Retail Opportunity Investments Corp (ROIC) 2016 Q4 法說會逐字稿

Welcome to Retail Opportunity Investments' 2016 fourth-quarter and year-end conference call.

(Operator Instructions)

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 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 stellar year of growth and performance in 2016. In fact, it's our seventh consecutive year as a shopping center REIT where we again achieved solid growth and created value across every aspect of our business.

Starting with our portfolio growth, during 2016 we continued to have great success in capitalizing on our long-term relationship to secure a number of exceptional acquisition opportunities that fit our disciplined strategy in our portfolio perfectly. We again completed over $300 million of property acquisitions. Specifically during 2016, we acquired eight terrific grocery anchored shopping centers encompassing over 750,000 square feet for a total investment of $332 million. (sic - see press release "$332.6" million).

If there is a theme that best describes our class of 2016 acquisitions, we would have to say there's not just one theme but three. First would be location. Our 2016 acquisitions are all situated in truly irreplaceable locations in the most sought after markets on the West Coast.

But more than that is their strategic fit within our existing portfolio. Importantly, our 2016 acquisitions serve to strengthen our presence in certain key markets and specifically in select densely populated, highly protected communities.

As an example, on our Seattle market we continued to strengthen and expand our presence in Bellevue, which is considered one of the most dynamic communities in the Seattle market. We also added to our presence in Northern California, specifically in Monterey, which is another highly desirable, highly protected community.

In addition to expanding our presence in certain key communities, we also established a new presence in several highly sought after communities within our core markets that are extremely protected an almost impossible to penetrate. Most notably, we acquired several exceptional shopping centers in Santa Barbara and Westlake Village.

The second theme regarding our 2016 acquisitions is their pure play, grocery anchored, daily necessity focus. Each property is well leased to a diverse mix of retailers providing basic consumer goods and services tailored to their surrounding customer base. This pure play focus combined with their irreplaceable location attributes translates into a very reliable and stable base of cash flow.

The third theme with respect to our 2016 acquisitions which we are most excited about is the upside potential. We are already hard at work at re-tenanting and recapturing below market space, that together with reconfiguring certain spaces as well as pursuing expansion in pad opportunities we expect to increase cash flow by as much as 15% to 20% over the course of the next 12 to 24 months. And then beyond that, we expect to drive the cash flow even higher as additional anchor leases roll further out that are currently 2 to 3 times below today's market rents.

Safe to say that we are very enthusiastic about our 2016 acquisitions. As much as we're excited about the opportunities to build value with our recent acquisitions, we are equally excited about our ongoing success with enhancing the value of our existing portfolio.

In 2016 we again took our portfolio to new heights. For the fourth consecutive year we achieved a year-end lease rate above 96%, finishing 2015 (sic - see press release "2016") at a very strong 97.6%. Additionally, we again posted very strong double-digit same-space rent growth, achieving a 29% cash increase on new leases which serve to drive our same-center NOI to new heights whereby we achieved a 5.3% cash increase for the year.

Turning to our balance sheet. During 2016 we continued our long-standing disciplined strategy of raising capital from a balance of sources to prudently fund our growth. Specifically we raised $424 million of new capital, including over $224 million of common equity.

As a result, our debt ratio at year end was below lowest year-end level since 2011. Our balance sheet today, by and large, is as strong as it's ever been.

Lastly, in light of our growth and performance in 2016, we are pleased to announce that the Board has increased the Company's dividend by 4.2%, representing the seventh consecutive year that we have delivered increased dividends to shareholders. Now I'll turn the call over to Mike to take you through the details of our financial results. Mike?

Thanks, Stuart. For the 12 months ended December 31, 2016 the Company had $237.2 million in total revenues and $77.2 million in GAAP operating income as compared to $192.7 million in total revenues and $59.3 million in GAAP operating income for 2015. With respect to property level NOI on a same-center comparative basis, cash NOI for the full year 2016 increased by 5.3% over 2015, as Stuart noted.

For the fourth-quarter of 2016 the Company had $63.1 million in total revenues and $22 million in GAAP operating income as compared to $51.3 million in total revenues and $16.3 million in GAAP operating income for the fourth-quarter of 2015. In terms of property level net operating income on a same-center compare basis, cash NOI increased by 5.5% for the fourth-quarter of 2016 as compared to the fourth-quarter of last year.

Turning to GAAP net income attributable to common shareholders, for the full-year 2016 GAAP net income was $32.8 million, or $0.31 per diluted share, as compared to GAAP net income of $22.9 million (sic - see press release "$23.9 million"), or $0.25 per diluted share for 2015. For the fourth-quarter of 2016 the Company had GAAP net income of $9.6 million, equating to $0.09 per diluted share, as compared to GAAP net income of $6.9 million, or $0.07 per diluted share for the fourth-quarter of 2015.

In terms of funds from operations, for the full-year 2016 FFO was $124.8 million as compared to FFO of $96 million for 2015. On a per-share basis FFO was a $1.08 per diluted share for the full year 2016, representing a 12.5% increase over FFO per diluted share for the full year of 2015.

For the fourth-quarter of 2016 FFO totaled $33.2 million as compared to FFO of $25.9 million for the fourth-quarter of 2015. On a per-share basis FFO was $0.27 per diluted share for the fourth-quarter of 2016, representing an 8% increase over FFO per diluted share for the fourth-quarter of 2015.

Turning to the Company's balance sheet. We raised $424 million of capital during 2016, as Stuart mentioned, from a balance of sources. We raised a total of $224 million of common equity, including $46 million in the form of OP units that we issued in connection with acquiring several shopping centers. Additionally we raised $133 million through a public stock offering last summer, and over the course of 2016 we raised approximately $45 million through our ATM program.

In terms of debt capital, in September we raised $200 million through a private placement of 10-year senior unsecured notes that bear interest at a fixed rate of 3.95%, which was a new record low coupon for the Company. Taking into account our capital raising initiatives during 2016, at year end the Company had total market capital of approximately $3.7 billion with $1.2 billion of debt outstanding, equating to a debt to total market cap ratio of just 31% at year end which, as Stuart indicated, represents a new five-year low for the Company.

That's particularly noteworthy when considering that during the past five years we have grown by more than fivefold. Yet we have carefully maintained our strong and conservative financial metrics. In fact, for the fourth year in a row we finished the year with an interest coverage ratio for the fourth quarter at or above a very solid 4 times.

Additionally we continue to work hard at maintaining a large unencumbered pool of properties. Over the past five years, in step with our portfolio growth, our unencumbered GLA has grown from about 2.8 million square feet, or roughly 89% of our total portfolio five years ago, to today been over 8.8 million square feet, representing 95% of our total portfolio.

Along with the flexibility afforded by having a large unencumbered pool of properties, we continue to have considerable capacity with respect to our unsecured credit facility. In fact, at year end we only had $98 million drawn on our $500 million line, which we also have the ability and capacity to increase to as much as $1 billion. In short, we continue to maintain a strong conservative financial position.

Looking ahead at 2017, in terms of our initial FFO guidance, we currently expect FFO to be between $1.10 and $1.14 per diluted share for the full year 2017. With respect to acquisitions, our guidance assumes that we will acquire $300 million to $400 million of additional shopping centers during 2017, at going-in cap rates between 5% and 6% on average.

Additionally, with respect to our current portfolio, our FFO guidance is based on maintaining occupancy in the 96% to 97% range. In terms of same-center NOI, we currently expect to achieve same-center cash NOI growth of approximately 4% for the full year 2017. Now I'll turn the call over to Rich to discuss property operations. Rich?

Thanks, Mike. To start, from a leasing point of view, 2016 was another terrific year in every respect. Demand for space continued to be very strong in the daily necessity neighborhood shopping center sector, particularly on the West Coast, and specifically as it relates to our protected supply constrained markets and our portfolio.

Importantly, the demand continues to be coming from an ever increasing broader mix of retailers, and that applies to national, regional, and local retailers, all seeking to capitalize on the strong long-term fundamentals of our sector in core markets. Perhaps the best evidence of this can be found by looking directly at our accomplishments and results for 2016.

Beginning with occupancy. As Stuart highlighted, for the fourth consecutive year we achieved a portfolio lease rate above 96%. Specifically at year end our portfolio stood at a very strong 97.6% leased, including having 46 of our shopping centers at a full 100% leased, up notably from our record set a year ago when 33 of our properties were 100% leased. Breaking the 97.6% number down between anchor and non-anchor space, at year end 2016 our anchor space was 99% leased and our shop space was 95% leased.

With respect to the economic spread between build and leased space, back a year ago we started 2016 with the spread being 4.4%, representing in total about $6 million in additional incremental annual base rent on a cash basis. During the course of 2016 we are pleased report that essentially all of the new tenants associated with that 4.4% spread took occupancy and commenced paying rent. Now taking into account our leasing activity during the last year, as of December 31, 2016 the economic spread stood at 4.7%, representing $8.1 million in additional incremental annual base rent on a cash basis.

Turning to our leasing statistics for the past year. During 2016 we executed 386 leases totaling approximately 1.3 million square feet of space, which is more than double the amount of space that was originally scheduled to expire back at the beginning of the year. Breaking down the 1.3 million square feet of leasing between new and renewed, we executed 168 new leases totaling approximately 585,000 square feet, achieving a strong 29.3% increase in same-space cash rents. And we renewed 218 leases totaling approximately 763,000 square feet, achieving a solid 12.2% increase in cash rents.

Just to clarify, the 12% increase on renewals is a blended number that includes both tenants that had predetermined renewal rents and tenants where we were able to negotiate the renewal rent. During the fourth quarter we executed 107 leases totaling 447,000 square feet, including 49 new leases totaling 241,000 square feet, achieving a 33.1% increase in same-space cash rents, and renewed 58 leases totaling approximately 206,000 square feet, achieving a 16.7% increase in cash rents.

One of the key drivers of our strong same-space increases is our ongoing recapture initiative whereby we are recapturing a combination of below market and underperforming spaces and releasing those spaces to much stronger retailers and at considerably higher rents. A year ago at the beginning of 2016 we had identified between 200,000 and 300,000 square feet of potential recapture opportunities, which if successful, we estimated could add around $1.5 million in annual incremental cash flow. We are pleased to report that during 2016 we successfully recaptured approximately 330,000 square feet of space, achieving a 54% increase in cash rents overall equating to $5.3 million of incremental annual cash rent.

Looking ahead, in 2017 we intend to continue our recapture initiative and currently have identified roughly 250,000 square feet of additional potential opportunities, which if successful, we estimate could add as much as another $2.5 million in annual incremental cash flow. Bear in mind, our recapture efforts are very fluid and constantly evolving.

Lastly, we are currently underway with 11 different pad developments that together total roughly 50,000 square feet. When completed, we expect will generate a 17% yield on cost on average, equating to approximately $1.9 million of additional annual rent. We expect to complete the bulk of these during the second half of 2017. Now I'll turn the call back over to Stuart.

Thanks, Rich. With another successful year under our belt, we have our sights firmly set on the new year. We are pleased to report that we are off to a good start.

In terms of acquisitions, we already have three shopping centers committed thus far in our pipeline for a total of $92 million. Additionally, as Rich touched on, we continue to be very focused on enhancing the value of our portfolio and have a number of initiatives underway that will continue to drive our internal growth.

In fact, taking into account the current spread that Rich spoke of, the $8.1 million of additional annual rent from new leases that we sign in the latter half of 2016, and then adding to that the $1.9 million of annual rent from our pad development together, just those two value-added initiatives alone will add $10 million of additional annual rent. However, because the majority of this is tied to anchor spaces it is somewhat difficult to estimate the timing of when the bulk of this $10 million will start to truly impact our financial numbers.

We currently expect that the bulk of it will begin to flow through our numbers in the latter half of 2017 with the full impact occurring in 2018. With this in mind, we are taking a prudent approach in terms of our initial FFO guidance for 2017, including our same-center NOI guidance as Mike discussed.

Finally, as we embark on our eighth year as a shopping center REIT we remain as committed and as confident as ever in our ability to continue executing our disciplined risk adverse strategy, the same core strategy that our team has pursued for over 25 years in the same core markets. It has been our discipline and our singular focus on the daily necessities sector in the best markets that has been the cornerstone of our success, and we have no doubt will continue to be the core driver in our ability to build value and take the Company to new heights in 2017 and beyond. Now we'll open up the call for your questions. Operator?

(Operator Instructions)

Christy McElroy, Citi.

Good morning, Christy.

Hi, good morning to you guys. Stuart, just to follow up on the comment you just made about the additional $10 million of anchor space rent coming online, unlikely until the second half. How does that translate into same-store NOI impact? If you think about the 4% growth rate overall through the year, what does the trajectory look like?

The first half of the year will start out a bit less than what we have guided the Street in terms of same-store. However, as we move through the year that will accelerate, especially as you get into the third and fourth quarter. The other thing to look at is the impact in terms of 2018 because as soon as all of this does come online in late 2017 it will have a very positive impact on 2018.

Then in terms of the financing behind the $300 million to $400 million of acquisitions that you're talking about through the year, can you give us -- Mike, can you give us sense for timing and size of another bond deal? And then in terms of the equity issuance that's baked into guidance, is that more ratable or would you expect to do a larger size deal somewhere in there throughout the year that maybe would cause some dilution in terms of timing?

Christie, our guidance is typically based on our -- consistent with we've done in the past, meaning prudently raising capital from a variety of sources, always maintaining our [long]-standing credit metrics. It's always dependent on the timing and velocity of the acquisition opportunities that we come across that's going to drive how we finance those, whether it be debt or equity

Okay, but is there any specific bond deal in there baked into guidance?

In our current guidance? No, there is not.

Okay. Thank you.

Thank you.

Paul Morgan, Canaccord Genuity.

Good morning, Paul.

Hi, good morning. Maybe on the deals that you have under contract now, can you provide any kind of initial color there? Maybe in particular the one in Santa Rosa.

I guess that's maybe a seller you've worked with before, if I see that correctly, but it's also not a typical ROIC deal in the sense that it's not grocery anchored. Have you any color about those transactions and what you see as the upside there?

Sure. We are very excited about the pipeline sitting here today. In terms of starting out with Santa Rosa, I don't know if you recall or not but this is owned by the same owner as the Crossroads, the [Share] family, and we do have a ROFO on everything he owns on the West Coast, which not only include Santa Rosa but some really high-quality assets in Orange County.

In terms of Santa Rosa, our goal here will be to retrofit one of the anchors and put a grocery store in. That is the objective and we are currently, even though we haven't closed on the transaction, we are currently underway in terms of meeting that objective.

We are very excited about the acquisition. It has been -- the family built the property. It has never traded in the market. More importantly the property is in a really strong location right on the 101 Freeway, along with rents that are typically 15% to 20% less as it relates to the market. So that sort of the color on Santa Rosa.

Great, thanks. And then going back to same-store. Last year I think your initial guidance was 4% to 5% and you came in at 5.3%, above the high end there. If I think about where you're starting this year at 4%, relatively where you ended the fourth quarter, how should I think about what kind of the mix is of well, it's early in the year, we try to be conservative at this point versus there is some deltas, maybe from space you're taking offline, that would cause a drop that you know is going to happen in the first half of the year? What's the mix between the two of those thought processes?

Sure. In terms of same-store, as Rich articulated, we had a lot of initiatives that we successfully were able to accomplish in 2016, and it's going to really drive NOI, certainly in the later part of 2017, as we articulated, and certainly on a full run rate basis in 2018. So a lot of these initiatives along with the two sports stores that we had go vacant that we re-leased will start the year off a bit slower, again in terms of same-store, but it will pick up quite dramatically very quick -- it will pick up very nicely as you move into the latter part of the year, as we would say.

So it's really a combination of the initiatives that we did along with the two bankruptcies in the only two power centers that we own that really drove the same store to fall bit in the first half of the year. But again, as we look at where things sit today we are confident that that will move up very quickly as we move through the year.

Okay, great. Thanks.

Collin Mings, Raymond James.

Good morning, Collin.

Hey, good morning Stuart. First question, I want to go back to Christy's question real quick, just as far as on the debt. Mike, can you update us on your thoughts around your mix of floating rate debt and if you might look at swapping any more of that out this year?

As you know, we still have $200 million on the term loan that's not swapped, and it's safe to say we're always keeping a careful eye on that floating rate debt exposure. So at year end we had roughly 75% of our debt was effectively fixed rate, and we are comfortable with that at the present time. We always keep an eye on the interest rate environment, but we are just holding tight right now.

Okay. Then Stuart, just going back to the transaction market, really two questions. First one being on as far as the grocery anchored centers, clearly I think as we've heard over the last several months there's been -- cap rates there have been maybe more resilient than some of the power centers. Just curious what you're seeing in your markets as far as any sort of upward pressure on cap rates?

Then just along those lines, the latest thoughts around your disposition plans in Sacramento?

Sure. So in terms of the West Coast, and my comments really refer to very affluent or high income dense markets on the West Coast, the primary markets that we operate in. We've yet to see any shift in cap rates as it relates to high-quality grocery anchored centers.

Certainly the B and C shopping centers in the secondary markets we are seeing more properties come to market, but fewer of these properties are actually trading. So there is -- presumably there's a shift in pricing underway, but it's really for the less desirable properties.

And additionally the power center sector properties, or centers with a lot of boxes, we have seen on the West Coast have had a significant shift in pricing and buyer appetite, almost 200 basis points on the West Coast. But as a relates to the type and location of the shopping centers we focus on, there's been no change thus far.

Okay, great. Then just following up as far on a potential disposition plans and what might be included in guidance on that front?

We have $50 million of dispositions in our model, or in our guidance, and it's the -- we are consider bringing, or we do currently have some non-core properties on the market.

Okay. I'll turn it over. Thanks, guys.

Thank you.

Todd Thomas, KeyBanc Capital Markets.

Good morning, Todd.

Hi, good morning. Just to follow up on pricing and cap rates, maybe ask a question a little differently here. I guess you talked about 5% to 6% initial cash yields on the 2017 acquisitions. I think that's a little bit higher than the cap rates that you've seen over the last several quarters.

Is the acquisition pipeline for 2017 comprised of different product or are you looking at anything that slightly different in terms of markets or locations in general? Maybe you could talk about the pipeline little bit in the context of those three themes that you talked about related to the 2016 acquisition pool.

So in terms of markets, we certainly have very good success in sourcing off-market opportunities across our core West Coast markets. We are sticking to our knitting, as we say. That's in terms of other markets.

In terms of cap rates, again dominant high-quality grocery anchored shopping centers have not moved in terms of what we are looking at buying or have bought. So we guide the Street as a cap rate between 5% and 6%. That doesn't necessarily mean that values have moved at all, because they haven't. But that is where we've initially laid out our guidance.

But certainly as we are look at the first quarter of the year or second quarter of the year, we don't really see any change as it relates to the cap rates. In terms of -- I think in terms -- did that answer your question? Your question had a number of questions in it. But we aren't moving into other markets, and our guidance is not based on what we see in the market, our guidance is based on what we can accomplish through our relationships.

Okay. And then can you just talk a little bit about trends you're seeing around the grocers, the supermarket industry and the landscape there? We are hearing about some new entrants into the space, some discount grocers, Amazon and some others. What are you hearing and how do you approach investing today or think about it as you fast-forward a few years based on what you're seeing and hearing?

Well, in terms of investing I'll let Rich answer the question on the grocery store stuff, but in terms of investing, our investment philosophy has not changed for the last three decades. We constantly look at the risks associated with what we are buying and the discipline in terms of our strategy as to the movement of the tenant base and the risks associated with that movement. I'll let Rich comment on the grocery store business and how that relates to what we see.

Sure. We still see a lot of grocers that are top of our list in terms of moving into the market for the first time, particularly in the Pacific Northwest. We have a lot of new entrants into that market, along with the current operators looking to increase their market share. That's from a broad range of operators from the discounters all the way up through the full line and specialty grocers

Okay. Then just two quick questions for Mike, maybe. You came in $0.01 ahead of the high end of your guidance for the year. What came in better than expected in the quarter relative to your forecast, which you revisited in mid-November. So what drove the better results in the quarter specifically?

I think we had a little bit on the revenue side, we had a revenue on that side and I think our G&A came in a little bit lower than we actually had expected for the full year, primarily comp-related. But it's savings on G&A and a slight beat on the revenue side.

Okay. And then how much annual rent commenced in the quarter? Was there anything of size that commenced in the quarter that's not been picked up in the quarter on a fully annualized basis?

I can't think of any (multiple speakers).

No, the only thing that was a bit higher in the quarter was percentage rent, that our grocers and or tenant base continue to see a very healthy increase in sales with that generated a bit more percentage rent than what normally we would have modeled. But other than that, and that's not what I call material by any means. But it was higher than it was last year, and sales are very strong across our portfolio. That to me is the only thing that was a bit different in terms of what we modeled.

Specific to the quarter, right.

Okay. All right, thank you.

George Hoglund, Jefferies.

Good morning, George.

Good morning, out there. Got a couple questions. First of all in terms of the recapture and re-tenanting opportunities, if you could you provide a little more color in terms of the types of tenants you're looking to get space back from and the types of tenants you're looking to replace them with, and how much downtime should we expect? I guess that's the first question.

The second one is just in terms of the ROFO with the sellers of the Santa Rosa property, how extensive is that in terms of how many more properties do you have -- does that ROFO apply to?

The ROFO has two more properties in Huntington Beach, well Orange County. In terms of the -- Rich, in terms of the recapture side?

So as Stuart touched on, and last year there was the two sporting good retailers and a couple of grocery spaces. Those have typically been re-let to grocers in certain circumstances, fitness users and other types of users that are entering these markets.

Primarily it's, as we said, the boxes which in our case are typically going to be the grocer or sometimes right-sizing a drugstore that may have more square footage than they need and are willing to give us back 9,000 or 10,000 square feet, which enables us to bring in some of those mid-box players.

Okay, thanks. Then just on the those two additional ROFOs, do you expect those to be exercised in 2017 or is this something potentially down the line, and what's the --.

I don't know. It depends. Typically you're going to be issuing OP units, as we did with Santa Rosa, and that may vary in terms of the amount. But I just don't know because it just depends on the needs of the seller and -- or seller of and his family in terms of capital.

So it's just hard to determine. Santa Rosa came in a quick phone call three months ago. We don't know, it just depends on what their needs are in terms of what they will do. But we didn't model that as an acquisition in 2017, just so you know.

Okay. Thanks for the color.

Craig Schmidt, Bank of America.

Good morning, Craig.

Great. In terms of acquisitions, will California continue to dominate the properties you add to your portfolio?

It's going to vary. All our markets are really, really strong. I will tell you the Pacific Northwest, I don't think we've seen this much strength in the Pacific Northwest since we've been operating out there for the last three decades. I mean, employment growth, job growth, income growth is really, really strong. So we will continue to be purchasing in all these markets.

They're all doing great. We see a lot of economic growth and a lot of demand right now. California certainly will be on our target list, but it's the whole West Coast in terms of where we'll be buying. It just depends on the opportunity more than anything else.

Okay. In terms of looking at cap rates for better quality asset, what's the difference between, say, Southern California and Oregon and Washington now?

There is no difference any more. In the core markets, the cap rates are really the same across all these core markets at this point. Historically I think the Pacific Northwest may have trended a bit higher. Now it's almost the other way around where the Pacific Northwest is almost trending lower than California.

That's because they're smaller markets and economic growth has been so dynamic. But in terms of the markets, it's just going to basically be -- I think the cap rates are really the same across all these markets. They're really, there's no bifurcation anymore.

Okay, good. Thank you.

Thank you.

Michael Gorman, BTIG.

Good morning, Michael.

Good morning. If I could start with a bigger picture question. You're talking a little bit about the Santa Rosa acquisition. Can you just give a little bit of color on the conversations you're having with other private families and maybe how they're thinking about the next 18 to 24 months, given some of the changes we've seen in terms of interest rate volatility and the political climate? Is there -- do you feel like there's more upside potential to acquisitions now, just given how some of these private families are thinking?

Yes. We are currently working on a series of transactions and have been working on that. In my humble opinion will come to fruition this year where we will be issuing a lot more equity with these families, certainly not lower than we issued equity to the public markets. I think you will see more of that in terms of our pipeline, because there are things we started working on years ago that have come -- are getting closer to the finish line.

In terms of the families themselves, I don't really see yet any sort of acceleration one way or another because I think there's still some uncertainty out there in terms of tax reform and other things that could impact their decisions. The good news is our pipeline is very active in terms of working with these families, but I can't tell you that it's made any difference in terms of what we see from a more external perspective.

Okay, great. Thanks. Just on little bit more of a granular level, with some of the anchor recaptures this year I think we saw some higher CapEx and leasing costs in 2016. Should we be thinking about a similar kind of run rate on tenant improvements and CapEx in 2017, given the pursuit of more re-tenanting or recapturing spaces?

I think it's always hard to pin that one down. I mean, if a lot of that CapEx can be driven because we're splitting a box, which involves utilities and HVAC and other factors that can drive that cost up, but in certain circumstances I'm re-leasing the box to one tenant and those numbers could be smaller.

And it also, again, depends on the use. Converting a general retail to a grocer is going to cost us more. But it's really hard to peg a number because we don't know where those deals are going to land and the timing on them, either.

Okay, great. Thank you very much.

Thank you.

Chris Lucas, Capital One Securities.

Good morning, Chris.

Good morning, guys. Two very simply and quick questions, I hope. One is on the same-store NOI guidance. Michael, if you could maybe give us a sense as to what you're bad debt assumptions are this year compared to how they were a year ago? Did they vary at all?

No, they shouldn't vary. We typically budget kind of a flat 1.5% of revenues as far as our bad debt first pass, and then we do specific tenant review each quarter. So there's no difference in the guidance on that assumption.

Okay. Then maybe going back to an early question that Christy asked related to the capital side, fourth-quarter run rate on shares outstanding was 121,000. You guided for 124,000 for the year. Given the conversations that you guys are having on the acquisition front, is it reasonable to assume that a good portion of the additional equity is going to come in the form of OP units rather than shares issued to the public?

That's kind of the way it's looking right now as far as what we see in the pipeline in the immediate future. Our model, the way it works is it backs you into an equity need. It doesn't appear that there's a lot beyond what we're seeing in the OP side.

Perfect. Thank you.

That concludes our Q&A for today. I'd like to turn the call back over to Mr. Stuart Tanz for any further remarks.

Thank you. In closing we'd like to thank again all of you for joining us today. We really appreciate your interest in ROIC. If you have any additional questions, please contact Mike Rich or me directly.

Also you can find additional information on the Company's quarterly supplemental package, which is posted on our website. Thanks again, and have a great day everyone.

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