Retail Opportunity Investments Corp (ROIC) 2017 Q4 法說會逐字稿

Welcome the Retail Opportunity Investments 2017 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 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 turn -- introduce the call over to Stuart Tanz, the company's Chief Executive Officer. Sir, you may begin.

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 solid year of portfolio growth and performance where we continue to capitalize on the strong underlying fundamentals across our West Coast markets.

In the face of what was a challenging year for the retailing industry, we stay focused and true to our core business plan of carefully growing our portfolio through strategically acquiring well-established, grocery-anchored shopping centers as well as continuing to enhance long-term intrinsic value of our portfolio for our leasing operating initiatives. Specifically, during 2017, we grew our portfolio by over 1 million square feet through acquiring 10 terrific shopping centers for a total investment of $358 million. Our 2017 acquisitions are a superb fit with our portfolio in every respect. In fact, the 10 properties that we added to our portfolio this past year are among the best yearly class of acquisition, so to speak, that we have successfully acquired during our 9-year history, thus far.

This year's acquisitions feature strong grocery operators with established customer bases as well as a broad range of necessity in service-based retailers. Additionally, our 2017 acquisitions offer numerous opportunities to increase cash flow and enhance the underlying value. Since acquiring the properties, we've already leased the bulk of the available space as well as making excellent headway with recapturing and re-leasing below-market space.

Also, after acquiring one of the properties, an expansion opportunity came to life that wasn't part of our original underwriting. We quickly seized on the opportunity and have already completed the expansion, which is fully leased.

Looking ahead, there are a number of opportunities to continue increasing cash flow through re-leasing below-market space as well as potential significant opportunities down the road involving key anchor tenants that are looking to expand their stores.

Perhaps the most important aspect of our 2017 acquisitions is their location attributes. As omnichannel retailing continues to have an increase in impact on bricks-and-mortar stores, having shopping centers ideally situated in sought-after markets is more important today than it's ever been in our industry and will no doubt be a critical component of our continued success going forward.

Our 2017 acquisitions are well-situated in demographically strong markets, markets where tenant demand continues to accelerate. 5 of our 10 acquisitions in 2017 are located in the 2 fastest-growing markets in the country, being Seattle and Portland. Additionally, 2 of our acquisitions are located in the San Francisco metro area, including a terrific shopping center in the heart of the Silicon Valley. We also added several prominent grocery anchored shopping centers locating in Orange County's key retail hubs.

In addition to being located in markets that retailers continue to seek out, these are markets that are supply constrained with significant barriers to entry, which is an extremely important attribute from our perspective as it's one of the core underlying drivers in our ability to consistently achieve rent growth as well as serving to protect our downside risk.

One additional key aspect of our acquisitions given our already strong presence in these markets is that the new acquisitions serve to strategically enhance our ability to work and maneuver tenancies at our various properties and potentially unlock the embedded growth in below-market leases. With our portfolio being virtually full today at over 97% leased, with the tenant demand as strong as ever, we think that maneuverability synergies will be an increasingly important part of our leasing initiatives going forward.

And speaking of leasing, we posted another very strong year in 2017. While the retail industry turmoil adversely impacted a broad range of retail properties across the country, that was not the case with our portfolio. As Rich will discuss in a minute, in 2017, we continue to remain in our high occupancy throughout the year and again achieved solid rent growth. Additionally, for the sixth consecutive year, we steadily grew same-center cash NOI, posting a 3.1% growth for 2017. While we are pleased with that number, we had expected for it to be a bit higher, closer to 4%. The difference was primarily a result of new anchor tenant openings that occurred later in the year than originally planned and the effect that it had with other tenancies. The good news is that the new anchor tenants are now open and performing well.

In summary, by sticking to our core principles and capitalizing on our core strengths, we grew our portfolio in 2017 pursuant to our stated objectives and advanced our strong operating platform from across the West Coast. In light of our growth in performance, we are pleased to announce that the board has increased the company's dividend for the eighth consecutive year, raising our dividend by 4%.

Now I'll turn the call over to Michael Haines to take you through the details of our financial results. Mike?

Thanks, Stuart. For the 12 months ended December 31, 2017, the company had $273.3 million in total revenues and $93.7 million in GAAP operating income as compared to $237.2 million in total revenues and $77.2 million in GAAP operating income for 2016. For the fourth quarter of 2017, the company had $72.8 million in total revenues and $26 million in GAAP operating income as compared to $63.1 million in total revenues and $22 million in GAAP operating income for the fourth quarter of 2016.

With respect to GAAP net income attributable to common shareholders, for the full year 2017, GAAP net income was $38.5 million or $0.35 per diluted share as compared to GAAP net income of $32.8 million or $0.31 per diluted share for 2016. For the fourth quarter of 2017, the company had GAAP net income of $10.8 million equating to $0.10 per diluted share as compared to GAAP net income of $9.6 million or $0.09 per diluted share for the fourth quarter of 2016.

In terms of funds from operations, for the full year of 2017, FFO was $138.9 million as compared to FFO of $124.8 million for 2016. On a per-share basis, FFO was $1.14 per diluted share for the full year 2017, representing a 5.6% increase over FFO per diluted share for the full year of 2016.

For the fourth quarter of 2017, FFO totaled $37 million as compared to FFO of $33.2 million for the fourth quarter of 2016. On a per-share basis, FFO was $0.30 per diluted share for the fourth quarter of 2017, representing an 11.1% increase over FFO per diluted share for the fourth quarter of 2016.

Turning to our balance sheet and financing initiatives for 2017. As economic growth took hold through the course of the year, putting increasing pressure on interest rates, one of our primary objectives in 2017 was to reduce our floating rate debt exposure. A year ago, at the outset of 2017, approximately 25% of the company's total debt was effectively floating rate. During 2017, specifically in the fourth quarter, the company completed a $250 million private placement of 10-year fixed rate unsecured bonds. We utilized the proceeds to pay down our floating rate credit line. Additionally, we entered into 2 interest rate swap agreements that, combined with our existing swaps, our entire $300 million floating rate term loan is now effectively fixed. As a result of these initiatives, at year-end 2017, 90.5% of our total debt was effectively fixed rate. Meaning, less than 10% of our debt was floating rate.

Along with reducing our floating rate debt exposure in 2017, another key objective for us was to enhance and extend out our debt maturity schedule. During 2017, we recapped both our credit line and term loan, extending out the maturities by another 3 and 4 years, respectively. As a result, we only have one small loan that matures later this year. And beyond that, we have no debt maturing until 2021, 3.5 years from now, and when our credit line comes up for renewal, which we have the ability to extend out further.

In terms of equity capital, during the fourth quarter 2017, in connection with 2 acquisitions, we issued approximately 2.6 million shares of common stock based on the value of $21.25 a share, equating to approximately $55 million of equity. Additionally, during the past couple of months, in December and in early January, we issued approximately 109,000 shares through our ATM program, raising approximately $2.2 million in net proceeds.

Going forward, we may look to utilize our ATM program further when market conditions are suitable. Taking into account our capital-raising initiatives during 2017, at year-end, the company had a total market cap of approximately $4 billion, with $1.5 billion of debt outstanding equating to a debt-to-total market cap ratio of 37.8% at year-end. And as I mentioned, 90.5% of our debt, totaling roughly $1.4 billion, was fixed rate at year-end with a weighted average from remaining maturity of 7.6 years.

In terms of our credit line, we had approximately $144 million outstanding as of December 31. Importantly, the vast majority of our debt is unsecured. In fact, at year-end, 93% of our total debt was unsecured, with only $106 million of mortgage debt outstanding and covering only 6 of our properties. In other words, 85 out of our 91 shopping centers are unencumbered.

Now I'll turn the call over to Rich to discuss property operations. Rich?

Thanks, Mike. As Stuart indicated, notwithstanding the adverse trends that affected much of the retailing sector this past year, our portfolio continue to perform very well. Demand for space continues to be very strong in the daily necessity neighbored shopping center sector, particularly on the West Coast and specifically as it relates to our protected supply constrained markets and our portfolio.

We continue to make the most of this ongoing demand. Throughout the year, in fact, during every quarter, we achieved a portfolio lease rate above 97% and ending 2017 at a very strong 97.5%, which is now our fourth consecutive year above 97%.

Breaking the 97.5% number down between anchor and nonanchor space, at year-end 2017, our anchor space was 100% leased and our shop space was 94.4% leased. With respect to the economic spread between build and lease space, at the beginning of 2017, the spread stood at 4.7%, representing just over $8 million of additional incremental annual base rent on a cash basis. During the course of 2017, the bulk of the new tenants associated with that 4.7% spread took occupancy and commenced paying rent, albeit a good portion of those tenants didn't take occupancy until late in the year, as Stuart touched on, in large part due to the lagging municipality permitting process.

Of the incremental annual $8 million, only $4.5 million of that was reflected in our 2017 cash flow. Taking into account our leasing activity during the past year, as of December 31, 2017, the economic spreads stood at 3.6%, representing $7.8 million in additional incremental annual base rent on a cash basis, which we expect will come online as we move through 2018.

With respect to our leasing statistics, during 2017, we continue to achieve solid rent growth each quarter, which was broad-based across of all of our markets. Specifically for the year, we executed 420 leases totaling approximately 1.4 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 1.4 million square feet of leasing between new and renewed, we executed 155 new leases totaling 397,000 square feet, achieving a strong 26.6% increase in same-space cash rents. And we renewed 265 leases totaling 958,000 square feet, achieving a solid 9.6% increase in cash rents.

During this past year, more and more of our tenants were proactive in coming to us well in advance of their lease expirations to renew their leases, in some cases, as much as a year in advance. We think this trend is indicative of how well tenants are performing across our portfolio as well as underscoring the strength of our markets and the location attributes of our specific shopping centers.

Turning back to our leasing stats. During the fourth quarter, we executed 102 leases totaling 393,000 square feet, including 38 new leases totaling 96,000 square feet, achieving a 14.1% increase in same-space cash rents. And we renewed 64 leases totaling approximately 297,000 square feet, achieving a 9% increase in cash rents.

One of the key drivers to our strong same-space increases during 2017 was our success in recapturing a combination of below-market and underperforming spaces and releasing those spaces to much stronger retailers and at considerably higher rents. During this past year, we successfully recaptured and released over 230,000 square feet, adding approximately $1.8 million in incremental annual cash flow.

We have worked very hard over the past 3 years, aggressively recapturing underperforming space. In total, we recaptured over 800,000 square feet during that time. As a result of our efforts, today, our tenant base is as strong, diverse and balanced as it has ever been.

Now I'll turn the call back over to Stuart.

Thanks, Rich. Our overrunning message today that we want to make clear is that the core drivers of our business remains sound. In fact, they've never been stronger in our 25-plus years’ experience. All of the key metrics from the overall economy and job growth to our core market demographics and the fact that there continues to be no new supply to speak of and the barriers to entry among the highest in the country, all of these metrics remain favorable. That said, even with our portfolio being rock solid and the fundamentals being as strong as ever, we're not immune to the current stock market view towards REITs in general and, specifically, towards retail REITs. With that in mind as we start out here in 2018, we are taking a cautious approach, as reflected in our initial FFO guidance, of $1.16 to $1.20. Our guidance is based on only a minimal amount of acquisition activity in 2018. Specifically, it simply incorporates the 2 shopping center acquisitions that we currently have under contract totaling $35 million. While the acquisition market across the West Coast continues to be active, and we continue to see a number of interest in off-market opportunities, we feel the prudent approach in this current environment is to be patient and wait to see how the acquisition market evolves.

In terms of same-center cash NOI, our guidance assumes a range of 2.5% to 3.5% growth for the full year 2018. The lower end of the range is purely based on simply re-leasing space that is currently scheduled to expire in 2018, a good portion of which could be renewals based on the dynamic that Rich described.

Our guidance also takes into account some additional equity, as Mike touched on, between $25 million and $50 million through the course of the year.

Finally, while it's safe to say that none of us here at ROIC are enjoying the uncertain stock market environment that we currently find ourselves in, rest assured that we are up to the challenge and remain firmly committed and fully focused on continuing to prudently build our business and enhance long-term value.

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

(Operator Instructions) Our first question is from Christine McElroy of Citi.

Just, Stuart, following up on some of the assumptions and guidance. Just given the timing of those lease commencements that you mentioned in Q4, just the later commencements that you thought, does that mean that given that those are coming online, should we see outsized same-store NOI growth in sort of Q1, Q2 versus the full year range of 2.5% to 3.5%? Can talk about sort of the trajectory there that we should expect?

We'll probably start the year out on the lower end of the guidance. And as we move through the year, what our models are showing is a pretty large increase. But on average, it's 2.5% to 3.5%.

Okay. Because it seemed like the -- and maybe there is some other factor at play here, but it seemed like the growth was expected to be pretty high in the fourth quarter should the commencements have occurred. I would've thought that it -- as those have come online, it would have been higher earlier in the year. But maybe it's -- maybe there's a timing issue there.

Yes. I think as Rich touched on, I mean, there's still a number of tenants that are under construction and were waiting to get occupancy on. We did see a lot of that at sort of towards the tail end of the fourth quarter. But to be conservative, we've looked at modeling same-store a bit on the lower side as we move to the first -- for the first couple of quarters.

Okay. And then how should we think about -- as your acquisition case is pulling back, how should we think about the GAAP rents versus the cash rents as some of the size 141 presumably starts to burn off? Is there inherent guidance? Is there a decrease in noncash rents that you're expecting?

We didn't get that granular on the budgeting on the noncash rents, but I don't know that we'll have a significant trail-off of the noncash rents in the -- in 2018 based on the current tenant base.

And again, part of that will be with the velocity of leasing that we currently are experiencing as we move -- as we get through 2018. As Rich articulated we're leasing double what's rolling over.

Okay. And then just lastly, on the $25 million to $50 million of equity issuance that you mentioned, can you give us what the average price that you're assuming inherent in your guidance and sort of the timing of that?

We're -- well, it's going to be kind of spread across the year based on market conditions, but our goal is to be about $20, like we were with the shares that we issued in December and early January. So that set our guidance ranges based on the varying additions, price assumption, both slightly above and below that. So $20 or above is what we're looking for.

Our next question comes from Collin Mings of Raymond James.

Just going back to guidance. Can you just update us on the status of the assets you previously discussed as being lined up for sale? And then just any sort of additional thoughts around dispositions that you might be contemplating at this point.

Well, the dispositions, I think, that we announced late last year are really 2 properties that are being redeveloped. So those are still moving forward, going through the entitlement process, and we do expect those to close a bit later on in the year. So that's sort of where things are set in terms of what we've announced. We're currently looking at possibly some other dispositions, but nothing to announce at the present time.

Okay. And then just given your aggregate exposure, Stuart, just how are you viewing the Albertson's-Rite Aide deal? And just thoughts around tenant concentration?

Sure. I'll let Rich address that.

Sure. From our perspective, we think the merger is a positive. We think the combined companies' credit profile will be stronger. As it relates to our portfolio specifically, we have 21 shopping centers that have Albertson's, Safeways or [bonds] at the grocery anchor that, together, account for 6% of our total base rent. And we have 14 shopping centers with Rite Aid as the tenant that account for about 1.6% of our total base rent. Of the 21 shopping centers, only 8 of those currently have drugstores as well, so there's a potential for Albertson's to bring Rite Aid to the additional shopping centers in our portfolio, either within the existing footprint or possibly taking additional space. But either way, we think it would enhance foot traffic at our centers. And it's safe to say, we are looking forward to discussing it in more detail with Albertson's and Rite Aid as they move forward.

Okay. And then one last one for me, and I'll turn it over. Just, Stuart, can you just maybe just expand upon the 2 acquisitions on your contract, just in terms of timing as far as closing? And just given that -- I believe they are 100% leased. Where's the upside? Again, that's something I know that you typically try to target when -- while these acquisitions just kind of embedded upside that you have visibility on. So can you maybe just talk a little bit more about that?

Sure. Well, I'll start out with the one that we're closing sooner, which is Seattle. Stadium is actually recording tomorrow morning. And this is a very strong asset located in a very -- in an area of Tacoma that is being gentrified and urbanized. Also, this is going to be -- this particular shopping center is going to have a major stop on a monorail system that is currently under construction. So this will be at the doorstep of downtown Tacoma from a transportation perspective. Grocery is doing extremely well. It's a pretty new center from the standpoint that the shopping center has been renovated, but the good news here is there are some very nice lifts in rents. And we bought it pretty -- at a pretty good unlevered return. King City is probably going to close, which is the deal in Portland, will close in the next several months. We've given that a bit more time for the seller to find a 1031 exchange. This one's a bit different. This one has been one owner, approximately 25, 30 years of ownership, family-run with extreme -- with a lot of upside in terms of rollover on the leases. It's also located very close to 2 other centers we own in a very strong part of the market. And with the acquisition of this asset, we will actually control this submarket in terms of owning all the grocery-anchored centers, which will give us a lot of power in terms of raising rents in the submarket itself. We're very excited about this one. There is a lot of juice, as we say. And that's really the quick overview of both acquisitions.

Our next question comes from Wes Golladay of RBC Capital Markets.

Stuart, in your prepared remarks, you mentioned that the anchors opening late in the year, I think, you said impacted the other tenants. Can you elaborate on this? Does it convert percent rent to full-paying rent? Does it improve recoveries? I just want to get additional color on that comment.

Sure. Yes, I mean -- this is Rich. That's -- it's all the things you mentioned. With the delay there of one tenant at the Crossroads fell into co-tenancy. But now that the anchor tenant's open, they're back out, but that had an impact. And then as you mentioned, it also trickles down to the recoveries as well in many circumstances. So I think you've hit on the high points.

Okay. And looking at the guidance for the year, the same-store of 2.5% to 3.5%, I mean, it looks like the base rents will be at least picking up throughout the year. Is there anything we need to look at as far as bad debt or the -- or recovery ratio that may be pulling it down?

I don't think so. Our bad debt it's -- we budgeted about 1% of -- for bad debt in our guidance, which is generally a little bit on the conservative side because our actual bad debt expense runs a little bit less than that, actually. So that wouldn't be impacting our same-store.

Okay. And then what about the recoveries? It looks like they were down about 3% for recoverable expenses, about 90% to 87% this year from 2017? The -- is it -- do we just have a normal run rate now, just abnormally high in 2016? Or should that pick up?

No. That will pick up because as Rich said, that really came in the fourth quarter, which as we talked about it had a bit of an impact on our same-store NOI from the leakage, as you would say, from the co-tenancy up in Crossroads and the lateness of picking up the rent on the 2 anchor spaces both at the Crossroads and at Fallbrook.

Okay. And then can you give us -- how do you see your tenants finality? Do you have a watch list? And how does that compare versus last year?

We still keep a pretty close eye on the portfolio. But given our product type, many of the tenants that have announced store closings in '17 are not in our shopping centers. We have virtually no exposure to those tenants. But we do keep an active watch on all of our tenants on an ongoing basis. But there's no one specific that we're currently worried about.

Our next question comes from George Hoglund of Jefferies.

Just a question. Can you give a little color on cap rates on some of the acquisitions? And then also on some of the upside potential from releasing and marketing these rents to market, what kind of time frame would there be on that?

Well, cap rates on $35 million we have under contract are around 5.75%. And Rich, do you want to talk about the mark-to-market in terms of the portfolio going forward?

Yes. I mean, I think we still see a lot of good rent growth in the portfolio. There are certain initiatives we're currently working on as leases roll over. And we're also proactively working on tenants that may be underperforming in terms of our ability to recapture and release that to a much better tenants at much higher rents.

Our next question comes from Todd Thomas of KeyBanc Capital Markets.

Just a question around the guidance. If we look at the fourth quarter FFO, $0.30 a share, you're forecasting to 2.5% to 3.5% same-store NOI growth. Some acquisitions, the timeline-weighted accretion from the second half of '17 acquisitions, primarily. What causes the quarterly run rate to decrease? What's the offset to FFO in 2018?

Well, I'm going to say, on the upside...

Part of that is the increased debt cost in terms of doing the private placement. That's going to have an impact. But the good news there, as Michael articulated, is that we've termed out that floating rate debt.

Right.

So it's some of -- I think it's primarily that. Mike?

That would be the biggest driver. Because in 2017, the bulk of our acquisitions out. So the OP that we acquired through relative low-cost debt capital.

Okay. And then following up on Christy's question around the delays that you referenced around some of the commencements in the fourth quarter, can you just provide a little more detail there? It sounds like its 2 anchors, in particular, 1 at Crossroads, 1 at Fallbrook. What was the timing in the fourth quarter of those commencements? And how much annualized base rent does that represent versus what was collected in the quarter?

Yes, you're right. It's basically Crossroads where we put in Dick's sporting goods to replace Sports Authority. We also put in Cost Plus World Market to replace the Barnes & Noble. Both of those tenants are -- have opened in December and are both paying rent now. And then down at Fallbrook, it was the replacement for Sports Chalet, Bob's Furniture, which just had their grand opening last weekend, but they started paying rent first of the year. So those were the 3 leases in question.

And because Dick's opened a bit later than what they had anticipated, the co-tenancy kicked in, which had an impact, which was almost unforeseeable because of the lateness of the opening, Todd. The good news is that co-tenancy opened up and then closed very quickly once they open. So that was really the other impact that occurred that we didn't see. And the good news is everyone's paying rent and CAM. And they're all doing very well, so we don't see any fallout from that going forward.

Okay. That's helpful. And just last question. Stuart or Mike also, in terms of leverage here, which is approaching the mid-7x range on the debt-to-EBITDA basis, can you just talk a little bit more about the financing strategy? With interest rates moving higher here, what plans you have to delever from current levels? $25 million to $50 million of equity gets you somewhat lower, slightly, I guess. But what's in the model for year-end leverage? And how are you thinking about leverage overall today?

Well, the total leverage -- I'm not that conservative. The net debt-to-EBITDA calculation is a little bit elevated. And that's why we're planning on working through the market conditions to issue some equity to the ATM to continue to knock that down. We didn't issue any equity in 2017. We kind of have a pattern of doing that year-over-year. But because of that -- primarily, because of the OPN transaction we had kind of pending, $21.25 a share. And on the stock prices, it was below that. We didn't think it was prudent to actually be issuing equity in advance of a limited partner coming in. So we held off during 2017. And now, we're just waiting for market conditions to become more suitable to issue equity to have a chance to knock that net debt to EBITDA down.

Yes. And I mean, Todd, we have a rock -- I mean, the balance sheet is rock solid. I mean, as Michael just articulated, it's really -- that's the item that we're focused on, which is the net debt-to-EBITDA. But all the other elements of the balance sheet are in great shape.

And maturities ...

Unencumbered pool. I mean, you could just go down the list. So we're watching the market closely, as Mike articulated, and we'll see how things go. But certainly, that's the one element of the balance sheet we're focused on.

Sure. Understood. But what if market conditions don't improve as much as you're anticipating? I guess, what happens then? Is your debt-to-EBITDA at this elevated level still a concern? I mean, do you look at asset sales? Or is there some other way that you'll look to delever?

Yes. We keep our mind open in terms of looking at everything, but there's nothing we can articulate to you at this moment.

Right. I think Stuart mentioned earlier that we're taking a very cautious approach to 2018 and waiting to see if this is like a temporary issue in the market or if it's a longer-term becoming more of a normalized. If that's the case, then we'll have to take a different approach. But for now, we're just going to -- taking it very cautiously.

Our next question comes from Craig Schmidt of Bank of America.

This is Justin, on for Craig. I was wondering if you could talk about any changes you've noticed with respect to small shop demand far this year? And whether this be more or less from this time last year? Or just categorically speaking, whether you're seeing an uptick in demand from certain types of tenant?

Well, the first quarter, I'll let Rich get into the particulars. But I will tell you, the first quarter of the year, which is typically the toughest quarter in our business, has turned out, from our perspective, to be one of the strongest quarters we've seen to date from a small shop leasing perspective. But maybe you want to dive into...

I think -- that's what we're hearing back from our leasing director is that they have seen more activity in the first quarter than they have been seeing in past years. They are very optimistic about the future. In terms of small-shop space leasing, being 100% leased in our anchor space, that's primarily where we're doing all of our leasing right now. And the demand still is very strong. It's from the same type of uses that we have been leasing to historically, which are medical and fitness, services, much further away from the retailers of the past, the more Internet-resistant tenants coming out with new concepts that are eager to fill the spaces as we get them available.

And then on future acquisitions, I appreciate the color you gave in your guidance assumptions. But can you talk about what the signs with -- that you're looking for that you need to see the step back in as a buyer? And how do these differ depending on locations that are in California versus Portland or Seattle?

Well, really, none of the markets we're in have deteriorated at all. They've only gotten better. So we're still looking, and we'll continue to look across all our markets. Obviously, the one thing that we have seen more recently is the uptick in the 10 year. So we're watching what impact that might have in terms of a site out there. But Justin, I think, as you know, we've been doing this for close to 3 decades, and we've seen a lot of cycles. So what this -- what the past has taught us is patience is a great virtue, although not a lot of people in our business have it. It is a great virtue to have. So really, it's the signs. Our interest rates, we're looking at any other fallout that could come forward where that may bring potentially pricing up a bit. But right now in terms of the West Coast, grocery-anchored -- widely marketed, grocery-anchored deals cap rates have not moved. So it's still the most sought-after product in the market. And again, we're just -- we're looking at various signs on the ground, but nothing specific that we can point to at this point.

Our next question comes from Vince Tibone of Green Street Advisors.

On previous calls, you guys discussed pad developments being one driver of growth. Can you comment on what the expected impact of pad development is on '18 same-store NOI guidance?

Well, pad development isn't in our same-store, right? It (inaudible)

Yes. It's not in our guidance. We still have about half dozen-or-so different pad development opportunities that we're working on. They're all in various stages. But the majority of that, we would expect, wouldn't come online until later in the year. But as Stuart says, it's not in our guidance. This would be an add-on.

Okay. Just wanted to clarify that. So any redevelopments -- pad development rollout on -- that will all be excluded from same property guidance?

Yes, yes.

Correct.

And is there any rough AVR you can peg for us in terms of what you expect roll out in the back half of the year?

It's hard to say just because of the entitlement process and other consents that we need to build these pads, but I -- So I don't have a specific number in front of us. We obviously are tracking a number, but I don't have it with me.

Okay. All right. And then are you still considering any dispositions in Sacramento or any other portion of your portfolio in the near term?

Yes.

Our next question comes from Michael Mueller of JPMorgan.

Just curious. Do you have a sense as to what level of cap -- interest rates would have to move through before you start to see cap rates in your market start to move?

Tough question to answer. We've seen the 10 year move certainly from a year ago, probably 50, 60 basis points, with no impact to pricing. So it's hard to really determine what impact it will have. The buyer profiles have shrunk with the raise of the interest rates. That, we've seen. But I would probably tell you, Mike, you've got to see at least another 25 to 50 basis points increase in the 10 year before you see anything. It's still the most sought-after product on the market, referring to Dominick's grocery anchorage shopping centers. And the West Coast, in my view, is the most sought-after market in the country. So it's a tough question to answer.

Our next question comes from Chris Lucas of Capital One.

Just a couple of follow-ups. Stuart, just on the dispositions question. I guess, the question I would have is, are you building any dispositions into guidance for 2018, recognizing that you're waiting for some entitlements to -- for them to move forward on?

No, it's not in our guidance. Although we are -- the 2 entitled properties get closed in '17, that's -- there's no NOI associated with those. It's just that -- this paydown on our balance sheet. So there's no NOI. But right now, in our guidance, no, there's no -- there's nothing that we're modeling in terms of selling.

Okay. And then I don't know if I missed this, but do you have the base minimum rent for -- with the lease to commence spread, what that dollar value represents at the end of fourth quarter?

The amount that's still to be received?

Yes. But the book between what's been leased and what's commenced, what's that variance?

Well, we have about $7.8 million that is not commenced representing about 3.6%.

In spread.

That's in the spread, as we said, at the end of the year. Is that what you're looking for?

Okay. Yes, yes. I just missed that. I'm sorry.

No problem.

I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Tanz for any closing remarks.

In closing, I would like to thank all of you for joining us today. We greatly 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.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.