Retail Opportunity Investments Corp (ROIC) 2018 Q1 法說會逐字稿

Welcome to the Retail Opportunity Investments 2018 First Quarter Conference Call. (Operator Instructions) 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 law. 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 risk and factors as well 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.

As 2018 gets fully under way, we are pleased to report that the company is off to another solid start. Demand for space across our portfolio in core markets continues to be strong. While the first quarter of each year is typically relatively quiet on the leasing front following the holiday season, that has not been the case for us this year. In fact, it's been the most active first quarter on record for ROIC. We leased over 400,000 square feet driven in part by tenants proactively coming to us to renew their leases well ahead of their lease expirations. In terms of new leases, we continue to not only achieve solid rent increases overall, but we're also making the most of the broad demand to carefully select the best retailers based on their financial strength and their ability to consistently draw daily customers as well as the right fit at each center in terms of retailer mix. Rich will go through the details in a minute, but it's safe to say that we're off to an excellent start in 2018.

With respect to acquisitions, as we commented on our last call, given the volatility in the market, we are being cautious in this environment, and have prudently slowed our activity for the time being. With that in mind, as previously announced, we only acquired one shopping center in the first quarter, a property located in the Seattle market, which continues to be one of the hottest markets in the country. In fact, the state of Washington was recently ranked as having the best state economy in the country with the ongoing pet boom in Seattle leading the way.

The shopping center that we acquired is located in Tacoma, which is a densely populated submarket of Seattle. Immediately surrounding our shopping center, there are number of new multifamily developments under construction that are geared towards young professionals. Additionally, the city of Tacoma is in the process of expanding their light rail transportation system that includes a stop directly in front of our shopping center. We think the long-term prospects of this grocery-anchored center are very promising. With this acquisition, we now own 16 grocery-anchored shopping centers in the Greater Seattle market, totaling upwards of 2 million square feet.

We also have one additional grocery-anchored shopping center acquisition under contract that's located in Portland, which is another very strong, rapidly growing, top-ranked market. The property that we are acquiring is located in a mature, established submarket of Portland, where we currently own several other key grocery-anchored shopping centers. In fact, with this new acquisition, we will own all of the grocery-anchored shopping centers serving this submarket, which will add to our ability to maneuver tenants, drive rents and enhance long-term value.

Beyond these 2 acquisitions, we continue to keep a close eye on the market. As it relates to widely marketed, grocery-anchored shopping centers, while the deal flow has slowed a bit as compared to the level of activity during the past several years, there still continues to be plenty of properties on the market. And while there aren't as many buyers as before, the ones that are in the market are still aggressively pursuing grocery-anchored properties such that pricing has only moved marginally.

Cap rates have generally been in the low-5s so far this year, or about a 25 basis point increase on average, give or take, from the record low cap rates that we saw last year. That's pretty well consistent across all our metro markets up and down the West Coast. In terms of off-market, privately-held shopping centers, while the flow of inquiries remains active, seller pricing expectations haven't changed much to speak of thus far as people are waiting to see which direction the market and interest rates will head once the current volatility settles down. Taking all of this into consideration, we intend to continue being patient.

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

Thanks, Stuart.

For the 3 months ended March 31, 2018, the company had $74.4 million in total revenues and $27.3 million in GAAP operating income as compared to $65.9 million in total revenues and $22.9 million in GAAP operating income for the first quarter of 2017.

GAAP net income attributable to common shareholders through the first quarter of 2018 was $10.7 million, equating to $0.09 per diluted share, as compared to GAAP net income of $10.2 million or $0.09 per diluted share for the first quarter of 2017.

In terms of funds from operations for the first quarter of 2018, FFO totaled $37 million, equating to $0.30 per diluted share as compared to FFO of $34.3 million or $0.28 per diluted share for the first quarter of 2017.

Included in other income during the first quarter, we received a $2.2 million lease settlement payment from a former tenant at a property that's slated to be sold and redeveloped as multifamily.

In terms of property-level net operating income, on a same-center comparative basis, which includes all the shopping centers that we have owned since the beginning of 2017, encompassing about 90% of our total portfolio GLA, cash NOI increased by 2.4% for the first quarter of 2018 as compared to the first quarter of last year. Bear in mind that with our portfolio at over 97% leased, specifically 97.5% for the same center pool both this quarter as well as last year, which is essentially full, we still continue to consistently achieve same-center NOI growth. In other words, our growth isn't coming from the benefit of increasing occupancy through leasing up vacant space. Our consistent growth is a function of our entire team all working together, from our leasing personnel working hard to drive rents higher as leases roll, to our accounting team working diligently to maximize recoveries, to our property management folks working to operate our properties as efficiently as possible. It's this coordinated effort of proactively working our portfolio by our entire organization that continues to drive our performance.

Turning to the company's balance sheet. At March 31, the company had a total market capital of approximately $3.7 billion with approximately $1.5 billion of debt outstanding. For the first quarter, the company's interest coverage was 3.4x. With respect to the $1.5 billion of debt, the vast majority of that is unsecured. In fact, during the first quarter, we reduced our secured debt outstanding, retiring a $10 million mortgage, leaving us with only $96 million of secured debt today. In terms of our unsecured debt, the bulk of it is long-term, fixed-rate bonds with a weighted average remaining maturity of 7.6 years. And regarding our unsecured credit facility, at March 31, we had approximately $160 million outstanding on our line.

Lastly, in terms of our FFO guidance, thus far we are on track with our previously stated guidance of achieving FFO between $1.16 and $1.20 per diluted share for the full year 2018.

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

Thanks, Mike.

As Stuart highlighted, demand for space across our portfolio is strong, and we continue to make the most of it. And as Stuart touched on, the demand continues to be driven by a broad base of retailers, most notably in the services, fitness and restaurant sectors, where there continues to be an abundance of new concepts being introduced, particularly unique, boutique-like concepts that are tailored for specific targeted consumers. By and large, these focus new concepts are proving to be very successful across our markets.

We're also seeing a growth -- growing influx of retailers from other parts of the U.S as well as some from Canada looking to enter the West Coast, again with very specific demographic parameters and with the goal of positioning their businesses at the most convenient, accessible locations in the heart of their target customer bases.

In short, it's safe to say that our tenants today, from the local mom and pops to the growing regional retailers to the expanding national players, they're all keenly and astutely drawn to the location attributes and surrounding demographic profiles of our shopping centers.

Looking at our specific results thus far in 2018. We continue to maintain our portfolio lease rate above 97%. At March 31, our portfolio stood at 97.4% leased, representing the 15th consecutive quarter of achieving portfolio lease rate at or above 97%. Breaking that 97.4% down between anchor and non-anchor space, at March 31, our anchor space was a full 100% leased and our shop space stood at 94.4% leased.

As Stuart noted, the first quarter of 2018 was our most active first quarter to date. Specifically, we leased 424,000 square feet, which is already more than half of the total amount of space scheduled to roll during the entire year. Of the 424,000 square feet, nearly 80% of that involved renewals, including many tenants that came to us well in advance of their lease expirations, including a number of key anchor tenants.

While we achieved a solid 8.3% increase in cash rental renewals, most of the renewals involved tenants exercising options with fixed increases. A majority of these fixed increases are notably below the current market. As a result, there continues to be considerable embedded growth in these leases going forward.

In terms of new releases, given that our portfolio is near 100% full at 97.4% leased and less than 4% of our portfolio is rolling this year, this means that we only have a limited amount of available space. As such, we're focused not only on capitalizing on the rent growth across our markets but also on continuing to bring the right retailers to our centers, retailers that complement existing tenancies and serve to grow shopper frequency and enhance the appeal and value of our properties.

Specifically, during the first quarter, we executed 26 new releases totaling 85,000 square feet, achieving a 21.6% increase in same-space cash rents on average.

And just to give you an example of our thought process in terms of selecting the right tenants, during the first quarter at one of our grocery-anchored shopping centers, we had an anchor tenant's lease expire, which was a regional theater operator. While we had a number of new anchor retailers highly interested in the space, the regional theater had been acquired by a well-established national chain, and they came to us wanting to sign a new long-term lease at a much higher rent with a plan to convert the space to the new, popular, stadium-style, reduced seating format. What that meant from our perspective is that we could get a substantial increase in rent with no downtime between leases, backed by a corporate guarantor, and it's a user that will bring consistent consumer traffic to our center. Furthermore, the reduced seating format will free up a considerable amount of dedicated parking per the city requirement, whereby we can now introduce several new restaurants to our property, which are in high demand and will further drive daily consumers to our center. In short, this one lease transaction will serve to notably enhance our property in several important ways.

Lastly, in terms of the economic spread between build and lease space, at year-end the spread was 3.6%, representing $7.8 million in additional annual rent on a cash basis. During the first quarter, tenants representing about $2.8 million of that incremental $7.8 million have started paying rent, of which $429,000 of the $2.8 million was received in the first quarter. Taking the $2.8 million into account together with our leasing activity during the first quarter, as of March 31, the spread was about 3%, representing approximately $6.8 million, which we expect will come online as we move through 2018.

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

Thanks, Rich.

Looking ahead, the strong and broad demand for space bodes well for the future prospects of our business not just near term but long term as well, especially given how protected our markets are. Notwithstanding the demand for space given the lack of available land and the difficult entitlement process on the West Coast, there continues to be very limited new supply, especially as it relates to grocery-anchored sector and the specific metro markets that our portfolio is focused in.

Additionally, the strength and diversity of our tenant base also bodes well for the future prospects of our business. While many shopping centers across the country continued to be adversely impacted by internet retailing, that's not the case with our portfolio. We focus on leasing to retailers in the daily necessity sector and tenants that provide goods and services that bring shoppers to our properties consistently like restaurants, doctors dentists, salons, fitness clubs, just to name a few, as well as entertaining users like Rich spoke of. In fact, today, over 80% of our revenue comes from these types of tenants, with supermarkets being the largest given that 95% of our portfolio is grocery anchored. Additionally, today our tenants are implementing innovative omnichannel internet strategies to enhance their bricks-and-mortar productivity.

In summary, we look forward to continuing to work hard at taking full advantage of the strong fundamentals across our markets as well as taking full advantage of the strong portfolio and tenant base that we've built over the years to continue building value and delivering solid results.

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

(Operator Instructions) And our first question comes from the line of Collin Mings from Raymond James.

Just to start, Stuart, just going back to your prepared remarks on the acquisition environment. That 25 basis point move in cap rate, should we think about that being an apple-to-apples comparison? Or is that a kind of a reflection of the mix of deals getting done this year?

It's a mix of deals. It's not what I would call -- I mean, it's more specific to the metro markets and grocery-anchored shopping centers, but it is a bit of mix in terms of the number of retailers. So it's primarily across the whole West Coast, but every property is going to be different in terms of where that pricing is going to end up and how wide that number is going to be.

Got you. But I guess the overall takeaway or message there is there has -- you have seen some upward pressure on cap rates in the current environment?

We have, but it's very little. And it's -- very little on the margin, as I said in my prepared remarks.

Okay. And then can you also maybe update us on how you're thinking about the trajectory of same-store NOI growth through the remainder of the year? Last quarter, it seemed like you suggested that 1Q would likely be the low point and kind of build from there in terms of year-over-year growth. Maybe just update us on how you think about that through the remainder of the year.

Sure. I mean, I think as we articulated in our call, our last call, we expect same store to ramp up primarily as we move through the year. But certainly, as we head into the second half of the year, that's when we get a full run rate in terms of all the anchor leasing that -- or repositioning we've done as well as the leasing that we've done. So again, it looks like it will continue to ramp up and with some -- certainly some very nice increases as we move towards the end of the year.

All right, one last one for me and I'll turn it over. Just as far as dispositions, Stuart, I know this has been something we've talked about a lot over the last several conference calls. But just updated thoughts there in context of your prepared remarks about the deal and acquisition environment and there still being a -- quality buyers out there, but maybe that buyer pool has come down a little bit in terms of size.

Yes, the buyer pool has shrunk. But certainly, any capital that's out there looking for retail, the focus is grocery, drug anchored in the, again, the more affluent primary markets. Dispositions, I think, as we articulated, we are in the midst of selling a couple of assets that are being redeveloped as residential properties, and both are going through entitlements, which we're helping to expedite, and we expect to have that completed as we moved through the year. And we are looking at a couple of other properties as well at the present time, and we'll have a bit more hopefully to talk about at our next call regarding what we're doing there.

And our next question comes from the line of Christine McElroy from Citi.

Just Stuart and Rich, you both talked about record leasing volumes in the quarter and more tenants proactively coming to you early to renew. Maybe you could expand on those comments a bit. Why do you think that's happening today in this market? Is it happening more among the anchor space or the smaller shop space? Just expand on that a bit.

Sure. I mean, we see most of the activity probably in the anchor space. I think that some of our anchor leases are coming up with either no options remaining or only one option remaining. The anchor tenants are looking out a bit further than the committed term that they have available to themselves. They want to put capital into the stores in many cases, and they need term. So it's bringing them to come to us earlier than their stated option would require them to so that they can invest capital in the space. We have Kroger adding fuel to one of our properties. So now they want to extend out the grocery store to be coterminous with this new fuel station. There's lots of motivation, but they -- it's usually because they want to invest in the location.

Okay. And then just regarding your new CapEx disclosure on Page 6. Can you talk about the difference between the tenant improvements and the value-enhancing kind of improvements? Is the value-enhancing portion related to some sort of redevelopment or expansion activity?

Yes, I wouldn't say it's necessarily a redevelopment or expansion. The value enhancement TIs, if we kind of break those up from regular TIs, which are primarily more of the shop space, but the value enhancement TIs are those associated with situations where we proactively recaptured underperforming space and in some cases years ahead of the leases expiring, or recently acquired properties and release it to stronger retailers at higher rents.

Okay. So it's all this sort of normal leasing CapEx still?

In a sense, yes. I think that these are -- relate primarily more to anchor spaces than small-shop tenants.

Got you. And then just lastly, on...

It's really more reconfiguring the spaces versus going and just finding one vacancy and re-leasing the one vacancy. It's looking at really the what we call the tenant mix and the repositioning of that tenant mix playing offense versus just sitting around and waiting for them to renew their leases. We look at where we could -- with the tenant demand at west we would have the ability to look at expirations and then enhance the real estate versus just lease what's there.

Okay. Got you. And then, lastly, just a follow up on Collin's question. You talked about cap rates in your market increasing a little bit at the margin, but the cap rate implied by your stock price has risen meaningfully more over the last year. To what extent does that motivate you to get more aggressive on disposition? So you talked about what you're doing, but maybe your motivation there? And whether it's dispositions or putting it towards share buybacks or even something bigger to the extent that you have this public/private valuation gap that exists today?

Well, the gap has gone quite wide for ROIC. Certainly, looking at more debt dispositions as we move through the year. But I think more importantly, what investors really need to understand and look at today in terms of the sector is really looking at the management teams. And I think one thing you're going to get with this management team is one that is battle tested, as we say. We've been through many recessions. We've seen many things occur over the years. And with the high quality portfolio that we have, we feel being patient is the best thing to do at the present time. So certainly, we're looking at share buybacks, and we're looking at increasing dispositions and other things. But the reality is that, the good news is that, we are in a great position to be thinking outside the box, and more importantly, staying very proactive in playing offense on the West Coast.

And our next question comes from the line of Wes Golladay from RBC Capital Markets.

Stuart, looking at that gap of -- that 3% gap versus lease versus economic. Do have a sense of how much is in the same-store pool? Or should we just expect outside growth from the non-comp pool this year?

We don't have the -- I don't know that broken down in front of me. So I really couldn't give you an answer at this time. We could follow up with you after the call.

Okay. Sounds good. Stuart, you also mentioned still playing offense. Are you looking to gain control at any more of your sites? And are you looking at any incremental dispositions of non-income-producing assets?

I mean, the answer is yes. We're looking at a couple of opportunities in terms of either it's some land that is beside one of our centers or maybe an opportunity even within the center in terms of repositioning. But that's our normal business as we say. I think that could be it and -- just in terms of looking at the real estate. Dispositions, we are continuing to focus on, but nothing really to talk about at the present time, but we're making some headway there.

And our next question comes from the line of Jeff Donnelly from Wells Fargo.

Just Stuart, I guess, thanks for the commentary on, I guess, capital markets. You mentioned that there might be fewer buyers showing up for transactions. I'm just curious, what sorts of buyers are backing away or not showing up in your opinion?

Certainly, private companies. We don't see as many syndicators, speculators, people that really are looking to deploy capital on a short term. These are really buyers that are much longer term as it relates to investing their capital. So it's institutional capital. It's 1031 buyers. But -- and then, I think there are a number of buyers out there that are like us are being somewhat patient. They are sort of watching the market and thinking about where cap rates might go. Whether they go higher or lower. But I think it's a combination of all 3 in terms of why the pool is smaller. And then I think the financing market is having a bit of an impact in terms of the buyer profile. What we do see out there and somewhat hear is that there's not as much financing available for under-capitalized buyers. So that's having an impact. It's all really all of those that's really impacting what we're seeing in the market at the present time.

Where do you think that threshold is? I'm not sure if you kind of think of it on a loan-to-value basis. Like is it -- is financing or was financing maybe readily available a year ago or 2 years ago at 70%, 80% LTV, and today it's dropped down, I guess? Do you think it's the access to debt or access to debt proceeds in that regard that's pushing people out?

I think it's the cost of debt capital and it's the access.

Actually, I think the lender is probably being a little bit more discerning with who their borrower is, and pushing down the LTV max, sticking with last year's demand depending on the credit quality of the borrower.

And then, just to switch gears. I noticed that, that your weighted average lease term for just nonanchor deals, up deals, have kind of bumped up steadily in the last few quarters from about 5-year deals to closer to 6-year deals. Is that a concerted effort to seek out term on leasing? Or is there something else driving that decision? Or is it really just kind of coincidence, I guess?

I think it's probably mostly coincidence, although we do take a hard look at getting committed term out of the tenants. Particularly tenants that want to get several options, we'll typically require that they commit to more term upfront because it's a bit of a one-way street when you hand out an option. So we do make an effort to get more committed term.

This might be a similar answer, but when I look at the new and renewal shop rents that you're achieving, like in this most recent quarter, it's about a 3% spread to what the average shop rent is that's expiring in 2018 and 2019. Last year, however, that gap was about 6% to 7%. I guess, I'm wondering, do you think that's sort of instructive that leasing spreads could decelerate over the next 12 or 18 months, just simply because either market rents aren't expanding as much or maybe you face slightly higher hurdles and your expiration schedule this year than you did last year?

I don't think we have any higher hurdles this year versus last year. I think that number moves around just depending on the particular deals that happen to be done in that particular quarter. So it's really hard to give -- to nail down a run rate that you'd see going forward. But there's still a lot of good embedded growth within the portfolio.

Yes, we don't see this as a trend, Jeff. This is a -- remember, we have to report every 90 days. As Rich articulates there's so many tenants that expire -- check-out within 90 days. So -- but no, this is -- we don't see this as a trend at all. In fact, as we're in the second quarter right now, we're continuing to see the mark-to-market on our renewals very strong, and in a number of cases, higher than that number, that 3% number.

And our next question comes from the line of George Hoglund from Jefferies.

First question is, in terms of the $150 million, $160 million line balance, any kind of updated thoughts on that, given just how the stock price is performing year-to-date?

Well, that's the only available debt we can pay down, everything else is fixed rate long-term debt. Our repositioning initiative is kind of on the tail end of stuff of the major ones we're proactively doing. Our free cash flow this year should be higher than in the past. That was just simply to delever. Because obviously, the stock price is now where we would like it to be.

So it will be a combination of some asset tails and the free cash flow that will continue to move that revolver...

That segment of our debt farther down.

Exactly.

Okay. And then just looking at shopping center sector more broadly, what's your sense on kind of the M&A environment? Do you think there's appetite out there from private equity or other capital just in terms of larger entity level transactions? And are you guys hearing of any discussions like starting to happen, people kicking the tires out there or is it just everyone is just still sitting on the sidelines?

Well, certainly from an M&A perspective, I don't hear much chatter out there at all. And I think a lot of the other companies are working and spending time on their real estate versus trying to go out and get bigger as we say. I think the one thing that you see in the market today that's playing out certainly with the change in retailing is that the smaller, more focused management team, and which are much more focused management team, I think, certainly has a bit of an advantage, which means the smaller companies just in terms of dealing with the changes that we see out there or changes that might be coming. So from an M&A perspective, I don't really see or hear much activity. I don't think there will be much activity in the sector. I think some of the other CEOs who certainly I've spoken to, when I've asked about M&A have said, why would I want to take on more of what I have at the present time, when I'm trying to work through some of the bigger issues out there as it relates to box retailing, primarily.

And our next question comes from [Han Liang Zane] from JPMorgan. If your line is on mute, please unmute it.

I think you might want to go to the next question.

And our next question comes from the line of Todd Thomas from KeyBanc.

First question, just on the same-store NOI growth and the expectation that you'll see growth ramp throughout the second half. I just wanted to clarify whether there's been any change at all to that 2.5% to 3.5% forecast for the full year?

No. I think we're still maintaining that guidance. I think, we expect in the first half to be lighter than the second half, and actually Q1 came in a little bit better than what we thought it would. But we're -- not enough to make us want to move the overall guidance range.

Okay. And then on the dispositions, are there -- 2 things. Are there any asset sales that are embedded in guidance? And then to the extent that you execute on some asset sales here throughout '18, how should we think about where proceeds will be redeployed today? Stuart, you mentioned the investment pipelines slowing a little bit. I know that can change quickly, but how -- would you prefer to buy assets or are you considering reducing leverage?

It's a combination of both really. I mean, we -- in our guidance, we assume that we would sell some stuff but redeploy that capital as we go. So on a net-net basis, really no change. However, as we look forward, there is still opportunities out there for the company in terms of doing the OP units as well as sourcing off-market deals that have bought good NOI growth. So it's really the churning of the capital in terms of our guidance, Todd. And that's how we've sort of modeled things.

Okay. And then, Rich, the -- in terms of those tenants that are approaching you to renew early. Can you just walk us through those negotiations a little bit? I'm just curious, you're getting compensated with a better mark-to-market than what would be implied by market rents today. And also, how much of this -- how much GLA do you foresee this type of activity for in 2018?

A little hard to target a GLA. I mean, we really deal with these as they come up. We obviously, proactively also reach out when we have a lease that's renewing in a couple years. We know that they don't have any options left. We start that conversation early so that we can get some certainty with our anchor tenants. I don't know that there's any good way to predict from a square footage perspective, but every time something comes up, we look at other opportunities. The Kroger deal I mentioned, where they're putting in fuel, and they now want to put a couple million dollars into that particular store, we are now trying another location together with that. We're going to have them exercise an option early. So not only are we dealing with one shopping center, we're bringing in and using our scale to secure an anchor tenant at another shopping center. So we're working it every single day. There's no doubt about it.

Well, and I think that's the key here, Todd, the fact that you've got a team management team, but a portfolio that is very high quality and very well located and very sought after in terms of retailers. So we have the ability when we deal with one retailer to actually go talk about all their other locations. And that's the power of being in the markets we're in and having the quality of assets and having necessity-based retailing in this market right now. We're still leading the charge in terms of that landlord tenant relationship. And I don't think you're seeing that in too many other places.

Got it. And that's helpful. And then just lastly Rich, you talked about some retailers that are coming to the West Coast from elsewhere in the U.S. and also from Canada. Can you just provide some examples, and maybe just give us a sense for how deep that demand is?

I mean, our leasing team has just, I think this first quarter they have been very impressed with the amount of offers that they have. They have multiple offers on the very few spaces that we have available. And it is coming from very boutique-type of operators. So it's -- we've been very fortunate to have very well located real estate that these new concepts are very eager to be to be in. So our leasing team is very optimistic about 2018 just from the demand that they've seen in the first quarter, which as you know is usually when you have the lowest amount of activity.

And our next question comes from the line of Chris Lucas from Capital One.

Just a couple quick ones. Michael, you mentioned that you -- that the same-store NOI number came in a little bit better than expected. Anything you can point to specifically that would help us understand what that was? And is it stealing or calling forward anything that you might have been expecting later in the year? Or what exactly sort of drove the maybe better-than-expected there?

Nothing that stands out individually. It's probably a collection of small amounts across the portfolio of the centers we're in the same-store pool. But nothing stood out usually different from our budgeting.

And then, Rich, just a question. As it relates to sort of tenant retention or tenant fallout, what have you seen this year that compares to sort of last year or the year before? Are things better or worse with retailers on that front?

I would say, it's pretty steady. In terms of year-over-year, there's been no increase in tenant fallout. The retention rate would remain in the mid-to-high 80s.

Chris, I was just going to say that's kind of reflected in our bad debt. At the end of each quarter we go tenant by tenant and make those appropriate adjustments in terms of bad debt. In the first quarter, they were very and only involving a handful of shop tenants.

Okay. Great. And then Stuart, last question for you. Just as it relates to the -- both the unit conversations that you have with potential sellers. What level of flexibility as it relates to sort of where your stock is that you have relative to the valuation that you are willing to accept? How off of sort of current market pricing are those sellers willing to negotiate?

Well, pricing expectations among these owners haven't moved. So the relationship to unit valuation hasn't been favorable this year. So that's been sort of one of the underlying issues in terms of trading our currency or doing OP transactions. Although, I think certainly sellers are still comfortable in my discussions in terms of looking at a stock price that even with the current valuations at 20 or higher. So it's becoming a bit harder, but on the other hand, most of these owners know us well, know our real estate, and are looking for the long-term investment horizon versus the short-term. So the volatility in the market for them is not as important. But that's sort of where things sit from an OP transaction perspective.

And our next question comes from the line of Craig Schmidt from Bank of America.

The property operating expense on your same-store or same-center NOI, is up 7.2. I just wonder if that's a good run rate for the remainder of the quarters, particularly given the ratcheting up of your same-store NOI growth.

I don't know if was necessarily a run rate, but it's not -- we don't think it's indicative of a trend, it was more a function of the timing once certain expenses were billed and paid.

So we can expect the NOI to climb not only by stronger revenue growth but maybe a little bit less operating expense?

Yes, exactly. If you look at the recovering income increase, that basically tracks with our overall recovery ratio as well. Even though expenses were up, so was recovery income.

And at this time, I'm showing no further questions. I would like to turn the call back over to Stuart Tanz 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, Rich or me directly. Also you can find additional information in the company's quarterly supplemental package, which is posted on our website. And lastly, for those of you that are attending ICSE convention in Las Vegas next month starting May 20, please stop by our booth, which will be in the South Hall at the corner of [End] Street and 50th Avenue. We hope to see you all there. Thanks again, and have a great day, everyone.

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