Retail Opportunity Investments Corp (ROIC) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Retail Opportunity Investment's third-quarter 2014 conference call. Participants are currently in a listen-only mode. Following the Company's prepared comments, the call will be opened up for questions.

Please note that certain matters discussed in this call today constitute forward-looking statements within the meaning of Federal Securities laws. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company can give no assurance that these expectations will be achieved. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause actual results to differ materially from future results expressed or implied by such forward-looking statements and expectations.

Information regarding such 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 the Company's financial and operational results. The Company's filings can be found on its website.

Now, I would like to introduce Stuart Tanz, the Company's Chief Executive Officer.

Thank you.

Here with me today is Mike Haines, our Chief Financial Officer, and Rich Schoebel, our Chief Operating Officer.

We are pleased to report that the Company posted another strong quarter. We continue to cultivate opportunities to acquire exceptional shopping centers and deepen our presence across our core West Coast markets.

We currently have five grocery-anchored shopping centers under contract, totaling $171 million. Each of these properties fit our acquisition profile and existing portfolio perfectly. The shopping centers are located in densely populated, affluent communities that are anchored by strong grocery operators well suited for their respective market demographic profile.

Included in the five properties is an exceptional three-property portfolio located in the Los Angeles and Orange County markets. The portfolio is owned by a private operator that we've known for years and we have had our eye on for a number of these assets for some time.

We learned recently that they were marketing one of their shopping centers for sale. We quickly capitalized on the opportunity and were able to work a favorable transaction whereby we are acquiring not just the one shopping center, but two additional grocery-anchored shopping centers that are not on the market.

The portfolio has considerable embedded growth through numerous lease up and re-tenanting opportunities. Additionally, the properties are located near existing shopping centers of ours which will enable us to capitalize on leasing and operating synergies.

In addition to the three property portfolio, we also have two other great shopping centers under contract. One center is a beautiful property in the Los Angeles market in the Thousand Oaks area. And the other property's a terrific grocery-anchored shopping center up in Portland.

The Portland acquisition is located just down the street from a shopping center that we developed in 2012. With this new acquisition, we will now own two of the three primary grocery-anchored shopping centers serving the community, enhancing our ability to capitalize on the strong demand for space in the market, particularly given that our existing shopping center has been essentially fully leased since we opened the property two years ago. And we have a number of retailers vying for more space.

Importantly, the seller with the Portland shopping center has taken his equity in the property, not in cash, but instead, all his common equity in the Company in the form of operating partnership units based on a value of $16.00 per share.

In addition to our ongoing acquisition activity, during the third quarter, we sold a non-core property for $12.4 million, generating a gain on sales of approximately $1.6 million.

On the leasing front, we continue our strong pace reaching a new all-time high occupancy at quarter end. We also achieved strong growth in terms of same-space releasing spreads and same property NOI.

Lastly, as we reported last week, the Company's warrants have now been fully retired.

In summary, over the past couple of years as warrants were exercised, we received in total over $297 million in equity proceeds, which served the Company well as we were able to efficiently invest the proceeds in our ongoing acquisition program and maintain our strong balance sheet.

Now, I'll turn the call over to Michael to discuss the Company's financial results. Mike?

Thanks, Stuart.

For the third quarter of 2014, the Company had $40.9 million in total revenues and operating income of $12.3 million, as compared to $27.1 million in total revenues and operating income of $6.5 million for the third quarter of 2012, representing a 51% increase in total revenues and 89% increase in operating income.

The sharp increase is largely attributable to our acquisition activity during the past year, most notably, our acquisition of Fallbrook in the second quarter of 2014, and our acquisition of our partner's joint venture interest in Crossroads in the third quarter of last year. In speaking of Crossroads, you may recall that when we acquired our partner's 51% JV interest, we recorded a one-time non-cash GAAP gain on consolidation of $20.4 million in the third quarter of 2013.

With respect to net income and funds from operations for the third quarter of 2014, the Company had net income of $6.7 million and FFO of $20.8 million as compared to net income of $25.3 million and FFO of $35.4 million for the third quarter of 2013, which again included the $20.4 million one-time non-cash gain on consolidation for Crossroads.

On a per share basis, the Company had net income for the third quarter of 2014 of $0.07 per diluted share and FFO of $0.22 per diluted share.

In terms of same center net operating income, for the 11th consecutive quarter, same-center NOI again increased, specifically by 4% for the third quarter on a cash basis.

Turning to our balance sheet, at September 30th, the Company had a total market capital of approximately $2.1 billion with $677 million of debt outstanding, equating to a conservative debt to total market cap ratio of 33%. Of the $677 million of debt, approximately 84% of that is unsecured debt, including $123 million outstanding on our unsecured credit facility.

And in terms of unencumbered GLA, at September 30th, 52 of our 58 shopping centers were unencumbered, equating to 88% of our total square footage. And given that the five pending acquisitions that Stuart spoke of will all be unencumbered, that 80% will increase to about 90%.

Additionally, we continue to maintain solid interest coverage, which was 4.1 times for the third quarter.

And as Stuart indicated, the warrants are now fully retired, having officially expired on October 23rd. To summarize the final tally, of the 49.4 million total warrants that were originally issued, 24.8 million warrants were exercised, generating $297.1 million in proceeds to the Company. Additionally, 16.6 million warrants were repurchased by the Company for an aggregate purchase price of $32.8 million. 8 million warrants were exercised on a cashless basis. And approximately 64,000 warrants expired unexercised.

In terms of our FFO guidance for 2014, we've remained fully on track to achieve our previously stated objective for the year. We currently expect FFO per diluted share to be between $0.83 and $0.85 for the full year.

Of the five pending acquisitions, we expect to close on three of the properties towards the end of the fourth quarter. And we expect to close on the other two properties in the first quarter. Accordingly, the incremental increased FFO from these acquisitions will likely be minimal in the fourth quarter.

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

Thanks, Michael.

As Stuart indicated, we posted another very strong record quarter on the property operations and leasing front. We achieved a new record high for the Company of 97.4% lease, which is a 60 basis point increase over the second quarter and a 210 basis point increase from a year ago.

We continue to aggressively lease up available space at newly acquired properties. In fact, three properties that we acquired just a few months ago, Tigard, Aurora, and Fallbrook, are now all 100% leased.

In terms of anchor occupancy versus shop space occupancy, we continue to maintain our anchor space at 100% leased. And in terms of our shop space, we continue to steadily increase occupancy, increasing it by 150 basis points from the second quarter to 94.4% leased as of September 30th.

And indicative of all of our ongoing leasing activity, the economic spread between occupied space and leased space, which includes newly signed tenants that will soon take occupancy and commence paying rent, remained at 5.9%, where we were at the end of the second quarter.

Along with making the most of the strong demand for space across our portfolio to increase occupancy, we continue to drive rental rates higher. Specifically, during the third quarter, we executed 66 leases, totaling 217,000 square feet. Breaking that down between new and renewed leases, we executed 35 new leases, totaling approximately 92,000 square feet, achieving a very strong, same space comparative rent increase of 31.2% on a cash basis. And we executed 31 renewals, totaling 126,000 square feet, achieving a sold same space cash increase of 6.2%.

What's also important to highlight with our re-leasing activity, is that we are steadily improving CAM Recoveries. Many of the leases that are expiring were signed prior to our having acquired the property and have rather weak or loose recovery structures, which we are now raising to our Triple Net Standard that over time will enhance our bottom-line NOI growth

Additionally, notwithstanding our anchor space being 100% leased with very little rollover looking out over the next couple of years, we continue to proactively work with our anchor tenants well ahead of their lease expirations. As an example, looking at our expiration schedule as of September 30th, we had one anchor lease scheduled to expire in the fourth quarter and three set to expire in 2015. We are pleased to report that we have now renewed three of those anchor leases ahead of schedule achieving same space cash rent increase of 43% on average.

Additionally, with respect to the fourth anchor lease set to expire in 2015, it's a non-retail tenant that we intend to replace. We are already in discussions with a very strong, national anchor retailer about taking all of the space and at a higher rent.

In terms of capital improvement initiatives, during the third quarter, we completed our repositioning value enhancement strategy at one of our centers in Orange County, Cypress West, where we completely transformed the overall appeal of the property with new facades, signage, and landscaping. The center looks amazing and is now 100% leased.

Up in Portland at our Division Crossing property, we're in the final stages of completing a repositioning initiative that centered around removing an old underperforming anchor tenant, reconfiguring their large space into two distinct new anchor spaces, which were leased to two strong national retailers, one of which is now open, and the second will be opening shortly. With those two new anchor leases, the property's 96% with strong interest in the remaining shop space.

And lastly, at Fallbrook, we are in the midst of completing a number of property enhancement initiatives which we commenced work on immediately after we acquired the property in June. The initiatives are specifically aimed at significantly enhancing the look and appeal of the primary pedestrian promenades, the signage, and the landscaping.

Additionally, several key anchor tenants are nearing completion on major renovation and extensive build-out initiatives. And as I mentioned, Fallbrook is now 100% leased.

One of the new tenants that we recently signed at Fallbrook is a large, highly successful Japanese retailer, Daiso. That is a terrific operator and has a very strong following on the West Coast.

We also recently signed a lease with Daiso at Crossroads. In fact, Daiso just had their grand opening at Crossroads last week. And when their doors opened, there was a large crowd of customers in the hundreds lined up around the building waiting to get in.

In addition to Crossroads and Fallbrook, we are also in discussions with Daiso about opening additional stores at several other properties.

With that, I'll turn the call back over to Stuart.

Thanks, Rich.

Before opening up the call for your questions, I would like to make a couple of additional comments starting with acquisitions.

With respect to the five properties that we currently have under contract, while we are nearing completion with respect to our due diligence and will be ready to close soon, the properties currently have secured debt, much of it being CMBS debt, which takes time for the servicer to line things up on their end in order for the loans to be paid off when we buy the properties.

So as Mike indicated, we expect the closings to occur towards year end and early 2015. That said, as we wait to close, we are taking full advantage of the downtime. We are already hard at work lining up potential new tenants for the available space. And we already have our sights set on several re-tenanting opportunities, relocating certain tenants and reconfiguring spaces to accommodate new larger retailers.

So when we do close on each property, we will be ready to hit the ground running.

Beyond these five acquisitions, our pipeline continues to be active. As such, we remain confident in our ability to continue broadening our portfolio as we move forward.

With respect to our same property NOI growth, the 4% increase for the third quarter was a touch below our previous projections simply due to the timing of rent commencement on new leases. The 4% is on a cash basis and as Rich indicated, the economic spread between occupied space and leased space is currently at 5.9%, which is an all time high for the Company.

As new tenants commence paying rent, our cash NOI will steadily climb. Additionally, given all of our ongoing acquisition activity, the pool of properties included in our same property NOI analysis increases each quarter. So the embedded cash flow growth from all of our leasing activity isn't always going to fully reflected in our same property NOI analysis.

Finally, we are pleased to report that the Company just celebrated its fifth year as a shopping center REIT. When we commenced operations in 2009, our objective was to carefully build a portfolio comprised of irreplaceable shopping centers that would serve as a strong foundation and provide the Company with a balance of long-term stable cash flow and good growth opportunities.

Today, our portfolio stands at 58 shopping centers totaling approximately 7 million square feet strategically located in the best metropolitan markets on the West Coast. Our portfolio today is over 97% leased to a diverse mix of necessity-based retailers with an average remaining anchor lease term of over eight years providing strong cash flow stability.

Additionally, there is a multitude of embedded growth opportunities in our portfolio that we continue to work hard at cultivating.

As we look ahead to the next five years, we believe that with the portfolio and strong franchise on the West Coast that we built thus far, together with our conservative balance sheet and financial resources, we are well positioned to continue delivering solid growth and increased value as we go forward.

Now, we will open up the call for your questions.

Operator?

Thank you. Our first question comes from Paul Adornato with BMO Capital Markets.

Hi, good morning. On the acquisitions -- sorry if I missed this -- did you talk about a cap rate on those assets?

Blended going-in cap rate on the five properties is approximately 5.8%. Looking ahead, we expect to increase that yield by 100 basis points as we lease up available space.

Beyond that, we expect to increase our yield even further as we execute a number of re-tenanting or repositioning initiatives that we've identified during our underwriting process, as well as releasing below market space.

Any opportunities for redevelopment or adding GLA?

On the properties that were in escrow, there is a couple of pad expansion opportunities that we are already pursuing, yes.

Okay. And just looking ahead at the lease rollovers, over the next, let's say, two years, should we expect roughly similar -- I realize it's going to be lumpy -- but should we expect similar mark to market on going forward that we've experienced over the last two years?

Yes, I think as it relates to releasing shop space, it's always an evolving process. In terms of which tenants will renew versus replace. So it's pretty hard to forecast a number or even a range other than to say that we would expect that it would continue to be positive.

And the only thing that I will add, Paul, is that typically when you have assets that are 100% occupied, you have the ability to raise rents at a much better increase than if you have properties that aren't.

Sure. Great. And I guess finally, when are you going to issue new warrants?

(laughter)

We're certainly glad that we don't have to talk about the warrants going forward because it's certainly been a lot of conversation over the last five years. And more importantly, today, our capital structure is very clean.

Great. Yes, it certainly is. Thanks very much.

Our next question comes from R.J. Milligan with Raymond James.

Hey, good morning, guys. Curious if you could just walk me through the timeline on the 590 basis point gap between lease and financial occupancy? Just curious how you expect to close that over the next year or two years and the timeline for that.

Sure. I think obviously, we'll be digging into that as we get into the first and second quarter of 2015. We will be adding some to it as well. But we do expect that gap to continue to close.

So would you anticipate something more like 200 or 300 basis points of a gap towards the end of next year?

Yes, I think that's reasonable.

Okay. And then, Stuart, just curious about obviously the portfolio is well occupies. A lot of demand out there on the West Coast for well located assets. Are you seeing any signs of new supply coming into the markets?

No new supply at all. And the demand across all our markets today is very, very, very strong. I haven't seen it this strong since we started the Company five years ago.

And is that just a function of people can't find the land? Or is it still the rents and development financing just aren't there?

I think it's a combination of things. I think with the primary markets that we're operating in and the -- just the embedded barriers to entry is making it hard for these developers to make deals pencil and get through the entitlement process.

All right. That's all I got, guys. Thanks.

Our next question comes from Jason White with Green Street Advisors.

Good morning. Just a follow up on R.J.'s question. On [same property] NOI, given that big gap, do you think 4Q gets you to where you wanted to get for the full year? I realize there's a pool difference as you shift quarter over quarter. So I was just wondering what it looks like for the full year.

Well, for the full year, Jason, we expect same property NOI to be -- there will be 43 properties in that pool, probably in the 3% to 4% range. Bear in mind that the 43 properties include the year-over-year analysis. Properties owned at least two years. So it's those properties that have been fully leased and stabilized for some time now. So the 3% to 4% growth which is (inaudible) reflects that.

Okay. And then moving on to your disposition. It's been I want to say four years hold period for you guys. And can you kind of walk through the round trip there? Because it felt like the -- what cap rates has been over that period -- and the game that you guys had there was not as substantial as we probably would have thought it would have been. Can you kind of walk through that asset and let us know what drove that?

You're talking about what we announced in this quarter, Jason?

O.C. Point.

O.C. Point? Yes. Sure. The cap rate on O.C. Point was in the mid-six range. But it was a very small non-anchor shopping center that was part of a portfolio -- the Graymar Portfolio -- that we bought in 2010 in Portland, a few years ago. When we bought the property, it was 70% occupied. And our strategy was to lease up the property as we did. And we did get it to 100%, improving that tenant mix, of course, along the way, and then sell it or redeploy those proceeds in our (inaudible) re-anchored shopping center.

In terms of selling assets looking forward, there's still a couple of assets that we are looking at selling. And that will probably come in the first quarter of next year.

Okay. So even though you were able to lease -- call it 30% of the space back up, the value was fairly similar to what you paid for it. Was that -- was there anything -- any moving pieces there that we didn't see from the press release?

Yes. It was a -- we did report again on the sale. But again, I wouldn't look at this as a comp to anything else to anything else we own because this was, again, an un-anchored small strip center which is--

It's part of a portfolio.

--part of our portfolio deal.

(multiple speakers)

It's a function of the allocation of the purchase back when the portfolio was acquired.

Correct. So again, this to me is something that really never belonged in our portfolio. We had to buy it. And again, I wouldn't look at this as it relates to the rest of what we own.

Okay. And then the final question for me is, if you look back at -- call it -- 2010, 2011, 2012 -- you looked at deals that you were acquiring, and the cap rates you were acquiring at, and the amount of upside, whether you were buying at a 6.5 and could take them to an 8 or 7.5, can you contrast that with today and what you're seeing in the market, and your going in cap rate versus where you can think -- where you think you can stabilize that yield at? Has that narrowed substantially or just because of competition in a stronger market? Or similar spread? Just trying to figure out how much upside on the acquisition front now versus -- call it -- a couple of years ago?

Well, times have changed. Cap rates today on the West Coast in the markets that we operate in are now at 5 or less. And the -- in terms of the spreads, certainly those spreads have contracted. But I think as we've articulated, we now probably have to pay in the high 5s and low 6s. But more importantly, we still have the ability with what we're buying to increase that yield 100 to 150 basis points. And that's the same as it was when we acquired these other assets back in the 2009 to 2011 period.

Okay. So similar upside potential even though cap rates have compressed.

Yes. The upside potential may even be a touch more today because the demand is so much greater. So and the releasing spreads have gotten a lot better. So if you look at comparing the two time periods, I will tell you today you may have as much upside because the markets out West are just so -- in such better condition. And the overall demand for space is really incredible right now in terms of what we're seeing.

Right. Thanks, guys.

Our next question comes from Paul Morgan with MOV.

Good morning. So the 590 basis points, so that puts your quarter-end occupancy at 91.5%, I guess, if I'm doing the math right? Do you have the sequential change from the last quarter?

The sequential change in terms of where we started the--

We don't have that at our fingertips. We certainly can follow up with you after the call with that data point.

Okay. I'm just trying to get it going from leased to your same store NOI is tough since it's really kind of the occupancy that's driving that. And if the spread is wider, I guess, that might imply something about occupancy. And so yes, that would be great to follow up on that.

And then kind of sticking with kind of that theme, so you said 43% spread's the number you reported on a few deals for kind of proactive anchor space. Is that part of the 31% number that you reported for the quarter for you new lease spreads?

No, those were subsequent to the end of the quarter.

Okay. And so would those show up next quarter? Or is it going to be over the course of a few quarters?

They'll be recognized in the fourth quarter. Correct.

Okay. And is there a meaningful amount of kind of short-term down time that we should expect to kind of try to go from that number to like a cash same store NOI impact?

Those three deals, there'll be no down time.

No to down time. Okay, so in those, the store is open next year?

Those are renewals. So the tenant remains in place. They are just renewed ahead of the scheduled expiration of next year.

Oh, okay. So the 43% spread is actually a renewal spread for those deals.

Correct.

Okay. Great. And then, what do you think of -- and I probably asked this in prior quarters -- but what do you think of as sort of a frictional maximum occupancy on the shop space? How much further can you get given the you're going to have fall each year, and you've got to replace some people, and it's going to take a little bit of time. How much higher can we get the leased rate and the occupied rate?

(laughter)

(Inaudible) until it's 103% occupied.

(laughter)

Good question.

Clearly there is, but I think getting it up to a 97% occupancy is not out of the question.

Occupancy.

In fact, if you (inaudible) in Green Valley where we have most of our fractional occupancy, our actual occupancy today is 98%, even a bit higher.

Okay. Great. And then just lastly, how are you thinking about the debt side of the balance sheet right now? You talked the possibility of a kind of a follow-on note offering. Given the pipeline in terms of acquisitions, what are you thinking about doing there over the next few quarters?

Hey, Paul, it's Mike.

We continue to look closely at the bond market. And if the right market condition or opportunity arises, we'll look to trim out a portion of our short-term floating rate, that with fixed rate bonds.

Okay. Great. Thanks.

Our next question comes from Christy McElroy with Citi.

Good morning or good afternoon. Just to -- just a follow up on the 5.9%, really on R.J.'s question. Do you have a sense for sort of what the narrowing of that lease to occupied spread means for incremental NOI contribution? In Q4 and then moving into first half of 2015? And what's the split in that space between small shop and anchor?

I think the split is probably -- it's mostly -- there's primarily two anchor spaces and the rest is shop space that's in that number. And in terms of how it's going to contribute to the NOI, I don't know that we have a -- I don't know, Mike, if you have a thought on that.

We have the numbers. We just don't have them right in front of us.

(multiple speakers)

Let's get back to you on that. And without giving you -- we've got the analysis. It's just not right in front of us, Christine.

Okay. It would be really helpful just in terms of -- it's a pretty big spread just in terms of getting a sense for the trajectory of how that spread should be. Did you say what it should be at year end 2014?

It will probably come in three --- I would think about 300 as Rich touch on -- between 300 and probably 400 basis points next year. So it will have a nice contribution in terms of our NOI growth.

In 2015.

In 2015.

Right.

Okay. And then, in terms of the lower same store NOI growth projection, I think you talked about 3% to 4% now in 2014 versus the original 5%. Would you have expected that lease to occupancy spread to be narrower? Did that play into the lower same store NOI guidance?

Well, it's just a function of the delivery and the tenants paying rent. And one of the issues, I will tell you, on the West Coast, given that how highly constrained our markets are, is the processing of permitting. It's been frustrating, I will tell you, that we have been working diligently with our tenants to get them open and start paying rent.

But the cities, because of the cutbacks and the recession, don't have the manpower given to process the permitting. So that's been one of the frustrations here in terms of delivering on that number.

The good news is that we're making very good progress on that front. And I think you'll see that as we move into next year as it relates to closing that gap.

But it's primary due to the permitting process. It's been very frustrating.

Okay. Got you. And then, earlier this year, you issued the equity obviously with the acquisition of Fallbrook. And you have a history of maintaining a conservative balance sheet. What are your funding plans for the equity on the deals under contract?

No need for equity at this point. As Michael touched on, our balance sheet is in unbelievable shape. We're at 31%, 32% levered. After we acquire all these deals, it goes up to 34%, 35%. And we have--

--units as well, too, so it's not all cash.

Got it.

And we're funding.

And the proceeds from the sale of (inaudible) Point is sitting with an [exchange] (inaudible). That's not evident on the balance sheet because it's in restricted cash. But that's the funding source for that one acquisition alone.

So with the sale of a couple more assets and with our program looking into 2015, which we'll talk about on our next call), we see no need for equity at the present time.

Okay. And then just lastly, were Wilsonville and Moorpark off market as well?

Yes.

Okay. Thank you.

Our next question comes from Jeff Donnelly with Wells Fargo Securities.

Just to build on Christy's question, do you have a rough sense of how you're thinking about same store NOI growth potential for 2015? I guess I'm wondering, do you think it'll mirror the pace that you've seen in 2014 or that leased occupied gap is going to help it accelerate next year?

Right now, from what our models are showing, that number will actually move higher.

But again, we can't determine sitting here today what -- because we're still wrapping up the budgeting process -- but the number is looking quite strong in terms of what we have modeled.

Again, it's just always a function of permitting and the tenants getting in a paying (inaudible).

(Inaudible) assumptions the budgeting process which we're about half way through at this point.

And maybe my recollection's off, but I thought at the early part of 2014, you guys were originally thinking that NOI growth this year would be closer to 5%. Maybe I'm -- as I said, maybe I'm off on that. What's caused the delta I guess year to date as to why now you're looking for something a little lower than that?

Well again, I think as we just mentioned, it's really being caused by a couple of anchor spaces that have taken a bit longer in terms of permitting spaces. And that's been primarily -- along with the permitting for some smaller tenants. We had some leases done that have taken -- believe it or not -- a year to permit. We're talking small spaces here. And that's been one of the underlying issues.

Rich, I don't know if you want to add to that.

No, I think that's exactly it.

Okay. And then, and Stuart, I've seen reports that Safeway's marketing sort of like a big development portfolio out there or own portfolio. Do you have any details on that? Or is that something that you guys have considered?

Generally speaking, Jeff, I think as you know, we look at all opportunities to acquire a great shopping center, be it through a portfolio deal or one off transactions. We are aware of the Safeway deal, but it wasn't the right deal for us at this time.

Again, widely marketed deals are just -- are not our focus.

In terms of off market opportunities, each deal that we source, we're always looking to see if there are additional properties to acquire from the same seller.

But as it relates to Safeway, there has been some news recently that the transaction is under contract. And the cap rate on that transactions from what we've heard is 4%, which certainly would make the NAV of this company higher than where most analysts have us today in terms of the [street].

That's true.

(laughter)

I'm curious on that Safeway, are you able to (inaudible) are these sort of single tenant Safeway boxes and are these sort of centers anchored by Safeway?

You know what, Jeff, I'm under confidentiality so I can't get into the details of the transaction. And that's all really I can talk about the deal as it relates to the -- what you've heard in the marketplace.

Okay. And just two last questions. One is, I just missed what you had said on the five assets have under contract. What was the timeframe you gave over what you expect to be able to boost the yield by about 100 basis points?

Twelve. It's usually -- we can usually get that yield boosted within 12 to 18 months after closing. In a lot of cases, it's done a lot quicker. But we always like to leave that much room in terms of getting the yield up that 100 or 150 basis points.

Now, is that predominantly new leasing? Or is that just you have a lot of expirations coming due and you're able to get at space that way?

It's a combination. There's opportunities to expand some existing tenants, even to right size, smaller anchor boxes similar to what we've done up in Bothell, Washington, and then leasing up the vacancy as well.

And just one last nit-picky question is, Santa Theresa in San Jose, I just noticed that it had a pretty sharp drop in occupancy in the quarter. And I don't think you mentioned it in your remarks. In the space that was vacated, I think sort of implied that it was paying a big price per foot. Was that just a series of smaller tenants vacating? Was it one large tenant? I'm just kind of curious what happened there and what you're thinking about releasing.

Yes, there were a couple of tenants that moved out at the end of the term. The good news is that one of the tenants was on a pad and the rents that we're looking at in terms of replacing that are going to be much greater excess of what we were getting from the last tenant with some really great tenants.

So we are not concerned about Santa Theresa. We do a facade enhancement program up there. We've completed this year. And the property looks terrific and there's a lot of demand.

Okay. Great. Thanks, guys.

Our next question comes from R.J. Milligan with Raymond James.

Hey, guys. My follow-up question was answered. Thanks.

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

Good morning. Thanks for taking my question.

Just in terms of the comments on the improving recovery rates, if I look at your consolidated statements and also the same store, they're both around 81%. Just where do you think that that recovery ratio can trend over time and sort of what's the timeframe to see that upside?

I would think that we could get it up into the mid-80s or a high 80%. But it's the function of primarily rolling over the non-anchor space.

Correct.

And that's just -- that's going to take a period of time as those three to five-year leases roll.

Right. And we lease new vacancy as well. So it's a combination of both.

As we put our standard lease language into place for recovery, that's going to just trend up over time.

Were there any changes with regard to the leases on the four anchors that you renewed that you were able to implement? And sort of is that mid-80s, is that by year end 2015, or is it further out than that?

I think probably it's maybe a bit out from that because as Mike was saying that we can only get to some of these leases when they roll. In terms of the four anchors, there's no increase CAM recovery anticipated from those leases.

But we have repositioned several spaces that were either on gross leases or paying well below market whereby some -- in some cases, the tenants weren't even covering the triple nets in these leases that we acquired. And now we've got them on full triple nets market rent leases.

So there are going to be some big pops in terms of individual deals, but as Mike said, in terms of the blend, I think you're going to -- you'll stabilize around 85%.

Okay. Got it. And then, just in terms of acquisitions, I guess the Safeway portfolio aside, quite a bit of activity this year. What's the pipeline look like from here? It sounds like there are some properties on the market, even portfolios, that are on the market of size. What's the Company's appetite like today going forward?

The pipeline is strong. I think as I commented, we don't chase widely marketed deals. But looking into 2015 at this point, our pipeline is as strong as it's ever been.

Okay. And then, I guess in terms of the balance sheet today, you commented that you're in good shape to take down what's under contract. But thinking forward, Stuart, you highlighted that the proceeds from the warrants over the last several years, were important. And that mechanism's gone. So how does equity sort of figure into the equation as we think about 2015?

Well, equity is the most precious resource this company has. And I think as I mentioned, there's no need today for equity. We'll see what 2015 looks like in terms of external growth. But right now, there's really nothing to talk about in terms of equity.

And Mike commented on the balance sheet side in terms of debt.

Okay. Great. Thank you.

Our next question comes from Christy McElroy with Citi.

Hey, it's Michael Bilerman here with Christy.

Stuart, you made a comment -- I think you were referencing sort of the leasing environment and being the best since 2009 which coming out of recession, clearly we would hope it's the best since 2009. And then in the response to Jeff's question, you talked about four cap on deals and that your NAV would be a hell of a lot higher than where the street's at currently which is at 15. And I'm just wondering if you can go back in your time machine a little bit to your days at Pan Pacific and talk about the similarities or differences? Because ultimately -- you ultimately sold the company to Kimco in the summer of 2006. Cap rates were low. You wanted to take advantage of that. It wasn't being reflected in your stock so you sold. And you talked about the environment from a leasing perspective. How similar or different are we sitting here today to that time? And how will you know when the right time is to pull that trigger or not?

Well, I'm not going to comment on the Company in terms of whether it's for sale or not. But what I will tell you is this. That things are a bit different today in terms of valuation.

The valuations that we see in the market today are actually higher than they were in the 2005, 2006 period. We saw cap rates get to the 5s, but we did not see them that much lower. Today, we are seeing assets that are trading lower than a 5 cap.

In terms of the -- in terms of why this is happening, I think it's a combination of no supply in the market for the last five years. The world is awash in capital. And the West Coast has become the most sought after markets in the country in terms of deploying that capital.

So I think these low cap rates are here to stay for a little while. I think we're going to -- as we've always been very focused on acquiring shopping centers that we can build value with, so -- and had -- and continue to have the discipline we've always had in terms of growing the Company.

But what's different today is the market and pricing is -- values are actually higher than they were in the 2005, 2006 period. And there's a lot more capital out there chasing the most sought after product type in my opinion, which is grocery drug anchored assets.

Right. But you ultimately made the decision back on 2006 to sell. I guess what drove in your mind set the need to get out at that point? And why if you have a similar circumstance -- set of circumstances -- today, it's actually even greater, right, where cap rates are lower and prices are higher from a value perspective. And your stock in your view, you just said it, is not reflective of sort of where you believe value is. Why wouldn't you come down to the same conclusion you did in 2006? Or was there a different mindset back then?

Mike, a number of reasons. Number 1, we talked about our spread over the next year, year-and-a-half, in terms of building NOI. We definitely want to capture that spread. That has a meaningful impact in terms of valuation at the Company.

Number 2 is that the pipeline of the Company has never looked stronger. And back in 2005, 2006, that pipeline at Pan Pacific was nonexistent. We didn't have the amount of properties in the market turning over. And the buyer profile was a touch different, too, back then.

But today in terms of ROIC, this company has a great runway ahead from what I can see both in terms of building value for shareholders and in terms of continuing to do what we've done in the past, As long as we can keep doing that, then we'll continue to build lots of value for shareholders.

Back in 2005, 2006, there was not much value you can build at that point in terms of our shareholder base. And that's the difference.

Right. Thanks for the color.

Our next question comes from Jason White with Green Street Advisors.

Just a couple follow ups. The first follow up was when you commented on the Safeway portfolio a little bit, you mentioned a 4% cap rate. Do you have a sense -- from my understanding there's -- almost half the portfolio is undeveloped or in process development land. Can you comment if you have a -- what you think the cap rate is on operating properties only?

Well, again, I can only comment as to what's been reported in the news. And so I can't comment on anything else. And what I've read is that in terms of the existing portfolio, the going in NOI -- this is what I've read -- that cap rate is 4%.

Okay. And then, last question. I think this is the first time I've heard you kind of deviate from the ROIC is always for sale language.

(laughter)

Can you talk through kind of what's changed? Because this is kind of a very different tone than we've heard over the last 16 earnings calls.

Look, I think, Jason, that any -- my goal and management's goal is to create value for shareholders. That is the number 1 goal that we focus on day in and day out.

And so in having that as one of our top goals, our job is, again, always to find ways of creating value, and the most value we can at any given moment in time. That's why, in my view, smart CEOs and management teams should always be -- have an open mind in terms of looking at companies and what you can do with the companies that you own and operate, whether that's buying, selling, merging, anything else.

The reason why the tone is a bit different is because we have still a lot of value to build around here. I will tell you looking at our same store spreads, looking at the demand in the marketplace, looking at what we're getting in terms of rollover, and looking at the pipeline, the future looks very strong.

And so again, that's why we believe continuing to do what we're doing, we'll be able to build a lot of value for shareholders over the next several years.

This ends the Q&A session for today. I'll turn it back to management for closing remarks.

In closing, I would like to thank all of you for joining us today. If you have any additional questions, please contact Michael, Rich, or me directly. And for those who are attending the REIT's annual convention in Atlanta next week, we hope to see you there.

Thanks again and have a great day, everyone.

Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.