Retail Opportunity Investments Corp (ROIC) 2014 Q4 法說會逐字稿

Welcome to Retail Opportunity Investments 2014 fourth-quarter and year-end conference call.

(Operator Instructions)

Please note that certain matters discussed in this call today constitute forward-looking statements within the meaning of the 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 insurance 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 are described in the Company's filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K. Participants are encouraged to refer to the Company's filings with the SEC regarding such risks and factors, as well as for more information regarding the Company's financial and operational results. The Company's filings can be found on this website.

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

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

We are pleased to report that the Company had a very productive fourth quarter, completing what was a very strong record year in which we met or exceeded our 2014 stated objectives in every key aspect of our business, including acquisitions, leasing, balance sheet and financial results. Specifically, in terms of acquisitions, while competition in the marketplace intensified over the past year, we continue to have good success in sourcing attractive off-market opportunities.

During 2014 we successfully completed $414 million of shopping center acquisitions, including $91 million in the fourth quarter. In total, during the year we acquired eight shopping centers encompassing 1.6 million square feet, expanding our portfolio by 27%, and deepening our presence across each of our core West Coast markets.

In addition to strategically enhancing our market presence, the new acquisitions also serve to further our tenant diversity. With the new shopping centers added to our portfolio in 2014 we grew our tenant base by 18% and enhanced our overall tenant diversity such that our largest tenant only accounts for less than 4% of our total base rent as of year end. And our 10 largest tenants as a group dropped to a new low of just 19%.

Importantly, these new acquisitions provide strong, stable cash flow derived from well-established anchor retailers with a weighted average remaining lease turn of 8.7 years. Additionally, there are a number of great opportunities to grow the cash flow to enhance the underlying value going forward. In fact, in the short time that we have owned and operated the new acquisitions we have already increased occupancy by roughly 200 basis points.

Looking ahead, there's an abundance of opportunities to release below market space over the next several years. There's also a number of opportunities to reconfigure expiring space, attract new, stronger retailers at higher rents, as well as potential expansion opportunities. In summary, our 2014 acquisitions are an excellent strategic fit by all measures, and enhance the value of our overall portfolio and presence on the West Coast.

Turning to property operations and leasing, our hands-on, proactive approach to aggressively working our properties and tenant base yielded strong results again in 2014. For the fifth consecutive year we increased occupancy across our portfolio, reaching a new record high for the Company of 97.6% as of year end. Additionally, we again achieved solid increases in our same-center and same-space comparative numbers, recording a 5.9% increase in same-center NOI for the fourth quarter and a 17.9% increase in same-space releasing rents.

Along with continuing to reach new heights on the acquisition and leasing fronts, we also continue to worked hard at elevating our financial position in 2014. We successfully raised a total of $580 million of new capital to a balance of sources including $330 million of equity and $250 million of debt. Along with using the capital from these various sources to fund new acquisitions, we also retired over $220 million of short-term debt during 2014. And, very important, the remaining warrants were retired in the fourth quarter, so there are no longer any warrants on our balance sheet.

Additionally, for the fourth year in a row we lowered our borrowing cost under an unsecured credit line, along with expanding the line's total capacity and extending the maturity. Finally, for the fourth consecutive year the Company achieved a double-digit total return to shareholders, posting an 18.4% total return in 2014.

An important component of our total return was in the form of quarterly cash dividends. As we have stated before delivering reliable cash dividends to shareholders that steadily increase as we grow our portfolio and recurring cash flow is an important part of our business plan. In light of our growth and success in 2014 we are pleased to announce that the Board has increased the dividend by 6.3%.

Now I will turn the call over to Michael Haines, the Company's Chief Financial Officer. Mike?

Thanks, Stuart. Starting with our financial results for the year, for the 12 months ended December 21, 2014, the Company had $156 million in total revenues and $112 million in total operating expenses, resulting in total operating income of $44 million for the year.

With respect to net income, for the year ended 2014 the Company had net income of $21 million, equating to $0.24 per diluted share. In terms of funds from operations, FFO for the year 2014 was $74.6 million, or $0.85 per diluted share, equalling the top end of our FFO guidance that we set forth a year ago, driven in part by higher than forecasted acquisition activity during 2014, as well as our ongoing success with poverty operations and leasing.

Looking at our fourth-quarter results, for the three months ended December 31, 2014, the Company had $41.7 million in total revenue and $30 million in total operating expenses, resulting in operating income of $11.7 million for the quarter. Net income for the fourth quarter was $4.8 million or $0.05 per diluted share, and FFO was $20.2 million or $0.21 per diluted share.

In terms of same-center net operating income for the fourth quarter, same-center NOI, which includes all the properties that the Company has owned since the beginning of the fourth quarter of 2013, totaling 50 shopping centers, increased by 5.9% on a cash basis. For the full year 2014, which includes only those properties we owned 100% since the beginning of 2013, which total 41 shopping centers, same-center cash NOI increased by 3.6%.

Given that our same-property NOI analysis is on a cash basis, it doesn't include additional revenue from new leases where tenants have yet take occupancy and commence paying rent. As Rich will discuss, the spread between leased and occupied space was about 5% at year end.

Turning to the Company's balance sheet, as Stuart indicated, 2014 proved to be a pivotal year in terms of completing a number of important initiatives aimed at enhancing our financial strength and flexibility for years to come. During 2014 we raised a total of $508 million of capital. Specifically, we raised a total of $330 million of equity proceeds, including raising $215 million through a public offering of common stock issuing 14.4 million shares.

We also generated $28 million in proceeds from the sale of two non-core properties. And we received $71 million in proceeds from the remaining warrants that were exercised, resulting in 5.9 million common shares being issued.

With the warrants now fully retired, not only is our capital structure simplified, the uncertainty regarding the short-term per-share dilutive impact from warrants being exercised is now finally behind us. And, lastly, in connection with one of acquisitions in the fourth quarter, we issued approximately $16 million worth of common equity in the form of operating partnership units.

In terms of debt, we continue to proactively manage our debt composition and maturity schedule. During 2014 we paid off two mortgages totaling $20.2 million that had a blended interest rate of 5.1%. And in the fourth quarter we issued $250 million of fixed-rate 10-year unsecured bonds, with a 4% coupon, utilizing the proceeds to retire a $200 million short-term floating rate loans, and to pay down our credit line.

Additionally, during 2014 the to Company's remaining interest rate swaps matured, totaling $75 million, further simplifying our balance sheet. Lastly, in the fourth quarter we expanded the capacity on our unsecured credit facility from $350 million to $500 million, along with increasing the accordion feature, providing the Company with the flexibility to increase that line to as much as $1 billion. We also extended the maturity to January 2019 and lowered the borrowing cost down to a new low for the Company of 1% over LIBOR.

Taking into account all of these initiatives, at December 31, 2014, the Company had a total market capital of approximately $2.4 billion, with $743 million of debt outstanding, equating to a conservative 31.6% debt to total market cap ratio. With respect to the $743 million of debt, only $94 million is secured debt. The balance is all unsecured with $493 million of fixed rate long-term bonds and approximately $156 million outstanding on our unsecured credit line at year end.

In terms of our unencumbered portfolio, taking into account our 2014 acquisitions, all of which we acquired unencumbered, at year end over 90% of our portfolio was unencumbered on a square footage basis. In terms of interest coverage, the Company continues to maintain a conservative ratio, ending the year at 4 times coverage.

Having retired over $220 million of short-term debt in 2014, the bulk of which was floating rate, approximately 80% of our debt was fixed rate at year end, with a weighted average maturity of 8.2 years. Additionally, we only have $94 million of debt maturing in the next three years, all of which is mortgage debt, bearing interest at about 6% on average, which we intend to pay off.

Looking ahead at 2015, we currently expect FFO to be between $0.88 and $0.93 per diluted share for the year. Our guidance takes into account the $250 million of bonds that the Company issued in the fourth quarter and the impact to FFO from replacing short-term floating-rate credit line debt with 10-year fixed-rate debt.

In terms of external growth, our guidance assumes that we will acquire approximately $300 million of shopping centers in 2015. We intend to finance the acquisitions utilizing a mix of debt and equity, with the objective of keeping our credit metrics at about the same levels they are at today. Additionally, in terms of property operations and leasing, with respect to our current portfolio, our guidance is based on maintaining occupancy in the 96% to 97% range and achieving same property NOI growth in the 4% to 6% range for the year.

Now I will turn the call over to Rich Schoebel, our COO. Rich?

Thanks, Mike. We are pleased to report that 2014 proved to be our best year yet in terms of property operations and leasing, as we seamlessly integrated acquisitions into our portfolio, steadily increased operating margins and occupancy throughout the year, and leased a record amount of square footage, achieving solid growth with respect to same-space releasing rents. And we completed a number of property enhancement initiatives.

As Stuart discussed, during 2014 we acquired eight exceptional shopping centers, strategically adding properties in each of our core metropolitan markets. Specifically, we added two properties to our Los Angeles portfolio, including our largest single acquisition to date, Fallbrook Center. With the two new acquisitions in LA, as a year end we owned 11 shopping centers in the greater Los Angeles marketplace.

We also added a shopping center to our San Diego portfolio where we now own seven grocery-anchored shopping centers. And we added another property to our Orange County portfolio which also now totals seven grocery-anchored shopping centers, as well. Additionally, we added another great center to our San Francisco Bay Area portfolio, increasing our holdings to nine shopping centers at year end.

And in the Pacific Northwest we added three shopping centers, including two properties in Portland, bringing our Portland portfolio to 11 shopping centers. And we added one shopping center to our Seattle portfolio, which now totals 10 properties.

As we continue to grow our portfolio in markets where we have an established presence, we continue to capitalize on the growing operating synergies, steadily improving property level operating margins, as well as continuing to capitalize on the leasing synergies and strong demand for space, steadily increasing occupancy each quarter throughout the year, reaching a new record high for the Company of 97.6% leased as of year end. And with more than 50% of our shopping centers at 100%, specifically 32 properties, which is another record for our Company.

In terms of the spread between occupied space and leased space, which includes newly signed tenants that will soon take occupancy and commence paying rent, at year end the spread was approximately 5%, which is a good indicator of the embedded cash flow growth to come in the months ahead. In terms of actual dollars, the 5% gap represents an additional $5 million, approximately, in annual base rent, and that $5 million does not include the additional incremental revenue from CAM recoveries.

In terms of anchor versus non-anchor occupancy, at the end of the fourth quarter our anchor space was 100% leased, which is the third consecutive quarter at 100%. And we continued to steadily increase non-anchor occupancy throughout the year, reaching a new high of 94.7% leased at year end, which is a 230 basis point increase from a year ago.

In terms of specific leasing activity, during 2014 we executed 266 leases totaling 865,000 square feet, including 139 new leases totaling 442,000 square feet, achieving a 15.3% increase in the same-space comparative cash rents. And we renewed 127 leases totaling 423,000 square feet, achieving a 9% increase in cash rents.

With respect to leasing activity in the fourth quarter, we executed 66 leases totaling 259,000 square feet, achieving a 17.9% increase in same-space comparative rents on a cash basis. Breaking that down, we executed 41 new leases totaling 101,000 square feet, achieving a same-space comparative cash rent increase of 16.7%. And we executed 25 renewals totaling 158,000 square feet, achieving an 18.5% increase in cash rents.

Looking ahead at 2015, about 6% of our total portfolio is scheduled to expire, totaling 461,000 square feet, which accounts for 8% of our total base rent. The vast majority of this is non-anchor shop space, which we expect to release, achieving same-space rent growth in the 15% to 20% range on average during the year.

We only have one anchor lease for 21,000 square feet scheduled to expire in 2015, which we are already in the works to replace the expiring tenant with a new much stronger anchor retailer that is the perfect fit for the center and will enhance the overall retailer mix at the property. And the new anchor tenant will be paying a higher rent as well as full triple net recoveries.

In addition to our leasing activity for 2015, we are currently in the entitlement process for roughly 16,000 square feet of pad space development that we currently expect to commence work on in the latter half of the year, with the goal of delivering the space in early 2016. Looking out further, we also have about 100,000 square feet of expansion opportunities at several properties which we currently expect will start to come into play next year.

Additionally, at our Crossroads property in Seattle we are beginning to move forward with the first phase of additional development at the property. You may recall that, in addition to the existing shopping center, Crossroads can support another 200,000 square feet of space, including more retail space, some office space, as well as multi-family, which is what this first phase involves.

Specifically, we have entered into an agreement with one of Seattle's leading developers of senior living communities. In fact, they are the largest operator of senior housing in the Pacific Northwest. We currently expect that the developer will break ground on the project towards the end of this year or early 2016.

Importantly, we are not taking on any development risk. We will simply be ground leasing the out parcel to the developer. So, when completed, the revenue from the long-term ground lease will go straight to our bottom line. Additionally, there will be about 2,000 square feet of street-level retail shop space as part of the development that we will own.

Lastly, at Fallbrook Center we are currently in the early stages of interfacing with the city regarding developing one of the out parcels as multi-family. And in light of that we are now in preliminary discussions with a prominent multi-family developer. Just like our strategy at Crossroads, we would look to ground lease the parcel to the multi-family developer. While discussions are progressing nicely thus far, it is still a bit early to discuss a definitive time frame.

Beyond this, there's potentially several other out parcel development opportunities of Fallbrook, as well as a number of redevelopment opportunities within the existing center that we intend to pursue over time.

Now, I will turn the call back over to Stuart.

Thanks, Rich. Capitalizing on our strong finish in 2014 we are already in full swing on all fronts as 2015 gets underway. In terms of acquisitions, in the first quarter we've acquired three excellent grocery-anchored shopping centers, one in the San Francisco market and two in the Los Angeles market. All three acquisitions were sourced through off-market opportunities, two of which were part of a three-property portfolio that we secured in the fourth quarter.

Importantly, all three shopping centers fit our acquisition profile and existing portfolio perfectly. All three feature strong grocery operators that are well suited for their respective trade areas. Additionally, upwards of 90% of the shop space rolls within the next two to three years and is currently more than 50% below market, on average. Just as we always do, we intend to aggressively pursue releasing that space ahead of scheduled expirations.

These three acquisitions total approximately $100 million. Having acquired $100 million in just the first quarter alone would suggest that we are already on track to exceed our 2015 target that Mike noted in our guidance. However, we may consider additional capital recycling in 2015, so the $300 million acquisition target is in that number.

Additionally, as we experienced in 2014, we fully expect that the acquisition market will remain highly competitive in 2015. We intend to remain patient and steadfast in pursuing only the best opportunities to acquire exceptional shopping centers that not only will strategically further our market presence, portfolio and platform, but will also offer unique opportunities to increase value through capitalizing on our market knowledge, relationships and retail expertise that we have developed over the past 25 years, offering exclusively on the West Coast.

Along with broadening our portfolio in 2015, we intend to continue capitalizing on the extraordinary demand for space across our markets, which, in 2014, was among the strongest that we have ever seen, and thus far in 2015 shows no signs of slowing down. While we intend to make the most of the demand to drive rental rates higher, we also intend to capitalize on the demand to continue strengthening our retailer mix and furthering our tenant diversity, which is the cornerstone of our business.

On the balance sheet side, we intend to continue funding our growth through a balance of debt and equity sources, maintaining our strong credit profile and flexibility so that we will continue to be well-positioned to take full advantage of the opportunities we see on the horizon. In short, we are very excited about the future prospects of our business and look forward to reporting our accomplishment and results as we move through the year.

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

(Operator Instructions)

Paul Morgan, MLV.

Good morning. Just in terms of the guidance, you mentioned occupancy, I think, in the 96% to 97% range. Is that in reference to your published leased rate? I'm just trying to get a sense of where you think occupancy is going to change on an apples to apples basis. Is it roughly flat? And what is that 96% to 97% reference and where are you today?

Occupancy will be a function of two things. Number one, the assets that we acquire in terms of the occupancy in those assets, as well as the turnover, the national turnover, in terms of our tenant base. We are a bit conservative in terms of looking at that assumption.

However, we do anticipate some fallout, like everyone does, in the first quarter, and then things should pick up accordingly. So, again, it is a bit of a conservative assumption. However, we tend to be a bit conservative in terms of looking at the occupancy and more importantly what we may be buying as it relates to the occupancy.

Okay. And the 4% to 6% same-store NOI if occupancy is flattish is going to be driven by your bumps and your spreads essentially? Any other factors? Because that's very strong same-store growth expectations given occupancy might be flattish. Did I hear you right, you said spreads would be in the high teens for the year?

That's what we're expecting, correct.

As far as the same-store growth, we expect that the growth would be primarily from releasing space at higher rates. With a portion coming from improving recoveries as we replace some of the older leases that had loose recoveries with newer, stronger, triple-net structures, expecting that a portion of our bottom-line growth will come slightly from lower property operating expenses, as well.

Okay, that's helpful. And then also you've been active in acquisitions and a lot of the deals over the past year or two, that you've acquired -- you talked about the above-average, cash flow growth over the next few years coming from those. As those hit the same-store pool, are those partly what's driving the higher numbers, bringing to market some of the upside from the acquisitions that you've acquired?

Yes.

Okay. And then the percentage rent number was way up in the same-store pool. What was that related to?

There was an increase that was largely driven simply by higher tenant sales.

Was it a specific asset or just widespread?

It was across the board.

Our supermarkets had a very strong year.

Okay, that's great. And then you mentioned capital recycling in 2015. Do you have any extra color on how you quantify that, and the specific assets you think you'll target for divestment?

We are considering selling these non-core properties this year but it's a bit early to talk any specifics right now.

Okay, great. Thanks.

Paul Adornato, BMO Capital Markets

Good morning. I was wondering if you could talk about the acquisition pipeline. If you were to characterize it as off-market -- first of all, how large is the pipeline and how much of that is off-market?

The pipeline in both one-offs and portfolios is very large right now. We think in terms of looking into 2015, we are comfortable with our guidance. And we think that we will continue to do as we have done in the past. We will continue to be able to source some very attractive acquisitions, Paul. It's a robust pipeline.

And what should we use in terms of modeling for going-in cap rates on this batch?

I would be using 5.5% to 6%.

And as usual you would expect that to grow by how much in your first 12 to 18 months?

100 to 200 basis points.

So pretty much the growth is unchanged, the cap rate is going down, as one would expect.

Yes. Fully leased, fully marketed properties are currently trading at the 5 cap-rate range, with some transactions now trading below that. A lot of buyers, both public and private, lining up and competing for those deals.

But as I've always stressed, those kinds of broadly marketed deals are not what we focus on. We focus on off-market, unique opportunities where we can acquire exceptional shopping centers, Paul, on a more reasonable term to quickly add value.

It's really situations where the seller is either facing financial challenges or seeking a quick transaction where we can accommodate our knowledge of the markets. Or the seller is facing probably some near-term leasing challenges. And because of our market knowledge and our retailer relationships we are always equipped to take on that challenge and that value very quickly.

Okay, great. And, Michael, sorry if I missed this -- the question is, where do you think you could get a10-year money these days, if you were to issue unsecured debt?

If we were looking at today's indicative pricing, if we were to do a seven-year deal, it would probably be in 3.60, 3.70 coupon, and a 10-year deal would be about 4 coupon.

And those are attractive? You'd expect to tap that market this year?

It's going to be dependent upon the acquisition pace and the timing of all that. We're obviously keeping our leverage metrics in check, and balancing debt and equity as we grow through the year on the acquisition side. So this will be dependent on timing.

And just in terms of redevelopment, since that is heating up, how should we think about redevelopment spend? And how much of that would open over the next, let's say, three to five years?

Three to five years is a pretty long time frame. (laughter)

Then you could say one to three years. I'm just trying to -- you know.

There's certain initiatives we're currently pursuing, Paul. There really is not a lot of capital being expended by us. It's being expanded by the developers that we are partnering with.

Okay. So, in terms of openings, you've indicated that some stuff might be hitting pretty soon.

Yes, I think the big initiative at Crossroads we touched on. Once it is fully completed we think that that income will start coming in in late 2016, early 2017, really depending on the timing of construction.

Okay, great, thank you.

Christy McElroy, Citi.

Good morning, guys. I just wanted to follow up on Paul Morgan's question about occupancy, but maybe looking at it in a different way, on physical occupancy on a same-space basis. I'm backing into a physical occupancy rate of about 92.6% today, which is up about 100 basis points year over year, if my math is right, given where the spread was a year ago.

I just wanted to get a grasp of what your expectations are for that physical occupancy rate through 2015 as we think about the movement in the lease rate and the timing of move-ins. Can you walk us through the trajectory of that occupancy as previously signed leases commence occupancy?

Sure. I think that right now the spread is around 5% between what is leased and what's paying rent. It's a mix of tenants and we expect those tenants to be taking occupancy during the next several quarters. But during that period, as well, we're going to be signing new leases so the number is always evolving in terms of how much is leased and how much is actually paying rent. But on a full, run rate basis probably later in third or fourth quarter is when you really see the impact of this, if I'm correct, Mike. I think the NOI associated with that 500 basis points, I think we calculated it at about just about $5 million. That's rent or NOI on an annual basis going forward for those tenants.

Okay. And that $5 million comment in terms of incremental, rental revenue, you mentioned that that was excluding the impact of recoveries. So, how should we think about the improvement in the recovery rate as those leases commence between now and year-end 2015?

Most of them are triple-net.

Yes, they are all primarily triple-net leases. We don't have a specific number for you right now but, needless to say, it's going to be more.

Hard to quantify between shop space and anchor.

Okay. And then just to follow up on the $300 million a acquisitions, I think that's a net number. How should we think about gross acquisitions versus dispositions? And I think I heard you mention that you plan to finance deals with a mix of debt and equity, so I just wanted to get a sense of embedded in your guidance what equity assurance is in there for 2015?

Equity assurance, I think the modeling, given where our line is today, acquisitions [fit] -- keep hearing leverage metrics where they are. We're going to be looking to do obviously equity during the year or a combination of maybe using the ATM, issuing additional operating partnership units, depending on the type of acquisitions we come across. If they are larger deals, like the Fallbrook transaction last year, where we would want to do more of a marketed equity offering to raise a lot more capital in a single slug. It just depends on the timing and the types of acquisitions we're going to come across.

Christy, I think OP transactions will continue to be at the forefront for us because there's still a lot of great real estate on the West Coast that is owned by families that we've been in contact with over the last 15 years, that we are taken under discussions more frequently now in terms of doing these types of OP transactions. So, I think you'll continue to see more of those as it relates to that equity component.

Okay. And just on the $300 million, what is that on a gross basis?

On a gross basis.

I believe that the $300 million is net of dispositions, so how should we think about closed acquisitions net of any dispositions?

Including the $100 million that we've closed already it's probably another $250 million to $300 million.

Okay, got you. Thank you.

Todd Thomas, KeyBanc Capital.

Just quickly, I just wanted to follow up on Christy's question in the release. I see the weighted, average, share counts projected to be higher at nearly 104 million shares in 2015 versus 96 million at year end. Is that essentially a mid-year assumption for issuance that's embedded in guidance in the model or is there something more ratable using the ATM or OP units?

It's just the way our model functions where you have assumed acquisitions occurring periodically during the year. Keeping a constant underleverage level, it flips over to just issuing equity from time to time, which drives the share count up over time. So, it's really a function of again when the acquisitions occur and when our financing needs arise.

Okay. Understood. That's helpful. And then, Stuart, you've commented in the past that Southern California would be strong into the end of the year and for some time here. And it seems like you're seeing some of that strength. Would you say that it's more in San Diego or LA, or is it really just more broad-based?

And then second part of that is, is it more specific to ROIC and what you own, or would you say that it's also more broad-based and resembles what you're seeing in the marketplace?

I think as I've said in the past, Southern California was really the last on the West Coast, the last metro markets on the West Coast to come out of the recession. And this is the seventh recession I've been through in this market. But when it comes out, it comes out with a vengeance, which is what you're now seeing in terms of the increase on rollover in our portfolio. It's continuing, I'll tell you that right now. As we look into 2015 that is continuing.

It is different for other people. ROIC, one of the big differences this time around is our portfolio is very high quality. And I will tell you that, as you heard from Rich, when you've got most of your assets at 100% occupancy you can really drive rents because we have tenants that are lined up to come into the center, and if tenants don't want to renew at that increase we basically have someone ready to pay that increased rent. So, it does make a difference in terms of the quality of assets and where they are located, as well as a focused management team. You need two of those.

Do see in any of the other three target markets for the Company, do you see another market going through a similar dynamic or having a similar acceleration in growth like you see in Southern California? Is there a market that's on deck if you look out one to two or three years?

Yes, Portland is on deck. We've seen more activity in the Portland market in the last six months than we've seen in the prior three years. It's like Southern California.

Seattle and San Francisco, I think as everyone knows, has continued to do very well. But the real engine has started in Portland and Southern California. We continue to see that progression as we move into 2015.

Right now, as I think Rich and I have articulated, all our markets are doing extremely well. And, more importantly, we are even more excited in 2015 because of how we bought the real estate in 2014. A lot of the stuff we bought has some mark-to-market increases that hopefully will come to fruition as the space turns over the next year to two years.

Okay. And then just last question for Rich. You talked about the one anchor lease expiration in 2015, but there's 10 in 2016 with an average, base rent of just over $9. I was just wondering, I know it's a little early, but given you're probably having conversations now on some of those, any insight on where market is for those expirations, and whether you expect any move-outs or anticipate renewing a majority of those leases.

We expect to renew the majority of them other than the one of that is expiring this year, like we mentioned. The ones expiring this year is a non-retail use, and we are already talking to several very strong retailers to take over that space, and potentially even adding some CLA as part of that but it's a little early in terms of where we will end up. The other ones typically have options, so we're expecting that most of those tenants will take down those options.

Okay. The 2016 anchor expirations?

Correct. And if they don't there is substantial upside, in my humble opinion, in terms of releasing the space. Anchor rents in these markets have gone up tremendously.

Okay. And that expiration of those anchor leases, if they exercise options, is there stated rent or will it become a negotiation?

They're all primarily at stated rent but with increases

Okay, thank you.

Michael Gorman from Cowen Group.

Good morning. Stuart, could you spend a little bit more time on the capital recycling? I know you've mentioned before recycling out of stabilized assets that you guys have maximized. But as you think about 2015 are the dispositions going to be more dependent on the acquisition pipeline so more as a source of financing, or are these dispositions you are targeting for the year no matter what the acquisition market looks like?

Again, it's tough to really lay out the exact assets as we go through. We have had our eye on a couple of non-core properties but, again, it's a bit too early to talk about specifics.

Okay. And then just generally speaking, if we think about the 5.5% to 6% as a going in, should we think about something similar on the potential dispositions, as well, just generally considering how well the portfolio is doing and the concentration in the markets?

The answer is yes.

Great, thank you.

Paul Puryear, Raymond James.

Good morning, Stuart. Can you talk about rent increases? You alluded to it earlier that your anchor leases are well below market. How fast are the market rents moving? And if you could talk about it for anchors as well as small shops, it would be helpful.

The anchor spaces on the West Coast have gone up probably as much as 15% or 20% over the last year. And the reason why is because there is no supply left in terms of new space or vacant space. Some of the more recent anchor leases that have been signed out West have been in the $25 to $30 range, with some even a lot higher. So, that's where the anchors sit in this market today. In terms of non-anchor space, Rich, do you want to comment on that?

I think it's a mix. Most of these leases that are burning off, if you look at the timeline of typically a five-year term those leases were put in place at a time when rents were significantly lower than what you're seeing today. So, while some people have options and that's going to keep the increase a bit lower, in the cases where there are no options there's significant upside on those rents. It's really hard to give you a number because every lease is an individual deal.

Yes, but is it fair to say Southern California, shop rents are escalating faster than Portland?

It's tough to really say. What I can tell you is both those two markets and Southern California continues to see tenant demand at a level that we have not seen for a lot of years. So, from that perspective rents should rise accordingly. But as Rich articulated, it's tough to put a number on that because every situation is going to be different.

Portland's the same way. I think you're going to see more rent growth out of those two markets over the next year to two years than probably San Francisco and Seattle, but it all depends on your entry point in terms of what you own as it relates to the tenant base itself. So, it does vary market to market.

Got it, okay. Then, Stuart, can you just talk about replacement cost and how that figures in when you're looking at, say, shifting some investment from one market to the other and what you're willing to pay?

Replacement cost is only one element or one attribute of understanding valuation. When you look at replacement cost across the West Coast in the supply-constraint, metro markets, you probably, given that lands costs have rebounded, all in are probably now in the $500 to $600 range. So, that is what replacement costs. And, again, it will vary from market to market.

Can you just, finally, some sense for the difference across your markets in the type of properties that you're buying on the replacement costs?

We only buy grocery/drug-anchored, shopping centers, which is the most sought after product in the market. In terms of trying to break that down market by market --.

I think you're looking at similar numbers up and down the I-5 corridor which is where we are operating. The barriers to entry are very similar in each of these metro markets that we're in. So, I think that number that Stuart is quoting is a good number to use for an average across all of our markets.

And we do look at that, Paul, in terms of our underwriting. But, again, we're also underwriting the stability of our income stream and what we can do with the team in terms of building value. That's what's critical to us -- as well as replacement cost. So, it's just one element of many things we look at, and with the focus on the risk profile of buying these shopping centers in terms of trying to protect downside risks

Okay. It just seems like that's a key indicator -- right? -- on your ability to keep raising rents. Thanks.

Correct. Correct. There's virtually no supply in these markets. And we don't see any supply coming to the market certainly over the next year to 18 months.

Okay, thank you.

Jay Carlington from Green Street Advisors.

Good morning. Stuart, looking at last year's initial guidance of 5%, and we hit that 3.6% for the year, so curious what drove that lower number, given hindsight. And maybe a related question is maybe where the risk is for 2015 as we look at the lower end of that 4% to 6% range.

In 2014 I think it was a combination of both the warrants and the debt in terms of guidance.

I thought he was talking about same-store.

Yes, the same-store guidance, the 5%.

Last year we guided 4% to 6% and we came in at 3.6%, and I think that's largely deliveries. We had 500 basis point lease versus in paying is what's causing some of that.

A couple of the anchor tenants, Jay, that we had signed leases with have taken a lot longer for them to [fixturize] and get open for business. The markets have been very slow -- the municipalities have been extremely slow in terms of the permitting process, much more so that we now require our tenants to hire expediters as part of that process. We've been monitoring that extremely closely and, really, that's the impact, is that's bled over into 2015. It's is the fact that a lot of these tenants have just taken -- the permitting process has taken a lot longer. But we are on top of it, I can assure you, and right now it's looking quite good in terms of getting these tenants open and paying rent

Okay. And maybe thinking about Haggen, are they going to be buying any of the Safeways that are currently in your portfolio?

Yes. This is Rich. Of the nine Safeway stores in our portfolio only one store is being taken over by Haggen. As you probably know, we already have a Haggen up in the Seattle area and we're adding one at our recently acquired, Mission Foothill property.

When we were in due diligence we underwrote that property based on that being replaced. The Vons lease there is scheduled to expire in two years from now with a five-year renewal option. We think Haggen is a much better fit for that market. And as part of the takeover we were able to negotiate that that lease has now been guaranteed for another seven years through the renewal option.

Maybe just a quick housekeeping question -- what's left on your ATM and have you used it this quarter?

We actually did use the ATM a little bit in January before we went into our [lack] out. So, we have a $100 million program and we used about $5 million of it -- $4.5 million to $5 million of it.

Okay. So, there's $95 million still left on there?

Correct.

Okay, got it. Thanks, guys.

Thank you. There are no further questions at this time, sir.

In closing I would like to thank all of you for joining us today. If you have any 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. Thanks again and have a great day, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect. Have a wonderful day.