Retail Opportunity Investments Corp (ROIC) 2013 Q3 法說會逐字稿

Welcome to Retail Investment's third-quarter 2013 conference call. Participants are currently in a listen-only mode. Following the Company's prepared comments, the call will be opened up for questions. Please note that certain matters discussed in this call today constitute forward-looking statements within the meaning of the Federal Securities laws.

Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company can give no assurance that these expectations will be achieved.

Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause actual results to differ materially from future results expressed or implied by such forward-looking statements and expectations. Information regarding such risks and factors is described in the Company's filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K.

Participants are encouraged to refer to the Company's filings with the SEC regarding risks and factors, as well as more information regarding the Company's financial and operational results. The Company's filings can be found on its website. I would now like to introduce Stuart Tanz, the Company's Chief Executive Officer. Please go ahead.

Thank you. Here with me today is Michael Haines, our Chief Financial Officer, and Rick Schoebel, our Chief Operating Officer. We are pleased to report that the Company posted another very strong quarter.

We continue to broaden our portfolio through off-market acquisitions, enhanced value through our management and leasing initiatives, and strengthen our financial position. Starting with acquisitions, 2013 is shaping up to be a record year for the Company.

Thus far, we've acquired 10 grocery anchored shopping centers totaling $368 million, including $154 million acquired in the third quarter. Our most notable acquisition in the third quarter was Crossroads Shopping Center in Seattle which, without a doubt, is considered to be one of the best and one of the most dominant shopping centers in the Pacific Northwest.

You may recall that back in 2010 we made our initial investment in Crossroads, acquiring a 49% interest. While a longstanding strategy is not to pursue joint ventures, we made an exception with Crossroads for several key reasons. First, it's truly a one-of-a-kind shopping center.

Second, we had a longstanding relationship with the owner dating back to our days at Pan Pacific, so we were very comfortable of being able to work well together as partners. And third, our initial investment came with the right to acquire the remaining 51% interest.

When we made our initial investment in 2010, we immediately began to proactively manage and lease the property in conjunction with our partner. In only three years time, we have significantly enhanced the underlying value through a number of remerchandising and retenanting initiatives, along with increasing the occupancy from 87% in 2010, to over 99% today.

Needless to say, we are very pleased to now own Crossroads 100%. Looking ahead, we believe the shopping center has tremendous upside potential, through not only continuing to remerchandise and retenant expiring space, much of which is significantly below market, but also by capitalizing on additional development opportunities at the property.

We consider this asset, given its longstanding prominence in the marketplace and its growth potential going forward, to be the flagship of our Pacific Northwest portfolio which now totals over 2 million square feet.

Based on the relationship that we have successfully established with our partner at Crossroads, we recently acquired from our partner another truly exceptional shopping center, Five Points Plaza, which is a beautiful irreplaceable shopping center located in Huntington Beach, California.

It is considered one of the key dominant shopping centers in the heart of Orange County, and features Trader Joe's as the primary anchor tenant. This location is among Trader Joe's best performing high-value stores in their portfolio.

Like Crossroads, the Five Points center is fully leased, and just like Crossroads, much of the existing leases are well below market so there's excellent upside potential going forward. In connection with the Crossroads and Five Points acquisitions, our partner, Ron Sher, elected to take the majority of his consideration not in cash, but instead Mr. Sher chose to take common equity in the Company in the form of operating partnership units.

In total, Mr. Sher received approximately $46 million in units, based on a valuation of $14.11 per share on average. Needless to say, we valued Mr. Sher as a real estate partner and we are now very pleased and value having him as a shareholder in the Company.

Along with acquiring Five Points, we just recently acquired another exceptional prominent grocery anchored shopping center in Huntington Beach, Peninsula Marketplace. This property was part of the portfolio transaction that we secured in December last year, and represents the fifth shopping center that we've acquired stemming from that one transaction.

And by owning Peninsula Marketplace together with Five Points Plaza, we now own two of the primary grocery-anchored shopping centers that serve the Huntington Beach community. In addition to broadening our portfolio in Seattle and California markets, we also added another exceptional grocery-anchored shopping center to our Portland portfolio where we now own upwards of 1 million square feet.

Our latest acquisition in Portland is specifically in West Linn where we already own one of the dominant grocery-anchored shopping centers in that market. Our latest acquisition features a new Wal-Mart Neighborhood Market, and similar to Huntington Beach, we now have a strong presence in West Linn, owning two out of the four primary grocery-anchored shopping centers that serve the community.

Our third-quarter acquisitions exemplify our ability to capitalize on our market knowledge and long standing relationships to cultivate rare off market direct to owner opportunities to acquire exceptional dominant grocery-anchored shopping centers and deepen our presence in among the strongest most sought after markets on the West Coast.

Turning to property operations in our balance sheet, as Michael and Rich will discuss, we continue to advance our business during the third quarter. Increasing occupancy, achieving solid growth in terms of same-store net operating income, and releasing spreads, and we significantly enhanced our debt facilities and lowered our borrowing costs.

With that I will turn the call over to Michael to discuss the Company's financial results. Mike?

Thanks, Stuart. Starting with our income statement for the third quarter of 2013, the Company had $27.1 million in total revenues and operating income of $6.5 million as compared to $18.9 million in total revenues and operating income of $3.1 million for the third quarter of 2012.

In terms of same-center net operating income, for the seventh consecutive quarter same-center NOI again increased specifically by a solid 5.6% for the third quarter on a cash basis. With respect to net income and funds from operations, during the third quarter of 2013 the Company had net income of $25.3 million, equating to $0.34 per diluted share, as compared to $2.6 million or $0.05 per diluted share for the third quarter of 2012.

FFO for the third quarter of 2013 was $35.4 million or $0.48 per diluted share, as compared to $10.2 million or $0.19 per diluted share for the third quarter of 2012. The substantial increase in net income and FFO was largely attributable to the GAAP accounting treatment of the Crossroads acquisition.

Given that we had previously owned a 49% interest in Crossroads, our interest was reflected in our historical financial statements as an unconsolidated joint venture. In connection with acquiring the remaining 51% interest in the third quarter in accordance with GAAP, the Company reported a one-time non-cash gain on consolidation of $20.4 million.

Turning to our balance sheet, at September 30 the Company had a total market cap of approximately $1.5 billion and $502 million of debt outstanding, equating to a conservative debt to total market cap ratio of 33%. Of the $502 million of debt, approximately 75% of that is unsecured debt including $175 million outstanding on our unsecured credit facility.

In terms of debt maturities, we do not have any debt maturing through the end of 2013. Looking out further, of the $502 million of debt outstanding only about 20% of that matures during the next three years. Additionally for the third quarter, the Company's interest coverage was a strong 4.5 times.

As Stuart mentioned, during the third quarter we expanded our unsecured debt facilities. Specifically, we increased the borrowing capacity on our unsecured credit facility from $200 million to $350 million. We also expanded the accordion feature on the line whereby the capacity can now be increased up to $700 million.

Equally important, in light of the Company being awarded investment grade ratings from both Moody's and S&P, the borrowing spread on the credit line was reduced to a new low for the Company of 110 basis points. Since the credit line was first put in place three years ago, we have successfully lowered the borrowing spread by approximately 40%. Additionally, the maturity date on the credit line now extends out four years to September 2017.

And lastly, taking into account the accordion features on both the credit facility and on our existing unsecured term loan, the combined capacity is now $1 billion. With respect to the Company's warrants, as it stands today approximately 87% of the warrants have now been retired.

Thus far, the Company has received a total of $223 million in equity proceeds from warrants that have been exercised to date, including $2.4 million received during the third quarter. And as we have discussed on previous calls, to help balance the near-term impact from the warrants being exercised, we repurchased a portion of the warrants as various opportunities arose.

In total, we repurchased approximately 16.6 million warrants including approximately 700,000 warrants repurchased in the third quarter and 4.4 million repurchased in October. Looking ahead, we do not anticipate repurchasing additional warrants. There are only 6.3 million warrants that remain outstanding which will expire in less than a year from now.

In terms of our FFO guidance for 2013, having achieved $0.85 through the first nine months, we currently expect FFO per diluted share to be between $1.03 and $1.05 for the full year. In other words, we expect FFO in the fourth quarter to be between $0.18 and $0.20 per diluted share which takes into account anticipated debt refinancing costs as well as all of the warrants that have been exercised thus far.

That said, as we have stated in the previous calls our guidance does not make any assumption as to the additional warrants being exercised going forward. As I mentioned, there are approximately 6.3 million warrants outstanding which expire in October 2014. Now, I will turn the call over to Rich Schoebel, our COO, to discuss property operations.

Thanks, Michael. At September 30, our portfolio totaled 51 shopping centers encompassing approximately 5.5 million square feet of gross leasable area, geographically diversified across the West Coast. Specifically, 20 of our shopping centers are located in Southern California, representing 37% of our total GLA.

12 properties, or 23% of our total GLA, are located in our Northern California region. Nine properties, representing 22% of our GLA, are located in the Seattle market. And 18% of our total GLA is in the Portland, Oregon market where we currently own 10 shopping centers.

As we discussed in our last call, we have seen a considerable increase in retailer demand across each of our core markets this year, coming from a broad range of large national retailers as well as regional and local tenants. Needless to say, we have been working very hard to capitalize on the increased demand and, as a result, our overall portfolio occupancy has risen to 95.3% as of September 30.

Just to highlight a few examples of how we are making the most of the increased demand, at our Canyon Crossing property in Seattle which we acquired just this past April, we have already substantially increased the occupancy from 70% at the time we acquired the newly developed center, to 84% as of September 30, to over 90% today and with pending leases we currently have in hand, the property could surpass 95% by year end.

Similarly at our Bay Plaza Shopping Center in San Diego, which we acquired in the fourth quarter of last year, we have significantly increased the occupancy there as well from 86.9% at the time we acquired the property, to 97.4% as of September 30. Additionally, as part of capitalizing on the demand, we have also remerchandised certain shop spaces to improve the tenant mix and enhance the underlying value.

A good example of this is our Heritage Market Shopping Center in Portland. We recently relocated a number of shop tenants at the property in order to make way for combining those spaces with the remaining adjacent available space to accommodate a new larger national tenant.

As a result, not only did we improve the tenant mix at the shopping center, which in turn will generate greater consumer and retailer interest at the property going forward, we also increased the occupancy from 91% to 100%.

Turning to our specific leasing stats, thus far in 2013 we have executed 138 leases totaling 417,000 square feet, including executing 58 leases during the third quarter totaling 164,000 square feet. Breaking down our third-quarter leasing activity between new and renewed leases, during the third quarter we executed 33 new leases totaling 70,000 square feet and renewed 25 leases totaling 94,000 square feet.

In terms of same space comparative numbers, cash rents increased by approximately 8% on average for the third quarter. Lastly, as Stuart indicated, we are very excited to now fully own Crossroads Shopping Center. As the former head of the Pacific Northwest region for Pan Pacific, I lived and worked in the region for many years and know the market extremely well.

As Stuart noted, Crossroads is truly a one-of-a-kind irreplaceable property. It is located in the heart of the Seattle market, specifically in the densely populated affluent community of Bellevue, which is home to Microsoft. In fact, Crossroads is located just down the street from Microsoft's headquarters.

The shopping center totals 464,000 square feet and features Kroger Supermarket operating under their QFC flag, Bed Bath & Beyond, Sports Authority, Joanne's Fabric, and Michael's, along with many other national and regional retailers. As Stuart mentioned, since we first invested in the property three years ago we have worked hard at enhancing this unique shopping center, capitalizing on our long standing relationships with key retailers.

In the past three years, we have introduced upwards of 100,000 square feet of new retailers to Crossroads, including a broad mix of daily necessity tenants, restaurants, and specialty retailers, all with an eye towards enhancing the center's longstanding draw as a family destination.

As a result of our efforts, we have substantially increased the occupancy to over 99% today. And through the combination of increasing the occupancy, together with implementing more efficient operating initiatives, net operating income has increased by over 50% in the past three years, and we believe there's a lot of growth and value still to cultivate at Crossroads. Now, I will turn the call back over to Stuart.

Thanks, Rich. With our accomplishments thus far in 2013, we are fully on track to have a record year. In terms of acquisitions, we've already acquired $368 million and anticipate finishing the year at around $400 million.

With respect to property operations, we're on track to finish the year at or above 95% occupied, and anticipate same-store NOI growth will be in the 6% range for the full year, if not a bit better, surpassing our initial estimate. What's also important to point out in terms of our property operations and leasing accomplishments is that we continue to enhance our tenant diversity.

As an example, our largest tenant, Safeway, now accounts for less than 6% of our total base rent. In fact, they are now down to just 5.4%. And our top 10 tenants, the majority of which are daily necessity retailers, now only account for 20% of our total base rent.

Additionally, under the 1100 tenants in our portfolio today, over 1000 of our tenants account for less than 1% of our total base rent individually. Maintaining a diverse tenant base, which in turn provides the Company with a strong and reliable revenue stream, continues to be the cornerstone of our business.

And lastly, as Michael addressed, we have significantly enhanced our financial position this year, including achieving investment grade ratings, investing well over $200 million in equity proceeds from the warrants, and acquiring exceptional shopping centers in each of our core markets, and significant lowering our borrowing costs through our newly expanded debt facilities.

Looking ahead, we are excited about finishing the year strong and believe that we are well positioned to head into 2014 with great momentum to keep building on our accomplishments to date and taking the Company to new heights. Now, we will open up the call for your questions. Operator?

Certainly.

(Operator Instructions)

Our first question comes from Paul Adornato from BMO Capital Markets. Your line is open.

Hello, everyone.

Good morning, Paul.

Maybe I will start off on the Crossroads. You've accomplished some lease-up on the retail side, but in the past you've also talked about adding density to the site. And was wondering if you could perhaps update us on those activities?

Sure. Well we're currently working on a number of opportunities. While there's no immediate plans to talk about the long term, the property can support another 200,000 square feet very quickly, including retail, office, and multifamily.

Over time, we intend to capitalize on this, particularly with regards to the additional retail space. As it relates to office and multifamily, given it's not our expertise, our goal ultimately would be to sell the parcels to office and multifamily developers and redeploy the proceeds into new shopping center acquisitions.

Okay. And the Five Points in Huntington Beach was acquired from the same seller, and so I was wondering, is that property of the same vintage? Maybe you could tell us what's the value add? Is there also densification opportunities on that property?

So Five Points is an asset that Ron Sher and his family developed 50 years ago and has never traded in the marketplace. In terms of upside, Rich, do you want to touch on the couple of leases there we're -- ?

We don't currently have any plans, but obviously with all of our properties, we're always looking for the opportunity to add more, but it's certainly not on the scale that we see at Crossroads.

Okay. And so, Stuart, was wondering if maybe you could just lay out for us, at this point in the Company's evolution there's certainly been great accretion from acquisitions and lease-up of the existing portfolio. But how should we think about the components of growth from here?

Specifically, if you could talk about perhaps the different components, lease rollovers, redevelopment potential, and acquisition opportunities from here?

Sure. Well, look, we're going to continue to do what we have done over the last four years. We will continue to grow the Company in acquiring exceptional grocery-anchored shopping centers on the West Coast. And our pipeline today is very strong.

We intend to, as we move into 2014, again, probably as we look at the market today, I think we can do as well next year as we've done this year, which has been a record year for us. With that growth, we will continue to redevelop Crossroads as we've talked about.

We also have another 83,000 square feet, may even be a bit more with some of the more recent acquisitions, of either pad space or some opportunity to develop out some land which is primarily on our books at no cost. So that's sort of the way we look at the Company going forward.

We'll continue to do exactly what we've done, and we believe we can continue to produce the outstanding results as we move forward as we have in the past.

Okay, great. Thanks very much.

Thank you. Our next question comes from Todd Thomas from KeyBanc. Your line is open.

Good morning, Todd.

Good morning. I'm here with Jordan Sadler as well. Just first question. What were the cap rates or the initial yields on the three third-party acquisitions that you completed? So outside of Crossroads, just the two in the quarter and then Peninsula Marketplace which closed earlier this month?

The going in cap rate excluding Crossroads was about 6.2%, but looking ahead there is very strong upside as we've talked about with these assets that we identified during our underwriting process. We believe we can increase that yield about 150 basis points over the next 12 to 24 months.

Okay. That's helpful. And then just regarding the acquisition environment a little more broadly, it sounds like you're fairly optimistic about continuing to find deals here. Your comments suggest maybe another $400 million would be reasonable to look for maybe next year.

Just wondering if you could give a little more color on the pipeline that you're seeing today and whether or not the increase in interest rates or some of the volatility we've seen in the markets is causing any changes in buyer or seller expectations at all, or anything that you're doing on the underwriting process at ROIC?

Sure. I mean, look, the type of assets we're acquiring, there hasn't been much change at all. So very high-quality assets in the sought after markets on the West Coast. We really haven't seen much change yet in cap rates, given the volatility in interest rates.

Looking into next year, we're very excited in terms of what we see ahead. Currently, we have another $30 million under contract which we intend to close over the next several weeks, and behind that, there is probably another $60 million to $100 million that we could do in the first quarter of next year.

So we're very excited, looking at where this Company is going right now in terms of growth. I can't tell you whether we'll hit $400 million or not, but I can tell you that the team here is very, very excited in terms of looking into 2014, on all fronts.

Okay. And then thinking about the acquisitions, how should we think about financing new investments here? You have some capacity under the line, and a lot more flexibility if you exercise the accordion. You also have some equity inflows from the warrants.

Are you trying to match fund new investments with the capital that's coming in from the warrants? How should we think about that going forward in terms of funding new acquisitions here?

Well, look, we don't need any equity for a period of time, that's for sure. So, Mike, in terms of capacity?

Right. As of today, we've still got $127 million available on the main commitments on the credit line. You had a $350 million on the accordion feature to that if we needed it.

About $75 million more proceeds due to come in as we're not really anticipating buying any more warrants back, but we don't know when that's going to come in. But I don't think we're going to need it, as Stuart mentioned, raise equity until sometime well after next year. So it's a function of using the available debt capacity with the banking group and still maintaining a fairly low leverage ratio.

And we will look at selling a couple of assets. That was one thing I missed in Paul's question. But we have earmarked three or four assets to sell, and that will help fund our growth as well next year without having to think about equity.

Okay. Great. Then just last question, the impact associated with the Crossroads transaction, I see the remeasurement gain on the income statement, but was there an impact to equity and income from unconsolidated properties in the quarter as well, the $2.1 million? What's in that number in the quarter?

Yes, there's a piece in that that relates to the consolidation. We closed Crossroads at the end of the third quarter, so that line item includes our 49% portion of the cash flow through the quarter, but it also includes a preferred return on the property that was recognized as part of acquiring that 51% interest.

We had a preferred return rate when we first acquired our 49% interest that we weren't able to recognize until we consolidated the entity. So that's in there, too.

So most of that will go away? Next quarter, we won't see much that in line at all? Is that correct?

You won't see anything in the line because we have no JVs at this point.

Right. Okay. So I guess I'm just trying to reconcile the guidance increase then. You increased guidance $0.22 on October 1 with the transaction activity update, and another $0.025 at the midpoint now, so that's $0.245 total.

But the gain on the remeasurement was $0.28. And sounds like there's a couple of pennies in the joint venture line as well, and acquisitions are running ahead of the target you laid out. So I'm just wondering if you can kind of walk through what some of the primary offsets are, help reconcile that a bit?

Well, we are anticipating doing some financing before year end in terms of our balance sheet. Some long-term financing. So we've put that into those assumptions. Along with any other dilution that may come from the warrants. So it's really the moving points in terms of financing. It would be the warrants and anything else warranted the penny --

You are also going to have a full quarter of the operating partnership units that will be outstanding. That's like 3.3 million warrants, or sorry, operating units that will be outstanding in that share count as well, which is bringing it down.

Got it. The other thing, Todd, I wanted to point out with the Crossroads, which I think is a very important item. To me, a very important point is is when you look at the overall blended cash yield on that asset in terms of consolidation, with the large increase that Rich articulated during his presentation, the going in yield today on that transaction, given where we acquired it three years ago, is just under 8%.

So there's a lot of value that's been created, which is our job, for shareholders, we've created a lot of value with that asset with a lot more to come.

Okay, thank you.

Thank you. Our next question comes from RJ Milligan from Raymond James. Your line is open.

Hello, good morning out there. Good afternoon, everybody.

Good morning.

Question on the guidance for same-store NOI growth. You guys had previously guided for 4% to 6%. You're saying that you expect that at the top end of the range and that might be conservative, which would still imply a pretty decent slowdown, at least from the first half of the year in the fourth quarter. Is that being more conservative, or is there something that might drive down that same-store NOI?

Can you repeat your question, RJ?

Sure. The same-store NOI increased for, let's see, it was up 9.5% in the second quarter, 7.9% in the first quarter.

Yes.

5.6% in this quarter.

Yes.

So to get for an annual rate of 6% would imply a pretty good slowdown in the fourth quarter. And I was wondering if there was anything that was driving that in particular, or if that was being more on the conservative end of just in terms of guidance?

Well, it's conservative. Fourth quarter will -- I can't tell you this second what the fourth quarter is, but I can certainly feel comfortable enough to tell you it is going to be better than 5.6%. Depending on lease-up and deliveries and everything else.

Also, the year-over-year, it's a different set of property tools than the quarter-over-quarter ones, too. So there's a difference there as well.

Right. I think more importantly, we still -- Rich, what are the numbers between leased and occupied?

There's still about a spread of 5%.

So there's still a 5% spread in terms of what's been leased.

And what's paying rent.

And what's paying rent. So that will translate into very strong, in my view, very strong NOI growth into 2014 at this point, given what the amount of leasing that we've been able to accomplish over the last several quarters.

Okay. Thanks. That's very helpful. And I was curious if there was -- you had provided this last quarter, and I didn't see it in the press release this quarter. An average price for the warrants repurchased?

It was about $1.81.

All told, it's about $1.98 for everything all in.

About $1.98.

A $1.98, yes.

Okay. Thanks, guys. That's it for me.

Thank you.

Thank you. Our next question comes from Jason White from Green Street Advisors.

Good morning, Jason.

Hello, guys. Just quick question on your small shop occupancy. I know you guys hadn't broken it out in the past. Do you guys have that metric this time around?

We don't have it specifically by small shop. We don't really have -- we only have one anchor space that we classify as over 15,000 square feet available right now. So primarily it's made up of small shops.

Okay. And then as you look towards leasing that small shop space up with the departure of the mom-and-pop tenants prior to the downturn, what kind of demand do you think you need to see to get that up to maybe a previous peak number, and what do you think that is?

Well, nothing is -- I mean, the objective we set is 100% occupancy or more, so -- (laughter)

It is the or more, that's challenging. (laughter) We're still seeing really good demand for the shop space. I think you see that in the decrease in the vacancy rate. And we continue to acquire properties that have significant demand out there, as I think is demonstrated by the Canyon Crossing up in Seattle.

Okay. And then also on the occupancy front, it was quite a hefty occupancy raise that you did also acquire fully leased properties. Do you have an idea what was actual organic leasing occupancy gains, rather than just adding newer properties to the pool?

I could follow up with you after the call and give you that specific number, but definitely during the quarter we acquired two highly occupied assets that brought that number up. But again, we've seen a lot of absorption just from the general portfolio.

Okay. Then the last question, in terms of your acquisition activity, do you have kind of a sense of, is it market related, or is it some kind of ideal size of portfolio that eventually gets you to a point where acquisitions decelerate and maybe become less of a story?

We've been operating, Jason, out here for 25 years, doing what we do. We have a pretty good idea where the portfolios lie on the West Coast in terms of ownership. Those opportunities we continue to pursue, but we're very selective in terms of acquiring portfolios as it relates to the impact to our balance sheet and other items.

I can't sit here today and tell that you we're going to be able to do a larger transaction, but what I can tell you is we're going to keep doing what we have been doing, and so we do continue to see the runway very strong in terms of off-market, one-off transactions.

Okay. And I was looking more for ideal size of your own portfolio? So as your acquisitions have crept up near $400 million this year, is there a portfolio size that you think where acquisitions become less of your story and it's more of an operational story?

No.

So there's no $2 billion is not going to slow down the pace of acquisitions, or $3 billion? There's not really a portfolio size that you can give?

No, our goal is to keep growing the Company smartly and to keep it as transparent and straightforward as possible.

Okay, that helps. Thanks.

Thank you.

Thank you. Our next question comes from Michael Gorman from Janney Capital. Your line is open.

Good morning, Michael.

Thanks, good morning, guys. Just staying with the transactions for a minute, I'm curious, does Mr. Sher have any additional properties in his own portfolio?

Great question. He does. And we do have a first right of refusal on everything he owns on the West Coast.

He's got another property in Huntington Beach. He's got a property in Santa Rosa, which is in the Bay Area. What am I missing here, Rich?

He has some smaller properties throughout the San Francisco area.

And in the San Francisco Bay Area as well. So that pipeline could continue or those properties can continue to feed our pipeline going forward.

Okay, great, yes. And going back to the funding sources, I'm curious as you're looking at the off-market transactions and talking to people, how are LP units playing into it going forward? Obviously, Mr. Sher chose to take some. And I'm curious what the reception is to other sellers towards taking LP units as a source of funding.

The reception is extremely strong, and especially with the announcement of the Crossroads. We have been approached by a series of sellers with past issues on some of the highest quality assets on the West Coast to begin conversations to use our currency. However, our currency is the most precious resource we have, and it's cheap today, as far as I'm concerned.

We agree.

(laughter) So going forward we'll continue to pursue doing those type of transactions. There are more of them on the table right now, but we're not selling our equity cheap.

We're going to, hopefully if we do these transactions, like Ron, I think the sellers will appreciate that they're taking a strong currency and that they will be paying a premium to wherever the stock trades.

Okay, great. And then, Stuart, can you just put a little bit of color around the three or four assets that have been earmarked? Are these core assets that don't have the growth characteristics, and so we should be thinking about cap rates in line with where you're buying? Or are these more non-core assets and we should be thinking about a higher cap rate when you look to exit those?

I'd say a bit of both. A number of these assets were debt deals that we did very early on that were really leased up stories. We're getting to the point over the next 9 to 12 months where those assets will be stabilized and will be sold. They just don't fit our portfolio today in terms of quality. Although they will deliver very strong returns to shareholders.

So that's one segment, and I can tell you exactly what properties they are, but those are going to be three or four assets. On the other hand, there will be one or two assets that have very little juice left, or very little internal growth left, like Pleasant Hill up in Northern California, and those type of assets will be earmarked as well. So it will be a combination of both.

Okay, great. Then maybe just one last one for Michael. Just wanted to make sure I understood on the fourth quarter guidance. You talked about some financing assumptions in there. I just wanted to make sure, are there any one-time financing costs assumed in there, like a prepayment or a defeasance penalty?

No, we haven't earmarked any defeasance repayment. We're really looking at some kind of a long-term debt financing cost associated with that. So no, it's just look at potentially doing some kind of an on deal.

Okay. So the $0.18 to $0.20 is a reasonable run rate? So there's nothing one time in there?

Right, correct.

Okay great. Thanks, guys.

Thank you.

Thank you. Our next question is a follow-up from Paul Adornato from BMO Capital Markets. Your line is open.

Thanks. My question has been answered.

Great. Thank you, Paul.

Thank you.

Thank you. I show no further questions and would like to turn the conference back to Stuart Tanz for closing remarks.

In closing, I would like to thank all of you for joining us today. If you have any additional questions please feel free to contact Michael, Rich, or myself. And for those who are attending NAREITs annual convention in San Francisco in a couple of weeks, we hope to see you 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 at this time.