4 million. I think that was in a net cash flow increase, how should we think about that rolling through, when those leases take effect for the new spaces, how that will impact [2016]?

It's going to be third and fourth quarter, because as we have terminated those leases in the third and fourth quarter of 2015, obviously there's some downtime in terms of construction, and the good news is that those anchor spaces are on target, one to begin paying June 1, and the other shortly thereafter. You're really going to see the momentum start to build, as we move through the year, as you saw in 2015, as well. But we are very excited about a lot of these tenants that we have repositioned are first-in-class, and we are very excited about the impact they are going to bring long term to these shopping centers.

Great and lastly now that the Haggen situation is mostly played out, how are you seeing any shifts in the market? What's your perspective on how that transpired, and when it means for demand for space in your markets?

I think as we've articulated, demand for space has never been stronger. I know we said that as we moved through 2015, and I think you saw that as it relates to our results at year end. As we sit here today, the fundamentals are as strong or stronger.

As it relates to Haggen, we feel like we are in pretty good shape, watching what's going on there. The good news is that we have been approached in one of the locations that is still operating from a grocer that is considered one of the top grocers in the country, to take the space if something were to happen. We are very excited about 2016, and as it relates to some of these moving pieces.

The only other thing I would like to articulate, Paul, in terms of our business, is how strong the grocery anchor segment of retailing is. When I look at the whole universe today as it relates to retail, I have never felt this good sitting here today looking at the changes in the industry, as it relates to the different product types. In the strip center sector, I truly believe that owning grocery-anchored shopping centers is going to prove to be the most defensive risk-adjusted product to own in this business, as retail continues to move through its evolution over the next several years. I feel really good in terms of where we sit today, as to what we own, and where we are. And the team has done a great job.

Great. Thanks.

Vineet Khanna, Capital One Securities.

With the recent capital market volatility, and the upcoming changes to the CMBS regulatory environment, are you seeing any changes in product availability across your markets?

The answer is yes. We are seeing a bit of product -- a bit more acceleration in terms of product coming to the market, but with the volatility in the market, the buyer profile has certainly dropped quite considerably. Today, four months ago, on a good transaction, widely marketed, you would see maybe 15, 20 offers. Today, you are going to see three to five in terms of having buyers that can actually close these transactions.

The volatility is going to, in my view, bring opportunity for this Company. I actually like volatility in the capital markets, because it does bring, again, lots of opportunity. The CMBS market, as we probably know is certainly -- it's not closed down, but it is certainly closing down.

We are finding the market is definitely much thinner in terms of the buyer profile, and it really puts companies like ROIC in a very strong position, to continue with the disciplined approach we have had. And more importantly, to really source strong transactions or very good assets. So yes velocity is picking up. (Multiple speakers)

Okay thanks. And what are you hearing from your tenants as it relates to actual potential impact from increases in minimum wage, change either in profitability or demand?

This is Rich. We're not really hearing any significant pushback as it relates to the rents that we are able to achieve. I think in the markets where they are raising the minimum wage, it's affecting all of the retailers. Their prices are probably going up slightly to account for that, but it's had no impact on the rent that they are willing to pay.

Okay, sure. And just lastly on Sports Authority I know you don't have a whole lot of exposure, but could you provide some numbers around your exposure, and just your thoughts on what's going on there? Is it liquidation, restructuring, and your plans for any of the Sports Authority space that you have.

We only have one Sports Authority in the portfolio, it's up in Seattle at our Crossroads property. Just over a year ago they completely redid their store at Crossroads, investing a considerable amount of capital. Today, they are performing well. They are current on their rent. Depending on where they go with their process, we would expect that ultimately they would accept this lease, and if we got it back the rent is below market, so at some level we would actually like to have it back.

That would be a good thing.

Great. Thanks for the time.

Todd Thomas, KeyBanc Capital Markets.

First question, I realize the spread between leased and occupied spaces is expected to stay elevated at between 3% and 4% or so, so it's an ongoing process but if we think about the incremental ABR, the $6.5 million, how much capital do you expect to spend, to bring that base rent online?

I don't have a specific number here in front of us. We could probably follow-up with you after the call, to give you some more detail on that. It's all over the board. One of the initiatives we have up in Northern California, the tenant's essentially taking the space as is, and they're also commencing rent ahead of them starting construction. There's going to be very little capital expended in that leasing commission, and that is about it. And it also depends on the user. There's no real rule of thumb that you can apply to this.

And the good news is part of this has already been paid for, too, because it's tenants that took possession, have been under construction, and we have paid for that already in 2015, and we're just waiting for them to open at this point.

Okay, and then this $300 million acquisition assumption that is embedded in guidance, is that net of dispositions? I think previously you have talked about selling a couple of non-core or non-strategic assets, I think, particularly in Sacramento. Just curious if you have anything embedded in guidance for dispositions, and maybe you could just provide an update on any disposition plans?

Yes, we are certainly contemplating and moving ahead on potentially selling a couple of properties. We started that process late last year. Nothing of real significance, but around $50 million. As we have built our portfolio over the past six years, we have been highly selective and disciplined on the type of shopping centers of course that we have acquired. But because of that discipline, there is only a handful of properties today, and I think we have articulated this in the past that we would sell, which is primarily the Sacramento region. So it is in that number.

Okay. And then Stuart, despite the strong results for the year, and your comments around demand being fairly strong, you mentioned that the year was characterized by economic and some macro uncertainty at the beginning of your prepared remarks. I was wondering are you seeing any signs of weakness or caution in your portfolio around the retail environment at all, whether small shop tenants, local tenants, or are there any areas of pushback or softness to speak to?

No. Our core markets all continued to perform very well. Again, despite the recent economic uncertainty, our markets do remain sound, and demand again, for space, remains very strong. Obviously, we are watching our markets very carefully. But again, what's important to understand is that we have operated on these markets for the past 25 years, at which time we have seen a lot of economic cycles, multiple times.

So as it relates today, we have seen nothing at this point in any of our -- the metropolitan markets on the West Coast, to suggest that any change is coming. As it specifically relates to the daily necessity shopping center sector, our metropolitan markets are really protected, and have very limited new supply. We really remain in what I would call a very favorable position.

Okay. Great. Thank you.

Paul Adornato, BMO Capital Markets.

I was wondering if you could comment, given the importance of OP units, just given all of the stock market volatility and where the stock is trading today, what about the appeal of OP units both for the seller and for you to use as currency?

I think it's a great way of issuing equity into the balance sheet personally, and I think as I articulated, certainly these transactions tend to be some of the best real estate on the West Coast. Again, these type of assets really don't trade.

But in terms of OP units, we have not issued any OP units less than the last deal we have done, and as I continue to meet with sellers that in some cases have been years in the making in terms of buying these assets, the most important aspect is to show them value. That the stock is certainly worth a lot more than where it is trading. To me, that is an easy point to sell from our perspective.

So I think you are going to continue to see these sellers come to us to trade their currency, and again, I think it's just a great way of buying assets, because you are ending up with the highest quality in terms of these markets, in terms of grocery-anchored centers, and you are issuing equity that typically will sit long term. I don't know, Mike, if you want to add?

Just that it's also a very cost-effective way to issue equity as well.

And it's an extremely cost-effective way. In fact, if you look at the cost of raising that equity at the last deal that we have done, we really raised that equity at the highest price our stock -- or close to the highest price our stock has ever traded.

Okay. Great. And Stuart, I guess maybe a related question is, given the arbitrage between private market and stock market valuations, in the past, you've commented on a potential sale of the Company at the right time. I was wondering if you could give us an update on your thoughts, both in terms of pricing, as well as additional wood to chop in terms of the NOI growth that you have teed up.

Sure. Obviously, we emphasize whenever we are asked this question, and we do get asked the question periodically, that we always operate with an open mind in terms of looking at all avenues when it comes to maximizing shareholder value. That is number one for the team here at the Company. While we're open to all things, we continue to be very excited about the future prospects of our business.

Again, as you have heard, the fundamentals across our core markets continues to be very strong. Job growth is expected to continue to outpace the nation. There's virtually no new supply, and tenant demand, of course, is very strong with a lot of room to continue to increasing rents. So there is a lot of embedded cash flow and growth in our portfolio.

So as we continue to see a lot of great acquisition opportunities, and again we're open to all things, but right now the way we see the Company, we are very excited about these opportunities, and on the horizon, that we can continue to significantly enhance value. Given all of that, again, our mind is always open. We are here to create value for shareholders, but in my view, this isn't the right time yet.

Okay. Great. Thank you for that.

Collin Mings, Raymond James.

First question, Mike, just what was the pricing on the swap that you put in place?

We did two separate swap transactions, and on a blended basis, the all-in fixed rate was 1.96%.

Okay. Thanks, that is helpful. Stuart, just talking a little bit more about the strength that you have already referenced as far as your markets overall, I think going back six, nine months ago, I know that you really hit home on how the strengthening you were seeing in Portland. Can you maybe just update us, if that's still a bright spot on the portfolio, or if there has been any other markets where you've seen incrementally more strength here over last three to six months?

Portland remains in my view to be one of the great markets on the West Coast right now. The index that came out yesterday had Portland at the top in terms of increase in housing prices year over year. Portland led the nation. I think that certainly gives you an indication of how strong Portland has got, and I think we articulated, the team articulated that when we did our Investor Day in Portland about a month and a half, two months ago.

Portland continues to be again, a really, really strong market. And Rich, I don't know if you want to add anything to that, but it really continues to outshine a lot of the other markets we operate in. However, the other markets are still doing as good. But Portland is really doing considerably well.

And remember Portland was the last market on the West Coast to come out of the recession. Or out of the credit crisis, along with Southern California. So Portland really looks strong right now.

While we'd like to highlight how well Portland is doing, I think Seattle is still very strong, the Bay Area is doing very well for us, the LA Orange County is doing extremely well for us. So we are very pleased in terms of our markets.

Okay. And then just on the guidance, I know you referenced cap rates in the range of 5% to 6% percent as far as acquisitions that you would be looking at. Just maybe any sort of differential between your different markets that you're seeing, either in cap rates or just on the margin? Any sort of feedback from potential sellers on if you're getting the sense that cap rates might be moving lower or higher in any of your specific markets?

Sure, well again, the West Coast seems to continue to be the most sought-after markets in the country. The metropolitan markets on the West Coast. In terms of cap rates, they continue to in some cases, even trend lower. For the product, of course, that we own and operate.

If you were to bifurcate the markets, what you would find is that the Pacific Northwest really doesn't trade much, given that those markets are typically much smaller than Northern and Southern California. Those markets continue to be very strong, in terms of cap rate compression. That is primarily driven by very little product that is on the market.

Northern and Southern California continue to again outshine the country in terms of cap rates and the compression of cap rates. We continue to see strong grocery-anchored centers in both Northern California, and when I say Northern California I'm talking the Bay Area primarily, and Orange County, San Diego and LA trade in the sub-5% cap rate, and we haven't seen any change in the market certainly from last quarter or the quarter before.

All right. Thanks for that extra color.

Jay Carlington, Green Street Advisors.

Maybe just to follow-up on that last question. We've heard that the bidding tents for lower-quality assets have been a bit thinner, and I'm curious if you could comment on maybe whether you observed any change in the cap rate spread between high-quality stuff that you've been bidding on, and other low-quality properties out there?

Yes, as you move into the tertiary and secondary markets, what you have found is that cap rates have begun to move up, and when I say move up, not much is trading right now, so it's very hard to put a number on the arbitrage or the difference in the spread in terms of where those cap rates have gone, because again, nothing is really trading.

However, I would tell you today that real estate that is more tertiary or secondary in nature is probably moved up about 25 to 35 basis points over the last two to three months. Certainly since the volatility began in the market, and the CMBS market has begun to freeze up.

Okay. Helpful. Maybe just going back to the Sternco acquisition, you mentioned rents at $20, and you'd like to push them to $50 to $60. How do the tenants manage through that type of OCR increase, just given modest consumer demand? Are the current tenants profitable enough to justify that OCR increase, or do you just need better tenants?

I think it's a combination. This is Rich. The tenants have actually been enjoying a very low rent for a very long time. So in our opinion, (multiple speakers) The seller profile here is local families, so they were more focused on keeping the tenants in place than driving the rents.

That is seen in a lot of the recent acquisitions, where they were more concerned about occupancy than driving the rents. We believe there still a lot of room in the rents that the tenants can handle that increase. To your point, some tenants will not make it, and we will replace them with a higher-quality tenant that has the ability to pay those rents.

It's a great property to remerchandise in terms of tenant base. We really think, given the connection, it's only a mile away from Crossroads, so there is a lot of what I would call crossover in terms of working both assets in the market. We believe that, and when you look at the roll over on this asset, there's a lot rolling over in the next three years. It's really being able to capture that sub market and being able to utilize our team on the ground to really take advantage of the demand in Bellevue, to really remerchandise the tenant base. I really think you're going to see some turnover in Sternco, and at the end of the day, if they don't pay their rents --

Got it. Maybe you just answered, just as a final question, maybe you just answered this for me. But when you look at that 28% call it small-shop releasing spread on new leases, are there particular markets that are benefiting that number more than others, because we have heard anecdotally that rents in California are already relatively high, so getting meaningful growth there would be challenging. Is there a difference, or is it across-the-board? Is the Northwest driving a lot of that, or how do you think about that?

I think it's across-the-board. Obviously, every deal is a different deal, but we are seeing those types of increases across-the-board.

Of course Jay, as you know, it all starts with the way you buy. If you buy older assets, when I say older assets, if you buy assets that are typically are either owned by mom and pops or other owners that really not as -- don't manage the asset as effective as REITs do, I do think there is an inherited advantage in terms of going in, in terms of capturing the fundamentals of our markets. That is what we have done for the last several years, and will continue to do.

Okay, I appreciate it. Thanks.

Craig Schmidt, Bank of America.

I was wondering what was driving the slightly higher tenant improvement costs, particularly in the third and fourth quarter, for non-anchored new leases?

I don't think there's any particular trend there that you would see. Again, it's really just a function of the type of deals we're doing. Some of these repositionings take a bit more TI to reconfigure the space. There are some restaurants that cost a bit more, but there is not a trend where we see it's costing us more in TI, or other concessions.

So there is no expectation as you kind of do this retenanting below-market spaces to maybe better spaces, you might need to spend more tenant improvement, that's not the case?

Correct.

Okay, when you incur a cost trying to get a below-market tenant out of the space, what line item does that come under, is that property expense?

You mean in a situation where we might pay termination fee of some sort or are you referring to TI dollars?

I think what he's saying is that are we -- typically those are being done for anchor tenants, right? That's where our initiatives have been focused. For smaller tenants, we really -- we don't really pay anyone.

Where in the financials he would see that number?

We are not incurring it.

Okay, so very little of those expenses that you're coming across the line?

Yes.

Okay. I appreciate it.

Michael Gorman, Cowen.

Stuart, if I could just go back to some of your earlier comments at some capital markets, volatilities, maybe thinning out some of the bidding packs, even though it's not impacting pricing yet. I'm curious, are we trending towards a spot where it might be attractive for you to start participating in marketed deals as well as your off-market initiatives, or are we still pretty far apart from that?

We look at everything. Both marketed and -- we don't tend to chase marketing deals, but we do look at everything. So it's hard to really answer your question, in terms of whether we are going to end up buying -- everything will be off market or a combination of both. It's a tough question to answer because the pipeline right now is really both for us.

We have the advantage of a series of off-market transactions and widely marketed, but we will continue to look at both. It's about the spread historically has really been, Mike, about 85% off market, 15% on market. That spread or that difference may change a bit. I just can't tell you how it will change at this point this early in the year.

Okay. Fair enough. Mike, just a quick question on guidance. I apologize if I missed it, but what are your assumptions as you think about the debt side of the balance sheet over the course of this year, in terms of funding the deal flow? Just what the unsecured markets look like, and what kind of rate you are thinking about?

It's an interesting market to keep our eyes on. We opted to do the swaps because of the volatility in the bond market. Very, very choppy, as you know. We've got some floating rate debt, but we've got plenty of capacity in the line as well. When we blend that with the equity side of the equation, we are growing the Company in 2016.

We're looking at all of our options, we're keeping an eye on the bond market. If we were to try to do a 10-year bond deal today, you're going to be pricing probably in the high 4%, which it's not the right time. The good news is our balance sheet is in a good position, and we have the benefit of being able to be patient and wait to see what happens in the market.

Okay, great, and just last one for me. Are there any options or do you have any options with the debt that would be assumed with the $63 million in acquisitions, to pay that off?

No, we are actually -- you're talking about the Santa Barbara ones coming up shortly. We are assuming those loans as part of the transaction, it has to do with tax protection stuff for the seller.

Okay. Got it. Thank you.

The equity is all OP units, and the debt we are assuming.

Thanks.

Thank you and this concludes our Q&A session for today. I would now like to turn the call back over to Stuart Tanz for closing remarks.

Great. In closing, I would like to thank all of you for joining us today. If you have any additional questions, please contact Mike, Rich or me directly. Also, you can find additional information in the Company's quarterly supplemental package, which is posted on our website. Thanks again, and have a great day, everyone.

Ladies and gentlemen, this concludes our conference for today. Thank you for participating in today's conference. Everyone, have a great day.