Retail Opportunity Investments Corp (ROIC) 2015 Q2 法說會逐字稿

Welcome to the Retail Opportunity Investments 2015 second-quarter conference call. (Operator Instructions)

Please note that certain matters discussed in this call today constitute forward-looking statements within the meaning of federal securities law. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company will give no assurance that these expectations will be achieved.

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

Participants are encouraged to refer to the Company's filings with the SEC regarding such risk factors, as well as for more information regarding the Company's financial and operational results. The Company's filings can be found on its website.

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

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

We are pleased to report that the Company posted another very productive and successful quarter. We continue to capitalize on the strong fundamentals across our core West Coast markets to take our business to new heights by continuing to broaden our portfolio through off-market acquisitions and by enhancing value through a number of proactive leasing initiatives.

Specifically with respect to acquisitions, we are fully on track to achieve our stated objective of acquiring $300 million for the year. Thus far in 2015 we've acquired $193 million. Beyond that we currently have another $85 million under contract that we expect to close in the third quarter, which will bring our total for the year to $278 million.

Included in the $193 million is a terrific three-property portfolio that we just completed a few days ago. The transaction is an excellent example of the value of having long-standing relationships, together with the value of operating in the same core markets for the past three decades.

We have known this seller for many years, and when we started discussing this transaction, it began simply as a one-property acquisition of a great grocery-anchored shopping center in the San Francisco market. The seller wanted a quick and easy closing. Given that we already knew the property well, along with knowing the market extremely well, we were able to underwrite and fully commit to the acquisition in only a few short weeks.

Having a relationship with the seller and being able to accommodate their request for a quick closing paved the way for us to pursue acquiring the other two additional grocery-anchored shopping centers from them in the Portland market. When it was all said and done, in a short period of time we identified, underwrote, and closed on three terrific grocery-anchored shopping centers.

Importantly, each of the properties are located in close proximity to a number of our existing shopping centers, which will enhance our operating leasing synergies. Furthermore, the in-place leases at these three properties are 25% to 30% below market on average so there's good upside potential going forward.

In addition to acquiring these three properties, as we discussed on our last earnings call, during the second quarter we acquired several key anchor spaces, one of which at our Canyon Park shopping center in Seattle represented a greatly re-leasing opportunity. We are pleased to report that soon after getting control of the space we signed a new long-term lease with the leading organic grocer in the Pacific Northwest.

The new grocer represents a significant event at our shopping center. When the grocer announced that they were opening a new store at our property, it immediately generated a lot of buzz in the marketplace. In fact, our leasing team received numerous calls from competitors congratulating us on landing the premier grocer in the market and doing it so quickly. More importantly, we now have a number of great retailers vying for the remaining available space at the center.

In addition to this lease transaction, we are also pursuing a number of other re-leasing opportunities. With the ongoing extraordinary demand for space across our portfolio, we are having great success in implementing a very aggressive game plan, playing offense if you will, such that 2015 thus far is shaping up to be our best, most significant year yet on the leasing front.

Rich will take you through the details in a minute, but first I'll turn the call over to Michael Haines, our CFO, to discuss our financial results. Mike?

Thanks, Stuart. For the three months ended June 30, 2015, the Company had $46.2 million in total revenues and $13.8 million in GAAP operating income as compared to $36.9 million in total revenues and $9.7 million in GAAP operating income for the second quarter of 2014. On a same-center basis, which includes all the shopping centers that we have owned since the second quarter of 2014, totaling 55 properties, net operating income on a cash basis increased by 4.4% for the second quarter of 2015 as compared to the second quarter of last year.

With respect to GAAP net income attributable to common stockholders, for the second quarter of 2015, the Company had GAAP net income of $5.2 million, equating to $0.05 per diluted share, as compared to GAAP net income of $5.8 million, or $0.07 per diluted share, for the second quarter of 2014. Included in the 2014 second-quarter GAAP net income was a $3.3 million gain in connection with the property we sold during the second quarter of last year.

In terms of funds from operations, for the second quarter of 2015 FFO totaled $22.3 million as compared to FFO of $17 million for the second quarter of 2014. On a per-share basis, FFO was $0.23 per diluted share for the second quarter of 2015, representing a 9.5% increase over FFO per diluted share for the second quarter of 2014.

Turning to the Company's balance sheet. At June 30, the Company had a total market cap of approximately $2.4 billion with $855 million of debt outstanding, equating to a debt-to-total-market cap ratio 36%.

With respect to the $855 million of debt, the vast majority of that is unsecured. In fact, at quarter end we only had $76 million of mortgage debt outstanding, representing less than 9% of our total debt, which is one of the lowest in the entire REIT industry. Additionally, as we discussed on our last earnings call, we are currently in the process of replacing our largest mortgage, a $48 million loan, with a new smaller mortgage totaling approximately $36 million. So our secure debt amount will be dropping even further.

And as a result of our secure debt dropping, together with the fact that all of our acquisitions this year have been debt free, the amount of square footage in our portfolio that is unencumbered continues to grow. At June 30, 91.5% of our portfolio was unencumbered, which is a new high for the Company. And once we complete the refinancing of the $48 million mortgage, and close on the pending acquisitions, we expect the 91.5% number will increase to around 96% by the end of the third quarter.

With respect to our EBITDA-to-interest-expense ratio for the second quarter, the company's interest coverage increased to 3.7 times. In terms of equity, thus far in 2015 we have secured approximately $26 million of common equity through a combination of utilizing our ATM program as well as utilizing operating partnership units in connection with one of our pending acquisitions.

Looking ahead at the second half of 2015, we have several financing initiatives we are currently pursuing. While it's too early to talk specifics, our objective is to lower our credit line balance, which stood at $286 million at June 30, as well as maintain our long-standing prudent financial ratios and straightforward balance sheet.

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

As Stuart indicated, we are in the midst of a terrific year of leasing, taking full advantage of the strong demand for space. As a result, our occupancy continues to steadily climb as we are moving through the year.

In fact, as of June 30 our portfolio was 97.3% leased, which is a 30 basis point increase over the first quarter, a 50 basis point increase from a year ago, and represents a new second-quarter high for the Company. Breaking the 97.3% number down between anchor and non-anchor space, at June 30 our anchor space was 100% leased, representing our fourth consecutive quarter of maintaining our anchor space at 100%, which again is indicative of the strong demand for space across our portfolio as well as the benefits of having a strong, growing presence in each of our core markets.

In terms of shop space, demand is very strong as well, being driven by an increasingly broad range of in-line retailers seeking more space to accommodate their growing businesses. As a result, we increased our shop space occupancy during the quarter to a new high of 94% leased as of June 30, which is a 60 basis point increase over the first quarter and a 110 basis point increase from a year ago.

With respect to the spread between occupied space and leased space, which includes newly-signed tenants that will soon take occupancy and commence paying rent, you may recall that at the end of the first quarter the spread was roughly 4.5%, representing about $5.6 million in incremental annual base rent on a cash basis. We are pleased to report that during the second quarter tenants representing over $2 million in incremental revenue took occupancy and commenced paying rent.

In terms of the current spread between occupied and leased, as of June 30 the spread stood at 3.8%. This takes into account not only those tenants that started paying rent in the second quarter, but also includes all the new leases we signed during the second quarter where these new tenants haven't yet taken occupancy and commenced paying rent.

With these new leases included, the 3.8% spread represents about $5.5 million in incremental annual base rent on a cash basis and that $5.5 million, as well as the $2 million that started in the second quarter, does not include the additional incremental cash flow from CAM recoveries or percentage rent going forward.

Lastly, with respect to the $2 million of incremental annual rent that commenced during the second quarter, the bulk of that started towards the end of the quarter. So as it relates to our same center NOI growth, the impact to our second quarter, 4.4% growth, was modest. The full impact will be reflected in the third quarter. Just simply taking into account what has commenced thus far, we are already on track to achieve same center NOI growth well above 4% in the third quarter.

Turning to our leasing activity, during the second quarter we executed 93 leases totaling 243,000 square feet, achieving a strong 25.8% increase in same space comparative rents on a cash basis. Breaking that down, we executed 37 new leases totaling 147,000 square feet, achieving a same-space comparative cash rent increase of 53.5%. And we executed 56 renewals totaling roughly 96,000 square feet, achieving a 10% increase in cash rents.

Notwithstanding our portfolio being virtually full at over 97% leased, we are pursuing leasing with an aggressive offense-like game plan, as Stuart called it. We are proactively seeking out every opportunity across our portfolio to recapture below-market space, often well ahead of scheduled expirations, and making the absolute most out of the extraordinary tenant demand.

Specifically, with respect to anchor spaces, we currently have about 200,000 square feet of space where we are in the process of recapturing below-market leases. This 200,000 square feet represents potentially upwards of $2 million of incremental annual rent above what the existing tenants are paying. Thus far, we have already signed leases for about 75,000 square feet which would generate approximately $900,000 of incremental rent once the new tenants take occupancy.

And we are in advanced discussions with numerous retailers for the balance of the space. Also, many of these existing anchor leases have been in place for a long time, well before we acquired the properties, and most of those have fairly loose recovery structures, which, as we re-lease those spaces, we are now replacing them with our standard triple-net structure.

With respect to shop space leasing activity, as I mentioned, we are continuing to capitalize on the growing trend of local and regional retailers expanding their businesses.

Just to briefly give you a couple of examples, in our Southern California portfolio we recently recaptured a midsize, below-market shop space and relocated an existing smaller shop tenant into this space. The smaller shop tenant's business has been performing very well and they were looking to expand into a new space about twice the size of their existing space. We were able to move them into the midsize space with no downtime and with a 27% increase in rent over the previous tenant.

And to give you another example, we recently recaptured a 14,000 square feet below-market space and have now released about half of the space to an in-line retailer that is an existing tenant at one of our other shopping centers, who is looking to expand their business by opening another store. Given our relationship and the fact that we have a strong presence in the market with multiple shopping centers, we are able to seamlessly accommodate their expansion plans.

Importantly, while the new tenant is only taking about half of the 14,000 square feet space, the new rent is nearly double what the previous tenant was paying on the entire space. And we now have several new shop retailers vying for the remaining space at much higher rent levels. Once the leasing is completed, the aggregate new rent will be nearly 4 times what the previous tenant was paying.

And, lastly, at our Fallbrook property, we recently recaptured one of the below-market pad spaces. We are currently in the process of redeveloping the pad and are in discussions with several great retailers who have been trying for some time now to get space at Fallbrook. Once we finish the redevelopment we expect that just this one pad alone will generate over $0.5 million in incremental annual rent to the center. And as we've discussed before, there are a number of other great value enhancement opportunities at Fallbrook that we intend to pursue going forward.

In summary, these types of leasing value enhancement initiatives are emblematic of what we are pursuing across our portfolio. Now I will turn the call back over to Stuart.

Thanks, Rich. Before opening up the call for questions, I would like to add a couple of additional insights as to what's helping drive our success.

First, with respect to acquisitions, our ongoing ability to source attractive opportunities is not only a function of capitalizing on our off-market sources and long-standing relationships, it's also a function of offering in multiple markets. In other words, our off-market acquisition opportunities ebb and flow differently in each market from one year to the next.

But, by actively seeking opportunities in multiple markets, we were able to identify a much broader range of opportunities, which in turn enables us to be highly selective and disciplined in pursuing only the best transactions and consistently achieving our growth objectives year after year. As an example, in 2014, the bulk of our off-market acquisition activity was primarily focused in Southern California, while thus far in 2015 the bulk of our activity has been focused in Northern California and now Portland.

Second, with respect to what continues to drive our strong leasing results, it is a combination of the economic trends which our core markets continue to be among the best in the nation. And just as important, it's the supply and demand fundamentals.

New development continues to be very limited in the shopping center sector across our core markets. Additionally, the barriers to entry are substantial as the amount of land available for new development is very limited and the entitlement process is very time consuming and costly. All of which translates into our markets and shopping centers being very protected.

As a result, demand for space continues to be very strong and, as Rich indicated, we continue to work very hard to make the most of it to enhance the underlying value of our portfolio. With that in mind, looking ahead at the second half of 2015 and beyond, we continue to be very excited about the prospects of our business.

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

(Operator Instructions) Tammi Fique, Wells Fargo.

I'm just curious, you mentioned OP units on a pending acquisition. I guess are you in a position to elaborate there on what you are expecting in terms of the total? And then as you think about OP units, I guess with today's stock price are you thinking about putting those in place at levels above where the stock price is today, or how are you thinking about that?

Sure. Well, the current transaction that we announced last quarter is being done at $17.25 a share. It's about $16 million, $17 million of equity.

In terms of --

Using them going forward.

-- using them going forward, absolutely. We -- when I say absolutely obviously we have -- this is not the first time we've used our currency in terms of buying very high quality assets on the West Coast, but more importantly, every time we've done a transaction it's been to a premium as to where our stock has traded.

So we will continue to look at the structure and continue doing more OP units, being very selective and disciplined as always, but more importantly at a premium to where our last deal was done, which was $17.25.

Okay. And then maybe just keeping on with the equity, there's obviously still some equity issuance embedded in guidance for the year. I guess can you just talk about timing there?

Can't really give specific on timing, but as I mentioned we are currently exploring several different financing strategies both on the debt and equity fronts. But it's too early to talk any specifics right now.

Okay. I noticed you had an uptick in G&A in the quarter. I guess can you talk about what that's related to?

The increase in our G&A was primarily a result of adjustments and compensation-related expenses, but looking ahead we expect that our G&A for the full year will be in the $13 million to $13.5 million range.

Okay. And then maybe just one more. You mentioned opportunities that you're seeing at Fallbrook. I'm just sort of curious where you see the opportunities there. Is it through expansion or is there some redevelopment potential? If you could just talk about that.

Sure. Primarily we've got this project we are working there with the pad and then beyond that we are also working on a couple of initiatives for multifamily development, which is progressing nicely but very preliminary at this point.

We are interfacing with the city regarding the possibility of developing one of the parcels for multifamily, and our strategy would be to ground lease the parcel to a multi-family developer so we wouldn't be taking on any new development risk. We are in the early stages. It's encouraging thus far, but it's too early to really discuss a definitive timeline.

Okay. And then maybe just one last one on disposition. You talked about previously monetizing some of your assets, but obviously your activity has been light thus far. I guess are we -- should we be expecting disposition activity in the second half?

Yes, we plan to put one non-core property on the market in the third quarter and we expect to generate around $50 million in proceeds.

Okay, great. Thank you very much.

Michael Gorman, Cowen Group.

Mike, if we could just go back to the financing question for a second. I know it's a little too early to get into specifics, but can you maybe talk about what you guys are seeing in the unsecured markets right now in terms of the kind of rates that you think you'd be able to achieve on a 10-year issuance.

Sure. As far as the pricing goes, with the current volatility and the market kind of changing every day it's a little hard to say, but for a 10-year bond deal it's probably -- for us, it's probably somewhere in the 200 to 220 basis point range over the 10-year Treasury.

Okay, got you. Would you expect any changes in covenant packages from previous unsecured issuances or would they be pretty similar?

I would expect them to be similar.

Okay. And then, Stuart, going back to the acquisition environment, can you maybe talk a little bit more about what you guys are seeing from competition in the marketplace, recognizing you mostly do off-market deals? What you're seeing on the marketed side in terms of how people are underwriting the assets. And then what's motivating the sellers at this point in the cycle to liquidate these assets?

The sellers in terms of motivation is the fear that maybe interest rates will be going up and that may have an impact on value. I don't believe that's going to happen in our core markets given that there's been no supply and the overall demand is very strong in terms of leasing.

Underwriting. In terms of underwriting, certainly we are underwriting our assets today as disciplined as we did five years ago when we started growing this company. I think what people have changed today is that a lot of people are looking to base valuations on NOI coming out of 2016 versus 2015, so they are making you want to pay a bit more for income that's not yet in place.

However, that's not how we are buying. We are buying on what we are getting today we close. So that's really what's changed from an underwriting perspective, in my view. And, Mike, I don't if you want to comment on the financing side in underwriting, but I think that the discipline that has been in the market from an underwriting perspective, as far as debt is concerned, is still there today. I don't think that's change much and I don't know, Mike, if you want to add to that.

You pretty much covered it all I think.

So that's our quick take, Mike.

Great, great. And then just one last question, I guess maybe for Rich. On the 200,000 square feet of conversations on the anchor spaces, is that primarily coming out of some of the 16 expirations or are they coming from even further out?

Then what are those conversations like? Are they looking for termination payments from your side or kind of what are the inducements to recapture some of this space?

Sure. Some are nearer-term expirations and some are a little bit further out and it's really a mixed bag. We have situations where we are going to be receiving a termination fee. We have other situations where it's just a -- we are gaining a termination right so that we can just let the tenant go and put in a much better retailer at higher rents.

And in some circumstances we are paying a termination fee, similar to what we did up in Canyon Park during the quarter.

It's a very exciting part of our game plan, I will tell you, because there's a lot of incremental NOI that's being created that will probably fold in in 2016 and will help carry our strong same-store growth, not only through 2015, but into 2016 at this point. So we are very excited about this and we are moving through this process quite quickly at this point.

Yes, those were pretty eye-popping anchor spreads. Okay, great. Thanks, guys.

Collin Mings, Raymond James.

I guess just firstly, it goes back to the potential capital markets activity. Maybe, Mike, can you remind us, just given the liquidity in your stock, what's reasonable to think you could raise through the ATM in any given quarter?

Well, we have a $100 million program in place. We only tapped about $10 million of it in the first quarter when the stock price was much higher. It just depends on their daily trading volume and where the stock price is trading. In terms of what price we would sell equity from our perspective today, we look at several things. We look at our consensus NAV, which currently has us between $16 and $17. So we also carefully look at our implied cap rate versus where we are acquiring properties.

So at our current stock price, the implied cap rate is between 5.5% and 6%, which is roughly equal to what our average going in cap rate is. As Stuart discussed in the shopping centers we are acquiring, have a number of near-term opportunities to increase that going-in yield.

So I would say probably $10 million to $15 million on the ATM, maybe more. It will ebb and flow depending on demand more than anything else.

The stock price and also our acquisition pace. We had acquisitions pegged for earlier in the year and they ended up more in the third quarter. So it's just a timing issue in that respect.

Okay, no, that's very helpful. Thank you. Then just going back to the conversation as it relates to the pricing power with tenants. Just curious, can you give us a little bit more color; just given how much you are trying to push rents and kind of current occupancy costs in your markets, can you just maybe talk a little bit more about that, Stuart?

Sure. Rich, do you want to comment on rents?

Yes, I think we are seeing really strong rents. I think you see that in the numbers. The renewals are very strong. I don't think we've had any renewal that's been for less rent. And there are these opportunities out there with near-term expirations and ones that are further out where we are able to get into these spaces and really do some pretty impressive things as you saw up in Bothell, Washington.

And the only thing I'd like to add to that which I've talked about a lot over the last several years is the higher occupied a portfolio is, the higher you can push rents. So a well-occupied portfolio has the power of pushing rents a lot higher than a portfolio that is less occupied.

Occupancy costs continue to trend down across the board for our tenants. Obviously, I can -- excuse me -- occupancy costs. I'm thinking of occupancy costs as it relates to sales.

To sales, yes, those are trending down. If you are talking about the operating costs at the property level, we are starting to see some synergies as the portfolio grows where we are able to negotiate harder with the vendors to keep those cost down. But as Stuart says, as a percentage of sales as sales continue to trend up, that percentage is going down.

Okay, that's helpful. Then just one last one from me. I think in the prepared remarks you talked a little bit as far as on the portfolio, one thing that attracted you to that portfolio was the ability where you have a lot of below-market rate rents right now.

Can you just talk about maybe the timeline as far as the lease expiration schedule, what you bought, and how we should think about the potential ramp in the incremental yield you're going to be getting from that portfolio?

Sure. Obviously, there's vacancy to lease up at one of the properties, which we are already in active discussions with tenants that want to expand into market. Our leasing team up there is hard at work at that.

And then capturing the rents in the in-place lease is really good be a function of as they roll. At those two specific properties, there's no specific initiative to recapture any specific space.

But as always, that yield should go up 75 to 100 basis points over the next 12 to 24 months.

Okay, great. Thanks, guys.

Paul Morgan, Canaccord.

Stuart, maybe you could talk a little bit about what your pipeline looks like. What's the opportunity set in terms of deals, additional deals that might close before year-end, say, and whether there is any shifts in the market composition? You talked about how this year has been more active in Northern California, but are you seeing things in other markets as well?

Sure. We are currently pursuing a number of attractive opportunities across our markets, and our pipeline is always evolving and, therefore, hard to give real specifics, Paul, until the property is under contract. As you heard in my remarks, we have been very active in Northern California and Portland so far this year, but that can change overnight.

So we continue, as you heard in my remarks, to look at all opportunities across our markets. And as it relates to the pipeline today, it is extremely strong. There are some very compelling opportunities ahead of us as it relates to continue to grow our portfolio smartly.

Okay, thanks. Maybe it was a year ago or so ago where you talked about how some of the strength that had been present on the demand side in Northern California and Seattle had migrated down to LA. Do you have any updates in terms of the market color? Is the retailer demand now just widespread and consistent across all of your markets, or are you seeing any kind of variation?

Sure. Well, as always, Seattle and the Bay Area continue to be very, very, very strong. But the one market that has really jumped -- that has really showed a lot of strength is Portland. Our Portland portfolio, while I don't have the exact number in front of me, we've probably gained as much as 300 or 400 basis points in occupancy in that portfolio over the last six months. T

hat portfolio and that market continues to really show, in my humble opinion, more strength today than we've seen in the past, and is beginning to look like Seattle and the Bay Area. Southern California continues to gain a stronger foothold every day. We haven't seen the Southern California market as strong like as Portland in terms of the amount of absorption demand in a very short period of time, but the market continues to get stronger and stronger and stronger on a daily basis.

We are very fortunate because all four of our markets right now are just humming. And as Rich articulated, we really haven't seen the fundamentals this strong in a long period of time. We are very fortunate.

Great, and then just lastly if you look at the deals that you are closing in the third quarter, are there any -- is there anything in terms of a capital plan that -- are you looking to renovate, refresh? Are there opportunities for pads or expansions or anything like that, or is it just more blocking and tackling and working through the end-of-lease goals?

There's always the opportunity as we do every day in terms of building value in NOI through re-leasing initiatives. But the only one that I can think of that I can't really articulate today but is out there is in Danville, there is the ability to go vertical. We have looked at that and we will continue to study that, but that may be some upside that we haven't yet quantified as it relates to closing that transaction.

Okay, great. Thanks.

Todd Thomas, KeyBanc Capital Markets.

Hi, good morning. First question, back to the 200,000 square feet of GLA that you are looking to recapture, are you anticipating any downtime associated with this re-tenanting that may act as a drag on core growth? Would you anticipate that the incremental NOI comes online in 2016, or would it be more for 2017?

Every deal is a little bit different, but we have made significant efforts to minimize any downtime; i.e., where we might have gained a termination right, but the tenant has agreed to stay operating for six months while the new tenant is in for permit. So we have done the best we can to minimize that downtime.

It's also mitigated by the fact that a lot of these rents we are replacing are so low that the impact is very minimal when we are down, and there will be a fairly large pop when the rent commences. To the other part of your question, yes, we expect most of this to come online in 2016.

Okay, but in terms of the downtime overall, it sounds like, I think, Stuart, based on your comments earlier that you are expecting same-store NOI growth to remain comfortably above 4% for the back half of the year. So there shouldn't be much volatility associated with the downtime overall.

Yes.

Okay. Then, Stuart, you mentioned that while lenders are still holding to more conservative underwriting parameters that sellers are now looking to transact based on 2016 income, and get paid for some leasing that's really even on the come.

Does that represent a change over the last few months. Has the market become more aggressive recently in that buyers are generally paying these prices, whereas they were not previously?

We see this in widely marketed transactions, and we don't really participate in widely marketed transactions. So I'm really giving you a footprint of what I see out there on a lot of deals that are being done through the brokerage community.

I don't know whether I would say it's any different than what we've seen in the past during markets like we are experiencing today. This is not new to buyers. We saw this in 2005 and 2006. We saw it in other cycles as well. So I think that buyers are very disciplined in the way they look at and underwrite this.

I think they approach this and they look at the cap rate that they're paying, and they take that into consideration as it relates to that spread or that value. So although it's certainly out there today, I don't think it really has a meaningful impact in terms of how people are valuing real estate. Because I think at the end of the day, most buyers are looking at what my income is today when they close and what it might look like a year, two years, three years and five years out as it relates to the rollover or the increasing cash flow. So I don't really think it has that much impact.

Okay. And then just last question in terms of the capital markets activity and permanently financing the line, I know you'd prefer not to issue equity. But you mentioned that there is one disposition on the table that might generate around $15 million of proceeds. It seems like you will need to reload the balance sheet by year-end more than just maybe issuing some equity under the ATM.

Is it possible to sidestep the equity market altogether, or is that part of the plan in the second half of the year?

From a disposition standpoint, we talked about one that we're moving on right now. There is a couple that management has in mind, noncore related, or doesn't have any internal growth over the next several years that is behind the one that we are thinking about. So that activity actually may be more than just the $15 million by the time we get towards year-end.

Mike, I don't know if you want to comment on --.

That's just one source of equity financing. Like I'd mentioned earlier in the prepared remarks, we are currently exploring several different financing strategies on both the debt and equity side, just to finance our business plan.

Okay, thank you.

R.J. Milligan, RW Baird.

A couple follow-up questions. Rich, wanted to know what's the timing for that $5.5 million that is expected to come online? How should we think about modeling that?

(multiple speakers)

The gap between --.

Is this the internal growth or is this the leasing initiative?

(multiple speakers) This is the gap in occupancy.

We expect to, as we said in the prepared remarks, the $2 million that came online in the third quarter is really going to be -- or the second quarter rather -- is really going to be hitting the third, plus another significant chunk will be coming in the third quarter. But as you saw, we also added to it.

And as we continue through the anchor repositioning initiatives here, we will be adding to that number. But we expect to continually be having that hitting the numbers every quarter going forward, but it will probably never be zero.

Right. Do you anticipate, though, at least the bulk of that will be in the next couple quarters?

Yes.

Okay. And then, Stuart, could you spend a little bit of time talking about underwriting for acquisitions that you made maybe in 2014 or in 2013? Obviously, you look to increase the yield over time. Sort of backward looking, can you talk about where the yields have gone and whether or not they've underperformed or outperformed expectations?

Sure. Yields have ended up being better for us because the fundamentals of the West Coast have gotten better a lot quicker than what we had anticipated. We are very conservative in our underwriting, extremely conservative. And again, a lot of the transactions that we buy through our management platform, we can lift those yields 75 to 100 basis points typically within 12 to 24 months. Those yields have actually come in a lot better.

It's the hard work in terms of the many people at ROIC , along with the fundamentals of the market. The West Coast is the most sought after market today, and because there's been no supply in this market for the last five years, it has really had a huge impact in terms of demand as it relates to lease rates. And we've seen lease rates rise since 2014 or 2013 at a much higher pace than what we underwrote at.

So all in all, to answer your question, these assets are certainly yielding above our expectations and more importantly, it's a combination of the hard work on the ground in terms of our people as well as the strength of the market.

So today we are seeing some assets trade with a 4 handle in front of them in San Francisco. And I'm curious, do you think those are reasonable cap rates, given the fact that we're still not seeing any new supply and that the growth expectations are there to justify those low cap rates, or would you say that we are getting overheated on the West Coast?

I would say they are reasonable today because the growth projected -- the growth for these tenants is much higher than what anyone had anticipated a year ago; certainly what we are seeing on the ground in the Bay Area. Rich, I don't know if you want to add to that, but I think that's pretty good value today

And we are starting to see 3s around the Bay Area rate now, just so you know. There is some transactions that are beginning to take hold under 4. So it's amazing to see. And again, the Bay Area is one of the most -- it's one of the strongest markets in the country in terms of demand, but certainly the trend is rent growth as it relates to that market, and we are seeing it at our properties.

Okay, great. Thanks, guys.

Jay Carlington, Green Street Advisors.

Good morning, Stuart. So a little unclear, was there an update to your acquisition guidance, or are we still at $300 million for the year?

Well, taking into consideration that we are looking to dispose of a couple of assets, we are right now keeping our guidance at $300 million. Will we surpass that given the pipeline? I can't give you any specifics sitting here right now on this call, but the pipeline does look strong and we are heading for another very strong year on the external growth side. That's all I can tell you.

Right, and that's a net number, right?

That is a net number, correct.

Okay. Mike, just on the share count reduction, I'm trying to figure out how much is related to timing versus, I guess, a shift in refinancing priorities. I'm just having difficulty parsing that out.

Yes, that purely is a function of timing. Our internal model contemplated equity throughout the year, partly from the ATM and other sources. But the acquisition pace wasn't evenly ratable through the year, and we are timing our financing accordingly. So the equity in our model has been pushed out to the second half of the year, which is why you are seeing a reduction in the share count.

Okay. And then, Stuart, maybe a big picture question. Where do you stand today with respect to your leasing structure? I guess are you appropriately staffed for a portfolio that has grown in multiples the last few years? And I guess at what point do you need to make incremental investments there?

Well, we are approaching 98% occupied. We've got a very dedicated staff that's -- in some cases, some of these leasing directors have been with us close to 17, 18 years. I believe we are staffed very well at this point for our growth.

I don't think we are going to need to add more leasing staff as we continue to add to the portfolio. And we are so well leased, really the focus right now is on the offense, as Rich has articulated and I have articulated. So going forward, we definitely have the capacity to keep growing the Company without having to incur a lot more overhead on the leasing front.

Okay, great. That's all I had. Thanks, guys.

I'm showing no further questions from the phone lines. I'd now like to turn the call back over to management.

Well, in closing, I'd 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, this concludes today's conference. Thank you for your participation and have a wonderful day.