Retail Opportunity Investments Corp (ROIC) 2016 Q3 法說會逐字稿

Welcome to Retail Opportunity Investments 2016 third-quarter conference call. Participants are currently in a listen-only mode. Following the Company's prepared comments, the call will be opened up for questions.

Please note that certain matters discussed in this call today constitute forward-looking statements within the meaning of 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 risk 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 risk 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.

Good morning, everyone. 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, very solid quarter. We continue to steadily grow and enhance our portfolio making the most of the ongoing strong fundamentals across our core West Coast markets.

Starting with our portfolio growth, year to date we have added eight terrific grocery anchored shopping centers to our portfolio for a total investment of $332 million including two properties that we acquired during the third quarter and another two that we just closed on here in the fourth quarter.

We continue to source these acquisitions through a variety of off market sources and long-standing relationships. Importantly, through our sources and relationships, we continue to gain unique access to acquire exceptional shopping centers that are situated in irreplaceable locations within some of the most dynamic, densely populated, protected markets on the West Coast.

A great example of this would be our recent acquisition in Long Beach, California. We have known the seller for years. In fact, the first shopping center that we acquired nearly seven years ago in 2009 was from this seller. Our long-standing relationship was instrumental in acquiring this new shopping center which is located in the heart of one of the oldest, most established residential communities in Long Beach. The target area for our shopping center has a population base of over 680,000 people. Additionally, our property features a new Trader Joe's that just recently opened at the center. In fact, it was one of the most successful store openings in Trader Joe's history.

Another great example is the terrific grocery anchored shopping center that we acquired in Portland. We landed the acquisition through an off-market source. The property had been privately held, family-owned for years. Given our team's success in presence in the Portland market dating back 25 years to our Pan Pacific days, the family knew our reputation well and was comfortable moving forward with us on an off-market basis.

Like the property we acquired in Long Beach, this shopping center is located in the heart of one of Portland's oldest, most established residential communities and similar to Long Beach, the center draws from a very strong demographic profile with a trade area population base of over 400,000 people.

This Portland shopping center is also anchored by a very strong successful supermarket that has a well-established customer base in the community. Going forward, this property has significant upside potential. The majority of the space rolls within the next 24 months and is substantially below market by as much as 75% to 100%. Additionally, there is the potential to add a new freestanding pads that would push our yield even higher.

To highlight one other recent acquisition, we just closed on Bridle Trails Shopping Center up in our Seattle market. As we noted on our last call, we first put this property under contract back in the spring but the seller, a family we have known for many years, requested a delayed closing in order to execute a 10-31 exchange. We have had our eye on acquiring this property for a long time so we were happy to accommodate their request. Like ours Long Beach and Portland acquisitions, this shopping center in Seattle is also situated in a very protected established residential community.

Additionally, this new acquisition has considerable upside potential as well. Similar to the Portland property, the Seattle shopping center, the majority of base will be expiring during the next 12 to 18 months whereby we expect to more than double the print on average and on top of that, we were already in the works of adding a new 5000 square foot pad.

In step with growing our portfolio, we are also continuing to achieve solid growth and strong results with property operations in leasing, all geared toward enhancing the long-term value of our shopping centers. We continue to maintain our portfolio at a very high 97% leased. We continue to consistently post solid same-store NOI growth, 5.5% through the first nine months and we continue to achieve strong same space rent growth, achieving an increase of over 35% for the third quarter thanks in part to our ongoing initiative of recapturing below market underperforming space.

Additionally as we discussed on our last call, we continue to maintain our strong financial position. In fact, as a result of our equity and debt raising initiatives during the third quarter whereby we raised over $330 million of capital, our interest coverage for the third quarter was a very strong 4.2 times. Our debt level at quarter end was a very low, 29%; over 94% of our portfolio was unencumbered. All in all, 2016 is shaping up to be another highly successful year for the Company.

Now I will turn the call over to Michael Haines to take you through our financial results. Mike?

Thanks, Stuart. For the three months ended September 30, 2016, the Company had $59.4 million in total revenues and $18.2 million in GAAP operating income as compared to $50.1 million in total revenues and $16.4 million in GAAP operating income for the third quarter of 2015.

In terms of property level net operating income on a same center comparative basis, as Stuart just noted, cash NOI increased by 5.5% for the first nine months of 2016 including a 4% increase during the third quarter. As we discussed on our last earnings call, the Company had minimal exposure to sporting-goods stores. In fact, out of our entire portfolio we only had two sporting-goods store closings which is reflected in our same center numbers. Excluding those two closings, same center NOI increased by 6% for the first nine months and 5.3% for the third quarter. And as Rich will discuss in a minute, we have new tenants already lined up to take both of the sporting goods store spaces.

With respect to GAAP net income attributable to common shareholders, for the third quarter of 2016, GAAP net income was $7.4 million equating to $0.07 per diluted share as compared to GAAP net income of $7.5 million or $0.08 per diluted share for the third quarter of 2015. For the first nine months of 2016, GAAP net income was $23.1 million or $0.22 per diluted share. This compared to GAAP net income of $16.9 million or $0.18 per diluted share for the first nine months of 2015.

In terms of funds from operations, for the third quarter of 2016, FFO increased to $31.3 million as compared to $25.9 million of FFO for the third quarter of 2015. On a per share basis taking into account the stock offering that we completed at the beginning of the third quarter whereby we issued 6.6 million shares, FFO for the third quarter of 2016 was $0.26 per diluted share which is on par with the third quarter from a year ago.

For the first nine months of 2016, FFO increased to $91.6 million as compared to $70.2 million of FFO for the first nine months of 2015. On a per share basis, FFO increased by 12.7% to $0.80 per diluted share for the first nine months of 2016.

In sync with proactively growing our portfolio and enhancing the value of our shopping centers, we continue to proactively and prudently manage our financial position always with an eye toward maintaining our sound financial metrics and our financial flexibility. To that end as Stuart indicated, during the third quarter, we successfully raised $333 million of capital. In early July, we issued the 6.6 million of common shares that I mentioned through an underwritten public offering raising $133 million in common equity.

Additionally at the end of the third quarter in late September, we issued through a private placement, $200 million of senior unsecured notes. The notes bear interest at a fixed rate of 3.95% and the bonds mature in 10 years in 2026. Notwithstanding the bond market being volatile this year, given the uncertainty regarding where interest rates are going, 3.95% rate that we achieved is a new low for the Company and we believe reflects in part our long-standing track record of maintaining a strong, straightforward and conservative balance sheet.

Taking our capital raising initiatives into account at September 30, the Company had a total market cap of approximately $3.7 billion with approximately $1.1 billion of debt outstanding equating to a debt to total market cap ratio of just 29%. In terms of the $1.1 billion of debt, the vast majority is unsecured. In fact, we only have $71 million of secured mortgage debt outstanding.

Additionally as a result of our capital raising initiatives, our credit facility has been reloaded such that at September 30, we only had $8 million outstanding under $500 million in secured credit line.

In terms of interest rate exposure which continues to be a key topic in the market from our perspective, over 80% of our total data at quarter end was effectively fixed-rate, the majority of which was long-term debt. In fact, we have virtually no debt maturing for the next two years, only a couple of small mortgages. Looking out further, our debt maturities our wealth laddered being spread out over eight years from 2019 through 2026. So our debt profile continues to be very stable.

Finally in terms of FFO, looking ahead at the remainder of the year, we expect FFO for the fourth quarter to be between $0.25 and $0.27 per diluted share which takes into account not only the stock offering but also the $200 million of bonds that we issued at the end of the third quarter. Assuming we achieve the $0.25 to $0.27 of FFO in the fourth quarter, it will put us in the range of $1.05 to $1.07 for the full-year 2016 which equates to an increase of approximately 10% over 2015.

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

Thanks, Mike. To underscore Stuart's and Mike's comments, we continue to be on pace to post another stellar, record-setting year with property operations and leasing. Starting with occupancy, we continue to maintain our portfolio at a very high, very strong 97% lease. In fact this is now the ninth consecutive quarter that we have achieved a portfolio lease rate at or above 97% which is a new record for us even going back as far as our days at Pan Pacific.

Our continued success speaks volumes not only in terms of the strength of our market but also it speaks to our team's commitment and discipline as well as our skill set, market knowledge and tenant relationships that we have cultivated over the past 25 years operating and leasing shopping centers exclusively on the West Coast.

Breaking the 97% lease number down between anchor and non-anchor space, at September 30, our anchor space was 98.7% leased and our shop space was 95% leased.

With respect to the economic spread between build and leased space during the third quarter, new tenants representing approximately $2.7 million in incremental annual cash flow took occupancy and started paying rent of which about $384,000 was reflected in our third-quarter cash flow.

As of the end of the quarter at September 30, the economic spread was approximately 3% representing about $6.4 million in additional incremental annual base rent on a cash basis.

You may recall that on our last earnings call we noted that we had roughly 350,000 square feet in total scheduled to expire during the second half of 2016. We are pleased to report that in just the third quarter alone we easily surpassed that leasing over 450,000 square feet which is another new record for our team.

Importantly, along with leasing space at a record pace, we are also continuing to achieve strong increases in same space comparative cash rents. Specifically during the third quarter, we achieved a 16.5% blended increase between new and renewed leases. Breaking that down, we executed 41 new leases totaling 157,000 square feet achieving a same space comparative cash rent increase of 35.5% and we executed 54 renewals totaling 296,000 square feet achieving a 6.9% increase in cash rents.

As Stuart indicated, we continue to have good success with recapturing below market underperforming space. As an example, we recently recaptured a large anchor space that the tenant had moved out of yet was still paying rent and had another four years to go on their lease. We were able to successfully recapture the space and now have several national tenants lined up to take this space pursuant to long-term leases whereby our incremental base rent will increase by over $400,000 annually over what the prior tenant was paying.

Additionally, as Mike touched on with respect to the two sporting goods store vacancies in our portfolio, we now have new tenants lined up to take all of the space at a blended increase in rent of approximately 30% which will add roughly $300,000 of incremental annual base rent when all is said and done. It will take a bit of time for the spaces to be refitted so we currently expect that the new tenants will take occupancy and commence paying rent in 2017.

Now I will turn the call back over to Stuart.

Thanks, Rich. Before opening up the call for questions, I would like to add a bit more color regarding our acquisition strategy. For 25 years running, our focus continues to be on acquiring traditional pure play grocery and drug anchored shopping centers that are in irreplaceable locations in densely populated and mature markets. With these underlying attributes, the shopping centers that we acquire are well-leased properties featuring daily necessity retailers that by and large have established customer bases which in turn provide us with a very reliable stable base of cash flow from which to build.

Our acquisitions this year fit this profile perfectly. The eight properties that we have acquired thus far in 2016 are 99% leased and the anchor tenants have been operating at the centers for over 23 years on average, very stable. Additionally, this stability combined with our acquisitions being in very protected supply constrained markets translates into very limited downside risk which is at the very core of our strategy.

Equally important to us is the potential to enhance value going forward. Given that the vast majority of our acquisitions continue to come through a variety of relationships and off market sources, we are able to achieve reasonable terms at the outset and position our team to quickly enhance value once we close.

For example, as it relates to the $332 million that we have acquired this year, we expect to increase the in-place cash flow by as much as 15% to 20% over the course of the next 12 to 24 months which if successful, we estimate could add as much as $50 million to $60 million of additional value.

In summary, all of us here at ROIC take pride in building a portfolio in business following a prudent risk-averse strategy that has consistently generated solid growth and results for the past seven years and we believe will continue to do so for years to come.

Now we will open up the call for your questions. Operator?

(Operator Instructions) Christy McElroy, Citi.

Good morning, everyone. Just following up on the comment about the $2.7 million of rents taking occupancy in Q3 and it sounds like the bulk of the impact will be felt in Q4, how should we be thinking about the offset of the rent coming off line in terms of your retenanting effort? I mean what is your target for same-store NOI growth in Q4 incorporating all of that?

Same-store for fourth quarter. We think the same center NOI growth for the full-year will still be between 5% and 6% which takes into account the two sporting goods store closings. And as it relates to the fourth quarter within the pool of properties included in the fourth quarter analysis, every shopping center that we have owned since October 1 of last year, there are a number of new tenants that are close to taking occupancy which will then start paying rent. It is difficult to predict the exact timing and therefore hard to predict but it could be anywhere between 3% on the low side to as high as 5% on the upside.

Okay. So pretty big range at this point. Where are you targeting occupancy at year-end?

I think occupancy at year-end given that hopefully we can get the last sports lease executed will certainly I believe be well over 97%.

Okay. And then just with the acquisitions that are closed year to date, do you have anything under contract today that is likely to close prior to year-end? I think your prior guidance was $390 million per year.

The pipeline looks strong as we are heading into the fourth quarter. I can't comment as to what we have in escrow or under contract but if what we have got in the pipeline does -- what we have in the pipeline moves to execution and then closing, we will certainly meet guidance and even exceed it but at this point, I can't comment whether we will meet that target or not.

Okay. Thank you so much.

Collin Mings, Raymond James.

First question for me just following up on Christie's question, I think at the Investor Day you hosted last fall you suggested really a multiyear opportunity as far as acquiring maybe $300 million plus per year. Obviously you have exceeded that this year but has that outlook changed at all, Stuart, as you start thinking about 2017?

No, it has not. In terms of what we see in the pipeline right now again, it is hard to predict future as it relates to 2017 but certainly feeling good right now in terms of what is in front of us.

Okay. Then in terms of cap rates, I know the last couple of calls, Stuart, we have talked about still seeing some cap rate compression out on the West Coast. Call it over the last three to six months, can you just speak to what you are seeing in cap rates maybe even by market and then just the competition for assets?

Sure. Cap rates over the past quarter really haven't moved much. For fully marketed shopping centers in California, cap rates continue to hold steady in the low 4% range. In the Pacific Northwest, cap rates in Seattle continue to hold steady as well. In Portland there has been some downward movement in cap rates with a recently fully marketed deal now trading in the low 5s and high 4s. So that is sort of a quick overview in terms of the markets as it relates to cap range.

The second part of the question was?

Just competition.

I think as we articulated last quarter, competition due to the volatility as Michael touched on in the bond market that we have found that the number of buyers for high-quality assets on the Coast have substantially receded. They have come down which is proven to be a benefit from our perspective in terms of looking and acquiring assets and underwriting them.

I don't see that changing right now and so looking forward, I think the market is going to probably stay in a pretty tight range as to what we have seen and more importantly, it certainly gives us a bigger advantage in terms of sourcing off market transactions with the relationships that we've got on the West Coast.

Okay. And then just as far as switching to dispositions, I think you guys had talked about $25 million being incorporated into your model before year-end. Has that changed at all?

We are working on a small number of non-core properties to market. The pipeline ahead of us about $50 million. These are properties I think as I have talked about that were part of a releasing process. And before putting them on the market we wanted to make sure that we were in a better position to achieve full value. These tenants have now taken possession and have gotten through the permitting process so everything is now sort of complete which puts us in a good position to move forward and soon.

So I think by our year-end conference call we will definitely have some definitive information to share with you.

Okay. One last one, Stuart, before I turn it over. Just curious, your perspective as a longtime owner of grocery anchored shopping centers, what are your thoughts now about Amazon starting to test the drive-up grocery store concept in the Seattle market?

I don't know. Rich, do you want to articulate on that in terms of Amazon? I mean we've been asked the question more recently in terms of what we have seen from Amazon. I guess the first thing is a number of our grocers are fulfilling Amazon's orders. And so number one, that benefits us from the standpoint that those sales are going to us in terms of percentage rent.

In terms of the new prototype, Rich, what are your thoughts there?

I think you can look at it in a lot of different ways. I mean for one, it could be an opportunity for us to lease space to Amazon. Another thing to look at it as it relates to our portfolio is that the grocers on the West Coast already have a significant presence. So if this concept proves to be successful, they have already got the infrastructure in place to replicate what Amazon is doing.

So while it is interesting to see what Amazon is attempting to do, we currently think that our portfolio given their location are well-positioned to compete and I think it also demonstrates that potentially Amazon's online only strategy needs to be supplemented with a bricks and mortar presence.

And then more importantly, it always comes down to sales and I can tell you that sales at our grocers continue to show very good improvement as we have moved through 2016 as it relates to 2015.

Thank you. Great color, guys. Good luck through the rest of the year.

Michael Gorman, BTIG.

Good morning. A quick question maybe going back to Rich. You mentioned the spread at the end of the quarter was about 3%, $6.4 million. Just curious, can you give a little bit of color on how that kind of rules out over the next three or four quarters? And then just given the volume of leasing that you guys have been doing, what do think that spread looks like at the end of the year?

I think if you looked back over the last few quarters, we have been maintaining somewhere in that $6 million range. We are obviously commencing a significant portion of that rent every quarter but with the recapturing initiative and all the leasing that we are doing, we are adding right back into the pool. So we kind of expected to continue along those lines right now as we continue to execute the repositioning initiatives and the lease up of the properties.

Okay, great. And then, Stuart, you mentioned a little bit about some of the market environment for acquisitions on the West Coast. Can you talk about, with some of the financial volatility, have you seen any deals being retraded that have been on the marketed side?

The only deals that I have seen that have been retraded have been transactions that have been in the tertiary or secondary markets. Those markets have slowed down, not nearly as much activity. And periodically I have seen some of those transactions being retraded. But in terms of the primary markets where we are very active in, we have seen nothing but more of the same. Cap rates at very, very low levels and valuations continue to stay where they are and in some cases even go higher.

Great. And then on those tertiary markets, where do you think the cap rate spread is right now versus the prime markets for the high-quality assets?

That spread has probably widened over the last six months 50 to 100 basis points.

Okay, great. Thank you.

Paul Adornato, BMO Capital Markets.

Sorry if I missed this but are we seeing a tougher grocer environment in part coming from food price deflation? So I was wondering if any of your tenants are -- seem to be a little bit more stressed in terms of competitive pressures?

Stress? So nothing that I have seen. I don't know, Rich, if you want to comment. What I can tell you is there are a series of grocers both at the high-end and in the middle that are expanding very rapidly again on the West Coast. I will give you an example. Sprouts, Sprouts is now very aggressively heading into the Pacific Northwest with us so from a growth perspective things have not slowed down in terms of the grocers. But in terms of what we are seeing as it relates to your question, we haven't really seen much impact. I mean it hasn't impacted rents, it hasn't impacted renewals. Rich, I don't know if you want to add to that?

No, I think there has been a select couple of grocers that we have taken out of our spaces and brought in other grocers so maybe some of the ones that are feeling that stress are the ones that are leaving the party. But we are able to quickly release them with better capitalized, stronger grocers. We get calls constantly from grocers looking to penetrate these markets and hoping for opportunities to arise. And that is why we have been so successful with the repositioning-recapturing initiative. So we are not seeing it, sales continue to do very, very well and we are not hearing that from our grocer base.

With some of the more recent acquisitions as I talked about during our remarks like Bridle Trails where we are repositioning to the grocer in that asset, I mean the amount of activity in terms of the number of grocers looking to get to this location is tremendous. I mean the demand has never been stronger on the West Coast.

That is great. Thanks so much.

Paul Morgan, Canaccord.

So on the same-store NOI I appreciate the color you gave there about the impact of the sports stores. In your supplemental it shows Dick's at Crossroads. Just to be clear, did Dick's acquire the designation rights of the store? You said you have kind of found replacement for the two, are they the replacement there and if so, kind of how did it work out in terms of rent impact?

Well, I mean we were overwhelmed with the number of offers that we had on the space and we did aggressively get to the courthouse steps and buy the lease because of the overall demand. So we made the decision to go with Dick's for a number of reasons but the good news is the downtime, it was probably one of the quickest leases Dick's has ever done. And number two was that the increase in rent was about 50% over what we were getting. And then more importantly, it was the downtime that we were really focused on and right now we are -- the plans are being drawn up. We are going in for permit but it does look like we will get rent as early as the third quarter of next year given that Dick's wants this location very badly.

Okay. That is great. And then so you mentioned that you are still looking at a 5% to 6% same-store growth so even with the sports events. So would it be correct to interpret as you would have been running a little bit ahead of plan in the absence of the closings?

Absolutely. I mean if we didn't have these two closures and the only two power centers but they are great assets that we own, we would have been over 6%.

Okay.

Above the range as we would say.

Yes, great. And then Stuart, could you maybe provide a little bit of color just in terms of the markets, not so much in terms of acquisitions but just in terms of what demand is looking like for the shop space in particular and whether it is varied up and down West Coast? Or were there any categories that are strong? People talk about maybe restaurants being a little weaker but what areas you are seeing strength in terms of demand?

I will let Rich comment on the tenants but in terms of the markets, in terms of demand, we continue to see very strong demand across all our markets. Portland continuing to lead the charge right now and Southern California but really the demand is coming from all aspects of the West Coast in terms of the primary markets. And from a tenant perspective, Rich?

I think our demand still comes from a very broad range of retailers that continues to grow. The types of retailers vary depending on the various markets. For example up in the Pacific Northwest which is a very highly sought after market for retailers looking to expand, the grocers are at the top of that list as Stuart and I just touched on, with new grocers try to move into the market for the first time.

Additionally across all of our markets, new restaurant food concepts still actually are highly in demand, not necessarily the chains that have had some trouble recently but the independent operators. If we get restaurant space back, it is leased immediately.

In addition, there is health, beauty, medical, fitness sectors all continuing to expand across the markets.

Great. Just lastly, you had the two anchor leases that with an 83% markup in the quarter and you talked about your plan for anchor placements like that. As you look into the next few quarters in 2017 in particular, should we expect to see more of those hit? I know it would be kind of lumpy.

We are currently working on about a dozen different initiatives or leases that are in our sites that we are pursuing which altogether total about 0.5 million square feet and potentially represent another $2.5 million to $3 million and incremental rent assuming we are successful in recapturing this space. So yes, there is still a lot to come but as you say, it is hard to predict the timing of it.

Is that sort of -- I mean as you think about just kind of broadly in terms of timing, is that kind of two year's worth of activity that it would take to address those or longer than that?

It better not take two years from my perspective. I'm getting old by the way, Paul. (multiple speakers)

I think we have a lot identified in 2017; some of the rent may not come in until the 2018 timeframe. But again, it is really dependent on when we are able to get the space back and get the new tenant fitted out.

Okay, great. Thanks.

R.J. Milligan, Baird.

Curious for some of the properties that have been in the same-store pool for a while, the ones that you have already repositioned and re-tenanted and gotten great leasing spreads. Are you getting any pushback about raising those rents within some of the more mature properties that you have already repositioned or are you rolling over and still getting pretty good spreads on those?

We are still getting very good spreads on the lease rollover. The demand is still there and the marketplace is just setting those market rates and our properties given their location within the market typically come in at the higher end.

So you would say that the leasing spreads are pretty even throughout the properties that were acquired five years ago versus the properties that were acquired over the past two years?

A lot of it is a function of when the lease was originally entered into and whether the tenants had options and whether the options were fixed or fair market value so there are some things that are beyond our control as it relates to contractual increases and our renewal spreads include both the exercise of contractual options which in some case could be flat or fixed as well as negotiated renewals.

I will tell you R.J., what we continue to see is a lot of these OP transactions that we have done over the years, a lot of juice in these assets. The sellers I think as we have articulated to the market, typically kept the properties 100% occupied without -- and much more focused on the cash flow than on the incremental increase on the rollover and that is still coming with a lot of these assets we have acquired like the crossroads, Santa Barbara, Warner, a lot of newer assets but there is some tremendous upside in these assets as we look forward over the next year to two years on the anticipation that they market stays healthy.

Okay, I guess that is a good segue. Looking at your acquisition pipeline currently, what percentage of those could potentially be OP unit deals?

Right now in front of us, a number of them potentially could be OP unit deals. That is starting to again pick up some pace as we move into the last part of the year. Again these transactions do take, they take some time. The good news is that we certainly are going to be issuing that currency at or above where our stock is currently trading and where we have done our last set of transactions. But as always it is evolving. I mean it flows back and forth but that pipeline is looking, it looks like there potentially could be more of that as we move into the balance of the year.

Great. Thanks, guys.

Chris Lucas, Capital One Securities.

I guess, Mike, just to start with you just on the guidance bump, was there anything specific to what drove the higher for the full-year guidance?

Nothing in particular. We just kind of tightened the low-end of the range given that we are three-quarters of the way through the year and kind of sensitive to the fourth quarter given the Sports Authority any sports related store closings this year. So that is why I kind of gave a range of 3% to 5% for the fourth quarter because we are not sure it is going to fall in. But we still think we will be in the range we gave for the guidance for the year as we did before.

Okay. Then just on the anchor repositioning process, I guess two questions there. One is that when you do that I am assuming that the asset stays in the same-store pool and if that is the case, what is the rough guidelines that we should be thinking about for next year as it relates to the drag to same-store NOI for that process?

Every situation is going to be different so some of that will be accelerated and some of it won't be what we try to do it certainly stay way ahead of that process.

We will establish guidance on our next call once we get through our full budgeting process as well.

So, Chris, it is just tough to try to quantify at this point but the good news is that there is a lot of demand for these anchor spaces and I think next quarter as we finish out the year, we will be able to provide you with some nice commentary in terms of what is coming.

Then just jumping back to Crossroads, I think Stuart, last call you talked about the ability to sort of move forward with your development, redevelopment plans there given that Sports Authority had some tough on the lease. Is that still the case with Dick's going in and if so, what are your thoughts about next steps at Crossroads?

The answer is, yes. We are moving forward and with Dick's coming in, it really had little impact or no impact in terms of our plans. But going forward, we are focused on phase two of the Crossroads. We are making some progress there. Rich, I don't if you want to add to that in terms of the timing?

Yes, with all of our leases since we have been involved with the Crossroads, we have taken a very strong position as it relates to making sure that we protect our ability to continue to redevelop that property and that was the approach we took with retenanting the Sports Authority box. So we still have the ability to continue with the phase two plan that we are currently working on and we still have a lot to come at Crossroads.

Last question for me, you talked about the demand on the non-anchor spaces being pretty broad. I guess I was just curious as to the composition of the demand as it relates to sort of national tenants versus regional versus mom-and-pops and whether you are seeing any shift in that demand right now say over the last couple of quarters?

Well, the national tenants always take a bit longer which is very frustrating from my perspective. But in terms of the allocation across the tenant spectrum, I would tell you demand -- and correct me if I am wrong, Rich -- is really continues to be at a national level a regional level and a local level maybe even some more pick up at the local level more than anything else.

Yes, I think it still comes from a very broad range and it really depends on the opportunity that we have in front of us for the anchor boxes we are doing with primarily anchor grocers for the most part. But when you get down to the shop bases, you know the local tenant base is still very active and they will typically pay the most rent and quicker than a national tenant will as Stuart is touching on. So the demand still seems to be very broad.

Okay, great. Thank you.

Jay Carlington, Green Street Advisors.

So just wanted to kind of go back in touch on the 80% spread on your new anchor leases, they came at a pretty decent TI cost. And I am wondering if you can kind of talk a little bit about what drove the sizable investment for those two deals?

Sure, this is Rich. In this case that drove the 80% was we need to split the space which involves some significant dollars to split the utilities, the space, put in facades and refit a space that really hasn't been touched for a number of years. So there is some seismic upgrades and things like that so that is what is driving that number.

Did they change uses? Did it go from like a grocery to something else or was it just purely splitting the box or what were the specifics on that?

There was a change in use in that particular one.

National tenant but it changed in use and we do have an offer for the balance of the box from a national tenant as well so. But yes, there was change in the use.

Maybe related to that, you've got five anchor leases coming up next year and I think you have talked about some other anchor boxes that you are going to get control of. Were these two leases kind of unique situations with respect with PIs or is that kind of what is required to get these deals done today?

I would tell you they are probably more unique in that you are taking an existing box and having to re-figure it or almost create a whole new building whereas I think every situation is going to be different, Jay.

Every situation is different. We did this Hmart this year up in Northern California where there is essentially no cost to us and so it didn't cost us anything to get the box back. So in other situations we are getting paid termination fees upon getting the box back so every situation is going to be slightly different. And then as you are touching on, it really depends on the condition of the existing space and the new use and what is going to be involved in spitting it out. So it can vary.

Okay, thank you.

Todd Thomas, KeyBanc Capital Markets.

Thanks. Good morning. The 15% to 20% increase in income over the first 12 to 24 months that you cited for the $330 million of property acquired this year so far. As you look ahead, do you think that that value creation opportunity could persist in what you are underwriting today?

In what we are underwriting in terms of new acquisitions or in terms of what we have acquired?

In terms of new acquisitions. So what might we see close by the end of this year and sort of looking ahead into 2017?

A tough question to answer. The answer though is what we are currently looking at in the pipeline, the answer is, yes. There is some interesting moving pieces in terms of rollover on some of these assets and the ability to recapture some of the space on a number of these assets. So the answer is yes.

If these acquisitions do come to fruition of course. But as you know, Todd, that is our story at this Company. We are very disciplined in terms of what we acquire and more importantly even though the value and our cost of capital has come down and the cost to acquire these assets have gotten more expensive, for us the story is all about what we can do once we close. And the value that we can deliver to shareholders in terms of building on what we are buying.

Okay. And then realizing that there is meaningful growth there in your one and two for some of the properties that you just acquired, can you share the initial yields on what you closed on in the quarter and the two properties that were acquired in October?

The two properties we acquired in October which was Bridle and Rose City, so Rose City and Monterey, you are looking at about a 5.5 and on the other two that we just acquired closer to the 5 number, but just over a 5 cap rate.

All right. And then, Rich, just a question on some of the recapture opportunities that you are pursuing. Are tenants more willing to negotiate and work with you to give back some space than they had in the past? Are you sensing that at all?

I don't if I would say they are more willing. I think it is situation by situation. We are working right now with one of our grocers to expand into an adjacent anchor space which will really turn the corner for this particular property. So I wouldn't say it that way.

Okay. Just one last one. Stuart, the portfolio is growing. It is closing in on 90 assets and I know you like to stay fairly involved at the property level. At what point do you lose the ability to maintain that level of involvement and how scalable is the platform today?

The platform is very scalable. I mean just in general, the real estate platform is an incredible platform in terms of the efficiencies you gain with scale. In terms of myself, the runway still looks very good in terms of our hands-on approach, in terms of operating and creating value for shareholders. The runway still looks very good right now.

And so you know, I don't know whether that begins to tail off at 120 properties or 140 properties but the good news is that you've got a portfolio that is very well leased, very stable, and you know that helps in terms of growing the portfolio and having the ability to do what we have done in the past.

Okay. Thanks.

Michael Mueller, JPMorgan.

Good morning. Going back to the past couple of questions about the 15% to 20% upside on acquisitions and the NOI that you see, can you talk about how much of that is just marking below market leases to market and how much of it is more of Richard talked about with sports stores where you have to put capital and then just kind of either upgrade or put some real capital in to get a return on it? What is the mix of that stuff?

It is about 50-50. I mean at Rose city that will be no cost. And that will go, that increase is going to be 100 and something. I don't know yet but at Rose City it is substantial and there will be no cost because all you are doing is taking a very successful grocer and just adjusting the lease to market value which is three times basically what they are currently paying.

The situation like at Bridle Trail is where you've got to go in and spent some capital because you are going to be putting a new grocer in, probably a very high end grocer into that space and that will require some capital. So it is about a 50-50 mix in terms of building on that value, Mike.

Okay, got it. Then I guess as a follow-up to that, let's say you buy a center to 5 and everything is going to be a little bit different here but if you go in and you put capital and you get the higher rent, I mean typically what happens to the yield like on I guess a net effective basis after you think about the capital spend? Is it the same as what you are getting and you just end up with a lower cap rate property? Is it higher? How does the typically work out?

It is a good question. Obviously what are goal and the criteria that we set for ourselves is to lift that cash unlevered yield about 100 to 200 basis points within 18 to 24 months. That is our goal. But remember the one important thing outside of lifting the cash flow is the quality of the tenant that you are putting in. You are taking a tenant that is weaker and you are replacing it with a stronger grocer, which is going to not only drive yield but it is also going to drive valuation long-term. So it really is a program that does both. It drives cash flow and it drives long-term value. And that is really our story at this Company in terms of what we do best for shareholders.

Got it. Okay. That was it. Thank you.

There are no further questions. I'd like to turn the call back over to Stuart for any closing remarks.

In closing I would like to thank all of you for joining us today. If you have additional questions, please contact Mike, Richard or me directly. Also you can find additional information on the Company's quarterly supplemental package which is posted on our website. And for those who are attending NAREIT's annual convention in Phoenix in a few weeks from now, we hope to see you all there. Thanks again and have a great day, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.